U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2005
Commission
File No. 001-16587
ORION
HEALTHCORP, INC.
(NAME
OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware
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58-1597246
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(STATE
OR OTHER JURISDICTION
OF
INCORPORATION OR ORGANIZATION)
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(IRS
EMPLOYER IDENTIFICATION NO.)
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1805
Old Alabama Road
Suite
350, Roswell GA
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30076
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(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
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(ZIP
CODE)
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ISSUER'S
TELEPHONE NUMBER:
(678) 832-1800
SECURITIES
REGISTERED UNDER SECTION 12(B) OF THE ACT:
TITLE
OF EACH CLASS
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NAME
OF EACH EXCHANGE ON
WHICH
REGISTERED
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Class
A Common Stock, $0.001 par value per share
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The
American Stock Exchange
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Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
o
As
of August 11, 2005, 11,321,265
shares of the Registrant's Class A Common Stock, par value $0.001, were
outstanding, 10,642,306 shares of the Registrant’s Class B Common Stock, par
value $0.001, were outstanding and 1,555,137 shares of the Registrant’s Class C
Common Stock, par value $0.001, were outstanding.
ORION
HEALTHCORP, INC.
Quarterly
Report on Form 10-QSB
For
the Quarterly Period Ended June 30, 2005
TABLE
OF CONTENTS
Item
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3
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3
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3.
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23
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1.
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23
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2.
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24
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3.
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26
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4.
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27
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6.
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F-1
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F-20
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this Quarterly Report on Form 10-QSB constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(collectively, the “Acts”). Forward-looking statements include statements
preceded by, followed by or that include the words “may”, “will”, “would”,
“could”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”,
“believes”, “anticipates”, “plans”, “expects”, “intends” and similar
expressions. Any statements contained herein that are not statements of
historical fact are deemed to be forward-looking statements.
The
forward-looking statements in this report are based on current beliefs,
estimates and assumptions concerning the operations, future results, and
prospects of Orion HealthCorp, Inc. (formerly known as SurgiCare, Inc.
“SurgiCare”) (“Orion” or the “Company”) and its affiliated companies described
herein. As actual operations and results may materially differ from those
assumed in forward-looking statements, there is no assurance that
forward-looking statements will prove to be accurate. Forward-looking statements
are subject to the safe harbors created in the Acts. Any number of factors
could
affect future operations and results, including, without limitation, changes
in
federal or state healthcare laws and regulations and third party payer
requirements, changes in costs of supplies, labor and employee benefits,
increases in interest rates on the Company’s indebtedness as well as general
market conditions, competition and pricing. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information or future events.
The
Company’s consolidated financial statements and related notes thereto are
included as a separate section of this report, commencing on page
F-1.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations highlights the principal factors that have affected
Orion’s financial condition and results of operations as well as Orion’s
liquidity and capital resources for the periods described. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Certain
Recent Developments
Acquisition
and Restructuring Transactions
On
November 18, 2003, the Company entered into an agreement and plan of merger
with
Integrated Physician Solutions, Inc. (“IPS”), which was amended and restated on
February 9, 2004, and further amended on July 16, 2004 and on September 9,
2004
(the “IPS Merger Agreement”), relating to the Company’s acquisition of IPS (the
“IPS Merger”). On February 9, 2004, the Company entered into an agreement and
plan of merger with Dennis Cain Physician Solutions, Ltd. (“DCPS”) and Medical
Billing Services, Inc. (“MBS”), which was amended and restated on July 16, 2004,
and further amended on September 9, 2004 and on December 15, 2004 (the “DCPS/MBS
Merger Agreement”), relating to the Company’s acquisition of DCPS and MBS (the
“DCPS/MBS Transaction” and together with the IPS Merger, the “Acquisitions”).
The Company completed the IPS Merger and the DCPS/MBS Transaction on December
15, 2004. As a result of the IPS Merger and the DCPS/MBS Transaction, IPS,
MBS
and DCPS became wholly-owned subsidiaries of the Company.
On
December 15, 2004, and simultaneous with the consummation of the IPS Merger
and
DCPS/MBS Transaction, the Company consummated its previously disclosed
restructuring transactions (the “Closing”), which included issuances of new
equity securities for cash and contribution of outstanding debt, and the
restructuring of its debt facilities. The Company also completed a one-for-ten
reverse stock split (the “Reverse Stock Split”), created three new classes of
common stock (Class A, Class B and Class C Common Stock) and changed its name.
SurgiCare common stock was converted to shares of Orion’s Class A Common Stock
(the “Reclassification”).
Also
on December 15, 2004, the Company issued 11,482,261 shares of its
Class B Common Stock (the “Investment Transaction”) to various investors
for $13,200,000 in cash plus cash in the amount of $128,350, which amount
equaled the accrued but unpaid interest immediately prior to the Closing owed
to
a subsidiary of Brantley Partners IV, L.P. (“Brantley IV”) by SurgiCare and IPS
on amounts advanced prior to October 24, 2003 (the “Base Bridge Interest
Amount”). At the Closing, Orion used $5,908,761 to pay off the debt owed to the
subsidiary of Brantley IV. The Company also granted to Brantley IV the right
to
purchase shares of Class A Common Stock for cash in an amount up to
an
aggregate of $3,000,000 after the Closing (the “Purchase Right”). Brantley IV
may exercise the Purchase Right at any time after December 15, 2004.
Each
additional investment will be: (i) subject to the approval of a majority
of
the members of the board of directors of the Company that are not affiliated
with Brantley IV, (ii) consummated on a date mutually agreed by the
Company
and Brantley IV, and (iii) accomplished with documentation reasonably
satisfactory to the Company and Brantley IV. Pursuant to the terms of the
Purchase Right, the purchase price per share of the Class A Common Stock
will be equal to the lesser of (a) $1.25, and (b) 70% multiplied by
the
average of the daily average of the high and low price per share of the
Class A Common Stock on the American Stock Exchange (“AMEX”) or a similar
system on which the Class A Common Stock shall be listed at the time,
for
the twenty trading days immediately preceding the date of the closing of the
exercise of the Purchase Right.
Holders
of shares of Class B Common Stock have the option to convert their
shares
of Class B Common Stock into shares of Class A Common Stock
at any
time based on a conversion factor in effect at the time of the conversion.
The
conversion factor is designed to yield one share of Class A Common
Stock
per share of Class B Common Stock converted, plus such additional
shares of
Class A Common Stock, or portions thereof, necessary to approximate
the
unpaid portion of the return of the original purchase price for the Class B
Common Stock less the Base Bridge Interest Amount, plus an amount equal to
nine
percent (9%) per annum on the amount of the original purchase price less
the
Base Bridge Interest Amount, without compounding, from the date the Class B
Common Stock was first issued to the date of conversion. The conversion factor
is calculated based on a number equal to one plus the quotient of $1.15 plus
9%
per annum (not compounded), divided by the fair market value of the Class A
Common Stock (which is determined by reference to the prices at which
Class A Common Stock trades immediately prior to the conversion).
Therefore, so long as the Class B Common Stock has not yet received
a full
return of its purchase price less the Base Bridge Interest Amount and a 9%
rate
of return, if the market value of a share of Class A Common Stock
increases, a share of Class B Common Stock will convert into fewer
shares
of Class A Common Stock, and if the market value of Class A
Common
Stock shares decreases, a share of Class B Common Stock will convert
into
more shares of Class A Common Stock. The initial conversion factor
was
approximately 1.28 (one share of Class B Common Stock converts into
approximately 1.28 shares of Class A Common Stock). As of June 30,
2005,
the conversion factor was approximately 2.435549575995 shares (one
share of
Class B Common Stock converts into approximately 2.435549575995 shares
of Class A Common Stock). The holders of Class B Common Stock
vote
together with the holders of Class A Common Stock and Class C
Common
Stock, as a single class, generally, with each holder of Class A Common
Stock entitled to one vote per share of Class A Common Stock held
by such
holder; with each holder of Class B Common Stock entitled to one vote
per
share of Class B Common Stock held by such holder; and with each holder
of
Class C Common Stock entitled to one vote per share of Class C
Common
Stock held by such holder.
Additionally,
the Company used $3,683,492 of the proceeds of the Investment Transaction to
repay a portion of the indebtedness to unaffiliated third parties and
restructured additional existing indebtedness.
New
Line of Credit and Debt Restructuring
In
connection with the Closing, Orion also entered into a new secured two-year
revolving credit facility pursuant to the Loan and Security Agreement (the
“Loan
and Security Agreement”), dated December 15, 2004, by and among Orion, certain
of its affiliates and subsidiaries, and Healthcare Business Credit Corporation
(“HBCC”). Under this facility, up to $4,000,000 of loans may be made available
to Orion, subject to a borrowing base. Orion borrowed $1,600,000 under this
facility concurrently with the Closing. The interest rate under this facility
is
equal to the prime rate plus 3%. Upon an event of default, HBCC can accelerate
the loans or call the guaranties described below. In connection with entering
into this new facility, Orion also restructured its previously-existing debt
facilities, which resulted in a decrease in aggregate debt owed to DVI Business
Credit Corporation and DVI Financial Services (collectively, “DVI”) from
approximately $10.1 million to a combined principal amount of approximately
$6.5 million, of which approximately $2 million was paid at the
Closing.
Pursuant
to the Guaranty Agreement (the “Brantley IV Guaranty”), dated as of
December 15, 2004, provided by Brantley IV to HBCC, Brantley IV agreed
to
provide a deficiency guaranty in the amount of $3,272,727. Pursuant to the
Guaranty Agreement (the “Brantley Capital Guaranty”; and together with the
Brantley IV Guaranty, collectively, the “Guaranties”), dated as of
December 15, 2004, provided by Brantley Capital Corporation (“Brantley
Capital”) to HBCC, Brantley Capital agreed to provide a deficiency guaranty in
the amount of $727,273. In consideration for the Guaranties, Orion issued
warrants to purchase 20,455 shares of Class A Common Stock, at an exercise
price of $0.01 per share, to Brantley IV, and issued warrants to purchase 4,545
shares of Class A Common Stock, at an exercise price of $0.01 per share,
to
Brantley Capital.
Post-Restructuring
Loan Transactions
On
March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000
(the “First Loan”). On June 1, 2005, the Company executed a convertible
subordinated promissory note in the principal amount of $1,025,000 (the “First
Note”) payable to Brantley IV to evidence the terms of the First Loan. The
material terms of the First Note are as follows: (i) the First Note is
unsecured; (ii) the First Note is subordinate to the Company's outstanding
loan
from HBCC and other indebtedness for monies borrowed, and ranks pari passu
with
general unsecured trade liabilities; (iii) principal and interest on the First
Note is due April 19, 2006 (the “First Note Maturity Date”); (iv) the interest
accrues from and after March 16, 2005, at a per annum rate equal to nine percent
(9.0%) and is non-compounding; (v) if an event of default occurs and is
continuing, Brantley IV, by notice to the Company, may declare the principal
of
the First Note to be due and immediately payable; and (vi) on or after the
First
Note Maturity Date, Brantley IV, at its option, may convert all or a portion
of
the outstanding principal and interest due of the First Note into shares of
Class A Common Stock of the Company at a price per share equal to $1.042825
(the
“First Note Conversion Price”). The number of shares of Class A Common Stock
issuable upon conversion of the First Note shall be equal to the number obtained
by dividing (x) the aggregate amount of principal and interest to be converted
by (y) the First Note Conversion Price (as defined above); provided, however,
the number of shares issuable upon conversion of the First Note shall not exceed
the lesser of: (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3%
of
the then outstanding Class A Common Stock.
On
April 19, 2005, Brantley IV loaned the Company an additional $225,000 (the
“Second Loan”). On June 1, 2005, the Company executed a convertible subordinated
promissory note in the principal amount of $225,000 (the “Second Note”) payable
to Brantley IV to evidence the terms of the Second Loan. The material terms
of
the Second Note are as follows: (i) the Second Note is unsecured; (ii) the
Second Note is subordinate to the Company's outstanding loan from HBCC and
other
indebtedness for monies borrowed, and ranks pari passu with general unsecured
trade liabilities; (iii) principal and interest on the Second Note is due April
19, 2006 (the “Second Note Maturity Date”); (iv) the interest accrues from and
after April 19, 2005, at a per annum rate equal to nine percent (9.0%) and
is
non-compounding; (v) if an event of default occurs and is continuing, Brantley
IV, by notice to the Company, may declare the principal of the Second Note
to be
due and immediately payable; and (vi) on or after the Second Note Maturity
Date,
Brantley IV, at its option, may convert all or a portion of the outstanding
principal and interest due of the Second Note into shares of Class A Common
Stock of the Company at a price per share equal to $1.042825 (the “Second Note
Conversion Price”). The number of shares of Class A Common Stock issuable upon
conversion of the Second Note shall be equal to the number obtained by dividing
(x) the aggregate amount of principal and interest to be converted by (y) the
Second Note Conversion Price (as defined above); provided, however, the number
of shares issuable upon conversion of the Second Note shall not exceed the
lesser of: (i) 254,597 shares of Class A Common Stock, or (ii) 3.6% of the
then
outstanding Class A Common Stock.
Additionally,
in connection with the First Loan and the Second Loan, the Company entered
into
a First Amendment to the Loan and Security Agreement (the “First Amendment”),
dated March 22, 2005, with certain of the Company’s affiliates and subsidiaries,
and HBCC, whereby its $4,000,000 secured two-year revolving credit facility
has
been reduced by the amount of the loans from Brantley IV to $2,750,000. As
a
result of the First Amendment, the Brantley IV Guaranty was amended by the
Amended and Restated Guaranty Agreement (the “Amended Brantley IV Guaranty”),
dated March 22, 2005, which reduces the deficiency guaranty provided by Brantley
IV by the amount of the First Loan to $2,247,727. Also as a result of the First
Amendment, the Brantley Capital Guaranty was amended by the Amended and Restated
Guaranty Agreement (the “Amended Brantley Capital Guaranty”), dated March 22,
2005, which reduces the deficiency guaranty provided by Brantley Capital by
the
amount of the Second Loan to $502,273.
Post-Restructuring
Transactions Involving Subsidiaries
On
June 7, 2005, InPhySys, Inc. (f/k/a IntegriMED, Inc.) (“IntegriMED”), a
wholly-owned subsidiary of IPS, executed an Asset Purchase Agreement (the
“Agreement”) with eClinicalWeb, LLC (“eClinicalWeb”) to sell substantially all
of the assets of IntegriMED. The Agreement was deemed to be effective as of
midnight on June 6, 2005. The property sold by IntegriMED to eClinicalWeb
(hereinafter collectively referred to as the “Acquired Assets”) includes the
machinery, equipment, supplies, materials, computers, software, software
licenses, and other personal property owned by IntegriMED and used exclusively
in the operation of IntegriMED's business, IntegriMED's goodwill and all of
the
business conducted under the name "IntegriMED" and "InPhySys", sales and
customer lists, account lists, records, manuals, and telephone numbers used
exclusively in the operation of IntegriMED's business, and all of IntegriMED's
rights and interests in all contracts, open customer purchase orders, quotations
or similar agreements to the extent entered into by IntegriMED or assigned
to
IntegriMED. Additionally, eClinicalWeb agreed to assume and to thereafter
perform and pay when due all liabilities related to the Acquired Assets but
only
to the extent such liabilities arise from and after the Closing Date (as defined
below). eClinicalWeb also agreed to sublease certain space from IPS that was
occupied by employees of IntegriMED as of the Closing Date. As consideration
for
the purchase of the Acquired Assets, eClinicalWeb issued to IntegriMED the
following: (i) a two percent (2%) ownership interest in eClinicalWeb; and (ii)
$69,033.90, for the payoff of certain leases and purchase of certain software,
via wire transfer at the closing of the transfer and delivery of all documents
and instruments necessary to consummate the transactions contemplated by the
Agreement (the "Closing Date"), which occurred concurrently with the execution
of the Agreement. In addition to the consideration listed above, IntegriMED
retained the following assets related to IntegriMED's business: (i) all cash
and
cash equivalents relating to IntegriMED's business as of the Closing Date;
(ii)
all accounts receivable relating to IntegriMED's business as of the Closing
Date; and (iii) other assets of IntegriMED not used exclusively in IntegriMED's
business.
On
June 13, 2005, the Company announced that it has accepted an offer to purchase
its interests in the ambulatory surgery center and the magnetic resonance
imaging (“MRI”) facility in Dover, Ohio. Under the terms of the offer letter,
the Company’s interests in these facilities would be sold to a local hospital
for cash and assumption of debt. In addition, the Company would continue to
operate the facilities under a long-term management agreement. This transaction
has not yet closed.
2004
Incentive Plan
On
June 1, 2005, the Company executed Amendment No. 1 (the “First Plan Amendment”)
to the Orion HealthCorp, Inc. 2004 Incentive Plan (“the Plan”), which was
adopted in December 2004. The First Plan Amendment amends the Plan to allow
the
grant of restricted stock units, as well as restricted stock (which was allowed
under the Plan) and is attached hereto as Exhibit 10.6.
On
June 17, 2005, the Company granted 1,357,000 stock options to certain employees,
officers, directors and former directors of the Company pursuant to the Plan,
which allows for a maximum of 2.2 million shares of Class A Common Stock to
be
delivered in satisfaction of awards made under the Plan. The Form of Orion
HealthCorp, Inc. Stock Option Agreement (Incentive Stock Option), dated as
of
June 17, 2005, is attached hereto as Exhibit 10.7.
American
Stock Exchange Compliance
On
July 8, 2005, the Company received a letter from AMEX stating that the Company
had evidenced compliance with the requirements necessary for continued listing
on AMEX. This letter was a result of the Company’s notification by AMEX on March
7, 2005, that it was not in compliance with the AMEX Company Guide in connection
with two issuances of common stock in 2003 and 2004 without advance shareholder
approval. After submission of and acceptance by the AMEX of a plan of
correction, which included the Company’s obtaining such shareholder approval at
its May 31, 2005 Annual Meeting of Shareholders, the Company has now regained
compliance. The results of the 2005 Annual Meeting of Shareholders are described
under the caption “Part II, Item 4. Submission of Matters to a Vote of Security
Holders.”
Critical
Accounting Policies and Estimates
The
preparation of Orion’s financial statements is in conformity with accounting
principles generally accepted in the United States of America, which require
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and footnotes. Orion management bases these estimates
on historical experience and on various other assumptions that are believed
to
be reasonable under the circumstances, the results of which form the basis
for
making judgments that are not readily apparent from other sources. These
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting period. Changes in the facts or circumstances underlying these
estimates could result in material changes and actual results could differ
from
these estimates. Orion believes the following critical accounting policies
affect the most significant areas involving management’s judgments and
estimates.
Consolidation
of Physician Practice Management Companies. In
March 1998, the Emerging Issues Task Force (“EITF”) of the Financial
Accounting Standards Board (“FASB”) issued its Consensus on Issue 97-2 (“EITF
97-2”). EITF 97-2 addresses the ability of physician practice management (“PPM”)
companies to consolidate the results of medical groups with which it has an
existing contractual relationship. Specifically, EITF 97-2 provides guidance
for
consolidation where PPM companies can establish a controlling financial interest
in a physician practice through contractual management arrangements. A
controlling financial interest exists, if, for a requisite period of time,
the
PPM has “control” over the physician practice and has a “financial interest”
that meets six specific requirements. The six requirements for a controlling
financial interest include:
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(a)
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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;
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(b)
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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;
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(c)
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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.
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IPS’s
management services agreements (each a “MSA” and collectively the “MSAs”)
governing the contractual relationship with its affiliated medical groups are
for forty year terms; are not terminable by the physician practice other than
for bankruptcy or fraud; provide IPS with decision making authority other than
related to the practice of medicine; provide for employment and non-compete
agreements with the physicians with governing compensation; provide IPS the
right to assign, transfer or sell its interest in the physician practice and
assign the rights of the MSAs; provide IPS with the right to receive a
management fee based on results of operations and the right to the proceeds
from
a sale of the practice to an outside party or, at the end of the MSA term,
to
the physician group. Based on this analysis, IPS has determined that its
contracts meet the criteria of EITF 97-2 for consolidating the results of
operations of the affiliated medical groups and has adopted EITF 97-2 in its
statement of operations. EITF 97-2 also has addressed the accounting method
for
future combinations with individual physician practices. IPS believes that,
based on the criteria set forth in EITF 97-2, any future acquisitions of
individual physician practices will be accounted for under the purchase method
of accounting.
Revenue
Recognition. The
Company recognizes revenue from its surgery and diagnostic center business
on
the date the procedures are performed, and accounts receivable are recorded
at
that time. Revenues are reported at the estimated realizable amounts from
patients and third-party payers. If such third-party payers were to change
their
reimbursement policies, the effect on revenue could be significant. Earnings
are
charged with a provision for contractual adjustments and doubtful accounts
based
on such factors as historical trends of billing and cash collections,
established fee schedules, accounts receivable agings and contractual
relationships with third-party payers. Contractual allowances are estimated
primarily using each surgery center’s collection experience. Contractual rates
and fee schedules are also helpful in this process. On a rolling average basis,
the Company tracks collections as a percentage of related billed charges. This
percentage, which is adjusted on a quarterly basis, has proved to be the best
indicator of expected realizable amounts from patients and third-party payers.
Contractual adjustments and accounts deemed uncollectible are applied against
the allowance account. The Company is not aware of any material claims, disputes
or unsettled matters with third-party payers and there have been no material
settlements with third party payers for the three months and six months ended
June 30, 2005.
IPS
records revenue based on patient services provided by its affiliated medical
groups. Net patient service revenue is impacted by billing rates, changes in
current procedural terminology code reimbursement and collection trends. IPS
reviews billing rates at each of its affiliated medical groups on at least
an
annual basis and adjusts those rates based on each insurer’s current
reimbursement practices. Amounts collected by IPS for treatment by its
affiliated medical groups of patients covered by Medicaid and other contractual
reimbursement programs, which may be based on cost of services provided or
predetermined rates, are generally less than the established billing rates
of
IPS’ 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, 2005 and 2004.
MBS
earns revenues based on the collection of MBS’s customers’ receivables. Revenues
are recognized during the period in which collections were received.
Accounts
Receivable and Allowance for Doubtful Accounts.
The Company’s surgery and diagnostic centers and IPS’s affiliated medical groups
grant credit without collateral to its patients, most of which are insured
under
third-party payer arrangements. The provision for bad debts that relates to
patient service revenues is based on an evaluation of potentially uncollectible
accounts. The provision for bad debts includes a reserve for 100% of the
accounts receivable older than 180 days. Establishing an allowance for
bad
debt is subjective in nature. IPS uses historical collection percentages to
determine the estimated allowance for bad debts, and adjusts the percentage
on a
quarterly basis.
MBS
records uncollectible accounts receivable using the direct write-off method
of
accounting for bad debts. Historically, MBS has experienced minimal credit
losses and has not written-off any material accounts during 2005 or 2004.
Investment
in Limited Partnerships. The
investments in limited partnerships are accounted for by the equity method.
Under the equity method, the investment is initially recorded at cost and is
subsequently increased to reflect the Company’s share of the income of the
investee and reduced to reflect the share of the losses of the investee or
distributions from the investee.
These
general partnership interests were accounted for as investment in limited
partnerships due to the interpretation of Statement of Financial Accounting
Standards (“SFAS”) 94/Accounting Research Bulletin (“ARB”) 51 and the
interpretations of such by Issue 96-16 and Statement of Position (“SOP”) 78-9.
