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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
 Commission File No. 001-16587 ORION HEALTHCORP, INC. FORMERLY SURGICARE, INC.)
  Delaware
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
    
    58-1597246
(IRS EMPLOYER IDENTIFICATION NO.)
 1805 Old Alabama Road
Suite 350, Roswell GA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    30076  
(ZIP CODE)
 ISSUERS TELEPHONE NUMBER: (678) 832-1800 SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS
    
    NAME OF EACH EXCHANGE ON
WHICH REGISTEREDClass A Common Stock, $0.001 par value per share
    
    The American Stock Exchange
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o As of April 23, 2005, 8,731,548 shares of the Registrants Class A Common Stock, par value $0.001,
were outstanding, 11,417,649 shares of the Registrants Class B Common Stock, par value $0.001,
were outstanding and 1,575,760 shares of the Registrants Class C Common Stock, par value $0.001,
were outstanding.




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ORION HEALTHCORP, INC.
Quarterly Report on Form 10-QSB
For the Quarterly Period Ended March 31, 2005 TABLE OF CONTENTS Item
    
    
    
    PageNumber
    
    
    
    NumberPART I  FINANCIAL INFORMATION1.
    
    Financial Statements
    
    32.
    
    Managements Discussion and Analysis or Plan of Operation
    
    33.
    
    Controls and Procedures
    
    15PART II  OTHER INFORMATION1.
    
    Legal Proceedings
    
    152.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    153.
    
    Defaults Upon Senior Securities
    
    164.
    
    Submission of Matters to a Vote of Security Holders
    
    165.
    
    Other Information
    
    166.
    
    Exhibits and Reports on Form 8-K
    
    16SIGNATURES
    
    17CONSOLIDATED FINANCIAL STATEMENTS
    
    F-1INDEX OF EXHIBITSEX-10.1 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENTEX-10.2 AMENDED AND RESTATED GUARANTY AGREEMENTEX-10.3 AMENDED AND RESTATED GUARANTY AGREEMENTEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFOEX-99.1 COPY OF PRESS RELEASE




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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, and
Section 21E of the Securities Exchange Act of 1934, as amended (collectively, the Acts).
Forward-looking statements include statements preceded by, followed by or that include the words
may, will, would, could, should, estimates, predicts, potential, continue,
strategy, believes, anticipates, plans, expects, intends and similar expressions. Any
statements contained herein that are not statements of historical fact are deemed to be
forward-looking statements. The forward-looking statements in this report are based on current beliefs, estimates and
assumptions concerning the operations, future results, and prospects of Orion HealthCorp, Inc.
(formerly known as SurgiCare, Inc. SurgiCare) (Orion or the Company) and its affiliated
companies 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. Forward-looking statements are subject to the safe harbors created in the
Acts. Any number of factors could affect future operations and results, including, without
limitation, changes in federal or state healthcare laws and regulations and third party payer
requirements, changes in costs of supplies, labor and employee benefits, increases in interest
rates on the Companys indebtedness as well as general market conditions, competition and pricing.
The Company undertakes no obligation to update publicly any forward-looking statements, whether as
a result of new information or future events. 
 PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS The Companys consolidated 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 Managements Discussion and Analysis of Financial Condition and Results of
Operations highlights the principal factors that have affected Orions financial condition and
results of operations as well as Orions liquidity and capital resources for the periods described.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain Recent Developments Acquisition and Restructuring Transactions On November 18, 2003, the Company entered into an agreement and plan of merger with Integrated
Physician Solutions, Inc. (IPS), which was amended and restated on February 9, 2004, and further
amended on July 16, 2004 and on September 9, 2004 (the IPS Merger Agreement), relating to the
Companys acquisition of IPS (the IPS Merger). On February 9, 2004, the Company entered into an
agreement and plan of merger with Dennis Cain Physician Solutions, Ltd. (DCPS) and Medical
Billing Services, Inc. (MBS), which was amended and restated on July 16, 2004, and further
amended on September 9, 2004 and on December 15, 2004 (the DCPS/MBS Merger Agreement), relating
to the Companys acquisition of DCPS and MBS (the DCPS/MBS Transaction and together with the IPS
Merger, the Acquisitions). The Company completed the IPS Merger and the DCPS/MBS Transaction on
December 15, 2004. As a result of the IPS Merger and the DCPS/MBS Transaction, IPS, MBS and DCPS
became wholly-owned subsidiaries of the Company. On December 15, 2004, and simultaneous with the consummation of the IPS Merger and DCPS/MBS
Transaction, the Company consummated its previously disclosed restructuring transactions (the
Closing), which included issuances of new equity securities for cash and contribution of
outstanding debt, and the restructuring of its debt facilities. The Company also completed a
one-for-ten reverse stock split (the Reverse Stock Split), created three new classes of common
stock and changed its name. SurgiCare common stock was converted to Orion Class A Common Stock
(the Reclassification). The Company also created Class B and Class C Common Stock, which were
issued in connection with the equity investments and acquisitions. Also on December 15, 2004, the Company issued 11,482,261 shares of its Class B Common Stock
(the Investment Transaction) to various investors for $13,200,000 in cash plus cash in the amount
of $128,350, which amount equaled the accrued but unpaid interest immediately prior to the Closing
owed to a subsidiary of Brantley Partners IV, L.P. (Brantley IV) by SurgiCare and IPS on amounts
advanced prior to October 24, 2003 (the Base Bridge Interest Amount). At the Closing, Orion used
$5,908,761 to pay off the debt owed to the subsidiary of Brantley IV. The Company also granted to
Brantley IV the right to purchase shares of Class A Common Stock for cash in an amount up to an
aggregate of $3,000,000 after the Closing (the Purchase Right). Brantley IV may exercise the
Purchase Right at any time after December 15, 2004. Each additional investment will be: (i) subject
to the approval of a majority of the members of the board of directors of the Company that are not
affiliated with Brantley IV, (ii) consummated on a date mutually agreed by the Company and Brantley
IV, and (iii) accomplished with documentation reasonably satisfactory to the Company and Brantley
IV. Pursuant to the terms of the Purchase Right, the purchase price per share of the Class A Common
Stock will be equal to the lesser of (a) $1.25, and (b) 70% multiplied by the average of the -3-




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daily average of the high and low price per share of the Class A Common Stock on the American
Stock Exchange (AMEX) or a similar system on which the Class A Common Stock shall be listed at
the time, for the twenty trading days immediately preceding the date of the closing of the exercise
of the Purchase Right. Holders of shares of Class B Common Stock have the option to convert their shares of Class B
Common Stock into shares of Class A Common Stock at any time based on a conversion factor in effect
at the time of the conversion. The conversion factor is designed to yield one share of Class A
Common Stock per share of Class B Common Stock converted, plus such additional shares of Class A
Common Stock, or portions thereof, necessary to approximate the unpaid portion of the return of the
original purchase price for the Class B Common Stock less the Base Bridge Interest Amount, plus an
amount equal to nine percent (9%) per annum on the amount of the original purchase price less the
Base Bridge Interest Amount, without compounding, from the date the Class B Common Stock was first
issued to the date of conversion. The conversion factor is calculated based on a number equal to
one plus the quotient of $1.15 plus 9% per annum (not compounded), divided by the fair market value
of the Class A Common Stock (which is determined by reference to the prices at which Class A Common
Stock trades immediately prior to the conversion). Therefore, so long as the Class B Common Stock
has not yet received a full return of its purchase price less the Base Bridge Interest Amount and a
9% rate of return, if the market value of a share of Class A Common Stock increases, a share of
Class B Common Stock will convert into fewer shares of Class A Common Stock, and if the market
value of Class A Common Stock shares decreases, a share of Class B Common Stock will convert into
more shares of Class A Common Stock. The initial conversion factor was approximately 1.28 (one
share of Class B Common Stock converts into approximately 1.28 shares of Class A Common Stock). As
of March 31, 2005, the conversion factor was approximately 2.24216582553 shares (one share of Class
B Common Stock converts into approximately 2.24216582553 shares of Class A Common Stock). The
holders of Class B Common Stock vote together with the holders of Class A Common Stock and Class C
Common Stock, as a single class, generally, with each holder of Class A Common Stock entitled to
one vote per share of Class A Common Stock held by such holder; with each holder of Class B Common
Stock entitled to one vote per share of Class B Common Stock held by such holder; and with each
holder of Class C Common Stock entitled to one vote per share of Class C Common Stock held by such
holder. Additionally, the Company used $3,683,492 of the proceeds of the Investment Transaction to
repay a portion of the indebtedness to unaffiliated third parties and restructured additional
existing indebtedness. New Line of Credit and Debt Restructuring In connection with the Closing, Orion also entered into a new secured two-year revolving
credit facility pursuant to the Loan and Security Agreement (the Loan and Security Agreement),
dated December 15, 2004, by and among Orion, certain of its affiliates and subsidiaries, and
Healthcare Business Credit Corporation (HBCC). Under this facility, up to $4,000,000 of loans may
be made available to Orion, subject to a borrowing base. Orion borrowed $1,600,000 under this
facility concurrently with the Closing. The interest rate under this facility is equal to the prime
rate plus 3%. Upon an event of default, HBCC can accelerate the loans or call the guaranties
described below. In connection with entering into this new facility, Orion also restructured its
previously-existing debt facilities, which resulted in a decrease in aggregate debt owed to DVI
Business Credit Corporation and DVI Financial Services (collectively, DVI) from approximately
$10.1 million to a combined principal amount of approximately $6.5 million, of which approximately
$2 million was paid at the Closing. Pursuant to the Guaranty Agreement (the Brantley IV Guaranty), dated as of December 15,
2004, provided by Brantley IV to HBCC, Brantley IV agreed to provide a deficiency guaranty in the
amount of $3,272,727. Pursuant to the Guaranty Agreement (the Brantley Capital Guaranty; and
together with the Brantley IV Guaranty, collectively, the Guaranties), dated as of December 15,
2004, provided by Brantley Capital Corporation (Brantley Capital) to HBCC, Brantley Capital
agreed to provide a deficiency guaranty in the amount of $727,273. In consideration for the
Guaranties, Orion issued warrants to purchase 20,455 shares of Class A Common Stock, at an exercise
price of $0.01 per share, to Brantley IV, and issued warrants to purchase 4,545 shares of Class A
Common Stock, at an exercise price of $0.01 per share, to Brantley Capital. Post-Restructuring Loan Transactions On March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000 (the March
Loan). On April 19, 2005, Brantley IV loaned the Company an additional $225,000 (the April
Loan). Although the definitive transaction documents with respect to these loans have not been
finalized or executed, a summary of the anticipated terms of the loans is as follows: (i) the loans
are unsecured; (ii) the loans are subordinate to the Companys outstanding loan from HBCC and other
indebtedness for monies borrowed and ranked pari passu with general trade liabilities; (iii)
principal and interest on the loans are due April 19, 2006; (iv) the interest accrues at a per
annum rate equal to nine percent (9%) and is non-compounding; and (v) Brantley IV, at its option,
may convert all or a portion of the outstanding principal and interest due on or after the maturity
date of the loans into shares of Class A Common Stock of the Company at a price per share equal to
$1.042825. The number of shares issuable upon conversion with respect to the March Loan shall not
exceed the lesser of (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3% of the then
outstanding Class A Common Stock. The number of shares issuable upon conversion with respect to
the April Loan shall not exceed the lesser of (i) 254,597 shares of Class A Common Stock, or (ii)
3.6% of the then outstanding Class A Common Stock. Paul H. Cascio, the Chairman of the board of
directors of Orion, and Michael J. Finn, a director of Orion, are affiliates of Brantley IV.
Additionally, Brantley IV is a principal stockholder of Orion and held approximately 49.1% of the
outstanding voting stock of -4-




