U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K-SB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
SURGICARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 58-1597246
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6699 CHIMNEY ROCK, SUITE 105
HOUSTON, TEXAS 77081
(ADDRESS OFPRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (713) 665-1406
SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT: NOT APPLICABLE
SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, $.005 PAR VALUE
SERIES A REDEEMABLE PREFERRED STOCK, $.001 PAR VALUE
<PAGE>
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 [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
SurgiCare's revenues for fiscal year ended December 31, 1999: $4,216,660
As of March 22, 2000, 12,596,657 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the shares of Common Stock
(based upon the closing sale price of these shares as reported by the Texas
brokerage firm, William Little and Company of the Registrant held by
non-affiliates on March 22, 2000 was approximately $1,787,471. This calculation
assumes that all shares of Common Stock beneficially held by executive officers
and members of the Board of Directors of the Registrant are owned by
"affiliates," a status which each of the officers and directors individually
disclaims. Portions of the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held May 21, 2000 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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SURGICARE, INC.
FORM 10K-SB
TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission or matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With 16(a) of the Exchange Act.
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
SurgiCare 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. On July 21, 1999, SurgiCare acquired
all of the issued and outstanding shares of common stock of Bellaire SurgiCare,
Inc. a Texas corporation ("Bellaire"), in exchange for the issuance of 9,860,000
shares of common stock, par value $.005 per share ("Common Stock") and 1,350,000
shares of Series A Redeemable Preferred Stock, par value $.001 per share
("Series A Preferred"), of SurgiCare to the holders of Bellaire's common stock.
For accounting purposes this transaction was effective July 1, 1999.
This acquisition was accounted for as a reverse merger. In addition
1,095,556 were issued to Surgery Centers of America II, L.L.C. (SCOA) as
required by the Bellaire / SCOA management contract that was in place prior to
July 21, 1999. Bellaire is now a wholly owned subsidiary of SurgiCare.
Throughout this document we may refer occasionally to SurgiCare meaning
SurgiCare and its subsidiary Bellaire.
SurgiCare is authorized to issue up to 50,000,000 shares of common stock,
par value $.005 per share, and 20,000,000 shares of preferred stock, par value
$.001 per share.
At the present time SurgiCare conducts its operations through its
wholly owned subsidiary, Bellaire. SurgiCare's current management personnel
were, immediately prior to the reverse merger with Bellaire, management
personnel of Bellaire. Bellaire owns and operates an ambulatory surgery center
located in Houston, Texas. Bellaire has been in operation for 14 years. First as
The Institute for Eye Surgery, and since March of 1995, as Bellaire SurgiCare,
Inc. This center provides the venue for a wide range of high volume, lower-risk
surgical procedures within a multi-specialty environment. Surgeons specializing
in podiatry, orthopedics, pain management, gynecology, plastics, as well as
general surgery, utilize this facility. The surgeons performing surgery at
Bellaire generally charge their patients for the professional services they
provide, while Bellaire only charges the patients for the facility fee.
SurgiCare's principal executive offices are located at 6699 Chimney Rock Rd,
Suite 105, Houston, Texas 77081, and its telephone number is 713-665-1406.
INDUSTRY OVERVIEW
Free standing ambulatory surgery centers are licensed outpatient
surgery centers, generally equipped and staffed for a wide variety of surgical
procedures. These procedures are generally lower-risk and considered appropriate
for the freestanding ambulatory setting In recent years, government programs,
private insurance companies, managed care organizations and self-insured
employers have implemented various cost-containment measures to limit the growth
of healthcare expenditures. These cost-containment measures, together with
technological advances, have resulted in a significant shift in the delivery of
healthcare services away from traditional inpatient hospitals to more
cost-effective alternate sites, including ambulatory surgery centers.
According to the industry publication SMG Marketing Group Inc.'s,
Freestanding Outpatient Surgery Center Directory, (June 1998):
Outpatient surgical procedures represented approximately 73% of
all surgical procedures performed in the United States in 1997 and
the number of outpatient surgery cases increased 71% from 3.1
million in 1993 to 5.3 million in 1997. As of December 31, 1997,
there were 2,634 freestanding ambulatory surgery centers in the
U.S., of which 155 were owned by hospitals and 704 were owned by
corporate entities. Primarily physicians independently owned the
remaining 1,775 centers.
SurgiCare believes that the following factors have contributed to the
growth of ambulatory surgery:
COST-EFFECTIVE ALTERNATIVE
Ambulatory surgical centers are not saddled with the high cost and
overhead of the ancillary services such as administration, laboratory,
radiology, or dietary, that are generally found in the hospital settings.
Therefore surgery is generally less expensive than hospital inpatient surgery.
In addition, SurgiCare believes that surgery performed at a freestanding
ambulatory surgery center is also less expensive than hospital-based ambulatory
surgery for a number of reasons, including
Lower facility development costs.
Lower cost associated with ancillary services.
More efficient staffing and space utilization.
Specialized operating environment focused on cost containment.
SurgiCare believes that interest in ambulatory surgery centers has
grown as managed care organizations have continued to seek a cost-effective
alternative to inpatient services.
PHYSICIAN AND PATIENT PREFERENCE
Operating physicians, who have determined that their patients are in
need of a surgical procedure, generally choose what facility the surgery will be
done in. In most cases patients will have their surgery done at the facility
that their doctor determines is most appropriate.
Freestanding ambulatory surgery centers do not subject doctors nor
their patients to the large institutional environment found at both acute care
inpatient hospitals, and out patient surgery centers locating within a hospital.
SurgiCare believes that because of the ease of admission and discharge,
many physicians prefer ambulatory surgery centers. SurgiCare believes that such
centers enhance physicians' productivity by providing them with greater
scheduling flexibility, more consistent nurse staffing and faster turnaround
time between cases. This allows the physician to perform more surgeries in a
defined period.
In contrast, hospitals generally serve a broader group of physicians,
including those involved with emergency procedures, resulting in postponed or
delayed surgeries. Additionally, many physicians choose to perform surgery in a
freestanding ambulatory surgery center because their patients prefer the
simplified admissions and discharge procedures and the less institutional
atmosphere.
NEW TECHNOLOGY
According to the industry publication SMG Marketing Group Inc.'s,
Freestanding Outpatient Surgery Center Directory, (June 1998):
The increased use of minimally invasive surgery, enhanced endoscopic
techniques and fiber optics, have reduced the trauma and recovery time
associated with many surgical procedures. Improved anesthesia has shortened
recovery time by minimizing postoperative side effects such as nausea and
drowsiness, thereby avoiding, in some cases, overnight hospitalization.
These new technology and advances in anesthesia, which have been
increasingly accepted by physicians, have significantly expanded the types of
surgical procedures that are being performed in ambulatory surgery centers.
BUSINESS PHILOSOPHY
SurgiCare believes that physician owned and operated surgical centers
have tended to be extremely profitable. This profitability results primarily
from the fact that physicians who own and operate an ambulatory surgical center
are the center's most significant source of patients, and benefactors. Generally
it is the operating physician, not the patient, who chooses the facilities where
surgical procedures are to be done. Because this decision is made at the
physician level, it is in fact the physicians bring patients to the outpatient
surgical facility.
SurgiCare believes that ambulatory surgical centers receive their
patient referrals almost exclusively from the operating physicians. Therefore it
becomes an extremely important role of a center's management to insure that the
operating physicians have everything they need, and that they are pleased with
the results that they are able to obtain at the center. If management and the
operating physicians are substantially the same, it becomes much easier to
insure that physician needs are meet, and that their experiences at the centers
are pleasant.
Furthermore, SurgiCare believes that when operating physicians own and
operate an ambulatory surgical center they become cost conscious. Without
allowing cost consciousness to detrimental to the patients, it may still have a
significant effect on the overall profitability of the center. For these
reasons, SurgiCare believes, physician owned ambulatory surgical centers have
historically been extremely profitable.
SurgiCare believes that the profitability of freestanding ambulatory
surgery centers tends to make them attractive to acquirers. Nevertheless,
following the acquisition of a physician owned center, evidence suggests that
the typical center's profitability will significantly decrease. SurgiCare
believes that this typical decline in profitability can be explained, in part,
because in many of such acquisitions the operating physician loses control of
the center. After a typical acquisition of an ambulatory surgery center, the
control of the center is typically vested in non-physician management. The
factors motivating the physician users to insure the center's profitability are
therefore typically removed.
SurgiCare's management structure consists of physicians and healthcare
professionals. SurgiCare's management has substantial experience in the
operations and management of ambulatory surgical centers. SurgiCare also expects
that it will issue its own shares, or other equity interests, to the physicians
who own and operate other centers which SurgiCare may acquire. SurgiCare
believes that it will thereby be able to substantially align the interests of
SurgiCare's management and shareholders with those of the physician owners of
centers which SurgiCare may acquire. SurgiCare also presently intends to permit
each surgery center to be substantially managed by its own board, which is
anticipated to consist of a majority of physicians associated with the center
and one or more representatives of SurgiCare. Based upon this approach,
SurgiCare expects that it will benefit from the substantial unity of goals and
motivations of its own management and shareholders with those of physicians who
have previously owned and operated a freestanding center acquired by SurgiCare.
SurgiCare therefore expects that with goals and motivations
substantially aligned, the profitability of each center, which it acquires, can
be maintained. As there are numerous factors which affect the profitability of
ambulatory surgery centers, including regulatory and liability matters, there
can, however, be no assurance that the profitability of any center or SurgiCare
as a whole will be maintained.
SurgiCare intends to apply its philosophy in the acquisition,
development and operation of physician owned / managed freestanding ambulatory
surgery centers.
THE ESSENTIAL COMPONENTS OF SURGICARE'S STRATEGY ARE:
Acquire physician owned ambulatory surgery centers.
SurgiCare expects to continue to grow through a combination of
acquisitions and development of physician owned / managed ambulatory
surgical centers throughout the United States.
Achieve Growth in Surgery Center Revenues and Profitability.
SurgiCare intends to enhance physician productivity and promote
increased same-center revenues and profitability by increasing
physician involvement, and creating operating efficiencies, including
improved scheduling, group purchasing programs and clinical
efficiencies.
SurgiCare is in the process of identifying ambulatory surgical centers
as potential acquisition targets, and has, in some cases, conducted preliminary
discussions with representatives of centers. At the time of this filing there
are no commitments, understandings, or agreements with any potential acquisition
targets. All of such discussions have been tentative in nature and there can be
no assurance that SurgiCare will acquire any center with which discussions have
been conducted. SurgiCare expects that generally the acquisition of another
surgery center will take the form of a merger, stock-for-stock exchange or
stock-for-assets exchange, and that in most instances the target company will
wish to structure the business combination to be within the definition of a
tax-free reorganization under Section 368 of the Internal Revenue Code of 1986,
as amended. SurgiCare may, however, use other acquisition structuring
techniques, including purchases of assets or stock for cash or cash and stock,
or through formation of one or more limited partnerships or limited liability
companies.
ACQUISITION AND DEVELOPMENT OF SURGERY CENTERS
SurgiCare's development staff will identify existing centers
that are potential acquisition candidates and identify physician practices that
are potential partners for new center development in the medical specialties
which SurgiCare has targeted for development.
