**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | **Quarterly Report under Section 13 or 15(d) of the  Securities Exchange Act of 1934  For the quarterly period ended June 30, 2002** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|

 
| **o** | **Transition report under Section 13 or 15(d) of the  Securities Exchange Act of 1934  For the transition period from                    to                  ** |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**SURGICARE, INC.**

(NAME OF SMALL BUSINESS ISSUER IN ITSCHARTER)

 

| **DELAWARE**                                        |   | **58-1597246**                       |
|-----------------------------------------------------|--------|--------------------------------------|
| (STATE OR OTHER JURISDICTION OF                     |   | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
| INCORPORATION OR ORGANIZATION)                      |   |                                 |
|                                                |   |                                 |
| **12727 KIMBERLEY LANE,  SUITE 200 HOUSTON, TEXAS** |   | **77024**                            |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)            |   | (ZIP CODE)                           |
|                                                |   |                                 |
| ISSUER’S TELEPHONE NUMBER: **(713) 973-6675**  |   |                                 |

 

Checkwhether the Registrant: (1) filed all reports required to be filed by Section13 or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes ý  No o

 

As ofAugust 9, 2002, 14,810,440 shares of Common Stock, $0.005 par value per share,were outstanding.

 

As ofAugust 9, 2002, 1,316,100 shares of Preferred “Series A” Stock, $0.001 parvalue per share, were outstanding.

 

As ofAugust 9, 2002, 1,200,000 shares of Preferred “Series AA” Stock, $.001 parvalue per share, were outstanding.

 

TransitionalSmall Business Disclosure Format:  Yes o  No ý

 

 

----

 

PART I

FINANCIAL INFORMATION

 

Theinformation contained herein contains certain forward looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended andSection 21E of the Securities Exchange Act of 1934, as amended, which areintended to be covered by the safe harbors created thereby.  Investors are cautioned that all forwardlooking statements involve risks and uncertainty, including, withoutlimitation, the ability of SurgiCare to continue its expansion strategy,changes in federal or state healthcare laws and regulations or third partypayor practices, SurgiCare’s historical and current compliance with existing orfuture healthcare laws and regulations and third party payor requirements,changes in costs of supplies, labor and employee benefits, as well as generalmarket conditions, competition and pricing. Although SurgiCare believes that the assumptions underlying the forwardlooking statements contained herein are reasonable, any of the assumptionscould be inaccurate, and therefore, there can be no assurance that the forwardlooking statements included in this Form 10-QSB will prove to be accurate.  In view of the significant uncertaintiesinherent in the forward looking statements included herein, the inclusion ofsuch information should not be regarded as a representation by SurgiCare or anyother person that the objectives and plans of SurgiCare will be achieved.  SurgiCare undertakes no obligation to updateor revise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results overtime.

 

ITEM 1.

 

FinancialStatements

 

Theinformation required hereunder is included in this report as set forth in the“Index to Financial Statements”

 
| INDEX TO FINANCIAL STATEMENTS                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                             |
| Consolidated Balance Sheets  as of December 31 2001, and June 30, 2002                                                                           |
|                                                                                                                                             |
| Consolidated  Income   Statements for the three months ending June 30, 2001 and 2002 and the  six months ending June 30, 2001 and 2002 |
|                                                                                                                                             |
| Consolidated  Statements of Cash Flows for the six months ending June 30, 2001 and 2002                                                          |
|                                                                                                                                             |
| Notes to  Consolidated Financial Statements                                                                                                      |

 

2

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SURGICARE, INC.

 

CONSOLIDATEDBALANCE SHEETS

 
|                                                                                          |   | **December 31,  2001** |       | **June 30,  2002** |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------|------------|--------------------|--------|
|                                                                                          |   |                   |       | **(Unaudited)**    |   |
| ASSETS                                                                                        |   |                   |       |               |   |
|                                                                                          |   |                   |       |               |   |
| Current Assets                                                                                |   |                   |       |               |   |
| Cash and cash equivalents                                                                     |   | $                      | 76,274     |               | $      | 380,633 |   |
| Accounts receivable, net                                                                      |   | 6,222,562              |       | 5,011,333          |   |
| Other receivables                                                                             |   | 26,643                 |       | 103,327            |   |
| Inventory                                                                                     |   | 583,575                |       | 624,233            |   |
| Prepaid expenses                                                                              |   | 174,082                |       | 208,994            |   |
| Other current assets                                                                          |   | 124,996                |       | 250,769            |   |
| Total Current Assets                                                                          |   | 7,208,132              |       | 6,579,289          |   |
|                                                                                          |   |                   |       |               |   |
| Property and Equipment                                                                        |   |                   |       |               |   |
| Office furniture and equipment                                                                |   | 221,277                |       | 1,481,529          |   |
| Medical and surgical equipment                                                                |   | 2,388,879              |       | 2,448,854          |   |
| Leasehold improvements                                                                        |   | 834,795                |       | 916,894            |   |
| Land                                                                                          |   |                   |       | 6,069,131          |   |
| Computer equipment                                                                            |   | 188,108                |       | 374,222            |   |
| Transportation equipment                                                                      |   | 49,157                 |       | 19,015             |   |
|                                                                                          |   |                   |       |               |   |
|                                                                                          |   | 3,682,216              |       | 11,309,645         |   |
|                                                                                          |   |                   |       |               |   |
| Less: Accumulated depreciation and  amortization                                              |   | (1,212,167             | )          | (2,099,743         | )      |
|                                                                                          |   |                   |       |               |   |
| Total Property and Equipment                                                                  |   | 2,470,049              |       | 9,209,902          |   |
|                                                                                          |   |                   |       |               |   |
| Other Assets                                                                                  |   |                   |       |               |   |
| Goodwill                                                                                      |   | 7,023,433              |       | 8,038,768          |   |
| Loan Fees (net of amortization of  $34,470 at December 31, 2001 and $49,242 at June 30, 2002) |   | 128,030                |       | 113,258            |   |
| Investment in limited partnerships                                                            |   | 346,325                |       | 1,086,695          |   |
| Deposits                                                                                      |   | 136,876                |       | 136,876            |   |
|                                                                                          |   |                   |       |               |   |
| TOTAL ASSETS                                                                                  |   | $                      | 17,312,845 |               | $      | 25,164,788 |   |

