CORRESP 1 filename1.htm Unassociated Document

FIRST SURGICAL PARTNERS INC.
411 First Street
Bellaire, Texas  77401

March 4, 2011

John Reynolds, Assistant Director
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549

 
Re:
First Surgical Partners Inc. (f/k/a Arkson Nutraceuticals Corp.)
Form 8-K
Filed January 6, 2011
File No. 000-52458

Mr. Reynolds:

The following responses address the comments of the Staff (the “Staff”) as set forth in its letter dated February 2, 2011 (the “Comment Letter”) relating to the Form 8-K filed January 6, 2011 (the “2011 Form 8-K”) of First Surgical Partners Inc. (f/k/a Arkson Nutraceuticals Corp). (“First Surgical”, “Arkson” or the "Company").

The numbers of the responses in this letter correspond to the numbers of the Staff’s comments as set forth in the Comment Letter.  Attached as Exhibit A is a draft of the Form 8-K Current Report we intend to file with the Commission upon clearing comments.

Form 8-K, filed January 6, 2011

Overview, page 1

1.    Please provide the disclosure required by Item 101(h) of Regulation S-K. For example, please provide disclosure about the December 1, 2010 acquisition of Piper Acquisition III by First Surgical Texas, as discussed in footnote one to the financial statements. Also, discuss the date and state of incorporation for each subsidiary.

Response

Footnote #1 has been revised to disclose that First Surgical Texas Inc. (f/k/a Piper Acquisition III, Inc.) (“First Texas”) acquired First Street Surgical Center, L.P., First Surgical Woodlands, L.P., and First Street Hospital, L.P. (collectively, the “Subsidiaries”) on December 1, 2010.  First Texas was in turn acquired by Arkson on December 31, 2010.  We have revised the Business section to disclose the transaction between First Texas (formerly Piper) and the subsidiaries.
 
 
 

 

2.   We note that the acquisition of Piper Acquisition III by First Surgical on December 1, 2010. However, the agreement between Arkson and Piper Acquisition was entered into on November 4, 2010, filed as Exhibit 10.1 reflects that the merger had already occurred. Please explain and disclose the reason(s) for the acquisition of Piper Acquisition by First Surgical.

Response

On November 4, 2010, First Texas (formerly Piper) entered a contribution agreement with Arkson pursuant to which the shareholders of Arkson agreed to contribute their shares of First Texas to Arkson.  The contribution Agreement dated November 4, 2010 specifically states in the first “Whereas” clause that First Texas is in the process of consolidating ASCs.  Subsequent to the signing of the November 4, 2010 agreement, on December 1, 2010, First Texas acquired the Subsidiaries.  On December 31, 2010, Arkson then acquired First Texas.  With the revisions provided in response to comment #1, we believe we have addressed this comment.

3.    Please provide a more detailed discussion of your business, as required by Item 101(h)(4)(i) of Regulation S-K. In addition, please discuss how long you have been conducting your business.

Response

We have revised the overview section to provide more detailed disclosure.  We have disclosed that we are focused in providing non life-threatening surgeries at our two centers and one acute care hospital.  Further, we have disclosed that we provide bariatric, reconstructive and cosmetic plastics, orthopedics, pain management, neurosurgery and podiatry services in the greater Houston area.

4.    Please disclose the material terms of the contribution agreement as amended, including any finders’ fees or other consideration provided in the agreement.

Response

We have revised the Overview section to provide additional details regarding the transaction.  Please note that no finders fees have been paid by the Company.

5.   Please describe more fully, and provide your basis for the statements made in your Overview and Industry Background. For instance, it is unclear how the ambulatory surgical center (ASC) model allows surgeons to exercise a higher degree of control over their cases and operate more efficiently or how your business model allows surgeons to operate more efficiently than the typical hospital environment.

Response

We have revised the Overview section as requested.

 
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Industry Background, page 2

6.   We note that First Surgical Partners L.L.C.’s website, in the FAQ’s section, states that state and federal licenses are required in order to operate an ASC. We also note the risk factor discussing the approvals required prior to constructing, acquiring or expanding additional surgical facilities. Please discuss the governmental regulation of your business, and the licensing involved, as required by Item 101(h)(4)(viii) of Regulation SK.

Response

Please note, as stated in the risk factor, the State of Texas, our only area of operation, there are no approvals necessary for the construction, acquisition or expansion of additional surgical facilities.  The risk factor specifically states “[a]lthough we have not previously been required to obtain a certificate in the State of Texas, we may not be able to obtain the certificates of need or other required approvals for additional or expanded facilities or services in the future.”

Further, the Government Regulation section of the Business section provides an extensive discussion of all regulation including Medicare/Medicaid Participation, Federal anti-kickback laws, physician self referral laws, false and improper claims and HIPAA compliance.

7.   Discuss in greater detail how you identify the physicians to utilize your facilities. In addition, we note the disclosure on page two that you have an operating model “through the purchase of equity to encourage physicians to affiliate” with your company and use your facilities. Please disclose the terms of these arrangements and discuss the percent of your revenues that are attributable to these physicians. Lastly, we note the disclosure on page six regarding the safe harbors under the anti-kickback statute relating to surgery centers. Please provide a more specific discussion of the “certain conditions.”

Response

We have revised the section titled “Our Business Strategy – Attract and retain top quality surgeons and other physicians” to provide a more detailed discussion of the Company’s plan to indentify surgeons.

Bariatric Program Sponsorship Agreement, page 3

8.   We note the company’s responsibility to pay a monthly $200,000 program sponsorship fee and its responsibility to furnish “office space, facilities, equipment, utilities, furniture, fixtures, office supplies, postage, courier services, and other outside services as may be reasonably required to operate the program.” Please revise to more fully discuss the services rendered by Vital Weight Control, Inc., d/b/a NuWeigh pursuant to the Bariatric Program Sponsorship Agreement and the role of the company pursuant to this agreement.

Response

We have revised to more fully discuss the role of Vital and the Company pursuant to the bariatric program.

 
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Competition, page 4

9.   Please provide the basis for your statements made in this section. For instance, it is unclear why the company believes that the hospitals with which it competes provide less efficiency and responsiveness to physician needs.

Response

We have revised the “Competition” section in response to your comment.

Government Regulation, page 9

10.  We note the company has two ASC and one general acute care hospital. We further note the company’s statement on page four that “[a]ll of [its] short stay surgical facilities are certified or, with respect to newly acquired or developed facilities, are awaiting certification to participate in the Medicare program.” Please revise to clarify what facilities are currently awaiting Medicare certification.

Response

We have revised the statement to reflect that all of our facilities are currently CMS certified.

Risk Factors, page 9

11.  Please remove the statement that “this section does not describe all risks that may be applicable to us, our industry, or our business, and it is intended only as a summary of certain material risk factors.” All known, material risks should be discussed in this section.

Response

We have revised the statement as requested.

The growth of our patient receivables…, page 15

12.  We note that your doubtful account allowance represented approximately 41.4% of your gross accounts receivable balance at December 31, 2009. Please clarify how much of your allowance represented an allowance for doubtful accounts and how much represented an allowance for contractual adjustments.
 
 
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Response

The amount we had reflected in this risk factor was materially comprised of non-contractual and other billing adjustments, and does not include bad debts.  We do not extend credit to our payers and as a result do not incur a material  amount of bad debt expense.  Most of our revenue is derived from insurance carriers and third party payers minimizing the uncertain collectability on an outstanding balance.  Any patient balance that would be subject to bad debt falls under insurance co-pays and patient deductibles which are collected prior to performing the surgical procedure.  All non-third party payers (e.g. cash or self pay) surgical procedures are negotiated prior to surgery, and payments are made prior to or on the day of surgery.  Accordingly, as there is no significant level of doubtful accounts, we have removed the risk factor.

We have also modified our disclosure throughout to clarify the nature of our “net” revenues and the required adjustments thereto.

Management’s Discussion and Analysis, page 17

13.  The Management’s Discussion and Analysis section is one of the most critical aspects of your disclosure. As such, we request that you revise this section to provide a more detailed executive overview to discuss the events, trends, and uncertainties that management views as most critical to your future revenues, financial position, liquidity, plan of operations, and results of operations, to the extent known and foreseeable. To assist you in this regard, please refer to the Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, Release Nos. 33-8350 (December 19, 2003) at http://www.sec.gov/rules/interp/33-8350.htm. This guidance is intended to elicit more meaningful disclosure in MD&A in a number of areas, including the overall presentation and focus of MD&A, with general emphasis on the discussion and analysis of known trends, demands, commitments, events and uncertainties, and specific guidance on disclosures about liquidity, capital resources, and critical accounting. Include a discussion of the increase in patient receivables and any deterioration in collectability.

Response

We have revised the overview to provide a more detailed executive overview.

Application of Critical Accounting Policies and Estimates, page 18

Allowance for Contractual Adjustments and Uncollectibles, page 19

14.  Please expand your discussion regarding the allowance for contractual adjustments and uncollectibles to include the following:
 
 
·
For each period presented quantify and disclose the amount of changes in estimates of prior period contractual allowances and discounts recorded during the current period and explain the reasons for material changes recorded.
 
 
·
 Quantify and disclose the reasonably possible effects that a change in estimate of unsettled amounts from third-party payors as of the latest balance sheet could have on financial position and operations.
 
 
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·
Disclose in a comparative tabular format the aging of accounts receivable. The aging schedule may be based on management’s own reporting criteria (e.g., unbilled, less than 30 days, 30 to 60 days, etc.) or some other reasonable presentation. At a minimum, the disclosure should indicate the past due amounts and a breakdown by payor class. If your billing system does not have the capacity to provide an aging schedule of your receivables, disclose that fact and clarify how this affects your ability to estimate your allowance for doubtful accounts.

Response

As noted previously, we do not extend credit to our payers and as a result do not incur a material amount of bad debt expense.  Most of our revenue is derived from insurance carriers and third party payers minimizing the uncertain collectability on an outstanding balance.  Any patient balance that would be subject to bad debt falls under insurance co-pays and patient deductibles which are collected prior to performing the surgical procedure.  All non-third party payers (e.g. cash or self pay) surgical procedures are negotiated prior to surgery, and payments are made prior to or on the day of surgery.

We have also modified our disclosure throughout to clarify the nature of our “net” revenues and the required adjustments thereto.

We have also revised the MD&A to include the following statement:

During all periods reported herein, the Company does not expect a material change in the estimate of prior period allowances for contractual and other adjustments. Further, we do not foresee any changes in our estimate of unsettled amount from third party payors as of the latest balance sheet date that could have a material impact on our financial position, results of operations or cash flows.

Results of Operations, page 19

15.  We note that your revenues during 2010 increased when compared to 2009 as a result of increases in hospital cases, which was offset by a decrease in surgical cases. Please tell us and discuss to the extent meaningful to an investor’s understand of your business the difference in margins generated by hospital cases compared to surgical cases, and describe how the trends in the types of cases impacted your results of operations for each comparison provided.

Response

We have expanded our discussion to provide for further clarity.

16. We note on page 23 that the billing per case was less in 2009 compared to 2008. Please discuss in quantitative terms the impact changes in price had on your revenues compared to changes in volume and the underlying reasons for the changes.

 
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Response

We have revised our disclosure to address your comment.

17. Please disclose whether your results of operations will include the management fees in the future.

Response

We have revised the Results of Operations to discuss that the management agreements are still in effect and that we will be making payments to First Surgical Partners LLC according to the terms set forth in the agreements.

18.  Please provide a more detailed discussion of the reason(s) for the changes in the various financial statement line items. For instance, we note the 34.7% increase in hospital cases during the three months ended September 30, 2010, as compared to 2009. Please revise to discuss the reasons behind this increase. See Item 303(a)(3) of Regulation S-K.

Response

We have revised our disclosure to address your comment.

19.  We note references to management agreements with First Surgical Partners LLC. Please disclose whether these agreements are still in place. If so, please file as exhibits and discuss the material terms.

Response

We have revised the Results of Operations to discuss that the management agreements are still in effect and that we will be making payments to First Surgical Partners LLC according to the terms set forth in the agreements.

20.  We note that you have over $11 million in long term debt. Please discuss in the liquidity section. Disclose the material terms of any material agreements and file any material agreements as exhibits.

Response

We have amended our disclosure to discuss the Company’s long-term debt in the liquidity section and have filed any material agreements as exhibits.

Contractual Obligations, page 24

21.  We note that payments for “lines of credit” include interest payments at the applicable rates as of December 31, 2009. Please clarify whether payments for “long-term debt and capital leases” include interest payments. To the extent they do not, please revise to include estimates for interest payments or tell us why such a revision is not meaningful.

 
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See Item 303(A)(5) of Regulation S-K.

Response

We have amended the disclosure to include estimates for interest payments on long-term debt and capital leases.

22.  Please present separately the contractual obligations related to capital leases and long-term debt. Refer to Item 303(a)(5) of Regulation S-K.

Response

We have amended the disclosure to separately show contractual obligations related to capital leases and long-term debt.

Management, page 25

23.  Please revise each director’s background to discuss the “specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director” for the company. See Item 401(e) of Regulation S-K.

Response

We have revised to provide a discussion of the specific experience, qualifications and attributes or skills that led to the conclusion that each of the directors should serve our company.

24.  Please revise the background information for each director and executive officer, as appropriate, to provide employment titles and beginning and end dates for each employment discussed and/or directorship. For instance, please clarify how long Dr. Varnon was President and Chief Executive Officer of Jeval Medical Laboratories and what titles Tony Rotondo held, and for how long, while in senior management with HealthSouth, Physicians Surgical Care, and National Surgery Centers. See Items 401(a), (b) and (e) of Regulation S-K.

Response

We have revised the background information to provide specific titles and dates for each executive officer and director.

25.  We note Don Knight is VP of Finance and has been included in the Summary Compensation Table. Please provide the business experience for Mr. Knight as required by Item 401(e) of Regulation S-K.

Response

We have revised to include Don Knight in the Management section.

 
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26.  Please revise to provide the information required by Item 407(a) of Regulation S-K. In this regard, we note there is no discussion of director independence.

Response

We have revised the filing to include a discussion of director independence as well as board committees.

Executive Compensation, page 26

27.  Please provide the disclosure required by Item 402(o) of Regulation S-K. Include in your discussion the material terms of the management agreements between First Surgical Partners, L.L.C. and both First Street Hospital, L.P. and First Surgical Woodlands, L.P. In addition, to the extent the compensation arrangements have or will change as a result of the reverse merger with a public company, clearly discuss the material changes. Lastly, clarify whether you have entered into any employment agreements, written or otherwise, with your named executive officers.

Response

We have revised to include material terms of the management agreements in the executive compensation section.  Further, we have confirmed that the management agreements have remained in operation since the closing of the acquisition of the subsidiaries by Arkson.  Further, we have stated that there are no employment agreements between the company and an executive officer.

28.  We note the disclosure in the Certain Relationships and Related Transactions section regarding the management agreements. Please explain how you determined the amount that was included in the all other compensation column for Messrs. Varon and Rotondo.

Response

We have revised footnote 1 to state that the amount stated in the “All Other Compensation” column for Dr. Varon and Mr. Rotondo represents half of the payments made to First Surgical Partners LLC as Dr. Varon and Mr. Rotondo own half each of such entity.

Certain Relationships and Related Transactions, page 26

29. The financial statements reflect $604,000 due from affiliates. Please provide disclosure in this section of these transactions.

Response

We have revised the Certain Relationships and Related Transactions section to discuss the $604,000 due from an affiliate.

30.  Please file the $700,000 line of credit as an exhibit. In addition, please identify the shareholder who provided the loan and the shareholder from whom you lease a building.

 
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Please disclose the lease payments made during the time periods required by Item 404 of Regulation S-K.

Response

We have revised the Form 8-K to include the line of credit as Exhibit 4.8.

Security Ownership of Certain Beneficial Owners and Management, page 27

31.  We note the voting agreement filed as exhibit 10.5. Please disclose the material terms and disclose the impact this has upon the beneficial ownership table.

Response

We have revised this section to discuss the material terms of the voting agreement and discussed the voting agreement within the beneficial ownership table.

Market for Common Equity and Related Stockholder Matters, page 28

32.  We note your disclosure that there has been no active trading and, therefore, no high and low bid prices in the company’s common stock. We further note that the company discloses the quarterly high and low share prices in its Form 10-K for the fiscal year ended June 30, 2010 and the change in company operations due to the reverse merger since that time. See Item 201 of Regulation S-K. Please reconcile or advise.

Response

We have revised the Form 8-K to include the appropriate disclosure relating to the Company’s common stock.

Exhibits

33.  We note that exhibits 4.1 through 10.1, 10.7, and 10.9 through 10.11 are filed in an improper electronic format. Please note that while you may file electronic documents as an image as an unofficial copy, you must still file your exhibits with an acceptable electronic format. Refer to Rule 102(a) of Regulation S-T and Section 2.1 of Volume II of the EDGAR Filer Manual. Please revise. Lastly, please file the executed exhibits 10.3, 10.4 and 10.5, rather than the form of the agreement.

Response

We have revised to include all exhibits in the required searchable format.  Please note that filing the executed exhibits 10.3, 10.4 and 10.5 as opposed to the forms would impose an unnecessary financial burden on the Company as we would be required to file approximately 90 agreements.  Further, as the agreements are essentially identical with respect to the materials terms, the reader will not gain any material advantage from reading the “form” copy filed as opposed to the executed copy.

 
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34.  We note that you have not filed all exhibits required by Item 601 of Regulation S-K. For instance, the company did not include as its exhibits hereto, a copy of the company’s articles of incorporation or bylaws, and any amendments thereto, and the subsidiaries of the registrant.

Response

We have amended the Super 8-K to provide a copy of the Company’s articles of incorporation, bylaws and amendments.  Please note that Item 601 only requires the inclusion of the registrant’s articles, bylaws and amendments.  Item 601 does not require that such documents be filed for a registrants subsidiaries.

35.  We note that exhibits 10.1 and 10.8 are missing schedules, exhibits or attachments.  Please file these exhibits in their entirety as required by Item 601(b)(10) of Regulation SK.

Response

We have included the missing schedules, exhibits or attachments with exhibit 10.1 and 10.8.

Financial Statements of First Surgical Texas, Inc. as of and for the Two Years Ended December 31, 2009 and 2008, Exhibit 99.1

Consolidated Balance Sheets, page 2

36.  Please tell us how have applied SAB Topic 4:B, which requires you to reclassify your retained earnings to additional paid-in capital as of the date you converted to a C corporation.

Response

With respect to our review of the application of SAB Topic 4B, we believe that the reclassification of retained earnings of the prior entities to additional paid in capital should occur as of the date of the execution of such change. Please note that this change did not occur until December 1, 2010, which is after the most recent financial results presented in this 8-K (September 30, 2010). We believe that this treatment is different that the reporting requirement for reverse acquisitions, which requires retroactive presentation of the newly consolidated entity to the earliest period presented.  We will ensure such reclassification is reflected in the Company’s Form 10-K for the year ended December 31, 2010.

Consolidated Statements of Operations, page 3

37.  It appears the operations of the company were formerly exempted from taxes. Therefore, please provide pro forma tax and earnings per share data on the face of historical statements for at least the latest fiscal year and interim period.

 
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Response

First Street Surgical Center LP, First Surgical Woodlands, and First Street Hospital LP are all Texas Limited Partnership.  Each entity was responsible for its own tax filing and compliance.  For 2009 and prior each entity filed a U.S. Return of Partnership Income (Form 1065) which allocated each partners’ share of income/loss on an individual basis (Schedule K-1) which made the partner solely responsible for paying federal income taxes on each individual income tax return.  For 2010, each partnership listed above will report their income on the same Form 1065 up through November 30, 2010.  The remaining month of the calendar year end partnerships will report that income under a U.S. Return for Corporate Income (Form 1120) for First Surgical Partners Inc. (f/k/a Arkson Nutraceuticals, Inc.).

We have attempted to identify the authoritative literature that sets for the requirement to present pro-forma tax and earnings per share data on the face of the historical statements and have been unable to do so and respectfully request you direct us to where we might find such.  We have disclosed, within Management’s Discussion and Analysis what we believe our effective tax rate to be in 2011.
 
38.  Please tell us and disclose the amount of bad debt expense for each period presented. In addition, tell us where you classified bad debt expense within your statements of operations.

Response

As noted previously, we do not extend credit to our payers and as a result do not incur a material amount of bad debt expense, or at such a level that would require separate disclosure.  Most of our revenue is derived from insurance carriers and third party payers minimizing the uncertain collectability on an outstanding balance.  Any patient balance that would be subject to bad debt falls under insurance co-pays and patient deductibles which are collected prior to performing the surgical procedure.  All non-third party payers (e.g. cash or self pay) surgical procedures are negotiated prior to surgery, and payments are made prior to or on the day of surgery.

We have also modified our disclosure throughout to clarify the nature of our “net” revenues and the required adjustments thereto.

Note 1. Organization and Description of Business, page 6

39.  We note that First Surgical Texas, Inc. exchanged shares with Piper Acquisition III, Inc. Please disclose when and how First Street Surgical Center, L.P., First Surgical Woodlands, L.P., and First Street Hospital, L.P. became organized into First Surgical Texas, Inc. In addition, provide us with the agreements related to your organization into First Surgical Texas, Inc. Last, tell us whether any entities or individuals possess an ownership interest in the ASCs or hospital other than First Surgical Texas, Inc.

 
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Response

We have revised Note 1 to more clearly depict the acquisition by Piper Acquisition III, Inc. of the three limited partnerships containing the Company’s operations.  No other entities or individuals possess an ownership interest in the ASCs or hospital other than First Surgical Texas, Inc.

40.  Please disclose as a subsequent event the terms of the merger with Arkson Nutraceuticals Corp.

Response

We have disclosed as a subsequent event the terms of the merger with Arkson Nutraceuticals Corp.

41.  We note your statement that the financial statements of the legal acquirer are not significant, and therefore you have not submitted pro forma financial information. It appears to us that the reverse merger would have impacted the equity of First Surgical Texas, Inc. Please explain to us in quantitative and qualitative terms how you determined that pro forma financial statements would not be meaningful in understanding the recapitalization’s effect on the equity and earnings per share of First Surgical Texas, Inc., or provide pro forma financial information giving effect to the recapitalization between Arkson Nutraceuticals Corp. and First Surgical Texas, Inc.

Response

We have revised Note 1 to more clearly depict the acquisition by Piper Acquisition III, Inc. of the three limited partnerships containing the Company’s operations.  It is the historical financials of Piper Acquisition III which are not significant (as of December 31, 2009, Piper Acquisition III’s balance sheet consisted of $50,658 of cash, $2,300 of accrued expenses and $48,358 of shareholders’ equity).

Note 2. Summary of Significant Accounting Policies, page 6

42.  We note in your description of business that you operate two ASCs and a general acute hospital. We further noted on page 21 that hospital cases increased 17.9% while surgical cases decreased 4% when comparing the nine months ended September 30, 2010 to the comparable period of 2009. Please provide us with your analysis of FASB ASC 280 in determining whether your ASCs and hospital represented two separate reportable units.

Response

The Company treats the consolidated entity as one reporting unit for segment reporting purposes. The basis for this determination is based on the specific operating characteristics in accordance with FASB ASC 280-10-50-11, namely the similar nature of operations of the Company’s subsidiaries, the similarity in services provided and types of clientele, and the existence of one regulatory environment governing our operations.

 
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Revenue recognition, page 7

43.  We note you present gross patient service revenue, which is reduced by an allowance for contractual adjustments and uncollectibles in arriving at net patient service revenue. Please explain to us why you believe presentation of gross revenue is relevant to an investor’s understanding of your financial statements, and tell us how you considered Item 10(e) of Regulation S-K in presenting disclosures related to non-GAAP measures. It appears to us your measure of gross revenue represents amounts billed that do not meet the criteria within SAB Topic 13:A.1 to be recognized as revenue.

