U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
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, The American Stock Exchange
$0.001 par value per share
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 whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes |_| No |X|
As of November 13, 2007, 105,504,032 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.
Transitional Small Business Disclosure Format Yes |_| No |X|
ORION HEALTHCORP, INC.
Quarterly Report on Form 10-QSB
For the Quarterly Period Ended September 30, 2007
TABLE OF CONTENTS
Item Page
Number Number
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PART I - FINANCIAL INFORMATION
1. Financial Statements
2. Management's Discussion and Analysis or Plan of Operation
3. Controls and Procedures
PART II - OTHER INFORMATION
3. Defaults Upon Senior Securities
6. Exhibits
SIGNATURES
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS F-1
INDEX OF EXHIBITS
2
The following text is qualified in its entirety by reference to the
more detailed information and unaudited consolidated condensed financial
statements, including the notes thereto, appearing elsewhere in this Quarterly
Report on Form 10-QSB. Unless otherwise indicated, the terms "we," "us" and
"our" refer to Orion HealthCorp, Inc. ("Orion" or the "Company") and its
consolidated subsidiaries.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, (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 Quarterly Report on Form 10-QSB, including
without limitation, statements under the caption "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, anticipated services,
expenses and financial results and any statements that are not statements of
historical facts. 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. Any number of factors
could affect future operations, including, without limitation, changes in
federal or state healthcare laws and regulations and third party payer
requirements, changes in costs of supplies, the loss of major customers,
increases in labor and employee benefit costs, increases in interest rates on
our indebtedness as well as general market conditions, competition and pricing,
and our ability to successfully implement our business strategies and integrate
acquisitions, including the expense and impact of any potential acquisitions and
the ability to obtain necessary approvals and financing. You are also advised to
consult the risk factors set forth in Item 6. Management's Discussion and
Analysis or Plan of Operations of our Annual Report on Form 10-KSB filed with
the Securities and Exchange Commission ("SEC") on April 2, 2007.
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. 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 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Our unaudited consolidated condensed financial statements and related
notes thereto are included as a separate section of this report, commencing on
page F-1.
ITEM 2. 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 unaudited consolidated
condensed financial statements and related notes thereto, which are included
elsewhere in this Quarterly Report on Form 10-QSB.
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 our clients and increased enterprise value for our
stakeholders. We believe our core competency is our long-term experience and
success in working with and creating value for physicians.
3
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 59 clients. Rand currently provides services to approximately
52 clients. On Line currently provides services to approximately 13 billing
clients and 43 transcription clients and provides payroll processing services to
over 200 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;
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 5 in our Notes to Unaudited Consolidated Condensed Financial
Statements included in Part I, Item 1. 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 September 30, 2007, IPS managed
six practice sites, representing three medical groups in Illinois and Ohio. The
physicians, who are all employed by unrelated corporations, provide all clinical
and patient care related services.
4
IPS was 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 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. The transaction contemplated
by the PSNW Settlement was consummated on May 31, 2007. Among other provisions,
after May 31, 2007, PSNW and IPS have been released from any further obligation
to each other from any previous agreement. The operations of PSNW are reflected
on our consolidated condensed statements of operations as `income from
operations of discontinued components' for the three months and nine months
ended September 30, 2007 and 2006, respectively. (See "Results of Operations -
Discontinued Operations.")
The operations of Dayton Infant Care Specialists, Corp. ("Dayton ICS")
are also reflected in our consolidated condensed statements of operations as
`income from operations of discontinued components' for the three months and
nine months ended September 30, 2007 and 2006, respectively. (See "Results of
Operations - Discontinued Operations.")
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 5 in our Notes to Unaudited Consolidated Condensed Financial
Statements included in Part I, Item 1. Financial Statements for financial
information regarding the continuing operations of our PM segment.
Company History and Strategic Focus
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, 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. We believe that we are 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.
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.
5
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 the occurrence of 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 both 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;
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 1,383,825 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 87,761,969 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 September 30, 2007, Brantley IV and its affiliates, Brantley
Venture Partners III, L.P. ("Brantley III") and Brantley Equity Partners, L.P.
("BEP"), owned 66,629,515 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 September 30, 2007, this represented 55.1% of
our voting power on an as-converted, fully-diluted basis. 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
Robert P. Pinkas, are affiliated with Brantley IV and its related entities.
Messrs. Cascio and Pinkas serve as general partners of the general partner of
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. Messrs. Cascio and Pinkas also
serve as advisors to BEP.
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 shares, or 11.7%, of our outstanding
Class A Common Stock as of September 30, 2007, 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 September 30, 2007 on an
as-converted, fully-diluted basis.
Certain Recent Developments
On August 21, 2007, we entered into a first amendment to the Credit
Agreement (the "First Amendment"), among Orion, its subsidiaries and Wells Fargo
Foothill, Inc. The First Amendment increased the commitment under the revolver
from $2,000,000 to $2,500,000 and revised certain of the financial covenants
contained in the Credit Agreement. On September 24, 2007, we entered into a
second amendment to the Credit Agreement (the "Second Amendment"), among Orion,
its subsidiaries and Wells Fargo Foothill, Inc. The Second Amendment revised
certain of the financial covenants contained in the Credit Agreement. A copy of
the First Amendment is incorporated by reference to Exhibit 10.1 of our Current
Report on Form 8-K, filed on August 22, 2007, and a copy of the Second Amendment
is attached hereto as Exhibit 10.1.
6
On September 19, 2007, a special committee of our board of directors
approved a 1-for-2,500 reverse stock split of our Class A Common Stock,
immediately followed by a 2,500-for-1 forward stock split of our Class A Common
Stock (collectively, the "Split"). Stockholders with fewer than 2,500 shares
pre-split will receive $0.23 per share for each such share. We anticipate that
as a result of the Split, our number of record holders of Class A Common Stock
will be less than 300 and we would then file to deregister our shares of Class A
Common Stock under the Securities Exchange Act of 1934. The Split would be
effected by an amendment to our Third Amended and Restated Certificate of
Incorporation (the "Amendment"). The Amendment requires approval of the majority
of our Class A Common and Class D Common stockholders of record, voting as a
single class. Our board of directors has now set a special meeting date on
Thursday, November 29, 2007, at 8:00 a.m. local time, at 1805 Old Alabama Road,
Roswell, Georgia 30076, or alternatively, at such later date, time and place to
be determined by our management for the purpose of seeking such stockholder
approval (the "Special Meeting"). Our board of directors has set a record date
of October 1, 2007 for the purpose of determining stockholders entitled to
notice of, and to vote at, the Special Meeting.
On September 21, 2007, we entered into a note purchase agreement (the
"Second Note Purchase Agreement") with Phoenix, Brantley IV and Terrence L.
Bauer ("Bauer"), providing for the issuance of our senior subordinated unsecured
promissory notes in the aggregate principal amount of $1,000,000 to be purchased
by Phoenix in the amount of $700,000, by Brantley IV in the amount of $250,000
and by Bauer in the amount of $50,000, each bearing interest at an aggregate
rate of 14% per annum and due December 1, 2011. The Second Note Purchase
Agreement was entered into to provide us with needed working capital and the
necessary funds to effect the Split referred above. The closing of the Second
Note Purchase Agreement is conditioned on no material adverse effect to us since
June 30, 2007 and the consummation of the Split pursuant to the Amendment
referred to above.
Financial Overview
As more fully described below, our results of operations for the three
months and nine months ended September 30, 2007 as compared to the same period
in 2006 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 revenues for Rand and On Line in the first three quarters of 2007
as compared to no revenue in the same period in 2006;
o Inclusion of legal expenses in the first quarter of 2007 related to
IPS's discontinued operations;
o Inclusion of expenses for Rand and On Line for the three and nine
months ended September 30, 2007 as compared to no expenses in the
first three quarters of 2006; and
o We closed the transaction contemplated by the PSNW Settlement
effective May 31, 2007, and recorded a gain on disposition of
discontinued components of $999,725 in the second quarter of 2007.
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, General, of our unaudited consolidated
condensed financial statements included beginning on Page F-1 of this Quarterly
Report on Form 10-QSB 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:
7
(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;
(c) 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.
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. IPS is not aware of any material claims, disputes or
unsettled matters with third party payers and there have been no material
settlements with third party payers for the three months and nine months ended
September 30, 2007 and 2006.
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 2007 or
2006.
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.
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.)
8
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115," ("SFAS 159") which is effective for fiscal years beginning
after November 15, 2007. SFAS 159 permits entities to measure eligible financial
assets, financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other U.S. generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair
value must be recorded in earnings. We do not expect the impact of SFAS 159 to
be material to our consolidated financial statements.
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 adopted the provisions of
FIN 48 effective January 1, 2007 and analyzed filing positions in our federal
and state jurisdictions where we are required to file income tax returns, as
well as for all open tax years in these jurisdictions. Our reserve for uncertain
tax positions was insignificant upon adoption of FIN 48 and we did not record a
cumulative effect adjustment to opening retained earnings related to the
adoption of FIN 48. We believe our income tax filing positions and deductions
will be sustained under audit and we believe we do not have significant
uncertain tax positions that, in the event of adjustment, will result in a
material effect on our results of operations or financial position.
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 principles in the income statement of the
period of change. SFAS 154 requires that such changes in accounting principles
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").
9
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 adopted the provisions of SFAS 123(R) beginning with the 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.
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 the three months and nine months ended September 30,
2007 include the results of MBS, Rand, On Line and IPS. Our results for the
three months and nine months ended September 30, 2006 include the results of MBS
and IPS. We did not acquire Rand and On Line until December 1, 2006.