Under those interpretations, the Company could not consolidate its interest
in
those facilities in which it held a minority general partnership interest due
to
management restrictions, shared operating decision-making, capital expenditure
and debt approval by limited partners and the general form versus substance
analysis. Therefore, the Company recorded them as investments in limited
partnerships.
Goodwill
and Other Intangible Assets. Goodwill
represents the excess of cost over the fair value of net assets of companies
acquired in business combinations accounted for using the purchase method.
In
July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and
SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141
eliminates pooling-of-interest accounting and requires that all business
combinations initiated after June 30, 2001, be accounted for using the
purchase method. SFAS No. 142 eliminates the amortization of goodwill
and
certain other intangible assets and requires the Company to evaluate goodwill
for impairment on an annual basis by applying a fair value test. SFAS
No. 142 also requires that an identifiable intangible asset that is
determined to have an indefinite useful economic life not be amortized, but
separately tested for impairment using a fair value-based approach at least
annually. The Company evaluates its goodwill and other intangible assets in
the
fourth quarter of each fiscal year.
Overview
Surgery
and Diagnostic Center Business
The
Company was incorporated in Delaware on February 24, 1984 as Technical Coatings
Incorporated. On September 10, 1984, its name was changed to Technical Coatings,
Inc. Immediately prior to July 1999, the Company was an inactive company. On
July 11, 1999, the Company changed its name to SurgiCare, Inc., and at that
time
changed its business strategy to developing, acquiring and operating
freestanding ambulatory surgery centers (“ASCs”). On July 21, 1999, the Company
acquired all of the issued and outstanding shares of common stock of Bellaire
SurgiCare, Inc. (“Bellaire SurgiCare”), in exchange for the issuance of 9.86
million shares of common stock (now 986,000 shares of Class A Common Stock
after
giving effect to the Reverse Stock Split and Reclassification), and 1.35 million
shares of Series A Redeemable preferred stock, par value $.001 per share, to
the
holders of Bellaire SurgiCare’s common stock. For accounting purposes, this
reverse acquisition was effective July 1, 1999. On December 15, 2004, the
Company changed its name to Orion HealthCorp, Inc.
As
of June 30, 2005, the Company owned a majority interest in two surgery centers
and a minority interest as general partner in one additional center. Two of
the
centers are located in Texas and one is located in Ohio. In limited
circumstances, the Company, or its subsidiaries, may also furnish anesthesia
services in support of the activities of the surgery centers. The Company’s ASCs
perform various types of procedures including: orthopedic surgery; colonoscopy;
ophthalmic laser surgery; pain injections; and various pediatric surgeries.
The
most common procedures performed in the Company’s ASCs include knee arthroscopy,
lumbar nerve block and sacral injection, colonoscopy, hammertoe correction,
sinus endoscopic biopsy, cataract removal, breast biopsy, Mitchell procedures
and cystourethroscopy. The Company also owns a 41% interest in an open MRI
center in Ohio, which opened in July 2004. The open MRI center performs
diagnostic procedures using MRI technology. On June 13, 2005, the Company
announced that it has accepted an offer to purchase its interests in the
ambulatory surgery center and the MRI center. Under the terms of the offer
letter, the Company’s interests in these facilities would be sold to a local
hospital for cash and assumption of debt. In addition, the Company would
continue to operate the facilities under a long-term management agreement.
This
transaction has not yet closed.
The
following table sets forth information related to Orion’s surgical and
diagnostic centers in operation as of June 30, 2005:
Name
|
|
Location
|
|
Acquisition
Date
|
|
Orion
Ownership
|
|
SurgiCare
Memorial Village
|
|
Houston,
Texas
|
|
Oct.
2000
|
|
60%
|
|
San Jacinto
Surgery Center
|
|
Baytown,
Texas
|
|
Oct.
2000
|
|
10%
|
|
Tuscarawas
Ambulatory Surgery Center
|
|
Dover,
Ohio
|
|
June 2002
|
|
51%
|
|
Tuscarawas
Open MRI
|
|
Dover,
Ohio
|
|
July 2004
|
|
41%
|
|
Integrated
Physician Solutions
IPS,
a Delaware corporation, was founded in 1996 as a business development company
to
provide physician practice management services to general and subspecialty
pediatric practices. IPS commenced its business activities upon consummation
of
several medical group business combinations effective January 1, 1999. The
Pediatric Physician Alliance (“PPA”) division of IPS manages pediatric medical
clinics. On June 7, 2005, IntegriMED, a wholly-owned subsidiary of IPS, executed
an Asset Purchase Agreement with eClinicalWeb, LLC to sell substantially all
of
the assets of IntegriMED. The Agreement was deemed to be effective as of
midnight on June 6, 2005. (See ““Part I, Item 2. Management’s Discussion and
Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries.”
PPA
is an experienced and innovative provider of healthcare management services
dedicated to the practice of pediatrics. As of June 30, 2005, PPA managed 10
practice sites, representing six medical groups in Illinois, Ohio and New
Jersey. PPA provides business management and administrative services to the
affiliated medical groups. These services include human resources management,
accounting, group purchasing, public relations, marketing, information
technology, and general day-to-day business operations management services.
The
affiliated physicians, who are all employed by separate corporations, provide
all clinical and patient care related services. There is a standard forty-year
contract between PPA and the various affiliated medical groups whereby the
physicians are compensated after all practice expenses and a management fee
is
paid to PPA.
IPS
owns all the assets used in the operation of the medical groups and the
physicians, who were equity owners in IPS, and, as a result of the IPS Merger,
are now equity owners in Orion. IPS manages the day-to-day business operations
of each medical group and provides the assets for the physicians to use in
their
practice, for a fixed fee or percentage of the net operating income of the
medical group. All revenues are collected by IPS, the fixed fee or percentage
payment to IPS is taken from the net operating income of the medical group
and
the remainder of the net operating income of the medical group is paid to the
physicians as a salary and treated as an expense on IPS’s accounting records.
Medical
Billing Services
MBS
is based in Houston, Texas and was incorporated in Texas on October 16,
1985. DCPS is based in Houston, Texas and was organized as a Texas limited
liability company on September 16, 1998. DCPS reorganized as a Texas
limited partnership on August 31, 2003. The Company acquired MBS and
DCPS
in the DCPS/MBS Transaction. Subsequent to the DCPS/MBS Transaction, DCPS has
operated as a wholly-owned subsidiary of MBS. MBS and DCPS provide practice
management, billing and collection, managed care consulting and
coding/reimbursement services to hospital-based physicians and clinics. The
discussion of MBS below includes the operations of DCPS.
|
·
|
Medical
Practice Management Services. MBS
provides a wide range of management services to medical practices,
including accounting and bookkeeping services, evaluation of staffing
needs, and billing and reimbursement analysis. These management services
help create a more efficient medical practice and provide assistance
with
the business aspects associated with operating a medical practice.
|
|
·
|
Billing
and Collection Services. MBS
provides billing and collection services to its clients. These
include
coding, reimbursement services, charge entry, claim submission,
collection
activities, and financial reporting services.
|
|
·
|
Managed
Care Consulting Services. MBS
provides consulting services aimed at assisting clients with
navigating
and interacting with managed care
organizations.
|
MBS
provides services to approximately 58 customers throughout Texas. These
customers include anesthesiologists, pathologists, radiologists, imaging
centers, comprehensive breast centers, hospital labs, cardio-thoracic surgeons
and ASCs.
Results
of Operations
As
part of the Acquisitions and restructuring transactions, which closed on
December 15, 2004, the IPS Merger has been treated as a reverse acquisition,
meaning that the purchase price, comprised of the fair value of the outstanding
shares of the Company prior to the transaction, plus applicable transaction
costs, has been allocated to the fair value of the Company’s tangible and
intangible assets and liabilities prior to the transaction, with any excess
being considered goodwill. IPS is being treated as the continuing reporting
entity, and thus IPS’s historical results have become those of the combined
company. Orion’s results include the results of IPS for the three months and six
months ended June 30, 2004 and the results of IPS, the Company’s surgery and
diagnostic center business and MBS (which includes DCPS) for the three months
and six months ended June 30, 2005. The descriptions of the business and results
of operations of MBS set forth in this report include the business and results
of operations of DCPS.
The
following table sets forth selected unaudited consolidated condensed statements
of operations data expressed as a percentage of Orion’s net operating revenues
for the three months and six months ended June 30, 2005 and 2004, respectively.
Orion’s historical results and period-to-period comparisons are not necessarily
indicative of the results for any future period.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
Direct
cost of revenues
|
|
|
45.0%
|
|
|
62.4%
|
|
|
45.3%
|
|
|
61.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
55.0%
|
|
|
37.6%
|
|
|
54.7%
|
|
|
38.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
146.3%
|
|
|
46.9%
|
|
|
108.6%
|
|
|
48.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before other income (expenses)
|
|
|
(91.3%)
|
|
|
(9.3%)
|
|
|
(53.9%)
|
|
|
(9.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses), net
|
|
|
(1.1%)
|
|
|
(5.7%)
|
|
|
(1.0%)
|
|
|
(5.8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest earnings in partnership
|
|
|
(0.3%)
|
|
|
0.0%
|
|
|
(0.4%)
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(92.7%)
|
|
|
(15.0%)
|
|
|
(55.3%)
|
|
|
(15.4%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations of discontinued components, including gain (loss)
on
disposal
|
|
|
(6.5%)
|
|
|
(7.6%)
|
|
|
(4.7%)
|
|
|
(5.2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(99.2%)
|
|
|
(22.6%)
|
|
|
(60.0%)
|
|
|
(20.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
0.0%
|
|
|
(4.0%)
|
|
|
0.0%
|
|
|
(4.0%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
|
(99.2%)
|
|
|
(26.6%)
|
|
|
(60.0%)
|
|
|
(24.6%)
|
|
Three
Months Ended June 30, 2005 as Compared to Three Months Ended June 30,
2004
The
following table sets forth, for the periods indicated, the unaudited
consolidated condensed statements of operations of Orion.
|
|
For
the Three Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
8,421,649
|
|
$
|
4,124,692
|
|
Direct
cost of revenues
|
|
|
3,786,846
|
|
|
2,573,503
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
4,634,803
|
|
|
1,551,189
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
2,777,112
|
|
|
752,510
|
|
Facility
rent and related costs
|
|
|
460,248
|
|
|
296,791
|
|
Depreciation
and amortization
|
|
|
960,360
|
|
|
136,609
|
|
Professional
and consulting fees
|
|
|
453,797
|
|
|
113,935
|
|
Insurance
|
|
|
247,815
|
|
|
132,939
|
|
Provision
for doubtful accounts
|
|
|
335,458
|
|
|
255,845
|
|
Other
expenses
|
|
|
722,759
|
|
|
244,454
|
|
Charge
for impairment of intangible assets
|
|
|
6,362,849
|
|
|
-
|
|
Total
operating expenses
|
|
|
12,320,397
|
|
|
1,933,083
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before other income (expenses)
|
|
|
(7,685,595
|
)
|
|
(381,894
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(113,503
|
)
|
|
(228,811
|
)
|
Equity
in earnings of limited partnerships
|
|
|
17,376
|
|
|
-
|
|
Other
expense, net
|
|
|
2,165
|
|
|
(7,079
|
)
|
Total
other income (expenses), net
|
|
|
(93,961
|
)
|
|
(235,890
|
)
|
|
|
|
|
|
|
|
|
Minority
interest earnings in partnership
|
|
|
(22,355
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(7,801,910
|
)
|
|
(617,784
|
)
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Income
from operations of discontinued components,
|
|
|
(545,878
|
)
|
|
(314,622
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(8,347,788
|
)
|
|
(932,406
|
)
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
(165,300
|
)
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(8,347,788
|
)
|
$
|
(1,097,706
|
)
|
Net
Operating Revenues.
Net operating revenues, which include net patient service revenue related to
the
operations of IPS’s affiliated medical groups, other revenue, surgery and
diagnostic center revenue and billing services revenue, increased $4,296,957,
or
104.2%, to $8,421,649 for the three months ended June 30, 2005, as compared
with
$4,124,692 for the same period in 2004. The Company’s surgery and diagnostic
center business and MBS reported net operating revenues of $684,184 and
$2,631,772, respectively, for the three months ended June 30, 2005, and
accounted for 77.2% of the increase in the second quarter of 2005.
IPS
net patient service revenue for the three months ended June 30, 2005 increased
$967,163, or 23.5%, from the same period in 2004. The increase in net patient
service revenue for the quarter was primarily the result of: (i) increased
patient volume during the quarter, with procedures and office visits at the
clinic-based facilities increasing 8,801 and 3,682, respectively, from second
quarter 2004 levels; (ii) rate increases beginning in January 2005 for three
of
IPS’s affiliated medical groups, which resulted in average revenue per visit of
$140 in the second quarter of 2005 compared to $121 for the second quarter
of
2004; and (iii) two new providers, who began practicing at one of IPS’s
affiliated medical groups in July 2004, whose production in the second quarter
of 2005 was approximately 254% higher than the second quarter 2004 production
of
the providers they replaced.
Other
revenue totaled $3,818 in the second quarter of 2004, increasing $13,838, or
362.4%, to $17,656 for the three months ended June 30, 2005. In the second
quarter of 2005, revenue from the IPS Vaccine Alliance, a group purchasing
alliance for vaccines and medical supplies, increased $2,344 over 2004 to
$6,162. Revenue related to a small number of former IntegriMED customers not
fully transitioned to eClinicalWeb totaled $10,390 in June 2005.
Direct
Cost of Revenues.
Direct cost of revenues, which includes physician compensation, surgical and
diagnostic costs and medical group direct clinical expenses and totaled
$2,573,503 in the second quarter of 2004, increased $1,213,343, or 47.1%, to
$3,786,846 for the three months ended June 30, 2005. The Company’s surgery and
diagnostic center business recorded direct cost of revenues totaling $424,542
for the second quarter of 2005 and accounted for 35.0% of the increase in
2005.
Pursuant
to the terms of the MSAs governing each of IPS’s affiliated medical groups, the
physicians of each medical group are compensated after the payment of all clinic
facility expenses as well as a management fee to IPS. The management fee revenue
and expense, which is eliminated in the consolidation of the financial
statements, is either a fixed fee, or is calculated based on a percentage of
net
operating income and represented approximately 14.2% of physician medical group
net operating income in the second quarter of 2005 compared to 14.0% in the
second quarter of 2004. Physician compensation increased $640,004, or 38.9%,
for
the quarter ended June 30, 2005 to $2,283,400, as compared with $1,643,396
for
the quarter ended June 30, 2004. Physician compensation expense represented
44.7% of total net operating revenues in the second quarter of 2005, compared
with 39.8% for the same period in 2004. The increase in compensation in the
second three months of 2005 was directly related to an increase in net patient
service revenue, which was primarily the result of: (i) increased patient
volume and (ii) rate increases implemented by three of IPS’s affiliated
medical groups.
Direct
clinical expenses are expenses that are directly related to the practice of
medicine by the physicians who practice at the affiliated medical groups managed
by IPS. For the quarter ended June 30, 2005, direct clinical expenses increased
$148,797, or 16.0% to $1,078,904, largely as a result of increased vaccine
expenses due to increased patient volume at the affiliated medical
groups.
Operating
Expenses.
Salaries
and Benefits.
Consolidated salaries and benefits increased $2,024,602 in the second quarter
of
2005 to $2,777,112, compared to $752,510 for the same period in 2004. The
Company’s surgery and diagnostic center business and MBS recorded salaries and
benefits expenses totaling $288,512 and $1,644,931, respectively in the second
three months of 2005, and accounted for 95.5% of the increase over
2004.
Salaries
and benefits, excluding the surgery and diagnostic center business and MBS,
represent the employee-related costs of all non-clinical practice personnel
and
the IPS and Orion corporate staff in Roswell, Georgia. These expenses increased
$91,158, or 12.1%, from $752,510 for the quarter ended June 30, 2004 to $843,668
for the same period in 2005. Of the total increase, $73,500 is for severance
costs related to the corporate staff reductions in Houston.
Facility
Rent and Related Costs.
Facility rent and related costs increased 55.1% from $296,791 for the quarter
ended June 30, 2004 to $460,248 for the quarter ended June 30, 2005. For the
second three months of 2005, the Company’s surgery and diagnostic center
business and MBS recorded facility rent and related expenses totaling $78,565
and $108,550, respectively, which accounted for 114.5% of the increase over
2004.
Facility
rent and related costs associated with IPS’s affiliated medical groups and
corporate office totaled $273,103 for the quarter ended June 30, 2005, a
decrease of $23,658. Of the total decrease, $7,883 is the result of the
sublease, which began in June 2005, between eClinicalWeb and IPS for a portion
of the corporate office in Roswell, Georgia. The remainder of the decrease
is a
result of rent reductions at the facilities of two of IPS’s affiliated medical
groups.
Depreciation
and Amortization.
Consolidated depreciation and amortization expense totaled $960,360 in the
second quarter of 2005, an increase of $823,751 over the quarter ended June
30,
2004. For the three months ended June 30, 2005, depreciation expense related
to
the fixed assets of the Company’s surgery and diagnostic center business and MBS
totaled $127,585 and $20,218, respectively. Depreciation expense related to
the
fixed assets of IPS totaled $26,944 for the quarter ended June 30, 2005.
Amortization expense related to the MSAs totaled $88,392 and $97,668 for the
quarters ended June 30, 2005 and 2004, respectively.
As
part of the IPS Merger, the purchase price, comprised of the fair value of
the
outstanding shares of the Company prior to the transaction, plus applicable
transaction costs, has been allocated to the fair value of the Company’s
tangible and intangible assets and liabilities prior to the transaction, with
any excess being considered goodwill. The amortization expense related to the
intangible assets recorded as a result of the reverse acquisition totaled
$431,697 for the quarter ended June 30, 2005.
As
part of the DCPS/MBS Transaction, the Company purchased MBS and DCPS for a
combination of cash, notes and stock. Since the consideration for this purchase
transaction exceeded the fair value of the net assets of MBS and DCPS at the
time of the purchase, a portion of the purchase price was allocated to
intangible assets and goodwill. The amortization expense related to the
intangible assets recorded as a result of the DCPS/MBS Transaction totaled
$265,523 for the quarter ended June 30, 2005.
Professional
and Consulting Fees.
For the quarter ended June 30, 2005, professional and consulting fees totaled
$453,797, an increase of $339,862, or 298.3%, over the same period in 2004.
For
the second three months of 2005, the Company’s surgery and diagnostic center
business and MBS recorded professional and consulting fees totaling $63,787
and
$10,368, respectively, and accounted for 21.8% of the increase over
2004.
IPS’s
professional and consulting fees, which also include the costs of Orion
corporate accounting, financial reporting and compliance, increased from
$113,935 for the three months ended June 30, 2004 to $379,642 for the three
months ended June 30, 2005. Of the total increase, $163,790 relates to
additional accounting, audit and legal fees as a result of the expanded
reporting requirements resulting from the IPS Merger and the DCPS/MBS
Transaction. An additional $26,417 in professional fees was recorded in the
second quarter of 2005 for investor relations and corporate
communications.
Insurance.
Consolidated insurance expense, including professional liability insurance
for
affiliated physicians, property and casualty insurance, and directors and
officers liability insurance, increased from $132,939 for the quarter ended
June
30, 2004 to $247,815 for the quarter ended June 30, 2005. Insurance expenses
of
the Company’s surgery and diagnostic center business and MBS totaled $43,143 and
$749, respectively, for the second quarter of 2005, and accounted for 38.2%
of
the increase over 2004.
Directors
and officers liability insurance expense for the Company, which is included
in
IPS’s insurance expense, increased $60,321 from the second quarter of 2004 to
the second quarter of 2005, and relates solely to the increase in premiums
as a
result of the acquisition and restructuring transactions that closed in December
2004.
Provision
for Doubtful Accounts.
The provision for doubtful accounts increased $79,613, or 31.1%, for the quarter
ended June 30, 2005 to $335,458. For the three months ended June 30, 2005,
the
Company’s surgery and diagnostic center business recorded bad debt expense
totaling $32,402. IPS’s provision for doubtful accounts for the second three
months of 2005 accounted for 5.9% of total net operating revenues compared
to
6.2% for the same period in 2004. The total collection rate, after contractual
allowances, for IPS’s affiliated medical groups was 71.6% in the second quarter
of 2005, compared to 67.5% for the second quarter of 2004.
Other
Expenses.
Other expenses, which include other operating expenses such as office and
computer supplies, telephone, data communications, printing, postage and
transfer agent fees, as well as board of directors’ compensation and meeting
expenses, totaled $722,759 for the quarter ended June 30, 2005, an increase
of
$478,305 over the same period in 2004. For the second quarter of 2005, the
Company’s surgery and diagnostic center business and MBS recorded other expenses
totaling $108,621 and $325,806, respectively, which accounted for 90.8% of
the
increase over 2004. IPS’s other expenses, which include Orion’s corporate costs,
totaled $288,332 in the second quarter of 2005, an increase of $43,878 over
the
same period in 2004. Of the total increase, $23,288 and $10,756 relate to Orion
board of directors’ compensation and meeting expenses and transfer agent fees,
respectively, which are new costs for the Company in 2005.Additional printing
costs associated with the Company’s SEC filings totaled $25,639 for the three
months ended June 30, 2005.
Charge
for Impairment of Intangible Assets.
On June 13, 2005, the Company announced that it has accepted an offer to
purchase its interests in the Tuscarawas ASC and the Tuscarawas open MRI
facility in Dover, Ohio. Under the terms of the offer letter, the Company’s
interests in these facilities would be sold to a local hospital for cash and
assumption of debt. In addition, the Company would continue to operate the
facilities under a long-term management agreement. 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. Based on the pending sales transaction involving the Tuscarawas
ASC and the Tuscarawas open MRI facility, as well as the uncertainty of future
cash flows related to the Company’s surgery center business, the Company has
recorded a charge for impairment of intangible assets of $6,362,849 for the
three months ended June 30, 2005.
Interest
Expense.
Consolidated interest expense totaled $113,503 for the second three months
of
2005, a decrease of $115,308 from the same period in 2004. The decrease from
2004 can be explained generally by the following events:
|
·
|
As
part of the Investment Transaction, the Company used $5,908,761 to
pay off
the debt owed to a subsidiary of Brantley IV.
|
|
·
|
As
described in “Item 2. Management’s Discussion and Analysis and Plan of
Operation - Certain Recent Developments - New Line of Credit and
Debt
Restructuring,” the Company restructured its previously-existing debt
facilities, which resulted in a decrease in aggregate debt owed to
DVI
from approximately $10.1 million to a combined principal amount
of
approximately $6.5 million, of which approximately $2 million
was paid at the Closing.
|
|
·
|
Brantley
Capital and Brantley Venture Partners III, L.P. (“Brantley III”) each held
debt of IPS and are party to an Amended and Restated Debt Exchange
Agreement dated February 9, 2004, as amended on July 16,
2004
(the “Debt Exchange Agreement”). Pursuant to the Debt Exchange Agreement,
Brantley Capital and Brantley III received Class A Common
Stock with
a fair market value (based on the daily average of the high and low
price
per share of SurgiCare common stock over the five trading days immediately
prior to the Closing) equal to the amounts owing to Brantley Capital
and
Brantley III under their loans to IPS in exchange for contribution
of such
debt to Orion. Pursuant to the Debt Exchange Agreement, Brantley
Capital
also received Class A Common Stock with a fair market value
(based on
the daily average of the high and low price per share of SurgiCare
common
stock over the five trading days immediately prior to the Closing)
equal
to the amount of certain accrued dividends owed to it by IPS in exchange
for the contribution of such indebtedness, provided that the amount
of
shares received in respect of such dividends was subject to reduction
to
the extent necessary to achieve the guaranteed allocation of shares
of
Class A Common Stock to the holders of IPS common stock and
Series B Convertible preferred stock pursuant to the IPS Merger
Agreement. The aggregate amount of debt exchanged by the parties
to the
Debt Exchange Agreement was $4,375,229, which included accrued interest
as
of the Closing, and $593,100 of debt in respect of accrued dividends.
|
Equity
in Earnings of Limited Partnerships. The
investments in limited partnerships are accounted for by the equity method.