Response

After further review, we agree with your conclusion that the Company’s revenues should only be presented as “net” with no reference to “gross” revenue before adjustment.  We have modified our disclosure accordingly.

Form 10-K, filed August 26, 2010

44.  Please confirm that in future filings you will include the signature of the company’s principal accounting officer or controller. See Form 10-K, General Instructions D(2)(a).

Response

In future filings, Don Knight, VP of Finance, will sign all filings as the Principal Accounting Officer.

The Company hereby acknowledges that:

 
·
The company is responsible for the adequacy and accuracy of the disclosure in the filing;

 
·
Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and

 
·
The company may not assert staff comments as a defense in any proceeding initiated by the commission or any person under the federal securities laws of the United States.

**********************

Please do not hesitate to contact our attorney, Stephen Fleming, at 516-833-5034 if you have any questions or comments. Thank you.

 
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Very truly yours,
   
 
/s/Anthony Rotondo
   
 
Anthony Rotondo, CEO

 
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): December 31, 2010

FIRST SURGICAL PARTNERS INC.
(Exact name of registrant as specified in its charter)

ARKSON NUTRACEUTICALS CORP.
(Former Name of Registrant)

Delaware
 
000-52458
 
51-0383940
(State or Other Jurisdiction of Incorporation)
  
(Commission File Number)
  
(IRS Employer Identification Number)

411 First Street
Bellaire, Texas  77401
(Address of principal executive offices) (zip code)

713-665-1111
(Registrant's telephone number, including area code)

Copies to:
Stephen M. Fleming, Esq.
Law Offices of Stephen M. Fleming PLLC
49 Front Street, Suite 206
Rockville Centre, New York 11570
Phone: (516) 833-5034
Fax: (516) 977-1209

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 8-K and other reports filed by First Surgical Partners Inc. (f/k/a Arkson Nutraceuticals, Inc.), a Delaware corporation (“First Surgical” “Arkson”) or the “Company”), from time to time with the Securities and Exchange Commission (collectively the "Filings") contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used in the filings the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan" or the negative of these terms and similar expressions as they relate to the Company’s or Company’s management identify forward looking statements.  Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this report entitled "Risk Factors") relating to the Company’s industry, the Company’s operations and results of operations and any businesses that may be acquired by the Company. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although the Company’s management believes that the expectations reflected in the forward looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the Company's financial statements and the related notes filed with this Form 8-K.

In this Form 8-K, references to "we," "our," "us," the "Company," “First Surgical,” or "Arkson" refer First Surgical Partners Inc., a Delaware corporation.

Item 1.01 Entry into a Material Definitive Agreement.
Item 2.01  Completion of Acquisition or Disposition of Assets.

On November 4, 2010, we entered into a Contribution Agreement with the shareholders of First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc.), a Nevada corporation (“First Surgical Texas”), each of which are accredited investors (“First Surgical Texas Shareholders”) pursuant to which the First Surgical Texas Shareholders agreed to contribute 100% of the outstanding securities of First Surgical Texas in exchange for 39,964,346 shares of our common stock (the “First Surgical Texas Contribution”).   On November 24, 2010, we entered an agreement with First Surgical Texas to extend the closing date to December 31, 2010 in consideration of a payment of $7,500.  The First Surgical Texas Contribution closed on December 31, 2010.  First Surgical Texas was incorporated in the State of Nevada on August 26, 2008.  Considering that, following the contribution, the First Surgical Texas Shareholders control the majority of our outstanding common stock and we effectively succeeded our otherwise minimal operations to those that are theirs, First Surgical Texas is considered the accounting acquirer in this reverse-merger transaction.  A reverse-merger transaction is considered, and accounted for as, a capital transaction in substance; it is equivalent to the issuance of First Surgical Texas securities for our net monetary assets, which are deminimus, accompanied by a recapitalization. Accordingly, we have not recognized any goodwill or other intangible assets in connection with this transaction.  First Surgical is the surviving and continuing entity and the historical financials following the reverse merger transaction will be those of First Surgical Texas.  We were a "shell company" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to our acquisition of First Surgical Texas pursuant to the terms of the Contribution Agreement.  As a result of such acquisition, our operations our now focused on the ownership and operation of two ambulatory surgery centers (“ASC”) and a general acute care hospital. Consequently, we believe that acquisition has caused us to cease to be a shell company as we no longer have nominal operations.

On December 31, 2010, the Company entered into an Agreement and Release with David Roff, a shareholder of the Company, pursuant to which Mr. Roff returned 36,111 shares of common stock of the Company to the Company for cancellation and has provided a full release of the Company in consideration of $300,000 less the repayment of any shareholder loans or accounts payable.

Prior to the closing of the First Surgical Texas contribution, First Surgical Texas acquired First Street Surgical Center, L.P. (“FSSC”), First Surgical Woodlands, L.P. (“FSW”), and First Street Hospital, L.P. (“FSH”) (collectively, the “Subsidiaries”) from the former partners.  FSSC, FSW and FSH are each limited partnerships formed in the State of Texas on December 6, 2002, April 1, 2005, and March 17, 2006, respectively.

Effective February 18, 2011, the  Company changed its name to “First Surgical Partners Inc.”  In addition, effective February 22, 2011, the Company’s quotation symbol on the Over-the-Counter Bulletin Board was changed from AKSN to FSPI.  The new CUSIP number is 337139109.

Overview

First Surgical Texas operates two ambulatory surgery centers (“ASC”) and a general acute care hospital in the Houston area.  First Surgical Texas partners with top surgeons in the local medical community to perform non life-threatening surgeries at these locations.  The procedures performed include bariatric, reconstructive and cosmetic plastics, orthopedics, pain management, neurosurgery and podiatry, all of which are often completed on an outpatient or short stay basis.  Each of the First Surgical Texas facilities resides within its own limited partnership, which is wholly owned by First Surgical Texas.  Since inception, our surgeons have performed nearly 33,000 procedures.  FSSC, FSW and FSH commenced operations in the State of Texas in 2003, 2005 and 2006, respectively.

First Surgical Texas’s primary goal is to become the leading provider of outpatient and short-stay surgeries in the Houston metropolitan area.  First Surgical Texas provides a comprehensive list of outpatient and short-stay surgical procedures performed by our surgeons at each site.  First Surgical Texas believes it offers a premier level of patient care as well as a highly desirable outpatient facility for surgeons to perform procedures.  First Surgical Texas competes for new surgeons through word-of-mouth marketing and its strong reputation within the healthcare community for a commitment to excellence, experienced management teams and its streamlined business model.  We believe top surgeons choose to operate in this environment because it allows them to exercise a higher degree control over their cases, staff, facilities and schedule.  A surgeon, operating in our facilities, has control over and is able to select its staff, the appropriate operating forum, and freely schedule such surgeries.  The flexibility in staffing, operating forum and schedule is not provided in a a typical large non-specialized hospital environment.  Further, the surgeons also have input on equipment to be purchased, staffing to be implemented and new specialties to be offered.  Our physicians assist in the efficiency by giving constant feedback to administration, and more importantly, participating in the operations of each facility.  Accordingly, we believe the ASC business model also allows these surgeon partners to operate more efficiently compared to a typical large non-specialized hospital environment, enabling the surgeon partners are able to perform more surgeries per day, thereby optimizing time and profit.

Our goal is to continue to grow our revenues by attracting top quality surgeons, expanding our presence in the state of Texas, expand into additional markets selectively and enhance operating efficiencies.
 
 
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Industry Background

We believe many physicians prefer surgery centers and general acute care hospitals. We believe that this is due to the non-emergency nature of the procedures performed at our surgery centers and surgical hospitals, which allows physicians to schedule their time more efficiently and therefore increase the number of surgeries they can perform in a given amount of time. In addition, outpatient facilities usually provide physicians with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases. While surgery centers and surgical hospitals generally perform scheduled surgeries, acute care hospitals and national health service facilities generally provide a broad range of services, including high priority and emergency procedures. Medical emergencies often demand the unplanned use of operating rooms and result in the postponement or delay of scheduled surgeries, disrupting physicians’ practices and inconveniencing patients. Surgery centers and surgical hospitals in the United States are designed to improve physician work environments and improve physician efficiency. In addition, many physicians choose to perform surgery in facilities like ours because their patients prefer the comfort of a less institutional atmosphere and the convenience of simplified admissions and discharge procedures.

New surgical techniques and technology, as well as advances in anesthesia, have significantly expanded the types of surgical procedures that are being performed in surgery centers and have helped drive the growth in outpatient surgery.  Lasers, arthroscopy, enhanced endoscopic techniques and fiber optics have reduced the trauma and recovery time associated with many surgical procedures. Improved anesthesia has shortened recovery time by minimizing post-operative side effects such as nausea and drowsiness, thereby avoiding the need for overnight hospitalization in many cases.

In addition to these technological and other clinical advancements, a changing payor environment has contributed to the rapid growth in outpatient surgery in recent years. Government programs, private insurance companies, managed care organizations and self-insured employers have implemented cost containment measures to limit increases in healthcare expenditures, including procedure reimbursement. We believe these cost containment measures have contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective alternate sites, including surgery centers. We believe that surgery performed at a surgery center is generally less expensive than hospital-based outpatient surgery because of lower facility development costs, more efficient staffing and space utilization and a specialized operating environment focused on quality of care and cost containment.

Our two ambulatory surgery centers and the general acute care hospital is licensed as a general hospital by the Texas Department of State Health Services Regulatory Licensing Unit. Further, our ambulatory surgery centers are licensed to provide prescriptions and medications, use radiation equipment and provide outpatient surgery services in the State of Texas by the Department of Health Ambulatory Surgical Centers, Board of Pharmacy, Department of Public Safety and Department of Health-Bureau of Radiation Control.  In addition, all of our facilities are CMS certified, allowing them to be reimbursed by the Medicare.

Our Business Strategy

Our goal is to steadily increase our revenues and cash flows. The key elements of our business strategy are to:

 
attract and retain top quality surgeons and other physicians;

 
expand our presence in the State of Texas initially;

 
expand selectively in new markets; and

 
enhance operating efficiencies.

Attract and retain top quality surgeons and other physicians

Prior to the acquisition of our subsidiaries, each of the limited partners had acquired their limited partnership interest for cash at such time they commenced using our facilities. Upon acquiring such facilities, the limited partners contributed their interest to First Surgical Texas and, in turn, the shareholders of First Surgical Texas, contributed their shares to the Company in exchange for shares of common stock of the Company. 100% of our revenue for the year ended December 31, 2009, was generated by surgeons that were formally limited partners in our subsidiaries. The Board of Directors is presently contemplating adopting a surgeon purchase plan, whereby surgeons contemplating using our facilities would be able to acquire shares of common stock for cash from the Company at a discount to the market determined by the Board of Directors. The shares acquired by such surgeons would be issued under Section 4(2) and/or Regulation D under the Securities Act of 1933, as amended. As of the date hereof, the surgeon purchase plan has not been adopted. Management, through its extensive contacts in the Houston, Texas medical community, will identify and negotiate with such surgeons that are identified for participation in the surgeon purchase plan. The Board of Directors will then determine whether to proceed with the sale of the securities to the surgeon and the price of the sale. We believe our structure whereby surgeons purchase securities in our company qualify for the safe harbor provisions of the “anti-kickback” statute, as more fully discussed below, as surgeons that perform procedures at our facilities are not being compensated for such surgery and the facility is a surgeon owned facility.

Since physicians are critical to the direction of healthcare, we have developed our operating model through the purchase of equity to encourage physicians to affiliate with us and to use our facilities as an extension of their practices. We believe we attract physicians because we design our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols to increase physician productivity and promote their professional and financial success. We believe this focus on physicians, combined with providing high quality healthcare in a friendly and convenient environment for patients, will continue to increase case volumes at our facilities.

Expand our presence in the State of Texas

Our primary strategy is to grow selectively in the State of Texas. We believe that selective acquisitions and development of new facilities in existing markets allow us to leverage our existing knowledge of these markets and to improve operating efficiencies. In particular, our experience has been that newly developed facilities in markets where we already have a presence and a not-for-profit hospital partner are the best use of our invested capital.

Expand selectively in new markets

We may continue to enter targeted markets by acquiring and developing surgical facilities. Although there is no guarantee, we intend to target the acquisition or development of multi-specialty centers that perform high volume, non-emergency, lower risk procedures requiring lower capital and operating costs than hospitals. In addition, we will also consider the acquisition of multi-facility companies.
 
 
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In determining whether to enter a new market, we will examine numerous criteria, including:

 
the potential to achieve strong increases in revenues and cash flows;

 
whether the physicians, healthcare systems and payors in the market are receptive to surgery centers and/or surgical hospitals;

 
the demographics of the market;

 
the number of surgical facilities in the market;

 
the number and nature of outpatient surgical procedures performed in the market;

 
the case mix of the facilities to be acquired or developed;

 
whether the facility is or will be well-positioned to negotiate agreements with insurers and other payors; and

 
licensing and other regulatory considerations.

Upon identifying a target facility, we will conduct financial, legal and compliance, operational, technology and systems reviews of the facility and conduct interviews with the facility’s management, affiliated physicians and staff. Once we acquire or develop a facility, we focus on upgrading systems and protocols, including implementing our proprietary methodology of defined processes and information systems, to increase case volume and improve operating efficiencies.

Enhance operating efficiencies

Once we acquire a new facility, we will integrate it into our existing network by implementing a specific action plan to support the local management team and incorporate the new facility into our group purchasing contracts.

Bariatric Program Sponsorship Agreement

The Company entered into a Bariatric Program Sponsorship Agreement on March 22, 2006, but effective May 1, 2006, with Vital Weight Control, Inc., d/b/a NeWeigh (‘Vital’).  Per the agreement, the Company is sponsoring, in part, a gastroplasty program involving surgical intervention for morbid obesity.  Under the sponsorship, the Company makes available its facility for surgeries on prospective patients that are participants in the bariatric program as well as for surgeries on other prospective patients that meet criteria for eligibility for bariatric surgery.  Vital is responsible for managing the bariatric program including coordinating the use of our facilities, nutritionists, other medical professionals, insurance professionals and other clinicians.  Vital is also responsible for marketing, advertising and promoting the bariatric program.  It is the Company’s responsibility to provide hospital services and make all required payments under the agreement.

In addition to the above, at all times during the term of the agreement the Company shall either furnish, at its expense, or reimburse Vital amounts Vital expends for operation of the program, including office space, facilities, equipment, utilities, furniture, fixtures, office supplies, postage, courier services, and other outside services as may be reasonably required to operate the program.  The original term of the agreement commenced on May 1, 2006, for a period of 36 months.  As compensation for the services rendered by Vital, the Company was obligated to pay a program sponsorship fee of $200,000 per month.

On February 13, 2008, the Company amended the existing contract with Vital to operate a second facility in The Woodlands.  The amendment further extended the term of the contract for a period of one year, thus the new termination date of the agreement became May 1, 2010.  The payment of $200,000 per month continued on the existing facility as well as an additional $200,000 per month for the new facility.

On December 10, 2009, the Company extended and renewed the agreement for an additional two years.  Program payments for both facilities are now set to expire April 30, 2012.

  Case Mix

The following table sets forth the percentage of the internally reported case volume of our facilities from each of the following specialties:

Specialty
 
Percentage
 
Bariatric and General Surgery
   
14.73
%
Reconstructive and Cosmetic Plastics
   
21.88
%
Orthopedics
   
29.83
%
Pain management
   
10.34
%
Neurosurgery
   
12.17
%
Podiatry
   
5.12
%
Gynecology and Urology
   
3.95
%
ENT
   
1.98
%
 
 
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Payor Mix

The following table sets forth the percentage of the internally reported case volume for the year ended December 31, 2009 from each of the following payors:

Payor
 
Percentage
 
Medicare
   
4.14
%
Worker’s Compensation
   
3.80
%
Commercial Carriers
   
83.85
%
Other (self pays, hardships, etc)
   
8.21
%

Competition

First Surgical Texas has three primary competitors in the greater Houston area:

 
·
North Cypress Medical Center;
 
·
United Surgical Partners International; and
 
·
Foundation Surgery Affiliates.

In all of our markets, our facilities compete with other providers, including major acute care hospitals and other surgery centers. Hospitals have various competitive advantages over us, including their established managed care contracts, community position, physician loyalty and geographical convenience for physicians’ inpatient and outpatient practices.

We compete with other providers in each of our markets for patients, physicians and for contracts with insurers or managed care payors. Competition for managed care contracts with other providers is focused on the pricing, number of facilities in the market and affiliation with key physician groups in a particular market.

There are several companies, both public and private, that acquire and develop freestanding multi-specialty surgery centers and surgical hospitals. Some of these competitors have greater resources than we do. The principal competitive factors that affect our ability and the ability of our competitors to acquire surgery centers and surgical hospitals are price, experience, reputation and access to capital. Further, many physician groups develop surgery centers without a corporate partner, and this presents a competitive threat to the Company.

The healthcare industry, including the outpatient and short-stay surgical segment, is highly competitive and undergoes continual changes in the manner in which services are delivered and providers are selected. Competitive factors affecting our business include quality of care, cost, treatment outcomes, convenience of location, relationships with the payor, and ability to meet the needs of the patient.

Government Regulation

Medicare and Medicaid Participation in Short Stay Surgical Facilities

Medicare is a federally funded and administered health insurance program, primarily for individuals entitled to social security benefits who are 65 or older or who are disabled. Medicaid is a health insurance program jointly funded by state and federal governments that provides medical assistance to qualifying low income persons. Each state Medicaid program has the option to determine coverage for ambulatory surgery center services and to determine payment rates for those services. The State of Texas covers Medicaid short stay surgical facility services; however, it may not continue to cover short stay surgical facility services and states into which we expand our operations may not cover or continue to cover short stay surgical facility services.

Medicare payments for procedures performed at short stay surgical facilities are not based on costs or reasonable charges. Instead, Medicare prospectively determines fixed payment amounts for procedures performed at short stay surgical facilities. These amounts are adjusted for regional wage variations.  A portion of our revenues, representing less than 5% of our revenue, are attributable to payments received from the Medicare and Medicaid programs.

In order to participate in the Medicare program, our short stay surgical facilities must satisfy a set of regulations known as “conditions of participation.” Each facility can meet this requirement through accreditation with the Joint Commission on Accreditation of Healthcare Organizations or other CMS-approved accreditation organizations, or through direct surveys at the direction of CMS. All of our short stay surgical facilities are certified to participate in the Medicare program. We have established ongoing quality assurance activities to monitor and ensure our facilities’ compliance with these conditions of participation. Any failure by a facility to maintain compliance with these conditions of participation as determined by a survey could result in the loss of the facility’s provider agreement with CMS, which would prohibit reimbursement for services rendered to Medicare or Medicaid beneficiaries until such time as the facility is found to be back in compliance with the conditions of participation. This could have a material adverse affect on the individual facility’s billing and collections.
 
 
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The Department of Health and Human Services and the states in which we perform surgical procedures for Medicaid patients may revise the Medicare and Medicaid payments methods or rates in the future. Any such changes could have a negative impact on the reimbursements we receive for our surgical services from the Medicare program and the state Medicaid programs. We do not know at this time if any such changes will be made, when any changes will occur, and to what extent revisions to such payment methodologies will be implemented.

As with most government programs, the Medicare and Medicaid programs are subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our short stay surgical facilities. In late 2005, Congress enacted legislation that limited reimbursement for certain ambulatory surgery center procedures, to the lower of the rate for ambulatory surgery centers or the rate for hospital outpatient departments. CMS implemented this legislative change effective January 1, 2007, resulting in decreased payment for approximately 280 procedures, primarily ophthalmology, dermatology and urology procedures. As part of a Congressional mandate to revise the Medicare payment system for procedures performed in ambulatory surgery centers, CMS, in November 2007, issued a revised payment methodology for services performed in ambulatory surgery centers. The revised system was implemented on January 1, 2008 and is phased in over a four-year period. The revised system expanded the number of procedures that are covered in ambulatory surgery centers and, among other things, set the payment rate at approximately 65% of the payment for procedures that are performed in a hospital outpatient department. Reductions or changes in Medicare or Medicaid funding could significantly affect our results of operations. We cannot predict at this time whether additional healthcare reform initiatives will be implemented or whether there will be other changes in the administration of government healthcare programs or the interpretation of government policies that would adversely affect our business.

Federal Anti-Kickback Law

State and federal laws regulate relationships among providers of healthcare services, including employment or service contracts and investment relationships. These restrictions include a federal criminal law, referred to herein as the anti-kickback statute, that prohibits offering, paying, soliciting or receiving any form of remuneration in return for:

 
referring patients for services or items payable under a federal healthcare program, including Medicare or Medicaid, or

 
purchasing, leasing or ordering, or arranging for or recommending purchasing, leasing or ordering, any good, facility, service or item for which payment may be made in whole or in part by a federal healthcare program.

A violation of the anti-kickback statute constitutes a felony. Potential sanctions include imprisonment of up to five years, criminal fines of up to $25,000, civil money penalties of up to $50,000 per act plus three times the remuneration offered or three times the amount claimed and exclusion from all federally funded healthcare programs. The applicability of these provisions to some forms of business transactions in the healthcare industry has not yet been subject to judicial or regulatory interpretation. Moreover, several federal courts have held that the anti-kickback statute can be violated if only one purpose (not necessarily the primary purpose) of the transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes.

Pursuant to the anti-kickback statute, and in an effort to reduce potential fraud and abuse relating to federal healthcare programs, the federal government has announced a policy of a high level of scrutiny of joint ventures and other transactions among healthcare providers. The Office of the Inspector General of the Department of Health and Human Services closely scrutinizes healthcare joint ventures involving physicians and other referral sources.

The anti-kickback statute contains provisions that insulate certain transactions from liability. In addition, pursuant to the provisions of the anti-kickback statute, the Health and Human Services Office of the Inspector General has also published regulations that exempt additional practices from enforcement under the anti-kickback statute. These statutory exceptions and regulations, known as “safe harbors,” if fully complied with, assure participants in particular types of arrangements that the Office of the Inspector General will not treat their participation in that arrangement as a violation of the anti-kickback statute. The statutory exceptions and safe harbor regulations do not expand the scope of activities that the anti-kickback statute prohibits, nor do they provide that failure to satisfy the terms of a safe harbor constitutes a violation of the anti-kickback statute. The Office of the Inspector General has, however, indicated that failure to satisfy the terms of an exception or a safe harbor may subject an arrangement to increased scrutiny. Therefore, if a transaction or relationship does not fit within an exception or safe harbor, the facts and circumstances as well as intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.

Our subsidiaries that are providers of services under the Medicare and Medicaid programs, are subject to the anti-kickback statute.
 
 
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The Office of the Inspector General has promulgated regulations setting forth certain safe harbors under the anti-kickback statute, including a safe harbor applicable to surgery centers. The surgery center safe harbor generally protects ownership or investment interests in a center by physicians who are in a position to refer patients directly to the center and perform procedures at the center on referred patients, if certain conditions are met. More specifically, the surgery center safe harbor protects any payment that is a return on an ownership or investment interest to an investor if certain standards are met in one of four categories of ambulatory surgery centers (1) surgeon-owned surgery centers, (2) single-specialty surgery centers, (3) multi-specialty surgery centers, and (4) hospital/physician surgery centers.

While several federal court decisions have aggressively applied the restrictions of the anti-kickback statute, they provide little guidance regarding the application of the anti-kickback statute to our partnerships and limited liability companies. We believe that our operations do not violate the anti-kickback statute. However, a federal agency charged with enforcement of the anti-kickback statute might assert a contrary position. Further, new federal laws, or new interpretations of existing laws, might adversely affect relationships we have established with physicians or other healthcare providers or result in the imposition of penalties on us or some of our facilities. Even the assertion of a violation could have a material adverse effect upon us.