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Orion as of March 31, 2005, on an as converted basis. Additionally, as part of this transaction, the Company entered into a First Amendment to the
Loan and Security Agreement (the First Amendment), dated March 22, 2005, with certain of the
Companys affiliates and subsidiaries, and HBCC, a copy of which is attached hereto as Exhibit
10.1, whereby its $4,000,000 secured two-year revolving credit facility has been reduced by the
amount of the loans from Brantley IV to $2,750,000. As a result of the First Amendment, the
Brantley IV Guaranty was amended by the Amended and Restated Guaranty Agreement (the Amended
Brantley IV Guaranty), dated March 22, 2005, a copy of which is attached hereto as Exhibit 10.2,
which reduces the deficiency guaranty provided by Brantley IV by the amount of the March Loan to
$2,247,727. Also as a result of the First Amendment, the Brantley Capital Guaranty was amended by
the Amended and Restated Guaranty Agreement (the Amended Brantley Capital Guaranty), dated March
22, 2005, a copy of which is attached hereto as Exhibit 10.3, which reduces the deficiency guaranty
provided by Brantley Capital by the amount of the April Loan to $502,273. American Stock Exchange Compliance On April 5, 2005 the Company received a letter from AMEX stating that it had reviewed the
Companys plan of compliance, which was submitted on March 10, 2005, in response to an earlier
letter received from AMEX notifying the Company of its failure to comply with listing standards in
connection with two issuances of common stock in 2003 and 2004 without advanced stockholder
approval. The April 5, 2005 letter stated that AMEX has granted the Company an extension of time
to regain compliance with the continued listing standards. The Company will be subject to periodic
review by AMEX staff during the extension period, which ends May 31, 2005. Failure to make
progress consistent with the plan or regain compliance with the continued listing standards by the
end of the extension period could result in the Company being delisted from AMEX. Pursuant to its
compliance plan, the Company is seeking stockholder approval for the prior stock issuances at the
2005 Annual Meeting of Stockholders. On April 20, 2005, the Company received a letter from AMEX notifying the Company that it did
not meet AMEXs continued listing standards because it was not in compliance with Sections 134 and
1101 of the AMEX Company Guide. The non-compliance resulted from the Companys failure to file its
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 by the extended filing
deadline of April 15, 2005. AMEX gave the Company until May 2, 2005 to file its Form 10-KSB and
regain compliance with the AMEX requirements. On April 28, 2005, the Company filed its Annual
Report on Form 10-KSB with the SEC. On May 3, 2005, the Company received a letter from AMEX
stating that, by filing its Form 10-KSB, the Company had resolved the continued listing deficiency
referenced in AMEXs April 20, 2005 letter. Critical Accounting Policies and Estimates The preparation of Orions financial statements is in conformity with accounting principles
generally accepted in the United States of America, which require management to make estimates and
assumptions that affect the amounts reported in the financial statements and footnotes. Orion
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. Orion believes the
following critical accounting policies affect the most significant areas involving managements
judgments and estimates. Consolidation of Physician Practice Management Companies.In March 1998, the Emerging Issues
Task Force of the Financial Accounting Standards Board (FASB) issued its Consensus on Issue 97-2
(EITF 97-2). EITF 97-2 addresses the ability of physician practice management (PPM) companies
to consolidate the results of medical groups with which it has an existing contractual
relationship. Specifically, EITF 97-2 provides guidance for consolidation where PPM companies can
establish a controlling financial interest in a physician practice through contractual management
arrangements. A controlling financial interest exists, if, for a requisite period of time, the PPM
has control over the physician practice and has a financial interest that meets six specific
requirements. The six requirements for a controlling financial interest include:  (a)
    the contractual arrangement between the PPM and physician practice (1) has a term
that is either the entire remaining legal life of the physician practice or a period of
10 years or more, and (2) is not terminable by the physician practice except in the case
of gross negligence, fraud, or other illegal acts by the PPM or bankruptcy of the PPM;(b)
    the PPM has exclusive authority over all decision making related to (1) ongoing,
major, or central operations of the physician practice, except the dispensing of medical
services, and (2) total practice compensation of the licensed medical professionals as
well as the ability to establish and implement guidelines for the selection, hiring, and
firing of them;(c)
    the PPM must have a significant financial interest in the physician practice that
(1) is unilaterally salable 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 -5-




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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s management services agreements (each an MSA and collectively the 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 with 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 will be accounted for under the purchase method of accounting. Revenue Recognition.The Company recognizes revenue from its surgery and diagnostic center
business on the date the procedures are performed, and accounts receivable are recorded at that
time. Revenues are reported at the estimated realizable amounts from patients and third-party
payers. If such third-party payers were to change their reimbursement policies, the effect on
revenue could be significant. Earnings are charged with a provision for contractual adjustments and
doubtful accounts based on such factors as historical trends of billing and cash collections,
established fee schedules, accounts receivable agings and contractual relationships with
third-party payers. Contractual allowances are estimated primarily using each surgery centers
collection experience. Contractual rates and fee schedules are also helpful in this process. On a
rolling average basis, the Company tracks collections as a percentage of related billed charges.
This percentage, which is adjusted on a quarterly basis, has proved to be the best indicator of
expected realizable amounts from patients and third-party payers. Contractual adjustments and
accounts deemed uncollectible are applied against the allowance account. The Company 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 quarter ended March 31, 2005. IPS records revenue based on patient services provided by its affiliated medical groups and
for services provided by its subsidiary, IntegriMED, Inc. (IntegriMED) to its customers. 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 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 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 quarters ended March 31, 2005 and
2004. IntegriMED generates revenue based on fees charged to its customers for training,
implementation, subscription services and administrative fees for management of employee benefit
programs. Deferred revenue is recorded at the execution of a contract for the training and
implementation fees billed and deposits collected from the customer, representing amounts to be
recognized as revenue in future periods. Training and implementation fee revenues are recognized
once the applicable software systems are installed and operational and are charged at a quoted
daily rate. Subscription fee revenues, which are billed on a monthly basis, are recognized based on
contractual fee schedules in the period the services are provided. Employee benefit administrative
fee revenues are recognized in the period the services are provided. MBS earns revenues based on the collection of MBSs customers receivables. Revenues are
recognized during the period in which collections were received. Accounts Receivable and Allowance for Doubtful Accounts. The Companys surgery and diagnostic
centers and 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. MBS records uncollectible accounts receivable using the direct write-off method of accounting
for bad debts. Historically, MBS has experienced minimal credit losses and has not written-off any
material accounts during 2005 or 2004. Investment in Limited Partnerships.The investments in limited partnerships are accounted for
by the equity method. Under the equity -6-




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method, the investment is initially recorded at cost and is subsequently increased to reflect
the Companys share of the income of the investee and reduced to reflect the share of the losses of
the investee or distributions from the investee. These general partnership interests were accounted for as investment in limited partnerships
due to the interpretation of SFAS 94/Accounting Research Bulletin (ARB) 51 and the
interpretations of such by Issue 96-16 and Statement of Position (SOP) 78-9. Under those
interpretations, the Company could not consolidate its interest in those facilities in which it
held a minority general partnership interest due to management restrictions, shared operating
decision-making, capital expenditure and debt approval by limited partners and the general form
versus substance analysis. Therefore, the Company recorded them as investments in limited
partnerships. Goodwill and Other Intangible Assets.Goodwill represents 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 the Company 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. The
Company evaluates its goodwill
and other intangible assets in the fourth quarter of each fiscal year. Overview Surgery and Diagnostic Center Business The Company was incorporated in Delaware on February 24, 1984 as Technical Coatings
Incorporated. On September 10, 1984, its name was changed to Technical Coatings, Inc. Immediately
prior to July 1999, the Company was an inactive company. On July 11, 1999, the Company changed its
name to SurgiCare, Inc., and at that time changed its business strategy to developing, acquiring
and operating freestanding ambulatory surgery centers (ASCs). On July 21, 1999, the Company
acquired all of the issued and outstanding shares of common stock of Bellaire SurgiCare, Inc.
(Bellaire SurgiCare), in exchange for the issuance of 9.86 million shares of common stock (now
986,000 shares of Class A Common Stock after giving effect to the Reverse Stock Split and
Reclassification), and 1.35 million shares of Series A Redeemable preferred stock, par value $.001
per share, to the holders of Bellaire SurgiCares common stock. For accounting purposes, this
reverse acquisition was effective July 1, 1999. On December 15, 2004, the Company changed its name
to Orion HealthCorp, Inc. As of March 31, 2005, the Company owned a majority interest in two surgery centers and a
minority interest as general partner in one additional center. Two of the centers are located in
Texas and one is located in Ohio. In limited circumstances, the Company, or its subsidiaries, may
also furnish anesthesia services in support of the activities of the surgery centers. The
Companys ASCs perform various types of procedures including: orthopedic surgery; colonoscopy;
ophthalmic laser surgery; pain injections; and various pediatric surgeries. The most common
procedures performed in the Companys ASCs include knee arthroscopy, lumbar nerve block and sacral
injection, colonoscopy, hammertoe correction, sinus endoscopic biopsy, cataract removal, breast
biopsy, Mitchell procedures and cystourethroscopy. The Company also owns a 41% interest in an open
magnetic resonance imaging (MRI) center in Ohio, which opened in July 2004. The open MRI center
performs diagnostic procedures using MRI technology. The following table sets forth information related to Orions surgical and diagnostic centers
in operation as of March 31, 2005: Acquisition
    
    
    OrionName
    
    Location
    
    Date
    
    
    OwnershipSurgiCare Memorial Village
    
    Houston, Texas
    
    Oct. 2000
    
    
    60
    %San Jacinto Surgery Center
    
    Baytown, Texas
    
    Oct. 2000
    
    
    10
    %Tuscarawas Ambulatory Surgery Center
    
    Dover, Ohio
    
    June 2002
    
    
    51
    %Tuscarawas Open MRI
    
    Dover, Ohio
    
    July 2004
    
    
    41
    %
 Integrated Physician Solutions IPS, a Delaware corporation, was founded in 1996 as a business development company to provide
physician practice management services to general and subspecialty pediatric practices. IPS
commenced its business activities upon consummation of several medical group business combinations
effective January 1, 1999. IPSs subsidiary, IntegriMED, is a provider of technology solutions for
physicians, including a comprehensive suite of integrated business and clinical software
applications. The Pediatric Physician Alliance (PPA) division of IPS manages pediatric medical
clinics. IntegriMED represents a practical approach to providing medical groups with business and
clinical software solutions that address day-to-day operational requirements and regulatory
compliance. IntegriMED provides software and technology solutions for physicians through an
application service provider model. Rather than independently developing a stand-alone software
application, IPS identified proven -7-




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and effective physician practice software solutions and developed an architecture that brought
these applications together in a single, integrated management system. The IntegriMED system
enables IPS to add new applications as required to respond to changing business and regulatory
burdens and allows IPS to deliver these applications to its clients over the Internet resulting in
a cost-effective means of delivering and accessing the applications. The IntegriMED system includes practice management, billing, scheduling, collections, human
resources, payroll and benefits administration, accounting, communication, procurement and
electronic medical records applications. IntegriMED contracts with third-party manufacturers for
practice management information systems, electronic medical records systems, human resources
management systems, accounting system management and electronic claims processing. Although each
of the third-party contracts contains multi-year terms, all are terminable for cause, which
includes performance deficiencies. In the event of the termination of any of the third-party
contracts, IntegriMED expects that a suitable replacement could be obtained on similar terms and
prices. IntegriMED internally developed proprietary applications, including a user interface
system and software integration systems. IntegriMED offers its customers secure hosting,
implementation, training and help desk services. IntegriMEDs clients may choose a single product
feature or bundle multiple products and services. Additional services can later be integrated into
the IntegriMED desktop. The integrated applications are accessed over the Internet and hosted at a
secure third-party site. As of March 31, 2005, IntegriMED had subscriptions for 413 desktops in 30 practices.
IntegriMED generally targets medical practices with less than 25 physicians with a primary emphasis
on family medicine, internal medicine and pediatric practices. PPA is an experienced and innovative provider of healthcare management services dedicated to
the practice of pediatrics. As of March 31, 2005, PPA managed 10 practice sites, representing six
medical groups in Illinois, Ohio and New Jersey. PPA provides business management and
administrative services to the affiliated medical groups. These services include human resources
management, accounting, group purchasing, public relations, marketing, information technology, and
general day-to-day business operations management services. The affiliated physicians, who are all
employed by separate corporations, provide all clinical and patient care related services. There
is a standard forty-year contract between PPA and the various affiliated medical groups whereby the
physicians are compensated after all practice expenses and a management fee is paid to PPA. IPS owns all the assets used in the operation of the medical groups and the physicians, who
were equity owners in IPS, and, as a result of the IPS Merger, are now equity owners in Orion. 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 as a salary and treated as an expense on
IPSs accounting records. Medical Billing Services MBS is based in Houston, Texas and was incorporated in Texas on October 16, 1985. DCPS is
based in Houston, Texas and was organized as a Texas limited liability company on September 16,
1998. DCPS reorganized as a Texas limited partnership on August 31, 2003. The Company acquired
MBS and DCPS in the DCPS/MBS Transaction. Subsequent to the DCPS/MBS Transaction, DCPS has
operated as a wholly-owned subsidiary of MBS. MBS and DCPS provide practice management, billing
and collection, managed care consulting and coding/reimbursement services to hospital-based
physicians and clinics. The discussion of MBS below includes the operations of DCPS.  
    Medical Practice Management Services.MBS provides a wide range of management
services to medical practices. These management services help create a more
efficient medical practice and provide assistance with the business aspects
associated with operating a medical practice.
    Billing and Collection Services.MBS provides billing and collection services
to its clients. These include coding, reimbursement services, charge entry, claim
submission, collection activities, and financial reporting services.
    Managed Care Consulting Services.MBS provides consulting services aimed at
assisting clients with navigating and interacting with managed care organizations. MBS provides services to approximately 58 customers throughout Texas. These customers include
anesthesiologists, pathologists, radiologists, imaging centers, comprehensive breast centers,
hospital labs, cardio-thoracic surgeons and ASCs. Results of Operations As part of the acquisition and restructuring transactions, which closed on December 15, 2004,
the IPS Merger has been treated as a reverse acquisition, meaning that the purchase price,
comprised of the fair value of the outstanding shares of the Company prior to the transaction, plus
applicable transaction costs, has been allocated to the fair value of the Companys tangible and
intangible assets and liabilities prior to the transaction, with any excess being considered
goodwill. IPS is being treated as the continuing reporting entity, and thus IPSs -8-




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##### Table of Contents



historical results have become those of the combined company. Orions results include the
results of IPS for the three months ended March 31, 2004 and the results of IPS, the Companys
surgery and diagnostic center business and MBS (which includes DCPS) for the three months ended
March 31, 2005. The descriptions of the business and results of operations of MBS set forth in
this report include the business and results of operations of DCPS. The following table sets forth selected unaudited consolidated condensed statements of
operations data expressed as a percentage of Orions net operating revenues for the three months
ended March 31, 2005 (1Q05) and 2004 (1Q04), respectively. Orions historical results and
period-to-period comparisons are not necessarily indicative of the results for any future period. 1Q05

