<PAGE>
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 001-15431
THE PLASTIC SURGERY COMPANY
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-2317410
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
509 E. MONTECITO STREET, 2ND FLOOR
SANTA BARBARA, CALIFORNIA 93103
TELEPHONE: (805) 963-0400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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[ ]
As of October 31, 2000, the registrant had 4,400,134 shares of common
stock, no par value, outstanding.
<PAGE>
THE PLASTIC SURGERY COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements ..................................................................... 3 - 5
Condensed Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 ...... 3
Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2000
(unaudited) and September 30, 1999 (unaudited) .......................................... 4
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2000
(unaudited) and September 30, 1999 (unaudited) .......................................... 5
Notes to Financial Statements ............................................................ 6 - 8
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ... 9 - 13
Item 3 Quantitative and Qualitative Disclosure About Market Risk ................................ 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings ........................................................................ 14
Item 6 Exhibits and Reports on Form 8-K ......................................................... 16
</TABLE>
2
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Plastic Surgery Company
Condensed Balance Sheets
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 842,307 $ 114,374
Accounts receivable, net of allowance for doubtful accounts 160,140 913,863
Other current assets ...................................... - 293,547
------------- -------------
Total current assets .................................... 1,002,447 1,321,784
------------- -------------
PROPERTY AND EQUIPMENT, at cost ............................. 1,196,865 1,372,600
Less accumulated depreciation and amortization ............ (49,285) (229,706)
------------- -------------
Property and equipment, net ............................. 1,147,580 1,142,894
------------- -------------
INTANGIBLE ASSETS ........................................... 9,294,504 9,298,628
Less accumulated amortization ............................. (142,330) (647,372)
------------- -------------
Intangible assets, net .................................. 9,152,174 8,651,256
------------- -------------
NOTES RECEIVABLE ............................................ - 114,254
OTHER ASSETS ................................................ - 11,316
------------- -------------
Total assets ............................................ $ 11,302,201 $ 11,241,504
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................... $ 70,518 $ 124,071
Accrued employee and consultant compensation .............. 1,535,862 1,358,278
Accrued liabilities ....................................... 880,104 588,130
Line of credit ............................................ - 143,416
Current portion of related party long-term debt ........... 1,952,557 1,109,181
------------- -------------
Total current liabilities ............................... 4,439,041 3,323,076
LONG-TERM RELATED PARTY DEBT, net of current portion ........ 4,203,565 4,220,364
------------- -------------
Total liabilities ....................................... 8,642,606 7,543,440
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock; no par value; 100,000,000 shares
authorized, 4,553,708 shares issued and
outstanding at December 31, 1999 and 4,400,134
shares issued and outstanding at September 30, 2000 ..... - -
Paid-in capital ........................................... 36,450,529 36,568,414
Warrants .................................................. 8,714,754 8,714,754
Accumulated deficit ....................................... (42,505,688) (41,585,104)
------------- -------------
Total shareholders' equity .............................. 2,659,595 3,698,064
------------- -------------
Total liabilities and shareholders' equity ............ $ 11,302,201 $ 11,241,504
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
The Plastic Surgery Company
Condensed Statements of Operations
(Unaudited)
<CAPTION>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues .................................. $ - $ 6,957,966 $ - $ 22,459,273
Direct expenses:
Salaries, wages, and benefits ............... - 1,797,141 - 5,438,748
Medical supplies ............................ - 917,710 - 2,827,779
Advertising ................................. - 667,546 - 2,827,776
Rent ........................................ - 651,062 - 1,485,746
------------- ------------- ------------- -------------
Total direct expenses ..................... - 4,033,459 - 12,580,049
Salaries, wages, and benefits ............... 322,157 431,480 2,122,956 1,187,709
General operating expenses .................. 122,369 1,962,550 999,895 6,685,389
Depreciation and amortization ............... 64,913 237,869 84,133 701,437
------------- ------------- ------------- -------------
Total operating expenses .................. 509,439 6,665,358 3,206,984 21,154,584
Operating margin .............................. (509,439) 292,608 (3,206,984) 1,304,689
Other income ................................ 209 3,673 6,127 15,934
Interest expense ............................ - (98,216) - (319,820)