 

3

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|                                                                                                                                                                 |   | **December 31,  2001** |       | **June 30,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|--------------------|--------|
|                                                                                                                                                                 |   |                   |       | **(Unaudited)**    |   |
| LIABILITIES                                                                                                                                                          |   |                   |       |               |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Current Liabilities                                                                                                                                                  |   |                   |       |               |   |
| Current maturities of long-term  debt                                                                                                                                |   | $                      | 1,789,441  |               | $      | 1,324,832 |   |
| Revolving lines of credit                                                                                                                                            |   | 2,140,546              |       | 2,845,179          |   |
| Current portion of capital leases                                                                                                                                    |   | 124,437                |       | 119,617            |   |
| Accounts payable                                                                                                                                                     |   | 1,177,682              |       | 1,785,764          |   |
| Accrued expenses                                                                                                                                                     |   | 133,232                |       | 131,059            |   |
| Federal income taxes                                                                                                                                                 |   | 1,609,576              |       | 907,059            |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Total Current Liabilities                                                                                                                                            |   | 6,974,914              |       | 7,113,510          |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Long-Term Capital Lease Obligations                                                                                                                                  |   | 236,247                |       | 232,583            |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Long-Term Debt                                                                                                                                                       |   | 2,989,865              |       | 4,011,906          |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Minority Interest in Partnership                                                                                                                                     |   | 915,584                |       | 551,020            |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Total Liabilities                                                                                                                                                    |   | 11,116,610             |       | 11,909,019         |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| SHAREHOLDERS’  EQUITY                                                                                                                                           |   |                   |       |               |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Preferred Stock, Series A, par  value $.001, 1,650,000 authorized, 1,316,100 issued and outstanding.                                                                 |   | 1,316                  |       | 1,316              |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Preferred Stock, Series AA, par  value $.001, 1,200,000 authorized, issued and outstanding.                                                                          |   |                   |       | 1,200              |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Common Stock, par value $.005,  50,000,000 shares authorized, 14,089,320 and 14,810,440 issued and  outstanding at December 31, 2001 and June 30, 2002, respectively |   | 70,446                 |       | 74,052             |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Additional Paid-In Capital                                                                                                                                           |   | 4,991,301              |       | 13,175,184         |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Retained Earnings                                                                                                                                                    |   | 1,141,422              |       | 12,267             |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| Less:        Shareholders receivable                                                                                              |   | (8,250                 | )          | (8,250             | )      |
|                                                                                                                                                                 |   |                   |       |               |   |
| Total Shareholders’ Equity                                                                                                                                      |   | 6,196,235              |       | 13,255,769         |   |
|                                                                                                                                                                 |   |                   |       |               |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                                     |   | $                      | 17,312,845 |               | $      | 25,164,788 |   |

 

4

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SURGICARE, INC.

 

CONSOLIDATEDINCOME STATEMENT

(unaudited)