    
    
    1Q04(Unaudited)
    
    
    (Unaudited)Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %Direct cost of revenues
    
    
    45.2
    %
    
    
    60.6
    %Gross margin
    
    
    54.8
    %
    
    
    39.4
    %Total operating expenses
    
    
    73.7
    %
    
    
    54.0
    %Loss from continuing operations before other income (expenses)
    
    
    (18.9
    %)
    
    
    (14.6
    %)Total other income (expenses), net
    
    
    (1.0
    %)
    
    
    (5.9
    %)Minority interest earnings in partnership
    
    
    (0.4
    %)
    
    
    0.0
    %Loss from continuing operations
    
    
    (20.3
    %)
    
    
    (20.5
    %)Discontinued operationsIncome from operations of discontinued components, including
net gain on disposal in 1Q05
    
    
    2.1
    %
    
    
    2.0
    %Net loss
    
    
    (18.2
    %)
    
    
    (18.5
    %)Preferred stock dividends
    
    
    0.0
    %
    
    
    (4.0
    %)Net loss attributable to common stockholders
    
    
    (18.2
    %)
    
    
    (22.5
    %)
 -9-




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Three Months Ended March 31, 2005 as Compared to Three Months Ended March 31, 2004 The following table sets forth, for the periods indicated, the unaudited consolidated
condensed statements of operations of Orion. For the Three MonthsEnded March 31,2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)Net operating revenues
    
    $
    9,202,448
    
    
    $
    4,178,175Direct cost of revenues
    
    
    4,161,479
    
    
    
    2,533,465Gross margin
    
    
    5,040,969
    
    
    
    1,644,710Operating expenses:Salaries and benefits
    
    
    3,098,180
    
    
    
    955,488Facility rent and related costs
    
    
    596,601
    
    
    
    292,837Depreciation and amortization
    
    
    1,111,584
    
    
    
    134,990Professional and consulting fees
    
    
    365,134
    
    
    
    168,837Insurance
    
    
    247,102
    
    
    
    138,942Provision for doubtful accounts
    
    
    367,941
    
    
    
    254,921Other expenses
    
    
    996,107
    
    
    
    311,273Total operating expenses
    
    
    6,782,649
    
    
    
    2,257,288Loss from continuing operations before other income (expenses)
    
    
    (1,741,680
    )
    
    
    (612,578
    )Other income (expenses):Interest expense
    
    
    (94,914
    )
    
    
    (240,081
    )Other expense, net
    
    
    1,553
    
    
    
    (5,590
    )Total other income (expenses), net
    
    
    (93,361
    )
    
    
    (245,671
    )Minority interest earnings in partnership
    
    
    (39,447
    )
    
    
    Loss from continuing operations
    
    
    (1,874,488
    )
    
    
    (858,249
    )Discontinued operationsIncome from operations of discontinued components, including net gain
on disposal of $343,575 in 1Q05
    
    
    193,858
    
    
    
    83,805Net loss
    
    
    (1,680,630
    )
    
    
    (774,444
    )Preferred stock dividends
    
    
    
    
    
    
    (165,300
    )Net loss attributable to common stockholders
    
    $
    (1,680,630
    )
    
    $
    (939,744
    )Weighted average common shares outstanding;Basic
    
    
    8,666,531
    
    
    
    8,602,149Diluted
    
    
    8,666,531
    
    
    
    8,602,149Earnings (loss) per share:Basic:Net loss per share from continuing operations
    
    $
    (0.216
    )
    
    $
    (0.100
    )Net income per share from discontinued operations
    
    $
    0.022
    
    
    $
    0.010Net loss per share
    
    $
    (0.194
    )
    
    $
    (0.090
    )Diluted:Net loss per share from continuing operations
    
    $
    (0.216
    )
    
    $
    (0.100
    )Net income per share from discontinued operations
    
    $
    0.022
    
    
    $
    0.010Net loss per share
    
    $
    (0.194
    )
    
    $
    (0.090
    )
 Net Operating Revenues.Net operating revenues, which include net patient service revenue
related to the operations of IPSs affiliated medical groups, IntegriMED and other revenue, surgery
and diagnostic center revenue and billing services revenue, increased $5,024,274, or 120.3%, to
$9,202,448 for the three months ended March 31, 2005, as compared with $4,178,175 for the same
period in 2004. The Companys surgery and diagnostic center business and MBS reported net
operating revenues of $1,380,501 and $2,535,844, respectively, for the first quarter of 2005, and
accounted for 77.9% of the increase in 2005. IPS net patient service revenue for the three months ended March 31, 2005 increased
$1,020,690, or 24.6%, from the same period in 2004. The increase in net patient service revenue
for the quarter was primarily the result of: (i) increased patient volume during the quarter, with
procedures and office visits at the clinic-based facilities increasing 10,881 and 4,679,
respectively, from first quarter 2004 levels; (ii) rate increases beginning in January 2005 for
three of IPSs affiliated medical groups, which resulted in average revenue per visit of $119 in
the first quarter of 2005 vs. $107 for the first quarter of 2004; and (iii) two new providers, who
began practicing at one of IPSs affiliated medical groups in July 2004, whose production in the
first quarter of 2005 was approximately 133% higher than the first quarter 2004 production of the
providers they replaced. IntegriMED and other revenue totaled $24,591 in the first quarter of 2004, increasing $87,240,
or 354.8%, to $111,830 for the three months ended March 31, 2005. Of the total increase, $58,620
relates to additional net revenue from the operations of IntegriMED, which was recognizing revenue
from 26 practices at the end of the first quarter of 2005 compared to 15 practices at 2004.
Additionally, IntegriMEDs training costs decreased $20,102 for the three months ended March 31,
2005 when compared to the same period in 2004, as a result of decreased use of third party training
and installation staff. Revenue from the IPS Vaccine Alliance, a group purchasing alliance for
vaccines and medical supplies, in the first quarter of 2005 increased $8,518 over 2004 to $23,934. Direct Cost of Revenues.Direct cost of revenues, which includes physician compensation,
surgical and diagnostic costs and medical group direct clinical expenses and totaled $2,533,465 in
the first quarter of 2004, increased $1,628,014, or 64.3%, to $4,161,479 for the three months ended
March 31, 2005. The Companys surgery and diagnostic center business recorded direct cost of
revenues of $758,348 for the first quarter of 2005 and accounted for 46.6% of the increase in 2005. Pursuant to the terms of the MSAs governing each of IPSs affiliated medical groups, the
physicians of each medical group are compensated 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 the financial statements, is either a fixed fee, or is calculated based on a
percentage of net operating income and represented approximately 13.6% of physician medical group
net operating income in the first quarter of 2005 compared to 15.5% in the first quarter of 2004.
Physician compensation increased $788,178, or 50.4%, for the quarter ended March 31, 2005 to
$2,352,689, as compared with $1,564,511 for the quarter ended March 31, 2004. Physician
compensation expense represented 44.5% of total net operating revenues in the first quarter of
2005, compared with 37.4% for the same period in 2004. The increase in compensation in the first
three months
of 2005 was directly related to an increase in net patient service revenue, which was primarily the
result of: (i) increased patient volume and (ii) rate increases implemented by three of IPSs
affiliated medical groups. Direct clinical expenses are expenses that are directly related to the practice of medicine by
the physicians who practice at the affiliated medical groups managed by IPS. For the quarter ended
March 31, 2005, direct clinical expenses increased $81,488, or 8.4% to $1,050,442, largely as a
result of increased vaccine expenses. Approximately 69% of the rise in vaccine expenses relates to
price increases from the Companys two largest vaccine suppliers, while the remaining 31% was a
result of increased patient volume at the affiliated medical groups. Operating Expenses. Salaries and Benefits.Consolidated salaries and benefits increased $2,142,692 in the first
quarter of 2005 to $3,098,180, compared to $955,488 for the same period in 2004. The Companys
surgery and diagnostic center business and MBS recorded salaries and benefits expenses totaling
$346,264 and $1,575,135, respectively in the first three months of 2005, and accounted for 89.7% of
the increase over 2004. Salaries and benefits, excluding the surgery and diagnostic center business and MBS, represent
the employee-related costs of all non-clinical practice personnel and the IPS corporate and
IntegriMED staff in Roswell, Georgia. These expenses increased $221,292, or 23.2%, from $955,488
for the quarter ended March 31, 2004 to $1,176,780 for the same period in 2005. This increase can
be attributed primarily to the addition of nine new employees after March 2004 in response to the
growth in the IntegriMED business. Facility Rent and Related Costs.Facility rent and related costs increased 103.7% from
$292,837 for the quarter ended March 31, -10-




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2004 to $596,601 for the quarter ended March 31, 2005. For
the first three months of 2005, the Companys surgery and diagnostic center business and MBS
recorded facility rent and related expenses totaling $183,866 and $113,628, respectively, which
accounted for 97.9% of the increase over 2004. Facility rent and related costs associated with IPSs affiliated medical groups and corporate
office totaled $299,107 for the quarter ended March 31, 2005, an increase of $6,270. Depreciation and Amortization.Consolidated depreciation and amortization expense totaled
$1,111,584 in the first quarter of 2005, an increase of $976,594 over the quarter ended March 31,
2004. For the three months ended March 31, 2005, depreciation expense related to the fixed assets
of the Companys surgery and diagnostic center business and MBS totaled $231,035 and $21,617,
respectively. Depreciation expense related to the fixed assets of IPS totaled $40,763 for the
quarter ended March 31, 2005. Amortization expense related to the MSAs totaled $120,949 and
$97,668 for the quarters ended March 31, 2005 and 2004, respectively. As part of the IPS Merger the purchase price, comprised of the fair value of the outstanding
shares of the Company prior to the transaction, plus applicable transaction costs, has been
allocated to the fair value of the Companys tangible and intangible assets and liabilities prior
to the transaction, with any excess being considered goodwill. The amortization expense related to
the intangible assets recorded as a result of the reverse acquisition totaled $431,697 for the
quarter ended March 31, 2005. As part of the DCPS/MBS Transaction, the Company purchased MBS and DCPS for a combination of
cash, notes and stock. Since the consideration for this purchase transaction exceeded the fair
value of the net assets of MBS and DCPS at the time of the purchase, a portion of the purchase
price was allocated to intangible assets and goodwill. The amortization expense related to the
intangible assets recorded as a result of the DCPS/MBS Transaction totaled $265,523 for the quarter
ended March 31, 2005. Professional and Consulting Fees.For the quarter ended March 31, 2005, professional and
consulting fees totaled $365,134, an increase of $196,297, or 116.3%, over the same period in 2004.
For the first three months of 2005, the Companys surgery and diagnostic center business and MBS
recorded professional and consulting fees totaling $70,267 and $12,483, respectively, and accounted
for 42.2% of the increase over 2004. IPSs professional and consulting fees, which also include the costs of Orion corporate
accounting, financial reporting and compliance, increased from $168,837 for the three months ended
March 31, 2004 to $282,384 for the three months ended March 31, 2005. Of the total increase,
$103,249 relates to additional accounting and audit fees as a result of the expanded reporting
requirements resulting from the IPS Merger and the DCPS/MBS Transaction. Insurance.Consolidated insurance expense, including professional liability insurance for
affiliated physicians, property and casualty insurance, directors and officers liability insurance,
increased from $138,942 for the quarter ended March 31, 2004 to $247,102 for the quarter ended
March 31, 2005. Insurance expenses of the Companys surgery and diagnostic center business and MBS
totaled $42,468 and $4,253, respectively, for the first quarter of 2005, and accounted for 43.2% of
the increase over 2004. Directors and officers liability insurance expense for the Company increased $60,321 from the
first quarter of 2004 to the first quarter
of 2005, and relates solely to the increase in premiums as a result of the acquisition and
restructuring transactions that closed in December 2004. Provision for Doubtful Accounts.The provision for doubtful accounts increased $113,020, or
44.3%, for the quarter ended March 31, 2005 to $367,941. For the three months ended March 31,
2005, the Companys surgery and diagnostic center business recorded bad debt expense totaling
$23,567. As a percentage of total net operating revenues, the provision for doubtful accounts for
the first three months of 2005 was consistent with the same period in the prior year at 6.5%. The
total collection rate, after contractual allowances, for IPSs affiliated medical groups was 69.6%
in the first quarter of 2005, compared to 68.7% for the first quarter of 2004. Other Expenses.Other expenses, which include other operating expenses such as office and
computer supplies, telephone, data communications, software support and postage, as well as board
of directors compensation and meeting expenses, totaled $996,107 for the quarter ended March 31,
2005, an increase of $684,834 over the same period in 2004. For the first quarter of 2005, the
Companys surgery and diagnostic center business and MBS recorded other expenses totaling $266,283
and $346,109, respectively, which accounted for 89.4% of the increase over 2004. As a percentage
of net operating revenues, IPSs other expenses for the quarter ended March 31, 2005 were
consistent with the same period one year ago at 7.3%. Interest Expense.Consolidated interest expense totaled $94,914 for the first three months of
2005, a decrease of $145,167 from the same period in 2004. The decrease from 2004 can be
explained generally by the following events:  
    As part of Investment Transaction, the Company used $5,908,761 to pay off the debt
owed to the subsidiary of Brantley IV.
    As described in Item 2. Managements Discussion and Analysis and Plan of Operation 
Certain Recent Developments  New -11-




