Orion Healthcorp, Inc. 10QSB/A
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT
NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
Commission
File No. 001-16587
ORION HEALTHCORP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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Delaware
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58-1597246 |
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
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(IRS EMPLOYER IDENTIFICATION NO.) |
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1805 Old Alabama Road |
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Suite 350, Roswell GA
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30076 |
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(ZIP CODE) |
ISSUERS TELEPHONE NUMBER: (678) 832-1800
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON |
TITLE OF EACH CLASS
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WHICH REGISTERED |
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Class A Common Stock, $0.001 par value per share
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The American Stock Exchange |
Check whether the issuer (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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.)
Yes
o No þ
As of August 9, 2006, 12,788,776 shares of the registrants Class A Common Stock, par value $0.001,
were outstanding, 10,448,470 shares of the registrants Class B Common Stock, par value $0.001,
were outstanding and 1,437,572 shares of the registrants Class C Common Stock, par value $0.001,
were outstanding.
Transitional Small Business Disclosure Format:
Yes o No þ
ORION HEALTHCORP, INC.
Quarterly Report on Form 10-QSB/A
For the Quarterly Period Ended June 30, 2006
EXPLANATORY NOTE
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-QSB/A (the Amendment)
to amend and restate the Quarterly Report on Form 10-QSB for the three months ended June 30, 2006
filed with the Securities and Exchange Commission (the SEC) on August 9, 2006 (the Original
Filing) in response to comments by the Staff of the SEC in connection with their review of our
preliminary proxy statement on Schedule 14A filed with the SEC on September 11, 2006. The
consolidated condensed statements of operations and statements of
cash flows for the three months and six
months ended June 30, 2005,
respectively, have been restated after determining that the Companys presentation of the charge
for impairment of intangible assets in continuing operations rather than in discontinued
operations was inconsistent with the guidelines set forth under Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Accordingly, this Amendment includes our restated financial statements for the three months and six
months ended June 30, 2005, respectively, with accompanying notes, which reflect the
reclassification of the charge for impairment of intangible assets from continuing operations to
discontinued operations. This Amendment also updates disclosure in Item 2. Managements Discussion
and Analysis or Plan of Operation to reflect the reclassification. The reclassification had no
effect on the consolidated net income or cash flows of the Company for the periods presented.
Pursuant to the rules of the SEC, we have included currently-dated certifications from our
principal executive and principal accounting officers, as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002. These certifications are attached as Exhibits 31.1, 31.2, 32.1 and
32.2, respectively. Except for the restated information described above, this Amendment continues
to describe conditions as of the Original Filing and we have not updated the disclosures contained
herein to reflect events that have occurred subsequent to that date. Accordingly, this Amendment
should be read in conjunction with our other filings, if any, made with the SEC subsequent to the
filing of the Original Filing, including any amendments to those filings.
TABLE OF CONTENTS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB/A constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, (the
Exchange Act, and collectively, with the Securities Act, the Acts). Forward-looking statements
include statements preceded by, followed by or that include the words may, will, would,
could, should, estimates, predicts, potential, continue, strategy, believes,
anticipates, plans, expects, intends and similar expressions. Any statements contained
herein that are not statements of historical fact are deemed to be forward-looking statements.
The forward-looking statements in this report are based on current beliefs, estimates and
assumptions concerning the operations, future results, and prospects of Orion HealthCorp, Inc. and
its affiliated companies (Orion or the Company) described herein. As actual operations and
results may materially differ from those assumed in forward-looking statements, there is no
assurance that forward-looking statements will prove to be accurate. Forward-looking statements are
subject to the safe harbors created in the Acts. Any number of factors could affect future
operations and results, including, without limitation, changes in federal or state healthcare laws
and regulations and third party payer requirements, changes in costs of supplies, the loss of major
customers, labor and employee benefits, the inability to obtain a forbearance on the Companys
revolving lines of credit as a result of the Companys default of its financial covenants,
increases in interest rates on the Companys indebtedness as well as general market conditions,
competition and pricing, and the Companys ability to successfully implement its business
strategies. The Company undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information or future events.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Companys unaudited consolidated condensed financial statements and related notes thereto are
included as a separate section of this report but included herein, commencing on page F-1.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
highlights the principal factors that have affected the Companys financial condition and results
of operations as well as the Companys liquidity and capital resources for the periods described.
All significant intercompany balances and transactions have been eliminated in consolidation.
Overview
Orion is a healthcare services organization providing outsourced business services to physicians,
serving the physician market through two subsidiaries, Medical Billing Services, Inc. (MBS) and
Integrated Physician Solutions, Inc. (IPS). MBS provides billing, collection, accounts receivable
management, coding and reimbursement services, reimbursement analysis, practice consulting, managed
care contract management and accounting and bookkeeping services, primarily to hospital-based
physicians such as pathologists, anesthesiologists and radiologists. MBS currently provides
services to approximately 58 clients, representing 337 physicians. IPS serves the general and
subspecialty pediatric physician market, providing accounting and bookkeeping, human resource
management, accounts receivable management, quality assurance services, physician credentialing,
fee schedule review, training and continuing education and billing and reimbursement analysis. IPS
currently provides services to five pediatric groups in Illinois and Ohio, representing 37
physicians. The Company believes the core competency of the Company is its long-term experience and
success in working with and creating value for physicians.
Company History
The Company was incorporated in Delaware on February 24, 1984 as Technical Coatings, Incorporated.
On December 15, 2004, the Company completed a transaction to acquire IPS (the IPS Merger) and to
acquire Dennis Cain Physician Solutions, Ltd. (DCPS) and MBS (the DCPS/MBS Merger)
(collectively, the 2004 Mergers). As a result of these transactions, IPS and MBS became wholly
owned subsidiaries of the Company, and DCPS is a wholly owned subsidiary of MBS. On December 15,
2004, and simultaneous with the consummation of the 2004 Mergers, the Company changed its name from
SurgiCare, Inc. to Orion HealthCorp, Inc. and consummated its restructuring transactions (the
Closing), which included issuances of new equity securities for cash and contribution of
outstanding debt, and the restructuring of its debt facilities. The Company also created Class B
Common Stock and Class C Common Stock, which were issued in connection with the equity investments
and acquisitions.
1
Strategic Focus
In 2005, the Company initiated a strategic plan designed to accelerate its growth and enhance its
future earnings potential. As part of this plan, since the first quarter of 2005, the Company began
divesting certain non-strategic assets and ceased investing in business lines that did not
complement the Companys plan, and redirected financial resources and company personnel to areas
that management believes enhances long-term growth potential. Specifically, in the first quarter of
2006, the Company sold SurgiCare Memorial Village, L.P. (Memorial Village) to First Surgical
Memorial Village, L.P. (First Surgical) and sold San Jacinto Surgery Center, Ltd. (San Jacinto)
to San Jacinto Methodist Hospital (Methodist). Additionally, in early 2006, the Company was
notified by Union Hospital that it was exercising its option to terminate the management services
agreements for Tuscarawas Ambulatory Surgery Center, LLC (TASC) and Tuscarawas Open MRI, L.P.
(TOM). With the completion of these activities, the Company no longer has any ownership or
management interests in ambulatory surgery and diagnostic centers.
Additionally, the Company believes that it is now positioned to focus on its physician services
business and the physician billing and collections market, leveraging its existing presence to
expand into additional geographic regions and increase the range of services it provides to
physicians. Part of this strategy will include acquiring financially successful billing companies
focused on providing services to hospital-based physicians and increasing sales and marketing
efforts in existing markets.
Financial Overview
As more fully described below, the Companys results of operations for the three months and six
months ended June 30, 2006 as compared to the same periods in 2005 reflect several important
factors, many relating to the impact of transactions which occurred as part of the Companys
strategic plan referred to above.
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The Company sold substantially all of the assets of Memorial Village and recorded a gain on
disposition of discontinued components of $574,321 in the first quarter of 2006; |
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The Company sold substantially all of the assets of San Jacinto and recorded a gain on
disposition of discontinued components of $94,066 in the first quarter of 2006; and |
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The Company paid $112,500 in satisfaction of a $778,000 debt and recognized a gain on
forgiveness of debt totaling $665,463 in the first quarter of 2006. |
Critical Accounting Policies and Estimates
The preparation of the Companys financial statements is in conformity with accounting principles
generally accepted in the United States, which require management to make estimates and assumptions
that affect the amounts reported in the financial statements and footnotes. The Companys
management bases these estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments that are not readily apparent from other sources. These estimates and assumptions affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting period. Changes in the facts or circumstances underlying these estimates could
result in material changes and actual results could differ from these estimates. The Company
believes the following critical accounting policies affect the most significant areas involving
managements judgments and estimates. In addition, please refer to Note 1. General of the
Companys unaudited consolidated condensed financial statements included beginning on Page F-7 of
this report for further discussion of the Companys accounting policies.
Consolidation of Physician Practice Management Companies. In March 1998, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board (FASB) issued its Consensus on Issue
97-2 (EITF 97-2). EITF 97-2 addresses the ability of physician practice management (PPM)
companies to consolidate the results of medical groups with which it has an existing contractual
relationship. Specifically, EITF 97-2 provides guidance for consolidation where PPM companies can
establish a controlling financial interest in a physician practice through contractual management
arrangements. A controlling financial interest exists, if, for a requisite period of time, the PPM
has control over the physician practice and has a financial interest that meets six specific
requirements. The six requirements for a controlling financial interest include:
(a) the contractual arrangement between the PPM and physician practice (1) has a term that is
either the entire remaining legal life of the physician practice or a period of 10 years or more,
and (2) is not terminable by the physician practice except in the case of gross negligence, fraud,
or other illegal acts by the PPM or bankruptcy of the PPM;
2
(b) the PPM has exclusive authority over all decision making related to (1) ongoing, major, or
central operations of the physician practice, except the dispensing of medical services, and (2)
total practice compensation of the licensed medical professionals as well as the ability to
establish and implement guidelines for the selection, hiring, and firing of them;
(c) the PPM must have a significant financial interest in the physician practice that (1) is
unilaterally salable or transferable by the PPM and (2) provides the PPM with the right to receive
income, both as ongoing fees and as proceeds from the sale of its interest in the physician
practice, in an amount that fluctuates based upon the performance of the operations of the
physician practice and the change in fair value thereof.
IPS is a PPM company. IPSs MSAs governing the contractual relationship with its affiliated medical
groups are for forty year terms; are not terminable by the physician practice other than for
bankruptcy or fraud; provide IPS with decision making authority other than related to the practice
of medicine; provide for employment and non-compete agreements with the physicians governing
compensation; provide IPS the right to assign, transfer or sell its interest in the physician
practice and assign the rights of the MSAs; provide IPS with the right to receive a management fee
based on results of operations and the right to the proceeds from a sale of the practice to an
outside party or, at the end of the MSA term, to the physician group. Based on this analysis, IPS
has determined that its contracts meet the criteria of EITF 97-2 for consolidating the results of
operations of the affiliated medical groups and has adopted EITF 97-2 in its statement of
operations. EITF 97-2 also has addressed the accounting method for future combinations with
individual physician practices. IPS believes that, based on the criteria set forth in EITF 97-2,
any future acquisitions of individual physician practices would be accounted for under the purchase
method of accounting.
Revenue Recognition. MBSs principal source of revenues is fees charged to clients based on a
percentage of net collections of the clients accounts receivable. MBS recognizes revenue and bills
its clients when the clients receive payment on those accounts receivable. MBS typically receives
payment from the client within 30 days of billing. The fees vary depending on specialty, size of
practice, payer mix, and complexity of the billing. In addition to the collection fee revenue, MBS
also earns fees from the various consulting services that MBS provides, including medical practice
management services, managed care contracting, coding and reimbursement services.
IPS records revenue based on patient services provided by its affiliated medical groups. Net
patient service revenue is impacted by billing rates, changes in current procedural terminology
code reimbursement and collection trends. IPS reviews billing rates at each of its affiliated
medical groups on at least an annual basis and adjusts those rates based on each insurers current
reimbursement practices. Amounts collected by IPS for treatment by its affiliated medical groups of
patients covered by Medicare, Medicaid and other contractual reimbursement programs, which may be
based on cost of services provided or predetermined rates, are generally less than the established
billing rates of IPSs affiliated medical groups. IPS estimates the amount of these contractual
allowances and records a reserve against accounts receivable based on historical collection
percentages for each of the affiliated medical groups, which include various payer categories. When
payments are received, the contractual adjustment is written off against the established reserve
for contractual allowances. The historical collection percentages are adjusted quarterly based on
actual payments received, with any differences charged against net revenue for the quarter.
Additionally, IPS tracks cash collection percentages for each medical group on a monthly basis,
setting quarterly and annual goals for cash collections, bad debt write-offs and aging of accounts
receivable. IPS is not aware of any material claims, disputes or unsettled matters with third party
payers and there have been no material settlements with third party payers for the three months and
six months ended June 30, 2006 and 2005, respectively.
Accounts Receivable and Allowance for Doubtful Accounts. MBS records uncollectible accounts
receivable using the direct write-off method of accounting for bad debts. Historically, MBS has
experienced minimal credit losses and has not written-off any material accounts during the three
months and six months ended June 30, 2006 or 2005, respectively.
IPSs affiliated medical groups grant credit without collateral to its patients, most of which are
insured under third-party payer arrangements. The provision for bad debts that relates to patient
service revenues is based on an evaluation of potentially uncollectible accounts. The provision for
bad debts includes a reserve for 100% of the accounts receivable older than 180 days. Establishing
an allowance for bad debt is subjective in nature. IPS uses historical collection percentages to
determine the estimated allowance for bad debts, and adjusts the percentage on a quarterly basis.
Investment in Limited Partnerships. At June 30, 2005, the Company owned a 10% general partnership
interest in San Jacinto. The investment is accounted for using the equity method. Under the equity
method, the investment is initially recorded at cost and is subsequently increased to reflect the
Companys share of the income of the investee and reduced to reflect the share of the losses of the
investee or distributions from the investee. Effective March 1, 2006, the Company sold its interest
in San Jacinto. (See Results of Operations Discontinued Operations.)
3
The general partnership interest was accounted for as an investment in limited partnership due to
the interpretation of SFAS 94/Accounting Research Bulletin 51 and the interpretations of such by
Issue 96-16 and Statement of Position SOP 78-9. Under those interpretations, the Company could
not consolidate its interest in an entity in which it held a minority general partnership interest
due to management restrictions, shared operating decision-making, and capital expenditure and debt
approval by limited partners and the general form versus substance analysis.
Goodwill and Intangible Assets. Goodwill and intangible assets represent the excess of cost over
the fair value of net assets of companies acquired in business combinations accounted for using the
purchase method. In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates pooling-of-interest accounting
and requires that all business combinations initiated after June 30, 2001, be accounted for using
the purchase method. SFAS No. 142 eliminates the amortization of goodwill and certain other
intangible assets and requires the Company to evaluate goodwill for impairment on an annual basis
by applying a fair value test. SFAS No. 142 also requires that an identifiable intangible asset
that is determined to have an indefinite useful economic life not be amortized, but separately
tested for impairment using a fair value-based approach at least annually. The Company evaluates
its goodwill and intangible assets in the fourth quarter of each fiscal year, unless circumstances
require testing at other times. (See Results of Operations Discontinued Operations for
additional discussion regarding the impairment testing of identifiable intangible assets.)
Recent Accounting Pronouncements
In December 2004, the FASB published SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)). SFAS 123(R) requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in the financial
statements. That cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS 123(R) is a replacement of SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes Auditing Practices Board Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretive guidance (APB 25).
The effect of SFAS 123(R) will be to require entities to measure the cost of employee services
received in exchange for stock options based on the grant-date fair value of the award, and to
recognize the cost over the period the employee is required to provide services for the award. SFAS
123(R) permits entities to use any option-pricing model that meets the fair value objective in SFAS
123(R). The Company was required to begin to apply SFAS 123(R) for its quarter ending March 31,
2006.
SFAS 123(R) allows two methods for determining the effects of the transition: the modified
prospective transition method and the modified retrospective method of transition. The Company has
adopted the modified prospective transition method beginning in 2006.
Results of Operations
The IPS Merger was treated as a reverse acquisition, meaning that the purchase price, comprised of
the fair value of the outstanding shares of the Company prior to the transaction, plus applicable
transaction costs, were allocated to the fair value of the Companys tangible and intangible assets
and liabilities prior to the transaction, with any excess being considered goodwill. IPS was
treated as the continuing reporting entity, and, thus, IPSs historical results became those of the
combined company. The Companys results for the three months and six months ended June 30, 2006 and
2005 include the results of IPS, MBS and the Companys ambulatory surgery and diagnostic center
business. The descriptions of the business and results of operations of MBS set forth in this
report include the business and results of operations of DCPS. This discussion should be read in
conjunction with the Companys unaudited consolidated condensed financial statements for the three
months and six months ended June 30, 2006 and 2005 and related notes thereto, which are included as
a separate section of this report commencing on page F-1.
Pursuant to paragraph 43 of SFAS 144, which states that, in a period in which a component of an
entity either has been disposed of or is classified as held for sale, the income statement of a
business enterprise for current and prior periods shall report the results of operations of the
component, including any gain or loss recognized, in discontinued operations. As such, the
Companys financial results for the three months and six months ended June 30, 2005 have been
reclassified to reflect the operations, including its surgery and diagnostic center businesses,
which were discontinued in 2005.
4
The following table sets forth selected statements of operations data expressed as a percentage of
the Companys net operating revenue for the three months and six months ended June 30, 2006 and
2005, respectively. The Companys historical results and period-to-period comparisons are not
necessarily indicative of the results for any future period.
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Three Months |
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Six Months |
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Ended |
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Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(Restated) |
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(Restated) |
Net operating revenues |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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Total operating expenses |
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105.1 |
% |
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117.4 |
% |
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105.0 |
% |
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117.5 |
% |
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Loss from continuing operations before other
income (expenses) |
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(5.1 |
%) |
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(17.4 |
%) |
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(5.0 |
%) |
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(17.5 |
%) |
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Total other income (expenses), net |
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(1.8 |
%) |
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(1.4 |
%) |
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3.0 |
% |
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(1.1 |
%) |
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Loss from continuing operations |
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(6.9 |
%) |
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(18.8 |
%) |
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(2.0 |
%) |
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(18.6 |
%) |
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Discontinued operations |
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Income (loss) from operations of discontinued
components, including net gain on disposal |
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0.0 |
% |
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(90.2 |
%) |
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4.1 |
% |
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(47.0 |
%) |
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Net income (loss) |
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(6.9 |
%) |
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(109.0 |
%) |
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2.1 |
% |
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(65.6 |
%) |
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5
Three Months Ended June 30, 2006 as Compared to Three Months Ended June 30, 2005
The following table sets forth, for the periods indicated, the consolidated statements of
operations of the Company.
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For the Three Months |
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Ended June 30, |
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2006 |
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2005 |
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(Unaudited) |
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(Unaudited) |
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(Restated) |
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Net operating revenues |
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$ |
6,931,714 |
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$ |
7,651,291 |
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Operating expenses |
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Salaries and benefits |
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2,773,316 |
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3,156,954 |
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Physician group distribution |
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1,920,041 |
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2,270,672 |
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Facility rent and related costs |
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390,890 |
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430,259 |
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Depreciation and amortization |
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408,930 |
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843,979 |
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Professional and consulting fees |
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361,044 |
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516,079 |
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Insurance |
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158,121 |
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228,768 |
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Provision for doubtful accounts |
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140,396 |
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298,326 |
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Other expenses |
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1,134,022 |
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1,240,771 |
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Total operating expenses |
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7,286,760 |
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8,985,808 |
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Loss from continuing operations before other income
(expenses) |
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(355,046 |
) |
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(1,334,517 |
) |
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Other income (expenses) |
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Interest expense |
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(121,631 |
) |
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(94,094 |
) |
Other expense, net |
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(4,488 |
) |
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(16,353 |
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Total other income (expenses), net |
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(126,119 |
) |
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(110,447 |
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Loss from continuing operations |
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(481,165 |
) |
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(1,444,964 |
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Discontinued operations |
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Income (loss) from operations of discontinued
components |
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968 |
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|
|
(6,902,825 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(480,197 |
) |
|
$ |
(8,347,789 |
) |
|
|
|
|
|
|
|
Net Operating Revenues. Net operating revenues of the Company consist of patient service
revenue, net of contractual adjustments, related to the operations of IPSs affiliated medical
groups, billing services revenue related to MBS and other revenue. For the three months ended June
30, 2006, consolidated net operating revenues decreased $719,576, or 9.4%, to $6,931,714, as
compared with $7,651,291 for the three months ended June 30, 2005.
MBSs net operating revenues totaled $2,361,762 for the three months ended June 30, 2006 as
compared to net operating revenues totaling $2,653,017 for the same period in 2005, a decrease of
$291,255, or 10.9%. The decrease in net operating revenues for MBS was primarily the result of the
loss of two customers in August 2005, one of which retired from medical practice and one group
which decided to bring their billing in-house, which accounted for approximately $260,000 in net
operating revenues in the second quarter of 2005. This decrease was partially offset in the second
quarter of 2006 by the addition of two new customers accounting for approximately $58,000 in net
operating revenues.
IPSs net patient service revenue decreased $428,322, or 8.6%, from $4,998,274 for the three months
ended June 30, 2005 to $4,569,952 for the three months ended June 30, 2006. The decrease in net
patient service revenue for IPSs affiliated medical groups was primarily the result of decreases
in patient volume as a consequence of a diminished cold and flu season in the second quarter of
2006 as compared to the same period in 2005. All of IPSs four clinic-based affiliated pediatric
groups experienced decreases in patient volume in the second quarter of 2006, with total procedures
and office visits for all clinic-based facilities decreasing 7,811 and 6,025, respectively, to
91,303 and 35,068 for the three months ended June 30, 2006.
Other revenue, which represents revenue from the Companys vaccine program, a group purchasing
alliance for vaccines and medical supplies, totaled $17,656 for the second three months of 2005,
increasing $83,540, or 473.2%, to $101,196 for the three months ended June 30, 2006. The vaccine
program, which had a total of 482 enrolled participants at March 31, 2006, added approximately 8
members during the second quarter of 2006.
6
Operating Expenses
Salaries and Benefits. Consolidated salaries and benefits decreased $383,639 to $2,773,316 for the
three months ended June 30, 2006, as compared to $3,156,954 for the same period in 2005.
MBSs salaries and benefits totaled $1,471,325 for the three months ended June 30, 2006 as compared
to $1,586,823 for the three months ended June 30, 2005, a decrease of $115,499. This decrease is
primarily the result of a reduction in health benefit costs related to the consolidation of MBSs
benefit plans with the IPS benefit plans at the beginning of 2006, thereby allowing greater
negotiating leverage with benefit providers.