Federal Physician Self-Referral Law

Section 1877 of the Social Security Act, commonly known as the “Stark Law,” prohibits any physician from referring patients to any entity for the furnishing of certain “designated health services” otherwise payable by Medicare or Medicaid, if the physician or an immediate family member has a financial relationship such as an ownership interest or compensation arrangement with the entity that furnishes services to Medicare beneficiaries, unless an exception applies. Persons who violate the Stark Law are subject to potential civil money penalties of up to $15,000 for each bill or claim submitted in violation of the Stark Law and up to $100,000 for each “circumvention scheme” they are found to have entered into, and potential exclusion from the Medicare and Medicaid programs. In addition, the Stark Law requires the denial (or, refund, as the case may be) of any Medicare and Medicaid payments received for designated health services that result from a prohibited referral.
 
 
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The list of designated health services under the Stark Law does not include ambulatory surgery services as such. However, some of the designated health services are among the types of services furnished by our ambulatory surgery centers. The Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, has promulgated regulations implementing the Stark Law. These regulations exclude health services provided by an ambulatory surgery center from the definition of “designated health services” if the services are included in the surgery center’s composite Medicare payment rate. Therefore, the Stark Law’s self-referral prohibition generally does not apply to health services provided by an ambulatory surgery center. However, if the ambulatory surgery center is separately billing Medicare for designated health services that are not covered under the ambulatory surgery center’s composite Medicare payment rate, or if either the ambulatory surgery center or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ambulatory surgery center service, the Stark Law’s self-referral prohibition would apply and such services could implicate the Stark Law. We believe that our operations do   not violate the Stark Law, as currently interpreted. However, it is possible that the Centers for Medicare and Medicaid Services will further address the exception relating to services provided by an ambulatory surgery center in the future. Therefore, we cannot assure you that future regulatory changes will not result in our ambulatory surgery centers becoming subject to the Stark Law’s self-referral prohibition.

False and Other Improper Claims

The federal government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes. While the criminal statutes are generally reserved for instances of fraudulent intent, the government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances. For example, the government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care was substandard.

Over the past several years, the government has accused an increasing number of healthcare providers of violating the federal False Claims Act. The False Claims Act prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S. government. The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. Because our facilities perform hundreds of similar procedures a year for which they are paid by Medicare, and there is a relatively long statute of limitations, a billing error or cost reporting error could result in significant penalties. Additionally, anti-Kickback or Stark Law claims can be “bootstrapped” to claims under the False Claims Act on the theory that, when a provider submits a claim to a federal health care program, the claim includes an implicit certification that the provider is in compliance with the Medicare Act, which would require compliance with other laws, including the anti-kickback statute and the Stark Law. As a result of this “bootstrap” theory, the U.S. government can collect additional civil penalties under the False Claims Act for claims that have been “tainted” by the anti-kickback or Stark Law violation.

Under the “qui tam,” or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the federal government. Such private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement. Both direct enforcement activity by the government and whistleblower lawsuits have increased significantly in recent years and have increased the risk that a healthcare company, like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs as a result of an investigation resulting from a whistleblower case. Although we believe that our operations materially comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit, or may otherwise be challenged or scrutinized by governmental authorities. A determination that we have violated these laws could have a material adverse effect on us.

Health Information Security and Privacy Practices

The regulations promulgated under the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) contain, among other measures, provisions that require many organizations, including us, to employ systems and procedures designed to protect the privacy and security of each patient’s individual healthcare information. Among the standards that the Department of Health and Human Services has adopted pursuant to HIPAA are standards for the following:

 
electronic transactions and code sets;

 
unique identifiers for providers, employers, health plans and individuals;

 
security and electronic signatures;

 
privacy; and

 
enforcement.
 
 
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In August 2000, the Department of Health and Human Services finalized the transaction standards, which we comply with. The transaction standards require us to use standard code sets established by the rule when transmitting health information in connection with some transactions, including health claims and health payment and remittance advices.

The Department of Health and Human Services has also published a rule establishing standards for the privacy of individually identifiable health information, which we comply with. These privacy standards apply to all health plans, all healthcare clearinghouses and many healthcare providers, including healthcare providers that transmit health information in an electronic form in connection with certain standard transactions. We are a covered entity under the final rule. The privacy standards protect individually identifiable health information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom such information is disclosed. A violation of the privacy standards could result in civil money penalties of $100 per incident, up to a maximum of $25,000 per person per year per standard. The final rule also provides for criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100,000 and five years in prison for obtaining protected health information under false pretenses, and up to $250,000 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm.

Finally, the Department of Health and Human Services has also issued a rule establishing, in part, standards for the security of health information by health plans, healthcare clearinghouses and healthcare providers that maintain or transmit any health information in electronic form, regardless of format. We are an affected entity under the rule. These security standards require affected entities to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure integrity, confidentiality and the availability of the information. The security standards were designed to protect the health information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure. Although the security standards do not reference or advocate a specific technology, and affected entities have the flexibility to choose their own technical solutions, the security standards required us to implement significant systems and protocols. We also comply with these regulations.

Signed into law on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) broadened the scope of the HIPAA privacy and security regulations. Among other things, the ARRA extends the application of certain provisions of the security and privacy regulations to business associates (entities that handle identifiable health information on behalf of covered entities) and subjects business associates to civil and criminal penalties for violation of the regulations. Violations of the HIPPA privacy and security regulations may result in civil and criminal penalties, and the ARRA has strengthened the enforcement provisions of HIPAA, which may result in increased enforcement activity. The ARRA increased the amount of civil penalties, with penalties now ranging up to $50,000 per violation for a maximum civil penalty of $1,500,000 in a calendar year for violations of the same requirement. In addition, the ARRA authorized state attorneys general to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents.

In addition to HIPAA, many states have enacted their own security and privacy provisions concerning a patient’s health information. These state privacy provisions will control whenever they provide more stringent privacy protections than HIPAA. Therefore, a health care facility could be required to meet both federal and state privacy provisions if it is located in a state with strict privacy protections.

Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently only aware of any legal proceedings or claims that we believe will not have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

Number of Employees

As of December 31, 2010, First Surgical Texas had 207 employees of which 132 were full-time employees. First Surgical Texas considers the relations with its employees to be good.

Properties

First Surgical Texas maintains a strategy of building desirable, high quality facilities with smaller sized footprints, in order to optimize operational efficiencies, ensure high profitability per square foot, and reduce the risk of underutilization.  The facilities typically have two to five operating rooms and ancillary areas for reception, preparation, recovery, and administration.

First Surgical Texas operates two ambulatory surgery centers (“ASC”) and a general acute care hospital in the Houston area.  First Street Surgical Center (“FSSC”) and First Surgical Woodlands (“FSW”) comprise the two ASC facilities.  First Street Hospital (“FSH”) is the general acute care location.
 
 
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FSSC is located in Bellaire, Texas.  FSSC is the flagship facility of First Surgical Texas with the first procedures being performed on February 14, 2003.  The FSSC facility contains approximately 12,000 square feet and consists of four operating rooms and 10 pre-op and recovery rooms.  On April 1, 2003, First Street Surgical Center, LP entered into a building lease with Dr. Jacob Varon, a former partner of FSSC, who is also a current shareholder and director of the Company .  The building lease is for an initial term of 10 years from commencement date followed by an option to extend the initial ten year term by two consecutive five year terms.  The lease agreement calls for minimum monthly lease payments of $23,000 per month, subject to escalation to reflect increases in the consumer price index.

FSH is also located in Bellaire, Texas, directly adjacent to FSSC.  FSH is First Surgical Texas’s inaugural general acute care hospital.  The FSH facility contains approximately 17,000 square feet and consists of two operating rooms, five beds and an emergency room.  The FSH facility is staffed by physicians at all times.    On September 17, 2006, First Street Hospital, LP entered into a building lease with Dr. Jacob Varon, a former partner of FSH, who is also a current shareholder and director of the Company.   The building lease is for an initial term of 10 years from commencement date followed by an option to extend the initial ten year term by two consecutive ten year terms. The lease agreement calls for minimum monthly lease payments of $39,400 per month, subject to escalation to reflect increases in the consumer price index.

FSW is located in Woodlands, Texas.  The FSW facility contains approximately 12,000 square feet and consists of five operating rooms and 10 pre-op and recovery rooms.  First Surgical Woodlands, LP entered into a building lease with a non related entity on September 1, 2005 and shall expire on the last day of the 84 th full calendar month following the commencement date.  Base rent is as follows:  $28,741 for months one through 24, $29,891 for months 25 through 60, and $30,783 for months 61 through 84.

Environmental Matters

Management is unaware of any environmental matters pending or threatened related to First Surgical Texas or its facilities.

RISK FACTORS

Our business, operations, and financial position are subject to various risks. These risks are described below.

Competition for staffing, shortages of qualified personnel, and union activity may increase our labor costs and reduce profitability.

Our operations are dependent on the efforts, abilities, and experience of our management and medical support personnel, such as physical therapists, nurses, and other healthcare professionals. We compete with other healthcare providers in recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our hospitals. In some markets, the lack of availability of physical therapists, nurses, and other medical support personnel has become a significant operating issue to healthcare providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain qualified personnel or to hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate.

If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenues consist of fixed, prospective payments, our ability to pass along increased labor costs is limited. Union activity is another factor that contributes to increased labor costs. Various federal legislative proposals, including the proposed Employee Free Choice Act or “card check” bill, would likely result in increased union activity in general. We cannot, however, predict the form or effect of final legislation, if any, that might promote union activity. Our failure to recruit and retain qualified management, physical therapists, nurses, and other medical support personnel, or to control our labor costs, could have a material adverse effect on our business, financial position, results of operations, and cash flows.

If we fail to comply with the extensive laws and government regulations applicable to healthcare providers, we could suffer penalties or be required to make significant changes to our operations.

As a healthcare provider, we are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. These laws and regulations relate to, among other things:

licensure, certification, and accreditation,

coding and billing for services,

requirements of the 60% compliance threshold under the 2007 Medicare Act,

relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws,
 
 
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quality of medical care,

use and maintenance of medical supplies and equipment,

maintenance and security of medical records,

acquisition and dispensing of pharmaceuticals and controlled substances, and

disposal of medical and hazardous waste.

In the future, changes in these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our investment structure, hospitals, equipment, personnel, services, capital expenditure programs, operating procedures, and contractual arrangements.

Although we have invested substantial time, effort, and expense in implementing internal controls and procedures designed to ensure regulatory compliance, if we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including (1) criminal penalties, (2) civil penalties, including monetary penalties and the loss of our licenses to operate one or more of our hospitals, and (3) exclusion or suspension of one or more of our hospitals from participation in the Medicare, Medicaid, and other federal and state healthcare programs. Substantial damages and other remedies assessed against us could have a material adverse effect on our business, financial position, results of operations, and cash flows.

Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.

As part of our growth strategy, we intend to pursue acquisitions of outpatient physical and occupational therapy clinics. Acquisitions may involve significant cash expenditures, potential debt incurrence and operational losses, dilutive issuances of equity securities and expenses that could have an adverse effect on our financial condition and results of operations. Acquisitions involve numerous risks, including:

 
the difficulty and expense of integrating acquired personnel into our business;

 
the diversion of management’s time from existing operations;

 
the potential loss of key employees of acquired companies;

 
the difficulty of assignment and/or procurement of managed care contractual arrangements; and

 
the assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.

We may not be successful in obtaining financing for acquisitions at a reasonable cost, or such financing may contain restrictive covenants that limit our operating flexibility. We also may be unable to acquire outpatient physical and occupational therapy clinics or successfully operate such clinics following the acquisition.

We depend on payments from third party payors, including government healthcare programs. If these payments are reduced, our revenue will decrease.

We are dependent upon private and governmental third party sources of payment for the services provided to patients in our surgery centers and surgical hospital. The amount of payment a surgical facility receives for its services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare and Medicaid regulations and the cost containment and utilization decisions of third party payors.

If we are unable to acquire and develop additional surgical facilities on favorable terms, are not successful in integrating operations of acquired surgical facilities, or are unable to manage growth, we may be unable to execute our acquisition and development strategy, which could limit our future growth.

Our strategy is to increase our revenues and earnings by acquiring and developing additional surgical facilities, primarily in collaboration with our hospital partners. Our efforts to execute our acquisition and development strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisition and development transactions. We are currently evaluating potential acquisitions and development projects and expect to continue to evaluate acquisitions and development projects in the foreseeable future. The surgical facilities we develop typically incur losses in their early months of operation (more so in the case of surgical hospitals) and, until their case loads grow, they generally experience lower total revenues and operating margins than established surgical facilities, and we expect this trend to continue. We may not be successful in acquiring surgical facilities, developing surgical facilities or achieving satisfactory operating results at acquired or newly developed facilities. Further, the companies or assets we acquire in the future may not ultimately produce returns that justify our related investment. If we are not able to execute our acquisition and development strategy, our ability to increase revenues and earnings through future growth would be impaired.
 
 
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If we are not successful in integrating newly acquired surgical facilities, we may not realize the potential benefits of such acquisitions. Likewise, if we are not able to integrate acquired facilities’ operations and personnel with ours in a timely and efficient manner, then the potential benefits of the transaction may not be realized. Further, any delays or unexpected costs incurred in connection with integration could have a material adverse effect on our operations and earnings. In particular, if we experience the loss of key personnel or if the effort devoted to the integration of acquired facilities diverts significant management or other resources from other operational activities, our operations could be impaired.

If we incur material liabilities as a result of acquiring surgical facilities, our operating results could be adversely affected.

Although we conduct extensive due diligence prior to the acquisition of surgical facilities and seek indemnification from prospective sellers covering unknown or contingent liabilities, we may acquire surgical facilities that have material liabilities for failure to comply with healthcare laws and regulations or other past activities. Although we maintain professional and general liability insurance, we do not currently maintain insurance specifically covering any unknown or contingent liabilities that may have occurred prior to the acquisition of surgical facilities. If we incur these liabilities and are not indemnified or insured for them, our operating results and financial condition could be adversely affected.

We depend on our relationships with the physicians who use our facilities. Our ability to provide medical services at our facilities would be impaired and our revenues reduced if we are not able to maintain these relationships.

Our business depends upon the efforts and success of the physicians who provide medical and surgical services at our facilities and the strength of our relationships with these physicians. Our revenues would be reduced if we lost our relationship with one or more key physicians or group of physicians or such physicians or groups reduce their use of our facilities. In addition, any failure of these physicians to maintain the quality of medical care provided or to otherwise adhere to professional guidelines at our surgical facilities or any damage to the reputation of a key physician or group of physicians could damage our reputation, subject us to liability and significantly reduce our revenues.

Our surgical facilities face competition for patients from other health care providers.

The health care business is highly competitive, and competition among hospitals and other health care providers for patients has intensified in recent years. Generally, other facilities in the local communities served by our facilities provide services similar to those offered by our surgery centers and surgical hospitals. In addition, the number of freestanding surgical hospitals and surgery centers in Texas has increased significantly. As a result, most of our surgery centers and surgical hospitals operate in a highly competitive environment. Some of the hospitals that compete with our facilities are owned by governmental agencies or not-for-profit corporations supported by endowments, charitable contributions and/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis. Our surgery centers and surgical hospital are facing increasing competition from unaffiliated physician-owned surgery centers and surgical hospitals for market share in high margin services and for quality physicians and personnel. If our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our surgery centers and surgical hospitals, we may experience an overall decline in patient volume.

Current economic conditions may adversely affect our financial condition and results of operations.

The current economic conditions will likely have an impact on our business. We regularly monitor quantitative as well as qualitative measures to identify changes in our business in order to react accordingly. Although we have not seen any significant trends as it relates to our case volume through December 2010, there can be no assurance that we will not be negatively impacted. The most likely impact on us will be lower case volumes as elective procedures may be deferred or cancelled, which could have an adverse effect on our financial condition and results of operations.

Our revenues may be reduced by changes in payment methods or rates under the Medicare or Medicaid programs.

The Department of Health and Human Services and the states in which we perform surgical procedures for Medicaid patients may revise the Medicare and Medicaid payment methods or rates in the future. Any such changes could have a negative impact on the reimbursements we receive for our surgical services from the Medicare program and the state Medicaid programs. Notably, as part of a Congressional mandate to revise the Medicare payment system for procedures performed in ambulatory surgery centers, the Center for Medicare and Medicaid Services published proposed rules revising the payment system for ambulatory surgery centers in August 2006. The final rule expanded the number of procedures that are covered in ambulatory surgery centers and, among other things, set the payment rate at approximately 65% of the payment for the same procedure when performed in a hospital outpatient department. The final rule will be phased in over a four-year period which began in 2008.
 
 
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Efforts to regulate the construction, acquisition or expansion of healthcare facilities could prevent us from acquiring additional surgical facilities, renovating our existing facilities or expanding the breadth of services we offer.

In several states, you must obtain prior approval for the construction, acquisition or expansion of healthcare facilities or expansion of the services they offer. When considering whether to approve such projects, these states take into account the need for additional or expanded healthcare facilities or services. Although we have not previously been required to obtain a certificate in the State of Texas, we may not be able to obtain the certificates of need or other required approvals for additional or expanded facilities or services in the future. In addition, at the time we acquire a facility, we may agree to replace or expand the acquired facility. If we are unable to obtain the required approvals, we may not be able to acquire additional surgery centers or surgical hospitals, expand the healthcare services provided at these facilities or replace or expand acquired facilities.

Failure to comply with federal and state statutes and regulations relating to patient privacy and electronic data security could negatively impact our financial results.

There are currently numerous federal and state statutes and regulations that address patient privacy concerns and federal standards that address the maintenance of the security of electronically maintained or transmitted electronic health information and the format of transmission of such information in common health care financing information exchanges. These provisions are intended to enhance patient privacy and the effectiveness and efficiency of healthcare claims and payment transactions. In particular, the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 required us to implement new systems and to adopt business procedures for transmitting health care information and for protecting the privacy and security of individually identifiable information.

We believe that we are in material compliance with existing state and federal regulations relating to patient privacy, security and with respect to the format for electronic health care transactions. However, if we fail to comply with the federal privacy, security and transactions and code sets regulations, we could incur significant civil and criminal penalties. Failure to comply with state laws related to privacy could, in some cases, also result in civil fines and criminal penalties.

If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations.

We are subject to many laws and regulations at the federal, state and local government levels in the jurisdictions in which we operate. These laws and regulations require that our healthcare facilities meet various licensing, certification and other requirements, including those relating to:

 
physician ownership;

 
the adequacy of medical care, equipment, personnel, operating policies and procedures;

 
building codes;

 
licensure, certification and accreditation;

 
billing for services;

 
handling of medication;

 
maintenance and protection of records; and

 
environmental protection.

We believe that we are in material compliance with applicable laws and regulations. However, if we fail or have failed to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored healthcare programs. A number of initiatives have been proposed during the past several years to reform various aspects of the healthcare system. In the future, different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. Current or future legislative initiatives or government regulation may have a material adverse effect on our operations or reduce the demand for our services.
 
 
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In pursuing our growth strategy, we may expand our presence into new geographic markets. In entering a new geographic market, we will be required to comply with laws and regulations of jurisdictions that may differ from those applicable to our current operations. If we are unable to comply with these legal requirements in a cost-effective manner, we may be unable to enter new geographic markets.

If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal remuneration under the Medicare or Medicaid programs, we may be subject to civil and criminal penalties, experience a significant reduction in our revenues or be excluded from participation in the Medicare and Medicaid programs.

The federal anti-kickback statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referrals for items or services payable by Medicare, Medicaid, or any other federally funded healthcare program. Additionally, the anti-kickback statute prohibits any form of remuneration in return for purchasing, leasing or ordering, or arranging for or recommending the purchasing, leasing or ordering of items or services payable by Medicare, Medicaid or any other federally funded healthcare program. The anti-kickback statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. Moreover, several federal courts have held that the anti-kickback statute can be violated if only one purpose (not necessarily the primary purpose) of a transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes. Violations of the anti-kickback statute may result in substantial civil or criminal penalties, including up to five years imprisonment and criminal fines of up to $25,000 and civil penalties of up to $50,000 for each violation, plus three times the remuneration involved or the amount claimed and exclusion from participation in all federally funded healthcare programs. An exclusion, if applied to our surgery centers or surgical hospitals, could result in significant reductions in our revenues, which could have a material adverse effect on our business.

Although we believe that our business arrangements do not violate the anti-kickback statute, a government agency or a private party may assert a contrary position. Additionally, new domestic federal or state laws may be enacted that would cause our relationships with the physician investors to become illegal or result in the imposition of penalties against us or our facilities. If any of our business arrangements with physician investors were deemed to violate the anti-kickback statute or similar laws, or if new domestic federal or state laws were enacted rendering these arrangements illegal, our business could be adversely affected.

Also, most of the states in which we operate have adopted anti-kickback laws, many of which apply more broadly to all third-party payors, not just to federal or state healthcare programs. Many of the state laws do not have regulatory safe harbors comparable to the federal provisions and have only rarely been interpreted by the courts or other governmental agencies. We believe that our business arrangements do not violate these state laws. Nonetheless, if our arrangements were found to violate any of these anti-kickback laws, we could be subject to significant civil and criminal penalties that could adversely affect our business.

If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of reimbursement revenues.

The U.S. federal physician self-referral law, commonly referred to as the Stark law, prohibits a physician from making a referral for a “designated health service” to an entity to furnish an item or service payable under Medicare if the physician or a member of the physician’s immediate family has a financial relationship with the entity such as an ownership interest or compensation arrangement, unless an exception applies. The list of designated health services under the Stark law does not include ambulatory surgery services as such. However, some of the designated health services are among the types of services furnished by our facilities.
 
 
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The Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, has promulgated regulations implementing the Stark law. These regulations exclude health services provided by an ambulatory surgery center from the definition of “designated health services” if the services are included in the facility’s composite Medicare payment rate. Therefore, the Stark law’s self-referral prohibition generally does not apply to health services provided by a surgery center. However, if the surgery center is separately billing Medicare for designated health services that are not covered under the surgery center’s composite Medicare payment rate, or if either the surgery center or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ambulatory surgery center service, the Stark law’s self-referral prohibition would apply and such services could implicate the Stark law. We believe that our operations do not violate the Stark Law, as currently interpreted.

Companies within the healthcare industry continue to be the subject of federal and state audits and investigations, which increases the risk that we may become subject to investigations in the future.

Both federal and state government agencies, as well as private payors, have heightened and coordinated audits and administrative, civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations. These investigations relate to a wide variety of topics, including the following:

 
cost reporting and billing practices;

 
quality of care;

 
financial reporting;

 
financial relationships with referral sources; and

 
medical necessity of services provided.

In addition, the Office of the Inspector General of the Department of Health and Human Services and the Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Moreover, another trend impacting healthcare providers is the increased use of the federal False Claims Act, particularly by individuals who bring actions under that law. Such “qui tam” or “whistleblower” actions allow private individuals to bring actions on behalf of the government alleging that a healthcare provider has defrauded the federal government. If the government intervenes and prevails in the action, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil monetary penalties of between $5,500 and $11,000 for each false claim submitted to the government. As part of the resolution of a qui tam case, the party filing the initial complaint may share in a portion of any settlement or judgment. If the government does not intervene in the action, the qui tam plaintiff may pursue the action independently. Additionally, some states have adopted similar whistleblower and false claims provisions. Although companies in the healthcare industry have been, and may continue to be, subject to qui tam actions, we are unable to predict the impact of such actions on our business, financial position or results of operations.

