U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission File No. 001-16587
ORION HEALTHCORP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 58-1597246
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1805 Old Alabama Road
Suite 350, Roswell GA 30076
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (678) 832-1800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
----------------------------------- --------------------------------------
Class A Common Stock, $0.001 The American Stock Exchange
par value per share
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. |_|
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes |_| No |X|
The registrant's revenues for the fiscal year ended December 31, 2006:
$23,401,424
The aggregate market value of the shares of Class A Common Stock of the
registrant (excluding the Class D Common Stock) held by non-affiliates on March
27, 2007 was approximately $3,477,355 based upon the closing price per share for
the registrant's Class A Common Stock on the American Stock Exchange on that
day. The aggregate market value of the shares of Class A Common Stock and Class
D Common Stock of the registrant held by non-affiliates on March 27, 2007
(assuming full conversion of Class D Common Stock into shares of Class A Common
Stock) was approximately $3,477,355 based upon the closing price per share for
the registrant's Class A Common Stock on the American Stock Exchange on that
day. The determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 27, 2007, 105,499,487 shares of the registrant's Class A Common
Stock, par value $0.001, were outstanding and 24,658,955 shares of the
registrant's Class D Common Stock, par value $0.001, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement, to be filed on or about April 9,
2007 in connection with the Annual Meeting of Stockholders presently scheduled
to be held on May 9, 2007, have been incorporated by reference into Part III of
this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format Yes |_| No |X|
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ORION HEALTHCORP, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 2006
TABLE OF CONTENTS
Item Page
Number Number
------------- --------
PART I
1. Description of Business 4
2. Description of Property 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Common Equity and Related Stockholder Matters 11
6. Management's Discussion and Analysis or Plan of Operation 13
7. Financial Statements 33
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 33
8A. Controls and Procedures 33
8B. Other Information 33
PART III
9. Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the
Exchange Act 34
10. Executive Compensation 34
11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 34
12. Certain Relationships and Related Transactions, and Director
Independence 35
13. Exhibits 35
14. Principal Accountant Fees and Services 36
SIGNATURES 37
CONSOLIDATED FINANCIAL STATEMENTS F-1
INDEX OF EXHIBITS 38
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The following text is qualified in its entirety by reference to the
more detailed information and consolidated financial statements, including the
notes thereto appearing elsewhere in this Annual Report on Form 10-KSB. Unless
otherwise indicated, the terms "we," "us" and "our" refer to Orion HealthCorp,
Inc. ("Orion" or the "Company") and its consolidated subsidiaries; references to
2006 are to our fiscal year ended December 31, 2006 and references to 2005 are
to our fiscal year ended December 31, 2005.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, (the "Exchange Act," and collectively, with the
Securities Act, the "Acts") as amended by the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). Any statements other than statements of
historical fact included in this Annual Report on Form 10-KSB, including without
limitation, statements under the captions "Business" and "Management's
Discussion and Analysis or Plan of Operation" regarding our financial position,
business strategy and plans and objectives for future performance are deemed to
be forward-looking statements. Forward-looking statements include statements
preceded by, followed by or including the words "may," "will," "would," "could,"
"should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends" and similar
expressions. In particular, these include statements relating to our future
actions, future performance or results of current and anticipated services,
expenses and financial results. From time to time, we may also provide oral or
written forward-looking statements in other materials we release to the public.
The forward-looking statements in this report are based on current beliefs,
estimates and assumptions concerning our operations, future results, and
prospects described herein. As actual operations and results may materially
differ from those assumed in forward-looking statements, there is no assurance
that forward-looking statements will prove to be accurate.
We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information or future events. You are
advised, however, to consult any further disclosures we make on related subjects
in the quarterly, periodic and annual reports we file with the SEC. Also note
that we provide a cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses in Part II, Item 6.
Management's Discussion and Analysis or Plan of Operation. These are factors
that we think could cause our actual results to differ materially from expected
and historical results. Other factors in addition to those described herein
could also adversely affect operating or financial performance. Forward-looking
statements are subject to the safe harbors created in the Reform Act.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
We are a healthcare services organization providing outsourced business
services to physicians, serving the physician market through two operating
segments - Revenue Cycle Management and Practice Management - via five operating
subsidiaries: Medical Billing Services, Inc. ("MBS"), Rand Medical Billing, Inc.
("Rand"), On Line Alternatives, Inc. ("OLA") and On Line Payroll Services, Inc.
("OLP") (collectively with OLA, "On Line"), and Integrated Physician Solutions,
Inc. ("IPS"). Our mission is to provide superior billing, collections, practice
management, business and financial management services for physicians, resulting
in optimal profitability for its clients and increased enterprise value for its
stakeholders. We believe our core competency is our long-term experience and
success in working with and creating value for physicians.
Revenue Cycle Management Segment ("RCM")
Our RCM segment includes three business units, MBS, Rand and On Line.
We offer billing, collection, accounts receivable management, coding and
reimbursement services, reimbursement analysis, practice consulting, managed
care contract management and accounting and bookkeeping services, primarily to
hospital-based physicians such as pathologists, anesthesiologists and
radiologists, allowing them to avoid the infrastructure investment in their own
back-office operations. In addition, we provide these services to other
specialties including plastic surgery, family practice, internal medicine,
orthopedics, neurologists, emergency medicine and ambulatory surgery centers.
These services help clients to be financially successful by improving cash flows
and reducing administrative costs and burdens. MBS currently provides services
to approximately 54 clients, representing 310 providers. Rand currently provides
services to approximately 58 clients, representing 171 providers. On Line
currently provides services to approximately 13 billing clients, representing 32
providers, and 43 transcription clients and provides payroll processing services
to 207 clients.
Billing and Collection Services. We offer billing and collection
services to our clients. These include coding, reimbursement services, charge
entry, claim submission, collection activities, and financial reporting
services, including:
o Current Procedural Terminology ("CPT") and International
Classification of Diseases ("ICD-9") utilization reviews;
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o Charge ticket (superbill) evaluations;
o Fee schedule analyses;
o Reimbursement audits; and
o Training seminars.
o Patient refund processing
Managed Care Contract Management Services. We offer consulting services
to assist clients in interacting with managed care organizations. Some of the
managed care consulting services are:
o Establishing the actual ownership of the managed care organization
and determining that the entity is financially sound;
o Negotiating the type of reimbursement offered;
o Assuring that there are no "withholds" beyond the discount agreed
upon;
o Determining patient responsibility for non-covered services, as well
as co-pays and deductibles;
o Tracking managed care payments to verify the accuracy of the
reimbursement rate;
o Evaluating the appeals process in case of disputes concerning
payment issues, utilization review, and medical necessity; and
o Confirming the length of the contract, the renewal process, and the
termination options.
Practice Consulting Services. We offer a wide range of management
consulting services to medical practices. These management services help create
a more efficient medical practice, providing assistance with the business
aspects associated with operating a medical practice. Our management consulting
services include the following:
o Accounting and bookkeeping services;
o Evaluation of staffing needs;
o Provision of temporary staff services;
o Quality assurance program development;
o Physician credentialing assistance;
o Fee schedule review, specific to locality;
o Formulation of scheduling systems; and
o Training and continuing education programs.
o Payroll processing
See Note 10 in our Notes to Consolidated Financial Statements included
in Part II, Item 7. Financial Statements for financial information regarding our
RCM segment.
Practice Management ("PM") Segment
IPS, a Delaware corporation, was founded in 1996 to provide physician
practice management services to general and subspecialty pediatric practices.
IPS commenced its business activities upon consummation of the combination of
several medical group businesses effective January 1, 1999.
IPS serves the general and subspecialty pediatric physician market,
providing accounting and bookkeeping, human resource management, group
purchasing, accounts receivable management, quality assurance services,
physician credentialing, fee schedule review, training and continuing education
and billing and reimbursement analysis. As of December 31, 2006, IPS managed
eight practice sites, representing five medical groups in Illinois and Ohio. The
physicians, who are all employed by separate corporations, provide all clinical
and patient care related services. The operations of two of the affiliated
medical practices managed at December 31, 2006 - Dayton Infant Care Specialists,
Corp. ("Dayton ICS") and Pediatric Specialists of the Northwest, M.D.S.C.
("PSNW") - are now reflected in our consolidated statements of operations as
`income from operations of discontinued components' for the twelve months ended
December 31, 2006 and 2005, respectively. (See Part I, Item 3. Legal
Proceedings.)
There is a standard forty-year management service agreement ("MSA")
between IPS and each of the various affiliated medical groups whereby a
management fee is paid to IPS. IPS owns all of the assets used in the operation
of the medical groups. IPS manages the day-to-day business operations of each
medical group and provides the assets for the physicians to use in their
practice for a fixed fee or percentage of the net operating income of the
medical group. All revenues are collected by IPS, the fixed fee or percentage
payment to IPS is taken from the net operating income of the medical group and
the remainder of the net operating income of the medical group is paid to the
physicians and treated as an expense on IPS's financial statements as "physician
group distribution."
See Note 10 in our Notes to Consolidated Financial Statements included
in Part II, Item 7. Financial Statements for financial information regarding the
continuing operations of our PM segment.
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Company History and Recent Developments
Orion was incorporated in Delaware on February 24, 1984 as Technical
Coatings, Incorporated. On December 15, 2004, we completed a series of
transactions to acquire IPS (the "IPS Merger") and to acquire Dennis Cain
Physician Solutions, Ltd. ("DCPS") and MBS (the "DCPS/MBS Merger")
(collectively, the "2004 Mergers"). As a result of these transactions, IPS and
MBS became our wholly owned subsidiaries. On December 15, 2004, and simultaneous
with the consummation of the 2004 Mergers, we changed our name from SurgiCare,
Inc. to Orion HealthCorp, Inc. and consummated restructuring transactions, which
included issuances of new equity securities for cash and contribution of
outstanding debt, and the restructuring of our debt facilities. We also created
Class B Common Stock and Class C Common Stock, which were issued in connection
with the equity investments and acquisitions.
In 2005, we initiated a strategic plan designed to accelerate our
growth and enhance our future earnings potential. The plan focuses on our
strengths, which include providing billing, collections and complementary
business management services to physician practices. As part of this plan, we
completed a series of transactions involving the divestiture of non-strategic
assets in 2005 and early 2006. In addition, we redirected financial resources
and company personnel to areas that management believed would enhance long-term
growth potential. A key component of our long-term strategic plan was the
identification of potential acquisition targets that would increase our presence
in the markets we serve and enhance stockholder value.
On December 1, 2006 we completed the acquisition of Rand and the On
Line businesses. We acquired all of the issued and outstanding capital stock of
Rand for an aggregate purchase price of $9,365,333, subject to adjustments
conditioned upon future revenue results. The purchase price was paid through a
combination of cash, the issuance of an unsecured subordinated promissory note
and the issuance of shares of our Class A Common Stock. We acquired all of the
issued and outstanding capital stock of both OLA and OLP for an aggregate
purchase price of $3,310,924, subject to adjustments conditioned upon future
revenue results. The purchase price was paid through a combination of cash and
the issuance of unsecured subordinated promissory notes.
These acquisitions were financed in part through the proceeds of a
private placement that was also completed on December 1, 2006 (the "Private
Placement"). The Private Placement consisted of our issuance of (i) shares of a
newly created class of our common stock, Class D Common Stock, par value $0.001
per share (the "Class D Common Stock"), which is convertible into our Class A
Common Stock, to each of Phoenix Life Insurance Company ("Phoenix") and Brantley
Partners IV, L.P. ("Brantley IV") for an aggregate purchase price of $4,650,000
and (ii) senior unsecured subordinated promissory notes due 2011 in the original
principal amount of $3,350,000, bearing interest at an aggregate rate of 14% per
annum, together with warrants to purchase shares of our Class A Common Stock, to
Phoenix for an aggregate purchase price of $3,350,000.
Our senior unsecured subordinated promissory notes bear interest at the
combined rate of (i) 12% per annum payable in cash on a quarterly basis and (ii)
2% per annum payable in kind (meaning that the accrued interest will be
capitalized as principal) on a quarterly basis, subject to our right to pay such
amount in cash. The notes are unsecured and subordinated to all of our other
senior debt. Upon the occurrence and during the continuance of an event of
default the interest rate on the cash portion of the interest shall increase
from 12% per annum to 14% per annum, for a combined rate of default interest of
16% per annum. We may prepay outstanding principal (together with accrued
interest) on the notes subject to certain prepayment penalties and we are
required to prepay outstanding principal (together with accrued interest) on the
notes upon certain specified circumstances.
As a condition to the Private Placement, on December 1, 2006, we
refinanced our existing loan facility with CIT Healthcare, LLC ("CIT") into a
four year $16,500,000 senior secured credit facility with Wells Fargo Foothill,
Inc. ("Wells Fargo") consisting of a $2,000,000 revolving loan commitment, a
$4,500,000 term loan and a $10,000,000 acquisition facility commitment. Amounts
borrowed under this facility are secured by substantially all of our assets and
a pledge of the capital stock of our operating subsidiaries. Under the terms of
the credit agreement (the "Credit Agreement") relating to this facility, amounts
borrowed bear interest at either a fluctuating rate based on the prime rate or
LIBOR rate, at our election. Currently, our interest rate on the revolving loan
commitment and the term loan is the prime rate plus 1.75%. In addition to
refinancing our existing loan facility, a portion of the proceeds from this
facility were used to fund our acquisitions of Rand and On Line and to finance
our ongoing working capital, capital expenditure and general corporate needs.
Upon repayment of the CIT loan facility, two of our stockholders, Brantley IV
and Brantley Capital Corporation "(Brantley Capital") were released from
guarantees that they had provided on our behalf in connection with the loan
facility.
Also on December 1, 2006 in connection with the consummation of the
Private Placement and the execution of the Credit Agreement, the following
actions were taken:
o We amended our certificate of incorporation to create the Class D
Common Stock and eliminate the Class B Common Stock and Class C Common
Stock;
o We purchased and retired all 1,722,983 shares of our Class B Common
Stock owned by Brantley Capital for an aggregate purchase price of
$482,435;
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o Brantley IV converted the entire unpaid principal balance, and accrued
but unpaid interest, of two convertible subordinated promissory notes
in the original aggregate amount of $1,250,000 (the "Brantley IV
Notes") into shares of our Class A Common Stock;
o All of our remaining holders of Class B Common Stock and Class C Common
Stock converted their shares into shares of our Class A Common Stock;
o We extended the maturity date and increased the interest rate on
certain unsecured subordinated promissory notes totaling in the
aggregate $1,714,336 (the "DCPS/MBS Notes") issued to certain of the
former equity holders of the businesses we acquired in 2004 as part of
the DCPS/MBS Merger, including two of our executive officers, Dennis
Cain, CEO of MBS, and Tommy Smith, President and COO of MBS; and
o We restructured certain unsecured notes issued to DVI Financial
Services, Inc. ("DVI") and serviced by U.S. Bank Portfolio Services
("USBPS") to reduce the outstanding balance from $3,750,000 to
$2,750,000.
As of December 31, 2006, after giving effect to the acquisitions of
Rand and On Line and the closing of the Private Placement, Brantley IV owned
62,437,789 shares of our Class A Common Stock, warrants to purchase 20,455
shares of our Class A Common Stock and 8,749,952 shares of our Class D Common
Stock which are currently convertible into 8,749,952 shares of our Class A
Common Stock. As of December 31, 2006, this represented 52.0% of our voting
power on an as-converted, fully-diluted basis. Therefore, as of December 1,
2006, we qualified as a "controlled company" under the listing rules of the
American Stock Exchange ("AMEX"). Two of our directors, Paul H. Cascio and
Michael J. Finn, are affiliated with Brantley IV and its related entities.
Messrs. Cascio and Finn serve as general partners of the general partner of
Brantley Venture Partners III, L.P. ("Brantley III") and Brantley IV and are
limited partners in these funds. The advisor to Brantley III is Brantley Venture
Management III, L.P. and the advisor to Brantley IV is Brantley Management IV,
L.P.
Phoenix is a limited partner in Brantley IV and Brantley Partners V,
L.P and has also co-invested with Brantley IV and its affiliates in a number of
transactions. Prior to the closing of the Private Placement, Phoenix did not
own, of record, any shares of our capital stock. As part of the Private
Placement, Phoenix received (i) 15,909,003 shares of Class D Common Stock,
representing upon conversion 15,909,003, or 11.6%, of our outstanding Class A
Common Stock as of December 31, 2006, on an as-converted, fully-diluted basis
taking into account the issuance of the shares of Class D Common Stock and (ii)
warrants to purchase 1,421,629 shares of our Class A Common Stock representing
1.0% of the voting power as of December 31, 2006 on an as-converted,
fully-diluted basis.
Competition
RCM Segment
There are several companies that compete with us in the RCM business
segment, including Per-Se Technologies, Inc., which was acquired by McKesson
Corporation on January 26, 2007, CBIZ, Inc., RMI, and Houston Medical Records.
We also compete with regional and local billing companies as well as physician
groups performing billing and collection services in house. Many of these
competitors have greater resources than us. The principal competitive factors
that affect our ability to provide such services are the ability to provide
proactive practice management consulting services, the efficiency and
effectiveness of converting medical services to cash while minimizing compliance
risk, the relationship with the client or prospective client, pricing of
services offered, the experience and expertise of personnel, reputation, and
access to capital.
PM Segment
We compete with many local, regional and national companies in the
healthcare business services markets in which they operate. IPS is able to
compete based on its long-term MSAs, by providing a high level of service,
having employees with many years of experience in the healthcare market and
focusing on the practice area of pediatrics. IPS's affiliated medical groups
compete with many other physician parties that provide similar specialties in
their respective geographic area.
Government Regulation
Administrative Simplification and Privacy Requirements. There are
currently numerous legislative and regulatory initiatives at the state and
federal levels addressing patient privacy concerns. In particular, on December
28, 2000, the Department of Health and Human Services ("DHHS") released final
health privacy regulations implementing portions of the Administrative
Simplification Provisions of HIPAA, and in August 2002 published revisions to
the final rules. These final health privacy regulations generally required
compliance by April 14, 2003 and extensively regulate the use and disclosure of
individually identifiable health-related information. We believe that the cost
of compliance with these regulations has not had a material adverse effect on
our business, financial position or results of operations. In addition, our
facilities will continue to remain subject to any state laws that are more
restrictive than the privacy regulations issued under HIPAA. These statutes vary
by state and could impose additional penalties.
We cannot predict whether other regulatory or statutory provisions will
be enacted by federal or state authorities that would prohibit or otherwise
regulate relationships which we have established or may establish with other
healthcare providers or the possibility of material adverse effects on our
business or revenues arising from such future actions. We believe, however, that
we will be able to adjust our operations to be in compliance with any regulatory
or statutory provision, as may be applicable.
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We are 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 ("FCA"), which may be
enforced by the federal government directly, or by a qui tam plaintiff (a
private person suing on the government's behalf under a statute that assigns a
certain part of the penalty award to the government). Under the FCA, 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 the
actual damages. In recent cases, some qui tam plaintiffs have taken the position
that violations of the anti-kickback statute and "Stark II" provisions of the
Omnibus Budget Reconciliation Act of 1993 should also be prosecuted as
violations of the federal FCA. Even though we believe that we have procedures in
place to ensure the accurate completion of claims forms and requests for
payment, the laws and regulations defining the proper parameters of Medicare or
Medicaid billing are frequently unclear and have not been subjected to extensive
judicial or agency interpretation. Billing errors can occur despite our 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
FCA or related statutes.
RCM Segment
Regulatory activities affect the business activities of our
subsidiaries operating in the RCM business segment by controlling reimbursement
to our clients, which affects our revenues, as well as regulations regarding
patient privacy and submission of fraudulent claims.
Our clients depend upon third-party programs, including governmental
and private health insurance programs, to reimburse them for services rendered
to patients. In order to receive Medicare reimbursement, each client must meet
the applicable conditions of participation set forth by DHHS relating to the
type of specialty, as well as comply with state and local laws and regulations,
all of which are subject to change from time to time. Reimbursement rates are
subject to governmental regulation as well as negotiated contracts with third
party payers. Changes in reimbursement to our clients could have a direct impact
on our RCM revenues because our RCM revenues are based on a percentage of such
reimbursements.
PM Segment
IPS's customers must comply with the governmental regulations, such as
those relating to HIPAA, Medicare and Medicaid, which affect healthcare
providers. When providing its customers with healthcare business services and
information technology solutions, IPS must consider the healthcare regulatory
framework in which its customers operate in order to provide them with services
and products that will not compromise their compliance with these regulations.
IPS's products and services are HIPAA compliant. IPS has HIPAA Business
Associate agreements in place with all companies that are third-party business
partners and may receive protected patient health information.
Employees
As of December 31, 2006, we had a total workforce of 423 employees.
Our RCM businesses employed a total of 274 employees, 264 of which were
full-time employees and 10 of which were part-time or as-needed ("PRN")
employees. These employees worked in the following areas: administration (214),
management or supervisory (51), and information technology (9).
Our PM business employed a total of 136 employees, 91 of which were
full-time employees and 45 of which were part-time or PRN employees. These
employees worked in the following areas: administration (62), clinical (70) and
operations (4).
Our principal corporate office in Roswell, Georgia employed a total of
13 persons, 12 of which were full-time employees and one of which was a
part-time employee. The corporate staff worked in the following positions:
corporate management (7), administration (4), information technology (1) and
operations (1).
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ITEM 2. DESCRIPTION OF PROPERTY
The following table contains information on the facility leases for our
principal corporate office, as well as the locations of our RCM and PM segment
businesses, as of December 31, 2006.
Location Approximate Lease Expiration
-------- Square Footage ----------------
---------------
Principal office:
1805 Old Alabama Road, Suite 350, Roswell, Georgia 8,600 April 30, 2012
RCM Segment:
10700 Richmond Avenue, Houston, Texas 21,000 June 30, 2011
714 FM 1960 West, Houston, Texas 10,200 December 31, 2007
3939 Green Oaks Blvd West, Arlington, Texas 1,853 November 30, 2007
32 Tacon Street, Mobile, Alabama 9,900 December 31, 2011
24 Tacon Street, Mobile, Alabama 1,300 December 31, 2007
1633 Erringer Road, Simi Valley, California (1) 9,900 December 31, 2010
PM Segment:
3617 Dayton-Xenia Road, Beavercreek, Ohio 3,621 October 30, 2011
5450 Far Hills Avenue, Kettering, Ohio 5,551 November 30, 2012
331 N. Breiel Boulevard, Middletown, Ohio 11,000 May 10, 2010
9000 N. Main Street, Dayton, Ohio 5,937 April 11, 2008
465 Avenue of the Cities, East Moline, Illinois 4,400 September 1, 2007
1625 Avenue of the Cities, Moline, Illinois 19,644 July 20, 2009
5057 Shoreline Road, Barrington, Illinois (2) 4,203 February 26, 2009
One Children's Plaza, Dayton, Ohio (3) 1,240 November 30, 2009
----------
(1) This lease agreement is payable to a trust that is managed by the former
stockholder of Rand who is now an employee of Orion.
(2) This lease agreement relates to PSNW, which is included in discontinued
operations for the twelve months ended December 31, 2006 and 2005,
respectively, and as `assets held for sale' and `liabilities held for sale'
at December 31, 2006.
(3) This lease agreement relates to Dayton ICS, which is included in
discontinued operations for the twelve months ended December 31, 2006 and
2005, respectively.
Annual rental payments related to our facility leases totaled
$1,715,278 for the year ended December 31, 2006. We believe our facilities are
sufficient for our purposes.
ITEM 3. LEGAL PROCEEDINGS
IPS is party to a management services agreement ("the Dayton MSA") with
Dayton ICS. The sole remaining shareholder of Dayton ICS has notified both IPS
and the hospitals at which Dayton ICS has contracts that he intends to dissolve
Dayton ICS, cease practicing at the hospitals and cease utilizing the services
of IPS. On November 28, 2006, we were named as a defendant in a suit entitled
Dayton Infant Care Specialists, Corp. vs. Integrated Physician Solutions, Inc.,
et al. in the United States District Court of the Southern District of Ohio,
Western Division, Case No. 3:06-cv-00374, in which Dayton ICS was seeking
certain injunctive relief ordering that certain funds derived from accounts
receivable and held in a lockbox be released to Dayton ICS. On November 29,
2006, the Court denied Dayton ICS's motion for a temporary restraining order.
There is an arbitration clause in the Dayton MSA. IPS asserts that Dayton ICS
waived arbitration and, therefore, has filed a counterclaim against Dayton ICS
for breach of contract and other causes of action. Also on November 29, 2006,
IPS filed a suit entitled Integrated Physician Solutions, Inc. vs. Don T.
Granger, M.D., et al. in the United States District Court of the Southern
District of Ohio, Western Division, Case No 3:06-cv-00377 against the
shareholder of Dayton ICS and physicians who are under employment agreements
with Dayton ICS stating various claims arising out of their involvement with the
termination of the business. Certain of the employees have filed a motion to
dismiss the counterclaim against them. Both cases are assigned to the same judge
in the Western Division of the United States District Court of the Southern
District of Ohio and may be consolidated. Trial dates have been scheduled for
both cases in July 2008.
IPS is party to a management services agreement ("the Illinois MSA")
with PSNW. IPS and PSNW were in arbitration regarding claims relating to the
Illinois MSA. In connection therewith, on February 9, 2007, IPS and PSNW entered
into the PSNW Settlement to settle disputes that had arisen between IPS and PSNW
and to avoid the risk and expense of further litigation. As part of the PSNW
Settlement, PSNW and IPS agreed that PSNW would purchase the assets owned by IPS
and used in connection with PSNW's practice, in exchange for a negotiated cash
consideration and termination of the Illinois MSA. Additionally, among other
provisions, after May 31, 2007, which is the anticipated closing date of the
transaction contemplated by the PSNW Settlement, PSNW and IPS will be released
from any further obligation to each other from any previous agreement.
In addition, we are involved in various other legal proceedings and
claims arising in the ordinary course of business. Our management believes that
the disposition of these additional matters, individually or in the aggregate,
is not expected to have a materially adverse impact on our financial condition.
However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a special meeting of stockholders on November 27, 2006. At this
special meeting, the stockholders voted on and approved each of the following
proposals.
Proposal One: To approve an amendment to our certificate of incorporation to
increase the aggregate number of shares of our authorized
capital stock from 117,000,000 shares to 370,000,000 shares.
Proposal One was approved by holders of 61.99% of the
outstanding shares of the Company's common stock (including
Class A, Class B and Class C Common Stock) entitled to vote at
the special meeting. Specifically, a total of 15,294,873
shares were voted in favor of this proposal, 21,679 shares
were voted against this proposal, and 6,000 shares abstained
from voting on this proposal.
Proposal Two: To approve an amendment to our certificate of incorporation to
increase the number of shares of Class A Common Stock
authorized and available for issuance from 70,000,000 shares
to 300,000,000 shares. The increased number of shares approved
is a portion of, and not in addition to, the additional shares
being authorized pursuant to Proposal One. Proposal Two was
approved by holders of 61.95% of the outstanding shares of the
Company's common stock (including Class A, Class B and Class C
Common Stock) entitled to vote at the special meeting.
Specifically, a total of 15,284,903 shares were voted in favor
of this proposal, 31,649 shares were voted against this
proposal, and 6,000 shares abstained from voting on this
proposal.
Proposal Three: To approve an amendment to our certificate of incorporation to
authorize 50,000,000 shares of a new class of common stock,
Class D Common Stock, which is convertible into shares of our
Class A Common Stock, and to provide for the rights and
preferences of the Class D Common Stock. The new shares
approved are a portion of, and not in addition to, the
additional shares being authorized pursuant to Proposal One.
Proposal Three was approved by holders of 61.95% of the
outstanding shares of the Company's common stock (including
Class A, Class B and Class C Common Stock) entitled to vote at
the special meeting, by 100% of the holders of Class B Common
Stock, voting as a single class, entitled to vote at the
special meeting, and by 100% of the holders of Class C Common
Stock, voting as a single class, entitled to vote at the
special meeting. Specifically, 15,284,848 shares were voted in
favor of this proposal, 31,704 shares were voted against this
proposal and 6,000 shares abstained from voting on this
proposal. With respect to the Class B Common Stock, voting as
a single class, 10,448,470 shares were voted in favor of this
proposal, with no shares voted against or abstained from
voting on this proposal. With respect to the Class C Common
Stock, voting as a single class, 1,437,572 shares were voted
in favor of this proposal, with no shares voted against or
abstained from voting on this proposal.
Proposal Four: To approve the issuance as part of a private placement
transaction to Phoenix and Brantley IV of such number of
shares of our newly created Class D Common Stock representing
upon conversion 19.375% of our outstanding Class A Common
Stock, on a fully-diluted basis, taking into account the
issuance of the shares of Class D Common Stock but excluding
certain of our outstanding options, warrants and convertible
securities and certain shares of Class B Common Stock to be
purchased by us from Brantley Capital. The shares of Class D
Common Stock issued pursuant to this proposal are a portion
of, and not in addition to, the shares being created pursuant
to Proposal Three, the shares of Class A Common Stock to be
issued upon conversion of such Class D Common Stock are a
portion of, and not in addition to, the additional shares
being authorized pursuant to Proposal Two and all of the
shares issued pursuant to this proposal are a portion of, and
not in addition to, the additional shares being authorized
pursuant to Proposal One. Proposal Four was approved by
holders of 61.95% of the outstanding shares of the Company's
common stock (including Class A, Class B and Class C Common
Stock) entitled to vote at the special meeting.
Specifically, 15,285,266 shares were voted in favor of this
proposal, 28,236 shares were voted against this proposal,
and 9,050 shares abstained from voting on this proposal.
Proposal Five: To approve the issuance as part of a private placement
transaction to Phoenix of warrants to purchase shares of our
Class A Common Stock equal to 1.117% of our outstanding Class
A Common Stock on the date of issuance of the warrant
certificate, taking into account the issuance of the shares of
Class D Common Stock described in Proposal Four but excluding
certain of our outstanding options, warrants and convertible
securities and certain shares of our Class B Common Stock to
be purchased by us from Brantley Capital. The shares of Class
A Common Stock to be issued upon the exercise of the warrants
referred to in this proposal are a portion of, and not in
addition to, the additional shares being authorized pursuant
to Proposal Two and are a portion of, and not in addition to,
the additional shares being authorized pursuant to Proposal
One. Proposal Five was approved by holders of 61.95% of the
outstanding shares of the Company's common stock (including
Class A, Class B and Class C Common Stock) entitled to vote at
the special meeting. Specifically, 15,285,961 shares were
voted in favor of this proposal, 27,541 shares were voted
against this proposal, and 9,050 shares abstained from voting
on this proposal.
10
Proposal Six: To approve the issuance as a portion of the consideration paid
for our acquisition of the stock of Rand to the selling
stockholder of Rand such number of shares of our Class A
Common Stock having a value of $600,000 based on the average
closing price per share of our Class A Common Stock for the
twenty day period prior to the closing of the acquisition of
Rand. The shares of Class A Common Stock issued pursuant to
this proposal are a portion of, and not in addition to, the
additional shares being authorized pursuant to Proposal Two
and are a portion of, and not in addition to, the additional
shares being authorized pursuant to Proposal One. Proposal Six
was approved by holders of 62.01% of the outstanding shares of
the Company's common stock (including Class A, Class B and
Class C Common Stock) entitled to vote at the special meeting.
Specifically, 15,300,218 shares were voted in favor of this
proposal, 16,274 shares were voted against this proposal, and
6,060 shares abstained from voting on this proposal.