Clinical salaries & benefits include wages for the nurse practitioners, nursing staff and medical
assistants employed by the affiliated medical groups and fluctuate indirectly to increases and
decreases in productivity and patient volume. Clinical salaries, bonuses, overtime and health
insurance collectively totaled $431,385 for the second three months of 2006, a decrease of $5,173
from the same period in 2005. These expenses represented approximately 9.7% and 8.8% of net
operating revenues for the three months ended June 30, 2006 and 2005, respectively. The increase,
as a % of net operating revenues, is related to the fixed nature of salaries and benefits needed to
maintain minimum staffing levels.
In August 2005, the Company consolidated its corporate operations into the Roswell, Georgia office.
Prior to the staff reductions resulting from this corporate consolidation, salaries and benefits
related to corporate staff in Houston, Texas totaled $267,352 for the three months ended June 30,
2005.
Administrative salaries and benefits, excluding MBS and the former staff of the Companys Houston,
Texas office, represent the employee-related costs of all non-clinical practice personnel at IPSs
affiliated medical groups as well as the Companys corporate staff in Roswell, Georgia. These
expenses increased $6,487, or 0.8%, from $831,323 for the three months ended June 30, 2005 to
$837,810 for the same period in 2006. These expenses include the adoption of SFAS 123(R), beginning
in the first quarter of 2006, which resulted in stock option compensation expense totaling $49,642.
The costs associated with the addition of one billing FTE and the promotion of three employees to
supervisor at two of IPSs affiliated medical groups as the result of billing office
reorganizations were offset by staffing adjustments at the Companys corporate office.
7
Physician Group Distribution. Physician group distribution decreased $350,631, or 15.4%, for the
three months ended June 30, 2006 to $1,920,041, as compared with $2,270,672 for the three months
ended June 30, 2005. Pursuant to the terms of the MSAs governing each of IPSs affiliated medical
groups, the physicians of each medical group receive disbursements after the payment of all clinic
facility expenses as well as a management fee to IPS. The management fee revenue and expense, which
is eliminated in the consolidation of the Companys financial statements, is either a fixed fee or
is calculated based on a percentage of net operating income. For the three months ended June 30,
2006, management fee revenue totaled $316,042 and represented approximately 14.1% of net operating
income as compared to management fee revenue totaling $380,566 and representing approximately 14.4%
of net operating income for the same period in 2005. Physician group distribution represented 43.0%
of net operating revenues in the second quarter of 2006, compared to 45.6% of net operating
revenues for the three months ended June 30, 2005. The decrease in physician group distribution for
the three months ended June 30, 2006 was directly related to the decrease in net patient service
revenue, which was primarily the result of decreased patient volume during the second three months
of 2006.
Facility Rent and Related Costs. Facility rent and related costs decreased $39,370, or 9.2%, from
$430,259 for the three months ended June 30, 2005 to $390,890 for the three months ended June 30,
2006.
MBSs facility rent and related costs totaled $127,442 for the three months ended June 30, 2006 as
compared to $122,955 for the same period in 2005. This increase can be explained generally by
increases in utilities and off-site storage costs for the second three months of 2006.
Facility rent and related costs associated with IPSs affiliated medical groups and Orions
corporate office totaled $248,504 for the three months ended June 30, 2006 compared to $257,679 for
the same period in 2005. Rent expense related to the Companys corporate office in Roswell, Georgia
was partially offset in the second quarter of 2006 by approximately $27,000 in rent payments
received for the sublease between eClinicalWeb and the Company as a result of the IntegriMED
Agreement in June 2005.
In August 2005, the Company consolidated its corporate operations into the Roswell, Georgia office.
Prior to this consolidation, facility-related costs such as utilities and personal property taxes
associated with the Companys former office in Houston, Texas totaled approximately $35,000 for the
three months ended June 30, 2005.
Depreciation and Amortization. Consolidated depreciation and amortization expense totaled $408,930
for the three months ended June 30, 2006, a decrease of $435,048 from the three months ended June
30, 2005.
For the three months ended June 30, 2006, depreciation expense related to the fixed assets of MBS
totaled $17,250 as compared to $20,218 for the same period in 2005. Deprecation expense related to
the fixed assets of IPS and Orion totaled $39,946 and $26,466 for the three months ended June 30,
2006 and 2005, respectively. Depreciation expense associated with fixed assets related to the
Companys former Houston, Texas office, which was closed in August 2005, totaled $11,682 for the
three months ended June 30, 2005.
As part of the DCPS/MBS Merger, the Company purchased MBS and DCPS for a combination of cash, notes
and stock. Since the consideration for this purchase transaction exceeded the fair value of the net
assets of MBS and DCPS at the time of the purchase, a portion of the purchase price was allocated
to intangible assets. The amortization expense related to the intangible assets recorded as a
result of the DCPS/MBS Merger totaled $265,523 for the three months ended June 30, 2006 and 2005,
respectively.
Amortization expense related to the MSAs for IPSs affiliated medical groups totaled $86,211 and
$88,392 for the three months ended June 30, 2006 and 2005, respectively. The decrease is directly
related to the Mutual Release and Settlement Agreement (the Sutter Settlement) with John Ivan
Sutter, M.D., PA (Dr. Sutter) to settle disputes that had arisen between IPS and Dr. Sutter and
to avoid the risk and expense of litigation. As part of the Sutter Settlement, which was executed
on October 31, 2005, Dr. Sutter and IPS agreed that Dr. Sutter would purchase the assets owned by
IPS and used in connection with Dr. Sutters practice, in exchange for termination of the related
MSA.
As part of the IPS Merger, the purchase price, comprised of the fair value of the outstanding
shares of the Company prior to the transaction, plus applicable transaction costs, was allocated to
the fair value of the Companys tangible and intangible assets and liabilities prior to the
transaction, with any excess being considered goodwill. As a result of the dispositions related to
the Companys surgery and diagnostic center business, which was discontinued in 2005, and the
uncertainty of future cash flows related to the Companys surgery center business, the Company
impaired substantially all of the intangible assets related to the IPS Merger in 2005. Therefore,
there was no amortization expense related to the intangible assets in the second quarter of 2006.
Amortization expense for the intangible assets recorded as a result of the IPS Merger totaled
$431,697 for the three months ended June 30, 2005. (See Discontinued Operations for additional
discussion regarding the disposition of intangible assets and goodwill recorded as a result of the
IPS Merger.)
8
Professional and Consulting Fees. For the three months ended June 30, 2006, professional and
consulting fees totaled $361,044, a decrease of $155,036, or 30.0%, from the same period in 2005.
For the second three months of 2006, MBS recorded professional and consulting expenses totaling
$47,621 as compared with $68,776 for the same period in 2005, a decrease of $21,155. This change is
primarily the result of a decrease in contract labor used in the second quarter of 2005 as a result
of staffing shortages. This contract labor was not utilized in the second quarter of 2006 because
MBSs position inventory is fully staffed.
IPSs and Orions professional and consulting fees, which include the costs of corporate
accounting, financial reporting and compliance, and legal fees, decreased from $376,916 for the
three months ended June 30, 2005 to $313,423 for the three months ended June 30, 2006. The decrease
is primarily the result of reduced legal fees and expenses related to the divestiture of the
Companys surgery and diagnostic business in 2005.
Insurance. Consolidated insurance expense, which includes the costs of professional liability for
affiliated physicians, property and casualty and general liability insurance and directors and
officers liability insurance, decreased from $228,768 for the three months ended June 30, 2005 to
$158,121 for the three months ended June 30, 2006. Insurance expense related to the directors and
officers liability policies in the first quarter of 2005 included approximately $40,000 of
premiums for run-off policies related to SurgiCare and IPS. The run-off policies were expensed
fully in 2005.
Provision for Doubtful Accounts. The Companys consolidated provision for doubtful accounts, or bad
debt expense, decreased $157,930, or 52.9%, for the three months ended June 30, 2006 to $140,396.
The entire provision for doubtful accounts for the quarter ended June 30, 2006 related to IPSs
affiliated medical groups and accounted for 3.1% of IPSs net operating revenues as compared to
6.0% of IPSs net operating revenues for the same period in 2005. The total collection rate, after
contractual allowances, for IPSs affiliated medical groups was 72.6% for the three months ended
June 30, 2006, compared to 64.3% for the same period in 2005.
Other Expenses. Consolidated other expenses totaled $1,134,023 for the three months ended June 30,
2006, a decrease of $106,749 from the same period in 2005. Other expenses include general and
administrative expenses such as office supplies, telephone & data communications, printing &
postage, transfer agent fees, and board of directors compensation and meeting expenses, as well as
some direct clinical expenses, which are expenses that are directly related to the practice of
medicine by the physicians that practice at the affiliated medical groups managed by IPS.
MBSs other expenses totaled $269,923 for the three months ended June 30, 2006 as compared to
$323,082 for the three months ended June 30, 2005. Of the total decrease, approximately $43,000 and
$2,000 related to decreases in office supplies and postage and courier expenses, respectively, in
the second three months of 2006 as compared to the same period in 2005. These expense fluctuations
are the direct result of the decrease in net operating revenues in the second quarter of 2006.
Additionally, MBS renegotiated its long distance rates in the fall of 2005, which resulted in
approximately $27,000 in cost savings in the second three months of 2006 as compared to the same
period in 2005.
For the three months ended June 30, 2006, IPSs direct clinical expenses, other than salaries and
benefits, totaled $581,083, an increase of $18,929 over second quarter 2005 direct clinical
expenses, which totaled $562,154. Vaccine expenses increased approximately $29,500 in the second
three months of 2006 when compared to the same period in 2005. IPSs affiliated medical groups
began using two new vaccines in late 2005 Menactra and Decavac which replaced lower-priced
vaccines previously utilized by the medical groups.
The Companys and IPSs general and administrative expenses totaled $163,956 for the three months
ended June 30, 2006, a decrease of $69,243 from the same period in 2005. There were approximately
$74,000 of expense decreases related to cost efficiencies and expense reductions as a result of the
consolidation of corporate functions into the Companys Roswell, Georgia office in August 2005.
Other Income and Expenses.
Interest Expense. Consolidated interest expense totaled $121,631 for the three months ended June
30, 2006, an increase of $27,537 from the same period in 2005. Interest expense activity in the
second quarter of 2006, including increases from the second three months of 2005, can be explained
generally by the following:
|
|
|
MBS Notes. On April 19, 2006, the Company executed subordinated promissory notes with the
former equity owners of MBS and DCPS for an aggregate of $714,336. This represented the
retroactive purchase price increase due to the former equity owners of MBS and DCPS based on
the financial results of the newly formed MBS, required by the merger agreement governing the
DCPS/MBS Merger. The notes bear interest at the rate of 8% per annum, payable monthly
beginning on April 30, 2006, and will mature on December 15, 2007. Interest expense related
to these notes totaled approximately $11,429 for the three months ended June 30, 2006. |
|
|
|
|
Line of Credit. As part of the restructuring transactions, the Company also entered into a
new secured two-year revolving credit facility pursuant to the Loan and Security Agreement
(the Loan and Security Agreement), dated December 15, 2004, by and among the Company,
certain of its affiliates and subsidiaries, and CIT Healthcare, LLC (formerly known as
Healthcare Business Credit Corporation)(CIT), borrowing $1.6 million under this facility
concurrently with the Closing. (See Liquidity and Capital Resources |
9
|
|
|
for additional discussion regarding the Loan and Security Agreement.) Interest expense
related to this line of credit totaled $51,363 for the three months ended June 30, 2006,
compared to $42,768 for the three months ended June 30, 2005. The increase in interest
expense on the line of credit facility was a direct result of interest rate increases for the
second three months of 2006 as compared to the same period in 2005. In December 2005, the
Company received notification from CIT stating that certain events of default under the Loan
and Security Agreement had occurred as a result of the Company being out of compliance with
two financial covenants. As a result of the events of default, CIT raised the interest rate
for monies borrowed under the Loan and Security Agreement to a default rate of prime rate
plus 6% as compared to the stated interest rate of prime rate plus 3% as of the Closing. (See
Part II, Item 3. Defaults Upon Senior Securities for additional discussion regarding the
Companys defaults under the Loan and Security Agreement.) The loan balance for this facility
was $998,668 and $1,681,450 at June 30, 2006 and 2005, respectively. Additionally, the
average prime rate for the second quarter of 2006 was 7.92% as compared to 5.92% for the same
three-month period in 2005. |
Discontinued Operations.
IntegriMED. On June 7, 2005, InPhySys, Inc. (formerly known as IntegriMED, Inc.) (IntegriMED), a
wholly owned subsidiary of IPS, executed an Asset Purchase Agreement (the IntegriMED Agreement)
with eClinicalWeb, LLC (eClinicalWeb) to sell substantially all of the assets of IntegriMED. As a
result of this transaction, the Company recorded a loss on disposal of this discontinued component
of $47,101 for the quarter ended June 30, 2005. The operations of this component are reflected in
the Companys consolidated condensed statements of operations as `loss from operations of
discontinued components for the three months ended June 30, 2005. There were no operations for
this component in the Companys financial statements after June 30, 2005.
The following table contains selected financial statement data related to IntegriMED as of and for
the three months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
82,155 |
|
Operating expenses |
|
|
392,931 |
|
|
|
|
|
Net loss |
|
$ |
(310,776 |
) |
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
(24,496 |
) |
Other assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
(24,496 |
) |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
17,022 |
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
17,022 |
|
|
|
|
|
10
TASC and TOM. On June 13, 2005, the Company announced that it had accepted an offer to
purchase its interests in TASC and TOM in Dover, Ohio. On September 30, 2005, the Company executed
purchase agreements to sell its 51% ownership interest in TASC and its 41% ownership interest in
TOM to Union Hospital (Union). Additionally, as part of the transactions, TASC, as the sole
member of TASC Anesthesia, L.L.C. (TASC Anesthesia), executed an Asset Purchase Agreement to sell
certain assets of TASC Anesthesia to Union. The limited partners of TASC and TOM also sold a
certain number of their units to Union such that at the closing of these transactions, Union owned
70% of the ownership interests in TASC and TOM. The Company no longer has an ownership interest in
TASC, TOM or TASC Anesthesia. As a result of these transactions, as well as the uncertainty of
future cash flows related to the Companys surgery center business, the Company determined that the
joint venture interests associated with TASC and TOM were impaired and recorded a charge for
impairment of intangible assets related to TASC and TOM of $2,122,445 for the three months ended
June 30, 2005. Also as a result of these transactions, the Company recorded a gain on disposal of
this discontinued component (in addition to the charge for impairment of intangible assets) of
$1,357,712 for the quarter ended December 31, 2005. The Company allocated the goodwill recorded as
part of the IPS Merger to each of the surgery center reporting units and recorded a loss on the
write-down of goodwill related to TASC and TOM totaling $789,173 for the quarter ended December 31,
2005, which reduced the gain on disposal. In early 2006, the Company was notified by Union that it
was exercising its option to terminate the management services agreements of TOM and TASC as of
March 12, 2006 and April 3, 2006, respectively. As a result, the Company recorded a charge for
impairment of intangible assets of $1,021,457 for the three months ended December 31, 2005 related
to the TASC and TOM management services agreements. The operations of this component are reflected
in the Companys consolidated condensed statements of operations as `loss from operations of
discontinued components for the three months ended June 30, 2005. There were no operations for
this component in the Companys financial statements after September 30, 2005.
The following table contains selected financial statement data related to TASC and TOM as of and
for the three months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
873,959 |
|
Operating expenses |
|
|
799,418 |
|
|
|
|
|
Net income |
|
$ |
74,541 |
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
794,831 |
|
Other assets |
|
|
1,487,732 |
|
|
|
|
|
Total assets |
|
$ |
2,282,563 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
709,779 |
|
Other liabilities |
|
|
907,390 |
|
|
|
|
|
Total liabilities |
|
$ |
1,617,169 |
|
|
|
|
|
Sutter. On October 31, 2005, IPS executed the Sutter Settlement with Dr. Sutter to settle
disputes that had arisen between IPS and Dr. Sutter and to avoid the risk and expense of
litigation. As part of the Sutter Settlement, Dr. Sutter and IPS agreed that Dr. Sutter would
purchase the assets owned by IPS and used in connection with Dr. Sutters practice, in exchange for
termination of the related MSA. Additionally, among other provisions, after October 31, 2005, Dr.
Sutter and IPS have been released from any further obligation to each other arising from any
previous agreement. As a result of this transaction, the Company recorded a loss on disposal of
this discontinued component (in addition to the charge for impairment of intangible assets of
$38,440 recorded in the fourth quarter of 2005) of $279 for the quarter ended December 31, 2005.
The operations of this component are reflected in the Companys consolidated condensed statements
of operations as `loss from operations of discontinued components for the three months ended June
30, 2005. There were no operations for this component in the Companys financial statements after
October 31, 2005.
The following table contains selected financial statement data related to Sutter as of and for the
three months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
107,419 |
|
Operating expenses |
|
|
105,171 |
|
|
|
|
|
Net income |
|
$ |
2,248 |
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
113,819 |
|
Other assets |
|
|
15,033 |
|
|
|
|
|
Total assets |
|
$ |
128,852 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
7,839 |
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
7,839 |
|
|
|
|
|
11
Memorial Village. As a result of the uncertainty of future cash flows related to our surgery
center business as well as the transactions related to TASC and TOM, the Company determined that
the joint venture interest associated with Memorial Village was impaired and recorded a charge for
impairment of intangible assets related to Memorial Village of $3,229,462 for the three months
ended June 30, 2005. In November 2005, the Company decided that, as a result of ongoing losses at
Memorial Village, it would need to either find a buyer for the Companys equity interests in
Memorial Village or close the facility. In preparation for this pending transaction, the Company
tested the identifiable intangible assets and goodwill related to the surgery center business using
the present value of cash flows method. As a result of the decision to sell or close Memorial
Village, as well as the uncertainty of cash flows related to the Companys surgery center business,
the Company recorded an additional charge for impairment of intangible assets of $1,348,085 for the
three months ended September 30, 2005. On February 8, 2006, Memorial Village executed an Asset
Purchase Agreement (the Memorial Agreement) for the sale of substantially all of its assets to
First Surgical. Memorial Village was approximately 49% owned by Town & Country SurgiCare, Inc., a
wholly owned subsidiary of the Company. The Memorial Agreement was deemed to be effective as of
January 31, 2006. As a result of this transaction, the Company recorded a gain on the disposal of
this discontinued component (in addition to the charge for impairment of intangible assets) of
$574,321 for the quarter ended March 31, 2006. The Company allocated the goodwill recorded as part
of the IPS Merger to each of the surgery center reporting units and recorded a loss on the
write-down of goodwill related to Memorial Village totaling $2,005,383 for the quarter ended
December 31, 2005. The operations of this component are reflected in the Companys consolidated
statements of operations as `loss from operations of discontinued components for the three months
ended June 30, 2005. There were no operations for this component in the Companys financial
statements after March 31, 2006.
The following table contains selected financial statement data related to Memorial Village as of
and for the three months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
684,676 |
|
Operating expenses |
|
|
812,407 |
|
|
|
|
|
Net loss |
|
$ |
(127,731 |
) |
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
861,111 |
|
Other assets |
|
|
767,497 |
|
|
|
|
|
Total assets |
|
$ |
1,628,608 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
729,567 |
|
Other liabilities |
|
|
725,884 |
|
|
|
|
|
Total liabilities |
|
$ |
1,455,451 |
|
|
|
|
|
San Jacinto. On March 1, 2006, San Jacinto executed an Asset Purchase Agreement for the sale
of substantially all of its assets to Methodist. San Jacinto was approximately 10% owned by
Baytown SurgiCare, Inc., the Companys wholly owned subsidiary, and is not consolidated in our
financial statements. As a result of this transaction, the Company recorded a gain on disposal of
this discontinued operation of $94,066 for the quarter ended March 31, 2006. As a result of the
uncertainty of future cash flows related to the surgery center business, and in conjunction with
the transactions related to TASC and TOM, the Company determined that the joint venture interest
associated with San Jacinto was impaired and recorded a charge for impairment of intangible assets
related to San Jacinto of $734,522 for the three months ended June 30, 2005. The Company also recorded an additional $2,113,262 charge for
impairment of intangible assets for the three months ended September 30, 2005 related to the
management contracts with San Jacinto. The Company allocated
the goodwill recorded as part of the IPS Merger to each of the surgery center reporting units and
recorded a loss on the write-down of goodwill related to San Jacinto totaling $694,499 for the
quarter ended December 31, 2005. There were no operations for this component in our
financial statements after March 31, 2006.
12
Orion. Prior to the divestiture of the Companys ambulatory surgery center business, the Company
recorded management fee revenue, which was eliminated in the consolidation of the Companys
financial statements, for Bellaire SurgiCare, Inc. (Bellaire SurgiCare), TASC and TOM and Memorial
Village. The management fee revenue for San Jacinto was not eliminated in consolidation. The
management fee revenue associated with the discontinued operations in the surgery center business
totaled $968 for the three months ended June 30, 2006. For the three months ended June 30, 2005,
the Company generated management fee revenue of $112,155 and net minority interest losses totaling
$3,318. For the quarters ended June 30, 2005 and December 31, 2005, the Company recorded a charge
for impairment of intangible assets of $276,420 and $142,377, respectively, related to trained work
force and non-compete agreements affected by the surgery center operations the Company discontinued
in 2005 and early 2006.