 
|                                                 |   | **FOR THE  THREE MONTHS ENDING  June 30** |      | **FOR THE  SIX MONTHS ENDING  June 30** |       |
|------------------------------------------------------|--------|-------------------------------------------|-----------|-----------------------------------------|------------|
|                                                 |   | **2001**                                  |      | **2002**                                |       | **2001** |   | **2002** |   |
| Revenues, net                                        |   | $                                         | 3,007,445 |                                    | $          | 3,776,546 |   | $ | 6,175,762 |   | $ | 7,040,536 |   |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Expenses                                             |   |                                      |      |                                    |       |   |   |   |   |
| Direct Surgical Expenses                             |   |                                      |      |                                    |       |   |   |   |   |
| Surgical costs                                       |   | 575,670                                   |      | 683,229                                 |       | 1,159,836 |   | 1,052,939 |   |
| Clinical salaries and benefits                       |   | 259,404                                   |      | 330,216                                 |       | 597,948 |   | 649,437 |   |
| Other                                                |   | 143,786                                   |      | 216,958                                 |       | 269,875 |   | 336,332 |   |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Total Direct Surgical Expenses                       |   | 978,860                                   |      | 1,230,403                               |       | 2,027,659 |   | 2,038,708 |   |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| General and Administrative Expenses                  |   |                                      |      |                                    |       |   |   |   |   |
| Salaries and benefits                                |   | 227,555                                   |      | 399,396                                 |       | 443,808 |   | 730,787 |   |
| Professional fees                                    |   | 252,333                                   |      | 495,635                                 |       | 522,924 |   | 788,138 |   |
| Rent                                                 |   | 142,833                                   |      | 150,500                                 |       | 254,975 |   | 282,835 |   |
| Management fees                                      |   | 21,140                                    |      | 30,178                                  |       | 39,797 |   | 55,140 |   |
| Depreciation and amortization                        |   | 259,135                                   |      | 168,839                                 |       | 511,153 |   | 317,734 |   |
| Consulting fees                                      |   | 35,000                                    |      | 96,200                                  |       | 70,000 |   | 131,200 |   |
| Other operating expenses                             |   | 130,523                                   |      | 240,227                                 |       | 279,980 |   | 405,402 |   |
| Provision for doubtful accounts                      |   |                                      |      | 3,757,634                               |       |   |   | 3,757,634 |   |
| Taxes                                                |   | 36,144                                    |      | 19,685                                  |       | 68,516 |   | 30,539 |   |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Total General & Administrative  Expenses         |   | 1,104,663                                 |      | 5,358,294                               |       | 2,191,153 |   | 6,499,409 |   |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Total Expenses                                       |   | 2,083,523                                 |      | 6,588,697                               |       | 4,218,812 |   | 8,538,117 |   |
| Operating Income (Loss)                              |   | 923,922                                   |      | (2,812,151                              | )          | 1,956,950 |   | (1,497,581 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Other Income (Expense)                               |   |                                      |      |                                    |       |   |   |   |   |
| Gain (Loss) on sale of asset                         |   |                                      |      |                                    |       |   |   | (2,118 | ) |
| Miscellaneous income                                 |   |                                      |      |                                    |       |   |   | 78 |   |
| Equity in Earnings of Limited  Partnerships          |   | 68,146                                    |      | 68,176                                  |       | 106,799 |   | 107,469 |   |
| Interest Expense                                     |   | (248,259                                  | )         | (231,112                                | )          | (415,562 | ) | (455,195 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Total Other Income (Expense)                         |   | (180,113                                  | )         | (162,936                                | )          | (308,763 | ) | (349,766 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Minority Interest in (Earnings)  Loss of Partnership |   | (267,701                                  | )         | 424,250                                 |       | (570,020 | ) | (1,382 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Earnings (Loss)Before Federal  Income Tax Expense    |   | 476,108                                   |      | (2,550,837                              | )          | 1,078,167 |   | (1,848,729 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Federal Income Tax Expense  (Benefit)                |   | 190,880                                   |      | (993,641                                | )          | 425,876 |   | (719,574 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Net Earnings (Loss)                                  |   | $                                         | 285,228   |                                    | (1,557,196 | ) | $ | 652,291 |   | (1,129,155 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Earnings (Loss) per share - basic                    |   | $                                         | .02       |                                    | $          | (.11 | ) | $ | .05 |   | $ | (.08 | ) |
|                                                 |   |                                      |      |                                    |       |   |   |   |   |
| Earnings (Loss) per share - diluted                  |   | $                                         | .02       |                                    | $          | (.11 | ) | $ | .04 |   | $ | (.08 | ) |

 

5

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SURGICARE, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(unaudited)

 
|                                              |   | **FOR THE  SIX MONTHS ENDING  June 30** |       |
|---------------------------------------------------|--------|-----------------------------------------|------------|
|                                              |   | **2001**                                | ** ** | **2002** |   |
|                                              |   |                                    |       |   |   |
| Cash Flows From Operating  Activities             |   |                                    |       |   |   |
| Net earnings (loss)                               |   | $                                       | 652,291    |   | $ | (1,129,155 | ) |
| Adjustments to reconcile net  earnings to         |   |                                    |       |   |   |
| net cash provided by operations:                  |   |                                    |       |   |   |
| Equity in earnings of limited  partnerships       |   | (138,524                                | )          | (107,469 | ) |
| Minority interest in earnings of  partnership     |   | 570,020                                 |       | 1,382 |   |
| Depreciation and amortization                     |   | 511,153                                 |       | 317,733 |   |
| Loss on sale of asset                             |   |                                    |       | 2,118 |   |
| Provision for doubtful accounts                   |   |                                    |       | 3,757,634 |   |
| Non-cash consulting expense                       |   | 70,000                                  |       | 124,200 |   |
| Deferred federal income tax                       |   | 167,000                                 |       |   |   |
| (Increase) Decrease in:                           |   |                                    |       |   |   |
| Accounts receivable                               |   | (1,915,000                              | )          | (2,461,716 | ) |
| Inventory                                         |   | 37,745                                  |       | 4,343 |   |
| Prepaid expenses                                  |   | (40,175                                 | )          | 96,138 |   |
| Other current assets                              |   | (100,412                                | )          | (125,773 | ) |
| Federal income tax                                |   | 84,045                                  |       | (702,517 | ) |
| Increase (Decrease) in:                           |   |                                    |       |   |   |
| Accounts payable                                  |   | 573,482                                 |       | 469,417 |   |
| Accrued expenses                                  |   | (254,970                                | )          | (63,939 | ) |
|                                              |   |                                    |       |   |   |
| Net Cash Provided by Operating  Activities        |   | 216,655                                 |       | 182,396 |   |
|                                              |   |                                    |       |   |   |
| Cash Flows From Investing  Activities             |   |                                    |       |   |   |
| Capital expenditures                              |   | (44,539                                 | )          | (171,430 | ) |
| Investment in limited partnerships                |   | (47,096                                 | )          | (640,846 | ) |
| Distributions from partnerships                   |   |                                    |       | 54,000 |   |
|                                              |   |                                    |       |   |   |
| Net Cash Used by Investing  Activities            |   | (91,635                                 | )          | (758,276 | ) |
|                                              |   |                                    |       |   |   |
| Cash Flows From Financing  Activities             |   |                                    |       |   |   |
| Borrowings on debt                                |   | 119,022                                 |       | 750,000 |   |
| Payments on debt                                  |   |                                    |       | (1,015,432 | ) |
| Net proceeds from lines of credit                 |   |                                    |       | 704,633 |   |
| Principal payments on capital lease               |   | (48,107                                 | )          | (75,516 | ) |
| Collections on shareholder debt                   |   | 8,000                                   |       |   |   |
| Proceeds from issuance of preferred  stock        |   | 9,500                                   |       |   |   |
| Proceeds from issuance of common  stock           |   |                                    |       | 882,500 |   |
| Distributions to limited partners                 |   | (162,587                                | )          | (365,946 | ) |
|                                              |   |                                    |       |   |   |
| Net Cash Provided (Used) by  Financing Activities |   | (74,172                                 | )          | 880,239 |   |
|                                              |   |                                    |       |   |   |
| Net Decrease in Cash and Cash  Equivalents        |   | 50,848                                  |       | 304,359 |   |
|                                              |   |                                    |       |   |   |
| Cash and Cash Equivalents -  Beginning of Period  |   | 21,666                                  |       | 76,274 |   |
|                                              |   |                                    |       |   |   |
| Cash and Cash Equivalents - End of  Period        |   | $                                       | 72,514     |   | $ | 380,633 |   |

