| PAINCARE HOLDINGS INC ITEM 1A RISK FACTORS You should consider the risks described below before making an investment decision |
| We believe that the risks and uncertainties described below are the principal material risks facing our company as of the date of this Form 10-K In the future, we may become subject to additional risks that are not currently known to us |
| Our business, financial condition or results of operations could be materially adversely affected by any of the following risks |
| The trading price of our common stock could decline due to any of the following risks |
| Risks Related to Our Business We may need to restate our consolidated financial statements again |
| Based upon comments received from the SEC staff regarding our method of accounting for (i) certain term notes, freestanding and embedded derivatives, and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions, we have restated our consolidated financial statements 20 ______________________________________________________________________ [49]Table of Contents for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 |
| We based the foregoing restatements on our interpretation of applicable accounting pronouncements, notwithstanding the fact that the SEC staff comments remain unresolved |
| There can be no assurance that the SEC staff will agree with our interpretation of the applicable accounting pronouncements |
| In the event the SEC staff disagrees with one or more of our interpretations of applicable accounting pronouncements, we may have to restate our consolidated financial statements again in the future |
| A number of class action lawsuits have been filed against us and certain of our officers and directors |
| We have become aware of at least twelve putative class action lawsuits and derivative demand letters filed against us and certain of our officers and directors |
| Of the total filed lawsuits and derivative demand letters, we’ve been served with nine |
| We understand that the lawsuits arose in connection with our determination to restate certain of our historical financial statements |
| We believe that the lawsuits lack merit and we have engaged the international law firm of McDermott Will & Emery LLP to vigorously defend against such allegations and claims |
| There can be no assurance at this time how the lawsuits in question will ultimately be resolved, or the impact, if any, such resolutions will have on our operations and/or financial condition |
| We may need to negotiate a waiver letter with respect to our senior credit facility |
| On May 2, 2006 we entered into a letter agreement with the lenders under our dlra30 million senior credit facility pursuant to which the lenders waived certain historic breaches of the terms of the credit facility in consideration for which we paid a dlra300cmam000 waiver fee to the lenders |
| Subsequent to the date of the letter agreement we may have failed to comply with certain covenants set forth in the credit facility |
| While we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of the credit facility after the date of the letter agreement, there can be no assurance that such a notice letter will not be received in the future |
| In the event we are served with such a notice letter in the future we will attempt to enter into another waiver agreement with the lenders |
| There can be no assurance that we would be able to enter into any such waiver agreement |
| As the credit facility is secured by all of our assets, to the extent we were unable to negotiate a waiver letter with the lenders the lenders might attempt to take certain actions that could materially adversely impact our operations, including, but not limited to, taking control of one or more of our operating subsidiaries and/or other company assets |
| We Need to Continue to Improve and Implement our Controls and Procedures |
| Requirements adopted by the SEC in response to the passage of the Sarbanes-Oxley Act of 2002 require us to (i) evaluate and report on a quarterly basis the effectiveness of our disclosure controls and procedures, and (ii) assess and report on an annual basis the effectiveness of our internal controls over financial reporting |
| During our assessment with respect to the effectiveness of the foregoing controls as of December 31, 2005, the end of our most recent fiscal year, management identified a number of material weaknesses, which are fully disclosed in Item 9A in this Form 10-K As a result of the material weaknesses, management concluded that our disclosure controls and procedures and our internal controls over financial reporting as of December 31, 2005, the end of our most recent fiscal year, were not effective |
| In an effort to rectify the foregoing material weaknesses, we have modified our method of accounting for certain transactions and have implemented additional controls |
| In so doing, we restated our consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 |
| We continue to evaluate our disclosure controls and procedures and our internal controls over financial reporting, and may modify, enhance or supplement them as appropriate in the future |
| There can be no assurance that we will be able to maintain compliance with all of the SEC control requirements |
| Any modifications, enhancements or supplements to our controls systems could be costly to prepare or implement, divert the attention of our management from operating our business, and cause our operating expenses to increase over the ensuing year |
| Further, our stock price may be adversely affected by the current, or any future, determination that our disclosure controls and procedures and/or internal controls over financial reporting were not effective |
| Please refer to Part II Item 9A below for an additional discussion regarding our controls |
| 21 ______________________________________________________________________ [50]Table of Contents The success of our growth strategy depends on the successful identification, completion and integration of acquisitions |
| We have acquired or entered into general management agreements with 21 physician practices and 9 ambulatory surgery centers since 2002 and we intend to pursue additional acquisitions and management relationships |
| Our future success will depend on our ability to identify and complete acquisitions and integrate the acquired businesses with our existing operations |
| Our growth strategy will result in significant additional demands on our infrastructure, and will place a significant strain on our management, administrative, operational, financial and technical resources, and increase demands on our systems and controls |