The candidates will then be evaluated against SurgiCare's project
criteria which may be expected to include several factors such as number of
procedures currently being performed by the practice, competition from and the
fees being charged by other surgical providers, relative competitive market
position of the physician practice under consideration, ability to contract with
payers in the market and state certificate of need ("CON") requirements for
development of a new center.
In the development of a new surgery centers, SurgiCare intends to work
in conjunction with Surgery Centers of America II. SurgiCare believes that its
management has a certain expertise in acquiring, managing and operating
ambulatory surgical centers. However, in order to assure that its acquisition
and development activities are efficiently and thoroughly conducted, SurgiCare
has agreed in principle to utilize SCOA to assist it in these efforts. However,
SurgiCare's current affiliation agreement (Exhibit 10.1) which covers certain
operational affiliations, does not currently cover these types of development
activates. In presenting the advantages to physicians of developing a new
freestanding ambulatory surgery center in partnership with SurgiCare, SurgiCare
anticipates that the SurgiCare and SCOA development staffs will emphasize the
following factors, among others:
1.Simplified administrative procedures.
2.The ability to schedule consecutive cases without preemption by
inpatient or emergency procedures.
3.Rapid turnaround time between cases.
4.The high technical competency of the center's clinical staff that
performs only a limited number of specialized procedures, and
state-of-the-art surgical equipment.
SurgiCare expects that, in conjunction with SCOA, it will provide the
following developmental services: Financial feasibility pro forma analysis;
Assistance in state CON approval process; Site selection; Assistance in space
analysis and schematic floor plan design; Analysis of local, state, and federal
building codes; Negotiation of equipment financing with lenders; Equipment
budgeting, specification, bidding, and purchasing; Construction financing;
Architectural oversight; Contractor bidding; Construction management; Assistance
with licensing; Assistance with Medicare certification and third party Managed
care contracts.
SurgiCare currently intends that its ownership interests in its
freestanding ambulatory surgery centers will generally be 100%. The physicians
who had owned and operated a center acquired by SurgiCare, or who have newly
developed a center in partnership with SurgiCare, generally will become
substantial shareholders in SurgiCare. The local physicians will generally
continue to oversee their local operations. SurgiCare anticipates that the terms
of its acquisition agreements with new centers will include a provision for the
appointment of one or more physician partners from each newly acquired center to
a position on the Board of Directors of SurgiCare or on an advisory committee
that will advise SurgiCare's board or management on operational aspects of the
center.
REVENUES
SurgiCare's principal source of revenues is a facility fee charged to
patients, for surgical procedures performed in its surgery center. SurgiCare
depends upon third-party programs, including governmental and private health
insurance programs to pay these fees, on behalf of their patients. Patients are
responsible for the co-payments and deductibles when applicable. This fee varies
depending on the procedure, but usually includes all charges for operating room
usage, special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees do not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which are billed directly to
third-party payers by such physicians.
Freestanding ambulatory surgery centers such as those in which
SurgiCare owns and intends to acquire, depend upon third-party reimbursement
programs, including governmental and private insurance programs, to pay for
services rendered to patients. SurgiCare derived approximately 23% of its net
revenues from governmental healthcare programs, including Medicare and Medicaid,
in the past trailing 12-month period.
The Medicare program currently pays ambulatory surgery centers and
physicians in accordance with fee schedules, which are prospectively determined.
On June 12, 1998, the Health Care Financing Agency of the U.S.
Department of Health and Human Services ("HCFA") published a proposed rule that
would update the rate setting methodology, payment rates, payment policies and
the list of covered surgical procedures for ambulatory surgery centers. The
proposed rule is subject to a comment period that has been extended until June
30, 1999, and provides for an implementation date that has been extended to a
date to be no earlier than January 2000. As of March 29, 2000, this proposed
plan has not been adopted. If the plan is ever adopted, the law now requires
that it can only be implemented by phasing it in slowly over a three-year
period.
The proposed rule would reduce the rates paid for certain ambulatory
surgery center procedures reimbursed by Medicare. While the effects of the
proposed rule, if adopted in its current form, cannot be precisely forecasted,
SurgiCare believesthat if adopted in its current form, the proposed HCFA rule
would not directly have a material adverse affect its annual revenues. This is
because the procedure codes that are involved in the proposed rule, are codes
that SurgiCare believes are not relevant or critical to its current operation.
However many third party payers, base their payment structure on a percentage of
the Medicare accepted rate. The adjustment of such payers' rates to follow the
rates proposed in the rule could adversely affect SurgiCare's annual revenues.
There can be no assurance that HCFA will not modify the proposed rule, before it
is enacted in final form, in a manner that would adversely impact SurgiCare's
financial condition, results of operation and business prospects.
In addition to payment from governmental programs, ambulatory surgery
centers derive a significant portion of their net revenues from private
healthcare reimbursement plans. These plans include both standard indemnity
insurance programs as well as managed care structures such as PPO's, HMOs and
other similar structures.
The strengthening of managed care systems nationally has resulted in
substantial competition among providers of services, including providers of
surgery center services. This competition would include companies with greater
financial resources and market penetration than SurgiCare. In some cases
national managed care systems require that a provider, in order to participate
in a specific plan, be able to cover an expanded geographical area.
In order to compete in market penetration, SurgiCare has associated
itself with SCOA. SCOA is located in Edmond Oklahoma, and is in the business of
developing, building, and managing ambulatory surgical centers nation wide, with
participating physician partners. SCOA maintains a minority ownership in each of
the centers that is develops.
This association allows SCOA on behalf of all of its centers and
affiliates to cover a large geographical area, and to participate with managed
care systems accordingly. SCOA manages surgery centers in Oklahoma, Arizona,
Missouri, and parts of Texas. The more comprehensive the geographical coverage
provided by a company, the better it is able to compete for managed care
contracts. SurgiCare offers SCOA the ability to include the geographical regions
covered by SurgiCare. Since SCOA includes the SurgiCare facilities in its
managed care contracting, SurgiCare also benefits from the geographical
penetration of SCOA.
SurgiCare believes that all payers, both governmental and private, will
continue their efforts over the next several years to reduce healthcare costs
and that their efforts will generally result in a less stable market for
healthcare services. While no assurances can be given concerning the ultimate
success of SurgiCare's efforts to contract with healthcare payers, SurgiCare
believes that its position as a low-cost alternative for certain surgical
procedures should enable its current center, and additional centers which it may
acquire, to compete effectively in the evolving healthcare
marketplace.
COMPETITION
There are several companies, many in niche markets, that acquire
existing freestanding ambulatory surgery centers. Many of these competitors have
greater resources than SurgiCare. The principal competitive factors that affect
the ability of SurgiCare and its competitors to acquire surgery centers are
price, experience, reputation, and access to capital. Competition for Managed
Care Contracts
SurgiCare's participation in managed care contracts, often referred to
as HMO's and PPO's, in most cases simply makes it more convenient and cost
effective for a potential patient to allow their doctor to choose a SurgiCare
facility. Participation in most managed care contracts is helpful, but not
material to SurgiCare's business. SurgiCare believes that its current center can
provide lower-cost, high quality surgery in a more comfortable environment for
the patient in comparison to hospitals and to hospital based surgery centers
with which SurgiCare competes for managed care contracts. SurgiCare intends that
any additional center, which it may acquire, will be similarly situated. In
competing for Managed Care contracts, it is important that SurgiCare be able to
show insurance companies that it provides quality healthcare, and can do so at
affordable competitive prices.
GOVERNMENT REGULATION
The healthcare industry is subject to extensive regulation by a number
of governmental entities at the federal, state and local level. Regulatory
activities affect the business activities of SurgiCare by controlling its
growth, requiring licensure and certification for its facilities, regulating the
use of SurgiCare's properties, and controlling reimbursement to SurgiCare for
the services it provides.
Certificates of Need and State Licensing. CON regulations control the
development of ambulatory surgery centers in certain states. CONs generally
provide that prior to the expansion of existing centers, the construction of new
centers, the acquisition of major items of equipment or the introduction of
certain new services, approval must be obtained from the designated state
health-planning agency. State CON statutes generally provide that, prior to the
construction of new facilities or the introduction of new services, a designated
state health-planning agency must determine that a need exists for those
facilities or services. SurgiCare expects that its development of ambulatory
surgery centers will generally focus on states that do not require CONs.
However, acquisitions of existing surgery centers, even in states that require
CONs for new centers, generally do not require CON regulatory approval.
State licensing of ambulatory surgery centers is generally a
prerequisite to the operation of each center and to participation in federally
funded programs, such as Medicare and Medicaid. Once a center becomes licensed
and operational, it must continue to comply with federal, state and local
licensing and certification requirements in addition to local building and life
safety codes. In addition, each center is also subject to federal, state and
local laws dealing with issues such as occupational safety, employment, medical
leave, insurance regulations, civil rights and discrimination, and medical waste
and other environmental issues.
Insurance Laws. Laws in all states regulate the business of insurance
and the operation of HMOs. Many states also regulate the establishment and
operation of networks of healthcare providers. SurgiCare believes that its
operations are in compliance with these laws in the states in which it currently
does business. The National Association of Insurance Commissioners (the "NAIC")
recently endorsed a policy proposing the state regulation of risk assumption by
healthcare providers. The policy proposes prohibiting providers from entering
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
healthcare providers will be precluded from entering into capitated contracts
directly with employers and benefit plans other than HMOs and companies.
SurgiCare and its affiliated groups may in the future enter contracts
with managed care organizations, such as HMOs, whereby SurgiCare and its
affiliated groups would assume risk in connection with providing healthcare
services under capitation arrangements. If SurgiCare or its affiliated groups
are considered to be in the business of insurance as a result of entering into
such risk sharing arrangements, they could become subject to a variety of
regulatory and licensing requirements applicable to insurance companies or HMOs,
which could have a material adverse effect upon SurgiCare's ability to enter
into such contracts.
With respect to managed care contracts that do not involve capitated
payments or some other form of financial risk sharing, federal and state
antitrust laws restrict the ability of healthcare provider networks such as
SurgiCare's specialty physician networks to negotiate payments on a collective
basis
Reimbursement. SurgiCare depends upon third-party programs, including
governmental and private health insurance programs; to reimburse it for services
rendered to patients in its ambulatory surgery center. In order to receive
Medicare reimbursement, each ambulatory surgery center must meet the applicable
conditions of participation set forth by the Department of Health and Human
Services ("DHHS") relating to the type of facility, its equipment, personnel and
standard of medical care, as well as compliance with state and local laws and
regulations, all of which are subject to change from time to time. Ambulatory
surgery centers undergo periodic on-site Medicare certification surveys.
SurgiCare's existing center is certified as a Medicare provider. Although
SurgiCare intends for its current center and those, which it may acquire, to
participate in Medicare and other government reimbursement programs, there can
be no assurance that these centers will continue to qualify for participation.
Since performing surgery is a fundamental part of any surgical practice
the facilities were a surgeon chooses to operate, is considered to be an
extension of the surgical practice. It is acceptable for certain surgical
procedures to be done in a doctors office, others procedures require a more
clinical environment such as that of an ambulatory surgical center, or a
hospital. Regardless of the location, when a surgeon performs a procedure the
surgical procedure is part of the surgical practice, and therefore the location
is considered to be an extension of the practice.