Proposal Seven: To approve the amendment to our 2004 Incentive Plan to
increase the number of shares of our Class A Common Stock
available for grants under the 2004 Incentive Plan from
2,200,000 shares to such number of shares representing 10% of
our outstanding Class A Common Stock as of the date of closing
of the private placement, on a fully-diluted basis taking into
account the shares issued in the private placement and the
Rand acquisition, and to increase the maximum number of shares
that can be granted to a participant in any calendar year
under the 2004 Incentive Plan from 1,000,000 shares to
3,000,000 shares. The increased number of shares approved
pursuant to this proposal were reserved out of the additional
shares of Class A Common Stock being authorized pursuant to
Proposals One and Two. Proposal Seven was approved by holders
of 62.00% of the outstanding shares of the Company's common
stock (including Class A, Class B and Class C Common Stock)
entitled to vote at the special meeting. Specifically,
15,297,284 shares were voted in favor of this proposal,
12,553 were voted against this proposal, and 12,715 shares
abstained from voting on this proposal.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our Class A Common Stock is currently traded on the AMEX under the
symbol ONH. From July 2001 to December 15, 2004, the Company's common stock was
traded on the AMEX under the symbol SRG.
On March 27, 2007, the last sale price of our common stock as reported
on the AMEX was $0.21 per share. The following table sets forth for the periods
indicated the high and low per share prices for our Class A Common Stock as
reported on the AMEX:
Year Ended December 31, 2006 High Low
-------------------------------------- -------------- --------------
Quarter ended March 31, 2006 $0.45 $0.25
Quarter ended June 30, 2006 $1.20 $0.22
Quarter ended September 30, 2006 $0.38 $0.22
Quarter ended December 31, 2006 $0.35 $0.12
Year Ended December 31, 2005 High Low
-------------------------------------- -------------- --------------
Quarter ended March 31, 2005 $2.70 $0.90
Quarter ended June 30, 2005 $1.40 $0.62
Quarter ended September 30, 2005 $0.88 $0.37
Quarter ended December 31, 2005 $0.49 $0.25
Holders
As of March 27, 2007, there were approximately (i) 464 holders of
record of our Class A Common Stock and 105,499,487 shares of Class A Common
Stock issued and outstanding; and (ii) 2 holders of record of our Class D Common
Stock and 24,658,955 shares of Class D Common Stock outstanding.
Dividends
We have not paid dividends on shares of our common stock within the
last three years, and do not expect to declare or pay any cash dividends on our
common stock in the foreseeable future. Additionally, without the prior written
consent of Wells Fargo, the Credit Agreement does not allow payment of a
distribution in cash to the holders of our Class A Common Stock or of our Class
D Common Stock at any time (a) while there are any amounts owed by us to Wells
Fargo under the Credit Agreement or (b) there is any commitment by Wells Fargo
to make any loans under the Credit Agreement.
11
Subject to the terms of any preferred stock or any other class of stock
(or any series thereof) having any preference or priority over, or rights
superior to, the Class A Common Stock and Class D Common Stock that the Company
may issue in the future, all dividends and other distributions will be made to
the holders of the shares of Class A Common Stock and Class D Common Stock in
the following order of priority:
o First, the holders of the shares of Class D Common Stock (other than
shares concurrently being converted into Class A Common Stock), as a
single and separate class, are entitled to receive all distributions
until there has been paid with respect to each such share from
amounts then and previously distributed an amount equal to the Class
D issuance amount plus an amount equal to nine percent (9%) per
annum on such amount, without compounding, from the date the Class D
Common Stock was first issued.
o Second, after the full distributions have been made to the holders
of the shares of Class D Common Stock, all holders of the shares of
Class A Common Stock and Class D Common Stock, as a single class,
shall thereafter be entitled to receive all remaining distributions
pro-rata based on the number of outstanding shares of Class A Common
Stock or Class D Common Stock held by each holder, provided that for
purposes of such remaining distributions, each share of Class D
Common Stock will be deemed to have been converted into one share of
Class A Common Stock (subject to adjustment to account for stock
splits, stock dividends, combinations or other similar events
affecting the Class A Common Stock.)
Recent Sales of Unregistered Securities
As described in Part I, Item 1. Description of Business under the
caption "Company History and Recent Developments" and incorporated herein by
reference, in connection with the closing of the acquisitions of Rand and On
Line and the Private Placement, we issued (i) 3,314,917 shares of our Class A
Common Stock to the stockholder of Rand; (ii) 24,658,955 shares of our Class D
Common Stock representing on conversion as of December 31, 2006, 24,658,955
shares of our Class A Common Stock to Phoenix and Brantley IV in the aggregate;
(iii) warrants to purchase 1,421,629 shares of our Class A Common Stock to
Phoenix, which are exercisable for five years from the date of issuance at a
price of $0.01 per share; (iv) 67,742,350 shares of our Class A Common Stock
upon conversion of 8,725,487 shares of our Class B Common Stock, pursuant to a
conversion ratio at December 1, 2006 under which each share of our Class B
Common Stock was convertible into 7.763732876712 shares of our Class A Common
Stock; (v) 20,019,619 shares of our Class A Common Stock upon conversion of
1,437,572 shares of our Class C Common Stock, pursuant to a conversion ratio at
December 1, 2006 under which each share of our Class C Common Stock was
convertible into 16.5 shares of our Class A Common Stock; and (vi) 1,383,825
shares of our Class A Common Stock upon conversion of the Brantley IV notes,
based on a conversion price per share of $1.042825. We issued these shares of
our Class A Common Stock in reliance on an exception from registration pursuant
to Section 4(2) of the Securities Act based on the purchasers' representations,
the absence of a general solicitation and other criteria needed to satisfy
Section 4(2).
On December 1, 2006, in connection with the closing of the Private
Placement we filed our Third Amended and Restated Certificate of Incorporation
which (i) increased the aggregate number of shares of our authorized capital
stock from 117,000,000 shares to 370,000,000 shares, consisting of 350,000,000
shares of common stock and 20,000,000 shares of preferred stock; (ii) specified
that 300,000,000 shares of the common stock were designated as Class A Common
Stock; (iii) created a new series of common stock designated as the Class D
Common Stock consisting of 50,000,000 shares; and (iv) eliminated the Class B
and Class C Common Stock and the rights and preferences related thereto. Our
Third Amended and Restated Certificate of Incorporation was approved by our
stockholders at our special meeting of stockholders held on November 27, 2006
and was filed on December 1, 2006. As a condition of the closing of the Private
Placement, we also purchased all 1,722,983 of the outstanding shares of our
Class B Common Stock held by Brantley Capital for an aggregate purchase price of
$482,435, or $0.28 per share As of December 1, 2006, we no longer have any Class
B or Class C Common Stock authorized, issued or outstanding.
12
Equity Compensation Plan Information
The following table gives information about our Class A Common Stock
that may be issued upon the exercise of options, warrants and rights under all
of our existing equity compensation plans as of December 31, 2006.
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in 1st column)
--------------------------------------------------- -------------------- -------------------- ------------------------
Equity compensation plans approved by security
holders 4,084,000 $0.32 9,241,782
Equity compensation plans not approved by security
holders -- -- --
------------------ -------------------
Total............................................. 4,084,000 $0.32 9,241,782
================== ===================
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion highlights the principal factors that have
affected our financial condition and results of operations as well as our
liquidity and capital resources for the periods described. All significant
intercompany balances and transactions have been eliminated in consolidation.
This discussion should be read in conjunction with our consolidated financial
statements and related notes thereto, which are included elsewhere in this
Annual Report on Form 10-KSB.
Overview
We are a healthcare services organization providing outsourced business
services to physicians, serving the physician market through two operating
segments - Revenue Cycle Management and Practice Management - via five operating
subsidiaries: MBS, Rand, OLA and OLP, and IPS. Our mission is to provide
superior billing, collections, practice, business and financial management
services for physicians, resulting in optimal profitability for its clients and
increased enterprise value for its stakeholders. We believe our core competency
is our long-term experience and success in working with and creating value for
physicians.
Strategic Focus
In 2005, we initiated a strategic plan designed to accelerate our
growth and enhance our future earnings potential. The plan focuses on our
strengths, which include providing billing, collections and complementary
business management services to physician practices. As part of this plan, we
completed a series of transactions involving the divestiture of non-strategic
assets in 2005 and early 2006. In addition, we redirected financial resources
and company personnel to areas that management believed would enhance long-term
growth potential. We believe that we are now positioned to focus on our
physician services business and the physician billing and collections market,
leveraging our existing presence to expand into additional geographic regions
and increase the range of services we provide to physicians. A key component of
this strategy includes acquiring financially successful billing companies
focused on providing services to hospital-based physicians and increasing sales
and marketing efforts in existing markets. Specifically, we took the following
actions in the second half of 2006:
o In December 2006, we entered into the Credit Agreement with Wells
Fargo for a four-year $16.5 million credit facility, including a $10
million acquisition line of credit; and
o In December 2006, we completed the acquisitions of Rand and On Line
and closed the Private Placement.
In conjunction with the transactions described above, and described
more fully in Part I. Item 1. Business under the caption "Company History and
Recent Developments," we also completed the following transactions related to
our balance sheet and capital structure in December 2006:
o We issued shares of Class D Common Stock to Phoenix and Brantley IV
and a subordinated promissory note to Phoenix in conjunction with
the Private Placement;
o We converted the Brantley IV notes with a principal amount of $1.25
million into shares of our Class A Common Stock;
o We purchased all 1,722,983 shares of our Class B Common Stock owned
by Brantley Capital;
o We converted all of the remaining shares of Class B and Class C
Common Stock into shares of our Class A Common Stock (representing
approximately 88 million shares of our Class A Common Stock in the
aggregate) and retired the Class B and Class C Common Stock;
13
o We renegotiated the payment terms of the DCPS/MBS Notes, which
included the extension of the maturity date of the DCPS/MBS Notes
from December 15, 2007 to December 15, 2008; and
o We executed the Restructured Loan Agreement with USBPS, which
provided for the reduction of our non-interest bearing obligation
with USBPS from $3,750,000 to $2,750,000 as well as the extension of
the maturity of this obligation until October 2013.
Financial Overview
As more fully described below, our results of operations for the year
ended December 31, 2006 as compared to the same period in 2005 reflect several
important factors, many related to the impact of the transactions which occurred
as part of our strategic plan referred to above.
o Changes in revenues, resulting from the reclassification of some of
IPS's operations into discontinued operations as well as the
inclusion of one month of revenues for Rand and On Line as compared
to no revenue in 2005;
o Inclusion of legal expenses in 2006 related to IPS's discontinued
operations;
o Professional and consulting fees incurred in connection with the
December 2006 Private Placement;
o Inclusion of one month of expenses for Rand and On Line as compared
to no expenses in 2005; and
o Significant charges for impairment of intangible assets and goodwill
in 2006 related to IPS's discontinued operations.
Critical Accounting Policies and Estimates
The preparation of our financial statements is in conformity with
accounting principles generally accepted in the United States, which require
management to make estimates and assumptions that affect the amounts reported in
the financial statements and footnotes. Our management bases these estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments that are not readily apparent from other sources. These
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Changes in the facts or circumstances underlying these
estimates could result in material changes and actual results could differ from
these estimates. We believe the following critical accounting policies affect
the most significant areas involving management's judgments and estimates. In
addition, please refer to Note 1, Organization and Accounting Policies, of our
consolidated financial statements included beginning on Page F-1 of this Annual
Report on Form 10-KSB for further discussion of our accounting policies.
Consolidation of Physician Practice Management Companies. In March
1998, the Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") issued its Consensus on Issue 97-2 ("EITF 97-2"). EITF
97-2 addresses the ability of physician practice management ("PPM") companies to
consolidate the results of medical groups with which it has an existing
contractual relationship. Specifically, EITF 97-2 provides guidance for
consolidation where PPM companies can establish a controlling financial interest
in a physician practice through contractual management arrangements. A
controlling financial interest exists, if, for a requisite period of time, the
PPM has "control" over the physician practice and has a "financial interest"
that meets six specific requirements. The six requirements for a controlling
financial interest include:
(a) the contractual arrangement between the PPM and physician practice (1)
has a term that is either the entire remaining legal life of the
physician practice or a period of 10 years or more, and (2) is not
terminable by the physician practice except in the case of gross
negligence, fraud, or other illegal acts by the PPM or bankruptcy of
the PPM;
(b) the PPM has exclusive authority over all decision making related to
(1) ongoing, major, or central operations of the physician practice,
except the dispensing of medical services, and (2) total practice
compensation of the licensed medical professionals as well as the
ability to establish and implement guidelines for the selection,
hiring, and firing of them;
(a) the PPM must have a significant financial interest in the physician
practice that (1) is unilaterally saleable or transferable by the PPM
and (2) provides the PPM with the right to receive income, both as
ongoing fees and as proceeds from the sale of its interest in the
physician practice, in an amount that fluctuates based upon the
performance of the operations of the physician practice and the change
in fair value thereof.
IPS is a PPM company. IPS's MSAs governing the contractual relationship
with its affiliated medical groups are for forty year terms; are not terminable
by the physician practice other than for bankruptcy or fraud; provide IPS with
decision making authority other than related to the practice of medicine;
provide for employment and non-compete agreements with the physicians governing
compensation; provide IPS the right to assign, transfer or sell its interest in
the physician practice and assign the rights of the MSAs; provide IPS with the
right to receive a management fee based on results of operations and the right
to the proceeds from a sale of the practice to an outside party or, at the end
of the MSA term, to the physician group. Based on this analysis, IPS has
determined that its contracts meet the criteria of EITF 97-2 for consolidating
the results of operations of the affiliated medical groups and has adopted EITF
97-2 in its statement of operations. EITF 97-2 also has addressed the accounting
method for future combinations with individual physician practices. IPS believes
that, based on the criteria set forth in EITF 97-2, any future acquisitions of
individual physician practices would be accounted for under the purchase method
of accounting.
14
Revenue Recognition. MBS, Rand and OLA's principal source of revenues
is fees charged to clients based on a percentage of net collections of the
client's accounts receivable. They recognize revenue and bill their clients when
the clients receive payment on those accounts receivable. Our RCM businesses
typically receive payment from the client within 30 days of billing. The fees
vary depending on specialty, size of practice, payer mix, and complexity of the
billing. In addition to the collection fee revenue, MBS, Rand and OLA also earn
fees from the various consulting services that they provide, including medical
practice management services, managed care contracting, coding and reimbursement
services and transcription services. OLP earns revenue based on a contracted
rate per transaction and recognizes revenue when the service is provided.
IPS records revenue based on patient services provided by its
affiliated medical groups. Net patient service revenue is impacted by billing
rates, changes in current procedural terminology code reimbursement and
collection trends. IPS reviews billing rates at each of its affiliated medical
groups on at least an annual basis and adjusts those rates based on each
insurer's current reimbursement practices. Amounts collected by IPS for
treatment by its affiliated medical groups of patients covered by Medicare,
Medicaid and other contractual reimbursement programs, which may be based on
cost of services provided or predetermined rates, are generally less than the
established billing rates of IPS's affiliated medical groups. IPS estimates the
amount of these contractual allowances and records a reserve against accounts
receivable based on historical collection percentages for each of the affiliated
medical groups, which include various payer categories. When payments are
received, the contractual adjustment is written off against the established
reserve for contractual allowances. The historical collection percentages are
adjusted quarterly based on actual payments received, with any differences
charged against net revenue for the quarter. Additionally, IPS tracks cash
collection percentages for each medical group on a monthly basis, setting
quarterly and annual goals for cash collections, bad debt write-offs and aging
of accounts receivable. For the twelve months ended December 31, 2006 and 2005,
IPS's net fee-for-service revenue, less bad debt expense, totaled $12,292,580
and $11,787,130, respectively. The variance between cash collections and net
fee-for-service revenue for the twelve months ended December 31, 2006 was
$(1,224), or 0.0% of net fee-for-service revenue. For the year ended December
31, 2005, the variance between cash collections and net fee-for-service revenue
was $311,376, or 2.6% of net fee-for-service revenue. IPS is not aware of any
material claims, disputes or unsettled matters with third party payers and there
have been no material settlements with third party payers for the twelve months
ended December 31, 2006 and 2005.
Accounts Receivable and Allowance for Doubtful Accounts. MBS, Rand and
On Line record uncollectible accounts receivable using the direct write-off
method of accounting for bad debts. Historically, they have experienced minimal
credit losses and have not written-off any material accounts during 2006 or
2005.
IPS's affiliated medical groups grant credit without collateral to its
patients, most of which are insured under third-party payer arrangements. The
provision for bad debts that relates to patient service revenues is based on an
evaluation of potentially uncollectible accounts. The provision for bad debts
includes a reserve for 100% of the accounts receivable older than 180 days.
Establishing an allowance for bad debt is subjective in nature. IPS uses
historical collection percentages to determine the estimated allowance for bad
debts, and adjusts the percentage on a quarterly basis.
The following table summarizes IPS's aging of accounts receivable, by
major payer classification, as of December 31, 2006 and 2005, respectively:
December 31, 2006
0-30 31-60 61-90 90+ Total
---- ----- ----- --- -----
Commercial,HMO/PPO $935,503 $210,027 $44,986 $19,664 $1,210,181
Medicaid 73,306 25,059 6,699 20,792 125,857
Other 24,987 12,580 3,366 80,471 121,404
Self Pay 21,251 86,096 71,876 204,620 383,843
----------------- --------------- --------------- --------------- -----------------
Total $1,055,048 $333,763 $126,927 $325,547 $1,841,285
================= =============== =============== =============== =================
December 31, 2005
0-30 31-60 61-90 90+ Total
---- ----- ----- --- -----
Commercial,HMO/PPO $708,762 $249,968 $152,506 $50,672 $1,161,907
Medicaid 45,384 24,995 34,757 21,611 126,748
Other 145,070 136,059 35,846 123,370 440,346
Self Pay 64,878 63,737 64,706 277,306 470,627
----------------- --------------- --------------- --------------- -----------------
Total $964,094 $474,759 $287,816 $472,959 $2,199,628
================= =============== =============== =============== =================
15
The following schedule provides a reconciliation of IPS's aging of
accounts receivable to our consolidated accounts receivable as of December 31,
2006 and 2005, respectively:
December 31,
2006 2005
---- ----
IPS gross accounts receivable $1,841,285 $2,199,628
Non-trade accounts receivable 248,295 223,241
MBS accounts receivable, net 1,239,372 856,823
Rand accounts receivable, net 630,111 --
On Line accounts receivable, net 160,146 --
SurgiCare accounts receivable, net -- 35,511
Accounts receivable related to discontinued operations (1) 432,021 735,607
Contractual allowance and bad debt reserve (975,856) (1,252,506)
------------------ ------------------
Consolidated accounts receivable, net $3,575,375 $2,798,304
================== ==================
(1) At December 31, 2006, net accounts receivable related to assets held for
sale totaled $264,250 and are not reflected in consolidated net accounts
receivable.
IPS's affiliated medical groups follow a written policy regarding the
write-off of accounts receivable older than 90 days. The billing department of
each affiliated medical group complies with government and third party payer
regulations regarding the collection of balance due amounts. Accounts receivable
eligible for adjustment are reviewed monthly by the practice administrators,
with accounts considered for assignment to a collection agency the latter of 180
days after the date of patient liability has been determined or as soon as the
internal collection effort has been exhausted. All collection attempts and
contacts are documented in the patient's account record for future reference.
Once maximum collection efforts are exhausted, both internally and through
external collection agencies, adjustments and write-offs are reviewed in the
following manner:
o Accounts showing a balance less than $9.99 may be written off at the
discretion of the billing staff;
o Accounts showing a balance greater than $10.00 but less than $500.00
will be evaluated by the billing staff, practice administrator and
Director of Operations; and
o Accounts showing a balance of greater than $500.00 will be evaluated
by the billing staff, practice administrator, Director of Operations
and managing affiliated physician partners.
IPS's days sales outstanding for continuing operations totaled 39.8 and
48.4, respectively, for the twelve months ended December 31, 2006 and 2005.
Investment in Limited Partnerships. At December 31, 2005, we owned a
10% general partnership interest in San Jacinto Surgery Center, Ltd. ("San
Jacinto"). The investment was accounted for using the equity method. Under the
equity method, the investment is initially recorded at cost and is subsequently
increased to reflect our share of the income of the investee and reduced to
reflect the share of the losses of the investee or distributions from the
investee. Effective March 1, 2006, we sold our interest in San Jacinto. (See
"Results of Operations - Discontinued Operations" for additional discussion
regarding the sale of San Jacinto.)
The general partnership interest was accounted for as an investment in
limited partnership due to the interpretation of SFAS 94/Accounting Research
Bulletin ("ARB") 51 and the interpretations of such by Issue 96-16 and Statement
of Position "SOP" 78-9. Under those interpretations, the Company could not
consolidate its interest in an entity in which it held a minority general
partnership interest due to management restrictions, shared operating
decision-making, and capital expenditure and debt approval by limited partners
and the general form versus substance analysis.
Goodwill and Other Intangible Assets. Goodwill and intangible assets
represent the excess of cost over the fair value of net assets of companies
acquired in business combinations accounted for using the purchase method. In
July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interest accounting and requires that all business combinations
initiated after June 30, 2001, be accounted for using the purchase method. SFAS
No. 142 eliminates the amortization of goodwill and certain other intangible
assets and requires us to evaluate goodwill for impairment on an annual basis by
applying a fair value test. SFAS No. 142 also requires that an identifiable
intangible asset that is determined to have an indefinite useful economic life
not be amortized, but separately tested for impairment using a fair value-based
approach at least annually. We evaluate our goodwill and other intangible assets
in the fourth quarter of each fiscal year, unless circumstances require testing
at other times. (See "Results of Operations -- Discontinued Operations" for
additional discussion regarding the impairment testing of identifiable
intangible assets.)
16
Recent Accounting Pronouncements
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements," ("SAB 108") which provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for fiscal years ending after November 15,
2006. The adoption of SAB 108 was not material to our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," ("SFAS 157") which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. Earlier application is encouraged provided
that the reporting entity has not yet issued financial statements for that
fiscal year, including financial statements for an interim period within that
fiscal year. We do not expect the impact of SFAS 157 to be material to our
consolidated financial statements.
In June 2006, the FASB issued Financial Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," ("FIN 48") which clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 provides that a tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be sustained upon
examination, based on the technical merits. This interpretation also provides
guidance on measurement, de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We are currently evaluating
the effect that the adoption of FIN 48 will have on our consolidated results of
operations and financial condition and are not yet in a position to determine
such effects.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154"). SFAS 154 replaces Auditing Practices Board
("APB") Opinion No. 20, "Accounting Changes" ("APB 20") and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting and reporting of a change in accounting
principle. SFAS 154 applies to all voluntary changes in accounting principle as
well as to changes required by an accounting pronouncement that does not include
specific transition provisions. Previously, most changes in accounting
principles were required to be recognized by way of including the cumulative
effect of the changes in accounting principle in the income statement of the
period of change. SFAS 154 requires that such changes in accounting principle be
retrospectively applied as of the beginning of the first period presented as if
that accounting principle had always been used, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. However, SFAS 154 does
not change the transition provisions of any existing accounting pronouncements.
The adoption of SFAS 154 was not material to our consolidated financial
statements.
In December 2004, the FASB published SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in the financial statements. That cost
will be measured based on the fair value of the equity or liability instruments
issued. SFAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R) is a
replacement of SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related interpretive guidance ("APB 25").
The effect of SFAS 123(R) was to require entities to measure the cost
of employee services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize the cost over the period
the employee is required to provide services for the award. SFAS 123(R) permits
entities to use any option-pricing model that meets the fair value objective in
SFAS 123(R). We were required to begin to apply SFAS 123(R) for its quarter
ending March 31, 2006.
SFAS 123(R) allows two methods for determining the effects of the
transition: the modified prospective transition method and the modified
retrospective method of transition. We adopted the modified prospective
transition method beginning in 2006.
17
Risk Factors
The following factors may affect our actual operating and financial
results and could cause results to differ materially from expected and
historical results. You should carefully consider the following information:
Our RCM businesses operate in a highly competitive and fragmented market, and an
inability to successfully compete for business could adversely affect our
operations.
The RCM business is highly competitive. We compete with national,
regional and local physician reimbursement organizations as well as physician
groups that provide their own billing and collections services in-house.
Potential industry and market changes that could adversely affect our ability to
compete for RCM outsourcing services include an increase in the number of local,
regional or national competitors providing comparable services and integration
of physician groups and hospital systems. Consolidation of management and
billing services through integrated delivery systems may result in a decrease in
demand for our outsourcing services for particular physician practices.
Consolidation among our customers in the RCM area may result in those customers
having greater leverage, which could adversely affect the rates we are able to
charge for our outsourcing services.
Additionally, there are several companies who compete with us for RCM
outsourcing services which cover larger geographic areas and have substantially
greater financial, technical, marketing and other resources than we do. Our
ability to retain and attract customers for our outsourcing services may be
adversely affected by the limits of our resources as compared to those larger
competitors.
Our pediatric medical groups compete with local hospitals and other
local medical groups for patients. Changes in local demographics, managed care
contracting, changes in operating hours and technological changes could
adversely impact our ability to retain and attract patients, which may result in
a decline in revenue for our medical groups.
Although we intend to monitor industry trends and respond accordingly,
we cannot provide assurances that we will be able to anticipate and successfully
respond to such trends in a timely manner. We cannot be certain that we will be
able to compete successfully against current and future competitors, or that
competitive pressures will not have a material adverse effect on our businesses,
financial condition or results of operations.
The healthcare industry is highly regulated, which may increase our costs of
operations or have a material adverse affect on our businesses.
The healthcare industry is highly regulated and subject to changing
political, economic and regulatory forces. Federal and state legislatures have
periodically considered programs to reform or amend the healthcare system and to
change healthcare financing and reimbursement systems, such as the Balanced
Budget Act of 1997 and the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise
change the healthcare industry environment, which may affect our businesses.
Billing and collection activities for healthcare organizations such as
physician groups are regulated by numerous federal and state civil and criminal
laws. These laws are used to investigate healthcare providers and companies
providing billing and collection services. Federal and state regulators could
also potentially use these laws to bring enforcement actions against companies
like us. We may be subjected to federal or state government investigations and
possible penalties may be imposed upon us, false claims actions may have to be
defended against, private payers may file claims against us and we could be
excluded from participation in Medicare, Medicaid or other government sponsored
healthcare programs.
There are numerous federal and state civil and criminal laws governing
the collection, use, storage and disclosure of personal information, including
health information for the purpose of safeguarding the privacy and security of
such information. We and many of our employees have access to personal and
health information for our medical group patients as well as the patients of the
clients for which we provide revenue cycle management outsourcing services.
Federal and state governments may impose penalties for noncompliance, both
criminal and civil, with these laws. Persons who believe their personal
information has been misused or improperly disclosed may bring claims against us
or our customers, seeking monetary damages.
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") established standards for privacy and security of individually
identifiable health information as well as standards for electronic
transactions. The HIPAA regulations set new or higher standards for the
healthcare industry in handling healthcare transactions and information, with
penalties for noncompliance. We have incurred and will continue to incur costs
to implement these standards and monitor compliance. Although we believe that
future compliance costs will not have a material affect on our results of
operations, compliance with these rules may be more costly than anticipated.
Failure to comply with such rules may have a material adverse effect on our
businesses, subject us to civil and criminal penalties and cause us to lose
customers and patients.
18
We expect the federal government as well as state governments to
continue to pass laws and issue regulations addressing healthcare issues and
reimbursement of healthcare providers. We cannot predict whether the government
will enact new legislation and regulations, and, if enacted, whether such new
developments will affect our businesses.
Payment restrictions by governmental and private payers and the use of
such measures as payment bundling, medical necessity edits and payment audits
may decrease reimbursement to our medical groups and our RCM outsourcing
customers, consequently decreasing our revenue and increasing our cost of
services.
Our businesses are highly dependent on our information systems and our
operations could be impaired by a failure of those systems.
The performance of our information systems and technology is critical
to our business operations. Our information systems are essential to a number of
critical areas of our operations, including accounting and financial reporting,
billing and collecting accounts for our medical groups as well as our RCM
outsourcing clients, coding and compliance and medical records of our medical
group patients.
Any system failure that causes an interruption in service or
availability of our systems could adversely affect operations or delay the
collection of revenue from payers and patients or for our customers. Although we
have implemented network security measures, our servers are vulnerable to
computer viruses, break-ins, disruptions from unauthorized tampering or damage
caused by fire, tornadoes, hurricanes, earthquakes, lightning and electrical
power outages. Although we have disaster recovery procedures in place and
insurance to protect against such contingencies, we cannot be certain that
insurance or these services will continue to be available at reasonable prices,
cover all of our losses or compensate for the possible loss of customers
occurring during any period that we are unable to provide business services. The
occurrence of any of these events could result in interruptions, delays, loss or
corruption of data, or cessations in the availability of our systems, all of
which could have a material adverse effect on our financial position and results
of operations and harm our business reputation.
The high volume of customer funds and data processed by us in our RCM
outsourcing business entails risks for which we may be held liable if the
accuracy or timeliness of the transactions processed are not correct. We could
incur significant legal expense to defend any claims against us, even those
claims without merit. While we carry insurance against such potential
liabilities, we cannot be certain that circumstances surrounding such an error
would be entirely reimbursed through insurance coverage. We believe we have
controls and procedures in place to address our fiduciary responsibility and
mitigate these risks. If we are not successful in managing these risks, it may
have a material adverse effect on our businesses, financial condition and
results of operations.
Our RCM outsourcing clients are highly concentrated in Alabama, California and
Texas, and our medical groups are concentrated in Illinois and Ohio, which makes
us sensitive to regulatory, economic, environmental and competitive changes in
those states.
We own three RCM subsidiaries: On Line in Mobile, Alabama, Rand in Simi
Valley, California, and MBS in Houston, Texas. On Line has 13 billing clients,
all of which are in Alabama, Rand has 58 clients, 49 of which are in California
and MBS has 54 clients, 37 of which are in the Houston, Texas area.
We also operated five medical groups at December 31, 2006 - two in
Dayton, Ohio, one in Middletown, Ohio, one in Moline, Illinois and one in
Barrington, Illinois.
Any material change in the current payment programs or regulatory,
economic, environmental or competitive conditions in these states could have a
disproportionate effect on our overall business results. Additionally, both
Mobile, Alabama and Houston, Texas are located in hurricane-prone areas and
California is susceptible to earthquakes. Hurricanes and earthquakes could have
a disruptive effect on our operations and those of our customers in Alabama,
California and Texas.
A reversal of or decline in the current trend of outsourcing business services
may have a material adverse effect on our RCM business, financial condition and
results of operations.
Our business and growth strategy depends, in large part, on the trend
toward outsourcing business services, in particular medical billing and
collection services by hospital-based physician groups. We can give no
assurances that this trend in outsourcing will continue. Current and potential
clients may elect to perform such services using their own employees, which may
have a material adverse effect on our financial condition and result of
operations.
19
We may be more sensitive to revenue fluctuations than other companies, which
could result in fluctuations in the market price of our common stock and have a
material adverse effect on financial condition and results of operations.
Approximately 51% of our operating expenses, such as salaries and
benefits, facility rent and related costs, depreciation and amortization and
insurance expense, are relatively fixed in the short term. As a result, we may
not be able to quickly reduce costs in response to any decrease in revenue. Any
decision by a significant customer to delay or cancel our services may cause
significant variations in operating results and could result in losses for the
applicable period as well as a decline in the price of our common stock.
We are dependent on the services of our executive officers and other key
employees, the loss of any of whom may have a material adverse effect on our
businesses, financial condition and results of operations.
Our success largely depends upon the abilities and continued services
of our executive officers and other key employees, such as the former owners of
our acquired RCM businesses - On Line, Rand and MBS - who are now our employees.