If we become subject to significant legal actions, we could be subject to substantial uninsured liabilities.

In recent years, physicians, surgery centers, hospitals and other healthcare providers have become subject to an increasing number of legal actions alleging malpractice or related legal theories. Many of these actions involve large monetary claims and significant defense costs. We do not employ any of the physicians who conduct surgical procedures at our facilities and the governing documents of each of our facilities require physicians who conduct surgical procedures at our facilities to maintain stated amounts of insurance. Additionally, to protect us from the cost of these claims, we maintain (through a captive insurance company) professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe to be appropriate for our operations. If we become subject to claims, however, our insurance coverage may not cover all claims against us or continue to be available at adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, we could be adversely affected.
 
 
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If we are unable to effectively compete for physicians, strategic relationships, acquisitions and managed care contracts, our business could be adversely affected.

The healthcare business is highly competitive. We compete with other healthcare providers, primarily other surgery centers and hospitals, in recruiting physicians and contracting with managed care payors. There are major unaffiliated hospitals in each market in which we operate. These hospitals have established relationships with physicians and payors. In addition, other companies either are currently in the same or similar business of developing, acquiring and operating surgery centers and surgical hospitals or may decide to enter our business. Many of these companies have greater financial, research, marketing and staff resources than we do. We may also compete with some of these companies for entry into strategic relationships with not-for-profit healthcare systems and healthcare professionals. If we are unable to compete effectively with any of these entities, we may be unable to implement our business strategies successfully and our business could be adversely affected.

Because our senior management has been key to our growth and success, we may be adversely affected if we lose any member of our senior management.

We are highly dependent on our senior management, including Dr. Jacob Varon, who is our chairman, and Tony Rotondo, who is our chief executive officer. We presently do not have employment agreements with Dr. Varon or Mr. Rotondo and we do not maintain “key man” life insurance policies on any of our officers. Because our senior management has contributed greatly to our growth since inception, the loss of key management personnel or our inability to attract, retain and motivate sufficient numbers of qualified management or other personnel could have a material adverse effect on us.

A small number of existing shareholders own a significant amount of our Common Stock, which could limit your ability to influence the outcome of any shareholder vote.

Our executive officers, directors and shareholders holding in excess of 5% of our issued and outstanding shares, beneficially own over 43% of our Common Stock. Under our Articles of Incorporation and Delaware law, the vote of a majority of the shares outstanding is generally required to approve most shareholder action.  As a result, these individuals will be able to significantly influence the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers or other significant corporate transactions.

Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.

The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of our stock over the past few years. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations.

We have not voluntary implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflict of interest and similar matters.

Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, and the adoption of a code of ethics. While we intend to adopt certain corporate governance measures such as a code of ethics and established an audit committee, Nominating and Corporate Governance Committee, and Compensation Committee of our board of  directors, we presently do not have any independent directors. We intend to expand our board membership in future periods to include independent directors. It is possible that if we were to have independent directors on our board, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by our sole director who has an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of both corporate governance measures and independent directors in formulating their investment decisions.
 
 
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If a public market for our common stock develops, trading will be limited under the SEC’s penny stock regulations, which will adversely affect the liquidity of our common stock.

The trading price of our common stock is less than $5.00 per share and, as a result, our common stock is considered a "penny stock," and trading in our common stock would be subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. Generally, the broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the  penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market. An active and liquid market in our common stock may never develop due to these factors.
 
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described.  This discussion should be read in conjunction with our audited Consolidated Financial Statements as of and for the two years ended December 31, 2009 and 2008, and the related notes thereto, and our unaudited Consolidated Financial Statements as of September 30, 2010, and for the three and nine months ended September 30, 2010 and 2009, and the related notes thereto, all included in Item 9.01 of this Form 8-K. This discussion contains forward-looking statements.  Please see the explanatory note concerning “Forward-Looking Statements” preceding Part 1.01 of this Form 8-K and our Risk Factors, found in Item 2.01, for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.  The operating results for the periods presented were not significantly affected by inflation.

OVERVIEW

First Surgical Texas, Inc., including its subsidiaries, is an owner and operator of two ambulatory surgery centers (“ASC”), First Street Surgical Center, L.P., and First Surgical Woodlands, L.P., and a general acute care hospital, First Street Hospital, L.P., all located in the greater Houston, Texas metro area.  Procedures performed include non life-threatening surgeries, such as bariatrics, reconstructive and cosmetic plastics, orthopedics, pain management, neurosurgery and podiatry, which are often completed on an outpatient or short stay basis.

Corporate History

Effective December 1, 2010, Piper Acquisition III, Inc. (“Piper”) acquired all of the limited and general partnership interests of First Street Surgical Center, L.P., First Surgical Woodlands, L.P., and First Street Hospital, L.P. (“Partnerships”), all of which were under common control, in exchange for the issuance of 36,000,002 shares of Piper’s common stock.  The exchange of shares with Piper was accounted for as a reverse acquisition under the purchase method of accounting.  Accordingly, the merger was recorded as a recapitalization of Piper, with the consolidated financials of the Partnerships being treated as the continuing entity.  Effective December 3, 2010, the Company changed its name to First Surgical Texas, Inc.  The historical financial statements presented are those of the Partnerships. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer, Piper, are not significant; therefore, no pro forma financial information is submitted.

On November 4, 2010, we entered into a Contribution Agreement with the shareholders of First Surgical Texas, Inc. (“First Surgical Texas”), each of which are accredited investors (“First Surgical Texas Shareholders”) pursuant to which the First Surgical Texas Shareholders agreed to contribute 100% of the outstanding securities of First Surgical Texas in exchange for 39,964,346 shares of our common stock (the “First Surgical Texas Contribution”).   On November 24, 2010, we entered an agreement with First Surgical Texas to extend the closing date to December 31, 2010 in consideration of a payment of $7,500.  The First Surgical Texas Contribution closed on December 31, 2010.  First Surgical Texas was incorporated in the State of Nevada on August 26, 2008.  Considering that, following the contribution, the First Surgical Texas Shareholders control the majority of our outstanding common stock and we effectively succeeded our otherwise minimal operations to those that are theirs, First Surgical Texas is considered the accounting acquirer in this reverse-merger transaction.  A reverse-merger transaction is considered, and accounted for as, a capital transaction in substance; it is equivalent to the issuance of First Surgical Texas securities for our net monetary assets, which are deminimus, accompanied by a recapitalization. Accordingly, we have not recognized any goodwill or other intangible assets in connection with this transaction.  First Surgical is the surviving and continuing entity and the historical financials following the reverse merger transaction will be those of First Surgical Texas.

Executive Summary

We operate two ambulatory surgery centers and a general acute hospital that provide treatment on both an inpatient and outpatient basis.  We are a Texas-based organization with plans to expand to other areas of the country that make economic sense.  Our ASC and hospital based procedures vary, ranging from orthopedics, bariatrics, spine, general surgery, pain management, podiatry, and otolaryngology (ENT).  Our team of highly skilled physicians, nurses, radiology techs, scrub techs, physical therapists, dietitians, utilize the latest in equipment and technology to give our patients successful outcomes.  All patient care is provided by the previously mentioned experts, and all care is directed by a physician order.  We have an internal case manager that monitors all hospital patient's progress; each patient's progress is documented with a progress note, achievement of goals, functional outcomes and a thorough discussion of a discharge plan.  This interdisciplinary approach leads to a higher, more personal level of care with excellent clinical outcomes.

We have over 30 affiliated physicians who provide medical care and surgical services to our patients.  In addition, there are an additional 60 non-affiliated physicians that use our locations for surgical procedures, many with great frequency.  Surgeons choose to perform surgeries at First Surgical because of (1) the input and control they have over the facilities’ operations, (2) the quality of the facilities, (3) the well trained staff, (4) the reputations of the other surgeons using the facilities, and (5) the well respected, financially disciplined management team.  Since our formation in 2002, we have partnered with the best surgeons in their specialties covering the greater Houston area.  Since inception, these physicians have performed nearly 33,000 procedures and the number of procedures performed each year continues to grow.
 
 
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During 2009, given increasing demand for services requiring overnight stays, we determined that we needed to expand our general acute care hospital from five beds to 19 beds and adding two additional operating rooms.  We commenced construction on this expansion in early 2010 and expect to complete the project during December 2010.

Key Challenges

While goals were met in 2010, the following represent the challenges facing the company going forward:

 - declining reimbursements- Third party payors are reimbursing less and less for our services.  We will continue to negotiate for favorable managed care contracts, as well as looking at alternative methods of reimbursements, such as direct contracting with self-insured employers and/or unions.

- Highly regulated industry-Over the last several years, changes in regulations regarding hospitals, specifically physician-owned hospitals, have created additional challenges from an operation perspective.  Many of these changes have resulted in limitations, including moratoriums on physician-owned start-up hospitals.  We have analyzed the aspects of Medicare reimbursements, and the changes in Medicare reimbursements will have a slightly deleterious effect on our revenues.
 
-  Healthcare Reform- President Obama has identified healthcare reform as a priority.  The future of healthcare reform to our book of business is concerning, yet out business model of looking at existing facilities to acquire is still advantageous.  We will continue to look at hospitals that would benefit from our leadership and model going forward.

- Accountable Care Organizations-Known as ACO's, this model of bundling payments to the facility, physician, and all other healthcare providers is troubling.  ACO's being adopted and the bundling of payments is difficult to predict at this time.  Major healthcare reform bills being contemplated now by Congress include at the very least consideration of this model.

Business Outlook

Outpatient surgical procedures continues to increase.  Due to technology, patients are going home quicker, and the availability for certain procedures just five years ago necessitating a two night stay in a hospital are now done the same day.  We believe we differentiate ourselves from competitors by offering surgeons and physicians that are best of class, superior outcomes, and competitive management efficiencies.  We believe we will deliver shareholder value by focusing on the key items discussed.

P ayor Mix

We bill payors for professional services provided by our affiliated and non-affiliated physicians to our patients based upon rates for specific services provided. Our billed charges are substantially the same for all parties regardless of the party responsible for paying the bill for our services.  We determine our net patient service revenue based upon the difference between our gross fees for services and our estimated ultimate collections from payors.  Net patient service revenue differs from gross fees due to (i) managed care payments at contracted rates, (ii) government-sponsored healthcare program reimbursements at government-established rates, (iii) various reimbursement plans and negotiated reimbursements from other third-parties, and (iv) discounted and uncollectible accounts of private-pay patients.

Our payor mix is composed of contracted managed care, government, principally Medicare, other third-parties and private-pay patients.

The following is a summary of our payor mix, expressed as a percentage of net patient service revenue, exclusive of administrative fees, for the periods indicated:
 
 
18

 

   
For the Year Ended
December 31,
 
   
2009
   
2008
 
             
Medicare
   
4.14
%
   
5.04
%
Workers’ Compensation
   
3.80
%
   
3.85
%
Commercial Carriers
   
83.85
%
   
83.20
%
Others (self pays, hardships, etc)
   
8.21
%
   
7.91
%
     
100.00
%
   
100.00
%

The payor mix shown in the table above is not necessarily representative of the amount of services provided to patients covered under these plans.  For example, the gross amount billed to patients covered under government programs for the years ended December 31, 2009 and 2008 represented approximately 7% and 9%, respectively, of our total gross patient service revenue.  In addition, gross billings under commercial carriers for the years ended December 31, 2009 and 2008 were 25% and 29% respectively.

Application of Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reporting of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities.  Note 2 to our audited Consolidated Financial Statements as of and for the two years ended December 31, 2009 and 2008, provides a summary of our significant accounting policies, which are all in accordance with generally accepted accounting principles in the United States.  Certain of our accounting policies are critical to understanding our Consolidated Financial Statements because their application requires management to make assumptions about future results and depends to a large extent on management’s judgment, because past results have fluctuated and are expected to continue to do so in the future.  We believe that the application of the accounting policies described in the following paragraphs is highly dependent on critical estimates and assumptions that are inherently uncertain and highly susceptible to change.  For all of these policies, we caution that future events rarely develop exactly as estimated, and the best estimates routinely require adjustment.  On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below.

Use of Estimates and Assumptions

Future events and their effects cannot be predicted with certainty; accordingly the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired , as additional information is obtained, and as our operating environment changes.  Significant estimates and assumptions are used for, but not limited to: (1) allowance for contractual revenue adjustments; (2) depreciable lives of assets; (3) assessment of long-lived assets for impairment; (4) economic lives and fair values of leased assets; (5) uncertain tax positions; and (6) contingency and litigation reserves.  The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  The Company evaluates its estimates and assumptions on a regular basis and may employ outside experts to assist in our evaluation, as considered necessary.  Actual results may differ from these estimates and assumptions used in preparation of its financial statements and changes in these estimates are recorded when known.

Revenue Recognition

Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments.  Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from the patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, and employers.  Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements.  Third-party payor contractual payment terms are generally based upon predetermined rates per diagnosis, per diem rates, or discounted fee-for-service rates.  The Company does not expect material changes in the estimate of prior period allowances for contractual and other adjustments. Further, we do not foresee  changes in our estimate of unsettled amounts from third party payors as of the latest balance sheet date that could have a material effect on our financial position, results of operations or cash flows.

Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation, and are routinely modified for provider reimbursement.  All healthcare providers participating in the Medicare and Medicaid programs are required to meet certain financial reporting requirements. Federal regulations require submission of annual cost reports covering medical costs and expenses associated with the services provided by each hospital to program beneficiaries.  Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to the Company under these reimbursement programs.  These audits often require several years to reach the final determination of amounts earned under the programs.  As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.
 
 
19

 

We provide care to patients who are financially unable to pay for the healthcare services they receive, and because we do not pursue collection of amounts determined to qualify as charity care, such amounts are not recorded as revenues.

Income Taxes

We provide for income taxes using the asset and liability method . This approach recognizes the amount of federal, state, and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns.  Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates.  A valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized.  Realization is dependent on generating sufficient future taxable income.  We evaluate our tax positions and establish assets and liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes.  We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly.  The Company and its corporate subsidiaries file a consolidated federal income tax return.  Some subsidiaries consolidated for financial reporting purposes are not part of the consolidated group for federal income tax purposes and file separate federal income tax returns.  State income tax returns are filed on a separate, combined, or consolidated basis in accordance with relevant state laws and regulations.  Partnerships, limited liability partnerships, limited liability companies, and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns.  We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return.  We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes.

Other Matters

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of our Consolidated Financial Statements.  All of our significant accounting policies are further described in Note 2 to our audited Consolidated Financial Statements as of and for the two years ended December 31, 2009 and 2008, in this Form 8-K.  The policies described in Note 2 often require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance and are frequently reexamined by accounting standards setters and regulators.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain information related to our operations expressed as a percentage of our net patient service revenue:
 
 
20

 

    
For the Three Months Ended
     
For the Nine Months Ended
  
     
September 30,
     
September 30,
  
   
2010
   
2009
   
2010
   
2009
 
                                 
Net Revenue
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Operating Expenses
                               
Salaries and Benefits
   
29.4
%
   
36.0
%
   
23.6
%
   
25.4
%
Medical Supplies
   
18.8
%
   
25.4
%
   
17.5
%
   
19.2
%
Management Fees
   
17.1
%
   
22.3
%
   
14.5
%
   
16.3
%
Rent
   
5.2
%
   
5.3
%
   
4.0
%
   
4.6
%
Depreciation and Amortization
   
3.4
%
   
2.9
%
   
2.9
%
   
3.1
%
Other Operating Expenses
   
13.2
%
   
14.6
%
   
14.1
%
   
12.2
%
Total Operating Expenses
   
87.1
%
   
106.6
%
   
76.6
%
   
80.7
%
Other Income and Expenses
                               
Interest Income
   
0.0
%
   
0.0
%
   
0.0
%
   
0.0
%
Interest Expense
   
(2.2
)%
   
(3.3
)%
   
(1.9
)%
   
(2.5
)%
Total Other Income and Expenses
   
(2.2
)%
   
(3.3
)%
   
(1.9
)%
   
(2.5
)%
Income Before Income Taxes
   
10.7
%
   
(9.9
)%
   
21.6
%
   
16.8
%
Income Taxes
   
0.0
%
   
0.0
%
   
0.0
%
   
0.0
%
Net Income
   
10.7
%
   
(9.9
)%
   
21.6
%
   
16.8
%

Three Months Ended September 30, 2010, as Compared to Three Months Ended September 30, 2009

Our net revenue increased $2,239,320 or 30.4%, to $9,610,214 for the three months ended September 30, 2010, as compared to $7,370,894 for 2009.  This increase was primarily related to a 34.7% increase in hospital cases during the three months ended September 30, 2010, as compared to 2009, partially offset by a 2.7% decrease in surgical cases during this same time period.   Our 34.7% increase in hospital cases resulted from 122 more cases, to 474 cases for the quarter ended September 30, 2010, as compared to 352 cases for the quarter ended September 30, 2009.  This increase was primarily attributable to the addition of two physicians as hospital utilizers during 2010.

Our insurance reimbursements for cases performed within a hospital setting are significantly higher than that of a surgical center.  Hospital stays tend to involve higher margins due to the risk involved in such cases, the length of stay as compared to average surgical cases and the increased level of supplies and other billable items than in surgical cases. Hospital cases will generate higher gross and net revenue per case then will surgical cases mainly due to higher levels of risk associated with the case, patient’s length of stay is longer, and detailed itemized bills allowing for reimbursement of specific costs used during the case (e.g. surgical hardware, implants, etc.).

Salaries and benefits increased $171,725, or 6.5%, to $2,828,906 for the three months ended September 30, 2010, as compared to $2,657,181 for 2009.  This increase was primarily attributable to: (i) the aforementioned higher case volume; (ii) the need for new hospital clinical and administrative staffing to assist in accommodating the hospital expansion of two additional operating rooms and 14 additional beds set to open December 2010; (iii) need to hire additional support staff for the accounting department, and (iv) increased premium expense for the Company’s employee health insurance.

Medical supplies decreased $64,824, or 3.5%, to $1,807,499 for the three months ended September 30, 2010, as compared to $1,872,323 for 2009.  This decrease was attributable to having enough supplies on hand that carried over from the previous quarter in 2010 to reduce the need for supply orders.

During the three months ended September 30, 2010 and 2009, both First Street Hospital, L.P. and First Surgical Woodlands, L.P. held management agreements with First Surgical Partners, LLC (the former General Partner of the Company’s limited partnerships and the owners of which are shareholders of the Company) where we retained the services of First Surgical Partners, LLC to assist us in managing and conducting day-to-day business and services.    Each agreement calls for the payment by the partnerships to First Surgical Partners, LLC a monthly fee equal to 5% of the net monthly collected revenues from the partnership’s cash collections.  These fees decreased $1,034, or 0.1%, to $1,641,542 for the three months ended September 30, 2010, as compared to $1,642,576 for 2009, as a direct result of corresponding decreases in cash collections in these two entities.  The management agreements are currently in effect and we will continue to pay such fees under the agreed upon tersm set forth therein.

Our rent increased $103,303, or 26.2%, to $497,370 for the three months ended September 30, 2010, as compared to $394,067 for 2009.  Due to the increase in case volume, operating medical equipment rentals were necessary to meet the demand for equipment necessary to support the increased volume.

Depreciation and amortization expense decreased by $110,409, or 51.9%, to $323,243 for the three months ended September 30, 2010, as compared to $212,834 for 2009.  This decrease was attributable primarily to certain of our older assets reaching the end of their depreciable lives.  No significant new leasehold improvements or equipment purchases were made during those three months ended September 30, 2009 and 2010.
 
 
21

 

Our other operating expenses increased by $191,793, or 17.8%, to $1,271,571 for the three months ended September 30, 2010, as compared to $1,079,778 for 2009.  This increase was mainly attributable to legal and professional expense increase of $93,191, transportation and valet services expense increase of $50,475 and collection fees expense increase of $67,299.

We recorded net interest expense of $210,743 for the three months ended September 30, 2010, as compared to $243,516 for 2009, or a decrease of 13.5%.  We also capitalized $13,774 of interest related to borrowings for projects under construction during the three months ended September 30, 2010. No interest was capitalized during the three months ended September 30, 2009.  The total decrease of $18,999 in interest cost, or 7.8%, after considering the changes in both expensed and capitalized interest, was a result of a similar decrease in weighted average borrowings during 2010 as compared to 2009.

We incurred no net income tax expense during either the three months ended September 30, 2010 or 2009, as a result of the flow-through treatment of our net income to the various partners of our limited partnerships.  We anticipate that our effective tax rate will be approximately 35.0 % for 2011.

Nine Months Ended September 30, 2010, as Compared to Nine Months Ended September 30, 2009

Our net revenue increased $4,351,525 or 14.4%, to $34,599,464 for the nine months ended September 30, 2010, as compared to $30,247,939 for 2009.  This increase was primarily related to a 17.9% increase in hospital cases during the nine months ended September 30, 2010, as compared to 2009, partially offset by a 4% decline in surgical cases between these two periods.  Our 17.9% increase in hospital cases resulted in 205 more cases, to 1,350 cases for the nine months ended September 30, 2010, as compared to 1,145 cases for the quarter ended September 30, 2009.  This increase was primarily attributable to the addition of two physicians as hospital utilizers during 2010.

Salaries and benefits increased $474,688, or 6.2%, to $8,158,006 for the nine months ended September 30, 2010, as compared to $7,683,318 for 2009.  This increase was primarily attributable to: (i) the aforementioned higher case volume; (ii) the need for new hospital clinical and administrative staffing to assist in accommodating the hospital expansion of two additional operating rooms and 14 additional beds set to open December 2010; (iii) need to hire additional support staff for the accounting department, and (iv) increased premium expense for the Company’s employee health insurance.

Medical supplies increased $223,250, or 3.8%, to $6,037,801 for the nine months ended September 30, 2010, as compared to $5,814,551 for 2009.  This increase was attributable to the aforementioned increase in case volume.

As noted above, First Street Hospital, L.P. and First Surgical Woodlands, L.P. hold management agreements with First Surgical Partners, LLC.  These fees increased $80,043, or 1.6%, to $5,001,306 for the nine months ended September 30, 2010, as compared to $4,921,263 for 2009, as a direct result of corresponding increases in cash collections in these two entities.  The management agreements are currently in effect and we will continue to pay such fees under the agreed upon terms set forth therein.

Our rent increased $17,707, or 1.3%, to $1,396,144 for the nine months ended September 30, 2010, as compared to $1,378,437 for 2009.  Due to the increase in case volume, operating medical equipment rentals were necessary to meet the demand for equipment necessary to support the increased volume.

Depreciation and amortization expense decreased by $94,677, or 10.3%, to $1,017,494 for the nine months ended September 30, 2010, as compared to $922,817 for 2009.  This decrease was attributable primarily to certain of our older assets reaching the end of their depreciable lives.  No significant new leasehold improvements or equipment purchases were made during the nine months ended September 30, 2010.

Our other operating expenses increased by $1,196,160 , or 32.5%, to $4,880,191 for the nine months ended September 30, 2010, as compared to $3,684,031 for 2009.  This increase was primarily attributable to stock compensation cost related to shares issued to consultants of $765,072, legal and professional expense increase of $153,651, transportation and valet services expense increase of $101,144 and collection fees expense increase of $179,940.

We recorded net interest expense of $649,711 for the nine months ended September 30, 2010, as compared to $759,926 for 2009, or a decrease of 14.5%.  We also capitalized $13,774 of interest related to borrowings for projects under construction during the nine months ended September 30, 2010. No interest was capitalized during the nine months ended September 30, 2009.  The total decrease of $97,778 in interest cost, or 12.8%, after considering the changes in both expensed and capitalized interest, was a result of a similar decrease in weighted average borrowings during 2010 as compared to 2009.