If an operating physician has a financial interest in a facility through a
partnership interest, or as a shareholder, the operating physician has the
potential to benefit from the profitability of the facility. Since the facility
where a surgeon performs surgery is considered an extension of the surgical
practice, profiting from an ownership interest is not considered to be in
violation of the anti-kickback statutes of the Medicare-Medicaid Illegal
Remuneration Provisions.
Medicare-Medicaid Illegal Remuneration Provisions. The anti-kickback
statute makes unlawful knowingly and willfully soliciting, receiving, offering
or paying any remuneration (including any kickback, bribe, or rebate) directly
or indirectly to induce or in return for referring an individual to a person for
the furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Violation is
a felony punishable by a fine of up to $25,000 or imprisonment for up to five
years, or both. The Medicare and Medicaid Patient Program Protection Act of 1987
(the "1987 Act") provides administrative penalties for healthcare practices
which encourage over utilization or illegal remuneration when the costs of
services are reimbursed under the Medicare program. Loss of Medicare
certification and severe financial penalties are included among the 1987 Act's
sanctions. The 1987 Act, which adds to the criminal penalties under preexisting
law, also directs the Inspector General of the DHHS to investigate practices
which may constitute over utilization, including investments by healthcare
providers in medical diagnostic facilities and to promulgate regulations
establishing exemptions or "safe harbors" for investments by medical service
providers in legitimate business ventures that will be deemed not to violate the
law even though those providers may also refer patients to such a venture.
Regulations identifying safe harbors were published in final form in July 1991
(the "Regulations").
The Regulations set forth two specific exemptions or "safe harbors"
related to "investment interests": the first concerning investment interests in
large publicly traded companies ($50,000,000 in net tangible assets) and the
second for investments in smaller entities. The corporate structure of SurgiCare
and its center do not meet all of the criteria of either existing "investment
interests" safe harbor as announced in the Regulations.
While several federal court decisions have aggressively applied the
restrictions of the anti-kickback statute, they provide little guidance as to
the application of the anti-kickback statute to SurgiCare or its subsidiary
company. SurgiCare believes that it is in compliance with the current
requirements of applicable federal and state law.
Notwithstanding SurgiCare's belief that the relationship of physician
partners to SurgiCare's surgery center should not constitute illegal
remuneration under the anti-kickback statute, no assurances can be given that a
federal or state agency charged with enforcement of the anti-kickback statute
and similar laws might not assert a contrary position or that new federal or
state laws might not be enacted that would cause the physician partners'
ownership interest in SurgiCare to become illegal, or result in the imposition
of penalties on SurgiCare or certain of its facilities. Even the assertion of a
violation could have a material adverse effect upon SurgiCare.
Prohibition on Physician Ownership of Healthcare Facilities. The
so-called "Stark II" provisions of the Omnibus Budget Reconciliation Act of 1993
amend the federal Medicare statute to prohibit a referral by a physician for
"designated health services" to an entity in which the physician has an
investment interest or other financial relationship, subject to certain
exceptions. A referral under Stark II that does not fall within an exception is
strictly prohibited. This prohibition took effect on January 1, 1995. Sanctions
for violating Stark II can include civil monetary penalties and exclusion from
Medicare and Medicaid.
Ambulatory surgery is not identified as a "designated health service",
and SurgiCare therefore does not believe that ambulatory surgery is otherwise
subject to the restrictions set forth in Stark II. Proposed regulations pursuant
to Stark II that were published on January 9, 1998 specifically provide that
services provided in any ambulatory surgery center and reimbursed under the
composite payment rate are not designated health services.
However, unfavorable final Stark II regulations or subsequent adverse
court interpretations concerning similar provisions found in recently enacted
state statutes could prohibit reimbursement for treatment provided by the
physicians affiliated with SurgiCare or its current or future centers to their
patients.
Neither SurgiCare nor its subsidiaries are engaged in the corporate
practice of medicine. SurgiCare does not employ any physicians to practice
medicine on its behalf. SurgiCare and its subsidiaries merely provide the venue
for its physicians to perform surgical procedures. SurgiCare submits claims and
bills to patients, for the FACILITY FEE only, and in no way are involved with
the billing or submission of claims for any professional medical fees.
SurgiCare cannot predict whether other regulatory or statutory
provisions will be enacted by federal or state authorities which would prohibit
or otherwise regulate relationships which SurgiCare has established or may
establish with other healthcare providers or the possibility of material adverse
effects on its business or revenues arising from such future actions. SurgiCare
believes, however, that it will be able to adjust its operations to be in
compliance with any regulatory or statutory provision, as may be applicable.
SurgiCare is subject to state and federal laws that govern the
submission of claims for reimbursement. These laws generally prohibit an
individual or entity from knowingly and willfully presenting a claim (or causing
a claim to be presented) for payment from Medicare, Medicaid or other third
party payers that is false or fraudulent. The standard for "knowing and willful"
often includes conduct that amounts to a reckless disregard for whether accurate
information is presented by claims processors
Penalties under these statutes include substantial civil and criminal
fines, exclusion from the Medicare program, and imprisonment. One of the most
prominent of these laws is the federal False Claims Act, which may be enforced
by the federal government directly, or by a qui tam plaintiff on the
government's behalf. Under the False Claims Act, both the government and the
private plaintiff, if successful, are permitted to recover substantial monetary
penalties, as well as an amount equal to three times actual damages. In recent
cases, some qui tam plaintiffs have taken the position that violations of the
anti-kickback statute and Stark II should also be prosecuted as violations of
the federal False Claims Act. SurgiCare believes that it has procedures in place
to ensure the accurate completion of claims forms and requests for payment.
However, the laws and regulations defining the proper parameters of
proper Medicare or Medicaid billing are frequently unclear and have not been
subjected to extensive judicial or agency interpretation. Billing errors can
occur despite SurgiCare's best efforts to prevent or correct them, and no
assurances can be given that the government will regard such errors as
inadvertent and not in violation of the False Claims Act or related statutes.
EMPLOYEES
As of July 21, 1999, SurgiCare and its subsidiary employed
approximately 18 persons, 13 of who were full-time employees and 5 of who were
part-time employees. Of the above, 2 were employed at SurgiCare's headquarters
staff office in Houston, Texas and the remaining employees were employed by
Bellaire. SurgiCare believes its relationship with its employees to be good.
SurgiCare does not have any employment or labor contracts, nor does it currently
plan on having any such contracts with any operating physician on staff at any
of its facilities. At this time SurgiCare believes that all of its nurses and
other employees have (at will) employment relationships with the company.
PHYSICIAN SHAREHOLDERS
SurgiCare has never entered into any arrangement, nor does it plan on
entering into any arrangement with any physicians that operate at any of its
facilities, to assure their continued use of its companies facilities. However
many of the surgeons that operating in SurgiCare facilities own either
SurgiCare's common stock, preferred stock, or both. Depending on SurgiCare's
profitability, the potential exist for all shareholders, both physician and
non-physician, to benefit financially.
Surgeons specializing in podiatry, orthopedics, pain management,
gynecology, ophthalmology, plastics, as well as general surgery, utilize
SurgiCare's facility. SurgiCare is not dependent on the revenue generated by
patients brought by any single operating physician. SurgiCare does however
derive a large portion of its revenue from procedures performed within specific
specialties. Currently podiatry and pain management are the dominant specialties
at Bellaire. Since Bellaire has over 20 podiatrist and three pain management
physicians bringing patients to the surgery center, none are considered to be a
major customer.
ITEM 2. DESCRIPTION OF PROPERTY
SurgiCare's principal office is located at 6699 Chimney Rock Rd., Suite
105, Houston, Texas, 77081. SurgiCare currently occupies space within the
facility operated by its wholly owned subsidiary, Bellaire. This property is
approximately 10,000 square feet, occupying about half of both the first and
second floors of the building in which it is located. The property is leased
from an unaffiliated third party for a term that expires in March 2003, with an
annual rental of $ 172,081.92, payable monthly in the amount of $15,771.50. The
rent has increased over prior years, in part because Bellaire has increased its
rental space by approximately 637 square feet, as of August 1, 1999. The balance
of the increase can be attributed to a rental increase for Bellaire's' pro-rata
share of building overhead. SurgiCare maintains tenant fire and casualty
insurance on its property located in such building in an amount deemed adequate
by SurgiCare.
ITEM 3. LEGAL PROCEEDINGS
SurgiCare is not party to, and none of its property or holdings is
subject to, any pending or threatened legal, governmental, administrative or
judicial proceedings that will have a material adverse effect upon SurgiCare's
condition or operation.
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
SurgiCare's Common Stock currently is not traded on any national
securities exchange or other public market. SurgiCare's management is working
with certain broker dealers affiliated with the National Association of
Securities Dealers Inc. in order to have the SurgiCare's companies stock listed
on the Over The Counter Bulletin Board (OTCBB). There can be no assurance that
SurgiCare's securities will become eligible to be quoted or that any market will
develop for SurgiCare's securities.
SurgiCare's common stock has been trading in Texas since August 23,1999
through William Little and Company. The following table sets forth the high and
low sales prices per share of the company's common stock as reported by William
Little and Company from August 23, 1999 through December 31, 1999 and each of
the quarters in 1999 subsequent to the initial quoting period. Such bid price
reflect quotations by William Little, and Company without commissions and may
not represent actual transactions.
HIGH BID LOW BID
August 23, 1999 through September 30, 1999 3 2 15/16
Quarter ended December 31, 1999 3 7/8 3
PENNY STOCK
SurgiCare's common stock may be classified as "penny stock" as defined
by the Securities and Exchange Commission. The Securities and Exchange
Commission has adopted a Rule which established the definition of a "penny
stock," for purposes relevant to the Company, as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions that do not currently apply to
SurgiCare's stock. For any transaction involving a penny stock, unless exempt,
the rules require: (i) that a broker or dealer approve a person's account for
transactions in penny stocks; and (ii) the broker or dealer receive from the
investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person's
account for transactions in penny stocks, the broker or dealer must (i) obtain
financial information and investment experience and objectives of the person;
and (ii) make a reasonable determination that the transactions in penny stocks
are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. The broker or dealer must also deliver, prior to
any transaction in a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, which, in highlight form, (i)
sets forth the basis on which the broker or dealer made the suitability
determination, and (ii) that the broker or dealer received a signed, written
agreement from the investor prior to the transaction. Disclosure also has to be
made about the risks of investing in penny stock in both public offering and in
secondary trading, and about commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the
rights and remedies available to an investor incases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. These requirements may reduce the level of
trading activity in the market for a stock that is subject to the penny stock
rules and therefore make it more difficult to sell those shares.
HOLDERS
SurgiCare believes that there were approximately 325 holders of record
of the Company's Common Stock, and 15 holders of the Company's Series A
Preferred as of December 31, 1999.
DIVIDENDS
SurgiCare has not paid dividends on shares of its Common Stock within
the last two years, and does not expect to declare or pay any cash dividends on
its common shares in the foreseeable future
CONVERTIBLE SECURITIES AND RESTRICTED SECURITIES
Convertible Securities. At the date of filing of this registration
statement, there are 1,350,000 shares of Series A Preferred Stock outstanding.
Each share of Series A Preferred Stock is convertible at the option of the
holder into one share of Common Stock of SurgiCare.
No options or warrants to purchase shares of Common Stock or Series A
Preferred Stock have been issued by SurgiCare.