 

6

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SURGICARE, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 Note 1 - General

 

In the opinion of Surgicare, Inc.’s (the Company) management, theaccompanying unaudited condensed, consolidated financial statements include alladjustments consisting of only normal recurring adjustments necessary for afair presentation of the Company’s financial position at June 30, 2002 and theresults of operations and cash flows for the three and six months ended June30, 2002 and 2001, respectively.

 

Although the Company believes that the disclosures in these financialstatements are adequate to make the information presented not misleading,certain information normally included in financial statements prepared inaccordance with generally accepted accounting principles has been condensed oromitted pursuant to the rules and regulations of the Securities and Exchange Commission.  Results of operations for the three and sixmonths ending June 30, 2002 are not necessarily indicative of results ofoperations to be expected for the year ending December 31, 2002.  Refer to the Company’s financial statementson Form 10K-SB for the year ended December 31, 2001 for additional information.

 

Note 2 - Acquisitions

 

On May 31, 2002, the Company acquired a 51% interest in the TuscarawasAmbulatory Surgery Center (“Tuscarawas Center”) located in Dover, Ohio for anaggregate of $725,000 cash and warrants to purchase 200,000 shares of theCompany common stock at an exercise price of $.01 per share expiring May 31,2007.  The warrants were valued at$590,000.  The Company has also enteredinto a Management Agreement with the Tuscarawas Center to act as exclusivemanager of the Tuscarawas Center in exchange for 5% of the Tuscarawas Center’snet monthly collected revenue.

 

The Company formed a real estate subsidiary to acquire and develop landfor new ambulatory surgery centers.  Inconjunction with this development, the company acquired five properties in atransaction valued at approximately $6,000,000, which acquisition closed onJune 4, 2002, from American International Industries, Inc., Texas Real EstateEnterprises, Inc., and Midcity Houston Properties, Inc.  The Company issued 1,200,000 shares ofSeries AA Preferred Stock to fund the transaction.  The Series AA Preferred Stock may be redeemed, in whole or in partat any time prior to its Conversion Date (defined below), at the option of theCompany.  The redemption price is $5.00per share.  The Series AA PreferredStock shall be converted automatically into shares of SurgiCare common stock ona 1-to-1 basis, with 300,000 shares being converted on each of the followingfour dates: June 4, 2003, June 4, 2004, June 4, 2005, and June 5, 2006 (eachdate referred to as a “Conversion Date”). However, in the event that the value of the common stock is less than$5.00 per share for the five (5) days preceding the Conversion Date, the holdershall be entitled to receive, at SurgiCare’s discretion, either: (a) shares ofSeries B Preferred Stock, which is yet to be designated, or (b) cash in anamount equal to the difference between $5.00 and the value of a share of commonstock on the Conversion Date multiplied by the number of shares of Series AAPreferred Stock converted (the “Cash Amount”). The number of shares of Series B Preferred Stock that the holder wouldbe entitled shall be determined by dividing the Cash Amount (that would bereceived if the holder selected the cash option) by the value of a share ofcommon stock.  Though the Series BRedeemable Preferred Stock has not been designated, it shall be redeemed on thefirst anniversary of their issuance at the rate of $5.00 per share and shall beardividends at a rate per annum of 16% of their face value payable in cashquarterly until such shares are redeemed. Holders of Series AA Preferred Stock are entitled to one vote for eachshare of Series AA Preferred Stock held at all shareholders meetings for allpurposes.

 

7

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Note 3 - Goodwill

 

Goodwill represents the excess of cost over the fair value of netassets of companies acquired in business combinations accounted for using thepurchase method.  Goodwill acquired inbusiness combinations prior to June 30, 2001 had been amortized using thestraight-line method over an estimated useful life of 20 years.  In July 2001, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill andOther Intangible Assets.”  SFAS No. 141requires that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized but insteadbe reviewed periodically for possible impairment.  The Company has adopted SFAS No. 142 effective January 1, 2002and will no longer amortize goodwill.