In the course of business operations, employees may resign and seek employment
elsewhere. Certain principal employees, however, are bound in writing to
non-compete agreements barring competitive employment and client and employee
solicitation for a period (generally two years) following his or her
resignation. While we generally have employment agreements and non-competition
agreements with key personnel, courts are at times reluctant to enforce such
non-competition agreements. In addition, our executive officers and other key
personnel participate in our stock option plan or are holders of a significant
amount of our common stock. We believe that these interests provide additional
incentives for these key employees to remain with us. In order to support our
growth, we intend to continue to effectively recruit, hire, train and retain
additional qualified management personnel. Our inability to attract and retain
necessary personnel could have a material adverse effect on our businesses,
financial condition and results of operations.
We may not be able to identify suitable acquisition targets or finance the
acquisition of those targets, which may limit our ability to pursue our business
strategy.
We completed two RCM acquisitions in December 2006. It is our intention
to selectively acquire additional companies in this area in our target markets.
However, we cannot be certain that we will be able to continue to identify
appropriate acquisition candidates and acquire them on satisfactory terms. We
cannot provide assurances that such acquisitions, even if completed, will
perform as expected, can be properly integrated or will contribute significant
synergies, revenues or profits. In addition, we may also face increased
competition for acquisition opportunities, which may inhibit our ability to
complete transactions on terms that are favorable to us. We have certain
provisions under the Credit Agreement that may limit our ability to acquire
additional businesses. In the event we are not in compliance with the financial
covenants under the Credit Agreement, we could be restricted from making
acquisitions, restricted from borrowing funds under the credit facility governed
by the Credit Agreement or required to pay down outstanding balances on the
credit facility governed by the Credit Agreement. If we are unable to find
suitable acquisition targets, an important component to our growth strategy may
not be realized.
We have increased leverage on our balance sheet as a result of our recent RCM
acquisitions and agreements governing our debt may limit our financial and
operational flexibility.
In December 2006, we completed two RCM acquisitions. These acquisitions
were financed by issuing additional equity securities in a private placement
transaction, borrowing $4.5 million under a term loan debt governed by the
Credit Agreement and issuing $3.35 million of subordinated notes payable.
Additionally, we have a $10 million acquisition facility commitment under the
Credit Agreement for future acquisitions. Our ability to make principal and
interest payments on our debt and fund the operations of our businesses will
depend on cash flow from operations, amounts available under our existing
revolving credit facility and our access to public and private equity and debt
markets.
The restrictive covenants on our revolving credit and term loan
facilities may prevent us from incurring additional indebtedness, modifying the
terms of indebtedness, create liens, make capital expenditures, pursue
additional acquisitions or sell assets. Also, these debt service obligations
may, among other things, limit our ability to borrow money or raise capital,
increase our vulnerability to adverse economic and industry conditions and could
require the dedication of a substantial portion of our cash flow from operating
activities to the payment of principal and interest on our credit facilities. In
addition, we are required to comply with specified financial covenants,
including a senior debt leverage ratio, minimum trailing twelve months earnings
before interest, taxes, depreciation and amortization ("EBITDA") targets, and a
minimum fixed charge coverage ratio. These covenants could place us at a
disadvantage compared to some of our competitors, which may have access to
cheaper sources of capital and may not be required to operate under covenants as
restrictive as those to which we are obligated.
We have a recent history of unprofitable operations and there are no guarantees
that we will have profitable operations in the future.
Our recent financial history includes losses from continuing operations
of approximately $1.6 million and $5.3 million for the twelve months ended
December 31, 2006 and 2005, respectively. While we believe that recent changes
in operations, cost savings initiatives as well as our two recent RCM
acquisitions will result in positive results from operations, we cannot provide
assurance that positive financial results will be achieved in the near future.
20
The trading price of our Class A Common Stock may be volatile and may negatively
affect your investment.
The trading price of our Class A Common Stock may be volatile. The
market for our Class A Common Stock may experience significant price and volume
fluctuations in response to a number of factors such as actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance, government regulatory actions, healthcare reform
measures, customer relationship developments and other factors, many of which
are beyond our control. Furthermore, the stock market in general and the market
for healthcare business services has experienced volatility that often has been
unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of our
Class A Common Stock, regardless of actual operating performance.
Our principal stockholders own approximately 82.9% of our outstanding Class A
Common Stock on a fully-diluted, as-converted basis and may have substantial
control over our operations.
At December 31, 2006, Brantley III and Brantley IV owned approximately
73.5 million shares of Class A Common Stock, representing 53.7% of our
outstanding Class A Common Stock on a fully-diluted, as-converted basis, Phoenix
owned approximately 17.3 million shares of Class A Common Stock, representing
12.7% of our outstanding Class A Common Stock on a fully-diluted, as-converted
basis, and former owners of our RCM outsourcing businesses (currently senior
executives) owned approximately 22.6 million shares of Class A Common Stock
representing 16.5% of our outstanding Class A Common Stock on a fully-diluted,
as-converted basis.
Because of their stock ownership, these stockholders may exert
substantial influence over actions that require the consent of a majority of our
outstanding shares, including the election of directors.
Shares held by our principal stockholders will be eligible for future sale and
may adversely affect the trading price of our Class A Common Stock.
The majority of the shares owned by our principal stockholders were
issued as part of acquisitions and private placement transactions. These shares
have restrictions from sale for periods of up to two years from the date of
issuance. We cannot provide assurance that future sales or the perception that
sales could occur will not adversely affect the trading price of our Class A
Common Stock. In addition, we cannot be sure when sales by holders of our Class
A Common Stock will occur, how many shares will be sold or the effect that sales
may have on the market price of our Class A Common Stock.
Results of Operations
The acquisitions of Rand and On Line were accounted for using the
purchase accounting method, meaning that the purchase price, comprised of the
consideration paid to the stockholders of Rand and On Line at closing, the fair
value of the liabilities assumed and the transaction costs associated with the
acquisitions, was allocated to the fair value of the tangible and identifiable
intangible assets of Rand and On Line, with any excess being considered
goodwill. Our results for fiscal 2006 include the results of MBS and IPS for the
twelve months ended December 31, 2006 and the results of Rand and On Line
commencing on December 1, 2006.
The IPS Merger was treated as a reverse acquisition, meaning that the
purchase price, comprised of the fair value of the outstanding shares of Orion
prior to the transaction, plus applicable transaction costs, were allocated to
the fair value of our tangible and intangible assets and liabilities prior to
the transaction, with any excess being considered goodwill. IPS was treated as
the continuing reporting entity and, thus, IPS's historical results became those
of the combined company. Our results for fiscal 2005 include the results of MBS,
IPS and our ambulatory surgery and diagnostic center business, which was
discontinued in 2005, for the twelve months ended December 31, 2005.
Pursuant to paragraph 43 of SFAS 144, which states that, in a period in
which a component of an entity either has been disposed of is classified as held
for sale, the income statement of a business enterprise for current and prior
periods shall report the results of operations of the component, including any
gain or loss recognized, in discontinued operations. As such, our financial
results for the twelve months ended December 31, 2006 and 2005 have been
reclassified to reflect the operations, including IPS operations discontinued in
2006 and our surgery and diagnostic center businesses, which were discontinued
in 2005.
This discussion should be read in conjunction with our consolidated
financial statements and related notes thereto, which are included as a separate
section of this Annual Report on Form 10-KSB beginning on page F-1.
21
The following table sets forth selected statements of operations data
expressed as a percentage of our net operating revenues for the years ended
December 31, 2006 and 2005, respectively. Our historical results and
period-to-period comparisons are not necessarily indicative of the results for
any future period.
2006 2005
--------------- ----------------
Net operating revenues 100.0% 100.0%
Total operating expenses 110.6% 124.2%
--------------- ----------------
Loss from continuing operations before other income (expenses) (10.6%) (24.2%)
Total other income (expenses), net 1.7% (1.6%)
--------------- ----------------
Loss from continuing operations (8.9%) (25.8%)
Discontinued operations
Loss from operations of discontinued components, net of gain (loss)
on disposal (8.8%) (63.7%)
--------------- ----------------
Net loss (17.7%) (89.5%)
=============== ================
Years Ended December 31, 2006 and 2005 - Continuing Operations
Net Operating Revenues.
2006 2005
--------------- ---------------
RCM Segment $10,305,611 $9,979,232
PM Segment 12,693,325 12,469,828
Other 402,488 395,691
--------------- ---------------
Total consolidated net operating revenues $23,401,424 $22,844,751
=============== ===============
Our net operating revenues consist of patient service revenue, net of
contractual adjustments, related to the operations of IPS's affiliated medical
groups, billing services revenue related to MBS, Rand and On Line, and other
revenue. Our results for fiscal 2006 include the results of MBS and IPS for the
twelve months ended December 31, 2006 and the results of Rand and On Line
commencing on December 1, 2006. Our results for fiscal 2005 include the results
of MBS, IPS and our ambulatory surgery and diagnostic center business, which was
discontinued in 2005, for the twelve months ended December 31, 2005. Our results
for fiscal 2004 include the results of IPS for the twelve months ended December
31, 2004 and the results of MBS and our ambulatory surgery and diagnostic center
business commencing on December 15, 2004.
For the twelve months ended December 31, 2006, consolidated net
operating revenues increased $556,673, or 2.4%, to $23,401,424, as compared with
$22,844,751 for the twelve months ended December 31, 2005.
Net operating revenues for our RCM segment, which included MBS, Rand
and On Line in 2006 and MBS in 2005, totaled $10,305,611 for the twelve months
ended December 31, 2006, an increase of $326,379, or 3.3%, over the same period
in 2005. Net operating revenues for Rand and On Line totaled $514,886 and
$183,501, respectively, in 2006, representing one month of operations commencing
on December 1, 2006. MBS's net operating revenues fell 3.7%, in 2006, decreasing
from $9,979,232 for the twelve months ended December 31, 2005 to $9,607,224 for
the same period in 2006. The decrease in net operating revenues for MBS consists
of the following: (i) the loss of eleven clients in 2005 and 2006, representing
a net revenue decrease of $1,102,573 from 2005 to 2006; (ii) the addition of
seven new clients in 2006, representing a net revenue increase of $402,372 from
2005 to 2006; and (iii) revenue increases related to the business of existing
customers totaling $328,193 from 2005 to 2006. Of the eleven clients lost in
2005 and 2006, two clients retired or closed their medical practices, five
clients chose to off-shore or bring their billing functions in-house, and four
clients lost major hospital contracts and/or sold their practices.
22
The following table illustrates, by customer category, the contribution
of existing, new and lost customers to MBS's net operating revenues for the
years ended December 31, 2006 and 2005, respectively:
2006 2005 Variance
-------------- -------------- --------------
MBS net operating revenues:
Existing customers $9,076,759 $8,748,566 $328,193
New customers in 2006 402,372 -- 402,372
Customers lost in 2005 -- 621,896 (621,896)
Customers lost in 2006 128,093 608,770 (480,677)
-------------- -------------- --------------
Total consolidated net operating revenues $9,607,224 $9,979,232 $(372,008)
============== ============== ==============
Net operating revenues for our PM segment, which consists of net
patient service revenue from IPS's affiliated medical groups, increased
$223,497, or 1.8%, from $12,469,828 for the twelve months ended December 31,
2005 to $12,693,325 for the twelve months ended December 31, 2006. Total office
visits declined from 133,672 in 2005 to 127,085 in 2006, largely as a result of
a diminished cold and flu season in the early part of 2006. However, IPS's
clinic-based affiliated pediatric groups experienced some increases in patient
volume in 2006, with total procedures and immunizations increasing 272 and
1,456, respectively, to 324,008 and 61,997 for the twelve months ended December
31, 2006. One medical practice relocated a satellite location in 2006, which has
produced higher than average patient volume and immunizations for the year.
Other revenue totaled $395,691 in 2005, increasing $6,797, or 1.7%, to
$402,488 for the year ended December 31, 2006. For the twelve months ended
December 31, 2006, revenue from our vaccine program, which is a group purchasing
alliance for vaccines and medical supplies, totaled $402,488, an increase of
$82,689 over 2005. The vaccine program, which had 456 enrolled participants at
the end of 2005, added a net of approximately 37 members during the year ended
December 31, 2006. Additionally, revenue related to a small number of former
customers of the software services business we sold in June 2005 who were not
transitioned to new software at the time of the sale totaled approximately
$58,000 for the year ended December 31, 2005. This revenue was not expected to
be recurring and the final customer was transitioned in November 2005.
Operating Expenses.
2006 2005
--------------- ---------------
Salaries and benefits $10,807,413 $11,686,613
Physician group distribution 5,131,315 4,975,521
Facility rent and related costs 1,428,439 1,409,763
Depreciation and amortization 1,732,058 2,795,011
Professional and consulting fees 1,618,972 1,789,011
Insurance 462,276 688,682
Provision for doubtful accounts 204,573 648,021
Other 4,507,131 4,372,094
--------------- ---------------
Total consolidated operating expenses $25,892,177 $28,364,716
=============== ===============
Our expenses for fiscal 2006 include the expenses of MBS and IPS for
the twelve months ended December 31, 2006 and the expenses of Rand and On Line
commencing on December 1, 2006. Our expenses for fiscal 2005 include the
expenses of MBS, IPS and our ambulatory surgery and diagnostic center business,
which was discontinued in 2005, for the twelve months ended December 31, 2005.
Consolidated operating expenses totaled $25,891,502 for the twelve
months ended December 31, 2006, a decrease of $2,473,213 from operating expenses
totaling $28,364,716 for the same period in 2005.
Salaries and Benefits. Consolidated salaries and benefits decreased
$879,200 to $10,807,413 for the twelve months ended December 31, 2006, as
compared to $11,686,613 in 2005. Salaries and benefits for Rand and On Line
totaled $338,079 and $138,357, respectively, in 2006 and represented one month
of expense commencing on December 1, 2006.
MBS's salaries and benefits totaled $5,961,618 for the twelve months
ended December 31, 2006 as compared to $6,243,209 for the same twelve months in
2005, a decrease of $281,591. The decrease from 2005 to 2006 is primarily the
result of a reduction in health benefit costs related to the consolidated of
MBS's benefit plans with the IPS benefit plans at the beginning of 2006, thereby
allowing greater negotiating leverage with benefit providers.
23
Clinical salaries and benefits include wages for the nurse
practitioners, nursing staff and medical assistants employed by the affiliated
medical groups and may fluctuate indirectly to increases and decreases in
productivity and patient volume. Clinical salaries, bonuses, overtime and health
insurance collectively totaled $1,247,656 for the twelve months ended December
31, 2006, an increase of $52,048 over the same period in 2005. There was one
additional medical assistant on the payroll of one of IPS's affiliated medical
groups in 2006 as compared to staffing levels for 2005. These expenses
represented approximately 9.8% and 9.6% of net operating revenues for the years
ended December 31, 2006 and 2005, respectively.
In August 2005, we consolidated our corporate operations into the
Roswell, Georgia office. Prior to the staff reduction resulting from this
corporate consolidation, salaries and benefits related to the corporate staff in
Houston, Texas totaled $720,760 for the twelve months ended December 31, 2005.
Additionally, salaries and benefits for the year ended December 31, 2005
included accruals for separation benefits for our former president, Keith
LeBlanc, who resigned on November 8, 2005, and $143,250 for retention costs and
accrued vacation related to the aforementioned staff reductions.
Administrative salaries and benefits, excluding MBS, Rand, On Line and
the former staff of our Houston, Texas office, represent the employee-related
costs of all non-clinical practice personnel at IPS's affiliated medical groups
as well as our corporate staff in Roswell, Georgia. These expenses increased
$222,592, or 8.0%, from $2,798,144 for the year ended December 31, 2005 to
$3,020,736 for the same period in 2006. The additional expense can be attributed
primarily to the adoption of SFAS 123(R) in the first quarter of 2006, which
resulted in stock option compensation expense totaling approximately $240,000
for the year ended December 31, 2006.
Physician Group Distribution. Physician group distribution increased
$155,794, or 3.1%, for the twelve months ended December 31, 2006 to $5,131,315,
as compared with $4,975,521 for the twelve months ended December 31, 2005.
Pursuant to the terms of the MSAs governing each of IPS's affiliated medical
groups, the physicians of each medical group receive disbursements after the
payment of all clinic facility expenses as well as a management fee to IPS. The
management fee revenue and expense, which is eliminated in the consolidation of
our financial statements, is either a fixed fee or is calculated based on a
percentage of net operating income. For the year ended December 31, 2006,
management fee revenue totaled $828,135 and represented approximately 13.9% of
net operating income as compared to management fee revenue totaling $891,225 and
representing approximately 15.2% of net operating income for the same period in
2005. Physician group distributions represented 39.2% of net operating revenues
in 2006, compared to 38.7% of net operating revenues for the same period in
2005. The increase in physician group distribution for the twelve months ended
December 31, 2006 was directly related to the increase in IPS's net patient
service revenue, which was primarily the result of increased patient volume
during 2006.
Facility Rent and Related Costs. Facility rent and related costs
increased $9,249, or 0.7%, from $1,419,190 for the twelve months ended December
31, 2005 to $1,428,439 for the twelve months ended December 31, 2006. Rent and
related expenses for Rand and On Line totaled $27,849 and $12,005, respectively,
and represented one month of expense commencing on December 1, 2006.
MBS's facility rent and related costs totaled $535,707 for the twelve
months ended December 31, 2006 as compared to $502,917 for the same period in
2005. This increase can be explained generally by increases in utilities and
off-site storage costs in 2006.
Facility rent and related costs associated with IPS's affiliated
medical groups and Orion's corporate office totaled $852,878 for the twelve
months ended December 31, 2006 compared to $784,310 for the same period in 2005.
Rent expense related to our corporate office in Roswell, Georgia decreased for
the first six months of 2006 due to approximately $54,000 in rent payments
received for the sublease between the us and the company that purchased our
software services business in June 2005. This savings was offset by rental
expense related to our former office in Houston, Texas in 2006 prior to the
expiration of our facility lease of this location.
In August 2005, we consolidated our corporate operations into our
Roswell, Georgia office. Prior to this consolidation, facility-related costs
such as utilities and personal property taxes associated with our former office
in Houston, Texas totaled approximately $123,000 for the twelve months ended
December 31, 2005.
Depreciation and Amortization. Consolidated depreciation and
amortization expense totaled $1,732,058 for the twelve months ended December 31,
2006, a decrease of $1,062,953 from the twelve months ended December 31, 2005.
24
In 2006, depreciation expense related to our fixed assets totaled $215,945 as
compared to $228,123 for the same period in 2005. Following is a table that
illustrates, by business unit, the depreciation expense for our fixed assets in
2006 and 2005:
2006 2005
--------------- ---------------
Depreciation expense:
Rand $ 6,596 $ --
On Line 3,501 --
MBS 68,753 86,081
IPS 64,091 53,911
Orion 73,003 88,131
--------------- ---------------
--------------- ---------------
Total consolidated depreciation expense $215,945 $228,123
=============== ===============
Amortization expense related to our intangible assets totaled
$1,516,113 for the twelve months ended December 31, 2006 as compared to
$2,566,888 for the same period in 2005. Following is a table that illustrates,
by business unit, the amortization expense related to our intangible assets in
2006 and 2005:
2006 2005
--------------- ---------------
Amortization expense:
Rand $ 43,971 $ --
On Line 30,815 --
MBS 1,062,093 1,062,093
IPS 344,845 386,125
Orion 34,389 1,118,670
--------------- ---------------
Total consolidated depreciation expense $1,516,113 $2,566,888
=============== ===============
Rand. Effective December 1, 2006, we purchased Rand for a combination
of cash, notes and stock. Since the consideration for this purchase transaction
exceeded the fair value of the net assets of Rand at the time of the purchase, a
portion of the purchase price was allocated to intangible assets and goodwill.
Following is a summary of the purchase price calculation, along with the
resulting allocation of the fair value of Rand's historical net assets to
identifiable intangible assets:
Purchase price includes:
Cash, at closing $7,200,000
Stock, in escrow at closing 600,000
Liabilities assumed 223,224
Transaction costs 738,071
---------------
Total purchase price $8,761,295
===============
Purchase price allocated as follows:
Historical As
NBV Adjustments Adjusted
----------- ----------- ------------
Cash $ 153,572 $ 153,572
Accounts receivable 593,208 593,208
Other current assets 16,975 16,975
-----------------------------------------
Total current assets 763,755 763,755
Property and equipment 114,375 114,375
Goodwill and identifiable
intangible assets $ 8,106,389 8,106,389
-----------------------------------------
Total assets 878,129 8,106,389 8,984,518
Accounts payable and accruals (212,184) (212,184)
Capital leases (11,040) (11,040)
-----------------------------------------
Net assets acquired $ 654,906 $ 8,106,389 $ 8,761,295
=========================================
25
As of December 1, 2006, identifiable intangible assets and goodwill
related to Rand were as follows:
Customer relationships $2,790,634
Non-compete agreement 644,975
Trained workforce (to be classified with goodwill for financial reporting purposes) 1,017,592
Goodwill 3,653,188
----------------
Total $8,106,389
================
The amortization expense related to the intangible assets recorded as a
result of the acquisition of Rand totaled $43,971 for the one month ended
December 31, 2006.
On Line. Effective December 1, 2006, we purchased On Line for a
combination of cash and notes. Since the consideration for this purchase
transaction exceeded the fair value of the net assets of On Line at the time of
the purchase, a portion of the purchase price was allocated to intangible assets
and goodwill. Following is a summary of the purchase price calculation, along
with the resulting allocation of the fair value of On Line's historical net
assets to identifiable intangible assets:
Purchase price includes:
Cash, at closing $2,401,943
Promissory note, at closing 75,000
Liabilities assumed 102,299
Transaction costs 190,710
--------------
Total purchase price $2,769,952
==============
Purchase price allocated as follows:
Historical As
NBV Adjustments Adjusted
----------- ----------- -----------
Cash $ 10,249 $ 10,249
Accounts receivable 183,119 183,119
Other current assets 448 448
-----------------------------------------
Total current assets 193,816 193,816
Property and equipment 127,328 127,328
(197,082)
Goodwill and identifiable intangible assets 197,082 2,551,108 2,551,108
-----------------------------------------
Total assets 518,226 2,354,026 2,872,251
Accounts payable and accruals (102,299) (102,299)
Capital leases -- --
-----------------------------------------
Net assets acquired $ 415,926 $ 2,354,026 $ 2,769,952
=========================================
As of December 1, 2006, identifiable intangible assets and goodwill
related to On Line were as follows:
Customer relationships - contractual $1,325,842
Non-compete agreement 360,736
Trained workforce (to be classified with goodwill for financial reporting purposes) 480,957
Goodwill 383,572
--------------
Total $2,551,108
==============
The amortization expense related to the intangible assets recorded as a
result of the acquisition of On Line totaled $30,815 for the one month ended
December 31, 2006.
MBS. As part of the DCPS/MBS Merger, the Company purchased MBS and DCPS
for a combination of cash, notes and stock. Since the consideration for this
purchase transaction exceeded the fair value of the net assets of MBS and DCPS
at the time of the purchase, a portion of the purchase price was allocated to
intangible assets. The amortization expense related to the intangible assets
recorded as a result of the DCPS/MBS Merger totaled $1,062,093 for the twelve
months ended December 31, 2006 and 2005, respectively.
26
IPS. Amortization expense related to the MSAs for IPS's affiliated
medical groups totaled $344,844 and $386,125 for the twelve months ended
December 31, 2006 and 2005, respectively. The decrease is directly related to
IPS operations discontinued in 2005, which resulted in the impairment of the MSA
related to those operations.
Orion. There were significant costs associated with the acquisitions of
Rand and On Line as well as the Private Placement, the Credit Agreement and the
restructured USBPS loan.
Those costs that were specifically related to a particular component of
the transactions were allocated directly to that component. In cases where it
was not possible to specifically allocate certain costs to each identifiable
component, we allocated the costs on a pro-rata basis based on each component's
transaction value relative to the value of all of the transactions in the
aggregate. With respect to the costs that we determined to be allocable to the
equity portion of the Private Placement, we determined that, since the proceeds
from the Private Placement were used to acquire Rand and On Line, those costs
were to be further allocated to Rand and On Line on a pro-rata basis based on
each company's acquisition consideration relative to the total aggregate
acquisition consideration.
Following is a summary of the transaction costs, other than those
allocated to Rand and On Line (which are included in the purchase price of Rand
and On Line as discussed above), that were allocated to each component and
capitalized on our consolidated balance sheet, along with a description of how
each component's costs will be amortized:
Transaction Component Amount Amortization
--------------------- ------ ------------
Phoenix subordinated debt $ 153,762 Straight-line amortization over 5 years (term of note)
Wells Fargo Credit Agreement 1,488,213 Straight-line amortization over 4 years (term of commitment)
Straight-line amortization over 7 years (term of restructured loan)
Restructured USBPS loan 69,321
----------------------
Total $1,711,296
======================
Amortization expense related to the transaction costs described above,
totaled $34,389 for the one month ended December 31, 2006.
As part of the IPS Merger, the purchase price, comprised of the fair
value of the outstanding shares of Orion prior to the transaction, plus
applicable transaction costs, was allocated to the fair value of our tangible
and intangible assets and liabilities prior to the transaction, with any excess
being considered goodwill. Amortization expense for the intangible assets
recorded as a result of the IPS Merger totaled $1,118,670 for the twelve months
ended December 31, 2005. As a result of the dispositions related to our surgery
and diagnostic center business, which was discontinued in 2005, and the
uncertainty of future cash flows related to our surgery center business, we
impaired substantially all of the intangible assets related to the IPS Merger in
2005. Therefore, there was no amortization expense related to the intangible
assets in the first twelve months of 2006. (See "Discontinued Operations" for
additional discussion regarding the disposition of intangible assets and
goodwill recorded as a result of the IPS Merger.)
Professional and Consulting Fees. For the twelve months ended December
31, 2006, professional and consulting fees totaled $1,618,972, a decrease of
$170,039, or 9.5%, from the same period in 2005. Professional and consulting
fees for Rand and On Line totaled $5,632 and $11,376 for 2006, representing one
month of expense commencing on December 1, 2006.
For the twelve months ended December 31, 2006, MBS recorded
professional and consulting expenses totaling $177,897 as compared with $275,176
for 2005, a decrease of $97,279. This change is primarily the result of a
decrease in contract labor used in 2005 as a result of staffing shortages. This
contract labor was not utilized in 2006 because MBS's position inventory is
fully staffed.
IPS's and Orion's professional and consulting fees, which include the
costs of corporate accounting, financial reporting and compliance, and legal
fees, decreased from $1,513,835 for the twelve months ended December 31, 2005 to
$1,424,067 for the twelve months ended December 31, 2006. Legal fees related to
the DICS and PSNW arbitrations totaled approximately $135,000. However, those
expenses were more than offset by reduced legal fees and expenses related to the
divestiture of our surgery and diagnostic business in 2005, including an accrual
of $90,000 related to a legal settlement recorded in the third quarter of 2005.
Insurance. Consolidated insurance expense, which includes the costs of
professional liability for affiliated physicians, property and casualty and
general liability insurance and directors and officers' liability insurance,
decreased from $688,682 for the twelve months ended December 31, 2005 to
$462,276 for the twelve months ended December 31, 2006. The decrease can be
explained generally by the following: (i) insurance expense related to the
directors and officers' liability policies for 2005 included approximately
$115,000 of premiums for run-off policies related to SurgiCare and IPS; (ii)
general liability insurance premiums related to our former Houston, Texas
office, which was closed in August 2005, totaled approximately $70,000 for the
twelve months ended December 31, 2005; (iii) refunds totaling approximately
$20,000 related to worker's compensation audits; and (iv) professional liability
insurance premiums for our affiliated medical groups decreased approximately
$6,000 for the twelve months ended December 31, 2006 when compared with the same
period in 2005.
27
Provision for Doubtful Accounts. The consolidated provision for
doubtful accounts, or bad debt expense, decreased $443,448, or 68.4%, for the
twelve months ended December 31, 2006 to $204,573. The entire provision for
doubtful accounts for the twelve months ended December 31, 2006 related to IPS's
affiliated medical groups and accounted for 1.6% of IPS's net operating revenues
as compared to 4.9% of IPS's net operating revenues for the same period in 2005.
The total collection rate, after contractual allowances, for IPS's affiliated
medical groups was 72.7% in 2006, compared to 70.7% for 2005.
Other. Other expenses include general and administrative expenses such
as office supplies, telephone and data communications, printing and postage, and
board of directors' compensation and meeting expenses, as well as some direct
clinical expenses, including vaccine costs, which are expenses that are directly
related to the practice of medicine by the physicians that practice at the
affiliated medical groups managed by IPS. Consolidated other expenses totaled
$4,507,131 for the twelve months ended December 31, 2006, an increase of
$135,037 from the same period in 2005.
Following is a table illustrating the composition of other expenses for
2006 and 2005:
2006 2005
--------------- ---------------
Other expenses:
Vaccine costs $1,790,544 $1,467,601
Medical supplies 240,080 219,606
Other direct clinical expenses 94,520 123,812
Travel 178,430 239,807
Office supplies and printing 392,653 500,671
Telephone and data communications 253,705 299,012
Postage and courier 794,856 737,472
Board of directors' compensation and meeting expenses 80,004 109,400
Bank charges 202,788 191,096
Taxes and licenses 130,458 57,022
Other general and administrative expenses 349,093 426,595
--------------- ---------------
Total consolidated other expenses $4,507,131 $4,372,094
=============== ===============
Other expenses for Rand and On Line totaled $55,701 and $25,817 in
2006, which represented one month of expenses commencing on December 1, 2006.
More than 50% of Rand and On Line's other expenses in 2006 related to postage,
courier and office supplies.
MBS's other expenses totaled $1,145,617 for the twelve months ended
December 31, 2006 as compared to $1,240,494 for the twelve months ended December
31, 2005. Of the total decrease, approximately $102,000 related to decreases in
office supplies in 2006 as compared to the same period in 2005. These expense
fluctuations are the direct result of the decrease in net operating revenues in
2006. Additionally, MBS renegotiated its long distance rates in the fall of
2005, which resulted in approximately $67,000 in cost savings in 2006 as
compared to 2005.
For the twelve months ended December 31, 2006, IPS's direct clinical
expenses, other than salaries and benefits, totaled $2,125,041, an increase of
$314,125 over direct clinical expenses in the same period in 2005, which totaled
$1,781,090. Vaccine expenses increased approximately $323,000 in 2006 when
compared with the twelve months ended December 31, 2005. IPS's affiliated
medical groups began using two new vaccines in late 2005 -- Menactra and Decavac
-- which replaced lower-priced vaccines previously utilized by the medical
groups.
General and administrative expenses other than those incurred by our
RCM segment totaled $1,154,852 for the twelve months ended December 31, 2006, a
decrease of $167,628 from the same period in 2005. Franchise taxes for Illinois
and Ohio increased approximately $73,000 in 2006 as a result of changes in our
corporate structure. We realized approximately $240,000 of cost efficiencies and
expense reductions as a result of the consolidation of corporate functions into
our Roswell, Georgia office in August 2005.
28
Other Income (Expenses).
2006 2005
----------- -----------
Interest expense $ (584,815) $ (336,213)
Gain on forgiveness of debt 1,006,164 --
Other expense, net (20,604) (18,830)
----------- -----------
Total other income (expenses), net $ 400,745 $ (355,043)
=========== ===========
Other income, net, totaled $400,745 for the twelve months ended
December 31, 2006 as compared with total other expenses, net of $355,043 for the
twelve months ended December 31, 2005.