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Line of Credit and Debt Restructuring, the Company
restructured its previously-existing debt facilities, which resulted in a decrease in
aggregate debt owed to DVI from approximately $10.1 million to a combined principal
amount of approximately $6.5 million, of which approximately $2 million was paid at the
Closing.
    Brantley Capital and Brantley Venture Partners III, L.P. (Brantley III) each held
debt of IPS and are party to the Amended and Restated Debt Exchange Agreement dated
February 9, 2004, as amended on July 16, 2004 (the Debt Exchange Agreement). Pursuant
to the Debt Exchange Agreement, Brantley Capital and Brantley III received Class A
Common Stock with a fair market value (based on the daily average of the high and low
price per share of SurgiCare common stock over the five trading days immediately prior
to the Closing) equal to the amount owing to it under its loan to IPS in exchange for
contribution of such debt to Orion. Pursuant to the Debt Exchange Agreement, Brantley
Capital also received Class A Common Stock with a fair market value (based on the daily
average of the high and low price per share of SurgiCare common stock over the five
trading days immediately prior to the Closing) equal to the amount of certain accrued
dividends owed to it by IPS in exchange for the contribution of such indebtedness,
provided that the amount of shares received in respect of such dividends was subject to
reduction to the extent necessary to achieve the guaranteed allocation of shares of
Class A Common Stock to the holders of IPS common stock and Series B Convertible
preferred stock pursuant to the IPS Merger Agreement. The aggregate amount of debt
exchanged by the parties to the Debt Exchange Agreement was $4,375,229, which included
accrued interest as of the Closing, and $593,100 of debt in respect of accrued
dividends. Minority Interest Earnings in Partnership.The investments in limited partnerships
are accounted for by the equity method. Under the equity method, the investment is initially
recorded at cost and is subsequently increased to reflect the Companys share of the income of the
investee and reduced to reflect the share of the losses of the investee or distributions from the
investee. These general partnership interests were accounted for as investment in limited partnerships
due to the interpretation of FAS 94/ARB 51 and the interpretations of such by Issue 96-16 and SOP
78-9. Under those interpretations, the Company could not consolidate its interest in those
facilities in which it held a minority general interest partnership interest due to management
restrictions, shared operating decision-making, capital expenditure and debt approval by limited
partners and the general form versus substance analysis. Therefore, the Company recorded them as
investments in limited partnerships. For the three months ended March 31, 2005, the Company
recorded a $39,447 loss on the minority interest in San Jacinto Surgery Center, based on the
Companys 10% ownership of that surgery center. Discontinued Operations.On September 19, 2003, IPS entered into a Mutual Release and
Settlement Agreement (the Settlement Agreement) with Dr. Jane Kao and PediApex Heart Center for
Children (the Heart Center) to settle disputes as to the existence and enforceability of certain
contractual obligations. As part of the Settlement Agreement, Dr. Kao, the Heart Center and IPS
agreed that, until December 31, 2004, each party would conduct their operations under the terms
established by the MSA. Additionally, among other provisions, after December 31, 2004, Dr. Kao and
the Heart Center were released from any further obligation to IPS arising from any previous
agreement, and Dr. Kao purchased the accounts receivable related to the Heart Center and IPS
terminated its ownership and management agreement with the Heart Center. The operating results of
the Heart Center were not included in the consolidated statements of operations of IPS after
September 19, 2003 because this medical group did not meet the criteria for consolidation after
that date in accordance with EITF 97-2. The operations of this component are reflected in the
Companys consolidated statements of operations as income from operations of discontinued
components in the first quarter of 2004. IPS recorded a loss on disposal of this discontinued
component of $12,366 for the year ended December 31, 2004. The following table contains selected financial data related to the Heart Center as of and for
the quarter ended March 31, 2004: 1Q04Income statement data:Net operating revenues
    
    $
    729,141Direct cost of revenues
    
    
    325,502Operating expenses
    
    
    357,634Net income
    
    $
    46,005Current assets
    
    $
    303,546Other assets
    
    
    91,732Total assets
    
    $
    395,278Current liabilities
    
    $
    586,847Other liabilities
    
    
    Total liabilities
    
    $
    586,847
 As part of the acquisition and restructuring transactions that closed on December 15, 2004,
the Company recorded intangible assets related to the IPS Merger and the DCPS/MBS Transaction. As
of the Closing, the Companys management expected the case volumes at Bellaire SurgiCare to improve
in 2005. However, by the end of February 2005, it was determined that the expected case volume
increases were -12-




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##### Table of Contents



not going to be realized. On March 1, 2005, the Company closed Bellaire SurgiCare
and consolidated its operations with the operations of SurgiCare Memorial Village. The Company
tested the identifiable intangible assets and goodwill related to the surgery and diagnostic center
business using the present value of cash flows method. As a result of the decision to close
Bellaire SurgiCare and the resulting impairment of the joint venture interest and management
contracts related to the surgery centers, the Company recorded a charge for impairment of
intangible assets of $4,090,555 for the year ended December 31, 2004. The operations of this
component are reflected in the Companys consolidated statements of operations as income from
operations of discontinued components for the quarter ended March 31, 2005. The Company recorded
a loss on disposal of this discontinued component (in addition to the charge for impairment of
intangible assets) of $163,050 for the quarter ended March 31, 2005. The following table contains selected financial data related to Bellaire SurgiCare as of and
for the quarter ended March 31, 2005: 1Q05Income statement data:Net operating revenues
    
    $
    161,679Direct cost of revenues
    
    
    235,993Operating expenses
    
    
    114,104Net loss
    
    $
    (188,418
    )Current assets
    
    $
    178,787Other assets
    
    
    82,826Total assets
    
    $
    261,613Current liabilities
    
    $
    254,692Other liabilities
    
    
    35,656Total liabilities
    
    $
    290,348
 On April 1, 2005, IPS entered into a Mutual Release and Settlement Agreement (the
Settlement) with Dr. Bradley E. Chipps, M.D. and Capital Allergy and Respiratory Disease Center,
a Medical Corporation (CARDC) to settle disputes as to the existence and enforceability of
certain contractual obligations. As part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that
CARDC would purchase the assets owned by IPS as shown on the balance sheet on March 31, 2005 in
exchange for termination of the MSA. Additionally, among other provisions, after April 1, 2005, Dr.
Chipps and CARDC have been released from any further obligation to IPS arising from any previous
agreement. As a result of the Settlement, the Company recorded a charge for impairment of
intangible assets related to CARDC of $704,927 for the year ended December 31, 2004. The
operations of this component are reflected in the Companys consolidated statements of operations
as income from operations of discontinued components for the quarters ended March 31, 2005 and
2004, respectively. The Company recorded a gain on disposal of this discontinued component (in
addition to the charge for impairment of intangible assets) of $506,625 for the quarter ended March
31, 2005. The following table contains selected financial data related to CARDC as of and for the
quarters ended March 31, 2005 and 2004, respectively: 1Q05
    
    
    1Q04Income statement data:Net operating revenues
    
    $
    848,373
    
    
    $
    765,482Direct cost of revenues
    
    
    523,255
    
    
    
    495,974Operating expenses
    
    
    286,418
    
    
    
    231,708Net income
    
    $
    38,700
    
    
    $
    37,800Balance sheet data:Current assets
    
    $
    262,921
    
    
    $
    248,209Other assets
    
    
    9,270
    
    
    
    14,309Total assets
    
    $
    272,191
    
    
    $
    262,518Current liabilities
    
    $
    239,747
    
    
    $
    320,544Other liabilities
    
    
    
    
    
    
    Total liabilities
    
    $
    239,747
    
    
    $
    320,544
 -13-




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The following table summarizes the components of income from operations of discontinued
components: 1Q05
    
    
    1Q04Income from operations of discontinued components:CARDCNet income
    
    $
    38,700
    
    
    $
    37,800Gain on disposal
    
    
    506,625
    
    
    
    Heart CenterNet income
    
    
    
    
    
    
    46,005Bellaire SurgiCareNet loss
    
    
    (188,418
    )
    
    
    Loss on disposal
    
    
    (163,050
    )
    
    
    Total income from operations of discontinued components
    
    $
    193,858
    
    
    $
    83,805
 Preferred Stock Dividends.IPSs Series A-2 preferred stockholders were entitled to receive,
when, as and if declared by the board of directors, cumulative dividends payable at the annual rate
of $0.40 for each share. Dividends accrued, even if not declared, and were to be declared and paid
in cash in equal installments on the first day of January, April, July and October immediately
following the issue date, or continued to be accrued until such time as the preferred stockholders
demanded payment. Preferred stock dividends in the amount of $165,300 were accrued for the quarter
ended March 31, 2004. No cash payments of dividends were made in the first quarter of 2004. The
Series A-2 redeemable convertible preferred stock, along with the other three series of redeemable
convertible preferred stock held by IPS stockholders prior to the merger, including any accrued and
unpaid dividends therein, were exchanged for Orion Class A Common Stock as a part of the IPS
Merger. Liquidity and Capital Resources Net cash used in operating activities totaled $749,399 for the quarter ended March 31, 2005
compared to net cash used in operating activities of $241,182 for the same period in 2004. The
increase in net cash used in operations can be attributed primarily to the growth in operating
expenses related to the IPS Merger and the DCPS/MBS Transaction, as well as the addition of nine
new employees after March 2004 in response to the growth in the IntegriMED business. Net cash used in investing activities totaled $84,592 for the three months ended March 31,
2005 compared to net cash used in investing activities totaling $34,230 for the three months ended
March 31, 2004. The sole investing activities in the first quarter of 2005 and 2004, respectively,
consisted of purchases and retirements of property and equipment. Net cash provided by financing activities totaled $744,493 for the quarter ended March 31,
2005 compared to net cash provided by financing activities totaling $409,330 for the quarter ended
March 31, 2004. The following financing activities occurred in the first quarter of 2005:  
    Repayments on capital lease obligations totaled $49,577;
    Net repayments on the HBCC revolving credit facility totaled $231,272; and
    On March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000 (See
Item 2. Managements Discussion and Analysis or Plan of Operation  Certain Recent
Developments  Post-Restructuring Loan Transaction.) As of March 31, 2005, the Company had $612,348 of cash and cash equivalents on hand and a
working capital deficit of $4,369,223. The Company incurred an operating loss of $1,874,488 for
the three months ended March 31, 2005. In addition, the Company has used substantial amounts of
working capital in its operations. The Company has financed its growth primarily through the issuance of equity, secured and/or
convertible debt, most recently by completing the Acquisitions, the Investment Transaction, the
Reclassification and the restructuring of its debt owed to DVI (the Debt Restructuring). In
connection with the Closing of the Acquisitions and the Investment Transaction, the Company entered
into a new secured two-year revolving credit facility pursuant to the Loan and Security Agreement
by and among Orion, certain of its affiliates and subsidiaries, and HBCC. (See Item 2.
Managements Discussion and Analysis or Plan of Operation  Certain Recent Developments 
Acquisition and Restructuring Transactions.) In connection with entering into this new facility,
Orion also consummated the Debt Restructuring, which resulted in a decrease in aggregate debt owed
to DVI from approximately $10.1 million to a combined principal amount of approximately $6.5
million, of which approximately $2 million was paid at the Closing. In addition to the Closing, on
March 16, 2005, Brantley IV loaned Orion an aggregate of $1,025,000. On April 19, 2005, Brantley IV
loaned the Company an additional $225,000. (See Item 2. Managements Discussion and Analysis or
Plan of Operation  Certain Recent Developments  Post-Restructuring Loan Transactions.) Paul H.
Cascio, the
Chairman of the board of directors of Orion, and Michael J. Finn, a director of Orion, are
affiliates of Brantley IV. Additionally, as part of this transaction, the Company entered into the
First Amendment whereby its $4,000,000 secured two-year revolving credit facility has been reduced
by the amount of the loans from Brantley IV to $2,750,000. As a result of the First Amendment, the
Brantley IV Guaranty was amended by the Amended Brantley IV Guaranty, which reduces the deficiency
guaranty provided by Brantley IV by the amount of the March Loan to $2,247,727. Also as a result
of the First Amendment, the Brantley Capital Guaranty was amended by the Amended Brantley Capital
Guaranty, which reduces the deficiency guaranty provided by Brantley Capital by the amount of the
April Loan to $502,273. As of March 31, 2005, the Companys existing credit facility with HBCC has limited
availability to provide for working capital shortages. Although the Company believes that it will
generate cash flows from operations in the future, there is substantial doubt as to whether it will
be able to fund its operations solely from its cash flows. On April 28, 2005, the Company announced
the initiation of a strategic plan designed to accelerate the Companys growth and enhance its
future earnings potential. The plan focuses on the Companys strengths, which include providing
billing, collections and complementary business management services to physician practices in
addition to the provision of development and management services to ambulatory surgery centers. A
fundamental component of the Companys plan is the selective consideration of accretive acquisition
opportunities in these core business sectors. The Company will begin to divest certain non-core
assets -14-