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 or 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 three months and nine months ended September 30, 2006 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 unaudited
consolidated condensed financial statements and related notes thereto, which are
included as a separate section of this Quarterly Report on Form 10-QSB beginning
on page F-1.
The following table sets forth selected statements of operations data
expressed as a percentage of our net operating revenues for the three months and
nine months ended September 30, 2007 and 2006, respectively. Our historical
results and period-to-period comparisons are not necessarily indicative of the
results for any future period.
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net operating revenues 100.0% 100.0% 100.0% 100.0%
Total operating expenses 104.6% 109.0% 105.7% 109.0%
---------- ---------- ---------- ----------
Loss from continuing operations before other income (expenses) (4.6%) (9.0%) (5.7%) (9.0%)
Total other income (expenses), net (4.3%) (2.2%) (4.3%) 1.8%
---------- ---------- ---------- ----------
Loss from continuing operations (8.9%) (11.2%) (10.0%) (7.2%)
Discontinued operations
Income from operations of discontinued components -- 2.6% 4.2% 6.0%
---------- ---------- ---------- ----------
Net loss (8.9%) (8.6%) (5.8%) (1.2%)
========== ========== ========== ==========
Three Months Ended September 30, 2007 and 2006 - Continuing Operations
Net Operating Revenues.
Three months ended
September 30,
2007 2006
--------------- ---------------
RCM Segment $ 4,968,294 $ 2,451,464
PM Segment 3,512,392 3,184,856
Other 70,436 79,141
--------------- ---------------
Total consolidated net operating revenues $8,551,122 $5,715,461
=============== ===============
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 the three months ended September 30, 2007 include the
results of MBS, Rand, On Line and IPS. Our results for the three months ended
September 30, 2006 include the results of MBS and IPS. We did not acquire Rand
and On Line until December 1, 2006.
10
For the three months ended September 30, 2007, consolidated net
operating revenues increased $2,835,661 or 49.6%, to $8,551,122, as compared
with $5,715,461 for the three months ended September 30, 2006.
Net operating revenues for our RCM segment, which included MBS, Rand
and On Line in the third quarter of 2007 and MBS in the third quarter of 2006,
totaled $4,968,294 for the three months ended September 30, 2007, an increase of
$2,516,830, or 102.7%, over the same period in 2006. Net operating revenues for
Rand and On Line totaled $1,717,793 and $610,128, respectively, in the third
quarter of 2007. MBS's net operating revenues increased 7.7% in the third
quarter of 2007, increasing from $2,451,464 for the three months ended September
30, 2006 to $2,640,373 for the same period in 2007.
The following table illustrates, by customer category, the contribution
of existing, new and lost customers to MBS's net operating revenues for the
three months ended September 30, 2007 and 2006, respectively:
Three months ended
September 30,
2007 2006 Variance
---------------- -------------- --------------
MBS net operating revenues:
Existing customers $ 2,346,171 $ 2,335,997 $ 10,174
New customers in 2006 261,078 98,194 162,884
New customers in 2007 31,593 -- 31,593
Customers lost in 2006 1,168 5,451 (4,283)
Customers lost in 2007 363 11,822 (11,459)
------------------------------------------------------
Total consolidated net operating revenues $ 2,640,373 $ 2,451,463 $ 188,909
================ ============== ==============
Net operating revenues for our PM segment, which consists of net
patient service revenue from IPS's affiliated medical groups, increased
$327,536, or 10.3%, from $3,184,856 for the three months ended September 30,
2006 to $3,512,392 for the three months ended September 30, 2007. IPS's
clinic-based affiliated pediatric groups experienced increases in patient volume
in the third quarter of 2007, with total office visits and immunizations
increasing 1,256 and 821, respectively, to 28,343 and 16,830 for the three
months ended September 30, 2007. These increases can be generally explained by
the release of a new vaccine for adolescent females to prevent cervical cancer,
which has increased patient demand.
Other revenue totaled $79,141 for the third quarter of 2006, decreasing
$7,183, or 9.1%, to $71,958 for the three months ended September 30, 2007. This
represents revenue from our vaccine program, which is a group purchasing
alliance for vaccines and medical supplies. The vaccine program, which had 513
enrolled participants at the end of the second quarter of 2007, added a net of
approximately eleven members during the quarter ended September 30, 2007.
Operating Expenses.
Three months ended
September 30,
2007 2006
---------- ----------
Salaries and benefits $4,200,894 $2,540,187
Physician group distribution 1,230,856 1,244,931
Facility rent and related costs 478,034 365,114
Depreciation and amortization 719,948 402,357
Professional and consulting fees 312,893 363,589
Insurance 138,315 117,044
Provision for doubtful accounts 65,405 28,492
Other expenses 1,795,636 1,168,715
---------- ----------
Total consolidated operating expenses $8,941,981 $6,230,429
========== ==========
Our expenses for the three months ended September 30, 2007 include the
results of MBS, Rand, On Line and IPS. Our expenses for the three months ended
September 30, 2006 include the results of MBS and IPS. We did not acquire Rand
and On Line until December 1, 2006.
Consolidated operating expenses totaled $8,941,981 for the three months
ended September 30, 2007, an increase of $2,711,552 over the same period in
2006.
11
Salaries and Benefits. Consolidated salaries and benefits increased
$1,660,707 to $4,200,894 for the three months ended September 30, 2007, as
compared to $2,540,187 in the third quarter of 2006. Salaries and benefits for
Rand and On Line totaled $1,097,736 and $357,800, respectively, for the three
months ended September 30, 2007.
MBS's salaries and benefits totaled $1,602,591 for the three months
ended September 30, 2007 as compared to $1,440,599 for the same three months in
2006, an increase of $161,992. Staffing levels increased quarter over quarter,
with salaries, including bonuses and overtime, increasing $186,858 while
temporary help decreased $39,315 in the third quarter of 2007 as compared to the
third quarter of 2006.
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 $342,169 for the three months ended September 30,
2007, an increase of $30,472 over the same period in 2006. These expenses
represented approximately 9.7% and 9.8% of net operating revenues for the
quarters ended September 30, 2007 and 2006, respectively.
Administrative salaries and benefits, excluding MBS, Rand and On Line,
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 from $765,434 for the three months ended
September 30, 2006 to $774,110 for the same period in 2007. Stock option expense
increased $49,752 in the third quarter of 2007, compared to the same period in
2006, as a result of options granted to employees and directors in December
2006. Additionally, the third quarter of 2007 included a reclassification of
$34,250 in prior period worker's compensation expense from corporate to Rand.
Physician Group Distribution. Physician group distribution decreased
$14,075, or 1.1%, for the three months ended September 30, 2007 to $1,230,856,
as compared with $1,244,931 for the three months ended September 30, 2006.
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 quarter ended September 30, 2007,
management fee revenue totaled $202,283 and represented approximately 14.1% of
net operating income as compared to management fee revenue totaling $207,848 and
representing approximately 14.3% of net operating income for the same period in
2006. Physician group distributions represented 35.0% of net operating revenues
in the third quarter of 2007, compared to 39.1% of net operating revenues for
the same period in 2006. The decrease in physician group distribution for the
three months ended September 30, 2007 was directly related to the increase in
vaccine expenses, which was primarily the result of increased immunization
volume during the third quarter.
Facility Rent and Related Costs. Facility rent and related costs
increased $112,920, or 30.9%, from $365,114 for the three months ended September
30, 2006 to $478,034 for the three months ended September 30, 2007. Rent and
related expenses for Rand and On Line totaled $69,272 and $40,510, respectively,
for the third quarter of 2007.
MBS's facility rent and related costs totaled $138,955 for the three
months ended September 30, 2007 as compared to $135,380 for the same period in
2006.
Facility rent and related costs associated with IPS's affiliated
medical groups and Orion's corporate office totaled $229,296 and $229,734 for
the three months ended September 30, 2007 and 2006, respectively.
Depreciation and Amortization. Consolidated depreciation and
amortization expense totaled $719,948 for the three months ended September 30,
2007, an increase of $317,591 over the three months ended September 30, 2006.
In the third quarter of 2007, depreciation expense related to our fixed
assets totaled $72,619 as compared to $50,622 for the same period in 2006.
Following is a table that illustrates, by business unit, the depreciation
expense for our fixed assets for the three months ended September 30, 2007 and
2006:
Three months ended
September 30,
2007 2006
------- -------
Depreciation expense:
Rand $14,638 $ --
On Line 9,476 --
MBS 18,011 16,996
IPS 16,231 15,448
Orion 14,263 18,188
------- -------
Total consolidated depreciation expense $72,619 $50,622
======= =======
12
Amortization expense related to our intangible assets totaled $647,329
for the three months ended September 30, 2007 as compared to $351,734 for the
same period in 2006. Following is a table that illustrates, by business unit,
the amortization expense related to our intangible assets in the third quarter
of 2007 and 2006:
Three months ended
September 30,
2007 2006
-------- --------
Amortization expense:
Rand $131,914 $ --
On Line 92,444 --
MBS 265,523 265,523
IPS 40,700 86,211
Orion 116,748 --
-------- --------
Total consolidated amortization expense $647,329 $351,734
======== ========
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.
The amortization expense related to the intangible assets recorded as a result
of the acquisition of Rand totaled $131,914 for the three months ended September
30, 2007.
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. The amortization expense related to the intangible assets recorded
as a result of the acquisition of On Line totaled $92,444 for the three months
ended September 30, 2007.
MBS. As part of the DCPS/MBS Merger, we 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 $265,523 for the three
months ended September 30, 2007 and 2006, respectively.