We incurred no net income tax expense during either the nine months ended September 30, 2010 or 2009, as a result of the flow-through treatment of our net income to the various partners of our limited partnerships.  We anticipate that our effective tax rate will be approximately 35.0 % for 2011.
 
22

 

 
Year Ended December 31, 2009, as Compared to Year Ended December 31, 2008

The following table sets forth, for the periods indicated, certain information related to our operations expressed as a percentage of our net patient service revenue:

   
For the Years Ended
 
   
December 31,
 
   
2009
   
2008
 
             
Net Revenue
    100.0 %     100.0 %
                 
Operating Expenses
               
Salaries and Benefits
    23.2 %     23.7 %
Medical Supplies
    17.9 %     15.2 %
Management Fees
    14.7 %     15.6 %
Rent
    4.1 %     4.0 %
Depreciation and Amortization
    3.2 %     4.6 %
Other Operating Expenses
    12.0 %     12.0 %
Total Operating Expenses
    75.1 %     75.1 %
                 
Other Income and Expenses
               
Interest Expense
    (2.3 )%     (3.2 )%
Total Other Income and Expenses
    (2.3 )%     (3.2 )%
Income Before Income Taxes
    22.6 %     21.8 %
Income Taxes
    0.0 %     0.0 %
Net Income
    22.6 %     21.8 %

Our net revenue increased $6,302,755 or 16.5%, to $44,555,531 for the year ended December 31, 2009, as compared to $38,252,776 for 2008.  This increase was due to a 7.4% increase in case volume, including an increase in more complex cases allowing for a higher gross billing.
 
Salaries and benefits increased $1,285,086, or 14.2%, to $10,336,123 for the year ended December 31, 2009, as compared to $9,051,037 for 2008.  This increase was primarily attributable to: (i) increased case volume from 5,652 cases in 2008 to 6,071 cases in 2009; and (ii) decrease in reliance on temporary/outsourced staffing.

Medical supplies increased $2,156,914, or 37.2%, to $7,961,804 for the year ended December 31, 2009, as compared to $5,804,890 for 2008.  This increase was attributable to: (i) the aforementioned increase in case volume; and (ii) an increase in those cases that involve a higher demand for medical supplies during surgery (e.g. orthopedics).

During the years ended December 31, 2009 and 2008, both First Street Hospital, L.P. and First Surgical Woodlands, L.P. held management agreements with First Surgical Partners, LLC (the former General Partner of the Company’s limited partnerships and the owners of which are shareholders of the Company) where we retained the services of First Surgical Partners, LLC to assist us in managing and conducting day-to-day business and services.    Each agreement calls for the payment by the partnerships to First Surgical Partners, LLC a monthly fee equal to 5% of the net monthly collected revenues from the partnership’s cash collections.  These fees increased $564,350, or 9.4%, to $6,547,955 for the year ended December 31, 2009, as compared to $5,983,605 for 2008, as a direct result in corresponding increases in cash collections in these two entities.  The management agreements are currently in effect and we will continue to pay such fees under the agreed upon terms set forth therein.

Our rent increased $294,047, or 19.4%, to $1,811,637 for the year ended December 31, 2009, as compared to $1,517,590 for 2008.  This increase was primarily attributable to the execution of a new equipment lease in late 2008 that requires annual payments of approximately $215,000.

Depreciation and amortization expense decreased by $333,869, or 18.9%, to $1,434,220 for the year ended December 31, 2009, as compared to $1,768,089 for 2008.  This decrease was attributable primarily to certain of our older assets reaching the end of their depreciable lives.  No significant new leasehold improvements or equipment purchases were made during 2009.

 
23

 

Our other operating expenses increased by $765,013, or 16.7%, to $5,356,297 for the year ended December 31, 2009, as compared to $4,591,284 for 2008.  This increase is mainly attributable to advertising and promotional expense increase of $278,840, repairs and maintenance increase of $151,041 and professional fee increase of $162,805.

We recorded net interest expense of $1,025,518 for the year ended December 31, 2009, as compared to $1,211,713 for 2008, or a decrease of 15.4%.  We also capitalized $81,498 and $123,557 of interest related to borrowings for projects under construction during the years ended December 31, 2009 and 2008, respectively.  The total decrease of $228,254 in interest cost, or 17.1%, after considering the changes in both expensed and capitalized interest, was a result of a similar decrease in weighted average borrowings during 2009 as compared to 2008.

We incurred no net income tax expense during either the year ended December 31, 2009 or 2008, as a result of the flow-through treatment of our net income to the various partners of our limited partnerships.  We will also incur limited income tax expense during 2010 for the same reason.  We anticipate that our effective tax rate will be approximately 35% for 2011.

Diluted net income per common and common equivalent share was $0.28 on weighted average shares outstanding of 36,002,950 for the year ended December 31, 2009, as compared to $0.23 on weighted average shares outstanding of 36,000,002 for 2008.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash on hand, cash flows from operations, and borrowings under our credit lines and long-term debt.

September 30, 2010

As of September 30, 2010, we had $781,792 of cash and cash equivalents on hand as compared to $261,594 at December 31, 2009. Additionally, we had net working capital of $12,508,353 at September 30, 2010, an increase of $962,356 from our net working capital balance of $11,545,997 at December 31, 2009.

We generated cash flow from operating activities of $8,531,405 and $8,375,471 for the nine months ended September 30, 2010 and 2009, respectively.  The net increase in cash flow provided from operating activities for 2010, was primarily due to: (i) improved year-over-year operating results; partially offset by (ii) working capital component changes related to accounts receivable.

We used $3,462,659 and $280,780 of cash for investing activities during the nine months ended September 30, 2010 and 2009, respectively.  These expenditures encompassed purchases of property and equipment as well as leasehold improvements on our facilities, including the construction for the hospital expansion.

During the nine months ended September 30, 2010 and 2009, we used $4,548,548 and $7,981,485 of cash in financing activities, respectively.  Of these amounts, $6,556,875 and $7,235,000 related to former limited partner distributions during each period, respectively.

As of September 30, 2010, we had $168,750 available to us under our various credit lines.  We monitor the financial strength of our depositories, creditors, insurance carriers, and other counterparties using publicly available information, as well as qualitative inputs.  Based on our current borrowing capacity and compliance with the financial covenants under our credit agreements, we do not believe there is significant risk in our ability to make draws under our various credit lines, if needed.  However, no such assurances can be provided.

As of September 30, 2010, we have scheduled principal payments of $1,215,036 during the next twelve months, related to long-term debt and capital lease obligations (see Note 6, Long-term Debt and Capital Lease Obligations , to the accompanying unaudited consolidated financial statements as of and for the nine months ended September 30, 2010).  We do not face near-term refinancing risk.  Our credit agreements governing the vast majority of our secured borrowings contains financial covenants that include a leverage ratio.  As of September 30, 2010, we were in compliance with the covenants under our various credit agreements.  If we anticipated a potential covenant violation, we would seek relief from our lenders, which would have some cost to us, and such relief might not be on terms favorable to those in our existing credit agreements.  Under such circumstances, there is also the potential our lenders would not grant relief to us which, among other things, would depend on the state of the credit markets at that time.
 
December 31, 2009
 
As of December 31, 2009, we had $261,594 of cash and cash equivalents on hand as compared to $487,139 at December 31, 2008.  Additionally, we had net working capital of $11,545,997 at December 31, 2009, a decrease of $509,682 from our net working capital balance of $12,055,679 at December 31, 2008.  This net working capital decrease was primarily attributable to increases in our lines of credit as well as the current portion of our long-term debt and capital leases.  We did realize a $1,334,608 increase in our total current assets, driven primarily by a $1,319,042 increase in accounts receivable.  However, this increase was offset by a $1,353,831 increase in accounts payable.  Our increase in accounts receivable was consistent with our increases in revenue between the periods.  For 2009, we billed a total of 6,071 cases, at an approximate $7,339 net revenue per case, whereas in 2008 we had a total of 5,652 cases at an approximate $6,768 net revenue per case.  Our accounts payable increased between the two periods as the need for medical supplies and staffing rose consistent with our overall operations.

We generated cash flow from operating activities of $11,300,492 and $10,760,340 for the years ended December 31, 2009 and 2008, respectively.  The net increase in cash flow provided from operating activities for the year ended December 31, 2009, was primarily due to: (i) improved year-over-year operating results; partially offset by (ii) working capital component changes related to accounts payable and accrued expenses.

 
24

 

We used $596,695 and $853,648 of cash for investing activities during the years ended December 31, 2009 and 2008, respectively.  These expenditures encompassed purchases of property and equipment as well as leasehold improvements on our facilities.
 
During the years ended December 31, 2009 and 2008, we used $10,929,342 and $9,743,882 of cash in financing activities, respectively.  Of these amounts, $9,711,500 and $9,432,500 related to former limited partner distributions during each period, respectively.  The balance related to net repayments on our outstanding debt obligations.
 
CONTRACTUAL OBLIGATIONS

At December 31, 2009, we had certain obligations and commitments under our accounts payable, lines of credit, long-term debt and capital leases, operating leases, the Bariatric Program Sponsorship and construction activities totaling approximately $44,363,298 as follows:

   
Payments Due
 
   
Total
   
2010
   
2011
and 2012
   
2013
and 2014
   
2015
and Later
 
                               
Accounts Payable
  $ 6,906,807     $ 6,906,807     $ -     $ -     $ -  
Lines of Credit (1)
    1,363,965       1,363,965       -       -       -  
Long-Term Debt (1)
    12,042,414       2,050,358       2,515,362       7,476,694       -  
Capital Leases (1)
    693,010       434,640       258,370       -       -  
Operating Leases
    7,127,755       1,704,026       3,274,471       1,249,019       900,239  
Bariatric Program Sponsorship
    11,200,000       4,800,000       4,800,000       1,600,000       -  
Construction Activities (2)
    5,029,348       5,029,348       -       -       -  
                                         
    $ 44,363,298     $ 22,289,143     $ 10,848,204     $ 10,325,713     $ 900,239  

 
(1)
Amounts include interest payments at the applicable rate as of December 31, 2009.
 
(2)
Amount represents the Guaranteed Maximum Price (GMP) of $4,791,375 for the expansion of the Company’s First Street Hospital facility, plus excluded engineering, architecture, plans and other soft costs associated with the expansion project.

At December 31, 2009, our Long-Term Debt consisted of the following:

First Street Hospital, L.P. issued a secured promissory note in the original amount of $7,822,256 on January 8, 2008, to a financial institution.  The note bears interest at 7.70% per annum and matures on January 8, 2013.  The note calls for monthly interest and principal payments of $73,747, with a balloon payment due on January 8, 2013, of $6,162,583.  As of December 31, 2009, the Company owed $7,213,676 on the note.

On June 1, 2006, First Street Surgical Center, L.P. entered into a $700,000 long-term line of credit with one of its former partners, who is a current shareholder of the Company.  The line of credit bears interest at 6.0% per annum and is unsecured.  As of December 31, 2009, the Company owed $302,695 on the line of credit.

First Street Surgical Center, L.P. issued a secured promissory note in the original amount of $1,652,030 on January 8, 2008, to a financial institution.  The note bears interest at 7.70% per annum and matures on January 8, 2013.  The note calls for monthly interest and principal payments of $15,502.88, with a balloon payment due on January 8, 2013, of $1,301,513.  As of December 31, 2009, the Company owed $1,523,507 on the note.

On September 18, 2009, First Surgical Woodlands, L.P. issued a $1,300,000 secured promissory note to a financial institution.  The note bears interest at 5.95% per annum and matured on January 18, 2011.  As of December 31, 2009, the Company owed $1,054,152 on the note.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2009 and September 30, 2010, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 
25

 

MANAGEMENT

Executive Officers and Directors

Below are the names and certain information regarding First Surgical’s executive officers and directors following the acquisition of First Surgical Texas.
 
Name
 
Age
 
Position
Dr. Jacob Varon
 
58
 
Chairman of the Board of Directors
Anthony F. Rotondo
 
44
 
Chief Executive Officer, President and Director
Dr. David E. Tomaszek
 
56
 
Director
         
Don Knight
 
42
 
Vice President of Finance

Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement), at its annual meeting, to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.

Background of Executive Officers and Directors

Dr. Jacob Varon, Chairman of the Board
Dr. Varon is a plastic and reconstructive surgeon and has been practicing in the Houston area for more than 20 years.  Dr. Varon has served as the President of the Texas Chapter of the International College of Surgeons (“ICS”), the National Chairman of Plastic Surgery for ICS since 1994 and the President and Chief Executive Officer of Jeval Laboratories Ltd. since 1993.  Dr. Varon has served as the Chairman of First Surgical Partners, L.L.C. since 2002.  Dr. Varon received his medical degree from Universidad Nacional de Mexico – Escuela de Medicina in 1973.  Dr. Varon has been a practicing surgeon for more than 20 years and has developed and operated multiple business enterprises including the development and structuring of surgery centers with First Surgical Partners, L.L.C.  Dr. Varon’s knowledge of our industry from a medical and business standpoint provides him with a deep knowledge of our business affairs and provides our company with profound insight with respect to its affairs.

Anthony F. Rotondo, President, Chief Executive Officer and Director
Mr. Rotondo has worked exclusively in the healthcare industry for his entire career and has more than a decade of experience within the Ambulatory Surgery Center (“ASC”) segment.  Mr. Rotondo served as an area manager with HealthSouth from September 1997 to December 1998, as Regional Operations Officer of Physicians Surgical Care , as Vice President of Operations of Foundation Surgical Affilaites from March 2000 to August 2000, Vice President of Operations for Surgicare from August 2000 to September 2002 and as CEO and co-founder of First Surgical Partners, L.L.C. from 2002 to present.   Mr. Rotondo holds a Bachelor of Business Administration from Texas Tech University and a Masters of Business Administration from the University of St. Thomas.  As a founder, President and Chief Executive Officer of First Surgical Partners, L.L.C.,, the former general partner of our subsidiaries, Mr. Rotondo has unparalleled knowledge of the Company’s history, strategies, technologies and culture. Mr. Rotondo has been a key component in developing our subsidiaries prior to our acquisition.

Dr. David E. Tomaszek, Director
For the last five years, Dr. Tomaszek has served as the President of Tomaszek Neurosurgical Associates PA.  Dr. Tomaszek received a B.A. from Williams College in 1977 and his medical degree from the University of Connecticut School of Medicine in 1980.  As a distinguished surgeon in the field of neurosurgery and a surgeon that utilizes our facilities, Dr. Tomaszek brings a unique perspective to our Board of Directors. He understands the needs of our surgeons and the healthcare industry as a whole.

Don Knight, Vice President of Finance
Mr. Knight served as an outsourced controller from 2002 through July 2007 for First Surgical Partners LLC (“FSP”), the former general partner of our subsidiaries.  During this period he assisted with each facility opening, maintaining their financial needs, and reporting the financial results  Mr. Knight, as a C.P.A., has over twelve years of public accounting experience with various industries, but more specifically real estate enterprises, healthcare facilities and physician private practices.  He specialized in accounting system setup and implementation, financial statement reporting and tax compliance.  He holds a Bachelor of Business Administration from Texas A&M University.   In July 2007, Mr. Knight was appointed as the V.P. of Finance for FSP and presently serves as the VP of Finance for the Company.

 
26

 

CORPORATE GOVERNANCE
 
Director Independence
 
We currently do not have any independent directors.  However, our board is considering the appointment of independent directors within the meaning of applicable Nasdaq Listing Rules and the rules promulgated by the SEC.
 
Board Committees
 
We presently do not have an audit committee, compensation committee or nominating committee or committees performing similar functions, as our management believes that until this point it has been premature at the early stage of our management and business development to form an audit, compensation or nominating committee.  However, our new management plans to form an audit, compensation and nominating committee in the near future.  The audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and system of internal controls.  We intend that the audit committee will be comprised solely of independent directors and will have an audit committee financial expert as required by the rules and regulations of the SEC.
 
The compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers.  The nominating committee will be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors.  The nominating committee will also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures.  Until these committees are established, these decisions will continue to be made by our board of directors.  Although our board of directors has not yet established any minimum qualifications for director candidates, when considering potential director candidates, our board of directors considers the candidate’s character, judgment, skills and experience in the context of the needs of our Company and our board of directors.
 
We do not have a charter governing the nominating process.  The members of our board of directors, who perform the functions of a nominating committee, are not independent because they are also our officers.  There has not been any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors.  Our board of directors does not believe that a defined policy with regard to the consideration of candidates recommended by shareholders is necessary at this time because, given the early stages of our development, a specific nominating policy would be premature and of little assistance until our business operations are at a more advanced level.

 
27

 

Executive Compensation
Summary Compensation Table
 
Name and
Principal
Position
 
Year
 
Salary ($)
   
Bonus
($)
   
(5)
Stock
Awards
($)
   
(6)
Stock
Options
($)
   
Non-equity
Incentive Plan
Compensation
($)
   
Non-Qualified
Deferred
Compensation
Earnings ($)
   
All Other
Compensation
($)
   
Total ($)
 
                                                     
Dr. Jacob Varon,
 
2010
                                        793,604 (1)     793,604  
Chairman
 
2009
                                        473,470 (1)     473,470  
                                                                     
Tony Rotondo,
 
2010
    104,988.00                                     793,604 (1)     898,592  
CEO
 
2009
    104,988.00                                     473,470 (1)     578,458  
                                                                     
Dr. David Tomaszek,
 
2010
                                                   
Director
 
2009
                                               
                                                                     
Don Knight,
 
2010
    145,002                                             145,002  
VP of Finance
 
2009
    138,078                                             138,078  
 
(1) Payments represent funds received pursuant to the management agreements between First Surgical Partners, LLC and both First Street Hospital, L.P. and First Surgical Woodlands, L.P.  During the years ended December 31, 2009 and 2008, both First Street Hospital, L.P. and First Surgical Woodlands, L.P. held management agreements with First Surgical Partners, LLC (the former General Partner of the Company’s limited partnerships and the owners of which are shareholders of the Company) where the Company retained the services of First Surgical Partners, LLC to assist the Company in managing and conducting day-to-day business and services.  Dr. Varon and Tony Rotondo, executive officers and directors of the Company, are the owners of First Surgical Partners, LLC.  The First Surgical Woodlands, L.P. agreement was executed on February 1, 2005, with a term of five years and shall automatically renew for one additional two year period unless otherwise terminated.  The First Street Hospital, L.P. agreement was executed on July 25, 2006, with a term of ten years and shall automatically renew for one additional two year period unless otherwise terminated.  Each agreement calls for the payment by the partnerships to First Surgical Partners, LLC a monthly fee equal to 5% of the net monthly collected revenues from the partnership’s cash collections.  For the year ended December 31, 2009 and 2008, the partnerships paid a total of $6,547,955 and $5,983,606 in management fees to First Surgical Partners, LLC.  For the three and nine months ended September 30, 2010, the management fees to First Surgical Partners, LLC totaled $1,641,542 and $5,001,306.  For the three and nine months ended September 30, 2009, management fees to First Surgical Partners, LLC totaled $1,642,576 and $4,921,263 respectively.  Dr. Varon and Mr. Rotondo are equal owners in First Surgical Partners LLC, and, as a result, half of the amount paid to First Surgical Partners, LLC was applied to Dr. Varon and Mr. Rotondo each.  The management agreements are continuing in operation following the acquisition of First Surgical Woodlands, L.P. and First Street Hospital, L.P. by our company.

Employment Agreements

As of the date hereof, the Company has not entered into any employment agreement with its executive officers except to the extent that the Company .
 
Outstanding Equity Awards at Fiscal Year-End

As of December 31, 2010, First Surgical did not have any equity awards outstanding.

DIRECTOR COMPENSATION

The Directors of First Surgical have not received compensation for rendering services as directors of First Surgical since inception.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 31, 2010, the Company entered into an Agreement and Release with David Roff, a shareholder of the Company, pursuant to which Mr. Roff returned 36,111 shares of common stock of the Company to the Company for cancellation and has provided a full release of the Company in consideration of $300,000 less the repayment of any shareholder loans or accounts payable.

During the years ended December 31, 2009 and 2008, both First Street Hospital, L.P. and First Surgical Woodlands, L.P. held management agreements with First Surgical Partners, LLC (the former General Partner of the Company’s limited partnerships and the owners of which are shareholders of the Company) where the Company retained the services of First Surgical Partners, LLC to assist the Company in managing and conducting day-to-day business and services.  Dr. Varon and Tony Rotondo, executive officers and directors of the Company, are the owners of First Surgical Partners, LLC.  The First Surgical Woodlands, L.P. agreement was executed on February 1, 2005, with a term of five years and shall automatically renew for one additional two year period unless otherwise terminated.  The First Street Hospital, L.P. agreement was executed on July 25, 2006, with a term of ten years and shall automatically renew for one additional two year period unless otherwise terminated.  Each agreement calls for the payment by the partnerships to First Surgical Partners, LLC a monthly fee equal to 5% of the net monthly collected revenues from the partnership’s cash collections.  For the year ended December 31, 2009 and 2008, the partnerships paid a total of $6,547,955 and $5,983,606 in management fees to First Surgical Partners, LLC.  For the three and nine months ended September 30, 2010, the management fees to First Surgical Partners, LLC totaled $1,641,542 and $5,001,306.  For the three and nine months ended September 30, 2009, management fees to First Surgical Partners, LLC totaled $1,642,576 and $4,921,263 respectively.

On June 1, 2006, First Street Surgical Center, L.P. entered into a $700,000 long-term line of credit with one of its former partners, who is a current shareholder of the Company.  The line of credit bears interest at 6.0% per annum and is unsecured.  As of September 30, 2010 and December 31, 2009, the Company owed $316,592 and $302,695, respectively on the line of credit. The Company recognized total interest expense of $17,585 and $20,588 during the years ended December 31, 2009 and 2008, respectively.  The Company recognized total interest expense of $4,702 and $4,429 during the three months ended September 30, 2010 and 2009, respectively, and $13,897 and $13,090 during the nine months ended September 30, 2010 and 2009, respectively.

On September 17, 2006, First Street Hospital, LP entered into a building lease with one of its former partners, who is a current shareholder of the Company.  The building lease is for an initial term of 10 years from commencement date followed by an option to extend the initial ten year term by two consecutive ten year terms. The lease agreement calls for minimum monthly lease payments of $39,400 per month, subject to escalation to reflect increases in the consumer price index.

As of December 31, 2009, we had $604,637 due from First Surgical Memorial Village LP, an entity managed by the former general partner of the Company’s three operating partnerships.  This amount was repaid in 2010.

 
28

 

On April 1, 2003, First Street Surgical Center, LP entered into a building lease with one of its former partners, who is a current shareholder of the Company.  The building lease is for an initial term of 10 years from commencement date followed by an option to extend the initial ten year term by two consecutive five year terms.  The lease agreement calls for minimum monthly lease payments of $23,000 per month, subject to escalation to reflect increases in the consumer price index.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of February 15, 2011 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.

Name of Beneficial Owner (1)
 
Common Stock Beneficially
Owned
   
Shares of Common Stock Subject
to Voting Agreement(7)
   
Percentage of Common Stock (3)
 
                   
Dr. Jacob Varon (2) (7)
    6,921,577       36,000,002       90.00 %
                         
Anthony F. Rotondo (2)(5)(7)
    6,293,737       36,000,002       90.00 %
                         
Dr. David E. Tomaszek (2)(6)
    3,992,655       0       9.98 %
                         
Don Knight (2)
    0       0       *  
                         
Nobis Capital Advisors, Inc.(4)
    2,575,046       0       6.44 %
                         
All officers and directors as a group (4 people)
    17,207,969       36,000,002       90.00 %

* Less than 1%

 
(1)
Except as otherwise indicated, the address of each beneficial owner is c/o First Surgical Partners, L.L.C., 411 First Street, Bellaire, Texas 77401.
 