Under the equity method, the investment is initially recorded at cost and is
subsequently increased to reflect the Company’s share of the income of the
investee and reduced to reflect the share of the losses of the investee or
distributions from the investee.
These
general partnership interests were accounted for as investment in limited
partnerships due to the interpretation of FAS 94/ARB 51 and the interpretations
of such by Issue 96-16 and SOP 78-9. Under those interpretations, the Company
could not consolidate its interest in those facilities in which it held a
minority general interest partnership interest due to management restrictions,
shared operating decision-making, capital expenditure and debt approval by
limited partners and the general form versus substance analysis. Therefore,
the
Company recorded them as investments in limited partnerships. For the three
months ended June 30, 2005, the Company recorded income of $19,036 on the
minority interest in San Jacinto Surgery Center, based on the Company’s 10%
ownership of that surgery center. Additionally, the Company recorded a loss
of
$1,660 on the minority interest in eClinicalWeb, based on the Company’s 2%
ownership in that entity beginning June 6, 2005.
Discontinued
Operations.
On September 19, 2003, IPS entered into a Mutual Release and Settlement
Agreement (the “Settlement Agreement”) with Dr. Jane Kao and PediApex Heart
Center for Children (the “Heart Center”) to settle disputes as to the existence
and enforceability of certain contractual obligations. As part of the Settlement
Agreement, Dr. Kao, the Heart Center and IPS agreed that, until
December 31, 2004, each party would conduct their operations under the
terms established by the MSA. Additionally, among other provisions, after
December 31, 2004, Dr. Kao and the Heart Center were released
from any
further obligation to IPS arising from any previous agreement, and Dr. Kao
purchased the accounts receivable related to the Heart Center and IPS terminated
its ownership and management agreement with the Heart Center. The operating
results of the Heart Center were not included in the consolidated statements
of
operations of IPS after September 19, 2003 because this medical group
did
not meet the criteria for consolidation after that date in accordance with
EITF
97-2. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ in the second quarter of 2004. IPS recorded a loss on disposal of
this discontinued component of $12,366 for the year ended December 31,
2004. There were no operations for this component in the second quarter of
2005.
The
following table contains selected financial statement data related to the Heart
Center as of and for the three months ended June 30, 2004:
|
|
Three
Months
Ended
|
|
|
June
30, 2004
|
Income
statement data:
|
|
|
Net
operating revenues
|
|
$
|
496,566
|
Direct
cost of revenues
|
|
|
178,149
|
Operating
expenses
|
|
|
299,622
|
Net
income
|
|
$
|
18,795
|
|
|
|
|
Balance
sheet data:
|
|
|
|
Current
assets
|
|
$
|
112,826
|
Other
assets
|
|
|
93,287
|
Total
assets
|
|
$
|
206,113
|
|
|
|
|
Current
liabilities
|
|
$
|
596,992
|
Other
liabilities
|
|
|
—
|
Total
liabilities
|
|
$
|
596,992
|
As
part of the Acquisitions and restructuring transactions that closed on
December 15, 2004, the Company recorded intangible assets related to
the
IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company’s
management expected the case volumes at Bellaire SurgiCare to improve in 2005.
However, by the end of February 2005, it was determined that the expected case
volume increases were not going to be realized. On March 1, 2005, the
Company closed Bellaire SurgiCare and consolidated its operations with the
operations of SurgiCare Memorial Village. The Company tested the identifiable
intangible assets and goodwill related to the surgery and diagnostic center
business using the present value of cash flows method. As a result of the
decision to close Bellaire SurgiCare and the resulting impairment of the joint
venture interest and management contracts related to the surgery centers, the
Company recorded a charge for impairment of intangible assets of $4,090,555
for
the year ended December 31, 2004. The Company also recorded a loss on
disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $163,050 for the quarter ended March 31,
2005. There were no operations for this component in the second quarter of
2005.
On
April 1, 2005, IPS entered into a Mutual Release and Settlement Agreement
(the “Settlement”) with Dr. Bradley E. Chipps, M.D. and Capital Allergy and
Respiratory Disease Center, a Medical Corporation (“CARDC”) to settle disputes
as to the existence and enforceability of certain contractual obligations.
As
part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that CARDC
would
purchase the assets owned by IPS as shown on the balance sheet on March 31,
2005 in exchange for termination of the MSA. Additionally, among other
provisions, after April 1, 2005, Dr. Chipps and CARDC have been
released from any further obligation to IPS arising from any previous agreement.
As a result of the Settlement, the Company recorded a charge for impairment
of
intangible assets related to CARDC of $704,927 for the year ended
December 31, 2004. The Company also recorded a gain on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $506,625 for the quarter ended March 31, 2005. For the quarter ended
June 30, 2005, the Company reduced the gain on disposal of this discontinued
component by $238,333 as the result of post-settlement adjustments related
to
the reconciliation of balance sheet accounts. The operations of this component
are reflected in the Company’s consolidated statements of operations as ‘income
from operations of discontinued components’ for the quarter ended June 30, 2004.
There were no operations for this component in the second quarter of 2005.
The
following table contains selected financial statement data related to CARDC
as
of and for the three months ended June 30, 2005:
|
|
Three
Months
Ended
|
|
|
June
30, 2005
|
Income
statement data:
|
|
|
Net
operating revenues
|
|
$
|
913,934
|
Direct
cost of revenues
|
|
|
644,113
|
Operating
expenses
|
|
|
231,122
|
Net
income
|
|
$
|
38,699
|
|
|
|
|
Balance
sheet data:
|
|
|
|
Current
assets
|
|
$
|
282,901
|
Other
assets
|
|
|
12,863
|
Total
assets
|
|
$
|
295,764
|
|
|
|
|
Current
liabilities
|
|
$
|
314,419
|
Other
liabilities
|
|
|
—
|
Total
liabilities
|
|
$
|
314,419
|
On
June 7, 2005, as described in “Part I, Item 2. Management’s Discussion and
Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries,” IPS executed an Asset
Purchase Agreement with eClinicalWeb to sell substantially all of the assets
of
IntegriMED. As a result of this transaction, the Company recorded a loss on
disposal of this discontinued component of $47,101 for the quarter ended June
30, 2005. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the three months ended June 30, 2005 and 2004,
respectively.
The
following table contains selected financial statement data related to IntegriMED
as of and for the three months ended June 30, 2005 and 2004,
respectively:
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Income
statement data:
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
82,155
|
|
$
|
65,553
|
|
Direct
cost of revenues
|
|
|
—
|
|
|
—
|
|
Operating
expenses
|
|
|
392,931
|
|
|
437,669
|
|
Net
income
|
|
$
|
(310,776
|
)
|
$
|
(372,116
|
)
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
(24,496
|
)
|
$
|
210,400
|
|
Other
assets
|
|
|
—
|
|
|
39,138
|
|
Total
assets
|
|
$
|
(24,496
|
)
|
$
|
249,538
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
17,022
|
|
$
|
278,383
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
Total
liabilities
|
|
$
|
17,022
|
|
$
|
278,383
|
|
On
June 13, 2005, the Company announced that it has accepted an offer to purchase
its interests in the Tuscarawas ASC and the Tuscarawas open MRI facility in
Dover, Ohio. Under the terms of the offer letter, the Company’s interests in
these facilities would be sold to a local hospital for cash and assumption
of
debt. In addition, the Company would continue to operate the facilities under
a
long-term management agreement. Although this transaction has not yet been
consummated, pursuant to SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the assets and liabilities of the Tuscarawas ASC
and Tuscarawas open MRI facility have been reclassified as assets held for
sale
and liabilities held for sale on the Company’s consolidated balance sheet as of
June 30, 2005. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the three months ended June 30, 2005.
The
following table contains selected financial statement data related to the
Tuscarawas ASC and Open MRI as of and for the three months ended June 30,
2005:
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
June
30, 2005
|
|
Income
statement data:
|
|
|
|
Net
operating revenues
|
|
$
|
873,949
|
|
Direct
cost of revenues
|
|
|
394,402
|
|
Operating
expenses
|
|
|
429,225
|
|
Net
income
|
|
$
|
50,332
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
Cash
|
|
$
|
(4,673
|
)
|
Accounts
receivable, net
|
|
|
718,490
|
|
Other
current assets
|
|
|
81,014
|
|
Property
and equipment, net
|
|
|
1,416,356
|
|
Other
long-term assets
|
|
|
71,376
|
|
Total
assets held for sale
|
|
$
|
2,282,564
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
709,779
|
|
Capital
lease obligation
|
|
|
462,295
|
|
Long-term
debt
|
|
|
445,095
|
|
Total
liabilities held for sale
|
|
$
|
1,617,168
|
|
The
following table summarizes the components of income from operations of
discontinued components:
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Income
from operations of discontinued components:
|
|
|
|
|
|
CARDC
|
|
|
|
|
|
Net
income
|
|
$
|
-
|
|
$
|
38,699
|
|
Gain
on disposal
|
|
|
(238,333
|
)
|
|
|
|
Heart
Center
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
18,795
|
|
Bellaire
SurgiCare
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
Loss
on disposal
|
|
|
-
|
|
|
-
|
|
IntegriMED
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(310,776
|
)
|
|
(372,116
|
)
|
Loss
on disposal
|
|
|
(47,101
|
)
|
|
-
|
|
Tuscarawas
ASC and Open MRI
|
|
|
|
|
|
|
|
Net
income
|
|
|
50,332
|
|
|
-
|
|
Total
income from operations of discontinued components
|
|
$
|
(545,878
|
)
|
$
|
(314,622
|
)
|
Preferred
Stock Dividends. Prior
to the IPS Merger, holders of IPS’s Series A-2 preferred stock were
entitled to receive, when, as and if declared by the board of directors,
cumulative dividends payable at the annual rate of $0.40 for each share.
Dividends accrued, even if not declared, and were to be declared and paid in
cash in equal installments on the first day of January, April, July and October
immediately following the issue date, or continued to be accrued until such
time
as the preferred stockholders demanded payment. Preferred stock dividends in
the
amount of $165,300 were accrued for the quarter ended June 30, 2004. No cash
payments of dividends were made in the second quarter of 2004. The
Series A-2 redeemable convertible preferred stock, along with the other
three series of redeemable convertible preferred stock held by IPS stockholders
prior to the IPS Merger, including any accrued and unpaid dividends therein,
were exchanged for shares of Orion’s Class A Common Stock as a part of the
IPS Merger.
Six
Months Ended June 30, 2005 as Compared to Six Months Ended June 30,
2004
The
following table sets forth, for the periods indicated, the unaudited
consolidated condensed statements of operations of Orion.
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
16,725,495
|
|
$
|
8,293,691
|
|
Direct
cost of revenues
|
|
|
7,568,571
|
|
|
5,106,968
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
9,156,924
|
|
|
3,186,723
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
5,454,081
|
|
|
1,529,818
|
|
Facility
rent and related costs
|
|
|
944,651
|
|
|
586,574
|
|
Depreciation
and amortization
|
|
|
1,951,026
|
|
|
269,736
|
|
Professional
and consulting fees
|
|
|
801,437
|
|
|
290,554
|
|
Insurance
|
|
|
479,291
|
|
|
271,969
|
|
Provision
for doubtful accounts
|
|
|
678,545
|
|
|
510,766
|
|
Other
expenses
|
|
|
1,497,676
|
|
|
523,167
|
|
Charge
for impairment of intangible assets
|
|
|
6,362,849
|
|
|
-
|
|
Total
operating expenses
|
|
|
18,169,556
|
|
|
3,982,584
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before other income (expenses)
|
|
|
(9,012,633
|
)
|
|
(795,861
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(191,921
|
)
|
|
(468,861
|
)
|
Equity
in earnings of limited partnerships
|
|
|
17,376
|
|
|
-
|
|
Other
expense, net
|
|
|
4,246
|
|
|
(12,523
|
)
|
Total
other income (expenses), net
|
|
|
(170,299
|
)
|
|
(481,384
|
)
|
|
|
|
|
|
|
|
|
Minority
interest earnings in partnership
|
|
|
(61,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(9,244,733
|
)
|
|
(1,277,245
|
)
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Income
from operations of discontinued components,
|
|
|
(783,686
|
)
|
|
(429,602
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(10,028,418
|
)
|
|
(1,706,847
|
)
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
(330,600
|
)
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(10,028,418
|
)
|
$
|
(2,037,447
|
)
|
Net
Operating Revenues.
Net operating revenues, which include net patient service revenue related to
the
operations of IPS’s affiliated medical groups, other revenue, surgery and
diagnostic center revenue and billing services revenue, increased $8,431,804,
or
101.7%, to $16,725,495 for the six months ended June 30, 2005, as compared
with
$8,293,691 for the same period in 2004. The Company’s surgery and diagnostic
center business and MBS reported net operating revenues of $1,267,842 and
$5,153,753, respectively, for the six months ended June 30, 2005, and accounted
for 76.4% of the increase in the first half of 2005.
IPS
net patient service revenue for the six months ended June 30, 2005 increased
$1,987,853, or 24.0%, from the same period in 2004. The increase in net patient
service revenue for the first half of the year was primarily the result of:
(i)
increased patient volume during the six months ended June 30, 2005, with
procedures and office visits at the clinic-based facilities increasing 19,682
and 8,361, respectively, from 2004 levels; (ii) rate increases beginning in
January 2005 for three of IPS’s affiliated medical groups, which resulted in
average revenue per visit of $135 in the first six months of 2005 compared
to
$124 for the first half of 2004; and (iii) two new providers, who began
practicing at one of IPS’s affiliated medical groups in July 2004, whose
production in the first half of 2005 was approximately 214% higher than the
2004
year-to-date production of the providers they replaced.
Other
revenue totaled $19,233 in the first six months of 2004, increasing $22,356,
or
116.2%, to $41,589 for the six months ended June 30, 2005. In the first half
of
2005, revenue from the IPS Vaccine Alliance, a group purchasing alliance for
vaccines and medical supplies, increased $11,966 over 2004 to $31,199. Revenue
related to a small number of former IntegriMED customers not fully transitioned
to eClinicalWeb totaled $10,390 in June 2005.
Direct
Cost of Revenues.
Direct cost of revenues, which includes physician compensation, surgical and
diagnostic costs and medical group direct clinical expenses and totaled
$5,106,968 in the first half of 2004, increased $2,461,603, or 48.2%, to
$7,568,571 for the six months ended June 30, 2005. The Company’s surgery and
diagnostic center business recorded direct cost of revenues totaling $803,136
for the first six months of 2005 and accounted for 32.6% of the increase in
2005.
Pursuant
to the terms of the MSAs governing each of IPS’s affiliated medical groups, the
physicians of each medical group are compensated after the payment of all clinic
facility expenses as well as a management fee to IPS. The management fee revenue
and expense, which is eliminated in the consolidation of the financial
statements, is either a fixed fee, or is calculated based on a percentage of
net
operating income and represented approximately 13.9% of physician medical group
net operating income in the first six months of 2005 compared to 14.8% in the
same period in 2004. Physician compensation increased $1,428,182, or 44.5%,
for
the six months ended June 30, 2005 to $4,636,089, as compared with $3,207,907
for the six months ended June 30, 2004. Physician compensation expense
represented 45.0% of total net operating revenues in the first half of 2005,
compared with 38.7% for the same period in 2004. The increase in compensation
in
the first six months of 2005 was directly related to an increase in net patient
service revenue, which was primarily the result of: (i) increased patient
volume and (ii) rate increases implemented by three of IPS’s affiliated
medical groups.
Direct
clinical expenses are expenses that are directly related to the practice of
medicine by the physicians who practice at the affiliated medical groups managed
by IPS. For the quarter ended June 30, 2005, direct clinical expenses increased
$230,285, or 12.1% to $2,129,346, largely as a result of increased vaccine
expenses due to increased patient volume at the affiliated medical
groups.
Operating
Expenses.
Salaries
and Benefits.
Consolidated salaries and benefits increased $3,924,263 in the first half of
2005 to $5,454,081, compared to $1,529,818 for the same period in 2004. The
Company’s surgery and diagnostic center business and MBS recorded salaries and
benefits expenses totaling $601,865 and $3,220,067, respectively in the first
six months of 2005, and accounted for 97.4% of the increase over
2004.
Salaries
and benefits, excluding the surgery and diagnostic center business and MBS,
represent the employee-related costs of all non-clinical practice personnel
and
the IPS and Orion corporate staff in Roswell, Georgia. These expenses increased
$102,331, or 6.7%, from $1,529,818 for the six months ended June 30, 2004 to
$1,632,149 for the same period in 2005. Of the total increase, $73,500 is for
severance costs related to the corporate staff reductions in
Houston.
Facility
Rent and Related Costs.
Facility rent and related costs increased 61.0% from $586,574 for the six months
ended June 30, 2004 to $944,651 for the six months ended June 30, 2005. For
the
first six months of 2005, the Company’s surgery and diagnostic center business
and MBS recorded facility rent and related expenses totaling $157,129 and
$217,563, respectively, which accounted for 104.6% of the increase over 2004.
Facility
rent and related costs associated with IPS’s affiliated medical groups and
corporate office totaled $569,959 for the six months ended June 30, 2005, a
decrease of $16,615. Of the total decrease, $7,883 is the result of the
sublease, which began in June 2005, between eClinicalWeb and IPS for a portion
of the corporate office in Roswell, Georgia. The remainder of the decrease
is a
result of rent reductions at the facilities of two of IPS’s affiliated medical
groups.
Depreciation
and Amortization.
Consolidated depreciation and amortization expense totaled $1,951,026 in the
first six months of 2005, an increase of $1,681,290 over the six months ended
June 30, 2004. For the six months ended June 30, 2005, depreciation expense
related to the fixed assets of the Company’s surgery and diagnostic center
business and MBS totaled $245,638 and $41,835, respectively. Depreciation
expense related to the fixed assets of IPS totaled $59,771 for the year-to-date
period ended June 30, 2005. Amortization expense related to the MSAs totaled
$209,341 and $195,336 for the six-month periods ended June 30, 2005 and 2004,
respectively.
As
part of the IPS Merger the purchase price, comprised of the fair value of the
outstanding shares of the Company prior to the transaction, plus applicable
transaction costs, has been allocated to the fair value of the Company’s
tangible and intangible assets and liabilities prior to the transaction, with
any excess being considered goodwill. The amortization expense related to the
intangible assets recorded as a result of the reverse acquisition totaled
$863,394 for the six months ended June 30, 2005.
As
part of the DCPS/MBS Transaction, the Company purchased MBS and DCPS for a
combination of cash, notes and stock. Since the consideration for this purchase
transaction exceeded the fair value of the net assets of MBS and DCPS at the
time of the purchase, a portion of the purchase price was allocated to
intangible assets and goodwill. The amortization expense related to the
intangible assets recorded as a result of the DCPS/MBS Transaction totaled
$531,046 for the six months ended June 30, 2005.
Professional
and Consulting Fees.
For the six months ended June 30, 2005, professional and consulting fees totaled
$801,437, an increase of $510,883, or 175.8%, over the same period in 2004.
For
the first six months of 2005, the Company’s surgery and diagnostic center
business and MBS recorded professional and consulting fees totaling $120,709
and
$22,850, respectively, and accounted for 28.1% of the increase over
2004.
IPS’s
professional and consulting fees, which also include the costs of Orion
corporate accounting, financial reporting and compliance, increased from
$290,554 for the six months ended June 30, 2004 to $657,877 for the six months
ended June 30, 2005. Of the total increase, $242,171 relates to additional
accounting, audit and legal fees as a result of the expanded reporting
requirements resulting from the IPS Merger and the DCPS/MBS Transaction. An
additional $40,264 in professional fees was recorded in the first six months
of
2005 for investor relations and corporate communications.
Insurance.
Consolidated insurance expense, including professional liability insurance
for
affiliated physicians, property and casualty insurance, and directors and
officers liability insurance, increased from $271,969 for the six-month period
ended June 30, 2004 to $479,291 for the six months ended June 30, 2005.
Insurance expenses of the Company’s surgery and diagnostic center business and
MBS totaled $69,984 and $5,002, respectively, for the first half of 2005, and
accounted for 36.2% of the increase over 2004.
Directors
and officers liability insurance expense for the Company, which is included
in
IPS’s insurance expense, increased $120,261 from the first six months of 2004 to
the six months ended June 30, 2005, and relates solely to the increase in
premiums as a result of the acquisition and restructuring transactions that
closed in December 2004.
Provision
for Doubtful Accounts.
The provision for doubtful accounts increased $167,779, or 32.8%, for the six
months ended June 30, 2005 to $678,545. For the first six months of 2005, the
Company’s surgery and diagnostic center business recorded bad debt expense
totaling $60,234. IPS’s provision for doubtful accounts for the first half of
2005 accounted for 6.3% of total net operating revenues compared to 6.2% for
the
same period in 2004. The total collection rate, after contractual allowances,
for IPS’s affiliated medical groups was 70.6% in the first six months of 2005,
compared to 68.1% for the six months ended June 30, 2004.
Other
Expenses.
Other expenses, which include other operating expenses such as office and
computer supplies, telephone, data communications, printing, postage and
transfer agent fees, as well as board of directors’ compensation and meeting
expenses, totaled $1,497,676 for the six months ended June 30, 2005, an increase
of $974,509 over the same period in 2004. For the first six months of 2005,
the
Company’s surgery and diagnostic center business and MBS recorded other expenses
totaling $243,048 and $662,667, respectively, which accounted for 92.9% of
the
increase over 2004. . IPS’s other expenses, which include Orion’s corporate
costs, totaled $591,961 in the first six months of 2005, an increase of $68,794
over the same period in 2004. Of the total increase, $73,181 and $16,392 relate
to Orion board of directors’ compensation and meeting expenses and transfer
agent fees, respectively, which are new costs for the company in 2005.
Additional printing costs associated with the Company’s SEC filings totaled
$41,513 in the first half of 2005, while bank charges fell more than $50,000
in
the first half of 2005 when compared with the same period in 2004, as a result
of the reduction in overdraft expenses associated with the Company’s revolving
line of credit.
Charge
for Impairment of Intangible Assets.