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and use the proceeds and expense reductions to repay debt, provide working capital and fund
growth. In addition, the Company will cease investment in business lines that do not complement the
Companys strategic plans and will redirect financial resources and company personnel to areas that
management believes enhances long-term growth potential. Presently, the Company is evaluating
strategic alternatives for its software services business. The Company does not anticipate a
significant reduction of revenue as a result of the implementation of these strategic initiatives.
However, the Company anticipates a substantial reduction of annual expenses attributable to a
combination of these initiatives and the consolidation of corporate functions currently duplicated
at the Companys Houston and Atlanta facilities. The Company intends to continue to manage its use of cash. However, the Companys business is
still faced with many challenges. If cash flows from operations and borrowings are not sufficient
to fund the Companys cash requirements, the Company may be required to further reduce its
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 the Company or that any additional financing
would not be substantially dilutive to the Companys existing stockholders. 
 ITEM 3. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. The Company maintains a set of disclosure
controls and procedures that are designed to provide reasonable assurance that information required
to be disclosed by us in the reports filed by us under the Securities and Exchange Act of 1934, as

amended (Exchange Act), is recorded, processed, summarized and reported accurately and within the
time periods specified in the Security and Exchange Commissions rules and forms. As of the end of
the period covered by this report, the Company evaluated, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of 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 Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including our consolidated
subsidiaries) required to be included in our 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 1. LEGAL PROCEEDINGS On January 1, 1999, IPS acquired Childrens Advanced Medical Institutes, Inc. (CAMI) in a
merger transaction. On that same date, IPS began providing management services to the Childrens
Advanced Medical Institutes, P.A. (the P.A.), an entity owned by the physicians affiliated with
CAMI. The parties rights and obligations were memorialized in a merger agreement, a management
services agreement and certain other agreements. On February 7, 2000, the P.A., certain physicians
affiliated with the P.A., and the former shareholders of CAMI filed suit against IPS in the U.S.
District Court for the Northern District of Texas, Dallas Division, Civil Action File No.
3-00-CV-0536-L. On May 9, 2001, IPS (which was formerly known as Pediatric Physician Alliance,
Inc.) filed suit against the P.A., certain physicians who were members of the P.A., and Patrick
Solomon as Escrow Agent of CAMI. The case was filed in the U.S. District Court for the Northern
District of Texas, Dallas Division, Civil Action File No. 3-01CV0877-L. Certain settlements were
reached in the cases. The two cases were referred to arbitration pursuant to the arbitration
clauses in the agreements between the parties. The arbitration includes all remaining claims in
both lawsuits. The P.A., the physicians and the former shareholders of CAMI seek recovery of
pre-merger accounts receivable they claim were collected by IPS after the merger, but belong to
CAMI under the merger agreement and agreements between CAMI and the affiliated physicians. IPS has
asserted a right of set-off for over-payments that it made after the merger to the physicians. IPS
also asserts a claim against the physicians for breach of the management services agreement and
other agreements. In their complaint, the P.A., the former shareholders of CAMI and the physicians seek a claim against IPS for approximately $500,000 (which includes
interest and attorneys fees). IPS asserted a claim against the physicians for over $5,000,000 due
to the overpayments and their alleged breach of the agreements. An arbitration hearing was held on
the claim filed by the former shareholders of CAMI in January 2004, and the Arbitrator issued an
award against IPS. The award was confirmed by the U.S. District Court in the amount of $548,884 and
judgment was entered. IPSs claims against the physicians are still pending. IPS has accrued
approximately $540,000 for possible losses related to this claim. In addition, the Company is involved in various other legal proceedings and claims arising in
the ordinary course of business. The Companys management believes that the disposition of these
additional matters, individually or in the aggregate, is not expected to have a materially adverse
effect on the Companys 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 the
Companys future results of operations or cash flows in a particular period. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS -15-




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##### Table of Contents



None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION On May 13, 2005, the Company filed a press release announcing the Companys results for the
quarter ended March 31, 2005. The press release is attached as Exhibit 99.1 to this report. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    Exhibits Exhibit No.
    
    DescriptionExhibit 10.1
    
    First Amendment to Loan and Security Agreement, dated as of
March 22, 2005, by and among Orion HealthCorp, Inc., certain
affiliates and subsidiaries of Orion HealthCorp, Inc., and
Healthcare Business Credit CorporationExhibit 10.2
    
    Amended and Restated Guaranty Agreement, dated as of March
22, 2005, provided by Brantley Partners IV, L.P. to
Healthcare Business Credit CorporationExhibit 10.3
    
    Amended and Restated Guaranty Agreement, dated as of March
22, 2005, provided by Brantley Capital Corporation to
Healthcare Business Credit CorporationExhibit 31.1
    
    Rule 13a-14(a)/15d-14(a) CertificationExhibit 31.2
    
    Rule 13a-14(a)/15d-14(a) CertificationExhibit 32.1
    
    Section 1350 CertificationExhibit 32.2
    
    Section 1350 CertificationExhibit 99.1
    
    Copy of press release issued by the Company on May 13, 2005
  (b)
    Reports on Form 8-K For the quarter ended March 31, 2005, the following reports on Form 8-K were filed: On March 7, 2005, the Company filed a current report on Form 8-K to report the
issuance of a press release announcing the consolidation of two Houston-based ambulatory
surgery centers. On March 11, 2005, the Company filed a current report on Form 8-K to report the
receipt of a letter from AMEX notifying the Company that it was not in compliance with
Sections 711 and 713 of the AMEX Company Guide. Additionally, the Company reported the
issuance of a press release announcing the receipt of the aforementioned letter. On March 22, 2005, the Company filed an amendment to the current report on Form 8-K,
which was originally filed on December 21, 2004, to add required financial information,
including interim financial statements of the acquired companies and pro forma financial
statements, required within 75 days from the closing of the acquisition and restructuring
transactions. On March 22, 2005, the Company filed a current report on Form 8-K to report the
receipt of a letter from AMEX notifying the Company that it was not in compliance with
Sections 134 and 1101 of the AMEX Company Guide and to announce a new loan transaction
with Brantley IV and Brantley Capital. Additionally, the Company reported the issuance of
a press release announcing the aforementioned items as well as the filing of an amendment
to the current report on Form 8-K, which was originally filed on December 21, 2004. -16-




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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. BauerTerrence L. BauerDated: May 13, 2005
    
    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 the, 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 May 13, 2005. By:
    
    /s/ Terrence L. Bauer
    
    By:
    
    /s/ Michael J. FinnTerrence L. Bauer
    
    
    
    Michael J. FinnChief Executive Officer and
    
    
    
    DirectorDirector (Principal Executive Officer)By:
    
    /s/ Paul H. Cascio
    
    By:Paul H. Cascio
    
    
    
    Gerald M. McIntoshDirector and Non-Executive Chairman
    
    
    
    Directorof the BoardBy:
    
    /s/ Keith G. LeBlanc
    
    By:
    
    /s/ Joseph M. Valley, Jr.Keith G. LeBlanc
    
    
    
    Joseph M. Valley, Jr.President and Director
    
    
    
    DirectorBy:
    
    /s/ David Crane
    
    By:
    
    /s/ Stephen H. MurdockDavid Crane
    
    
    
    Stephen H. MurdockDirector
    
    
    
    Chief Financial Officer (Principal Accountingand Financial Officer)
 -17-




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ORION HEALTHCORP, INC. 
 INDEX TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 PageNumberConsolidated Condensed Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004
    
    
    F-1Consolidated Condensed Statements of Operations for the Quarters Ended March 31, 2005 and 2004 (unaudited)
    
    
    F-2Consolidated Condensed Statements of Cash Flows for the Quarters Ended March 31, 2005 and 2004 (unaudited)
    
    
    F-3Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    F-4
 -18-




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Orion HealthCorp, Inc. 
 Consolidated Condensed Balance Sheets
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Current assetsCash and cash equivalents
    
    $
    612,348
    
    
    $
    701,846Accounts receivable, net
    
    
    5,022,737
    
    
    
    4,469,240Inventory
    
    
    499,612
    
    
    
    519,509Prepaid expenses and other current assets
    
    
    775,231
    
    
    
    519,843Total current assets
    
    
    6,909,928
    
    
    
    6,210,438Property and equipment, net
    
    
    3,007,146
    
    
    
    3,370,928Other long-term assetsIntangible assets, including goodwill
    
    
    31,432,470
    
    
    
    32,250,640Other assets, net
    
    
    527,023
    
    
    
    534,314Total other long-term assets
    
    
    31,959,493
    
    
    
    32,784,954Total assets
    
    $
    41,876,567
    
    
    $
    42,366,320Current liabilitiesAccounts payable and accrued expenses
    
    $
    7,255,454
    
    
    $
    6,784,950Deferred revenue
    
    
    207,046
    
    
    
    304,144Income taxes payable
    
    
    116,943
    
    
    
    116,943Current portion of capital lease obligation
    
    
    250,656
    
    
    
    258,478Current portion of long-term debt
    
    
    3,449,052
    
    
    
    2,762,334Total current liabilities
    
    
    11,279,151
    
    
    
    10,226,849Long-term liabilitiesCapital lease obligation, net of current portion
    
    
    498,519
    
    
    
    540,274Long-term debt, net of current portion
    
    
    4,226,191
    
    
    
    4,238,839Deferred tax liability
    
    
    620,977
    
    
    
    620,977Minority interest in partnership
    
    
    216,447
    
    
    
    169,500Total long-term liabilities
    
    
    5,562,134
    
    
    
    5,569,590Stockholders equityPreferred stock, par value $0.001; 20,000,000
shares authorized; no shares issued and
outstanding
    
    
    
    
    
    
    Common stock, Class A, par value $0.001;
70,000,000 shares authorized, 8,685,381 and
8,602,149 shares issued and outstanding at
March 31, 2005 and December 31, 2004,
respectively
    
    
    8,685
    
    
    
    8,602Common stock, Class B, par value $0.001;
25,000,000 shares authorized, 11,482,261 shares
issued and outstanding at March 31, 2005 and
December 31, 2004
    
    
    11,482
    
    
    
    11,482Common stock, Class C, par value $0.001;
2,000,000 shares authorized, 1,575,760 shares
issued and outstanding at March 31, 2005 and
December 31, 2004
    
    
    1,576
    
    
    
    1,576Additional paid-in capital
    
    
    56,748,734
    
    
    
    56,602,786Accumulated deficit
    
    
    (31,696,877
    )
    
    
    (30,016,247
    )Treasury stock  at cost; 9,140 shares at March
31, 2005 and December 31, 2004
    
    
    (38,318
    )
    
    
    (38,318
    )Total stockholders equity
    
    
    25,035,282
    
    
    
    26,569,881Total liabilities and stockholders equity
    
    $
    41,876,567
    
    
    $
    42,366,320
 The accompanying notes are an integral part of these financial statements. F - 1




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Orion HealthCorp, Inc. 
 Consolidated Condensed Statements of Operations
 For the Three Months EndedMarch 31,2005
    
    
    2004(Unaudited)
    
    (Unaudited)Net operating revenues
    
    $
    9,202,448
    
    
    $
    4,178,175Direct cost of revenues
    
    
    4,161,479
    
    
    
    2,533,465Gross margin
    
    
    5,040,969
    
    
    
    1,644,710Operating expenses:Salaries and benefits
    
    
    3,098,180
    
    
    
    955,488Facility rent and related costs
    
    
    596,601
    
    
    
    292,837Depreciation and amortization
    
    
    1,111,584
    
    
    
    134,990Professional and consulting fees
    
    
    365,134
    
    
    
    168,837Insurance
    
    
    247,102
    
    
    
    138,942Provision for doubtful accounts
    
    
    367,941
    
    
    
    254,921Other expenses
    
    
    996,107
    
    
    
    311,273Total operating expenses
    
    
    6,782,649
    
    
    
    2,257,288Loss from continuing operations before other income (expenses)
    
    
    (1,741,680
    )
    
    
    (612,578
    )Other income (expenses):Interest expense
    
    
    (94,914
    )
    
    
    (240,081
    )Other expense, net
    
    
    1,553
    
    
    
    (5,590
    )Total other income (expenses), net
    
    
    (93,361
    )
    
    
    (245,671
    )Minority interest earnings in partnership
    
    
    (39,447
    )
    
    
    Loss from continuing operations
    
    
    (1,874,488
    )
    
    
    (858,249
    )Discontinued operationsIncome from operations of discontinued components, including net gain
on disposal of $343,575 in 1Q05
    
    
    193,858
    
    
    
    83,805Net loss
    
    
    (1,680,630
    )
    
    
    (774,444
    )Preferred stock dividends
    
    
    
    
    
    
    (165,300
    )Net loss attributable to common stockholders
    
    $
    (1,680,630
    )
    
    $
    (939,744
    )Weighted average common shares outstanding;Basic

    
    
    8,666,531
    
    
    
    8,602,149Diluted
    
    
    8,666,531
    
    
    
    8,602,149Earnings (loss) per share:Basic:Net loss per share from continuing operations
    
    $
    (0.216
    )
    
    $
    (0.100
    )Net income per share from discontinued operations
    
    $
    0.022
    
    
    $
    0.010Net loss per share
    
    $
    (0.194
    )
    
    $
    (0.090
    )Diluted:Net loss per share from continuing operations
    
    $
    (0.216
    )
    
    $
    (0.100
    )Net income per share from discontinued operations
    
    $
    0.022
    
    
    $
    0.010Net loss per share
    
    $
    (0.194
    )
    
    $
    (0.090
    )
 The accompanying notes are an integral part of these financial statements. F - 2