Restricted Securities. As of December 31, 1999 there were approximately 325
holders of record of SurgiCare's Common Stock and 14 holders of record of its
Series A Preferred Stock. Currently 11,055,556 of the 12,596,657 shares of
Common Stock and all of the shares of Series A Preferred Stock issued and
outstanding are deemed to be "restricted securities" within the meaning of Rule
144 promulgated under the Securities Act and may be publicly resold only if
registered under the Securities Act in the future or sold in accordance with an
applicable exemption from registration, such as is set forth in Rule 144.
SurgiCare believes that its directors and officers constituting affiliates of
SurgiCare currently own 3,247,776 restricted shares of Common Stock and 400,000
restricted shares of Series A Preferred Stock.
In general, under Rule 144 as currently in effect, a person (including an
affiliate of SurgiCare) who beneficially has owned restricted securities that
were acquired from SurgiCare for at least one year prior to an intended sale
date is entitled to sell within any three-month period a number of shares that
does not exceed the greater of the following: a. one percent of the number of
shares of common stock then outstanding; or b. the average weekly reported
trading volume of the common stock during the four calendar weeks immediately
preceding the date on which notice of such sale is filed with the Securities and
Exchange Commission, provided that manner of sale and notice requirements and
requirements as to the availability of current public information concerning
SurgiCare are satisfied.
Under Rule 144(k), a person who has not been an affiliate of SurgiCare
for at least three months preceding the intended sale date and who beneficially
has owned restricted securities acquired from SurgiCare for at least two years
prior to the sale date, would be entitled to sell the shares without volume
limitations, manner of sale provisions, or notification requirements.
.
Shares owned by persons who, under the Securities Act, are deemed to be
affiliates of SurgiCare are subject to volume limitations, manner of sale
provisions, notification requirements, and requirements as to the availability
of current public information regarding SurgiCare, regardless of how long the
shares have been owned. As defined in Rule 144, an affiliate of an issuer is a
person that directly or indirectly through the use of one or more
intermediaries, controls, or is controlled by, or is under common control with,
the issuer. SurgiCare believes that Messrs. Blumfield, Penso, Nagler, Mineo
Browne, Nguyen, and Cohen (its directors and officers) are affiliates of
SurgiCare.
TRANSFER AGENT
SurgiCare's transfer agent is First National Trust Company; their
address is 240 N. Jones Blvd, STE F-206, Las Vegas, NV 89107. Their toll free
telephone number is 1-888-505-3721.
RECENT SALES OF UNREGISTERED SECURITIES
On July 2, 1999 Technical Coatings issued 100,000 Shares of Common
Stock to Marjorie Kleiman Mintz, personally and as surviving spouse of Martin
Kleiman, in exchange for all of her rights, title and interest in a judgment
owned by her in the amount of $211,040.40 plus interest and attorney's fees,
pursuant to Settlement Agreement dated July 7, 1999. The original judgment had
been issued against TCI in the Circuit Court of the Eleventh Judicial Circuit in
and for Dade County Florida, on April 20, 1990. This transaction took place
prior to the Bellaire Shareholders acquiring the Technical Coatings Stock There
is no remaining contingent liabilities as a result of this settlement agreement.
Pursuant to the Settlement Agreement, Mrs. Kleiman Mintz agreed that for a
period of one year she would not sell more than 25% of the shares of Common
Stock received by her, increasing by 25% per year thereafter. The Settlement
Agreement further provides that if at any time the Common Stock reaches a market
price of $5.00 per share, and maintains that market price for a period of 90
days, all restrictions imposed by the Settlement Agreement would be released.
The stock issued is subject to the restrictions of Rule 144, and any restriction
imposed by that rule shall supersede any restrictions imposed, or released,
pursuant to the terms of the Settlement Agreement.
On July 21, 1999, SurgiCare issued 9,860,000 shares of its Common
Stock, with a $0.005 per share par value, and 1,350,000 shares of its Series A
Preferred, to the shareholders of Bellaire pursuant to a Stock Exchange
Agreement effective July 1, 1999. The shares were issued as part of a stock for
stock exchange, upon the completion of which SurgiCare became the sole
shareholder of Bellaire.
On July 18,1999 SurgiCare issued 1,095,566 shares of its Common Stock
to SCOA pursuant to an agreement, dated July 1, 1999, among SurgiCare, SCOA and
Bellaire (the "SCOA Agreement"). The shares issued to SCOA were issued in
satisfaction of SCOA's rights, under a previous agreement with Bellaire, to
participate in the proceeds of any transaction resulting in a change of control
of Bellaire, and in connection with the agreed early termination of that
agreement.
No underwriters were involved in any of the foregoing sales or issuance
of securities. Such sales or issuance were made in reliance upon an exemption
from the registration provisions of the Securities Act set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering, or the
rules and regulations there under. Each individual receiving securities in the
foregoing sales or issuance is believed by SurgiCare to be an "accredited
investor" as that term is defined under Rule 501 of Regulation D under the
Securities Act, and to have been provided with, or have by virtue of their
position access to, adequate information concerning SurgiCare at the time of the
respective issuance. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
The information contained herein contains certain forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward looking statements involve risks and uncertainty,
including, without limitation, the ability of SurgiCare to continue its
expansion strategy, changes in federal or state healthcare laws and regulations
or third party payer practices, SurgiCare's historical and current compliance
with existing or future healthcare laws and regulations and third party payer
requirements, changes in costs of supplies, labor and employee benefits, as well
as general market conditions, competition and pricing. Although SurgiCare
believes that the assumptions underlying the forward looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward looking statements
included in this Form 10K-SB will prove to be accurate. In view of the
significant uncertainties inherent in the forward looking statements included
herein, the inclusion of such information should not be regarded as a
representation by SurgiCare or any other person that the objectives and plans of
SurgiCare will be achieved. SurgiCare undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes to future operating results over time.
SurgiCare's principal business strategies are to (i) increase physician
utilization of existing facilities, (ii) increase both the revenue and profits,
from current cases and procedures being performed in existing facilities and,
(iii) achieve growth and expand revenues by pursuing strategic acquisitions of
existing, and the development of new, physician owned ambulatory surgical
centers.
(i) Bellaire SurgiCare is currently operating at or near capacity. In order
to facilitate growth, SurgiCare is in the process of adding one additional
operating room to its Bellaire facility. This additional operating room
will increase the capacity at Bellaire by 50%.
(ii) SurgiCare is constantly striving to achieve increase profits from
existing revenues. Surgical supply costs are the single largest cost
component of any ambulatory surgical center. Therefore SurgiCare is always
looking for ways to decrease the cost of surgical supplies. Through
participation in national buying groups SurgiCare has been able to
negotiate discounts on most of the commonly used surgical supplies.
SurgiCare has also implemented a "Just in Time" approach to inventory. This
allows the center to minimize the amount of supplies that it is required to
keep in inventory. SurgiCare is also always looking for new distributors of
its surgical supplies that have the capability to deliver the majority of
its surgical supplies "Just in Time", and provide quality service, at
reduced prices. SurgiCare has found that the purchasing policies that
govern the acquisition of surgical equipment is an important key to
maximize a centers profit. Therefore all equipment is purchased at the
corporate level, in order to insures that the equipment is purchased at the
lowest possible price.
(iii) SurgiCare is in the process of identifying ambulatory surgical
centers as potential acquisition targets, and has, in some cases, conducted
preliminary discussions with representatives of centers. At the time of
this filing there are no commitments, understandings, or agreements with
any potential acquisition targets. All of such discussions have been
tentative in nature and there can be no assurance that SurgiCare will
acquire any center with whom discussions have been conducted. SurgiCare
expects that generally the acquisition of another surgery center will take
the form of a merger, stock-for-stock exchange or stock-for-assets
exchange, and that in most instances the target company will wish to
structure the business combination to be within the definition of a
tax-free reorganization under Section 368 of the Internal Revenue Code of
1986, as amended. SurgiCare may, however, use other acquisition structuring
techniques, including purchases of assets or stock for cash or cash and
stock, or through formation of one or more limited partnerships or limited
liability companies.
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following table sets forth for the periods indicated the percentages of
revenues represented by income statement items.
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
- ------------------------------------------------------------------------
Revenues, net 100.00% 100.00%
- ------------------------------------------------------------------------
Expenses
Direct Costs of Sales
- ------------------------------------------------------------------------
Surgical Costs 18.34% 15.53%
- ------------------------------------------------------------------------
Clinical Salaries, Wages and benefits 11.37% 9.24%
- ------------------------------------------------------------------------
Other Surgical Cost 4.45% 3.88%
- ------------------------------------------------------------------------
Total Direct Cost of Services 34.16% 28.65%
- ------------------------------------------------------------------------
General & Administrative Expenses
- ------------------------------------------------------------------------
Salaries, Wages and benefits 3.86% 4.80%
- ------------------------------------------------------------------------
Management Co. Termination Fee 0.00% 3.90%
- -----------------------------------------------------------------------
Professional Fees 2.98% 1.16%
- ------------------------------------------------------------------------
Rent 6.57% 4.29%
- ------------------------------------------------------------------------
Management Fee 7.98% 4.89%
- ------------------------------------------------------------------------
Insurance 0.84% 1.04%
- ------------------------------------------------------------------------
Depreciation 5.14% 3.36%
- ------------------------------------------------------------------------
Repairs & Maintenance 0.52% 0.29%
- ------------------------------------------------------------------------
Other operating expenses 1.36% 1.75%
- ------------------------------------------------------------------------
Taxes 1.12% 1.72%
- ------------------------------------------------------------------------
Total G & A 30.37% 27.19%
- ------------------------------------------------------------------------
Total Expenses 64.53% 55.84%
- ------------------------------------------------------------------------
Operating Income 35.47% 44.16%
- ------------------------------------------------------------------------
Other Income
- ------------------------------------------------------------------------
Gain on sale of property and equipment 0.20% 0.29%
- ------------------------------------------------------------------------
Miscellaneous income 0.28% 0.29%
- ------------------------------------------------------------------------
Interest Expense -1.76% -1.18%
- ------------------------------------------------------------------------
Total Other Income -1.28% -0.60%
- ------------------------------------------------------------------------
Earnings Before Federal Income Tax Expense 34.19% 43.55%
- ------------------------------------------------------------------------
Federal Income Tax Expense (Benefit)
- ------------------------------------------------------------------------
Current 0.00% 3.93%
- ------------------------------------------------------------------------
Deferred 0.00% 12.95%
- ------------------------------------------------------------------------
Net Earnings 34.19% 26.68%
- ------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATION
The following table sets forth for the period indicated the number of surgical
cases.
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
1998 1999
<S> <C> <C>
- ----------------------------------------------------------------------------
Number of Cases
- ----------------------------------------------------------------------------
Bellaire 1790 2620
- ----------------------------------------------------------------------------
Total Revenues Generated $2,559,526 $4,216,660
- ----------------------------------------------------------------------------
Avg. Revenue Generated per Case $ 1,430 $ 1,609
- ----------------------------------------------------------------------------
Avg. Earnings Before Federal Income Tax per Case $ 489 $ 701
- ----------------------------------------------------------------------------
</TABLE>
TWELVE MONTHS ENDING DECEMBER 31,1999 vs.TWELVE MONTHS ENDING DECEMBER 31,1998
The twelve months ending December 31, 1999 dramatically demonstrated
the success of SurgiCare's strategic effort to increase the number of profitable
low cost procedures while decreasing the number of high cost, low profit
procedures. The results of these efforts had significant impact on the financial
results for the year ending December 31, 1999. The total case performed for the
year 1999 were 2620 compared to 1790 procedures during 1998, this represents 46%
increase year over year utilization.