IPS. Amortization expense related to the MSAs for IPS's affiliated
medical groups totaled $40,700 and $86,211 for the three months ended September
30, 2007 and 2006, respectively. The decrease is directly related to IPS
operations discontinued in 2006, which resulted in the impairment of the
intangible assets related to those operations at December 31, 2006.
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.
Amortization expense related to the transaction costs described above
totaled $116,748 for the three months ended September 30, 2007.
Professional and Consulting Fees. For the three months ended September
30, 2007, professional and consulting fees totaled $312,893, a decrease of
$50,696, or 13.9%, from the same period in 2006. Professional and consulting
fees for Rand and On Line totaled $27,695 and $49,592, respectively, in the
third quarter of 2007.
For the three months ended September 30, 2007, MBS recorded
professional and consulting expenses totaling $31,283 as compared with $43,980
for the same period in 2006, a decrease of $12,697. This change is primarily the
result of a decrease in contract labor used in 2006 as a result of staffing
shortages.
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 $319,609 for the three months ended September 30, 2006 to
$204,322 for the three months ended September 30, 2007. This decrease can be
explained generally by a $30,000 decrease in consulting fees related to a
business development consultant who was utilized in the second quarter of 2006,
as well as decreases in legal, accounting and purchased services totaling
approximately $83,000 in the aggregate.
13
Insurance. Consolidated insurance expense, which includes the costs of
professional liability insurance for affiliated physicians, property and
casualty insurance and general liability insurance and directors' and officers'
liability insurance, increased from $117,044 for the three months ended
September 30, 2006 to $138,315 for the three months ended September 30, 2007.
Approximately $15,000 of the increase relates to workers' compensation and
errors and omissions insurance for Rand and On Line, which was not included in
the third quarter 2006 expense totals.
Provision for Doubtful Accounts. The consolidated provision for
doubtful accounts, or bad debt expense, increased $36,913, or 129.6%, for the
three months ended September 30, 2007 to $65,405. The entire provision for
doubtful accounts for the three months ended September 30, 2007 related to IPS's
affiliated medical groups and accounted for 0.7% of IPS's net operating revenues
as compared to 0.3% of IPS's net operating revenues for the same period in 2006.
The total collection rate, after contractual allowances, for IPS's affiliated
medical groups was 69.8% in the third quarter of 2007, compared to 63.0% for the
same period in 2006.
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
$1,795,636 for the three months ended September 30, 2007, an increase of
$626,921 over the same period in 2006.
Following is a table illustrating the composition of other expenses for
the three months ended September 30, 2007 and 2006:
14
Three months ended
September 30,
2007 2006
---------- ----------
Vaccine costs $ 785,164 $ 508,507
Medical supplies 61,064 53,050
Other direct clinical expenses 29,528 23,744
Travel 67,545 48,883
Office supplies and printing 134,519 91,643
Telephone and data communications 103,792 58,026
Postage and courier 402,486 204,439
Board of directors' compensation and meeting expenses 14,799 20,001
Bank charges 43,054 40,354
Taxes and licenses 31,976 20,458
Other general and administrative expenses 121,709 99,610
-----------------------
Total consolidated other expenses $1,795,636 $1,168,715
=======================
Other expenses for Rand and On Line totaled $220,560 and $94,062 for
the third quarter of 2007. Approximately 71% of Rand's and 60% of On Line's
other expenses in the third quarter of 2007 related to postage, courier and
office supplies.
MBS's other expenses totaled $303,678 for the three months ended
September 30, 2006 as compared to $340,849 for the three months ended September
30, 2007. The increase can be explained generally by an aggregate increase of
approximately $28,000 in postage and courier expenses in the third quarter of
2007 as compared to the same three-month period in 2006.
For the three months ended September 30, 2007, IPS's direct clinical
expenses, other than salaries and benefits, totaled $875,756, an increase of
$290,455 over direct clinical expenses in the same period in 2006, which totaled
$585,301. Vaccine expenses increased approximately $277,000 in the third quarter
of 2007 when compared with the three months ended September 30, 2006. In
addition to price increases for certain vaccines that took effect in late 2006,
vaccine purchases increased in the third quarter of 2007 as a result of
increased patient volume as well as the continued impact of the release of a new
vaccine for adolescent females to prevent cervical cancer.
General and administrative expenses other than those incurred by our
RCM segment totaled $264,410 for the three months ended September 30, 2007, a
decrease of $15,327 over the same period in 2006.
Other Income (Expenses).
Three months ended
September 30,
2007 2006
--------- ---------
Interest expense $(361,725) $(120,958)
Other expense, net (4,636) (3,002)
--------- ---------
Total other income (expenses), net $(366,361) $(123,960)
========= =========
Other expenses, net, totaled $366,361 for the three months ended
September 30, 2007 as compared with other expenses, net, of $123,960 for the
three months ended September 30, 2006.
Interest Expense. Consolidated interest expense totaled $361,725 for
the three months ended September 30, 2007, an increase of $240,767 over the same
period in 2006. Interest expense activity in the third quarter of 2007,
including increases over 2006, can be explained generally by the following:
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 owed 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 a quarterly principal
payment amortization schedule that begins on December 15, 2007 and
extends to December 15, 2008, and increased the annual interest rate
from 8% to 9%. Interest expense related to these notes totaled $38,573
and $34,287 for the three months ended September 30, 2007 and 2006,
respectively.
15
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 2.
Management's Discussion and Analysis or Plan of Operation - Company
History and Strategic Focus.) On August 21, 2007, we entered into
First Amendment, which increased the commitment under the revolver
from $2,000,000 to $2,500,000. As of September 30, 2007, we had
amounts outstanding under the revolving loan commitment and term loan
of $2,050,564 and $4,263,750, respectively. Interest expense related
to these loan facilities totaled approximately $169,000 in the third
quarter of 2007.
o Phoenix Subordinated Debt. On December 1, 2006 we closed the Private
Placement with Phoenix and Brantley IV. (See Part I, Item 2.
Management's Discussion and Analysis or Plan of Operation - Company
History and Strategic Focus.) 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 accrued interest expense of
approximately $117,000 on this note in the third quarter of 2007, in
addition to approximately $14,000 in additional interest expense
related to the amortization of the debt discount that was applied to
the warrants issued in conjunction with the subordinated note to
Phoenix.
o Brantley Debt. In March and April 2005, we borrowed an aggregate of
$1,250,000 from Brantley IV. We converted the Brantley IV Notes to
Class A Common Stock on December 1, 2006. (See Part I, Item 2.
Management's Discussion and Analysis or Plan of Operation - Company
History and Strategic Focus.) Interest expense related to these notes
totaled approximately $29,000 for the three months ended September 30,
2006.
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. 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. Interest expense related to the CIT
credit facility totaled approximately $51,000 in the third quarter of
2006.
Nine months Ended September 30, 2007 and 2006 - Continuing Operations
Net Operating Revenues.
Nine months ended
September 30,
2007 2006
----------- -----------
RCM Segment $14,687,945 $ 7,207,517
PM Segment 10,051,914 9,119,915
Other 257,195 259,786
----------- -----------
Total consolidated net operating revenues $24,997,054 $16,587,218
=========== ===========
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 the nine months ended September 30, 2007 include the
results of MBS, Rand, On Line and IPS. Our results for the nine months ended
September 30, 2006 include the results of MBS and IPS. We did not acquire Rand
and On Line until December 1, 2006.
For the nine months ended September 30, 2007, consolidated net
operating revenues increased $8,409,836 or 50.7%, to $24,997,054, as compared
with $16,587,218 for the nine months ended September 30, 2006.
Net operating revenues for our RCM segment, which included MBS, Rand
and On Line in the first half of 2007 and MBS in the first half of 2006, totaled
$14,687,945 for the nine months ended September 30, 2007, an increase of
$7,480,428, or 103.8%, over the same period in 2006. Net operating revenues for
Rand and On Line totaled $4,981,700 and $1,843,038, respectively, for the first
nine months of 2007. MBS's net operating revenues increased 9.1% in the first
nine months of 2007, increasing from $7,207,517 for the nine months ended
September 30, 2006 to $7,863,207 for the same period in 2007.
The following table illustrates, by customer category, the contribution
of existing, new and lost customers to MBS's net operating revenues for the nine
months ended September 30, 2007 and 2006, respectively:
16
Nine months ended
September 30,
2007 2006 Variance
---------- ---------- ----------
MBS net operating revenues:
Existing customers $6,931,993 $6,817,070 $ 114,923
New customers in 2006 865,076 114,519 750,557
New customers in 2007 57,405 -- 57,405
Customers lost in 2006 3,985 125,648 (121,663)
Customers lost in 2007 4,748 150,280 (145,532)
---------- ---------- ----------
Total consolidated net operating revenues $7,863,207 $7,207,517 $ 655,690
========== ========== ==========
Net operating revenues for our PM segment, which consists of net
patient service revenue from IPS's affiliated medical groups, increased
$931,999, or 10.2%, from $9,119,915 for the nine months ended September 30, 2006
to $10,051,914 for the nine months ended September 30, 2007. IPS's clinic-based
affiliated pediatric groups experienced increases in patient volume in the first
nine months of 2007, with total office visits and immunizations increasing 4,250
and 8,666, respectively, to 94,608 and 49,109 for the nine months ended
September 30, 2007. These increases can be generally explained by the release of
a new vaccine for adolescent females to prevent cervical cancer, which has
increased patient demand.
