U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to ________
SURGICARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 58-1597246
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
12727 KIMBERLEY LANE, SUITE 200, HOUSTON, TEXAS 77024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (713) 973-6675
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 9, 2003, 24,883,175 shares of Common Stock, $0.005 par value per
share, were outstanding.
1
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
------------------------------
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements"
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
Consolidated Statements of Operations for the three months ending June 30, 2003
and 2002
Consolidated Statements of Operations for the six months ending June 30, 2003
and 2002
Consolidated Statements of Cash Flows for the six months ending June, 2003 and
2002
Notes to Consolidated Financial Statements
2
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
----------------- ----------------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 263,901 $ 262,327
Accounts Receivable:
Trade (less allowance for contractual adjustments and doubtful
accounts of $4,706,000 and $6,496,000 at June 30, 2003
and December 31, 2002, respectively) 834,004 1,324,944
Other receivables 403,032 398,834
Note receivable 223,178 223,178
Inventory 366,483 397,772
Prepaid expenses 133,437 69,380
Other current assets 105,081 76,313
-------------- ---------------
Total Current Assets 2,329,116 2,752,748
Property and Equipment
Office furniture and equipment 395,797 378,901
Medical and surgical equipment 3,735,672 3,576,721
Leasehold improvements 941,440 941,440
Computer equipment 382,263 377,495
Transportation equipment 19,015 19,015
-------------- ---------------
5,474,187
Less: Accumulated depreciation and amortization 2,846,017 2,468,662
-------------- ---------------
Total Property and Equipment 2,628,170 2,824,910
Goodwill 8,045,735 8,045,735
Real Estate 4,579,385 4,579,385
Investment in Limited Partnerships 368,679 306,654
Prepaid Limited Partner Distributions 403,748 403,748
Loan fees (net of amortization of $175,067 at June 30, 2003 and
$108,321 at December 31, 2002) 126,970 193,716
--------------- ---------------
TOTAL ASSETS $ 18,481,803 $ 19,106,896
=============== ===============
3
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
2003 2002
--------------- ---------------
LIABILITIES (unaudited)
Current Liabilities
Current maturities of long-term debt $ 5,983,536 $ 6,295,389
Revolving lines of credit 1,315,898 1,665,657
Current portion of capital leases 293,843 313,725
Accounts payable 2,718,598 2,362,378
Accrued expenses 768,686 472,645
Payable to a related party 116,909
------------------ ----------------
Total Current Liabilities 11,080,561 11,226,703
Long-Term Debt 427,813 454,328
------------------ ----------------
Total Liabilities 11,508,374 11,681,031
SHAREHOLDERS' EQUITY
Preferred Stock, Series A, par value $.001, 1,650,000
authorized, 1,225,100 issued and outstanding
(Redemption and liquidation value $6,125,500). 1,225 1,225
Preferred Stock, Series AA, par value $.001, 1,200,000
authorized, 900,000 issued and outstanding 900 900
Common Stock, par value $.005, 50,000,000 shares authorized; 24,883,175 and
21,327,131 issued June 30, 2003 and
December 31, 2002, respectively. 124,416 106,635
Additional Paid-In Capital 16,189,292 15,065,801
Accumulated Deficit (9,295,836) (7,708,196)
Less: Treasury Stock-at cost, 91,400 and 75,000 shares at June 30,
2003 and December 31, 2002, respectively (38,318) (32,250)
Shareholders receivable (8,250) (8,250)
------------------ ---------------
Total Shareholders' Equity 6,973,429 7,425,865
------------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,481,803 $ 19,106,896
================== ===============
See notes to consolidated financial statements.
4
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ending
June 30,
------------------------------------------
2003 2002
-------------------- -----------------
Revenues, net $ 1,939,008 $ 3,776,546
Direct Surgical expenses:
Surgical costs 399,109 683,229
Clinical salaries & benefits 455,739 330,216
Other 213,783 216,958
------------------ -----------------
Total Direct Surgical Expenses 1,068,631 1,230,403
General and Administrative Expenses:
Salaries and benefits 383,975 399,396
Management and affiliation fees 27,104 30,178
Rent 235,062 150,500
Depreciation and amortization 225,085 168,839
Professional fees 299,487 591,835
Taxes 30,351 19,685
Provision for doubtful accounts 291,530 3,757,634
Other 275,647 240,227
------------------ -----------------
Total General & Administrative Expenses 1,768,241 5,358,294
Total Expenses 2,836,872 6,588,697
------------------ -----------------
Operating Loss (897,864) (2,812,151)
------------------ -----------------
Other Income (Expense):
Gain on sale of partnership interest 319,086
Miscellaneous income 8,250
Equity in Earnings of Limited Partnerships 80,297 68,176
Interest Expense (468,906) (231,112)
------------------ -----------------
Total Other Income (Expense) (61,273) (162,936)
Minority Interest in (Earnings)
Loss of Partnership 49,984 424,250
----------------- -----------------
Loss Before Income Tax Expenses (909,153) (2,550,837)
Federal Income Tax Benefit (993,641)
----------------- -----------------
Net Loss $ (909,153) $ (1,557,196)
================= =================
Earnings (Loss) per share - Basic $ (.04) $ (.11)
================= =================
Earnings (Loss) per share - Diluted $ (.04) $ (.11)
================= =================
Weighted Average Shares Outstanding:
Basic 24,877,900 14,693,450
================= =================
Diluted 24,877,900 14,693,450
================= =================
See notes to consolidated financial statements.