------------- ------------- ------------- -------------
Income (loss) before provision for income taxes (509,230) 198,065 (3,200,857) 1,000,803
Provision for income taxes .................... - 15,845 - 80,219
------------- ------------- ------------- -------------
Net income (loss) ............................. $ (509,230) $ 182,220 $ (3,200,857) $ 920,584
============= ============= ============= =============
Basic earnings (loss) per share ............... $ (19.93) $ 0.04 $ (142.17) $ 0.20
============= ============= ============= =============
Weighted average basic shares outstanding ..... 25,548 4,533,677 22,515 4,546,982
============= ============= ============= =============
Diluted earnings (loss) per share ............. $ (19.93) $ 0.04 $ (142.17) $ 0.20
============= ============= ============= =============
Weighted average diluted shares outstanding ... 25,548 4,632,193 22,515 4,645,498
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
4
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<TABLE>
The Plastic Surgery Company
Condensed Statements of Cash Flows
(Unaudited)
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 2000
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $(3,200,857) $ 920,584
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of property and equipment ............... - 7,603
Depreciation and amortization ............................ 84,133 701,437
Expense related to stock and warrant issuance
to founders, employees and consultants ................. 1,148,112 -
Changes in assets and liabilities:
Accounts receivable .................................... (8,095) (856,850)
Other current assets ................................... (391,250) (293,547)
Other assets ........................................... - (11,316)
Accounts payable ....................................... 856,831 53,553
Accrued employee and consultant compensation ........... 607,956 (177,584)
Accrued liabilities .................................... - (291,974)
------------ ------------
Net cash provided by (used in) operating activities .. (903,170) 51,906
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ......................... (2,327) (251,536)
Proceeds from sale of property and equipment ............... - 600
Acquisition of intangible assets ........................... (426,800) (4,124)
------------ ------------
Net cash used in investing activities ................ (429,127) (255,060)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock sold in private placement .............. 237,000 -
Proceeds from warrants issued to employees and consultants . 695,103 -
Proceeds from notes receivable ............................. - 19,735
Payment of debt ............................................ - (544,514)
------------ ------------
Net cash provided by (used in) financing activities .. 932,103 (524,779)
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ................................................ (400,194) (727,933)
CASH AND CASH EQUIVALENTS,
Beginning of period ........................................ 402,860 842,307
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 2,666 $ 114,374
============ ============
NON-CASH TRANSACTIONS
Warrants issued to shareholders ............................ $ 9,269,630 $ -
============ ============
Common stock issued in purchase of contract rights from ISIS $ 3,073,780 $ -
============ ============
Transactions associated with rescinding practice acquisition
Accounts receivable write off ............................ $ - $ 103,128
============ ============
Disposal of equipment .................................... $ - $ 51,624
============ ============
Forgiveness of long term debt ............................ $ - $ (138,647)
============ ============
Note receivable for the repayment of cash advanced ....... $ - $ (133,990)
============ ============
Changes to paid in capital ............................... $ - $ 117,885
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
THE PLASTIC SURGERY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Organization
The Plastic Surgery Company (the "Company") was incorporated as a Georgia
corporation on April 30, 1997 to provide business development services and
Internet solutions to plastic surgery practices. The Company had no significant
operations until the closing of an initial public offering (the "Offering") on
December 15, 1999.
Upon the closing of the Offering, the Company effected the transfer (the
"Transfer"), of certain operating assets and certain liabilities of, or the
stock of an entity holding certain assets and certain liabilities of, plastic
surgery practice entities (the "Founding Practices") in exchange for cash, notes
and shares of common stock. Each Founding Practice transaction was individually
negotiated between the Company and the Founding Practice as to all material
terms. The Company also entered into long-term business services agreements with
these Founding Practices.
The Company accounted for certain of the Founding Practices acquired in the
Transfers under Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary
Assets by Promoters and Shareholders" ("SAB 48"). The shareholders of these
Founding Practices are considered promoters. For each Transfer accounted for
under SAB 48, the Founding Practice received up to a maximum of 25 percent of
the total consideration for each transaction in cash and notes and the balance
in 2,812,963 shares of common stock valued at the initial public offering price.