Other revenue totaled $259,778 for the first nine months of 2006,
decreasing $1,046, or 0.4%, to $258,732 for the nine months ended September 30,
2007. This represents revenue from our vaccine program, which is a group
purchasing alliance for vaccines and medical supplies. The vaccine program,
which had 493 enrolled participants at the end of 2006, added a net of
approximately thirty-one members during the nine months ended September 30,
2007.
Operating Expenses.
Nine months ended
September 30,
2007 2006
----------- -----------
Salaries and benefits $12,623,138 $ 7,592,765
Physician group distribution 3,602,351 3,609,846
Facility rent and related costs 1,408,824 1,031,734
Depreciation and amortization 2,137,197 1,210,725
Professional and consulting fees 980,145 1,013,129
Insurance 410,856 350,174
Provision for doubtful accounts 183,572 137,908
Other expenses 5,064,209 3,129,333
----------- -----------
Total consolidated operating expenses $26,410,292 $18,075,614
=========== ===========
Our expenses for the nine months ended September 30, 2007 include the
results of MBS, Rand, On Line and IPS. Our expenses for the nine months ended
September 30, 2006 include the results of MBS and IPS. We did not acquire Rand
and On Line until December 1, 2006.
Consolidated operating expenses totaled $26,410,292 for the nine months
ended September 30, 2007, an increase of $8,334,678 over the same period in
2006.
Salaries and Benefits. Consolidated salaries and benefits increased
$5,030,373 to $12,623,138 for the nine months ended September 30, 2007, as
compared to $7,592,765 in the first nine months of 2006. Salaries and benefits
for Rand and On Line totaled $3,257,753 and $1,080,258, respectively, for the
nine months ended September 30, 2007.
MBS's salaries and benefits totaled $4,846,524 for the nine months
ended September 30, 2007 as compared to $4,392,967 for the same nine months in
2006, an increase of $453,557. Staffing levels increased year-over-year, with
salaries, including bonuses and overtime, increasing $433,494 in the first nine
months of 2007 as compared to the same period in 2006.
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/or decreases in
productivity and patient volume. Clinical salaries, bonuses, overtime and health
insurance collectively totaled $989,704 for the nine months ended September 30,
2007, an increase of $66,302 over the same period in 2006. These expenses
represented approximately 9.8% and 10.1% of net operating revenues for the
nine-month periods ended September 30, 2007 and 2006, respectively.
17
Administrative salaries and benefits, excluding MBS, Rand and On Line,
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 $135,082, or 6.1%, from $2,231,435 for the
nine months ended September 30, 2006 to $2,366,517 for the same period in 2007.
The additional expense can be explained generally by the $144,388 increase in
stock option compensation expense in the first nine months of 2007, compared to
the same period in 2006, as a result of options granted to employees and
directors in December 2006.
Physician Group Distribution. Physician group distribution decreased
$7,495, or 0.2%, for the nine months ended September 30, 2007 to $3,602,351, as
compared with $3,609,846 for the nine months ended September 30, 2006. 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 nine months ended September 30, 2007, management fee
revenue totaled $607,267 and represented approximately 14.4% of net operating
income as compared to management fee revenue totaling $602,902 and representing
approximately 14.3% of net operating income for the same period in 2006.
Physician group distributions represented 35.8% of net operating revenues in the
first nine months of 2007, compared to 39.6% of net operating revenues for the
same period in 2006. Physician group distribution for the nine months ended
September 30, 2007 remained relatively flat despite increased revenues largely
due to increases in vaccine expenses as a result of increased immunization
volume during the first nine months of 2007.
Facility Rent and Related Costs. Facility rent and related costs
increased $377,090, or 36.5%, from $1,031,734 for the nine months ended
September 30, 2006 to $1,408,824 for the nine months ended September 30, 2007.
Rent and related expenses for Rand and On Line totaled $210,533 and $104,236,
respectively, for the first nine months of 2007.
MBS's facility rent and related costs totaled $425,578 for the nine
months ended September 30, 2007 as compared to $392,274 for the same period in
2006. This increase can be explained generally by increases in base rent at all
of MBS's operating locations.
Facility rent and related costs associated with IPS's affiliated
medical groups and Orion's corporate office totaled $668,477 for the nine months
ended September 30, 2007 compared to $639,460 for the same period in 2006.
Depreciation and Amortization. Consolidated depreciation and
amortization expense totaled $2,137,197 for the nine months ended September 30,
2007, an increase of $926,472 over the nine months ended September 30, 2006.
In the first nine months of 2007, depreciation expense related to our
fixed assets totaled $219,495 as compared to $155,523 for the same period in
2006. Following is a table that illustrates, by business unit, the depreciation
expense for our fixed assets for the nine months ended September 30, 2007 and
2006:
Nine months ended
September 30,
2007 2006
-------- --------
Depreciation expense:
Rand $ 39,923 $ --
On Line 30,160 --
MBS 52,227 51,823
IPS 48,062 49,055
Orion 49,123 54,645
-------- --------
Total consolidated depreciation expense $219,495 $155,523
======== ========
Amortization expense related to our intangible assets totaled
$1,917,702 for the nine months ended September 30, 2007 as compared to
$1,055,203 for the same period in 2006. Following is a table that illustrates,
by business unit, the amortization expense related to our intangible assets for
the first nine months of 2007 and 2006:
18
Nine months ended
September 30,
2007 2006
---------- ----------
Amortization expense:
Rand $ 395,743 $ --
On Line 277,331 --
MBS 796,570 796,570
IPS 122,100 258,633
Orion 325,959 --
---------- ----------
Total consolidated amortization expense $1,917,702 $1,055,203
========== ==========
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.
The amortization expense related to the intangible assets recorded as a result
of the acquisition of Rand totaled $395,743 for the nine months ended September
30, 2007.
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. The amortization expense related to the intangible assets recorded
as a result of the acquisition of On Line totaled $277,331 for the nine months
ended September 30, 2007.
MBS. As part of the DCPS/MBS Merger, we 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 $796,570 for the nine months
ended September 30, 2007 and 2006, respectively.
IPS. Amortization expense related to the MSAs for IPS's affiliated
medical groups totaled $122,100 and $258,633 for the nine months ended September
30, 2007 and 2006, respectively. The decrease is directly related to IPS
operations discontinued in 2006, which resulted in the impairment of the
intangible assets related to those operations at December 31, 2006.
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.
Amortization expense related to the transaction costs described above
totaled $325,959 for the nine months ended September 30, 2007.
Professional and Consulting Fees. For the nine months ended September
30, 2007, professional and consulting fees totaled $980,145, a decrease of
$32,984, or 3.3%, from the same period in 2006. Professional and consulting fees
for Rand and On Line totaled $57,007 and $139,793 in the first nine months of
2007.
For the nine months ended September 30, 2007, MBS recorded professional
and consulting expenses totaling $95,276 as compared with $132,455 for the same
period in 2006, a decrease of $37,179. This change is primarily the result of a
decrease in contract labor used in early 2006 as a result of staffing shortages.
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 $880,674 for the nine months ended September 30, 2006 to
$688,068 for the nine months ended September 30, 2007. This decrease can be
explained generally by a $91,000 decrease in consulting fees related to a
business development consultant who was utilized in the first nine months of
2006, as well as decreases in legal, accounting and purchased services totaling
approximately $103,000 in the aggregate.
19
Insurance. Consolidated insurance expense, which includes the costs of
professional liability insurance for affiliated physicians, property and
casualty insurance and general liability insurance and directors' and officers'
liability insurance, increased from $350,174 for the nine months ended September
30, 2006 to $410,856 for the nine months ended September 30, 2007. Approximately
$44,000 of the increase relates to workers' compensation and errors and
omissions insurance for Rand and On Line, which was not included in 2006.
Professional liability insurance and workers' compensation insurance also
increased slightly on a year over year basis.
Provision for Doubtful Accounts. The consolidated provision for
doubtful accounts, or bad debt expense, increased $45,664, or 33.1%, for the
nine months ended September 30, 2007 to $183,572. The entire provision for
doubtful accounts for the nine months ended September 30, 2007 related to IPS's
affiliated medical groups and accounted for 1.8% of IPS's net operating revenues
in the first nine months of 2007 as compared to 1.5% of net operating revenues
for the same period in 2006. The total collection rate, after contractual
allowances, for IPS's affiliated medical groups was 68.9% in the first nine
months of 2007, compared to 64.5% for the same period in 2006.
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
$3,268,572 for the nine months ended September 30, 2007, an increase of
$1,307,956 over the same period in 2006.
Following is a table illustrating the composition of other expenses for
the nine months ended September 30, 2007 and 2006:
Nine months ended
September 30,
2007 2006
---------- ----------
Vaccine costs $2,056,675 $1,226,814
Medical supplies 193,947 180,655
Other direct clinical expenses 88,227 72,310
Travel 182,184 119,015
Office supplies and printing 401,549 286,394
Telephone and data communications 289,968 178,451
Postage and courier 1,134,675 571,963
Board of directors' compensation and meeting expenses 44,397 60,003
Bank charges 141,831 132,756
Taxes and licenses 101,987 54,529
Other general and administrative expenses 428,769 246,443
-----------------------
Total consolidated other expenses $5,064,209 $3,129,333
=======================
Other expenses for Rand and On Line totaled $614,002 and $271,016,
respectively, for the first nine months of 2007. Approximately 74% of Rand's and
56% of On Line's other expenses in the first nine months of 2007 related to
postage, courier and office supplies.
MBS's other expenses totaled $970,043 for the nine months ended
September 30, 2006 as compared to $860,298 for the nine months ended September
30, 2007. The increase can be explained generally by an aggregate increase of
approximately $92,000 in postage and courier expenses in the first nine months
of 2007 as compared to the same nine-month period in 2006.