5
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Six Months Ending
June 30,
------------------------------------------
2003 2002
-------------------- -----------------
Revenues, net $ 4,219,129 $ 7,040,536
Direct Surgical expenses:
Surgical costs 871,686 1,052,939
Clinical salaries & benefits 927,167 649,437
Other 506,108 336,332
------------------ -----------------
Total Direct Surgical Expenses 2,304,961 2,038,708
General and Administrative Expenses:
Salaries and benefits 770,371 730,787
Management and affiliation fees 58,537 55,140
Rent 468,105 282,835
Depreciation and amortization 444,103 317,734
Professional fees 514,584 919,338
Taxes 59,240 30,539
Provision for doubtful accounts 300,692 3,757,634
Other 549,813 405,402
------------------ -----------------
Total General & Administrative Expenses 3,165,445 6,499,409
Total Expenses 5,470,406 8,538,117
------------------ -----------------
Operating Loss (1,251,277) (1,497,581)
------------------ -----------------
Other Income (Expense):
Gain on sale of partnership interest 319,086
Loss on sale of assets (168) (2,118)
Miscellaneous income 20,219 78
Equity in Earnings of Limited Partnerships 167,939 107,469
Interest Expense (909,018) (455,195)
------------------ -----------------
Total Other Income (Expense) (401,942) (349,766)
Minority Interest in (Earnings)
Loss of Partnership 52,018 (1,382)
----------------- -----------------
Loss Before Income Tax Expenses (1,601,201) (1,848,729)
Federal Income Tax Expense (Benefit) (13,561) (719,574)
----------------- -----------------
Net Loss $ (1,587,640) $ (1,129,155)
================= =================
Earnings (Loss) per share - Basic $ (.07) $ (.08)
================= =================
Earnings (Loss) per share - Diluted $ (.07) $ (.08)
================= =================
Weighted Average Shares Outstanding:
Basic 24,232,458 14,420,650
================= =================
Diluted 24,232,458 14,420,650
================= =================
See notes to consolidated financial statements.
6
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months Ending
June 30,
---------------------------------------------------------
2003 2002
----------------------------- ---------------------
Cash Flows From Operating Activities:
Net loss $ (1,587,640) $ (1,129,155)
Adjustments to reconcile net earnings to net cash provided by operations:
Equity in earnings of limited partnerships (167,939) (107,469)
Minority interest in earnings (loss) of partnerships (52,018) 1,382
Depreciation and amortization 444,102 317,733
Amortization of debt discount 74,920
Provision for doubtful accounts 300,692 3,757,634
Non-cash consulting expense 124,200
Gain on sale of interest in limited partnership (319,086)
(Increase) Decrease in:
Accounts receivable 186,050 (2,461,716)
Notes receivable
Inventory 31,289 4,343
Prepaid expenses (64,057) 96,138
Other current assets 23,250 (125,733)
Federal income tax (702,517)
Increase (Decrease) in:
Accounts payable 274,311 469,417
Accrued expenses 296,041 (63,939)
------------------------- -----------------
Net Cash Provided by (Used in) Operating Activities (560,085) 182,396
------------------------- -----------------
Cash Flows From Investing Activities:
Capital expenditures (25,795) (171,430)
Proceeds from sale of interest in limited partnership 425,000
Investment in limited partnership (640,846)
Distributions from partnerships 54,000
------------------------- -----------------
Net Cash Provide by (Used in) Investing Activities 399,205 (758,276)
------------------------- -----------------
Cash Flows From Financing Activities:
Borrowings on lines of credit 2,796,768 704,633
Payments on lines of credit (3,146,527)
Borrowings on debt 750,000
Payments on debt (502,099) (1,015,432)
Principal payments on capital lease (50,892) (75,516)
Proceeds from issuance of common stock 1,069,897 882,500
Proceeds from exercise of warrants 1,375
Distributions to limited partners (365,946)
Purchase of treasury stock (6,068)
------------------------- -----------------
Net Cash Provided by Financing Activities 162,454 880,239
------------------------- -----------------
Net Increase in Cash and Cash Equivalents 1,574 304,359
Cash and Cash Equivalents - Beginning of Period 262,327 76,274
------------------------- -----------------
Cash and Cash Equivalents - End of Period $ 263,901 $ 380,633
========================= =================
7
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
For the Six Months Ending
June 30,
---------------------------------------------------------
2003 2002
----------------------------- ---------------------
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest $ 667,828 $ 286,675
Non-cash investing and financing activities:
Issuance of common shares for:
Investment 74,750
Accounts payable 70,000 41,000
Equipment acquired under capital lease
Obligations 154,821 67,032
See notes to consolidated financial statements.
8
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
SurgiCare, Inc. ("SurgiCare", the "Company", "we", "us", or "our"),
through its wholly owned subsidiaries, owns a majority interest in limited
partnerships or corporations that operate three surgery centers. The Company
also owns a minority interest as general partner in two limited partnerships
that each operates a surgery center. The consolidated statements include the
accounts of the Company and its subsidiaries and its majority owned limited
partnerships. Consolidation of the majority owned partnerships is necessary as
the Company owns 51% or more of the financial interest and, as general partner,
is responsible for the day-to-day management of the partnerships.
These financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. ("GAAP") for interim
financial reporting and in accordance with Securities and Exchange Commission
("SEC") Rule 10-01 of Regulation S-X. In the opinion of management, the
accompanying unaudited condensed, consolidated financial statements include all
adjustments consisting of only normal recurring adjustments necessary for a fair
presentation of the Company's financial position and the results of operations
and cash flows for the interim periods presented. The results of operations for
any interim period are not necessarily indicative of results for the full year.
The accompanying consolidated financial statements should be read in
conjunction with the financial statements and related notes included in
SurgiCare's 2002 Annual Report on Form 10-KSB.
Note 2- Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from those estimates.
The determination of contractual allowances constitutes a significant
estimate. In determining the amount of contractual allowances, management
considers such factors as historical trends of billing and cash collections,
established fee schedules, accounts receivable agings and contractual
relationships with third-party payors. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account.
Note 3 - Revenue Recognition
Revenues at the Company's surgery centers consist of billing for the
use of the centers' facilities ("facility fee") directly to the patient or
third-party payor. The facility fee excludes any amounts billed for physicians'
services, which are billed separately by the physician to the patient or
third-party payor.