| Our growth strategy involves numerous risks, including, but not limited to: • the possibility that we are not able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms; • possible decreases in capital resources or dilution to existing stockholders; • difficulties and expenses incurred in connection with an acquisition; • the difficulties of operating an acquired business; • the diversion of management’s attention from other business concerns; • a limited ability to predict future operating results of acquired practices; and • the potential loss of key physicians, employees and patients of an acquired practice |
| In the event that the operations of an acquired practice do not meet expectations, we may be required to restructure the acquired practice or write-off the value of some or all of the assets of the acquired practice |
| We cannot assure you that any acquisition will be successfully integrated into our operations or will have the intended financial or strategic results |
| In addition, acquisitions entail an inherent risk that we could become subject to contingent or other liabilities in connection with the acquisitions, including liabilities arising from events or conduct pre-dating our acquisition and that were not known to us at the time of acquisition |
| Although we conduct due diligence in connection with each of our acquisitions, this does not mean that we will necessarily identify all potential problems or issues in connection with any given acquisition, some of which could be significant |
| Our failure to successfully identify and complete future acquisitions or to integrate and successfully manage completed acquisitions could have a material adverse effect on our business, financial condition and results of operations |
| Our strategy is to rapidly grow by acquiring, establishing and managing a network of pain management, minimally invasive spine surgery and orthopedic rehabilitation centers |
| Identifying appropriate physician groups and proposing, negotiating and implementing economically attractive affiliations with them can be a lengthy, complex and costly process |
| There can be no assurance that we will be successful in identifying and establishing relationships with orthopedic surgery and pain management groups |
| If we are successful in implementing our strategy of rapid growth, such growth may impair our ability to efficiently provide non-professional support services, facilities, equipment, non-professional personnel, supplies and non-professional support staff to medical practices |
| Our future financial results could be materially adversely affected if we are unable to manage growth effectively |
| There can be no assurance that physicians, medical providers or the medical community in general will accept our business strategy and adopt the strategy offered by us |
| The extent to which, and rate at which, these services achieve market acceptance and penetration will depend on many variables including, but not limited to, the establishment and demonstration in the medical community of the 22 ______________________________________________________________________ [51]Table of Contents clinical safety, efficacy and cost-effectiveness of these services, the advantage of these services over existing technology, and third-party reimbursement practices |
| There can be no assurance that the medical community and third-party payors will accept our technology |
| Similar risks will confront any other services developed by us in the future |
| Failure of our services to gain market acceptance would have a material adverse effect on our business, financial condition, and results of operations |
| If we do not have sufficient additional capital to finance our growth strategy, our development may be limited |
| We will need to raise additional capital in order to acquire, integrate, develop, operate and expand our affiliated physician practices |
| We may finance future acquisition and development projects through debt or equity financings and may use shares of our capital stock for all or a portion of the consideration to be paid in acquisitions |
| To the extent that we undertake these financings or use capital stock as consideration, our stockholders may, in the future, experience significant ownership dilution |
| To the extent we incur indebtedness, we may have significant interest expense and may be subject to covenants in the related debt agreements that affect the conduct of our business |
| We have convertible notes and debentures outstanding that have anti-dilution rights and limitations on incurring additional indebtedness that could limit our ability to obtain financing on favorable terms, or at all |
| We can give no assurances that we will be able to obtain financing necessary for our acquisition and development strategy or that, if available, the financing will be on terms acceptable to us |
| If we do not have sufficient capital resources, our growth could be limited and our operations impaired |
| There has been a lack of profitable operations in recent periods |
| For the years ended December 31, 2005, 2004 and 2003, net loss was (dlra5cmam339cmam378), $(1cmam501cmam482) and (dlra11cmam482cmam842), respectively |
| We expect to increase our spending significantly as we continue to expand our service offerings and commercialization activities |
| As a result, we will need to generate significant revenues in order to continue to grow our business and become profitable |
| A significant portion of our assets consists of goodwill and other intangible assets and any impairment, reduction, or elimination of these intangible assets could hurt our results of operations |
| As of December 31, 2005, we had an intangible asset, net goodwill, of approximately dlra111dtta5 million, which constituted 61prca of our total assets |
| The net goodwill reflects the amount we pay for our acquired practices in excess of the fair value of other identifiable intangible and tangible assets |
| Our net goodwill will increase in the future as a result of our acquisitions as we pay the contingent purchase price for the acquisitions according to the terms of the respective purchase agreements |
| In addition, we expect to acquire additional goodwill in connection with future acquisitions |
| As prescribed by generally accepted accounting principles, we do not amortize goodwill; rather it is carried on our balance sheet until it is impaired |
| At least annually we test net goodwill for impairment |
| Any determination of impairment could require a significant reduction, or the elimination, of goodwill, which could hurt our results of operations |
| Also, the effect of a prolonged downturn in our business will be exacerbated by the impairment, and resulting write-down, of goodwill related to a reduction in the value of our acquired practices |
| Our cash flow and financial condition may be adversely affected by the assumption of credit risks |
| Our managed and limited management practices bill their patients’ insurance carriers for services provided by the practices |