For the nine months ended September 30, 2007, IPS's direct clinical
expenses, other than salaries and benefits, totaled $2,338,849, an increase of
$859,173 over direct clinical expenses in the same period in 2006, which totaled
$1,479,676. Vaccine expenses increased approximately $832,000 in the first nine
months of 2007 when compared with the nine months ended September 30, 2006. In
addition to price increases for certain vaccines that took effect in late 2006,
vaccine purchases increased in the first nine months of 2007 as a result of
increased patient volume as well as the continued impact of the release of a new
vaccine for adolescent females to prevent cervical cancer.
General and administrative expenses other than those incurred by our
RCM segment totaled $870,300 for the nine months ended September 30, 2007, an
increase of $81,046 over the same period in 2006. This increase can be explained
generally by the following: (i) franchise taxes for Illinois increased
approximately $47,000 in the first nine months of 2007 as a result of changes in
our corporate structure; (ii) business promotion expenses totaled approximately
$20,000 in the first nine months of 2007 and related to printed marketing
materials to be used at trade shows and in conjunction with other corporate
presentations; and (iii) meeting expenses related to a strategic planning
meeting totaled approximately $37,000 for the nine months ended September 30,
2007.
20
Other Income (Expenses).
Nine months ended
September 30,
2007 2006
----------- -----------
Interest expense $(1,046,789) $ (352,412)
Gain on forgiveness of debt -- 665,463
Other expense, net (16,635) (14,406)
----------- -----------
Total other income (expenses), net $(1,063,424) $ 298,646
=========== ===========
Other expenses, net, totaled $1,063,424 for the nine months ended
September 30, 2007 as compared with other income, net, of $298,646 for the nine
months ended September 30, 2006.
Interest Expense. Consolidated interest expense totaled $1,046,789 for
the nine months ended September 30, 2007, an increase of $694,377 over the same
period in 2006. Interest expense activity in the first nine months of 2007,
including increases over 2006, can be explained generally by the following:
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 owed 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 a quarterly principal
payment amortization schedule that begins on December 15, 2007 and
extends to December 15, 2008, and increased the annual interest rate
from 8% to 9%. Interest expense related to these notes totaled
$115,718 and $85,828 for the nine months ended September 30, 2007 and
2006, respectively.
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 2.
Management's Discussion and Analysis or Plan of Operation - Company
History and Strategic Focus.) On August 21, 2007, we entered into
First Amendment, which increased the commitment under the revolver
from $2,000,000 to $2,500,000. As of September 30, 2007, we had
amounts outstanding under the revolving loan commitment and term loan
of $2,050,564 and $4,263,750, respectively. Interest expense related
to these loan facilities totaled approximately $478,000 in the first
nine months of 2007.
o Phoenix Subordinated Debt. On December 1, 2006 we closed the Private
Placement with Phoenix and Brantley IV. (See Part I, Item 2.
Management's Discussion and Analysis or Plan of Operation - Company
History and Strategic Focus.) 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 accrued interest expense of
approximately $352,000 on this note in the first nine months of 2007,
in addition to approximately $42,000 in additional interest expense
related to the amortization of the debt discount that was applied to
the warrants issued in conjunction with the subordinated note to
Phoenix.
o Brantley Debt. In March and April 2005, we borrowed an aggregate of
$1,250,000 from Brantley IV. We converted the Brantley IV Notes to
Class A Common Stock on December 1, 2006. (See Part I, Item 2.
Management's Discussion and Analysis or Plan of Operation - Company
History and Strategic Focus.) Interest expense related to these notes
totaled approximately $85,000 for the nine months ended September 30,
2006.
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. 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. Interest expense related to the CIT
credit facility totaled approximately $168,000 in the first nine
months of 2006.
21
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. IPS and SurgiCare also 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 principal payments, totaling, in the aggregate,
$570,000, 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.
Three Months and Nine months Ended September 30, 2007 and 2006 - Discontinued
Operations
Memorial Village. As a result of the uncertainty of future cash flows
related to our surgery center business, 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, we 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, 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.
Dayton ICS. 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. 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 Dayton ICS are now reflected in our consolidated statements of
operations as `income from operations of discontinued components' for the three
months and nine months ended September 30, 2007 and 2006, 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 was 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. The transaction contemplated by the PSNW
Settlement was consummated on May 31, 2007. We recorded a gain on disposal of
discontinued components totaling $999,725 for the quarter ended June 30, 2007.
PSNW and IPS have been 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 three months and nine months
ended September 30, 2007 and 2006, respectively. Additionally, we recorded a
charge for impairment of intangible assets of $1,249,080 for PSNW for the
quarter ended December 31, 2006.
22
Orion. Prior to the divestiture of our ambulatory surgery center
businesses, we recorded management fee revenue, which was eliminated in the
consolidation of our financial statements, from our surgery centers. 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 $968 and $61,038, respectively, for the three
months and nine months ended September 30, 2006.
The following table contains selected financial information regarding
our discontinued operations for the three months and nine months ended September
30, 2007 and 2006:
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net operating revenues from discontinued operations $ -- $ 1,758,732 $ 1,578,152 $ 5,050,991
Total expenses from discontinued operations -- (1,607,509) (1,528,152) (4,726,306)
----------- ----------- ----------- -----------
Income from discontinued operations -- 151,223 50,000 324,685
Gain on disposal of discontinued operations -- -- 999,725 668,387
----------- ----------- ----------- -----------
Net income from discontinued operations $ -- $ 151,223 $ 1,049,725 $ 993,072
=========== =========== =========== ===========
Liquidity and Capital Resources
Net cash used in operating activities totaled $558,290 for the nine
months ended September 30, 2007 as compared with cash used in operating
activities of $359,402 for the nine months ended September 30, 2006. Net cash
used in operations increased in the first nine months of 2007 largely as a
result of (i) increased interest expense in 2007 as a result of the Wells Fargo
loan facilities and the subordinated debt with Phoenix; and (ii) increased legal
expenses in the first quarter of 2007 related to operations we discontinued at
the end of 2006. The net impact of discontinued operations on net cash used by
operating activities in the first nine months of 2007 was $830,772.
For the nine months ended September 30, 2007, net cash used in
investing activities totaled $200,135 compared to $380,448 in net cash provided
by investing activities for the same period in 2006. The net impact of
discontinued operations on net cash provided by investing activities in the
first nine months of 2006 related to the transactions involving the sale of
Memorial Village and San Jacinto.
Net cash provided by financing activities totaled $436,504 for the nine
months ended September 30, 2007 as compared to $219,058 in cash used in
financing activities for the same period in 2006. The change in cash sources and
uses related to financing activities from the first nine months of 2006 to the
first nine months of 2007 can be explained generally by the following:
o We borrowed an aggregate of approximately $868,000 from Wells Fargo in
the first nine months of 2007 under the revolving loan commitment
pursuant to the Credit Agreement;
o We made aggregate principal payments of $210,000 to Wells Fargo in the
first nine months of 2007 pursuant to the amortization of our term
loan commitment;
o We repaid an aggregate of $75,000 to the former shareholder of On Line
as repayment for one of the notes issued on December 1, 2006 as
consideration in connection with our acquisition of On Line;
o We repaid approximately $200,000 in satisfaction of a working capital
note from the sellers of MBS in the first quarter of 2006; and
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.
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 under the caption "Company History
and Strategic Focus." 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.
23
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 and for the
three months and twelve months ended September 30, 2007, we were out of
compliance with the minimum level of trailing twelve month EBITDA and maximum
senior debt leverage ratio covenants under the Credit Agreement and notified the
lender as such. Under the terms of the Credit Agreement, failure to meet the
required financial covenants constitutes an event of default. On November 14,
2007, we obtained a waiver of the events of default from Wells Fargo. We believe
that once we deliver our October financial statements to Wells Fargo we will
be in compliance with all of our financial covenants as of October 31, 2007.
As of September 30, 2007, our revolving loan commitment with Wells
Fargo had no 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. 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 "Company History and Strategic Focus.") 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 3. 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 our 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.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Credit Agreement contains certain financial covenants that require
us to maintain minimum levels of trailing twelve month 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 and
for the three months and twelve months ended September 30, 2007, we were out of
compliance with the minimum level of trailing twelve month EBITDA and maximum
senior debt leverage ratio covenants under the Credit Agreement and notified the
lender as such. Under the terms of the Credit Agreement, failure to meet the
required financial covenants constitutes an event of default. On November 14,
2007, we obtained a waiver of the events of default from Wells Fargo. We believe
that once we deliver our October financial statements to Wells Fargo we will
be in compliance with all of our financial covenants as of October 31, 2007.
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this Quarterly Report
on Form 10-QSB 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."
24
Exhibit No. Description
----------- -------------------------------------------------------
10.1 Second Amendment to Credit Agreement, dated as of
September 24, 2007, by and among Orion HealthCorp,
Inc., each of the subsidiaries identified therein and
Wells Fargo Foothill, Inc.
24.1 Power of Attorney (See Signatures on page [ ])
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
25
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: November 14, 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 November 14, 2007.
By: /s/ Terrence L. Bauer By: /s/ Robert P. Pinkas
------------------------------------------------ -----------------------------------------------
Terrence L. Bauer Robert P. Pinkas
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)
26
ORION HEALTHCORP, INC.