On June 13, 2005, the Company announced that it has accepted an offer to
purchase its interests in the Tuscarawas ASC and the Tuscarawas open MRI
facility in Dover, Ohio. Under the terms of the offer letter, the Company’s
interests in these facilities would be sold to a local hospital for cash and
assumption of debt. In addition, the Company would continue to operate the
facilities under a long-term management agreement. In preparation for this
pending transaction, the Company tested the identifiable intangible assets
and
goodwill related to the surgery center business using the present value of
cash
flows method as of June 30, 2005. Based on the pending sales transaction
involving the Tuscarawas ASC and Tuscarawas open MRI facility, as well as the
uncertainty of future cash flows related to the Company’s surgery center
business, the Company has recorded a charge for impairment of intangible assets
of $6,362,849 for the six months ended June 30, 2005.
Interest
Expense.
Consolidated interest expense totaled $191,921 for the first six months of
2005,
a decrease of $276,940 from the same period in 2004. The decrease from 2004
can
be explained generally by the following events:
|
·
|
As
part of the Investment Transaction, the Company used $5,908,761 to
pay off
the debt owed to a subsidiary of Brantley IV.
|
|
·
|
As
described in “Item 2. Management’s Discussion and Analysis and Plan of
Operation - Certain Recent Developments - New Line of Credit and
Debt
Restructuring,” the Company restructured its previously-existing debt
facilities, which resulted in a decrease in aggregate debt owed to
DVI
from approximately $10.1 million to a combined principal amount
of
approximately $6.5 million, of which approximately $2 million
was paid at the Closing.
|
|
·
|
Brantley
Capital and Brantley III each held debt of IPS and are party to the
Debt
Exchange Agreement. Pursuant to the Debt Exchange Agreement, Brantley
Capital and Brantley III received Class A Common Stock with
a fair
market value (based on the daily average of the high and low price
per
share of SurgiCare common stock over the five trading days immediately
prior to the Closing) equal to the amounts owing to Brantley Capital
and
Brantley III under their loans to IPS in exchange for contribution
of such
debt to Orion. Pursuant to the Debt Exchange Agreement, Brantley
Capital
also received Class A Common Stock with a fair market value
(based on
the daily average of the high and low price per share of SurgiCare
common
stock over the five trading days immediately prior to the Closing)
equal
to the amount of certain accrued dividends owed to it by IPS in exchange
for the contribution of such indebtedness, provided that the amount
of
shares received in respect of such dividends was subject to reduction
to
the extent necessary to achieve the guaranteed allocation of shares
of
Class A Common Stock to the holders of IPS common stock and
Series B Convertible preferred stock pursuant to the IPS Merger
Agreement. The aggregate amount of debt exchanged by the parties
to the
Debt Exchange Agreement was $4,375,229, which included accrued interest
as
of the Closing, and $593,100 of debt in respect of accrued dividends.
|
Equity
in Earnings of Limited Partnerships. The
investments in limited partnerships are accounted for by the equity method.
Under the equity method, the investment is initially recorded at cost and is
subsequently increased to reflect the Company’s share of the income of the
investee and reduced to reflect the share of the losses of the investee or
distributions from the investee.
These
general partnership interests were accounted for as investment in limited
partnerships due to the interpretation of FAS 94/ARB 51 and the interpretations
of such by Issue 96-16 and SOP 78-9. Under those interpretations, the Company
could not consolidate its interest in those facilities in which it held a
minority general interest partnership interest due to management restrictions,
shared operating decision-making, capital expenditure and debt approval by
limited partners and the general form versus substance analysis. Therefore,
the
Company recorded them as investments in limited partnerships. For the six months
ended June 30, 2005, the Company recorded income of $19,036 on the minority
interest in San Jacinto Surgery Center, based on the Company’s 10% ownership of
that surgery center. Additionally, the Company recorded a loss of $1,660 on
the
minority interest in eClinicalWeb, based on the Company’s 2% ownership in that
entity beginning June 6, 2005.
Discontinued
Operations.
On September 19, 2003, IPS entered into the Settlement Agreement with
Dr. Jane Kao and the Heart Center to settle disputes as to the existence
and enforceability of certain contractual obligations. As part of the Settlement
Agreement, Dr. Kao, the Heart Center and IPS agreed that, until
December 31, 2004, each party would conduct their operations under the
terms established by the MSA. Additionally, among other provisions, after
December 31, 2004, Dr. Kao and the Heart Center were released
from any
further obligation to IPS arising from any previous agreement, and Dr. Kao
purchased the accounts receivable related to the Heart Center and IPS terminated
its ownership and management agreement with the Heart Center. The operating
results of the Heart Center were not included in the consolidated statements
of
operations of IPS after September 19, 2003 because this medical group
did
not meet the criteria for consolidation after that date in accordance with
EITF
97-2. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the six months ended June 30, 2004. IPS recorded a loss on
disposal of this discontinued component of $12,366 for the year ended
December 31, 2004. There were no operations for this component in
2005.
The
following table contains selected financial statement data related to the Heart
Center as of and for the six months ended June 30, 2004:
|
|
Six
Months
Ended
|
|
June
30, 2004
|
Income
statement data:
|
|
Net
operating
revenues
|
$
1,225,707
|
Direct
cost of
revenues
|
503,651
|
Operating
expenses
|
657,257
|
Net
income
|
$
64,799
|
|
|
Balance
sheet data:
|
|
Current
assets
|
$
112,826
|
Other
assets
|
93,287
|
Total
assets
|
$
206,113
|
|
|
Current
liabilities
|
$
596,992
|
Other
liabilities
|
—
|
Total
liabilities
|
$
596,992
|
As
part of the acquisition and restructuring transactions that closed on
December 15, 2004, the Company recorded intangible assets related to
the
IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company’s
management expected the case volumes at Bellaire SurgiCare to improve in 2005.
However, by the end of February 2005, it was determined that the expected case
volume increases were not going to be realized. On March 1, 2005, the
Company closed Bellaire SurgiCare and consolidated its operations with the
operations of SurgiCare Memorial Village. The Company tested the identifiable
intangible assets and goodwill related to the surgery and diagnostic center
business using the present value of cash flows method. As a result of the
decision to close Bellaire SurgiCare and the resulting impairment of the joint
venture interest and management contracts related to the surgery centers, the
Company recorded a charge for impairment of intangible assets of $4,090,555
for
the year ended December 31, 2004. The Company also recorded a loss on
disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $163,050 for the quarter ended March 31,
2005. There were no operations for this component in the second quarter of
2005.
The
following table contains selected financial statement data related to Bellaire
SurgiCare as of and for the six months ended June 30, 2005:
|
|
|
|
Six
Months
Ended
|
|
|
June
30, 2005
|
Income
statement data:
|
|
|
|
|
Net
operating
revenues
|
|
$
|
161,679
|
Direct
cost of
revenues
|
|
|
235,993
|
Operating
expenses
|
|
|
114,104
|
Net
income
|
|
$
|
(188,418)
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
Current
assets
|
|
$
|
—
|
Other
assets
|
|
|
—
|
Total
assets
|
|
$
|
—
|
|
|
|
|
|
Current
liabilities
|
|
$
|
—
|
Other
liabilities
|
|
|
—
|
Total
liabilities
|
|
$
|
—
|
On
April 1, 2005, IPS entered into the Settlementwith Dr. Bradley
E.
Chipps, M.D. and CARDC to settle disputes as to the existence and enforceability
of certain contractual obligations. As part of the Settlement, Dr. Chipps,
CARDC, and IPS agreed that CARDC would purchase the assets owned by IPS as
shown
on the balance sheet on March 31, 2005 in exchange for termination of
the
MSA. Additionally, among other provisions, after April 1, 2005,
Dr. Chipps and CARDC have been released from any further obligation
to IPS
arising from any previous agreement. As a result of the Settlement, the Company
recorded a charge for impairment of intangible assets related to CARDC of
$704,927 for the year ended December 31, 2004. The Company also recorded
a
gain on disposal of this discontinued component (in addition to the charge
for
impairment of intangible assets) of $506,625 for the quarter ended March 31,
2005. For the quarter ended June 30, 2005, the Company reduced the gain on
disposal of this discontinued component by $238,333 as the result of
post-settlement adjustments related to the reconciliation of balance sheet
accounts. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the six months ended June 30, 2005 and 2004, respectively. There
were no operations for this component in the second quarter of 2005.
The
following table contains selected financial statement data related to CARDC
as
of and for the six months ended June 30, 2005 and 2004,
respectively:
|
|
Six
Months Ended June
30,
|
|
|
2005
|
|
2004
|
|
|
|
|
|
Income
statement data:
|
|
|
|
|
Net
operating revenues
|
|
$
|
848,373
|
|
$
|
1,679,416
|
Direct
cost of revenues
|
|
|
523,255
|
|
|
1,140,087
|
Operating
expenses
|
|
|
286,418
|
|
|
462,830
|
Net
income
|
|
$
|
38,700
|
|
$
|
76,499
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
Current
assets
|
|
$
|
—
|
|
$
|
282,901
|
Other
assets
|
|
|
—
|
|
|
12,863
|
Total
assets
|
|
$
|
—
|
|
$
|
295,764
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
—
|
|
$
|
314,419
|
Other
liabilities
|
|
|
—
|
|
|
—
|
Total
liabilities
|
|
$
|
—
|
|
$
|
314,419
|
On
June 7, 2005, as described in “Part I, Item 2. Management’s Discussion and
Analysis or Plan of Operations - Certain Recent Developments -
Post-Restructuring Transactions Involving Subsidiaries,” IPS executed an Asset
Purchase Agreement with eClinicalWeb to sell substantially all of the assets
of
IntegriMED. As a result of this transaction, the Company recorded a loss on
disposal of this discontinued component of $47,101 for the quarter ended June
30, 2005. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the six months ended June 30, 2005 and 2004,
respectively.
The
following table contains selected financial statement data related to IntegriMED
as of and for the six months ended June 30, 2005 and 2004,
respectively:
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Income
statement data:
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
191,771
|
|
$
|
109,864
|
|
Direct
cost of revenues
|
|
|
—
|
|
|
—
|
|
Operating
expenses
|
|
|
899,667
|
|
|
680,764
|
|
Net
income
|
|
$
|
(707,896
|
)
|
$
|
(570,900
|
)
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
(24,496
|
)
|
$
|
210,400
|
|
Other
assets
|
|
|
—
|
|
|
39,138
|
|
Total
assets
|
|
$
|
(24,496
|
)
|
$
|
249,538
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
17,022
|
|
$
|
278,383
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
Total
liabilities
|
|
$
|
17,022
|
|
$
|
278,383
|
|
On
June 13, 2005, the Company announced that it has accepted an offer to purchase
its interests in the Tuscarawas ASC and the Tuscarawas open MRI facility in
Dover, Ohio. Under the terms of the offer letter, the Company’s interests in
these facilities would be sold to a local hospital for cash and assumption
of
debt. In addition, the Company would continue to operate the facilities under
a
long-term management agreement. Although this transaction has not yet been
consummated, pursuant to SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” the assets and liabilities of the Tuscarawas ASC
and Tuscarawas open MRI facility have been reclassified as assets held for
sale
and liabilities held for sale on the Company’s consolidated balance sheet as of
June 30, 2005. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the six months ended June 30, 2005.
The
following table contains selected financial statement data related to the
Tuscarawas ASC and Tuscarawas open MRI facility as of and for the six months
ended June 30, 2005:
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
Income
statement data:
|
|
|
|
Net
operating revenues
|
|
$
|
1,670,801
|
|
Direct
cost of revenues
|
|
|
774,156
|
|
Operating
expenses
|
|
|
880,858
|
|
Net
income
|
|
$
|
15,787
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
Cash
|
|
$
|
(4,673
|
)
|
Accounts
receivable, net
|
|
|
718,490
|
|
Other
current assets
|
|
|
81,014
|
|
Property
and equipment, net
|
|
|
1,416,356
|
|
Other
long-term assets
|
|
|
71,376
|
|
Total
assets held for sale
|
|
$
|
2,282,564
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
709,779
|
|
Capital
lease obligation
|
|
|
462,295
|
|
Long-term
debt
|
|
|
445,095
|
|
Total
liabilities held for sale
|
|
$
|
1,617,168
|
|
The
following table summarizes the components of income from operations of
discontinued components:
|
|
|
Six
Months Ended June 30,
|
|
|
2005
|
|
2004
|
Income
from operations of discontinued components:
|
|
|
|
|
|
|
CARDC
|
|
|
|
|
|
|
Net
income
|
|
$
|
38,700
|
|
|
$
|
76,499
|
Gain
on disposal
|
|
|
268,292
|
|
|
|
|
Heart
Center
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
64,799
|
Bellaire
SurgiCare
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(188,418
|
)
|
|
|
-
|
Loss
on disposal
|
|
|
(163,050
|
)
|
|
|
-
|
IntegriMED
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(707,896
|
)
|
|
|
(570,900)
|
Loss
on disposal
|
|
|
(47,101
|
)
|
|
|
-
|
Tuscarawas
ASC and Open MRI
|
|
|
|
|
|
|
|
Net
income
|
|
|
15,787
|
|
|
|
-
|
Total
income from operations of discontinued components
|
|
$
|
(783,686
|
)
|
|
$
|
(429,602)
|
Preferred
Stock Dividends. Prior
to the IPS Merger, holders of IPS’s Series A-2 preferred stock were
entitled to receive, when, as and if declared by the board of directors,
cumulative dividends payable at the annual rate of $0.40 for each share.
Dividends accrued, even if not declared, and were to be declared and paid in
cash in equal installments on the first day of January, April, July and October
immediately following the issue date, or continued to be accrued until such
time
as the preferred stockholders demanded payment. Preferred stock dividends in
the
amount of $330,600 were accrued for the six months ended June 30, 2004. No
cash
payments of dividends were made in the first six months of 2004. The
Series A-2 redeemable convertible preferred stock, along with the other
three series of redeemable convertible preferred stock held by IPS stockholders
prior to the IPS Merger, including any accrued and unpaid dividends therein,
were exchanged for shares of Orion Class A Common Stock as a part of
the
IPS Merger.
Liquidity
and Capital Resources
Net
cash used in operating activities totaled $951,095 for the three months ended
June 30, 2005 compared to net cash used in operating activities of $529,714
for
the same period in 2004. The increase in net cash used in operations can be
attributed primarily to the growth in operating expenses related to the IPS
Merger and DCPS/MBS Transaction.
For
the six-month period ended June 30, 2005, net cash used in operating activities
totaled $1,805,230 compared to $770,896 in net cash used by operating activities
for the same period in 2004.
Net
cash provided by investing activities totaled $12,051 for the three months
ended
June 30, 2005 compared to net cash used in investing activities totaling
$117,400 for the three months ended June 30, 2004. Certain fixed assets of
the
IntegriMED were sold to eClinicalWeb as part of the Agreement, which is
described in “Part I, Item 2. Management’s Discussion and Analysis or Plan of
Operations - Certain Recent Developments - Post-Restructuring Transactions
Involving Subsidiaries.” The only other investing activities in the second three
months of 2005 and 2004, respectively, consisted of purchases and retirements
of
property and equipment.
For
the six-month period ended June 30, 2005, net cash provided by investing
activities totaled $32,195 compared to $151,630 in net cash used by investing
activities for the same period in 2004.
Net
cash provided by financing activities totaled $637,780 for the three months
ended June 30, 2005 compared to net cash provided by financing activities
totaling $599,744 for the three months ended June 30, 2004. For the six-month
period ended June 30, 2005, net cash provided by financing activities totaled
$1,382,273 compared to net cash provided by financing activities of $1,009,073
for the same period in 2004. The following financing activities occurred in
the
first six months of 2005:
|
Repayments
of capital lease obligations totaled $125,650;
|
|
Net
borrowings on the HBCC revolving credit facility totaled $364,514;
and
|
|
On
March 16, 2005, Brantley IV loaned the Company an aggregate of
$1,025,000.
On April 19, 2005, Brantley IV loaned the Company an additional
$225,000.
(See “Part I, Item 2. Management’s Discussion and
Analysis
or Plan of Operation - Certain Recent Developments - Post-Restructuring
Loan Transaction.)
|
As
of June 30, 2005, the Company had $311,083 of cash and cash equivalents on
hand
and a working capital deficit of $5,516,249. The Company incurred operating
losses of $7,801,910 and $9,244,733, respectively for the three months and
six
months ended June 30, 2005. In addition, the Company has used substantial
amounts of working capital in its operations.
The
Company has financed its growth primarily through the issuance of equity,
secured and/or convertible debt, most recently by completing the Acquisitions,
the Investment Transaction, the Reclassification and the restructuring of its
debt owed to DVI (the “Debt Restructuring”). In connection with the Closing of
the Acquisitions and the Investment Transaction, the Company entered into a
new
secured two-year revolving credit facility pursuant to the Loan and Security
Agreement by and among Orion, certain of its affiliates and subsidiaries, and
HBCC. (See “Item 2. Management’s Discussion and Analysis or Plan of
Operation - Certain Recent Developments - Acquisition and Restructuring
Transactions.”) In connection with entering into this new facility, Orion also
consummated the Debt Restructuring, which resulted in a decrease in aggregate
debt owed to DVI from approximately $10.1 million to a combined principal
amount of approximately $6.5 million, of which approximately
$2 million was paid at the Closing. In addition to the Closing, on
March 16, 2005, Brantley IV loaned Orion an aggregate of $1,025,000.
On
April 19, 2005, Brantley IV loaned the Company an additional $225,000.
(See
“Item 2. Management’s Discussion and Analysis or Plan of Operation - Certain
Recent Developments - Post-Restructuring Loan Transactions.) Paul H. Cascio,
the
Chairman of the board of directors of Orion, and Michael J. Finn, a director
of
Orion, are affiliates of Brantley IV. Additionally, as part of this transaction,
the Company entered into the First Amendment whereby its $4,000,000 secured
two-year revolving credit facility has been reduced by the amount of the loans
from Brantley IV to $2,750,000. As a result of the First Amendment, the Brantley
IV Guaranty was amended by the Amended Brantley IV Guaranty, which reduces
the
deficiency guaranty provided by Brantley IV by the amount of the First Loan
to
$2,247,727. Also as a result of the First Amendment, the Brantley Capital
Guaranty was amended by the Amended Brantley Capital Guaranty, which reduces
the
deficiency guaranty provided by Brantley Capital by the amount of the Second
Loan to $502,273.
As
part of the Loan and Security Agreement, the Company is required to comply
with
certain financial covenants, measured on a quarterly basis, beginning as of
and
for the six months ended June 30, 2005. 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 six months ended June 30, 2005, the
Company was out of compliance with both of these financial covenants and has
notified the lender as such. Under the terms of the Loan and Security Agreement,
failure to meet the required financial covenants constitutes an event of
default. Under an event of default, the lender may (i) accelerate and declare
the obligations under the credit facility to be immediately due and payable;
(ii) withhold or cease to make advances under the credit facility; (iii)
terminate the credit facility; (iv) take possession of the collateral pledged
as
part of the Loan and Security Agreement; (v) reduce or modify the revolving
loan
commitment; and/or (vi) take necessary action under the Guaranties. The loan
is
secured by the Company’s healthcare accounts receivable. As of August 11, 2005,
the outstanding principal under the revolving credit facility was $2,605,203.
The full amount of the loan as of June 30, 2005 is recorded as a current
liability. The Company is currently in negotiations with the lender and is
seeking to obtain a waiver of the financial covenants as of and for the six
months ended June 30, 2005. In the event the lender declares the obligations
under the credit facility to be immediately due and payable or exercises its
other rights described above, the Company would not be able to meet its
obligations to the lender or its other creditors. As a result, such action
would
have a material adverse effect on the Company and on its ability to continue
as
a going concern.
As
of June 30, 2005, the Company’s existing credit facility with HBCC has limited
availability to provide for working capital shortages. Although the Company
believes that it will generate cash flows from operations in the future, there
is substantial doubt as to whether it will be able to fund its operations solely
from its cash flows. On April 28, 2005, the Company announced the initiation
of
a strategic plan designed to accelerate the Company’s growth and enhance its
future earnings potential. The plan focuses on the Company’s strengths, which
include providing billing, collections and complementary business management
services to physician practices in addition to the provision of development
and
management services to ambulatory surgery centers. A fundamental component
of
the Company’s plan is the selective consideration of accretive acquisition
opportunities in these core business sectors. In addition, the Company will
cease investment in business lines that do not complement the Company’s
strategic plans and will redirect financial resources and Company personnel
to
areas that management believes enhances long-term growth potential. On June
7,
2005, as described in “Part I, Item 2. Management’s Discussion and Analysis or
Plan of Operations - Certain Recent Developments - Post-Restructuring
Transactions Involving Subsidiaries,” the Company, via its IPS subsidiary
executed an Asset Purchase Agreement with eClinicalWeb to sell substantially
all
of the assets of IntegriMED. Additionally, on June 13, 2005, the Company
announced that it has accepted an offer to purchase its interests in the
Tuscarawas ASC and Tuscarawas open MRI facility in Dover, Ohio. Under the terms
of the offer letter, the Company’s interests in these facilities would be sold
to a local hospital for cash and assumption of debt. In addition, the Company
would continue to operate the facilities under a long-term management agreement.
This transaction has not yet closed. The Company does not anticipate a
significant reduction of revenue as a result of the implementation of these
strategic initiatives. However, the Company anticipates a substantial reduction
of annual expenses attributable to a combination of these initiatives and the
consolidation of corporate functions currently duplicated at the Company’s
Houston and Atlanta facilities.
The
Company intends to continue to manage its use of cash. However, the Company’s
business is still faced with many challenges. If cash flows from operations
and
borrowings are not sufficient to fund the Company’s cash requirements, the
Company may be required to further reduce its operations and/or seek additional
public or private equity financing or financing from other sources or consider
other strategic alternatives, including possible additional divestitures of
specific assets or lines of business. There can be no assurances that additional
financing or strategic alternatives will be available, or that, if available,
the financing or strategic alternatives will be obtainable on terms acceptable
to the Company or that any additional financing would not be substantially
dilutive to the Company’s existing stockholders.
Evaluation
of Disclosure Controls and Procedures.
The Company maintains a set of disclosure controls and procedures that are
designed to provide reasonable assurance that information required to be
disclosed by us in the reports filed by us under the Securities and Exchange
Act
of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and
reported accurately and within the time periods specified in the Security and
Exchange Commission’s rules and forms. As of the end of the period covered by
this report, the Company evaluated, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief
Financial Officer, of the design and effectiveness of our disclosure controls
and procedures pursuant to Rule 13a-15(c) of the Exchange Act. Based
on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including our
consolidated subsidiaries) required to be included in our 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.
On
January 1, 1999, IPS acquired Children’s Advanced Medical Institutes, Inc.
(“CAMI”) in a merger transaction. On that same date, IPS began providing
management services to the Children’s 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. Certain settlements were reached in the
cases. The two cases were referred to arbitration pursuant to the arbitration
clauses in the agreements between the parties. The arbitration includes all
remaining claims in both lawsuits. The P.A., the physicians and the former
shareholders of CAMI sought recovery of pre-merger accounts receivable they
claim were collected by IPS after the merger, but belong to CAMI under the
merger agreement and agreements between CAMI and the affiliated physicians.
IPS
asserted a right of set-off for over-payments that it made after the merger
to
the physicians. IPS also asserted a claim against the physicians for breach
of
the management services agreement and other agreements. In their complaint,
the
P.A., the former shareholders of CAMI and the physicians sought 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 award
was
confirmed by the U.S. District Court in the amount of $548,884 and judgment
was
entered. 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 have been dismissed with prejudice.