Interest Expense. Consolidated interest expense totaled $584,815 for
the twelve months ended December 31, 2006, an increase of $248,601 from the same
period in 2005. Interest expense activity in 2006, including increases over
2005, can be explained generally by the following:
o Brantley Debt. In March and April 2005, we borrowed an aggregate of
$1,250,000 from Brantley IV. Interest expense related to these notes
totaled approximately $104,000 for the twelve months ended December
31, 2006 as compared to $89,000 for the year ended December 31,
2005. We converted the Brantley IV Notes to Class A Common Stock on
December 1, 2006. (See Part I, Item 1. Business - Company History
and Recent Developments.)
o MBS Notes. On April 19, 2006, we executed subordinated promissory
notes with the former equity owners of MBS and DCPS for an aggregate
of $714,336. These notes, in addition to the $1,000,000 in notes
payable issued as a result of the DCPS/MBS Merger, represented the
retroactive purchase price increase due to the former equity owners
of MBS and DCPS based on the financial results of the newly formed
MBS, as required by the merger agreement governing the DCPS/MBS
Merger. On December 1, 2006, we executed the DCPS/MBS Notes, which
extended the maturity of the amounts outstanding to the former
equity owners of MBS and DCPS from December 15, 2007 to December 15,
2008, and increased the annual interest rate from 8% to 9%. Interest
expense related to these notes totaled approximately $122,000 and
$80,000 for the y ears ended December 31, 2006 and 2005,
respectively.
o CIT Line of Credit. In conjunction with the 2004 Mergers, we also
entered into a new secured two-year revolving credit facility with
CIT. Interest expense related to this line of credit totaled
$216,010 for the year ended December 31, 2006, compared to $208,211
in 2005. The increase in interest expense on the line of credit
facility was a direct result of interest rate increases during 2006
as compared to the same period in 2005. On December 1, 2006, in
conjunction with the new loan facilities under the Credit Agreement
with Wells Fargo, we paid CIT a total of $1,027,321, which
represented full payment of all obligations under the loan and
security agreement with CIT, plus expenses. We no longer have any
amounts due to CIT.
o Loan Facilities with Wells Fargo. On December 1, 2006, we entered
into the Credit Agreement with Wells Fargo, which provides for a
four year $16.5 million senior secured credit facility consisting of
a $2 million revolving loan commitment, a $4.5 million term loan and
a $10 million acquisition facility commitment. (See Part I, Item 1.
Business - Company History and Recent Developments.) As of December
31, 2006, we had amounts outstanding under the revolving loan
commitment and term loan of $1,182,400 and $4,473,350, respectively.
Interest expense related to these loan facilities totaled
approximately $70,000 in 2006.
o Phoenix Subordinated Debt. On December 1, 2006 we closed the Private
Placement with Phoenix and Brantley IV. (See Part I, Item 1.
Business - Company History and Recent Developments.) As part of the
Private Placement, we issued a senior unsecured subordinated
promissory note to Phoenix in the amount of $3.35 million, bearing
interest at the combined rate of (i) 12% per annum payable in cash
on a quarterly basis and (ii) 2% per annum payable in kind (meaning
that the accrued interest will be capitalized as principal) on a
quarterly basis, subject to our right to pay such amount in cash. We
paid interest expense of approximately $39,000 on this note in 2006.
Gain on Forgiveness of Debt. On August 25, 2003, our lender, DVI,
announced that it was seeking protection under Chapter 11 of the United States
Bankruptcy laws. Our predecessors had loans outstanding to DVI in the form of
term loans and revolving lines of credit. As part of the IPS Merger, we
negotiated a discount on the term loans revolving lines of credit and, as part
of that agreement we executed a new loan agreement with USBPS, as Servicer for
payees, for payment of the revolving lines of credit and renegotiation of the
term loans. In the first quarter of 2006, we negotiated an 85% discount on the
revolving line of credit, which had a balance of $778,000 at December 31, 2005.
As of March 13, 2006, we had made aggregate payments in the amount of $112,500
in satisfaction of the $778,000 debt, and recognized a gain on forgiveness of
debt totaling $665,463 in the first quarter of 2006. Immediately prior to
December 1, 2006, there was $3,750,000 outstanding under term loan obligation.
On December 1, 2006, we entered into a Restructured Loan Agreement with USBPS,
as Servicer, which provides for the outstanding amount to be reduced to
$2,750,000 and for monthly payments of principal until October 1, 2013, when the
remaining amount becomes due. We recognized a gain on forgiveness of debt
totaling $340,701 in the fourth quarter of 2006 with respect to the Restructured
Loan Agreement.
29
Years Ended December 31, 2006 and 2005 - Discontinued Operations
Bellaire SurgiCare. As of the closing of the 2004 Mergers, our
management expected the case volumes at Bellaire SurgiCare, Inc. ("Bellaire
SurgiCare") to improve in 2005. However, by the end of February 2005, we
determined that the expected case volume increases were not going to be
realized. On March 1, 2005, we closed Bellaire SurgiCare and consolidated its
operations with the operations of SurgiCare Memorial Village ("Memorial
Village"). We tested the identifiable intangible assets and goodwill related to
the surgery center business using the present value of cash flows method. As a
result of the decision to close Bellaire SurgiCare and the resulting impairment
of the joint venture interest and management contracts related to the surgery
centers, we recorded a charge for impairment of intangible assets of $4,090,555
for the year ended December 31, 2004. We also recorded a loss on disposal of
this discontinued component (in addition to the charge for impairment of
intangible assets) of $163,049 for the quarter ended March 31, 2005. There were
no operations for this component after March 31, 2005.
Capital Allergy and Respiratory Disease Center ("CARDC"). On April 1,
2005, IPS entered into a Mutual Release and Settlement Agreement (the "CARDC
Settlement") with Dr. Bradley E. Chipps, M.D. and CARDC to settle disputes as to
the existence and enforceability of certain contractual obligations. As part of
the CARDC Settlement, Dr. Chipps, CARDC, and IPS agreed that CARDC would
purchase the assets owned by IPS and used in connection with CARDC, in exchange
for termination of the MSA between IPS and CARDC. Additionally, among other
provisions, after April 1, 2005, Dr. Chipps, CARDC and IPS have been released
from any further obligation to each other arising from any previous agreement.
As a result of the CARDC dispute, we recorded a charge for impairment of
intangible assets related to CARDC of $704,927 for the year ended December 31,
2004. We also recorded a gain on disposal of this discontinued component (in
addition to the charge for impairment of intangible assets) of $506,625 for the
quarter ended March 31, 2005. For the quarter ended June 30, 2005, we reduced
the gain on disposal of this discontinued component by $238,333 as the result of
post-settlement adjustments related to the reconciliation of balance sheet
accounts. There were no operations for this component in our financial
statements after March 31, 2005.
IntegriMED. On June 7, 2005, InPhySys, Inc. (formerly known as
IntegriMED, Inc.) ("IntegriMED"), a wholly owned subsidiary of IPS, executed an
Asset Purchase Agreement (the "IntegriMED Agreement") with eClinicalWeb, LLC
("eClinicalWeb") to sell substantially all of the assets of IntegriMED. As a
result of this transaction, we recorded a loss on disposal of this discontinued
component of $47,101 for the quarter ended June 30, 2005. There were no
operations for this component in our financial statements after June 30, 2005.
Tuscarawas Ambulatory Surgery Center, LLC ("TASC") and Tuscarawas Open
MRI, L.P. ("TOM"). On June 13, 2005, we announced that we had accepted an offer
to purchase our interests in TASC and TOM in Dover, Ohio. On September 30, 2005,
we executed purchase agreements to sell our 51% ownership interest in TASC and
our 41% ownership interest in TOM to Union Hospital ("Union"). Additionally, as
part of the transactions, TASC, as the sole member of TASC Anesthesia, LLC
("TASC Anesthesia"), executed an Asset Purchase Agreement to sell certain assets
of TASC Anesthesia to Union. The limited partners of TASC and TOM also sold a
certain number of their units to Union such that at the closing of these
transactions, Union owned 70% of the ownership interests in TASC and TOM. We no
longer have an ownership interest in TASC, TOM or TASC Anesthesia. As a result
of these transactions, as well as the uncertainty of future cash flows related
to our surgery center business, we determined that the joint venture interests
associated with TASC and TOM were impaired and recorded a charge for impairment
of intangible assets related to TASC and TOM of $2,122,445 for the three months
ended June 30, 2005. Also as a result of these transactions, we recorded a gain
on disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $1,357,712 for the quarter ended December
31, 2005. We allocated the goodwill recorded as part of the IPS Merger to each
of the surgery center reporting units and recorded a loss on the write-down of
goodwill related to TASC and TOM totaling $789,173 for the quarter ended
December 31, 2005, which reduced the gain on disposal. In early 2006, we were
notified by Union that it was exercising its option to terminate the management
services agreements of TOM and TASC as of March 12, 2006 and April 3, 2006,
respectively. As a result, we recorded a charge for impairment of intangible
assets of $1,021,457 for the three months ended December 31, 2005 related to the
TASC and TOM management services agreements. There were no operations for this
component in the Company's financial statements after September 30, 2005.
Sutter. On October 31, 2005, IPS executed a settlement agreement (the
"Sutter Settlement") with Dr. Sutter to settle disputes that had arisen between
IPS and Dr. Sutter and to avoid the risk and expense of litigation. As part of
the Sutter Settlement, Dr. Sutter and IPS agreed that Dr. Sutter would purchase
the assets owned by IPS and used in connection with Dr. Sutter's practice, in
exchange for termination of the related MSA. Additionally, among other
provisions, after October 31, 2005, Dr. Sutter and IPS have been released from
any further obligation to each other arising from any previous agreement. As a
result of this transaction, we recorded a loss on disposal of this discontinued
component (in addition to the charge for impairment of intangible assets of
$38,440 recorded in the fourth quarter of 2005) of $279 for the quarter ended
December 31, 2005. There were no operations for this component in the Company's
financial statements after October 31, 2005.
30
Memorial Village. As a result of the uncertainty of future cash flows
related to our surgery center business as well as the transactions related to
TASC and TOM, we determined that the joint venture interest associated with
Memorial Village was impaired and recorded a charge for impairment of intangible
assets related to Memorial Village of $3,229,462 for the three months ended June
30, 2005. In November 2005, we decided that, as a result of ongoing losses at
Memorial Village, it would need to either find a buyer for our equity interests
in Memorial Village or close the facility. In preparation for this pending
transaction, we tested the identifiable intangible assets and goodwill related
to the surgery center business using the present value of cash flows method. As
a result of the decision to sell or close Memorial Village, as well as the
uncertainty of cash flows related to our surgery center business, we recorded an
additional charge for impairment of intangible assets of $1,348,085 for the
three months ended September 30, 2005. On February 8, 2006, Memorial Village
executed an Asset Purchase Agreement (the "Memorial Agreement") for the sale of
substantially all of its assets to First Surgical. Memorial Village was
approximately 49% owned by Town & Country SurgiCare, Inc., a wholly owned
subsidiary of Orion. The Memorial Agreement was deemed to be effective as of
January 31, 2006. As a result of this transaction, we recorded a gain on the
disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $574,321 for the quarter ended March 31,
2006. We allocated the goodwill recorded as part of the IPS Merger to each of
the surgery center reporting units and recorded a loss on the write-down of
goodwill related to Memorial Village totaling $2,005,383 for the quarter ended
December 31, 2005. There were no operations for this component in our financial
statements after March 31, 2006.
San Jacinto. On March 1, 2006, San Jacinto executed an Asset Purchase
Agreement for the sale of substantially all of its assets to Methodist. San
Jacinto was approximately 10% owned by Baytown SurgiCare, Inc., a wholly owned
subsidiary of Orion, and was not consolidated in our financial statements. As a
result of this transaction, we recorded a gain on disposal of this discontinued
operation of $94,066 for the quarter ended March 31, 2006. As a result of the
uncertainty of future cash flows related to the surgery center business, and in
conjunction with the transactions related to TASC and TOM, we determined that
the joint venture interest associated with San Jacinto was impaired and recorded
a charge for impairment of intangible assets related to San Jacinto of $734,522
for the three months ended June 30, 2005. We also recorded an additional
$2,113,262 charge for impairment of intangible assets for the three months ended
September 30, 2005 related to the management contracts with San Jacinto. We
allocated the goodwill recorded as part of the IPS Merger to each of the surgery
center reporting units and recorded a loss on the write-down of goodwill related
to San Jacinto totaling $694,499 for the quarter ended December 31, 2005. There
were no operations for this component in our financial statements after March
31, 2006.
DICS. IPS is party to the Dayton MSA with DICS. The sole remaining
shareholder of DICS has notified both IPS and the hospitals at which DICS has
contracts that he intends to dissolve DICS, cease practicing at the hospitals
and cease utilizing the services of IPS. IPS believes that the unilateral
decision to dissolve DICS and terminate the business of DICS breaches the Dayton
MSA and violates duties owed by DICS to IPS as a creditor of DICS. As a result
of the pending litigation and the uncertainty of the outcome, the operations of
DICS are now reflected in our consolidated statements of operations as `income
from operations of discontinued components' for the twelve months ended December
31, 2006 and 2005, respectively. Additionally, we recorded a charge for
impairment of intangible assets of $1,845,669 for DICS for the quarter ended
December 31, 2006.
PSNW. IPS is party to the Illinois MSA with PSNW. IPS and PSNW were in
arbitration regarding claims relating to the Illinois MSA. In connection
therewith, on February 9, 2007, IPS and PSNW entered into the PSNW Settlement to
settle disputes that had arisen between IPS and PSNW and to avoid the risk and
expense of further litigation. As part of the PSNW Settlement, PSNW and IPS
agreed that PSNW would purchase the assets owned by IPS and used in connection
with PSNW's practice, in exchange for a negotiated cash consideration and
termination of the Illinois MSA. Additionally, among other provisions, after May
31, 2007, which is the anticipated closing date of the transaction contemplated
by the PSNW Settlement, PSNW and IPS will be released from any further
obligation to each other from any previous agreement. As a result of the PSNW
Settlement, the operations of PSNW are now reflected in our consolidated
statements of operations as `income from operations of discontinued components'
for the twelve months ended December 31, 2006 and 2005, respectively, and the
assets and liabilities of PSNW are reflected as `assets held for sale' and
`liabilities held for sale' on our consolidated balance sheet at December 31,
2006. Additionally, we recorded a charge for impairment of intangible assets of
$1,249,080 for PSNW for the quarter ended December 31, 2006.
Orion. Prior to the divestiture of our ambulatory surgery center
business, we recorded management fee revenue, which was eliminated in the
consolidation of our financial statements, for Bellaire SurgiCare, TASC and TOM
and Memorial Village. The management fee revenue for San Jacinto was not
eliminated in consolidation. The management fee revenue associated with the
discontinued operations in the surgery center business totaled $61,039 for the
year ended December 31, 2006. For the twelve months ended December 31, 2005, we
generated management fee revenue of $407,595 and net minority interest losses
totaling $50,529. For the quarters ended June 30, 2005 and December 31, 2005, we
recorded a charge for impairment of intangible assets of $276,420 and $142,377,
respectively, related to trained work force and non-compete agreements affected
by the surgery center operations we discontinued in 2005 and early 2006.
31
The following table contains selected financial information regarding
our discontinued operations for the years ended December 31, 2006 and 2005:
2006 2005
------------ ------------
Net operating revenues from discontinued operations $ 6,359,176 $ 12,115,531
Total expenses from discontinued operations 5,997,274 13,992,749
------------ ------------
Income (loss) from discontinued operations 361,902 (1,877,218)
Loss on disposal of discontinued operations (2,426,362) (12,681,153)
------------ ------------
Net loss from discontinued operations $ (2,064,460) $(14,558,371)
============ ============
Liquidity and Capital Resources
Net cash used in operating activities totaled $1,693,279 for the twelve
months ended December 31, 2006 as compared to cash used in operating activities
of $3,309,086 for the twelve months ended December 31, 2005. Net cash used in
operations decreased from 2005 primarily as a result of the operating
efficiencies realized by the closing of our office in Houston, Texas as well as
the decrease in operating expenses as a result of operations we discontinued in
2005. The net impact of discontinued operations on net cash provided by
operating activities in 2006 was $3,009,538.
For the twelve months ended December 31, 2006, net cash used in
investing activities totaled $4,863,599 compared to $1,947,565 in net cash
provided by investing activities for the same period in 2005. We received an
aggregate of $4,650,000 from Brantley IV and Phoenix in connection with the
Private Placement. We also paid cash in the aggregate amount of $9,601,943 for
the purchase of Rand and On Line, net of $163,821 representing cash on hand at
Rand and On Line on the acquisition date; and $482,435 to Brantley Capital for
the purchase of their 1,722,983 shares of our Class B Common Stock. The net
impact of discontinued operations on net cash used in investing activities
totaled $430,244 in 2006.
Net cash provided by financing activities totaled $7,101,703 for the
twelve months ended December 31, 2006 as compared to $958,482 in net cash
provided by financing activities for the same period in 2005. The change in cash
uses related to financing activities from 2005 to 2006 can be explained
generally by the following:
o We received an aggregate of $3,350,000 from Phoenix on December 1,
2006 for the purchase of our subordinated notes payable;
o We borrowed an aggregate of $4,500,000 under the Credit Agreement at
December 1, 2006, approximately $1,070,000 of which was used to
repay the CIT revolving credit facility;
o We borrowed an aggregate of approximately $1,182,000 from Wells
Fargo under the revolving loan commitment pursuant to the Credit
Agreement;
o We made aggregate payments in the amount of $112,500 in the first
quarter of 2006 in satisfaction of a $778,000 debt, and recognized a
gain on forgiveness of debt totaling $665,463; and
o We repaid approximately $200,000 in satisfaction of a working
capital note from the sellers of MBS in the first quarter of 2006.
We have financed our growth and operations primarily through the
issuance of equity securities, secured and/or convertible debt, most recently by
completing a series of transactions, including the Private Placement, which
occurred in December 2006 and is described in Item 1. Description of Business
under the caption "Company History and Recent Developments." As a condition to
the Private Placement, on December 1, 2006, we refinanced our existing loan
facility with CIT into a four year $16,500,000 senior secured credit facility
with Wells Fargo consisting of a $2,000,000 revolving loan commitment, a
$4,500,000 term loan and a $10,000,000 acquisition facility commitment. Amounts
borrowed under this facility are secured by substantially all of our assets and
a pledge of the capital stock of our operating subsidiaries. Under the terms of
the Credit Agreement relating to this facility, amounts borrowed bear interest
at either a fluctuating rate based on the prime rate or LIBOR rate, at our
election. Currently, our interest rate on the revolving loan commitment and the
term loan is the prime rate plus 1.75%. In addition to refinancing our existing
loan facility, a portion of the proceeds from this facility were used to fund
our acquisitions of Rand and On Line and to finance our ongoing working capital,
capital expenditure and general corporate needs. Upon repayment of the CIT loan
facility, two of our stockholders, Brantley IV and Brantley Capital were
released from guarantees that they had provided on our behalf in connection with
the loan facility.
32
The Credit Agreement contains certain financial covenants that require
us to maintain minimum levels of trailing twelve month earnings before income
taxes, depreciation and amortization ("EBITDA"), a minimum fixed charge coverage
ratio, a maximum senior debt leverage ratio and a limitation on annual capital
expenditures and other customary terms and conditions. As of December 31, 2006,
we were in compliance with all of the financial covenants under the Credit
Agreement.
As of December 31, 2006, our revolving loan commitment with Wells Fargo
had limited availability to provide for working capital shortages. Although we
believe we will generate cash flows from operations in the future, there is no
guarantee that we will be able to fund our operations solely from our cash
flows. In 2005, we initiated a strategic plan designed to accelerate our growth
and enhance our future earnings potential. The plan focuses on our strengths,
which include providing billing, collections and complementary business
management services to physician practices. As part of this plan, we completed a
series of transactions involving the divestiture of non-strategic assets in 2005
and early 2006. (See Item 1. Description of Business under the captions "PM
Segment" and "Ambulatory Surgery Center Business.") In addition, we redirected
financial resources and company personnel to areas that management believed
would enhance long-term growth potential. A key component of our long-term
strategic plan is the identification of potential acquisition targets that will
increase our presence in the markets we serve and enhance stockholder value. On
December 1, 2006 we completed the acquisition of Rand and On Line. (See Item 1.
Description of Business - Company History and Recent Developments.) In addition
to Rand and On Line, we have identified other potential acquisition
opportunities to expand our business that are consistent with our strategic
plan. We have a $10 million acquisition facility commitment under the Credit
Agreement that will enable us to finance some or all of the cash consideration
for future acquisitions based on a formula tied to our pro forma trailing twelve
month EBITDA, including the EBITDA of the potential acquisition target.
We intend to continue to manage our use of cash. However, our business
is still faced with many challenges. If cash flows from operations and
borrowings are not sufficient to fund our cash requirements, we may be required
to further reduce our operations and/or seek additional public or private equity
financing or financing from other sources or consider other strategic
alternatives, including possible additional divestitures of specific assets or
lines of business. There can be no assurances that additional financing or
strategic alternatives will be available, or that, if available, the financing
or strategic alternatives will be obtainable on terms acceptable to us or that
any additional financing would not be substantially dilutive to our existing
stockholders.
ITEM 7. FINANCIAL STATEMENTS
Our consolidated financial statements and related notes thereto are
included as a separate section of this report, commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain a set of
disclosure controls and procedures that are designed to provide reasonable
assurance that information required to be disclosed by us in our reports filed
under the Exchange Act is recorded, processed, summarized and reported
accurately and within the time periods specified in the SEC's rules and forms.
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including our
principal executive and principal financial officer, the design and
effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15(c) of the Exchange Act. Based on that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in timely alerting them to material information
related to us (including its consolidated subsidiaries) required to be included
in periodic filings.
Changes in Internal Controls. During the most recent fiscal quarter,
there have been no changes in our internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Certain information required by this item is incorporated by reference
from the "Information About the Director Nominees," "Biographical Information"
and "Audit Committee" sections of our Proxy Statement to be filed in connection
with the 2007 Annual Meeting of Stockholders no later than 120 days after the
end of our fiscal year.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires that our officers and
directors, and persons who own more than 10% of our Class A Common Stock, to
file reports of ownership and changes in ownership of our Class A Common Stock
with the SEC and to provide copies of these Section 16(a) reports to us.
Based solely upon a review of the copies of the forms furnished to us,
or written representations from certain reporting persons, we believe that all
Section 16(a) filing requirements of the Exchange Act applicable to our
officers, directors and 10% beneficial owners were complied with during the
fiscal year ended December 31, 2006, except that late filings to report the
statement of changes in beneficial ownership were made as follows:
--------------- -------------------------------------- -------------------------------- ----------------------------------
Transaction
Date Name Title Transaction
--------------- -------------------------------------- -------------------------------- ----------------------------------
5/12/06 David Crane Director Stock option grant - 10,000 shares
--------------- -------------------------------------- -------------------------------- ----------------------------------
5/12/06 Joseph M. Valley, Jr. Director Stock option grant - 10,000 shares
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Phoenix Life Insurance Company 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Brantley Venture Management III, L.P. 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Brantley Venture Management IV, L.P. 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Brantley Partners IV, L.P. 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Brantley Venture Partners III, L.P. 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Robert P. Pinkas 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Paul H. Cascio Director & 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
12/1/06 Michael J. Finn Director & 10% Beneficial Owner Private Placement
--------------- -------------------------------------- -------------------------------- ----------------------------------
Each of these transactions was subsequently reported.
Code of Ethics
The board of directors has adopted a Corporate Code of Business Conduct
and Ethics that is applicable to all of our officers and employees. We have
posted the Corporate Code of Business Conduct and Ethics in the Investor
Information section of our website at www.orionhealthcorp.com. If, in the
future, we amend, modify or waive a provision in the Corporate Code of Business
and Ethics, rather than filing a Form 8-K, we may satisfy the disclosure
requirement under Item 10 of Form 8-K by posting such information on our website
at www.orionhealthcorp.com as necessary.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the "Director and Executive Officer Compensation" section of our Proxy Statement
to be filed in connection with the 2007 Annual Meeting of Stockholders no later
than 120 days after the end of our fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from
the "Section 16(a) Beneficial Ownership Reporting Compliance" section of our
Proxy Statement to be filed in connection with the 2007 Annual Meeting of
Stockholders no later than 120 days after the end of our fiscal year. The
"Equity Compensation Plan Information" table required by this item is
incorporated by reference to the table included in Item 5. Market for Common
Equity and Related Stockholder Matters under the caption "Equity Compensation
Plan Information."
34
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the "Certain Relationships and Related Transactions" section of our Proxy
Statement to be filed in connection with the 2007 Annual Meeting of Stockholders
no later than 120 days after the end of our fiscal year.
ITEM 13. EXHIBITS
The following documents are filed as exhibits to this Annual Report on
Form 10-KSB pursuant to Item 601 of Regulation S-B. Since our incorporation, we
have operated under various names including: Technical Coatings, Inc.,
SurgiCare, Inc. and Orion HealthCorp, Inc. Exhibits listed below refer to these
names collectively as "the Company."
Exhibit No. Description
----------- -----------
2.1 Asset Purchase Agreement, dated as of June 6, 2005, by and between InPhySys, Inc. (f/k/a
IntegriMED, Inc.) and eClinicalWeb, LLC. (Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K filed on June 13, 2005) **
2.2 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Ambulatory Surgery
Center, L.L.C., Orion HealthCorp, Inc., each of the individuals holding a minority equity
interest in Tuscarawas Ambulatory Surgery Center, L.L.C., and Union Hospital. (Incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on October 7, 2005) **
2.3 Asset Purchase Agreement, dated as of September
30, 2005, by and between Union Hospital and
TASC Anesthesia, L.L.C. (Incorporated by
reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K filed on October 7,
2005) **
2.4 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Open MRI, L.P., Orion
HealthCorp, Inc., each of the individuals holding a minority equity interest in Tuscarawas Open
MRI, L.P., and Union Hospital. (Incorporated by reference to Exhibit 2.3 of the Company's
Current Report on Form 8-K filed on October 7, 2005) **
2.5 Asset Purchase Agreement, dated as of February 8, 2006, between and among SurgiCare Memorial
Village, L.P. and First Surgical Memorial Village, L.P., joined herein by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
February 14, 2006) **
2.6 Asset Purchase Agreement, dated as of March 1, 2006, between and among San Jacinto Methodist
Hospital and San Jacinto Surgery Center, Ltd., joined herein by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
March 6, 2006) **
2.7 Stock Purchase Agreement, dated as of September 8, 2006, by and among Orion HealthCorp, Inc.,
Rand Medical Billing, Inc. and the stockholder of Rand Medical Billing, Inc. (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on September 11,
2006) **
2.8 Stock Purchase Agreement, dated as of September 8, 2006, by and among Orion HealthCorp, Inc., On
Line Alternatives, Inc., On Line Payroll Services, Inc., and the shareholders of On Line
Alternatives, Inc. and On Line Payroll Services, Inc. (Incorporated by reference to Exhibit 10.2
of the Company's Current Report on Form 8-K filed on September 11, 2006) **
3.1 Amended and Restated By-Laws of Orion HealthCorp, Inc. (Incorporated by reference to Exhibit 3.2
of the Company's Current Report on Form 8-K filed on December 21, 2004)
3.2 Third Amended and Restated Certificate of Incorporation of Orion HealthCorp, Inc. (Incorporated
by reference Exhibit 3.1 of the Company's Current Report on Form 8-K filed on December 7, 2006)
4.1 Form of Certificate of Class A Common Stock of Orion HealthCorp, Inc. (Incorporated by reference
to Exhibit 2 of the Company's Registration Statement on Form 8-A filed on December 15, 2004)
10.1 Warrant, dated December 15, 2004, issued to Brantley Partners IV, L.P. by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 10.6 of the Company's Current Report on Form 8-K filed on
December 21, 2004)
10.2 Warrant, dated December 15, 2004, issued to
Brantley Capital Corporation by Orion
HealthCorp, Inc. (Incorporated by reference to
Exhibit 10.7 of the Company's Current Report on
Form 8-K filed on December 21, 2004)
10.3 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc. and Terrence L.
Bauer. (Incorporated by reference to Exhibit 10.8 of the Company's Current Report on Form 8-K
filed on December 21, 2004) *
10.4 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc. and Keith G.
LeBlanc. (Incorporated by reference to Exhibit 10.9 of the Company's Current Report on Form 8-K
filed on December 21, 2004) *
35
10.5 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc. and Stephen H.
Murdock. (Incorporated by reference to Exhibit 10.10 of the Company's Current Report on Form 8-K
filed on December 21, 2004) *
10.6 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc., Medical Billing
Services, Inc. and Dennis Cain. (Incorporated by reference to Exhibit 10.11 of the Company's
Current Report on Form 8-K filed on December 21, 2004) *
10.7 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc., Medical Billing
Services, Inc. and Tom M. Smith. (Incorporated by reference to Exhibit 10.12 of the Company's
Current Report on Form 8-K filed on December 21, 2004) *
10.8 Registration Rights Agreement dated December 15, 2004, by and among Orion HealthCorp, Inc. and
the investors set forth on Schedule I thereto. (Incorporated by reference to Exhibit 10.13 of
the Company's Current Report on Form 8-K filed on December 21, 2004)
10.9 Stockholders Agreement dated December 15, 2004, by and among Orion HealthCorp, Inc., Brantley
Venture Partners III, L.P., Brantley Venture Partners IV, L.P. and Brantley Capital Corporation.
(Incorporated by reference to Exhibit 10.14 of the Company's Current Report on Form 8-K filed on
December 21, 2004)
10.10 Orion HealthCorp, Inc. 2004 Incentive Plan. (Incorporated by reference to Exhibit 10.19 of the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on April 28,
2005) *
10.11 Amendment No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of June 1, 2005.
(Incorporated by reference to Exhibit 10.6 of the Company's Form 10-QSB for the quarter ended
June 30, 2005 filed on August 12, 2005) *
10.12 Form of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock Option), dated as of June
17, 2005. (Incorporated by reference to Exhibit 10.7 of the Company's Form 10-QSB for the
quarter ended June 30, 2005 filed on August 12, 2005) *
10.13 Separation Agreement and General Release, dated as of November 8, 2005, by and between Orion
HealthCorp, Inc. and Keith G. LeBlanc. (Incorporated by reference to Exhibit 10.8 of the
Company's Form 10-QSB for the quarter ended September 30, 2005 filed on November 14, 2005) *
10.14 Stock Purchase Agreement, dated as of September 8, 2006, by and among Orion HealthCorp, Inc.,
Phoenix Life Insurance Company and Brantley Partners IV, L.P. (Incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-K filed on September 11, 2006) *
10.15 Note Purchase Agreement, dated as of September 8, 2006, by and between Orion HealthCorp, Inc. and
Phoenix Life Insurance Company. (Incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K filed on September 11, 2006) **
10.16 Stock Purchase Agreement, dated as of September 8, 2006, by and between Orion HealthCorp,
Inc. and Brantley Capital Corporation. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K filed on September 11, 2006) **
10.17 Settlement Agreement with a Joint and Mutual Release and Indemnity Agreement, dated as of
September 8, 2006, by and among American International Industries, Inc., International
Diversified Corporation, Ltd. and Daniel Dror II as Claimants and Orion HealthCorp, Inc.,
Brantley Capital Corporation, Brantley Venture Partners III, L.P., Brantley Partners IV, L.P.,
Keith G. LeBlanc and Paul Cascio as Defendants. (Incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K filed on September 14, 2006)
10.18 First Amendment to Note Purchase Agreement, dated as of December 1, 2006, by and between Orion
HealthCorp, Inc. and Phoenix Life Insurance Company.