INDEX TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Page
Number
-------
Consolidated Condensed Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006 F-2
Consolidated Condensed Statements of Operations for the Three Months Ended September 30, 2007 and 2006 (unaudited) F-3
Consolidated Condensed Statements of Operations for the Nine Months Ended September 30, 2007 and 2006 (unaudited) F-4
Consolidated Condensed Statements of Cash Flows for the Three Months Ended September 30, 2007 and 2006 (unaudited) F-5
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited) F-6
Notes to Unaudited Consolidated Condensed Financial Statements F-7
F-1
Orion HealthCorp, Inc.
Consolidated Condensed Balance Sheets
September 30, December 31,
2007 2006
------------ ------------
(Unaudited)
Current assets
Cash and cash equivalents $ 321,711 $ 643,632
Accounts receivable, net 3,399,244 3,575,375
Inventory 215,658 277,799
Prepaid expenses and other current assets 454,615 406,790
Assets held for sale -- 502,147
------------ ------------
Total current assets 4,391,228 5,405,743
------------ ------------
Property and equipment, net 655,075 711,012
------------ ------------
Other long-term assets
Intangible assets, excluding goodwill, net 12,751,685 14,343,429
Goodwill 7,815,303 7,815,303
Other assets, net 2,578,587 1,907,710
------------ ------------
Total other long-term assets 23,145,575 24,066,442
------------ ------------
Total assets $ 28,191,878 $ 30,183,197
============ ============
Current liabilities
Accounts payable and accrued expenses $ 5,803,974 $ 6,937,935
Current portion of capital lease obligations 111,206 103,004
Current portion of long-term debt 2,581,089 1,744,368
Current portion of long-term debt held by related parties 1,150,000 325,000
Liabilities held for sale -- 158,714
------------ ------------
Total current liabilities 9,646,269 9,269,021
------------ ------------
Long-term liabilities
Capital lease obligations, net of current portion 130,011 155,034
Long-term debt, net of current portion 6,483,751 6,833,750
Long-term debt, net of current portion, held by related parties 3,683,206 4,541,603
------------ ------------
Total long-term liabilities 10,296,968 11,530,387
------------ ------------
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 shares authorized
at September 30, 2007 and December 31, 2006, respectively; 105,504,032
and 105,374,487 shares issued and outstanding at September 30, 2007 and
December
31, 2006, respectively 105,504 105,375
Common Stock, Class D, par value $0.001; 50,000,000
shares authorized at September 30, 2007 and December 31,
2006, respectively; 24,658,955 shares issued and
outstanding at September 30, 2007 and December 31, 2006 24,659 24,659
Additional paid-in capital 64,167,701 63,876,039
Accumulated deficit (56,010,905) (54,583,966)
Treasury stock - at cost; 9,140 shares (38,318) (38,318)
------------ ------------
Total stockholders' equity 8,248,641 9,383,789
------------ ------------
Total liabilities and stockholders' equity $ 28,191,878 $ 30,183,197
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Operations
For the Three Months Ended September 30,
2007 2006
------------------ --------------------
(Unaudited) (Unaudited)
Net operating revenues $ 8,551,122 $ 5,715,461
Operating expenses
Salaries and benefits 4,200,894 2,540,187
Physician group distribution 1,230,856 1,244,931
Facility rent and related costs 478,034 365,114
Depreciation and amortization 719,948 402,357
Professional and consulting fees 312,893 363,589
Insurance 138,315 117,044
Provision for doubtful accounts 65,405 28,492
Other expenses 1,795,636 1,168,715
------------------ --------------------
Total operating expenses 8,941,981 6,230,429
------------------ --------------------
Loss from continuing operations before other income
(expenses) (390,861) (514,968)
------------------ --------------------
Other income (expenses)
Interest expense (361,725) (120,958)
Gain on forgiveness of debt -- --
Other expense, net (4,636) (3,002)
------------------ --------------------
Total other income (expenses), net (366,361) (123,961)
------------------ --------------------
Loss from continuing operations (757,222) (638,929)
Discontinued operations
Income from operations of discontinued components -- 151,223
------------------ --------------------
Net loss $ (757,222) $ (487,706)
================== ====================
Weighted average common shares outstanding
----------------------------------------------------------
Basic 105,503,461 12,652,882
Diluted 105,503,461 12,652,882
Income (loss) per share
----------------------------------------------------------
Basic
Net loss per share from continuing operations $ (0.01) $ (0.05)
Income per share from discontinued operations $ 0.00 $ 0.01
------------------ --------------------
Net income (loss) per share $ (0.01) $ (0.04)
================== ====================
Diluted
Net loss per share from continuing operations $ (0.01) $ (0.05)
Income per share from discontinued operations $ 0.00 $ 0.01
------------------ --------------------
Net income (loss) per share $ (0.01) $ (0.04)
================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Operations
For the Nine Months Ended September 30,
2007 2006
------------------- ------------------
Net operating revenues $ 24,997,054 $ 16,587,218
Operating expenses
Salaries and benefits 12,623,138 7,592,765
Physician group distribution 3,602,351 3,609,846
Facility rent and related costs 1,408,824 1,031,734
Depreciation and amortization 2,137,197 1,210,725
Professional and consulting fees 980,145 1,013,129
Insurance 410,856 350,174
Provision for doubtful accounts 183,572 137,908
Other expenses 5,064,209 3,129,333
------------------- ------------------
Total operating expenses 26,410,292 18,075,614
------------------- ------------------
Loss from continuing operations before other income
(expenses) (1,413,238) (1,488,396)
------------------- ------------------
Other income (expenses)
Interest expense (1,046,789) (352,412)
Gain on forgiveness of debt -- 665,463
Other expense, net (16,635) (14,405)
------------------- ------------------
Total other income (expenses), net (1,063,424) 298,646
------------------- ------------------
Loss from continuing operations (2,476,662) (1,189,750)
Discontinued operations
Income from operations of discontinued components 1,049,725 993,072
------------------- ------------------
Net loss $ (1,426,937) $ (196,678)
=================== ==================
Weighted average common shares outstanding
----------------------------------------------------------
Basic 105,499,862 12,578,759
Diluted 105,499,862 12,578,759
Income (loss) per share
----------------------------------------------------------
Basic
Net loss per share from continuing operations $ (0.02) $ (0.09)
Net income per share from discontinued operations $ 0.01 $ 0.08
------------------- ------------------
Net income (loss) per share $ (0.01) $ (0.01)
=================== ==================
Diluted
Net loss per share from continuing operations $ (0.02) $ (0.09)
Net income per share from discontinued operations $ 0.01 $ 0.08
------------------- ------------------
Net income (loss) per share $ (0.01) $ (0.01)
=================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Cash Flows
For the Three Months Ended September
30,
2007 2006
------------------- -----------------
Operating activities
Net loss $ (757,222) $ (487,706)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts 65,405 28,492
Depreciation and amortization 719,948 402,357
Stock option compensation expense 99,393 49,642
Impact of discontinued operations (44,728) 124,208
Changes in operating assets and liabilities:
Accounts receivable 43,596 (62,070)
Inventory 35,289 (111,817)
Prepaid expenses and other assets 122,149 (113,316)
Other assets (52,352) 1,400
Accounts payable and accrued expenses (338,567) (52,109)
------------------- -----------------
Net cash used in operating activities (107,089) (220,919)
------------------- -----------------
Investing activities
Purchase of property and equipment (112,333) (36,785)
Impact of discontinued operations (29,787) --
------------------- -----------------
Net cash used in investing activities (142,120) (36,785)
------------------- -----------------
Financing activities
Net borrowings (repayments) of capital lease
obligations 63,138 (22,463)
Net borrowings on line of credit 318,196 9,674
Net repayments of senior notes payable (52,500) --
Net borrowings from related parties 13,868 --
Net repayments of notes payable (15,000) --
Net borrowings (repayments) of other obligations (33,515) 42,425
------------------- -----------------
Net cash provided by financing activities 294,187 29,576
------------------- -----------------
Net increase (decrease) in cash and cash equivalents 44,978 (228,128)
Cash and cash equivalents, beginning of period 276,733 328,923
------------------- -----------------
Cash and cash equivalents, end of period $ 321,711 $ 100,795
=================== =================
Supplemental cash flow information
Cash paid during the period for
Income taxes $ -- $ --
Interest $ 347,856 $ 92,208
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Orion HealthCorp, Inc.
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
2007 2006
-------------------- -----------------
Operating activities
Net loss $ (1,426,937) $ (196,678)
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for doubtful accounts 183,572 137,908
Depreciation and amortization 2,137,197 1,210,725
Gain on forgiveness of debt -- (665,463)
Stock option compensation expense 291,742 147,355
Issuance of stock 41 --
Impact of discontinued operations (830,772) 554,942
Changes in operating assets and liabilities:
Accounts receivable 192,958 (392,776)
Inventory 62,141 (75,860)
Prepaid expenses and other assets (47,825) (199,028)
Other assets (125,333) 14,342
Accounts payable and accrued expenses (995,074) (894,869)
-------------------- -----------------
Net cash used in operating activities (558,290) (359,402)
-------------------- -----------------
Investing activities
Sale (purchase) of property and equipment (204,748) (49,796)
Impact of discontinued operations 4,608 430,244
Proceeds from equity transaction 5 --
-------------------- -----------------
Net cash provided by (used in) investing activities (200,135) 380,448
-------------------- -----------------
Financing activities
Net borrowings (repayments) of capital lease
obligations (16,822) (68,162)
Net borrowings (repayments) on line of credit 868,164 (408,607)
Net borrowings (repayments) of senior notes
payable (210,000) 589,252
Net borrowings (repayments) to related parties 41,603 (199,697)
Net repayments of notes payable (125,000) --
Net borrowings (repayments) of other obligations (121,442) 168,156
Impact of discontinued operations -- (300,000)
-------------------- -----------------
Net cash provided by (used in) financing activities 436,504 (219,058)
-------------------- -----------------
Net increase (decrease) in cash and cash equivalents (321,921) (198,012)
Cash and cash equivalents, beginning of period 643,632 298,807
-------------------- -----------------
Cash and cash equivalents, end of period $321,711 $ 100,795
==================== =================
Supplemental cash flow information
Cash paid during the period for
Income taxes $ -- $ --
Interest $1,005,185 $ 267,100
F-6
Orion HealthCorp, Inc.