The cash paid to the Founding Practices accounted for under SAB 48 was recorded
as a dividend by the Company and the assets and liabilities acquired were
recorded at their historical costs. For the Transfers not accounted for under
SAB 48, the Company recorded the Transfers at fair value as asset acquisitions
and recorded intangible assets amortized over periods ranging from 10 to 15
years.
Basis of Presentation
The financial statements included herein have been prepared in accordance
with rule 10-01 of Regulation S-X. Pursuant to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the information at September 30,
2000 and for the three and nine-months periods ended September 30, 2000 and 1999
is unaudited. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The financial
statements reflect all elimination entries and normal adjustments (consisting of
normal recurring adjustments) that are necessary for a fair presentation of the
results for the interim periods ended September 30, 2000 and September 30, 1999.
In the opinion of management, the accompanying condensed financial statements
include the accounts of the Company and all adjustments necessary to present
fairly the Company's financial position at September 30, 2000 and December 31,
1999, its results of operations for the three and nine months ended September
30, 2000 and September 30, 1999 and cash flows for the nine months ended
September 30, 2000 and September 30, 1999.
Operating results for interim periods are not necessarily indicative of the
results for full years. These condensed financial statements should be read in
conjunction with the financial statements of The Plastic Surgery Company and
related notes thereto, and management's discussion and analysis related thereto,
all of which are included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
The Company currently does not consolidate the operations of the practices
that it manages because the arrangements do not meet the requirements for
consolidation as set forth in Emerging Issues Task Force 97-2.
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue in amounts equal to the operating expenses of
the practices assumed by the Company plus service fees of approximately 15% of
the net cash collected by the practices. Net cash collected is defined as
revenue resulting from fees and charges for each month collected by and on
behalf of each practice as a result of professional services provided by the
practice's surgeons and those under the surgeons' supervision and other fees or
income generated by the practice, less any adjustments for refunds or other
items that do not generate a fee. The amount of operating expenses of the
practices assumed by the Company was as follows:
<TABLE>
<CAPTION>
Service Fees Operating Expenses Net Revenue
------------ ------------------ ------------
<S> <C> <C> <C>
For the three months ended September 30, 1999 $ - $ - $ -
For the nine months ended September 30, 1999 $ - $ - $ -
For the three months ended September 30, 2000 $ 1,330,653 $ 5,627,313 $ 6,957,966
For the nine months ended September 30, 2000 $ 4,178,073 $ 18,281,200 $ 22,459,273
</TABLE>
Intangible Assets
Intangible assets consist of the excess of the purchase price over the fair
value of the net assets acquired from the asset acquisitions at fair value and
the purchase of contract rights discussed below. For the acquired practices, the
business services agreements have terms of 20 to 25 years. The Company has
allocated these intangible assets to the value obtained through entering into
business services agreements. The Company believes that no other identifiable
intangible asset was generated by these acquisitions. The Company amortizes the
intangible assets over their estimated useful lives taking into consideration
various qualitative factors, including the terms of the business services
agreements. The Company considers the unique characteristics of each practice
being managed and uncertainties resulting from the Company's inability or the
practices' inability to perform over the term of the applicable business
services agreement. These factors take into consideration the probability that a
practice will be able to extend its existence indefinitely and thus enable the
Company to recover through profitable operations the carrying value of the
intangible assets.
The Company is amortizing intangible assets related to the acquisitions of
allied practices or allied practice assets over periods ranging from 10 to 15
years. Amortization expense related to these intangible assets for the year
ended December 31, 1999 and the three and nine-month periods ended September 30,
2000 are $22,613, $135,672, and $407,014, respectively.