10.19 Registration Rights Agreement, dated as of December 1, 2006, by and among Orion HealthCorp, Inc.,
Brantley Partners IV, L.P. and Phoenix Life Insurance Company.
10.20 Warrant, dated December 1, 2006, issued to Phoenix Life Insurance Company by Orion HealthCorp, Inc.
10.21 Credit Agreement, dated as of December 1, 2006, by and among Orion HealthCorp, Inc., each of the
subsidiaries identified therein, each of the Lenders identified therein and Wells Fargo Foothill,
Inc., as its Arranger and Administrator Agent and Lender. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K filed on December 7, 2006) **
10.22 Security Agreement, dated as of December 1, 2006, among Orion HealthCorp, Inc. and the other
grantors identified therein and Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit
10.2 of the Company's Current Report on Form 8-K filed on December 7, 2006) **
10.23 Amendment No. 2 to the Orion HealthCorp, Inc. 2004 Incentive Plan. (Incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-K filed on December 7, 2006)
10.24 Amendment No. 1, dated as of December 1, 2006, to the Stock Purchase Agreement, dated as of
September 8, 2006, by and among Orion HealthCorp, Inc., Rand Medical Billing, Inc. and the
stockholder of Rand Medical Billing, Inc. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K filed on December 7, 2006) **
10.25 Forms of Amended and Restated Promissory Notes, dated as of December 1, 2006, by and between
Orion HealthCorp, Inc. and DCPS Sellers and MBS Sellers. (Incorporated by reference to Exhibit
10.10 of the Company's Current Report on Form 8-K filed on December 7, 2006)
10.25 Restructured Loan Agreement, dated as of December 1, 2006, by and between Orion HealthCorp, Inc.
and Lyon Financial Services, Inc. dba U.S. Bank Portfolio Services, as successor servicer for DVI
Financial Services, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 7, 2006) **
21 List of Subsidiaries of Orion HealthCorp, Inc.
23 Consent of UHY, LLP
24.1 Power of Attorney (See Signatures on page 37)
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Section 1350 Certification
32.2 Section 1350 Certification
* Indicates executive compensation plan or arrangement.
** Pursuant to Item 601(b)(2) of Regulation S-B, certain
exhibits and schedules have been omitted from this filing. We
agree to furnish to the Securities and Exchange Commission on
a supplemental basis a copy of any omitted exhibit or
schedule.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from
the "Appointment of Our Independent Public Auditors" section of our Proxy
Statement to be filed in connection with the 2007 Annual Meeting of Stockholders
no later than 120 days after the end of our fiscal year.
36
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ORION HEALTHCORP, INC.
By: /s/ Terrence L. Bauer
-----------------------------------
Dated: April 2, 2007 Terrence L. Bauer
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears on the signature page to this report constitutes and appoints Terrence
L. Bauer and Stephen H. Murdock, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the same,
with all exhibits hereto, and other documents in connection herewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on April 2, 2007.
By: /s/ Terrence L. Bauer By: /s/ Michael J. Finn
----------------------------------------- ---------------------
Terrence L. Bauer Michael J. Finn
President, Chief Executive Officer and Director
Director (Principal Executive Officer)
By: /s/ Paul H. Cascio By: /s/ Joseph M. Valley, Jr.
----------------------------------------- ---------------------------
Paul H. Cascio Joseph M. Valley, Jr.
Director Director
By: /s/ David Crane By: /s/ Stephen H. Murdock
----------------------------------------- ------------------------
David Crane Stephen H. Murdock
Director Chief Financial Officer (Principal Accounting
and Financial Officer)
37
ORION HEALTHCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
-----------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2006 and 2005 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006 and 2005 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Orion HealthCorp, Inc., and Subsidiaries
We have audited the accompanying balance sheets of Orion HealthCorp, Inc. as of
December 31, 2006, and 2005, and the related statements of income, stockholders'
equity and comprehensive income, and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Orion HealthCorp, Inc. as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the Consolidated Financial Statements, included in
Part II, Item 7, effective January 1, 2006, Orion HealthCorp, Inc. and its
subsidiaries adopted Statement of Financial Accounting Standards No. 123(R),
Share Based Payment.
/s/ UHY LLP
Atlanta, Georgia
April 2, 2007
F-2
Orion HealthCorp, Inc.
Consolidated Balance Sheets
December 31, December 31,
2006 2005
------------------- -------------------
Current assets
Cash and cash equivalents $ 643,632 $ 298,807
Accounts receivable, net 3,575,375 2,798,304
Inventory 277,799 206,342
Prepaid expenses and other current assets 406,790 715,671
Assets held for sale 502,147 975,839
------------------- -------------------
Total current assets 5,405,743 4,994,963
------------------- -------------------
Property and equipment, net 711,012 741,966
------------------- -------------------
Other long-term assets
Intangible assets, excluding goodwill, net 14,343,429 13,797,714
Goodwill 7,815,303 2,490,695
Other assets, net 1,907,710 92,432
------------------- -------------------
Total other long-term assets 24,066,442 16,380,841
------------------- -------------------
Total assets $ 30,183,197 $ 22,117,770
=================== ===================
Current liabilities
Accounts payable and accrued expenses $ 6,937,935 $ 6,738,278
Other current liabilities -- 25,000
Current portion of capital lease
obligations 103,004 92,334
Current portion of long-term debt 1,744,368 2,768,366
Current portion of long-term debt held
by related parties 325,000 1,463,308
Liabilities held for sale 158,714 452,027
------------------- -------------------
Total current liabilities 9,269,021 11,539,313
------------------- -------------------
Long-term liabilities
Capital lease obligations, net of current
portion 155,034 213,599
Long-term debt, net of current portion 6,833,750 2,871,593
Long-term debt, net of current portion,
held by related parties 4,541,603 1,000,000
Minority interest in partnership -- 35,000
------------------- -------------------
Total long-term liabilities 11,530,387 4,120,193
------------------- -------------------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, par value $0.001;
20,000,000 shares authorized; no shares
issued and outstanding -- --
Common Stock, Class A, par value $0.001;
300,000,000 and 70,000,000 shares
authorized at December 31, 2006 and 2005,
respectively; 105,374,487and 12,428,042
shares issued and outstanding at December
31, 2006 and 2005, respectively 105,375 12,428
Common Stock, Class B, par value $0.001; 0
and 25,000,000 shares authorized at
December 31, 2006 and 2005, respectively;
0 and 10,448,470 shares issued and
outstanding at December 31, 2006 and 2005,
respectively -- 10,448
Common Stock, Class C, par value $0.001; 0
and 2,000,000 shares authorized at
December 31, 2006 and 2005, respectively;
0 and 1,437,572 shares issued and
outstanding at December 31, 2006 and 2005,
respectively -- 1,438
Common Stock, Class D, par value $0.001;
50,000,000 and 0 shares authorized at
December 31, 2006 and 2005, respectively;
24,658,955 and 0 shares issued and
outstanding at December 31, 2006 and 2005,
respectively 24,659 --
Additional paid-in capital 63,876,039 56,928,016
Accumulated deficit (54,583,966) (50,455,748)
Treasury stock - at cost; 9,140 shares (38,318) (38,318)
------------------- -------------------
Total stockholders' equity 9,383,789 6,458,264
------------------- -------------------
Total liabilities and stockholders' equity $ 30,183,197 $ 22,117,770
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Orion HealthCorp, Inc.
Consolidated Statements of Operations
For the Twelve Months Ended
December 31,
2006 2005
-------------- --------------
Net operating revenues $23,401,424 $ 22,844,751
Operating expenses
Salaries and benefits 10,807,413 11,686,613
Physician group distribution 5,131,315 4,975,521
Facility rent and related costs 1,428,439 1,409,763
Depreciation and amortization 1,732,058 2,795,011
Professional and consulting fees 1,618,972 1,789,011
Insurance 462,276 688,682
Provision for doubtful accounts 204,573 648,021
Other expenses 4,507,131 4,372,094
-------------- --------------
Total operating expenses 25,892,177 28,364,716
-------------- --------------
Loss from continuing operations before other income
(expenses) (2,490,753) (5,519,965)
-------------- --------------
Other income (expenses)
Interest expense (558,565) (336,213)
Gain on forgiveness of debt 1,006,164 -
Other expense, net (20,604) (18,830)
-------------- --------------
Total other income (expenses), net 426,995 (355,043)
-------------- --------------
Minority interest earnings in partnership - (6,122)
-------------- --------------
Loss from continuing operations (2,063,758) (5,881,130)
Discontinued operations
Loss from operations of discontinued components (2,064,460) (14,558,371)
-------------- --------------
Net loss $(4,128,218) $(20,439,501)
============== ==============
Weighted average common shares outstanding
------------------------------------------
Basic 20,267,781 10,345,453
Diluted 20,267,781 10,345,453
Income (loss) per share
-----------------------
Basic
Net loss per share from continuing operations $ (0.10) $ (0.57)
Net loss per share from discontinued operations $ (0.10) $ (1.41)
-------------- --------------
Net loss per share $ (0.20) $ (1.98)
============== ==============
Diluted
Net loss per share from continuing operations $ (0.10) $ (0.57)
Net loss per share from discontinued operations $ (0.10) $ (1.41)
-------------- --------------
Net loss per share $ (0.20) $ (1.98)
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Orion HealthCorp, Inc.
Consolidated Statement of Stockholders' Equity
----------------------------------------------------------------------------------------
Common Stock
----------------------------------------------------------------------------------------
Class A Class B Class C Class D
---------------------------------------------------------------- -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------- -----------------------
Balance, January 1, 2005 8,602,149 $ 8,602 11,482,261 $ 11,482 1,575,760 $ 1,576 -- $ --
Conversion of notes payable into
Class A Common Stock 374,164 374 -- -- -- -- -- --
Conversion of Class B Common Stock
into Class A Common Stock 2,875,726 2,876 (1,033,791) (1,034) -- -- -- --
Conversion of Class C Common Stock
into Class A Common Stock 660,536 661 -- -- (138,188) (138) -- --
Other (84,533) (85) -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
Balance, December 31, 2005 12,428,042 $ 12,428 10,448,470 $ 10,448 1,437,572 $ 1,438 -- $ --
Issuance of Class A Common Stock 485,734 486 -- -- -- -- -- --
Private Placement 89,145,794 89,146 (10,448,470) (10,448)(1,437,572) (1,438) 24,658,955 24,659
Acquisition of Rand and On Line 3,314,917 3,315 -- -- -- -- -- --
Stock option expense -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
Balance, December 31, 2006 105,374,487 $105,374 -- $ -- -- $ -- 24,658,955 $ 24,659
========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Orion HealthCorp, Inc.
Consolidated Statement of Stockholders' Equity
----------------- ------------------ ---------------- -------------------
Additional Treasury Stock Accumulated Stockholders'
Paid-in Deficit Equity
Capital Shares Amount (Deficit)
----------------- ------------------ ---------------- -------------------
Balance, January 1, 2005 $ 56,602,786 (9,140) $(38,318) $ (30,016,247) $ 26,569,881
Conversion of notes payable into Class A Common Stock 335,848 -- -- -- 336,222
Conversion of Class B Common Stock into Class A Common
Stock (1,842) -- -- -- --
Conversion of Class C Common Stock into Class A Common
Stock (523) -- -- -- --
Other (8,253) -- -- -- (8,338)
Net loss -- -- -- (20,439,501) (20,439,501)
----------------- ------------------ ---------------- -------------------
Balance, December 31, 2005 $ 56,928,016 (9,140) $(38,318) $ (50,455,748) $ 6,458,264
Issuance of Class A Common Stock (486) -- -- -- --
Private Placement 5,786,090 -- -- -- 5,888,009
Acquisition of Rand and On Line 922,207 -- -- -- 925,522
Stock option expense 240,212 -- -- -- 240,212
Net loss -- -- -- (4,128,218) (4,128,218)
----------------- ------------------ ---------------- -------------------
Balance, December 31, 2006 $ 63,876,039 (9,140) $(38,318) $ (54,583,966) $ 9,383,789
================= ================== ================ ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Orion HealthCorp, Inc.
Consolidated Statements of Cash Flows
For the Twelve Months Ended
December 31,
2006 2005
-----------------------------------
Operating activities
Net loss $ (4,128,218) $ (20,439,501)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities: --
Writedown of goodwill 210,700
Provision for doubtful accounts 204,573 648,021
Depreciation and amortization 1,732,059 2,795,010
Gain on forgiveness of debt (1,006,164) --
Stock option compensation expense 240,212 --
Stock issued for acquisitions (3,315) --
Conversion of notes payable -- 57,885
Discount on subordinated notes payable (277,356) --
Impact of discontinued operations 3,009,538 11,714,723
Changes in operating assets and
liabilities:
Accounts receivable (205,317) 1,649,987
Inventory (71,457) 114,093
Prepaid expenses and other assets 144,574 (114)
Other assets (1,617,832) 49,145
Accounts payable and accrued expenses (5,276) 221,164
Other liabilities -- (119,499)
-----------------------------------
Net cash used in operating activities (1,693,279) (3,309,086)
-----------------------------------
Investing activities
Sale (purchase) of property and equipment (23,286) 3,636,368
Impact of discontinued operations 430,244 (1,688,803)
Proceeds from equity transaction 4,650,000 --
Net cash paid for acquisitions (9,638,122) --
Cash paid for stock repurchase (482,435) --
-----------------------------------
Net cash provided by (used in) investing
activities (5,063,599) 1,947,565
-----------------------------------
Financing activities
Net borrowings (repayments) of capital
lease obligations (58,935) 142,525
Net borrowings (repayments) on line of
credit (220,878) 386,340
Net borrowings of senior notes payable 4,473,750 2,106,833
Net borrowings from related parties 3,211,692 1,250,000
Net repayments of other obligations (3,926) (47,984)
Impact of discontinued operations (300,000) (2,879,232)
-----------------------------------
Net cash provided by financing activities 7,101,703 958,482
-----------------------------------
Net increase (decrease) in cash and cash
equivalents 344,825 (403,039)
Cash and cash equivalents, beginning of
period 298,807 701,846
-----------------------------------
Cash and cash equivalents, end of period $ 643,632 $ 298,807
===================================
Supplemental cash flow information
Cash paid during the period for
Income taxes $ -- $ --
Interest $ 449,056 $ 360,375
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Orion HealthCorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
Unless otherwise indicated, the terms "we," "us" and "our" refer to
Orion HealthCorp, Inc. and its subsidiaries (formerly SurgiCare, Inc.
"SurgiCare") ("Orion" or the "Company"); references to 2006 are to our fiscal
year ended December 31, 2006 and references to 2005 are to our fiscal year ended
December 31, 2005.
Note 1. Organization and Accounting Policies
We maintain our accounts on the accrual method of accounting in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). Accounting principles followed by us 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
We are a healthcare services organization providing outsourced business
services to physicians, serving the physician market through two operating
segments - Revenue Cycle Management and Practice Management - via five operating
subsidiaries: Medical Billing Services, Inc. ("MBS"), Rand Medical Billing, Inc.
("Rand"), On Line Alternatives, Inc. ("OLA") and On Line Payroll Services, Inc.
("OLP") (collectively with OLA, "On Line"), and Integrated Physician Solutions,
Inc. ("IPS"). Our mission is to provide superior billing, collections, practice,
business and financial management services for physicians, resulting in optimal
profitability for its clients and increased enterprise value for its
stakeholders. We believe our core competency is our long-term experience and
success in working with and creating value for physicians.
Orion was incorporated in Delaware on February 24, 1984 as Technical
Coatings, Incorporated. On December 15, 2004, we completed a series of
transactions to acquire IPS (the "IPS Merger") and to acquire Dennis Cain
Physician Solutions, Ltd. ("DCPS") and MBS (the "DCPS/MBS Merger")
(collectively, the "2004 Mergers"). As a result of these transactions, IPS and
MBS became our wholly owned subsidiaries. On December 15, 2004, and simultaneous
with the consummation of the 2004 Mergers, we changed our name from SurgiCare,
Inc. to Orion HealthCorp, Inc. and consummated restructuring transactions, which
included issuances of new equity securities for cash and contribution of
outstanding debt, and the restructuring of our debt facilities. We also created
Class B Common Stock and Class C Common Stock, which were issued in connection
with the equity investments and acquisitions.
In 2005, we initiated a strategic plan designed to accelerate our
growth and enhance our future earnings potential. The plan focuses on our
strengths, which include providing billing, collections and complementary
business management services to physician practices. As part of this plan, we
completed a series of transactions involving the divestiture of non-strategic
assets in 2005 and early 2006. In addition, we redirected financial resources
and company personnel to areas that management believed would enhance long-term
growth potential. A key component of our long-term strategic plan was the
identification of potential acquisition targets that would increase our presence
in the markets we serve and enhance stockholder value.
On December 1, 2006 we completed the acquisition of Rand and On Line.
We acquired all of the issued and outstanding capital stock of Rand for an
aggregate purchase price of $9,365,333, subject to adjustments conditioned upon
future revenue results. The purchase price was paid through a combination of
cash, the issuance of an unsecured subordinated promissory note and the issuance
of shares of our Class A Common Stock. We acquired all of the issued and
outstanding capital stock of both OLA and OLP for an aggregate purchase price of
$3,310,924, subject to adjustments conditioned upon future revenue results. The
purchase price was paid through a combination of cash and the issuance of
unsecured subordinated promissory notes. (See Note 2. Acquisitions and Private
Placement for additional information on the furtherance of our strategic plan in
2006.)
Revenue Cycle Management Segment ("RCM")
Our RCM segment includes three business units, MBS, Rand and On Line.
We offer billing, collection, accounts receivable management, coding and
reimbursement services, reimbursement analysis, practice consulting, managed
care contract management and accounting and bookkeeping services, primarily to
hospital-based physicians such as pathologists, anesthesiologists and
radiologists, allowing them to avoid the infrastructure investment in their own
back-office operations. In addition, we provide these services to other
specialties including plastic surgery, family practice, internal medicine,
orthopedics, neurologists, emergency medicine and ambulatory surgery centers.
These services help clients to be financially successful by improving cash flows
and reducing administrative costs and burdens. MBS currently provides services
to approximately 54 clients, representing 310 providers. Rand currently provides
services to approximately 58 clients, representing 171 providers. On Line
currently provides services to approximately 13 billing clients, representing 32
providers, and 43 transcription clients and payroll processing services to 207
clients.
F-8
Billing and Collection Services. We offer billing and collection
services to our clients. These include coding, reimbursement services, charge
entry, claim submission, collection activities, and financial reporting
services, including:
o Current Procedural Terminology ("CPT") and International
Classification of Diseases ("ICD-9") utilization reviews;
o Charge ticket (superbill) evaluations;
o Fee schedule analyses;
o Reimbursement audits; and
o Training seminars.
o Patient refund processing
Managed Care Contract Management Services. We offer consulting services
to assist clients with navigating and interacting with managed care
organizations. Some of the managed care consulting services are:
o Establishing the actual ownership of the managed care organization and
determining that the entity is financially sound;
o Negotiating the type of reimbursement offered;
o Assuring that there are no "withholds" beyond the discount agreed
upon;
o Determining patient responsibility for non-covered services, as well
as co-pays and deductibles;
o Tracking managed care payments to verify the correctness of the
reimbursement rate;
o Evaluating the appeals process in case of disputes concerning payment
issues, utilization review, and medical necessity; and
o Confirming the length of the contract, the renewal process, and the
termination options.
Practice Consulting Services. We offer a wide range of management
consulting services to medical practices. These management services help create
a more efficient medical practice, providing assistance with the business
aspects associated with operating a medical practice. Our management consulting
services include the following:
o Accounting and bookkeeping services;
o Evaluation of staffing needs;
o Provision of temporary staff services;
o Quality assurance program development;
o Physician credentialing assistance;
o Fee schedule review, specific to locality;
o Formulation of scheduling systems; and
o Training and continuing education programs.
o Payroll processing
Practice Management ("PM") Segment
IPS, a Delaware corporation, was founded in 1996 to provide physician
practice management services to general and subspecialty pediatric practices.
IPS commenced its business activities upon consummation of several medical group
business combinations effective January 1, 1999.
IPS serves the general and subspecialty pediatric physician market,
providing accounting and bookkeeping, human resource management, group
purchasing, accounts receivable management, quality assurance services,
physician credentialing, fee schedule review, training and continuing education
and billing and reimbursement analysis. As of December 31, 2006, IPS managed
eight practice sites, representing five medical groups in Illinois and Ohio. The
physicians, who are all employed by separate corporations, provide all clinical
and patient care related services.
There is a standard forty-year management service agreement ("MSA")
between IPS and the various affiliated medical groups whereby a management fee
is paid to IPS. IPS owns all of the assets used in the operation of the medical
groups. IPS manages the day-to-day business operations of each medical group and
provides the assets for the physicians to use in their practice for a fixed fee
or percentage of the net operating income of the medical group. All revenues are
collected by IPS, the fixed fee or percentage payment to IPS is taken from the
net operating income of the medical group and the remainder of the net operating
income of the medical group is paid to the physicians and treated as an expense
on IPS's financial statements as "physician group distribution."
On April 1, 2005, IPS entered into a Mutual Release and Settlement
Agreement (the "CARDC Settlement") with Bradley E. Chipps, M.D. ("Dr. Chipps")
and Capital Allergy and Respiratory Disease Center, a medical corporation
("CARDC") to settle disputes as to the existence and enforceability of certain
contractual obligations. As part of the CARDC Settlement, Dr. Chipps, CARDC, and
IPS agreed that CARDC would purchase the assets owned by IPS and used in
connection with CARDC in exchange for termination of the MSA between IPS and
CARDC. Additionally, among other provisions, after April 1, 2005, Dr. Chipps,
CARDC and IPS have been released from any further obligation to each other.
F-9
On June 7, 2005, InPhySys, Inc. (formerly known as IntegriMED, Inc.)
("IntegriMED"), a wholly owned subsidiary of IPS, executed an Asset Purchase
Agreement (the "IntegriMED Agreement") with eClinicalWeb, LLC ("eClinicalWeb")
to sell substantially all of the assets of IntegriMED. The IntegriMED Agreement
was deemed to be effective as of midnight on June 6, 2005. As consideration for
the purchase of the acquired assets, eClinicalWeb issued to IntegriMED the
following: (i) a two percent (2%) ownership interest in eClinicalWeb; and (ii)
$69,034 for the payoff of certain leases and purchase of certain software. Also
eClinicalWeb agreed to sublease certain office space from IPS that was occupied
by employees of IntegriMED.
On October 31, 2005, IPS executed a Mutual Release and Settlement
Agreement (the "Sutter Settlement") with John Ivan Sutter, M.D., PA ("Dr.
Sutter") to settle disputes that had arisen between IPS and Dr. Sutter and to
avoid the risk and expense of litigation. As part of the Sutter Settlement, Dr.
Sutter and IPS agreed that Dr. Sutter would purchase the assets owned by IPS and
used in connection with Dr. Sutter's practice, in exchange for termination of
the related MSA. Additionally, among other provisions, after October 31, 2005,
Dr. Sutter and IPS have been released from any further obligation to each other.
IPS is party to a management services agreement (the "Dayton MSA") with
Dayton Infant Care Specialists, Corp. ("Dayton ICS"). The sole remaining
shareholder of Dayton ICS has notified both IPS and the hospitals at which
Dayton ICS has contracts that he intends to dissolve Dayton ICS, cease
practicing at the hospitals and cease utilizing the services of IPS. IPS
believes that the unilateral decision to dissolve Dayton ICS and terminate the
business of Dayton ICS breaches the Dayton MSA and violates duties owed by
Dayton ICS to IPS as a creditor of Dayton ICS. As a result of pending litigation
and the uncertainty of the outcome, the operations of Dayton ICS are now
reflected in our consolidated statements of operations as `income from
operations of discontinued components' for the twelve months ended December 31,
2006 and 2005, respectively.
IPS is party to a management services agreement (the "Illinois MSA")
with Pediatric Specialists of the Northwest, M.D.S.C. ("PSNW"). IPS and PSNW
were in arbitration regarding claims relating to the Illinois MSA. In connection
therewith, on February 9, 2007, IPS and PSNW entered into a settlement agreement
(the "PSNW Settlement") to settle disputes that had arisen between IPS and PSNW
and to avoid the risk and expense of further litigation. As a result of the PSNW
Settlement, the operations of PSNW are now reflected in our consolidated
statements of operations as `income from operations of discontinued components'
for the twelve months ended December 31, 2006 and 2005, respectively, and the
assets and liabilities of PSNW are reflected as `assets held for sale' and
`liabilities held for sale' on our consolidated balance sheet at December 31,
2006. (See Note 16. Subsequent Events).
Ambulatory Surgery Center Business
As of December 31, 2006, we no longer have ownership or management
interests in surgery and diagnostic centers.
On March 1, 2005, we closed our wholly owned subsidiary, Bellaire
SurgiCare, Inc. ("Bellaire SurgiCare"), and consolidated its operations with the
operations of SurgiCare Memorial Village, L.P. ("Memorial Village").
In April 2005, due to unsatisfactory financial performance of our
surgery centers and in accordance with our strategic plan, we began the process
of divesting our surgery center ownership interests.
On September 30, 2005, we executed purchase agreements to sell our 51%
ownership interest in Tuscarawas Ambulatory Surgery Center, L.L.C. ("TASC") and
our 41% ownership interest in Tuscarawas Open MRI, L. P., ("TOM") both located
in Dover, Ohio, to Union Hospital ("Union"). Additionally, as part of the
transactions, TASC, as the sole member of TASC Anesthesia, L.L.C. ("TASC
Anesthesia"), executed an Asset Purchase Agreement to sell certain assets of
TASC Anesthesia to Union. The limited partners of TASC and TOM also sold a
certain number of their units to Union such that at the closing of these
transactions, Union owned 70% of the ownership interests in TASC and TOM.
As consideration for the purchase of the 70% ownership interests in
TASC and TOM, Union Hospital paid purchase prices of $950,000 and $2,188,237,
respectively. Our portion of the total proceeds for TASC, TASC Anesthesia and
TOM, after closing costs of $82,632, was cash in the amount of $1,223,159 and a
note due on or before March 30, 2006 in the amount of $530,547. As a result of
these transactions, we no longer have an ownership interest in TASC, TOM or TASC
Anesthesia.
Additionally, as part of the TASC and TOM transactions, Orion executed
two-year management services agreements (the "TASC MSA" and the "TOM MSA") with
terms substantially the same as those of the management services agreements
under which Orion performed management services to TASC and TOM prior to the
transactions.
F-10
On January 12, 2006, the Company was notified by Union that it was
exercising its option to terminate the TOM MSA as of March 12, 2006. In 2005,
management fee revenue related to TOM was $38,837.
On February 3, 2006, the Company was notified by Union that it was
exercising its option to terminate the TASC MSA as of April 3, 2006. In 2005,
management fee revenue related to TASC was $95,846.
On February 8, 2006, Memorial Village executed an Asset Purchase
Agreement (the "Memorial Agreement") for the sale of substantially all of its
assets to First Surgical Memorial Village, L.P. ("First Surgical"). Memorial
Village was approximately 49% owned by Town & Country SurgiCare, Inc., a wholly
owned subsidiary of Orion. The Memorial Agreement was deemed to be effective as
of January 31, 2006.
The property sold by Memorial Village to First Surgical (hereinafter
collectively referred to as the "Memorial Acquired Assets") included the
equipment, inventory, goodwill, contracts, leasehold improvements, equipment
leases, books and records, permits and licenses and other personal property
owned by Memorial Village and used in the operation of Memorial Village's
business. The Memorial Acquired Assets did not include any of the following:
accounts receivable, cash and cash equivalents, marketable securities, insurance
policies, prepaid expenses, deposits with utility and/or service providers,
shares of corporations, real estate owned by Memorial Village, or liabilities,
other than those expressly assumed by the First Surgical in the Agreement.
As consideration for the Memorial Acquired Assets, Memorial Village
received a total purchase price of $1,100,000, of which we received
approximately $815,000 after payment of certain legal and other post-closing
expenses. The proceeds received by us consisted of the following amounts:
i. Approximately $677,000 representing the principal amount of a note
payable owed to us from Memorial Village;
ii. Approximately $99,000 representing our pro-rata share of the net
proceeds after payment of certain legal and other post-closing
expenses; and
iii. A reserve fund of approximately $39,000, pending approval of the
assumption of certain capital leases by First Surgical.
On March 1, 2006, San Jacinto Surgery Center, Ltd. ("San Jacinto"),
executed an Asset Purchase Agreement (the "San Jacinto Agreement") for the sale
of substantially all of its assets to San Jacinto Methodist Hospital
("Methodist"). San Jacinto was approximately 10% owned by Baytown SurgiCare,
Inc., a wholly owned subsidiary of Orion.
The property sold by San Jacinto to Methodist (hereinafter collectively
referred to as the "San Jacinto Acquired Assets"), included the leasehold title
to real property, together with all improvements, buildings and fixtures, all
major, minor or other equipment, all computer equipment and hardware, furniture
and furnishings, inventory and supplies, current financial, patient,
credentialing and personnel records, interest in all commitments, contracts,
leases and agreements outstanding in respect to San Jacinto, to the extent
assignable, all licenses and permits held by San Jacinto, all patents and patent
applications and all logos, names, trade names, trademarks and service marks,
all computer software, programs and similar systems owned by or licensed to San
Jacinto, goodwill and all interests in property, real, personal and mixed,
tangible and intangible acquired by San Jacinto prior to March 1, 2006. The San
Jacinto Acquired Assets did not include any of the following: restricted and
unrestricted cash and cash equivalents, marketable securities, certificates of
deposit, bank accounts, temporary investments, accounts receivable, notes
receivable intercompany accounts of San Jacinto, and all commitments, contracts,
leases and agreements other than those expressly assumed by Methodist in the San
Jacinto Agreement.
As consideration for the San Jacinto Acquired Assets, San Jacinto
received a total purchase price of $5,500,000, of which we received a net amount
of approximately $598,000. The proceeds received by us consisted of the
following amounts:
i. Approximately $450,000 representing our pro-rata share of the net
proceeds; and
ii. Approximately $148,000 representing the principal and interest amounts
of a note payable owed to us from San Jacinto.
As part of the closing of the Agreement, we were obligated to make
payments, totaling $607,000, from our portion of the proceeds as follows:
i. Approximately $357,000 representing distributions due to the limited
partners of San Jacinto for cash collections previously received by
us, and payment of accounts payable and other expenses; and
ii. Approximately $250,000 to CIT Healthcare, LLC ("CIT"), which
represents repayment of the obligations related to San Jacinto under
the Loan and Security Agreement with CIT.
F-11
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. The acquisitions of Rand and
On Line were accounted for using the purchase accounting method, meaning that
the purchase price, comprised of the consideration paid to the stockholders of
Rand and On Line at closing, the fair value of the liabilities assumed and the
transaction costs associated with the acquisitions, was allocated to the fair
value of the tangible and identifiable intangible assets of Rand and On Line,
with any excess being considered goodwill. Our results for fiscal 2006 include
the results of MBS and IPS for the twelve months ended December 31, 2006 and the
results of Rand and On Line commencing on December 1, 2006.
The IPS Merger was treated as a reverse acquisition, meaning that the
purchase price, comprised of the fair value of the outstanding shares of Orion
prior to the transaction, plus applicable transaction costs, were allocated to
the fair value of our tangible and intangible assets and liabilities prior to
the transaction, with any excess being considered goodwill. IPS was treated as
the continuing reporting entity and, thus, IPS's historical results became those
of the combined company. Our results for fiscal 2005 include the results of MBS,
IPS and our ambulatory surgery and diagnostic center business, which was
discontinued in 2005, for the twelve months ended December 31, 2005.
