Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no Annual Meeting of Stockholders during the Fiscal Year Ending September 30, 2010.
PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our Common Stock is traded in the over-the-counter market under the symbol “FPCG.OB.” The following table presents, for the periods indicated, the high and low bid prices per share of our Common Stock. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
STOCKHOLDERS
As of January 31, 2011, and to the best of our records, there were approximately 200 stockholders of record of our Common Stock.
DIVIDENDS
We have never declared or paid cash dividends on our Common Stock or preferred stock. Holders of our Series 1-A Convertible Preferred Stock are entitled to non-cumulative dividends, if declared by the Board of Directors, of $0.20 per share annually. Holders of our Series 2-A Convertible Preferred Stock are entitled to non-cumulative dividends, if declared by the Board of Directors, in an amount equal to 8% of the price originally paid to us for each share of Series 2-A Convertible Preferred Stock. Holders of our Series 5-A Convertible Preferred Stock, par value $0.01 per share (the “5-A Preferred”) are entitled to non-cumulative dividends, if declared by the Board of Directors, of $40 per share annually. Holders of our 6-A Preferred are entitled to non-cumulative dividends, if declared by the Board of Directors and pari passu with 5-A Preferred, of $40 per share annually. No dividend may be declared and paid upon shares of our Common Stock in any fiscal year unless dividends on all such preferred stock have been paid or declared and set aside for payment to holders of our preferred stock for such fiscal year. We currently intend to retain all future earnings to finance future growth and therefore do not anticipate declaring or paying any cash dividends in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
SALES OF UNREGISTERED EQUITY SECURITIES
On May 15, 2008, we sold and issued 25 shares of 5-A Preferred to an investor, pursuant to a Series 5-A Preferred Stock and Warrant Purchase Agreement. Such investor represented to us in writing that he was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. In connection with this issuance, we also issued warrants to purchase 15,000 shares of our Common Stock to an investor, pursuant to the same Series 5-A Preferred Stock and Warrant Purchase Agreement. These warrants are exercisable for a period of 2 years at an exercise price of $0.50 per share. Such investor represented to us in writing that he was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act.
In May 2009, we accepted warrant exercises in the amount of 60,000 shares of Common Stock for an aggregate amount of $30,000 from one investor, who represented to us in writing that he is an “accredited investor,” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The shares were issued pursuant to the exercise of warrants originally issued on March 23, 2007, in connection with a private placement of our 5-A Preferred to various investors.
In September 2009, we accepted warrant exercises in the amount of 60,000 shares of Common Stock for an aggregate amount of $30,000 from two investors, each of whom represented to us in writing that he is an “accredited investor,” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The shares were issued pursuant to the exercise of warrants originally issued on August 10, 2007 and March 8, 2007 in connection with a private placement of our 5-A Preferred to various investors.
On May 21, 2010, we accepted warrant exercises in the amount of 60,000 shares (the “Warrant Exercise Shares”) of Common Stock, for an aggregate purchase price of $30,000 from one investor. The Warrant Exercise Shares were issued pursuant to the exercise of a warrant to purchase shares of Common Stock at an exercise price of $0.50 per share, in connection with the private placement of our Series 5-A Preferred Stock and warrants to purchase Common Stock. The investor represented to us in writing that he is an “Accredited Investor,” as that term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The offers and sales of the Warrant Exercise Shares pursuant to the warrant exercises were exempt from the registration and prospectus delivery requirements of the Securities Act, by virtue of Section 4(2) of the Securities Act and Regulation D promulgated there-under.
Item 6.
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
Not Applicable.
Item 7.
Item 7.
MANAGEMENT’S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto appearing elsewhere in this Form 10-K.
FORWARD LOOKING STATEMENTS
The information set forth in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain forward-looking statements. Please refer to “SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS” at the beginning of this Form 10-K for more information about forward-looking statements.
We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
OVERVIEW
From 2001 to November 2004, we provided Fortune 500 and Global 500 companies with BPO solutions into and across the Asia-Pacific region. In November 2004, our active business operations ceased with the sale of our BPO operations in Asia.
On December 2, 2005, we resumed active operations through newly created indirect subsidiaries, and we entered into two separate purchase agreements to acquire from Surgical Ventures, Inc., a California corporation, a controlling interest in Del Mar and Point Loma, two separate outpatient surgical centers in the San Diego ambulatory surgical centers. In June 2007, we consolidated the operations of the San Diego ambulatory surgical centers at the Del Mar facility.
On October 29, 2007, we acquired 51% of the issued and outstanding membership units of RHA. Based in Oklahoma City, RHA owns and operates three critical access hospitals, one medical clinic and an ancillary support services units all focused the delivery of healthcare services to rural communities in Oklahoma. On May 1, 2008, RHA completed a material acquisition with the purchase of SPMC, a multi-specialty physician practice, also located in Oklahoma. Beginning November 18, 2008, RHA began operating under the trade name “Southern Plains Medical Group.” On December 11, 2008, through a wholly-owned subsidiary, we acquired the remaining 49% of the issued and outstanding membership units of RHA, thus making RHA an indirect wholly-owned subsidiary of ours.
CHANGE IN THE FISCAL YEAR END
In November 2007, our Board of Directors approved a change to our fiscal year end from January 31 to September 30. In view of this change, this report includes the twelve-month periods ended September 30, 2010 and 2009, data for all periods are derived from our audited consolidated financial statements.
FUNDING
We have sustained operating losses since our inception and had an accumulated deficit of approximately $95.5 million as of September 30, 2010, which has been funded primarily through the issuance of preferred stock, the issuance of promissory notes and cash generated from operations.
As of September 30, 2010 we had current liabilities of $10.3 million and current assets of $6.5 million.
In December 2008, subsidiaries of RHA completed the 2008 Loans. The completion of the 2008 Loans, which carry amortization schedules of 16 years to 20 years and are guaranteed up to 80% by the USDA, had the effect of reducing our current liabilities by $4.6 million.
In 2009, we completed a bridge financing transaction (the “Bridge Financing”) for $2.2 million, which was consummated in three separate closings. The notes were due and payable as follows: $1.5 million was due on November 6, 2009, $0.5 million was due on December 3, 2009, $0.1 million was due on December 31, 2009 and $50,000 was due on January 14, 2010. On the due dates of the $1.5 million due on November 6, 2009, the $0.5 million due on December 3, 2009 and the $0.1 million due on December 31, 2009, we exercised our right to extend the due dates to February 6, 2010, March 3, 2010 and March 31, 2010, respectively. On the extended due dates, we exercised our right to again extend the due dates. The $1.5 million previously due on February 6, 2010, was extended to provide for $0.5 million to be due August 6, 2011 and $1 million to be due February 6, 2013. The $0.5 million previously due on March 3, 2010 was extended to provide for $0.2 million to be due on September 3, 2011 and $0.3 million to be due on March 3, 2013. The $150,000 previously due March 31, 2010 was extended to provide for $100,000 to be due March 31, 2013 and $50,000 to be due September 30, 2011. The $50,000 previously due April 4, 2010 was extended to be due April 14, 2013.
As disclosed in an August 10, 2010 press release, the Company, as part of its strategic growth plan entered into various Letters of Intent to acquire new operations with new capital and divest other existing operations that no longer fit its strategic profile moving forward or no longer provided any attractive return on capital or was creating a significant drag on operational performance and company liquidity.
The poorly performing units at the Company have put liquidity pressure on the better performing facilities. The Company was not able to grow into its cost structure in Oklahoma. Consequently, we are eliminating poorly performing facilities and the related infrastructure necessary to support them specifically as it relates to our Oklahoma facilities.
An inability to complete our re-organization would have necessitated a mandatory capital infusion to sustain our operations in Fiscal 2011. Management intends to continue to prune its balance sheet in fiscal 2011 and expand its capital base as appropriate or necessary for operations and/or its transaction needs.
Our recurring losses from operations and anticipated future losses raise substantial doubt about our ability to continue as a going concern. Our plan of operations, even if successful, may not result in cash flow sufficient to finance our business. Realization of our assets is dependent upon our continued operations, which in turn is dependent upon meeting financing requirements and the success of future operations.
Our ability to continue as a going concern is dependent on improving profitability and cash flow and securing additional financing. While we believe in the viability of our strategy to raise additional funds and that the actions presently being taken provide the opportunity to continue as a going concern, there can be no assurances to that effect.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Accounts Receivable
Accounts receivable are reported at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. A significant portion of our revenues are concentrated with federal and state agencies.
Additions to the allowance for doubtful accounts are made by means of the line item “Provision for Doubtful Accounts” in our financial statements. We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect.
We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we considered the impact of any adverse changes in general economic conditions, business office operations, payor mix, or trends in federal or state governmental healthcare coverage.
Impairment of Goodwill and Long-lived Assets
We review long-lived assets, certain identifiable intangible assets and goodwill related to these assets for impairment. For assets to be held and used, including acquired intangibles, we initiate a review whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable and annually for goodwill and other intangible assets not subject to amortization. Recoverability of an asset is measured by comparison of its carrying value to the future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying value exceeds the projected discounted future operating cash flows. Assets to be disposed of and for which management has committed a plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.
In the Fiscal Year Ended September 30, 2010, we determined there was no impairment of Goodwill, however we recorded an impairment of $187,000 of the intangible assets of The Chandler Clinic arising from the sale of the operation on December 1, 2010. See Item 8, Footnote No. 17, “Subsequent Events” for a discussion of the sale of The Chandler Clinic.
In the Fiscal Year Ended September 30, 2009, we determined that an impairment of the goodwill previously recorded upon the acquisition of RHA had occurred. An impairment charge of $209,000 was recorded. In the Fiscal Year Ended September 30, 2008, we recorded an impairment of $308,000 with respect to fixed assets at Point Loma arising from the termination of activities at this facility as part of our review of long-lived assets, certain identifiable intangible assets and goodwill.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable and collectability is probable or reasonably assured.
Income Taxes
The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
Accounting for Uncertainty in Income Taxes
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.
Stock-Based Compensation
Effective February 1, 2006, we adopted the fair value recognition provisions of FASB ASC 718, “Accounting for Compensation Arrangements,” using the modified prospective application method. Our stock option plans are described in Note 15 to our financial statements contained in Item 8 of this Form 10-K.
Earnings Per Share
Basic earnings/(loss) per share is computed by dividing net income/(loss) by the weighted average shares of Common Stock outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average shares of Common Stock and potential common shares outstanding during the year. Potential common shares outstanding consist of dilutive shares issuable upon the conversion of our preferred stock to Common Stock as computed using the if-converted method and the exercise of outstanding options and warrants to purchase Common Stock, computed using the treasury stock method.
Recent Accounting Pronouncements
In December 2007, the FASB issued guidance on “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51.” This guidance requires companies with non-controlling interests to disclose such interests clearly as a portion of equity but separate from the parent’s equity. The non-controlling interest’s portion of net income must also be clearly presented on the income statement. This is effective for financial statements issued for fiscal years beginning after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010. The adoption of the new rules did not have a material impact on our financial condition or results of operation.
In December 2007, the FASB issued updated guidance on business combinations. This guidance applies the acquisition method of accounting for business combinations where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. The updated guidance requires the acquirer to fair value the assets and liabilities of the acquiree and record goodwill on bargain purchases and is effective for financial statements issued for fiscal years beginning after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010. The adoption did not have a material impact on our financial condition or results of operation.
In January 2010, new guidance was issued regarding improving disclosures about fair value measurements. This standard amends the disclosure guidance with respect to fair value measurements for both interim and annual reporting periods. Specifically, this standard requires new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross rather than net, basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which will be effective as of October 1, 2011, the remaining new disclosure requirements are effective as of October 1, 2010.
Fair Value of Financial Instruments
Carrying amounts of certain of our financial instruments, including cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. Carrying value of notes payable and long-term debt approximate fair values as they bear market rates of interest. None of our financial instruments are held for trading purposes.
RESULTS OF OPERATIONS (All amounts in thousands)
MANAGEMENT’S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS - FISCAL YEAR ENDED SEPTEMBER 30, 2010 COMPARED TO YEAR ENDED SEPTEMBER 30, 2009
Revenue
Revenue of $39.5 million was generated in the Fiscal Year Ended September 30, 2010 compared with $39.1 million in the Fiscal Year Ended September 30, 2009, an increase of 1.02%, primarily due to the inclusion of a full year of The Chandler Clinic operations during Fiscal Year Ended September 30, 2010 and only five months during Fiscal Year Ended September 30, 2009.
Selling, General and Administrative Expenses and Provision for Doubtful Accounts
Selling, general and administrative expenses, including provision for doubtful accounts, consisted primarily of employee-related costs that are directly related to providing goods or services, such as salaries and benefits of administrative and support personnel, rental, insurance premiums and costs relating to other outside services.
Selling, general and administrative expenses and provision for doubtful accounts totaled $44.2 million in the Fiscal Year Ended September 30, 2010 and $44.1 million in the Fiscal Year Ended September 30, 2009. Operating efficiencies realized at the parent company and RHA were offset by additional operating expenses at Del Mar which was commensurate with the increase in revenue.
Amortization of Stock-Based Compensation
Amortization of stock-based compensation consists of the expense incurred as the grant of options and warrants to purchase common stock vest over the term of the grant agreements. Since 2006, we have granted to officers, employees and members of our Advisory Board options to purchase our common stock.
We granted options to purchase 650,000 and 1,839,390 shares of our common stock during the Fiscal Years ended September 30, 2010 and 2009 respectively. As a result of the decreased number of shares granted during the Fiscal Year ended September 30, 2010 and the related vesting schedules, the amortization of stock-based compensation expense decreased to $1,078,000 during the Fiscal Year ended September 30, 2010 from $1,245,000 during the Fiscal Year ended September 30, 2009.
See Item 8, Footnote No. 14, “Stock Options” for a discussion of our stock option plans and stock-based compensation.
Impairment of Long-Lived Assets and Goodwill
In the Fiscal Year Ended September 30, 2010, we determined there was no impairment of Goodwill, however we recorded an impairment of $187,000 of the intangible assets of The Chandler Clinic arising from the sale of the operations on December 1, 2010. See Item 8, Footnote No. 17, “Subsequent Events”, for a discussion of the sale of The Chandler Clinic. In the Fiscal Year Ended September 30, 2009, we determined that an impairment of the goodwill previously recorded upon the acquisition of RHA had occurred. An impairment charge of $209,000 was recorded.
Operating Loss
As a result of the foregoing, we had an operating loss in the Fiscal Year Ended September 30, 2010 of $7.3 million compared to an operating loss of $7.5 million in the Fiscal Year Ended September 30, 2009, or a decrease of 3.2%. The operating loss decreased as a result of operating efficiencies achieved at the parent company and RHA and revenue growth at Del Mar.
Other Income (Expense)
In Fiscal Year Ended September 30, 2010, we received $429,000 of insurance proceeds which were a reimbursement for tornado damage at one of our critical access hospitals.
We had no gain or loss from the sale of assets in the Fiscal Year Ended September 30, 2010. We recognized a $281,000 loss from the sale of a 10.9% equity interest in Del Mar in the Fiscal Year Ended September 30, 2009.
Interest Income
We had interest income of $42,000 in the Fiscal Year Ended September 30, 2010 and $42,000 in the Fiscal Year Ended September 30, 2009.
Interest Expense
We recorded interest expense of $2.0 million in the Fiscal Year Ended September 30, 2010 and $2.1 million in the Fiscal Year Ended September 30, 2009, reflecting a decrease of 4.8%. This decrease was due primarily to a decrease in the interest rate on the Bridge Financing.
Non-Controlling Interest
In the Fiscal Year Ended September 30, 2010, non-controlling interest amounted to ($0.7) million, compared to ($0.2) million for the Fiscal Year Ended September 30, 2009. The increase in non-controlling interest over the prior years is due to improved earnings at Del Mar coupled with the increased ownership share of Del Mar non-controlling interests.
Taxation
FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.
Net Income or Loss Before Non-Cash Beneficial Conversion Feature
As a result of the foregoing, we recorded a net loss of $9.5 million and $10.1, in the Fiscal Years Ended September 30, 2010 and 2009 respectively, a decrease of $0.6 million or 5.9% The net loss decreased as a result of operating efficiencies achieved at the parent company and RHA and revenue growth at Del Mar.