| By undertaking the responsibility for patient billing and collection activities, the practices assume the credit risk presented by the patient base, as well as the risk of payment delays attendant to reimbursement through governmental programs or third-party payors |
| If our practices are unsuccessful in collecting a substantial amount of such fees, it will have a material adverse affect on our financial condition because our compensation from these practices is dependent on the practices’ collections |
| 23 ______________________________________________________________________ [52]Table of Contents If we are forced to repay our debentures and notes in cash, we may not have enough cash to fund our operations |
| Our 7dtta5prca convertible debentures and our secured convertible term notes contain certain provisions and restrictions, which if violated, could result in the full principal amount, dlra9cmam653cmam008 as of December 31, 2005, together with interest and other amounts, becoming immediately due and payable in cash on such securities |
| If such an event occurred and if a holder of such securities demanded repayment, we might not have the cash resources to repay such indebtedness |
| The debentures have a term of three years, with interest payable quarterly |
| Subject to certain conditions, the quarterly interest payments on the debentures may be paid, at our option, in cash or additional shares of our common stock |
| Our secured convertible term notes are repayable in monthly installments of principal over the three year life of the notes |
| Subject to certain conditions, the monthly principal and interest payments on the notes may be paid, at our option, in cash or additional shares of common stock |
| If we made the payments on the debentures and notes in cash rather than additional shares of common stock, it would reduce the amount of cash available to fund operations |
| We may not be able to attract and retain qualified physicians we need to support our business |
| Our operations are substantially dependent on the services of our practices’ physicians |
| With respect to our owned practices, we have employment agreements with our physicians that generally have terms of five years, but may be terminated by either party in certain circumstances |
| Our management agreements with our managed practices generally have a 40 year term, while our agreements with limited management practices have a 5 year term with options for two additional five year renewal terms which are exercisable at our election |
| These agreements may be earlier terminated under certain circumstances |
| Although we will endeavor to maintain and renew such contracts, in the event a significant number of physicians terminate their relationships with us, our business could be adversely affected |
| While our employment and management agreements contain covenants not to compete with us for a period of generally two years after termination of employment, these provisions may not be enforceable |
| We compete with many types of health care providers and government institutions for the services of qualified physicians |
| If we are unable to attract and retain physicians, our revenues will decrease and our business will suffer |
| If certain key employees were to leave, we may be unable to operate our business profitably, complete existing projects or undertake certain new projects |
| Our key employees and consultants include Merrill Reuter, MD, Randy Lubinsky, Mark Szporka, and Ron Riewold |
| We have entered into employment agreements with Randy Lubinsky (Chief Executive Officer and Director), Ron Riewold (President and Director), Mark Szporka (Chief Financial Officer and Director), and Dr |
| Merrill Reuter (President of one of our subsidiaries and Chairman of the Board) |
| Reuter, Randy Lubinsky, Ron Riewold, or Mark Szporka or other key personnel become unavailable to us for any reason, our business could be adversely affected |
| There is no assurance that we will be able to retain these key individuals and/or attract new employees of the caliber needed to achieve our objectives |
| We do not maintain any key employee life insurance policies |
| Our employment agreements with certain senior executive officers entitle them to individual annual bonuses equal to a minimum of dlra200cmam000 up to a maximum of 150prca of salary |
| Our employment agreements with our Chief Executive Officer, Chief Financial Officer and 24 ______________________________________________________________________ [53]Table of Contents President, which expire on December 31, 2010, and were amended effective January 1, 2006, entitle each officer to a minimum annual bonus of dlra200cmam000 up to a maximum of 150prca of their base salary in any one calendar year |
| Increased costs associated with corporate governance compliance may significantly affect our results of operations |
| The Sarbanes-Oxley Act of 2002 and our being subject to the Securities Exchange Act of 1934, as amended, requires changes in some of our corporate governance and securities disclosure and compliance practices, and requires a review of our internal control procedures |
| We expect these developments to increase our legal compliance and financial reporting costs |
| In addition, they could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers |
| Finally, director and officer liability insurance for public companies has become more difficult and more expensive to obtain, and we may be required to accept reduced coverage or incur higher costs to obtain coverage that is satisfactory to us and our officers or directors |
| We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude or additional costs we may incur as a result |
| Changes associated with reimbursement by third-party payors for our services may adversely affect our operating results and financial condition |
| Approximately 50prca of our revenues are directly dependent on the acceptance of the services provided by our managed practices and limited management practices as covered benefits under third-party payor programs, including PPOs, HMOs and other managed care entities |
| The health care industry is undergoing significant changes, with third-party payors taking measures to reduce reimbursement rates or, in some cases, denying reimbursement for previously acceptable treatment modalities |
| There is no assurance that third-party payors will continue to pay for the services provided by our owned practices under their payor programs or by the managed practices |
| Failure of third-party payors to adequately cover minimally invasive surgery or other services will have a material adverse effect on us |
| Professional liability claims could adversely impact our business |
| Our managed practices are involved in the delivery of health care services to the public and are exposed to the risk of professional liability claims |
| Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage |
| Insurance against losses related to claims of this type can be expensive and varies widely from state to state |
| There can be no assurance that our owned and managed practices will not be subject to such claims, that any claim will be successfully defended or, if our practices are found liable, that the claim will not exceed the limits of our insurance |
| Liabilities in excess of our insurance could have a material adverse effect on us |
| Our business is subject to substantial competition which could have a material impact on our business and financial condition |
| The health care industry, in general, and the markets for orthopedic, rehabilitation and minimally invasive surgery services in particular, are highly competitive |
| The practices we own or manage compete with other physicians and rehabilitation clinics who may be better established or have greater recognition in a particular community than the physicians in these practices |
| These practices also compete against hospitals and large health care companies, such as HealthSouth, Inc |
| and US Physical Therapy, Inc, with respect to orthopedic and rehabilitation services, and Symbion and AmSurg Corp, with respect to outpatient surgery centers |
| These hospitals and companies have established operating histories and greater financial resources than us |
| In addition, we expect competition to increase, particularly in the market for rehabilitation services, as consolidation of the physical therapy industry continues through the acquisition by hospitals and large health care companies of physician-owned and other privately owned physical therapy practices |
| We will also compete with our competitors in connection with acquisition opportunities |
| 25 ______________________________________________________________________ [54]Table of Contents Failure to obtain managed care contracts and legislative changes could adversely affect our business |
| There can be no assurance that our owned or managed practices will be able to obtain managed care contracts |
| These practices’ future inability to obtain managed care contracts in their markets could have a material adverse effect on our business, financial condition or results of operation |
| In addition, federal and state legislative proposals have been introduced that could substantially increase the number of Medicare and Medicaid recipients enrolled in HMOs and other managed care plans |
| We derive, through these practices, a substantial portion of our revenue from Medicare and Medicaid |
| In the event such proposals are adopted, there can be no assurance that these practices will be able to obtain contracts from HMOs and other managed care plans serving Medicare and Medicaid enrollees |
| Failure to obtain such contracts could have a material adverse effect on the business, financial condition and results of operations |
| Even if our practices are able to enter into managed care contracts, the terms of such agreements may not be favorable to us |
| Risks Related to Our Industry The health care industry is highly regulated and our failure to comply with laws and regulations applicable to us or the owned practices, and the failure of the managed practices and the limited management practices to comply with laws and regulations applicable to them, could have an adverse effect on our financial condition and results of operations |
| Our owned practices, the managed practices and the limited management practices are subject to stringent federal, state and local government health care laws and regulations |
| If we or they fail to comply with applicable laws, or if a determination is made that in the past we or the managed practices or the limited management practices have failed to comply with these laws, we may be subject to civil or criminal penalties, including the loss of our license or our physicians’ licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored and third-party health care programs |
| In addition, laws and regulations are constantly changing and may impose additional requirements |
| These changes could have the effect of impeding our ability to continue to do business or reduce our opportunities to continue to grow |
| Periodic revisions to laws and regulations may reduce the revenues generated by the owned practices, managed practices and the limited management practices |
| A significant amount of the revenues generated by our owned practices, the managed practices and the limited management practices is derived from governmental payors |
| These governmental payors have taken and may continue to take steps designed to reduce the cost of medical care |
| Private payors often follow the lead of governmental payors, and private payors have been taking steps to reduce the cost to them of medical care |
| A change in the makeup of the patient mix that results in a decrease in patients covered by private insurance or a shift by private payors to other payment structures could also adversely affect our business, financial condition and results of operations |
| If reductions in reimbursement occur, the revenues generated by the owned practices, the managed practices and the limited management practices could shrink |
| This shrinkage would cause a reduction in our revenues |
| Accordingly, our business could be adversely affected by reductions in or limitations on reimbursement amounts for medical services rendered, payor mix changes or shifts by payors to different payment structures |
| Because government-sponsored payors generally pay providers based on a fee schedule, and the trend is for private payors to do the same, we may not be able to prevent a decrease in our revenues by increasing the amounts the owned practices charge for services |
| The same applies to the limited 26 ______________________________________________________________________ [55]Table of Contents management practices and the managed practices |
| They cannot increase their charges in an attempt to counteract reductions in reimbursement for services |
| There can be no assurance that any reduced operating margins could be recouped through cost reductions, increased volume, and introduction of additional procedures or otherwise |
| We believe that trends in cost containment in the health care industry will continue to result in reductions from historical levels of per-patient revenue |
| Federal and state healthcare reform may have an adverse effect on our financial condition and results of operations |
| Federal and state governments have continued to focus significant attention on health care reform |
| A broad range of health care reform measures have been introduced in Congress and in state legislatures |
| It is not clear at this time what proposals, if any, will be adopted, or, if adopted, what effect, if any, such proposals would have on our business |