On
July 12, 2005, Orion was named as a defendant in a suit entitled American
International Industries, Inc. vs. Orion HealthCorp, Inc., previously known
as
SurgiCare, Inc., Keith G. LeBlanc, Paul Cascio, Brantley Capital Corporation,
Brantley Venture Partners III, L.P., and Brantley Venture Partners IV, L.P.
in
the 80th
Judicial District Court of Harris County, Texas, Cause No. 2005-44326. This
case
involves allegations that the Company made material and intentional
misrepresentations regarding the financial condition of the parties to the
acquisition and restructuring transactions effected on December 15, 2004 for
the
purpose of inducing American International Industries, Inc. (“AII”) to convert
its SurgiCare Class AA convertible preferred stock (“Class AA Preferred Stock”)
into shares of Orion Class A Common Stock. AII asserts that the value of its
Class A Common Stock of Orion has fallen as a direct result of the alleged
material misrepresentations by the Company. AII is seeking actual damages of
$3,800,000, punitive damages of $3,800,000, and rescission of the agreement
to
convert the Class AA Preferred Stock into Class A Common Stock. The Company
and
the other defendants filed an Answer denying the allegations set forth in the
Complaint.
In
addition, the Company is involved in various other legal proceedings and claims
arising in the ordinary course of business. The Company’s management believes
that the disposition of these additional matters, individually or in the
aggregate, is not expected to have a materially adverse effect on the Company’s
financial condition. However, depending on the amount and timing of such
disposition, an unfavorable resolution of some or all of these matters could
materially affect the Company’s future results of operations or cash flows in a
particular period.
Convertible
Notes. In
November 2003, the Company completed a $470,000 financing for working capital
through the issuance of one-year convertible unsecured promissory notes (the
“Convertible Notes”) bearing interest at 10% per annum (with a default interest
rate of 18% per annum). The holders of the Convertible Notes also received
five-year warrants to purchase an aggregate of 335,700 shares of the Company’s
common stock (the “Warrants”).
The
Convertible Notes are convertible into shares of Company’s common stock, at any
time, at the option of the note holders. The Warrants may be exercised on a
cashless basis at the option of the holder. Initially, the Convertible Notes
converted at a price per share of (a) $0.35 per share if converted on or prior
to January 31, 2004, or (b) the lesser of (i) $.25, or (ii) seventy-five percent
(75%) of the average closing price for the 20 trading days immediately prior
to
the conversion date, if converted after January 31, 2004. Initially, the
Warrants were exercisable at an exercise price of $.35 per share.
The
Convertible Notes matured on October 31, 2004, and were not paid at that time
by
the Company causing the interest rate to increase to 18% per annum. Prior to
October 31, 2004, one of the eight holders of Convertible Notes converted its
Convertible Note into common stock of the Company. As a result of the Reverse
Stock Split and the Reclassification, which took place after January 31, 2004,
the Convertible Notes became convertible at a price per share equal to the
lesser of (i) $.25, or (ii) seventy-five percent (75%) of the average closing
price for the 20 trading days immediately prior to the conversion date. Also,
as
a result of the Reverse Stock Split and the Reclassification, the Warrants
are
exercisable for an aggregate of 33,570 shares of the Company’s Class A Common
Stock at an exercise price of $3.50 per share.
On
December 21, 2004, the Company offered all holders of outstanding Convertible
Notes the opportunity to convert their Convertible Notes at a price of $2.00
per
share, provided the conversions were completed by January 31, 2005. Two of
the
holders of the Convertible Notes elected to convert their Convertible Notes
at
$2.00 per share in January 2005. During the month of January 2005, the stock
price of the Company’s Class A Common Stock decreased below $2.50 per share and
it was not beneficial for the remaining note holders to convert. Therefore,
the
Company offered the holders of all remaining unconverted Convertible Notes
the
opportunity to convert their Convertible Notes at a price of $1.50 per share,
provided the conversions were completed by January 31, 2005. One holder of
the
Convertible Notes elected to convert his Convertible Note at $1.50 per share
in
January 2005. All but one of the holders of the remaining unconverted
Convertible Notes elected to convert their Convertible Notes in April 2005,
per
the terms of the original Convertible Notes.
From
January 1, 2005 through August 11, 2005, holders of the Convertible Notes
converted an aggregate of $270,000 of indebtedness (plus accrued interest
totaling $66,225.21) into 374,164 shares of the Company’s Class A Common Stock.
The Company’s Class A Common Stock was issued upon conversion of certain of the
Convertible Notes as of the following dates:
Effective
Date of
Issuance
|
Aggregate
Principal
and
Interest of Notes
Converted
|
Number
of Shares of
Class
A Common
Stock
Issued
|
1/3/05
|
$24,211.51
|
12,106
|
1/13/05
|
$60,528.77
|
30,264
|
1/31/05
|
$61,293.15
|
40,862
|
4/26/05
|
$126,778.08
|
193,628
|
4/27/05
|
$12,682.74
|
19,461
|
4/27/05
|
$50,730.96
|
77,843
|
There
was no placement agent or underwriter for the conversions. The Company processed
the conversions internally. The shares were not sold for cash. The shares of
Class A Common Stock were issued in exchange for (and in conversion of) the
outstanding Convertible Notes. The shares of Class A Common Stock issued are
not
convertible or exchangeable. In
connection with the issuance of the shares of Class A Common Stock in connection
with the conversion of the Convertible Notes, the Company relied upon the
exemption from the registration requirements of the Securities Act of 1933,
as
amended, by virtue of Section 3(a)(9) thereof.
Class
B Common Stock Conversions. As
part of the acquisition and restructuring transactions completed on December
15,
2004, the Company created Class B Common Stock, which was issued in connection
with the Investment Transaction. Holders of shares of Class B Common Stock
have
the option to convert their shares of Class B Common Stock into Class A Common
Stock at any time based on a conversion factor in effect at the time of the
transaction. The conversion factor is designed to yield one share of
Class A Common Stock per share of Class B Common Stock converted,
plus
such additional shares of Class A Common Stock, or portions thereof,
necessary to approximate the unpaid portion of the return of the original
purchase price for the Class B Common Stock less the Base Bridge Interest
Amount, plus an amount equal to nine percent (9%) per annum on the amount of
the
original purchase price less the Base Bridge Interest Amount, without
compounding, from the date the Class B Common Stock was first issued
to the
date of conversion. As of August 11, 2005, each share of Class B Common Stock
is
convertible into 3.485247414034 shares of Class A Common Stock. As of that
date,
10,642,306 shares of Class B Common Stock were issued and outstanding. (See
Part
I, Item 2. Management’s Discussion and Analysis of Plan of Operation - Certain
Recent Developments - Acquisition and Restructuring Transactions.)
From
January 1, 2005 through August 11, 2005, holders of shares of Class B Common
Stock converted an aggregate of 839,955 shares of Class B Common Stock into
2,023,144 shares of Class A Common Stock. The Company’s Class A Common Stock was
issued upon conversion of certain of the Company’s Class B Common Stock as of
the following dates:
Effective
Date of
Issuance
|
Number
of Shares of
Class
B Common
Stock
Converted
|
Number
of Shares of
Class
A Common
Stock
Issued
|
4/22/05
|
64,612
|
134,292
|
5/23/05
|
86,149
|
201,829
|
6/21/05
|
646,119
|
1,560,802
|
8/5/05
|
43,075
|
126,221
|
There
was no placement agent or underwriter for the conversions. The Company processed
the conversions internally. The shares of Class A Common Stock were not sold
for
cash. The Company did not receive any consideration in connection with the
conversions, other than the return of the shares of Class B Common Stock. The
shares of Class A Common Stock issued are not convertible or exchangeable.
In
connection with the issuance of the Class A Common Stock upon conversion of
shares of the Class B Common Stock, the Company relied upon the exemption from
the registration requirements of the Securities Act of 1933, as amended, by
virtue of Section 3(a)(9) thereof. In
connection with the original issuance of the Class B Common Stock in the
Investment Transaction, the Company relied on the exemption from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4(2) thereof and Rule 506 of Regulation D promulgated
thereunder. For purposes of the exemption, the Company relied upon:
(i) certain representation and warranties of certain individuals and
entities receiving equity securities in the Investment Transaction at the
Closing; and (ii) its own independent investigation to confirm that
each of
such individuals and entities were “accredited investors” (as such term is
defined in Rule 501 of Regulation D). The Company did not pay
any
underwriting discounts or commissions in connection with the issuance of the
Class B Common Stock in the Investment Transaction
Class
C Common Stock Conversions. As
part of the acquisition and restructuring transactions completed on December
15,
2004, the Company created Class C Common Stock, which was issued in connection
with the DCPS/MBS Transaction. Holders of shares of Class C Common Stock have
the option to convert their shares of Class C Common Stock into shares of Class
A Common Stock at any time based on a conversion factor in effect at the time
of
the transaction. The conversion factor is designed initially to yield one share
of Class A Common Stock per share of Class C Common Stock converted,
with the number of shares of Class A Common Stock reducing to the extent
that distributions are paid on the Class C Common Stock. The conversion
factor is calculated as (x) the amount by which $3.30 exceeds the aggregate
distributions made with respect to a share of Class C Common Stock divided
by (y) $3.30. The initial conversion factor was one (one share of Class C
Common Stock converts into one share of Class A Common Stock) and is
subject to adjustment as discussed below.
If
the fair market value used in determining the conversion factor for the
Class B Common Stock in connection with any conversion of Class B
Common Stock is less than $3.30 (subject to adjustment to account for stock
splits, stock dividends, combinations or other similar events affecting
Class A Common Stock), holders of shares of Class C Common Stock
have
the option to convert their shares of Class C Common Stock (within
10 days of receipt of notice of the conversion of the Class B
Common
Stock) into a number of shares of Class A Common Stock equal to
(x) the amount by which $3.30 exceeds the aggregate distributions made
with
respect to a share of Class C Common Stock divided by (y) the
fair
market value used in determining the conversion factor for the Class B
Common Stock (the “Anti-Dilution Option”). The aggregate number of shares of
Class C Common Stock so converted by any holder shall not exceed a number
equal to (a) the number of shares of Class C Common Stock held
by such
holder immediately prior to such conversion plus the number of shares of
Class C Common Stock previously converted in Class A Common Stock
by
such holder multiplied by (b) a fraction, the numerator of which is
the
number of shares of Class B Common Stock converted at the lower price
and
the denominator of which is the aggregate number of shares of Class B
Common Stock issued at the closing of the Investment Transaction.
From
January 1, 2005 through August 11, 2005, holders of shares of Class C Common
Stock converted an aggregate of 108,132 shares of Class C Common Stock into
409,933 shares of Class A Common Stock. The Class C conversion price for each
Class C conversion was determined by the Anti-Dilution Option calculated after
each conversion of Class B Common Stock. The Company’s Class A Common Stock was
issued upon conversion of certain of the Company’s Class C Common Stock as of
the following dates:
Effective
Date of
Issuance
|
Number
of Shares of
Class
C Common
Stock
Converted
|
Number
of Shares of
Class
A Common
Stock
Issued
|
5/11/05
|
2,217
|
6,650
|
5/11/05
|
2,217
|
6,650
|
5/12/05
|
222
|
665
|
5/12/05
|
222
|
665
|
5/12/05
|
3,582
|
10,747
|
5/12/05
|
44
|
133
|
5/12/05
|
364
|
1,091
|
6/16/05
|
2,939
|
10,897
|
6/16/05
|
2,939
|
10,897
|
6/16/05
|
59
|
218
|
6/17/05
|
294
|
1,090
|
6/17/05
|
294
|
1,090
|
6/17/05
|
4,749
|
17,610
|
6/17/05
|
482
|
1,787
|
7/5/05
|
21,877
|
84,935
|
7/5/05
|
21,877
|
84,935
|
7/7/05
|
2,188
|
8,494
|
7/7/05
|
2,188
|
8,494
|
7/7/05
|
35,354
|
137,256
|
7/7/05
|
3,588
|
13,929
|
7/10/05
|
438
|
1,699
|
There
was no placement agent or underwriter for the conversions. The Company processed
the conversions internally. The shares were not sold for cash. The Company
did
not receive any consideration in connection with the conversions, other than
the
return of the shares of Class C Common Stock. The shares of Class A Common
Stock
issued are not convertible or exchangeable. In connection with the issuance
of
the Class A Common Stock upon conversion of shares of the Class C Common Stock,
the Company relied upon the exemption from the registration requirements of
the
Securities Act of 1933, as amended, by virtue of Section 3(a)(9) thereof.
In
connection with the original issuance of the Class C Common Stock in the
DCPS/MBS Transaction, the Company relied on the exemption from the registration
requirements of the Securities Act of 1933, as amended, by virtue of
Section 4(2) thereof and Rule 506 of Regulation D promulgated
thereunder. For purposes of the exemption, the Company relied upon:
(i) certain representation and warranties of certain individuals and
entities receiving equity securities in the DCPS/MBS Transaction at the Closing;
(ii) its own independent investigation to confirm that certain of such
individuals and entities were “accredited investors” (as such term is defined in
Rule 501 of Regulation D); and (iii) the inclusion of
no more
than 35 purchasers who were not “accredited investors” in accordance with
Rule 506 of Regulation D.
As
part of the Loan and Security Agreement, the Company is required to comply
with
certain financial covenants, measured on a quarterly basis, beginning as of
and
for the six months ended June 30, 2005. 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 six months ended June 30, 2005, the
Company was out of compliance with both of these financial covenants and has
notified the lender as such. Under the terms of the Loan and Security Agreement,
failure to meet the required financial covenants constitutes an event of
default. Under an event of default, the lender may (i) accelerate and declare
the obligations under the credit facility to be immediately due and payable;
(ii) withhold or cease to make advances under the credit facility; (iii)
terminate the credit facility; (iv) take possession of the collateral pledged
as
part of the Loan and Security Agreement; (v) reduce or modify the revolving
loan
commitment; and/or (vi) take necessary action under the Guaranties. The loan
is
secured by the Company’s healthcare accounts receivable. As of August 11, 2005,
the outstanding principal under the revolving credit facility was $2,605,203.
The full amount of the loan as of June 30, 2005 is recorded as a current
liability. The Company is currently in negotiations with the lender and is
seeking to obtain a waiver of the financial covenants as of and for the six
months ended June 30, 2005. In the event the lender declares the obligations
under the credit facility to be immediately due and payable or exercises its
other rights described above, the Company would not be able to meet its
obligations to the lender or its other creditors. As a result, such action
would
have a material adverse effect on the Company and on its ability to continue
as
a going concern.
The
Company held its Annual Meeting of Stockholders (the “Annual Meeting”) on May
31, 2005. At the Annual Meeting, the stockholders voted on and approved each
of
the following proposals:
Proposal
One: |
To
elect seven directors to serve until the 2006 annual meeting of
stockholders or until their successors are elected and qualified.
The
following list indicates the number of votes received by each of
the
nominees for election to Orion’s board of directors in Proposal
One:
|
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Withheld
|
|
|
|
|
|
|
|
|
|
|
Terrence
L. Bauer |
15,544,901
|
|
0
|
|
0
|
|
1,673
|
|
Paul
H. Cascio |
15,544,901
|
|
0
|
|
0
|
|
1,673
|
|
David
Crane
|
15,529,808
|
|
0
|
|
0
|
|
16,766
|
|
Michael
J. Finn
|
15,544,851
|
|
0
|
|
0
|
|
1,723
|
|
Keith
G. LeBlanc
|
15,529,758
|
|
0
|
|
0
|
|
16,816
|
|
Gerald
M. McIntosh
|
15,544,901
|
|
0
|
|
0
|
|
1,673
|
|
Joseph
M. Valley, Jr.
|
15,544,951
|
|
0
|
|
0
|
|
1,623
|
|
|
|
|
|
|
|
|
|
Proposal
Two:
|
To
ratify a March 2003 private placement of units consisting of common
shares
of the Company and warrants to purchase common shares. Proposal Two
was
approved by holders of 71.2% of the outstanding shares of the Company’s
common stock (including Class A, Class B and Class C Common Stock)
entitled to vote at the Annual Meeting. Specifically, a total of
15,478,669 shares were voted in favor of this proposal, 2,229 shares
were
voted against the proposal and 65,676 shares abstained from voting
on the
proposal. There were no broker non-votes on this
proposal.
|
|
|
|
|
|
|
|
|
|
Proposal
Three:
|
To ratify a February 2004
issuance
of common shares of the Company to consultants as compensation for
services rendered. Proposal Three was approved by holders of 71.6%
of the
outstanding shares of the Company’s common stock (including Class A, Class
B and Class C Common Stock) entitled to vote at the Annual Meeting.
Specifically, a total of 15,541,862 shares were voted in favor of this
proposal, 3,942 shares were voted against the proposal and 770 shares
abstained from voting on the proposal. There were no broker non-votes
on
this proposal. |
|
|
|
|
|
|
|
|
|
Proposal
Four:
|
To
ratify the appointment of UHY Mann Frankfort Stein & Lipp CPAs, LLP
(“UMFSL”) as the Company’s independent public accountants. Proposal Four
was approved by holders of 72.6% of the outstanding shares of the
Company’s common stock (including Class A, Class B and Class C Common
Stock) entitled to vote at the Annual Meeting. Specifically, a total
of
15,545,444 shares were voted in favor of this proposal, 1,130 shares
were
voted against the proposal and 0 shares abstained from voting on
the
proposal.
|
From
January 1, 2005 through August 11, 2005, holders of the Convertible Notes
converted an aggregate of $270,000 of indebtedness (plus accrued interest
totaling $66,225.21) into 374,164 shares of the Company’s Class A Common Stock.
(See “Part II, Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds - Convertible Notes.”)
From
January 1, 2005 through August 11, 2005, holders of shares of Class B Common
Stock converted an aggregate of 839,955 shares of Class B Common Stock into
2,023,144 shares of Class A Common Stock. (See “Part II, Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds - Class B Common Stock
Conversions.”)
From
January 1, 2005 through August 11, 2005, holders of shares of Class C Common
Stock converted an aggregate of 108,132 shares of Class C Common Stock into
409,933 shares of Class A Common Stock. (See “Part II, Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds - Class C Common Stock
Conversions.”)
As
part of the Loan and Security Agreement, the Company is required to comply
with
certain financial covenants, measured on a quarterly basis, beginning as of
and
for the six months ended June 30, 2005. 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 six months ended June 30, 2005, the
Company was out of compliance with both of these financial covenants and has
notified the lender as such. (See “Part II, Item 3. Defaults Upon Senior
Securities.”)
Exhibits
Exhibit
No.
|
|
Description
|
Exhibit
2.1
|
|
Asset
Purchase Agreement, dated as of June 6, 2005, by and among InPhySys,
Inc.
(f/k/a IntegriMED, Inc.) and eClinicalWeb, LLC (Incorporated by reference
to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K filed
on June 13, 2005)
|
Exhibit
10.1
|
|
First
Amendment to Loan and Security Agreement, dated as of March 22, 2005,
by
and among Orion HealthCorp, Inc., certain affiliates and subsidiaries
of
Orion HealthCorp, Inc., and Healthcare Business Credit Corporation
(Incorporated by reference to Exhibit 10.1 filed with the Company’s
Quarterly Report on Form 10-QSB filed on May 13, 2005)
|
Exhibit
10.2
|
|
Amended
and Restated Guaranty Agreement, dated as of March 22, 2005, provided
by
Brantley Partners IV, L.P. to Healthcare Business Credit Corporation
(Incorporated by reference to Exhibit 10.2 filed with the Company’s
Quarterly Report on Form 10-QSB filed on May 13, 2005)
|
Exhibit
10.3
|
|
Amended
and Restated Guaranty Agreement, dated as of March 22, 2005, provided
by
Brantley Capital Corporation to Healthcare Business Credit Corporation
(Incorporated by reference to Exhibit 10.3 filed with the Company’s
Quarterly Report on Form 10-QSB filed on May 13, 2005)
|
Exhibit
10.4
|
|
Convertible
Subordinated Promissory Note, dated as of June 1, 2005, by and among
Orion
HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
reference
to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed
on June 7, 2005)
|
Exhibit
10.5
|
|
Convertible
Subordinated Promissory Note, dated as of June 1, 2005, by and among
Orion
HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
reference
to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed
on June 7, 2005)
|
Exhibit
10.6
|
|
Amendment
No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of
June 1,
2005
|
Exhibit
10.7
|
|
Form
of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock
Option),
dated as of June 17, 2005
|
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
|
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. |
|
|
|
Date: August
12, 2005 |
By: |
/s/ Terrence
L. Bauer |
|
|
|
Terrence
L. Bauer
Chief
Executive Officer and Director
(Duly
Authorized
Representative)
|
POWER
OF ATTORNEY
KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears on the
signature page to this Report constitutes and appoints Terrence L. Bauer and
Stephen H. Murdock, and each of them, his true and lawful attorneys-in-fact
and
agents, with full power of substitution and resubstitution, for him and in
his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Report, and to file the same, with all exhibits hereto, and other
documents in connection herewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents and each of them, full power
and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes
as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of the, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on
August 12, 2005.
|
|
|
|
/s/ Terrence
L. Bauer |
|
|
/s/ Michael
J. Finn |
|
|
|
|
Terrence
L. Bauer
Chief Executive Officer and
Director (Principal Executive Officer)
|
|
|
Michael
J. Finn Director |
|
|
|
|
/s/ Paul
H. Cascio |
|
|
/s/ Gerald
M. McIntosh |
|
|
|
|
Paul
H. Cascio
Director and Non-Executive Chairman of the
Board
|
|
|
Gerald
M. McIntosh Director |
|
|
|
|
/s/ Keith
G. LeBlanc |
|
|
/s/ Joseph
M. Valley, Jr. |
|
|
|
|
Keith
G. LeBlanc
President and Director
|
|
|
Joseph
M. Valley, Jr.
Director
|
|
|
|
|
/s/ David
Crane |
|
|
/s/ Stephen
H. Murdock |
|
|
|
|
David
Crane
Director
|
|
|
Stephen
H. Murdock
Chief Financial Officer (Principal
Accounting
and Financial
Officer)
|
|
|
Page
|
|
|
|
Number
|
|
Consolidated
Condensed Balance Sheets as of June 30, 2005 (unaudited) and December
31,
2004
|
|
F-2
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the Three Months Ended June
30,
2005 and 2004 (unaudited)
|
|
F-3
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the Six Months Ended June
30, 2005
and 2004 (unaudited)
|
|
F-4
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the Three Months Ended June
30,
2005 and 2004 (unaudited)
|
|
F-5
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the Six Months Ended June
30, 2005
and 2004 (unaudited)
|
|
F-6
|
|
|
|
|
|
Notes
to Unaudited Consolidated Condensed Financial Statements
|
|
F-7
|
|
Orion
HealthCorp, Inc.