The following table summarizes the components of income (loss) from operations of discontinued
components:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
|
|
|
(Restated) |
|
CARDC |
|
|
|
|
|
|
|
|
Gain on disposal |
|
|
|
|
|
|
(238,333 |
) |
IntegriMED |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(310,776 |
) |
Loss on disposal |
|
|
|
|
|
|
(47,101 |
) |
TASC and TOM |
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
74,541 |
|
Loss on disposal |
|
|
|
|
|
|
(2,122,445 |
) |
Sutter |
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
2,248 |
|
Memorial Village |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(127,731 |
) |
Loss on disposal |
|
|
|
|
|
|
(3,229,462 |
) |
San Jacinto |
|
|
|
|
|
|
|
|
Loss on disposal |
|
|
|
|
|
|
(734,522 |
) |
Orion |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
968 |
|
|
|
(169,244 |
) |
|
|
|
Total income (loss) from operations of
discontinued components, including net
gain (loss) on disposal |
|
$ |
968 |
|
|
$ |
(6,902,825 |
) |
|
|
|
13
Six Months Ended June 30, 2006 as Compared to Six Months Ended June 30, 2005
The following table sets forth, for the periods indicated, the consolidated statements of
operations of the Company.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
(Restated) |
|
Net operating revenues |
|
$ |
14,085,728 |
|
|
$ |
15,281,113 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
5,535,247 |
|
|
|
6,205,856 |
|
Physician group distribution |
|
|
4,023,346 |
|
|
|
4,603,758 |
|
Facility rent and related costs |
|
|
792,276 |
|
|
|
858,099 |
|
Depreciation and amortization |
|
|
818,828 |
|
|
|
1,727,201 |
|
Professional and consulting fees |
|
|
707,112 |
|
|
|
931,640 |
|
Insurance |
|
|
339,360 |
|
|
|
441,272 |
|
Provision for doubtful accounts |
|
|
299,146 |
|
|
|
636,835 |
|
Other expenses |
|
|
2,272,944 |
|
|
|
2,550,096 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
14,788,259 |
|
|
|
17,954,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before other income
(expenses) |
|
|
(702,531 |
) |
|
|
(2,673,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(234,144 |
) |
|
|
(150,391 |
) |
Gain on forgiveness of debt |
|
|
665,463 |
|
|
|
|
|
Other expense, net |
|
|
(14,151 |
) |
|
|
(18,977 |
) |
|
|
|
|
|
|
|
Total other income (expenses), net |
|
|
417,168 |
|
|
|
(169,368 |
) |
|
|
|
|
|
|
|
Minority interest earnings in partnership |
|
|
|
|
|
|
(1,660 |
) |
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(285,363 |
) |
|
|
(2,844,672 |
) |
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued
components |
|
|
576,390 |
|
|
|
(7,183,746 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
291,027 |
|
|
$ |
(10,028,418 |
) |
|
|
|
|
|
|
|
Net Operating Revenues. Net operating revenues of the Company consist of patient service
revenue, net of contractual adjustments, related to the operations of IPSs affiliated medical
groups, billing services revenue related to MBS and other revenue. For the six months ended June
30, 2006, consolidated net operating revenues decreased $1,195,385, or 7.8%, to $14,085,728, as
compared to consolidated net operating revenues of $15,281,113 for the six months ended June 30,
2005.
MBSs net operating revenues totaled $4,756,052 for the six months ended June 30, 2006 as compared
to net operating revenues totaling $5,193,532 for the same period in 2005, a decrease of $437,478,
or 8.4%. The decrease in net operating revenues for MBS was primarily the result of the loss of two
customers in August 2005, one of which retired from medical practice and one group which decided to
bring their billing in-house, which accounted for approximately $486,000 in net operating revenues
in the first six months of 2005. This decrease was partially offset in the first half of 2006 by
the addition of three new customers accounting for approximately $258,525 in net operating revenues
in the first six months of 2006.
14
IPSs net patient service revenue decreased $757,906, or 7.5%, from $10,087,581 for the six months
ended June 30, 2005 to $9,329,675 for the six months ended June 30, 2006. The decrease in net
patient service revenue for IPSs affiliated medical groups was primarily the result of decreases
in patient volume as a consequence of a diminished cold and flu season in the first six months of
2006 as compared with the same period in 2005. All of IPSs four clinic-based affiliated pediatric
groups experienced decreases in patient volume in the first six months of 2006, with total
procedures and office visits for all clinic-based facilities decreasing 13,422 and 9,016,
respectively, to 191,124 and 79,894 for the six months ended June 30, 2006.
Other revenue, which represents revenue from the Companys vaccine program, a group purchasing
alliance for vaccines and medical supplies, totaled $41,589 for the first six months of 2005,
increasing $139,048, or 334.3%, to $180,637 for the six months ended June 30, 2006. The vaccine
program, which had a total of 428 enrolled participants at December 31, 2005, added approximately
62 members during the first six months of 2006.
Operating Expenses
Salaries and Benefits. Consolidated salaries and benefits decreased $670,609 to $5,535,247 for the
six months ended June 30, 2006, as compared to $6,205,856 for the same period in 2005.
15
MBSs salaries and benefits totaled $2,922,367 for the six months ended June 30, 2006 as compared
to $3,100,956 for the six months ended June 30, 2005, a decrease of $178,588. This decrease is
primarily the result of a reduction in health benefit costs related to the consolidation of MBSs
benefit plans with the IPS benefit plans at the beginning of 2006, thereby allowing greater
negotiating leverage with benefit providers.
Clinical salaries & benefits include wages for the nurse practitioners, nursing staff and medical
assistants employed by the affiliated medical groups and fluctuate indirectly to increases and
decreases in productivity and patient volume. Clinical salaries, bonuses, overtime and health
insurance collectively totaled $865,670 for the first six months of 2006, an increase of $9,334
over the same period in 2005. There was one additional medical assistant on the payroll of one of
IPSs affiliated medical groups in the first six months of 2006 as compared to the staffing levels
for the first six months of 2005. These expenses represented approximately 9.5% and 8.5% of net
operating revenues for the six months ended June 30, 2006 and 2005, respectively. The increase, as
a % of net operating revenues, is related to the fixed nature of salaries and benefits needed to
maintain minimum staffing levels.
In August 2005, the Company consolidated its corporate operations into the Roswell, Georgia office.
Prior to the staff reductions resulting from this corporate consolidation, salaries and benefits
related to corporate staff in Houston, Texas totaled $565,026 for the six months ended June 30,
2005.
Administrative salaries and benefits, excluding MBS and the former staff of the Companys Houston,
Texas office, represent the employee-related costs of all non-clinical practice personnel at IPSs
affiliated medical groups as well as the Companys corporate staff in Roswell, Georgia. These
expenses increased $67,129, or 4.2%, from $1,605,306 for the six months ended June 30, 2005 to
$1,672,435 for the same period in 2006. The additional expense can be attributed primarily to the
adoption of SFAS 123(R) in the first quarter of 2006, which resulted in stock option compensation
expense totaling approximately $98,000 for the first six months of 2006.
Physician Group Distribution. Physician group distribution decreased $580,412, or 12.6%, for the
six months ended June 30, 2006 to $4,023,346, as compared with $4,603,758 for the six months ended
June 30, 2005. Pursuant to the terms of the MSAs governing each of IPSs affiliated medical groups,
the physicians of each medical group receive disbursements after the payment of all clinic facility
expenses as well as a management fee to IPS. The management fee revenue and expense, which is
eliminated in the consolidation of the Companys financial statements, is either a fixed fee or is
calculated based on a percentage of net operating income. For the six months ended June 30, 2006,
management fee revenue totaled $660,513 and represented approximately 14.1% of net operating income
as compared to management fee revenue totaling $751,853 and representing approximately 14.0% of net
operating income for the same period in 2005. Physician group distribution represented 43.1% of net
operating revenues in the first six months of 2006, compared to 45.6% of net operating revenues for
the six months ended June 30, 2005. The decrease in physician group distribution for the six months
ended June 30, 2006 was directly related to the decrease in net patient service revenue, which was
primarily the result of decreased patient volume during the first half of 2006.
Facility Rent and Related Costs. Facility rent and related costs decreased $65,824, or 7.7%, from
$858,099 for the six months ended June 30, 2005 to $792,276 for the six months ended June 30, 2006.
MBSs facility rent and related costs totaled $256,895 for the six months ended June 30, 2006 as
compared to $242,777 for the same period in 2005. This increase can be explained generally by
increases in utilities and off-site storage costs for the first half of 2006.
Facility rent and related costs associated with IPSs affiliated medical groups and Orions
corporate office totaled $507,103 for the six months ended June 30, 2006 compared to $539,406 for
the same period in 2005. Rent expense related to the Companys corporate office in Roswell, Georgia
decreased for the first half of 2006 due to approximately $54,000 in rent payments received for the
sublease between eClinicalWeb and the Company as a result of the IntegriMED Agreement in June 2005.
In August 2005, the Company consolidated its corporate operations into the Roswell, Georgia office.
Prior to this consolidation, facility-related costs such as utilities and personal property taxes
associated with the Companys former office in Houston, Texas totaled approximately $48,000 for the
six months ended June 30, 2005.
Depreciation and Amortization. Consolidated depreciation and amortization expense totaled $818,828
for the six months ended June 30, 2006, a decrease of $908,373 from the six months ended June 30,
2005.
For the six months ended June 30, 2006, depreciation expense related to the fixed assets of MBS
totaled $34,836 as compared to $41,836 for the same period in 2005. Deprecation expense related to
the fixed assets of IPS and Orion totaled $80,523 and $58,816 for the six months ended June 30,
2006 and 2005, respectively. Depreciation expense associated with fixed assets related to the
Companys former Houston, Texas office, which was closed in August 2005, totaled $22,768 for the
six months ended June 30, 2005.
16
As part of the DCPS/MBS Merger, the Company purchased MBS and DCPS for a combination of cash, notes
and stock. Since the consideration for this purchase transaction exceeded the fair value of the net
assets of MBS and DCPS at the time of the purchase, a portion of the purchase price was allocated
to intangible assets. The amortization expense related to the intangible assets recorded as a
result of the DCPS/MBS Merger totaled $531,046 for the six months ended June 30, 2006 and 2005,
respectively.
Amortization expense related to the MSAs for IPSs affiliated medical groups totaled $172,422 and
$209,341 for the six months ended June 30, 2006 and 2005, respectively. The decrease is directly
related to the Sutter Settlement and the CARDC Settlement.
As part of the IPS Merger, the purchase price, comprised of the fair value of the outstanding
shares of the Company prior to the transaction, plus applicable transaction costs, was allocated to
the fair value of the Companys tangible and intangible assets and liabilities prior to the
transaction, with any excess being considered goodwill. Amortization expense for the intangible
assets recorded as a result of the IPS Merger totaled $863,394 for the six months ended June 30,
2005. As a result of the dispositions related to the Companys surgery and diagnostic center
business, which was discontinued in 2005, and the uncertainty of future cash flows related to the
Companys surgery center business, the Company impaired substantially all of the intangible assets
related to the IPS Merger in 2005. Therefore, there was no amortization expense related to the
intangible assets in the first half of 2006. (See Discontinued Operations for additional
discussion regarding the disposition of intangible assets and goodwill recorded as a result of the
IPS Merger.)
Professional and Consulting Fees. For the six months ended June 30, 2006, professional and
consulting fees totaled $707,112, a decrease of $224,528, or 24.1%, from the same period in 2005.
For the first six months of 2006, MBS recorded professional and consulting expenses totaling
$88,476 as compared with $142,261 for the first six months of 2005, a decrease of $53,786. This
change is primarily the result of a decrease in contract labor used in the first half of 2005 as a
result of staffing shortages. This contract labor was not utilized in the first six months of 2006
because MBSs position inventory is fully staffed.
IPSs and Orions professional and consulting fees, which include the costs of corporate
accounting, financial reporting and compliance, and legal fees, decreased from $653,835 for the six
months ended June 30, 2005 to $618,636 for the six months ended June 30, 2006. The decrease is
primarily the result of reduced legal fees and expenses related to the divestiture of the Companys
surgery and diagnostic business in 2005.
Insurance. Consolidated insurance expense, which includes the costs of professional liability for
affiliated physicians, property and casualty and general liability insurance and directors and
officers liability insurance, decreased from $441,272 for the six months ended June 30, 2005 to
$339,360 for the six months ended June 30, 2006. Insurance expense related to the directors and
officers liability policies in the first half of 2005 included approximately $75,000 of premiums
for run-off policies related to SurgiCare and IPS. The run-off policies were expensed fully in
2005.
Provision for Doubtful Accounts. The Companys consolidated provision for doubtful accounts, or bad
debt expense, decreased $337,689, or 53.0%, for the six months ended June 30, 2006 to $299,146. The
entire provision for doubtful accounts for the six months ended June 30, 2006 related to IPSs
affiliated medical groups and accounted for 3.2% of IPSs net operating revenues as compared to
6.3% of IPSs net operating revenues for the same period in 2005. The total collection rate, after
contractual allowances, for IPSs affiliated medical groups was 70.6% for the six months ended June
30, 2006, compared to 63.8% for the same period in 2005.
Other Expenses. Consolidated other expenses totaled $2,272,944 for the six months ended June 30,
2006, a decrease of $277,151 from the same period in 2005. Other expenses include general and
administrative expenses such as office supplies, telephone & data communications, printing &
postage, transfer agent fees, and board of directors compensation and meeting expenses, as well as
some direct clinical expenses, which are expenses that are directly related to the practice of
medicine by the physicians that practice at the affiliated medical groups managed by IPS.
MBSs other expenses totaled $556,621 for the six months ended June 30, 2006 as compared to
$662,957 for the six months ended June 30, 2005. Of the total decrease, approximately $90,000 and
$19,000 related to decreases in office supplies and postage and courier expenses, respectively, in
the first six months of 2006 as compared to the same period in 2005. These expense fluctuations are
the direct result of the decrease in net operating revenues in the first half of 2006.
Additionally, MBS renegotiated its long distance rates in the fall of 2005, which resulted in
approximately $39,000 in cost savings in the first six months of 2006 as compared to the same
period in 2005.
17
For the six months ended June 30, 2006, IPSs direct clinical expenses, other than salaries and
benefits, totaled $1,146,920, an increase of $34,792 over direct clinical expenses in the first
half of 2005, which totaled $1,112,128. Vaccine expenses accounted for approximately $43,000 of the
total increase in direct clinical expenses in the first six months of 2006. IPSs affiliated
medical groups began using two new vaccines in late 2005 Menactra and Decavac which replaced
lower-priced vaccines previously utilized by the medical groups.
The Companys and IPSs general and administrative expenses totaled $334,778 for the six months
ended June 30, 2006, a decrease of $200,472 from the same period in 2005. Of the total decrease,
approximately $198,000 relates to cost efficiencies and expense reductions as a result of the
consolidation of corporate functions into the Companys Roswell, Georgia office in August 2005.
Other Income and Expenses.
Interest Expense. Consolidated interest expense totaled $234,144 for the six months ended June 30,
2006, an increase of $83,752 from the same period in 2005. Interest expense activity in the first
half of 2006, including increases from the first six months of 2005, can be explained generally by
the following:
|
|
|
Brantley Debt. In March and April 2005, the Company borrowed an aggregate of $1,250,000 from
Brantley Partners IV, L.P. (Brantley IV). (See Liquidity and Capital Resources.) Interest
expense related to these notes totaled approximately $57,000 for the six months ended June
30, 2006. |
|
|
|
|
MBS Notes. On April 19, 2006, the Company executed subordinated promissory notes with the
former equity owners of MBS and DCPS for an aggregate of $714,336. This represented the
retroactive purchase price increase due to the former equity owners of MBS and DCPS based on
the financial results of the newly formed MBS, as required by the merger agreement governing
the DCPS/MBS Merger. The notes bear interest at the rate of 8% per annum, payable monthly
beginning on April 30, 2006, and will mature on December 15, 2007. Interest expense related
to these notes totaled approximately $11,429 for the six months ended June 30, 2006. |
|
|
|
|
Line of Credit. As part of the restructuring transactions, the Company also entered into a
new secured two-year revolving credit facility pursuant to the Loan and Security Agreement
borrowing $1.6 million under this facility concurrently with the Closing. (See Liquidity and
Capital Resources for additional discussion regarding the Loan and Security Agreement.)
Interest expense related to this line of credit totaled $114,807 for the six months ended
June 30, 2006, compared to $97,825 for the six months ended June 30, 2005. The increase in
interest expense on the line of credit facility was a direct result of interest rate
increases for the first six months of 2006 as compared to the same period in 2005. In
December 2005, the Company received notification from CIT stating that certain events of
default under the Loan and Security Agreement had occurred as a result of the Company being
out of compliance with two financial covenants. As a result of the events of default, CIT
raised the interest rate for monies borrowed under the Loan and Security Agreement to a
default rate of prime rate plus 6% as compared to the stated interest rate of prime rate plus
3% as of the Closing. (See Part II, Item 3. Defaults Upon Senior Securities for additional
discussion regarding the Companys defaults under the Loan and Security Agreement.) The loan
balance for this facility was $998,668 and $1,681,450 at June 30, 2006 and 2005,
respectively. Additionally, the average prime rate for the first half of 2006 was 7.67% as
compared to 5.67% for the same six-month period in 2005. |
Gain on Forgiveness of Debt. On August 25, 2003, the Companys lender, DVI, announced that it was
seeking protection under Chapter 11 of the United States Bankruptcy laws. Both IPS and SurgiCare
had loans outstanding to DVI in the form of term loans and revolving lines of credit. As part of
the IPS Merger, the Company negotiated a discount on the term loans and a buy-out of the revolving
lines of credit. As part of that agreement, the Company executed a new loan agreement with U.S.
Bank Portfolio Services, as Servicer for payees, for payment of the revolving lines of credit and
renegotiation of the term loans. In the first quarter of 2006, the Company negotiated an 85%
discount on the revolving line of credit, which had a balance of $778,000 at December 31, 2005. As
of March 13, 2006, the Company had made aggregate payments in the amount of $112,500 in
satisfaction of the $778,000 debt, and recognized a gain on forgiveness of debt totaling $665,463
for the six months ended June 30, 2006.
18
Discontinued Operations.
Bellaire SurgiCare. As of the Closing, the Companys management expected the case volumes at
Bellaire SurgiCare to improve in 2005. However, by the end of February 2005, it was determined that
the expected case volume increases were not going to be realized. On March 1, 2005, the Company
closed Bellaire SurgiCare and consolidated its operations with the operations of Memorial Village.
The Company tested the identifiable intangible assets and goodwill related to the surgery center
business using the present value of cash flows method. As a result of the decision to close
Bellaire SurgiCare and the resulting impairment of the joint venture interest and management
contracts related to the surgery centers, the Company recorded a charge for impairment of
intangible assets of $4,090,555 for the year ended December 31, 2004. The Company also recorded a
loss on disposal of this discontinued component (in addition to the charge for impairment of
intangible assets) of $163,049 for the quarter ended March 31, 2005. There were no operations for
this component after March 31, 2005.
The following table contains selected financial statement data related to Bellaire SurgiCare as of
and for the six months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
161,679 |
|
Operating expenses |
|
|
350,097 |
|
|
|
|
|
Net loss |
|
$ |
(188,418 |
) |
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
|
|
Other assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
|
|
|
Capital Allergy and Respiratory Disease Center (CARDC). On April 1, 2005, IPS entered into a
Mutual Release and Settlement Agreement (the CARDC Settlement) with Dr. Bradley E. Chipps, M.D.
and CARDC to settle disputes as to the existence and enforceability of certain contractual
obligations. As part of the CARDC Settlement, Dr. Chipps, CARDC, and IPS agreed that CARDC would
purchase the assets owned by IPS and used in connection with CARDC, in exchange for termination of
the MSA between IPS and CARDC. Additionally, among other provisions, after April 1, 2005, Dr.
Chipps, CARDC and IPS have been released from any further obligation to each other arising from any
previous agreement. As a result of the CARDC dispute, the Company recorded a charge for impairment
of intangible assets related to CARDC of $704,927 for the year ended December 31, 2004. The Company
also recorded a gain on disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $506,625 for the quarter ended March 31, 2005. For the quarter
ended June 30, 2005, the Company reduced the gain on disposal of this discontinued component by
$238,333 as the result of post-settlement adjustments related to the reconciliation of balance
sheet accounts. There were no operations for this component in the Companys financial statements
after March 31, 2005.
The following table contains selected financial statement data related to CARDC as of and for the
six months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
848,373 |
|
Operating expenses |
|
|
809,673 |
|
|
|
|
|
Net income |
|
$ |
38,700 |
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
|
|
Other assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
|
|
|
19
IntegriMED. On June 7, 2005, IntegriMED executed the IntegriMED Agreement with eClinicalWeb.
As a result of this transaction, the Company recorded a loss on disposal of this discontinued
component of $47,101 for the quarter ended June 30, 2005. The operations of this component are
reflected in the Companys consolidated condensed statements of operations as loss from operations
of discontinued components for the six months ended June 30, 2005. There were no operations for
this component in the Companys financial statements after June 30, 2005.
The following table contains selected financial statement data related to IntegriMED as of and for
the six months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
191,771 |
|
Operating expenses |
|
|
899,667 |
|
|
|
|
|
Net loss |
|
$ |
(707,896 |
) |
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
(24,496 |
) |
Other assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
(24,496 |
) |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
17,022 |
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
17,022 |
|
|
|
|
|
TASC and TOM. On June 13, 2005, the Company announced that it had accepted an offer to
purchase its interests in TASC and TOM in Dover, Ohio. On September 30, 2005, the Company executed
purchase agreements to sell its 51% ownership interest in TASC and its 41% ownership interest in
TOM to Union. Additionally, as part of the transactions, TASC, as the sole member of TASC
Anesthesia, executed an Asset Purchase Agreement to sell certain assets of TASC Anesthesia to
Union. The limited partners of TASC and TOM also sold a certain number of their units to Union such
that at the closing of these transactions, Union owned 70% of the ownership interests in TASC and
TOM. The Company no longer has an ownership interest in TASC, TOM or TASC Anesthesia. As a result
of these transactions, as well as the uncertainty of future cash flows related to the Companys
surgery center business, the Company determined that the joint venture interests associated with
TASC and TOM were impaired and recorded a charge for impairment of intangible assets related to
TASC and TOM of $2,122,445 for the three months ended June 30, 2005. Also as a result of these
transactions, the Company recorded a gain on disposal of this discontinued component (in addition
to the charge for impairment of intangible assets) of $1,357,712 for the quarter ended December 31,
2005. The Company allocated the goodwill recorded as part of the IPS Merger to each of the surgery
center reporting units and recorded a loss on the write-down of goodwill related to TASC and TOM
totaling $789,173 for the quarter ended December 31, 2005, which reduced the gain on disposal. In
early 2006, the Company was notified by Union that it was exercising its option to terminate the
management services agreements of TOM and TASC as of March 12, 2006 and April 3, 2006,
respectively. As a result, the Company recorded a charge for impairment of intangible assets of
$1,021,457 for the three months ended December 31, 2005 related to the TASC and TOM management
services agreements. The operations of this component are reflected in the Companys consolidated
condensed statements of operations as `loss from operations of discontinued components for the six
months ended June 30, 2005. There were no operations for this component in the Companys financial
statements after September 30, 2005.
The following table contains selected financial statement data related to TASC and TOM as of and
for the six months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
1,670,801 |
|
Operating expenses |
|
|
1,630,806 |
|
|
|
|
|
Net income |
|
$ |
39,995 |
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
794,831 |
|
Other assets |
|
|
1,487,732 |
|
|
|
|
|
Total assets |
|
$ |
2,282,563 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
709,779 |
|
Other liabilities |
|
|
907,390 |
|
|
|
|
|
Total liabilities |
|
$ |
1,617,169 |
|
|
|
|
|
20
Sutter. On October 31, 2005, IPS executed the Sutter Settlement with Dr. Sutter to settle
disputes that had arisen between IPS and Dr. Sutter and to avoid the risk and expense of
litigation. As part of the Sutter Settlement, Dr. Sutter and IPS agreed that Dr. Sutter would
purchase the assets owned by IPS and used in connection with Dr. Sutters practice, in exchange for
termination of the related MSA. Additionally, among other provisions, after October 31, 2005, Dr.