All material intercompany balances and transactions have been
eliminated in consolidation.
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108") which provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 is effective for fiscal years
ending after November 15, 2006. The adoption of SAB 108 was not material to our
consolidated financial statements.
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements," ("SFAS 157") which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. Earlier application is encouraged provided
that the reporting entity has not yet issued financial statements for that
fiscal year, including financial statements for an interim period within that
fiscal year. We do not expect the impact of SFAS 157 to be material to our
consolidated financial statements.
In June 2006, the FASB issued Financial Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," ("FIN 48") which clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 provides that a tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be sustained upon
examination, based on the technical merits. This interpretation also provides
guidance on measurement, de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We are currently evaluating
the effect that the adoption of FIN 48 will have on our consolidated results of
operations and financial condition and are not yet in a position to determine
such effects.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154"). SFAS 154 replaces Auditing Practices Board
("APB") Opinion NO. 20, "Accounting Changes" ("APB 20") and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting and reporting of a change in accounting
principle. SFAS 154 applies to all voluntary changes in accounting principle as
well as to changes required by an accounting pronouncement that does not include
specific transition provisions. Previously, most changes in accounting
principles were required to be recognized by way of including the cumulative
effect of the changes in accounting principle in the income statement of the
period of change. SFAS 154 requires that such changes in accounting principle be
retrospectively applied as of the beginning of the first period presented as if
that accounting principle had always been used, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. However, SFAS 154 does
not change the transition provisions of any existing accounting pronouncements.
The adoption of SFAS 154 was not material to our consolidated financial
statements.
In December 2004, the FASB published SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires that the
compensation cost relating to share-based payment transactions, including grants
of employee stock options, be recognized in the financial statements. That cost
will be measured based on the fair value of the equity or liability instruments
issued. SFAS 123(R) covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R) is a
replacement of SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related interpretive guidance ("APB 25").
F-12
The effect of SFAS 123(R) was to require entities to measure the cost
of employee services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize the cost over the period
the employee is required to provide services for the award. SFAS 123(R) permits
entities to use any option-pricing model that meets the fair value objective in
SFAS 123(R). We were required to begin to apply SFAS 123(R) for its quarter
ending March 31, 2006.
SFAS 123(R) allows two methods for determining the effects of the
transition: the modified prospective transition method and the modified
retrospective method of transition. We adopted the modified prospective
transition method beginning in 2006.
Cash and Cash Equivalents
We consider all short-term investments with an original maturity of
three months or less to be cash equivalents.
As described more fully in Note 2. Acquisitions and Private Placement
under the caption "Rand," an aggregate of $200,000 of the cash consideration for
the acquisition of Rand was placed into escrow at December 1, 2006, and payment
of this amount to the former stockholder of Rand is conditioned upon future
revenue results. The $200,000 of cash in escrow is included in "other assets,
net" in the long-term assets section of our consolidated balance sheet at
December 31, 2006.
Revenue Recognition
MBS, Rand and On Line's principal source of revenues is fees charged to
clients based on a percentage of net collections of the client's accounts
receivable. They recognize revenue and bill their clients when the clients
receive payment on those accounts receivable. Our RCM businesses typically
receive payment from the client within 30 days of billing. The fees vary
depending on specialty, size of practice, payer mix, and complexity of the
billing. In addition to the collection fee revenue, MBS, Rand and OLA also earn
fees from the various consulting services that they provide, including medical
practice management services, managed care contracting, coding and reimbursement
services and transcription services. OLP earns revenue based on a contracted
rate per transaction and recognizes revenue when the service is provided.
IPS records revenue based on patient services provided by its
affiliated medical groups. Net patient service revenue is impacted by billing
rates, changes in current procedural terminology code reimbursement and
collection trends. IPS reviews billing rates at each of its affiliated medical
groups on at least an annual basis and adjusts those rates based on each
insurer's current reimbursement practices. Amounts collected by IPS for
treatment by its affiliated medical groups of patients covered by Medicare,
Medicaid and other contractual reimbursement programs, which may be based on
cost of services provided or predetermined rates, are generally less than the
established billing rates of IPS's affiliated medical groups. IPS estimates the
amount of these contractual allowances and records a reserve against accounts
receivable based on historical collection percentages for each of the affiliated
medical groups, which include various payer categories. When payments are
received, the contractual adjustment is written off against the established
reserve for contractual allowances. The historical collection percentages are
adjusted quarterly based on actual payments received, with any differences
charged against net revenue for the quarter. Additionally, IPS tracks cash
collection percentages for each medical group on a monthly basis, setting
quarterly and annual goals for cash collections, bad debt write-offs and aging
of accounts receivable. IPS is not aware of any material claims, disputes or
unsettled matters with third party payers and there have been no material
settlements with third party payers for the twelve months ended December 31,
2006 and 2005.
Our principal source of revenues from our surgery center business was a
surgical facility fee charged to patients for surgical procedures performed in
its ASCs and for diagnostic services performed at TOM. We depended upon
third-party programs, including governmental and private health insurance
programs to pay these fees on behalf of its patients. Patients were responsible
for the co-payments and deductibles when applicable. The fees varied depending
on the procedure, but usually included all charges for operating room usage,
special equipment usage, supplies, recovery room usage, nursing staff and
medications. Facility fees did not include the charges of the patient's surgeon,
anesthesiologist or other attending physicians, which were billed directly to
third-party payers by such physicians. In addition to the facility fee revenues,
we also earned management fees from its operating facilities and development
fees from centers that it developed. As more fully described under the caption
"Description of Business," we no longer have ownership or management interests
in surgery and diagnostic centers.
F-13
Accounts Receivable and Allowance for Doubtful Accounts.
MBS, Rand and On Line record uncollectible accounts receivable using
the direct write-off method of accounting for bad debts. Historically, they have
experienced minimal credit losses and have not written-off any material accounts
during 2006 and 2005.
IPS's affiliated medical groups grant credit without collateral to its
patients, most of which are insured under third-party payer arrangements. The
provision for bad debts that relates to patient service revenues is based on an
evaluation of potentially uncollectible accounts. The provision for bad debts
includes a reserve for 100% of the accounts receivable older than 180 days.
Establishing an allowance for bad debt is subjective in nature. IPS uses
historical collection percentages to determine the estimated allowance for bad
debts, and adjusts the percentage on a quarterly basis.
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. 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 5-7 years
Medical and surgical equipment 5-7 years
Leasehold improvements 3 years or remaining life of lease
Computer equipment and software 3-7 years
Transportation equipment 5 years
Investment in Limited Partnerships
At December 31, 2005, we owned a 10% general partnership interest in
San Jacinto. The investment was accounted for using the equity method. Under the
equity method, the investment is initially recorded at cost and is subsequently
increased to reflect our share of the income of the investee and reduced to
reflect the share of the losses of the investee or distributions from the
investee. Effective March 1, 2006, we sold our interest in San Jacinto. (See
"Description of Business" for additional discussion regarding the sale of San
Jacinto.)
The general partnership interest was accounted for as an investment in
limited partnership due to the interpretation of SFAS 94/Accounting Research
Bulletin ("ARB") 51 and the interpretations of such by Issue 96-16 and Statement
of Position "SOP" 78-9. Under those interpretations, the Company could not
consolidate its interest in an entity in which it held a minority general
partnership interest due to management restrictions, shared operating
decision-making, and capital expenditure and debt approval by limited partners
and the general form versus substance analysis.
Segments of an Enterprise and Related Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has determined that it has two
reportable segments - RCM and PM. The reportable segments are strategic business
units that offer different products and services. They are managed separately
because each business requires different technology, operational support and
marketing strategies. Our reportable segments consist of: (i) RCM, which
consists of MBS, Rand and On Line; and (ii) PM, which consists of the pediatric
medical groups that provide patient care operating under the MSA. We chose to
aggregate the MSAs into a single operating segment consistent with the objective
and basic principles of SFAS No. 131 based on similar economic characteristics,
including the nature of the products and services, the type of customer for
their services, the methods used to provide their services and in consideration
of the regulatory environment under Medicare and the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA").
Goodwill and Intangible Assets
Goodwill and intangible assets represent the excess of cost over the
fair value of net assets of companies acquired in business combinations
accounted for using the purchase method. In July 2001, the FASB issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates pooling-of-interest accounting and requires
that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method. SFAS No. 142 eliminates the amortization of goodwill
and certain other intangible assets and requires us to evaluate goodwill for
impairment on an annual basis by applying a fair value test. SFAS No. 142 also
requires that an identifiable intangible asset that is determined to have an
indefinite useful economic life not be amortized, but separately tested for
impairment using a fair value-based approach at least annually.
F-14
We adopted SFAS No. 142 effective January 1, 2002. As a result, IPS
determined that its long-term MSAs, executed as part of the medical group
business combinations consummated in 1999, are an identifiable intangible asset
in accordance with paragraph 39 of SFAS No. 141.
We evaluate our goodwill and other intangible assets in the fourth
quarter of each fiscal year, unless circumstances require testing at other
times. (See also Note 3. Goodwill and Intangible Assets.)
Income Taxes
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed in SFAS No. 109, "Accounting for Income Taxes." As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the current period's provision for income taxes. A valuation
allowance is provided for deferred tax assets if it is more than likely that
such asset will not be realizable.
Stock Based Compensation
At December 31, 2006, we had two stock-based employee compensation
plans. Prior to January 1, 2006, we accounted for grants for these plans under
Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations, and applied SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," for
disclosure purposes only. Under APB 25, stock-based compensation cost related to
stock options was not recognized in net income since the options underlying
those plans had exercise prices greater than or equal to the market value of the
underlying stock on the date of the grant. Effective January 1, 2006, we adopted
SFAS No. 123(R), which requires that all share-based payments to employees be
recognized in the financial statements based on their fair values at the date of
grant. The calculated fair value is recognized as expense (net of any
capitalization) over the requisite service period, net of estimated forfeitures,
using the straight-line method under SFAS No. 123(R). We consider many factors
when estimated expected forfeitures, including types of awards, employee class
and historical experience. The statement was adopted using the modified
prospective method of application which requires compensation expense to be
recognized in the financial statements for all unvested stock options beginning
in the quarter of adoption. No adjustments to prior periods have been made as a
result of adopting SFAS No. 123(R). Under this transition method, compensation
expense for share-based awards granted prior to January 1, 2006, but not yet
vested as of January 1, 2006, will be recognized in our financial statements
over their remaining service period. The cost was based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123. As
required by SFAS No. 123(R), compensation expense recognized in future periods
for share-based compensation granted prior to adoption of the standard will be
adjusted for the effects of estimated forfeitures.
On June 17, 2005, we granted 1,357,000 stock options to certain of our
employees, officers, directors and former directors under our 2004 Incentive
Plan, as amended. In the third quarter of 2005, stock options totaling 360,000
to certain employees were cancelled as a result of staff reductions related to
the consolidation of corporate functions duplicated at our Houston, Texas and
Roswell, Georgia facilities. On May 12, 2006, we granted 102,000 stock options
to certain of our employees and directors under our 2004 Incentive Plan, as
amended. On December 4, 2006, we granted 2,500,000 stock options to certain of
our employees, officers and directors under our 2004 Incentive Plan, as amended.
On August 31, 2005, we granted 650,000 restricted stock units to
certain of our officers under our 2004 Incentive Plan, as amended.
For the twelve months ended December 31, 2006, the impact of adopting
SFAS No. 123(R) on our consolidated statements of operations was an increase in
salaries and benefits expense of $240,212 with a corresponding decrease in our
income from continuing operations, income before provision for income taxes and
net income resulting from the recognition of compensation expense associated
with employee stock options. There was no material impact on our basic and
diluted net income per share as a result of the adoption of SFAS No. 123(R).
The adoption of SFAS No. 123(R) has no effect on net cash flow. Since
we are not presently a taxpayer and have provided a valuation allowance against
deferred income tax assets net of liabilities, there is also no effect on our
consolidated statement of cash flows. Had we been a taxpayer, we would have
recognized cash flow resulting from tax deductions in excess of recognized
compensation cost as a financing cash flow.
F-15
The following table illustrates the pro forma net income and earnings
per share that would have resulted in the twelve months ended December 31, 2005
from recognizing compensation expense associated with accounting for employee
stock-based awards under the provisions of SFAS No. 123(R). The reported and pro
forma net income and earnings per share for the twelve months ended December 31,
2006 are provided for comparative purposes only, since stock-based compensation
expense is recognized in the financial statements under the provisions of SFAS
No.123(R).
Twelve Months Ended
December 31,
2006 2005
---- ----
Net income (loss) - as reported $ (4,128,218) $ (20,439,501)
Add: Stock-based employee compensation included in net income (loss) 240,212 --
Deduct: Total stock-based employee compensation (expense determined
under the fair value-based method for all awards), net of tax
effect (240,212) (142,861)
-------------------------------
Net loss - pro forma $ (4,128,218) $ (20,582,362)
===============================
Net loss per share:
Basic - as reported $ (0.20) $ (1.96)
Basic - pro forma $ (0.20) $ (1.97)
Diluted - as reported $ (0.20) $ (1.96)
Diluted - pro forma $ (0.20) $ (1.97)
The above pro forma effects on net loss per share of Class A Common
Stock are not likely to be representative of the effects on reported net loss
for future years because options vest over several years and additional awards
may be made in subsequent periods.
Reclassifications
Certain reclassifications have been made in the 2005 financial
statements to conform to the reporting format in 2006. Such reclassifications
had no effect on previously reported earnings. The most significant
reclassifications related to the presentation of discontinued operations for
comparative purposes.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. While management believes
current estimates are reasonable and appropriate, actual results could differ
from those estimates.
F-16
Note 2. Acquisitions and Private Placement
On December 1, 2006 we completed the acquisitions of Rand and On Line.
RAND. We acquired all of the issued and outstanding capital stock of
Rand for an aggregate purchase price of $9,365,333, subject to adjustments
conditioned upon future revenue results. The purchase price was paid through a
combination of cash, the issuance of an unsecured subordinated promissory note
and the issuance of shares of our Class A Common Stock. As of the closing of the
Rand acquisition on December 1, 2006, $7,200,000 of the purchase price was paid
in cash, and both $200,000 in cash and 3,314,917 shares of our Class A Common
Stock (having a value of $600,000 based on the average closing price per share
of our Class A Common Stock for the twenty-day period prior to the closing of
the Rand acquisition) were placed in escrow pending resolution of the purchase
price adjustments and subject to claims, if any, for indemnification. The
remainder of the purchase price was paid in a combination of cash and the
issuance of an unsecured subordinated promissory note in the original principal
amount of $1,365,333.
The Rand stock purchase agreement includes contingent future payments
(the "Rand Earn-out") to the seller based on post acquisition revenue targets
for Rand in 2007 and 2008 of $6,349,206 and $9,600,000, respectively. The stock
portion of the Rand Earn-out (3,314,917 shares) was placed into escrow at the
closing of the acquisition, but the shares were considered issued and
outstanding as of December 1, 2006. Therefore, the stock portion of the Rand
Earn-out has been reflected in the purchase price we paid for Rand. The cash and
promissory note portions of the contingent Rand Earn-out have not been reflected
in the purchase price we paid for Rand on December 1, 2006, and were placed into
escrow as of the closing. If the revenue targets are achieved, then the cash and
shares held in escrow will be released to the seller and the full amount of the
promissory note will be outstanding. If the revenue targets are not achieved,
then all or a portion of the shares held in the escrow will be forfeited, all or
a portion of the cash will be returned to us and/or the amount of the promissory
note will be reduced. The contingent Rand Earn-out, if realized, will be
accounted for at the time as an addition to (earn-out) or reduction in
(reduction) the cost of the acquisition and goodwill and other identifiable
intangible assets will be adjusted accordingly. (See Note 3. Goodwill and
Intangible Assets for a more detailed description of the purchase price
allocation for the Rand acquisition.)
ON LINE. We acquired all of the issued and outstanding capital stock of
On Line for an aggregate purchase price of $3,310,924, subject to adjustments
conditioned upon future revenue results. The purchase price was paid through a
combination of cash and the issuance of unsecured subordinated promissory notes.
As of the closing of the On Line acquisition on December 1, 2006, $2,401,943 of
the purchase price was paid in cash and the remainder through the issuance of
unsecured promissory notes in the original aggregate principal amount of
$908,981. The On Line stock purchase agreement includes contingent future
payments (the"On Line Earn-out") to the seller in the form of a promissory note
and cash, and contingent return or adjustment of the promissory note based on a
post acquisition revenue target for the twelve months after closing of
$2,500,259. The On Line Earn-out has not been reflected in the purchase price
allocation. The On Line Earn-out, if realized, will be accounted for at the
time as an addition to (earnout) or reduction in (reduction) the cost of the
acquisition and goodwill and other identifiable intangible assets will be
adjusted accordingly. (See Note 3. Goodwill and Intangible Assets for a more
detailed description of the purchase price allocation for the On Line
acquisition.)
F-17
PRIVATE PLACEMENT. These acquisitions were financed in part through the
proceeds of the Private Placement, which consisted of our issuance of (i) shares
of a newly created class of our common stock, Class D Common Stock, par value
$0.001 per share (the "Class D Common Stock"), which is convertible into our
Class A Common Stock, to each of Phoenix Life Insurance Company ("Phoenix") and
Brantley Partners IV, L.P. ("Brantley IV") for an aggregate purchase price of
$4,650,000 and (ii) senior unsecured subordinated promissory notes due 2011 in
the original principal amount of $3,350,000, bearing interest at an aggregate
rate of 14% per annum, together with warrants to purchase shares of our Class A
Common Stock, to Phoenix for an aggregate purchase price of $3,350,000.
Our senior unsecured subordinated promissory notes bear interest at the
combined rate of (i) 12% per annum payable in cash on a quarterly basis and (ii)
2% per annum payable in kind (meaning that the accrued interest will be
capitalized as principal) on a quarterly basis, subject to our right to pay such
amount in cash. The notes are unsecured and subordinated to all of our other
senior debt. Upon the occurrence and during the continuance of an event of
default the interest rate on the cash portion of the interest shall increase
from 12% per annum to 14% per annum, for a combined rate of default interest of
16% per annum. We may prepay outstanding principal (together with accrued
interest) on the note subject to certain prepayment penalties and we are
required to prepay outstanding principal (together with accrued interest) on the
note upon certain specified circumstances.
As of December 31, 2006, after giving effect to the acquisitions of
Rand and On Line and the closing of the Private Placement, Brantley IV owned
62,437,789 shares of our Class A Common Stock, warrants to purchase 20,455
shares of our Class A Common Stock and 8,749,952 shares of our Class D Common
Stock which are currently convertible into 8,749,952 shares of our Class A
Common Stock. As of December 31, 2006, this represented 52.0% of our voting
power on an as-converted, fully-diluted basis. Two of our directors, Paul H.
Cascio and Michael J. Finn, are affiliated with Brantley IV and its related
entities. Messrs. Cascio and Finn serve as general partners of the general
partner of Brantley Venture Partners III, L.P. ("Brantley III") and Brantley IV
and are limited partners in these funds. The advisor to Brantley III is Brantley
Venture Management III, L.P. and the advisor to Brantley IV is Brantley
Management IV, L.P.
Phoenix is a limited partner in Brantley IV and Brantley Partners V,
L.P and has also co-invested with Brantley IV and its affiliates in a number of
transactions. Prior to the closing of the Private Placement, Phoenix did not
own, of record, any shares of our capital stock. As part of the Private
Placement, Phoenix received (i) 15,909,003 shares of Class D Common Stock,
representing upon conversion 15,909,003, or 11.6%, of our outstanding Class A
Common Stock as of December 31, 2006, on an as-converted, fully-diluted basis
taking into account the issuance of the shares of Class D Common Stock and (ii)
warrants to purchase 1,421,629 shares of our Class A Common Stock representing
1.0% of the voting power as of December 31, 2006 on an as-converted,
fully-diluted basis.
As a condition to the Private Placement, on December 1, 2006, we
refinanced our existing loan facility with CIT Healthcare, LLC ("CIT") into a
four year $16,500,000 senior secured credit facility with Wells Fargo Foothill,
Inc. ("Wells Fargo") consisting of a $2,000,000 revolving loan commitment, a
$4,500,000 term loan and a $10,000,000 acquisition facility commitment. Amounts
borrowed under this facility are secured by substantially all of our assets and
a pledge of the capital stock of our operating subsidiaries. Under the terms of
the credit agreement (the "Credit Agreement") relating to this facility, amounts
borrowed bear interest at either a fluctuating rate based on the prime rate or
LIBOR rate, at our election. Currently, our interest rate on the revolving loan
commitment and the term loan is the prime rate plus 1.75%. In addition to
refinancing our existing loan facility, a portion of the proceeds from this
facility were used to fund our acquisitions of Rand and On Line and to finance
our ongoing working capital, capital expenditure and general corporate needs.
Upon repayment of the CIT loan facility, two of our stockholders, Brantley IV
and Brantley Capital Corporation "(Brantley Capital") were released from
guarantees that they had provided on our behalf in connection with the loan
facility.
The Credit Agreement contains certain financial covenants that require
us to maintain minimum levels of trailing twelve month earnings before income
taxes, depreciation and amortization ("EBITDA"), a minimum fixed charge coverage
ratio, a maximum senior debt leverage ratio and a limitation on annual capital
expenditures and other customary terms and conditions. As of December 31, 2006,
we were in compliance with all of the financial covenants under the Credit
Agreement.
Also on December 1, 2006 in connection with the consummation of the
Private Placement and the execution of the Credit Agreement, the following
actions were taken:
o All of our remaining holders of Class B Common Stock and Class C
Common Stock converted their shares into shares of our Class A Common
Stock;
o We purchased and retired all 1,722,983 shares of our Class B Common
Stock owned by Brantley Capital for an aggregate purchase price of
$482,435;
o We amended our certificate of incorporation to create the Class D
Common Stock and eliminate the Class B Common Stock and Class C Common
Stock;
o Brantley IV converted the entire unpaid principal balance, and accrued
but unpaid interest, of two convertible subordinated promissory notes
in the original aggregate amount of $1,250,000 into shares of our
Class A Common Stock;
o We extended the maturity date and increased the interest rate on
certain unsecured subordinated promissory notes totaling in the
aggregate $1,714,336 (the "DCPS/MBS Notes") issued to certain of the
former equity holders of the businesses we acquired in 2004 as part of
the DCPS/MBS Merger, including two of our executive officers, Dennis
Cain, CEO of MBS, and Tommy Smith, President and COO of MBS; and
o We restructured certain unsecured notes issued to DVI Financial
Services, Inc. ("DVI") and serviced by U.S. Bank Portfolio Services
("USBPS") to reduce the outstanding balance from $3,750,000 to
$2,750,000.
As of December 31, 2006, our revolving loan commitment with Wells Fargo
had limited availability to provide for working capital shortages. Although we
believe we will generate cash flows from operations in the future, there is no
guarantee that we will be able to fund our operations solely from our cash
flows. In 2005, we initiated a strategic plan designed to accelerate our growth
and enhance our future earnings potential. The plan focuses on our strengths,
which include providing billing, collections and complementary business
management services to physician practices. As part of this plan, we completed a
series of transactions involving the divestiture of non-strategic assets in 2005
and early 2006. (See Note 1. General - Description of Business under the
captions "PM Segment" and "Ambulatory Surgery Center Business.") In addition, we
redirected financial resources and company personnel to areas that management
believed would enhance long-term growth potential. A key component of our
long-term strategic plan was the identification of potential acquisition targets
that would increase our presence in the markets we serve and enhance stockholder
value. On December 1, 2006 we completed the acquisition of Rand and On Line. In
addition to Rand and On Line, we have identified other potential acquisition
opportunities to expand our business that are consistent with our strategic
plan. We have a $10 million acquisition facility commitment under the Credit
Agreement that will enable us to finance some or all of the cash consideration
for future acquisitions based on a formula tied to our pro forma trailing twelve
month EBITDA, including the EBITDA of the potential acquisition target.
We intend to continue to manage our use of cash. However, our business
is still faced with many challenges. If cash flows from operations and
borrowings are not sufficient to fund our cash requirements, we may be required
to further reduce our operations and/or seek additional public or private equity
financing or financing from other sources or consider other strategic
alternatives, including possible additional divestitures of specific assets or
lines of business. There can be no assurances that additional financing or
strategic alternatives will be available, or that, if available, the financing
or strategic alternatives will be obtainable on terms acceptable to us or that
any additional financing would not be substantially dilutive to our existing
stockholders.
Note 3. Goodwill and Intangible Assets
Goodwill and intangible assets represent the excess of cost over the
fair value of net assets of companies acquired in business combinations
accounted for using the purchase method. In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interest accounting and requires that all business combinations
initiated after June 30, 2001, be accounted for using the purchase method. SFAS
No. 142 eliminates the amortization of goodwill and certain other intangible
assets and requires us to evaluate goodwill for impairment on an annual basis by
applying a fair value test. SFAS No. 142 also requires that an identifiable
intangible asset that is determined to have an indefinite useful economic life
not be amortized, but separately tested for impairment using a fair value-based
approach at least annually.
F-18
We adopted SFAS No. 142 effective January 1, 2002. As a result, IPS
determined that its long-term MSAs, executed as part of the medical group
business combinations consummated in 1999, are an identifiable intangible asset
in accordance with paragraph 39 of SFAS No. 141.
As part of the acquisition and restructuring transactions that closed
on December 15, 2004, we recorded intangible assets and goodwill related to the
2004 Mergers. As of the closing, our management expected the case volumes at
Bellaire SurgiCare to improve in 2005. However, by the end of February 2005, it
was determined that the expected case volume increases were not going to be
realized. On March 1, 2005, we closed Bellaire SurgiCare and consolidated its
operations with the operations of Memorial Village. We tested the identifiable
intangible assets and goodwill related to the surgery center business using the
present value of cash flows method. As a result of the decision to close
Bellaire SurgiCare and the resulting impairment of the joint venture interest
and management contracts related to the surgery centers, we recorded a charge
for impairment of intangible assets of $4,090,555 for the year ended December
31, 2004.
As a result of the CARDC Settlement described in Note 1. General -
Description of Business - Integrated Physician Solutions, we recorded a charge
for impairment of intangible assets related to CARDC of $704,927 for the year
ended December 31, 2004.
On June 13, 2005, we announced that we had accepted an offer to
purchase our interests in TASC and TOM in Dover, Ohio. In preparation for this
pending transaction, we tested the identifiable intangible assets related to the
surgery center business using the present value of cash flows method as of June
30, 2005. Based on the pending sales transaction involving TASC and TOM, as well
as the uncertainty of future cash flows related to our surgery center business,
we determined that the joint venture interests associated with TASC, TOM and
Memorial Village were impaired and recorded a charge for impairment of
intangible assets of $6,362,849 for the quarter ended June 30, 2005. The sale of
our interests in TASC and TOM was completed effective as of October 1, 2005.
(See Note 1. General - Description of Business - Ambulatory Surgery Center
Business).
In November 2005, we decided that, as a result of ongoing losses at
Memorial Village, we would need to either find a buyer for our equity interests
in Memorial Village or close the facility. In preparation for this expected
transaction, we once again tested the identifiable intangible assets related to
the surgery center business using the present value of cash flows method at
September 30, 2005. Based on the decision to sell or close Memorial Village, as
well as the continuing uncertainty of cash flows related to our surgery center
segment, we determined that the joint venture interests for San Jacinto, as well
as the management contracts associated with Memorial Village and San Jacinto,
were impaired and recorded an additional charge for impairment of intangible
assets totaling $3,461,351 for the quarter ended September 30, 2005.
As described in Note 1. General - Description of Business - Ambulatory
Surgery Center Business, effective January 31, 2006 and March 1, 2006,
respectively, we executed Asset Purchase Agreements to sell substantially all of
the assets of Memorial Village and San Jacinto. Also in the first quarter of
2006, we were notified by Union that it was exercising its option to terminate
the TASC MSA and TOM MSA. As a result of the sales of Memorial Village and San
Jacinto, as well as the termination of the TASC MSA and TOM MSA, we no longer
have an ownership or management interest in any ambulatory surgery centers and,
as such, we tested the remaining identifiable intangible assets related to the
surgery centers from the IPS Merger at December 31, 2005. Based on the
terminations of the TASC MSA and TOM MSA, as well as the sales of Memorial
Village and San Jacinto, we determined that the management contracts associated
with TASC and TOM were impaired and recorded an additional charge for impairment
of intangible assets of $1,163,830 for the quarter ended December 31, 2005.
As a result of the Sutter Settlement, which is described in Note 1.
General - Description of Business - Practice Management Segment, we also
recorded an additional $38,440 charge for impairment of intangible assets for
the quarter ended December 31, 2005.
As a result of the Dayton ICS litigation and the PSNW Settlement, which
are described in Note 1. General - Description of Business - Practice Management
Segment, we also recorded an additional $1,845,669 and 1,249,080 charge for
impairment of intangible assets, respectively, for the quarter ended December
31, 2006.
All of the charges for impairment of intangible assets are included in
discontinued operations.
F-19
In order to determine whether the goodwill recorded as a result of the
IPS Merger was impaired at December 31, 2005, we compared the fair value of each
ASC's assets to its net carrying value. As each of the ASCs was sold between
October 1, 2005 and March 1, 2006, the fair value of each ASC was best
determined by the purchase price of the assets. Since TASC and TOM were sold
effective October 1, 2005, the balance sheet at September 30, 2005 was used to
determine the fair value of its assets. Since the Memorial Village and San
Jacinto transactions took place after year-end, the December 31, 2005 balance
sheets were used to determine the carrying value of the assets of those
entities. We determined that the fair value of each ASC was greater than the
carrying value in each case and concluded that there was no impairment of
goodwill at December 31, 2005. As a result of the sale of all of the entities
related to our ambulatory surgery center business, we allocated the goodwill
recorded as part of the IPS Merger to each of the surgery center reporting units
and recorded a loss on the write-down of goodwill of $3,489,055 for the quarter
ended December 31, 2005. The charge for the write-down of goodwill was included
in discontinued operations in 2005.
Effective December 1, 2006, we purchased Rand for a combination of
cash, notes and stock. Since the consideration for this purchase transaction
exceeded the fair value of the net assets of Rand at the time of the purchase, a
portion of the purchase price was allocated to intangible assets and goodwill.
Following is a summary of the purchase price calculation, along with the
resulting allocation of the fair value of Rand's historical net assets to
identifiable intangible assets:
Purchase price includes:
Cash, at closing $7,200,000
Stock, in escrow at
closing 600,000
Liabilities assumed 223,224
Transaction costs 738,071
------------
Total purchase price $8,761,295
============
Purchase price allocated as follows: As
Historical NBV Adjustments Adjusted
------------------- ------------------ -----------------
Cash $ 153,572 $ 153,572
Accounts receivable 593,208 593,208
Other current assets 16,975 16,975
--------------------------------------------------------
Total current assets 763,755 763,755
Property and equipment 114,375 114,375
Goodwill and identifiable intangible
assets 8,106,389 8,106,389
--------------------------------------------------------
Total assets 878,129 8,106,389 8,984,518
Accounts payable and accruals (212,184) (212,184)
Capital leases (11,040) (11,040)
--------------------------------------------------------
Net assets acquired $ 654,906 $ 8,106,389 $ 8,761,295
========================================================
As of December 1, 2006, identifiable intangible assets and goodwill
related to Rand were as follows:
Customer relationships $2,790,634
Non-compete agreement 644,975
Trained workforce (to be classified with goodwill for financial
reporting purposes) 1,017,592
Goodwill 3,653,188
------------
Total $8,106,389
============
Effective December 1, 2006, we purchased On Line for a combination of
cash and notes. Since the consideration for this purchase transaction exceeded
the fair value of the net assets of On Line at the time of the purchase, a
portion of the purchase price was allocated to intangible assets and goodwill.