Revenues generated per case for the same period rose 12.5% from an
average of $1,430 per case to $1,609. Most significant was the 43.3% increase in
pre-tax earnings generated per case, from $489 for the twelve-month period
ending December 31, 1998, to $701 for the same period in 1999.
In the twelve months ending December 31, 1999, Bellaire posted record
revenues of $4,216,660 compared to $2,559,526 for the same period in 1998, a
64.7% increase, resulting from the increase in cases and average per case
discussed above. For the same period direct surgical expenses rose only 38% from
$0.87 million to $1.2 million. As a percentage of revenue direct surgical
expenses dropped from 34.2% for the twelve month period ending December 31,
1998, to 28.7% for the same period in 1999, this reduction was the result of
increased percentage of lower cost cases. As a percentage of revenue General and
Administrative Expenses fell from 30.4% for the twelve-month period ending
December 31, 1998, to 27.2% for the same period in 1999.
The increased revenue, along with the percentage decrease in expenses
yielded an increase in pre tax earnings of 110% to $1,836,520 for the
twelve-month period ending December 31, 1999, from $875,125 for the same period
in 1998.
In July of 1999, SurgiCare incurred a one-time charge of $164,333. This
charge was a fee for the termination of Bellaire's pre-existing management
contract with Surgery Centers of America. As a direct result of the termination
of this contact, there was a slight decrease in the management fee as a
percentage of revenue, The cost of the new affiliation agreement the company has
with Surgery Centers of America, is only 2% of total collected revenue, compared
to the previous contracted 5% of total collected revenue.
Due to the expanded facility utilization in 1999, SurgiCare is adding
one additional operating room to its Bellaire facility. This additional
operating room will increase the capacity at Bellaire by 50%. This expansion
project was completed in early March of 2000, and by the end of the same month,
the company began utilizing it's new expanded facilities
The funds for this expansion have been secured and approved through a
conventional loan from the Southwest Bank of Texas. With the exception of the
above-mentioned remodeling project, SurgiCare does not anticipate the need to
raise or borrow any additional funds to meet any of its obligations during the
next 12 months.
Prior to the reverse merger in July 1999, Bellaire SurgiCare was an
S-Corporation and therefore any and all tax liabilities, and or credits, passed
through directly to its shareholders. SurgiCare has therefore entered a one-time
charge in 1999 for deferred taxes of $429,000, based on Bellaire's balances at
the time of the reverse merger.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has financed its operating
activities primarily through cash generated from operations. Net cash provided
by operating activities increased from $.6 million in fiscal 1998 to $1.4
million in fiscal 1999, due primarily to the level of net income and changes in
operating assets and liabilities. The Company had $641 thousand of working
capital as of December 31, 1999 compared to $420 thousand of working capital as
of December 31, 1998.
Capital expenditures increased from $71 thousand through December
31, 1998 to $194 thousand for the same period in 1999. The increase was due in
part to the additional equipment required to increase case capacity within
specific surgical services, as well as the expenses associated with the addition
of the new operative suite. All anticipated capital expenditures, can and will
be funded from operating revenues.
SurgiCare does not foresee any trend or uncertainties that would
impact the long or short-term liquidity of the company. The company does not
plan or expect any material capital expenditures that would require additional
source of funds.
YEAR 2000 COMPLIANCE
SurgiCare experienced no material Y2K related complications.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS TABLE OF CONTENTS
Page Number
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Earnings 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
<PAGE>
Independent Auditors' Report
The Board of Directors
SurgiCare, Inc.
Houston, Texas
We have audited the accompanying Consolidated Balance Sheets of SurgiCare, Inc.
as of December 31, 1998 and 1999, and the related Consolidated Statements of
Earnings, Shareholders' Equity, and Cash Flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SurgiCare, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
March 3, 2000
-2-
<PAGE>
<TABLE>
<CAPTION>
SURGICARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
<S> <C> <C>
- ------------------------------------------------------- ---------- ----------
1998 1999
---------- ----------
ASSETS
- ------------------------------------------------------- ---------- ----------
Current Assets
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Cash and cash equivalents $ 57,049 $ 243,859
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Accounts receivable (less allowance for contractual
adjustments and doubtful accounts of $835,000 and
$1,682,000 at Decand 1999, respectively) 923,4321 1,751,984
- ------------------------------------------------------- ---------- ----------
Other receivable 80,849
- ------------------------------------------------------ ---------- ----------
Inventory 47,987 89,361
- ------------------------------------------------------- ---------- ----------
Prepaid expenses 26,210 27,175
- ------------------------------------------------------- ---------- ----------
Other current assets 5,862 21,200
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Total Current Assets 1,060,540 2,214,428
---------- ----------
- ------------------------------------------------------- ---------- ----------
Property and Equipment
- ------------------------------------------------------- ---------- ----------
Office furniture and equipment 34,445 40,922
- ------------------------------------------------------- ---------- ----------
Medical and surgical equipment 583,648 660,225
- ------------------------------------------------------- ---------- ----------
Leasehold improvements 28,016 28,016
- ------------------------------------------------------- ---------- ----------
Computer equipment 38,175 58,303
- ------------------------------------------------------- ---------- ----------
Construction in progress 117,121
---------- ----------
- ------------------------------------------------------- ---------- ----------
684,284 904,587
- ------------------------------------------------------- ---------- ----------
Less: Accumulated depreciation and amortization 401,988 487,998
---------- ----------
- ------------------------------------------------------- ---------- ----------
282,296 416,589
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Goodwill (net of amortization of $5,737) 166,367
---------- ----------
- ------------------------------------------------------- ---------- ----------
$1,342,836 $2,797,384
========== ==========
</TABLE>
See notes to consolidated financial
statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
- ------------------------------------------------------- ---------- ----------
1998 1999
---------- ----------
- ------------------------------------------------------- ---------- ----------
LIABILITIES
- ------------------------------------------------------- ---------- ----------
Current Liabilities
- ------------------------------------------------------- ---------- ----------
Current portion of capital lease obligations $ 7,386 $ 21,464
- ------------------------------------------------------- ---------- ----------
Notes payable 545,278 633,764
- ------------------------------------------------------- ---------- ----------
Accounts payable 37,826 147,685
- ------------------------------------------------------- ---------- ----------
Accrued expenses 49,811 128,280
- ------------------------------------------------------- ---------- ----------
Federal income tax payable 95,637
- ------------------------------------------------------- ---------- ----------
Deferred federal income tax 546,000
---------- ----------
- ------------------------------------------------------- ---------- ----------
Total Current Liabilities 640,301 1,572,830
- ------------------------------------------------------- ---------- ----------
Long-Term Capital Lease Obligations 7,491 49,544
---------- ----------
- ------------------------------------------------------- ---------- ----------
647,792 1,622,374
- ------------------------------------------------------- ---------- ----------
SHAREHOLDERS' EQUITY
- ------------------------------------------------------- ---------- ----------
Preferred Stock, Series A, par value $.001, 1,650,000
authorized,1,400,000 issued and outstanding at December
31, 1999 and liquidation value $7,000,000 1400
- ------------------------------------------------------- ---------- ----------
Common Stock, par value $.10, 1,000,000 shares
authorize 140 issued at December 31, 1998 140
- ------------------------------------------------------- ---------- ----------
Common Stock, par value $.005, 50,000,000 shares
authorized, 12,652,766 issued and outstanding at
December 31, 1999 63,272
- ------------------------------------------------------- ---------- ----------
Additional Paid-In Capital 32,610 899,956
- ------------------------------------------------------- ---------- ----------
Retained Earnings 765,794 237,882
- ------------------------------------------------------- ---------- ----------
Less: Treasury stock, 150 shares at cost (54,750)
- ------------------------------------------------------- ---------- ----------
Shareholder receivables (48,750) (27,500)
---------- ----------
- ------------------------------------------------------- ---------- ----------
695,044 1,175,010
- ------------------------------------------------------- ---------- ----------
$1,342,836 $2,797,384
========== ==========
- ------------------------------------------------------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
---------- ----------
<CAPTION>
For the Year Ended
December 31,
<S> <C> <C>
- ------------------------------------------------------- ---------- ----------
1998 1999
---------- ----------
- ------------------------------------------------------- ---------- ----------
Revenues, net $2,559,526 $4,216,660
---------- ----------
- ------------------------------------------------------- ---------- ----------
Expenses
- ------------------------------------------------------- ---------- ----------
Surgical costs 469,528 654,727
- ------------------------------------------------------- ---------- ----------
Salaries, wages and benefits 389,999 592,180
- ------------------------------------------------------- ---------- ----------
Contract services 31,871 38,506
- ------------------------------------------------------- ---------- ----------
Management fees 204,328 206,335
- ------------------------------------------------------- ---------- ----------
Management company termination fee 164,333
- ------------------------------------------------------- ---------- ----------
Rent 168,083 180,693
- ------------------------------------------------------- ---------- ----------
Depreciation and amortization 131,559 141,884
- ------------------------------------------------------- ---------- ----------
Insurance 21,603 29,844
- ------------------------------------------------------- ---------- ----------
Professional fees 87,460 48,771
- ------------------------------------------------------- ---------- ----------
Repairs and maintenance 52,154 44,875
- ------------------------------------------------------- ---------- ----------
Other operating expenses 66,456 179,907
- ------------------------------------------------------- ---------- ----------
Taxes 28,605 72,628
---------- ----------
1,651,646 2,354,683
---------- ----------
- ------------------------------------------------------- ---------- ----------
Operating Income 907,880 1,861,977
---------- ----------
- ------------------------------------------------------- ---------- ----------
Other Income (Expense)
- ------------------------------------------------------- ---------- ----------
Gain on sale of property and equipment 5,092 12,025
- ------------------------------------------------------- ---------- ----------
Miscellaneous income 7,292 12,433
- ------------------------------------------------------- ---------- ----------
Interest expense (45,139) (49,915)
---------- ----------
- ------------------------------------------------------- ---------- ----------
(32,755) (25,457)
---------- ----------
- ------------------------------------------------------- ---------- ----------
Earnings Before Federal Income Tax Expense 875,125 1,836,520
---------- ----------
- ------------------------------------------------------- ---------- ----------
Federal Income Tax Expense
- ------------------------------------------------------- ---------- ----------
Current 165,637
- ------------------------------------------------------- ---------- ----------
Deferred 546,000
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
711,637
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Net Earnings $ 875,125 $1,124,883
========== ==========
- ------------------------------------------------------- ---------- ----------
Pro forma income data (unaudited):
- ------------------------------------------------------- ---------- ----------
Earnings before federal income tax expense $ 875,125 $1,836,520
- ------------------------------------------------------- ---------- ----------
Pro forma income tax 341,299 624,417
---------- ----------
- ------------------------------------------------------- ---------- ----------
Pro forma Net Earnings $ 533,826 $1,212,103
========== ==========
- ------------------------------------------------------- ---------- ----------
Pro forma earnings per share - basic $ .05 $ .08
========== ==========
- -------------------------------------------------------- ---------- ----------
Pro forma earnings per share - diluted $ .05 $ .07
========== ==========
</TABLE>
See notes to
consolidated financial statements.