Revenue is recognized on the date the procedures are performed, and
accounts receivable are recorded at that time. Revenues are reported at the
estimated realizable amounts from patients and third-party payors (net of
contractual allowances). If such third-party payors were to change their
reimbursement policies, the effect on revenue could be significant. Earnings are
charged with a provision for contractual adjustments and doubtful accounts.
Note 4 - Goodwill
Goodwill represents the excess of cost over the fair value of net
assets of companies acquired in business combinations accounted for using the
purchase method. Goodwill acquired in business combinations prior to June 30,
2001 had been amortized using the straight-line method over an estimated useful
life of 20 years. In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill no longer be amortized but instead be reviewed
periodically for possible impairment. The Company has adopted SFAS No. 142
effective January 1, 2002 and will no longer amortize goodwill.
9
Under SFAS 142, the Company must have completed its initial assessment
of goodwill for possible impairment no later than December 31, 2002. The Company
completed the first phase of this impairment test and, based on an independent
valuation performed by a third party, believes that there was no impairment of
goodwill as of January 1, 2002.
Due to the significant losses incurred during 2002, and the decline in
the quoted market price of the common shares, the Company believed that a second
impairment test as of December 31, 2002 was necessary. Using the same
methodology (mainly the market method) as employed in the transitional
valuation, the Company concluded that no impairment had occurred as of December
31, 2002.
Note 5 - Recent Accounting Pronouncements
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," issued in August 2001, supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This statement retains certain requirements
of SFAS No. 121 relating to the recognition and measurement of impairment of
long-lived assets to be held and used. Additionally, this statement results in
one accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale and also addresses certain
implementation issues related to SFAS No. 121, including the removal of goodwill
from its scope due to the issuance of SFAS No. 142. The Company adopted this
pronouncement on January 1, 2002, which had no impact on its consolidated
financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," issued in June 2002, rescinds Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at its
fair value in the period that the liability is incurred. The provisions of this
Statement shall be effective for exit or disposal activities initiated after
December 31, 2002, with early application encouraged. Management has determined
that the adoption of SFAS No. 146 will not have a material impact on the
Company's financial position and results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002. The Company has entered into certain guarantees as described in Note
11.
10
In January 2003, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosures." This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement also amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in the financials statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement were effective for the December 31, 2002
financial statements. The interim reporting disclosure requirements became
effective for this quarterly report. Because the Company continues to account
for employee stock-based compensation under APB opinion No. 25, the transitional
guidance of SFAS No. 148 has no effect on the financial statements at this time.
However, the accompanying financial statements presented have incorporated the
enhanced disclosure requirements of SFAS No. 148.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The Company does not believe that the adoption of
SFAS 150 will have a significant impact on its financial statements.
Note 6 - Acquisitions / Dispositions
On May 31, 2002, the Company acquired a 51% interest in the Tuscarawas
Ambulatory Surgery Center ("Tuscarawas Center") located in Dover, Ohio for an
aggregate of $725,000 cash and warrants to purchase 200,000 shares of the
Company common stock at an exercise price of $.01 per share expiring May 31,
2007. The warrants were valued at $590,000. The Company has also entered into a
Management Agreement with the Tuscarawas Center to act as exclusive manager of
the Tuscarawas Center in exchange for 5% of the Tuscarawas Center's net monthly
collected revenue.
In June 2003, the Company sold its 10% interest in Physician's
Endoscopy Center, Ltd for $425,000 and recognized a gain on the sale of
$319,086. As part of the sale agreement, the Company was released of any
liability of the center and removed as a guarantor on the center's bank note
payable.
Note 7 - Debt
Loan agreements relating to the majority of the Company's credit lines,
notes payable and capital leases contain requirements for maintenance of defined
minimum financial ratios. The Company is not in compliance with all such
provisions as of June 30, 2003. Further, the Company is delinquent in payments
on the majority of its outstanding debt. All notes and capital leases in default
have been shown as current in these financial statements. The Company has
obtained a letter of forbearance through August 29, 2003, in connection with its
senior lender, DVI Business Credit Corp.
The Company has financed its growth primarily though the issuance of
equity, secured and/or convertible debt. As of June 30, 2003, the Company does
not have any credit facilities available with financial institutions or other
third parties to provide for working capital shortages. Although the Company
believes it will generate cash flow from operations in future quarters, due to
its debt load, it is not able to fund its current operations solely from its
cash flow.
The Company believes that additional sales of debt and/or equity
securities will be required to continue operations. The Company is continuing to
pursue additional financing of debt and/or equity, but does not currently have
firm commitments for the additional sales of debt or equity securities. Any such
sales will be made on a best efforts basis. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support its operations, or fund acquisitions for
its anticipated growth. In the event that any future financing efforts are not
successful, the Company will be forced to liquidate assets and/or curtail
operations.
11
Note 8 - Earnings Per Share
Basic earnings per share are calculated on the basis of the weighted
average number of shares outstanding. Diluted earnings per share, in addition to
the weighted average determined for basic loss per share, include common stock
equivalents, which would arise from the exercise of stock options and warrants
using the treasury stock method, and assumes the conversion of the Company's
preferred stock for the period outstanding, since their issuance.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- ---------------- --------------- ---------------
Basic Loss Per Share:
Net Loss $(909,153) $(1,557,196) $(1,587,640) $(1,129,155)
============== ================ =============== ===============
Weighted average shares
outstanding 24,877,900 14,693,450 24,232,458 14,420,650
Dilutive stock options and
warrants (a) (a) (a) (a)
Conversion of preferred shares (b) (b) (b) (b)
Conversion of debt (c) (c) (c) (c)
-------------- ---------------- --------------- ---------------
Weighted average common shares 24,877,900 24,232,458
outstanding for diluted net loss
per share 14,693,450 14,420,650
============== ================ =============== ===============
Net loss per share - Basic
$(.04) $(.11) $(.07) $(.08)
============== ================ =============== ===============
Net loss per share - Diluted
$(.04) $(.11) $(.07) $(.08)
============== ================ =============== ===============
The following potentially dilutive shares are not included because their effect
would be anti-dilutive due to the net loss for the period:
a. 10,942,807 and 1,703,741 options and warrants outstanding at June 30, 2003
and June 30, 2002, respectively.
b. 900,000 and 1,200,000 shares of Series AA Preferred Stock convertible into
$4,500,000 and $6,000,000 of common shares at June 30 2003 and June 30,
2002, respectively. 1,225,000 and 1,316,100 shares of Series A Preferred
stock convertible into 1,225,000 and 1,316,100 common shares at June 30,
2003 and June 30, 2002, respectively.
c. $1,000,000 of debentures convertible into common stock at a price equal to
$1.50 per share at June 30, 2003.