 
(2)
Executive officer and/or director of the Company.
 
 
(3)
Applicable percentage ownership is based on 40,000,002 shares of common stock outstanding as of December 31, 2010, together with securities exercisable or convertible into shares of common stock within 60 days of December 31, 2010 for each stockholder.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of common stock that are currently exercisable or exercisable within 60 days of December 31, 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
 
   
(4)
The address for Nobis Capital Advisors, Inc. (“Nobis”) is 2901 West Coast Highway, 3 rd Floor, Newport Beach, California  92663.  Thomas Rubin, CEO of Nobis, has voting and dispositive control over the securities held by Nobis.
 
 
(5)
Includes 5,293,737 shares of common stock held by Anthony F. Rotondo and 1,000,000 shares of common stock held by The Anthony F. Rotondo Irrevocable Trust dated July 23, 2010..  Mr. Rotondo is the beneficiary of such trust but does not serve as the trustee and, as a result, does not have voting or dispositive control over such securities.
 
 
(6)
Includes 3,532,655 shares of common stock held by David E. Tomaszek and 390,000 shares of common stock held by The David E. Tomaszek Irrevocable Trust dated July 20, 2010.  Dr. Tomaszek is the beneficiary of such trust but does not serve as the trustee and, as a result, does not have voting or dispositive control over such securities.

 
29

 

   
(7)
 On November 4, 2010, we entered into a Contribution Agreement with the shareholders of First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc.), a Nevada corporation (“First Surgical Texas”), each of which are accredited investors (“First Surgical Texas Shareholders”) pursuant to which the First Surgical Texas Shareholders agreed to contribute 100% of the outstanding securities of First Surgical Texas in exchange for 39,964,346 shares of our common stock (the “First Surgical Texas Contribution”).   On November 24, 2010, we entered an agreement with First Surgical Texas to extend the closing date to December 31, 2010 in consideration of a payment of $7,500.  The First Surgical Texas Contribution closed on December 31, 2010.  Prior to the closing of the First Surgical Texas contribution, First Surgical Texas acquired First Street Surgical Center, L.P. (“FSSC”), First Surgical Woodlands, L.P. (“FSW”), and First Street Hospital, L.P. (“FSH”) (collectively, the “Subsidiaries”) from the former partners.  Pursuant to that certain voting agreement executed in connection with the acquisition of FSSC, FSW and FSH by First Surgical Texas, each of the former owners of the Subsidiaries granted Dr. Varon and Mr. Rotondo, affiliates of the Company, the authority to vote their shares of the Subsidiaries or such successor of the Subsidiaries as Dr. Varon and Mr. Rotondo deem appropriate in their sole discretion.  Dr. Varon and Mr. Rotondo disclaim beneficial ownership of such shares governed by the Voting Agreement.

 
30

 

DESCRIPTION OF SECURITIES

The Company’s authorized capital stock consists of 200,000,000 shares of common stock at a par value of $0.001 per share and 50,000,00  shares of preferred stock at a par value of $0.001 per share.  As of December 31, 2010, there are 40,000,002  shares of the Company’s common stock issued and outstanding that are held by approximately 220 stockholders of record and no shares of preferred stock issued and oustanding.

Holders of the Company’s common stock are entitled to one vote for each share on all matters submitted to a stockholder vote.  Holders of common stock do not have cumulative voting rights.  Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors.  Holders of the Company’s common stock representing a majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders.  A vote by the holders of a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to the Company’s articles of incorporation.

Holders of the Company’s common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds.  In the event of liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.

The Board of Directors may later determine to issue our preferred stock.  If issued, the preferred stock may be created and issued in one or more series and with such designations, rights, preferences and restrictions as shall be stated and expressed in the resolution(s) providing for the creation and issuance of such preferred stock.  If preferred stock is issued and we are subsequently liquidated or dissolved, the preferred stockholders would have preferential rights to receive a liquidating distribution for their shares prior to any distribution to common shareholders. Although we have no present intent to do so, we could issue shares of preferred stock with such terms and privileges that a third party acquisition of our company could be difficult or impossible, thus entrenching our existing management in control of our company indefinitely.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Registrant's common stock is quoted from time to time on the OTC-BB under the symbol FSPT. The following table sets forth quarterly high and low bid prices of a share of our common stock as reported by the OTC Bulletin Board for the years December 31, 2010 and 2009. The quotations listed below reflect inter-dealer prices, without mark-ups, mark-downs or commissions and may not necessarily reflect actual transactions.

   
High
   
Low
 
YEAR ENDED December 31, 2009
           
Quarter ended December 31,
  $ 0.30     $ 0.30  
Quarter ended September 30,
    0.30       0.30  
Quarter ended June 30,
    3.00       3.00  
Quarter ended March 31,
    3.00       3.00  
                 
YEAR ENDED December 31, 2010
               
Quarter ended December 31,
  $ 0.30     $ 0.30  
Quarter ended September 30,
    0.30       0.30  
Quarter ended June 30,
    0.30       0.30  
Quarter ended March 31,
    0.30       0.30  

Holders of our Common Stock

As of December 31, 2010, there were approximately 220 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.  The stock transfer agent for our securities is Interwest Transfer Company, Inc., 1981 Murray Holladay Road, Suite 100, Salt Lake City, Utah 84117.

Dividends

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company does not have an authorized equity compensation plan.

 
31

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company’s directors and executive officers are indemnified as provided by the Delaware Corporation law and its Bylaws. These provisions state that the Company’s directors may cause the Company to indemnify a director or former director against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him as a result of him acting as a director. The indemnification of costs can include an amount paid to settle an action or satisfy a judgment.  Such indemnification is at the discretion of the Company’s board of directors and is subject to the Securities and Exchange Commission’s policy regarding indemnification.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, The Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

Item 3.02
Unregistered Sales of Equity Securities.

On December 31, 2010, the Company closed a Contribution Agreement with the First Surgical Texas Shareholders pursuant to which we acquired 100% of the outstanding securities of First Surgical Texas in exchange for 39,964,346 shares of our common stock.  Each of the shareholders are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

In addition, on December 31, 2010, subsequent to the acquisition of First Surgical Texas, the Company entered into an Agreement and Release with David Roff, a significant shareholder of the Company, pursuant to which Mr. Roff agreed to return 36,111 shares of common stock of the Company to the Company for cancellation and has provided a full release of the Company in consideration of $300,000 less the repayment of any shareholder loans or accounts payable.

This issuance of these above securities are exempt from the registration requirements under Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 as promulgated under Regulation D.    Each of t he shareholders are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

Item 3.03
Material Modification to Rights of Security holders

The information set forth in Item 1.01 and Item 3.02 of this Current Report on Form 8-K is incorporated by reference into this Item 3.03.

Item 5.01
Changes in Control of Registrant.

The information set forth in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.01.

Item 5.02
Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

The information set forth in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.02.

Item 5.06
Change in Shell Company Status.

As a result of the consummation of the First Surgical Texas Contribution described in Item 1.01 of this Current Report on Form 8-K, we are no longer a shell corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.

Item 9.01
Financial Statements and Exhibits

 
Financial Statements of Business Acquired
 
(a)
Filed herewith are the following:
 
Audited consolidated financial statements of First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc.) for the year ended December 31, 2009 (see Exhibit 99.1)

Unaudited consolidated financial statements of First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc.) for the nine and three months ended September 30, 2010 (see Exhibit 99.2)
 
(b)
Pro Forma Financial Information
 
Not Applicable

 
32

 

(c)
Shell Company Transactions
 
Reference is made to Items 9.01(a) and the exhibits referred to therein, which are incorporated herein by reference.
 
(d)
Exhibits
   
Exhibit No.
 
Description
     
3.1
 
Certificate of Incorporation of Arkson Nutraceuticals Corp. (4)
3.2
 
Corporate Bylaws of Arkson Nutraceuticals Corp. (4)
3.3
 
Certificate of Amendment of Certificate of Incorporation dated January 11, 2008
3.4
 
Certificate of Correction dated February 8, 2008
3.5
 
Certificate of Amendment of Certificate of Incorporation dated August 6, 2008
3.6
 
Certificate of Amendment to Certificate of Incorporation dated November 30, 2010
3.7
 
Certificate of Ownership of Arkson Nutraceuticals Corp. (5)
4.1
 
Letter Loan Agreement by and between First Street Hospital, L.P. and the Bank of River Oaks dated January 8, 2008
4.2
 
Secured Promissory Note issued by First Street Hospital, L.P. to the Bank of River Oaks dated January 8, 2008
4.3
 
Unsecured Promissory Note issued by First Street Hospital, L.P. to the Bank of River Oaks dated May 4, 2010
4.4
 
Secured Construction Loan Agreement by and between First Street Hospital, L.P. and the Bank of River Oaks dated May 4, 2010
4.5
 
Promissory Note issued by First Street Surgical Center LP to Bank of River Oaks Date January 1, 2008
4.6
 
Secured Promissory Note issued by First Surgical Woodlands, L.P. to the Bank of River Oaks dated May 18, 2006
4.7
 
Secured Promissory Note issued by First Surgical Woodlands, L.P.  to the Bank of River Oaks dated September 18, 2009
4.8
 
Long-term Line of Credit between First Street Surgical Center, L.P. and Jacob Varon dated June 1, 2006.
10.1
 
Contribution Agreement by and between Arkson Nutraceuticals Corp. and Piper Acquisition III, Inc., dated November 4, 2010.
10.2
 
Amendment to the Contribution Agreement by and between Arkson Nutraceuticals Corp. and Piper Acquisition III, Inc., dated November 24, 2010. (2)
10.3
 
Form of Non-Competition, Non-Disclosure and Non-Solicitation Agreement by and between First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc., a wholly owned subsidiary of the Company), and former limited partners or members of First Street Hospital, L.P., First Surgical Woodlands, L.P., First Street Surgical Center, L.P. and First Surgical Partners, L.L.C.(3)
10.4
 
Form of Lock-Up Agreement by and between First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc., a wholly owned subsidiary of the Company), and former limited partners or members of First Street Hospital, L.P., First Surgical Woodlands, L.P., First Street Surgical Center, L.P. and First Surgical Partners, L.L.C. (3)
10.5
 
Form of Voting Agreement by and between First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc., a wholly owned subsidiary of the Company), and former limited partners or members of First Street Hospital, L.P., First Surgical Woodlands, L.P., First Street Surgical Center, L.P. and First Surgical Partners, L.L.C. (3)
10.6
 
Agreement entered by and between the Company and David Roff dated December 31, 2010(3)
10.7
 
Lease Agreement for First Street Surgical Center, L.P. dated April 1, 2003
10.8
 
Lease Agreement for First Street Hospital, L.P. dated September 17, 2006 (3)
10.9
 
Bariatric Program Sponsorship Agreement by and between the Company and Vital Weight Control, Inc. d/b/a NeWeigh dated May 1, 2006
10.10
 
Amendment to the Bariatric Program Sponsorship Agreement by and between the Company and Vital Weight Control, Inc. d/b/a NeWeigh dated February 13, 2008
10.11
 
Amendment to the Bariatric Program Sponsorship Agreement by and between the Company and Vital Weight Control, Inc. d/b/a NeWeigh dated December 10, 2009
10.12
 
Management Agreement by and between First Surgical Partners LLC and First Street Hospital LP
10.13
 
Management Agreement by and between First Surgical Partners LLC and First Surgical Woodlands LP
99.1
 
Audited consolidated financial statements of First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc.) for the year ended December 31, 2009
99.2
 
Unaudited consolidated financial statements of First Surgical Texas, Inc. (f/k/a Piper Acquisition III, Inc.) for the nine and three months ended September 30, 2010

 
(1)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on November 15, 2010
 
(2)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on November 26, 2010
   
(3)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 6, 2011
 
(4)
Incorporated by reference to the Form 10 Registration Statement filed with the Securities and Exchange Commission on February 9, 2007
 
(5)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 8, 2011

 
33

 

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

     
FIRST SURGICAL PARTNERS INC.
 
       
Dated: March 4, 2011
By:  
/s/ Anthony F. Rotondo
 
   
Name: Anthony F. Rotondo
 
   
Title: President and Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
   
/s/Don Knight
 
   
Name: Don Knight
 
   
Title: Vice President of Finance
 
   
(Principal Accounting Officer)
 

 
34

 
 
 
State of Delaware
 
Secretary of State
 
Division of Corporations
 
Delivered 03:38 PM 01/11/2008
 
FILED 03;38 PM 01/11/2008
 
SIZI7 080036808 - 2951292 FILE
 
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
 
Arkson Nutraceuticals Corp., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,
 
DOES HEREBY CERTIFY:
 
FIRST: That at a meeting of the Board of Directors of Arkson Nutraceuticals Corp. resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling for consideration thereof and consent thereto by a majority in interest of the stockholders of the corporation. The resolution setting forth the proposed amendment is as follows:
 
RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered “Fourth so that, as amended, said Article shall be and read as follows:
 
The corporation shall have the authority to issue two hundred million shares of common stock with a par value of $0.0001 and fifty million shares of preferred stock with a par value of $0.0001. The preferred stock may be issued in series, each of which may have such voting powers and such designations, preferences and relative, participating, optional or other special rights, and qualifications, or restrictions thereof, as shall be stated in the resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by this provision of its certificate of incorporation.
 
SECOND: That thereafter, written consents for the above amendment were obtained from a majority in interest of the stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware.
 
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
 
FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment.
 
IN WITNESS WHEREOF, the Board of Directors and Stockholders of Arkson Nutraceuticals Corp. has caused this certificate to be signed by Robert Auduon, an Authorized Officer, this 11th day of January, 2008.
 
By:
/s/Robert Auduon
 
 
Robert Auduon. President
 
 
 
 

 
 
 
State of Delaware
Secretary of State
Division of Corporations
Delivered 06:20 PM 02/08/2008
FILED 06:20 PM 02/08/2008
SRV 080138308 - 2951292 FILE
 
STATE OF DELAWARE
CERTIFICATE OF CORRECTION
 
ARKSON NUTRACEUTICALS CORP., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,
 
DOES HEREBY CERTIFY:
 
 
1.
The name of the corporation is Arkson Nutraceuticals Corp.
 
 
2.
That a Certificate of Amendment of Certificate of Incorporation was filed by the Secretary of State of Delaware on January 11, 2008 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of Delaware.
 
 
3.
The inaccuracy or defect of said Certificate is: Under the By-Laws of said Corporation a meeting of shareholders was required for the Amendment filed, but in fact no meeting was properly noticed or held: therefore said Certificate should not have been filed and the Directors of said Corporation wish to render the Certificate null and void.
 
 
4.
The Certificate of Amendment filed on January 11, 2008 should be rendered null and void.
 
IN WITNESS WHEREOF, said corporation has caused this Certificate of Correction this Eighth Day of February, A.D. 2008.
 
By:
/s/Robert Auduon
 
Name:
Robert Auduon
 
Title:
President & Director
 
 
 

 
State of Delaware
 
Secretary of State
 
Division of Corporations
 
   
FILED 07:27 PM 09/06/2009
 
Delivered 07:27 PM 08/06/2008
 
SRV 080853147 – 2951292 FILE
 
 
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
 
Arkson Nutraceuticals Corp., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,
 
DOES HEREBY CERTIFY:
 
FIRST: That at a meeting of the Board of Directors of Arkson Nutraceuticals Corp. resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling for consideration thereof and consent thereto by a majority in interest of the stockholders of the corporation. The resolution setting forth the proposed amendment is as follows:
 
RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "Fourth" so that, as amended, said Article shall be and read as follows:
 
The corporation shall have the authority to issue two hundred million shares of common stock with a par value of $0.0001 and fifty million shares of preferred stock with a par value of $0.0001. The preferred stock may be issued in series, each of which may have such voting powers and such designations, preferences and relative, participating, optional or other special rights, and qualifications, or restrictions thereof, as shall be stated in the resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it. by this provision of its certificate of incorporation.
 
SECOND: That thereafter, written consents fbr the above amendment were obtained from a majority in interest of the stockholders in accordance with Section 228 of the Genera] Corporation Law of the Stale of Delaware.
 
THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
 
FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment
 
IN WITNESS WHEREOF, the Board of Directors and Stockholders of Arkson Nutraceuticals Corp. has caused this certificate to be signed by Robert Audtion, an Authorized officer, this 6th day of August, 2008.
 
By:
/s/ Robert Auduon
 
Robert Auduon, President
 
 
 

 
 
 
State of Delaware
 
Secretary of State
 
Division of Corporations
 
Delivered 03:57 PM 11/30/2010
 
FILED 03:47 PM 11/30/2010
 
SRV 101132155 - 2951292 FILE
 
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ARKSON NUTRACEUTICALS CORP.
 
Arkson Nutraceuticals Corp. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify:
 
FIRST: That in lieu of a meeting and vote of stockholders at a meeting, stockholders representing a majority of the shares issued and outstanding and entitled to vote on the amendments, in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware, have given written consent authorizing the Corporation's Board of Directors to effect the following amendment to the Certificate of Incorporation of the Corporation, and written notice of the adoption of the amendment has been given as provided in Section 228 of the General Corporation Law of the State of Delaware to every stockholder entitled to such notice, and that the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board of Directors, have adopted resolutions authorizing and approving the following amendment to the Certificate of Incorporation of the Corporation:
 
RESOLVED, that the Certificate of Incorporation of the Corporation be amended by adding the following paragraph to ARTICLE FOUR:
 
"Effective as of December 13, 2010, for every 9 shares of Common Stock, then issued and outstanding, automatically and without any action on the part of the respective holders thereof, shall be converted and combined into one share of Common Stock. No fractional shares shall be issued as a result thereof. In lieu of issuing fractional shares, any fractional share resulting from the combination shall be rounded up to the nearest whole share of Common Stock. The reverse split shall not change the number of authorized shares of Common Stock."
 
SECOND; That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware.
 
THIRD: That this Certificate of Amendment of the Certificate of Incorporation shall be effective on December 13, 2010 (the "Effective Date").
 
IN WITNESS WHEREOF, Arkson Nutraceuticals Corp. has caused this certificate to be signed by David Roff, its President, on the 3rd day of November, 2010.
 
 
ARKSON NUTFtACEUTICALS CORP.
 
     
 
/s/ David Roff
  
 
By: David Roff
 
 
Its: President
 
 
 
1

 
 
LETTER LOAN AGREEMENT
 
January 8 , 2008
 
FIRST STREET HOSPITAL, L.P.
411 FIRST ST.
BELLAIRE, TEXAS 77401
 
Gentlemen:
 
Pursuant to our prior discussions, this Letter Loan Agreement will serve to set forth the terms of the financing agreement by and between FIRST STREET HOSPITAL, L.P., a Texas limited partnership (the "Borrower") and THE BANK OF RIVER OAKS (the "Lender"):
 
1,                Loans. Subject to the terms and conditions set forth in this Letter Loan Agreement (the "Loan Agreement") and the other agreements, instruments, and documents executed and delivered in connection herewith and pursuant hereto (collectively, together with this Loan Agreement, referred to hereinafter as the "Loan Documents"), Lender and Borrower hereby agree as follows:
 
(a)          Term Loan. Lender agrees to lend to Borrower, and Borrower agrees to borrow from Lender, an amount not to exceed $7,822,256.00 (the "Term Loan"). The Term Loan proceeds will be used by Borrower for debt consolidation.
 
(b)          Revolving Line of Credit Loan. Lender agrees to lend to Borrower, and Borrower may borrow from Lender, on a revolving basis, from time to time during the period commencing on the date hereof and continuing through and including a date one year from the note date (the "Termination Date"), such amounts as Borrower may request up to but not to exceed at any time outstanding, the amount of $750,000.00 (the "Revolving Line ofCredit  Loan"). The Revolving Line of Credit Loan proceeds will be used by Borrower solely for working capital. The Revolving Line of Credit Loan shall be due and payable in full on the Termination Date. Within the limits of this subparagraph, Borrower may borrow, repay, and reborrow hereunder in accordance with the terms of this Loan Agreement, Borrower shall give Lender not less than 2 business days' prior notice of each requested advance hereunder, specifying (9 the aggregate amount of such requested advance, and (ii) the requested date of such advance, with such advances to be requested in a form satisfactory to Lender.
 
The Revolving Line ofCredit Loan, and Term Loan are sometimes referred to hereinafter collectively as the "Loans".
 
2.                Promissory Notes. The Loans shall be evidenced by one or more promissory notes (collectively called, together with any renewals, extensions and increases thereof, the "Notes"), duly executed by Borrower, in the original principal amounts of $7,822,256.00 and $750,000.00 and in form and substance acceptable to Lender. Interest on the Notes shall accrue at the rate set forth therein. The principal of and interest on the Notes shall be due and payable in accordance with the terms and conditions set forth in the Notes and in this Loan Agreement.
 
3.               Collateral. As collateral and security for the Loans, and any and all other indebtedness or obligations from time to time owing by Borrower to Lender, Borrower shall grant, or cause the owner thereof to grant, to Lender, its successors and assigns, a lien and security interest (which shall be a first and prior lien and security interest therein), in and to the following described property, together with any and all products and proceeds thereof (collectively, the "Collateral"):
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 1
 
(a)     Real Property. The real property more particularly described on Exhibit "A" attached hereto and incorporated herein by reference (the "Property"), together with an assignment of all rents and leases with respect to the Property.
 
(b)     Personal Pr_Lp) erty. All ofBorrower's present and future accounts, inventory, equipment, fixtures, chattel paper, documents, instruments, and general intangibles.
 
4.                Guaranties. At closing, and as an inducement to Lender to execute and deliver this Loan Agreement and to make the Loans to Borrower, Borrower agrees to cause
 
Riva Linda Collins, M.D.
David L. Blumfield, M.D.
Kaare Kolstad, M.D.
4611 Locust
5215 Pine St.
3229 Locke Lane
Bellaire, Texas 77401
Bellaire, Texas 77401
Houston, Texas 77019
     
Franklin Rose, M.D.
Michael Ciaravino, M.D.
Ellegy Etter, M.D.
803 Country Lane
5-1-sxeetiiver 37go IS;atto
9315 Silver Lake
Houston. Texas 77024
Houston, Texas 744610
Houston, Texas 77025
     
Anthony Rotondo
Mark Labbe, M.D.
Patrick McCulloch, M.D.
8611 N. Fitzgerald Way
3424 Sunset Blvd.
2203 Baldwin St...it-53-1k
Missouri City. Texas 77459
Houston, Texas 77005
Houston, Texas 77002
     
Richard Nixon, M.D.
Todd Siff, M.D.
Kevin Varner, M.D.
17106 Wlinderhill Dr.
869 Country Lane
5212 Aspen
Spring, Texas 773 79
Houston, Texas 77024
Bellaire, Texas 77401
     
David E. Tomaszek, M.D.
Jacob() Varon, M.D.
Abcle,ikatler-Fttstelris.C.LL.
7439 Teaswood Dr.
5835 Shady River
6-FarntrarrParlr
Conroe, Texas 77304
Houston, Texas 77057
HaI r s tur71-14. . .
 
(collectively, the "Guarantor") to execute and deliver their guaranties to Lender, in form and substance satisfactory to Lender (collectively, the "Guaranty Agreement").
 
5.                Origination Fee. Lender shall be entitled to an origination fee of 0.25% of the Term Loan to be paid at funding of the Term Loan.
 
6.               Term Loan Prepayment. The Term Loan will cam/ a prepayment penalty as set forth in the provisions of the Term Loan promissory note.
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 2
 
7.                Closing Documents. Prior to or contemporaneously with the closing of the Loans, Borrower shall deliver, or cause to be delivered, to Lender, in addition to this Agreement and the Notes, the following agreements, documents, and instruments, each in the form required by Lender:
 
(a)          Deed of Trust and Security Agreement covering the Property.
 