-5-
<PAGE>
<TABLE>
SURGICARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1999
<CAPTION>
$.10 Par Value $.005 Par Value Additional
Preferred Stock Common Stock Common Stock Paid-in Treasury Stock Shareholder Retained Total
Capital Receivables Earnings Equity
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Balance - December 31, 1997 1,400 140 $13,860 $(20,500)$417,419 $410,919
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Dividends to shareholders (526,750)(526,750)
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Purchase of Treasury stock (400)$(146,000) (146,000)
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Sale of Treasury stock $18,750 250 91,250 (110,000)
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Collections on shareholder 81,750 81,750
receivables
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Net Earnings 875,125 875,125
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Balance - December 31, 1998 1,400 140 $32,610 (150)$(54,750) (78,750) 765,794 695,044
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Dividends to shareholders (599,000)(599,000)
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Sale of Treasury stock $ 8,500 100 36,500 (45,000)
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Cancellation of Treasury
stock (50) (5) (18,245) 50 18,250
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Stock issued for termination
of management agreement 1,095,556 $5,478 158,855 164,333
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Net earnings -
January 1, 1999 to 561,001 561,001
June 30, 1999
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Capitalization of S 727,795 (727,795)
corporation earnings
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Contributions by shareholders 27,000 27,000
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Shares exchanged in reverse 1,350,000 $1,350 (1,350) (135) 11,501,101 57,505 (58,720)
acquisition
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Sale of preferred stock 50,000 $ 50 $22,450 (22,500)
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Dividends paid to preferred (326,000)(326,000)
shareholders
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Collections on shareholder 88,750 88,750
receivables
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Net earnings -
July 1, 1999 to 563,882 563,882
December 31, 1999
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
Balance - December 31, 1999 1,400,000 $ 1,400 $ 12,596,657 $62,983 $900,24 $(27,500) $237,882 $1,175,010
- ----------------------------- --------- ------- ------- ----- --------- ------- --------- ----- -------- --------- -------- --------
</TABLE>
See notes to consolidated financial
statements.
-6-
<PAGE>
SURGICARE, INC.
<TABLE> CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
---------- ----------
For the Year Ended
December 31,
---------- ----------
<S> <C> <C>
- ------------------------------------------------------- ---------- ----------
1998 1999
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Cash Flows From Operating Activities
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Net earnings $ 875,125 $1,124,883
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Adjustments to reconcile net earnings to net cash provided by operations:
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Depreciation and amortization 131,559 141,884
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Gain on sale of property and equipment (5,092) (12,025)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Deferred federal income tax 546,000
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Management company termination fee 164,333
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
(Increase) Decrease in:
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Accounts receivable (356,667) (828,552)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Inventory (1,988) (41,374)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Prepaid expenses 3,828 (965)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Other current assets (2,845) (15,338)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Increase (Decrease) in:
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Accounts payable (52,743) 109,859
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Federal income tax payable 95,637
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Accrued expenses 19,847 78,469
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Net Cash Provided by Operating Activities 611,024 1,362,811
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Cash Flows From Investing Activities
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Capital expenditures (70,865) (193,872)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Advance on other receivable (80,849)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Proceeds from sale of property and equipment 27,500 12,428
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Acquisition of SurgiCare, Inc. (172,104)
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Net Cash Used in Investing Activities (43,365) (434,397)
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Cash Flows From Financing Activities
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Borrowings on debt 78,500 336,000
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Payments on debt (118,369) (247,514)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Principal payments on capital lease (12,216) (20,840)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Purchase of treasury stock (121,667)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Collections on shareholder receivable 88,750
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Contributions by shareholders 27,000
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Dividends paid to preferred shareholders (326,000)
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Distributions to shareholders (526,750) (599,000)
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Net Cash Used in Financing Activities (618,752) (741,604)
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (51,093) 186,810
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Cash and Cash Equivalents - Beginning of Period 108,142 57,049
---------- ----------
- ------------------------------------------------------- ---------- ----------
- ------------------------------------------------------- ---------- ----------
Cash and Cash Equivalents - End of Period $ 57,049 $ 243,859
========== ==========
- ------------------------------------------------------- ---------- ----------
</TABLE>
-10-
<PAGE>
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
Note 1 - Accounting Policies
SurgiCare, Inc. (the Company) maintains its accounts on the accrual method of
accounting in accordance with generally accepted accounting principles.
Accounting principles followed by the Company and the methods of applying those
principles which materially affect the determination of financial position,
results of operations and cash flows are summarized below:
Description of Business
Bellaire Surgicare, Inc. (Bellaire) was formed in January, 1995 as a Texas
corporation to operate a day surgery center in Houston, Texas, and
therefore operates as a single segment. Effective July 1, 1999, Bellaire
acquired SurgiCare, Inc. (formerly Technical Coatings, Inc.) in a reverse
acquisition. Bellaire Surgicare, Inc. is now a wholly-owned subsidiary of
SurgiCare, Inc.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Bellaire Surgicare, Inc. All material
intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. During the year, the
Company maintained cash balances in excess of federally insured limits.
Revenue Recognition
Revenue is recognized on the date the procedures are performed, and
accounts receivable are recorded at that time. Revenues are reported at the
estimated realizable amounts from patients and third-party payers. If such
third-party payers were to change their reimbursement policies, the effect
on revenue could be significant. Earnings are charged with a provision for
contractual adjustments and doubtful accounts based on fee schedules,
contracts and collection experience. Contractual adjustments and accounts
deemed uncollectible are applied against the allowance account.
Inventory
Inventory consists of medical and pharmaceutical supplies which are stated
at the lower of cost or market. Cost is determined under the first-in,
first-out method.
Property and Equipment
Property and equipment are presented at cost. Medical and surgical
equipment, of approximately $144,000, under capital lease is recorded at
the present value of future minimum lease payments. Depreciation and
amortization are computed at rates considered sufficient to amortize the
cost of the assets, using the straight-line method over their estimated
useful lives as follows:
Office furniture and equipment 7 years
Medical and surgical equipment 5 years
Leasehold improvements 5 years
Computer equipment 5 years
Goodwill
Goodwill arises from the acquisition of assets at an amount in excess of
their fair market value. Amortization is computed by the straight-line method
over 15 years.
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1999
Federal Income Taxes
Prior to July 1, 1999, the Company had elected to be taxed as an S
corporation under provisions of the Internal Revenue Code. As such, current
taxable income had been included on the income tax returns of the
shareholders for federal income tax purposes and no provision had been made
for federal income taxes.
Effective July 1, 1999, the Company changed its election to be taxed as a C
corporation under the Internal Revenue Code. Taxes on income are provided
based upon Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future. Such deferred income tax asset and
liability computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to affect taxable income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 2 - Acquisition
In July, 1999, the shareholders of Bellaire paid $125,000 to an individual
for 1,000,000 shares of common stock (approximately 60%) of Technical Coatings,
Inc. (a publicly-held company with no assets, liabilities or revenues). The name
of Technical Coatings, Inc. was changed to SurgiCare, Inc.
<PAGE>
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1999
Effective July 1, 1999, in a reverse acquisition accounted for as a purchase,
the Bellaire shareholders received 1,350,000 shares of preferred stock and
9,860,000 shares of $.005 par common stock for all of the Bellaire common stock,
and Bellaire became a wholly-owned subsidiary of SurgiCare, Inc. In connection
with this transaction, the management company received 1,095,556 shares of
common stock as a termination fee. After these transactions, the former Bellaire
shareholders owned approximately 86% of SurgiCare, Inc. The acquisition costs of
$172,104, including legal fees, have been allocated to goodwill in these
consolidated financial statements.
Note 3 - Unaudited Pro Forma Net Earnings and Pro Forma Earnings Per Share
Pro forma earnings per share represent pro forma net earnings (after a pro forma
provision for income taxes as if the Company had been subject to federal and
state income taxation as a C corporation since inception) available to common
shareholders divided by the pro forma weighted average number of common shares
outstanding during the period. Pro forma weighted average shares were calculated
giving effect to the 7,304 to 1 exchange of SurgiCare common stock for Bellaire
common stock, as if the reverse acquisition had occurred at the beginning of
each period presented.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
.......................................................... For the Year Ended
.......................................................... December 31,
<S> <C> <C>
----------- -----------
- ------------------------------------------------------------ ----------- -----------
1998 1999
Basic Earnings Per Share:
- ------------------------------------------------------------ ----------- -----------
Pro forma net earnings .................................. $ 533,826 $ 1,212,103
- ------------------------------------------------------------ ----------- -----------
Less: Preferred dividends ............................... 326,000
------------------------------------------------------------ ----------- -----------
Pro forma net earnings available for common shareholders $ 533,826 $ 886,103
=========== ===========
- ------------------------------------------------------------ ----------- -----------
Weighted average shares outstanding ..................... 11,546,840 11,811,531
=========== ===========
- ------------------------------------------------------------ ----------- -----------
Pro forma net earnings per share - basic ................ $ .05 $ .08
=========== ===========
- ------------------------------------------------------------ ----------- -----------
Diluted Earnings Per Share:
- ------------------------------------------------------------ ----------- -----------
Pro forma net earnings available for common shareholders $ 533,826 $ 886,103
=========== ===========
- ------------------------------------------------------------ ----------- -----------
Weighted average shares outstanding ..................... 11,546,840 11,811,531
- ------------------------------------------------------------ ----------- -----------
Plus: Shares from assumed conversion of preferred stock . 679,167
----------- -----------
- ------------------------------------------------------------ ----------- -----------
Weighted average shares assuming dilution ............... 11,546,840 12,490,698
=========== ===========
- ------------------------------------------------------------ ----------- -----------
Pro forma net earnings per share - diluted .............. $ .05 $ .07
=========== ===========
- ------------------------------------------------------------ ----------- -----------
</TABLE>
<PAGE>
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999 and 1998
<TABLE>
<CAPTION> December 31,
1998 1999
<S> <C> <C>
Note payable bearing interest at the
prime rate, secured by furniture,
equipment and intangibles, guaranteed
by the shareholders, payable on demand
or in monthly installments of $ 457,792 $ 329,202
principal and interest of $13,398
through March, 2002
Note payable bearing interest at the
prime rate, secured by furniture,
equipment and intangibles, guaranteed
by the shareholders, payable on demand
or in monthly installments of
principal of $5,667, plus interest,
due June 8, 2001 102,000
Note payable bearing interest at the
prime rate, guaranteedby the shareholders,
payable on demand or in monthly installments
of principal of %,500 per month plus
interest, due January 1, 2003 200,000
Non-interest-bearing unsecured note
payable to a former shareholder, due
November 30, 1999 24,333
Note payable bearing interest at the
prime rate, secured by furniture,
equipment and intangibles, guaranteed
by the shareholders, payable on demand
or in monthly installments of
principal and interest of $5,000
through January, 2000 63,153 2,562
$ 545,278 $ 633,764
</TABLE>
<PAGE>
Note 5 - Operating Lease
The Company leases its treatment facility from an entity in which a former
Bellaire shareholder was a partner under an operating sublease which expires in
2003. The lease provides for annual operating expense increases. Rent for 1998
and 1999 was $168,083 and $180,693, respectively. Base rental payments under
this lease agreement are as follows:
- ------------------------------------------------ ---- --------------------
For the Year Ending December 31,
- ------------------------------------------------ ---- --------------------
2000 184,841
- ------------------------------------------------ ---- --------------------
2001 184,841
- ------------------------------------------------ ---- --------------------
2002 184,841
- ------------------------------------------------ ---- --------------------
2003 77,017
- ------------------------------------------------ ---- --------------------
$ 631,541
===================
Note 6 - Long-Term Capital Leases
The Company leases certain equipment from third parties. The leases expire
through 2003. The stockholders have guaranteed the leases.