Note 9 - Litigation
In September 2002, SurgiCare was named as a defendant in a suit entitled
Charles Cohen vs. SurgiCare, Inc. and David Blumfield, in the 234th Judicial
District Court of Harris County, Texas. Mr. Cohen sued SurgiCare for breach of
contract and both defendants for defamation. Mr. Cohen claims that SurgiCare
breached his employment agreement when it terminated his employment (although he
remains a Director of SurgiCare as of the date of this filing) and that Mr.
Blumfield and SurgiCare made defamatory statements about him. Mr. Cohen has made
claims for $562,000 for breach of the employment agreement plus additional
damages for the defamation claim. David Blumfield has since been dropped as a
defendant in this suit. SurgiCare intends to vigorously defend this suit.
12
In February 2003, SurgiCare was named as a defendant in a suit entitled S.E.
Altman, individually, and d/b/a Altman & Associates vs. SurgiCare, Inc., in the
County Court at Law No. 1, Harris County, Texas. Altman has sued SurgiCare for
breach of contract based on a finders fee contract in which Altman claims
SurgiCare has not performed. Altman has made claims in the amount of $202,000
plus attorney's fees. American International Industries has indemnified
SurgiCare from any losses and expenses related to this lawsuit. SurgiCare
intends to vigorously defend this suit.
In March 2003, SurgiCare Memorial Village, L.P. and Town & Country
SurgiCare, Inc. were named as defendants in a suit entitled MarCap Corporation
vs. Health First Surgery Center-Memorial, Ltd.; HFMC, L.C.; SurgiCare Memorial
Village, L.P.; and Town & Country SurgiCare, Inc. MarCap has sued for default
under a promissory note and refusing to remit payment on a promissory note in
the amount of $215,329.36. SurgiCare has paid $53,832.34 of this balance and is
attempting to arrange for a payment plan to pay the remaining balance.
In April 2003, SurgiCare was named as a defendant in a suit entitled
International Diversified Corporation, Limited vs. SurgiCare, Inc. International
Diversified Corporation (IDC) has sued for breach of contract in which IDC
invested $1,000,000 into SurgiCare. IDC has sued for the rescission of the
contract and the return of $1,000,000 or the deliverance of 2,439,024 shares.
SurgiCare intends to vigorously defend this suit.
In April 2003, SurgiCare was named as a defendant in a suit entitled
Jackson Walker, LLP vs. SurgiCare, Inc. Jackson Walker is claiming damages of
$52,247.18 in unpaid invoices for services rendered. SurgiCare is currently
attempting to settle the account.
On July 7, 2003, SurgiCare, Inc. was named as a party in the arbitration
entitled Brewer & Pritchard, P.C. vs. SurgiCare, Inc. before the American
Arbitration Association. Brewer & Pritchard have claimed breach of contract and
demanded payment of $131,294.88 in billed and unbilled legal fees plus third
party expenses, interest at the highest legal rate, costs, legal fees and
damages from breach of contract. SurgiCare has denied the material allegations
in Brewer & Pritchard's demand and intends on vigorously defending this demand.
Note 10 - Employee Stock-Based Compensation
The Company accounts for its employee stock options and warrants under the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net loss, as all employee options and warrants granted had
an exercise price equal to the market value of the underlying common stock on
the date of grant.
The Company also grants options and warrants to non-employees for goods and
services and in conjunction with certain agreements. These grants are accounted
for under FASB Statement No. 123, "Accounting for Stock-Based Compensation"
based on the grant date fair values.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123 to stock-based employee compensation.
13
Three Months Ended Six Months Ended
---------------------------------------------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net loss - as reported $ (909,153 ) $ (1,557,196 ) $ (1,587,640 ) $ (1,129,155 )
Deduct: Total stock-based employee
compensation (expense determined under the
fair value based method for all awards),
net of tax effect (52,725 ) (80,399 ) (105,450 ) (123,549 )
Pro forma net loss $ (961,878 ) $ (1,637,595 ) (1,693,090 ) (1,252,704 )
Loss per share:
Basic net loss per share - as reported $(.04 ) $(.11 ) $(.07 ) $(.08 )
Basic net loss per share - pro forma $(.04 ) $(.11 ) $(.07 ) $(.09 )
Diluted net loss per share - as reported $(.04 ) $(.11 ) $(.07 ) $(.08 )
Diluted net loss per share - pro forma $(.04 ) $(.11 ) $(.07 ) $(.09 )
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net earnings (loss) for future
years because options vest over several years and additional awards could be
made each year.
Note 11 - Guarantees
The Company is guarantor on a working capital line of credit for San
Jacinto Surgery Center, L.P. ("San Jacinto"), in which the Company owns a 10%
general partnership interest through a wholly-owned subsidiary. As of June 30,
2003, the line of credit facility had a balance of $576,000 and is recorded on
San Jacinto's balance sheet, which is not consolidated with the Company's
financial statements. As of the date of this filing, the line has matured and
management is currently working on an extension.
Note 12 - Subsequent Event
On August 13, 2003, DVI, Inc. (NYSE: DVI) issued a press release
announcing that it will seek protection under the United States bankruptcy laws.
DVI, Inc. is a senior lender to the Company and its primary source of cash flow.