Non-Cash Beneficial Conversion Feature Preferred Dividend
In the Fiscal Year Ended September 30, 2010, we recognized a $48,000 non-cash beneficial conversion feature preferred dividend expense compared to $317,000 in the Fiscal year Ended September 30, 2009, relating to the issuance of our 5-A Preferred and 6-A Preferred, each together with warrants, during the periods. The expense, which arose from a beneficial conversion feature resulting from the fact that such convertible securities could be converted into our Common Stock at an amount below its market price on the commitment date of the securities, was recognized in accordance with FASB standards on accounting for convertible securities with beneficial conversion features.
Net Income or Loss Allocable to Common Stockholders
Net income or loss allocable to common stockholders is computed from net income or loss and adding or deducting deemed non-cash dividend to preferred stockholders and credit on exchanges. We had net loss allocable to common stockholders of $9.5 million, or ($0.64) per basic share in the Fiscal Year Ended September 30, 2010, compared with $10.4 million, or $(0.94) per basic share in the Fiscal Year Ended September 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents totaled $1.7 million as of September 30, 2010, compared with $2.3 million as of September 30, 2009.
At September 30, 2010, we had a working capital deficit of $3.7 million and a stockholders’ deficit of $16.4 million, as compared to a working capital of $1.8 million and a stockholders’ deficit of $9.0 million at September 30, 2009. We have long-term liabilities of $16.6 million as of September 30, 2010, compared to $12.4 million as of September 30, 2009. To date, we have financed our operations primarily through sales of preferred and common equity, issuance of promissory notes, and cash from operations.
Net cash used in operating activities totaled $2.9 million in the Fiscal Year Ended September 30, 2010, compared with $3.5 million in the Fiscal Year Ended September 30, 2009. The decrease in net cash used in the Fiscal Year Ended September 30, 2010 arose from the decrease in the net operating loss during the Fiscal Year Ended September 30, 2010.
Net cash provided in (used) by investing activities in the Fiscal Year Ended September 30, 2010 was $1.4 million, compared to ($4.3) million in the Fiscal Year Ended September 30, 2009. During the Fiscal Year Ended September 30, 2010, cash was provided by the removal of restrictions on $1.5 million of cash held on deposit with the former debt holder on the SPMC building. The net cash used by investing in the Fiscal Year Ended September 30, 2009 was primarily due to the purchase of real property for our hospital located in Stroud, Oklahoma and the acquisition of the remaining membership units in RHA, which we did not previously own.
Net cash provided by financing activities was $0.9 million in the Fiscal Year Ended September 30, 2010, compared with $7.2 million in the Fiscal Year Ended September 30, 2009. Net cash provided by financing activities in the Fiscal Years Ended September 30, 2010 and 2009 was provided primarily by the issuance of promissory notes. At September 30, 2010, we had total liabilities of $28.6 million and assets of $25.7 million.
Our recurring losses from operations and anticipated future losses raise substantial doubt about our ability to continue as a going concern. Our plan of operations, even if successful, may not result in cash flow sufficient to finance our business. Realization of our assets is dependent upon our continued operations, which in turn is dependent upon meeting financing requirements and the success of future operations.
Our ability to continue as a going concern is dependent on improving profitability and cash flow and securing additional financing. While we believe in the viability of our strategy to raise additional funds and that the actions presently being taken provide the opportunity to continue as a going concern, there can be no assurances to that effect.
OFF-BALANCE SHEET FINANCING
We currently have no “off-balance sheet” financing arrangements, other than operating leases.
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Contractual Obligations (in thousands)
“Other contractual obligations” consist primarily of obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms and are not cancelable without a penalty. Our obligations primarily relate to software licensing, clinical coding, medical waste removal, equipment maintenance and linen service.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to our cash on deposit with high quality financial institutions and a portion of our long-term debt that is based on prime rates. We are exposed with respect to interest rate fluctuations in the U.S. as changes in U.S. interest rates affect the interest earned on our cash and interest paid on our debt.
FOREIGN CURRENCY RISK
We derive our revenues from operations in the United States. All of our revenues are currently denominated in U.S. dollars. An increase or decrease in the value of the U.S. dollar relative to foreign currencies does not have a material impact on the demand for our services or on our expenses. Currently, we do not hedge against any foreign currencies and, as a result, could incur unanticipated gains or losses.
Item 8.
Item 8.
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
First Physicians Capital Group, Inc.
We have audited the accompanying consolidated balance sheets of First Physicians Capital Group, Inc. (the “Company”), as of September 30, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of September 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss of $9,544,000 during the year ended September 30, 2010, and, as of that date, had a working capital deficiency of $3,716,000. As noted in footnote 1 to the financial statements, the recurring losses from operations and anticipated future losses raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Whitley Penn LLP
Dallas, Texas
February 14, 2011
FIRST PHYSICIANS CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FIRST PHYSICIANS CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FIRST PHYSICIANS CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
(in thousands, except for shares data)
The accompanying notes are an integral part of these Consolidated Financial Statements.
FIRST PHYSICIANS CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
During the Fiscal Year ended September 30, 2009, there was a non-cash transaction which involved the purchase of the 49% minority interest in RHA (as that term is defined herein) for a promissory note of $1,800,000, with the first payment of $50,000 paid at closing.
During the Fiscal Year ended September 30, 2009, the fair value of warrants issued in conjunction with the convertible notes amounted to $932,000. The beneficial conversion feature associated with the convertible notes amounted to $253,000.
During the Fiscal Year ended September 30, 2009, the fair value of warrants issued in conjunction with the issuance of preferred stock amounted $84,473. The beneficial conversion feature associated with the preferred stock amounted to $317,000.
During the Fiscal Year ended September 30, 2010, the fair value of warrants issued in conjunction with the extension of the convertible notes which were issued in connection with the bridge financing we entered into during the fiscal year ended September 30, 2009 amounted to $291,000.
The accompanying notes are an integral part of these Consolidated Financial Statements.
FIRST PHYSICIANS CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Background
We were originally incorporated in Nevada in October 1980 and re-incorporated in Delaware in November 2000. From 2001 to November 2004, we provided Fortune 500 and Global 500 companies with customizable and comprehensive business process outsourcing (“BPO ”) solutions into and across the Asia-Pacific region. In November 2004, our active business operations ceased with the sale of our BPO operations in Asia.
On December 16, 2005, at our Annual Meeting of Stockholders, our stockholders voted to amend our Certificate of Incorporation to change our legal name from “Vsource, Inc.” to “Tri-Isthmus Group, Inc.” (“TIGroup ”) and to reduce the number of authorized shares of our common stock, par value $0.01 per share (the “Common Stock ”), from 500,000,000 shares to 100,000,000 shares, as described in our Proxy Statement filed with the Securities and Exchange Commission (the “SEC ”) on November 28, 2005. The reduction of the number of authorized shares of our Common Stock did not affect the number of shares of Common Stock issued and outstanding.
During the fiscal year ended January 31, 2007 (the “Fiscal Year Ended January 31, 2007”), we resumed active operations following the acquisition of two ambulatory surgical centers located in Southern California. On December 2, 2005, through newly created indirect subsidiaries, we entered into two separate purchase agreements to acquire from Surgical Ventures, Inc., a California corporation, a controlling interest in two separate outpatient surgical centers in San Diego, California, Point Loma Surgical Center, L.P. and Outpatient Surgery of Del Mar, L.P., and we completed these acquisitions on November 16, 2006. On February 9, 2007, we converted these limited partnerships into Outpatient Surgery of Point Loma, L.L.C. (“Point Loma ”) and Outpatient Surgery of Del Mar, L.L.C. (“Del Mar,” and, together with Point Loma, the “San Diego ambulatory surgical centers ”), respectively. In June 2007, we consolidated the operations of the San Diego ambulatory surgical centers at the Del Mar facility.
On October 29, 2007, we acquired 51% of the issued and outstanding membership units of Rural Hospital Acquisition, LLC, an Oklahoma limited liability company (“RHA ”). Based in Oklahoma City, RHA owns and operates three critical access hospitals, one medical clinic and an ancillary support services unit, all focused on the delivery of healthcare services to rural communities in Oklahoma. On May 1, 2008, RHA Anadarko, LLC, a wholly owned subsidiary of RHA, purchased 100% of the issued and outstanding membership interests of Southern Plains Medical Center (“SPMC ”). Founded in 1915, SPMC is one of the oldest continuously operating multi-specialty physician practices in the United States. Located in Chickasha, Oklahoma, SPMC’s 15 physicians and other licensed healthcare providers deliver primary and specialty care in the following areas: family medicine; pediatrics; internal medicine; acute care; occ/med; general surgery; gynecology; ophthalmology; orthopedic surgery; radiology; oncology; cardiology and urology. Ancillary services provided onsite include imaging (computer-assisted tomography (“ CT ”), magnetic resonance imaging (“MRI ”), mammography, x-ray, EKG, vascular and ultra-sound bone densitometry) and laboratory services. SPMC also provides urgent care services outside of normal business hours seven days a week through its “Quick Care” department. Beginning November 18, 2008, RHA began operating under the trade name Southern Plains Medical Group. On December 11, 2008, we acquired the remaining 49% of the issued and outstanding membership units of RHA, making RHA an indirect wholly-owned subsidiary of ours.
On December 12, 2008, we and certain of our subsidiaries entered into three loan agreements, effective November 6, 2008, with two Oklahoma-based lenders, Bank of Commerce and Valliance Bank, resulting in an aggregate debt financing of $8.4 million. We obtained the financing to purchase the building and real property of the Stroud Regional Medical Center Hospital and clinics, refinance existing loans totaling $4.6 million, upgrade facilities at the Johnston Memorial Hospital and improve the consolidated balance sheet and maintain general working capital. The loans are evidenced by promissory notes issued by RHA Anadarko, LLC, RHA Stroud, LLC and RHA Tishomingo, LLC, two of which mature on November 6, 2028 and one of which matures on November 6, 2024.
On May 1, 2009, we purchased The Chandler Clinic (“TCC”), a family medical practice located in Chandler, Oklahoma. TCC is located within the service area of the Stroud Regional Medical Center. As further described in Note 19, “Subsequent Events”, on December 1, 2010, we sold the operations of The Chandler Clinic.
On September 29, 2009, at our Annual Meeting of Stockholders, our stockholders voted to amend our Certificate of Incorporation to change our legal name from “Tri-Isthmus Group, Inc.” to “First Physicians Capital Group, Inc.” to reflect our focus on the healthcare industry. We became First Physicians Capital Group, Inc. on September 29, 2009.
Following the sale of our BPO operations in November 2004, we reduced our headcount significantly to a two-person staff when David Hirschhorn and Todd Parker joined us as our Co-Chief Executive Officers in July 2005. Our new management initiated a growth strategy defined by acquisitions. Our management team and Board of Directors have been and are currently comprised of a group of individuals with complementary talents across a broad range of disciplines, including mergers and acquisitions, finance and operations.
During the Fiscal Years Ended January 31, 2006 and January 31, 2007, our management team focused our acquisition strategy on the healthcare industry.
In December 2006, we resumed active operations following the acquisition of the San Diego ambulatory surgical centers.
In 2007, we refined our acquisition strategy to focus on the delivery of financial and managerial services to healthcare facilities in non-urban markets.
In September 2007, David Hirschhorn became our sole Chief Executive Officer upon Todd Parker’s resignation. Dennis M. Smith, formerly a director and senior consultant to us, re-joined us as our Chief Financial Officer. On October 9, 2008, Mr. Smith’s employment agreement with us was terminated. Effective January 26, 2009, Mr. Smith ceased to be our Chief Financial Officer. Upon the termination of his employment agreement, Mr. Smith had certain contractual rights, pursuant to which we continued to pay Mr. Smith until April 9, 2009. Mr. Smith was offered a severance package to continue his pay beyond April 9, 2009 in recognition for past services rendered, and Mr. Smith accepted the severance package which entitled him to severance payments which began May 10, 2009 and lasted until October 20, 2009. Mr. Smith had and has no disagreements with us on any matter related to our operations, policies or practices. On March 3, 2009, Mr. Smith resigned as a member of our Board of Directors.
In November 2008, we appointed Thomas Rice as President of RHA. Mr. Rice has over 37 years’ experience in the administration and operation of healthcare facilities, including key senior management positions with major Oklahoma-based healthcare services companies. Also in November 2008, we announced the addition of Donald C. Parkerson as Chief Financial Officer of RHA, a position he held until June 2009 when he ceased acting as the CFO of RHA. On January 30, 2009, Mr. Parkerson was also appointed as our Chief Financial Officer. Mr. Parkerson has served in financial leadership positions with companies in healthcare businesses during his more than 30-year career. In November 2008, we hired Richard Rentsch as Vice President of Finance of RHA, and currently he serves as the Chief Accounting Officer of RHA. Mr. Rentsch is an experienced financial leader with more than 25 years of healthcare experience.
Our support staff at RHA’s hospitals and Del Mar consists of registered nurses, operating room technicians, an administrator who supervises the day-to-day activities of the surgery center and a small number of office staff. Each operating unit also has appointed a medical director, who is responsible for and supervises the quality of medical care provided at the center. Use of our surgery centers is limited to licensed physicians. With the acquisition of SPMC in May 2008, we added 15 physicians and other healthcare providers to our team at RHA as employees. Our business depends upon the efforts and success of these physicians and non-employee physicians who provide medical services at our facilities. Our business could be adversely affected by the loss of our relationship with, or a reduction in use of our facilities by, a key physician or group of physicians.
As discussed above, in December 2008, RHA became an indirect wholly-owned subsidiary of ours with the acquisition by RHA of the interests not already held by us.
On January 13, 2010, Southern Plains Medical Center, Inc., our wholly-owned indirect subsidiary and an Oklahoma corporation (“SPMC ”), entered into a sale/leaseback transaction pursuant to a purchase agreement, whereby SPMC sold certain property to Southern Plains Associates, LLC (“SPA”). SPA is an Oklahoma limited liability company, in which our wholly-owned subsidiary, First Physicians Realty Group, LLC, an Oklahoma limited liability company owns 50% and Capital Investors of Oklahoma, LLC, an Oklahoma limited liability company own the other 50%.
The purchase price for the sale/leaseback transaction was paid to SPMC as follows: (i) $1,500,000 was paid in the form of a promissory note, dated January 13, 2010, and (ii) $4,500,000 was paid in cash at the closing. Our wholly-owned subsidiary, First Physicians Realty Group, LLC, an Oklahoma limited liability company, owns 50% of SPA, and Capital Investors of Oklahoma, LLC, an Oklahoma limited liability company, owns 50% of SPA.
In connection with the purchase agreement, SPMC leased back from SPA the property sold, pursuant to a lease agreement dated December 16, 2009. The lease agreement provides for a 20-year term with an automatic 10-year renewal.
The $4,500,000 in cash proceeds was used to pay off short-term debt associated with the property sold in the amount of $3,700,942, plus related interest. SPMC received net proceeds of $732,221 after retirement of the debt and other associated closing costs. Restricted cash on deposit with the debt holder and pledged as a security on the debt in the amount of $1,524,091 was released and returned to us.
On June 14, 2010, Sean Kirrane was hired as the Vice President of Finance and Controller. Mr. Kirrane has over 10 years experience in senior finance and accounting roles for large publicly traded companies. On August 23, 2010, Mr. Kirrane was appointed to serve as the Company’s Principal Accounting Officer following Mr. Parkerson’s departure.
On August 23, 2010 Donald C. Parkerson resigned his position as Chief Financial Officer, effective this same date. Mr Parkerson’s employment with the Company was governed by an Executive Services Agreement, dated June 27, 2008, by and between the Company and Tatum LLC. Mr. Parkerson had no disagreements with us on any matter related to our operations, policies or practices.
Strategy
Our initial strategy was to identify and invest in “platform” companies in the business services and healthcare industries that provided essential core offerings, which could be expanded over time. As we focused our efforts in the healthcare industry, two particular segments, ambulatory surgical centers and rural hospitals, stood out in terms of fundamentally-favorable economics, positive regulatory trends, inherent cost advantages, improving demographics and, for non-urban healthcare opportunities, a large, under-served market. We determined that the top-down trends and attractive cash flows of ambulatory surgical centers made this an area of particular interest. Less well-known, however, is the non-urban sector, which has suffered from a long-term lack of access to capital despite providing care to more than 50 million people in the United States. We determined that focusing on rural healthcare could represent a significant long-term opportunity for us.