(b)          Security Agreement covering the Personal Property.
 
(c)          UCC- I Financing Statements.
 
(d)          Lock Box Agreement.
 
(e)          Resolutions of Borrower, authorizing Borrower to enter into the transactions contemplated under this Loan Agreement and the other Loan Documents.
 
(0           Guaranty Agreement from Guarantor.
 
(g)         Such other agreements, instruments, documents, and certificates as may be requested by Lender to evidence the Loans and to grant and perfect a lien and security interest in the Collateral.
 
8.               Representations and Warranties. Borrower and each Guarantor to the extent that the stated action or information relates to Guarantor, hereby represents and warrants as follows:
 
(a)         Existence. Borrower is duly organized, validly existing, and is in good standing under the laws of the state of its formation and all other states where it is doing business, and has all requisite power and authority to execute and deliver this Loan Agreement and the other Loan Documents.
 
(b)         Authorization. The execution, delivery, and performance of this Loan Agreement and all of the other Loan Documents have been duly authorized, and constitute legal, valid, and binding obligations, enforceable inaccordance with their respective terms, except as limitedby bankruptcy, insolvencyor sinniarlaws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles.
 
(c)         Authority. The execution, delivery, and performance of this Loan Agreement and the other Loan Documents, and the consummation of the transactions contemplated hereby and thereby, do not conflict with, result in a violation of, or constitute a default under (i) any provision of Borrower's governing documents, any other agreement or instrument, or (ii) any law, governmental regulation, court decree, or order applicable to Borrower, or require the consent, approval, or authorization of any third party.
 
(d)         Financial Condition Each financial statement supplied to Lenders prepared in accordance with generally accepted accounting principles, consistently appli ed, in effect on the date such statements were prepared and truly discloses and fairly presents the financial condition as of the date of each such statement, and there has been no material adverse change in such financial condition or results of operations subsequent to the date of the most recent financial statement supplied to Lender.
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 3
 
(e)        Litigation. There are no actions, suits or proceedings pending or, to the knowledge of Borrower, threatened against or affecting Borrower or the properties of Borrower, before any court or governmental department, commission or board, which, if determined adversely to Borrower, (i) would subject Borrower to any liability not fully covered by insurance, or (ii) would have a material adverse effect on the financial condition, properties, or operations of Borrower, or its ability to perform its obligations under this Loan Agreement.
 
(f)         Tax Returns. Borrower and each Guarantor has filed all federal, state, and local tax reports and returns, if any, required by any law or regulation to be filed by it and has either duly paid all taxes, duties, and charges, if any, indicated due on the basis of such returns and reports, except those being contested in good faith by appropriate proceeding, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected.
 
(g)       No Material Changes. There is no fact known that has not been disclosed to Lender in writing which may result in any material adverse change in Borrower's business, properties or operations. No certificate or statement herewith or heretofore delivered to Lender in connection herewith, or in connection with any transaction contemplated hereby, contains any untrue statement of a material fact or fails to state any material fact necessary to keep the statements contained therein from being misleading. Borrower is not in default and no event or circumstance has occurred which, except for the passage of time or the giving of notice, or both, would constitute a default under any loan or credit agreement, mortgage, deed of trust, security agreement or other agreement or instrument. Since the date of the last financial statements delivered to Lender, neither the business nor the assets or properties of Borrower have been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition, or taking of property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof or by acts of God.
 
(h)       Ownership of Assets. Borrower owns all of the assets reflected on its most recent balance sheet free and clear of all liens, security interests or other encumbrances, except as previously disclosed in writing to Lender.
 
Governmental Authority . Borrower, (i) is not in violation of any law, judgment, decree, order, ordinance, or governmental rule or regulation, or (ii) has not failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any assets or properties or the conduct of business.
 
Principal Office. The principal office of Borrower, as well as the place at which Borrower keeps its books and records, is the address set forth above.

 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 4
 
9.                Representation in Request for Advance. Each request for an advance hereunder shall constitute, a representation and warranty by Borrower that, as of the date of such request, (a) all of the representations and warranties of Borrower contained in this Loan Agreement and the other Loan Documents are true and correct, and (b) no event has occurred and is continuing, or would result from the requested advance, which constitutes an Event of Default under any of the Loan Documents. All representations and warranties made by Borrower in this Loan Agreement shall survive delivery of the Loan Documents and the making of the Loans.
 
10.              Conditions Precedent to the Loans. Any obligation of Lender to make the Loans shall be subject to the complete and continuing satisfaction, on or before the date hereof, of the following conditions precedent:
 
(a)       Loan Documents. Borrower, each Guarantor and any other person or entity required to do so shall have executed and delivered to Lender the Loan Documents to which they are a party and any and all other documents reasonably required or requested by Lender to give effect to the transactions contemplated by this Loan Agreement, all in form and substance satisfactory to Lender and its counsel.
 
(b)       Real Estate. With regard to the Property, Lender shall receive the following (i) a current commitment for a Mortgagee's Title Insurance Policy issued for the benefit of Lender at Bon-owees expense, agreeing to insure Lender's lien as a first and prior lien and subject to no exceptions other than as agreed upon by Lender, in its sole discretion; (ii) an MAI appraisal satisfactory to Lender performed on an "As Is" basis; (iii) an acceptable survey prepared by a licensed surveyor or engineer; and (iv) an environmental site audit or assessment performed by an engineer or other environmental consultant acceptable to Lender.
 
(c)        Additional Agreements Lender shall have received such other agreements, instruments, documents, and certificates incidental and appropriate to the transaction provided for herein as Lender or its counsel may reasonably request.
 
11.             Conditions Precedent to Future Advances . Lender's obligation to make any advance under this Loan Agreement and the other Loan Documents shall be, in addition to the conditions precedent set forth in paragraph 10 hereof, subject to the additional conditions precedent that, as of the date of such advance and after giving effect thereto, (a) all representations and warranties made to Lender by Borrower in this Loan Agreement and the other Loan Documents shall be true and correct, as of and as if made on such date; (b) no material adverse change in Borrower's financial condition since the effective date of the most recent financial statements furnished to Lender by Borrower shall have occurred and be continuing; and (c) Lender has received a request for advance from Borrower, such request to be in a form acceptable to Lender, provided, Lender may advance under this Loan Agreement upon or at the verbal request of Don Knight, Anthony Rotondo, M.D., or Jacobo Varon, M.D. to be confirmed in writing.
 
12.              Affirmative Covenants. Until the Loans and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, Borrower and each Guarantor to the extent that the stated action or information relates to such Guarantor, agrees and covenants that it will, unless Lender shall otherwise consent in writing:
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 5
 
(a)          Books and Records. Borrower shall maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine, audit, and make and take away copies or reproductions, at all reasonable times.
 
(b)       Payments of Obligations Borrower shall pay and discharge when due all of its indebtedness and obligations, including without limitation, all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits; provided, however, Borrower will not be required to pay and discharge any such assessment, tax charge, levy, lien or dahlias long as (i) the legality of the same shall be contested in good faith by appropriate judicial, administrative or other legal proceedings, and (ii) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien or claim in accordance with generally accepted accounting principles, consistently applied.
 
(c)        Compliance with Laws. Borrower shall conduct its business in an orderly and efficient manner consistent with good business practices, and perform and comply with all statutes, rules, regulations and/or ordinances imposed by any governmental unit upon Borrower and its businesses and operations.
 
(d)       Insurance. Borrower shall maintain insurance, including but not limited to, hazard, fire, comprehensive property damage, flood, public liability, worker's compensation, business interruption, professional liability, and other insurance in such form and substance and with Lender listed as an additional insured, mortgagee and/or loss payee, as deemed appropriate by Lender. Upon request of Lender, Borrower will furnish or cause to be furnished to Lender from time to time a summary of the respective insurance coverage of Borrower in form and substance satisfactory to Lender and if requested will furnish Lender with copies of the applicable policies.
 
(e)       Right of Inspection. Borrower shall permit such persons as Lender may designate to visit its properties and installations and examine, make, and take away copies of its books and records, as Lender may reasonably desire, including annual field audits to be conducted at Borrower's expense as Lender deems necessary.
 
(0           Cure of Defect. Borrower shall promptly cure any defects in the execution and delivery of any of the other Loan Documents and all other instruments executed in connection with this transaction.
 
(g)         Additional Documentation Borrower shall execute and deliver, or cause to be executed and delivered, any and all other agreements, instruments, or documents which Lender may reasonably request in order to give effect to the transactions contemplated under this Loan Agreement and the other Loan Documents.

 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 6
 
(h)       Legal Existence. Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect Borrower's partnership existence in good standing.
 
(i)        Maintenance of Assets. Borrower shall maintain all of its material assets, both real and personal, used in the conduct of its business, in good condition, repair, and working order, and supplied with all necessary equipment, and cause to be made all necessary repairs, renewals, replacements, and improvements thereof and thereto, so that the business carried on in connection therewith may be properly and advantageously conducted at all times.
 
(j)        Notice of Matters. Borrower shall promptly inform Lender of (i) any and all material adverse changes in its financial condition, (ii) all claims which could maters all affect its financial condition, (iii) after the commencement thereof, notify Lender of all actions, suits, and proceedings before any court or any governmental department, commission, or board, and (iv) of the creation, occurrence, or assumption of any actual or contingent liabilities not permitted under this Loan Agreement.
 
(k)        Primary Depository Relationship Borrower shall establish and maintain its primary operating and related account(s) with Lender.
 
Automatic Debit. Borrower shall maintain an account with Lender for the automatic debit of payments on the Term Loan.
 
(m)      Lock Box. Borrower shall maintain an account with Lender for the deposit of all payments on accounts. All invoices related to Borrower's accounts shall set forth the Lock Box account as the sole address for payment. Lender shall have exclusive and unrestricted access to the Lock Box pursuant to the Lock Box Agreement.
 
(n)        Right to Additional Information. Borrower shall furnish Lender with such additional information and statements, lists of assets and liabilities, tax returns, and other reports with respect to its financial condition and business operations as Lender may request from time to time.
 
13.              Financial Covenants. Until the Loans and all obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, Borrower agrees and covenants that it will maintain the following financial covenants unless Lender shall otherwise consent in writing:
 
(a)          Debt Service Coverage Ratio. Borrower will maintain, as of the last day of each fiscal year beginning with the end of the first (1st) fiscal year after the date of this Agreement, a ratio of (a) net income after taxes plus (i) depreciation, (ii) amortization and (iii) other non-cash expenses for the 12 month period ending with such fiscal year to (b) current maturities of long-term debt (principal and interest) for such 12 month period, of not less than 1.25 to 1.0 and supply Lender with a calculation, in form acceptable to Lender, of the Debt Service Coverage Ratio signed by its chief operating officer or equivalent ranking officer.
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 7
 
(b)         Maintenance of Books and Records. Borrower shall keep records and books of account (including, but not limited to, such records as are necessary to determine compliance with the Loan Agreement) in accordance with generally accepted accounting principles consistently applied and reflecting all transactions of the Borrower.
 
Unless otherwise specified, all accounting and financial terms and covenants set forth above are to be determined according to generally accepted accounting principles, consistently applied.
 
14.              Negative Covenants. Until the Loans and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, Borrower will not, without the prior written consent of Lender:
 
(a)        Nature of Business; Change of Management or Operation. Borrower shall not make any material change in the nature of the business as carried on as of the date hereof, including, but not limited to, any material change in the management or operation of its business and no material changes to its existing partnership agreement without the prior written consent of Lender.
 
(b)       Liquidations; Mergers; Consolidations. Borrower shall not liquidate, merge, or consolidate with or into any other entity.
 
(c)        Sale of Assets. Borrower shall not sell, transfer, or otherwise dispose of any of its assets or properties, other than in the ordinary course of business.
 
(d)       Transfer of Ownership. Borrower shall not. permit the sale or other transfer of a controlling ownership interest in Borrower.
 
(e)       No Additional Debt. Borrower will not incur any additional indebtedness other than in the ordinary course of business or guaranty the indebtedness of any third party without Lender's prior written consent.
 
No Owner Distributions. In the event of a default under any of the loan documents, Borrower will not, without Lender's written consent pay any dividends, fees or financial distributions of any kind to any owner, shareholder, partner or investor during the term of the Loan.
 
(g)        No Liens. Borrower will not permit any additional liens other than in favor of Lender against its assets nor will it pledge any of its assets to any other creditor without Lender's prior written consent.
 
(h)       No Change in Partnership. Borrower will not cause or permit any material change to its limited partnership structure or agreement without Lender's prior written consent.
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 8
 
(i)              No Capital Expenditures. Borrower will not make cumulative capital expenditures in excess of $100,000.00 in any twelve month period without Lender's prior written consent.
 
(j)              Government Regulation. Borrower shall not (i) be or become subject at any time to any law, regulation, or list of any government agency including, without limitation, (the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit to Borrower or from otherwise conducting business with Borrower, or (ii) fail to provide documentary and other evidence of Borrower's identity as may be requested by Lender at any time to enable Lender to verify Borrower's identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.
 
15.              Reporting Requirements. Until the Loans and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, Borrower and each Guarantor to the extent that the stated action or information relates to such Guarantor, will, unless Lender shall otherwise consent in writing, furnish to Lender:
 
(a)        Events of Default. As soon as possible and in any event within 5 days after the occurrence of each Event of Default (as defined herein) or each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, together with the statement of the President and/or Chief Financial Officer of the general partner of Borrower setting forth the details of such Event of Default or event and the action which Borrower proposes to take with respect thereto.
 
(b)       Borrower's Monthly. Within thirty (30) days of the last day o f each operating month, the Borrower shall provide financial reports for the Borrower and Collateral including, but not limited to, balance sheets, income statements, accounts receivable aging, and accounts payable aging acceptable to Lender.
 
(c)       Borrower's Annual. The Borrower shall submit, within 90 days of the last day of each fiscal year, Borrower's audited financial statements prepared by a certified public accountant acceptable to Lender.
 
(d)       Guarantor's Information. Each Guarantor shall submit a current financial statement for the previous calendar year within sixty (60) days of the last day of each fiscal year, which financial statement shall contain such information as reasonably requested by Lender, including, but not limited to, balance sheet, income statement and schedule of contingent liabilities.
 
(e)         Tax Returns. As soon as available and in any event within 30 days of the filing thereof; a copy of the tax return filed by Borrower and each Guarantor with the Internal Revenue Service and in the event of an extension, verification of the extension filing.
 
(0           Governmental Action. Promptly after the commencement thereof, and upon request for each Guarantor, notice of all actions, suits, and proceedings before any court or any governmental department, commission, or board affecting Borrower or any of its properties.

 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 9
 
(g)         Evidence of Payment of Obligations. Upon demand of Lender, evidence of payment of all assessments, taxes, charges, levies, liens, and claims against Borrower's properties.
 
(h)       Right to Additional Information. Borrower and each Guarantor shall furnish Lender with such additional information and statements, lists of assets and liabilities, tax returns, and other reports with respect to its financial condition and business operations as Lender may reasonably request from time to time.
 
All references to a preceding period shall mean the period ending as of the end of the month, quarter, or fiscal year for which the applicable report is delivered. All references to a period immediately following shall mean the period beginning on the first day of the month, quarter or fiscal year following the end of the period for which the applicable report is delivered. All financial reports furnished to Lender pursuant to this Loan Agreement shall be prepared in such form and such detail as shall be satisfactory to Lender, shall be prepared on the same basis as those prepared in prior years, and shall be duly certified by the reporting party as being true and correct in all material aspects.
 
16.              Events of Default. Bach of the following shall constitute an Event of Default" under this Loan Agreement:
 
(a)         Any default in the payment when due of any part of the principal of, or interest on, the Notes or any other indebtedness or obligation from time to time owing by Borrower to Lender.
 
(b)         The failure to maintain the insurance coverage as required by the Loan Documents.
 
(c)         Any default, breach or failure in the performance of any term, condition, warranty, agreement, or covenant of this Loan Agreement or any of the other Loan Documents.
 
(d)         Any representation or warranty set forth in this Loan Agreement or in any of the other Loan Documents is proven to have been false or untrue in any material respect when made.
 
(e)         Any event which results in or permits the acceleration of the maturity of any indebtedness of Borrower to others under any agreement or undertaking.
 
(0        Borrower suspends the transaction of its business for any period of time.
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 10
(g)          If Borrower or any Obligated Party (as defined below): ( i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii)has a receiver, trustee, or custodian appointed for, or take possession of, all or substantially all of the assets of such party, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within 60 days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy, or similar laws all of the foregoing (hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within 60 days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization, or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of 30 days any attachment, sequestration, or similar writ levied upon any property of such party; or (vi) fails to pay within 30 days any final money judgment against such party. The term " Obligated Party " as used herein, shall mean any party other than Borrower who secures, guaranties, and/or is otherwise obligated on all or any portion of the indebtedness evidenced by the Notes.
 
(h)          The liquidation, dissolution, merger, or consolidation of Borrower.
 
(i)           Any material adverse change in the financial condition or results of operation of Borrower or any Guarantor since the effective date of any financial statement previously furnished to Lender by Borrower or such Guarantor has occurred and is continuing.
 
Any default, breach, or failure in performance of any term, condition, warranty, agreement, or covenant of Borrower under the terms of any of its indebtedness to Lender.

Notwithstanding anything hi the Loan Documents to the contrary, upon the occurrence of an Event of Default as defined by subparagraphs (a) or (b) above, Lender shall give Borrower notice of same and if such Event of Default is not cured within 10 days after the date such notice is given by Lender, Lender may exercise any of the remedies provided in the Event of Default. Notwithstanding anything in the Loan Documents to the contrary, upon the occurrence of an Event of Default other than as specified in subparagraphs (a) or (b) above, Lender shall give Borrower notice of same, and if such Event of Default is not cured within 30 days after the date such notice is given by Lender, Lender may exercise any of the remedies provided in the Event of Default; provided, however, if such Event of Default m ay not be cured within such 30 day period and Borrower is taking all reasonable actions in regard to curing same, Borrower shall be allowed a reasonable time to perform or take such actions required to cure the Event of -Default, and Lender shall be advised of the status of all actions being taken by Borrower. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, CONCURRENTLY AND A UTOMAT1CA LLY WITH THE OCCURRENCE OF AN EVENT OF DEFAULT, FURTHER ADVANCES ON THE LOANS SHALL CEASE UNTIL SUCH EVENT OF DEFAULT IS CURED.

 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 11
 
17.          Remedies. Upon the occurrence of any one or more of the foregoing Events of Default, and the expiration of any applicable right to cure period, the entire unpaid balance of principal of the Notes, together with all accrued but unpaid interest thereon, and all other indebtedness then owing by Borrower to Lender, shall, at the option of Lender, become immediately due and payable without further presentation, demand for payment, notice of intent to accelerate, notice of acceleration or dishonor, protest or notice of protest of any kind, all of which are expressly waived by Borrower. All rights and remedies of Lender set forth in this Loan Agreement and in any of the other Loan Documents may also be exercised by Lender at its option to be exercised in its sole discretion, upon the occurrence of an Event of Default, and the expiration of any applicableright to cure period.
 
18.         Rights Cumulative. All rights of Lender under the terms of this Loan Agreement shall be cumulative of, and in addition to, the rights of Lender under any and all other agreements between Borrower and Lender including, (but not limited to, the other Loan Documents), and not in substitution or diminution of any rights now or hereafter held by Lender under the terms of any other agreement.
 
19.         Waiver and Agreement. Neither the failure nor any delay on the part of Lender to exercise any right, power or privilege herein or under any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision in this Loan Agreement or in any of the other Loan Documents and no departure by Borrower there from shall be effective unless the same shall be in writing and signed by Lender, and then shall be effective only in the specific instance and for the purpose for which given and to the extent specified in such writing. No modification or amendment to this Loan Agreement or to any of the other Loan Documents shall be valid or effective unless the same is signed by the party against whom it is sought to be enforced.
 
20.         Maximum Interest Rate. Regardless of any provision contained in this Loan Agreement, any of the other Loan Documents, or any other document or instrument executed pursuant hereto or thereto, Lender shall never be entitled to receive, collect, charge or apply, as interest on the Loans contemplated hereunder, any amount in excess of the highest lawful rate, and, in the event Lender ever receives, collects, charges or applies as interest, any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and, i idle principal debt of the Loans is paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Borrower and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any 11 on- principal payment as an expense, fee, or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread, in equal pails, the total amount of interest throughout the entire contemplated term of the Loans so that the interest rate is uniform throughout the entire term of the Loans; provided, that if the Loans are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the highest lawful rate, Lender shall refund to Borrower or credit against the principal debt of the Loans the amount of such excess and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, taking, reserving, or receiving interest in excess of the highest lawful rate.
 
 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 12
 
21.              Chapter 346. Borrower and Lender hereby agree that Chapter 346 of the Texas Finance Code (regulating certain revolving credit loans and revolving tri-party accounts) shall not apply to the Loan Documents.
 
22.             Notices. Except as otherwise provided herein, all notices, demands, requests, and other communications required or permitted hereunder shall be given in writing and sent by (i) personal delivery, or (ii) expedited delivery service with proof of delivery, or (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, or (iv) facsimile provided that such facsimile is confirmed by expedited delivery service or by United States mail in the manner previously described), addressed to the addressee at such party's address contained in the Loan Documents, or to such other address as either party shall have designated by written notice, sent in accordance with this paragraph at least 30 days prior to the date of the giving of such notice. Any such notice or communication shall be deemed to have been given and received either at the time of personal delivery, or in the case of mail, as of 3 days after deposit in an official depository of the United States mail, or in the case of del i very service or facsimile, upon receipt. To the extent actual receipt is required, rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was received shall be deemed to be receipt of the notice, demand, request or other communication sent.
 
23.              Construction. This Loan Agreement and the other Loan Documents have been executed and delivered in the State of Texas, shall be governed by and construed in accordance with the laws of the State of Texas, and shall be performable by the parties hereto in Harris County, Texas.
 
24,              Choke of Forum; Consent to Service of Process and Jurisdiction. Any suit, action or proceeding against Borrower with respect to this Loan Agreement, the Notes or any judgment entered by any court in respect thereof, may be brought in the courts of the State of Texas, County of Harris, or in the United States courts located in the State of Texas as Lender in its sole discretion may elect and Borrower hereby submits to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. Borrower hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of an suit, action or proceeding arising out of or relating to this Loan Agreement or the Note brought in the courts located in the State of Texas, County of Han-is, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum.
 
25.              invalid Provisions. If any provision of this Loan Agreement or any of the other Loan Documents is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions of this Loan Agreement or any of the other Loan Documents shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. Furthermore, in lieu of each such illegal, invalid or unenforceable provision, there shall be added as part of such Loan Documents a provision mutually agreeable to Borrower and Lender as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In the event Borrower and Lender are unable to agree upon a provision to be added to the Loan Documents within a period of 10 business days after a provision of the Loan Documents is held to be illegal, invalid or unenforceable, then a provision acceptable to Lender as similar in terms to the illegal, invalid and unenforceable provision as is reasonably possible and be legal, valid and enforceable shall be added automatically to such Loan Documents. In either case, the effective date of the added provision shall be the date upon which the prior provision was held to be illegal, invalid or unenforceable.

 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 13
 
26.              Expenses. Borrower shall pay all costs and expenses (including, without limitation, the reasonable attorneys' fees of Lender's legal counsel) in connection with (i) the preparation of this Loan Agreement and the other Loan Documents, and any and all extensions, renewals, amendments, supplements, extensions or modifications thereof, (ii) any action required in the course of administration of the Loans, and (iii) any action in the enforcement of Lender's rights upon the occurrence of Event of Default.
 