 

Comparative Proformaresults of adopting SFAS 142 follow:

 
|                                       |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|--------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                       |   | **2002**                          |       | **2001**                        |       | **2002** |   | **2001** |   |
|                                       |   |                              |       |                            |       |   |   |   |   |
| **Net  Income (Loss):**                    |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
|                                       |   |                              |       |                            |       |   |   |   |   |
| Reported  net income (loss)                |   | $                                 | (1,557,196 | )                               | $          | 285,228 |   | $ | (1,129,155 | ) | $ | 652,291 |   |
|                                       |   |                              |       |                            |       |   |   |   |   |
| Goodwill  amortization                     |   | —                            |       | 127,395                         |       | — |   | 254,791 |   |
|                                       |   |                              |       |                            |       |   |   |   |   |
| Proforma  net income (loss)                |   | $                                 | (1,557,196 | )                               | $          | 412,623 |   | $ | (1,129,155 | ) | $ | 907,082 |   |
|                                       |   |                              |       |                            |       |   |   |   |   |
| **Basic  and Diluted earnings per share:** |   |                              | ** ** |                            | ** ** |   | ** ** |   | ** ** |
|                                       |   |                              |       |                            |       |   |   |   |   |
| Reported  net income (loss)                |   | $                                 | (.11       | )                               | $          | .02 |   | $ | (.08 | ) | $ | .05 |   |
|                                       |   |                              |       |                            |       |   |   |   |   |
| Goodwill  amortization                     |   | —                            |       | .01                             |       | — |   | .02 |   |
|                                       |   |                              |       |                            |       |   |   |   |   |
| Proforma  net income (loss)                |   | $                                 | (.11       | )                               | $          | .03 |   | $ | (.08 | ) | $ | .07 |   |

 

Under SFAS 142, theCompany must complete its initial assessment of goodwill for possibleimpairment no later than December 31, 2002. The Company has completed the first phase of this impairment test andbelieves that there was no impairment of goodwill as of January 1, 2002.

 

8

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Note 4 - Earnings Per Share

 

Basic earnings per share are calculated on the basis of the weightedaverage number of shares outstanding. Diluted earnings per share, in addition to the weighted averagedetermined for basic earnings per share, include common stock equivalents whichwould arise from the exercise of stock options and warrants using the treasurystock method, and assumes the conversion of the Company’s preferred stock forthe period outstanding, since their issuance.

 
|                                                                           |   | **For the  Three Months Ended  June 30,** |       | **For the  Six Months Ended  June 30,** |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-----------------------------------------|--------|
|                                                                           |   | **2002**                                  |       | **2001**                                |   | **2002** |   | **2001** |   |
| Basic Earnings  Per Share:                                                     |   |                                      |       |                                    |   |   |   |   |   |
| Net Earnings  (Loss)                                                           |   | $                                         | (1,557,196 | )                                       | $      | 285,228 |   | $ | (1,129,155 | ) | $ | 652,291 |   |
| Weighted average  shares outstanding                                           |   | 14,693,450                                |       | 14,089,320                              |   | 14,420,650 |   | 13,971,820 |   |
| Dilutive stock  options and warrants                                           |   | (A                                        | )     | 41,528                                  |   | (A | )  | 62,519 |   |
| Conversion of  preferred shares                                                |   | (A                                        | )     | 1,316,100                               |   | (A | )  | 1,316,100 |   |
| Weighted average  common shares outstanding for diluted net earnings per share |   | 14,693,450                                |       | 15,446,948                              |   | 14,420,650 |   | 15,350,439 |   |
| Net earnings  (loss) per share - Basic                                         |   | $                                         | (.11       | )                                       | $      | .02 |   | $ | (.08 | ) | $ | .05 |   |
| Net earnings  (loss) per share - Diluted                                       |   | $                                         | (.11       | )                                       | $      | .02 |   | $ | (.08 | ) | $ | .04 |   |

 

----

(A)     Noincremental shares are included because their effect would be anti-dilutive.

 

9

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ITEM 2.

 

Management’s  Discussion and Analysis of FinancialCondition and results of Operation.

 

Theinformation  contained  herein contains  certain forward looking statements  within the meaning of Section 27A of the  Securities Act of 1933, as amended and  Section 21E of the  Securities  Exchange  Act of 1934,  as amended, which are intended to be covered by the safe harborscreated thereby.  Investors arecautioned that all forward looking statements involve risks and uncertainty,including, without limitation, the ability of SurgiCare to continue itsexpansion strategy, changes in federal or state healthcare laws and regulationsor third party payor practices, SurgiCare’s historical and current compliancewith existing or future healthcare laws and regulations and third party payorrequirements, changes in costs of supplies, labor and employee benefits, aswell as general market conditions, competition and pricing.  Although SurgiCare believes that theassumptions underlying the forward looking statements contained herein arereasonable, any of the assumptions could be inaccurate, and therefore,  there can be no  assurance  that the forward looking statements includedin this Form 10Q-SB will prove to be accurate. In  view of the significantuncertainties inherent in the forward-looking statements included herein, theinclusion of such information should not be regarded as a representation bySurgiCare or any other person that the objectives and plans of SurgiCare willbe achieved.  SurgiCare undertakes noobligation to update or revise forward-looking statements to reflect changedassumptions, the occurrence of unanticipated events or changes to futureoperating results over time.