The following is a schedule of future minimum lease payments under the capital
leases, together with the present value of the net minimum lease payments as of
December 31, 1999:
For the Year Ending December 31,
--------------------------------------------------------- --------------------
2000 $ 33,078
--------------------------------------------------------- --------------------
2001 24,468
--------------------------------------------------------- --------------------
2002 20,891
--------------------------------------------------------- --------------------
2003 1,325
-------------------
79,962
--------------------------------------------------------- --------------------
Less: Amount representing interest 8,754
--------------------------------------------------------- --------------------
Present value of minimum lease payments 71,008
--------------------------------------------------------- --------------------
--------------------------------------------------------- --------------------
Less: Current obligations 21,464
-------------------
--------------------------------------------------------- --------------------
--------------------------------------------------------- --------------------
Long-term obligations under capital lease $ 49,544
===================
<PAGE>
SURGICARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1999
Note 7 - Management Fees
The Company had an agreement with a third party management company to manage the
operations of the treatment facility. Under the contract, the Company was
required to pay 5% of net monthly collected revenues and 10% of the amount
distributed to shareholders. Management fee expense under this contract was
$204,328 and $168,969 in 1998 and 1999, respectively. This agreement was
terminated effective July 1, 1999 concurrent with the reverse acquisition. The
Company issued 1,095,556 shares of $.005 par value common stock valued at
$164,333 in connection with this transaction.
After the termination of the management agreement, the Company signed an
affiliation agreement with the same management company. The affiliation
agreement permits the Company to utilize regulatory approved clinical and
administrative policies and procedures, managed care contract assistance and
access to national purchasing contracts. The Company will pay 2% of cash
collections for these services. The Company expensed $37,366 under this new
agreement in 1999.
Note 8 - Related Party Transactions
As of December 31, 1998 and 1999, the Company had non-interest-bearing
receivables from shareholders of $48,750 and $27,500, respectively, for the
purchase of stock.
During 1998 and 1999, the Company paid rent of $168,083 and $180,693,
respectively, to an entity in which a former Bellaire shareholder was a partner.
Note 9 - Federal Income Taxes
Prior to July 1, 1999, the Company had elected to be taxed as an S corporation
under provisions of the Internal Revenue Code. As such, current taxable income
had been included on the income tax returns of the shareholders. Effective July
1, 1999, the Company's Subchapter S status was terminated and, as a result of
such change in status, the Company established a deferred tax liability of
$429,000. The remaining retained earnings of $727,795 at July 1, 1999 were
transferred to additional paid-in capital.
The following is a reconciliation of federal income taxes computed at the
statutory rate with income taxes recorded in the Consolidated Statement of
Earnings for the year ended December 31, 1999:
- ---------------------------------------------------------- --------------------
Federal income tax expense at statutory rate $ 624,417
- ---------------------------------------------------------- --------------------
S corporation earnings (341,700)
- ---------------------------------------------------------- --------------------
Deferred taxes provided for change in tax status 429,000
- ---------------------------------------------------------- --------------------
Other (80)
------------------
- ---------------------------------------------------------- --------------------
$ 711,637
==================
- -------------------------------------------------------------------------------
The component of the deferred tax liability as of December 31,
1999 is as follows:
- ---------------------------------------------------------- --------------------
Deferred tax liability:
- ---------------------------------------------------------- --------------------
Accrual to cash conversion $ 546,000
==================
Note 10 - Preferred Stock
The Series A preferred stock is convertible at a rate of one share of preferred
stock into one share of $.005 par value common stock. The Company can redeem the
stock at $5 per share. The Series A preferred stock accrues dividends at a rate
of $.48 per share per annum which are payable, in arrears, on the first day of
the month. Holders of Series A preferred stock are entitled to one vote for each
share of Series A preferred stock held.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On June 15, 1999, TCI retained Philip H. Salchli, Certified Public
Accountant, to serve as its independent accountant. Philip H. Salchli is a
member of the SEC Practice Section of the AICPA. Mr. Salchli preformed an
independent audit for both 1997 and 1998. The audit opinion was issued with no
qualification or modifications. On May 28, 1999, Bellaire retained Weinstein
Spira & Company, Certified Public Accountants, to serve as its independent
accountants. Weinstein Spira & Company, P.C. is also a member of the SEC
Practice Section of the AICPA. Weinstein Spira and Company preformed an
independent audit Bellaire, for both 1997 and 1998.
As of the date of this registration statement Philip H. Salchli is no
longer the principal independent accountant for SurgiCare (formerly Technical
Coatings, Inc), and Weinstein Spira & Company has been retained as the principal
independent public accountants for both SurgiCare and Bellaire. To the best of
the knowledge of SurgiCare's current management, there have been no
disagreements between SurgiCare and either of its current or former accountants
during the last two years over any accounting policy or practice.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
SurgiCare's Directors and Executive Officers are as follows:
<TABLE>
<CAPTION>
Name /Address ........... Position Age
<S> <C> <C>
David Blumfield ......... President and Chief Executive
Officer
Director 42
- ------------------------- ----------------------------------- --
Jeffery Penso ........... Vice-President 44
- ------------------------- ----------------------------------- --
Sherman Nagler .......... Secretary 44
- ------------------------- ----------------------------------- --
Michael Mineo ........... Treasurer
- ------------------------- ----------------------------------- --
Charles S. Cohen ........ Chief Operating Officer 38
- ------------------------- ----------------------------------- --
Shirley Browne .......... Director 47
- ------------------------- ----------------------------------- --
Son Nguyen .............. Director 44
</TABLE>
Dr. David Blumfield D.P.M. was elected as a Director and President and
Chief Executive Officer of SurgiCare, Inc. on July 10, 1999. Dr. Blumfield has
served as President of Bellaire SurgiCare, Inc. since March of 1995. He has been
in private practice for 15 years. He received his undergraduate degree in 1980
at Wilkes University, and then attended the Temple College of Podiatric
Medicine. He has been a diplomat of the American Board of Podiatric Surgery
since 1988.
Charles S. Cohen was elected as a Director and Chief Operating Officer of
SurgiCare, Inc. on July 10, 1999. Mr. Cohen has been the acting Chief Operating
Officer of Bellaire SurgiCare, Inc. since September 1998. Prior to September of
1998, Mr. Cohen was the President of Medical Distributors International, Inc.
(MDI) he was elected to that position in November of 1994. He has served as a
Director of TMDI Medical, from 1995-1997. Both MDI and TMDI were involved with
the international purchasing, importing, and exporting of medical and surgical
equipment. Mr. Cohen was educated at the University of Missouri at Columbia in
business.
Dr. Jeffery Penso D.P.M. was elected as Director and Vice President of
SurgiCare, Inc. on July 10, 1999. Dr. Penso has served as Vice-President of
Bellaire SurgiCare, Inc. since July of 1998. He has been in private practice for
16 years. He received his undergraduate degree in 1983 at University of Akron,
and then attended the Ohio College of Podiatric Medicine. He has been a Diplomat
of the American Board of Podiatric Surgery since 1988.
Dr. Shirley Brown M.D. Director - Dr. Browne has served as the Medical
Director of Bellaire SurgiCare since September of 1998. She has been in practice
for 19 years. She received her undergraduate degree from Lamar University, and
then attended the University of Texas Medical School, Houston
Dr. Son Nguyen M.D. Director - Dr. Nguyen was elected as a director in
August of 1999. He has been in private practice for 13 years. He received his
undergraduate degree from Waynesberg College and then attended the University of
Cincinnati Medical School. He has been a Diplomat of the American Board of
Anesthesia since 1989, and a Fellow of the American College of Pain Medicine
since 1994.
Dr. Michael Mineo D.P.M. was elected as Director and Treasurer of
SurgiCare, Inc. on July 10, 1999. Dr. Mineo has served as Vice-President of
Bellaire SurgiCare, Inc. since March of 1995. He has been in private practice
for 29 years. He received his undergraduate degree in 1964 from Geneva College,
Beaver Falls, PA, and then attended the Ohio College of Podiatric Medicine. He
has been a Diplomat of the American Board of Podiatric Surgery since 1979, and a
Fellow of the American College of Foot Surgeons since 1980.
Dr. Sherman Nagler D.P.M. was elected as Director and Secretary of
SurgiCare, Inc. on July 10, 1999. Dr. Nagler has served as Secretary of Bellaire
SurgiCare, Inc. since March of 1995. He has been in private practice for16
years. He received his undergraduate degree in 1977 at State University of New
York at Plattsburgh, and then attended the New York College of Podiatric
Medicine. He has been a Diplomat of the American Board of Podiatric Surgery
since 1985.
The terms of office of SurgiCare's current directors will expire at the
next annual meeting of the stockholders. Thereafter, directors will hold office
until the succeeding annual meeting or their successors are elected and
qualified. SurgiCare's officers hold office at the pleasure of the board of
directors and until the meeting of the board of directors next following the
annual meeting of stockholders, at which board meeting officers are to be
elected.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid during each of SurgiCare's last three fiscal years to each of
the highest paid persons who are officers or directors of SurgiCare, Inc.
receiving compensation of at least $100,000 and the Chief Executive Officer (the
"Covered Executives"). Each of the persons indicated received their compensation
as a director or officer of Bellaire.
<TABLE>
<CAPTION>
Name Principal Position Year Annual Compensation
<S> <C> <C> <C>
- -------------------------- ------------------------- --------- --------------------
David Blumfield President and CEO 1999 $ 24,000
- -------------------------- ------------------------- --------- --------------------
- -------------------------- ------------------------- --------- --------------------
Charles Cohen Chief Operating Officer 1999 $ 75,000
- -------------------------- ------------------------- --------- --------------------
- -------------------------- ------------------------- --------- --------------------
1998 $ 50,000
- -------------------------- ------------------------- --------- --------------------
</TABLE>
Except as set fourth in the table, no compensation has been rewarded to, earned
by or paid to any of the Covered Executives and required to be reported in the
table for any of the last three fiscal year. Item 11. Directors, Executive
Officers, Promoters, and Control Persons; COMPLIANCE With 16(a) of the Exchange
Act.
The following table sets forth information, to the best knowledge of
SurgiCare as of August 9, 1999, with respect to each person known by SurgiCare
to own beneficially more than 5% of any class of SurgiCare's outstanding common
stock.