On October 29, 2007, we acquired 51% of the issued and outstanding membership units of RHA. Based in Oklahoma City, RHA owns and operates three critical access hospitals, one medical clinic and an ancillary support services unit, all focused on the delivery of healthcare services to rural communities in Oklahoma. Together, the acquisition of RHA and the subsequent acquisition of SPMC by RHA are referred to herein collectively as the “RHA Acquisition,” and the three RHA hospitals, the medical clinic, ancillary support services units and SPMC are referred to herein collectively as the “RHA Healthcare Operations.” On May 1, 2008, RHA purchased 100% of the issued and outstanding membership interests of SPMC. Beginning November 18, 2008, RHA began operating under the trade name “Southern Plains Medical Group.” On December 11, 2008, through one of our wholly-owned subsidiaries, we acquired the remaining 49% of the issued and outstanding membership units of RHA, making RHA an indirect wholly-owned subsidiary.
Our portfolio was expected to consist of (i) majority interests in healthcare platforms or facilities, such as RHA, the San Diego ambulatory surgical center and SPMC and (ii) equity positions in a diversified portfolio of minority interests in ambulatory surgical centers with a history of positive cash flows. In addition, we expect to selectively invest in business solutions providing financial and processing services to healthcare providers and physicians and in support of new treatment solutions.
In line with our strategy, we re-branded our activities. The operations in the non-urban market previously known as RHA were re-branded “Southern Plains Medical Group” to leverage the old and well-established recognition that SPMC has in the regional markets. In addition, effective September 29, 2009, we changed our name to “First Physicians Capital Group, Inc.” to reflect our focus on the healthcare industry.
In response to local market economic conditions including the expected impact of changes in healthcare law, during the Fiscal Year ended September 30, 2010 we have shifted our strategy and embarked upon initiatives to reorganize our operations. Our strategy has transitioned away from majority ownership in healthcare delivery companies to a focus on healthcare management services and the financing of equipment and real estate used by healthcare entities. We will maintain or acquire minority ownership in selected healthcare delivery companies that complement our management services and financing activities. We will also invest in, acquire or partner with other companies that provide similar services in our markets.
In pursuit of this reorganization, we are divesting underperforming facilities and reducing or outsourcing administrative functions to better align cost structures and business volume.
Funding
We have sustained operating losses since our inception and had an accumulated deficit of approximately $95.5 million as of September 30, 2010, which has been funded primarily through the issuance of preferred stock and common stock, the issuance of promissory notes and cash generated from operations.
As of September 30, 2010 we had current liabilities of $10.3 million and current assets of $6.5 million.
Upon completion of the RHA Acquisition in October 2007, RHA assumed a bank obligation in the amount of $4.4 million (the “RHA Loan ”). With the completion of the SPMC acquisition by RHA in May 2008, we acquired SPMC bank obligations in the amount of $4.5 million. In December 2008, subsidiaries of RHA obtained three loans totaling an aggregate of $8.4 million, the proceeds of which were used for (i) the purchase of the real property and assets of the hospital operated by RHA in Stroud, Oklahoma for a consideration of $3.2 million pursuant to an existing option agreement; (ii) the repayment of the RHA Loan and (iii) the financing of capital expenditures, fees associated with the financings and working capital requirements (the “ 2008 Loans ”). The 2008 Loans carry amortization schedules of 16-years to 20-years and are guaranteed up to 80% by the U.S. Department of Agriculture Rural Development 80% Business & Industry Loan Guarantee program (“USDA ”). The completion of the 2008 Loans had the effect of reducing our current liabilities by $4.6 million.
Our recurring losses from operations and anticipated future losses raise substantial doubt about our ability to continue as a going concern. Our plan of operations, even if successful, may not result in cash flow sufficient to finance our business. Realization of our assets is dependent upon our continued operations, which in turn is dependent upon meeting financing requirements and the success of future operations.
Our ability to continue as a going concern is dependent on improving profitability and cash flow and securing additional financing. While we believe in the viability of our strategy to raise additional funds and that the actions presently being taken provide the opportunity to continue as a going concern, there can be no assurances to that effect. These financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.
2. Summary of Significant Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include our accounts and the accounts of our subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Our actual results could differ from estimates and assumptions made.
Reclassifications
Certain reclassifications and format changes have been made to the prior period amounts in order to conform to the current period presentation.
Cash and Cash Equivalents
Cash consists of cash on hand and amounts deposited with high quality financial institutions. Amounts on deposit at times exceeds the insurance limits. Cash equivalents are highly liquid instruments including cash in money market current accounts that are interest-bearing, capital guaranteed and without any withdrawal restrictions.
Restricted cash consists of funds on deposit with a bank held as security for debt relating to the SPMC acquisition.
Accounts Receivable
Accounts receivable are reported at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. A significant portion of our revenues are concentrated with federal and state agencies.
Additions to the allowance for doubtful accounts are made by means of the line item “Provision for Doubtful Accounts” in our financial statements. We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect.
We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we considered the impact of any adverse changes in general economic conditions, business office operations, payor mix, or trends in federal or state governmental healthcare coverage.
Property and Equipment
Property and equipment are stated at cost. Depreciation for property and equipment is provided using the straight-line method over the estimated useful lives of the respective assets as follows:
Depreciation for leasehold improvements is provided using the straight-line method over the shorter of the estimated useful lives of the respective assets or the remaining lease term.
Impairment of Goodwill and Long-lived Assets
We review long-lived assets, certain identifiable intangible assets and goodwill related to these assets for impairment. For assets to be held and used, including acquired intangibles, we initiate a review whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable and annually for goodwill and other intangible assets not subject to amortization. Recoverability of an asset is measured by comparison of its carrying value to the future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying value exceeds the projected discounted future operating cash flows. Assets to be disposed of and for which management has committed a plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.
In the Fiscal Year Ended September 30, 2010, we determined there was no impairment of Goodwill, however we recorded an impairment of $187,000 of the intangible assets of The Chandler Clinic arising from the sale of the operations on December 1, 2010. See Note 19, “Subsequent Events”, for a discussion of the sale of The Chandler Clinic. In the fiscal year ended September 30, 2009 (the “Fiscal Year Ended September 30, 2009”), we determined that an impairment of the goodwill previously recorded upon the acquisition of RHA had occurred. An impairment charge of $209,000 was recorded.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable and collectability is probable or reasonably assured.
Income Taxes
The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
Accounting for Uncertainty in Income Taxes
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.
Functional Currency
Our functional currency is United States dollars.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to expenses, gains and losses that under generally accepted accounting principles in the United States are included in comprehensive income (loss) but are excluded from net income (loss), as these amounts are recorded directly as an adjustment to stockholders’ equity, net of tax. Our other comprehensive income (loss) is composed of unrealized gains and losses on foreign currency translation adjustments.
Stock-Based Compensation
Effective February 1, 2006, we adopted the fair value recognition provisions of FASB ASC 718, “Accounting for Compensation Arrangements,” using the modified prospective application method. Our stock option plans are described in Note 14.
Earnings Per Share
Basic earnings/(loss) per share is computed by dividing net income/(loss) by the weighted average shares of Common Stock outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average shares of Common Stock and potential common shares outstanding during the year. Potential common shares outstanding consist of dilutive shares issuable upon the conversion of our preferred stock to Common Stock as computed using the if-converted method and the exercise of outstanding options and warrants to purchase Common Stock, computed using the treasury stock method.
Recent Accounting Pronouncements
In December 2007, the FASB issued guidance on “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51.” This guidance requires companies with non-controlling interests to disclose such interests clearly as a portion of equity but separate from the parent’s equity. The non-controlling interest’s portion of net income must also be clearly presented on the income statement. This is effective for financial statements issued for fiscal years beginning after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010. The adoption of the new rules did not have a material impact on our financial condition or results of operation.
In December 2007, the FASB issued updated guidance on business combinations. This guidance applies the acquisition method of accounting for business combinations where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. The updated guidance requires the acquirer to fair value the assets and liabilities of the acquiree and record goodwill on bargain purchases and is effective for financial statements issued for fiscal years beginning after December 15, 2008 and was adopted by us in the first quarter of fiscal year 2010. The adoption did not have a material impact on our financial condition or results of operation.
In January 2010, new guidance was issued regarding improving disclosures about fair value measurements. This standard amends the disclosure guidance with respect to fair value measurements for both interim and annual reporting periods. Specifically, this standard requires new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross rather than net, basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which will be effective as of October 1, 2011, the remaining new disclosure requirements are effective as of October 1, 2010.
Fair Value of Financial Instruments
Carrying amounts of certain of our financial instruments, including cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. Carrying value of notes payable and long-term debt approximate fair values as they bear market rates of interest. None of our financial instruments are held for trading purposes.
3. Net Income/(Loss) Allocable to Common Stockholders and Comprehensive Income/(Loss)
The following table is a calculation of net income or loss allocable to common stockholders (in thousands) and comprehensive loss:
Earnings/(Loss) Per Share
The amounts in the table below are in thousands except for per share amounts.
As we had a net loss for the Fiscal Years Ended September 30, 2010 and 2009, potential common shares outstanding are excluded from the computation of diluted net loss per share as their effect is anti-dilutive per standards prescribed in the ASC.
4. Accounts receivable
Accounts receivable consisted of the following:
5. Other current assets
6. Property and equipment
The gross value of leased capital assets were $7,002,889 at September 30, 2010 and $608,704 at September 30, 2009 which are included in Property and Equipment on the Consolidated Balance Sheet. The accumulated amortization on leased capital assets was $665,960 and $113,012 at September 30, 2010 and September 30, 2009, respectively. Amortization of capital lease assets is recognized over the term of the lease on a straight line basis and included in depreciation expense.
7. Advance to Affiliated Entity
On April 28, 2006, we entered into an agreement with CSA II, LLC, a Cayman Islands company controlled by Dennis M. Smith, one of our former directors. Under the terms of this agreement, we advanced $333,333 to CSA II, LLC to finance the purchase of securities issued by Cross Shore Acquisition Corporation, a Delaware corporation (“Cross Shore ”), pursuant to a private placement of $112,000,008 of Cross Shore’s securities completed on April 24, 2006. The securities were listed on the Alternative Investment Market of the London Stock Exchange (the “AIM ”) and started trading on April 28, 2006 and ceased trading on the AIM on September 4, 2009. On August 29, 2007, Cross Shore completed an acquisition by way of a reverse merger with Research Pharmaceutical Services, Inc. (“RPS ”) and changed its name to RPS as part of the transaction. At September 30, 2007, CSA II, LLC held 167,420 common shares in RPS. In addition, for consideration of $239.38, we purchased warrants to purchase 239,375 membership units of CSA II, LLC, constituting 22.5% of the total issued limited liability company interests outstanding on a fully diluted basis upon payment of the exercise price equal to $0.001 per unit. On May 24, 2006, we received a partial repayment of this advance in the amount of $60,654, leaving a balance of approximately $272,000 at January 31, 2007. On June 12, 2006, we were reimbursed $75,000, representing expenses associated with this advance. In October 2007, approximately $33,000 was reimbursed to us, leaving a balance outstanding of $239,000. Mr. Smith’s interests in RPS represent less than 2% of the issued and outstanding share capital of RPS as of the date of the completion of the reverse merger in August 2007. In light of the disruption in the overall economy at the time, the volatility in the financial markets and restrictions applicable to the sale of RPS common shares by CSA II, LLC, we recorded a charge of $71,635 as a reserve against the repayment of this advance during the Fiscal Year Ended September 30, 2009.
8. Bridge Financing
During the Fiscal Year Ended September 30, 2009, we entered into a bridge financing transaction (the “Bridge Financing ”) which was consummated in three separate closings. On February 11, 2009, we completed the first closing of the Bridge Financing, a transaction in which we entered into the following two promissory notes, each dated as of February 6, 2009: (i) a convertible promissory note with SMP Investments, LLC, a Michigan limited liability company (“SMP ”), in the principal amount of $500,000 and (ii) a convertible promissory note with Anthony J. Ciabattoni, Trustee of the Ciabattoni Living Trust, dated August 17, 2000 (“ Ciabattoni ”), in the principal amount of $1,000,000 (collectively, the “Bridge Notes ”). SMP and Ciabattoni are each a “Bridge Lender ” and are collectively referred to herein as the “Bridge Lenders.”
On February 11, 2009, in addition to the issuance of the Bridge Notes, we issued four warrants to purchase Common Stock to the Bridge Lenders as follows: (i) a warrant issued to SMP for the purchase of up to 375,000 shares of Common Stock at an initial exercise price of $0.50 per share and exercisable for a period of three years from the date of issuance; (ii) a warrant issued to SMP for the purchase of up to 250,000 shares of Common Stock at an initial exercise price of $0.75 per share and exercisable for a period of three years from the date of issuance; (iii) a warrant issued to Ciabattoni for the purchase of up to 750,000 shares of Common Stock at an initial exercise price of $0.50 per share and exercisable for a period of three years from the date of issuance and (iv) a warrant issued to Ciabattoni for the purchase of up to 500,000 shares of Common Stock at an initial exercise price of $0.75 per share and exercisable for a period of three years from the date of issuance.
Each Bridge Note originally became due and payable on November 6, 2009; we extended these notes under the terms of an extension option contained in the Bridge Notes. Pursuant to the terms of the extension option, we are required to issue warrants to the Bridge Lenders to purchase shares of Common Stock in the following amounts: (i) to SMP, 125,000 shares at a price of $0.50 per share, and 83,333 shares at a price of $0.75 per share and (ii) to Ciabattoni, 250,000 shares at a price of $0.50 per share, and 166,667 shares at a price of $0.75 per share. The new due date of the Bridge Notes pursuant to the extension option was February 6, 2010; we were to repay the unpaid principal of each Bridge Note on this date, together with accrued and unpaid interest of 16% per annum.
The Bridge Lenders have agreed to extensions as follows: the maturity date of the promissory note held by SMP, in the principal amount of $500,000, is extended to August 6, 2011; the maturity date of the promissory note held by Ciabattoni, in the principal amount of $1,000,000, is extended to February 6, 2013. Effective February 1, 2010, the interest rate was changed from 16% to 10% per annum for the Bridge Notes.
The Bridge Notes include a conversion feature allowing each Bridge Lender to convert all or any portion of the entire unpaid principal and any unpaid accrued interest at the date upon which the conversion is to be effected into a number of shares of Common Stock, determined by dividing the sum of the unpaid principal and unpaid accrued interest at the conversion date by the conversion price in effect at the conversion date. The initial conversion price is $0.625, which price is adjustable as set forth in the Notes. As of September 30, 2010, none of the Bridge Lenders has effected such a conversion.
The Bridge Notes include a provision granting the Bridge Lenders, to the extent that the Bridge Lenders holding notes representing a majority of the aggregate outstanding principal amount of the Bridge Notes agree, demand registration rights with respect to the resale of the shares of Common Stock that would be issuable upon conversion of the Bridge Notes, which rights vest thirty six (36) months after the date of issuance of the Bridge Notes. The registration statement would be prepared by us at our expense and filed on Form S-1 or other appropriate form and, once declared effective, allow the registered securities to be sold on a continuous basis and we will keep the registration statement continuously effective until certain conditions are met which would allow us to stop maintaining its effectiveness.
On March 3, 2009, we completed the second closing of the Bridge Financing, a transaction in which we entered into nine (9) promissory notes, each dated as of March 3, 2009, in the aggregate principal amount of $500,000 (the “Second Bridge Notes ”), with various investors (the “Second Bridge Lenders ”).
Each Second Bridge Note originally became due and payable on December 3, 2009, unless the maturity date is extended pursuant to the terms of an extension option. The Second Bridge Notes include a conversion feature allowing each Second Bridge Lender to convert all or any portion of the entire unpaid principal and any unpaid accrued interest at the date upon which the conversion is to be effected into a number of shares of Common Stock, determined by dividing the sum of the unpaid principal and unpaid accrued interest at the conversion date by the conversion price in effect at the conversion date. The initial conversion price is $0.625, which price is adjustable as set forth in the Second Bridge Notes. As of September 30, 2010, none of the Second Bridge Lenders has effected such a conversion.