 

SurgiCare’sprincipal business strategies are to (i) increase both the revenue and profits,from current cases and procedures being performed in existing facilities and,(ii) achieve growth and expand revenues by pursuing strategic acquisitions ofexisting surgical centers, and the development of new, physician-ownedambulatory surgical centers.

 

(i)SurgiCare is constantly working to increase profits from existingrevenues.  Surgical supply costs are oneof the largest cost components of any ambulatory surgical center.  Therefore, SurgiCare is always looking forways to decrease the cost of surgical supplies.  Through participation in national buying groups, SurgiCare hasbeen able to negotiate discounts on most of the commonly used surgical supplies.  SurgiCare practices a “Just in Time”approach to inventory.  This allows thecenter to minimize the amount of supplies that it is required to keep ininventory.  SurgiCare is also alwayslooking for new distributors of its surgical supplies that have the capabilityto deliver the majority of its surgical supplies “Just in Time”, and providequality service, at reduced prices. SurgiCare has found that the purchasing policies and volume discountsthat govern the acquisition of surgical supplies and equipment are an importantkey to maximize a centers’ profit.

 

(ii)SurgiCare is in the process of identifying ambulatory surgical centers and ASCmanagement companies as potential acquisition targets, and has, in some cases,conducted preliminary discussions with representatives of centers.  There can be no assurance that SurgiCarewill acquire or develop any center with whom letters of intent have beensigned, nor any other centers with whom preliminary discussions have beenconducted.  SurgiCare expects thatgenerally the acquisition of another surgery center will take the form of amerger, stock-for-stock exchange or stock-for-assets exchange, but that in mostcases, some combination of stock and cash will be used.  In addition, the target company will may wishto structure the business combination to be within the definition of a tax-freereorganization under Section 368 of the Internal Revenue Code of 1986, asamended.  SurgiCare may, however, useother acquisition structuring techniques, including purchases of assets orstock for cash or cash and stock, in conjunction with the formation of one ormore limited partnerships or limited liability companies.

 

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RESULTS OFOPERATIONS

 

Thefollowing table sets forth for the period indicated the number of surgicalcases.

 
|                       |   | **For the Three  Months Ended  June 30** |            | **For the Six  Months Ended  June 30** |   |
|----------------------------|--------|------------------------------------------|-----------------|----------------------------------------|--------|
|                       |   | **2001**                                 |            | **2002**                               |   | **2001** |   | **2002** |   |
|                       |   |                                     |            |                                   |   |   |   |   |   |
| Total Number of Cases      |   | 1,248                                    |            | 1,617                                  |   | 2,591 |   | 2,878 |   |
|                       |   |                                     |            |                                   |   |   |   |   |   |
| Total Revenue Generated    |   | $                                        | 3,007,445  |                                   | $      | 3,776,546 |   | $ | 6,175,762 |   | $ | 7,040,536 |   |
|                       |   |                                     |            |                                   |   |   |   |   |   |
| Revenue Generated per Case |   | $                                        | 2,410           |                                   | $      | 2,336 |   | $ | 2,384 |   | $ | 2,446 |   |
|                       |   |                                     |            |                                   |   |   |   |   |   |
| Gross Margin per Case      |   | $                                        | 1,626           |                                   | $      | 1,575 |   | $ | 1,601 |   | $ | 1,738 |   |

 

 

THREEMONTHS ENDING June 30, 2002 vs THREE MONTHS ENDING June 30, 2001

 

SurgiCareis  continuing  to make a concerted effort to  increase  both revenues  and  profits.  One of the programs SurgiCare uses toincrease revenues and profits involves constantly monitoring the profitabilityof specific procedures and services. This information is then used to de-emphasize less profitable,high-cost  services, and emphasize themore profitable, less cost-intensive services.  Since the acquisitionof the Memorial Village Surgery Center, in October 2000, SurgiCare has beenevaluating the types of procedures being performed to determine the best courseof action to increase the profitability per case.

 

SurgiCareperformed 1,617 cases for the three months ending June 30, 2002 compared to1,248 cases for the same  period in2001, an increase of 30% in utilization. Revenues generated per case decreased slightly from $2,410 for the threemonths ending June 30, 2001, to $2,336 for the same three  month period in 2002.  Revenues decreased as a result of changes inthird-party reimbursements in the second quarter.

 

Inthe three months ending June 30, 2002, SurgiCare generated revenue of$3,776,546  compared to $3,007,445  for the same  period  ending in 2001, an increase of 26%.  Total direct surgical costs remainedconstant at 32% for the three months ending June 30, 2002 and 2001.

 

SurgiCare adopted a new policy during the second quarter as a result of theconsolidation of its  collectiondepartments.  In connection with thischange, it took a non-cash charge of $3,757,634 reflecting the company’s newpolicy to outsource the collection of certain aged receivables.  This charge is reflected in the company’sConsolidated Income Statement as “Provision For Doubtful Accounts.

 

Generaland administrative costs for the three months ending June 30, 2002 increased to141.88% of revenue compared to 36.73% of revenue for the same period in2001.  The increased costs are directlyrelated to the charges taken based on the company’s policy to outsource certainaged receivables.

 

Forthe three months ending June 30, 2002, the minority interest in earnings (loss)of partnerships was $(424,250) compared to $267,701 for the same period in2001.  The loss incurred in the threemonths ending June 30, 2002 is directly attributable to the charges taken basedon the company’s policy to outsource certain aged receivables.