Sutter and IPS have been released from any further obligation to each other arising from any
previous agreement. As a result of this transaction, the Company recorded a loss on disposal of
this discontinued component (in addition to the charge for impairment of intangible assets of
$38,440 recorded in the fourth quarter of 2005) of $279 for the quarter ended December 31, 2005.
The operations of this component are reflected in the Companys consolidated condensed statements
of operations as `loss from operations of discontinued components for the six months ended June
30, 2005. There were no operations for this component in the Companys financial statements after
October 31, 2005.
The following table contains selected financial statement data related to Sutter as of and for the
six months ended June 30, 2005:
|
|
|
|
|
|
|
June 30, 2005 |
|
Income statement data: |
|
|
|
|
Net operating revenues |
|
$ |
216,319 |
|
Operating expenses |
|
|
210,609 |
|
|
|
|
|
Net income |
|
$ |
5,710 |
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
Current assets |
|
$ |
113,819 |
|
Other assets |
|
|
15,033 |
|
|
|
|
|
Total assets |
|
$ |
128,852 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
7,839 |
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
7,839 |
|
|
|
|
|
Memorial Village. As a result of the uncertainty of future cash flows related to our surgery
center business as well as the transactions related to TASC and TOM, the Company determined that
the joint venture interest associated with Memorial Village was impaired and recorded a charge for
impairment of intangible assets related to Memorial Village of $3,229,462 for the three months
ended June 30, 2005. In November 2005, the Company decided that, as a result of ongoing losses at
Memorial Village, it would need to either find a buyer for the Companys equity interests in
Memorial Village or close the facility. In preparation for this pending transaction, the Company
tested the identifiable intangible assets and goodwill related to the surgery center business using
the present value of cash flows method. As a result of the decision to sell or close Memorial
Village, as well as the uncertainty of cash flows related to the Companys surgery center business,
the Company recorded an additional charge for impairment of intangible assets of $1,348,085 for the
three months ended September 30, 2005. On February 8, 2006, Memorial Village executed the Memorial
Agreement for the sale of substantially all of its assets to First Surgical. Memorial Village was
approximately 49% owned by Town & Country SurgiCare, Inc., a wholly owned subsidiary of the
Company. The Memorial Agreement was deemed to be effective as of January 31, 2006. As a result of
this transaction, the Company recorded a gain on the disposal of this discontinued component (in
addition to the charge for impairment of intangible assets) of $574,321 for the quarter ended March
31, 2006. The Company allocated the goodwill recorded as part of the IPS Merger to each of the
surgery center reporting units and recorded a loss on the write-down of goodwill related to
Memorial Village totaling $2,005,383 for the quarter ended December 31, 2005. The operations of
this component are reflected in the Companys consolidated statements of operations as `loss from
operations of discontinued components for the six months ended June 30, 2006 and 2005,
respectively. There were no operations for this component in the Companys financial statements
after March 31, 2006.
The following table contains selected financial statement data related to Memorial Village as of
and for the six months ended June 30, 2006 and 2005, respectively:
21
June 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
June 30, 2005 |
Income statement data: |
|
|
|
|
|
|
|
|
Net operating revenues |
|
$ |
17,249 |
|
|
$ |
1,268,852 |
|
Operating expenses |
|
|
170,285 |
|
|
|
1,511,624 |
|
|
|
|
Net loss |
|
$ |
(153,036 |
) |
|
$ |
(242,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
|
|
|
$ |
861,111 |
|
Other assets |
|
|
|
|
|
|
767,497 |
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
1,628,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
|
|
|
$ |
729,567 |
|
Other liabilities |
|
|
|
|
|
|
725,884 |
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
1,455,451 |
|
|
|
|
San Jacinto. On March 1, 2006, San Jacinto executed an Asset Purchase Agreement for the sale
of substantially all of its assets to Methodist. San Jacinto was approximately 10% owned by Baytown
SurgiCare, Inc., a wholly owned subsidiary of the Company, and is not consolidated in the Companys
financial statements. As a result of this transaction, the Company recorded a gain on disposal of
this discontinued operation of $94,066 for the quarter ended March 31, 2006. As a result of the
uncertainty of future cash flows related to the surgery center business, and in conjunction with
the transactions related to TASC and TOM, the Company determined that the joint venture interest
associated with San Jacinto was impaired and recorded a charge for impairment of intangible assets
related to San Jacinto of $734,522 for the three months ended June 30, 2005. The Company also recorded an additional $2,113,262 charge for
impairment of intangible assets for the three months ended September 30, 2005 related to the
management contracts with San Jacinto. The Company allocated
the goodwill recorded as part of the IPS Merger to each of the surgery center reporting units and
recorded a loss on the write-down of goodwill related to San Jacinto totaling $694,499 for the
quarter ended December 31, 2005. There were no operations for this component in the
Companys financial statements after March 31, 2006.
Orion. Prior to the divestiture of the Companys ambulatory surgery center business, the Company
recorded management fee revenue, which was eliminated in the consolidation of the Companys
financial statements, for Bellaire SurgiCare, TASC and TOM and Memorial Village. The management fee
revenue for San Jacinto was not eliminated in consolidation. The management fee revenue associated
with the discontinued operations in the surgery center business totaled $61,039 for the six months
ended June 30, 2006. For the six months ended June 30, 2005, the Company generated management fee
revenue of $218,407 and net minority interest losses totaling $42,765. For the quarters ended June
30, 2005 and December 31, 2005, the Company recorded a charge for impairment of intangible assets
of $276,420 and $142,377, respectively, related to trained work force and non-compete agreements
affected by the surgery center operations the Company discontinued in 2005 and early 2006.
The following table summarizes the components of income (loss) from operations of discontinued
components:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, 2006 |
|
June 30, 2005 |
|
|
|
|
|
|
|
(Restated) |
Bellaire SurgiCare |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
|
|
|
|
(188,418 |
) |
Loss on disposal |
|
|
|
|
|
|
(163,049 |
) |
CARDC |
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
38,700 |
|
Gain on disposal |
|
|
|
|
|
|
268,292 |
|
IntegriMED |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(707,896 |
) |
Loss on disposal |
|
|
|
|
|
|
(47,101 |
) |
TASC and TOM |
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
39,995 |
|
Loss on disposal |
|
|
|
|
|
|
(2,122,445 |
) |
Sutter |
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
5,710 |
|
Memorial Village |
|
|
|
|
|
|
|
|
Net loss |
|
|
(153,036 |
) |
|
|
(242,772 |
) |
Gain (loss) on disposal |
|
|
574,321 |
|
|
|
(3,229,462 |
) |
San Jacinto |
|
|
|
|
|
|
|
|
Gain (loss) on disposal |
|
|
94,066 |
|
|
|
(734,522 |
) |
Orion |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
61,039 |
|
|
|
(100,778 |
) |
|
|
|
|
Total income (loss) from
operations of
discontinued components,
including net gain
(loss) on disposal |
|
$ |
576,390 |
|
|
$ |
(7,183,746 |
) |
|
|
|
22
Liquidity and Capital Resources
Net cash provided by operating activities totaled $57,173 for the three months ended June 30, 2006
as compared to cash used in operating activities of $951,095 for the three months ended June 30,
2005. For the six months ended June 30, 2006, net cash provided by operating activities totaled
$575,852 as compared to net cash used in operating activities totaling $1,805,230 for the same
period in 2005. The net impact of discontinued operations on net cash provided by operating
activities in the first six months of 2006 totaled $230,744.
For the three months ended June 30, 2006, net cash used by investing activities totaled $11,743
compared to $12,051 in net cash provided by investing activities for the same period in 2005. For
the six months ended June 30, 2006, net cash provided by investing activities totaled $417,234 as
compared to $32,195 in net cash provided by investing activities in the six months ended June 30,
2005. The net impact of discontinued operations on net cash provided by investing activities
totaled $430,244 in the first six months of 2006.
Net cash used in financing activities totaled $962,970 for the six months ended June 30, 2006 as
compared to $1,382,272 in net cash provided by financing activities for the six months ended June
30, 2005. The change in cash uses related to financing activities from 2005 to 2006 can be
explained generally by the following:
|
|
|
Net repayments on the CIT revolving credit facility totaled $718,221 in the first six months
of 2006, including approximately $300,000 in repayments related to discontinued operations; |
|
|
|
|
As discussed below, in March and April of 2005, the Company borrowed an aggregate of
$1,250,000 from Brantley IV. |
|
|
|
|
The Company made aggregate payments in the amount of $112,500 in the first quarter of 2006 in
satisfaction of a $778,000 debt, and recognized a gain on forgiveness of debt totaling
$665,463 for the six months ended June 30, 2006; and |
|
|
|
|
The Company repaid approximately $200,000 in satisfaction of a working capital note from the
sellers of MBS in the first quarter of 2006. |
The Companys unaudited consolidated condensed financial statements have been prepared in
conformity with GAAP, which contemplate the continuation of the Company as a going concern. The
Company incurred substantial operating losses during 2005, and has used substantial amounts of
working capital in its operations. Additionally, as described more fully below, the Company
received notification from CIT in December 2005 that certain events of default under the Loan and
Security Agreement had occurred as a result of the Company being out of compliance with two
financial covenants relating to its debt service coverage ratio and its minimum operating income
level. These conditions raise substantial doubt about the Companys ability to continue as a going
concern.
The Company has financed its growth and operations primarily through the issuance of equity
securities, secured and/or convertible debt, most recently by completing the 2004 Mergers and
restructuring transactions in December 2004, which are described under the caption Company
History, and borrowing from related parties. On December 15, 2004, the Company also entered into a
new secured two-year revolving credit facility pursuant to the Loan and Security Agreement. Under
this facility, initially up to $4,000,000 of loans could be made available to the Company, subject
to a borrowing base. As discussed below, the amount available under this credit facility has been
reduced. The Company borrowed $1,600,000 under this facility concurrently with the Closing. The
interest rate under this facility is the prime rate plus 6%. Upon an event of default, CIT can
accelerate the loans or call the Guaranties described below. (See Part II, Item 3. Defaults Upon
Senior Securities for additional discussion regarding the Companys defaults under the Loan and
Security Agreement.) In connection with entering into this new facility, the Company also
restructured its previously-existing debt facilities, which resulted in a decrease in aggregate
debt owed to DVI from approximately $10.1 million to a combined principal amount of approximately
$6.5 million, of which approximately $2.0 million was paid at the Closing.
Pursuant to a Guaranty Agreement (the Brantley IV Guaranty), dated as of December 15, 2004,
provided by Brantley IV to CIT, Brantley IV agreed to provide a deficiency guaranty in the initial
amount of $3,272,727. As discussed below, the amount of this Brantley IV Guaranty has been reduced.
Pursuant to a Guaranty Agreement (the Brantley Capital Guaranty and collectively with the
Brantley IV Guaranty, the Guaranties), dated as of December 15, 2004, provided by Brantley
Capital Corporation (Brantley Capital) to CIT, Brantley Capital agreed to provide a deficiency
guarantee in the initial amount of $727,273. As discussed below, the amount of this Brantley
Capital Guaranty has been reduced. In consideration for the Guaranties, the Company issued warrants
to purchase 20,455 shares of Class A Common Stock, at an exercise price of $0.01 per share, to
Brantley IV, and issued warrants to purchase 4,545 shares of Class A Common Stock, at an exercise
price of $0.01 per share, to Brantley Capital. None of these warrants, which expire on December 15,
2009, have been exercised as of June 30, 2006.
23
On March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000 (the First
Loan). On June 1, 2005, the Company executed a convertible subordinated promissory note in the
principal amount of $1,025,000 (the First Note) payable to Brantley IV to evidence the terms of
the First Loan. The material terms of the First Note are as follows: (i) the First Note is
unsecured; (ii) the First Note is subordinate to the Companys outstanding loan from CIT and other
indebtedness for monies borrowed, and ranks pari passu with general unsecured trade liabilities;
(iii) principal and interest on the First Note is due in a lump sum on April 19, 2006 (the First
Note Maturity Date);
(iv) the interest on the First Note accrues from and after March 16, 2005, at a per annum rate
equal to nine percent (9.0%) and is non-compounding; (v) if an event of default occurs and is
continuing, Brantley IV, by notice to the Company, may declare the principal of the First Note to
be due and immediately payable; and (vi) on or after the First Note Maturity Date, Brantley IV, at
its option, may convert all or a portion of the outstanding principal and interest due of the First
Note into shares of Class A Common Stock of the Company at a price per share equal to $1.042825
(the First Note Conversion Price). The number of shares of Class A Common Stock to be issued upon
conversion of the First Note shall be equal to the number obtained by dividing (x) the aggregate
amount of principal and interest to be converted by (y) the First Note Conversion Price (as defined
above); provided, however, the number of shares to be issued upon conversion of the First Note
shall not exceed the lesser of: (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3% of the
then outstanding Class A Common Stock. As of June 30, 2006, if Brantley IV were to convert the
First Note, the Company would have to issue 1,098,644 shares of Class A Common Stock. On May 9,
2006, Brantley IV and the Company executed an amendment to the First Note (the First and Second
Note Amendment) extending the First Note Maturity Date to August 15, 2006. On August 8, 2006,
Brantley IV and the Company executed a second amendment to the First Note (the First and Second
Note Second Amendment) extending the First Note Maturity Date to October 15, 2006. A copy of the
First and Second Note Second Amendment is attached hereto as Exhibit 10.1.
On April 19, 2005, Brantley IV loaned the Company an additional $225,000 (the Second Loan). On
June 1, 2005, the Company executed a convertible subordinated promissory note in the principal
amount of $225,000 (the Second Note) payable to Brantley IV to evidence the terms of the Second
Loan. The material terms of the Second Note are as follows: (i) the Second Note is unsecured; (ii)
the Second Note is subordinate to the Companys outstanding loan from CIT and other indebtedness
for monies borrowed, and ranks pari passu with general unsecured trade liabilities; (iii) principal
and interest on the Second Note is due in a lump sum on April 19, 2006 (the Second Note Maturity
Date);
(iv) the interest on the Second Note accrues from and after April 19, 2005, at a per annum rate
equal to nine percent (9.0%) and is non-compounding; (v) if an event of default occurs and is
continuing, Brantley IV, by notice to the Company, may declare the principal of the Second Note to
be due and immediately payable; and (vi) on or after the Second Note Maturity Date, Brantley IV, at
its option, may convert all or a portion of the outstanding principal and interest due of the
Second Note into shares of Class A Common Stock of the Company at a price per share equal to
$1.042825 (the Second Note Conversion Price). The number of shares of Class A Common Stock to be
issued upon conversion of the Second Note shall be equal to the number obtained by dividing (x) the
aggregate amount of principal and interest to be converted by (y) the Second Note Conversion Price
(as defined above); provided, however, the number of shares to be issued upon conversion of the
Second Note shall not exceed the lesser of: (i) 254,597 shares of Class A Common Stock, or (ii)
3.6% of the then outstanding Class A Common Stock. As of June 30, 2006, if Brantley IV were to
convert the Second Note, the Company would have to issue 239,332 shares of Class A Common Stock. On
May 9, 2006, Brantley IV and the Company executed the First and Second Note Amendment extending the
Second Note Maturity Date to August 15, 2006. On August 8, 2006, Brantley IV and the Company
executed the First and Second Note Second Amendment extending the Second Note Maturity Date to
October 15, 2006.
Additionally, in connection with the First Loan and the Second Loan, the Company entered into a
First Amendment to the Loan and Security Agreement (the First Amendment), dated March 22, 2005,
with certain of the Companys affiliates and subsidiaries, and CIT, whereby its $4,000,000 secured
two-year revolving credit facility has been reduced by the amount of the loans from Brantley IV to
$2,750,000. As a result of the First Amendment, the Brantley IV Guaranty was amended by the Amended
and Restated Guaranty Agreement, dated March 22, 2005, which reduced the deficiency guaranty
provided by Brantley IV by the amount of the First Loan to $2,247,727. Also as a result of the
First Amendment, the Brantley Capital Guaranty was amended by the Amended and Restated Guaranty
Agreement, dated March 22, 2005, which reduced the deficiency guaranty provided by Brantley Capital
by the amount of the Second Loan to $502,273. Paul H. Cascio, the Chairman of the board of
directors of the Company, and Michael J. Finn, a director of the Company, are affiliates of
Brantley IV.
24
As part of the Loan and Security Agreement, the Company is required to comply with certain
financial covenants, measured on a quarterly basis. The financial covenants include maintaining a
required debt service coverage ratio and meeting a minimum operating income level for the surgery
and diagnostic centers before corporate overhead allocations. As of and for the three months and
six months ended June 30, 2006, the Company was out of compliance with both of these financial
covenants and has notified the lender as such. Under the terms of the Loan and Security Agreement,
failure to meet the required financial covenants constitutes an event of default. Under an event of
default, the lender may (i) accelerate and declare the obligations under the credit facility to be
immediately due and payable; (ii) withhold or cease to make advances under the credit facility;
(iii) terminate the credit facility; (iv) take possession of the collateral pledged as part of the
Loan and Security Agreement; (v) reduce or modify the revolving loan commitment; and/or (vi) take
necessary action under the Guaranties. The revolving credit facility is secured by the Companys
assets. As of June 30, 2006, the outstanding principal under the revolving credit facility was
$998,668. The full amount of the loan as of June 30, 2006 is recorded as a current liability. In
December 2005, the Company received notification from CIT stating that (i) certain events of
default under the Loan and Security Agreement had occurred as a result of the Company being out of
compliance with two financial covenants relating to its debt service coverage ratio and its minimum
operating income level, (ii) as a result of the events of default, CIT raised the interest rate for
monies borrowed under the Loan and Security Agreement to the provided Default Rate of prime rate
plus 6%, (iii) the amount available under the revolving credit facility was reduced to $2,300,000
and (iv) CIT reserved all additional rights and remedies available to it as a result of these
events of default. The Company is currently in negotiations with CIT to obtain, among other
provisions, a waiver of the events of default. In the event CIT declares the obligations under the
Loan and Security Agreement to be immediately due and payable or exercises its other rights
described above, the Company would not be able to meet its obligations to CIT or its other
creditors. As a result, such action would have a material adverse effect on the Companys ability
to continue as a going concern.
As of June 30, 2006, the Companys existing credit facility with CIT had limited availability to
provide for working capital shortages. Although the Company believes that it will generate cash
flows from operations in the future, there is substantial doubt as to whether it will be able to
fund its operations solely from its cash flows. In April 2005, the Company initiated a strategic
plan designed to accelerate the Companys growth and enhance its future earnings potential. The
plan focuses on the Companys strengths, which include providing billing, collections and
complementary business management services to physician practices. A fundamental component of the
Companys plan is the selective consideration of accretive acquisition opportunities in these core
business sectors. In addition, the Company ceased investment in business lines that did not
complement the Companys strategic plans and redirected financial resources and Company personnel
to areas that management believes enhances long-term growth potential. On June 7, 2005, as
described in Discontinued Operations, IPS completed the sale of substantially all of the assets
of IntegriMED, and on October 1, 2005, the Company completed the sale of its interests in TASC and
TOM in Dover, Ohio. Beginning in the third quarter of 2005, the Company successfully completed the
consolidation of corporate functions into its Roswell, Georgia facility. Additionally, consistent
with its strategic plan, the Company sold its interest in Memorial Village effective January 31,
2006 and in San Jacinto effective March 1, 2006. These transactions are described in greater detail
under the caption Discontinued Operations.
The Company intends to continue to manage its use of cash. However, the Companys business is still
faced with many challenges. If cash flows from operations and borrowings are not sufficient to fund
the Companys cash requirements, the Company may be required to further reduce its operations
and/or seek additional public or private equity financing or financing from other sources or
consider other strategic alternatives, including possible additional divestitures of specific
assets or lines of business. Any acquisitions will require additional capital. There can be no
assurances that additional financing will be available, or that, if available, the financing will
be obtainable on terms acceptable to the Company or that any additional financing would not be
substantially dilutive to the Companys existing stockholders.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure
controls and procedures that are designed to provide reasonable assurance that information required
to be disclosed by the Company in its reports filed under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the SECs rules and
forms. As of the end of the period covered by this report, the Company evaluated, under the
supervision and with the participation of its management, including the Chief Executive Officer and
Chief Financial Officer, the design and effectiveness of its disclosure controls and procedures
pursuant to Rule 13a-15(c) of the Exchange Act. Based on that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures
are effective in timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in its periodic filings.
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.
25
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the DCPS/MBS Merger in December 2004, 75,758 shares of Orions Class A Common
Stock were reserved for issuance at the direction of the sellers of the MBS and DCPS equity. On
July 14, 2006, 75,000 shares of Class A Common Stock were issued to certain employees and
affiliates of MBS and DCPS.