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##### Table of Contents



Orion HealthCorp, Inc. 
 Consolidated Condensed Statements of Cash Flows
 For the Three Months EndedMarch 31,2005
    
    
    2004Operating activitiesNet loss
    
    $
    (1,680,630
    )
    
    $
    (774,444
    )Adjustments to reconcile net loss to net cash used in operating activities:Minority interest in earnings of partnerships
    
    
    39,447
    
    
    
    Provision for doubtful accounts
    
    
    367,941
    
    
    
    261,911Depreciation and amortization
    
    
    1,111,585
    
    
    
    136,510Amortization of debt issuance costs
    
    
    
    
    
    
    1,400Conversion of notes payable to common stock
    
    
    26,031
    
    
    
    Gain on disposition of discontinued components
    
    
    (343,575
    )
    
    
    Changes in operating assets and liabilities:Intercompany
    
    
    
    
    
    
    Accounts receivable
    
    
    (679,289
    )
    
    
    48,884Inventory
    
    
    41,266
    
    
    
    8,780Prepaid expenses and other assets
    
    
    (253,798
    )
    
    
    (11,552
    )Other assets
    
    
    8,470
    
    
    
    Accounts payable and accrued expenses
    
    
    629,149
    
    
    
    39,484Deferred revenues
    
    
    (15,996
    )
    
    
    47,845Net cash used in operating activities
    
    
    (749,399
    )
    
    
    (241,182
    )Investing activitiesPurchase of property and equipment
    
    
    (84,592
    )
    
    
    (34,230
    )Net cash used in investing activities
    
    
    (84,592
    )
    
    
    (34,230
    )Financing activitiesNet repayments of capital lease obligations
    
    
    (49,577
    )
    
    
    (14,696
    )Net repayments on line of credit
    
    
    (231,272
    )
    
    
    (35,272
    )Net borrowings (repayments) of notes payable
    
    
    930,164
    
    
    
    (166,908
    )Net borrowings of other obligations
    
    
    95,178
    
    
    
    626,206Net cash provided by financing activities
    
    
    744,493
    
    
    
    409,330Net increase (decrease) in cash and cash equivalents
    
    
    (89,498
    )
    
    
    133,918Cash and cash equivalents, beginning of period
    
    
    701,846
    
    
    
    49,532Cash and cash equivalents, end of period
    
    $
    612,348
    
    
    $
    183,450
 The accompanying notes are an integral part of these financial statements. F - 3




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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1. General Orion HealthCorp, Inc. (formerly SurgiCare, Inc. SurgiCare) (Orion or the Company) and
its subsidiaries maintain their accounts on the accrual method of accounting in accordance with
accounting principles generally accepted in the United States of America. The consolidated
financial statements include the accounts of the Company and all of its majority-owned
subsidiaries. As described in Note 3, Acquisition and Restructuring Transactions, Orions results
include the results of IPS for the three months ended March 31, 2004 and the results of the IPS,
the Companys surgery and diagnostic center business and MBS (which includes DCPS) for the three
months ended March 31, 2005. The descriptions of the business and results of operations of MBS set
forth in these notes include the business and results of operations of DCPS. All material
intercompany balances and transactions have been eliminated in consolidation. These financial statements have been prepared in accordance with generally accepted accounting
principles (GAAP) for interim financial reporting and in accordance with Securities and Exchange
Commission (SEC) Rule 310-(b) of Regulation S-B. In the opinion of management, the accompanying
unaudited consolidated condensed financial statements include all adjustments consisting of only
normal recurring adjustments necessary for a fair presentation of the Companys financial position
and results of operations and cash flows of the interim periods presented. The results of
operations for any interim period are not necessarily indicative of results for the full year. The accompanying unaudited consolidated condensed financial statements should be read in
conjunction with the financial statements and related notes therein included in the Companys 2004
Annual Report on Form 10-KSB. Description of Business Surgery and Diagnostic Centers SurgiCare, Inc. was incorporated in Delaware on February 24, 1984 as Technical Coatings
Incorporated. On September 10, 1984, its name was changed to Technical Coatings, Inc. (TCI).
Immediately prior to July 1999, TCI was an inactive company. On July 11, 1999, TCI changed its name
to SurgiCare, Inc., and at that time changed its business strategy to developing, acquiring and
operating freestanding ambulatory surgery centers (ASCs). On July 21, 1999, SurgiCare acquired
all of the issued and outstanding shares of common stock of Bellaire SurgiCare, Inc. a Texas
corporation (Bellaire SurgiCare), in exchange for the issuance of 9.86 million shares of
SurgiCares common stock (now 986,000 shares of Class A Common Stock after giving effect to the
Reverse Stock Split and Reclassification, as discussed in Note 3. Acquisition and Restructuring
Transactions) and 1.35 million shares of SurgiCares Series A Redeemable Preferred Stock, par value
$.001 per share, to the holders of Bellaire SurgiCares common stock. For accounting purposes, this
reverse acquisition was effective July 1, 1999. On December 15, 2004, the Company changed its name
to Orion HealthCorp, Inc. As of March 31, 2005, Orion owned a majority interest in two surgery centers and a minority
interest as general partner in one additional center. Two of the centers are located in Texas and
one is located in Ohio. In limited circumstances, Orion, or its subsidiaries, may also furnish
anesthesia services in support of the activities of the surgery centers. The Companys ASCs perform
various types of procedures including: orthopedic surgery, colonoscopy, ophthalmic laser surgery,
pain injections and various pediatric surgeries. The most common procedures performed in our ASCs
include knee arthroscopy, lumbar nerve block and sacral injection, colonoscopy, hammertoe
correction, sinus endoscopic biopsy, cataract removal, breast biopsy, Mitchell procedures and
cystourethroscopy. Orion also owns a 41% interest in an open magnetic resonance imaging (MRI)
center in Ohio, which opened in July 2004. The open MRI center performs diagnostic procedures using
MRI technology. Integrated Physician Solutions Integrated Physician Solutions, Inc. (IPS), a Delaware corporation, was founded in 1996 as a
business development company to provide physician practice management services to general and
subspecialty pediatric practices. IPS commenced its business activities upon consummation of
several medical group business combinations effective January 1, 1999. IPSs subsidiary,
IntegriMED, Inc. (IntegriMED), is a provider of technology solutions for physicians, including a
comprehensive suite of integrated business and clinical software applications. The Pediatric
Physician Alliance (PPA) division of IPS manages pediatric medical clinics. As of March 31,
2005, PPA managed ten practice sites, representing six medical groups in Illinois, Ohio and New
Jersey. Medical Billing Services Medical Billing Services, Inc. (MBS) is based in Houston, Texas and was incorporated in
Texas on October 16, 1985. Dennis Cain Physician Solutions, Ltd. (DCPS) is based in Houston,
Texas and was organized as a Texas limited liability company on September 16, 1998. DCPS
reorganized as a Texas limited partnership on August 31, 2003. Orion acquired MBS and DCPS in the
DCPS/MBS Transaction, which is described in Note 3. Acquisition and Restructuring Transactions.
Subsequent to the DCPS/MBS Transaction, DCPS has operated as a subsidiary of MBS. MBS and DCPS
provide practice management, billing and collection, managed care consulting and
coding/reimbursement F-4




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services to hospital-based physicians and clinics. Any descriptions of MBS include the
business and operations of DCPS. Note 2. Going Concern The accompanying consolidated condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America, which contemplate
the continuation of the Company as a going concern. However, the Company incurred substantial
operating losses during 2004 and in the first quarter of 2005. In addition, the Company has used
substantial amounts of working capital in its operations. These conditions raise substantial doubt
about the Companys ability to continue as a going concern. The Company has financed its growth primarily through the issuance of equity, secured and/or
convertible debt, most recently by completing a series of acquisition and restructuring
transactions (the Closing), which occurred in December 2004 and are described in Note 3.
Acquisition and Restructuring Transactions. In connection with the closing of these transactions,
the Company entered into a new secured two-year revolving credit facility pursuant to the Loan and
Security Agreement (the Loan and Security Agreement), dated December 15, 2004, by and among
Orion, certain of its affiliates and subsidiaries, and Healthcare Business Credit Corporation
(HBCC). In connection with entering into this new facility, Orion also restructured its
previously-existing debt facilities, which resulted in a decrease in aggregate debt owed to DVI
Business Credit Corporation and DVI Financial Services, Inc. (collectively, DVI) from
approximately $10.1 million to a combined principal amount of approximately $6.5 million, of which
approximately $2 million was paid at the Closing. In addition to the Closing, on March 16, 2005,
Brantley Partners IV, L.P. (Brantley IV) loaned Orion an aggregate of $1,025,000 (the March
Loan). On April 19, 2005, Brantley IV loaned the Company an additional $225,000 (the April
Loan). Although the definitive transaction documents with respect to these loans have not been
finalized or executed, a summary of the anticipated terms of the loans is as follows: (i) the loans
are unsecured; (ii) the loans are subordinate to the Companys outstanding loan from HBCC and other
indebtedness for monies borrowed and ranked pari passu with general trade liabilities; (iii)
principal and interest on the loans are due April 19, 2006; (iv) the interest accrues at a per
annum rate equal to nine percent (9%) and is non-compounding; and (v) Brantley IV, at its option,
may convert all or a portion of the outstanding principal and interest due on or after the maturity
date of the loans into shares of Class A Common Stock of the Company at a price per share equal to
$1.042825. The number of shares issuable upon conversion with respect to the March Loan shall not
exceed the lesser of (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3% of the then
outstanding Class A Common Stock. The number of shares issuable upon conversion with respect to
the April Loan shall not exceed the lesser of (i) 254,597 shares of Class A Common Stock, or (ii)
3.6% of the then outstanding Class A Common Stock. Paul H. Cascio, the Chairman of the board of
directors of Orion, and Michael J. Finn, a director of Orion, are affiliates of Brantley IV.
Additionally, Brantley IV is a principal stockholder of Orion and held approximately 49.1% of the
outstanding voting stock of Orion as of March 31, 2005, on an as converted basis. Additionally, as
part of this transaction, the Company entered into a First Amendment to the Loan and Security
Agreement (the First Amendment), dated March 22, 2005, with certain of the Companys affiliates
and subsidiaries, and HBCC whereby its $4,000,000 secured two-year revolving credit facility has
been reduced by the amount of the loans from Brantley IV to $2,750,000. As a result of the First
Amendment, the Brantley IV Guaranty was amended by the Amended and Restated Guaranty Agreement (the
Amended Brantley IV Guaranty), dated March 22, 2005, which reduces the deficiency guaranty
provided by Brantley IV by the amount of the March Loan to $2,247,727. Also as a result of the
First Amendment, the Brantley Capital Guaranty was amended by the Amended and Restated Guaranty
Agreement (the Amended Brantley Capital Guaranty), dated March 22, 2005, which reduces the
deficiency guaranty provided by Brantley Capital by the amount of the April Loan to $502,273. As of March 31, 2005, the Companys existing credit facility with HBCC has limited
availability to provide for working capital shortages. Although the Company believes that it will
generate cash flows from operations in the future, there is substantial doubt as to whether it will
be able to fund its operations solely from its cash flows. The Company has a strategic plan
designed to accelerate the Companys growth and enhance its future earnings potential. The plan
focuses on the Companys strengths, which include providing billing, collections and complementary
business management services to physician practices in addition to the provision of development and
management services to ambulatory surgery centers. A fundamental component of Orions plan is the
selective consideration of accretive acquisition opportunities in these core business sectors. The
Company will begin to divest certain non-core assets and use the proceeds and expense reductions to
repay debt, provide working capital and fund growth. In addition, the Company will cease investment
in business lines that do not complement the Companys strategic plans and will redirect financial
resources and company personnel to areas that management believes enhances long-term growth
potential. Presently, the Company is evaluating strategic alternatives for its software services
business. The Company does not anticipate a significant reduction of revenue as a result of the
implementation of these strategic initiatives. However, Orion anticipates a substantial reduction
of annual expenses attributable to a combination of these initiatives and the consolidation of
corporate functions currently duplicated at the Companys Houston and Atlanta facilities. The Company intends to continue to manage its use of cash. However, the Companys business is
still faced with many challenges. If cash flows from operations and borrowings are not sufficient
to fund the Companys cash requirements, the Company may be required to further reduce its
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 the Company or that any additional financing
would not be substantially dilutive to the Companys existing stockholders. F-5