The future effect on the Company's cash flow is not known at this time.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
The information contained herein contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward looking statements involve risks and uncertainty,
including, without limitation, our ability to continue our expansion strategy,
changes in federal or state healthcare laws and regulations or third party payor
practices, our historical and current compliance with existing or future
healthcare laws and regulations and third party payor requirements, changes in
costs of supplies, labor and employee benefits, as well as general market
conditions, competition and pricing. Although we believe that the assumptions
underlying the forward looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward looking statements included in this Form 10-QSB will prove to
be accurate. In view of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by management or any other person
that our objectives and plans will be achieved. We undertake no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
14
Critical Accounting Policies
In December 2001, the SEC requested that reporting companies discuss
their most "critical accounting policies" in management's discussion and
analysis of financial condition and results of operations. The SEC indicated
that a "critical accounting policy" is one that is important to the portrayal of
a company's financial condition and operating results and requires management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of this and
other accounting policies, see Notes 1 and 2 in the Notes to the Consolidated
Financial Statements of our Annual Report on Form 10-KSB. Our preparation of
this Form 10-QSB and our Annual Report on Form 10-KSB requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as of the date of
our financial statements. Therefore, actual results may differ from those
estimates.
Revenue Recognition - Revenue is recognized on the date the procedures
are performed, and accounts receivable are recorded at that time. Revenues are
reported at the estimated realizable amounts from patients and third-party
payers. If such third-party payers were to change their reimbursement policies,
the effect on revenue could be significant. Earnings are charged with a
provision for contractual adjustments and doubtful accounts based on such
factors as historical trends of billing and cash collections, established fee
schedules, accounts receivable agings and contractual relationships with
third-party payors. Contractual adjustments and accounts deemed uncollectible
are applied against the allowance account.
Investment in Limited Partnerships - The investments in limited
partnerships are accounted for by the equity method. Under the equity method,
the investment is initially recorded at cost and is subsequently increased to
reflect the Company's share of the income of the investee and reduced to reflect
the share of the losses of the investee or distributions from the investee.
Goodwill - Goodwill arises from the acquisition of assets at an amount in
excess of their fair market value. In July 2001, the FASB issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the criteria
for recording intangible assets separately from goodwill. Recorded goodwill and
intangibles are evaluated against these criteria and may result in certain
intangibles being transferred to goodwill or, alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. Under SFAS No. 142, a non-amortization approach, goodwill and certain
intangibles with indefinite lives are not amortized into results of operations,
but instead reviewed periodically for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and certain intangibles with indefinite lives is more than its fair
value. The provisions of each statement which apply to goodwill and intangible
assets acquired prior to June 30, 2001, was adopted by the Company on January 1,
2002. At the review dates of January 1, 2002 and December 31, 2002, the Company
concluded that no impairment had occurred.
Overview
SurgiCare's principal business strategies are to (a) increase physician
utilization of existing facilities, (b) increase both the revenue and profits
from current cases and procedures being performed in existing facilities (c)
achieve growth and expand revenues by pursuing strategic acquisitions of
existing, and the development of new, physician owned ambulatory surgical
centers, and (d) expand into related healthcare facilities, including imaging,
surgical hospitals and practice management.
15
Surgical supply costs are the single largest cost component of any
ambulatory surgical center. Therefore, SurgiCare's goal is to minimize the cost
of surgical supplies. Through participation in national buying groups, SurgiCare
has been able to negotiate discounts on most of the commonly used surgical
supplies. SurgiCare has also implemented a "Just in Time" approach to inventory.
This allows the center to minimize the amount of supplies that it is required to
keep in inventory.
SurgiCare is in the process of identifying ambulatory surgical centers,
imaging centers, surgical hospitals and practice management companies as
potential acquisition targets and has, in some cases, conducted preliminary
discussions with representatives of these organizations. Although there are no
commitments, understandings, or agreements with any other potential acquisition
targets, talks are ongoing for the acquisition of additional entities. All of
such discussions have been tentative in nature and there can be no assurance
that we will acquire any center with whom discussions have been conducted.
Financial Condition and Results of Operations
The following table sets forth for the periods indicated the
percentages of revenues represented by income statement items.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Revenues, net 100.0% 100.0% 100.0% 100.00%
Expenses:
Direct Cost of Services 55.1% 32.6% 54.6% 29.0%
General & Administrative
Expenses 91.2% 141.9% 75.0% 92.3%
Total Operating Expenses 146.3% 174.5% 129.7% 121.3%
Operating Income (Loss) -46.3% -74.5% -29.7% -21.3%
Other Income (Loss) -3.2% -4.3% -9.5% -5.0%
Minority Interest in Earnings (losses)
of Partnerships 2.6% 11.2% 1.2% -
Earnings (Loss) Before Federal Income
Tax Expense -46.9% -67.5% -38.0% -26.3%
Federal Income Tax Expense (Benefit) - -26.3% .3% -10.3%
Net Earnings (Loss) -46.9% -41.2% -37.6% -16.0%
Results of Operations
THREE MONTHS ENDED JUNE 30, 2003 vs. THREE MONTHS ENDED JUNE 30, 2002
Net Revenue. On a consolidated basis, case volume increased 7.0% to
1,731 in the three months ended June 30, 2003 from 1,618 in the 2002 comparable
period. On a same-center basis (which includes unconsolidated centers and
pre-acquisition cases), total utilization increased 23.9% to 4,082 cases in the
three months ended June 30, 2003 from 3,294 in the 2002 comparable period. New
centers accounted for $621,350 in revenue in the three months ended June 30,
2003. However, revenue declined 48.7% to $1,939,008 in the three months ended
June 30, 2003, from $3,776,546 in the comparable 2002 period. On a per-case
basis, revenue decreased to $1,120 in the three months ended June 30, 2003 from
$2,334 in the 2002 comparable period. The decrease was due primarily to a
reduction in our estimates for reimbursement from third-party payors. The
reduction in reimbursement resulted in the higher insurance contractual
allowances, which negatively affected revenue. Such adjustments were necessary
based on our assessment of recent reimbursement activity. The average
contractual allowance in the second quarter of 2003 was 70% of gross revenue
compared to 63% in the comparable prior year period. Secondarily, the revenue
decrease is attributable to the shift in types of cases performed. With the
acquisition of the Tuscarawas Center, increased ophthalmology and
gastroenterology cases were performed, which generally have gross billing rates
below $1,000 compared to a company average of greater than $3,000 per case.