| Currently proposed federal and state legislation could have an adverse effect on our business |
| Our affiliated physicians may not appropriately record or document services they provide |
| Our affiliated physicians are responsible for assigning reimbursement codes and maintaining sufficient supporting documentation for the services they provide |
| The owned practices, managed practices and limited management practices use this information to seek reimbursement for their services from third-party payors |
| If these physicians do not appropriately code or document their services, our financial condition and results of operations could be adversely affected |
| Unfavorable changes or conditions could occur in the geographic areas where our operations are concentrated |
| A majority of our revenue in 2005 was generated by our operations in five states |
| Adverse changes or conditions affecting these particular markets, such as health care reforms, changes in laws and regulations, reduced Medicaid reimbursements and government investigations, may have a material adverse effect on our financial condition and results of operations |
| Regulatory authorities could assert that the owned practices, the managed practices or the limited management practices fail to comply with the federal Stark Law |
| If such a claim were successfully asserted, this would result in the inability of these practices to bill for services rendered, which would have an adverse effect on our financial condition and results of operations |
| In addition, we could be required to restructure or terminate our arrangements with these practices |
| This result, or our inability to successfully restructure the arrangements to comply with the Stark Law, could jeopardize our business |
| Section 1877 of Title 18 of the Social Security Act, commonly referred to as the “Stark Law”, prohibits a physician from making a referral to an entity for the furnishing of Medicare-covered “designated health services” if the physician (or an immediate family member of the physician) has a “financial relationship” with that entity |
| “Designated health services” include clinical laboratory services; physical and occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services (including the professional component of such diagnostic testing, but excluding procedures where the imaging modality is used to guide a needle, probe or catheter accurately); radiation therapy services and supplies; durable medical equipment and supplies; home health services; inpatient and outpatient hospital services; and others |
| A “financial relationship” is defined as an ownership or investment interest in or a compensation arrangement with an entity that provides designated health services |
| Sanctions for prohibited referrals include denial of Medicare payment and civil monetary penalties of up to dlra15cmam000 for each service ordered |
| Designated health services furnished pursuant to a referral that is prohibited by the Stark Law are not covered by Medicare and payments improperly collected must be promptly refunded |
| 27 ______________________________________________________________________ [56]Table of Contents The physicians in our owned practices have a financial relationship with the owned practices (they receive compensation for services rendered) and may refer patients to the owned practices for physical and occupational therapy services (and perhaps other designated health services) covered by Medicare |
| Therefore, an exception would have to apply to allow the physicians in our owned practices to refer patients to the owned practices for the provision by the owned practices of Medicare-covered designated health services |
| There are several exceptions to the prohibition on referrals for designated health services which have the effect of allowing a physician that has a financial relationship with an entity to make referrals to that entity for the provision of Medicare-covered designated health services |
| The exception on which we rely with respect to the owned practices is the exception for employees, as all of the physicians employed in our owned practices are W-2 employees of the respective owned practices |
| Therefore, we believe that the physicians employed by our owned practices can refer patients to the owned practices for the provision of designated health services covered by Medicare |
| Nevertheless, should the owned practices fail to adhere to the conditions of the employment exception, or if a regulator determines that the employees or the employment relationship do not meet the criteria of the employment exception, the owned practices would be liable for violating the Stark Law, which could have a material adverse effect on us |
| We believe that our relationships with the managed practices and the limited management practices, respectively, do not trigger the Stark Law |
| Nevertheless, if a regulator were somehow to determine that these relationships are subject to the Stark Law, and that the relationships do not meet the conditions of any exception to the Stark Law, such failure would have a material adverse effect on us |
| The referral of Medicare patients by physicians employed by or under contract with the managed practices and the limited management practices, respectively, to their respective practices, however, does trigger the Stark Law |
| We believe, nevertheless, that the in-office ancillary exception to the Stark Law has the effect of permitting these physician members of the respective managed practices and limited management practices to refer patients to their respective group practice for the provision by the respective group practice of Medicare-covered designated health services |
| If the managed practices or limited management practices were found not to comply with the terms of the in-office ancillary exception, they cannot properly bill Medicare for the designated health services provided by them |
| In such an event, our business could be materially adversely affected because the revenues we generate from these practices are dependent, at least in part, on the revenues or profits generated by those practices |
| Regulatory authorities could assert that our owned practices, the managed practices or the limited management practices, or the contractual arrangements between us and the managed practices or the limited management practices, fail to comply with state laws analogous to the Stark Law |
| In such event, we could be subject to civil penalties and could be required to restructure or terminate the contractual arrangements |
| At least some of the states in which we do business also have prohibitions on physician self-referrals that are similar to the Stark Law |
| These laws and interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion |
| As indicated elsewhere, we enter into management agreements with the managed practices and the limited management practices |
| Under those agreements, we provide management and other items and services to the practices in exchange for compensation |
| Although we believe that the practices comply with these laws, and although we attempt to structure our relationships with these practices in a manner that we believe keeps us from violating these laws (or in a manner that we believe does not trigger the law), state regulatory authorities or other parties could assert that the practices violate these laws and/or that our agreements with the practices violate these laws |
| Any such conclusion could adversely affect our financial results and operations |
| 28 ______________________________________________________________________ [57]Table of Contents Regulatory authorities or other persons could assert that our relationships with our owned practices, the managed practices or the limited management practices fail to comply with the anti-kickback law |
| If such a claim were successfully asserted, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements |
| If we were subject to penalties or are unable to successfully restructure the relationships to comply with the Anti-Kickback Statute it would have an adverse effect on our financial condition and results of operations |
| The anti-kickback provisions of the Social Security Act prohibit anyone from knowingly and willfully (a) soliciting or receiving any remuneration in return for referrals for items and services reimbursable under most federal health care programs; or (b) offering or paying any remuneration to induce a person to make referrals for items and services reimbursable under most federal health care programs, which we refer to as the “Anti-Kickback Statute” or “Anti-Kickback Law |
| ” The prohibited remuneration may be paid directly or indirectly, overtly or covertly, in cash or in kind |
| Violation of the Anti-Kickback Statute is a felony and criminal conviction results in a fine of not more than dlra25cmam000, imprisonment for not more than five years, or both |
| Further, the Secretary of the Department of Health and Human Services (“DHHS”) has the authority to exclude violators from all federal health care programs and/or impose civil monetary penalties of dlra50cmam000 for each violation and assess damages of not more than three times the total amount of remuneration offered, paid, solicited or received |
| As the result of a congressional mandate, the Office of the Inspector General (“OIG”) of DHHS promulgated a regulation specifying certain payment practices which the OIG determined to be at minimal risk for abuse |
| The OIG named these payment practices “Safe Harbors |
| ” If a payment arrangement fits within a Safe Harbor, it will be deemed not to violate the Anti-Kickback Statute |
| Merely because a payment arrangement does not comply with all of the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute |
| We receive fees under our agreements with the managed practices and the limited management practices for management and administrative services and equipment and supplies |
| We do not believe we are in a position to make or influence referrals of patients or services reimbursed under Medicare, Medicaid or other governmental programs |
| Because the provisions of the Anti-Kickback Statute are broadly worded and have been broadly interpreted by federal courts, however, it is possible that the government could take the position that we, as a result of our ownership of the owned practices, and as a result of our relationships with the limited management practices and the managed practices, will be subject, directly and indirectly, to the Anti-Kickback Statute |
| With respect to the managed practices and the limited management practices, we contract with the managed practices to provide general management services and limited management services, respectively |
| In return for those services, we receive compensation |
| The OIG has concluded that, depending on the facts of each particular arrangement, management arrangements may be subject to the Anti-Kickback Statute |
| In particular, an advisory opinion published by the OIG in 1998 (98-4) concluded that in a proposed management services arrangement where a management company was required to negotiate managed care contracts on behalf of the practice, the proposed arrangement could constitute prohibited remuneration where the management company would be reimbursed for its costs and paid a percentage of net practice revenues |
| Our management agreements with the managed practices and the limited management practices differ from the management agreement analyzed in Advisory Opinion 98-4 |
| Significantly, we believe we are not in a position to generate referrals for the managed practices or the limited management practices |
| In fact, our management agreements do not require us to negotiate managed care contracts on behalf of the managed practices or the limited management practices, or to provide marketing, advertising, public 29 ______________________________________________________________________ [58]Table of Contents relation services or practice expansion services to those practices |
| Because we do not undertake to generate referrals for the managed practices or the limited management practices, and the services provided to these practices differ in scope from those provided under Advisory Opinion 98-4, we believe that our management agreements with the managed practices and limited management practices do not violate the Anti-Kickback Statute |
| Nevertheless, although we believe we have structured our management agreements in such a manner as not to violate the Anti-Kickback Statute, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited remuneration |
| In such an event, our operations would be materially adversely affected |
| The relationship between the physicians employed by the owned practices and the owned practices is subject to the Anti-Kickback Statute as well because the employed physicians refer Medicare patients to the owned practices and the employed physicians receive compensation from the owned practices for services rendered on behalf of the owned practices |
| Nevertheless, we have tried to structure our arrangements with our physician employees to meet the employment Safe Harbor |
| Therefore, it is our position that the owned practices’ arrangements with their respective employed physicians do not violate the Anti-Kickback Statute |
| Nevertheless, if the relationship between the owned practices and their physician employees is determined not to be a bona fide employment relationship, this could have a material adverse effect on us |
| Our agreements with the limited management practices may also raise different Anti-Kickback concerns, but we believe that our arrangements are sufficiently different from those deemed suspect by the OIG so as not to violate the law |