There was no placement agent or underwriter for the stock issuances. The Company processed the
stock issuances internally. The shares were not sold for cash. The Company did not receive any
consideration in connection with the stock issuances. In connection with the issuance of the Class
A Common Stock, the Company relied upon the exemption from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As part of the Loan and Security Agreement, the Company is required to comply with certain
financial covenants, measured on a quarterly basis. The financial covenants include maintaining a
required debt service coverage ratio and meeting a minimum operating income level for the surgery
and diagnostic centers before corporate overhead allocations. As of and for the three months and
six months ended June 30, 2006, the Company was out of compliance with both of these financial
covenants and has notified the lender as such. Under the terms of the Loan and Security Agreement,
failure to meet the required financial covenants constitutes an event of default. Under an event of
default, the lender may (i) accelerate and declare the obligations under the credit facility to be
immediately due and payable; (ii) withhold or cease to make advances under the credit facility;
(iii) terminate the credit facility; (iv) take possession of the collateral pledged as part of the
Loan and Security Agreement; (v) reduce or modify the revolving loan commitment; and/or (vi) take
necessary action under the Guaranties. The revolving credit facility is secured by the Companys
assets. As of June 30, 2006, the outstanding principal under the revolving credit facility was
$998,668. The full amount of the loan as of June 30, 2006 is recorded as a current liability. In
December 2005, the Company received notification from CIT stating that (i) certain events of
default under the Loan and Security Agreement had occurred as a result of the Company being out of
compliance with two financial covenants relating to its debt service coverage ratio and its minimum
operating income level, (ii) as a result of the events of default, CIT raised the interest rate for
monies borrowed under the Loan and Security Agreement to the provided Default Rate of prime rate
plus 6%, (iii) the amount available under the revolving credit facility was reduced from $2,750,000
to $2,300,000 and (iv) CIT reserved all additional rights and remedies available to it as a result
of these events of default. The Company is currently in negotiations with CIT to obtain, among
other provisions, a waiver of the events of default. In the event CIT declares the obligations
under the Loan and Security Agreement to be immediately due and payable or exercises its other
rights described above, the Company would not be able to meet its obligations to CIT or its other
creditors. As a result, such action would have a material adverse effect on the Company`s ability
to continue as a going concern.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders (the Annual Meeting) on May 12, 2006. At the
Annual Meeting, the stockholders voted on and approved each of the following proposals:
|
|
|
|
|
|
|
Proposal One:
|
|
To elect five directors of the Company to serve until the 2007
annual meeting of stockholders or until their respective
successors are elected and qualified. |
|
|
|
|
|
|
|
|
|
The following list indicates the number of votes received by
each of the nominees for election to the Companys board of
directors in Proposal One: |
|
|
|
|
|
|
|
|
|
|
|
For |
|
|
Withheld |
|
Terrence L. Bauer |
|
|
16,714,716 |
|
|
|
279,074 |
|
Paul H. Cascio |
|
|
16,720,737 |
|
|
|
273,053 |
|
Michael J. Finn |
|
|
16,933,439 |
|
|
|
60,351 |
|
David Crane |
|
|
16,933,489 |
|
|
|
60,301 |
|
Joseph M. Valley |
|
|
16,948,632 |
|
|
|
45,158 |
|
26
|
|
|
|
|
|
|
Proposal Two:
|
|
To ratify the the appointment of UHY Mann Frankfort Stein &
Lipp CPAs, L.L.P. as the Companys independent public
auditors. Proposal Two was approved by holders of 69.7% of the
outstanding share of the Companys common stock (including
Class A, Class B and Class C Common Stock) entitled to vote at
the Annual Meeting. Specifically, a total of 16,949,333 shares
were voted in favor of this proposal, 31,014 shares were voted
against this proposal, and 13,443 shares abstained from voting
on this proposal. |
ITEM 6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
Exhibit 10.1
|
|
Second Amendment to Convertible Subordinated Promissory
Notes, dated as of August 8, 2006, by and between Orion
HealthCorp, Inc. and Brantley Partners IV, L.P. |
|
|
|
Exhibit 31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification |
|
|
|
Exhibit 31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification |
|
|
|
Exhibit 32.1
|
|
Section 1350 Certification |
|
|
|
Exhibit 32.2
|
|
Section 1350 Certification |
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ORION HEALTHCORP, INC.
|
|
|
|
|
|
|
|
|
By: |
/s/ Terrence L. Bauer
|
|
Dated: November 9, 2006 |
|
Terrence L. Bauer |
|
|
|
President, Chief Executive Officer
and Director
(Duly Authorized Representative) |
|
|
In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on November 9, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Terrence L. Bauer
Terrence
L. Bauer
|
|
By:
|
|
/s/ Michael J. Finn*
Michael J. Finn
|
|
|
|
|
|
|
President, Chief Executive Officer and
|
|
|
|
Director |
|
|
|
|
|
|
Director (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Paul H. Cascio*
Paul
H. Cascio
|
|
By:
|
|
/s/ Joseph M. Valley, Jr.*
Joseph M. Valley, Jr.
|
|
|
|
|
|
|
Director and Non-Executive
|
|
|
|
Director |
|
|
|
|
|
|
Chairman of the Board |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ David Crane*
David
Crane
|
|
By:
|
|
/s/ Stephen H. Murdock
Stephen H. Murdock
|
|
|
|
|
|
|
Director
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
(Principal Accounting |
|
|
|
|
|
|
|
|
|
|
and Financial Officer) |
|
|
*By: /s/
Stephen H. Murdock
Stephen H. Murdock
Attorney-In-Fact
28
Exhibit Index
|
|
|
Exhibit No. |
|
Description |
Exhibit 10.1
|
|
Second Amendment to Convertible Subordinated Promissory
Notes, dated as of August 8, 2006, by and between Orion
HealthCorp, Inc. and Brantley Partners IV, L.P. |
|
|
|
Exhibit 31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification |
|
|
|
Exhibit 31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification |
|
|
|
Exhibit 32.1
|
|
Section 1350 Certification |
|
|
|
Exhibit 32.2
|
|
Section 1350 Certification |
29
ORION
HEALTHCORP, INC.
INDEX TO
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
Orion
HealthCorp, Inc.
Consolidated Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
328,923
|
|
|
$
|
298,807
|
|
Accounts receivable, net
|
|
|
2,329,863
|
|
|
|
2,798,304
|
|
Inventory
|
|
|
170,385
|
|
|
|
206,342
|
|
Prepaid expenses and other current
assets
|
|
|
619,853
|
|
|
|
715,671
|
|
Assets held for sale
|
|
|
|
|
|
|
975,839
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,449,024
|
|
|
|
4,994,963
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
639,617
|
|
|
|
741,966
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
Intangible assets, excluding
goodwill, net
|
|
|
13,094,246
|
|
|
|
13,797,714
|
|
Goodwill
|
|
|
2,490,695
|
|
|
|
2,490,695
|
|
Other assets, net
|
|
|
64,043
|
|
|
|
92,432
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
|
15,648,984
|
|
|
|
16,380,841
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
19,737,625
|
|
|
$
|
22,117,770
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
5,395,519
|
|
|
$
|
6,738,278
|
|
Other current liabilities
|
|
|
|
|
|
|
25,000
|
|
Current portion of capital lease
obligations
|
|
|
92,129
|
|
|
|
92,334
|
|
Current portion of long-term debt
|
|
|
3,439,897
|
|
|
|
4,231,674
|
|
Liabilities held for sale
|
|
|
|
|
|
|
452,027
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,927,545
|
|
|
|
11,539,313
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of
current portion
|
|
|
168,105
|
|
|
|
213,600
|
|
Long-term debt, net of current
portion
|
|
|
3,794,972
|
|
|
|
3,871,593
|
|
Minority interest in partnership
|
|
|
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
3,963,077
|
|
|
|
4,120,193
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001;
20,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common Stock, Class A, par
value $0.001; 70,000,000 shares authorized, 12,713,776 and
12,428,042 shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively
|
|
|
12,713
|
|
|
|
12,428
|
|
Common Stock, Class B, par
value $0.001; 25,000,000 shares authorized,
10,448,470 shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively
|
|
|
10,448
|
|
|
|
10,448
|
|
Common Stock, Class C, par
value $0.001; 2,000,000 shares authorized,
1,437,572 shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively
|
|
|
1,438
|
|
|
|
1,438
|
|
Additional paid-in capital
|
|
|
57,025,443
|
|
|
|
56,928,016
|
|
Accumulated deficit
|
|
|
(50,164,721
|
)
|
|
|
(50,455,748
|
)
|
Treasury stock at cost;
9,140 shares
|
|
|
(38,318
|
)
|
|
|
(38,318
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,847,003
|
|
|
|
6,458,264
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
19,737,625
|
|
|
$
|
22,117,770
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-2
Orion
HealthCorp, Inc.
Consolidated Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Restated)
|
|
|
Net operating revenues
|
|
$
|
6,931,714
|
|
|
$
|
7,651,291
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
2,773,316
|
|
|
|
3,156,954
|
|
Physician group distribution
|
|
|
1,920,041
|
|
|
|
2,270,672
|
|
Facility rent and related costs
|
|
|
390,890
|
|
|
|
430,259
|
|
Depreciation and amortization
|
|
|
408,930
|
|
|
|
843,979
|
|
Professional and consulting fees
|
|
|
361,044
|
|
|
|
516,079
|
|
Insurance
|
|
|
158,121
|
|
|
|
228,768
|
|
Provision for doubtful accounts
|
|
|
140,396
|
|
|
|
298,326
|
|
Other expenses
|
|
|
1,134,022
|
|
|
|
1,240,771
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,286,760
|
|
|
|
8,985,808
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before other income (expenses)
|
|
|
(355,046
|
)
|
|
|
(1,334,517
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(121,631
|
)
|
|
|
(94,094
|
)
|
Other expense, net
|
|
|
(4,488
|
)
|
|
|
(16,353
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(126,119
|
)
|
|
|
(110,447
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(481,165
|
)
|
|
|
(1,444,964
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Income (loss) from operations of
discontinued components, including net loss on disposal of
$6,371,863 for the three months ended June 30, 2005
|
|
|
968
|
|
|
|
(6,902,825
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(480,197
|
)
|
|
$
|
(8,347,789
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,591,319
|
|
|
|
9,246,425
|
|
Diluted
|
|
|
12,591,319
|
|
|
|
9,246,425
|
|
Loss per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Net loss per share from continuing
operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.15
|
)
|
Net loss per share from
discontinued operations
|
|
|
|
|
|
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net loss per share from continuing
operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.15
|
)
|
Net loss per share from
discontinued operations
|
|
|
|
|
|
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-3
Orion
HealthCorp, Inc.
Consolidated Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Restated)
|
|
|
Net operating revenues
|
|
$
|
14,085,728
|
|
|
$
|
15,281,113
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
5,535,247
|
|
|
|
6,205,856
|
|
Physician group distribution
|
|
|
4,023,346
|
|
|
|
4,603,758
|
|
Facility rent and related costs
|
|
|
792,276
|
|
|
|
858,099
|
|
Depreciation and amortization
|
|
|
818,828
|
|
|
|
1,727,201
|
|
Professional and consulting fees
|
|
|
707,112
|
|
|
|
931,640
|
|
Insurance
|
|
|
339,360
|
|
|
|
441,272
|
|
Provision for doubtful accounts
|
|
|
299,146
|
|
|
|
636,835
|
|
Other expenses
|
|
|
2,272,944
|
|
|
|
2,550,096
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,788,259
|
|
|
|
17,954,757
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before other income (expenses)
|
|
|
(702,531
|
)
|
|
|
(2,673,644
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(234,144
|
)
|
|
|
(150,391
|
)
|
Gain on forgiveness of debt
|
|
|
665,463
|
|
|
|
|
|
Other expense, net
|
|
|
(14,151
|
)
|
|
|
(18,977
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
417,168
|
|
|
|
(169,368
|
)
|
|
|
|
|
|
|
|
|
|
Minority interest earnings in
partnership
|
|
|
|
|
|
|
(1,660
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(285,363
|
)
|
|
|
(2,844,672
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Income (loss) from operations of
discontinued components, including net gain (loss) on disposal
of $668,387 and $5,293,765 for the six months ended
June 30, 2006 and 2005, respectively
|
|
|
576,390
|
|
|
|
(7,183,746
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
291,027
|
|
|
$
|
(10,028,418
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,510,131
|
|
|
|
8,958,080
|
|
Diluted
|
|
|
89,319,164
|
|
|
|
8,958,080
|
|
Income (loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Net loss per share from continuing
operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.32
|
)
|
Net income (loss) per share from
discontinued operations
|
|
|
0.05
|
|
|
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(1.12
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net loss per share from continuing
operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.32
|
)
|
Net income (loss) per share from
discontinued operations
|
|
|
0.01
|
|
|
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(1.12
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-4
Orion
HealthCorp, Inc.
Consolidated Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Revised (Restated)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(480,197
|
)
|
|
$
|
(8,347,789
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
140,396
|
|
|
|
298,326
|
|
Depreciation and amortization
|
|
|
408,930
|
|
|
|
843,979
|
|
Stock option compensation expense
|
|
|
49,641
|
|
|
|
|
|
Conversion of notes payable to
common stock
|
|
|
|
|
|
|
31,855
|
|
Impact of discontinued operations
|
|
|
|
|
|
|
6,828,826
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
27,450
|
|
|
|
(307,923
|
)
|
Inventory
|
|
|
27,553
|
|
|
|
(23,766
|
)
|
Prepaid expenses and other assets
|
|
|
(89,095
|
)
|
|
|
174,287
|
|
Other assets
|
|
|
12,339
|
|
|
|
(14,706
|
)
|
Accounts payable and accrued
expenses
|
|
|
(39,844
|
)
|
|
|
(479,198
|
)
|
Deferred revenues and other
liabilities
|
|
|
|
|
|
|
45,014
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
57,173
|
|
|
|
(951,095
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Sale (purchase) of property and
equipment
|
|
|
(11,743
|
)
|
|
|
12,051
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(11,743
|
)
|
|
|
12,051
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net repayments of capital lease
obligations
|
|
|
(22,010
|
)
|
|
|
(76,073
|
)
|
Net borrowings (repayments) on
line of credit
|
|
|
(163,991
|
)
|
|
|
595,786
|
|
Net repayments of notes payable
|
|
|
(5,495
|
)
|
|
|
|
|
Net borrowings (repayments) of
other obligations
|
|
|
(22,561
|
)
|
|
|
118,066
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(214,057
|
)
|
|
|
637,779
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(168,627
|
)
|
|
|
(301,265
|
)
|
Cash and cash equivalents,
beginning of quarter
|
|
|
497,550
|
|
|
|
612,348
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
quarter
|
|
$
|
328,923
|
|
|
$
|
311,083
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the quarter for
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
|
|
Interest
|
|
$
|
93,194
|
|
|
$
|
62,882
|
|
Beginning in the fourth quarter of 2005, the Company separately
disclosed the operating, investing and financing components of
the cash flows attributable to its discontinued operations,
which in prior periods were reported on a combined basis as a
single amount.
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Orion
HealthCorp, Inc.
Consolidated Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Revised (Restated)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
291,027
|
|
|
$
|
(10,028,418
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Minority interest in earnings of
partnerships
|
|
|
|
|
|
|
1,660
|
|
Provision for doubtful accounts
|
|
|
299,146
|
|
|
|
636,835
|
|
Depreciation and amortization
|
|
|
818,828
|
|
|
|
1,727,201
|
|
Gain on forgiveness of debt
|
|
|
(665,463
|
)
|
|
|
|
|
Stock option compensation expense
|
|
|
97,712
|
|
|
|
|
|
Conversion of notes payable to
common stock
|
|
|
|
|
|
|
57,886
|
|
Impact of discontinued operations
|
|
|
230,744
|
|
|
|
6,635,059
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
169,295
|
|
|
|
(897,899
|
)
|
Inventory
|
|
|
35,957
|
|
|
|
(25,238
|
)
|
Prepaid expenses and other assets
|
|
|
(85,912
|
)
|
|
|
(82,691
|
)
|
Other assets
|
|
|
12,942
|
|
|
|
(8,594
|
)
|
Accounts payable and accrued
expenses
|
|
|
(628,424
|
)
|
|
|
149,951
|
|
Deferred revenues and other
liabilities
|
|
|
|
|
|
|
29,018
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
575,852
|
|
|
|
(1,805,230
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Sale (purchase) of property and
equipment
|
|
|
(13,010
|
)
|
|
|
32,195
|
|
Impact of discontinued operations
|
|
|
430,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
417,234
|
|
|
|
32,195
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net repayments of capital lease
obligations
|
|
|
(45,700
|
)
|
|
|
(125,650
|
)
|
Net borrowings (repayments) on
line of credit
|
|
|
(418,221
|
)
|
|
|
364,514
|
|
Net borrowings of notes payable
|
|
|
|
|
|
|
1,402,460
|
|
Net repayments of notes payable
|
|
|
(325,189
|
)
|
|
|
|
|
Net borrowings (repayments) of
other obligations
|
|
|
126,140
|
|
|
|
(259,052
|
)
|
Impact of discontinued operations
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(962,970
|
)
|
|
|
1,382,272
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
30,116
|
|
|
|
(390,763
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
298,807
|
|
|
|
701,846
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
328,923
|
|
|
$
|
311,083
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
|
|
Interest
|
|
$
|
177,581
|
|
|
$
|
119,179
|
|
Beginning in the fourth quarter of 2005, the Company separately
disclosed the operating, investing and financing components of
the cash flows attributable to its discontinued operations,
which in prior periods were reported on a combined basis as a
single amount.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Orion
HealthCorp, Inc.
June 30, 2006 and 2005
Orion HealthCorp, Inc. (formerly SurgiCare, Inc.
SurgiCare) and its subsidiaries (Orion
or the Company) maintain their accounts on the
accrual method of accounting in accordance with accounting
principles generally accepted in the United States of America
(GAAP). Accounting principles followed by the
Company and its subsidiaries and the methods of applying those
principles, which materially affect the determination of
financial position, results of operations and cash flows are
summarized below.
The unaudited consolidated condensed financial statements
include the accounts of the Company and all of its
majority-owned subsidiaries. Orions results for the three
months and six months ended June 30, 2006 and 2005 include
the results of IPS, MBS and the Companys ambulatory
surgery and diagnostic center business. The descriptions of the
business and results of operations of MBS set forth in these
notes include the business and results of operations of DCPS.
All material intercompany balances and transactions have been
eliminated in consolidation.
These financial statements have been prepared in accordance with
GAAP for interim financial reporting and in accordance with the
instructions to
Form 10-QSB
and
Item 310-(b)
of
Regulation S-B.
Accordingly, they do not contain all of the information and
footnotes required by GAAP for complete financial statements. In
the opinion of management, the accompanying unaudited
consolidated condensed financial statements include adjustments
consisting of only normal recurring adjustments necessary for a
fair presentation of the Companys financial position and
results of operations and cash flows of the interim periods
presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
The accompanying unaudited consolidated condensed financial
statements should be read in conjunction with the financial
statements and related notes therein included in the
Companys Annual Report on
Form 10-KSB
for the year ended December 31, 2005.
Description
of Business
Orion is a healthcare services organization providing outsourced
business services to physicians. The Company serves the
physician market through two subsidiaries, Medical Billing
Services, Inc. (MBS), which provides billing,
collection and practice management services, primarily to
hospital-based physicians; and Integrated Physician Solutions,
Inc. (IPS), which provides business and management
services to general and subspecialty pediatric physician
practices.
The Company was incorporated in Delaware on February 24,
1984 as Technical Coatings, Incorporated. On December 15,
2004, the Company completed a transaction to acquire IPS (the
IPS Merger) and to acquire Dennis Cain Physician
Solutions, Ltd. (DCPS) and MBS (the DCPS/MBS
Merger) (collectively, the 2004 Mergers). As a
result of these transactions, IPS and MBS became wholly owned
subsidiaries of the Company, and DCPS is a wholly owned
subsidiary of MBS. On December 15, 2004, and simultaneous
with the consummation of the 2004 Mergers, the Company changed
its name from SurgiCare, Inc. to Orion and consummated its
restructuring transactions (the Closing), which
included issuances of new equity securities for cash and
contribution of outstanding debt, and the restructuring of its
debt facilities. The Company also created Class B Common
Stock and Class C Common Stock, which were issued in
connection with the equity investments and acquisitions.
In April 2005, the Company initiated a strategic plan designed
to accelerate the Companys growth and enhance its future
earnings potential. The plan focuses on the Companys
strengths, which include providing billing, collections and
complementary business management services to physician
practices. As part of this strategic plan, the Company began to
divest certain non-strategic assets. In addition, the Company
ceased investment in business lines that did not complement the
Companys strategic plan and redirected financial resources
and Company personnel to areas that management believes enhance
long-term growth potential. Beginning in the third quarter of
2005, the Company successfully completed the consolidation of
corporate
F-7
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
functions into its Roswell, Georgia facility. Consistent with
its strategic plan, the Company also completed a series of
transactions involving the divestiture of non-strategic assets
in 2005.
Medical
Billing Services
MBS is based in Houston, Texas and was incorporated in Texas on
October 16, 1985. DCPS is based in Houston, Texas and was
organized as a Texas limited liability company on
September 16, 1998. DCPS reorganized as a Texas limited
partnership on August 31, 2003. MBS (which includes the
operations of DCPS) offers its clients a complete outsourcing
service, which includes practice management and billing and
collection services, allowing them to avoid the infrastructure
investment in their own back-office operations. These services
help clients to be financially successful by improving cash
flows and reducing administrative costs and burdens.
MBS provides services to approximately 58 customers throughout
Texas. These customers include anesthesiologists, pathologists,
and radiologists, imaging centers, comprehensive breast centers,
hospital labs, cardio-thoracic surgeons and ambulatory surgery
centers (ASCs.)
Integrated
Physician Solutions
IPS, a Delaware corporation, was founded in 1996 to provide
physician practice management services to general and
subspecialty pediatric practices. IPS commenced its business
activities upon consummation of several medical group business
combinations effective January 1, 1999.
As of June 30, 2006, IPS managed nine practice sites,
representing five medical groups in Illinois and Ohio. IPS
provides human resources management, accounting, group
purchasing, public relations, marketing, information technology,
and general
day-to-day
business operations management services to these medical groups.
The physicians, who are all employed by separate corporations,
provide all clinical and patient care related services.
There is a standard forty-year management service agreement
(MSA) between IPS and the various affiliated medical
groups whereby a management fee is paid to IPS. IPS owns all of
the assets used in the operation of the medical groups. IPS
manages the
day-to-day
business operations of each medical group and provides the
assets for the physicians to use in their practice, for a fixed
fee or percentage of the net operating income of the medical
group. All revenues are collected by IPS, the fixed fee or
percentage payment to IPS is taken from the net operating income
of the medical group and the remainder of the net operating
income of the medical group is paid to the physicians and
treated as an expense on IPSs financial statements as
physician group distribution.
On April 1, 2005, IPS entered into a Mutual Release and
Settlement Agreement (the CARDC Settlement) with
Bradley E. Chipps, M.D. (Dr. Chipps) and
Capital Allergy and Respiratory Disease Center, a medical
corporation (CARDC) to settle disputes as to the
existence and enforceability of certain contractual obligations.
As part of the CARDC Settlement, Dr. Chipps, CARDC, and IPS
agreed that CARDC would purchase the assets owned by IPS and
used in connection with CARDC in exchange for termination of the
MSA between IPS and CARDC. Additionally, among other provisions,
after April 1, 2005, Dr. Chipps, CARDC and IPS have
been released from any further obligation to each other.
On June 7, 2005, InPhySys, Inc. (formerly known as
IntegriMED, Inc.) (IntegriMED), a wholly owned
subsidiary of IPS, executed an Asset Purchase Agreement (the
IntegriMED Agreement) with eClinicalWeb, LLC
(eClinicalWeb) to sell substantially all of the
assets of IntegriMED. The IntegriMED Agreement was deemed to be
effective as of midnight on June 6, 2005. As consideration
for the purchase of the acquired assets, eClinicalWeb issued to
IntegriMED the following: (i) a two percent (2%) ownership
interest in eClinicalWeb; and (ii) $69,034 for the payoff
of certain leases and purchase of certain software. Also
eClinicalWeb agreed to sublease certain office space from IPS
that was occupied by employees of IntegriMED.
On October 31, 2005, IPS executed a Mutual Release and
Settlement Agreement (the Sutter Settlement) with
John Ivan Sutter, M.D., PA (Dr. Sutter) to
settle disputes that had arisen between IPS and Dr. Sutter
and to
F-8
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
avoid the risk and expense of litigation. As part of the Sutter
Settlement, Dr. Sutter and IPS agreed that Dr. Sutter
would purchase the assets owned by IPS and used in connection
with Dr. Sutters practice, in exchange for
termination of the related MSA. Additionally, among other
provisions, after October 31, 2005, Dr. Sutter and IPS
have been released from any further obligation to each other.