16
Direct Surgical Expenses. Total direct surgical costs increased to
55.1% of revenue in the three months ended June 30, 2003 from 32.6% in the 2002
comparable period. Direct surgical costs per case decreased 8.0% to $617 in the
three months ended June 30, 2003 compared to $760 in the same period in 2002.
The increase as a percentage of revenue is primarily due to the decrease in
revenue dollars resulting from the Company increasing its estimates of insurance
contractual allowances discussed above. The decreased cost per case is due the
acquisition of the Tuscarawas Center, which performs lower cost procedures.
General and Administrative Expenses. General and administrative costs
decreased $3,590,054, or 67.0% to $1,768,241 in the three months ended June 30,
2003 from $5,358,295 in the 2002 comparable period. The decrease is primarily
due to charge of $3.7 million to bad debt expense taken in the 2002 period
related to a change in the Company's policies regarding doubtful accounts.
Total Operating Expenses. Total operating expenses decreased
$3,751,826, or 56.9% to $2,836,872 in the three months ended June 30, 2003 from
$6,588,697 in the 2002 comparable period. As a percent of revenue, total
expenses decreased to 146.3% of revenue in the three months ended June 30, 2003
from 174.5% in the 2002 comparable period. The decreased costs, expressed both
in dollars and as a percentage of revenue, are related to the factors discussed
above.
Other Income (Expense). Total Other Expense decreased $101,663, or
62.4% to $61,273 in the three months ended June 30, 2003 from $162,936 in the
2002 comparable period. The decrease was primarily due to a gain of $319,086
recognized on the sale of the Company's 10% interest in Physician's Endoscopy
Center. Such gain was partially offset by an increase in interest expense of
$237,794, or 102.9% between the two comparable three-month periods resulting
from additional borrowings to complete an acquisition, to attempt to acquire
Aspen Healthcare, and to finance the Company's working capital.
Minority Interest in Losses of Partnerships. In the three months ended
June 30, 2003, the minority interest in losses of partnerships decreased to
$49,984 from $424,250 in the 2002 comparable period due to significant charges
to bad debt expense in the 2002 period, which created the losses.
Federal Income Tax. For the three months ended June 30, 2003, the
Company did not record a tax benefit on its pre-tax loss of $909,153 due to a
valuation allowance recorded against the Company's deferred tax assets. In the
three months ended June 30, 2002, the Company recorded income tax benefit of
$993,641 or 39.0% of its pre-tax loss.
Net Loss. Due to the factors discussed above, the net loss in the three
months ended June 30, 2003 decreased to a loss of $909,153 compared to a loss of
$1,557,196 in the 2002 comparable period.
17
SIX MONTHS ENDED JUNE 30, 2003 vs. SIX MONTHS ENDED JUNE 30, 2002
Net Revenue. On a consolidated basis, case volume increased 22.2% to
3,517 in the six months ended June 30, 2003 from 2,879 in the 2002 comparable
period. On a same-center basis (which includes unconsolidated centers and
pre-acquisition cases), total utilization increased 34.8% to 8,146 cases in the
six months ended June 30, 2003 from 6,043 in the 2002 comparable period. New
centers accounted for $1,251,994 in revenue in the six months ended March 31,
2003. However, revenue declined 40.1% to $4,219,129 in the six months ended June
30, 2003, from $7,040,536 in the comparable 2002 period. On a per-case basis,
revenue decreased to $1,200 in the six months ended June 30, 2003 from $2,445 in
the 2002 comparable period. The decrease was due primarily to a reduction in our
estimates for reimbursement from third-party payors. The reduction in
reimbursement resulted in the higher insurance contractual allowances, which
negatively affected revenue. Such adjustments were necessary based on our
assessment of recent reimbursement activity. The average contractual allowance
in the first six months of 2003 was 68% of gross revenue compared to 59% in the
comparable prior year period. Secondarily, the revenue decrease is attributable
to the shift in types of cases performed. With the acquisition of the Tuscarawas
Center, increased ophthalmology and gastroenterology cases were performed, which
generally have gross billing rates below $1,000 compared to an average of
greater than $3,000 per case.
Direct Surgical Expenses. Total direct surgical costs increased to
54.6% of revenue in the six months ended June 30, 2003 from 29.0% in the 2002
comparable period. Direct surgical costs per case decreased 7.4% to $655 in the
six months ended June 30, 2003 compared to $708 in the same period in 2002. The
increase as a percentage of revenue is primarily due to the decrease in revenue
dollars resulting from the Company increasing its estimates of insurance
contractual allowances discussed above. The decreased cost per case is due the
acquisition of the Tuscarawas Center, which performs lower cost procedures.
General and Administrative Expenses. General and administrative costs
decreased $3,333,964, or 51.3% to $3,165,445 in the six months ended June 30,
2003 from $6,499,409 in the 2002 comparable period. The decrease is primarily
due to charge of $3.7 million to bad debt expense taken in the 2002 period
related to a change in the Company's policies regarding doubtful accounts.
Total Operating Expenses. Total operating expenses decreased
$3,067,711, or 35.9% to $5,470,406 in the six months ended June 30, 2003 from
$8,538,117 in the 2002 comparable period. As a percent of revenue, total
expenses increased to 129.7% of revenue in the six months ended June 30, 2003
from 121.3% in the 2002 comparable period. Such expense fluctuations, expressed
both in dollars and as a percentage of revenue, are related to the factors
discussed above.