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
311,083
|
|
$
|
701,846
|
|
Accounts
receivable, net
|
|
|
3,718,445
|
|
|
4,469,240
|
|
Inventory
|
|
|
477,472
|
|
|
519,509
|
|
Prepaid
expenses and other current assets
|
|
|
531,978
|
|
|
519,843
|
|
Assets
held for sale
|
|
|
2,282,564
|
|
|
|
|
Total
current assets
|
|
|
7,321,542
|
|
|
6,210,438
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,236,577
|
|
|
3,370,928
|
|
|
|
|
|
|
|
|
|
Other
long-term assets
|
|
|
|
|
|
|
|
Intangible
assets, including goodwill
|
|
|
25,284,008
|
|
|
32,250,640
|
|
Other
assets, net
|
|
|
470,353
|
|
|
534,314
|
|
Total
other long-term assets
|
|
|
25,754,362
|
|
|
32,784,954
|
|
Total
assets
|
|
$
|
34,312,481
|
|
$
|
42,366,320
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
6,844,434
|
|
$
|
6,784,950
|
|
Deferred
revenue
|
|
|
-
|
|
|
304,144
|
|
Income
taxes payable
|
|
|
116,943
|
|
|
116,943
|
|
Current
portion of capital lease obligation
|
|
|
111,071
|
|
|
258,478
|
|
Current
portion of long-term debt
|
|
|
4,148,175
|
|
|
2,762,334
|
|
Liabilities
held for sale
|
|
|
1,617,168
|
|
|
|
|
Total
current liabilities
|
|
|
12,837,791
|
|
|
10,226,849
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
Capital
lease obligation, net of current portion
|
|
|
99,737
|
|
|
540,274
|
|
Long-term
debt, net of current portion
|
|
|
3,645,826
|
|
|
4,238,839
|
|
Deferred
tax liability
|
|
|
620,977
|
|
|
620,977
|
|
Minority
interest in partnership
|
|
|
238,801
|
|
|
169,500
|
|
Total
long-term liabilities
|
|
|
4,605,341
|
|
|
5,569,590
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.001; 20,000,000 shares authorized; no shares
issued
and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, Class A, par value $0.001; 70,000,000 shares authorized,
10,934,652
and 8,602,149 shares issued and outstanding at June 30, 2005
and
December
31, 2004, respectively
|
|
|
10,935
|
|
|
8,602
|
|
Common
stock, Class B, par value $0.001; 25,000,000 shares authorized,
10,685,381
and 11,482,261 shares issued and outstanding at June 30, 2005
and
December
31, 2004, respectively
|
|
|
10,685
|
|
|
11,482
|
|
Common
stock, Class C, par value $0.001; 2,000,000 shares authorized,
1,555,137
and 1,575,760 shares issued and outstanding at June 30, 2005
and
December
31, 2004, respectively
|
|
|
1,556
|
|
|
1,576
|
|
Additional
paid-in capital
|
|
|
56,929,156
|
|
|
56,602,786
|
|
Accumulated
deficit
|
|
|
(40,044,665
|
)
|
|
(30,016,247
|
)
|
Treasury
stock - at cost; 9,140 shares at June 30, 2005 and December 31,
2004,
respectively
|
|
|
(38,318
|
)
|
|
(38,318
|
)
|
Total
stockholders' equity
|
|
|
16,869,349
|
|
|
26,569,881
|
|
Total
liabilities and stockholders' equity
|
|
$
|
34,312,481
|
|
$
|
42,366,320
|
|
The
accompanying notes are an integral part of these financial
statements.
Orion
HealthCorp, Inc.
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
8,421,649
|
|
$
|
4,124,692
|
|
Direct
cost of revenues
|
|
|
3,786,846
|
|
|
2,573,503
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
4,634,803
|
|
|
1,551,189
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
2,777,112
|
|
|
752,510
|
|
Facility
rent and related costs
|
|
|
460,248
|
|
|
296,791
|
|
Depreciation
and amortization
|
|
|
960,360
|
|
|
136,609
|
|
Professional
and consulting fees
|
|
|
453,797
|
|
|
113,935
|
|
Insurance
|
|
|
247,815
|
|
|
132,939
|
|
Provision
for doubtful accounts
|
|
|
335,458
|
|
|
255,845
|
|
Other
expenses
|
|
|
722,759
|
|
|
244,454
|
|
Charge
for impairment of intangible assets
|
|
|
6,362,849
|
|
|
-
|
|
Total
operating expenses
|
|
|
12,320,397
|
|
|
1,933,083
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before other income (expenses)
|
|
|
(7,685,595
|
)
|
|
(381,894
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(113,503
|
)
|
|
(228,811
|
)
|
Equity
in earnings of limited partnerships
|
|
|
17,376
|
|
|
-
|
|
Other
expense, net
|
|
|
2,165
|
|
|
(7,079
|
)
|
Total
other income (expenses), net
|
|
|
(93,961
|
)
|
|
(235,890
|
)
|
Minority
interest earnings in partnership
|
|
|
(22,355
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(7,801,910
|
)
|
|
(617,784
|
)
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Income
from operations of discontinued components, including net loss
on disposal
of $285,434 for the three months ended June 30, 2005
|
|
|
(545,878
|
)
|
|
(314,622
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(8,347,788
|
)
|
|
(932,406
|
)
|
Preferred
stock dividends
|
|
|
-
|
|
|
(165,300
|
)
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(8,347,788
|
)
|
$
|
(1,097,706
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
9,244,850
|
|
|
8,602,149
|
|
Diluted
|
|
|
9,244,850
|
|
|
8,602,149
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations
|
|
$
|
(0.844
|
)
|
$
|
(0.072
|
)
|
Net
income per share from discontinued operations
|
|
$
|
(0.059
|
)
|
$
|
(0.037
|
)
|
Net
loss per share
|
|
$
|
(0.903
|
)
|
$
|
(0.108
|
)
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations
|
|
$
|
(0.844
|
)
|
$
|
(0.072
|
)
|
Net
income per share from discontinued operations
|
|
$
|
(0.059
|
)
|
$
|
(0.037
|
)
|
Net
loss per share
|
|
$
|
(0.903
|
)
|
$
|
(0.108
|
)
|
The
accompanying notes are an integral part of these financial
statements.
Orion
HealthCorp, Inc.
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
16,725,495
|
|
$
|
8,293,691
|
|
Direct
cost of revenues
|
|
|
7,568,571
|
|
|
5,106,968
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
9,156,924
|
|
|
3,186,723
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
5,454,081
|
|
|
1,529,818
|
|
Facility
rent and related costs
|
|
|
944,651
|
|
|
586,574
|
|
Depreciation
and amortization
|
|
|
1,951,026
|
|
|
269,736
|
|
Professional
and consulting fees
|
|
|
801,437
|
|
|
290,554
|
|
Insurance
|
|
|
479,291
|
|
|
271,969
|
|
Provision
for doubtful accounts
|
|
|
678,545
|
|
|
510,766
|
|
Other
expenses
|
|
|
1,497,676
|
|
|
523,167
|
|
Charge
for impairment of intangible assets
|
|
|
6,362,849
|
|
|
-
|
|
Total
operating expenses
|
|
|
18,169,556
|
|
|
3,982,584
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before other income (expenses)
|
|
|
(9,012,633
|
)
|
|
(795,861
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(191,921
|
)
|
|
(468,861
|
)
|
Equity
in earnings of limited partnerships
|
|
|
17,376
|
|
|
-
|
|
Other
expense, net
|
|
|
4,246
|
|
|
(12,523
|
)
|
Total
other income (expenses), net
|
|
|
(170,299
|
)
|
|
(481,384
|
)
|
Minority
interest earnings in partnership
|
|
|
(61,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(9,244,733
|
)
|
|
(1,277,245
|
)
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Income
from operations of discontinued components, including net gain
on disposal
of $58,141 for the six months ended June 30, 2005
|
|
|
(783,686
|
)
|
|
(429,602
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(10,028,418
|
)
|
|
(1,706,847
|
)
|
Preferred
stock dividends
|
|
|
-
|
|
|
(330,600
|
)
|
Net
loss attributable to common stockholders
|
|
$
|
(10,028,418
|
)
|
$
|
(2,037,447
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
9,149,828
|
|
|
8,602,149
|
|
Diluted
|
|
|
9,149,828
|
|
|
8,602,149
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations
|
|
$
|
(1.010
|
)
|
$
|
(0.148
|
)
|
Net
income per share from discontinued operations
|
|
$
|
(0.086
|
)
|
$
|
(0.050
|
)
|
Net
loss per share
|
|
$
|
(1.096
|
)
|
$
|
(0.198
|
)
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net
loss per share from continuing operations
|
|
$
|
(1.010
|
)
|
$
|
(0.148
|
)
|
Net
income per share from discontinued operations
|
|
$
|
(0.086
|
)
|
$
|
(0.050
|
)
|
Net
loss per share
|
|
$
|
(1.096
|
)
|
$
|
(0.198
|
)
|
The
accompanying notes are an integral part of these financial
statements.
Orion
HealthCorp, Inc.
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,347,788
|
)
|
$
|
(932,406
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Charge
for impairment of intangible assets
|
|
|
6,362,849
|
|
|
-
|
|
Minority
interest in earnings of partnerships
|
|
|
22,355
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
335,458
|
|
|
264,634
|
|
Depreciation
and amortization
|
|
|
960,360
|
|
|
143,385
|
|
Assets
held for sale
|
|
|
4,673
|
|
|
-
|
|
Conversion
of notes payable to common stock
|
|
|
31,855
|
|
|
-
|
|
Loss
on disposition of discontinued components
|
|
|
285,435
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(307,923
|
)
|
|
(275,724
|
)
|
Inventory
|
|
|
(23,766
|
)
|
|
(66,921
|
)
|
Prepaid
expenses and other assets
|
|
|
174,287
|
|
|
(39,602
|
)
|
Other
assets
|
|
|
(14,706
|
)
|
|
8,040
|
|
Accounts
payable and accrued expenses
|
|
|
(479,198
|
)
|
|
347,468
|
|
Deferred
revenues
|
|
|
45,014
|
|
|
21,412
|
|
Net
cash used in operating activities
|
|
|
(951,095
|
)
|
|
(529,714
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
12,051
|
|
|
(117,400
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
12,051
|
|
|
(117,400
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net
borrowings (repayments) of capital lease obligations
|
|
|
(76,073
|
)
|
|
62,266
|
|
Net
borrowings (repayments) on line of credit
|
|
|
595,786
|
|
|
(35,613
|
)
|
Net
borrowings of notes payable
|
|
|
472,296
|
|
|
423,796
|
|
Net
borrowings (repayments) of other obligations
|
|
|
(354,230
|
)
|
|
149,295
|
|
Net
cash provided by financing activities
|
|
|
637,780
|
|
|
599,744
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(301,265
|
)
|
|
(47,370
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
612,348
|
|
|
183,449
|
|
Cash
and cash equivalents, end of period
|
|
$
|
311,083
|
|
$
|
136,079
|
|
The
accompanying notes are an integral part of these financial
statements.
Orion
HealthCorp, Inc.
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,028,418
|
)
|
$
|
(1,706,847
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Charge
for impairment of intangible assets
|
|
|
6,362,849
|
|
|
-
|
|
Minority
interest in earnings of partnerships
|
|
|
61,801
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
678,545
|
|
|
526,543
|
|
Depreciation
and amortization
|
|
|
1,951,026
|
|
|
281,294
|
|
Assets
held for sale
|
|
|
4,673
|
|
|
-
|
|
Conversion
of notes payable to common stock
|
|
|
57,886
|
|
|
-
|
|
Gain
on disposition of discontinued components
|
|
|
(58,140
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(897,899
|
)
|
|
(226,841
|
)
|
Inventory
|
|
|
(25,238
|
)
|
|
(58,141
|
)
|
Prepaid
expenses and other assets
|
|
|
(82,691
|
)
|
|
(51,154
|
)
|
Other
assets
|
|
|
(8,594
|
)
|
|
8,040
|
|
Accounts
payable and accrued expenses
|
|
|
149,951
|
|
|
386,952
|
|
Deferred
revenues
|
|
|
29,018
|
|
|
69,257
|
|
Net
cash used in operating activities
|
|
|
(1,805,230
|
)
|
|
(770,896
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
32,195
|
|
|
(151,630
|
)
|
Net
cash used in investing activities
|
|
|
32,195
|
|
|
(151,630
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net
borrowings (repayments) of capital lease obligations
|
|
|
(125,650
|
)
|
|
47,570
|
|
Net
borrowings (repayments) on line of credit
|
|
|
364,514
|
|
|
(70,885
|
)
|
Net
borrowings of notes payable
|
|
|
1,402,460
|
|
|
1,050,002
|
|
Net
repayments of other obligations
|
|
|
(259,052
|
)
|
|
(17,614
|
)
|
Net
cash provided by financing activities
|
|
|
1,382,273
|
|
|
1,009,073
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(390,763
|
)
|
|
86,547
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
701,846
|
|
|
49,532
|
|
Cash
and cash equivalents, end of period
|
|
$
|
311,083
|
|
$
|
136,079
|
|
The
accompanying notes are an integral part of these financial
statements.
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
1. General
Orion
HealthCorp, Inc. (formerly SurgiCare, Inc. “SurgiCare”) (“Orion” or the
“Company”) and its subsidiaries maintain their accounts on the accrual method
of
accounting in accordance with accounting principles generally accepted
in the
United States of America. The consolidated financial statements include
the
accounts of the Company and all of its majority-owned subsidiaries. As
described
in Note 3, Acquisition and Restructuring Transactions, Orion’s results include
the results of Integrated Physician Solutions, Inc. (“IPS”) for the three months
and six months ended June 30, 2004 and the results of the IPS, the Company’s
surgery and diagnostic center business and Medical Billing Services,
Inc.
(“MBS”) (which includes Dennis Cain Physician Solutions, Ltd. (“DCPS”))) for the
three months and six months ended June 30, 2005. The descriptions of
the
business and results of operations of MBS set forth in these notes include
the
business and results of operations of DCPS. All material intercompany
balances
and transactions have been eliminated in consolidation.
These
financial statements have been prepared in accordance with generally
accepted
accounting principles (“GAAP”) for interim financial reporting and in accordance
with Securities and Exchange Commission (“SEC”) Rule 310-(b) of Regulation S-B.
In the opinion of management, the accompanying unaudited consolidated
condensed
financial statements include all adjustments consisting of only normal
recurring
adjustments necessary for a fair presentation of the Company’s financial
position and results of operations and cash flows of the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
The
accompanying unaudited consolidated condensed financial statements should
be
read in conjunction with the financial statements and related notes therein
included in the Company’s 2004 Annual Report on Form 10-KSB.
Description
of Business
Surgery
and Diagnostic Centers
SurgiCare,
Inc. was incorporated in Delaware on February 24, 1984 as Technical
Coatings Incorporated. On September 10, 1984, its name was changed
to
Technical Coatings, Inc. (“TCI”). Immediately prior to July 1999, TCI was
an inactive company. On July 11, 1999, TCI changed its name to
SurgiCare,
Inc., and at that time changed its business strategy to developing, acquiring
and operating freestanding ambulatory surgery centers (“ASCs”). On July 21,
1999, SurgiCare acquired all of the issued and outstanding shares of
common
stock of Bellaire SurgiCare, Inc. a Texas corporation (“Bellaire SurgiCare”), in
exchange for the issuance of 9.86 million shares of SurgiCare’s common
stock (now 986,000 shares of Class A Common Stock after giving
effect to
the Reverse Stock Split and Reclassification, as discussed in Note 3.
Acquisition and Restructuring Transactions) and 1.35 million shares
of
SurgiCare’s Series A Redeemable Preferred Stock, par value $.001 per share,
to the holders of Bellaire SurgiCare’s common stock. For accounting purposes,
this reverse acquisition was effective July 1, 1999. On December
15, 2004,
the Company changed its name to Orion HealthCorp, Inc.
As
of
June 30, 2005, Orion owned a majority interest in two surgery centers
and a
minority interest as general partner in one additional center. Two of
the
centers are located in Texas and one is located in Ohio. In limited
circumstances, Orion, or its subsidiaries, may also furnish anesthesia
services
in support of the activities of the surgery centers. The Company’s ASCs perform
various types of procedures including: orthopedic surgery, colonoscopy,
ophthalmic laser surgery, pain injections and various pediatric surgeries.
The
most common procedures performed in our ASCs include knee arthroscopy,
lumbar
nerve block and sacral injection, colonoscopy, hammertoe correction,
sinus
endoscopic biopsy, cataract removal, breast biopsy, Mitchell procedures
and
cystourethroscopy. Orion also owns a 41% interest in an open magnetic
resonance
imaging (“MRI”) center in Ohio, which opened in July 2004. The open MRI
center performs diagnostic procedures using MRI technology. On June 13,
2005,
the Company announced that it has accepted an offer to purchase its interests
in
the ambulatory surgery center and the open MRI facility in Dover, Ohio.
Under
the terms of the offer letter, the Company’s interests in these facilities would
be sold to a local hospital for cash and assumption of debt. In addition,
the
Company would continue to operate the facilities under a long-term management
agreement. This transaction has not yet closed.
Integrated
Physician Solutions
IPS,
a
Delaware corporation, was founded in 1996 as a business development company
to
provide physician practice management services to general and subspecialty
pediatric practices. IPS commenced its business activities upon consummation
of
several medical group business combinations effective January 1,
1999. The
Pediatric Physician Alliance (“PPA”) division of IPS manages pediatric medical
clinics. As of June 30, 2005, PPA managed ten practice sites, representing
six
medical groups in Illinois, Ohio and New Jersey.
On
June
7, 2005, InPhySys, Inc. (f/k/a IntegriMED, Inc.) (“IntegriMED”), a wholly-owned
subsidiary of IPS, executed an Asset Purchase Agreement (the “Agreement”) with
eClinicalWeb, LLC (“eClinicalWeb”) to sell substantially all of the assets of
IntegriMED. The Agreement was deemed to be effective as of midnight on
June 6,
2005. The property sold by IntegriMED to eClinicalWeb (hereinafter collectively
referred to as the “Acquired Assets”) includes the machinery, equipment,
supplies, materials, computers, software, software licenses, and other
personal
property owned by IntegriMED and used exclusively in the operation of
IntegriMED's business, IntegriMED's goodwill and all of the business
conducted
under the name "IntegriMED" and "InPhySys", sales and customer lists,
account
lists, records, manuals, and telephone numbers used exclusively in the
operation
of IntegriMED's business, and all of IntegriMED's rights and interests
in all
contracts, open customer purchase orders, quotations or similar agreements
to
the extent entered into by IntegriMED or assigned to IntegriMED. Additionally,
eClinicalWeb agreed to assume and to thereafter perform and pay when
due all
liabilities related to the Acquired Assets but only to the extent such
liabilities arise from and after the Closing Date (as defined below).
eClinicalWeb also agreed to sublease certain space from IPS that was
occupied by
employees of IntegriMED as of the Closing Date. As consideration for
the
purchase of the Acquired Assets, eClinicalWeb issued to IntegriMED the
following: (i) a two percent (2%) ownership interest in eClinicalWeb;
and (ii)
$69,033.90, for the payoff of certain leases and purchase of certain
software,
via wire transfer at the closing of the transfer and delivery of all
documents
and instruments necessary to consummate the transactions contemplated
by the
Agreement (the "Closing Date"), which occurred concurrently with the
execution
of the Agreement. In addition to the consideration listed above, IntegriMED
retained the following assets related to IntegriMED's business: (i) all
cash and
cash equivalents relating to IntegriMED's business as of the Closing
Date; (ii)
all accounts receivable relating to IntegriMED's business as of the Closing
Date; and (iii) other assets of IntegriMED not used exclusively in IntegriMED's
business.
MBS
is
based in Houston, Texas and was incorporated in Texas on October 16,
1985.
DCPS is based in Houston, Texas and was organized as a Texas limited
liability
company on September 16, 1998. DCPS reorganized as a Texas limited
partnership on August 31, 2003. Orion acquired MBS and DCPS in
the DCPS/MBS
Transaction, which is described in Note 3. Acquisition and Restructuring
Transactions. Subsequent to the DCPS/MBS Transaction, DCPS has operated
as a
subsidiary of MBS. MBS and DCPS provide practice management, billing
and
collection, managed care consulting and coding/reimbursement services
to
hospital-based physicians and clinics. Any descriptions of MBS include
the
business and operations of DCPS.
Note
2. Going Concern
The
accompanying consolidated condensed financial statements have been prepared
in
conformity with accounting principles generally accepted in the United
States of
America, which contemplate the continuation of the Company as a going
concern.
However, the Company incurred substantial operating losses during 2004
and in
the first and second quarters of 2005. In addition, the Company has used
substantial amounts of working capital in its operations. These conditions
raise
substantial doubt about the Company’s ability to continue as a going concern.
The
Company has financed its growth primarily through the issuance of equity,
secured and/or convertible debt, most recently by completing a series
of
acquisition and restructuring transactions (the “Closing”), which occurred in
December 2004 and are described in Note 3. Acquisition and Restructuring
Transactions. In connection with the closing of these transactions, the
Company
entered into a new secured two-year revolving credit facility pursuant
to a Loan
and Security Agreement (the “Loan and Security Agreement”), dated December 15,
2004, by and among Orion, certain of its affiliates and subsidiaries,
and
Healthcare Business Credit Corporation (“HBCC”). In connection with entering
into this new facility, Orion also restructured its previously-existing
debt
facilities, which resulted in a decrease in aggregate debt owed to DVI
Business
Credit Corporation and DVI Financial Services, Inc. (collectively, “DVI”) from
approximately $10.1 million to a combined principal amount of
approximately
$6.5 million, of which approximately $2 million was paid
at the
Closing.
In
addition to the Closing, on March 16, 2005, Brantley Partners
IV, L.P.
(“Brantley IV”) loaned Orion an aggregate of $1,025,000 (the “First Loan”). On
June 1, 2005, the Company executed a convertible subordinated promissory
note in
the principal amount of $1,025,000 (the "First Note") payable to Brantley
IV to
evidence the terms of the First Loan. The material terms of the First
Note are
as follows: (i) the First Note is unsecured; (ii) the First Note is subordinate
to the Company's outstanding loan from HBCC and other indebtedness for
monies
borrowed, and ranks pari passu with general unsecured trade liabilities;
(iii)
principal and interest on the First Note is due April 19, 2006 (the "First
Note
Maturity Date"); (iv) the interest accrues from and after March 16, 2005,
at a
per annum rate equal to nine percent (9.0%) and is non-compounding; (v)
if an
event of default occurs and is continuing, Brantley IV, by notice to
the
Company, may declare the principal of the First Note to be due and immediately
payable; and (vi) on or after the First Note Maturity Date, Brantley
IV, at its
option, may convert all or a portion of the outstanding principal and
interest
due of the First Note into shares of Class A Common Stock of the Company
at a
price per share equal to $1.042825 (the "First Note Conversion Price").