Ambulatory
Surgery Center Business
As of June 30, 2006, the Company no longer has ownership or
management interests in surgery and diagnostic centers.
On March 1, 2005, the Company closed its wholly owned
subsidiary, Bellaire SurgiCare, Inc. (Bellaire
SurgiCare), and consolidated its operations with the
operations of SurgiCare Memorial Village, L.P. (Memorial
Village).
In April 2005, due to unsatisfactory financial performance of
the Companys surgery centers and in accordance with its
strategic plan, the Company began the process of divesting its
surgery center ownership interests.
On September 30, 2005, Orion executed purchase agreements
to sell its 51% ownership interest in Tuscarawas Ambulatory
Surgery Center, L.L.C. (TASC) and its 41% ownership
interest in Tuscarawas Open MRI, L. P., (TOM) both
located in Dover, Ohio, to Union Hospital (Union).
Additionally, as part of the transactions, TASC, as the sole
member of TASC Anesthesia, L.L.C. (TASC Anesthesia),
executed an Asset Purchase Agreement to sell certain assets of
TASC Anesthesia to Union. The limited partners of TASC and TOM
also sold a certain number of their units to Union such that at
the closing of these transactions, Union owned 70% of the
ownership interests in TASC and TOM.
As consideration for the purchase of the 70% ownership interests
in TASC and TOM, Union Hospital paid purchase prices of $950,000
and $2,188,237, respectively. Orions portion of the total
proceeds for TASC, TASC Anesthesia and TOM, after closing costs
of $82,632, was cash in the amount of $1,223,159 and a note due
on or before March 30, 2006 in the amount of $530,547. The
March 30, 2006 note was not fully paid by Union and the
remaining balance of $261,357 was written off against the gain
on disposition for the quarter ended December 31, 2005. As
a result of these transactions, Orion no longer has an ownership
interest in TASC, TOM or TASC Anesthesia.
Additionally, as part of the TASC and TOM transactions, Orion
executed two-year management services agreements (the TASC
MSA and the TOM MSA) with terms substantially
the same as those of the management services agreements under
which Orion performed management services to TASC and TOM prior
to the transactions.
On January 12, 2006, the Company was notified by Union that
it was exercising its option to terminate the TOM MSA as of
March 12, 2006. Management fee revenue related to TOM was
$0 and $11,728 for the three months ended June 30, 2006 and
2005, respectively. For the six months ended June 30, 2006
and 2005, management fee revenue related to TOM was $7,217 and
$17,351, respectively.
On February 3, 2006, the Company was notified by Union that
it was exercising its option to terminate the TASC MSA as of
April 3, 2006. Management fee revenue related to TASC was
$968 and $26,014 for the three months ended June 30, 2006
and 2005, respectively. For the six months ended June 30,
2006 and 2005, management fee revenue related to TASC was
$22,525 and $52,038, respectively.
On February 8, 2006, Memorial Village executed an Asset
Purchase Agreement (the Memorial Agreement) for the
sale of substantially all of its assets to First Surgical
Memorial Village, L.P. (First Surgical). Memorial
Village is approximately 49% owned by Town & Country
SurgiCare, Inc., a wholly owned subsidiary of Orion. The
Memorial Agreement was deemed to be effective as of
January 31, 2006.
F-9
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The property sold by Memorial Village to First Surgical
(hereinafter collectively referred to as the Memorial
Acquired Assets) included the equipment, inventory,
goodwill, contracts, leasehold improvements, equipment leases,
books and records, permits and licenses and other personal
property owned by Memorial Village and used in the operation of
Memorial Villages business. The Memorial Acquired Assets
did not include any of the following: accounts receivable, cash
and cash equivalents, marketable securities, insurance policies,
prepaid expenses, deposits with utility
and/or
service providers, shares of corporations, real estate owned by
Memorial Village, or liabilities, other than those expressly
assumed by the First Surgical in the Agreement.
As consideration for the Memorial Acquired Assets, Memorial
Village received a total purchase price of $1,100,000, of which
Orion received approximately $815,000 after payment of certain
legal and other post-closing expenses. The proceeds received by
Orion consisted of the following amounts:
i. Approximately $677,000 representing the principal amount
of a note payable owed to Orion from Memorial Village;
ii. Approximately $99,000 representing Orions
pro-rata share of the net proceeds after payment of certain
legal and other post-closing expenses; and
iii. A reserve fund of approximately $39,000, pending
approval of the assumption of certain capital leases by First
Surgical.
On March 1, 2006, San Jacinto Surgery Center,
Ltd. (San Jacinto) executed an Asset
Purchase Agreement (the San Jacinto Agreement)
for the sale of substantially all of its assets to
San Jacinto Methodist Hospital (Methodist).
San Jacinto is approximately 10% owned by Baytown
SurgiCare, Inc., a wholly owned subsidiary of Orion.
The property sold by San Jacinto to Methodist (hereinafter
collectively referred to as the San Jacinto Acquired
Assets), included the leasehold title to real property,
together with all improvements, buildings and fixtures, all
major, minor or other equipment, all computer equipment and
hardware, furniture and furnishings, inventory and supplies,
current financial, patient, credentialing and personnel records,
interest in all commitments, contracts, leases and agreements
outstanding in respect to San Jacinto, to the extent
assignable, all licenses and permits held by San Jacinto,
all patents and patent applications and all logos, names, trade
names, trademarks and service marks, all computer software,
programs and similar systems owned by or licensed to
San Jacinto, goodwill and all interests in property, real,
personal and mixed, tangible and intangible acquired by
San Jacinto prior to March 1, 2006. The
San Jacinto Acquired Assets did not include any of the
following: restricted and unrestricted cash and cash
equivalents, marketable securities, certificates of deposit,
bank accounts, temporary investments, accounts receivable, notes
receivable intercompany accounts of San Jacinto, and all
commitments, contracts, leases and agreements other than those
expressly assumed by Methodist in the San Jacinto Agreement.
As consideration for the San Jacinto Acquired Assets,
San Jacinto received a total purchase price of $5,500,000,
of which Orion received a net amount of approximately $598,000.
The proceeds received by Orion consisted of the following
amounts:
i. Approximately $450,000 representing Orions
pro-rata share of the net proceeds; and
ii. Approximately $148,000 representing the principal and
interest amounts of a note payable owed to Orion from
San Jacinto.
As part of the closing of the Agreement, Orion was obligated to
make payments, totaling $607,000, from its portion of the
proceeds as follows:
i. Approximately $357,000 representing distributions due to
the limited partners of San Jacinto for cash collections
previously received by Orion, and payment of accounts payable
and other expenses; and
F-10
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
ii. Approximately $250,000 to CIT, which represents
repayment of the obligations related to San Jacinto under
the Loan and Security Agreement.
The accompanying unaudited consolidated condensed financial
statements have been prepared in conformity with GAAP, which
contemplate the continuation of the Company as a going concern.
The Company incurred substantial operating losses during 2005,
and has used substantial amounts of working capital in its
operations. Additionally, as described more fully below, the
Company received notification from CIT Healthcare, LLC (formerly
known as Healthcare Business Credit Corporation)
(CIT) in December 2005 that certain events of
default under the Loan and Security Agreement had occurred as a
result of the Company being out of compliance with two financial
covenants relating to its debt service coverage ratio and its
minimum operating income level. These conditions raise
substantial doubt about the Companys ability to continue
as a going concern.
The Company has financed its growth and operations primarily
through the issuance of equity securities, secured
and/or
convertible debt, most recently by completing a series of
acquisitions and restructuring transactions (the
Restructuring), which occurred in December 2004, and
borrowing from related parties. In connection with the closing
of these transactions, the Company entered into a new secured
two-year revolving credit facility pursuant to a Loan and
Security Agreement (the Loan and Security
Agreement), dated December 15, 2004, by and among
Orion, certain of its affiliates and subsidiaries, and CIT.
Under this facility, initially up to $4,000,000 of loans could
be made available to Orion, subject to a borrowing base, which
is determined based on a percentage of eligible outstanding
accounts receivable less than 180 days old. As discussed
below, the amount available under this credit facility has been
reduced. Orion borrowed $1,600,000 under this facility
concurrently with the closing of the Restructuring. The interest
rate under this facility is the prime rate plus 6%. Upon an
event of default, CIT can accelerate the loans or call the
Guaranties described below. (See Note 10. Long-Term Debt
and Lines of Credit, for additional discussion regarding the
Companys defaults under the Loan and Security Agreement.)
In connection with entering into this new facility, Orion also
restructured its previously-existing debt facilities, which
resulted in a decrease in aggregate debt owed to DVI Business
Credit Corporation and DVI Financial Services, Inc.
(collectively, DVI) from approximately
$10.1 million to a combined principal amount of
approximately $6.5 million, of which approximately
$2.0 million was paid at the Closing.
Pursuant to a Guaranty Agreement (the Brantley IV
Guaranty), dated as of December 15, 2004, provided by
Brantley Partners IV, L.P. (Brantley IV) to CIT,
Brantley IV agreed to provide a deficiency guaranty in the
initial amount of $3,272,727. As discussed below, the amount of
this Brantley IV Guaranty has been reduced. Pursuant to a
Guaranty Agreement (the Brantley Capital Guaranty
and collectively with the Brantley IV Guaranty, the
Guaranties), dated as of December 15, 2004,
provided by Brantley Capital Corporation (Brantley
Capital) to CIT, Brantley Capital agreed to provide a
deficiency guarantee in the initial amount of $727,273. As
discussed below, the amount of this Brantley Capital Guaranty
has been reduced. In consideration for the Guaranties, Orion
issued warrants to purchase 20,455 shares of Class A
Common Stock, at an exercise price of $0.01 per share, to
Brantley IV, and issued warrants to purchase 4,545 shares
of Class A Common Stock, at an exercise price of $0.01 per
share, to Brantley Capital. None of these warrants, which expire
on December 15, 2009, have been exercised as of
June 30, 2006.
On March 16, 2005, Brantley IV loaned the Company an
aggregate of $1,025,000 (the First Loan). On
June 1, 2005, the Company executed a convertible
subordinated promissory note in the principal amount of
$1,025,000 (the First Note) payable to
Brantley IV to evidence the terms of the First Loan. The
material terms of the First Note are as follows: (i) the
First Note is unsecured; (ii) the First Note is subordinate
to the Companys outstanding loan from CIT and other
indebtedness for monies borrowed, and ranks pari passu with
general unsecured trade liabilities; (iii) principal and
interest on the First Note is due in a lump sum on
April 19, 2006 (the First Note Maturity
Date); (iv) the interest on the First Note accrues
from and after March 16, 2005, at a per annum rate equal to
nine percent (9.0%) and is non-compounding; (v) if an event
of default occurs and is
F-11
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
continuing, Brantley IV, by notice to the Company, may declare
the principal of the First Note to be due and immediately
payable; and (vi) on or after the First Note Maturity
Date, Brantley IV, at its option, may convert all or a portion
of the outstanding principal and interest due of the First Note
into shares of Class A Common Stock of the Company at a
price per share equal to $1.042825 (the First
Note Conversion Price). The number of shares of
Class A Common Stock to be issued upon conversion of the
First Note shall be equal to the number obtained by dividing
(x) the aggregate amount of principal and interest to be
converted by (y) the First Note Conversion Price (as
defined above); provided, however, the number of shares to be
issued upon conversion of the First Note shall not exceed the
lesser of: (i) 1,159,830 shares of Class A Common
Stock, or (ii) 16.3% of the then outstanding Class A
Common Stock. As of June 30, 2006, if Brantley IV were
to convert the First Note, the Company would have to issue
1,098,644 shares of Class A Common Stock. On
May 9, 2006, Brantley IV and the Company executed an
amendment to the First Note (the First and Second
Note Amendment) extending the First
Note Maturity Date to August 15, 2006. On
August 8, 2006, Brantley IV and the Company executed a
second amendment to the First Note (the First and Second
Note Second Amendment) extending the First
Note Maturity Date to October 15, 2006.
On April 19, 2005, Brantley IV loaned the Company an
additional $225,000 (the Second Loan). On
June 1, 2005, the Company executed a convertible
subordinated promissory note in the principal amount of $225,000
(the Second Note) payable to Brantley IV to
evidence the terms of the Second Loan. The material terms of the
Second Note are as follows: (i) the Second Note is
unsecured; (ii) the Second Note is subordinate to the
Companys outstanding loan from CIT and other indebtedness
for monies borrowed, and ranks pari passu with general unsecured
trade liabilities; (iii) principal and interest on the
Second Note is due in a lump sum on April 19, 2006 (the
Second Note Maturity Date); (iv) the
interest on the Second Note accrues from and after
April 19, 2005, at a per annum rate equal to nine percent
(9.0%) and is non-compounding; (v) if an event of default
occurs and is continuing, Brantley IV, by notice to the Company,
may declare the principal of the Second Note to be due and
immediately payable; and (vi) on or after the Second
Note Maturity Date, Brantley IV, at its option, may convert
all or a portion of the outstanding principal and interest due
of the Second Note into shares of Class A Common Stock of
the Company at a price per share equal to $1.042825 (the
Second Note Conversion Price). The number of
shares of Class A Common Stock to be issued upon conversion
of the Second Note shall be equal to the number obtained by
dividing (x) the aggregate amount of principal and interest
to be converted by (y) the Second Note Conversion
Price (as defined above); provided, however, the number of
shares to be issued upon conversion of the Second Note shall not
exceed the lesser of: (i) 254,597 shares of
Class A Common Stock, or (ii) 3.6% of the then
outstanding Class A Common Stock. As of June 30, 2006,
if Brantley IV were to convert the Second Note, the Company
would have to issue 239,332 shares of Class A Common
Stock. On May 9, 2006, Brantley IV and the Company
executed the First and Second Note Amendment extending the
Second Note Maturity Date to August 15, 2006. On
August 8, 2006, Brantley IV and the Company executed
the First and Second Note Second Amendment extending the
Second Note Maturity Date to October 15, 2006.
Additionally, in connection with the First Loan and the Second
Loan, the Company entered into a First Amendment to the Loan and
Security Agreement (the First Amendment), dated
March 22, 2005, with certain of the Companys
affiliates and subsidiaries, and CIT, whereby its $4,000,000
secured two-year revolving credit facility has been reduced by
the amount of the loans from Brantley IV to $2,750,000. As
a result of the First Amendment, the Brantley IV Guaranty
was amended by the Amended and Restated Guaranty Agreement,
dated March 22, 2005, which reduced the deficiency guaranty
provided by Brantley IV by the amount of the First Loan to
$2,247,727. Also as a result of the First Amendment, the
Brantley Capital Guaranty was amended by the Amended and
Restated Guaranty Agreement, dated March 22, 2005, which
reduced the deficiency guaranty provided by Brantley Capital by
the amount of the Second Loan to $502,273. Paul H. Cascio, the
Chairman of the board of directors of the Company, and Michael
J. Finn, a director of the Company, are affiliates of Brantley
IV.
As part of the Loan and Security Agreement, the Company is
required to comply with certain financial covenants, measured on
a quarterly basis. The financial covenants include maintaining a
required debt service coverage ratio and meeting a minimum
operating income level for the surgery and diagnostic centers
before corporate overhead allocations. As of and for the three
months and six months ended June 30, 2006, the Company
F-12
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
was out of compliance with both of these financial covenants and
has notified the lender as such. Under the terms of the Loan and
Security Agreement, failure to meet the required financial
covenants constitutes an event of default. Under an event of
default, the lender may (i) accelerate and declare the
obligations under the credit facility to be immediately due and
payable; (ii) withhold or cease to make advances under the
credit facility; (iii) terminate the credit facility;
(iv) take possession of the collateral pledged as part of
the Loan and Security Agreement; (v) reduce or modify the
revolving loan commitment;
and/or
(vi) take necessary action under the Guaranties. The
revolving credit facility is secured by the Companys
assets. As of June 30, 2006, the outstanding principal
under the revolving credit facility was $998,668. The full
amount of the loan as of June 30, 2006 is recorded as a
current liability. In December 2005, the Company received
notification from CIT stating that (i) certain events of
default under the Loan and Security Agreement had occurred as a
result of the Company being out of compliance with two financial
covenants relating to its debt service coverage ratio and its
minimum operating income level, (ii) as a result of the
events of default, CIT raised the interest rate for monies
borrowed under the Loan and Security Agreement to the provided
Default Rate of prime rate plus 6%, (iii) the
amount available under the revolving credit facility was reduced
from $2,750,000 to $2,300,000 and (iv) CIT reserved all
additional rights and remedies available to it as a result of
these events of default. The Company is currently in
negotiations with CIT to obtain, among other provisions, a
waiver of the events of default. In the event CIT declares the
obligations under the Loan and Security Agreement to be
immediately due and payable or exercises its other rights
described above, the Company would not be able to meet its
obligations to CIT or its other creditors. As a result, such
action would have a material adverse effect on the
Companys ability to continue as a going concern.
As of June 30, 2006, the Companys existing credit
facility with CIT had limited availability to provide for
working capital shortages. Although the Company believes that it
will generate cash flows from operations in the future, there is
substantial doubt as to whether it will be able to fund its
operations solely from its cash flows. In April 2005, the
Company initiated a strategic plan designed to accelerate the
Companys growth and enhance its future earnings potential.
The plan focuses on the Companys strengths, which include
providing billing, collections and complementary business
management services to physician practices. A fundamental
component of the Companys plan is the selective
consideration of accretive acquisition opportunities in these
core business sectors. In addition, the Company ceased
investment in business lines that did not complement the
Companys strategic plans and redirected financial
resources and Company personnel to areas that management
believes enhance long-term growth potential. On June 7,
2005, as described in Note 1. General
Description of Business Integrated Physician
Solutions, IPS completed the sale of substantially all of the
assets of IntegriMED, and on October 1, 2005, the Company
completed the sale of its interests in TASC and TOM in Dover,
Ohio. Beginning in the third quarter of 2005, the Company
successfully completed the consolidation of corporate functions
into its Roswell, Georgia facility. Additionally, consistent
with its strategic plan, the Company sold its interest in
Memorial Village effective January 31, 2006 and in
San Jacinto effective March 1, 2006. (See Note 1.
General Description of Business
Ambulatory Surgery Center Business).
The Company intends to continue to manage its use of cash.
However, the Companys business is still faced with many
challenges. If cash flows from operations and borrowings are not
sufficient to fund the Companys cash requirements, the
Company may be required to further reduce its operations
and/or seek
additional public or private equity financing or financing from
other sources or consider other strategic alternatives,
including possible additional divestitures of specific assets or
lines of business. Any acquisitions will require additional
capital. There can be no assurances that additional financing
will be available, or that, if available, the financing will be
obtainable on terms acceptable to the Company or that any
additional financing would not be substantially dilutive to the
Companys existing stockholders.
|
|
Note 3.
|
Revenue
Recognition
|
MBSs principal source of revenues is fees charged to
clients based on a percentage of net collections of the
clients accounts receivable. MBS recognizes revenue and
bills it clients when the clients receive payment on those
accounts receivable. MBS typically receives payment from the
client within 30 days of billing. The fees vary
F-13
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
depending on specialty, size of practice, payer mix, and
complexity of the billing. In addition to the collection fee
revenue, MBS also earns fees from the various consulting
services that MBS provides, including medical practice
management services, managed care contracting, coding and
reimbursement services.
IPS records revenue based on patient services provided by its
affiliated medical groups. Net patient service revenue is
impacted by billing rates, changes in Current Procedure
Terminology code reimbursement and collection trends. IPS
reviews billing rates at each of its affiliated medical groups
on at least an annual basis and adjusts those rates based on
each insurers current reimbursement practices. Amounts
collected by IPS for treatment by its affiliated medical groups
of patients covered by Medicare, Medicaid and other contractual
reimbursement programs, which may be based on cost of services
provided or predetermined rates, are generally less than the
established billing rates of IPSs affiliated medical
groups. IPS estimates the amount of these contractual allowances
and records a reserve against accounts receivable based on
historical collection percentages for each of the affiliated
medical groups, which include various payer categories. When
payments are received, the contractual adjustment is written off
against the established reserve for contractual allowances. The
historical collection percentages are adjusted quarterly based
on actual payments received, with any differences charged
against net revenue for the quarter. Additionally, IPS tracks
cash collection percentages for each medical group on a monthly
basis, setting quarterly and annual goals for cash collections,
bad debt write-offs and aging of accounts receivable.
As of June 30, 2006, the Company no longer has ownership or
management interests in surgery and diagnostic centers.
Orions principal source of revenues from its surgery
center business was a surgical facility fee charged to patients
for surgical procedures performed in its ASCs and for diagnostic
services performed at TOM. Orion depended upon third-party
programs, including governmental and private health insurance
programs to pay these fees on behalf of its patients. Patients
were responsible for the co-payments and deductibles when
applicable. The fees varied depending on the procedure, but
usually included all charges for operating room usage, special
equipment usage, supplies, recovery room usage, nursing staff
and medications. Facility fees did not include the charges of
the patients surgeon, anesthesiologist or other attending
physicians, which were billed directly to third-party payers by
such physicians. In addition to the facility fee revenues, Orion
also earned management fees from its operating facilities and
development fees from centers that it developed. ASCs, such as
those in which Orion owned an interest prior to June 30,
2006, depend upon third-party reimbursement programs, including
governmental and private insurance programs, to pay for services
rendered to patients. The Medicare program currently pays ASCs
and physicians in accordance with fee schedules, which are
prospectively determined. In addition to payment from
governmental programs, ASCs derive a significant portion of
their net revenues from private healthcare reimbursement plans.
These plans include standard indemnity insurance programs as
well as managed care structures such as preferred provider
organizations, health maintenance organizations and other
similar structures.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. While management
believes current estimates are reasonable and appropriate,
actual results could differ from those estimates.
|
|
Note 5.
|
Segment
Reporting
|
In accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information,
the Company has determined that it has two reportable
segments IPS and MBS. The reportable segments are
strategic business units that offer different products and
services. They are managed separately because each business
requires different technology, operational support and marketing
strategies. The Companys reportable
F-14
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
segments consist of: (i) IPS, which includes the pediatric
medical groups that provide patient care operating under the
MSA; and (ii) MBS, which provides practice management,
billing and collections, managed care consulting and coding and
reimbursement services to hospital-based physicians and clinics.
Management chose to aggregate the MSAs into a single operating
segment consistent with the objective and basic principles of
SFAS No. 131 based on similar economic
characteristics, including the nature of the products and
services, the type of customer for their services, the methods
used to provide their services and in consideration of the
regulatory environment under Medicare and the Health Insurance
Portability and Accountability Act of 1996.