We extended the Second Bridge Notes for an additional three months under the terms of the extension option contained in the Second Bridge Notes. Upon exercising this option, we were required to issue warrants to the Second Bridge Lenders to purchase an aggregate of 208,333 shares of our Common Stock, 125,000 shares of which will be issued at an exercise price of $0.50 per share and 83,333 shares of which will be issued at an exercise price of $0.75 per share. The new due date for the Second Bridge Notes pursuant to the extension option was March 3, 2010. The Second Bridge Lenders have agreed to an additional extension period for the Second Bridge Notes ranging from eighteen to thirty-six months from the March 3, 2010 due date and also agreed to a reduction in the annual interest rate from 16% to 10%.
The Second Bridge Notes also include a provision granting the Second Bridge Lenders, to the extent holders of a majority of the aggregate outstanding principal amount of the Bridge Notes and Second Bridge Notes agree, demand registration rights with respect to the resale of the shares of Common Stock that would be issuable upon conversion of the Second Bridge Notes, which rights vest thirty-six (36) months after the date of issuance of the Second Bridge Notes. The registration statement would be prepared by us at our expense and filed on Form S-1 or other appropriate form and, once declared effective, allow the registered securities to be sold on a continuous basis and we will keep the registration statement continuously effective until certain conditions are met which would allow us to stop maintaining its effectiveness.
On April 14, 2009, we completed the third closing of the Bridge Financing, a transaction in which we entered into the following three (3) promissory notes: (i) a convertible promissory note, dated as of March 31, 2009, with Frank Darras, Trustee of the Darras Family Trust (“ Darras ”), in the principal amount of $100,000 (the “Darras Note ”); (ii) a convertible promissory note, dated as of March 31, 2009, with SFV, Inc., a California corporation (“SFV ”), in the principal amount of $50,000 (the “SFV Note ”) and (iii) a convertible promissory note, dated as of April 14, 2009, with NFS LLC/FMTC Rol IRA FBO Neal Katz (“Katz ”), in the principal amount of $50,000 (the “Katz Note ”) (each, a “ Third Bridge Note ” and collectively, the “Third Bridge Notes ”). Darras, SFV and Katz are each a “Third Bridge Lender ” and are collectively referred to herein as the “Third Bridge Lenders.”
The Darras Note and the SFV Note originally became due and payable on December 31, 2009 and the Katz Note originally became due and payable on January 14, 2010. The terms of each of the Third Bridge Notes contained an extension option to extend such notes for an additional three months at our discretion. We extended the Darras Note and the SFV Note under the terms of the respective options, and therefore are obligated to issue warrants to Darras and SFV as follows: (i) Darras - 25,000 shares at an exercise price of $0.50 per share, and 16,667 shares at an exercise price of $0.75 per share; (ii) SFV - 12,500 shares at an exercise price of $0.50 per share, and 8,333 shares at an exercise price of $0.75 per share. We extended the Katz Note under the terms of an extension option contained in the Katz Note. By exercising this option, we are required to issue warrants to Katz to purchase an aggregate of 20,833 shares, 12,500 shares of which will be issued at an exercise price of $0.50 per share and 8,333 shares of which will be issued at an exercise price of $0.75 per share. The new due dates for the Third Bridge Notes, pursuant to the extension option, were March 31, 2010 for each of the Darras Note and the SFV Note and April 14, 2010 for the Katz Note. The Third Bridge Lenders have agreed to an additional extension period for the notes ranging from eighteen to thirty-six months from the March 31, 2010 and April 14, 2010 due dates and also agreed to a reduction in the annual interest rate from 16% to 10%.
The Third Bridge Notes include a conversion feature allowing each Third Bridge Lender to convert all or any portion of the entire unpaid principal and any unpaid accrued interest at the date upon which the conversion is to be effected into a number of shares of Common Stock, determined by dividing the sum of the unpaid principal and unpaid accrued interest at the conversion date by the conversion price in effect at the conversion date. The initial conversion price is $0.625, which price is adjustable as set forth in the Third Bridge Notes.
The Third Bridge Notes include a provision granting the Third Bridge Lenders, to the extent the holders of a majority of the aggregate outstanding principal amount of the notes issued in the Bridge Financing agree, demand registration rights with respect to the resale of the shares of Common Stock that would be issuable upon conversion of the Third Bridge Notes, which rights vest thirty-six (36) months after the date of issuance of the Third Bridge Notes. The registration statement would be prepared by us at our expense and filed on Form S-1 or other appropriate form and, once declared effective, allow the registered securities to be sold on a continuous basis and we will keep the registration statement continuously effective until certain conditions are met which would allow us to stop maintaining its effectiveness.
The fair value of the warrants issued in conjunction with the convertible notes issued under the Bridge Financing amounted to $932,000, and the fair value of the warrants issued in conjunction with the extension of the Bridge Notes, the Second Bridge Notes, the Darras Note, the SFV Note and the Katz Note amounted to $291,000. The beneficial conversion feature associated with the convertible notes issued in conjunction with the Bridge Financing totaled $253,000. Both the fair value of the warrants issued under the Bridge Financing and the subsequent extension of the Bridge Notes, the Second Bridge Notes the Darras Note, the SFV Note and the Katz Note, as well as the beneficial conversion feature, will be amortized over the term of the loans. Amortization for the Fiscal Years ended September 30, 2010 and 2009 amounted to $522,000 and $952,000, respectively.
Sales of Unregistered Equity Securities
On May 15, 2008, we sold and issued 25 shares of 5-A Preferred to an investor, pursuant to a Series 5-A Preferred Stock and Warrant Purchase Agreement. Such investor represented to us in writing that he was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. On May 15, 2008, in connection with this issuance, we also issued warrants to purchase 15,000 shares of our Common Stock to an investor, pursuant to the same Series 5-A Preferred Stock and Warrant Purchase Agreement. These warrants are exercisable for a period of 2 years at an exercise price of $0.50 per share. Such investor represented to us in writing that he was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act.
In May 2009, we accepted warrant exercises in the amount of 60,000 shares of Common Stock for an aggregate amount of $30,000 from one investor, who represented to us in writing that he is an “accredited investor,” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The shares were issued pursuant to the exercise of warrants originally issued on March 23, 2007, in connection with a private placement of our 5-A Preferred to various investors.
In September 2009, we accepted warrant exercises in the amount of 60,000 shares of Common Stock for an aggregate amount of $30,000 from two investors, each of whom represented to us in writing that he is an “accredited investor,” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The shares were issued pursuant to the exercise of warrants originally issued on August 10, 2007 and March 8, 2007 in connection with a private placement of our 5-A Preferred to various investors.
On May 21, 2010, we accepted warrant exercises in the amount of 60,000 shares (the “Warrant Exercise Shares ”) of Common Stock, for an aggregate purchase price of $30,000 from one investor. The Warrant Exercise Shares were issued pursuant to the exercise of a warrant to purchase shares of Common Stock at an exercise price of $0.50 per share, in connection with the private placement of our Series 5-A Preferred Stock and warrants to purchase Common Stock. The investor represented to us in writing that he is an “Accredited Investor,” as that term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act of 1933, as amended (the “Securities Act ”). The offers and sales of the Warrant Exercise Shares pursuant to the warrant exercises were exempt from the registration and prospectus delivery requirements of the Securities Act, by virtue of Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
9. Long-term Debt
Long-term debt consists of the following (in thousands):
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter:
10. Non-controlling Interests
Non-controlling interests attributable to the equity interests in SPA, RHA, Del Mar and Point Loma not held by us and recorded during the Fiscal Years Ended September 30, 2010 and 2009 amounted to $681,000 and $177,000 respectively.
On December 11, 2008, we entered into a Membership Interest Purchase Agreement with RHA, pursuant to which RHA repurchased 49% of the issued and outstanding voting membership units of RHA for an aggregate purchase price of $1,800,000. In connection with the repurchase, RHA issued a promissory note and we entered into a limited guaranty agreement of RHA’s obligations under the promissory note.
During the Fiscal Year Ended September 30, 2009, we entered into a series of equity transactions at Del Mar, which resulted in an increase in non-controlling interests held in Del Mar. Non-controlling interests increased from 39% at September 30, 2008 to 65% at September 30, 2009 and 2010. However, we have a 3:2 voting majority on the board of managers, which gives us control of the management decisions of the center, and Del Mar is still subject to consolidation.
During the Fiscal Year Ended September 30, 2010, SPMC, our indirect wholly-owned subsidiary, entered into a sale/leaseback transaction pursuant to a purchase agreement, whereby SPMC sold certain property to SPA. The purchase price for the sale/leaseback transaction was paid to SPMC as follows: (i) $1,500,000 was paid in the form of a promissory note, dated January 13, 2010, and (ii) $4,500,000 was paid in cash at the closing. Our wholly-owned subsidiary, First Physicians Realty Group, LLC, an Oklahoma limited liability company, owns 50% of SPA, and Capital Investors of Oklahoma, LLC, an Oklahoma limited liability company, owns 50% of SPA. First Physicians Realty Group, LLC has control of SPA and is therefore consolidated into First Physicians Capital Group, Inc.
11. Warrants
Outstanding exercisable warrants consisted of the following as of September 30, 2010:
Warrants Issued Pursuant to the Sale and Issuance of Series 5-A Convertible Preferred Stock
During the Fiscal Year Ended September 30, 2008, pursuant to the issuance of 6,085 shares of 5-A Preferred, we issued warrants to purchase an aggregate of 3,651,000 shares of Common Stock to a group of investors. Each investor represented to us in writing that it was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. These warrants had an exercise price of $0.50 per share and have expired as of the Fiscal Year ended September 30, 2010. Management is in discussion with the holders of these 5-A Preferred shares about extending the expiration date of the Common Stock warrants (See Footnote 17, “Subsequent Events”).
Warrants Issued Pursuant to the Sale and Issuance of Series 6-A Convertible Preferred Stock
During the Fiscal Year Ended September 30, 2008, pursuant to the sale and issuance of 4,607 shares of 6-A Preferred, we issued warrants to purchase an aggregate of 2,764,200 shares of Common Stock to a group of investors. Each investor represented to us in writing that it was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. These warrants had an exercise price of $0.50 per share and have expired as of the Fiscal Year ended September 30, 2010. Management is in discussion with the holders of these 6-A Preferred shares about extending the expiration date of the Common Stock warrants (See Footnote 17, “Subsequent Events”).
During the Fiscal Year Ended September 30, 2009, pursuant to the sale and issuance of 350 shares of 6-A Preferred, we issued warrants to purchase an aggregate of 210,000 shares of Common Stock to an investor. The investor represented to us in writing that he is an “accredited investor,” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. These warrants have an exercise price of $0.50 per share.
Warrants Issued Pursuant to the Individuals for Advisory Board Participation
During the Fiscal Year Ended September 30, 2008, we issued warrants to purchase 714,285 shares of our Common Stock to Mr. Brian Potiker in consideration for his service on our Advisory Board. These warrants are exercisable for a period of 2 years at an exercise price of $0.45 per share. Mr. Potiker represented to us in writing that he was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. These warrants were issued with Black-Scholes assumptions of 101.3% volatility, $0.33 share price, risk-free interest rates of 1.6% and exercise price of $0.45. The warrants had a calculated value of $71,234, recognized over the two-year vesting period. As of September 30, 2008, all of these warrants remained outstanding. These warrants were still outstanding as of September 30, 2009 and were exercised on October 30, 2009.
During the Fiscal Year Ended September 30, 2009, we issued warrants to purchase 125,000 shares of our Common Stock to individuals for participation on our Advisory Board. These warrants were issued with Black-Scholes assumptions of 152% volatility, $0.50 share price, risk-free interest rates of 1.39% and an exercise price of $0.625. The warrants had a calculated value of $50,000, recognized over the two-year vesting period. As of September 30, 2010, all of these warrants remained outstanding.
During the Fiscal Year Ended September 30, 2009, we issued warrants to purchase 150,000 shares of our Common Stock to a member of the newly created Medical Advisory Board. These warrants were issued with Black Scholes assumptions of 152% volatility, $0.52 share price, risk-free interest rates of 2.0% and an exercise price of $0.625. The warrants had a calculated value of $62,000, recognized over the one-year vesting period. As of September 30, 2010, all of these warrants remain outstanding.
Other Warrant Issuances
In connection with the sale and issuance of promissory notes to finance the purchase of RHA on October 29, 2007 during the Fiscal Year Ended September 30, 2008, we issued two groups of warrants to the purchasers of these promissory notes (the “Holders ”). The first group of warrants, a certain number of which were issued to each of the Holders, allows the Holders to purchase up to an aggregate of 1,980,000 shares of our Common Stock at an initial exercise price of $0.3125 per share, exercisable for a period of three years from the date of issuance. The warrants were issued with Black-Scholes assumptions of 52% volatility, $0.29 share price, risk-free interest rates of 3.13% and exercise price of $0.3125. The warrants had a calculated value of $203,648, recognized over the vesting period. The second group of warrants, a certain number of which were issued to each of the Holders, allows the Holders to purchase up to an aggregate of 1,237,500 shares of our Common Stock at an initial exercise price of $0.50 per share, exercisable for a period of three years from the date of issuance. The warrants were issued with Black-Scholes assumptions of 52% volatility, $0.29 share price, risk-free interest rates of 3.13% and exercise price of $0.50. The warrants had a calculated value of $76,000, to be recognized over the vesting period. Each of the Holders represented to us in writing that it was an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. As of September 30, 2010, all of these warrants remained outstanding.
During the Fiscal Year Ended September 30, 2008, we issued warrants to purchase 397,250 shares of our Common Stock to Waveland Capital, LLC in connection with their service as placement agent in the private placement of shares of our 5-A Preferred and 6-A Preferred sold and issued during the Fiscal Year Ended September 30, 2008. These warrants are exercisable for a period of 5 years at an exercise price of $0.50 per share. Waveland Capital, LLC represented to us in writing that it is an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. As of September 30, 2010, all of these warrants remained outstanding. The warrants had a calculated value of $123,000, netted against the proceeds of the above-described private placement.
12. Commitments and Contingencies
We lease our operating facilities under non-cancelable operating leases that expire at various dates through 2030. We also lease certain equipment under capital leases. Rent expense was $1.7 million in the Fiscal Year Ended September 30, 2010 and $1.6 million in the Fiscal Year Ended September 30, 2009.
Future minimum lease obligations at September 30, 2010 for those leases having an initial or remaining non-cancelable lease term in excess of one year, are as follows:
We have other contractual obligations that consist primarily of obligations to purchase goods or services that are enforceable and legally binding on us. These obligations specify all significant terms and are not cancelable without a penalty. Our obligations primarily relate to software licensing, clinical coding, medical waste removal, equipment maintenance and linen service (see Disclosure of Contractual Obligations in Item 7 of this Form 10-K).
13. Preferred Stock
Non-Redeemable Preferred Stock and Redeemable Preferred Stock
Effective February 24, 2000, we authorized 5,000,000 shares of preferred stock. The preferred stock is divided into several series. The Series 1-A Convertible Preferred Stock consists of 2,802,000 shares, the Series 2-A Convertible Preferred Stock consists of 1,672,328 shares, the Series 3-A Convertible Preferred Stock consists of 500,000 shares, the Series 4-A Preferred consists of 25,000 shares, the 5-A Preferred consists of 9,000 shares and the 6-A Preferred consists of 5,000 shares. Following completion of the sale of our BPO operations in Asia, no Series 3-A Preferred Stock or Series 4-A Preferred Stock remained outstanding and no shares of Series 3-A Preferred Stock or Series 4-A Preferred Stock were subsequently issued. During the Fiscal Year Ended September 30, 2008, we began issuing preferred stock designated as 6-A Preferred. Series 1-A Convertible Preferred Stock, Series 2-A Convertible Preferred Stock, 5-A Preferred and Series 6-A Preferred Stock outstanding as of end of the Fiscal Year Ended September 30, 2010 and the Fiscal Year Ended September 30, 2009 is described below.