The
number of shares of Class A Common Stock issuable upon conversion of
the First
Note shall be equal to the number obtained by dividing (x) the aggregate
amount
of principal and interest to be converted by (y) the First Note Conversion
Price
(as defined above); provided, however, the number of shares issuable
upon
conversion of the First Note shall not exceed the lesser of: (i) 1,159,830
shares of Class A Common Stock, or (ii) 16.3% of the then outstanding
Class A
Common Stock. On April 19, 2005, Brantley IV loaned the Company
an
additional $225,000 (the “Second Loan”). On June 1, 2005, the Company executed a
convertible subordinated promissory note in the principal amount of $225,000
(the "Second Note") payable to Brantley IV to evidence the terms of the
Second
Loan. The material terms of the Second Note are as follows: (i) the Second
Note
is unsecured; (ii) the Second Note is subordinate to the Company's outstanding
loan from HBCC and other indebtedness for monies borrowed, and ranks
pari passu
with general unsecured trade liabilities; (iii) principal and interest
on the
Second Note is due April 19, 2006 (the "Second Note Maturity Date");
(iv) the
interest accrues from and after April 19, 2005, at a per annum rate equal
to
nine percent (9.0%) and is non-compounding; (v) if an event of default
occurs
and is continuing, Brantley IV, by notice to the Company, may declare
the
principal of the Second Note to be due and immediately payable; and (vi)
on or
after the Second Note Maturity Date, Brantley IV, at its option, may
convert all
or a portion of the outstanding principal and interest due of the Second
Note
into shares of Class A Common Stock of the Company at a price per share
equal to
$1.042825 (the "Second Note Conversion Price"). The number of shares
of Class A
Common Stock issuable upon conversion of the Second Note shall be equal
to the
number obtained by dividing (x) the aggregate amount
of
principal and interest to be converted by (y) the Second Note Conversion
Price
(as defined above); provided, however, the number of shares issuable
upon
conversion of the Second Note shall not exceed the lesser of: (i) 254,597
shares
of Class A Common Stock, or (ii) 3.6% of the then outstanding Class A
Common
Stock. Paul H. Cascio, the Chairman of the board of directors of Orion,
and
Michael J. Finn, a director of Orion, are affiliates of Brantley IV.
Additionally, in connection with the First Loan and the Second Loan,
the Company
entered into a First Amendment to the Loan and Security Agreement (the
“First
Amendment”), dated March 22, 2005, with certain of the Company’s affiliates and
subsidiaries, and HBCC whereby its $4,000,000 secured two-year revolving
credit
facility has been reduced by the amount of the loans from Brantley IV
to
$2,750,000. As a result of the First Amendment, the Brantley IV Guaranty,
which
is discussed in Note 3. Acquisition and Restructuring Transactions, was
amended
by the Amended and Restated Guaranty Agreement (the “Amended Brantley IV
Guaranty”), dated March 22, 2005, which reduces the deficiency guaranty provided
by Brantley IV by the amount of the First Loan to $2,247,727. Also as
a result
of the First Amendment, the Brantley Capital Guaranty, which is discussed
in
Note 3. Acquisition and Restructuring Transactions, was amended by the
Amended
and Restated Guaranty Agreement (the “Amended Brantley Capital Guaranty”), dated
March 22, 2005, which reduces the deficiency guaranty provided by Brantley
Capital by the amount of the Second Loan to $502,273.
As
part
of the Loan and Security Agreement, the Company is required to comply
with
certain financial covenants, measured on a quarterly basis, beginning
as of and
for the six months ended June 30, 2005. 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 six months ended June 30, 2005,
the
Company was out of compliance with both of these financial covenants
and has
notified the lender as such. Under the terms of the Loan and Security
Agreement,
failure to meet the required financial covenants constitutes an event
of
default. Under an event of default, the lender may (i) accelerate and
declare
the obligations under the credit facility to be immediately due and payable;
(ii) withhold or cease to make advances under the credit facility; (iii)
terminate the credit facility; (iv) take possession of the collateral
pledged as
part of the Loan and Security Agreement; (v) reduce or modify the revolving
loan
commitment; and/or (vi) take necessary action under the Guaranties. The
loan is
secured by the Company’s healthcare accounts receivable. As of August 11, 2005,
the outstanding principal under the revolving credit facility was $2,605,203.
The full amount of the loan as of June 30, 2005 is recorded as a current
liability. The Company is currently in negotiations with the lender and
is
seeking to obtain a waiver of the financial covenants as of and for the
six
months ended June 30, 2005. In the event the lender declares the obligations
under the credit facility to be immediately due and payable or exercises
its
other rights described above, the Company would not be able to meet its
obligations to the lender or its other creditors. As a result, such action
would
have a material adverse effect on the Company and on its ability to continue
as
a going concern.
As
of
June 30, 2005, the Company’s existing credit facility with HBCC has limited
availability to provide for working capital shortages. Although the Company
believes that it will generate cash flows from operations in the future,
there
is substantial doubt as to whether it will be able to fund its operations
solely
from its cash flows. On April 28, 2005, the Company announced the initiation
of
a strategic plan designed to accelerate the Company’s growth and enhance its
future earnings potential. The plan focuses on the Company’s strengths, which
include providing billing, collections and complementary business management
services to physician practices in addition to the provision of development
and
management services to ambulatory surgery centers. A fundamental component
of
the Company’s plan is the selective consideration of accretive acquisition
opportunities in these core business sectors. In addition, the Company
will
cease investment in business lines that do not complement the Company’s
strategic plans and will redirect financial resources and Company personnel
to
areas that management believes enhances long-term growth potential. On
June 7,
2005, as described in Note 1. General - Description of Business, IPS
executed an
Asset Purchase Agreement with eClinicalWeb to sell substantially all
of the
assets of IntegriMED. Additionally, on June 13, 2005, the Company announced
that
it has accepted an offer to purchase its interests in the ambulatory
surgery
center and the MRI facility in Dover, Ohio. Under the terms of the offer
letter,
the Company’s interests in these facilities would be sold to a local hospital
for cash and assumption of debt. In addition, the Company would continue
to
operate the facilities under a long-term management agreement. This transaction
has not yet closed. The Company does not anticipate a significant reduction
of
revenue as a result of the implementation of these strategic initiatives.
However, the Company anticipates a substantial reduction of annual expenses
attributable to a combination of these initiatives and the consolidation
of
corporate functions currently duplicated at the Company’s Houston and Atlanta
facilities.
The
Company intends to continue to manage its use of cash. However, the Company’s
business is still faced with many challenges. If cash flows from operations
and
borrowings are not sufficient to fund the Company’s cash requirements, the
Company may be required to further reduce its operations and/or seek
additional
public or private equity financing or financing from other sources or
consider
other strategic alternatives, including possible additional divestitures
of
specific assets or lines of business. There can be no assurances that
additional
financing or strategic alternatives will be available, or that, if available,
the financing or strategic alternatives will be obtainable on terms acceptable
to the Company or that any additional financing would not be substantially
dilutive to the Company’s existing stockholders.
Note
3. Acquisition and Restructuring Transactions
On
November 18, 2003, the Company entered into an agreement and plan
of merger
with IPS, which was amended and restated on February 9, 2004,
and further
amended on July 16, 2004 and on September 9, 2004 (the “IPS Merger
Agreement”), relating to the Company’s acquisition of IPS (the “IPS Merger”). On
February 9, 2004, the Company entered into an agreement and plan
of merger
with DCPS and MBS, which was amended and restated on July 16,
2004, and
further amended on September 9, 2004 and on December 15,
2004 (the
“DCPS/MBS Merger Agreement”), relating to the Company’s acquisition of MBS and
DCPS (the “DCPS/MBS Transaction” and together with the IPS Merger, the
“Acquisitions”). The Company completed the IPS Merger and the DCPS/MBS
Transaction on December 15, 2004. As a result of the IPS Merger
and the
DCPS/MBS Transaction, IPS, MBS and DCPS became wholly-owned subsidiaries
of the
Company.
On
December 15, 2004, and simultaneous with the consummation of the
IPS Merger
and DCPS/MBS Transaction, the Company consummated the Closing, which
included
issuances of new equity securities for cash and contribution of outstanding
debt, and the restructuring of its debt facilities. The Company also
completed a
one-for-ten reverse stock split (the “Reverse Stock Split”), created three new
classes of common stock (Class A, Class B and Class C Common Stock) and
changed
its name. The Company’s common stock was converted to Orion Class A Common
Stock (the “Reclassification”).
Also
on
December 15, 2004, the Company issued 11,482,261 shares of its
Class B
Common Stock (the “Investment Transaction”) to various investors for $13,200,000
in cash plus cash in the amount of $128,350, which amount equaled the
accrued
but unpaid interest immediately prior to the Closing owed to a subsidiary
of
Brantley IV by SurgiCare and IPS on amounts advanced prior to October 24,
2003. At the Closing, Orion used $5,908,761 to pay off the debt owed
to a
subsidiary of Brantley IV. The Company also granted to Brantley IV the
right to
purchase shares of Class A Common Stock for cash in an amount
up to an
aggregate of $3,000,000 after the Closing (the “Purchase Right”). Brantley IV
may exercise the Purchase Right at any time after December 15,
2004. Each
additional investment will be: (i) subject to the approval of
a majority of
the members of the board of directors of the Company that are not affiliated
with Brantley IV, (ii) consummated on a date mutually agreed by
the Company
and Brantley IV, and (iii) accomplished with documentation reasonably
satisfactory to the Company and Brantley IV. Pursuant to the terms of
the
Purchase Right, the purchase price per share of the Class A Common
Stock
will be equal to the lesser of (a) $1.25, and (b) 70% multiplied
by the
average of the daily average of the high and low price per share of the
Class A Common Stock on the American Stock Exchange (“AMEX”) or a similar
system on which the Class A Common Stock shall be listed at the
time, for
the twenty trading days immediately preceding the date of the closing
of the
exercise of the Purchase Right.
Additionally,
the Company used $3,683,492 of the proceeds of the Investment Transaction
to
repay a portion of the indebtedness to unaffiliated third parties and
restructured additional existing indebtedness.
The
IPS
Merger has been treated as a “reverse acquisition” for accounting purposes.
Statement of Financial Accounting Standards (“SFAS”) No. 141 requires that, in a
business combination effected through the issuance of shares or other
equity
interests, as in the case of the IPS Merger, a determination be made
as to which
entity is the accounting acquirer. This determination is principally
based on
the relative voting rights in the combined entity held by existing stockholders
of each of the combining companies, the composition of the board of directors
of
the combined entity, and the expected composition of the executive management
of
the combined entity. Based on an assessment of the relevant facts and
circumstances existing with respect to the IPS Merger, it has been determined
that IPS is the acquirer for accounting purposes, even though IPS is
a
subsidiary of Orion.
Accordingly,
the IPS Merger has
been treated as a reverse acquisition, meaning that the purchase price,
comprised of the fair value of the outstanding shares of the Company
prior to
the transaction, plus applicable transaction costs, has been allocated
to the
fair value of the Company’s tangible and intangible assets and liabilities prior
to the transaction, with any excess being considered goodwill. IPS is
being
treated as the continuing reporting entity, and thus IPS’s historical results
have become those of the combined company. Orion’s results include the results
of IPS for the three months and six months ended June 30, 2004 and the
results
of IPS, the Company’s surgery and diagnostic center business and MBS (which
includes DCPS) for the three months and six months ended June 30,
2005.
New
Line of Credit
Orion
also entered into a new secured two-year revolving credit facility pursuant
to
the Loan and Security Agreement. Under this facility, up to $4,000,000
of loans
may be made available to Orion, subject to a borrowing base. Orion borrowed
$1,600,000 under this facility concurrently with the Closing. The interest
rate
under this facility is the prime rate plus 3%. Upon an event of default,
HBCC
can accelerate the loans or call the Guaranties described below. In connection
with entering into this new facility, Orion also restructured its
previously-existing debt facilities, which resulted in a decrease in
aggregate
debt owed to DVI from approximately $10.1 million to a combined
principal
amount of approximately $6.5 million, of which approximately
$2 million was paid at the Closing.
Pursuant
to a Guaranty Agreement (the “Brantley IV Guaranty”), dated as of
December 15, 2004, provided by Brantley IV to HBCC, Brantley IV
agreed to
provide a deficiency guaranty in the amount of $3,272,727. Pursuant to
a
Guaranty Agreement (the “Brantley Capital Guaranty”), dated as of
December 15, 2004, provided by Brantley Capital Corporation (“Brantley
Capital”) to HBCC, Brantley Capital agreed to provide a deficiency guarantee
in
the amount of $727,273. In consideration for the Guaranties, Orion issued
warrants to purchase 20,455 shares of Class A Common Stock, at
an exercise
price of $0.01 per share, to Brantley IV, and issued warrants to purchase
4,545
shares of Class A Common Stock, at an exercise price of $0.01
per share, to
Brantley Capital.
On
March 16, 2005, Brantley IV loaned the Company an aggregate of
$1,025,000.
On April 19, 2005, Brantley IV loaned the Company an additional
$225,000.
(See Note 2. Going Concern.) Additionally, as part of these loan transactions,
the Company entered into the First Amendment, dated March 22, 2005, with
HBCC
whereby its $4,000,000 secured two-year revolving credit facility has
been
reduced by the amount of the loans from Brantley IV to $2,750,000. As
a result
of the First Amendment, the Brantley IV Guaranty was amended by the Amended
Brantley IV Guaranty, which reduces the deficiency guaranty provided
by Brantley
IV by the amount of the First Loan to $2,247,727. Also as a result of
the First
Amendment, the Brantley Capital Guaranty was amended by the Amended Brantley
Capital Guaranty, which reduces the deficiency guaranty provided by Brantley
Capital by the amount of the Second Loan to $502,273.
Note
4. Revenue Recognition
The
Company’s surgery and diagnostic center business recognizes revenue on the date
the procedures are performed, and accounts receivable are recorded at
that time.
Revenues are reported at the estimated realizable amounts from patients
and
third-party payers. If such third-party payers were to change their
reimbursement policies, the effect on revenue could be significant. Earnings
are
charged with a provision for contractual adjustments and doubtful accounts
based
on such factors as historical trends of billing and cash collections,
established fee schedules, accounts receivable agings and contractual
relationships with third-party payers. Contractual allowances are estimated
primarily using each surgery center’s collection experience. Contractual rates
and fee schedules are also helpful in this process. On a rolling average
basis,
the Company tracks collections as a percentage of related billed charges.
This
percentage, which is adjusted on a quarterly basis, has proved to be
the best
indicator of expected realizable amounts from patients and third-party
payers.
Contractual adjustments and accounts deemed uncollectible are applied
against
the allowance account. The Company is not aware of any material claims,
disputes
or unsettled matters with third-party payers and there have been no material
settlements with third party payers for the three months and six months
ended
June 30, 2005.
IPS
records revenue based on patient services provided by its affiliated
medical
groups and for services provided by IntegriMED to its customers. Net
patient
service revenue is impacted by billing rates, changes in current procedural
terminology (“CPT”) code reimbursement and collection trends. IPS reviews
billing rates at each of its affiliated medical groups on at least an
annual
basis and adjusts those rates based on each insurer’s current reimbursement
practices. Amounts collected by IPS for treatment by its affiliated medical
groups of patients covered by Medicaid and other contractual reimbursement
programs, which may be based on cost of services provided or predetermined
rates, are generally less than the established billing rates of IPS’ 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, 2005 and 2004, respectively.
MBS
earns
revenues based on the collection of MBS’s customers’ receivables. Revenues are
recognized during the period in which collections were received.
Note
5. Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 differ from those estimates.
Note
6. Segments and Related Information
In
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise
and Related Information,” the Company has determined that it has three
reportable segments for the six months ended June 30, 2005 - PPA, the
Company’s
surgery and diagnostic centers 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 Company’s reportable segments consist of:
(i) PPA, the pediatric medical groups that provide patient care
operating
under management services agreements (“MSAs”); (ii) the Company’s surgery
and diagnostic centers; and (iii) MBS, which provides practice
management,
billing and collection, managed care consulting and coding/reimbursement
services to hospital-based physicians and clinics. Management chose to
aggregate
the MSAs into a single operating segment consistent with the objective
and basic
principles of SFAS No. 131 based on similar economic characteristics,
including the nature of the products and services, the type of customer
for
their services, the methods used to provide their services and in consideration
of the regulatory environment under Medicare and the Health Insurance
Portability and Accountability Act (“HIPAA”).
The
following table summarizes key financial information, by reportable segment,
as
of and for the six months ended June 30, 2005 and 2004, respectively.
|
|
For
the Six Months Ended June 30, 2005
|
|
|
PPA
|
|
|
Surgery
and diagnostic
centers
|
|
MBS
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
10,262,311
|
|
|
$
|
1,267,842
|
|
$
|
5,153,753
|
|
$
|
16,683,906
|
Income
(loss) from continuing operations
|
|
|
548,222
|
|
|
|
(8,329,689
|
)
|
|
462,898
|
|
|
(7,318,569
|
Depreciation
and amortization (including charge for impairment of
intangible
assets)
|
|
|
245,965
|
|
|
|
7,471,881
|
|
|
572,882
|
|
|
8,290,728
|
Total
assets
|
|
|
9,799,965
|
|
|
|
11,423,560
|
|
|
10,474,085
|
|
|
31,697,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended June 30, 2004
|
|
|
|
PPA
|
|
|
|
Surgery
and diagnostic
centers
|
|
|
MBS
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
8,274,458
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,274,458
|
Loss
from continuing operations
|
|
|
568,038
|
|
|
|
-
|
|
|
-
|
|
|
568,038
|
Depreciation
and amortization (including charge for impairment of
intangible
assets)
|
|
|
52,726
|
|
|
|
-
|
|
|
-
|
|
|
52,726
|
Total
assets
|
|
|
10,076,379
|
|
|
|
-
|
|
|
-
|
|
|
10,076,379
|
The
following schedules provide a reconciliation of the key financial information
by
reportable segment to the consolidated totals found in Orion’s consolidated
condensed balance sheets and statements of operations as of and for the
six
months ended June 30, 2005 and 2004, respectively.
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Net
operating revenues:
|
|
|
|
|
|
Total
net operating revenues for reportable segments
|
|
$
|
16,683,906
|
|
$
|
8,274,458
|
|
Corporate
revenue
|
|
|
41,589
|
|
|
19,233
|
|
Elimination
of intercompany transactions
|
|
|
-
|
|
|
-
|
|
Total
consolidated net operating revenues
|
|
$
|
16,725,495
|
|
$
|
8,293,691
|
|
-
|
|
|
|
|
|
-
|
|
Loss
from continuing operations:
|
|
|
|
|
|
|
|
Total
loss from continuing operations for reportable segments
|
|
$
|
(7,318,569
|
)
|
$
|
568,038
|
|
Corporate
overhead
|
|
|
(1,129,901
|
)
|
|
(1,135,945
|
)
|
Elimination
of intercompany transactions
|
|
|
(796,263
|
)
|
|
(709,338
|
)
|
Total
consolidated loss from continuing operations
|
|
$
|
(9,244,733
|
)
|
$
|
(1,277,245
|
)
|
-
|
|
|
|
|
|
-
|
|
Depreciation
and amortization (including charge for impairment of intangible
assets):
|
|
|
|
|
|
|
|
Total
depreciation and amortization for reportable segments
|
|
$
|
8,290,728
|
|
$
|
52,726
|
|
Charge
for impairment of intangible assets
|
|
|
(6,362,849
|
)
|
|
-
|
|
Corporate
depreciation and amortization
|
|
|
23,147
|
|
|
217,010
|
|
Total
consolidated depreciation and amortization
|
|
$
|
1,951,026
|
|
$
|
269,736
|
|
-
|
|
|
|
|
|
-
|
|
Total
assets:
|
|
|
|
|
|
|
|
Total
assets for reportable segments
|
|
$
|
31,697,610
|
|
$
|
10,076,379
|
|
Corporate
assets
|
|
|
332,308
|
|
|
560,328
|
|
Assets
held for sale
|
|
|
2,282,563
|
|
|
-
|
|
Total
consolidated assets
|
|
$
|
34,312,481
|
|
$
|
10,636,707
|
|
Goodwill
represents the excess of cost over the fair value of net assets of companies
acquired in business combinations accounted for using the purchase method.
In
July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and
Other Intangible Assets.” SFAS No. 141 eliminates pooling-of-interest
accounting and requires that all business combinations initiated after
June 30, 2001, be accounted for using the purchase method. SFAS
No. 142 eliminates the amortization of goodwill and certain other
intangible assets and requires the Company to evaluate goodwill for impairment
on an annual basis by applying a fair value test. SFAS No. 142
also
requires that an identifiable intangible asset that is determined to
have an
indefinite useful economic life not be amortized, but separately tested
for
impairment using a fair value-based approach at least annually.
On
June
13, 2005, the Company announced that it has accepted an offer to purchase
its
interests in the Tuscarawas ASC and the Tuscarawas open MRI facility
in Dover,
Ohio. Under the terms of the offer letter, the Company’s interests in these
facilities would be sold to a local hospital for cash and assumption
of debt. In
addition, the Company would continue to operate the facilities under
a long-term
management agreement. 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. Based on
the
pending sales transaction involving the Tuscarawas ASC and Open MRI,
as well as
the uncertainty of future cash flows related to the Company’s surgery center
business, the Company has recorded a charge for impairment of intangible
assets
of $6,362,849 for the six months ended June 30, 2005.
Note
8. Earnings per Share
Basic
earnings per share are calculated on the basis of the weighted average
number of
Class A Common Stock outstanding. Diluted earnings per share,
in addition
to the weighted average determined for basic loss per share, include
common
stock equivalents, which would arise from the exercise of stock options
and
warrants using the treasury stock method, conversion of debt and conversion
of
Class B and Class C Common Stock.
|
|
For
the Three Months Ended
|
|
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
Basic
loss per share:
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,347,788
|
)
|
$
|
(932,406
|
)
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
Dilutive
stock options and warrants
|
|
|
(a
|
)
|
|
(a
|
)
|
Convertible
notes
|
|
|
(b
|
)
|
|
(b
|
)
|
Class B
Common Stock
|
|
|
(c
|
)
|
|
(c
|
)
|
Class C
Common Stock
|
|
|
(d
|
)
|
|
(d
|
)
|
Weighted
average common shares outstanding for diluted net loss per
share
|
|
|
9,244,850
|
|
|
8,602,149
|
|
Net
loss per share from continuing operations
|
|
$
|
(0.844
|
)
|
$
|
(0.072
|
)
|
Net
loss per share from discontinued operations
|
|
$
|
(0.059
|
)
|
$
|
(0.037
|
)
|
Net
loss per share — basic
|
|
$
|
(0.903
|
)
|
$
|
(0.108
|
)
|
Net
loss per share — diluted
|
|
$
|
(0.903
|
)
|
$
|
(0.108
|
)
|
|
|
For
the Six Months Ended
|
|
|
June
30,
|
|
|
2005
|
|
2004
|
|
Basic
loss per share:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,028,418
|
)
|
$
|
(1,706,847
|
)
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
Dilutive
stock options and warrants
|
|
|
(a
|
)
|
|
(a
|
)
|
Convertible
notes
|
|
|
(b
|
)
|
|
(b
|
)
|
Class B
Common Stock
|
|
|
(c
|
)
|
|
(c
|
)
|
Class C
Common Stock
|
|
|
(d
|
)
|
|
(d
|
)
|
Weighted
average common shares outstanding for diluted net loss per
share
|
|
|
9,149,828
|
|
|
8,602,149
|
|
Net
loss per share from continuing operations
|
|
$
|
(1.010
|
)
|
$
|
(0.148
|
)
|
Net
loss per share from discontinued operations
|
|
$
|
(0.086
|
)
|
$
|
(0.050
|
|
Net
loss per share — basic
|
|
$
|
(1.096
|
)
|
$
|
(0.198
|
)
|
Net
loss per share — diluted
|
|
$
|
(1.096
|
)
|
$
|
(0.198
|
)
|
(a) |
2,146,841
and 803,317 options and warrants were outstanding at June 30,
2005 and
2004, respectively. The information for 2004 relates to SurgiCare
prior to
the acquisition and restructuring transactions.
|
(b) |
$50,000
and $470,000 of notes were convertible into Class A Common
Stock as of
June 30, 2005 and 2004, respectively. The conversion price
was equal to
$3.50 per share until January 31, 2004. Subsequent to that
date, the
conversion price is equal to the lower of $2.50 or 75% of the
average
closing price for the 20 trading days immediately prior to
the conversion
date. The information for 2004 relates to SurgiCare prior to
the
acquisition and restructuring transactions.
|
(c) |
10,685,381
shares of Class B Common Stock were outstanding at June 30,
2005.
|
(d) |
1,555,137
shares of Class C Common Stock were outstanding at June 30,
2005.
|
Note
9. Preferred Stock
On
December 15, 2004, as part of the acquisition and restructuring
transactions described in Note 3. Acquisition and Restructuring Transactions,
the Company redesignated its common stock as Class A Common Stock and
created
two new classes of common stock and one new class of preferred stock.