 

Forthe three months ending June 30, 2002, the Company’s earnings from its equityin limited partnerships were $68,175, compared to $68,146 for the same periodin 2001.

 

Interestexpense for the three months ending June 30, 2002 decreased to 6.12% of revenuecompared to 8.25% of revenue for the same period in 2001.  This decrease is due to the payment ofprincipal on certain long-term obligations.

 

FederalIncome Tax expense for the three months ending June 30, 2002 and 2001,respectfully, has been computed based on the applicable federal corporateincome tax rates.

 

Earnings(loss) available to common shareholders for the three months ending June 30,2002 decreased from $285,228 for the three months ending June 30, 2001 to($1,557,196) for the same period in 2002. The loss incurred in the three months ending June 30, 2002 is primarilyattributable to the charges taken based on the company’s policy to outsourcecertain aged receivables.

 

11

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SIX MONTHSENDING June 30, 2002 vs. SIX MONTHS ENDING June 30, 2001

 

Inthe six months ending June 30, 2002 SurgiCare generated revenue of $7,040,536compared to $6,175,762 for the same period in 2001, an increase of 14%.

 

SurgiCareperformed 2,878 cases for the six months ending June 30, 2002 compared to 2,591cases for the same  period in 2001, anincrease of 11% in utilization. Revenues  generated per case increasedslightly from $2,384 for the six months ending June 30, 2001, to $2,446 for thesame period  in 2002.  Revenues increased due to changes inprocedure and payor mixes.

 

Asa percent of revenue, total expenses rose from 68.31% for the six months endingJune 30, 2001, to 121.27% for the same period in 2002.  Again, the increased costs are primarilyrelated to the charges taken based on the company’s policy to outsource certainaged receivables.

 

Totaldirect surgical costs decreased from 32.83% of revenue for the six monthsending June 30, 2001 to 28.96% for the same period ending in 2002.  This decrease in surgical costs is thedirect result of programs initiated by SurgiCare to monitor and controlsurgical costs.

 

SurgiCare adopted a new policy during the second quarter as a result of theconsolidation of its  collectiondepartments.  In connection with thischange, it took a non-cash charge of $3,757,634 reflecting the company’s newpolicy to outsource the collection of certain aged receivables.  This charge is reflected in the company’sConsolidated Income Statement as “Provision For Doubtful Accounts.

 

Generaland administrative costs for the six months ending June 30, 2002 increased to92.31% of revenue compared to 35.48% of revenue for the same period in2001.  The increased costs are primarilyrelated to the charges taken based on the company’s policy to outsource certainaged receivables.

 

Forthe six months ending June 30, 2002, the minority interest in earnings ofpartnership was $1,382 compared to $570,020 for the same period in 2001.

 

Forthe six months ending June 30, 2002, the Company’s equity in earnings fromlimited partnerships were $107,468 compared to $106,799 for the same period in2001.

 

Interestexpense for the six months ending June 30, 2001 decreased to 6.47% of revenuecompared to 6.73% of revenue for the same period in 2001.  This decrease is the due to the payment ofprincipal on certain long-term obligations.

 

FederalIncome Tax expense for the six months ending June 30, 2002 and 2001,respectfully, has been computed based on the applicable federal corporateincome tax rates.

 

Earnings(loss) available to common shareholders for the six months ending June 30, 2002decreased to ($1,129,155) from $652,291 for the same period in 2001.  This decrease is the result of increases inthe charges taken based on the company’s policy to outsource certain agedreceivables.

 

 

LIQUIDITYand CAPTIAL RESOURCES

 

SurgiCare’sprimary sources of working capital are advances under lines of credit securedby SurgiCare’s accounts receivables. Net cash provided by operating activities decreased from $216,655 forthe period ending June 30, 2001 to ($16,388) for the same period in 2002.  As of June 30, 2000, the Company hadcash and cash equivalents of $380,633 and negative working capital of$534,221.  The primaryreason for the decrease in working capital was the decrease in receivablesbased on the company’s policy to outsource certain aged receivables.  SurgiCare continues to make necessarychanges to improve its billing and collection efforts and expects to realizethe benefits there from in 2002.

 

In July 2002, the Company closed a $1,000,000 fundingwhich was primarily used to fund the initial payments for the Aspen Healthcareacquistion.  The Company issuedconvertible debentures in the principal amount of $1,000,000 maturing July 14,2003, bearing interest at a rate of 10% per annum, with principal and interestdue upon maturity.  In the event thatthe closing bid price is not $2.20 per share or higher for 75 or more tradingdays, commencing on November 15, 2002 and prior to maturity, interest willaccrue on the entire principal amount at a rate of 25% per annum.  The debentures are convertible into commonstock at a price equal to $1.50 per share.

 

Netcash used by investing activities increased from $91,635 for the period endingJune 30, 2001 to $569,493 for the same period in 2002.  The increased use of cash was primarily forthe investment in Tuscarawas Surgery Center and Aspen Healthcare.

 

Netcash provided by financing activities increased from ($74,172) for the periodending June 30, 2001 to $880,240 for the same period in 2002.  The increase in cash was primarily due toproceeds received from the issuance of common stock.