Series 1-A Convertible Preferred Stock
As of the end of the Fiscal Years Ended September 30, 2010 and 2009, we had 67,600 and 67,600 respectively, shares of Series 1-A Convertible Preferred Stock outstanding with an aggregate liquidation value of $167,000 and $169,000 respectively. In the event of any liquidation or dissolution, either voluntary or involuntary, the holders of the Series 1-A Convertible Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds, to the holders of the Common Stock by reason of their ownership thereof, a preference amount per share consisting of the sum of (A) $2.50 for each outstanding share of Series 1-A Convertible Preferred Stock and (B) an amount equal to declared but unpaid dividends on such shares, if any. Each share of Series 1-A Convertible Preferred Stock shall be convertible at any time after the date of issuance of such shares, into such number of fully paid shares of Common Stock as is determined by dividing the original issue price by the then-applicable conversion price in effect on the date the certificate evidencing such share is surrendered for conversion. Each share of Series 1-A Convertible Preferred Stock, subject to the surrendering of the certificates of the Series 1-A Convertible Preferred Stock, shall be automatically converted into shares of Common Stock at the then-effective conversion price, immediately upon closing of a public offering of our Common Stock with aggregate gross proceeds of at least $10.0 million and a per share price of at least $5.00, or at the election of the holders of a majority of the outstanding shares of Series 1-A Convertible Preferred Stock. The holder of each share of Series 1-A Convertible Preferred Stock has the right to that number of votes equal to the number of shares of Common Stock which would be issued upon conversion of the Series 1-A Convertible Preferred Stock. Holders of the Series 1-A Convertible Preferred Stock are entitled to non-cumulative dividends, if declared by our Board of Directors, of $0.20 per share annually. Under certain circumstances, such as stock splits or issuances of Common Stock at a price less than the issuance price of the Series 1-A Convertible Preferred Stock, these shares are subject to stated Series 1-A Convertible Preferred Stock conversion price adjustments. There are currently three holders of Series 1-A Convertible Preferred Stock.
Series 2-A Convertible Preferred Stock
As of the end of the Fiscal Years Ended September 30, 2010 and 2009, we had 3,900 and 3,900 shares of Series 2-A Convertible Preferred Stock outstanding with an aggregate liquidation value of $24,000 and $25,000 respectively. In the event of any liquidation or dissolution, either voluntary or involuntary, the holders of the Series 2-A Convertible Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds, to the holders of the Common Stock by reason of their ownership thereof, a preference amount per share consisting of the sum of (A) $6.41 for each outstanding share of Series 2-A Convertible Preferred Stock and (B) an amount equal to declared but unpaid dividends on such shares, if any. Each share of Series 2-A Convertible Preferred Stock shall be convertible at any time after the date of issuance of such shares, into such number of fully paid shares of Common Stock as is determined by dividing the original issue price by the then-applicable conversion price in effect on the date the certificate evidencing such share is surrendered for conversion. Each share of Series 2-A Convertible Preferred Stock, subject to the surrendering of the certificates of the Series 2-A Convertible Preferred Stock, shall be automatically converted into shares of Common Stock at the then-effective conversion price, immediately upon closing of a public offering of our Common Stock with aggregate gross proceeds of at least $20.0 million and a per share price of at least $13.00, or at the election of the holders of a majority of the outstanding shares of Series 2-A Convertible Preferred Stock. The holder of each share of Series 2-A Convertible Preferred Stock has the right to that number of votes equal to the number of shares of Common Stock which would be issued upon conversion of the Series 2-A Convertible Preferred Stock. Holders of the Series 2-A Convertible Preferred Stock are entitled to non-cumulative dividends, if declared by our Board of Directors, of $0.20 per share annually. Under certain circumstances, such as stock splits or issuances of Common Stock at a price less than the issuance price of the Series 2-A Convertible Preferred Stock, these shares are subject to stated Series 2-A Convertible Preferred Stock conversion price adjustments. There is currently one holder of Series 2-A Convertible Preferred Stock.
Series 5-A Convertible Preferred Stock
Under the terms of the Series 5-A Preferred Stock and Warrant Purchase Agreement, in the event of any liquidation or dissolution, either voluntary or involuntary, the holders of the 5-A Preferred shall be entitled to receive, pari passu with the 6-A Preferred, after distribution of all amounts due to the holders of the Series 1-A Convertible Preferred Stock and Series 2-A Convertible Preferred Stock, but prior and in preference to any distribution of any of the assets or surplus funds to the holders of the Common Stock by reason of their ownership thereof, a preference amount per share consisting of the sum of (A) the original issue price, which initially is $1,000 (as adjusted for stock splits, stock dividends, combinations and the like) plus (B) an amount equal to all declared but unpaid dividends on such shares, if any. Each share of 5-A Preferred shall be convertible at any time after the date of issuance of such shares, into such number of fully paid shares of Common Stock as is determined by dividing the original issue price by the then-applicable conversion price in effect on the date the certificate evidencing such share is surrendered for conversion. Each share of 5-A Preferred, subject to the surrendering of the certificates of the 5-A Preferred, shall be automatically converted into shares of Common Stock at the then-applicable conversion price, upon the election of the holders of not less than a majority of the outstanding shares of 5-A Preferred electing to effect such conversion. The holder of each share of 5-A Preferred shall have the right to that number of votes equal to the number of shares of Common Stock which would be issued upon conversion of the 5-A Preferred. Holders of the 5-A Preferred are entitled to non-cumulative dividends, if declared by our Board of Directors, of $40 per share annually. Under certain circumstances, such as stock splits or issuances of Common Stock at a price less than the issuance price of the Series 5-A Convertible Preferred Stock, these shares are subject to stated Series 5-A Convertible Preferred Stock conversion price adjustments. Shares of 5-A Preferred had an initial conversion price of $0.3125 per share.
Shares of 5-A Preferred Stock are subject to redemption at our option or if required by a majority of the outstanding 5-A Preferred shares after certain events have occurred (“Triggering Events”). Triggering Events include our failure to honor a properly tendered request for conversion and if our Common Stock is not eligible for quotation on certain public stock exchanges including the OTC Bulletin Board and the Nasdaq Small Cap Market. No Triggering Event has occurred as of September 30, 2010.
As of September 30, 2010 and September 30, 2009, there were 9,000 and 8,987 shares respectively of 5-A Preferred outstanding, convertible into 28,800,000 and 28,758,400 common shares respectively with an aggregate liquidation value of $9.01 million and $9.00 million respectively and an aggregate redemption value of $9.4 million and $9.4 million respectively. There are currently 64 holders of 5-A Preferred.
Series 6-A Convertible Preferred Stock
On March 31, 2008, we entered into a Series 6-A Preferred Stock and Warrant Purchase Agreement (the “6-A Purchase Agreement ”), pursuant to which we issued and sold 3,585 shares of newly created class of convertible preferred stock, known as the 6-A Preferred and warrants to purchase an aggregate of 2,151,000 shares of Common Stock to a group of investors. Net proceeds from the issuance totaled $3.3 million. As of September 30, 2010, all of the warrants from the March 31, 2008 issuance have expired.
Under the terms of the 6-A Purchase Agreement, in the event of any liquidation or dissolution, either voluntary or involuntary, the holders of the 6-A Preferred shall be entitled to receive, pari passu with the 5-A Preferred, after distribution of all amounts due to the holders of the Series 1-A Convertible Preferred Stock and Series 2-A Convertible Preferred Stock, but prior and in preference to any distribution of any of the assets or surplus funds to the holders of the Common Stock by reason of their ownership thereof, a preference amount per share consisting of the sum of (A) the original issue price, which initially is $1,000 (as adjusted for stock splits, stock dividends, combinations and the like) plus (B) an amount equal to all declared but unpaid dividends on such shares, if any. The holders of 6-A Preferred shall be entitled to receive dividends pari passu with the 5-A Preferred stockholders. Each share of 6-A Preferred shall be convertible at any time after the date of issuance of such shares, into such number of fully paid shares of Common Stock as is determined by dividing the original issue price by the then-applicable conversion price in effect on the date the certificate evidencing such share is surrendered for conversion. Each share of 6-A Preferred, subject to the surrendering of the certificates of the 6-A Preferred, shall be automatically converted into shares of Common Stock at the then-applicable conversion price, upon the election of the holders of not less than a majority of the outstanding shares 6-A Preferred electing to effect such conversion. The holder of each share of 6-A Preferred shall have the right to that number of votes equal to the number of shares of Common Stock, which would be issued upon conversion of the 6-A Preferred. Holders of the 6-A Preferred are entitled to non-cumulative dividends, if declared by our Board of Directors, of $40 per share annually. Under certain circumstances, such as stock splits or issuances of Common Stock at a price less than the issuance price of the Series 6-A Convertible Preferred Stock, these shares are subject to stated Series 6-A Convertible Preferred Stock conversion price adjustments. Shares of 6-A Preferred have an initial conversion price of $0.3125 per share.
Shares of 6-A Preferred Stock are subject to redemption at our option or if required by a majority of the outstanding 6-A Preferred shares after certain events have occurred (“Triggering Events”). Triggering Events include our failure to honor a properly tendered request for conversion and if our Common Stock is not eligible for quotation on certain public stock exchanges including the OTC Bulletin Board and the Nasdaq Small Cap Market. No Triggering Event has occurred as of September 30, 2010.
As of September 30, 2010, there were 4,875 shares of 6-A Preferred outstanding, convertible into 15,600,000 common shares with an aggregate liquidation value of $4.9 million and an aggregate redemption value of $5.3 million. As of September 30, 2009, there were 4,957 shares of 6-A Preferred outstanding, convertible into 15,862,400 common shares with an aggregate liquidation value of $5.0 million and an aggregate redemption value of $5.9 million. There are currently 41 holders of 6-A Preferred.
Series B Preferred Stock issued by subsidiary
As noted above, on December 2, 2005, through newly created indirect subsidiaries, we entered into two Surgical Center Acquisition Agreements to acquire from Surgical Ventures, Inc., a California corporation, a controlling interest in the San Diego ambulatory surgical centers. These acquisitions were completed on November 16, 2006.
This preferred stock is exchangeable into shares of our Common Stock under certain terms and conditions, at $2.00 per common share. Additionally, this preferred stock became redeemable at the option of the holder under certain terms and conditions, by notice to the subsidiaries, as of March 2009. At September 30, 2008, the total shares of Series B Preferred Stock outstanding was 19,990 shares. During the Fiscal Year Ended September 30, 2009, the Series B Preferred Stock was exchanged for 2,384,250 shares of our Common Stock. Accordingly, there are no Series B shares outstanding at September 30, 2010 or 2009.
Related Party Interests in Preferred Stock
Our executive officers and affiliates held no shares of either Series 1-A Convertible Preferred Stock or Series 2-A Convertible Preferred Stock as of September 30, 2010 and September 30, 2009. They held 2,373 shares of 5-A Preferred and 1,643 shares of 6-A Preferred as of September 30, 2010. They held 2,360 shares of 5-A Preferred and 1,600 shares of 6-A Preferred as of September 30, 2009.
14. Stock Options
Stock-Based Compensation
Options to purchase 650,000 and 1,839,390 shares of our Common Stock were granted in the Fiscal Years Ended September 30, 2010, and 2009 respectively. The weighted average fair value of stock options granted during the Fiscal Years Ended September 30, 2010 and 2009 were $0.49 and $0.63, respectively. The weighted average fair value of these stock options was estimated using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
Stock Option Plans
In July 2000, our Board of Directors approved a stock option plan (the “2000 Plan”). Our stockholders have not approved the 2000 Plan. The 2000 Plan authorizes the grant of incentive stock options and non-statutory stock options covering an aggregate of 39,750 shares of Common Stock, as adjusted for our November 2002 reverse stock split (subject to limitations of applicable laws and adjustment in the event of stock dividends, stock splits, reverse stock splits and certain other corporate events). The 2000 Plan expires on July 6, 2010, unless it is terminated earlier or suspended by the Board of Directors. The 2000 Plan is not subject to any provisions of the Employee Retirement Income Security Act of 1974. As of each of September 30, 2009 and September 30, 2008 options to purchase an aggregate of 27,171 shares of Common Stock were outstanding under the 2000 Plan, with a weighted average exercise price of $15.25. We do not intend to issue any further options under the 2000 Plan or warrants to purchase stock to additional individuals or vendors as compensation for services rendered. This plan was allowed to expire.
In 2001, our Board of Directors approved the 2001 Stock Options/Stock Issuance Plan (the “2001 Plan”). Stockholders at the 2001 Annual Meeting approved the 2001 Plan in November 2001. The maximum number of shares of Common Stock that may be issued under the 2001 Plan cannot exceed 20% of the total shares of Common Stock outstanding at the time the calculation is made (including, on an as-converted basis, all convertible preferred stock, convertible debt securities, warrants, options and other convertible securities that are exercisable), but in no event can the maximum number of shares of Common Stock which may be issued under this plan as incentive stock options exceed 20,000,000. As of September 30, 2010 and 2009, based on the 20% calculation, the maximum number of shares issuable under the 2001 Plan was 16,108,800 and 16,750,800 respectively. Options are generally granted for a term of ten years and generally vest over periods ranging from one to three years. We have granted various non-qualified stock options to key executives, management and other employees at exercise prices equal to or below the market price at the date of grant.
On November 10, 2008, in connection with the appointment of Thomas Rice as President and Chief Operating Officer of RHA, we entered into an Option Grant Agreement, under which we granted to Mr. Rice an incentive stock option to purchase up to 500,000 shares of Common Stock, at an exercise price of $0.625 per share, which option shall expire on November 10, 2015. Mr. Rice’s option to purchase Common Stock shall vest incrementally on the following vesting schedule: (1) 125,000 shares vested immediately on November 10, 2008; (2) 125,000 shares vested on November 10, 2009; and (3) 250,000 shares shall vest on November 10, 2010. For the Fiscal Years Ended September 30, 2010 and 2009, the amortization recognized was $57,000 and $86,000 respectively.
On April 22, 2009, pursuant to the terms of our 2001 Plan, we granted options (the “2009 Employee Options ”) to employees of our indirect wholly-owned subsidiary, RHA (the “2009 Employee Optionees ”), to purchase an aggregate of 1,319,390 shares of Common Stock in variable individual amounts. Pursuant to the terms of the Option Grant Agreements, and subject to the terms of the 2001 Plan, the shares underlying the 2009 Employee Options vest according to the following schedule: (1) one-quarter vested immediately upon the date of issuance, (2) an additional one-quarter of the 2009 Employee Option Shares vest upon the passing of the one year anniversary of the date of issuance and (3) the remaining one-half of the 2009 Employee Option Shares vest upon the second anniversary of the date of issuance. The 2009 Employee Options were issued at an exercise price of $0.625 per share and are exercisable by the 2009 Employee Optionees with respect to all or any of the vested 2009 Employee Option Shares until April 22, 2016, subject to the terms and conditions of the 2001 Plan and the related Option Grant Agreements. For the Fiscal Years Ended September 30,2010 and 2009, the amortization recognized was $146,000 and $201,000 respectively.
On May 27, 2009, in connection with the employment of David Jamin as the administrator of RHA Stroud, LLC, we entered into an Option Grant Agreement, under which we granted to Mr. Jamin an incentive stock option to purchase up to 20,000 shares of Common Stock, at an exercise price of $0.625 per share, which option shall expire on Mary 27, 2016. Mr. Jamin’s option to purchase Common Stock shall vest incrementally on the following vesting schedule: (1) 6,667 shares vest on May 27, 2010, (2) 6,667 shares vest on May 27, 2011 and (3) 6,666 shares shall vest on May 27, 2012. For the Fiscal Years Ended September 30, 2010 and 2009, the amortization recognized was $0 and $2,000, respectively. As of September 30, 2010, 20,000 shares had expired effective with Mr. Jamin’s termination.
On December 29, 2009, in connection with Dan Chen’s employment agreement, we entered into an option grant agreement with Mr. Chen effective as of December 29, 2009, under which we granted to Mr. Chen an incentive stock option to purchase up to 500,000 shares of Common Stock, at an exercise price of $0.625 per share, which option shall expire on December 29, 2016. Mr. Chen’s option to purchase Common Stock vests incrementally on the following vesting schedule: (1) the option to purchase up to 100,000 shares vested immediately on December 29, 2009; (2) an option to purchase up to 100,000 shares vest incrementally on each anniversary date of the date of grant thereafter (with the final options vesting on the fourth anniversary date of the date of grant). The amortization recognized in connection with this option for the Fiscal Year Ended September 30, 2010 was $80,000.