| In April of 2003, the OIG issued a Special Advisory Bulletin where the OIG addressed contractual arrangements where a health care provider in one line of business (“Owner”) expands into a related health care business by contracting with an existing provider of a related item or service (“Manager”) to provide the new item or service to the Owner’s existing patient population |
| In those arrangements, the Manager not only manages the new line of business, but may also supply it with inventory, employees, space, billing and other services |
| In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager, receiving in return the profits of the business as remuneration for its federal program referrals to the Manager |
| According to the OIG, contractual joint ventures have the following characteristics: (i) the establishment of a new line of business; (ii) a captive referral base; (iii) the Owner lacks business risk; (iv) the Manager is a would be competitor of the Owner’s new line of business; (v) the scope of services provided by the Manager is extremely broad, with the manager providing: day to day management; billing; equipment; personnel; office space; training; health care items, supplies and services; (vi) the practical effect of the arrangement is to enable the Owner to bill insurers and patients for business otherwise provided by the Manager; (vii) the parties agree to a non-compete clause barring the Owner from providing items or services to any patient other than those coming from the Owner and/or barring the Manager from providing services in its own right to the Owner’s patients |
| We have attempted to draft our agreements with the limited management practices in a manner that takes into account the concerns in the Special Advisory Bulletin |
| Specifically, under our arrangements, the limited management practice takes business risk |
| It is financially responsible for the following costs: the space required to provide the services; employment costs of the personnel providing the services and intake personnel; and billing and collections |
| We do not reimburse the limited management practice for any of these costs |
| We provide solely equipment, supplies and our management expertise |
| In return for these items and services, we receive a percentage of the limited management practice’s collections from the services being managed by us |
| Consequently, we believe that the limited management practice is not being compensated for its referrals |
| Although we believe that our arrangements with the limited management practices do not violate the Anti-Kickback Statute for the reasons specified above, we cannot guarantee that our arrangements will be free from scrutiny by the OIG or that the OIG would not conclude that these arrangements violate the Anti-Kickback Statute |
| In the event the OIG were to conclude that these arrangements violate the Anti-Kickback Statute, this would have a material adverse effect on us |
| 30 ______________________________________________________________________ [59]Table of Contents State regulatory authorities or other parties may assert that we are engaged in the corporate practice of medicine |
| If such a claim were successfully asserted, we could be subject to civil, and perhaps criminal, penalties and could be required to restructure or terminate the applicable contractual arrangements |
| This result, or our inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business and results of operations |
| Many states in which we do business have corporate practice of medicine laws which prohibit us from exercising control over the medical judgments or decisions of physicians |
| These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion |
| We enter into management agreements with managed practices and limited management practices |
| Under those agreements, we provide management and other items and services to the practices in exchange for a service fee |
| We structure our relationships with the practices in a manner that we believe keeps us from engaging in the corporate practice of medicine or exercising control over the medical judgments or decisions of the practices or their physicians |
| Nevertheless, state regulatory authorities or other parties could assert that our agreements violate these laws |
| Regulatory authorities or others may assert that our agreements with limited management practices or managed practices, or our owned practices, violate state fee splitting laws |
| If such a claim were successfully asserted, we could be subject to civil and perhaps criminal penalties, and could be required to restructure or terminate the applicable contractual arrangements |
| The laws of many states prohibit physicians from splitting fees with non-physicians (or other physicians) |
| These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion |
| The relationship between us on the one hand, and the managed practices and limited management practices, on the other hand, may raise issues in some states with fee splitting prohibitions |
| Although we have attempted to structure our contracts with the managed practices and the limited management practices in a manner that keeps us from violating prohibitions on fee splitting, state regulatory authorities or other parties may assert that we are engaged in practices that constitute fee-splitting, which would have a material adverse effect on us |
| Our use and disclosure of patient information is subject to privacy regulations |
| Numerous state, federal and international laws and regulations govern the collection, dissemination, use and confidentiality of patient-identifiable health information, including the federal Health Insurance Portability and Accountability Act of 1996 and related rules, or HIPAA In the provision of services to our patients, we may collect, use, maintain and transmit patient information in ways that may or will be subject to many of these laws and regulations |
| The three rules that were promulgated pursuant to HIPAA that could most significantly affect our business are the Standards for Electronic Transactions, or Transactions Rule; the Standards for Privacy of Individually Identifiable Health Information, or Privacy Rule; and the Health Insurance Reform; Security Standards, or Security Rule |
| The respective compliance dates for these rules for most entities were October 16, 2002, April 16, 2003 and April 21, 2005 |
| HIPAA applies to covered entities, which include most health care providers that will contract for the use of our services |
| HIPAA requires covered entities to bind contractors to comply with certain burdensome HIPAA requirements |
| Other federal and state laws restricting the use and protecting the privacy of patient information also apply to us, either directly or indirectly |