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Note 3. Acquisition and Restructuring Transactions On November 18, 2003, the Company entered into an agreement and plan of merger with IPS, which
was amended and restated on February 9, 2004, and further amended on July 16, 2004 and on September
9, 2004 (the IPS Merger Agreement), relating to the Companys acquisition of IPS (the IPS
Merger). On February 9, 2004, the Company entered into an agreement and plan of merger with DCPS
and MBS, which was amended and restated on July 16, 2004, and further amended on September 9, 2004
and on December 15, 2004 (the DCPS/MBS Merger Agreement), relating to the Companys acquisition
of MBS and DCPS (the DCPS/MBS Transaction and together with the IPS Merger, the Acquisitions).
The Company completed the IPS Merger and the DCPS/MBS Transaction on December 15, 2004. As a result
of the IPS Merger and the DCPS/MBS Transaction, IPS, MBS and DCPS became wholly-owned subsidiaries
of the Company. On December 15, 2004, and simultaneous with the consummation of the IPS Merger and DCPS/MBS
Transaction, the Company consummated the Closing, which included issuances of new equity
securities for cash and contribution of outstanding debt, and the restructuring of its debt
facilities. The Company also completed a one-for-ten reverse stock split (the Reverse Stock
Split), created three new classes of common stock and changed its name. The Companys common stock
was converted to Orion Class A Common Stock (the Reclassification). The Company also created
Class B and Class C Common Stock, which were issued in connection with the equity investments and
acquisitions. Also on December 15, 2004, the Company issued 11,482,261 shares of its Class B Common Stock
(the Investment Transaction) to various investors for $13,200,000 in cash plus cash in the amount
of $128,350, which amount equaled the accrued but unpaid interest immediately prior to the Closing
owed to a subsidiary of Brantley IV by SurgiCare and IPS on amounts advanced prior to October 24,
2003. At the Closing, Orion used $5,908,761 to pay off the debt owed to the subsidiary of Brantley
IV. The Company also granted to Brantley IV the right to purchase shares of Class A Common Stock
for cash in an amount up to an aggregate of $3,000,000 after the Closing (the Purchase Right).
Brantley IV may exercise the Purchase Right at any time after December 15, 2004. Each additional
investment will be: (i) subject to the approval of a majority of the members of the board of
directors of the Company that are not affiliated with Brantley IV, (ii) consummated on a date
mutually agreed by the Company and Brantley IV, and (iii) accomplished with documentation
reasonably satisfactory to the Company and Brantley IV. Pursuant to the terms of the Purchase
Right, the purchase price per share of the Class A Common Stock will be equal to the lesser of (a)
$1.25, and (b) 70% multiplied by the average of the daily average of the high and low price per
share of the Class A Common Stock on the American Stock Exchange (AMEX) or a similar system on
which the Class A Common Stock shall be listed at the time, for the twenty trading days immediately
preceding the date of the closing of the exercise of the Purchase Right. Additionally, the Company used $3,683,492 of the proceeds of the Investment Transaction to
repay a portion of the indebtedness to unaffiliated third parties and restructured additional
existing indebtedness. The IPS Merger has been treated as a reverse acquisition for accounting purposes. SFAS No.
141 requires that, in a business combination effected through the issuance of shares or other
equity interests, as in the case of the IPS Merger, a determination be made as to which entity is
the accounting acquirer. This determination is principally based on the relative voting rights in
the combined entity held by existing stockholders of each of the combining companies, the
composition of the board of directors of the combined entity, and the expected composition of the
executive management of the combined entity. Based on an assessment of the relevant facts and
circumstances existing with respect to the IPS Merger, it has been determined that IPS is the
acquirer for accounting purposes, even though IPS is a subsidiary of Orion. Accordingly, the IPS Merger has been treated as a reverse acquisition, meaning that the
purchase price, comprised of the fair value of the outstanding shares of the Company prior to the
transaction, plus applicable transaction costs, has been allocated to the fair value of the
Companys tangible and intangible assets and liabilities prior to the transaction, with any excess
being considered goodwill. IPS is being treated as the continuing reporting entity, and thus IPSs
historical results have become those of the combined company. Orions results include the results
of IPS for the three months ended March 31, 2004 and the results of IPS, the Companys surgery and
diagnostic center business and MBS (which includes DCPS) for the three months ended March 31, 2005. New Line of Credit Orion also entered into a new secured two-year revolving credit facility pursuant to the Loan
and Security Agreement. Under this facility, up to $4,000,000 of loans may be made available to
Orion, subject to a borrowing base. Orion borrowed $1,600,000 under this facility concurrently with
the Closing. The interest rate under this facility is the prime rate plus 3%. Upon an event of
default, HBCC can accelerate the loans or call the Guaranties described below. In connection with
entering into this new facility, Orion also restructured its previously-existing debt facilities,
which resulted in a decrease in aggregate debt owed to DVI from approximately $10.1 million to a
combined principal amount of approximately $6.5 million, of which approximately $2 million was paid
at the Closing. Pursuant to the Guaranty Agreement (the Brantley IV Guaranty), dated as of December 15,
2004, provided by Brantley IV to HBCC, Brantley IV agreed to provide a deficiency guaranty in the
amount of $3,272,727. Pursuant to the Guaranty Agreement (the Brantley Capital Guaranty), dated
as of December 15, 2004, provided by Brantley Capital Corporation (Brantley Capital) to HBCC,
Brantley Capital agreed to provide a deficiency guarantee in the amount of $727,273. In
consideration for the Guaranties, Orion issued warrants to purchase F-6




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20,455 shares of Class A Common Stock, at an exercise price of $0.01 per share, to Brantley
IV, and issued warrants to purchase 4,545 shares of Class A Common Stock, at an exercise price of
$0.01 per share, to Brantley Capital. On March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000. On April 19,
2005, Brantley IV loaned the Company an additional $225,000. (See Note 2. Going Concern.)
Additionally, as part of this transaction, the Company entered into the First Amendment, dated
March 22, 2005, with HBCC whereby its $4,000,000 secured two-year revolving credit facility has
been reduced by the amount of the loans from Brantley IV to $2,750,000. As a result of the First
Amendment, the Brantley IV Guaranty was amended by the Amended Brantley IV Guaranty, which reduces
the deficiency guaranty provided by Brantley IV by the amount of the March Loan to $2,247,727.
Also as a result of the First Amendment, the Brantley Capital Guaranty was amended by the Amended
Brantley Capital Guaranty, which reduces the deficiency guaranty provided by Brantley Capital by
the amount of the April Loan to $502,273. Note 4. Revenue Recognition The Companys surgery and diagnostic center business recognizes revenue on the date the
procedures are performed, and accounts receivable are recorded at that time. Revenues are reported
at the estimated realizable amounts from patients and third-party payers. If such third-party
payers were to change their reimbursement policies, the effect on revenue could be significant.
Earnings are charged with a provision for contractual adjustments and doubtful accounts based on
such factors as historical trends of billing and cash collections, established fee schedules,
accounts receivable agings and contractual relationships with third-party payers. Contractual
allowances are estimated primarily using each surgery centers collection experience. Contractual
rates and fee schedules are also helpful in this process. On a rolling average basis, the Company
tracks collections as a percentage of related billed charges. This percentage, which is adjusted on
a quarterly basis, has proved to be the best indicator of expected realizable amounts from patients
and third-party payers. Contractual adjustments and accounts deemed uncollectible are applied
against the allowance account. The Company 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 quarter ended March 31, 2005. IPS records revenue based on patient services provided by its affiliated medical groups and
for services provided by IntegriMED to its customers. Net patient service revenue is impacted by
billing rates, changes in current procedural terminology (CPT) 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 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 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 quarters ended March 31, 2005 and 2004. IntegriMED generates revenue based on fees charged to its customers for training,
implementation, subscription services and administrative fees for management of employee benefit
programs. Deferred revenue is recorded at the execution of a contract for the training and
implementation fees billed and deposits collected from the customer, representing amounts to be
recognized as revenue in future periods. Training and implementation fee revenues are recognized
once the applicable software systems are installed and operational and are charged at a quoted
daily rate plus expenses. Subscription fee revenues, which are billed on a monthly basis, are
recognized based on contractual fee schedules in the period the services are provided. Employee
benefit administrative fee revenues are recognized in the period the services are provided. MBS earns revenues based on the collection of MBSs customers receivables. Revenues are
recognized during the period in which collections were received. Note 5. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Note 6. Segments and Related Information In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise F-7




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and Related Information, the Company has determined that it has four reportable segments 
PPA, IntegriMED, the Companys surgery and diagnostic centers and MBS. The reportable segments are
strategic business units that offer different products and services. They are managed separately
because each business requires different technology, operational support and marketing strategies.
The Companys reportable segments consist of: (i) PPA, the pediatric medical groups that provide
patient care operating under management services agreements (MSAs); (ii) IntegriMED, a provider
of access to applications and services to physicians and medical groups; (iii) the Companys
surgery and diagnostic centers; and (iv) MBS, which provides practice management, billing and
collection, managed care consulting and coding/reimbursement services to hospital-based physicians
and clinics. Management chose to aggregate the MSAs into a single operating segment consistent with
the objective and basic principles of SFAS No. 131 based on similar economic characteristics,
including the nature of the products and services, the type of customer for their services, the
methods used to provide their services and in consideration of the regulatory environment under
Medicare and HIPAA. The following table summarizes key financial information, by reportable segment, as of and for
the quarters ended March 31, 2005 and 2004, respectively. For the Quarter Ended March 31, 2005Surgery andIntegriMED
    
    
    diagnosticPPA
    
    
    and other
    
    
    centers
    
    
    MBS
    
    
    TotalNet operating revenues
    
    $
    5,174,274
    
    
    $
    133,550
    
    
    $
    1,380,501
    
    
    $
    2,535,844
    
    
    $
    9,224,168Income (loss) from continuing operations
    
    
    253,800
    
    
    
    (373,186
    )
    
    
    (1,061,213
    )
    
    
    200,674
    
    
    
    (979,926
    )Depreciation and amortization
    
    
    141,698
    
    
    
    7,935
    
    
    
    662,732
    
    
    
    287,140
    
    
    
    1,099,505Total assets
    
    
    9,870,980
    
    
    
    487,633
    
    
    
    19,682,426
    
    
    
    10,699,435
    
    
    
    40,740,475
 For the Quarter Ended March 31, 2004Surgery andIntegriMED
    
    
    diagnosticPPA
    
    
    and other
    
    
    centers
    
    
    MBS
    
    
    TotalNet operating revenues
    
    $
    4,153,584
    
    
    $
    59,726
    
    
    $
    
    
    
    $
    
    
    
    $
    4,213,310Loss from continuing operations
    
    
    195,698
    
    
    
    (183,371
    )
    
    
    
    
    
    
    
    
    
    
    12,327Depreciation and amortization
    
    
    122,086
    
    
    
    1,863
    
    
    
    
    
    
    
    
    
    
    
    123,949Total assets
    
    
    9,996,537
    
    
    
    247,403
    
    
    
    
    
    
    
    
    
    
    
    10,243,940
 The following schedules provide a reconciliation of the key financial information by
reportable segment to the consolidated totals found in Orions consolidated condensed balance
sheets and statements of operations as of and for the quarters ended March 31, 2005 and 2004,
respectively. 1Q05
    
    
    1Q04Net operating revenues:Total net operating revenues for reportable segments
    
    $
    9,224,168
    
    
    $
    4,213,310Elimination of intercompany transactions
    
    
    (21,720
    )
    
    
    (35,136
    )Total consolidated net operating revenues
    
    $
    9,202,448
    
    
    $
    4,178,175Loss from continuing operations:Total loss from continuing operations for
reportable segments
    
    $
    (979,926
    )
    
    $
    12,327Corporate overhead
    
    
    (481,113
    )
    
    
    (493,404
    )Elimination of intercompany transactions
    
    
    (413,449
    )
    
    
    (377,172
    )Total consolidated loss from continuing operations
    
    $
    (1,874,488
    )
    
    $
    (858,249
    )Depreciation and amortization:Total depreciation and amortization for reportable
segments
    
    $
    1,099,505
    
    
    $
    123,949Corporate depreciation and amortization
    
    
    12,079
    
    
    
    11,041Total consolidated depreciation and amortization
    
    $
    1,111,584
    
    
    $
    134,990Total assets:Total assets for reportable segments
    
    $
    40,740,475
    
    
    $
    10,243,940Corporate assets
    
    
    1,136,092
    
    
    
    356,548Total consolidated assets
    
    $
    41,876,567
    
    
    $
    10,600,488
 Note 7. Goodwill and Intangible Assets Goodwill represents 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 the Company 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 8. Earnings per Share Basic earnings per share are calculated on the basis of the weighted average number of Class A
Common Stock outstanding. 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 and Class C Common Stock. For the Quarters EndedMarch 31,2005
    
    
    2004Basic loss per share:Net loss
    
    $
    (1,680,630
    )
    
    $
    (774,444
    )Weighted average common shares outstanding
    
    
    8,666,531
    
    
    
    8,602,149Dilutive stock options and warrants
    
    
    (a
    )
    
    
    (a
    )Convertible notes
    
    
    (b
    )
    
    
    (b
    )Class B Common Stock
    
    
    (c
    )
    
    
    (c
    )Class C Common Stock
    
    
    (d
    )
    
    
    (d
    )Weighted average common shares outstanding for diluted net loss per share
    
    
    8,666,531
    
    
    
    8,602,149Net loss per share from continuing operations
    
    $
    (0.216
    )
    
    $
    (0.100
    )Net loss per share from discontinued operations
    
    $
    0.022
    
    
    $
    0.010Net loss per share  basic
    
    $
    (0.194
    )
    
    $
    (0.090
    )Net loss per share  diluted
    
    $
    (0.194
    )
    
    $
    (0.090
    )
   (a)
    
    789,845 and 923,985 options and warrants were outstanding at March 31, 2005 and
2004, respectively. The information for 2004 relates to SurgiCare prior to the
acquisition and restructuring transactions.(b)
    
    $200,000 and $470,000 of notes were convertible into Class A Common Stock as of
March 31, 2005 and 2004, respectively. The conversion price was equal to $3.50 per share
until January 31, 2004. Subsequent to that date, the conversion price is equal to the F-8