Long-Term Related Party Debt
The Company's debt consisted of the following at September 30, 2000:
Current Long Term
------------ ------------
Note payable to shareholder, non-secured,
8.5% imputed interest $ 180,000 $ 833,821
Note payable to allied practices, non-secured,
8% interest 929,181 3,386,543
------------ ------------
$ 1,109,181 $ 4,220,364
============ ============
Earnings (loss) per share
Basic earnings (loss) per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share represents net earnings divided by the weighted-average
number of shares outstanding including the dilutive impact of common stock
equivalents calculated using the treasury stock method. For the three and
nine-months periods ended September 30, 2000, the difference between the
weighted-average number of shares used in the basic computation compared to that
used in the diluted computation was due to the dilutive impact of options and
warrants to purchase common stock. The impact of options and warrants was not
included in 1999 as the effect was anti-dilutive.
7
<PAGE>
3. SUBSEQUENT EVENTS
In October 2000 the Company purchased the assets and liabilities of The
Aesthetic Institute of North Carolina, P.A. The transaction consisted of the
Company assuming the liabilities of the practice in exchange for a note payable
from the physician with no other compensation being paid. The Company does not
expect any goodwill to result from the transaction. This practice was accounted
for using APB 16. It has become the first "Company-owned center." The original
business model was based on providing development services to cosmetic surgery
practices through long-term practice services agreements. The Company expects
that future acquisitions will be on the Company-owned center basis and that the
Company will endeavor to convert some of its long-term practice service
agreements to "Company-owned centers". There are no assurances that the Company
will be able to acquire additional Company-owned centers either by acquisition
or by conversion of its existing agreements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended (the
"1934 Act"). Although we believe that our expectations are based on reasonable
assumptions, we can give no assurance that our goals will be achieved. The
important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include, without limitation, our
ability to grow through affiliations with additional allied practices and
company-owned cosmetic surgery centers, our ability to identify suitable
affiliation candidates and to profitably manage or successfully integrate new
allied practices and company-owned centers with us and our existing practices,
our ability to secure capital, and the related cost of such capital, needed to
fund our future growth, regulatory development and changes in the United States
healthcare system and medical profession that may affect our profitability or
the enforceability of our agreements with the allied practices and the other
factors detailed in our Annual Report on Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission.
OVERVIEW
On December 15, 1999 the Company began providing business development
services and Internet solutions to our alliance of 30 board-certified or
board-eligible plastic surgeons and one surgeon certified by the Canadian Board
of Plastic Surgery located in 18 metropolitan markets throughout the United
States. Since then, we have severed our alliance with one of the practices and
are in negotiations with another practice that will also be leaving the
alliance. In the future we intend to provide business services and acquire
certain assets of, or to manage, additional plastic surgery practices. In
addition, we may acquire companies, businesses or assets that compliment or
expand our existing business. We may expand our business into the performance of
nonsurgical, noninvasive procedures. In the future we intend to provide business
services and acquire certain assets of, or to manage, additional plastic surgery
practices. Our Internet strategy is important to our business. We have two
proprietary websites: www.Idealme.com, our consumer website; and
www.ThePlasticSurgeryCo.com, our surgeon website. Idealme.com allows consumers
to research available procedures, submit inquiries regarding cosmetic surgery
procedures, view possible cosmetic changes through online imaging technology,
obtain financing for procedures and locate board-certified cosmetic surgeons.
ThePlasticSurgeryCo.com will provide allied surgeons online access to our
national buying programs and facilitate "best practices" study groups among our
allied surgeons. We did not conduct any significant operations or earn any
revenue until the close of our initial public offering on December 15, 1999.
We earn revenue from providing services to the allied practices pursuant to
the business services agreements on a monthly basis as each practice collects
its cash. The business services agreements provide that each practice will pay
our fees based on a percentage of the net cash collected by that practice. Our
revenue consists of the sum of the service fee and amounts equal to the
operating expenses of the practice assumed by us under the business services
agreements. We separately disclose in the notes to our financial statements the
revenue from service fees and operating expenses. The operating expenses of the
practice that are our responsibility and which we are legally obligated to pay
include the following:
o salaries, benefits, payroll taxes, workers compensation, health
insurance and other benefit plans, and other direct expenses of
non-medical employees that are our employees located at the practice;
o direct costs of all employees or consultants that provide services to
each practice's office;
o medical and office supplies;
o lease or rent payments, utilities, telephone and maintenance expenses
for practice facilities;
o property taxes on our assets located at the practice offices;
o property, casualty and liability insurance premiums, excluding
malpractice insurance which is the responsibility of the practice;
o surgeon recruiting expenses; and
o advertising and expenses attributable to the promotion of practice
offices.