<TABLE>
<CAPTION>
Title of Class ....Name and address of Amount and nature of Percent of Class
Beneficial Owner ... Beneficial Ownership(a)
<S> <C> <C> <C>
Common Stock ....... SCOA II 1,095,556 8.695%
1930 S. Bryant
Edmond, OK 73013
Common Stock ....... David Blumfield 804,444 (b) 6.357%
Series A Preferred . 7400 Fannin # 1100 100,000 (d) 7.407%
Houston, TX 77056
Common Stock ....... Sherman Nagler 804,444 (b) 6.357%
Series A Preferred . 1200 Binz 100,000 (d) 7.407%
Houston, TX 77004
Common Stock ....... William Bradbury 804,444 (b) 6.357%
Series A Preferred . 7400 Fannin #1100 100,000 (d) 7.407%
Houston, TX 77056
Common Stock ....... Robert Parker 804,444 (b) 6.357%
Series A Preferred . 14441 Memorial #16 100,000 (d) 7.407%
Houston, TX 77079
Common Stock ....... Jeffery Penso 804,444 (b) 6.357%
Series A Preferred . 11006 Westheimer 100,000 (d) 7.407%
Houston, TX 77042
Common Stock ....... Gregory Mangum 804,444 (b) 6.357%
Series A Preferred . 4754 Beechnut 100,000 (d) 7.407%
Houston, TX 77096
Common Stock ....... Jeffrey Ross 804,444 (b) 6.357%
Series A Preferred . 6624 Fannin #2450 100,000 (d) 7.407%
Houston, TX 77030
Common Stock ....... Michael Mineo 804,444 (b) 6.357%
Series A Preferred . 6699 Chimney Rock 100,000 (d) 7.407%
Houston, TX 77081
Common Stock ....... Bruce Miller 804,444 (b) 6.357%
Series A Preferred . 13737 S.W. Freeway 100,000 (d) 7.407%
Sugarland, TX 77478
Common Stock ....... Brain Zale 804,444 (b) 6.357%
Series A Preferred . 11320 S. Post Oak #1 100,000 (d) 7.407%
Houston, TX 77035
Common Stock ....... Son Nguyen 804,444 (b) 6.357%
Series A Preferred . 1120-A Dennis 100,000 (d) 7.407%
Houston, TX 77004
Common Stock ....... Long Nguyen 804,444 (b) 6.357%
Series A Preferred . 4007 Bellaire #FF 100,000 (d) 7.407%
Houston, TX 77025
Common Stock ....... Larry Likover 804,444 (b) 6.357%
Series A Preferred . 902 Frostwood #902 100,000 (d) 7.407%
Houston, TX
Common Stock ....... Shirley Browne 402,222 (c) 3.179%
Series A Preferred . P.O. Box 247 50,000 (d) 3.704%
Richmond, TX 77406
</TABLE>
a. As of January 31, 2000, 12,596,657shares of common stock were issued and
outstanding. Unless otherwise noted, the security ownership disclosed in
the table is of record and beneficial.
b. Includes 74,074 shares held in trust pursuant to that Voting Trust
Agreement, dated, of July 28, 1999 (the "Voting Trust Agreement"),
between and among the shareholders and David Blumfield, D.P.M.,
trustee. A total of 1,000,000 shares of Common Stock have been
deposited in the voting trust created pursuant to such Voting Trust
Agreement. Dr. Blumfield is deemed to have sole voting power as to such
shares.
c. Includes 37,037 shares held in trust pursuant to the Voting Trust
Agreement.
d. As of January 31, 2000, 1,350,000 shares of Series A Preferred were
issued and outstanding. Unless otherwise noted, the security ownership
of such Series A Preferred disclosed in the table is of record and
beneficial.
(B) Security ownership of management.
The following table sets forth information, to the best knowledge of
SurgiCare as of January 31, 2000, with respect to the beneficial ownership of
each officer and director, and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Title of Class ....Name and address of Amount and nature of Percent of Class
Beneficial Owner ...Beneficial Ownership (a)
<S> <C> <C> <C>
Common Stock .......David Blumfield 804,449 (b) 6.357%
Series A Preferred .7400 Fannin #1100 100,000 (c) 7.407%
Houston, TX 7705
Common Stock .......Jeffery Penso 804,449 (b) 6.357%
Series A Preferred .11006 Westheimer 100,000 (c) 7.407%
Houston, TX 77042
Common Stock .......Sherman Nagler 804,449 (b) 6.357%
Series A Preferred .1200 Binz 100,000 (c) 7.407%
Houston, TX 77004
Common Stock .......Michael Mineo 804,449 (b) 6.357%
Series A Preferred .6699 Chimney Rock 100,000 (c) 7.407%
Houston, TX 77081
Common Stock .......Charles S. Cohen 30,000 0.237%
5947 Bankside
Houston, TX 77096
Common Stock ...... Son Nguyen 804,444 (b) 6.357%
Series A Preferred 1120-A Dennis 100,000 (d) 7.407%
Houston, TX 77004
Common Stock ...... Shirley Browne 402,222 (c) 3.179%
Series A Preferred P.O. Box 247 50,000 (d) 3.704%
Richmond, TX 77406
All officers and dir 3,247,796 (a) 35.36%
(seven persons)..... 400,00 (b) 40.74%
</TABLE>
a. As of January 31, 2000, 12,596,657shares of common stock were issued and
outstanding. Unless otherwise noted, the security ownership disclosed in
the table is of record and beneficial.
b. Includes 74,074 shares held in trust pursuant to that Voting Trust
Agreement, dated, of July 28, 1999 (the "Voting Trust Agreement"),
between and among the shareholders and David Blumfield, D.P.M.,
trustee. A total of 1,000,000 shares of Common Stock have been
deposited in the voting trust created pursuant to such Voting Trust
Agreement. Dr. Blumfield is deemed to have sole voting power as to such
shares.
c. Includes 37,037 shares held in trust pursuant to the Voting Trust
Agreement.
d. As of January 31, 2000, 1,350,000 shares of Series A Preferred were
issued and outstanding. Unless otherwise noted, the security ownership
of such Series A Preferred disclosed in the table is of record and
beneficial.
(B) Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires SurgiCare's officers and directors, and persons who own more than 10
percent of a registered class of SurgiCare's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors, and greater than 10 percent
stockholders are required by SEC regulation to furnish SurgiCare with copies of
all Section 16(a) forms they file.
Based solely on SurgiCare's review of the copies of such forms received by
SurgiCare, SurgiCare believes that during the year ended December 31,1999 all
filing requirements applicable to its officers, directors, and greater than 10
percent beneficial stockholders were complied with except that (i) Drs.
Blumfield, Penso, Mineo and Nagler, and Mr. Cohen, failed to timely file a Form
3 upon SurgiCare's equity securities becoming registered under the Exchange Act,
and (ii) Drs. Browne and Nguyen failed to timely file a Form 3 upon becoming
directors of SurgiCare.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 21, 1999, the Board of Directors of both SurgiCare and
Bellaire unanimously approved SurgiCare's acquisition, effective July 1, 1999 of
100% (1,350 shares) of the issued and out standing common stock of Bellaire in
exchange for 10,955,556 shares of SurgiCare's common stock and 1,350,000 shares
of SurgiCare's Series A Preferred. This acquisition was accounted for as a
reverse merger. Following the closing of the transaction, Bellaire became a
wholly owned subsidiary of SurgiCare. At the time of the approval by both boards
of directors, the shareholders of Bellaire jointly held the majority of the
issued and outstanding shares of SurgiCare. In addition four of the five members
of the Board of Directors of SurgiCare each individually held 7.4% of the out
standing and issued shares of Bellaire.
In determining the amount and character of the consideration to be paid
by SurgiCare for the Bellaire stock, the boards of directors of both SurgiCare
and Bellaire considered numerous factors, including the then inactive status of
SurgiCare and prior offers that Bellaire had received for the acquisition of
Bellaire by others.
SurgiCare has entered into a formal "Affiliation Agreement" (see
exhibit 10.1), effective July 1,1999 with SCOA, pursuant to which agreement SCOA
will render certain administrative and other services to SurgiCare. SCOA has
developed extensive policies and procedures that have been approved by all
governmental licensing and regulatory authorities. These Policies and procedures
pertain to both clinical and administrative services. Throughout this
affiliation agreement SurgiCare is licensed to utilize these policies and
procedures at each of its centers. SCOA has a managed care department that is
continually reviewing managed care contracts, negotiating new contracts and
negotiating the renewal of existing contract. Throughout the SCOA / SurgiCare
affiliation agreement, SurgiCare utilizes the services provided by this
department. SCOA has also negotiated national buying contracts that increase the
buying power of each surgery center. These contract can substantially decrease
the cost of surgical supplies. SurgiCare through its affiliation agreement
participates in all of SCOA's national buying contract.
SurgiCare will pay to SCOA 2% of the total cash collections monthly for these
services. SurgiCare believes that the terms of such agreement are no less
favorable to SurgiCare than could be obtained from surgery center management
companies not affiliated with the Company. Prior to SurgiCare's reverse merger
with Bellaire, SCOA provide management and administrative services to Bellaire.
In consideration of the termination of this pre-existing management contract,
SurgiCare issued SCOA 1,095,556 shares of SurgiCare common stock.
PART III
ITEM13. EXHIBITS AND REPORTS ON FORM 10K
--------------------------------
(A) EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
3.1 *Amended and Restated Certificate of Incorporation of SurgiCare, Inc.
3.2 *Articles of Incorporation of Bellaire SurgiCare, Inc.
3.3 *By-Laws of Technical Coatings Incorporated (now SurgiCare, Inc.)
3.4 *By-Laws of Bellaire SurgiCare, Inc.
4 *Certificate of Designation, Powers, Preferences and Rights of Series A
Redeemable
9 *Voting Trust Agreement, dated July 28, 1999, among
David Blumfield, D.P.M., individually
10.1 *Agreement, dated July 29, 1999, between SurgiCare, Inc. and
Surgery Centers of America
10.2 *Letter agreement with SCOA
21 *List of Subsidiaries of SurgiCare, Inc.
27 *Financial Data Schedule
Incorporated herein by reference to the Company's Registration Statement on
Form 10-SB/A filed on January 28, 2000
(B) Reports on Form 8-k
NONE
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the Registrants and in the
capacities and on the date indicated.
Date: March 29, 2000 REGISTRANT:
SurgiCare, Inc
By: /s/ David Blumfield
Dr. David Blumfield
President, CEO and Director
Date: March 29, 2000
By: /s/ CHARLES S. COHEN
Charles S. Cohen
Chief Operating Officer
Date: March 29, 2000
By: /s/ JEFFERY PENSO
Dr. Jeffery Penso
Vice-President and Director
Date: March 29, 2000
By: /s/ SHERMAN NAGLER
Dr. Sherman Nagler
Secretary and Director
Date: March 29, 2000
By: /s/ MICHAEL MINEO
Dr. Michael Mineo
Treasure and Director
Date: March 29, 2000
By: /s/ SHIRLEY BROWNE
Dr. Shirley Browne
Director
Date: March 29, 2000
By: /s/ SON NGUYEN
Dr. Son Nguyen
Director
Date: March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000755113
<NAME> SurgiCare, Inc
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 244
<SECURITIES> 0
<RECEIVABLES> 3515
<ALLOWANCES> 1682
<INVENTORY> 89
<CURRENT-ASSETS> 2214
<PP&E> 905
<DEPRECIATION> 488
<TOTAL-ASSETS> 2797
<CURRENT-LIABILITIES> 1573
<BONDS> 50
0
1
<COMMON> 63
<OTHER-SE> 1111
<TOTAL-LIABILITY-AND-EQUITY> 2797
<SALES> 0
<TOTAL-REVENUES> 4217
<CGS> 0
<TOTAL-COSTS> 1208
<OTHER-EXPENSES> 1147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 1837
<INCOME-TAX> 712
<INCOME-CONTINUING> 1125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1125
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