The following table summarizes key financial information, by
reportable segment, as of and for the three months and six
months ended June 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2006
|
|
|
|
IPS
|
|
|
MBS
|
|
|
Total
|
|
|
IPS
|
|
|
MBS
|
|
|
Total
|
|
|
Net operating revenues
|
|
$
|
4,468,756
|
|
|
$
|
2,361,762
|
|
|
$
|
6,830,518
|
|
|
$
|
9,149,031
|
|
|
$
|
4,756,052
|
|
|
$
|
13,905,083
|
|
Income from continuing operations
|
|
|
229,831
|
|
|
|
149,321
|
|
|
|
379,152
|
|
|
|
488,092
|
|
|
|
338,890
|
|
|
|
826,982
|
|
Depreciation and amortization
|
|
|
107,883
|
|
|
|
282,773
|
|
|
|
390,656
|
|
|
|
216,488
|
|
|
|
565,883
|
|
|
|
782,371
|
|
Total assets
|
|
|
8,220,192
|
|
|
|
10,043,365
|
|
|
|
18,263,557
|
|
|
|
8,220,192
|
|
|
|
10,043,365
|
|
|
|
18,263,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
|
IPS
|
|
|
MBS
|
|
|
Total
|
|
|
IPS
|
|
|
MBS
|
|
|
Total
|
|
|
Net operating revenues
|
|
$
|
4,980,618
|
|
|
$
|
2,653,017
|
|
|
$
|
7,633,635
|
|
|
$
|
10,045,992
|
|
|
$
|
5,193,532
|
|
|
$
|
15,239,524
|
|
Income from continuing operations
|
|
|
292,174
|
|
|
|
262,225
|
|
|
|
554,399
|
|
|
|
542,512
|
|
|
|
462,898
|
|
|
|
1,005,410
|
|
Depreciation and amortization
|
|
|
103,789
|
|
|
|
285,742
|
|
|
|
389,531
|
|
|
|
245,010
|
|
|
|
572,882
|
|
|
|
817,892
|
|
Total assets
|
|
|
9,799,965
|
|
|
|
10,474,085
|
|
|
|
20,274,050
|
|
|
|
9,799,965
|
|
|
|
10,474,085
|
|
|
|
20,274,050
|
|
F-15
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The following schedules provide a reconciliation of the key
financial information by reportable segment to the consolidated
totals found in Orions consolidated balance sheets and
statements of operations as of and for the three months and six
months ended June 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net operating revenues for
reportable segments
|
|
$
|
6,830,518
|
|
|
$
|
7,633,635
|
|
|
$
|
13,905,083
|
|
|
$
|
15,239,524
|
|
Corporate revenue
|
|
|
101,196
|
|
|
|
17,656
|
|
|
|
180,644
|
|
|
|
41,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net operating
revenues
|
|
$
|
6,931,714
|
|
|
$
|
7,651,291
|
|
|
$
|
14,085,727
|
|
|
$
|
15,281,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing
operations for reportable segments
|
|
$
|
379,152
|
|
|
$
|
554,399
|
|
|
$
|
826,982
|
|
|
$
|
1,005,410
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
665,463
|
|
|
|
|
|
Corporate overhead
|
|
|
(860,317
|
)
|
|
|
(1,999,363
|
)
|
|
|
(1,777,808
|
)
|
|
|
(3,850,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated from continuing
operations
|
|
$
|
(481,165
|
)
|
|
$
|
(1,444,964
|
)
|
|
$
|
(285,363
|
)
|
|
$
|
(2,844,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and
amortization for reportable segments
|
|
$
|
390,656
|
|
|
$
|
389,531
|
|
|
$
|
782,371
|
|
|
$
|
817,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate depreciation and
amortization
|
|
|
18,274
|
|
|
|
454,448
|
|
|
|
36,457
|
|
|
|
909,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation
and amortization
|
|
$
|
408,930
|
|
|
$
|
843,979
|
|
|
$
|
818,828
|
|
|
$
|
1,727,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable
segments
|
|
$
|
18,263,557
|
|
|
$
|
20,274,050
|
|
|
$
|
18,263,557
|
|
|
$
|
20,274,050
|
|
Corporate assets
|
|
|
1,474,068
|
|
|
|
785,171
|
|
|
|
1,474,068
|
|
|
|
785,171
|
|
Assets held for sale or related to
discontinued operations(1)
|
|
|
|
|
|
|
13,253,261
|
|
|
|
|
|
|
|
13,253,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
19,737,625
|
|
|
$
|
34,312,482
|
|
|
$
|
19,737,625
|
|
|
$
|
34,312,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The balance at June 30, 2005 includes $9,179,336 of
intangible assets and goodwill that were impaired in 2005. |
|
|
Note 6.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets represent the excess of cost over
the fair value of net assets of companies acquired in business
combinations accounted for using the purchase method. In July
2001, the FASB issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141
eliminates
pooling-of-interest
accounting and requires that all business combinations initiated
after June 30, 2001, be accounted for using the purchase
method. SFAS No. 142 eliminates the amortization of
goodwill and certain other intangible assets and requires the
Company to evaluate goodwill for impairment on an annual basis
by applying a fair value test. SFAS No. 142 also
requires that an identifiable intangible asset that is
determined to have an indefinite useful economic life not be
amortized, but separately tested for impairment using a fair
value-based approach at least annually.
F-16
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The Company adopted SFAS No. 142 effective
January 1, 2002. As a result, IPS determined that its
long-term MSAs, executed as part of the medical group business
combinations consummated in 1999, are an identifiable intangible
asset in accordance with paragraph 39 of
SFAS No. 141.
As part of the acquisition and restructuring transactions that
closed on December 15, 2004, the Company recorded
intangible assets and goodwill related to the 2004 Mergers. As
of the Closing, the Companys management expected the case
volumes at Bellaire SurgiCare to improve in 2005. However, by
the end of February 2005, it was determined that the expected
case volume increases were not going to be realized. On
March 1, 2005, the Company closed Bellaire SurgiCare and
consolidated its operations with the operations of Memorial
Village. The Company tested the identifiable intangible assets
and goodwill related to the surgery center business using the
present value of cash flows method. As a result of the decision
to close Bellaire SurgiCare and the resulting impairment of the
joint venture interest and management contracts related to the
surgery centers, the Company recorded a charge for impairment of
intangible assets of $4,090,555 for the year ended
December 31, 2004.
As a result of the CARDC Settlement described in Note 1.
General Description of Business
Integrated Physician Solutions, the Company recorded a charge
for impairment of intangible assets related to CARDC of $704,927
for the year ended December 31, 2004.
On June 13, 2005, the Company announced that it had
accepted an offer to purchase its interests in TASC and TOM in
Dover, Ohio. In preparation for this pending transaction, the
Company tested the identifiable intangible assets related to the
surgery center business using the present value of cash flows
method as of June 30, 2005. Based on the pending sales
transaction involving TASC and TOM, as well as the uncertainty
of future cash flows related to the Companys surgery
center business, the Company determined that the joint venture
interests associated with TASC, TOM and Memorial Village were
impaired and recorded a charge for impairment of intangible
assets of $6,362,849 for the quarter ended June 30, 2005.
The sale of the Companys interests in TASC and TOM was
completed effective as of October 1, 2005. (See
Note 1. General Description of
Business Ambulatory Surgery Center Business).
In November 2005, the Company decided that, as a result of
ongoing losses at Memorial Village, it would need to either find
a buyer for the Companys equity interests in Memorial
Village or close the facility. In preparation for this expected
transaction, the Company once again tested the identifiable
intangible assets related to the surgery center business using
the present value of cash flows method at September 30,
2005. Based on the decision to sell or close Memorial Village,
as well as the continuing uncertainty of cash flows related to
the Companys surgery center segment, the Company
determined that the joint venture interests for
San Jacinto, as well as the management contracts associated
with Memorial Village and San Jacinto, were impaired and
recorded an additional charge for impairment of intangible
assets totaling $3,461,351 for the quarter ended
September 30, 2005.
As described in Note 1. General
Description of Business Ambulatory Surgery Center
Business, effective January 31, 2006 and March 1,
2006, respectively, the Company executed Asset Purchase
Agreements to sell substantially all of the assets of Memorial
Village and San Jacinto. Also in the first quarter of 2006,
the Company was notified by Union that it was exercising its
option to terminate the TASC MSA and TOM MSA. As a result of the
sales of Memorial Village and San Jacinto, as well as the
termination of the TASC MSA and TOM MSA, the Company no longer
has an ownership or management interest in any ambulatory
surgery centers and, as such, the Company tested the remaining
identifiable intangible assets related to the surgery centers
from the IPS Merger at December 31, 2005. Based on the
terminations of the TASC MSA and TOM MSA, as well as the sales
of Memorial Village and San Jacinto, the Company determined
that the management contracts associated with TASC and TOM were
impaired and recorded an additional charge for impairment of
intangible assets of $1,163,830 for the quarter ended
December 31, 2005.
As a result of the Sutter Settlement, which is described in
Note 1. General Description of
Business Integrated Physician Solutions, the Company
also recorded an additional $38,440 charge for impairment of
intangible assets for the quarter ended December 31, 2005.
F-17
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
All of the charges for impairment of intangible assets are
included in discontinued operations.
In order to determine whether the goodwill recorded as a result
of the IPS Merger was impaired at December 31, 2005, the
Company compared the fair value of each ASCs assets to its
net carrying value. As each of the ASCs was sold between
October 1, 2005 and March 1, 2006, the fair value of
each ASC was best determined by the purchase price of the
assets. Since TASC and TOM were sold effective October 1,
2005, the balance sheet at September 30, 2005 was used to
determine the fair value of its assets. Since the Memorial
Village and San Jacinto transactions took place after
year-end, the December 31, 2005 balance sheets were used to
determine the carrying value of the assets of those entities.
The Company determined that the fair value of each ASC was
greater than the carrying value in each case and concluded that
there was no impairment of goodwill at December 31, 2005.
As a result of the sale of all of the entities related to the
Companys ambulatory surgery center business, the Company
allocated the goodwill recorded as part of the IPS Merger to
each of the surgery center reporting units and recorded a loss
on the write-down of goodwill of $3,489,055 for the quarter
ended December 31, 2005. The charge for the write-down of
goodwill was included in discontinued operations in 2005.
|
|
Note 7.
|
Earnings
per Share
|
Basic earnings per share are calculated on the basis of the
weighted average number of shares of Class A Common Stock
outstanding at the end of the reporting periods. 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, conversion of debt
and conversion of Class B Common Stock and Class C
Common Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income (loss)
|
|
$
|
(480,197
|
)
|
|
$
|
(8,347,789
|
)
|
|
$
|
291,027
|
|
|
$
|
(10,028,418
|
)
|
Weighted average number of shares
of Class A Common Stock outstanding for basic net income
(loss) per share
|
|
|
12,591,319
|
|
|
|
9,246,425
|
|
|
|
12,510,131
|
|
|
|
8,958,080
|
|
Dilutive stock options, warrants
and restricted stock units(1)
|
|
|
|
(5)
|
|
|
|
(a)
|
|
|
2,612,347
|
|
|
|
|
(a)
|
Convertible notes payable(2)
|
|
|
|
(5)
|
|
|
|
(b)
|
|
|
1,687,200
|
|
|
|
|
(b)
|
Class B Common Stock(3)
|
|
|
|
(5)
|
|
|
|
(c)
|
|
|
57,623,732
|
|
|
|
|
(c)
|
Class C Common Stock(4)
|
|
|
|
(5)
|
|
|
|
(d)
|
|
|
14,885,754
|
|
|
|
|
(d)
|
Weighted average number of shares
of Class A Common Stock outstanding for diluted net loss
per share
|
|
|
12,591,319
|
|
|
|
9,246,425
|
|
|
|
89,319,164
|
|
|
|
8,958,080
|
|
Net income (loss) per
share Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
0.03
|
|
|
$
|
(1.12
|
)
|
Net income (loss) per
share Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
0.01
|
|
|
$
|
(1.12
|
)
|
|
|
|
(1) |
|
2,612,347 options, warrants and restricted stock units were
outstanding as of June 30, 2006. |
|
(2) |
|
$1,300,000 of notes were convertible into Class A Common
Stock at June 30, 2006. Of the total, $50,000 was
convertible into 349,224 shares of Class A Common
Stock based on a conversion price equal to 75% of the average
closing price for the 20 trading days immediately prior to
June 30, 2006. The remaining $1,250,000 was convertible
into 1,337,976 shares of Class A Common Stock at
June 30, 2006. |
F-18
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
|
|
|
(3) |
|
10,448,470 shares of Class B Common Stock were
outstanding at June 30, 2006. Holders of shares of
Class B Common Stock have the option to convert their
shares of Class B Common Stock into Class A Common
Stock at any time based on a conversion factor in effect at the
time of the transaction. The conversion factor is designed to
yield one share of Class A Common Stock per share of
Class B Common Stock converted, plus such additional shares
of Class A Common Stock, or portions thereof, necessary to
approximate the unpaid portion of the return of the original
purchase price for the Class B Common Stock and a nine
percent (9%) return on the original purchase price for the
Class B Common Stock without compounding, from the date of
issuance through the date of conversion. As of June 30,
2006, each share of Class B Common Stock was convertible
into 5.515040151157 shares of Class A Common Stock. |
|
(4) |
|
1,437,572 shares of Class C Common Stock were
outstanding at June 30, 2006. Holders of shares of
Class C Common Stock have the option to convert their
shares of Class C Common Stock into shares of Class A
Common Stock at any time based on a conversion factor in effect
at the time of the transaction. The conversion factor is
designed initially to yield one share of Class A Common
Stock per share of Class C Common Stock converted, with the
number of shares of Class A Common Stock reducing to the
extent that distributions are paid on the Class C Common
Stock. The conversion factor is calculated as (x) the
amount by which $3.30 exceeds the aggregate distributions made
with respect to a share of Class C Common Stock divided by
(y) $3.30. The initial conversion factor was one (one share
of Class C Common Stock converts into one share of
Class A Common Stock) and is subject to adjustment as
discussed below. If the fair market value used in determining
the conversion factor for the Class B Common Stock in
connection with any conversion of Class B Common Stock is
less than $3.30 (subject to adjustment to account for stock
splits, stock dividends, combinations or other similar events
affecting Class A Common Stock), holders of shares of
Class C Common Stock have the option to convert their
shares of Class C Common Stock (within 10 days of
receipt of notice of the conversion of the Class B Common
Stock) into a number of shares of Class A Common Stock
equal to (x) the amount by which $3.30 exceeds the
aggregate distributions made with respect to a share of
Class C Common Stock divided by (y) the fair market
value used in determining the conversion factor for the
Class B Common Stock (the Anti-Dilution
Option). The aggregate number of shares of Class C
Common Stock so converted by any holder shall not exceed a
number equal to (a) the number of shares of Class C
Common Stock held by such holder immediately prior to such
conversion plus the number of shares of Class C Common
Stock previously converted in Class A Common Stock by such
holder multiplied by (b) a fraction, the numerator of which
is the number of shares of Class B Common Stock converted
at the lower price and the denominator of which is the aggregate
number of shares of Class B Common Stock issued at the
closing of the 2004 Mergers. If all of the Class B Common
Stock had been converted at June 30, 2006, the holders of
Class C Common Stock would have been eligible to convert
1,308,142 shares of Class C Common Stock into
14,885,754 shares of Class A Common Stock under the
anti-dilution provision. |
|
(5) |
|
The potentially dilutive securities listed in (1)
(4), above, are not included in the calculation of weighted
average number of shares of Class A Common Stock
outstanding for diluted net loss per share for the three months
ended June 30, 2006, because the effect would be
anti-dilutive due to the net loss for the quarter: |
The following potentially dilutive securities are not included
in the calculation of weighted average number of shares of
Class A Common Stock outstanding for diluted net loss per
share for the three months and six months ended June 30,
2005, because the effect would be anti-dilutive due to the net
loss for the periods:
a) 1,860,347 options and warrants were outstanding at
June 30, 2005.
b) $1,300,000 of notes were convertible into Class A
Common Stock at June 30, 2005. Of the total, $50,000 were
convertible at a conversion price equal to the lower of $2.50 or
75% of the average closing price for the 20 trading days
immediately prior to the conversion date. The remaining
$1,250,000 was convertible into 1,228,598 shares of
Class A Common Stock at June 30, 2005.
c) 10,685,381 shares of Class B Common Stock were
outstanding at June 30, 2005. Holders of shares of
Class B Common Stock have the option to convert their
shares of Class B Common Stock into Class A
F-19
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
Common Stock at any time based on a conversion factor in effect
at the time of the transaction. The conversion factor is
designed to yield one share of Class A Common Stock per
share of Class B Common Stock converted, plus such
additional shares of Class A Common Stock, or portions
thereof, necessary to approximate the unpaid portion of the
return of the original purchase price for the Class B
Common Stock and a nine percent (9%) return on the original
purchase price for the Class B Common Stock without
compounding, from the date of issuance through the date of
conversion.
d) 1,555,137 shares of Class C Common Stock were
outstanding at June 30, 2005. The shares of Class C
Common Stock are convertible into shares of Class C Common
Stock based on the formula described in (4), above.
|
|
Note 8.
|
Employee
Stock-Based Compensation
|
At June 30, 2006, the Company had two stock-based employee
compensation plans. Prior to January 1, 2006, the Company
accounted for grants for these plans under Accounting Principals
Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees (APB 25)
and related interpretations, and applied SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, for
disclosure purposes only. Under APB 25, stock-based
compensation cost related to stock options was not recognized in
net income since the options underlying those plans had exercise
prices greater than or equal to the market value of the
underlying stock on the date of the grant. The Company grants
options at or above the market price of its common stock at the
date of each grant.
On June 17, 2005, the Company granted 1,357,000 stock
options to certain employees, officers, directors and former
directors of the Company under the Companys 2004 Incentive
Plan, as amended. In the third quarter of 2005, stock options
totaling 360,000 to certain employees were cancelled as a result
of staff reductions related to the consolidation of corporate
functions duplicated at the Companys Houston, Texas and
Roswell, Georgia facilities. On May 12, 2006, the Company
granted 102,000 stock options to certain employees and directors
of the Company under the Companys 2004 Incentive Plan, as
amended.
On August 31, 2005, the Company granted 650,000 restricted
stock units to certain officers of the Company under the
Companys 2004 Incentive Plan, as amended. No restricted
stock units have been granted in 2006.
Effective January 1, 2006, the company adopted
SFAS No. 123 (revised 2004), Share Based
Payment, (SFAS No. 123(R)) which
revises SFAS No. 123 and supersedes APB 25.
SFAS No. 123(R) requires that all share-based payments
to employees be recognized in the financial statements based on
their fair values at the date of grant. The calculated fair
value is recognized as expense (net of any capitalization) over
the requisite service period, net of estimated forfeitures,
using the straight-line method under SFAS No. 123(R).
The Company considers many factors when estimated expected
forfeitures, including types of awards, employee class and
historical experience. The statement was adopted using the
modified prospective method of application which requires
compensation expense to be recognized in the financial
statements for all unvested stock options beginning in the
quarter of adoption. No adjustments to prior periods have been
made as a result of adopting SFAS No. 123(R). Under
this transition method, compensation expense for share-based
awards granted prior to January 1, 2006, but not yet vested
as of January 1, 2006, will be recognized in the
Companys financial statements over their remaining service
period. The cost was based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123. As required by
SFAS No. 123(R), compensation expense recognized in
future periods for share-based compensation granted prior to
adoption of the standard will be adjusted for the effects of
estimated forfeitures.
For the three months and six months ended June 30, 2006,
the impact of adopting SFAS No. 123(R) on the
Companys consolidated condensed statements of operations
was an increase in salaries and benefits expense of $49,642 and
$97,713, respectively, with a corresponding decrease in the
Companys income from continuing operations, income before
provision for income taxes and net income resulting from the
recognition of
F-20
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
compensation expense associated with employee stock options.
There was no material impact on the Companys basic and
diluted net income per share as a result of the adoption of
SFAS No. 123(R).
The adoption of SFAS No. 123(R) has no effect on net
cash flow. Since the Company is not presently a taxpayer and has
provided a valuation allowance against deferred income tax
assets net of liabilities, there is also no effect on the
Companys consolidated statement of cash flows. Had the
Company been a taxpayer, the Company would have recognized cash
flow resulting from tax deductions in excess of recognized
compensation cost as a financing cash flow.
The following table illustrates the pro forma net income and
earnings per share that would have resulted in the three months
and six months ended June 30, 2005 from recognizing
compensation expense associated with accounting for employee
stock-based awards under the provisions of
SFAS No. 123(R). The reported and pro forma net income
and earnings per share for the three months and six months ended
June 30, 2006 are provided for comparative purposes only,
since stock-based compensation expense is recognized in the
financial statements under the provisions of
SFAS No. 123(R).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income (loss) as
reported
|
|
$
|
(480,197
|
)
|
|
$
|
(8,347,789
|
)
|
|
$
|
291,027
|
|
|
$
|
(10,028,418
|
)
|
Add: Stock-based employee
compensation included in net income (loss)
|
|
|
49,642
|
|
|
|
|
|
|
|
97,713
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation (expense determined under the fair value-based
method for all awards), net of tax effect
|
|
|
(49,642
|
)
|
|
|
(42,775
|
)
|
|
|
(97,713
|
)
|
|
|
(69,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(480,197
|
)
|
|
$
|
(8,390,564
|
)
|
|
$
|
291,027
|
|
|
$
|
(10,097,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
(0.04
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
0.03
|
|
|
$
|
(1.12
|
)
|
Basic pro forma
|
|
$
|
(0.04
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
0.03
|
|
|
$
|
(1.13
|
)
|
Diluted as reported
|
|
$
|
(0.04
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
0.01
|
|
|
$
|
(1.12
|
)
|
Diluted pro forma
|
|
$
|
(0.04
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
0.00
|
|
|
$
|
(1.13
|
)
|
|
|
Note 9.
|
Discontinued
Operations
|
Bellaire SurgiCare. As of the Closing, the
Companys management expected the case volumes at Bellaire
SurgiCare to improve in 2005. However, by the end of February
2005, it was determined that the expected case volume increases
were not going to be realized. On March 1, 2005, the
Company closed Bellaire SurgiCare and consolidated its
operations with the operations of Memorial Village. The Company
tested the identifiable intangible assets and goodwill related
to the surgery center business using the present value of cash
flows method. As a result of the decision to close Bellaire
SurgiCare and the resulting impairment of the joint venture
interest and management contracts related to the surgery
centers, the Company recorded a charge for impairment of
intangible assets of $4,090,555 for the year ended
December 31, 2004. The Company also recorded a loss on
disposal of this discontinued component (in addition to the
charge for impairment of intangible assets) of $163,049 for the
quarter ended March 31, 2005. The operations of this
component are reflected in the Companys consolidated
condensed statements of operations as loss from operations
of discontinued components for the three months and six
months ended June 30, 2005. There were no operations for
this component after March 31, 2005.