9
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We assume all of the above expenses and will pay the third-party provider of
the goods and services. These expenses have been recorded in our financial
statements as expenses because we are legally obligated to pay them. In exchange
for assuming these expenses and providing business services, we have recorded
revenue in amounts equal to the assumed expenses plus the service fee described
above.
The practice retains the responsibility for payment of any and all direct
employment expenses, including benefits, for any surgeon or other employee that
we are prohibited from employing by applicable law. In addition, the practice
retains responsibility for the payment of expenses for continuing education,
seminars, professional licenses, professional membership dues and malpractice
insurance and all other expenses of any surgeon. These expenses that remain the
responsibility of the practice are not included in reimbursed operating expenses
that is a component of our revenue.
POSSIBLE SOURCES OF FUTURE REVENUES
For certain current cosmetic surgery centers and nearly all future
acquisitions, the company is making a strategic shift to "company-owned cosmetic
surgery centers." The original business model was based on providing development
services to cosmetic surgery practices through long-term practice services
agreements. Under these agreements, the affiliating physicians continue to be
responsible for the day-to-day management of the practices, including
operations, finance and human resources. In contrast, as a "company-owned
center" The Plastic Surgery Company will have all of these responsibilities,
which conversely provides for a greater degree of control over increasing
consumer demand and the total patient experience as well as the business and
finance practices of these cosmetic surgery centers. In addition, ownership
brings with it the right to make all investment decisions. The affiliating
surgeon enjoys the transition from a client still burdened with many day-to-day
business decisions to an independent contractor of the center, free to spend all
of their time focused on patient care and surgery. The Company currently has
affiliating cosmetic surgery centers in 23 locations throughout the United
States and while both models are profitable, the company-owned center provides a
much greater opportunity to build value.
At introduction, we listed profiles for board certified plastic surgeons at
www.idealme.com who were not affiliated with the Plastic Surgery Company. While
we continue to offer free, basic listings to non-affiliated plastic surgeons, we
introduced two new for-fee subscription services during the third-quarter. Our
subscribing surgeons pay to list special information about themselves and their
practices and receive links from www.idealme.com to their personal Web pages.
The subscriptions are offered for the convenience of potential consumers located
in areas where we are not affiliated with an allied practice and as a source of
revenue to fund future online developments. We will not investigate the
qualifications of the surgeons who subscribe for this service. Our website will
advise consumers to independently investigate each surgeon's qualifications. We
may generate future revenues from the sale of products and services through our
proprietary websites. The revenue generated may include fees from banner and
sponsorship advertising, subscriptions to our online magazine and digital
imaging. In addition our web site has built one of the largest and only
customizable "before and after" photo galleries of cosmetic procedures on the
Internet. The Gallery currently offers annotated photographs of over 550 cases,
or 1,100 photographs, spanning a broad range of procedures and patients. Each
case includes a detailed, searchable profile that allows users to arrange the
Gallery by procedure, patient age range, gender and skin tone. There are an
additional 500 cases to be uploaded before the end of fourth quarter.
RESULTS OF OPERATIONS
For the three months ended September 30, 2000 we had net income of $182,220
on operating revenues of $6,957,966. This compared to a loss of $509,230 and no
revenues for the same period in 1999. For the nine months ended September 30,
2000 we had net income of $920,584 on operating revenues of $22,459,273 as
compared to a loss of $3,200,857 and no revenues for the same period in 1999. In
1999, we were in a development stage and conducted no operations and earned no
revenues.
Net Revenues. Net revenues for the three months ended September 30, 2000
were $6,957,966 including $1,330,653 in service fees from allied practices. Net
revenues for the nine months ended September 30, 2000 were $22,459,273 including
$4,178,073 in service fees from the allied practices. Net revenues include the
service fees earned plus the operating expenses of the practices assumed by us
pursuant to the business services agreements.
