HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
Houston, Texas
ANNUAL FINANCIAL REPORT
September 30, 2000
TABLE OF CONTENTS
Page Number
Independent Auditors' Report ...............................F-1
Balance Sheets .............................................F-2
Statements of Operations ...................................F-3
Statements of Partners' Capital ............................F-4
Statements of Cash Flows ...................................F-5
Notes to Financial Statements ..............................F-6
Independent Auditors' Report
November 30, 2000
The Partners
Healthfirst Memorial Village Surgery Center, Ltd.
Houston, Texas
We have audited the accompanying Balance Sheets of Healthfirst Memorial
Village Surgery Center, Ltd. (a limited partnership) as of December 31, 1999 and
1998, and the related Statements of Operations, Partners' Capital, and Cash
Flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
Except as explained in the following paragraph, 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.
The Partnership's records did not permit the application of auditing
procedures to inventories or to accounts receivable as of December 31, 1997. The
amount of the receivables and inventory at December 31, 1997 materially affects
the determination of the results of operations and cash flows for the year ended
December 31, 1998. Therefore, the scope of our work was not sufficient to enable
us to express, and we do not express, an opinion on the accompanying Statements
of Operations, Partners' Capital, and Cash Flows for the year ended December 31,
1998.
In our opinion, the financial statements referred to in the first paragraph
above present fairly, in all material respects, the financial position of
Healthfirst Memorial Village Surgery Center, Ltd. as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the year ended
December 31, 1999, in conformity with generally accepted accounting principles.
F-1
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HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
September 30, December 31, 2000 1999 1998 (Unaudited) ASSETS Current Assets
Cash and cash equivalents $ 66,289 $ 165,780 $ 98,733 Accounts receivable (less
allowance for contractual adjustments and doubtful accounts of $129,000,
$153,000 and $340,500 at September-30, 2000, December-31, 1999 and December-31,
1998, respectively) 544,742 868,640 728,402 Inventory 364,997 274,950 181,078
Other assets 18,975 18,975 18,975 Total Current Assets 995,003 1,328,345
1,027,188 Property and Equipment Leasehold improvements 645,294 645,294 645,294
Medical and surgical equipment 2,178,247 2,152,786 1,979,423 Office furniture
and equipment 164,092 161,074 143,318 2,987,633 2,959,154 2,768,035 Less:
Accumulated depreciation (2,005,022) (1,616,280) (1,107,994) 982,611 1,342,874
1,660,041 $ 1,977,614 $ 2,671,219 $ 2,687,229 LIABILITIES Current Liabilities
Line-of-credit $ 228,141 $ 109,994 $ 180,000 Current portion of capital lease
obligations 57,194 52,597 47,037 Accounts payable 239,753 321,176 90,851 Accrued
expenses 89,584 65,226 61,065 Current portion of long-term debt 493,409 453,229
376,319 Total Current Liabilities 1,108,081 1,002,222 755,272 Long-Term Capital
Lease Obligations 32,450 75,938 128,535 Long-Term Debt 650,927 1,026,172
1,379,469 1,791,458 2,104,332 2,263,276 PARTNERS' CAPITAL 186,156 566,887
423,953 $ 1,977,614 $ 2,671,219 $ 2,687,229
See notes to financial statements.
F-2
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<CAPTION>
HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
For the Nine Month
Period Ended For the Year Ended
September 30, December 31,
2000 1999 1999 1998
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Revenues, net ........................................................ $ 2,999,154 $ 3,430,034 $ 4,783,471 $ 4,184,539
Direct Cost of Revenue:
Surgical costs .................................................... 788,451 682,685 947,782 904,069
Clinical salaries and benefits .................................... 611,294 593,040 819,424 832,305
1,399,745 1,275,725 1,767,206 1,736,374
General and Administrative:
Salaries, wages and benefits ...................................... 204,505 216,025 284,883 161,544
Depreciation ...................................................... 388,742 405,828 529,756 466,150
Management fees ................................................... 153,340 169,356 235,455 223,493
Rent .............................................................. 224,760 192,624 262,664 253,648
Litigation costs .................................................. 206,308 69,485
Other ............................................................. 345,713 333,523 396,777 197,686
1,523,368 1,317,356 1,779,020 1,302,521
2,923,113 2,593,081 3,546,226 3,038,895
Operating Income ..................................................... 76,041 836,953 1,237,245 1,145,644
Other Expense
Interest .......................................................... (131,772) (162,028) (210,675 (248,861)
Loss on sale of fixed assets ...................................... (14,135) (14,135) (5,662)
(131,772) (176,163) (224,810 (254,523)
Net Earnings (Loss) .................................................. $ (55,731) $ 660,790 $ 1,012,435$ 891,121
</TABLE>
See notes to financial statements.