Notes to Unaudited Consolidated Condensed Financial Statements
September 30, 2007 and 2006
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").
Note 1. General
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.
Our unaudited consolidated condensed financial statements include the
accounts of the Company and all of its majority-owned subsidiaries. Our results
for the three months and nine months ended September 30, 2007 include the
results of Medical Billing Services, Inc. ("MBS"), Rand Medical Billing, Inc.
("Rand"), On Line Alternatives, Inc. ("OLA"), On Line Payroll Services, Inc.
("OLP") (collectively with OLA, "On Line"), and Integrated Physician Solutions,
Inc. ("IPS"). Our results for the three months and nine months ended September
30, 2006 include the results of MBS and IPS. We did not acquire Rand and On Line
until December 1, 2006. All material intercompany balances and transactions have
been eliminated in consolidation.
These financial statements have been prepared in accordance with GAAP
for interim financial reporting and in accordance with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not contain all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the accompanying unaudited
consolidated condensed financial statements include adjustments consisting of
only normal recurring adjustments necessary for a fair presentation of our
financial position, results of operations and cash flows for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
Certain reclassifications have been made in the 2006 financial
statements to conform to the reporting format in 2007. Such reclassifications
had no effect on previously reported earnings. In addition, the first, second
and third quarter financial statements were restated to reflect operations
discontinued subsequent to the first nine months of 2006.
The accompanying unaudited consolidating condensed financial statements
should be read in conjunction with the financial statements and related notes
therein included in our Annual Report on Form 10-KSB for the year ended December
31, 2006.
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 our operating
subsidiaries: MBS, Rand, On Line, and IPS. Our mission is to provide superior
billing, collections, practice, business and financial management services for
physicians, resulting in optimal profitability for our clients and increased
enterprise value for our 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, Private
Placement and Going Private Transaction for additional information on the
furtherance of our strategic plan in 2006.)
F-7
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 59 clients. Rand currently provides services to approximately
52 clients. On Line currently provides services to approximately 13 billing
clients and 43 transcription clients and provides payroll processing services to
over 200 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;
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.
F-8
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 September 30, 2007, IPS managed
six practice sites, representing three 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."
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 three months and nine months
ended September 30, 2007 and 2006, respectively.
IPS was 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 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. The transaction contemplated
by the PSNW Settlement was consummated on May 31, 2007. Among other provisions,
after May 31, 2007, PSNW and IPS have been released from any further obligation
to each other from any previous agreement. The operations of PSNW are reflected
on our consolidated condensed statements of operations as `income from
operations of discontinued components' for the three months and nine months
ended September 30, 2007 and 2006, respectively.
Ambulatory Surgery Center Business
As of September 30, 2007, we no longer have ownership or management
interests in surgery and diagnostic centers.
On January 12, 2006, we were notified by Union Hospital ("Union") that
it was exercising its option to terminate the management services agreement for
Tuscarawas Open MRI, L.P. ("TOM") as of March 12, 2006. In 2005, management fee
revenue related to TOM was $38,837.
On February 3, 2006, we were notified by Union that it was exercising
its option to terminate the management services agreement for Tuscarawas
Ambulatory Surgery Center, L.L.C. ("TASC") 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.
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.
Note 2. Acquisitions, Private Placement and Going Private Transaction
On December 1, 2006 we completed the acquisitions of Rand and On Line.
F-9
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 at December 1, 2006. 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.
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 aggregate original 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 (earn-out) or reduction in (reduction) the cost of the
acquisition and goodwill and other identifiable intangible assets will be
adjusted accordingly.
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 September 30, 2007, Brantley IV and its affiliates, Brantley
Venture Partners III, L.P. ("Brantley III") and Brantley Equity Partners, L.P.
("BEP"), owned 66,629,515 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 September 30, 2007, this represented 55.1% of
our voting power on an as-converted, fully-diluted basis. 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
Robert P. Pinkas, are affiliated with Brantley IV and its related entities.
Messrs. Cascio and Pinkas serve as general partners of the general partner of
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. Messrs. Cascio and Pinkas also
serve as advisors to BEP.
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.
F-10
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 and for the
three months and twelve months ended September 30, 2007, we were out of
compliance with the minimum level of trailing twelve month EBITDA and maximum
senior debt leverage ratio covenants under the Credit Agreement and notified the
lender as such. Under the terms of the Credit Agreement, failure to meet the
required financial covenants constitutes an event of default. On November 14,
2007, we obtained a waiver of the events of default from Wells Fargo. We believe
that once we deliver our October financial statements to Wells Fargo we will
be in compliance with all of our financial covenants as of October 31, 2007.
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 shares, 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.
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.
On August 21, 2007, we entered into a first amendment to the Credit
Agreement (the "First Amendment"), among Orion, its subsidiaries and Wells Fargo
Foothill, Inc. The First Amendment increased the commitment under the revolver
from $2,000,000 to $2,500,000 and revised certain of the financial covenants
contained in the Credit Agreement. On September 24, 2007, we entered into a
second amendment to the Credit Agreement (the "Second Amendment"), among Orion,
its subsidiaries and Wells Fargo Foothill, Inc. The Second Amendment revised
certain of the financial covenants contained in the Credit Agreement.
Going Private Transaction. On September 19, 2007, a special committee
of our board of directors approved a 1-for-2,500 reverse stock split of our
Class A Common Stock, immediately followed by a 2,500-for-1 forward stock split
of our Class A Common Stock (collectively, the "Split"). Stockholders with fewer
than 2,500 shares pre-split will receive $0.23 per share for each such share. We
anticipate that as a result of the Split, our number of record holders of Class
A Common Stock will be less than 300 and we would deregister our shares of Class
A Common Stock under the Securities Exchange Act of 1934. The Split would be
effected by an amendment to our Third Amended and Restated Certificate of
Incorporation (the "Amendment"). The Amendment requires approval of the majority
of our Class A Common and Class D Common stockholders of record, voting as a
single class. Our board of directors has set a special meeting date of Thursday,
November 29, 2007, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell,
Georgia 30076, or alternatively, at such later date, time and place to be
determined by our management for the purpose of seeking such stockholder
approval (the "Special Meeting"). Our board of directors has set a record date
of October 1, 2007 for the purpose of determining stockholders entitled to
notice of, and to vote at, the Special Meeting.
On September 21, 2007, we entered into a note purchase agreement (the
"Second Note Purchase Agreement") with Phoenix, Brantley IV and Terrence L.
Bauer ("Bauer"), providing for the issuance of our senior subordinated unsecured
promissory notes in the aggregate principal amount of $1,000,000 to be purchased
by Phoenix in the amount of $700,000, by Brantley IV in the amount of $250,000
and by Bauer in the amount of $50,000, each bearing interest at an aggregate
rate of 14% per annum and due December 1, 2011. The Second Note Purchase
Agreement was entered into to provide us with needed working capital and the
necessary funds to effect the Split referred above. The closing of the Note
Purchase Agreement is conditioned on no material adverse effect to us since June
30, 2007 and the consummation of the Split pursuant to the Amendment referred to
above.
F-11
As of September 30, 2007, our revolving loan commitment with Wells
Fargo had no 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. 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. 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 three months ended September 30,
2007 and 2006.
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 in Note 1. General
under the caption "Description of Business," we no longer have ownership or
management interests in surgery and diagnostic centers.
F-12
Note 4. 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, results could differ from
these estimates.
Note 5. Segment Reporting
The following table summarizes key financial information, by reportable
segment, as of and for the three months and nine months ended September 30, 2007
and 2006, respectively:
For the three months ended September 30, 2007
--------------------------------------------------------------------
RCM PM Total
--------------------- --------------------- ------------------
Net operating revenues $4,968,294 $3,512,392 $8,480,686
Income from continuing operations 330,563 202,283 532,846
Depreciation and amortization 532,006 67,645 599,651
Total assets 20,053,330 4,140,944 24,194,274
For the three months ended September 30, 2006
--------------------------------------------------------------------
RCM PM Total
--------------------- --------------------- ------------------
Net operating revenues $2,451,464 $3,184,856 $5,636,320
Income from continuing operations 230,982 207,848 438,830
Depreciation and amortization 282,510 101,659 384,169
Total assets 9,677,957 8,458,400 18,136,357
For the nine months ended September 30, 2007
--------------------------------------------------------------------
RCM PM Total
--------------------- --------------------- ------------------
Net operating revenues $14,687,945 $10,051,914 $24,739,859
Income from continuing operations 916,742 607,264 1,524,006
Depreciation and amortization 1,591,953 286,909 1,878,862
Total assets 20,053,330 4,140,944 24,194,274
For the nine months ended September 30, 2006
--------------------------------------------------------------------
RCM PM Total
--------------------- --------------------- ------------------
Net operating revenues $7,207,517 $9,119,915 $16,237,432
Income from continuing operations 569,872 602,902 1,172,774
Depreciation and amortization 848,392 307,688 1,156,080
Total assets 9,677,957 8,458,400 18,136,357
F-13
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 three
months and nine months ended September 30, 2007 and 2006, respectively:
Nine months ended
Three months ended September 30, September 30,
2007 2006 2007 2006
---- ---- ---- ----
Net operating revenues:
Total net operating revenues for reportable
segments $8,480,686 $5,636,320 $24,739,859 $10,691,111
Corporate revenue 70,436 79,141 257,195 180,645
---------------- --------------- --------------- ---------------
Total consolidated net operating revenues $8,551,122 $5,715,461 $24,997,054 $10,871,756
================ =============== =============== ===============
Income (loss) from continuing operations:
Total income from continuing operations for
reportable segments $532,846 $438,830 $1,524,006 $733,944
Extraordinary gain - - - 665,463
Corporate overhead (1,290,068) (1,077,758) (4,000,668) (1,950,229)
---------------- --------------- --------------- ---------------
Total consolidated income (loss) from
continuing operations $(757,222) $(638,928) $(2,476,662) $(550,822)
================ =============== =============== ===============
Depreciation and amortization:
Total depreciation and amortization for
reportable segments $599,651 $384,169 $1,878,862 $771,912
Corporate depreciation and amortization 120,297 18,188 258,335 36,457
---------------- --------------- --------------- ---------------
Total consolidated depreciation and
amortization $719,948 $402,357 $2,137,197 $808,369
================ =============== =============== ===============
Total assets:
Total assets for reportable segments $24,194,274 $18,136,357 $24,194,274 $18,136,357
Corporate assets 3,866,829 1,640,670 3,866,829 1,640,670
Assets held for sale or related to
discontinued operations (1) 130,775 - 130,775 -
---------------- --------------- --------------- ---------------
Total consolidated assets $28,191,878 $19,777,027 $28,191,878 $19,777,027
================ =============== =============== ===============
Note 6. 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.