Direct Expenses. Direct expenses represent certain operating costs incurred
by the allied practices that we assumed pursuant to the business services
agreements.
10
<PAGE>
Salaries, Wages and Benefits. Salary, wages and benefits expenses represent
all costs of employees and consultants incurred during the three and nine months
ended September 30, 2000. Net headcount did not increase during the quarter, but
it is anticipated that in the future it will grow as required to provide
marketing and administrative services to the allied practices.
General Operating Expenses. General operating expenses include $1,593,854 of
reimbursed practice expenses and $368,696 of Corporate operating costs incurred
during the three months ended September 30, 2000. For the nine months ended
September 30, 2000 the general operating expenses of the Company included
$5,701,151 of reimbursed practice expenses and $984,238 of Corporate operating
costs.
Depreciation and Amortization. For the three months and nine months ended
September 30, 2000, depreciation expense on corporate assets was $69,521 and
$196,395, respectively. Amortization expense of $168,348 and $505,042 related to
intangible assets was recorded as a result of allied practice acquisitions for
the three months and nine months ended September 30, 2000, respectively.
Interest expense
Interest expense of $98,216 and $319,820 was recorded during the three and
nine months ended September 30, 2000 respectively. For the three and nine months
ended September 30, 2000 this amount included $96,193 and $310,433 related to
the interest portion of note payments to allied practices. There was no debt in
1999 and therefore no interest. These notes were issued as part of the
consideration to the allied practices from the acquisition on December 15, 1999.
The remaining amounts relate to short term borrowing by the Company.
Provision for income taxes
The Company recorded provisions for income taxes of $15,845 and $80,219 for
the three-months and nine-months periods ended September 30, 2000 respectively.
This reflects using a net operating loss carryforwards from 1999 to offset
federal taxable income. The provision reflects primarily a provision for state
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to our registration statement on Form S-1 declared effective on
December 2, 1999, we offered and sold 1,400,000 shares of common stock in our
initial public offering for an aggregate offering price of $11,200,000. As of
December 31, 1999, the amount of expenses we incurred in connection with the
issuance and distribution of the stock in our initial public offering was (1)
$1,120,000 for underwriting discounts and commissions, and (2) approximately
$1,547,000 for legal, accounting, printing, filing fees and miscellaneous costs.
We have used the remaining net proceeds of $8,533,000 to pay the cash portion of
the consideration to the founding practices, to service the debt payments of the
notes issued as part of the consideration to the allied practices, to repay
indebtedness assumed from certain allied practices, and to pay certain accrued
liabilities and for working capital.
The Company's primary working capital requirements will be funded through
cash from operating activities. Cash flows from investing activities were used
to purchase property and equipment, and cash flows from financing activities
were used for payment of debt to allied practices.
In the quarter ending September 30, 2000, the Company rescinded the
acquisition of one practice, and the Company expects to rescind the acquisition
of one additional practice before the end of the fiscal year. The Company does
not expect either transaction to have a material adverse effect on its
operations.
As of September 30, 2000, we had a working capital deficit of approximately
$2,001,292. Approximately $925,082 of the current liabilities relate to amounts
owed to employees and consultants who have agreed to defer payment until we
obtain financing. We will require capital for the following purposes:
o to pay accrued salaries and consulting fees of our employees or
consultants;
o to pay amounts owed to allied practices pursuant to notes issued in the
acquisitions of the founding practices;
11
<PAGE>
o to pay amounts owed to our chairman pursuant to a $1,013,821 promissory
note;
o to pay operating expenses;
o to form additional affiliations with plastic surgery practices;
o to pay costs associated with the development and maintenance of our
websites; and
o to fund corporate costs for providing business services.
Each note issued in the acquisitions of the founding practices bears
interest at 8 percent per annum and provides for equal monthly payments of
principal and interest over the five-year term of the note.