 

For the remainder of the fiscal year, the Company has $722,225 inpayments due on its long-term debt and line of credit, and currently owes$1,785,764 in accounts payable.  Duringthe quarter ending September 30, 2002, the Company has a payment of $5,756,000due to finalize its purchase of Aspen Healthcare, Inc.  As of August 13, 2002, Surgicare has made atotal investment in Aspen Healthcare, Inc. of $1,397,286 in cash, common stockand warrants.  If Surgicare is notsuccessful in its efforts to raise additional capital and make the finalpayment to Aspen, a charge to earnings in the amount of $1,397,286 will bemade.  Although the Company believes itwill generate cash flow from operations in future quarters, due its rapidgrowth, it is not able to fund its current operations solely from its cashflow.  As such, the foregoing paymentwill be made from additional sales of debt and/or equity securities.  The Company does not currently have firmcommitments for the additional sales of debt or equity securities, and any suchsales will be made on a best efforts basis. The Company does not have any significant credit facilities availablewith financial institutions or other third parties and until it can generatesufficient cash flow from operations, it will be dependent upon externalsources of best efforts financing.  TheCompany can provide no assurance that it will be successful in any futurefinancing effort to obtain the necessary working capital to support itsoperations, or to make the final payment of the purchase price for AspenHealthcare, Inc.

 

 

12

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PART II

OTHER INFORMATION

ITEM 1.

LegalProceedings

 

SurgiCareis not currently involved in any material legal proceedings.

 

ITEM 2.

Change inSecurities and Use of Proceeds

 

In May 2002,Surgicare issued 75,000 shares of common stock to a shareholder of AspenHealthcare as part of the purchase price of Aspen Healthcare.  In addition, the Company issued to two AspenHealthcare shareholders warrants to purchase an aggregate of 136,786 shares ofcommon stock in connection with the acquisition.  Surgicare believes the transaction was exempt from registrationpursuant to Section 4(2) of the Securities Act, as the issuances were tosophisticated investors and since the transactions was non-recurring andprivately negotiated.

 

In May 2002,Surgicare issued to the members of Tuscarawas Ambulatory Surgery Centers, LLC,warrants to purchase 200,000 shares of common stock.  Surgicare believes the transaction was exempt from registrationpursuant to Section 4(2) of the Securities Act, as the issuances were tosophisticated investors and since the transactions was non-recurring andprivately negotiated.

 

In May 2002,Surgicare issued 1,200,000 shares of Series AA Preferred Stock as theconsideration in the acquisition of real estate valued at $6,000,000.  Surgicare believes the transaction wasexempt from registration pursuant to Section 4(2) of the Securities Act, as theissuance was to an accredited investor and since the transaction was non-recurringand privately negotiated.

 

In May 2002,Surgicare issued 125,000 shares of common stock upon the exercise ofwarrants.  Surgicare believes thetransaction was exempt from registration pursuant to Section 4(2) of theSecurities Act, as the issuance was to an accredited investor and since thetransaction was non-recurring and privately negotiated.

 

In April 2002,Surgicare issued 1,500 shares of common stock to a consultant for servicesrendered, which were valued at approximately $1,500.  Surgicare believes the transaction was exempt from registrationpursuant to Section 4(2) of the Securities Act, as the issuance was to asophisticated investor and since the transaction was non-recurring andprivately negotiated.

 

In April 2002,Surgicare issued 400,000 shares of common stock upon the conversion ofdebt.  Surgicare believes thetransaction was exempt from registration pursuant to Section 4(2) of theSecurities Act, as the issuance was to an accredited investor and since thetransaction was non-recurring and privately negotiated.

 

ITEM 3.

DefaultUpon Senior Securities

 

SurgiCarehas not defaulted on any payments of principal or interest on any securities.

 

ITEM 4.

Submissionof Matters to a Vote of Security Holder

 

None

 

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SIGNATURES

 

 

Inaccordance with the requirements of the Exchange Act, the Registrant causedthis Report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| Date:  | August  13, 2002 |   |                  | REGISTRANT: |
|--------|------------------|--------|-----------------------|-------------|
|   |             |   |                  |
|   |             |   | SurgiCare,  Inc.      |
|   |             |   |                  |
|   |             | By:    | /s/  David Blumfield  |
|   |             |   | Dr.  David Blumfield  |
|   |             |   | President  and Co CEO |
|   |             |   |                  |
|   |             |   |                  |
|   |             | By:    | /s/  CHARLES S. COHEN |
|   |             |   | Charles  S. Cohen     |
|   |             |   | Co  CEO               |

 

ITEM 6.

INDEX TOEXHIBITS

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION**                                                                                                                                                        |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 | *      | Amended  and Restated Certificate of Incorporation of SurgiCare, Inc.                                                                                                  |
| 3.2                 | *      | Articles  of Incorporation of Bellaire SurgiCare, Inc.                                                                                                                 |
| 3.3                 | *      | By-Laws  of Technical Coatings Incorporated (now SurgiCare, Inc.)                                                                                                      |
| 3.4                 | *      | By-Laws  of Bellaire SurgiCare, Inc.                                                                                                                                   |
| 4                   | *      | Certificate  of Designation,  Powers, Preferences  and Rights of Series A Redeemable   Preferred  Stock, par value  $.001 per share, of SurgiCare, Inc. |
| 99.1                |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                              |
| 99.2                |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                              |
| 99.3                |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                              |

 

*  Incorporated herein by reference to theCompany’s Current Report on form 10-SB filed on August 20, 1999.

 

Duringthe six months ended June 30, 2002, SurgiCare filed the following currentreports on Form 8-K - None.

 

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