The
Company is authorized to issue 20,000,000 shares of preferred stock,
par value
$0.001 (the “Preferred Stock”). Subject to the limitations prescribed by law and
the provisions of the Amended and Restated Certificate of Incorporation
of the
Company, the board of directors is authorized to issue the Preferred
Stock from
time to time in one or more series, each of such series to have such
number of
shares, voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other
special
rights, and such qualifications, limitations or restrictions thereof,
as shall
be determined by the board of directors in a resolution or resolutions
providing
for the issue of such Preferred Stock. Subject to the powers and rights
of any
Preferred Stock, including any series thereof, having any preference
or priority
over, or rights superior to, the common stock, the holders of the common
stock
shall have and possess all powers and voting and other rights pertaining
to the
stock of the Company.
Also
on
December 15, 2004, all of IPS’s outstanding redeemable convertible
preferred stock, including accrued and unpaid dividends, was converted
to common
stock and exchanged for shares of Orion.
Note
10. Discontinued Operations
On
September 19, 2003, IPS entered into a Mutual Release and Settlement
Agreement (the “Settlement Agreement”) with Dr. Jane Kao and PediApex Heart
Center for Children (the “Heart Center”) to settle disputes as to the existence
and enforceability of certain contractual obligations. As part of the
Settlement
Agreement, Dr. Kao, the Heart Center and IPS agreed that, until
December 31, 2004, each party would conduct their operations under
the
terms established by the MSA. Additionally, among other provisions, after
December 31, 2004, Dr. Kao and the Heart Center were released
from any
further obligation to IPS arising from any previous agreement, and Dr. Kao
purchased the accounts receivable related to the Heart Center and IPS
terminated
its ownership and management agreement with the Heart Center. The operating
results of the Heart Center were not included in the consolidated statements
of
operations of IPS after September 19, 2003 because this medical
group did
not meet the criteria for consolidation after that date in accordance
with
Emerging Issues Task Force (“EITF”) 97-2. The operations of this component are
reflected in the Company’s consolidated statements of operations as ‘income from
operations of discontinued components’ for the three months and six months ended
June 30, 2004. IPS recorded a loss on disposal of this discontinued component
of
$12,366 for the year ended December 31, 2004. There were no operations
for
this component in 2005.
The
following table contains selected financial statement data related to
the Heart
Center as of and for the three and six months ended June 30, 2004:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2004
|
|
June
30, 2004
|
|
Income
statement data:
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
496,566
|
|
$
|
1,225,707
|
|
Direct
cost of revenues
|
|
|
178,149
|
|
|
503,651
|
|
Operating
expenses
|
|
|
299,622
|
|
|
657,257
|
|
Net
income
|
|
$
|
18,795
|
|
$
|
64,799
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
112,826
|
|
$
|
112,826
|
|
Other
assets
|
|
|
93,287
|
|
|
93,287
|
|
Total
assets
|
|
$
|
206,113
|
|
$
|
206,113
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
596,992
|
|
$
|
596,992
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
Total
liabilities
|
|
$
|
596,992
|
|
$
|
596,992
|
|
As
part
of the acquisition and restructuring transactions that closed on
December 15, 2004, the Company recorded intangible assets related
to the
IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company’s
management expected the case volumes at Bellaire SurgiCare to improve
in 2005.
However, by the end of February 2005, it was determined that the expected
case
volume increases were not going to be realized. On March 1, 2005,
the
Company closed Bellaire SurgiCare and consolidated its operations with
the
operations of SurgiCare Memorial Village. The Company tested the identifiable
intangible assets and goodwill related to the surgery and diagnostic
center
business using the present value of cash flows method. As a result of
the
decision to close Bellaire SurgiCare and the resulting impairment of
the joint
venture interest and management contracts related to the surgery centers,
the
Company recorded a charge for impairment of intangible assets of $4,090,555
for
the year ended December 31, 2004. The Company also recorded a
loss on
disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $163,050 for the quarter ended March
31,
2005. There were no operations for this component in the second quarter
of
2005.
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
|
|
Direct
cost of revenues
|
|
|
—
|
|
|
235,993
|
|
Operating
expenses
|
|
|
—
|
|
|
114,104
|
|
Net
income
|
|
$
|
—
|
|
$
|
(188,418
|
)
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
—
|
|
$
|
—
|
|
Other
assets
|
|
|
—
|
|
|
—
|
|
Total
assets
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
—
|
|
$
|
—
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
Total
liabilities
|
|
$
|
—
|
|
$
|
—
|
|
On
April 1, 2005, IPS entered into a Mutual Release and Settlement
Agreement
(the “Settlement”) with Dr. Bradley E. Chipps, M.D. and Capital Allergy and
Respiratory Disease Center, a Medical Corporation (“CARDC”) to settle disputes
as to the existence and enforceability of certain contractual obligations.
As
part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that
CARDC would
purchase the assets owned by IPS as shown on the balance sheet on March 31,
2005 in exchange for termination of the MSA. Additionally, among other
provisions, after April 1, 2005, Dr. Chipps and CARDC have
been
released from any further obligation to IPS arising from any previous
agreement.
As a result of the Settlement, the Company recorded a charge for impairment
of
intangible assets related to CARDC of $704,927 for the year ended
December 31, 2004. The Company also recorded a gain on disposal
of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $506,625 for the quarter ended March 31, 2005. For the quarter
ended
June 30, 2005, the Company reduced the gain on disposal of this discontinued
component by $238,333 as the result of post-settlement adjustments related
to
the reconciliation of balance sheet accounts. The operations of this
component
are reflected in the Company’s consolidated statements of operations as ‘income
from operations of discontinued components’ for the three months and six months
ended June 30, 2005 and 2004, respectively. There were no operations
for this
component in the second quarter of 2005.
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 and 2004,
respectively:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
Income
statement data:
|
|
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
—
|
|
$
|
913,934
|
|
$
|
848,373
|
|
$
|
1,679,416
|
|
Direct
cost of revenues
|
|
|
—
|
|
|
644,113
|
|
|
523,255
|
|
|
1,140,087
|
|
Operating
expenses
|
|
|
—
|
|
|
231,122
|
|
|
286,418
|
|
|
462,830
|
|
Net
income
|
|
$
|
—
|
|
$
|
38,699
|
|
$
|
38,700
|
|
$
|
76,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
—
|
|
$
|
282,901
|
|
$
|
—
|
|
$
|
282,901
|
|
Other
assets
|
|
|
—
|
|
|
12,863
|
|
|
—
|
|
|
12,863
|
|
Total
assets
|
|
$
|
—
|
|
$
|
295,764
|
|
$
|
—
|
|
$
|
295,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
—
|
|
$
|
314,419
|
|
$
|
—
|
|
$
|
314,419
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
liabilities
|
|
$
|
—
|
|
$
|
314,419
|
|
$
|
—
|
|
$
|
314,419
|
|
On
June
7, 2005, as described in Note 1. General - Description of Business, the
Company,
via its IPS subsidiary executed an Asset Purchase Agreement with eClinicalWeb
to
sell substantially all of the assets of IntegriMED. As a result of this
transaction, the Company recorded a loss on disposal of this discontinued
component of $47,101 for the quarter ended June 30, 2005. The operations
of this
component are reflected in the Company’s consolidated statements of operations
as ‘income from operations of discontinued components’ for the three months and
six months ended June 30, 2005 and 2004, respectively.
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 and
2004,
respectively:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
Income
statement data:
|
|
|
|
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
82,155
|
|
$
|
65,553
|
|
$
|
191,771
|
|
$
|
109,864
|
|
Direct
cost of revenues
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
expenses
|
|
|
392,931
|
|
|
437,669
|
|
|
899,667
|
|
|
680,764
|
|
Net
income
|
|
$
|
(310,776
|
)
|
$
|
(372,116
|
)
|
$
|
(707,896
|
)
|
$
|
(570,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
(24,496
|
)
|
$
|
210,400
|
|
$
|
(24,496
|
)
|
$
|
210,400
|
|
Other
assets
|
|
|
—
|
|
|
39,138
|
|
|
—
|
|
|
39,138
|
|
Total
assets
|
|
$
|
(24,496
|
)
|
$
|
249,538
|
|
$
|
(24,496
|
)
|
$
|
249,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
17,022
|
|
$
|
278,383
|
|
$
|
17,022
|
|
$
|
278,383
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
liabilities
|
|
$
|
17,022
|
|
$
|
278,383
|
|
$
|
17,022
|
|
$
|
278,383
|
|
On
June
13, 2005, the Company announced that it has accepted an offer to purchase
its
interests in the Tuscarawas ASC and the Tuscarawas open MRI facility
in Dover,
Ohio. Under the terms of the offer letter, the Company’s interests in these
facilities would be sold to a local hospital for cash and assumption
of debt. In
addition, the Company would continue to operate the facilities under
a long-term
management agreement. Although this transaction has not yet been consummated,
pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the assets and liabilities of the Tuscarawas ASC and
Tuscarawas open MRI facility have been reclassified as assets held for
sale and
liabilities held for sale on the Company’s consolidated balance sheet as of June
30, 2005. The operations of this component are reflected in the Company’s
consolidated statements of operations as ‘income from operations of discontinued
components’ for the three months and six months ended June 30,
2005.
The
following table contains selected financial statement data related to
the
Tuscarawas ASC and Open MRI as of and for the three months and six months
ended
June 30, 2005:
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2005
|
|
Income
statement data:
|
|
|
|
|
|
Net
operating revenues
|
|
$
|
873,949
|
|
$
|
1,670,801
|
|
Direct
cost of revenues
|
|
|
394,402
|
|
|
774,156
|
|
Operating
expenses
|
|
|
429,225
|
|
|
880,858
|
|
Net
income
|
|
$
|
50,332
|
|
$
|
15,787
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
(4,673
|
)
|
$
|
(4,673
|
)
|
Accounts
receivable, net
|
|
|
718,490
|
|
|
718,490
|
|
Other
current assets
|
|
|
81,014
|
|
|
81,014
|
|
Property
and equipment, net
|
|
|
1,416,356
|
|
|
1,416,356
|
|
Other
long-term assets
|
|
|
71,376
|
|
|
71,376
|
|
Total
assets held for sale
|
|
$
|
2,282,564
|
|
$
|
2,282,564
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
709,779
|
|
$
|
709,779
|
|
Capital
lease obligation
|
|
|
462,295
|
|
|
462,295
|
|
Long-term
debt
|
|
|
445,095
|
|
|
445,095
|
|
Total
liabilities held for sale
|
|
$
|
1,617,168
|
|
$
|
1,617,168
|
|
The
following table summarizes the components of income from operations of
discontinued components:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Income
from operations of discontinued components:
|
|
|
|
|
|
|
|
|
|
CARDC
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
-
|
|
$
|
38,699
|
|
$
|
38,700
|
|
$
|
76,499
|
|
Gain
(loss) on disposal
|
|
|
(238,333
|
)
|
|
|
|
|
268,292
|
|
|
|
|
Heart
Center
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
18,795
|
|
|
-
|
|
|
64,799
|
|
Bellaire
SurgiCare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
(188,418
|
)
|
|
-
|
|
Loss
on disposal
|
|
|
-
|
|
|
-
|
|
|
(163,050
|
)
|
|
-
|
|
IntegriMED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(310,776
|
)
|
|
(372,116
|
)
|
|
(707,896
|
)
|
|
(570,900
|
)
|
Loss
on disposal
|
|
|
(47,101
|
)
|
|
-
|
|
|
(47,101
|
)
|
|
-
|
|
Tuscarawas
ASC and Open MRI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
50,332
|
|
|
-
|
|
|
15,787
|
|
|
-
|
|
Total
income from operations of discontinued components
|
|
$
|
(545,878
|
)
|
$
|
(314,622
|
)
|
$
|
(783,686
|
)
|
$
|
(429,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
11. Litigation
On
January 1, 1999, IPS acquired Children’s Advanced Medical Institutes, Inc.
(“CAMI”) in a merger transaction. On that same date, IPS began providing
management services to the Children’s 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. Certain settlements were reached
in the
cases. The two cases were referred to arbitration pursuant to the arbitration
clauses in the agreements between the parties. The arbitration includes
all
remaining claims in both lawsuits. The P.A., the physicians and the former
shareholders of CAMI sought recovery of pre-merger accounts receivable
they
claim were collected by IPS after the merger, but belong to CAMI under
the
merger agreement and agreements between CAMI and the affiliated physicians.
IPS
asserted a right of set-off for over-payments that it made after the
merger to
the physicians. IPS also asserted a claim against the physicians for
breach of
the management services agreement and other agreements. In their complaint,
the
P.A., the former shareholders of CAMI and the physicians sought 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 award was
confirmed by the U.S. District Court in the amount of $548,884 and judgment
was
entered. 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 have been dismissed with prejudice.
On
July
12, 2005, Orion was named as a defendant in a suit entitled American
International Industries, Inc. vs. Orion HealthCorp, Inc., previously
known as
SurgiCare, Inc., Keith G. LeBlanc, Paul Cascio, Brantley Capital Corporation,
Brantley Venture Partners III, L.P., and Brantley Venture Partners IV,
L.P. in
the 80th
Judicial
District Court of Harris County, Texas, Cause No. 2005-44326. This case
involves
allegations that the Company made material and intentional misrepresentations
regarding the financial condition of the parties to the acquisition and
restructuring transactions effected on December 15, 2004 for the purpose
of
inducing American International Industries, Inc. (“AII”) to convert its
SurgiCare Class AA convertible preferred stock (“Class AA Preferred Stock”) into
shares of Orion’s Class A Common Stock. AII asserts that the value of its Class
A Common Stock of Orion has fallen as a direct result of the alleged
material
misrepresentations by the Company. AII is seeking actual damages of $3,800,000,
punitive damages of $3,800,000, and rescission of the agreement to convert
the
Class AA Preferred Stock into Class A Common Stock. The Company and the
other
defendants filed an Answer denying the allegations set forth in the
Complaint.
In
addition, the Company is involved in various other legal proceedings
and claims
arising in the ordinary course of business. The Company’s management believes
that the disposition of these additional matters, individually or in
the
aggregate, is not expected to have a materially adverse effect on the
Company’s
financial condition. However, depending on the amount and timing of such
disposition, an unfavorable resolution of some or all of these matters
could
materially affect the Company’s future results of operations or cash flows in a
particular period.
Note
12. Employee Stock-Based Compensation
SFAS
No. 123, “Accounting for Stock-Based Compensation” encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. In December 2002, the FASB issued
SFAS
No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosure- an amendment of SFAS No. 123,” to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The statement also
amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in
both annual and interim financial statements about the method of accounting
for
stock-based compensation and the effect of the method used on reported
results.
The
Company has chosen to continue to account for stock-based compensation
issued to
employees using the intrinsic value method prescribed in Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”
and related interpretations. Accordingly, compensation cost for stock
options is
measured as the excess, if any, of the quoted market price of the Company’s
stock at the date of the grant over the amount an employee must pay to
acquire
the stock. The Company grants options at or above the market price of
its common
stock at the date of each grant.
The
fair
value of options is calculated using the Black-Scholes option-pricing
model. Had
the Company adopted the fair value method of accounting for stock based
compensation, compensation expense would have been higher, and net loss
and net
loss attributable to common shareholders would have increased for the
periods
presented. No change in cash flows would occur. The effects of applying
SFAS
No. 123 in this pro forma disclosure are not indicative of future
amounts.
|
|
For
the Three Months Ended June
30,
|
|
|
|
2005
|
|
2004
|
|
Net
loss — as reported
|
|
|
(8,347,788
|
)
|
|
(932,406
|
)
|
Deduct:
Total stock-based employee compensation (expense determined
under the fair
value based method for all awards), net of tax effect
|
|
|
(41,857
|
)
|
|
(49,795
|
)
|
Net
loss — pro forma
|
|
$
|
(8,389,645
|
)
|
$
|
(982,201
|
)
|
Net
Loss per share:
|
|
|
|
|
|
|
|
Basic
— as reported
|
|
$
|
(0.903
|
)
|
$
|
(0.108
|
)
|
Basic
— pro forma
|
|
$
|
(0.907
|
)
|
$
|
(0.114
|
)
|
Diluted
— as reported
|
|
$
|
(0.903
|
)
|
$
|
(0.108
|
)
|
Diluted
— pro forma
|
|
$
|
(0.907
|
)
|
$
|
(0.114
|
)
|
|
|
For
the Six Months Ended June 30,
|
|
|
2005
|
|
2004
|
|
Net
loss — as reported
|
|
$
|
(10,028,418
|
)
|
$
|
(1,706,847
|
)
|
Deduct:
Total stock-based employee compensation (expense determined
under the fair
value based method for all awards), net of tax effect
|
|
|
(68,220
|
)
|
|
(102,520
|
)
|
Net
loss — pro forma
|
|
$
|
(10,096,638
|
)
|
$
|
(1,809,367
|
)
|
Net
Loss per share:
|
|
|
|
|
|
|
|
Basic
— as reported
|
|
$
|
(1.096
|
)
|
$
|
(0.198
|
)
|
Basic
— pro forma
|
|
$
|
(1.103
|
)
|
$
|
(0.210
|
)
|
Diluted
— as reported
|
|
$
|
(1.096
|
)
|
$
|
(0.198
|
)
|
Diluted
— pro forma
|
|
$
|
(1.103
|
)
|
$
|
(0.210
|
)
|
On
June
17, 2005, the Company granted 1,357,000 stock options to certain employees,
officers, directors and former directors of the Company. No options were
granted
to employees for the first six months of 2004. The information for 2004
relates
to SurgiCare prior to the acquisition and restructuring
transactions.
Note
13. Long-Term Debt and Lines of Credit
Future
aggregate maturities of long-term debt are as follows:
|
|
As
of June 30,
|
|
|
|
2005
|
|
2004
|
|
Promissory
note due to sellers of MBS, bearing interest at 8%, interest
payable
monthly or on demand, matures December 15, 2007
|
|
$
|
1,000,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Working
capital loan due to sellers of MBS, non-interest bearing,
due on demand
|
|
|
299,545
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Term
loan with a financial institution, non-interest bearing,
matures November
15, 2010
|
|
|
3,117,088
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit with a financial institution, bearing interest
at 6.5%,
interest payable monthly or on demand, $500,000 matures
December 2005 and
$287,650 matures June 2006
|
|
|
787,650
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,750,000
revolving line of credit, bearing interest at prime (6.25%
at June
30, 2005) plus 3%, interest payable monthly, matures December
14, 2006
|
|
|
1,681,450
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Convertible
notes, bearing interest at 18%, interest payable monthly,
matured October
2004
|
|
|
50,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable due to a related party, bearing interest at 6%,
interest payable
monthly, matures November 24, 2005
|
|
|
35,896
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Insurance
financing note payable, bearing interest at 5.25%, interest
payable
monthly, matures January 2006
|
|
|
17,467
|
|
|
12,700
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes due to a related party, bearing interest
at 9%, matures
April 19, 2006
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
notes due to a related party, bearing interest at 15%
|
|
|
-
|
|
|
1,271,171
|
|
|
|
|
|
|
|
|
|
Demand
notes due to a related party, bearing interest at 15%
|
|
|
-
|
|
|
667,447
|
|
|
|
|
|
|
|
|
|
Demand
notes due to a related party, bearing interest at 10%
|
|
|
-
|
|
|
1,318,000
|
|
|
|
|
|
|
|
|
|
Demand
notes due to a related party, bearing interest at 8%
|
|
|
-
|
|
|
2,040,000
|
|
|
|
|
|
|
|
|
|
Term
loan with a financial institution, bearing interest at
the 31-day treasury
note rate, interest payable monthly, originally scheduled
to mature on
March 25, 2008
|
|
|
-
|
|
|
2,710,623
|
|
|
|
|
|
|
|
|
|
$5,000,000
revolving line of credit with a financial institution,
secured by accounts
receivable bearing interest at prime (4.00% at December
31, 2003) plus
2.35%, interest payable monthly
|
|
|
-
|
|
|
2,383,545
|
|
Total
|
|
$
|
8,239,096
|
|
$
|
10,403,486
|
|
Less:
current portion
|
|
|
(4,148,176
|
)
|
|
(8,272,589
|
)
|
Less:
liability held for sale
|
|
|
(445,095
|
)
|
|
-
|
|
Total
long-term debt
|
|
$
|
3,645,826
|
|
$
|
2,130,897
|
|
|
|
|
|
|
|
|
|
F-19
|
|
Exhibit
No.
|
|
Description
|
|
Exhibit
2.1
|
|
Asset
Purchase Agreement, dated as of June 6, 2005, by and among InPhySys,
Inc.
(f/k/a IntegriMED, Inc.) and eClinicalWeb, LLC (Incorporated by reference
to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K filed
on June 13, 2005)
|
|
Exhibit
10.1
|
|
First
Amendment to Loan and Security Agreement, dated as of March 22, 2005,
by
and among Orion HealthCorp, Inc., certain affiliates and subsidiaries
of
Orion HealthCorp, Inc., and Healthcare Business Credit Corporation
(Incorporated by reference to Exhibit 10.1 filed with the Company’s
Quarterly Report on Form 10-QSB filed on May 13, 2005)
|
|
Exhibit
10.2
|
|
Amended
and Restated Guaranty Agreement, dated as of March 22, 2005, provided
by
Brantley Partners IV, L.P. to Healthcare Business Credit Corporation
(Incorporated by reference to Exhibit 10.2 filed with the Company’s
Quarterly Report on Form 10-QSB filed on May 13, 2005)
|
|
Exhibit
10.3
|
|
Amended
and Restated Guaranty Agreement, dated as of March 22, 2005, provided
by
Brantley Capital Corporation to Healthcare Business Credit Corporation
(Incorporated by reference to Exhibit 10.3 filed with the Company’s
Quarterly Report on Form 10-QSB filed on May 13, 2005)
|
|
Exhibit
10.4
|
|
Convertible
Subordinated Promissory Note, dated as of June 1, 2005, by and among
Orion
HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
reference
to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed
on June 7, 2005)
|
|
Exhibit
10.5
|
|
Convertible
Subordinated Promissory Note, dated as of June 1, 2005, by and among
Orion
HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
reference
to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed
on June 7, 2005)
|
|
Exhibit
10.6
|
|
Amendment
No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of
June 1,
2005
|
|
Exhibit
10.7
|
|
Form
of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock
Option),
dated as of June 17, 2005
|
|
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
|
|
F-20