F-21
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The following table contains selected financial statement data
related to Bellaire SurgiCare as of and for the three months and
six months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
|
|
|
$
|
161,679
|
|
Operating expenses
|
|
|
|
|
|
|
350,097
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
|
|
$
|
(188,418
|
)
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
|
|
|
$
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
CARDC. On April 1, 2005, IPS entered into
the CARDC Settlement with Dr. Bradley E. Chipps, M.D.
and CARDC to settle disputes as to the existence and
enforceability of certain contractual obligations. As part of
the CARDC Settlement, Dr. Chipps, CARDC, and IPS agreed
that CARDC would purchase the assets owned by IPS and used in
connection with CARDC, in exchange for termination of the MSA
between IPS and CARDC. Additionally, among other provisions,
after April 1, 2005, Dr. Chipps, CARDC and IPS have
been released from any further obligation to each other arising
from any previous agreement. As a result of the CARDC dispute,
the Company recorded a charge for impairment of intangible
assets related to CARDC of $704,927 for the year ended
December 31, 2004. The Company also recorded a gain on
disposal of this discontinued component (in addition to the
charge for impairment of intangible assets) of $506,625 for the
quarter ended March 31, 2005. For the quarter ended
June 30, 2005, the Company reduced the gain on disposal of
this discontinued component by $238,333 as the result of
post-settlement adjustments related to the reconciliation of
balance sheet accounts. The operations of this component are
reflected in the Companys consolidated condensed
statements of operations as loss from operations of
discontinued components for the three months and six
months ended June 30, 2005. There were no operations for
this component in the Companys financial statements after
March 31, 2005.
F-22
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The following table contains selected financial statement data
related to CARDC as of and for the three months and six months
ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
|
|
|
$
|
848,373
|
|
Operating expenses
|
|
|
|
|
|
|
809,673
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
|
|
$
|
38,700
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
|
|
|
$
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
IntegriMED. On June 7, 2005, as described
in Note 1. General Description of
Business Integrated Physician Solutions, IPS
executed an Asset Purchase Agreement with eClinicalWeb to sell
substantially all of the assets of IntegriMED. As a result of
this transaction, the Company recorded a loss on disposal of
this discontinued component of $47,101 for the quarter ended
June 30, 2005. The operations of this component are
reflected in the Companys consolidated condensed
statements of operations as loss from operations of
discontinued components for the three months and six
months ended June 30, 2005. There were no operations for
this component in the Companys financial statements after
June 30, 2005.
The following table contains selected financial statement data
related to IntegriMED as of and for the three months and six
months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
82,155
|
|
|
$
|
191,771
|
|
Operating expenses
|
|
|
392,931
|
|
|
|
899,667
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(310,776
|
)
|
|
$
|
(707,896
|
)
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
(24,496
|
)
|
|
$
|
(24,496
|
)
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
(24,496
|
)
|
|
$
|
(24,496
|
)
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
17,022
|
|
|
$
|
17,022
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
17,022
|
|
|
$
|
17,022
|
|
|
|
|
|
|
|
|
|
|
TASC and TOM. On June 13, 2005, the
Company announced that it had accepted an offer to purchase its
interests in TASC and TOM in Dover, Ohio. These transactions,
which were consummated on September 30, 2005, were deemed
to be effective as of October 1, 2005, and are described in
greater detail in Note 1. General Description
of Business Ambulatory Surgery Center Business. As a
result of these transactions, as well as the
F-23
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
uncertainty of future cash flows related to the Companys
surgery center business, the Company determined that the joint
venture interests associated with TASC and TOM were impaired and
recorded a charge for impairment of intangible assets related to
TASC and TOM of $2,122,445 for the three months ended
June 30, 2005. As a result of these transactions, the
Company recorded a gain on disposal of this discontinued
component (in addition to the charge for impairment of
intangible assets) of $1,357,712 for the quarter ended
December 31, 2005. The Company allocated the goodwill
recorded as part of the IPS Merger to each of the surgery center
reporting units and recorded a loss on the write-down of
goodwill related to TASC and TOM totaling $789,173 for the
quarter ended December 31, 2005, which reduced the gain on
disposal. In early 2006, the Company was notified by union that
it was exercising its option to terminate the management
services agreements of TOM and TASC as of March 12, 2006
and April 3, 2006, respectively. As a result, the Company
recorded a charge for impairment of intangible assets of
$1,012,457 for the three months ended December 31, 2005
related to the TASC and TOM management services agreements. The
operations of this component are reflected in the Companys
consolidated condensed statements of operations as loss
from operations of discontinued components for the three
months and six months ended June 30, 2005. There were no
operations for this component in the Companys financial
statements after September 30, 2005.
The following table contains selected financial statement data
related to TASC and TOM as of and for the three months and six
months ended June 30 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
873,959
|
|
|
$
|
1,670,801
|
|
Operating expenses
|
|
|
799,418
|
|
|
|
1,630,806
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,541
|
|
|
$
|
39,995
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
794,831
|
|
|
$
|
794,831
|
|
Other assets
|
|
|
1,487,732
|
|
|
|
1,487,732
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,282,563
|
|
|
$
|
2,282,563
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
709,779
|
|
|
$
|
709,779
|
|
Other liabilities
|
|
|
907,390
|
|
|
|
907,390
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,617,169
|
|
|
$
|
1,617,169
|
|
|
|
|
|
|
|
|
|
|
Sutter. On October 31, 2005, IPS executed
the Sutter Settlement with Dr. Sutter to settle disputes
that had arisen between IPS and Dr. Sutter and to avoid the
risk and expense of litigation. As part of the Sutter
Settlement, Dr. Sutter and IPS agreed that Dr. Sutter
would purchase the assets owned by IPS and used in connection
with Dr. Sutters practice, in exchange for
termination of the MSA between IPS and Dr. Sutter.
Additionally, among other provisions, after October 31,
2005, Dr. Sutter and IPS have been released from any
further obligation to each other arising from any previous
agreement. As a result of this transaction, the Company recorded
a loss on disposal of this discontinued component (in addition
to the charge for impairment of intangible assets of $38,440
recorded in the fourth quarter of 2005) of $279 for the quarter
ended December 31, 2005. The operations of this component
are reflected in the Companys consolidated condensed
statements of operations as loss from operations of
discontinued components for the three months and six
months ended June 30, 2005. There were no operations for
this component in the Companys financial statements after
October 31, 2005.
F-24
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The following table contains selected financial statement data
related to Sutter as of and for the three months and six months
ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
|
June 30, 2005
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
107,419
|
|
|
$
|
216,319
|
|
Operating expenses
|
|
|
105,171
|
|
|
|
210,609
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,248
|
|
|
$
|
5,710
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
113,819
|
|
|
$
|
113,819
|
|
Other assets
|
|
|
15,033
|
|
|
|
15,033
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
128,852
|
|
|
$
|
128,852
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
7,839
|
|
|
$
|
7,839
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
7,839
|
|
|
$
|
7,839
|
|
|
|
|
|
|
|
|
|
|
Memorial Village. As a result of the
uncertainty of future cash flows related to the Companys
surgery center business as well as the transactions involving
TASC and TOM, the Company determined that the joint venture
interest associated with the joint venture interest associated
with Memorial Village was impaired and recorded a charge for
impairment of intangible assets related to Memorial Village of
$3,229,462 for the three months ended June 30, 2005. In
November 2005, the Company decided that, as a result of ongoing
losses at Memorial Village, it would need to either find a buyer
for the Companys equity interests in Memorial Village or
close the facility. In preparation for this pending transaction,
the Company tested the identifiable intangible assets and
goodwill related to the surgery center business using the
present value of cash flows method. As a result of the decision
to sell or close Memorial Village, as well as the uncertainty of
cash flows related to the Companys surgery center
business, the Company recorded an additional charge for
impairment of intangible assets of $1,348,085 for the three
months ended September 30, 2005. As described in
Note 1. General Description of
Business Ambulatory Surgery Center Business,
effective January 31, 2006, the Company executed an Asset
Purchase Agreement to sell substantially all of the assets of
Memorial Village. As a result of this transaction, the Company
recorded a gain on the disposal of this discontinued component
(in addition to the charge for impairment of intangible assets)
of $574,321 for the quarter ended March 31, 2006. The
Company allocated the goodwill recorded as part of the IPS
Merger to each of the surgery center reporting units and
recorded a loss on the write-down of goodwill related to
Memorial Village totaling $2,005,383 for the quarter ended
December 31, 2005. The operations of this component are
reflected in the Companys consolidated statements of
operations as loss from operations of discontinued
components for the three months and six months ended
June 30, 2006 and 2005, respectively.
F-25
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The following table contains selected financial statement data
related to Memorial Village as of and for the three months and
six months ended June 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
Income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
|
|
|
$
|
684,676
|
|
|
$
|
17,249
|
|
|
$
|
1,268,852
|
|
Operating expenses
|
|
|
|
|
|
|
812,407
|
|
|
|
170,285
|
|
|
|
1,511,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
|
|
$
|
(127,731
|
)
|
|
$
|
(153,036
|
)
|
|
$
|
(242,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
|
|
|
$
|
861,111
|
|
|
$
|
|
|
|
$
|
861,111
|
|
Other assets
|
|
|
|
|
|
|
767,497
|
|
|
|
|
|
|
|
767,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
1,628,608
|
|
|
$
|
|
|
|
$
|
1,628,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
729,567
|
|
|
$
|
|
|
|
$
|
729,567
|
|
Other liabilities
|
|
|
|
|
|
|
725,884
|
|
|
|
|
|
|
|
725,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
1,455,451
|
|
|
$
|
|
|
|
$
|
1,455,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Jacinto. As described in Note 1.
General Description of Business
Ambulatory Surgery Center Business, effective March 1,
2006, the Company executed an Asset Purchase Agreements to sell
substantially all of the assets of San Jacinto, which is
10% owned by Baytown SurgiCare, Inc., a wholly owned subsidiary
of the Company and is not consolidated in the Companys
financial statements. As a result of the uncertainty of future
cash flows related to the Companys surgery center
business, and in conjunction with the transactions involving
TASC and Tom the Company determined that the joint venture
interest associated with San Jacinto was impaired and recorded a
charge for impairment of intangible assets related to San
Jacinto of $734,522 for the three months ended June 30,
2005. The
Company also recorded an additional $2,113,262 charge for
impairment of intangible assets for the three months ended
September 30, 2005 related to the management contracts with
San Jacinto. As a result of this transaction, the Company recorded a
gain on disposal of this discontinued operation of $94,066 for
the quarter ended March 31, 2006. The Company allocated the
goodwill recorded as part of the IPS Merger to each of the
surgery center reporting units and recorded a loss on the
write-down of goodwill related to San Jacinto totaling
$694,499 for the quarter ended December 31, 2005.
Orion. Prior to the divestiture of the
Companys ambulatory surgery center business, the Company
recorded management fee revenue, which was eliminated in the
consolidation of the Companys financial statements, for
Bellaire SurgiCare, TASC and TOM and Memorial Village. The
management fee revenue for San Jacinto was not eliminated
in consolidation. The management fee revenue associated with the
discontinued operations in the surgery center business totaled
$968 and $61,039, respectively, for the three months and six
months ended June 30, 2006. For the three months and six
months ended June 30, 2005, the Company generated
management fee revenue of $112,155 and 218,407, respectively,
and net minority interest losses totaling $3,318 and 42,765,
respectively. For the quarters ended June 30, 2005 and
December 31, 2005, the Company recorded a charge for
impairment of intangible assets of $276,420 and $142,377,
respectively, related to trained work force and non-compete
agreements affected by the surgery center operations the Company
discontinued in 2005 and early 2006.
F-26
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
The following table summarizes the components of income (loss)
from operations of discontinued components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
Bellaire SurgiCare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
(188,418
|
)
|
Loss on disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,049
|
)
|
CARDC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,700
|
|
Gain on disposal
|
|
|
|
|
|
|
(238,333
|
)
|
|
|
|
|
|
|
268,292
|
|
IntegriMED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(310,776
|
)
|
|
|
|
|
|
|
(707,896
|
)
|
Loss on disposal
|
|
|
|
|
|
|
(47,101
|
)
|
|
|
|
|
|
|
(47,101
|
)
|
TASC and TOM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
74,541
|
|
|
|
|
|
|
|
39,995
|
|
Loss on disposal
|
|
|
|
|
|
|
(2,122,445
|
)
|
|
|
|
|
|
|
(2,122,445
|
)
|
Sutter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
2,248
|
|
|
|
|
|
|
|
5,710
|
|
Memorial Village
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(127,731
|
)
|
|
|
(153,036
|
)
|
|
|
(242,772
|
)
|
Gain (loss) on disposal
|
|
|
|
|
|
|
(3,229,462
|
)
|
|
|
574,321
|
|
|
|
(3,229,462
|
)
|
San Jacinto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal
|
|
|
|
|
|
|
(734,522
|
)
|
|
|
94,066
|
|
|
|
(734,522
|
)
|
Orion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
968
|
|
|
|
(169,244
|
)
|
|
|
61,039
|
|
|
|
(100,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from
operations of discontinued components, including net gain (loss)
on disposal
|
|
$
|
968
|
|
|
$
|
(6,902,825
|
)
|
|
$
|
576,390
|
|
|
$
|
(7,183,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
Long-term debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
Promissory note due to sellers of
MBS, bearing interest at 8%, interest payable monthly or on
demand, matures December 15, 2007
|
|
$
|
1,714,336
|
|
|
$
|
1,000,000
|
|
Working capital due to sellers of
MBS, due on demand
|
|
|
|
|
|
|
199,697
|
|
Term loan with a financial
institution, non-interest bearing, matures November 15,
2010, net of accretion of $654,418 and $641,467, respectively
|
|
|
3,095,725
|
|
|
|
3,108,677
|
|
Revolving line of credit with a
financial institution, bearing interest at 6.5%, interest
payable monthly or on demand(1)
|
|
|
|
|
|
|
778,005
|
|
$2,300,000 revolving line of
credit, bearing interest at prime (8.25% at June 30,
2006) plus 6%, interest payable monthly, matures
December 14, 2006(2)
|
|
|
998,668
|
|
|
|
1,703,277
|
|
Convertible notes, bearing
interest at 18%, interest payable monthly, convertible on demand
|
|
|
50,000
|
|
|
|
50,000
|
|
Note payable due to a related
party, bearing interest at 6%, interest payable monthly, due on
demand
|
|
|
|
|
|
|
13,611
|
|
Insurance financing note payable,
bearing interest at 5.25%, interest payable monthly
|
|
|
126,140
|
|
|
|
|
|
Convertible promissory notes due
to a related party, bearing interest at 9%, matures
October 15, 2006
|
|
|
1,250,000
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
7,234,869
|
|
|
|
8,103,267
|
|
Less: current portion of long-term
debt
|
|
|
(3,439,897
|
)
|
|
|
(4,231,674
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion
|
|
$
|
3,794,972
|
|
|
$
|
3,871,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 13, 2006, the Company had retired approximately
$778,000 of debt at a discounted price of $112,500. |
|
(2) |
|
As part of the Loan and Security Agreement, the Company is
required to comply with certain financial covenants, measured on
a quarterly basis. The financial covenants include maintaining a
required debt service coverage ratio and meeting a minimum
operating income level for the surgery and diagnostic centers
before corporate overhead allocations. At June 30, 2006,
the Company was out of compliance with both of these financial
covenants and has notified the lender as such. Under the terms
of the Loan and Security Agreement, failure to meet the required
financial covenants constitutes an event of default. Under an
event of default, the lender may (i) accelerate and declare
the obligations under the credit facility to be immediately due
and payable; (ii) withhold or cease to make advances under
the credit facility; (iii) terminate the credit facility;
(iv) take possession of the collateral pledged as part of
the Loan and Security Agreement; (v) reduce or modify the
revolving loan commitment;
and/or
(vi) take necessary action under the Guaranties. The full
amount of the loan as of June 30, 2006 is recorded as a
current liability. In December 2005, the Company received
notification from CIT stating that (i) certain events of
default under the Loan and Security Agreement had occurred as a
result of the Company being out of compliance with two financial
covenants relating to its debt service coverage ratio and its
minimum operating income level, (ii) as a result of the
events of default, CIT raised the interest rate for monies
borrowed under the Loan and Security Agreement to the provided
Default Rate of prime rate plus 6%, (iii) the
amount available under the revolving credit facility was reduced
to $2,300,000 and |
F-28
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
|
|
|
|
|
(iv) CIT reserved all additional rights and remedies
available to it as a result of these events of default. The
Company is currently in negotiations with CIT to obtain, among
other provisions, a waiver of the events of default. In the
event CIT declares the obligations under the Loan and Security
Agreement to be immediately due and payable or exercises its
other rights described above, the Company would not be able to
meet its obligations to CIT or its other creditors. As a result,
such action would have a material adverse effect on the
Companys ability to continue as a going concern. |
On January 1, 1999, IPS acquired Childrens Advanced
Medical Institutes, Inc. (CAMI) in a merger
transaction. On that same date, IPS began providing management
services to the Childrens Advanced Medical Institutes,
P.A. (the P.A.), an entity owned by the physicians
affiliated with CAMI. The parties rights and obligations
were memorialized in a merger agreement, a management services
agreement and certain other agreements. On February 7,
2000, the P.A., certain physicians affiliated with the P.A., and
the former shareholders of CAMI filed suit against IPS in the
U.S. District Court for the Northern District of Texas,
Dallas Division, Civil Action File
No. 3-00-CV-0536-L.
On May 9, 2001, IPS (which was formerly known as Pediatric
Physician Alliance, Inc.) filed suit against the P.A., certain
physicians who were members of the P.A., and Patrick Solomon as
Escrow Agent of CAMI. The case was filed in the
U.S. District Court for the Northern District of Texas,
Dallas Division, Civil Action File
No. 3-01CV0877-L.
In their complaint, the P.A., the former shareholders of CAMI
and the physicians seek a claim against IPS for approximately
$500,000 (which includes interest and attorneys fees). IPS
asserted a claim against the physicians for over $5,000,000 due
to the overpayments and their alleged breach of the agreements.
An arbitration hearing was held on the claim filed by the former
shareholders of CAMI in January 2004, and the Arbitrator issued
an award against IPS. The U.S. District Court confirmed the
award in the amount of $548,884 and judgment was entered. IPS
has accrued approximately $540,000 for possible losses related
to this claim. On June 1, 2005, IPS and the physicians
executed a settlement agreement under which $300,000 of the
judgment was paid to the physicians with the remaining amount of
the judgment being returned to IPS. All claims asserted in the
lawsuit and arbitration were dismissed with prejudice.
On October 5, 2004, Orions predecessor, SurgiCare,
was named as a defendant in a suit entitled Shirley Browne and
Bellaire Anesthesia Management Consultants, Inc.
(BAMC) v. SurgiCare, Inc., Bellaire SurgiCare,
Inc., Sherman Nagler, Jeffrey Penso, and Michael Mineo, in the
152nd Judicial District Court of Harris County, Texas,
Cause
No. 2004-55688.
The dispute arises out of the for cause termination of
BAMCs exclusive contract to provide anesthesia services to
Bellaire SurgiCare, Inc. Ms. Browne had filed a charge of
discrimination with the EEOC on February 6, 2004, claiming
that she was terminated in retaliation for having previously
complained about discriminatory treatment and a hostile work
environment. She claimed she had been discriminated against
based on her sex, female, and retaliated against in violation of
Title VII. The Company denied Ms. Brownes
allegations of wrongdoing. The EEOC declined to institute an
action and issued a right to sue letter, which prompted the
lawsuit. The parties have reached a final settlement, which was
accrued for as of September 30, 2005 and paid on
December 27, 2005, on all matters for dismissal of all
claims.
On July 12, 2005, Orion was named as a defendant in a suit
entitled American International Industries, Inc. vs. Orion
HealthCorp, Inc., previously known as SurgiCare, Inc., Keith G.
LeBlanc, Paul Cascio, Brantley Capital Corporation, Brantley
Venture Partners III, L.P., and Brantley Partners IV, L.P.
in the 80th Judicial District Court of Harris County,
Texas, Cause
No. 2005-44326.
This case involves allegations that the Company made material
and intentional misrepresentations regarding the financial
condition of the parties to the acquisition and restructuring
transactions effected on December 15, 2004 for the purpose
of inducing American International Industries, Inc.
(AII) to convert its SurgiCare Class AA
convertible preferred stock (Class AA Preferred
Stock) into shares of Orion Class A Common Stock. AII
asserts that the value of its Class A Common Stock of Orion
has fallen as a direct result of the alleged material
misrepresentations by the Company. AII is seeking actual damages
of $3,800,000, punitive damages of $3,800,000, and rescission of
the agreement to convert the Class AA Preferred Stock into
F-29
Orion
HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial
Statements (Continued)
Class A Common Stock. The Company and the other defendants
filed an Answer denying the allegations set forth in the
Complaint.
In addition, the Company is involved in various other legal
proceedings and claims arising in the ordinary course of
business. The Companys management believes that the
disposition of these additional matters, individually or in the
aggregate, is not expected to have a materially adverse effect
on the Companys financial condition. However, depending on
the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially
affect the Companys future results of operations or cash
flows in a particular period.
|
|
Note 12.
|
Subsequent
Events
|
In connection with the DCPS/MBS Merger in December 2004,
75,758 shares of Orions Class A Common Stock
were reserved for issuance at the direction of the sellers of
the MBS and DCPS equity. On July 14, 2006,
75,000 shares of Class A Common Stock were issued to
certain employees and affiliates of MBS and DCPS.
On August 8, 2006, Brantley IV and the Company
executed the First and Second Note Second Amendment, which
extends the First Note Maturity Date and Second
Note Maturity Date to October 15, 2006. (See
Note 2. Going Concern).
Note 13. Restatement of Financial Statements
On November 1, 2006, the Company received comments from the Staff of the Securities and
Exchange Commission (the SEC) in connection with their
review of the Companys preliminary proxy statement
on Schedule 14A filed with the SEC on September 11, 2006. In connection with the receipt of these
comments, the Company determined that the Companys presentation of the charge for impairment of
intangible assets in continuing operations rather than in discontinued operations was inconsistent
with the guidelines set forth under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Accordingly, the Companys historical unaudited consolidated condensed
statements of operations and statements of cash flows for the three months and six months ended June 30, 2005 have been restated
to reflect the reclassification of the charge for impairment of intangible assets of $6,362,849
from continuing operations to discontinued operations. The reclassification had no effect on the
consolidated net income or cash flows of the Company for the periods presented.
F-30