On June 14, 2010, in connection with Sean Kirrane’s employment agreement, we entered into an option grant agreement with Mr. Kirrane effective as of June 14, 2010, under which we granted to Mr. Kirrane an incentive stock option to purchase up to 150,000 shares of Common Stock, at an exercise price of $0.625 per share, which option shall expire on June 14, 2017. Mr. Kirrane’s option to purchase Common Stock vests incrementally on the following vesting schedule: (1) the option to purchase up to 30,000 shares vested immediately on June 14, 2010; (2) an option to purchase up to 30,000 shares vest incrementally on each anniversary date of the date of grant thereafter (with the final options vesting on the fourth anniversary date of the date of grant). The amortization recognized in connection with this option for the Fiscal Year Ended September 30, 2010 was $23,000.
The following summarizes activities under the stock option plans:
The following summarizes information for stock options outstanding as of September 30, 2010:
The intrinsic value of options that have an exercise price below the market price at September 30, 2010 is $72,000. As of September 30, 2010, there was $2,402,000 in unrecognized compensation cost related to outstanding options, net of forecasted forfeitures. This amount is expected to be recognized over a weighted average of 2.4 years.
Employee Stock Purchase Plan
In November 2001, our stockholders approved the Employee Stock Purchase Plan (the “ESPP”), which provides (after adjustment to reflect our November 20, 2002 reverse stock split) for the issuance of a maximum of 350,000 shares of Common Stock. Eligible employees can have up to 10% of their earnings withheld, up to certain maximum limits, to be used to purchase shares of Common Stock at certain plan-defined dates. The price of Common Stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Common Stock on the commencement date and specified purchase date of each six-month offering period. We have discontinued offering the ESPP and no shares have been issued subsequent to the original issuance, and we have no current intention to issue any more shares under the ESPP.
15. 401(k) Plan
We sponsor a 401(k) employee savings plan (“401(k) Plan”) under which eligible U.S. employees may choose to defer a portion of their eligible compensation on a pre-tax basis, subject to certain IRS limitations.
16. Income Taxes
Rate reconciliation:
The deferred tax assets and liabilities were comprised of the following (in thousands):
The valuation allowance at September 30, 2010, principally applies to federal tax loss carry-forwards that, in the opinion of the management, are more likely than not to expire before we can use them.
As of September 30, 2010, we had net operating loss carry-forwards of approximately $48.7 million, available to offset future regular, alternative minimum and foreign taxable income, if any. Change of ownership of more than 50% occurred on June 22, 2001 and according to applicable U.S. tax laws, losses that occurred before that date are limited to $0.3 million per year for up to 20 years, totaling approximately $6.5 million. The loss carryovers will expire between 2011 and 2029. Changes in our ownership may lead to further restrictions in respect of the availability and use of these tax losses.
FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.
17. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through January 31, 2011, the date on which the financial statements became available to be issued. The Company noted the following items for disclosure.
Reorganization of Operations:
As disclosed in an August 10, 2010 press release, the Company, as part of its strategic growth plan entered into various Letters of Intent to acquire new operations with new capital and divest other existing operations that no longer fit its strategic profile moving forward or no longer provided any attractive return on capital or was creating a significant drag on operational performance and company liquidity.
The poorly performing units at the Company have put liquidity pressure on the better performing facilities. The Company was not able to grow into its cost structure in Oklahoma. Consequently, we are eliminating poorly performing facilities and the related infrastructure necessary to support them specifically as it relates to our Oklahoma facilities.
An inability to complete our re-organization would have necessitated a mandatory capital infusion to sustain our operations in Fiscal 2011. Management intends to continue to prune its balance sheet in fiscal 2011 and expand its capital base as appropriate or necessary for operations and/or its transaction needs.
Operational Changes:
Additionally, the Company had carried a fully staffed administrative and back office operation in Oklahoma City, OK that no longer fit the long term needs of the Company. An outsourced solution, joint venture solution or working with eventual merger partner’s larger back office solution provided a more attractive and more flexible approach for the Company moving into the 2011 fiscal operating year. Management also believes that the potential merger partners and transactions it has been pursuing provide a better and more efficient back office solution than what the Company currently has in place.
Proposed Corporate Structure Changes:
The Company has continued to work with its bank lenders to effect a separation of its operations from its real estate assets to provide more access to less expensive capital related to its accounts receivable, equipment and its real estate. The Company has received various indications of interest to provide financing once this separation has been completed. The Company previously discussed this desire during the recently completed fiscal year 2010. There is no guarantee the Company will complete these financing opportunities, Management believes they are available if needed once the Company restructures its operations.
Contemplated and Completed Asset Sales:
The Company is a more attractive merger partner with the completion of the transactions described below in Management’s opinion. Management also believes that it would not be prudent to continue to carry the non-core operations as they created a significant negative financial drag on the Company including creating pressure on operating liquidity and vendor relationships.
Transactions:
Management pursued offers and interest from various parties to divest itself of the following non-core business lines as part of a one-time reorganization of its operations and administrative offices:
•
The Chandler Clinic
•
Johnson Memorial Hospital in Tishomingo OK
•
Southern Plains Medical Clinic
Chandler-Sale
In December 2010, Southern Plains Medical Group LLC successfully sold its Chandler Clinic to the physician group that it was originally purchased from. The Company has no further obligations or interests in this facility. The buyer assumed the liabilities and leases related to this facility in the transaction. The company did not receive any consideration at closing.
Johnson Memorial Hospital in Tishomingo OK-Sale
In January 2011, Southern Plains Medical Group LLC signed an agreement related to Johnson Memorial Hospital in Tishomingo OK to sell the hospital operations to one group and the real estate and equipment to another group. As part of the transaction, the USDA mortgage debt related to the facility was retired in the amount of $1.14 million. The transaction structure includes an escrow agreement related to transaction related representations, warranties and indemnities which will remain in place for a period of time and restrict the Company’s access to approximately $500,000 in net sale proceeds after bank debt repayment. The gross proceeds in the transaction was $1.687 million in cash plus retention of net accounts receivable of approximately $275,000. As part of the Tishomingo sale, the Company expects to transition a significant portion of its back office operation in cooperation with the new owner. The Company may continue this co-back office arrangement for a period of time or indefinitely or it may opt to completely outsource these functions. The company does expect a wind-down of its corporate back office and revenue cycle management operations in Oklahoma City in fiscal 2011 in favor of another solution.
Southern Plains Medical Clinic - LOI
The Company has entered into a Letter of Intent to sell the Southern Plains Medical Clinic to a consortium of local healthcare services providers in Oklahoma. The contemplated transaction is a sale of the stock of SPMC including the related real estate held in our First Physicians Realty Group. The transaction would also transfer any and all debt related to SPMC that the Company holds to the buyer which at present is approximately $4.7 million plus related operating liabilities and accrued expenses as the parties deem appropriate. While there are no guarantees the transaction will be consummated as currently contemplated, the Company believes it should close during the first calendar quarter of 2011.
Other Operating Facilities in Oklahoma
While the Company has signed LOI’s with potential buyers for its other facilities in Oklahoma there is no guarantee that those transactions will be completed. The Company continues to receive both solicited and un-solicited proposals from time to time to sell, joint-venture, partner or combinations of approaches. The Company is always open to transactions that make good business sense relative to its strategic plan, provide an appropriate buyer or partners for the community the facility is located and creates a good opportunity for the employees working at those facilities.
Acquisitions, Mergers and Growth Initiatives:
The Company has continued its dialogues with the businesses in its transaction pipeline. Additionally, the Company met with bank lenders and other capital providers to the extent funding would be required for these transactions. These transactions may or may not be completed. These transactions may or may not result in a change in control of the Company.
Other:
Local Management Changes in Oklahoma:
On February 14, 2011, Tom Rice’s employment as President and Chief Operating Officer at Southern Plains Medical Group was terminated by mutual agreement. While Mr. Rice had an employment agreement and severance agreement, by mutual consent he accepted 3 months severance plus vesting of his stock options per the Company stock option plan terms. His resulting severance payments will begin once certain asset sales and the reorganization of the Oklahoma operations are completed.
Certain Common Stock Warrants
Management has been in discussions with the holders of certain common stock warrants as they related to Series 5A and 6A preferred and certain advisory board warrants and bridge loan warrants that expired during Fiscal 2010 for any number of reasons to extend those warrants. The number of warrants involved is approximately 6,415,200. Management expects to document the changes if any, during the first calendar quarter of 2011.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A(T).
Item 9A(T).
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Principal Accounting Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Exchange Act), as of September 30, 2010. Based on such evaluation, such executive officers have concluded that, as of September 30, 2010, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us, including our consolidated subsidiaries, required to be included in our reports filed or submitted under the Exchange Act. Our Chief Executive Officer and Principal Accounting Officer also concluded that the controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive and financial officers or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Assessment of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(e). Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2010. The criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework” were used to make this assessment. Management believes that our internal control over financial reporting as of September 30, 2010 is effective based on those criteria.
This Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rule 404b of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
None.
PART III
The following table sets forth the names, ages and certain information regarding each of our current directors and executive officers. There are no family relationships among our directors or executive officers.
(1)
Member of the Audit Committee.
(2)
Member of the Audit Committee and Compensation Committee.
David Hirschhorn. Since September 2005, Mr. Hirschhorn has been our Chairman and CEO and was recently reappointed by the Board of Directors in July 2008 as CEO. Previously, Mr. Hirschhorn served on our Board of Directors and as Co-Chairman, Co-Chief Executive Officer and Co-Chief Financial Officer from July 2005 through September 2007, when he was appointed as sole Chairman and Chief Executive Officer. Prior to that, Mr. Hirschhorn co-managed a private equity firm from July 2001 through July 2005. During his career, he has been CEO and chairman of a number of turnarounds and start-ups. He was a managing director at Cruttenden Roth (now Roth Capital Partners) from May 1994 to March 1997. Mr. Hirschhorn also worked for The Nikko Securities Co. International, Inc. as an investment banker in their New York office from 1991 to 1994, where as part of a team he built a new department that provided financial advice and raised capital for domestic and international clients. He began his career as a consultant for KPMG Peat Marwick and later worked as a senior consultant for Deloitte & Touche from 1997 to 2000. Mr. Hirschhorn earned a BA from the University of Michigan in Political Science.
Donald C. Parkerson. Mr. Parkerson served as our Chief Financial Officer, until his resignation on August 23, 2010. Mr. Parkerson has been a partner in the Nashville practice of Tatum, LLC since March of 2008 and he currently still holds this position. His 34-year career in the healthcare industry includes serving as the Vice President of Accounting and Corporate Controller of public companies in the healthcare segment and 25 years as audit and technology consulting partner in a public accounting firm serving clients in healthcare, telecommunications, distribution and a number of other industries. Between November 2007 and February 2008, Mr. Parkerson was searching for a suitable employment opportunity consistent with his years of experience and educational background. From July 2007 to October 2007, he worked as Senior Vice President, Corporate Controller, of Surgical Care Affiliates, LLC. From May 2004 to June 2007, he served as Senior Vice President, Surgery Division Controller, of HealthSouth Corporation. Prior to that, he was a partner at the accounting firm of Young, Parkerson & Co., LLP. Mr. Parkerson graduated with a degree in accounting from Delta State University.
Sean Kirrane. On August 23, 2010 Mr, Kirrane, who has served as the Company’s Vice President of Finance and Controller since June 14, 2010, was appointed to serve as the Company’s Principal Accounting Officer following Mr. Parkerson’s departure. Mr. Kirrane brings over 10 years of experience in senior finance and accounting roles for large publicly traded companies, including large financial services and insurance firms. From September 2007 to March 2010, Mr. Kirrane served as Assistant Vice President, Head of Global Treasury for Endurance Specialty Holdings, Ltd., where he designed, implemented, staffed and managed global treasury functions for the property and casualty insurer. From March 2004 to March 2007, Mr. Kirrane served in various finance and investment roles at New York Mortgage Trust, Inc. (“New York Mortgage”), where he was responsible for treasury, budgeting & forecasting, debt management and covenant compliance activities. He assisted New York Mortgage through a successful IPO in June 2004 and was eventually appointed Vice President and Treasurer in 2005. From January 2000 to March 2004, Mr. Kirrane held various positions in the accounting and treasury departments of Hudson United Bancorp. (“Hudson United”), including Assistant Vice President, Investment Officer and Treasury Cash Manager. In his positions at Hudson United, he was responsible for managing treasury operations and the derivatives and traded fixed income portfolio. Mr. Kirrane received a B.S. in Finance in 2000 from St. Joseph’s University in Philadelphia, PA and is a candidate for the Chartered Financial Analyst designation.
Todd Parker. Mr. Parker served on our Board of Directors and as Co-Chairman, Co-Chief Executive Officer and Co-Chief Financial Officer from July 2005 until September 2007. He continues on our board as a non-executive director. Since 2002, Mr. Parker has been a Managing Director at Hidden River LLC, a firm specializing in investments and services provided to the wireless and communications industry. Previously, Mr. Parker was the founder and CEO of HR One, a human resources solutions provider. He has held senior executive and general manager positions with AirTouch Corporation where he managed over 15 corporate transactions and joint venture formations with a total value of over $6 billion and participated in over 30 acquisitions, including AirTouch’s merger with US West in a $10 billion dollar transaction. Prior to AirTouch, Mr. Parker worked for Arthur D. Little as a consultant. Mr. Parker earned a BS from Babson College in Entrepreneurial Studies and Communications.
Robert N. Schwartz, Ph.D. Dr. Schwartz has served on our Board of Directors since January 1998. Since 1979, Dr. Schwartz has been a visiting professor at U.C.L.A. and, since December 2000, the owner of a scientific consulting company, Channel Islands Scientific Consulting. From 1981 to 2000, Dr. Schwartz was a Senior Research Scientist at HRL Laboratories, LLC, Malibu, California. Prior to joining HRL Laboratories he was a Professor of Physical Chemistry at the University of Illinois, Chicago from 1968 until 1981. Since 2006 Dr. Schwartz has served as a Senior Scientist at the Aerospace Corporation in El Segundo, California. He has a B.A. in Mathematics, Chemistry and Physics, an M.S. in Chemical Physics from the University of Connecticut and a Ph.D. in Chemical Physics from the University of Colorado.
Richardson E. Sells. Mr. Sells has served on our Board of Directors since April 2005. Mr. Sells served as Vice President Global Sales, Cargo, of Northwest Airlines, Inc. from January 29, 2001 until his retirement at the end of calendar year 2006. Mr. Sells is currently the Managing Partner of Transition Management, LLC, a transportation-related consulting firm. Prior to joining Northwest Airlines, Mr. Sells was Managing Director, Hong Kong and China, for CV Transportation Services, LDC, from 1995 through December 31, 2000. Mr. Sells has a Bachelors of Science degree in Business Management from East Tennessee State University.
William A. Houlihan. Mr. Houlihan has served on our Board of Directors since September 29, 2009. Mr. Houlihan has more than 30 years of business and financial experience. For the periods from February 2006 to July 2006, February 2007 to May 2007 and December 2008 through present, Mr. Houlihan was a private investor while he evaluated opportunities to be the Chief Financial Officer of certain companies. Mr. Houlihan has served as Chief Financial Officer for several companies, which were Sixth Gear, Inc. from October 2007 to November 2008, Sedgwick Claims Management Services in Memphis, Tennessee from August 2006 until January 2007, Metris Companies from August 2004 to January 2006, and Hudson United Bancorp from January 2001 to November 2003. He also worked as an investment banker at UBS in New York, New York from June 2007 to September 2007, at J.P. Morgan Securities from November 2003 to July 2004, KBW, Inc. from October 1996 to January 2001, Bear, Stearns & Co., Inc. from April 1991 to October 1996, and Goldman Sachs & Co. from June 1981 to April 1991. Mr. Houlihan received a B.S. in Accounting in 1977 from Manhattan College, became licensed as a C.P.A. in 1979, and received his M.B.A. in Finance in 1983 from New York University Graduate School of Business.