Each business services agreement obligates us, with no limitation, to pay
the operating expenses of the allied practice. These operating expenses are paid
out of individual practice cash accounts that we control. To the extent a
practice's operating expenses exceed its revenues, we are required to pay any
excess expense but the allied practice is obligated to repay this amount to us
with interest. We will record this amount as a receivable from the practice
bearing interest at the prime rate as published in THE WALL STREET JOURNAL plus
one percent. As of September 30, 2000, no receivable for funding excess
operating expenses existed from the allied practices. If it does occur, the
allied practice will be required to repay any receivable to us out of its future
revenues. The receivable will be repaid after the payment of the service fee and
before the allied surgeon receives any compensation. There is no defined payment
date related to the receivable. We intend to fund these excess operating
expenses from working capital or borrowings under a credit facility. Since
approximately 75 percent of the procedures performed by our allied surgeons are
cosmetic with fees generally paid no later than the time the procedure is
performed, we believe that our requirement to finance the excess operating
expenses of the allied practices can be funded through our operations. In
addition, our allied practices must pay our service fees and their operating
expenses before the surgeons receive any funds from the practice. We do not
believe that a lag in collections of patient receivables would occur or if it
occurred would significantly affect our liquidity.
We believe that cash flow from operations will be sufficient to fund our
ongoing operations through the terms of the business services agreements.
However, if the cash flow from operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or acquire a credit facility. We also believe that anticipated borrowings under
a credit facility, if obtained, will be sufficient to fund our planned capital
needs for the next 12 months. The Company is actively seeking a credit facility.
Our business plan involves an aggressive strategy of acquiring additional
medical practices. To the extent we are unable to obtain a credit facility, we
may not be able to fully implement our acquisition program. As of September 30,
2000, the Company has not obtained a credit facility. In addition, the Vice
President of Development, whose responsibility it was to acquire practices,
resigned primarily due to increased travel demands due to the change in
direction to the new Company-owned centers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange. To date, all of the Company's revenue from operations has
exclusively been denominated in United States dollars. In the future, the
Company may acquire practices outside the United States whose expenses and
revenues are priced in currencies other than the United States dollar. If this
occurs, fluctuations in the values of the respective currencies in which the
Company incurs expenses or generates revenues could adversely affect the
Company. Due to the constantly changing currency exposures and the volatility of
currency exchange rates, there can be no assurance that the Company would not
experience currency losses in the future, nor can the Company predict the effect
of exchange rate fluctuations upon future operating results. In the event the
Company conducts transactions in currencies other than the United States dollar,
we intend to carefully evaluate our currency management policies. If management
deems it appropriate, the Company may consider hedging a portion of any currency
exposure in the future.
Interest Rates. The Company invests its surplus cash in a variety of
financial instruments, consisting principally of bank time deposits and
short-term marketable securities with maturities of less than one year. The
Company's investment securities are held for purposes other than trading. The
Company accounts for its investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). All of the cash equivalent and
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short-term investments are treated as "available for sale" under SFAS 115.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, the Company's future investment income may fall
short of expectations due to changes in interest rates or the Company may suffer
losses in principal if forced to sell securities which have seen a decline in
market value due to changes in interest rates. The Company may also face
interest rate risk exposure in connection with debt issued in connection with
the Company's acquisition strategy.
New Authoritative pronouncements
In accordance with SFAS NO. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
"the Company delayed the implementation of SFAS NO. 133, "Accounting for
Derivative Instruments and Hedging Activities." until January 1, 2001. Complying
with this new pronouncement is not expected to have a material effect on the
Companies' financial statements.
In fiscal 2000, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition" ("SAB No. 101"). SAB No. 101 addresses issues related to revenue
recognition and does not impact the Company's condensed balance sheets,
statements of operations, or cash flows.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any litigation that if adversely determined would have
a material adverse effect on our operations. Many of the founding practices have
pending litigation arising in the ordinary course of business. If we acquired
the stock of a practice in a stock purchase or merger transaction, we assume the
liabilities of the practice from a financial perspective, including litigation,
prior to the transaction. We intend to vigorously defend any and all litigation.