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lower of $2.50 or 75% of the average closing price for the 20 trading days immediately
prior to the conversion date. The information for 2004 relates to SurgiCare prior to the
acquisition and restructuring transactions.(c)
    
    11,482,261 shares of Class B Common Stock were outstanding at March 31, 2005.(d)
    
    1,575,760 shares of Class C Common Stock were outstanding at March 31, 2005. Note 9. Preferred Stock On December 15, 2004, as part of the acquisition and restructuring transactions described in
Note 3. Acquisition and Restructuring
Transactions, the Company created two new classes of common stock and one new class of
preferred stock. Pursuant to the Form 8-A that was filed with the SEC on December 15, 2004, the
Company is authorized to issue 20,000,000 shares of preferred stock, par value $0.001 (the
Preferred Stock). Subject to the limitations prescribed by law and the provisions of the Amended
and Restated Certificate of Incorporation of the Company, the board of directors is authorized to
issue the Preferred Stock from time to time in one or more series, each of such series to have such
number of shares, voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights, and such qualifications,
limitations or restrictions thereof, as shall be determined by the board of directors in a
resolution or resolutions providing for the issue of such Preferred Stock. Subject to the powers
and rights of any Preferred Stock, including any series thereof, having any preference or priority
over, or rights superior to, the common stock, the holders of the common stock shall have and
possess all powers and voting and other rights pertaining to the stock of the Company. Also on December 15, 2004, all of IPSs outstanding redeemable convertible preferred stock,
including accrued and unpaid dividends, was converted to common stock and exchanged for shares of
Orion. Note 10. Discontinued Operations On September 19, 2003, IPS entered into a Mutual Release and Settlement Agreement (the
Settlement Agreement) with Dr. Jane Kao and PediApex Heart Center for Children (the Heart
Center) to settle disputes as to the existence and enforceability of certain contractual
obligations. As part of the Settlement Agreement, Dr. Kao, the Heart Center and IPS agreed that,
until December 31, 2004, each party would conduct their operations under the terms established by
the MSA. Additionally, among other provisions, after December 31, 2004, Dr. Kao and the Heart
Center were released from any further obligation to IPS arising from any previous agreement, and
Dr. Kao purchased the accounts receivable related to the Heart Center and IPS terminated its
ownership and management agreement with the Heart Center. The operating results of the Heart Center
were not included in the consolidated statements of operations of IPS after September 19, 2003
because this medical group did not meet the criteria for consolidation after that date in
accordance with EITF 97-2. The operations of this component are reflected in the Companys
consolidated statements of operations as income from operations of discontinued components in the
first quarter of 2004. IPS recorded a loss on disposal of this discontinued component of $12,366
for the year ended December 31, 2004. The following table contains selected financial data related to the Heart Center as of and for
the quarter ended March 31, 2004: 1Q04Income statement data:Net operating revenues
    
    $
    729,141Direct cost of revenues
    
    
    325,502Operating expenses
    
    
    357,634Net income
    
    $
    46,005Current assets
    
    $
    303,546Other assets
    
    
    91,732Total assets
    
    $
    395,278Current liabilities
    
    $
    586,847Other liabilities
    
    
    Total liabilities
    
    $
    586,847
 As part of the acquisition and restructuring transactions that closed on December 15, 2004,
the Company recorded intangible assets related to the Acquisitions. As of the Closing, the
Companys management expected the case volumes at Bellaire SurgiCare to improve in 2005. However,
by the end of February 2005, it was determined that the expected case volume increases were not
going to be realized. On March 1, 2005, the Company closed Bellaire SurgiCare and consolidated its
operations with the operations of SurgiCare Memorial Village. The Company tested the identifiable
intangible assets and goodwill related to the surgery and diagnostic center business using the
present value of cash flows method. As a result of the decision to close Bellaire SurgiCare and the
resulting impairment of the joint venture interest and management contracts related to the surgery
centers, the Company recorded a charge for impairment of intangible assets of $4,090,555 for the
year ended December 31, 2004. The operations of this component are reflected in the Companys
consolidated statements of operations as income from operations of discontinued components for
the quarter ended March 31, 2005. The Company recorded a loss on disposal of this F-9




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discontinued
component (in addition to the charge for impairment of intangible assets) of $163,050 for the
quarter ended March 31, 2005. The following table contains selected financial data related to Bellaire SurgiCare as of and
for the quarter ended March 31, 2005: 1Q05Income statement data:Net operating revenues
    
    $
    161,679Direct cost of revenues
    
    
    235,993Operating expenses
    
    
    114,104Net loss
    
    $
    (188,418
    )Current assets
    
    $
    178,787Other assets
    
    
    82,826Total assets
    
    $
    261,613Current liabilities
    
    $
    254,692Other liabilities
    
    
    35,656Total liabilities
    
    $
    290,348
 On April 1, 2005, IPS entered into a Mutual Release and Settlement Agreement (the
Settlement) with Dr. Bradley E. Chipps, M.D. and Capital Allergy and Respiratory Disease Center,
a Medical Corporation (CARDC) to settle disputes as to the existence and enforceability of
certain contractual obligations. As part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that
CARDC would purchase the assets owned by IPS as shown on the balance sheet on March 31, 2005 in
exchange for termination of the MSA. Additionally, among other provisions, after April 1, 2005, Dr.
Chipps and CARDC have been released from any further obligation to IPS arising from any previous
agreement. As a result of the Settlement, the Company recorded a charge for impairment of
intangible assets related to CARDC of $704,927 for the year ended December 31, 2004. The
operations of this component are reflected in the Companys consolidated statements of operations
as income from operations of discontinued components for the quarters ended March 31, 2005 and
2004, respectively. The Company recorded a gain on disposal of this discontinued component (in
addition to the charge for impairment of intangible assets) of $506,625 for the quarter ended March
31, 2005. The following table contains selected financial data related to CARDC as of and for the
quarters ended March 31, 2005 and 2004, respectively: 1Q05
    
    
    1Q04Income statement data:Net operating revenues
    
    $
    848,373
    
    
    $
    765,482Direct cost of revenues
    
    
    523,255
    
    
    
    495,974Operating expenses
    
    
    286,418
    
    
    
    231,708Net income
    
    $
    38,700
    
    
    $
    37,800Balance sheet data:Current assets
    
    $
    262,921
    
    
    $
    248,209Other assets
    
    
    9,270
    
    
    
    14,309Total assets
    
    $
    272,191
    
    
    $
    262,518Current liabilities
    
    $
    239,747
    
    

    $
    320,544Other liabilities
    
    
    
    
    
    
    Total liabilities
    
    $
    239,747
    
    
    $
    320,544
 F-10




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The following table summarizes the components of income from operations of discontinued
components: 1Q05
    
    
    1Q04Income from operations of discontinued components:CARDCNet income
    
    $
    38,700
    
    
    $
    37,800Gain on disposal
    
    
    506,625
    
    
    
    Heart CenterNet income
    
    
    
    
    
    
    46,005Bellaire SurgiCareNet loss
    
    
    (188,418
    )
    
    
    Loss on disposal
    
    
    (163,050
    )
    
    
    Total income from operations of discontinued components
    
    $
    193,858
    
    
    $
    83,805
 Note 11. Litigation On January 1, 1999, IPS acquired Childrens Advanced Medical Institutes, Inc. (CAMI) in a
merger transaction. On that same date, IPS began providing management services to the Childrens
Advanced Medical Institutes, P.A. (the P.A.), an entity owned by the physicians affiliated with
CAMI. The parties rights and obligations were memorialized in a merger agreement, a management
services agreement and certain other agreements. On February 7, 2000, the P.A., certain physicians
affiliated with the P.A., and the former shareholders of CAMI filed suit against IPS in the U.S.
District Court for the Northern District of Texas, Dallas Division, Civil Action File No.
3-00-CV-0536-L. On May 9, 2001, IPS (which was formerly known as Pediatric Physician Alliance,
Inc.) filed suit against the P.A., certain physicians who were members of the P.A., and Patrick
Solomon as Escrow Agent of CAMI. The case was filed in the U.S. District Court for the Northern
District of Texas, Dallas Division, Civil Action File No. 3-01CV0877-L. Certain settlements were
reached in the cases. The two cases were referred to arbitration pursuant to the arbitration
clauses in the agreements between the parties. The arbitration includes all remaining claims in
both lawsuits. The P.A., the physicians and the former shareholders of CAMI seek recovery of
pre-merger accounts receivable they claim were collected by IPS after the merger, but belong to
CAMI under the merger agreement and agreements between CAMI and the affiliated physicians. IPS has
asserted a right of set-off for over-payments that it made after the merger to the physicians. IPS
also asserts a claim against the physicians for breach of the management services agreement and
other agreements. In their complaint, the P.A., the former shareholders of CAMI and the physicians
seek a claim against IPS for approximately $500,000 (which includes interest and attorneys fees).
IPS asserted a claim against the physicians for over $5,000,000 due to the overpayments and their
alleged breach of the agreements. An arbitration hearing was held on the claim filed by the former
shareholders of CAMI in January 2004, and the Arbitrator issued an award against IPS. The award was
confirmed by the U.S. District Court in the amount of $548,884 and judgment was entered. IPSs
claims against the physicians are still pending. IPS has accrued approximately $540,000 for
possible losses related to this claim. In addition, the Company is involved in various other legal proceedings and claims arising in
the ordinary course of business. The Companys management believes that the disposition of these
additional matters, individually or in the aggregate, is not expected to have a materially adverse
effect on the Companys 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 the
Companys future results of operations or cash flows in a particular period. Note 12. Employee Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation encourages, but does not require,
companies to record compensation cost for stock-based employee compensation plans at fair value. In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure- an amendment of SFAS No. 123, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee
compensation. The statement also amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation issued to employees
using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market price of the
Companys stock at the date of the grant over the amount an employee must pay to acquire the stock.
The Company grants options at or above the market price of its common stock at the date of each
grant. The fair value of options is calculated using the Black-Scholes option-pricing model. Had the
Company adopted the fair value method
of accounting for stock based compensation, compensation expense would have been higher, and
net loss and net loss attributable to common shareholders would have increased for the periods
presented. No change in cash flows would occur. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts. For
the Quarters Ended March 31,2005
    
    
    2004Net loss  as reported
    
    $
    (1,680,630
    )
    
    $
    (744,444
    )Deduct: Total stock-based
employee compensation
(expense determined under the
fair value based method for
all awards), net of tax
effect
    
    
    (26,363
    )
    
    
    (52,725
    )Net loss  pro forma
    
    $
    (1,706,993
    )
    
    $
    (797,169
    )Net Loss per share:Basic  as reported
    
    $
    (0.194
    )
    
    $
    (0.090
    )Basic  pro forma
    
    $
    (0.197
    )
    
    $
    (0.093
    )Diluted  as reported
    
    $
    (0.194
    )
    
    $
    (0.090
    )Diluted  pro forma
    
    $
    (0.197
    )
    
    $
    (0.093
    )
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No options were granted to employees in the first quarter of 2005 or 2004. The information for
2004 relates to SurgiCare prior to the acquisition and restructuring transactions. Note 13. Subsequent Events On March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000. On April 19,
2005, Brantley IV loaned the Company an additional $225,000. (See Note 3. Acquisition and
Restructuring Transactions  New Line of Credit.) Additionally, as part of this transaction, the
Company entered into the First Amendment, dated March 22, 2005, with HBCC whereby its $4,000,000
secured two-year revolving credit facility has been reduced by the amount of the loans from
Brantley IV to $2,750,000. As a result of the First Amendment, the Brantley IV Guaranty was
amended by the Amended Brantley IV Guaranty, which reduces the deficiency guaranty provided by
Brantley IV by the amount of the March Loan to $2,247,727. Also as a result of the First
Amendment, the Brantley Capital Guaranty was amended by the Amended Brantley Capital Guaranty,
which reduces the deficiency guaranty provided by Brantley Capital by the amount of the April Loan
to $502,273. On April 1, 2005, IPS entered into the Settlement with Dr. Bradley E. Chipps, M.D. and CARDC
to settle disputes as to the existence and enforceability of certain contractual obligations. As
part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that CARDC would purchase the assets
owned by IPS as shown on the balance sheet on March 31, 2005 in exchange for termination of the
MSA. Additionally, among other provisions, after April 1, 2005, Dr. Chipps and CARDC have been
released from any further obligation to IPS arising from any previous agreement. F-12




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Exhibit Index Exhibit No.
    
    DescriptionExhibit 10.1
    
    First Amendment to Loan and Security Agreement, dated as of
March 22, 2005, by and among Orion HealthCorp, Inc., certain
affiliates and subsidiaries of Orion HealthCorp, Inc., and
Healthcare Business Credit CorporationExhibit 10.2
    
    Amended and Restated Guaranty Agreement, dated as of March
22, 2005, provided by Brantley Partners IV, L.P. to
Healthcare Business Credit CorporationExhibit 10.3
    
    Amended and Restated Guaranty Agreement, dated as of March
22, 2005, provided by Brantley Capital Corporation to
Healthcare Business Credit CorporationExhibit 31.1
    
    Rule 13a-14(a)/15d-14(a) CertificationExhibit 31.2
    
    Rule 13a-14(a)/15d-14(a) CertificationExhibit 32.1
    
    Section 1350 CertificationExhibit 32.2
    
    Section 1350 CertificationExhibit 99.1
    
    Copy of press release issued by the Company on May 13, 2005
 -31-