Thomas Rice. Mr. Rice serves as President and Chief Operating Officer of RHA, through an indirect subsidiary of ours. From 2000 to 2008, Mr. Rice served as Vice President of Healthcare Partners Investments, a partnership based in Oklahoma City, which owns and manages two hospitals, one surgery center, three sleep study centers, three outpatient physical therapy clinics and two imaging centers. From 1995-2000, Mr. Rice served as President of Integris Baptist Medical Center and Integris Southwest Medical Center, two large medical centers operating in Oklahoma City, where he grew revenue by 32% to over $450 million in a difficult reimbursement environment. Prior to that, Mr. Rice was President and CEO of Southwest Medical Center in Oklahoma City, which he led into a successful merger with Integris Health. Previously, Mr. Rice was Senior Vice President of St. David’s Healthcare System in Austin, Texas and administrator of various medical facilities in cities around the United States. Mr. Rice is a graduate of Lamar University and has a Masters Degree in Health Administration from Duke University. He has been certified as a Fellow in the American College of Healthcare Executives.
Board Meetings and Committees
The Board of Directors did not meet during the fiscal year ended September 30, 2010. It did however take action by unanimous written consent on eleven (11) occasions. During the Fiscal Year Ended September 20, 2010, our board decided to transition to monthly and twice-monthly board and committee calls (that included all board members and minimally 4 out of 5 board members) given the volume of transactions, financings and operationally changes being undertaken and contemplated by the company. This approach proved more efficient and obtained more input and leverage from the board and more timely dialog given the sheer volume of project and negotiations in process simultaneously. As the first large phase of the Company’s reorganization is nearing completion the board expects to resume is normal quarterly meeting schedule with monthly interim board calls.
Stockholder Communications with the Board of Directors
Our stockholders may communicate with the members of our Board of Directors and may recommend nominees to our Board of Directors by writing directly to our Board of Directors or specified individual directors at the following address:
First Physicians Capital Group, Inc.
Attn: Corporate Secretary
9663 Santa Monica Boulevard, #959
Beverly Hills, California 90210
Our Secretary will deliver stockholder communications to the specified individual director, if so addressed, or to one of our directors who can address the matter.
Compensation of Directors
Mr. Hirschhorn is the only director also serving as a full-time employee of ours as of September 30, 2010. He receives no additional compensation for serving as a director. With respect to non-employee, independent directors, our philosophy is to provide competitive compensation necessary to attract and retain qualified non-employee, independent directors.
In addition, on November 17, 2005, our Board of Directors approved the grants of options to acquire an aggregate of 360,000 shares of our Common Stock to two independent directors. The shares underlying these options vested in quarterly increments over three years, with an effective grant date of August 1, 2005. The exercise price of these options is $0.40 per share, which was the closing price of our Common Stock on November 17, 2005. These options were granted with Black-Scholes assumptions of 99% volatility, $0.37 share price, risk-free interest rates of 4.1% and exercise price of $0.40.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and officers and persons who beneficially own more than ten percent of our Common Stock to file with the SEC reports of beneficial ownership on Forms 3 and changes in beneficial ownership of our Common Stock and other equity securities on Form 4s or Forms 5. SEC regulations require all officers, directors and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during, and Forms 5 and amendments thereto furnished to us with respect to, the Fiscal Year Ended September 30, 2010, and any written representations from reporting persons that no Form 5 is required, the following table sets forth information regarding each person who, at any time during the Fiscal Year Ended September 30, 2010, was a director, officer or beneficial owner of more than 10% of our Common Stock who failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16(a) of the Exchange Act during the Fiscal Year Ended September 30, 2010:
Code of Ethics
On April 22, 2008, we adopted a Corporate Code of Business Conduct and Ethics for Directors, executive officers and Employees (the “Code of Ethics ”). The Code of Ethics applies to the Board, the Chief Executive Officer, the President, the Chief Operations Officer (should one be appointed), the Chief Financial Officer, each financial or accounting officer at the level of the principal accounting officer or controller and all other Section 16 reporting executive officers and all of our employees. A copy of the Code of Ethics is attached as an exhibit to the Form 10-K for the Fiscal Year Ended September 30, 2008.
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Philosophy and Compensation Program Objectives
As a growing public company operating in the competitive healthcare industry, we place high value on attracting and retaining our executives since it is their talent and performance that is responsible for our success. Therefore, our compensation philosophy is to create a performance-based culture that attracts and retains a superior team. We aim to achieve this goal by designing a competitive and fiscally responsible compensation program to:
•
Attract the highest caliber of talent required for the success of our business;
•
Retain those individuals capable of achieving challenging performance standards;
•
Incent our executives to strive for superior company-wide and individual performance; and
•
Align management and stockholder interests over both the short and long-term.
Our executive compensation program is designed in a manner to offer a compensation package that utilizes three key elements: (1) base salary, (2) annual cash incentives and (3) long-term equity incentives. We believe that together these performance-based elements support the objectives of our compensation program.
•
Base Salaries. We seek to provide competitive base salaries factoring in the position, the executive’s skills and experience, the executive’s performance, as well as other factors. We believe appropriate base salary levels are critical in helping us to attract and retain talented executives.
•
Annual Cash Incentives. The aim of this element of compensation is to reward individual contributions to align with our annual operating performance and to recognize the achievement of challenging performance standards.
•
Long-Term Equity Incentives. The long-term element of our compensation program consists of discretionary grants of equity awards which are reviewed annually. These are designed to align our interests with those of management, employees and our stockholders by directly linking individual compensation to our long-term performance, as reflected in stock price appreciation and increased stockholder value.
Below is a description of our executive compensation process and a detailed discussion of each of the key elements of our compensation program as they apply to the executive officers named in the Summary Compensation Table set forth below. Because we are a growing public company, we will continue to review the overall design of our executive compensation program to ensure that it is structured to most effectively meet our compensation philosophy and objectives. We will also evaluate the program in the context of competitive market practice, as well as applicable legal and regulatory guidelines, including IRS rules governing the deductibility of compensation. This review may result in changes to the program we use today.
The Executive Compensation Process
The Board of Directors
We established a Compensation Committee in September 2007 with responsibility for determining all aspects of officer and director compensation, which goes through the following process prior to determining equity compensation:
•
Reviewing and approving our compensation philosophy;
•
Determining executive compensation levels;
•
Annually reviewing and assessing performance goals and objectives for all executive officers, including our Chief Executive Officer and Chief Financial Officer; and
•
Determining short-term and long-term incentive compensation for all executive officers, including our Chief Executive Officers and Chief Financial Officer.
Upon recommendation of the Compensation Committee, the Board of Directors is responsible for making all decisions with respect to the compensation of the Chief Executive Officer and the Chief Financial Officer. In the first quarter of each the fiscal year, the Compensation Committee reviews base salaries, determines payout amounts for annual cash incentives and reviews long-term equity for the Chief Executive Officer and the Chief Financial Officer. In the first quarter of the Fiscal Year Ended September 30, 2010, the Compensation Committee met as needed to consider specific contracts of executive officers, as revised from time to time, including a meeting to discuss David Hirschhorn’s employment agreement. Upon recommendation from the Compensation Committee, the Board of Directors reviews and establishes performance metrics for the current year’s annual incentive plan.
Outside Compensation Advice
The Compensation Committee may also seek compensation advice from our Advisory Board. These individuals advise the Board of Directors on compensation plan design issues, regulatory changes and best practices related to compensation.
Benchmarking Process
When making compensation decisions, the Compensation Committee considers the competitive market for executives and compensation levels provided by comparable companies. Though we generally target salary levels at the median of our peer group, total compensation may exceed or fall below the median for our Chief Executive Officer and Chief Financial Officer. Since one of the objectives of our compensation program is to consistently reward and retain top performers, actual compensation will vary depending on individual and our overall performance.
Compensation of Executive Officers
Mr. Hirschhorn joined us as Co-Chief Executive Officer and Co-Chief Financial Officer in July 2005, during a period when we were discontinuing active operations and entering a new industry. In order to attract Mr. Hirschhorn, we negotiated a compensation package with Mr. Hirschhorn that provided increasing annual salaries as we grow and other incentives that align his interests with those of our stockholders. Mr. Hirschhorn entered into an initial employment agreement, effective July 18, 2005, in which he received annual base salaries for the years ending July 18, 2006, 2007 and 2008, of $204,000, $240,000 and $360,000, respectively, and was eligible for an annual target incentive bonus of up to 300% of the applicable base salary. This bonus was payable upon achievement of certain performance targets set by the Board of Directors. Under his employment agreement, Mr. Hirschhorn was guaranteed annual incentive bonuses of $50,000, $75,000 and $100,000. Mr. Hirschhorn was also issued no less than 50,000 vested shares of our restricted Common Stock annually beginning with the second year of his employment agreement. At the time of his hire, Mr. Hirschhorn was also issued 1,250,000 restricted shares of our Common Stock. The cash components of Mr. Hirschhorn’s compensation package were intentionally set below market with performance incentives that would compensate him as we grew. The combination of Mr. Hirschhorn’s compensation structure and the equity awards granted to him at the time of his hire created a heavy weighting on long-term incentives. Mr. Hirschhorn entered into a second employment agreement, effective July 1, 2008, in which he will receive annual base salaries for the years ending July 1, 2009, 2010, 2011, 2012 and 2013 of $480,000, $540,000, $600,000, $630,000 and $661,500, respectively, and he is eligible for an annual incentive bonus as determined by the Compensation Committee of an amount not exceeding three times the base salary or 10% of our EBITDA for the immediately preceding fiscal year. Mr. Hirschhorn has also received options to purchase up to 6,250,000 shares of Common Stock at an initial exercise price of $0.625 per share. Mr. Hirschhorn’s shares vest according to the following schedule: 1,250,000 shares vested on July 1, 2009; 1,250,000 shares vest on July 1, 2010; 1,250,000 shares vest on July 1, 2011; 1,250,000 shares vest on July 1, 2012 and the last 1,250,000 vest on July 1, 2013.
Details regarding Mr. Hirschhorn’s current compensation package are contained in the tables that follow, and a description of Mr. Hirschhorn’s employment agreement is described below as well. We continue to evaluate the components and level of compensation for our executive management.
Mr. Kirrane joined us as Vice President of Finance and Controller in June 2010, following the resignation of Donald Parkerson our CFO, Mr. Kirrane was appointed to serve as the Company’s Principal Accounting Officer. Mr. Kirrane entered into an initial employment agreement effective June 9, 2010, in which he received an annual base salary of $150,000 with an automatic increase upon completing six months of employment to $165,000. Mr. Kirrane is eligible for an annual incentive bonus of up to 50% of his fiscal year end base salary, prorated the first year to percentage of time worked, based upon a percentage of 10% of adjusted EBITDA as defined in the bonus pool for all other C-level executives at the Company. Mr. Kirrane was also granted an incentive stock option to purchase up to 150,000 shares of Common Stock at an exercise price of $0.625 per share. Mr Kirrane’s options vested on the following schedule, 30,000 immediately, and 30,000 each anniversary over the next four years.
Details regarding Mr. Kirrane’s compensation package are contained in the tables that follow, and a description of Mr. Kirrane’s employment agreement is described below as well. We continue to evaluate the components and level of compensation for our executive management.
Components of the Executive Compensation Program
Though we feel it is important to provide competitive cash compensation, we believe that a substantial portion of executive compensation should be performance-based. We believe it is essential for executives to have a meaningful equity stake linked to our long-term performance and, therefore, we have created compensation packages that aim to foster an owner-operator culture. Other than base salary, compensation of our executive officers and other key associates is also largely comprised of variable or “at risk” incentive pay linked to our financial and stock performance and individual contributions. Other factors we consider in evaluating executive compensation include internal equity, external market and competitive information, assessment of individual performance, level of responsibility and the overall expense of the program. In addition, we also strive to offer competitive benefits and appropriate perquisites.
Base Salary
Base salary represents the fixed component of our executive officers’ compensation. Following the review and recommendation of the Compensation Committee, the Board of Directors sets base salary levels based upon experience and skills, position, level of responsibility, the ability to replace the individual and market practices. The Compensation Committee reviews base salaries of the executive officers annually and approves all salary increases for the executive officers. Increases are based on several factors, including the Compensation Committee’s assessment of individual performance and contribution, promotions, level of responsibility, scope of position and competitive market data. These salaries are below the salary level normally provided to a Chief Executive Officer and/or Chief Accounting Officer of a company of comparable size, complexity and performance and below the median level of our peer group.
Annual Cash Incentives
Our executive officers have the opportunity to earn cash incentives for meeting annual performance goals. Following review and recommendation of the Compensation Committee, the Board of Directors establishes financial and performance targets and opportunities linked to our overall performance.
Long-Term Equity Incentives
Our executive officer compensation is heavily weighted in long-term equity, as we believe superior stockholder returns are achieved through an ownership culture that encourages a focus on long-term performance by our executive officers. By providing our executive officers with an equity stake in our future, we are better able to align the interests of our executive officers and our stockholders. In establishing long-term equity incentive grants for our executive officers, the Compensation Committee reviews certain factors, including the outstanding equity grants held both by the individual and by our executives as a group, total compensation, performance, accumulated wealth analysis that includes projections of the potential value of vested equity (which is prepared reflecting assumptions about future stock price growth rates), the vesting dates of outstanding grants, tax and accounting costs, potential dilution and other factors.
Perquisites and Other Benefits
We do not generally provide material perquisites that are not, in the Board of Directors’ view, integrally and directly related to the executive officers’ duties. Our executive officers also participate in other broad-based benefit programs that are generally available to our salaried employees, including health, dental and life insurance programs.
Retirement Plans
The Board of Directors believes that an important aspect of attracting and retaining qualified individuals to serve as executive officers involves providing methods for those individuals to save for retirement. We currently do not have an established a retirement plan for our executive officers, but may create one in the future.
Benefits Upon Termination of Employment
We have employment agreements with Mr. Hirschhorn, our Chief Executive Officer, Mr. Kirrane, Vice President of Finance and Principal Accounting Officer, Mr. Chen, Managing Director, Director of Corporate Development and Mr. Rice, an executive officer of RHA. The agreement with Mr. Hirschhorn provides that in the event Mr. Hirschhorn is terminated without cause we are obligated to pay Mr. Hirschhorn certain lump sum payments, as set forth below in the table entitled The Fiscal Year Ended September 30, 2010 - Potential Payments Upon Termination or Change in Control.
Mr. Kirrane joined us as Vice President of Finance in June 2010. Mr. Kirrane’s employment was effective June 14, 2010, pursuant to which he will receive an annual base salary of $150,000, with an automatic increase after 6 months of employment to $165,000 per fiscal year. In the event Mr. Kirrane’s employment is terminated during the first six months of employment, he shall receive the continued payment of his base salary for three months. In the event Mr. Kirrane’s employment is terminated between six and twenty months of employment, he shall receive the continued payment of his base salary for six months. In the event Mr. Kirrane’s employment is terminated after two years of employment, he shall receive the continued payment of his pay base for twelve months.
Mr. Rice joined us as President and Chief Operating Officer of RHA in November of 2008. Mr. Rice entered into an employment agreement, effective November 10, 2008, pursuant to which he will receive an annual base salary of $275,000 per fiscal year. In the event Mr. Rice’s employment is terminated without cause or upon death or disability, RHA is obligated to pay Mr. Rice certain severance payments. If the termination occurs after Mr. Rice has been employed for less than twelve consecutive months, he shall receive the continued payment of his base salary for six months following the termination date. If the termination occurs after Mr. Rice has been employed for at least twelve consecutive months, he shall receive the continued payment of his base salary for twelve months following the termination date..
The Board of Directors believes that the severance provisions contained in the employment agreements are an important element in attracting and retaining executive officers. See “The Fiscal Year Ended September 30, 2010 - Potential Payments Upon Termination or Change in Control” below for information with respect to potential payments and benefits under these employment agreements and our other compensation arrangements upon the termination of our executive officers.
Tax and Accounting Matters
Section 162(m) of the Internal Revenue Code of 1986 (the “Code”), enacted as part of the Omnibus Budget Reconciliation Act of 1993, generally disallows a tax deduction to public companies for compensation over $1,000,000 paid to the Chief Executive Officer and the four other most highly compensated executive officers. Under Internal Revenue Service regulations, qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. The Compensation Committee does not believe that any of the executive compensation arrangements for the Fiscal Year Ended September 30, 2010 will result in the loss of a tax deduction pursuant to Section 162(m). The Compensation Committee expects to continue to monitor the application of Section 162(m) to executive compensation and will take appropriate action if it is warranted in the future.