We maintain general liability insurance for us and on behalf of our allied
practices and, where permitted by applicable law and insurers, we will be named
as an additional insured under the policies of the allied practices. The allied
surgeons maintain professional liability insurance covering the delivery of
health services. Also, we are indemnified under the business services agreements
for liabilities we incur as a result of the performance of medical services by
allied surgeons. Successful malpractice claims against allied practices could
have a material adverse effect on our profitability. Although we believe we have
adequate liability insurance coverage, there can be no assurance that a pending
or future claim or claims will not be successful or, if successful, will not
exceed the limits of available insurance coverage. There can also be no
assurance that coverage will continue to be available at acceptable costs and on
favorable terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See exhibit index on page 15
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, we have
duly caused this Form 10-Q to be signed on behalf of the undersigned, thereunto
duly authorized, on Nov 8, 2000.
THE PLASTIC SURGERY COMPANY
By: /S/ Dennis E. Condon
-----------------------------------------------
Dennis E. Condon
President, Chief Executive Officer and Director
Pursuant to the requirements of the 1934 Act, this report has been signed
below by the following persons in the capacities indicated and on the date
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Jonathan Wilfong Chairman of the Board November 13, 2000
---------------------------
Jonathan Wilfong
/S/ Dennis Condon President and Chief November 13, 2000
--------------------------- Executive Officer (Principal
Dennis Condon Executive Officer)
/S/ Gunnar Sundstrom Chief Financial Officer November 13, 2000
--------------------------- (Principal Accounting
Gunnar Sundstrom Officer)
/S/ Director November , 2000
---------------------------
Robert Ersek, M.D.
/S/ Director November , 2000
---------------------------
John Schantz, M.D.
/S/ W. Grant Stevens Director November 13, 2000
---------------------------
W. Grant Stevens, M.D.
/S/ Director November , 2000
---------------------------
William Armiger, M.D.
15
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------------------------------------------
2.1 Form of Agreement and Plan of Reorganization between the Company and
the Founding Practices [A]
2.2 Form of Amendment to the Form of Agreement and Plan of Reorganization
between the Company and the Founding Practices [A]
2.3 Form of Purchase and Sale Agreement between the Company and the
Founding Practices [A]
2.4 Form of Stock Purchase and Sale Agreement between the Company and the
Founding Practices [A]
2.5 Letter Agreement between the Company and Isis Cosmetic Surgery
Partners, Inc. dated May 13, 1999 [A]
2.6 Form of Amendment to Agreement and Plan of Reorganization dated as of
November 11, 1999 between the Company and the Founding Practices [A]
2.7 Form of Amendment to Purchase and Sale Agreement dated as of November
11, 1999 between the Company and the Founding Practices [A]
2.8 Form of Amendment to Agreement and Plan of Reorganization dated as of
November 24, 1999 between the Company and Founding Practices [A]
2.9 Form of Amendment to Purchase and Sale Agreement dated as of November
24, 1999 between the Company and Founding Practices [A]
3.1 Form of Amended and Restated Articles of Incorporation [A]
3.2 Form of Amended and Restated Bylaws [A]
4.1 Specimen Common Stock Certificate [A]
4.2 Form of Warrant Agreement between the Company and the representatives
of the underwriters of the Company's initial public offering [A]
4.3 Form of Referral Warrant [A]
10.1 Amendment to Employment Agreement between the Company and David
Challoner dated February 25, 1999 [A]
10.2 Amendment to Employment Agreement between the Company and Patricia
Altavilla dated March 1, 1999 [A]
10.3 Form of Service Agreement between the Company and the Founding
Practices [A]
10.4 Form of Amendment to Form of Service Agreement between the Company and
the Founding Practices [A]
10.5 Form of Consulting and Business Services Agreement between the Company
and the Founding Practices [A]
10.6 Form of Employment Agreement between the allied surgeons and the
allied practices [A]
10.7 1998 Employee Stock Option Plan [A]
10.8 1999 Non-Employee Director Stock Plan [A]
10.9 Amendment to Employment Agreement between the Company and Dennis E.
Condon dated June 30, 1999 [B]
10.10 Employment Agreement between the Company and Joshua Levine dated
February 1, 2000 [B]
27.1 Financial Data Schedule (for SEC use only).
-----------------
[A] Incorporated by reference to the Company's Registration on Form S-1,
File No. 333-78565.
[B] Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 filed September 30, 2000, File
No. 1-15431.
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