Other Income (Expense). Total Other Expense increased $52,176, or 14.9%
to $401,942 in the six months ended June 30, 2003 from $349,766 in the 2002
comparable period. The increase was primarily due to an increase in interest
expense of $453,823, or 99.7% between the two comparable six-month periods
resulting from additional borrowings to complete an acquisition, to attempt to
acquire Aspen Healthcare, and to finance the Company's working capital. The
increase was partially offset by a gain of $319,086 recognized on the sale of
the Company's 10% interest in Physician's Endoscopy Center in June 2003.
Minority Interest in (Earnings)Losses of Partnerships. In the six
months ended June 30, 2003, the minority interest in (earnings) losses of
partnerships was $52,018 compared to $(1,382) in the 2002 comparable period. The
losses incurred by the partnerships are directly attributable to the increase in
the majority-owned partnerships' contractual allowances in the 2003 period,
partially offset by significant bad debt write-offs during the second quarter of
2002.
18
Federal Income Tax. For the six months ended June 30, 2003, the Company
recorded a tax benefit of $13,561, or 0.9% of its pre-tax loss of $1,601,201.
The percentage is less than the normally expected rate due to a valuation
allowance recorded against the Company's deferred tax assets. In the six months
ended June 30, 2002, the Company recorded an income tax benefit of $719,574, or
38.9% of its pre-tax loss.
Net Loss. Due to the factors discussed above, the net loss in the six
months ended June 30, 2003 increased to $1,587,640 compared $1,129,155 in the
2002 comparable period.
Liquidity and Capital Resources
Net cash used in operating activities was $560,085 for the six months
ended June 30, 2003 compared to $182,396 cash provided by operating activities
in the comparative 2002 period. The primary reason for the increase in cash used
in operations was the increase in the Company's cash net losses in the six
months ended June 30, 2003.
Net cash provided by investing activities was $399,205 in the six
months ended June 30, 2003 compared to net cash used in investing activities of
$758,276 in the comparable 2002 period. In 2003, the Company sold its ownership
interest in Physician's Endoscopy Center for $425,000 cash, while in 2002, the
Company purchased a 51% ownership interest in the Tuscarawas Center, which
included $640,846 cash.
Net cash provided by financing activities decreased to $162,454 for the
six months ended June 30, 2003 from $880,239 in the 2002 comparable period. In
the 2003 period, cash raised through the sale of common stock was predominantly
used to pay down debt. In 2002, the Company used portions of the cash raised
through debt and issuance of common stock to fund an acquisition and other
capital expenditures.
As of June 30, 2003, the Company had cash and cash equivalents of
$263,901 and negative working capital of $8,751,445. SurgiCare has a total of
$5,638,044 in long-term debt and an additional $1,315,898 in revolving lines of
credit currently in default. SurgiCare has defaulted on certain provisions of
its Loan and Security Agreement with its senior lender, DVI Business Credit
Corporation (DVI). However, DVI has agreed to forbear from taking any action to
foreclose on any collateral or place the Company into receivership until August
29, 2003. We are in the process of refinancing these agreements as well as its
other debt arrangements, but can provide no assurance that we will be successful
in our efforts.
The Company has financed its growth primarily though the issuance of
equity, secured and/or convertible debt. As of June 30, 2003, the Company does
not have any credit facilities available with financial institutions or other
third parties to provide for working capital shortages. Although the Company
believes it will generate cash flow from operations in future quarters, due to
its debt load, it is not able to fund its current operations solely from its
cash flow.
In March 2003, the Company completed a $1,212,490 private placement of
3,418,544 shares of common stock to existing physician shareholders, local
Houston physicians, and select Houston individuals. The shares are restricted
under Rule 144. In addition, the investors received a warrant for every two
shares of common stock purchased. The warrants are exercisable for one year and
are priced at $0.35. The Company received proceeds (net of expenses) of
$1,070,105 in cash and $70,000 in reduction in notes/accounts payable. The cash
proceeds of the financing were used to pay down debt and for working capital
purposes.
19
The Company believes that additional sales of debt and/or equity securities
will be required to continue operations. The Company is continuing to pursue
additional financing of debt and/or equity, but does not currently have firm
commitments for the additional sales of debt or equity securities. Any such
sales will be made on a best efforts basis. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support its operations, or fund acquisitions for
its anticipated growth. In the event that any future financing efforts are not
successful, the Company will be forced to liquidate assets and/or curtail
operations.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2003, an evaluation was performed under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the CEO and CFO,
concluded that our disclosure controls and procedures were effective as of June
30, 2003.
Changes in Internal Controls
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
In September 2002, SurgiCare was named as a defendant in a suit entitled
Charles Cohen vs. SurgiCare, Inc. and David Blumfield, in the 234th Judicial
District Court of Harris County, Texas. Mr. Cohen sued SurgiCare for breach of
contract and both defendants for defamation. Mr. Cohen claims that SurgiCare
breached his employment agreement when it terminated his employment (although he
remains a Director of SurgiCare as of the date of this filing) and that Mr.
Blumfield and SurgiCare made defamatory statements about him. Mr. Cohen has made
claims for $562,000 for breach of the employment agreement plus additional
damages for the defamation claim. David Blumfield has since been dropped as a
defendant in this suit. SurgiCare intends to vigorously defend this suit.
In February 2003, SurgiCare was named as a defendant in a suit entitled
S.E. Altman, individually, and d/b/a Altman & Associates vs. SurgiCare, Inc., in
the County Court at Law No. 1, Harris County, Texas. Altman has sued SurgiCare
for breach of contract based on a finders fee contract in which Altman claims
SurgiCare has not performed. Altman has made claims in the amount of $202,000
plus attorney's fees. American International Industries has indemnified
SurgiCare from any losses and expenses related to this lawsuit. SurgiCare
intends to vigorously defend this suit.
In March 2003, SurgiCare Memorial Village, L.P. and Town & Country
SurgiCare, Inc. were named as defendants in a suit entitled MarCap Corporation
vs. Health First Surgery Center-Memorial, Ltd.; HFMC, L.C.; SurgiCare Memorial
Village, L.P.; and Town & Country SurgiCare, Inc. MarCap has sued for default
under a promissory note and refusing to remit payment on a promissory note in
the amount of $215,329.36. SurgiCare has paid $53,832.34 of this balance and is
attempting to arrange for a payment plan to pay the remaining balance.