Following is a summary of the purchase price calculation, along with the
resulting allocation of the fair value of On Line's historical net assets to
identifiable intangible assets:
F-20
Purchase price includes:
Cash, at closing $ 2,401,943
Promissory note, at
closing 75,000
Liabilities assumed 102,299
Transaction costs 190,710
----------------------
Total purchase price $ 2,769,952
======================
Purchase price allocated as follows: As
Historical NBV Adjustments Adjusted
----------------- -------------- --------------
Cash $ 10,249 $ 10,249
Accounts receivable 183,119 183,119
Other current assets 448 448
-----------------------------------------------
Total current assets 193,816 193,816
Property and equipment 127,328 127,328
(197,082)
Goodwill and identifiable intangible
assets 197,082 2,551,108 2,551,108
-----------------------------------------------
Total assets 518,226 2,354,026 2,872,251
Accounts payable and accruals (102,299) (102,299)
Capital leases -- --
-----------------------------------------------
Net assets acquired $ 415,926 $ 2,354,026 $ 2,769,952
===============================================
As of December 1, 2006, identifiable intangible assets and goodwill
related to On Line were as follows:
Customer relationships -
contractual $ 1,325,842
Non-compete agreement 360,736
Trained workforce (to be classified with goodwill for financial
reporting purposes) 480,957
Goodwill 383,572
--------------
Total $ 2,551,108
==============
The changes in the carrying amount of intangible assets for the years
ended December 31, 2005 and 2006 are as follows:
Balance, January 1, 2005 $ 26,876,995
Amortization expense (2,566,891)
Charge for impairment - TASC (1,069,776)
Charge for impairment - TOM (1,999,666)
Charge for impairment - Memorial Village (4,501,047)
Charge for impairment - San Jacinto (2,761,084)
Charge for impairment - Sutter (38,440)
Charge for impairment - Orion (142,377)
-------------------
Balance, December 31, 2005 $ 13,797,714
Amortization expense (1,481,723)
Acquisition of Rand - intangible assets 3,435,609
Acquisition of On Line - intangible assets 1,686,578
Charge for impairment - Dayton ICS (1,845,669)
Charge for impairment - PSNW (1,249,080)
-------------------
Balance, December 31, 2006 $ 14,343,429
===================
F-21
The changes in the carrying amount of goodwill for the years ended December 31,
2005 and 2006 are as follows:
Balance, January 1, 2005 $ 5,373,645
Charge for impairment - TASC (74,460)
Charge for impairment - Memorial Village (76,500)
Charge for impairment - San Jacinto (86,700)
Charge for impairment - Orion (276,420)
Purchase price adjustment - IPS Merger 900,876
Purchase price adjustment - DCPS/MBS Merger 840,286
Goodwill - Deferred tax benefit (620,977)
Goodwill - write-down related to discontinued operations (3,489,055)
---------------
Balance, December 31, 2005 2,490,695
Acquisition of Rand - goodwill 4,670,780
Acquisition of On Line - goodwill 864,529
Goodwill - write-down related to discontinued operations (210,701)
---------------
Balance, December 31, 2006 $ 7,815,303
===============
Our amortizable identifiable intangible assets consist of the MSAs,
client relationships, non-compete agreements, and acquired software, which are
amortizable over periods of two to twenty-five years. Future annual amortization
of our identifiable intangible assets for the next five years is as follows:
Fiscal year ending Amount
-------------------------------------------------- ------------------
2007 $ 2,122,325
2008 2,107,294
2009 1,924,934
2010 1,533,416
2011 1,522,666
------------------
$ 9,210,635
==================
Note 4. Earnings per Share
Basic earnings per share are calculated on the basis of the weighted
average number of shares of Class A Common Stock outstanding at year-end.
Diluted earnings per share, in addition to the weighted average determined for
basic loss per share, include common stock equivalents which would arise from
the exercise of stock options and warrants using the treasury stock method,
conversion of debt and conversion of Class B Common Stock, Class C Common Stock
and Class D Common Stock.
For the Years Ended December 31,
2006 2005
--------------- --------------
Net loss $ (4,128,218) $(20,439,501)
Weighted average number of shares of Class A
Common Stock outstanding for basic net loss
per share 20,267,781 10,345,453
Dilutive stock options, warrants and
restricted stock units (a) (a)
Convertible notes payable (b) (b)
Class B Common Stock (c) (c)
Class C Common Stock (d) (d)
Class D Common Stock (e) (e)
Weighted average number of shares of Class A
Common Stock outstanding for diluted net
loss per share 20,267,781 10,345,453
Net loss per share - Basic $ (0.20) $ (1.98)
Net loss per share - Diluted $ (0.20) $ (1.98)
The following potentially dilutive securities are not included in the
2006 and 2005 calculation of weighted average number of shares of Class A Common
Stock outstanding for diluted net loss per share, because the effect would be
anti-dilutive due to the net losses for the year:
F-22
a) 6,838,976 and 2,510,347 options, warrants and restricted stock units were
outstanding at December 31, 2006 and 2005, respectively. (See Note 3.
Acquisitions and Private Placement for information on warrants issued to
Phoenix.)
b) $50,000 and $1,300,000 of notes were convertible into our Class A Common
Stock at December 31, 2006 and 2005, respectively. Of the total, $50,000
was convertible into 430,000 and 244,927 shares of our Class A Common Stock
at December 31, 2006 and 2005, respectively, based on a price equal to the
lower of $2.50 or 75% of the average closing price for the 20 trading days
immediately prior to the conversion date. The remaining $1,250,000 was
convertible into 1,365,546 shares at December 31, 2005.
c) 0 and 10,448,470 shares of our Class B Common Stock were outstanding at
December 31, 2006 and 2005, respectively. On December 1, 2006, we purchased
all 1,722,983 shares of our Class B Common Stock owned by Brantley Capital
and retired them in accordance with the terms of our Third Amended and
Restated Certificate of Incorporation. Also on December 1, 2006, in
connection with the Private Placement, all of the other holders of our
Class B Common Stock converted those shares into 67,742,350 shares of our
Class A Common Stock. (See Note 3. Acquisitions and Private Placement.) The
Class B Common Stock was convertible into 4.700108783239 shares of our
Class A Common Stock at December 31, 2005
d) 0 and 1,437,572 shares of our Class C Common Stock were outstanding at
December 31, 2006 and 2005, respectively. On December 1, 2006, in
connection with the Private Placement, all of the holders of our Class C
Common Stock converted those shares into 20,019,619 shares of our Class A
Common Stock. (See Note 3. Acquisitions and Private Placement.) The Class C
Common Stock was convertible into 9.705882352941 shares of our Class A
Common Stock at December 31, 2005.
e) 24,658,955 and 0 shares of our Class D Common Stock were outstanding at
December 31, 2006 and 2005, respectively. On December 1, 2006, pursuant to
the Stock Purchase Agreement, Phoenix and Brantley IV purchased an
aggregate of 24,658,955 shares of our Class D Common Stock for a total
purchase price of $4,650,000. (See Note 3. Acquisitions and Private
Placement.)
F-23
Note 5. Long-Term Debt
Long-term debt is as follows:
12/31/2006 12/31/2005
-------------- ---------------
$4,500,000 senior note payable to a financial institution,
bearing interest at the Prime Rate (8.25% at December 31,
2006) plus 1.75%, interest payable monthly, principal
payments monthly based on schedule, matures December 1,
2010 $ 4,473,750 $ --
$2,000,000 senior revolving line of credit with a financial
institution, bearing interest at the Prime Rate (8.25% at
December 31, 2006) plus 1.75%, interest payable monthly,
matures December 1, 2010 1,182,400 --
$10,000,000 senior acquisition line of credit with a
financial institution, bearing interest at the Prime Rate
(8.25% at December 31, 2006) plus 1.75%, interest payable
monthly, principal payments monthly based on schedule,
matures December 1, 2010 -- --
Promissory notes payable to sellers of MBS, bearing interest
at 9%, interest payable monthly or on demand, matures
December 15, 2008 1,714,336 1,000,000
$75,000 unsecured subordinated promissory note payable to
the stockholders of OLA, bearing interest at 7%, interest
payable monthly in arrears, principal payable February 1,
2007 75,000 --
$3,350,000 senior subordinated promissory note payable to a
related party, bearing interest at 12% plus 2% PIK,
interest payable quarterly, principal due on December 1,
2011 3,077,267 --
Term loan payable to a financial institution, non-interest
bearing, matures October 1, 2013 2,735,000 3,108,677
Convertible notes, bearing interest at 18%, interest payable
monthly, convertible on demand 50,000 50,000
Insurance financing note payable, bearing interest at 5.25%,
interest payable monthly 136,968 --
Working capital loan due to sellers of MBS, non-interest
bearing, due on demand -- 199,697
Revolving line of credit with a financial institution,
bearing interest at 6.5%, interest payable monthly or on
demand -- 778,006
$2,300,000 revolving line of credit, bearing interest at
prime (8.25% at September 30, 2006) plus 6%, interest
payable monthly, matured December 14, 2006 -- 1,703,277
Note payable due to a related party, bearing interest at 6%,
interest payable monthly, matured November 24, 2005 -- 13,611
Convertible promissory notes due to a related party, bearing
interest at 9%, matured November 30, 2006 -- 1,250,000
-------------- ---------------
Total $ 13,444,721 $ 8,103,268
Less: current portion (2,069,368) (4,231,675)
-------------- ---------------
Total long-term debt $ 11,375,353 $ 3,871,593
============== ===============
F-24
Future aggregate annual maturities of long-term debt are as follows:
Fiscal year ending Amount
-----------------
2007 $ 2,069,368
2008 1,981,836
2009 765,000
2010 3,123,750
2011 and beyond 5,504,767
-----------------
Total long-term debt 13,444,721
Less: current portion of long-term debt (2,069,368)
-----------------
Long-term debt, net of current portion $ 11,375,353
=================
Note 6. Capital Lease Obligations
We have entered into several leases for computer software and hardware.
These leases are accounted for as capital leases. Future annual minimum
lease payments are as follows:
Fiscal year ending Amount
------------------
2007 $ 126,687
2008 120,281
2009 39,101
2010 9,056
2011 6,950
------------------
Total future minimum lease payments 302,075
Less: Amounts representing interest (44,037)
------------------
Present value of future minimum lease payments 258,038
Less: Current portion of capital lease
obligations (103,004)
------------------
Capital lease obligations, net of current portion $ 155,034
==================
Note 7. Operating Leases
We lease our treatment facilities and corporate office space under
operating leases that expire in various years through 2012. The leases provide
for annual operating expense increases. Annual rental payments related to our
facility leases totaled $1,715,278 and $1,998,300 for the years ended December
31, 2006 and 2005, respectively. Rental payments related to our principal office
in Roswell, Georgia were offset by approximately $63,000 in rent payments
received for the sublease between eClinicalWeb and us as a result of the
IntegriMED Agreement in June 2005.
Future annual base rental payments under these lease agreements are as
follows:
Fiscal year ending Amount
-----------------------
2007 $ 1,593,796
2008 1,296,515
2009 1,204,722
2010 901,094
2011 464,944
Thereafter 182,176
-----------------------
Total future annual base rental payments(1) $ 5,643,247
=======================
(1) This total includes base rental payments in the amount of $63,292 and
$131,155 related to Dayton ICS and PSNW, respectively, which are included
in discontinued operations as of December 31, 2006. (See Note 12.
Discontinued Operations).
F-25
Note 8. Related Party Transactions
We entered into the Stockholders Agreement with Brantley III, Brantley
IV and Brantley Capital, pursuant to which each of Brantley III, Brantley IV and
Brantley Capital (i) is entitled to nominate one person to become a member of
our board of directors and (ii) has agreed to cast all votes necessary to elect
as members of our board of directors the three people who have been nominated by
Brantley III, Brantley IV and Brantley Capital. In accordance with the
Stockholders Agreement, Paul Cascio, Michael Finn and David Crane were nominated
to be elected as directors at the last annual meeting.
Paul H. Cascio and Michael J. Finn, each of whom is one of our
directors, are general partners of the general partner of Brantley III and
Brantley IV and limited partners of those funds. The advisor to Brantley III is
Brantley Venture Management III, L.P. and the advisor to Brantley IV is Brantley
Management IV, L.P.
Brantley IV and Phoenix Life Insurance Company own shares of our Class
D Common Stock and Brantley III owns shares of our Class A Common Stock. By
virtue of their affiliations with Brantley III and Brantley IV, Mr. Cascio and
Mr. Finn may be deemed to have a pecuniary interest in the shares of Class D
Common Stock held by Brantley IV and the shares of Class A Common Stock held by
Brantley III.
On December 1, 2006, we completed the Private Placement consisting of
our issuance of (i) 15,909,003 shares of our newly created Class D Common Stock
to Phoenix for a purchase price of $3,000,000 (ii) 8,749,952 shares of Class D
Common Stock to Brantley IV for an purchase price of $1,650,000 and (iii) senior
unsecured subordinated promissory notes due 2011 in the original principal
amount of $3,350,000, bearing interest at an aggregate rate of 14% per annum,
together with warrants to purchase 1,421,629 shares of our Class A Common Stock,
to Phoenix for an aggregate purchase price of $3,350,000. As of December 31,
2006, Brantley IV and its affiliates owned 64,759,438 shares of our Class A
Common Stock, 8,749,952 shares of our Class D Common Stock, and warrants to
purchase 20,455 shares of our Class A Common Stock, all of which in the
aggregate constituted 53.7% of our outstanding equity on an as-converted,
fully-diluted basis. As of December 31, 2006, Phoenix owned 15,909,003 shares of
our Class D Common Stock and warrants to purchase 1,421,629 shares of our Class
A Common Stock which, in the aggregate, constituted 12.7% of our outstanding
equity on an as-converted, fully-diluted basis.
Brantley IV and Phoenix also received the right to register pursuant to
a Registration Rights Agreement, dated as of December 1, 2006, by and among
Orion, Brantley IV and Phoenix (the "Registration Rights Agreement") for all of
the shares of Class A Common Stock issuable upon conversion of their shares of
Class D Common Stock. Initially, this will be approximately 24,658,955 shares.
Brantley IV and Phoenix and their permitted transferees will also have
registration rights for any additional shares of Class A Common Stock (including
Class A Common Stock into which other securities of Orion are convertible)
issued to them. If the registration rights are exercised and the underlying
shares are offered or sold, our stock price could decline.
Pursuant to the Registration Rights Agreement, Brantley IV and Phoenix
and/or their permitted transferees, holding in the aggregate at least 50 percent
of the registrable shares have the right to request that we effect the
registration on Form S-1 of shares of Class A Common Stock having an anticipated
net aggregate offering price of at least $10,000,000. We are not required to
effect any such registration within six months after the effective date of any
such registration statement. Additionally, at any time we are eligible to file a
registration statement on Form S-3, Brantley IV, Phoenix and/or their permitted
transferees, may request that we effect the registration on Form S-3 of
registrable shares having an anticipated net aggregate offering price of at
least $1,000,000.
At any time we otherwise propose to register any of its equity
securities under the Securities Act, Brantley IV and Phoenix and/or their
permitted transferees may request the registration of registrable shares.
However, we are not obligated to effect any registration of shares incidental to
the registration of our securities in connection with a Form S-8 or a Form S-4
relating to the acquisition or merger, by us or our subsidiaries, of or with any
other business.
As a condition to the Private Placement, on December 1, 2006, we
refinanced our existing loan facility with CIT into a four year $16,500,000
senior secured credit facility with Wells Fargo consisting of a $2,000,000
revolving loan commitment, a $4,500,000 term loan and a $10,000,000 acquisition
facility commitment. Upon repayment of the CIT loan facility, two of our
stockholders, Brantley IV and Brantley Capital were released from guarantees
that they had provided on our behalf in connection with the loan facility.
F-26
Also on December 1, 2006 in connection with the consummation of the
Private Placement and the execution of the Credit Agreement, the following
actions were taken:
o All of our remaining holders of Class B Common Stock and Class C
Common Stock converted their shares into shares of our Class A Common
Stock;
o We purchased and retired all 1,722,983 shares of our Class B Common
Stock owned by Brantley Capital for an aggregate purchase price of
$482,435;
o We amended our certificate of incorporation to create the Class D
Common Stock and eliminate the Class B Common Stock and Class C Common
Stock;
o Brantley IV converted the entire unpaid principal balance, and accrued
but unpaid interest, of two convertible subordinated promissory notes
in the original aggregate amount of $1,250,000 into shares of our
Class A Common Stock;
o We extended the maturity date and increased the interest rate on
the DCPS/MBS Notes totaling in the aggregate $1,714,336 issued to
certain of the former equity holders of the businesses we acquired in
2004 as part of the DCPS/MBS Merger, including two of our executive
officers, Dennis Cain, CEO of MBS, and Tommy Smith, President and COO
of MBS; and
o We restructured certain unsecured notes issued to DVI and serviced by
USBPS to reduce the outstanding balance from $3,750,000 to $2,750,000.
On June 17, 2005, we granted an aggregate of 972,000 stock options to
certain of our employees, officers, directors and former directors under our
2004 Incentive Plan, as amended, which included among the recipients: (1)
Terrence L. Bauer, our director, President and Chief Executive Officer and a
stockholder of ours; (2) Stephen H. Murdock, our Chief Financial Officer and
Corporate Secretary, (3) Dennis M. Cain, CEO of MBS and a stockholder of ours,
(4) Tom M. Smith, President and COO of MBS and a stockholder of ours, (5) Joseph
M. Valley, Jr., our current director and a former director of IPS and (6) David
Crane, our current director.
On May 12, 2006, we granted an aggregate of 102,000 stock options to
certain of our employees and directors under ou 2004 Incentive Plan, as amended,
which included among the recipients: (1) Joseph M. Valley, Jr., our current
director and a former director of IPS and (2) David Crane, our current director.
On December 4, 2006, we granted an aggregate of 2.5 million stock
options to certain of our employees, officers and directors under our 2004
Incentive Plan, as amended, which included among the recipients: (1) Terrence L.
Bauer, our director, President and Chief Executive Officer and a stockholder of
ours; (2) Stephen H. Murdock, our Chief Financial Officer and Corporate
Secretary, (3) Joseph M. Valley, Jr., our current director and a former director
of IPS and (4) David Crane, our current director.
Effective December 15, 2004, we entered into an employment agreement
with Keith G. LeBlanc, for the position of President of Orion. On November 8,
2005, we entered into a Separation Agreement and General Release (the
"Separation Agreement") with Mr. LeBlanc terminating his employment with us
effective as of October 31, 2005. Pursuant to the terms of the Separation
Agreement, Mr. LeBlanc resigned his positions as President and a director of
Orion and received a lump sum payment of $125,000. Mr. LeBlanc also received a
lump sum payment, less applicable withholding, of $9,313 for accrued but unused
paid time off, which represented 80.72 hours as of October 31, 2005. Mr. LeBlanc
was retained as a consultant to Orion, on an independent contractor basis, to
assist with certain transition matters in exchange for a payment of $215,000 to
be paid in equal incremental payments through October 31, 2006. In addition, Mr.
LeBlanc was entitled to receive an aggregate lump sum payment totaling $125,000
at the time of the closing of the sales by us of its Memorial Village and San
Jacinto ambulatory surgery centers, assuming the terms of the sales were
substantially the same as those set forth in the letters of intent for those
sales. In lieu of this lump sum payment, Mr. LeBlanc began receiving payments
totaling $125,000 in equal incremental payments commencing on November 1, 2006
and continuing through October 31, 2007. The vesting of the restricted stock
units granted to Mr. LeBlanc on August 31, 2005 was accelerated to vest in equal
parts on each of January 1, 2006 and January 1, 2007. On November 1, 2006, Mr.
LeBlanc converted 125,000 restricted stock units, which represented the vested
portion at that time, into shares of our Class A Common Stock. On January 5,
2007, Mr. LeBlanc converted the remaining 125,000 restricted stock units into
shares of our Class A Common Stock. Likewise, warrants previously issued to Mr.
LeBlanc were modified to vest in full and be exercisable until November 2013 at
a price of $0.34 per share. In exchange for these benefits, the Separation
Agreement included a general release of all claims by Mr. LeBlanc against us
arising from his employment and a restriction on his ability to engage in
certain activities competitive with us prior to November 1, 2007.
Terrence L. Bauer entered into an employment agreement with Orion and
became the Chief Executive Officer of Orion, reporting to its board of directors
as of December 15, 2004. He has also served on our board of directors since
December 15, 2004. In November 2005, Mr. Bauer was named President of Orion. As
of December 31, 2006, Mr. Bauer owned 13,461 shares of our Class A Common Stock,
options to purchase 1,700,000 shares of our Class A Common Stock, and 300,000
restricted stock units.
F-27
Stephen H. Murdock, the former Chief Financial Officer of IPS, entered
into an employment agreement to become Chief Financial Officer of Orion
effective December 15, 2004. As of December 31, 2006, Mr. Murdock owned options
purchase 1,000,000 shares of our Class A Common Stock and 200,000 restricted
stock units.
Dennis Cain entered into an employment agreement to become the Chief
Executive Officer of MBS as of December 15, 2004. Pursuant to the DCPS/MBS
Merger Agreement, he may have the authority to appoint a member to any advisory
board established by our board of directors. As of December 31, 2006, Mr. Cain
and his wife together owned, directly and indirectly, 10,503,944 shares of our
Class A Common Stock and options to purchase 150,000 shares of our Class A
Common Stock. On an as-converted, fully-diluted basis, Mr. Cain and his wife
together owned, directly and indirectly, approximately 7.8% of our outstanding
equity at December 31, 2006.
Tom M. Smith entered into an employment agreement to become the
President and Chief Operating Officer of MBS as of December 15, 2004. Pursuant
to the DCPS/MBS Merger Agreement, he may have the authority to appoint a member
to any advisory board established by our board of directors. As of December 31,
2006, Mr. Smith owned 8,483,363 shares of our Class A Common Stock and options
to purchase 150,000 shares of our Class A Common Stock, the aggregate of which,
on an as-converted, fully-diluted basis, constituted approximately 6.3% of our
outstanding equity.
We have entered into agreements to employ Messrs. Bauer, Murdock, Cain
and Smith in the capacities described above. The initial term of each
employment agreement is five years. The employment agreements provide that we
may pay bonuses to the executives upon the attainment of objectives determined
by the board of directors. By entering into these employment agreements, the
executives agree not to disclose confidential information or engage in an
activity that interferes with us until the second anniversary of (i) the end of
the executive's employment agreement or (ii) termination of the executive's
employment ("Non-Competition Period"). If an executive's employment is
terminated without cause, the agreements provide for continuation of the
executive's base salary until the expiration of the Non-Competition Period and a
minimum bonus of 50% of the average of the bonus payments made to the executive
in the two years immediately preceding the termination. All options would also
vest at that time.
Marvin I. Retsky, M.D. entered into an employment agreement to become
the President of Rand as of December 1, 2006. As of December 31, 2006, Dr.
Retsky owned 3,314,917 shares of our Class A Common Stock, which, on an
as-converted, fully-diluted basis, constituted approximately 2.4% of our
outstanding equity. The initial term of Dr. Retsky's employment agreement is
three years. The employment agreement provides that we may pay a bonus to Dr.
Retsky upon the attainment of objectives determined by the board of directors.
By entering into the employment agreement, Dr. Retsky agrees not to disclose
confidential information on engage in an activity that interferes with us during
the Non-Competition Period. If Dr. Retsky's employment is terminated without
cause, the agreement provides for continuation of his base salary until the
expiration of the Non-Competition Period and the payment of any accrued bonus
through the date of termination. All options would also vest at that time.
As of December 31, 2006, our combined base annual salary commitments
related to the employment agreements for our named executive officers totaled
$2,715,000 through 2009.
Note 9. Income Taxes
Our income tax provision consisted of the following:
Current: 2006 2005
---- ----
Federal -- --
State -- --
Deferred:
Federal -- --
State -- --
------------------- ---------------------
Total income tax provision -- --
=================== =====================
Significant components of net deferred tax assets and liabilities are as
follows:
Years Ended December 31,
2006 2005
---- ----
Deferred tax liabilities:
Intangibles $ (3,134,153) $ (2,839,193)
Accrual to cash conversion -- --
------------------- ---------------------
Total deferred tax liabilities (3,134,153) (2,839,193)
Deferred tax assets:
Net operating loss - Federal and State 11,314,464 10,842,488
Allowance for bad debts 369,076 344,869
Stock options 91,849 --
Depreciation 150,824 22,400
Other 197,328 8,174
------------------- ---------------------
Total deferred tax assets 12,123,541 11,217,931
Total net deferred tax assets 8,989,388 8,378,738
Valuation allowance (8,989,388) (8,378,738)
------------------- ---------------------
Net deferred tax assets $-- $ --
=================== =====================
Based on uncertainties associated with the future realization of the deferred
tax assets, we established a valuation allowance for the entire amount of net
deferred tax assets of $8,989,388 and $8,378,738 as of December 31, 2006 and
2005, respectively. The 2006 increase in valuation allowance is due to the
increase in deferred tax assets net of the tax effect of the impairment of
intangibles.
A reconciliation from the statutory federal income tax rate to the income tax
expense from continuing operations is as follows for the years ended December
31, 2006 and 2005:
2006 2005
---- ----
Federal benefit at statutory rate $ (1,402,159) $ (6,791,387)
State income tax benefit, net of
Federal benefit at statutory rate (211,242) (938,502)
Nondeductible write-offs and amortization
of intangible assets 1,169,462 1,199,120
Other (166,710) 21,203
Change in valuation allowance 610,649 6,509,566
------------------- ---------------------
Tax expense (benefit) $-- $--
=================== =====================
At December 31, 2006, we had net operating loss carryforwards of approximately
$29,577,000 (federal), which will begin to expire in the year 2011 and
$29,580,000 (state), which began to expire in the year 2006. As a result of the
acquisitions and restructurings, we have undergone an ownership change and the
utilization of the tax net operating losses are subject to potential limitations
pursuant to Internal Revenue Code Section 382. These limitations could reduce
the amount of the net operating loss carryforwards utilized in the future.
Furthermore, the ultimate utilization of the carryforwards is dependent upon the
timing and extent of our future profitability. The annual limitations combined
with the expiration date of the carryforwards may prevent the utilization of the
carryforwards.
Note 10. Segment Reporting
The following table summarizes key financial information, by reportable
segment, as of and for the years ended December 31, 2006 and 2005, respectively:
For the Twelve Months Ended December 31, 2006
---------------------------------------------------
RCM PM Total
--------------- --------------- -----------------
Net operating revenues $10,305,611 $12,693,325 $22,998,936
Income from continuing operations 596,246 828,135 1,424,381
Depreciation and amortization 1,215,730 443,327 1,659,057
Total assets 21,801,248 4,678,630 26,479,878
For the Twelve Months Ended December 31, 2005
---------------------------------------------------
RCM PM Total
--------------- --------------- -----------------
Net operating revenues $9,979,232 $12,469,828 $22,449,060
Income from continuing operations 548,571 891,225 1,439,796
Depreciation and amortization 1,148,173 440,036 1,588,209
Total assets 10,532,449 5,117,745 15,650,194
F-28
The following schedules provide a reconciliation of the key financial
information by reportable segment to the consolidated totals found in our
consolidated balance sheets and statements of operations as of and for the years
ended December 31, 2006 and 2005, respectively:
Twelve Months Ended
December 31,
2006 2005
--------------- ---------------
Net operating revenues:
Total net operating revenues for
reportable segments $ 22,998,936 $ 22,449,060
Corporate revenue 402,488 395,691
--------------- ---------------
Total consolidated net operating
revenues $ 23,401,424 $ 22,844,751
=============== ===============
Income (loss) from continuing operations:
Total income from continuing operations
for reportable segments $ 1,424,382 $ 1,439,796
Extraordinary gain 1,006,164 -
Corporate overhead (4,494,303) (7,320,926)
--------------- ---------------
Total consolidated income (loss) from
continuing operations $ (2,063,758) $ (5,881,130)
=============== ===============
Depreciation and amortization:
Total depreciation and amortization for
reportable segments $ 1,659,057 $ 1,588,209
Corporate depreciation and amortization 73,001 1,206,802
--------------- ---------------
Total consolidated depreciation and
amortization $ 1,732,058 $ 2,795,011
=============== ===============
Total assets:
Total assets for reportable segments $ 26,479,878 $ 15,650,194
Corporate assets 2,766,600 1,870,265
Assets held for sale or related to
discontinued operations (1) 936,719 4,597,311
--------------- ---------------
Total consolidated assets $ 30,183,197 $ 22,117,770
=============== ===============
Note 11. Discontinued Operations
Bellaire SurgiCare. As of the closing of the 2004 Mergers, our
management expected the case volumes at Bellaire SurgiCare to improve in 2005.
However, by the end of February 2005, we determined that the expected case
volume increases were not going to be realized. On March 1, 2005, we closed
Bellaire SurgiCare and consolidated its operations with the operations of
Memorial Village. We tested the identifiable intangible assets and goodwill
related to the surgery center business using the present value of cash flows
method. As a result of the decision to close Bellaire SurgiCare and the
resulting impairment of the joint venture interest and management contracts
related to the surgery centers, we recorded a charge for impairment of
intangible assets of $4,090,555 for the year ended December 31, 2004. We also
recorded a loss on disposal of this discontinued component (in addition to the
charge for impairment of intangible assets) of $163,049 for the quarter ended
March 31, 2005. There were no operations for this component after March 31,
2005.
CARDC. On April 1, 2005, IPS entered into the CARDC Settlement with Dr.
Chipps and CARDC to settle disputes as to the existence and enforceability of
certain contractual obligations. As part of the CARDC Settlement, Dr. Chipps,
CARDC, and IPS agreed that CARDC would purchase the assets owned by IPS and used
in connection with CARDC, in exchange for termination of the MSA between IPS and
CARDC. Additionally, among other provisions, after April 1, 2005, Dr. Chipps,
CARDC and IPS have been released from any further obligation to each other
arising from any previous agreement. As a result of the CARDC dispute, we
recorded a charge for impairment of intangible assets related to CARDC of
$704,927 for the year ended December 31, 2004. We also recorded a gain on
disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $506,625 for the quarter ended March 31,
2005. For the quarter ended June 30, 2005, we reduced the gain on disposal of
this discontinued component by $238,333 as the result of post-settlement
adjustments related to the reconciliation of balance sheet accounts. There were
no operations for this component in our financial statements after March 31,
2005.
F-29
IntegriMED. On June 7, 2005, InPhySys, Inc. executed the IntegriMED
Agreement with eClinicalWeb to sell substantially all of the assets of
IntegriMED. As a result of this transaction, we recorded a loss on disposal of
this discontinued component of $47,101 for the quarter ended June 30, 2005.
There were no operations for this component in our financial statements after
June 30, 2005.