Note 7. 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.
F-14
For the three months ended For the nine months ended
September 30, September 30,
2007 2006 2007 2006
------------------------------ ------------- ----------------
Net loss $ (757,222) $ (487,706) $ (1,426,937) $ (196,678)
Weighted average number of shares of
Class A Common Stock outstanding for
basic net income (loss) per share 105,503,461 12,652,882 105,499,862 12,578,759
Dilutive stock options, warrants and
restricted stock units (a) (a) (a) (a)
Convertible notes payable (b) (b) (b) (b)
Class B Common Stock (c) (c) (c) (c)
Class C Common Stock (d) (d) (d) (d)
Class D Common Stock (e) -- (e) --
Weighted average number of shares of
Class A Common Stock outstanding for
diluted net income (loss) per share 105,503,461 12,652,882 105,499,862 12,578,759
Net income (loss) per share - Basic $ (0.01) $ (0.04) $ (0.01) $ (0.01)
Net income (loss) per share - Diluted $ (0.01) $ (0.04) $ (0.01) $ (0.01)
The following potentially dilutive securities are not included in the
calculation of weighted average number of shares of Class A Common Stock
outstanding for diluted net income (loss) per share for the three months and
nine months ended September 30, 2007 and 2006, respectively, because the effect
would be anti-dilutive due to the net loss for the quarter:
a) 6,683,361 and 2,612,347 options, warrants and restricted stock
units were outstanding at September 30, 2007 and 2006,
respectively. (See Note 2. Acquisitions, Private Placement and
Going Private Transaction for information on warrants issued to
Phoenix.)
b) A $50,000 note was convertible into 442,152 and 391,832 shares of
our Class A Common Stock at September 30, 2007 and 2006,
respectively, based on 75% of the average closing price for the 20
trading days immediately prior to the conversion date.
c) There were no shares of our Class B Common Stock outstanding at
September 30, 2007. 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 2. Acquisitions, Private Placement and Going Private
Transaction.) There were 10,448,470 shares of our Class B Common
Stock outstanding at September 30, 2006. Each share of Class B
Common Stock was convertible into 6.564372146 shares of Class A
Common Stock at September 30, 2006.
d) There were no shares of our Class C Common Stock outstanding at
September 30, 2007. 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 2. Acquisitions, Private Placement and
Going Private Transaction.) There were 1,437,572 shares of our
Class C Common Stock outstanding at September 30, 2006. Each share
of Class C Common Stock was convertible into 13.75 shares of Class
A Common Stock at September 30, 2006.
e) 24,658,955 shares of our Class D Common Stock were outstanding at
September 30, 2007. 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. Each share of our Class D Common
Stock is currently convertible into one share of our Class A
Common Stock. (See Note 2. Acquisitions, Private Placement and
Going Private Transaction.)
Note 8. Employee Stock Based Compensation
At September 30, 2007, 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 estimating 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.
F-15
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.
In March 2007, we granted 420,000 stock options to certain of our employees
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 nine months ended September 30, 2007 and 2006, the impact of
adopting SFAS No. 123(R) on our consolidated statements of operations was an
increase in salaries and benefits expense of $291,742 and $147,357,
respectively, 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.
Note 9. Discontinued Operations
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-16
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 Dayton ICS are
now reflected in our consolidated statements of operations as `income from
operations of discontinued components' for the three months and nine months
ended September 30, 2007 and 2006, 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 was 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. The transaction contemplated by the PSNW
Settlement was consummated on May 31, 2007. We recorded a gain on disposal of
discontinued components totaling $999,725 for the quarter ended June 30, 2007.
PSNW and IPS have been 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 three months and nine months
ended September 30, 2007 and 2006, respectively. 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, from our surgery centers. 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 $968 and $61,038, respectively, for the three
months and nine months ended September 30, 2006.
The following table contains selected financial information regarding
our discontinued operations for the three months and nine months ended September
30, 2007 and 2006, respectively:
Three months ended Nine months ended September 30,
September 30,
2007 2006 2007 2006
------------- ----------------- --------------- ----------------
Net operating revenues from discontinued
operations $ -- $ 1,758,732 $ 1,578,152 $ 5,050,991
Total expenses from discontinued operations -- (1,607,509) (1,528,152) (4,726,306)
------------- ----------------- --------------- ----------------
Income from discontinued operations -- 151,223 50,000 324,685
Gain on disposal of discontinued
operations -- -- 999,725 668,387
------------- ----------------- --------------- ----------------
Net income from discontinued operations $ -- $ 151,223 $ 1,049,725 $ 993,072
============= ================= =============== ================
F-17
Note 10. Long-Term Debt
Long-term debt is as follows:
September 30, 2007 December 31, 2006
----------------------- ---------------------
Long-term debt:
----------------------------------------------------------------
$4,500,000 senior note payable to a financial institution,
bearing interest at the Prime Rate (7.75% at September 30,
2007) plus 1.75%, interest payable monthly, principal payments
monthly based on schedule, matures December 1, 2010 (1) $ 4,263,750 $ 4,473,750
$2,500,000 senior revolving line of credit with a financial
institution, bearing interest at the Prime Rate (7.75% at
September 30, 2007) plus 1.75%, interest payable monthly,
matures December 1, 2010 (1) 2,050,564 1,182,400
$10,000,000 senior acquisition line of credit with a financial
institution, bearing interest at the Prime Rate (7.75% at
September 30, 2007) plus 1.75%, interest payable monthly,
principal payments monthly based on schedule, matures December
1, 2010 (1) -- --
Term loan payable to a financial institution, non-interest
bearing, matures October 1, 2013 2,685,000 2,735,000
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 15,526 136,968
----------------------- ---------------------
Total debt 9,064,840 8,578,118
Less: Current portion of long-term debt (2,581,089) (1,744,368)
----------------------- ---------------------
Total long-term debt $ 6,483,751 $ 6,833,750
======================= =====================
Long-term debt held by related parties:
----------------------------------------------------------------
Promissory notes payable to sellers of MBS, bearing interest at
9%, interest payable monthly, principal payments quarterly
beginning on December 15, 2007 based on schedule, matures
December 15, 2008 1,714,336 1,714,336
$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 3,118,870 3,077,267
$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
----------------------- ---------------------
Total debt held by related parties $ 4,833,206 $ 4,866,603
Less: Current portion of long-term debt held by related parties (1,150,000) (325,000)
----------------------- ---------------------
Total long-term debt held by related parties $ 3,683,206 $ 4,541,603
======================= =====================
(1) The Credit Agreement contains certain financial covenants that require us
to maintain minimum levels of trailing twelve month 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 and for the three months and twelve months ended
September 30, 2007, we were out of compliance with the minimum level of
trailing twelve month EBITDA and maximum senior debt leverage ratio
covenants under the Credit Agreement and notified the lender as such. Under
the terms of the Credit Agreement, failure to meet the required financial
covenants constitutes an event of default. On November 14, 2007, we
obtained a waiver of the events of default from Wells Fargo. We believe
that once we deliver our October financial statements to Wells Fargo we
will be in compliance with all of our financial covenants as of October
31, 2007.
Note 11. Litigation
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.
F-18
IPS was 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 was the closing date of the transaction contemplated by the PSNW
Settlement, PSNW and IPS have been 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 12. Subsequent Events
On November 14, 2007, we filed a definitive proxy statement with the
SEC on Form DEF14A with respect to the going private transaction contemplated by
the Splits and the Second Note Purchase Agreement, which are described in Note
2. Acquisitions, Private Placement and Going Private Transaction, and set a
special stockholder's meeting date of November 29, 2007 for approval of the
Splits.
F-19
Exhibit No. Description
------------ -------------------------------------------------------------------
10.1 Second Amendment to Credit Agreement, dated as of September 24,
2007, by and among Orion HealthCorp, Inc., each of the subsidiaries
identified therein and Wells Fargo Foothill, Inc.
24.1 Power of Attorney (See Signatures on page [ ])
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
38