| The HIPAA Transactions Rule establishes format and data content standards for eight of the most common health care transactions |
| When we perform billing and collection services for our owned 31 ______________________________________________________________________ [60]Table of Contents practices or managed practices we may be engaging in one or more of these standard transactions and will be required to conduct those transactions in compliance with the required standards |
| The HIPAA Privacy Rule restricts the use and disclosure of patient information, requires covered entities to safeguard that information and to provide certain rights to individuals with respect to that information |
| The HIPAA Security Rule establishes elaborate requirements for safeguarding patient information transmitted or stored electronically |
| We may be required to make costly system purchases and modifications to comply with the HIPAA requirements that are imposed on us and our failure to comply may result in liability and adversely affect our business |
| Federal and state consumer protection laws are being applied increasingly by the Federal Trade Commission, or FTC, and state attorneys general, to regulate the collection, use and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of website content |
| Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access |
| Numerous other federal and state laws protect the confidentiality of private information |
| These laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and potentially exposing us to additional expense, adverse publicity and liability |
| Other countries also have, or are developing, laws governing the collection, use and transmission of personal or patient information and, if applicable, these laws could create liability for us or increase our cost of doing business |
| New health information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle health care related data, and the cost of complying with these standards could be significant |
| If we do not properly comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions |
| Risks Related to Our Common Stock Because we use our common stock as consideration for our acquisitions, your interest in our company will be significantly diluted |
| In addition, if the investors in our recent financings convert their debentures and notes, or if we elect to pay principal and/or interest on the debentures and notes with shares of our common stock or anti-dilution rights in these securities are triggered, our existing shareholders will experience significant dilution |
| We have used, and we expect in the future to use, our common stock as consideration for our acquisitions |
| In addition, a significant amount of our acquisitions’ purchase price is contingent upon future performance |
| We expect to issue a significant amount of our common stock to pay contingent purchase prices for previous acquisitions |
| In addition, because the value of the stock we issue as payment of contingent consideration is not fixed, to the extent our stock price decreases our existing shareholders interest in our company will be even more diluted by the payment of contingent consideration |
| To the extent that our outstanding debentures and notes are converted, a significantly greater number of shares of our common stock will be outstanding and the interests of our existing stockholders will be substantially diluted |
| In addition, if we complete a financing at a price per share that is less than the conversion price of our debentures and notes, the conversion price of our debentures and notes will be reduced to the financing price |
| We cannot predict whether or how many additional shares of our common stock will become issuable as a result of these provisions |
| Hence, such amounts could be substantial |
| Additionally, we may elect to make payments of principal and interest on the debentures and the notes in shares of our common stock, which could result in increased downward pressure on our stock price and further dilution to our existing stockholders |
| 32 ______________________________________________________________________ [61]Table of Contents Future sales of our common stock in the public market, including sales by our stockholders with significant holdings, may depress our stock price |
| In 2004, we filed registration statements registering the resale of 49cmam376cmam123 shares, which includes shares issuable upon conversion of convertible notes and debentures, upon exercise of options and warrants and shares that are issuable pursuant to the earnout provisions of various business acquisitions |
| The market price of our common stock could drop due to sales of a large number of shares or the perception that such sales could occur, including sales or perceived sales by our directors, officers or principal stockholders |
| These factors also could make it more difficult to raise funds through future offerings of common stock |
| There is a limited market for our common stock and the market price of our common stock has been volatile |
| There is a limited market for our common stock |
| There can be no assurance that an active trading market for the common stock will be developed or maintained |
| Historically, the market prices for securities of companies like us have been highly volatile |
| In fact, since January 1, 2002, our common stock price has ranged from a low of dlra0dtta12 to a high of dlra5dtta45 (as determined on a reverse-split basis) |
| The market price of the shares could continue to be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the shares, announcements of potential business acquisitions, and changes in general market conditions |
| We do not expect to pay dividends |
| Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors |
| The Board of Directors is not expected to declare dividends or make any other distributions in the foreseeable future, but instead intends to retain earnings, if any, for use in business operations |
| In addition, the securities purchase agreement for our convertible notes contains restrictions on the payment of dividends |
| Accordingly, investors should not rely on the payment of dividends in considering an investment in our Company |
| Provisions of Florida law and our charter documents may hinder a change of control and therefore depress the price of our common stock |
| Our articles of incorporation, our bylaws and Florida law contain provisions that could have the effect of delaying, deferring or preventing a change in control of us by various means such as a tender offer or merger not approved by our board of directors |
| These provisions may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders |
| These provisions may also entrench our management by making it more difficult for a potential acquirer to replace or remove our management or board of directors |