F-3
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<CAPTION>
HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 1999 and 1998 (Unaudited)
and the Nine Month Period Ended September 30, 2000 (Unaudited)
<S> <C>
Balance - December 31, 1997 ....... $ 368,832
Contributions from Partners ....... 21,000
Distributions to Partners ......... (857,000)
Net Earnings (Unaudited) .......... 891,121
Balance - December 31, 1998 ....... 423,953
Contributions from Partners ....... 63,500
Distributions to Partners ......... (933,001)
Net Earnings ...................... 1,012,435
Balance - December 31, 1999 ....... 566,887
Distributions to Partners ......... (325,000)
Net Loss (Unaudited) .............. (55,731)
Balance - September 30, 2000 ...... $ 186,156
</TABLE>
See notes to financial statements.
F-4
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<TABLE>
<CAPTION>
HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the Year Ended
For the Nine Month Period Ended
September 30, December 31,
2000 1999 1999 1998
(Unaudited) (Unaudited)
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Cash Flows From Operating Activities
Net earnings (loss) .................................................. $55,731) $ 660,790 $ 1,012,435 $891,121
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization ....................... .............. 388,742 405,828 529,756 466,150
Loss on sale of fixed assets ....................................... 14,135 14,135 5,662
(Increase) Decrease in:
Accounts receivable .............................................. 323,898 71,463 (140,238) 116,747
Inventories ...................................................... (90,047) (102,105) (93,872) (18,803)
Other assets ..................................................... (1,860)
Increase (Decrease) in:
Accounts payable ................................................. (81,423) 109,918 230,325 (135,677)
Accrued expenses ................................................. 24,358 5,339 4,161 (7,807)
Net Cash Provided by Operating Activities ............................... 509,797 1,165,368 1,556,702 1,315,533
Cash Flows From Investing Activities
Capital expenditures .................................................... (28,479) (188,214) (243,026) (356,596)
Proceeds from disposition of fixed assets ................. .............. 16,302 16,302 16,663
Net Cash Used in Investing Activities ................................... (28,479) (171,912) (226,724) (339,933)
Cash Flows From Financing Activities
Principal payments under capital lease obligations .......................... (38,891) (34,781) (47,037) (42,065)
Proceeds from long-term debt ................................................ 119,153 119,153 71,993
Payment of long-term debt ...................................................(335,065) (290,029) (395,540) (328,137)
Net borrowings (repayments) under line-of-credit
agreement ................................................................. 118,147 (60,084) (70,006) 180,000
Partner contributions ....................................................... 38,500 63,500 21,000
Partner distributions .......................................................(325,000) (748,000) (933,001) (857,000)
Net Cash Used in Financing Activities ...................................... (580,809) (975,241) (1,262,931) (954,209)
Net Increase (Decrease) in Cash and Cash
Equivalents ................................................................ (99,491) 18,215 67,047 21,391
Cash and Cash Equivalents - Beginning of Period ................................ 165,780 98,733 98,733 77,342
Cash and Cash Equivalents - End of Period .................................... $ 66,289 $ 116,948 $ 165,780 $ 98,733
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest .................................... $ 133,933 $ 163,848 $ 212,646 $ 249,689
</TABLE>
See notes to financial statements.
F-5
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HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999 (Unaudited)
and December 31, 1999 and 1998
Note 1 - Accounting Policies
Healthfirst Memorial Village Surgery Center, Ltd. (the Partnership)
maintains its accounts on the accrual method of accounting in accordance with
generally accepted accounting principles. Accounting principles followed by the
Partnership 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
The Partnership was formed in September, 1996 as a limited partnership to
operate a day surgery center in Houston, Texas. The partners consist of
doctors of medicine and HFMC, L.C.
Cash and Cash Equivalents
The Partnership considers all short-term investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
1999, there were deposits in excess of federally insured limits.
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.
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. 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.
Property and Equipment
Property and equipment are presented at cost. Property under capital lease,
consisting of medical equipment with a net book value of $85,914, $122,734
and $171,828 at September 30, 2000, December 31, 1999 and 1998,
respectively, 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:
Leasehold improvements 10 years
Medical and surgical equipment 5 years
Office furniture and equipment 5 - 7 years
F-6
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HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Continued)
September 30, 2000 and 1999 (Unaudited)
and December 31, 1999 and 1998
Federal Income Tax
Federal income taxes are not reflected in the financial statements, as the
members report their share of taxable income or loss on their own returns.