TASC and TOM. On June 13, 2005, we announced that we had accepted an
offer to purchase our interests in TASC and TOM in Dover, Ohio. On September 30,
2005, we executed purchase agreements to sell our 51% ownership interest in TASC
and our 41% ownership interest in TOM to Union. Additionally, as part of the
transactions, TASC, as the sole member of TASC Anesthesia, executed an Asset
Purchase Agreement to sell certain assets of TASC Anesthesia to Union. The
limited partners of TASC and TOM also sold a certain number of their units to
Union such that at the closing of these transactions, Union owned 70% of the
ownership interests in TASC and TOM. We no longer have an ownership interest in
TASC, TOM or TASC Anesthesia. As a result of these transactions, as well as the
uncertainty of future cash flows related to our surgery center business, we
determined that the joint venture interests associated with TASC and TOM were
impaired and recorded a charge for impairment of intangible assets related to
TASC and TOM of $2,122,445 for the three months ended June 30, 2005. Also as a
result of these transactions, we recorded a gain on disposal of this
discontinued component (in addition to the charge for impairment of intangible
assets) of $1,357,712 for the quarter ended December 31, 2005. We allocated the
goodwill recorded as part of the IPS Merger to each of the surgery center
reporting units and recorded a loss on the write-down of goodwill related to
TASC and TOM totaling $789,173 for the quarter ended December 31, 2005, which
reduced the gain on disposal. In early 2006, we were notified by Union that it
was exercising its option to terminate the management services agreements of TOM
and TASC as of March 12, 2006 and April 3, 2006, respectively. As a result, we
recorded a charge for impairment of intangible assets of $1,021,457 for the
three months ended December 31, 2005 related to the TASC and TOM management
services agreements. There were no operations for this component in the
Company's financial statements after September 30, 2005.
Sutter. On October 31, 2005, IPS executed the Sutter Settlement with
Dr. Sutter to settle disputes that had arisen between IPS and Dr. Sutter and to
avoid the risk and expense of litigation. As part of the Sutter Settlement, Dr.
Sutter and IPS agreed that Dr. Sutter would purchase the assets owned by IPS and
used in connection with Dr. Sutter's practice, in exchange for termination of
the related MSA. Additionally, among other provisions, after October 31, 2005,
Dr. Sutter and IPS have been released from any further obligation to each other
arising from any previous agreement. As a result of this transaction, we
recorded a loss on disposal of this discontinued component (in addition to the
charge for impairment of intangible assets of $38,440 recorded in the fourth
quarter of 2005) of $279 for the quarter ended December 31, 2005. There were no
operations for this component in the Company's financial statements after
October 31, 2005.
Memorial Village. As a result of the uncertainty of future cash flows
related to our surgery center business as well as the transactions related to
TASC and TOM, we determined that the joint venture interest associated with
Memorial Village was impaired and recorded a charge for impairment of intangible
assets related to Memorial Village of $3,229,462 for the three months ended June
30, 2005. In November 2005, we decided that, as a result of ongoing losses at
Memorial Village, it would need to either find a buyer for our equity interests
in Memorial Village or close the facility. In preparation for this pending
transaction, we tested the identifiable intangible assets and goodwill related
to the surgery center business using the present value of cash flows method. As
a result of the decision to sell or close Memorial Village, as well as the
uncertainty of cash flows related to our surgery center business, we recorded an
additional charge for impairment of intangible assets of $1,348,085 for the
three months ended September 30, 2005. On February 8, 2006, Memorial Village
executed an Asset Purchase Agreement (the "Memorial Agreement") for the sale of
substantially all of its assets to First Surgical. Memorial Village was
approximately 49% owned by Town & Country SurgiCare, Inc., a wholly owned
subsidiary of Orion. The Memorial Agreement was deemed to be effective as of
January 31, 2006. As a result of this transaction, we recorded a gain on the
disposal of this discontinued component (in addition to the charge for
impairment of intangible assets) of $574,321 for the quarter ended March 31,
2006. We allocated the goodwill recorded as part of the IPS Merger to each of
the surgery center reporting units and recorded a loss on the write-down of
goodwill related to Memorial Village totaling $2,005,383 for the quarter ended
December 31, 2005. There were no operations for this component in our financial
statements after March 31, 2006.
San Jacinto. On March 1, 2006, San Jacinto executed an Asset Purchase
Agreement for the sale of substantially all of its assets to Methodist. San
Jacinto was approximately 10% owned by Baytown SurgiCare, Inc., a wholly owned
subsidiary of Orion, and was not consolidated in our financial statements. As a
result of this transaction, we recorded a gain on disposal of this discontinued
operation of $94,066 for the quarter ended March 31, 2006. As a result of the
uncertainty of future cash flows related to the surgery center business, and in
conjunction with the transactions related to TASC and TOM, we determined that
the joint venture interest associated with San Jacinto was impaired and recorded
a charge for impairment of intangible assets related to San Jacinto of $734,522
for the three months ended June 30, 2005. We also recorded an additional
$2,113,262 charge for impairment of intangible assets for the three months ended
September 30, 2005 related to the management contracts with San Jacinto. We
allocated the goodwill recorded as part of the IPS Merger to each of the surgery
center reporting units and recorded a loss on the write-down of goodwill related
to San Jacinto totaling $694,499 for the quarter ended December 31, 2005. There
were no operations for this component in our financial statements after March
31, 2006.
F-30
Dayton ICS. IPS is party to the Dayton MSA with Dayton ICS. The sole
remaining shareholder of Dayton ICS has notified both IPS and the hospitals at
which Dayton ICS has contracts that he intends to dissolve Dayton ICS, cease
practicing at the hospitals and cease utilizing the services of IPS. IPS
believes that the unilateral decision to dissolve Dayton ICS and terminate the
business of Dayton ICS breaches the Dayton MSA and violates duties owed by
Dayton ICS to IPS as a creditor of Dayton ICS. As a result of the pending
litigation and the uncertainty of the outcome, the operations of DICS are now
reflected in our consolidated statements of operations as `income from
operations of discontinued components' for the twelve months ended December 31,
2006 and 2005, respectively. Additionally, we recorded a charge for impairment
of intangible assets of $1,845,669 for Dayton ICS for the quarter ended December
31, 2006.
PSNW. IPS is party to the Illinois MSA with PSNW. IPS and PSNW were in
arbitration regarding claims relating to the Illinois MSA. In connection
therewith, on February 9, 2007, IPS and PSNW entered into the PSNW Settlement to
settle disputes that had arisen between IPS and PSNW and to avoid the risk and
expense of further litigation. As part of the PSNW Settlement, PSNW and IPS
agreed that PSNW would purchase the assets owned by IPS and used in connection
with PSNW's practice, in exchange for a negotiated cash consideration and
termination of the Illinois MSA. Additionally, among other provisions, after May
31, 2007, which is the anticipated closing date of the transaction contemplated
by the PSNW Settlement, PSNW and IPS will be released from any further
obligation to each other from any previous agreement. As a result of the PSNW
Settlement, the operations of PSNW are now reflected in our consolidated
statements of operations as `income from operations of discontinued components'
for the twelve months ended December 31, 2006 and 2005, respectively, and the
assets and liabilities of PSNW are reflected as `assets held for sale' and
`liabilities held for sale' on our consolidated balance sheet at December 31,
2006. Additionally, we recorded a charge for impairment of intangible assets of
$1,249,080 for PSNW for the quarter ended December 31, 2006.
Orion. Prior to the divestiture of our ambulatory surgery center
business, we recorded management fee revenue, which was eliminated in the
consolidation of our financial statements, for Bellaire SurgiCare, TASC and TOM
and Memorial Village. The management fee revenue for San Jacinto was not
eliminated in consolidation. The management fee revenue associated with the
discontinued operations in the surgery center business totaled $61,039 for the
year ended December 31, 2006. For the twelve months ended December 31, 2005, we
generated management fee revenue of $407,595 and net minority interest losses
totaling $50,529. For the quarters ended June 30, 2005 and December 31, 2005, we
recorded a charge for impairment of intangible assets of $276,420 and $142,377,
respectively, related to trained work force and non-compete agreements affected
by the surgery center operations we discontinued in 2005 and early 2006.
The following table contains selected financial information regarding
our discontinued operations for the years ended December 31, 2006 and 2005:
2006 2005
-------------- ---------------
Net operating revenues from discontinued operations $ 6,359,176 $ 12,115,531
Total expenses from discontinued operations 5,997,274 13,992,749
-------------- ---------------
Income (loss) from discontinued operations 361,902 (1,877,218)
Loss on disposal of discontinued operations (2,426,362) (12,681,153)
-------------- ---------------
Net loss from discontinued operations $ (2,064,460) $ (14,558,371)
============== ===============
Note 12. Warrants and Options
Transactions with Other Than Employees
--------------------------------------
We account for equity instruments issued to non-employees based on the
fair value of the equity instruments issued.
In 2006, we issued warrants as follows:
Number of Exercise Expiration In connection
Shares Price Date with
---------------- ----------- --------------------- ------------------
1,421,629 $0.01 December 1, 2011 Private Placement
In 2005, we did not issue any warrants.
F-31
The following table contains information regarding warrants for the years ended
December 31, 2006 and 2005, respectively:
------------------------------- --------------------------------
2006 2005
------------------------------- --------------------------------
Warrants Price per Share Warrants Price per Share
-------------- --------------- ------------- -----------------
Outstanding on January 1 879,732 $0.01 - 20.00 884,732 $ 0.01 - 20.00
Issued 1,421,629 $ 0.01 --
Exercised -- --
Cancelled -- (5,000) $ 10.00
-------------- -------------
Outstanding on December 31 2,301,361 $0.01 - 20.00 879,732 $ 0.01 - 20.00
============== =============
Weighted average exercise price $ 1.45 $ 3.79
Weighted average fair value of
warrants granted during the
year $ 277,356 --
Weighted average remaining life
of warrants at December 31 4.69 years 4.32 years
The fair value of the warrants at date of issuance was estimated using
the Black-Scholes Model with the following weighted average assumptions:
2006 2005
-------------- --------------
Risk-free interest rate 3.76% N/A
Expected life 5.0 years N/A
Expected dividends None N/A
Expected volatility 265% N/A
Transactions with Employees and Directors
-----------------------------------------
Prior to January 1, 2006, we accounted for equity grants under APB 25
and related interpretations, and applied SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," for disclosure purposes
only. Under APB 25, stock-based compensation cost related to stock options was
not recognized in net income since the options underlying those plans had
exercise prices greater than or equal to the market value of the underlying
stock on the date of the grant.
In October 2001, we established a stock option plan, which authorized
140,000 shares of common stock to be made available through an incentive program
for employees. The options are granted at an exercise price equal to the fair
market value of the common stock at the date of grant. The options have a
ten-year term. There are no options outstanding under this plan.
On September 7 2004, our board of directors adopted the 2004 Incentive
Plan, which initially provided for the grant of stock incentive awards for up to
2.2 million shares of our Class A Common Stock. On June 1, 2005, we executed
Amendment No. 1 to our 2004 Incentive Plan to include restricted stock units as
permissible awards to be issued under the plan. On December 1, 2006, Amendment
No. 2 to our 2004 Incentive Plan was effective. This amendment provides for (i)
an increase in the number of shares of our Class A Common Stock available for
grants under the 2004 Incentive Plan from 2,200,000 shares to 13,450,782 (an
increase of 11,250,582 shares), and (ii) an increase of the maximum number of
shares that can be granted to a participant in any calendar year from 1,000,000
to 3,000,000 shares. This amendment was approved by our stockholders at the
special meeting of the stockholders held on November 27, 2006 but was not
effective until the closing of the transactions contemplated under the Private
Placement Agreements, which are described more fully in Note 3. Acquisitions and
Private Placement, and the filing of our Third Amended and Restated Certificate
of Incorporation which occurred on December 1, 2006.
On June 17, 2005, we granted 1,357,000 stock options to certain of our
employees, officers, directors and former directors under our 2004 Incentive
Plan, as amended. In the third quarter of 2005, stock options totaling 360,000
to certain employees were cancelled as a result of staff reductions related to
the consolidation of corporate functions duplicated at our Houston, Texas and
Roswell, Georgia facilities. On May 12, 2006, we granted 102,000 stock options
to certain of our employees and directors under our 2004 Incentive Plan, as
amended. On December 4, 2006, we granted 2,500,000 stock options to certain of
our employees, officers and directors under our 2004 Incentive Plan, as amended.
F-32
On August 31, 2005, we granted 650,000 restricted stock units to
certain of our officers under our 2004 Incentive Plan, as amended.
The purpose of the 2004 Incentive Plan is to advance our interests by
providing for the grant to participants of stock-based and other incentive
awards
The following table contains information regarding options and
restricted stock units for the years ended December 31, 2006 and 2005,
respectively:
------------------------------- ---------------------------------
2006 2005
------------------------------- ---------------------------------
Options and Options and
Restricted Restricted
Stock Units Price per Share Stock Units Price per Share
-------------- --------------- ---------------- ---------------
Outstanding on January 1 1,625,615 $0.84 - 20.05 5,109 $ 20.50
Issued 2,602,000 $0.18 - $0.47 2,007,000 $0.84 - 20.50
Exercised (125,000) -- --
Forfeited (18,615) $0.84 - 20.50 (386,494) $0.84 - 20.50
-------------- ----------------
Outstanding on December 31 4,084,000 $0.18 - 0.84 1,625,615 $0.84 - 20.50
============== ================
Exercisable on December 31 312,000 3,615
============== ================
Weighted average exercise
price
Outstanding $ 0.32 $ 0.55
Exercisable $ 0.84 $ 20.50
Weighted average remaining
life at December 31
Outstanding 8.30 years 5.67 years
Exercisable 8.47 years 5.76 years
Note 13. 401(k) Plan
IPS has an employee benefit plan under Section 401(k) of the Internal
Revenue Code for all eligible employees. Participants are permitted to defer
compensation up to the dollar limitation as defined by the IRS for the taxable
year. On discretionary basis, IPS may match up to 100% of the non-highly
compensated employee's deferrals, as long as the total of the employee's
deferrals and employer match contribution combined do not exceed 25% of their
income. The amount of any employer matching contribution or maximum contribution
cap shall be determined annually on a location-by-location basis. IPS's
contributions vest 33 1/3% after 2 years of service, 66 2/3% after 3 years of
service, and 100% after 4 years of service. IPS contributed approximately
$20,077 and $61,346 in match contributions in 2006 and 2005, respectively.
In 2005, SurgiCare had an employee benefit plan under Section 401(k) of
the Internal Revenue Code for all eligible employees. Participants are permitted
to defer compensation up to the dollar limitation as defined by the IRS for the
taxable year. On a discretionary basis, we could make a match equal to a uniform
percentage of the employees' salary deferrals that did not exceed 3% of the
employees' compensation. SurgiCare's contributions vest 20% after one year of
service and 20% each year thereafter, being fully vested after five years of
service. SurgiCare did not make a matching contribution to the plan in 2005.
In 2004, MBS had an employee benefit plan under Section 401(k) of the
Internal Revenue Code for all eligible employees. This plan is a "safe harbor
401(k) plan, which means that MBS can make a safe harbor contribution equal to
100% of each employee deferral that does not exceed 3% of the employee's
compensation plus 50% of employee salary deferrals between 3% and 5% of the
employee's compensation. This safe harbor matching contribution is fully vested
and is referred to as a basic matching contribution. Participants are permitted
to defer compensation up to the dollar limitation as defined by the IRS for the
taxable year. MBS may make a matching contribution equal to a uniform percentage
of the employees' salary deferrals, which percentage would be determined each
year. On a discretionary basis, MBS may make a profit sharing contribution.
MBS's contributions vest 20% after two years of service, and 20% each year
thereafter, being fully vested after six years of service. MBS did not make a
matching contribution or profit sharing contribution to the plan during 2004.
Concurrent with the DCPS/MBS Merger, the assets of MBS's employee benefit plan
were frozen. Effective in March 2005, all eligible MBS employees were
transferred to SurgiCare's employee benefit plan.
F-33
Effective January 1, 2006, the assets of the employee benefits plans of
IPS, SurgiCare and MBS were liquidated and transferred into one employee benefit
plan under Section 401(k) of the Internal Revenue Code for all eligible
employees of Orion HealthCorp, Inc.
Note 14. Litigation
On July 12, 2005, we were named as a defendant in a suit entitled
American International Industries, Inc. ("AII") vs. Orion HealthCorp, Inc.
(previously known as SurgiCare, Inc.), Keith G. LeBlanc, Paul Cascio, Brantley
Capital Corporation, Brantley Venture Partners III, L.P., Brantley Partners IV,
L.P. (collectively, "the Named Defendants") and UHY Mann Frankfort Stein & Lipp
CPAs, LLP ("UHY Mann") in the 80th Judicial District Court of Harris County,
Texas, Cause No. 2005-44326. The case involved allegations that we made material
and intentional misrepresentations regarding the financial condition of the
parties to the acquisition and restructuring transactions effected on December
15, 2004 for the purpose of inducing AII to convert its SurgiCare Class AA
convertible preferred stock into shares of our Class A Common Stock. AII
asserted that the value of its Class A Common Stock of Orion had fallen as a
direct result of the alleged material misrepresentations by us. AII was seeking
an aggregate of $7,600,000 in damages (actual damages of $3,800,000 and punitive
damages of $3,800,000), and rescission of the agreement to convert the SurgiCare
Class AA convertible preferred stock into our Class A Common Stock.
On September 8, 2006, we entered into a Settlement Agreement with a
Joint and Mutual Release and Indemnity Agreement (the "AII Settlement
Agreement") in which the claims by AII against the Named Defendants were fully
settled as to all claims, with complete mutual releases for all of the Named
Defendants and AII. Under the terms of the AII Settlement Agreement, AII
received $750,000, paid primarily by various insurance carriers of the Named
Defendants, forty-five days from the execution of the AII Settlement Agreement.
As part of the AII Settlement Agreement, the Named Defendants vigorously denied
any liability and AII acknowledged the highly disputed nature of its claims
against the Named Defendants. Both the Named Defendants and AII acknowledged
that the AII Settlement Agreement was made as a compromise to avoid further
expense and to terminate for all time the controversy underlying the lawsuit.
IPS is party to the Dayton MSA with Dayton ICS. The sole remaining
shareholder of Dayton ICS has notified both IPS and the hospitals at which
Dayton ICS has contracts that he intends to dissolve Dayton ICS, cease
practicing at the hospitals and cease utilizing the services of IPS. On November
28, 2006, we were named as a defendant in a suit entitled Dayton Infant Care
Specialists, Corp. vs. Integrated Physician Solutions, Inc., et al. in the
United States District Court of the Southern District of Ohio, Western Division,
Case No. 3:06-cv-00374, in which Dayton ICS was seeking certain injunctive
relief ordering that certain funds derived from accounts receivable and held in
a lockbox be released to Dayton ICS. On November 29, 2006, the Court denied
Dayton ICS's motion for a temporary restraining order. There is an arbitration
clause in the Dayton MSA. IPS asserts that Dayton ICS waived arbitration and,
therefore, has filed a counterclaim against Dayton ICS for breach of contract
and other causes of action. Also on November 29, 2006, IPS filed a suit entitled
Integrated Physician Solutions, Inc. vs. Don T. Granger, M.D., et al. in the
United States District Court of the Southern District of Ohio, Western Division,
Case No 3:06-cv-00377 against the shareholder of Dayton ICS and physicians who
are under employment agreements with Dayton ICS stating various claims arising
out of their involvement with the termination of the business. Certain of the
employees have filed a motion to dismiss the counterclaim against them. Both
cases are assigned to the same judge in the Western Division of the United
States District Court of the Southern District of Ohio and may be consolidated.
Trial dates have been scheduled for both cases in July 2008.
IPS is party to the Illinois MSA with PSNW. IPS and PSNW were in
arbitration regarding claims relating to the Illinois MSA. In connection
therewith, on February 9, 2007, IPS and PSNW entered into the PSNW Settlement to
settle disputes that had arisen between IPS and PSNW and to avoid the risk and
expense of further litigation. As part of the PSNW Settlement, PSNW and IPS
agreed that PSNW would purchase the assets owned by IPS and used in connection
with PSNW's practice, in exchange for a negotiated cash consideration and
termination of the Illinois MSA. Additionally, among other provisions, after May
31, 2007, which is the anticipated closing date of the transaction contemplated
by the PSNW Settlement, PSNW and IPS will be released from any further
obligation to each other from any previous agreement.
In addition, we are involved in various other legal proceedings and
claims arising in the ordinary course of business. Our management believes that
the disposition of these additional matters, individually or in the aggregate,
is not expected to have a materially adverse effect on our financial condition.
However, depending on the amount and timing of such disposition, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period.
Note 15. Commitments
Effective December 15, 2004, we entered into employment agreements with
key executives. The initial terms of the agreements are five years, with
automatic renewal at the end of the initial term and each successive renewal
term thereafter for successive two-year terms.
Additionally, on November 9, 2005, the Company announced that Keith G.
LeBlanc had resigned his position as president and director of the Company to
pursue other interests. Mr. LeBlanc will remain as a consultant to the Company
for a period of twelve months. The Company and Mr. LeBlanc executed the
Separation Agreement governing Mr. LeBlanc's separation benefits and consulting
agreement. Salaries and benefits expense in 2005 included an accrual of $484,520
for separation benefits related to the Separation Agreement.
F-34
Effective December 1, 2006, we entered into an employment agreement
with a key executive of Rand. The initial term of the Rand employment agreement
is three years, with automatic renewal at the end of the initial term and each
successive renewal term thereafter for successive one-year terms.
If the key executives are terminated without cause, the agreement
provides for, among other things, a continuation of base salary through and
until the end of the non-competition period, which for purposes of the
employment agreement shall mean the period during the term of employment and
thereafter until the second anniversary of the date of termination of the key
executive's employment with us. All equity incentives, including stock options,
warrants and restricted stock units, would also vest at that time. As of
December 31, 2006, our combined base annual salary commitments related to the
employment agreements totaled $2,715,000 through 2009.
Note 16. Subsequent Events
On February 9, 2007, IPS and PSNW entered into the PSNW Settlement to
settle disputes that had arisen between IPS and PSNW and to avoid the risk and
expense of further litigation. As part of the PSNW Settlement, PSNW and IPS
agreed that PSNW would purchase the assets owned by IPS and used in connection
with PSNW's practice, in exchange for a negotiated cash consideration and
termination of the Illinois MSA. Additionally, among other provisions, after May
31, 2007, which is the anticipated closing date of the transaction contemplated
by the PSNW Settlement, PSNW and IPS will be released from any further
obligation to each other from any previous agreement. As a result of the PSNW
Settlement, the operations of PSNW are now reflected in our consolidated
statements of operations as 'income from operations of discontinued components'
for the twelve months ended December 31, 2006 and 2005, respectively, and the
assets and liabilities of PSNW are reflected as 'assets held for sale' and
'liabilities held for sale' on our consolidated balance sheet at December 31,
2006.
F-35
Exhibit Index
Exhibit No. Description
----------- -----------
2.1 Asset Purchase Agreement, dated as of June 6, 2005, by and between InPhySys, Inc. (f/k/a
IntegriMED, Inc.) and eClinicalWeb, LLC. (Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K filed on June 13, 2005) **
2.2 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Ambulatory Surgery
Center, L.L.C., Orion HealthCorp, Inc., each of the individuals holding a minority equity
interest in Tuscarawas Ambulatory Surgery Center, L.L.C., and Union Hospital. (Incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on October 7, 2005) **
2.3 Asset Purchase Agreement, dated as of September 30, 2005, by and between Union Hospital and TASC
Anesthesia, L.L.C. (Incorporated by reference to Exhibit 2.2 of the Company's Current Report on
Form 8-K filed on October 7, 2005) **
2.4 Purchase Agreement, dated as of September 30, 2005, by and among Tuscarawas Open MRI, L.P., Orion
HealthCorp, Inc., each of the individuals holding a minority equity interest in Tuscarawas Open
MRI, L.P., and Union Hospital. (Incorporated by reference to Exhibit 2.3 of the Company's
Current Report on Form 8-K filed on October 7, 2005) **
2.5 Asset Purchase Agreement, dated as of February 8, 2006, between and among SurgiCare Memorial
Village, L.P. and First Surgical Memorial Village, L.P., joined herein by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
February 14, 2006) **
2.6 Asset Purchase Agreement, dated as of March 1, 2006, between and among San Jacinto Methodist
Hospital and San Jacinto Surgery Center, Ltd., joined herein by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on
March 6, 2006) **
2.7 Stock Purchase Agreement, dated as of September 8, 2006, by and among Orion HealthCorp, Inc.,
Rand Medical Billing, Inc. and the stockholder of Rand Medical Billing, Inc. (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on September 11,
2006) **
2.8 Stock Purchase Agreement, dated as of September 8, 2006, by and among Orion HealthCorp, Inc., On
Line Alternatives, Inc., On Line Payroll Services, Inc., and the shareholders of On Line
Alternatives, Inc. and On Line Payroll Services, Inc. (Incorporated by reference to Exhibit 10.2
of the Company's Current Report on Form 8-K filed on September 11, 2006) **
3.1 Amended and Restated By-Laws of Orion HealthCorp, Inc. (Incorporated by reference to Exhibit 3.2
of the Company's Current Report on Form 8-K filed on December 21, 2004)
3.2 Third Amended and Restated Certificate of Incorporation of Orion HealthCorp, Inc. (Incorporated
by reference Exhibit 3.1 of the Company's Current Report on Form 8-K filed on December 7, 2006)
4.1 Form of Certificate of Class A Common Stock of Orion HealthCorp, Inc. (Incorporated by reference
to Exhibit 2 of the Company's Registration Statement on Form 8-A filed on December 15, 2004)
10.1 Warrant, dated December 15, 2004, issued to Brantley Partners IV, L.P. by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 10.6 of the Company's Current Report on Form 8-K filed on
December 21, 2004)
10.2 Warrant, dated December 15, 2004, issued to Brantley Capital Corporation by Orion HealthCorp, Inc.
(Incorporated by reference to Exhibit 10.7 of the Company's Current Report on Form 8-K filed on
December 21, 2004)
10.3 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc. and Terrence L.
Bauer. (Incorporated by reference to Exhibit 10.8 of the Company's Current Report on Form 8-K
filed on December 21, 2004) *
10.4 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc. and Keith G.
LeBlanc. (Incorporated by reference to Exhibit 10.9 of the Company's Current Report on Form 8-K
filed on December 21, 2004) *
10.5 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc. and Stephen H.
Murdock. (Incorporated by reference to Exhibit 10.10 of the Company's Current Report on Form 8-K
filed on December 21, 2004) *
10.6 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc., Medical Billing
Services, Inc. and Dennis Cain. (Incorporated by reference to Exhibit 10.11 of the Company's
Current Report on Form 8-K filed on December 21, 2004) *
10.7 Employment Agreement, dated December 15, 2004, between Orion HealthCorp, Inc., Medical Billing
Services, Inc. and Tom M. Smith. (Incorporated by reference to Exhibit 10.12 of the Company's
Current Report on Form 8-K filed on December 21, 2004) *
38
10.8 Registration Rights Agreement dated December 15, 2004, by and among Orion HealthCorp, Inc. and
the investors set forth on Schedule I thereto. (Incorporated by reference to Exhibit 10.13 of
the Company's Current Report on Form 8-K filed on December 21, 2004)
10.9 Stockholders Agreement dated December 15, 2004, by and among Orion HealthCorp, Inc., Brantley
Venture Partners III, L.P., Brantley Venture Partners IV, L.P. and Brantley Capital Corporation.
(Incorporated by reference to Exhibit 10.14 of the Company's Current Report on Form 8-K filed on
December 21, 2004)
10.10 Orion HealthCorp, Inc. 2004 Incentive Plan. (Incorporated by reference to Exhibit 10.19 of the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on April 28,
2005) *
10.11 Amendment No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of June 1, 2005.
(Incorporated by reference to Exhibit 10.6 of the Company's Form 10-QSB for the quarter ended
June 30, 2005 filed on August 12, 2005) *
10.12 Form of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock Option), dated as of June
17, 2005. (Incorporated by reference to Exhibit 10.7 of the Company's Form 10-QSB for the
quarter ended June 30, 2005 filed on August 12, 2005) *
10.13 Separation Agreement and General Release, dated as of November 8, 2005, by and between Orion
HealthCorp, Inc. and Keith G. LeBlanc. (Incorporated by reference to Exhibit 10.8 of the
Company's Form 10-QSB for the quarter ended September 30, 2005 filed on November 14, 2005) *
10.14 Stock Purchase Agreement, dated as of September 8, 2006, by and among Orion HealthCorp, Inc.,
Phoenix Life Insurance Company and Brantley Partners IV, L.P. (Incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-K filed on September 11, 2006) *
10.15 Note Purchase Agreement, dated as of September 8, 2006, by and between Orion HealthCorp, Inc. and
Phoenix Life Insurance Company. (Incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K filed on September 11, 2006) **
10.16 Stock Purchase Agreement, dated as of September 8, 2006, by and between Orion HealthCorp, Inc.
and Brantley Capital Corporation. (Incorporated by reference to Exhibit 10.5 of the Company's
Current Report on Form 8-K filed on September 11, 2006) **
10.17 Settlement Agreement with a Joint and Mutual Release and Indemnity Agreement, dated as of
September 8, 2006, by and among American International Industries, Inc., International
Diversified Corporation, Ltd. and Daniel Dror II as Claimants and Orion HealthCorp, Inc.,
Brantley Capital Corporation, Brantley Venture Partners III, L.P., Brantley Partners IV, L.P.,
Keith G. LeBlanc and Paul Cascio as Defendants. (Incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K filed on September 14, 2006)
10.18 First Amendment to Note Purchase Agreement, dated as of December 1, 2006, by and between Orion
HealthCorp, Inc. and Phoenix Life Insurance Company.
10.19 Registration Rights Agreement, dated as of December 1, 2006, by and among Orion HealthCorp, Inc.,
Brantley Partners IV, L.P. and Phoenix Life Insurance Company.
10.20 Warrant, dated December 1, 2006, issued to Phoenix Life Insurance Company by Orion HealthCorp, Inc.
10.21 Credit Agreement, dated as of December 1, 2006, by and among Orion HealthCorp, Inc., each of the
subsidiaries identified therein, each of the Lenders identified therein and Wells Fargo Foothill,
Inc., as its Arranger and Administrator Agent and Lender. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K filed on December 7, 2006) **
10.22 Security Agreement, dated as of December 1, 2006, among Orion HealthCorp, Inc. and the other
grantors identified therein and Wells Fargo Foothill, Inc. (Incorporated by reference to Exhibit
10.2 of the Company's Current Report on Form 8-K filed on December 7, 2006) **
10.23 Amendment No. 2 to the Orion HealthCorp, Inc. 2004 Incentive Plan. (Incorporated by reference to
Exhibit 10.3 of the Company's Current Report on Form 8-K filed on December 7, 2006)
10.24 Amendment No. 1, dated as of December 1, 2006, to the Stock Purchase Agreement, dated as of
September 8, 2006, by and among Orion HealthCorp, Inc., Rand Medical Billing, Inc. and the
stockholder of Rand Medical Billing, Inc. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K filed on December 7, 2006) **
10.25 Forms of Amended and Restated Promissory Notes, dated as of December 1, 2006, by and between
Orion HealthCorp, Inc. and DCPS Sellers and MBS Sellers. (Incorporated by reference to Exhibit
10.10 of the Company's Current Report on Form 8-K filed on December 7, 2006)
10.25 Restructured Loan Agreement, dated as of December 1, 2006, by and between Orion HealthCorp, Inc.
and Lyon Financial Services, Inc. dba U.S. Bank Portfolio Services, as successor servicer for DVI
Financial Services, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 7, 2006) **
39
21 List of Subsidiaries of Orion HealthCorp, Inc.
23 Consent of UHY, LLP
24.1 Power of Attorney (See Signatures on page 37)
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Section 1350 Certification
32.2 Section 1350 Certification
* Indicates executive compensation plan or arrangement.
** Pursuant to Item 601(b)(2) of Regulation S-B, certain
exhibits and schedules have been omitted from this filing. We
agree to furnish to the Securities and Exchange Commission on
a supplemental basis a copy of any omitted exhibit or
schedule.
40