We operate our compensation programs with the intention of complying with Section 409A of the Code. Effective February 1, 2006, we began accounting for stock-based compensation with respect to our long-term equity incentive award programs in accordance with the requirements of existing accounting standards.
THE FISCAL YEARS ENDED SEPTEMBER 30, 2010, 2009, 2008 AND TRANSITION PERIOD ENDED SEPTEMBER 30, 2007 SUMMARY EXECUTIVE COMPENSATION TABLE
The following table sets forth information concerning total compensation paid or earned during the Fiscal Years Ended September 30, 2010, 2009, 2008 and the Transition Period Ended September 30, 2007 for the persons who served during the Fiscal Year Ended September 30, 2010, 2009, 2008 and the Transition Period Ended September 30, 2007 as our Chief Executive Officers and Chief Financial Officers, as well as certain other key employees of ours. These are our only two Executive Officers. As reflected in the tables below, the primary components of our compensation program are cash compensation, consisting of a mix of base salary and cash bonus compensation, and equity compensation, consisting of restricted stock grants.
EMPLOYMENT AGREEMENTS
Mr. Hirschhorn is party to an employment agreement with us dated effective as of July 1, 2008 and approved by our Compensation Committee. The employment agreement expires on July 1, 2013. Under the employment agreement, Mr. Hirschhorn receives annual base salaries for the years ending July 1, 2009, 2010, 2011, 2012 and 2013 of $480,000, $540,000, $600,000, $630,000 and $661,500, respectively, and is eligible for an annual incentive bonus as determined by the Compensation Committee in an amount not to exceed three times his base salary for that fiscal year or 10% of our EBITDA for the immediately preceding fiscal year. Mr. Hirschhorn entered into an Option Grant Agreement pursuant to the 2001 Plan, effective July 1, 2008, pursuant to which Mr. Hirschhorn was granted the option to acquire 6,250,000 shares of our Common Stock at an exercise price of $0.625. The shares underlying this option vest according to the following schedule: 1,250,000 vested on July 1, 2009, 1,250,000 on July 1, 2010, 1,250,000 on July 1, 2011, 1,250,000 on July 1, 2012, and the remaining 1,250,000 on July 1, 2013; Mr. Hirschhorn was not terminated for Misconduct (as that term is defined in the Option Grant Agreement, filed as Exhibit 10.2 to the Form 8-K filed with the SEC on July 7, 2008), nor has he, to our knowledge, engaged in Misconduct through the date of this Form 10-K. Either party may terminate Mr. Hirschhorn’s employment by providing written notice to the other party. If we terminate the employment, our notice shall include a statement indicating whether the termination was because of disability or for cause or without cause. In the event Mr. Hirschhorn is terminated, we are obligated to pay Mr. Hirschhorn certain lump sum payments, as set forth below in the table entitled “The Fiscal Year Ended September 30, 2010 - Potential Payments Upon Termination or Change in Control.”
The employment agreement with Mr. Hirschhorn also states that Mr. Hirschhorn shall receive a term life insurance policy with a death benefit of $1.0 million for the first year of the agreement, $1.5 million for the second and third years of the agreement and $2.0 million for each of the fourth and fifth years of the agreement. The premiums for this policy are to be paid by us as long as Mr. Hirschhorn remains employed by us pursuant to the Agreement. We are not the beneficiary of the policy. The life insurance policy has not been purchased at this time, and in the event that Mr. Hirschhorn passes away, we may be liable to his estate in an amount to be determined, which may be up to $2.0 million.
THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 - GRANTS OF PLAN-BASED AWARDS
On June 14, 2010, our Compensation Committee approved the issuance of options to purchase 150,000 shares of our Common Stock pursuant to the 2001 Plan to Sean Kirrane. These options are exercisable for a period of seven years at an exercise price of $0.625 per share.
GRANTS OF PLAN-BASED AWARDS
THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 - OUTSTANDING EQUITY AWARDS (update for Sean)
The following table summarizes information with respect to our outstanding equity awards held by executive officers at September 30, 2010.
(2) THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 - POTENTIAL PAYMENTS UPON TERMINATION OR A CHANGE IN CONTROL
The following tables show the estimated amount of potential payments, as well as estimated value of continuing benefits, assuming the executive officer’s employment terminated effective September 30, 2010, and based on compensation and benefit levels in effect on September 30, 2010. Due to the numerous factors involved in estimating these amounts, the actual benefits and amounts payable can only be determined at the time of an executive officer’s termination.
DAVID HIRSCHHORN, CHIEF EXECUTIVE OFFICER (FORMERLY CO-CEO and CO-CFO)
(1)
In the event of Mr. Hirschhorn’s voluntary termination, we are required to pay Mr. Hirschhorn any amount of base salary earned by, but not yet paid to, Mr. Hirschhorn through the effective date of termination.
(2)
In the event of Mr. Hirschhorn’s voluntary termination, we are additionally required to pay to Mr. Hirschhorn (i) all benefits that have been earned by or vested in, and are payable to, Mr. Hirschhorn under and subject to the terms (including all eligibility requirements) of, the compensation and benefit plans in which Mr. Hirschhorn participated through the effective date of termination; (ii) all reimbursable expenses due, but not yet paid, to Mr. Hirschhorn as of the effective date of termination and (iii) an amount equal to all accrued and unused paid vacation or time off, calculated in accordance with our paid vacation or time off policies, practices and procedures (including authorized deductions and the deductions required by law), as of the effective date of termination.
(3)
Mr. Hirschhorn’s employment agreement provides that he shall receive a term life insurance policy with a death benefit of $1,000,000 for the first year of the agreement; $1,500,000 for the second and third years of the agreement and $2,000,000 for each of the fourth and fifth years of the agreement.
DONALD C. PARKERSON, CHIEF FINANCIAL OFFICER
We did not compensate Mr. Parkerson during the Fiscal Year Ended September 30, 2010; however Mr. Parkerson did receive compensation from Tatum, LLC, pursuant to an Executive Services Agreement between us and Tatum, LLC. Mr. Parkerson resigned his position effective August 23, 2010.
Sean Kirrane, VP of Finance and Principal Accounting Officer
(1)
In the event Mr. Kirrane’s employment is terminated in the first six months of employment, he shall receive the continued payment of his base salary for three months
(2)
In the event Mr. Kirrane’s employment is terminated between six and twenty four months of employment, he shall receive the continued payment of his base salary for six months
(3)
In the event Mr. Kirrane’s employment is terminated two years of employment, he shall receive the continued payment of his base salary for twelve months
THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 DIRECTOR COMPENSATION
We did not compensate non-employee members of our Board of Directors during the Fiscal Year Ended September 30, 2010.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Common Stock, Series 1-A Convertible Preferred Stock, Series 2-A Convertible Preferred Stock, Series 5-A Convertible Preferred Stock and Series 6-A Convertible Preferred Stock
The following table sets forth certain information, as of January 9, 2011, regarding the beneficial ownership of our Common Stock, including Common Stock issuable upon conversion of all preferred convertible securities, options, warrants and other convertible securities, by (i) all persons or entities who beneficially own 5% or more of our Common Stock, (ii) each of our current directors, (iii) the executive officers listed in the Summary Compensation Table herein and (iv) all of our current executive officers and directors as a group, in each case, to the best of our knowledge. As of January 9, 2011, there were (i) 15,049,507 shares of Common Stock outstanding, (ii) 85,788,029 shares of Common Stock on a fully as-converted basis and (iii) on a fully as-converted basis, 71,123,307 shares of Preferred Stock, options, warrants and other securities convertible into Common Stock currently exercisable within 60 days of January 9, 2011, with each share of Common Stock being entitled to one vote.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since we are not listed on a national securities exchange, we have decided to use the independence standards of the NYSE Amex (formerly known as the American Stock Exchange or AMEX). We believe that the Board of Directors would determine that Richardson E. Sells, Robert N. Schwartz and William Houlihan would be “independent directors” under the rules of the NYSE Amex if we were listed on the NYSE Amex and asked to make such a determination.
Advisory Board
On August 22, 2005, we announced the creation of an Advisory Board with seven initial members. We issued warrants to purchase up to 900,000 shares of Common Stock to Advisory Board members as compensation for their service. On November 9, 2005, we delivered 727,500 of such warrants to our seven initial Advisory Board members, with an effective issuance date of August 2, 2005. All such warrants were issued with Black-Scholes assumptions of 99% volatility, $0.35 share price, risk-free interest rates of 4.1% and an exercise price of $0.35. The warrants become one-third vested upon issuance and vest an additional third after each calendar year. The shares underlying these warrants became fully vested in August 2007. In December 2006, our Board of Directors approved the issuance of a warrant to purchase 50,000 shares of our Common Stock at an exercise price of $0.45 per share to Steven Spector, upon his addition as a member to the Advisory Board. The shares underlying the warrant issued to Mr. Spector became fully vested on December 12, 2008 and are currently in the process of being exercised. On September 11, 2007, our Board of Directors approved the issuance of warrants to purchase an aggregate of 350,000 shares of our Common Stock at an exercise price of $0.45 per share to six new members of our Advisory Board. The shares underlying these warrants become fully vested on September 13, 2009. 125,000 of these warrants expired and 225,000 are in the process of being exercised On February 15, 2008, our Board of Directors approved the issuance of a warrant to purchase a total of 714,285 shares of our Common Stock at an exercise price of $0.45 per share to Brian Potiker, in consideration for his continued service as a member of our Advisory Board. The shares underlying the warrant issued to Mr. Potiker became fully vested on October 30, 2008 and expired on October 30, 2009.
In March 2009, in consideration for their strategic advice and assistance, Messrs. Jay Beaghan, Rod Rivera, I. Bobby Majumder and Dr. Harley Liker, as members of our Advisory Board, were issued Advisory Board warrants to purchase an aggregate of 125,000 shares of Common Stock at an exercise price of $0.625 per share. These warrants will expire on March 16, 2012 and were issued in the following individual amounts: (i) 25,000 warrants to Mr. Beaghan; (ii) 25,000 warrants to Mr. Rivera; (iii) 25,000 warrants to Mr. Majumder and (iv) 50,000 warrants to Dr. Liker. One-third of the warrants vested immediately, one-third vest on March 16, 2010 and one-third vest on March 16, 2011. These warrants expire on March 16, 2012. As of September 30, 2010 all of these warrants remain outstanding.
In June 2009, we issued warrants to purchase 150,000 shares of Common Stock to a member of the newly created Medical Advisory Board. These warrants were issued an exercise price of $0.625. One-third of the warrants vested immediately upon issuance on June 10, 2009 and the remaining two-thirds vest on June 10, 2010. These warrants expire on June 10, 2012. As of September 30, 2010 all of these warrants remain outstanding.
Advance to Affiliated Entity
On April 28, 2006, we entered into an agreement with CSA II, LLC, a Cayman Islands company controlled by Dennis M. Smith, one of our directors at that time. Under the terms of this agreement, we advanced $333,333 to CSA II, LLC to finance the purchase of securities issued by Cross Shore Acquisition Corporation, a Delaware corporation, pursuant to a private placement of $112,000,008 of securities completed on April 24, 2006. The securities were listed on the Alternative Investment Market of the London Stock Exchange (the “AIM ”) and started trading on April 28, 2006 and ceased trading on the AIM on September 4, 2009. In addition, for consideration of $239.38, we purchased warrants to purchase 239,375 membership units of CSA II, LLC, constituting 22.5% of the total issued limited liability company interests outstanding on a fully diluted basis upon payment of the exercise price equal to $0.001 per unit. On May 24, 2006, we received a partial repayment of this advance in the amount of $60,654. In addition, on June 12, 2006, we were reimbursed $75,000, representing expenses associated with this advance. As of September 30, 2009 we have written the remaining amounts due on this advance off as uncollectible.
Sub-Lease from HSP, Inc.
We are subleasing office space located at 433 N. Camden, Suite 810, Beverly Hills, California 90210 from HSP, Inc. which is a related entity to SMP, an affiliate of ours. The sub-lease is for a term of 5 years at a monthly rental of $4,800 per month, subject to adjustment downward based on other subtenants occupying space at the same location.
Repurchase of 49% Interest in RHA
Beginning November 18, 2008, RHA began operating under the trade name Southern Plains Medical Group. On December 11, 2008, through our subsidiary RHA, we purchased the remaining 49% issued and outstanding membership units of RHA not owned by us from Carol Schuster, an individual residing in Oklahoma and holder of approximately forty-two percent (42%) of our Common Stock. RHA repurchased the remainder of its issued and outstanding membership units for $1,800,000 through a series of cash payments and the issuance of a promissory note. We serve as guarantor for those payment obligations.
Exercise of Warrants
In August 2008, three of the initial seven Advisory Board members exercised their warrants in full and a total of 302,500 shares of Common Stock were issued. The other four initial Advisory Board members, holding a total of 425,000 shares of Common Stock, allowed their warrants to expire unexercised. The Advisory Board warrant issued to Mr. Spector vested on December 12, 2008 and is in the process of being exercised. The warrants issued to six new Advisory Board members on September 13, 2007, and the warrant issued to Mr. Potiker, remain outstanding.
Item 14.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
We have engaged Whitley Penn LLP to audit our financial statements for the Fiscal Years Ended September 30, 2010 and September 30, 2009. The decision to engage Whitley Penn LLP as our independent auditors for Fiscal Year Ended September 30, 2010 has been approved by the Board of Directors, the Audit Committee and our stockholders.
Fees
Aggregate fees for professional services rendered to us by Whitey Penn LLP as of or for the Fiscal Year Ended September 30, 2010 and 2009, respectively, were:
Audit fees for the Fiscal Year Ended September 30, 2010 and the Fiscal Year Ended September 30, 2009, respectively, were for professional services rendered for the audits of our consolidated financial statements and the reviews of certain subsidiary companies and the quarterly reviews of the financial statements included in our Forms 10-Q.
Audit Related fees for the Fiscal Year Ended September 30, 2010, Fiscal Year Ended September 30, 2009, respectively, would have been for accounting consultations, capital issuances and review of responses to various SEC comment letters.
Tax fees for the Fiscal Year Ended September 30, 2010, Fiscal Year Ended September 30, 2009 were for services related to tax compliance and advisory services including assistance with review of tax returns, advice on goods and services taxes and duties in various jurisdictions and ad hoc corporate tax planning and advice. Other fees for the Fiscal Year Ended September 30, 2010 were related to fees associated with potential acquisitions.
We had no other fees for professional services rendered by our independent auditors during the Fiscal Years Ended September 30, 2010 and 2009 respectively.
The Audit Committee has advised us that it has determined that the non-audit services rendered by our independent auditors during the Fiscal Year Ended September 30, 2010, the Fiscal Year Ended September 30, 2009 are compatible with maintaining the independence of the auditors.
Audit Committee Pre-Approval Policies and Procedures
Our Audit Committee pre-approves audit and non-audit services provided by our independent auditors at its quarterly meetings.
PART IV
Item 15.
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Form 10-K:
(1)
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2010 and September 30, 2009
Consolidated Statements of Operations for the Fiscal Years Ended September 30, 2010 and September 30, 2009
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended September 30, 2010 and September 30, 2009
Consolidated Statements of Cash Flows for the Fiscal Years Ended September 30, 2010 and September 30, 2009
Notes to the Consolidated Financial Statements
(2)
Financial Statement Schedules
All schedules have been omitted because they are not required or the required information is shown in the financial statements or notes thereto.
(3)
The following documents are filed as exhibits to this Form 10-K (exhibits marked with an asterisk (*) have been previously filed with the SEC as indicated and are incorporated herein by reference):
*
Previously filed with the SEC as indicated, and hereby incorporated herein by reference.

Certain portions of these documents have been omitted based on a request for confidential treatment submitted to the SEC. The non-public information that has been omitted from these documents has been separately filed with the SEC. Each redacted portion of these documents is indicated by a “[*]” and is subject to the request for confidential treatment submitted to the SEC. The redacted information is confidential information of the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and dates indicated.
EXHIBIT INDEX
*
Previously filed with the SEC as indicated, and hereby incorporated herein by reference.

Certain portions of these documents have been omitted based on a request for confidential treatment submitted to the SEC. The non-public information that has been omitted from these documents has been separately filed with the SEC. Each redacted portion of these documents is indicated by a “[*]” and is subject to the request for confidential treatment submitted to the SEC. The redacted information is confidential information of the Registrant.