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 - Line-of-Credit
The Partnership has a $400,000 revolving line-of-credit with a bank,
secured by accounts receivable, bearing interest at the prime rate. Monthly
payments of interest are due until April 1, 2001, when the remaining
principal and interest are payable in full.
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Note 3 - Long-Term Debt
Long-term debt at December 31, 1999 and 1998 is as follows:
December 31,
<S> <C> <C>
1999 1998
Note payable to a financial institution, secured by inventory and
equipment, due in monthly installments of $44,482 including
interest at a rate of 11.5%, maturing November, 2002 $ 1,327,276 $ 1,689,231
Note payable to a financial institution, secured by inventory and
equipment, due in monthly installments of $1,739 including
interest at a rate of 11.1%, maturing November, 2002 52,193 66,557
Note payable to a financial institution, secured by inventory and
equipment, due in monthly installments of $3,280 including
interest at a rate of 9.5%, maturing November, 2002 99,932
1,479,401 1,755,788
Less: current portion 453,229 376,319
$ 1,026,172 $ 1,379,469
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F-7
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HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Continued)
September 30, 2000 and 1999 (Unaudited)
and December 31, 1999 and 1998
Long-term debt is payable in the future as follows:
2000 $ 453,229
2001 507,581
2002 518,591
$ 1,479,401
Note 4 - Long-Term Capital Leases
The Partnership leases medical equipment from third parties. The
Partnership is responsible for most expenses relating to the equipment. The
leases are for various terms expiring in 2002.
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 $ 64,375
2001 64,375
2002 17,473
146,223
Less: Amount representing interest (17,688)
Present value of minimum lease payments 128,535
Less: Current obligations 52,597
Long-term obligations under capital lease $ 75,938
Note 5 - Operating Lease
The Partnership leases its treatment facility and office space from a third
party under operating leases expiring in 2006. Minimum payments under this lease
agreement are as follows:
For the Year Ending December 31,
2000 $ 250,188
2001 264,835
2002 270,201
2003 270,201
2004 270,201
Thereafter 342,643
$ 1,668,269
Rent expense was $253,648, $262,664, $192,624 and $224,760 for the years
ended December-31, 1998 and 1999, and the nine months ended September 30, 1999
and 2000, respectively.
F-8
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HEALTHFIRST MEMORIAL VILLAGE SURGERY CENTER, LTD.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (Continued)
September 30, 2000 and 1999 (Unaudited)
and December 31, 1999 and 1998
Note 6 - Related Party Management Fees and Shared Services Agreement
The Partnership has contracted with HFMC, L.C., the general partner of the
Partnership, to provide management, administrative and operational services.
Under the contract, the Partnership was required to pay a management fee of 5%
of net revenues. The contract existed on a month by month basis.
Management fee expense was $153,340, $169,356, $235,455 and $223,493 for
the nine-month periods ended September 30, 2000 and 1999, and the years ended
December 31, 1999 and 1998, respectively. As of September 30, 2000, December 31,
1999 and December 31, 1998, the Partnership had $34,491, $22,934 and $18,278,
respectively, in management fees due to HFMC, L.C.
The Partnership has contracted with Lone Star Ambulatory Care ("LSAC"), an
affiliated company of HFMC, L.C. to provide certain administrative services.
Under the contract, the Partnership was required to pay LSAC on a monthly basis
for all costs incurred for the services provided. The term of the contract was
three years from the effective date of September 1, 1998. The contract was
terminated upon sale of the assets on October 20, 2000.
Shared services expense was $29,044, $172,937, $217,523 and $31,330 for the
nine-month periods ended September 30, 2000 and 1999, and the years ended
December 31, 1999 and 1998, respectively. As of September-30, 2000, the
Partnership had a receivable of $5,229 due from LSAC. As of December-31, 1999
and 1998, the Partnership had $6,579 and $2,701 in shared services fees due to
LSAC.
Note 7 - Subsequent Event
On October 20, 2000, the Partnership entered into an agreement with Town &
Country Surgicare, Inc., a Delaware corporation and subsidiary of Surgicare,
Inc. (Sub), whereby the Sub agreed to purchase a 60% undivided interest in
substantially all of the net assets of the Partnership. Following the net asset
purchase, the Sub and the owners of the remaining 40% of the net assets
comprising the surgery center contributed their respective ownership interests
in the net assets to a newly-formed Texas limited partnership, Surgicare
Memorial Village, L.P.
F-9
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