20
In April 2003, SurgiCare was named as a defendant in a suit entitled
International Diversified Corporation, Limited vs. SurgiCare, Inc. International
Diversified Corporation (IDC) has sued for breach of contract in which IDC
invested $1,000,000 into SurgiCare. IDC has sued for the rescission of the
contract and the return of $1,000,000 or the deliverance of 2,439,024 shares.
SurgiCare intends to vigorously defend this suit.
In April 2003, SurgiCare was named as a defendant in a suit entitled
Jackson Walker, LLP vs. SurgiCare, Inc. Jackson Walker is claiming damages of
$52,247.18 in unpaid invoices for services rendered. SurgiCare is currently
attempting to settle the account.
On July 7, 2003, SurgiCare, Inc. was named as a party in the
arbitration entitled Brewer & Pritchard, P.C. vs. SurgiCare, Inc. before the
American Arbitration Association. Brewer & Pritchard have claimed breach of
contract and demanded payment of $131,294.88 in billed and unbilled legal fees
plus third party expenses, interest at the highest legal rate, costs, legal fees
and damages from breach of contract. SurgiCare has denied the material
allegations in Brewer & Pritchard's demand and intends on vigorously defending
this demand.
ITEM 2. Change in Securities.
In March 2003, the Company completed a $1,212,490 private placement of
3,418,544 shares of common stock to existing physician shareholders, local
Houston physicians, and select Houston individuals. The shares are restricted
under Rule 144. In addition, the investors received a warrant for every two
shares of common stock purchased. The warrants are exercisable for one year and
are priced at $0.35. The Company received proceeds (net of expenses) of
$1,070,105 in cash and $70,000 in reduction in notes/accounts payable. The cash
proceeds of the financing were used to pay down debt and for working capital
purposes.
No underwriters were involved in any of the foregoing sales or issuance
of securities. Such sales or issuance were made in reliance upon an exemption
from the registration provisions of the Securities Act set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering, or the
rules and regulations there under. Each recipient either received adequate
information about SurgiCare or had access, through employment or other
relationships, to such information, and SurgiCare determined that each recipient
had such knowledge and experience in financial and business matters that they
were able to evaluate the merits and risks of an investment in SurgiCare. All of
the foregoing securities are deemed restricted securities for the purposes of
the Securities Act.
ITEM 3. Default Upon Senior Securities.
SurgiCare has defaulted on certain provisions of its Loan and Security
Agreement with DVI Business Credit Corporation (DVI). However, DVI has agreed to
forbear from taking any action to foreclose on any collateral or place the
Company into receivership until August 29, 2003.
SurgiCare has defaulted on its convertible Debenture Agreement for
failure to file a registration statement for the resale of certain securities
pursuant to the agreement.
ITEM 4. Submission of Matters to a Vote of Security Holder.
None
ITEM 5. Other Information.
None
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
------------ -----------
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 18 U.S.C.ss.1350 Certification
Exhibit 32.2 18 U.S.C.ss.1350 Certification
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, we filed the following reports
on Form 8-K:
Dated April 1, 2003 to report issuance of a press release with fourth
quarter and fiscal 2002 financial results.
Dated May 15, 2003 to report issuance of a press release with first
quarter 2003 financial results.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 14, 2003 REGISTRANT:
SurgiCare, Inc.
By: /s/ KEITH G. LEBLANC
Keith G. LeBlanc
Chief Executive Officer
By: /s/ PHIL SCOTT
Phil Scott
Chief Financial Officer
23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 *Amended and Restated Certificate of Incorporation of SurgiCare, Inc.
3.2 *Articles of Incorporation of Bellaire SurgiCare, Inc.
3.3 *By-Laws of Technical Coatings Incorporated (now SurgiCare, Inc.)
3.4 *By-Laws of Bellaire SurgiCare, Inc.
4.0 *Certificate of Designation, Powers, Preferences and
Rights of Series A Redeemable, Preferred Stock, par value
$.001 per share, of SurgiCare, Inc.
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 18 U.S.C.ss.1350 Certification
32.2 18 U.S.C.ss.1350 Certification
24
Exhibit 31.1
I, Keith G. LeBlanc, Chief Executive Officer of SurgiCare, Inc. (the "Company"),
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SurgiCare, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15) for the small business issuer and
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
small business issuer's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: August 14, 2003
By: /s/ Keith G. LeBlanc
-------------------------------------------------------
Keith G. LeBlanc, Chief Executive Officer
25
Exhibit 31.2
I, Phillip C. Scott, Chief Financial Officer of SurgiCare, Inc. (the "Company"),
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SurgiCare, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15) for the small business issuer and
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
small business issuer's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: August 14, 2003
By: /s/ Phillip C. Scott
-----------------------------------------------------------
Phillip C. Scott, Chief Financial Officer
26
Exhibit 32.1
Certification Pursuant to 18 U.S.C. ss. 1350
The undersigned, Keith G. LeBlanc, Chief Executive Officer of SurgiCare, Inc., a
Delaware corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certifies
that:
(1) the Company's Quarterly Report on Form 10-QSB for the period ended June 30,
2003 (the "Report") fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 14, 2003
By: /s/ Keith G. LeBlanc
----------------------------------------------------------
Keith G. LeBlanc, Chief Executive Officer
27
Exhibit 32.2
Certification Pursuant to 18 U.S.C. ss. 1350
The undersigned, Phillip C. Scott, Chief Financial Officer of SurgiCare, Inc., a
Delaware corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certifies
that:
(1) the Company's Quarterly Report on Form 10-QSB for the period ended June 30,
2003 (the "Report") fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 14, 2003
By: /s/ Phillip C. Scott
-----------------------------------------------------------
Phillip C. Scott, Chief Financial Officer
28