27.             Binding Effect. This Loan Agreement shall be binding upon and inure to the benefit of  Borrower, Lender and their respective heirs, successors, assigns and legal representatives; provided however, that Borrower may not, without the prior written consent of Lender, assign any rights, powers, duties or obligations there under.
 
28.              Offset. Upon an Event of Default which remains uncured after notice and the opportunity to cure, as provided above, Borrower grants to Lender the right of offset, to secure repayment of the Notes, upon any and all moneys, securities, or other property of Borrower and the proceeds there from, now or hereafter held or received by or in transit to Lender or any of its agents, from or for the account of Borrower whether for safe keeping, custody, pledge, transmission, collection, or otherwise, and also upon any and all deposits (general or special) and credits of Borrower, and any and all claims of Borrower against Lender (or any of them) at any time existing.
 
29.              Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Loan Agreement.
 
30.             Survival, All representations and warranties made by Borrower in this Loan Agreement shall survive delivery of the Notes and the making of the Loans.
 
31.               No Third Party Beneficiary. The parties do not intend the benefits of this Loan Agreement to inure to any third party, nor shall this Loan Agreement be construed to make or render Lender liable to any material man, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Borrower, or for debts or claims accruing to any such persons against Borrower. Notwithstanding anything contain ed herein or in the Notes, or in any other Loan Documents, or any conduct or course of conduct by any or all of the parties hereto, before or after signing this Loan Agreement or any of the other Loan Documents, neither this Loan Agreement nor any other Loan Documents shall be construed as creating any right, claim or cause of action against Lender, or any of its officers, directors, agents or employees, in favor of any material man, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Borrower, nor to any other person or entity other than Borrower.

 
 

 
 
FIRST STREET HOSPITAL, L.P.
Page 14
 
32.               Counterparts. This Loan Agreement may be separately executed in any number of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same agreement.
 
33.             Waiver of Special Damages . BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT BORROWER MAY HAVE TO CLAIM OR RECOVER FROM LENDER IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE, OR CONSEQUENTIAL DAMAGES.
 
34,              Jury Waiver. BORROWER AND LENDER HEREBY VOLUNTARILY, KNOWINGLY, I RREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTH ERWISE) B ETWEEN OR AMONG BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY R ELATED TO THIS LOAN AGREEMENT, ANY OT HER LOAN DOCUMENTS OR ANY RELATIONSHIP BETWEEN OR AMONG THEM. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER LOAN DOCUMENTS.
 
35.             Imaged Documents. Borrower and all sureties, endorsers, guarantors, and any other party now or hereafter liable for the .payment of the Loan, in whole or in part, (1) understand and agree that Lender's document retention policy may involve the imaging of executed Loan Documents, which includes but is not limited to any note, guaranty, deed of trust, security agreement, assignment, financing statement and any other document which evidences any indebtedness owed by Borrower to Lender and/or secures such indebtedness, and the destruction of the paper original, including the original note, and (ii) waive any rights and/or defenses that it may have to the use of such imaged copies of Loan Documents in the enforcement of any of Lender's rights in a court of law or otherwise and/or as to any claim that such imaged copies of the Loan Documents are not originals.
 
36.             Arbitration. Borrower, Lender and Guarantor agree that all disputes, claims and controversies between them whether individual, joint, or class in nature, arising from this document or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. No act to take or dispose of any Collateral or Property (as defined herein or in any Related Document) securing this document shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief, including but not limited to, a temporary restraining order, temporary injunction or prejudgment writs of garnishment, attachment or sequestration, or a receiver from a court of competent jurisdiction, or invoking a power of sale under any deed of trust or mortgage; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to applicable law. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral or Property securing this document, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral or Property securing this document, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party such authority being reserved to a court of competent jurisdiction. Judgment
 
 
 

 
 
Address:
THE BANK OF RIVER OAKS
2929 KIRBY
   
HOUSTON, TEXAS 77098
By:
[Illegible]
 
Name:
[Illegible]
 
Title:
SR. Vice-President
 
 
 

 

BORROWER:
       
         
Address:
 
First Street Hospital, L.P.
411 First Street
       
Bellaire, Texas 77401
       
   
By:
First Surgical Partners, L.L.C., a Texas limited
liability company, its general partner
         
     
By:
/s/Tony Rotondo
         
       
Tony Rotondo, Member
         
     
By:
/s/Jacobo Varon
         
       
Jacobo Varon, M.D. Member
         
ACCEPTED this 8 day of January, 2008
   
     
List of Attachments
   
     
Exhibit "A" Property
   
 
 
 

 
 
GF No. 07-40104499
 
    EXHIBIT "A"
 
TRACT 1:
 
0,4821 acre tract of land in Block Three (3) of the TOWN OF BELLAIRE, according to the map or plat thereof recorded in Volume 3, Page 59 of the Map Records of Harris County, Texas, and also including the adjoining North 1/2 of a ten foot wide alley described in Quitclaim Deed recorded under Harris County Clerk's File No. S228250; said 0.4821 acre tract being more fully described by metes and bounds on Exhibit "A-1" attached hereto.
 
TRACT 2:
 
Rights regarding an overhead walkway or pedestrian bridge above that certain 2,380 square feet portion of Chestnut Street, Bellaire, Harris County, Texas, described in Exhibit "A-1" and as described in that Consent to Encroachment executed by the City of Bellaire to Jacob° Varon, Trustee, and First Street Holdings, Ltd., recorded under Harris County Clerk's File No. Y820021.
 
 
 

 

EXHIBIT "A-1"
Tract 1
 
' FIELD NOTES
 
0.4821 Acre .tor 21,000 square feet) out of Block 3 of the Townsite of Bellaire, in the City of Bellaire, Harris County, Texas, according to the plat of said townsite recorded in Volume 3, Page 59, Harris County Map Recorded, and being all of Lots 1, 2 ad 3 of said Block and the north half of the adjacent 10 foot Alley described in Quit Claim Deed from the City of Bellaire recorded under Harris County Clerk's File No. S 228250, said 0.4821 acre of land being more particularly described as follows:
 
BEGINING at a 5/8" iron rod set for corner at the northeast corner of said Lot 1 on the south right-of-way line of Chestnut Street at its intersection with the west right-of-way line of First Street, both 60 feet wide, and located 0.80 foot south of a found .5/8" iron rod with cap;
 
THENCE South in part with the east line of said Lot 1 and with said west right-of-way line, at i35.00..feet pass the southeast darner of said Lot, and continuing a total of 140.00 feet to a 5/8" iron rod set for corner on the centerline of said alley;
 
THENCE West with the centerline of said alley 150.00 feet to a 5/8" iron rod set for corner;
 
THENCE North, at 5.00 feet pass the southwest corner of Lot 3 and the southeast corner of Lot 4, and continue a total distance of 140.00 feet to a 5/8" iron rod set for corner at the northwest corner of Lot 3 and the northeast corner of Lot 4 on the south right-of-way line of Chestnut Street, and from which a found 6/8" iron rod with cap bears North 0.18 foot and West 0.18 foot;
 
THENCE. East with the north line of Lots 3, 2 and 1 and with said south right-of-way line 150.0 feet to the PLACE OF BEGINNING.

/S/Chalmers R. Miller
Chalmers R. Miller,
Registered Professional
Land Surveyor No. 4222.
 
NOTE: THIS COMPANY DOES NOT REPRESENT THAT THE ABOVE ACREAGE
AND OR SQUARE FOOTAGE CALCULATIONS ARE CORRECT_
 
 
 

 

EXHIBIT "A-1"
 
Tract 2
 
FIELD NOTES
 
2380 Square Feet of land, being a strip of land 39.67 feet wide across the sixty foot wide right-of-way of Chestnut Street between Nook 2 and Kook 3 of the Townsite of Bellaire, plat of which is recorded in Volume 3, Page 59, Harris County Map Records, being in the City of Bellaire in Harris County, Texas, said strip of Land being more parti­cularly described as follows;
 
Beginning at a point on the north-right-of-way line of Chestnut Street and the south line of said Block 2 from which the southeast corner of Block 2 at the intersection of said north right-of-way line with the west right-or-way line of Firet SMrset beams Soot 10.00 feet;
 
THEWS Oauth across, Chestnut Street 60.00 feet to a point for corner on the south right-of-way line of Chestnut Street and the north line of paid Block 3, from which the northeast corner of Block 3 at the intersection of said right-of-way line with said went right-of-way line of First Street bears East 10.00 feet; -
 
THENCE West with said south right-of-way line 39.67 feet to a point for earner;
 
THENCE North across Chestnut Street 60.00 feet to a point for earner on said north right-or-way line and the south line of Block 2;
 
THNCE East with said line 39.67 feet to the PLACE OF BEGINNING.
 
/s/ Chalmers R. Miller
Chalmers R. Miller
Registered Professional
Land Surveyor No. 4222.
 
NOTE: THIS COMPANY DOES NOT REPRESENT THAT THE ABOVE ACREAGE
AND OR SQUARE FOOTAGE CALCULATIONS ARE CORRECT.
 
 
 

 
 

PROMISSORY NOTE
$750,000.00
January 8,, 2008
 
FOR VALUE RECEIVED, the undersigned, FIRST STREET HOSPITAL, L.P., a Texas limited partnership (the "Maker", whether one or more, and if more than one, jointly and severally) promises to pay to the order of THE BANK OF RIVER OAKS (the "Payee", together with any and all subsequent owners and holders of this Note), at its offices at 2929 KIRBY, HOUSTON, TEXAS 77098 or such other place as Payee shall designate in writing to Maker, which at the time of payment is legal tender of the United States of America for payment of public and private debts the principal sum of $750,000,00, or so much thereof as may be advanced and outstanding hereunder, together with interest thereon from and after date hereof until maturity at a rate per annum which shall from day to day be equal to the lesser of (a) a fluctuating rate per annum (the "Contract Rate") which is equal to the Index Rate (as hereinafter defined) in effect from day to day, each such change in the Contract Rate hereunder to become effective, without notice to Maker, on the effective date of each change in the Index Rate, computed on the basis of a year of 360 days, unless such calculation would result in a usurious rate, in which case interest shall be calculated on the per annum basis of 365 or 366 days, as the case may be, and for the actual number of days elapsed (including the first day but excluding the last day), or (b) the Maximum Rate (as hereinafter defined); provided, however, if at any time the Contract Rate shall exceed the Maximum Rate, thereby causing the interest rate on the principal of the Note to be limited to the Maximum Rate, then notwithstanding any subsequent change in either the Index Rate or the Maximum Rate that would otherwise reduce the Contract Rate to less than the Maximum Rate, the rate of interest on the principal of this Note shall remain equal to the Maximum Rate until the total amount of interest accrued on the principal of this Note equals the amount of interest which would have accrued on the principal of this Note if the Contract Rate had at all times been in effect. As used herein, the term "Index Rate" shall mean at any time the rate of interest per annum then most recently established by J.P. Morgan Chase Bank (or its successors), as its prime rate.
 
It is expressly understood, notwithstanding any provision herein to the contrary, that this Note is a revolving line of credit Note established pursuant to the terms of a Letter Loan Agreement (the "Loan Agreement") of even date herewith, by and between Maker and Payee. Subsequent and periodic advances in various increments will be made to Maker pursuant to the Loan Agreement up to, but in no event to exceed, the maximum of the face value hereof. The unpaid principal balance of this Note at any time shall be the total amounts loaned or advanced hereunder by Payee, less the amount of payments or prepayments of principal made hereon by or for the account of Maker. It is contemplated that by reason of prepayments hereon, there may be times when no indebtedness is owing hereunder; provided, notwithstanding such occurrence, this Note shall remain valid and shall be in full force and effect as to the advances made pursuant to and under the terms of this Note subsequent to such occurrence. Each advance and each payment on account of principal or interest shall be reflected by a notation made by Payee in its records kept in the ordinary course of its business with regard to this Note. The aggregate unpaid amount of advances reflected by the notations in such records shall be deemed rebuttable presumptive evidence of the principal amount owing under this Note, which amount Maker unconditionally promises to pay to the order of Payee under the terms hereof. In the event that the unpaid principal amount hereof at any time, for any reason, exceeds the maximum amount specified in the Loan Agreement, Maker covenants and agrees to pay the excess principal amount immediately upon demand and such excess principal amount shall in all respects be deemed to be included among the advances made pursuant to the terms of this Note and shall bear interest at the rate specified above.
 
INITIAL
 
 
 

 

Interest only, accruing and to accrue on this Note, shall be due and payable monthly as it accrues, beginning one month from the date hereof, and continuing regularly on the same day of each succeeding calendar month thereafter until one year from the date hereof when the entire amount, principal and interest then remaining unpaid, shall be due and payable. AT MATURITY, YOU MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE LOAN AND UNPAID INTEREST THEN DUE. PAYEE IS UNDER NO OBLIGATION TO REFINANCE THE LOAN AT THAT TIME EXCEPT ON TERMS MUTUALLY ACCEPTABLE TO MAKER AND PAYEE.
 
If a payment is 10 or more days late, Maker will pay a delinquency charge in an amount equal to the greater of (i) 5.0% of the amount of the delinquent payment up to the maximum amount of $1,500.00, or (ii) $25.00. All payments due under this Note shall be made by Maker without offset or other reduction. Upon an Event of Default (as defined below) and the expiration of any notice and/or cure period provided in the Loan Agreement, including failure to pay upon final maturity, and acceleration of the principal balance of this Note, Payee, at its option, may also, if permitted under Applicable Law (as defined below), do one or both of the following: (a) increase the Contract Rate to the Maximum Rate (as defined below), and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased Contract Rate).
 
If any payment of principal or interest on this Note shall become due on a day which is not a Business Day (as hereinafter defined), such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computing of interest in connection with such payment. As used herein, the term "Business Day" shall mean any day other than a Saturday, Sunday or federal banking holiday upon which Payee is closed. Any check, draft, money order or other instrument given in payment of all or any portion of this Note may be accepted by Payee and handled in collection in the customary manner, but the same shall not constitute payment or diminish any rights of Payee except to the extent that actual cash proceeds of such instrument are unconditionally received by Payee.
 
Unless otherwise agreed in writing, or otherwise required by Applicable Law, interest on this Note will be calculated on the unpaid principal balance to the date each installment is paid and each installment payment will be applied first to unpaid accrued interest, then to principal, and any remaining amount to any unpaid collection costs, delinquency charges and other charges; provided, however, upon delinquency or other Event of Default, Payee reserves the right to apply installment payments among principal, interest, delinquency charges, collection costs and other charges, at its discretion.
 
Maker agrees not to send payments marked "paid in full," "without recourse," or similar language. If Maker sends such a payment, Payee may accept it without losing any of Payee's rights under this Note, and Maker will remain obligated to pay any further amounts owed or that may become owed to Payee. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount, must be mailed or delivered to: 2929 Kirby, Houston, Texas 77098; Attention: President.
 
Maker shall have the privilege to prepay at any time, and from time to time, all or any part of the principal amount of this Note, without notice, penalty or fee. Except as expressly provided herein to the contrary, all prepayments on this Note shall be applied in the following order of priority: (i) the payment or reimbursement of any expenses, costs, or obligations (other than the outstanding principal balance hereof and interest hereon) for which either Maker shall be obligated or Payee shall be entitled pursuant to the provisions of this Note or the other Security Instruments (as defined below), (ii) the payment of accrued but unpaid interest hereon, and (iii) the payment of all or any portion of the principal balance hereof then outstanding hereunder, in the inverse order of maturity.
 
JV & TR
INITIAL
 
 
2

 
 
In the event the Index Rate becomes unavailable or ceases to exist for any reason, Payee, in its sole discretion, shall designate a substitute Index Rate which is based upon comparable information to the prior index. Payee shall notify Maker of the change of the index, but the failure of Payee to notify Maker shall in no way affect the calculation of the interest to accrue hereunder or the effective date of such change.
 
Maker agrees that upon the occurrence of any one or more of the following events of default ("Event of Default"):
 
(a)          failure of Maker to pay any installment of principal of or interest on this Note or on any other indebtedness of Maker to Payee when due; or
 
(b)          the occurrence of any event of default specified in any of the other documents evidencing, securing, governing, guaranteeing and/or pertaining to this Note including, but not limited to the Loan Agreement and the Security Instruments
 
the holder of this Note may, at its option, without further notice or demand except as provided in the Loan Agreement, (i) declare the outstanding principal balance of and accrued but unpaid interest on this Note at once due and payable, (ii) refuse to advance any additional amounts under this Note, (iii) foreclose all liens securing payment hereof, (iv) pursue any and all other rights, remedies, and recourses available to the holder hereof, including but not limited to any such rights, remedies, or recourses under any of the Security Instruments, or other loan documents, at law or in equity, or
(v) pursue any combination of the foregoing.
 
All makers, endorsers, sureties and guarantors hereof, as well as all other parties to become liable on this Note, hereby severally: (i) except as specifically provided in the Loan Agreement, waive notice of default, demand, notice of intent of demand, presentment for payment, notice of non-payment, protest, notice of protest, grace, notice of intent to accelerate maturity, notice of acceleration of maturity, filing of suit, diligence in collection or enforcing any of the security for this Note; (ii) agree that they are and shall be jointly, severally, directly and primarily liable for the repayment of all sums due and owing under this Note; (iii) consent to any and all renewals, extensions and modification in the time of payment and to any other indulgence with respect to this Note; (iv) agree that Payee shall not be required first to institute suit or exhaust its remedies against Maker or others liable or to become liable on this Note, or to enforce its rights against them or any security for this Note; (v) agree to any substitution, subordination, exchange or release of any security for this Note, or the release of any party primarily or secondarily liable on this Note; and (vi) acknowledge that Payee has no duty of good faith to Maker and that no fiduciary, trust or other special relationship exists between Maker and Payee. Maker acknowledges and agrees that it may be required to pay this Note in full without assistance from any other party, or any collateral or security for this Note. Payee shall not be required to mitigate damages, file suit, or take any action to foreclose, proceed against, or exhaust any collateral or security in order to enforce the payment of this Note.
 
INITIAL
 
 
3

 

Upon the occurrence of an Event of Default, and if any action is taken by Payee to enforce the terms and provisions of this Note, including, but not limited to, this Note is placed in the hands of an attorney for collection, or suit is brought on same, or the same is collected through any Probate, Bankruptcy Court, or any judicial proceeding whatsoever, then Maker agrees and promises to pay Payee's reasonable expenses and costs, including, but not limited to, attorney's fees.
 
It is expressly provided and stipulated that notwithstanding any provision of this Note or any other instrument evidencing or securing the loan evidenced hereby, in no event shall the aggregate of all interest paid by Maker to Payee under this Note ever exceed the Maximum Rate on the principal balance of this Note from time to time advanced and remaining unpaid. In this connection, it is expressly stipulated and agreed that it is the intent of Payee and Maker in the execution and delivery of this Note to contract in strict compliance with Applicable Law as defined below. in furtherance thereof, none of the terms of this Note or any other instrument evidencing or securing the loan evidenced hereby, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, at a rate in excess of the Maximum Rate permitted to be charged of Maker under Applicable Law. Maker or any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall never be liable for interest in excess of the Maximum Rate, and the provision of this paragraph and the immediately succeeding paragraph shall govern over all other provisions of this Note and any instruments evidencing or securing the loan evidenced hereby, should such provisions be in apparent conflict herewith.
 
Specifically and without limiting the generality of the foregoing paragraph, it is expressly provided that:
 
(i)            In the event of prepayment of the principal of this Note (if permitted hereunder) or the payment of the principal of this Note prior to the stated maturity date hereof resulting from acceleration of maturity of this Note, if the aggregate amounts of interest accruing hereon prior to such payment plus the amount of any interest accruing after maturity and plus any other amounts paid or accrued in connection with the loan evidenced hereby which by Applicable Law are deemed interest on the loan evidenced by this Note and which aggregate amount paid or accrued (if calculated in accordance with the provisions of this Note other than this paragraph) would exceed the Maximum Rate, then in such event the amount of such excess shall be credited, as of the date paid, toward the payment of principal of this Note so as to reduce the amount of the final paymentof principal due on this Note;
 
(ii)           If under any circumstance the aggregate amounts paid on the loan evidenced by this Note prior to and incident to the final payment hereof include amounts which by Applicable Law are deemed interest and which would exceed the Maximum Rate, Maker stipulates that such payment and collection will have been and will be deemed to have been the result of a mathematical en-or on the part of both Maker and Payee, and any excess shall be credited on the Note by Payee. If this Note shall have been paid in full, Payee shall promptly refund the amount of such excess (to the extent only of the excess of such interest payments above the Maximum Rate) upon the discovery of such error or notice thereof; and
 
(iii)         All amounts paid or agreed to be paid in connection with the indebtedness evidenced by this Note which would under Applicable Law be deemed interest shall, to the extent provided by Applicable Law, be amortized, prorated, allocated and spread throughout the full term of this Note.
 
 
4

 

As security for this Note and all indebtedness which may at any time be owing by any Maker under this Note to Payee, each Maker hereby grants Payee a right of setoff on any property of any Maker in its possession, including, without limitation, that which it may hold for collection or safekeeping, and on any money or accounts on deposit with Payee, and Payee may retain and apply the property, money, securities or accounts to the payment of this Note or such other indebtedness with or without notice to any Maker. This right of Payee is in addition to any other right of setoff which Payee may have under Applicable Law.
 
As used herein, the term "Applicable Law" means that law in effect from time to time and applicable to this Note, including the laws of the State of Texas and laws of the United States of America.
 
As used herein, the term "Maximum Rate" means the maximum lawful nonusurious rate of interest (if any) which under Applicable Law Payee is permitted to charge Maker on this Note from time to time. It is intended that Chapter 303 of the Texas Finance Code shall be included in the laws of the State of Texas in determining Applicable Law; and for the purpose of applying such provisions to this Note, the interest ceiling applicable to this Note shall be the "weekly ceiling" from time to time in effect. If Applicable Law does not provide for a maximum non-usurious rate of interest, the Maximum Rate shall be 18% per annum.
 
Except as otherwise provided herein, all notices, demands, requests, and other communications required or permitted hereunder shall be given in writing and sent by (i) personal delivery, or (ii) expedited delivery service with proof of delivery, or (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, or (iv) facsimile (provided that such facsimile is confirmed by expedited delivery service or by United States mail in the manner previously described), addressed to the addressee at such party's address set forth herein, or to such other address as such party may specify by written notice, sent in accordance with this paragraph at least 30 days prior to the date of the giving of such notice. Any such notice or communication shall be deemed to have been given and received either at the time of personal delivery, or in the case of mail, as of 3 days following deposit in an official depository of the United States mail, or in the case of either delivery service, or facsimile, upon receipt. To the extent actual receipt is required, rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was received shall be deemed to be receipt of the notice, demand, request or other communication sent.
 
This Note is secured by all security agreements, guaranty agreements, loan agreements, collateral assignments, mortgages, deeds of trust and any other lien instruments executed by Maker, or any other party as pledgor, surety, or guarantor for Maker, in favor of Payee, including those executed simultaneously herewith, those previously executed and those hereafter executed (the "Security Instruments"), including, but not limited to, the following:
 
(i)
Two Deeds of Trust and Security Agreement of even date herewith, executed by Maker to Andy Lane, Trustee, covering certain real property situated in Harris County, Texas.
 
(ii)
Two Assignments of Rents and Leases of even date herewith, executed by Maker for the benefit of Payee.
 
(iii)
Security Agreement of even date herewith, executed by to Payee, covering accounts, inventory, fixtures, equipment, and general intangibles.
 
JV & TR
INITIAL
 
 
5

 
 
(iv)
Guaranty Agreements of even date herewith, executed by

Riva Linda Collins, M.D.
4611 Locust
 
David L. Blumfield, M.D.
5215 Pine St.
 
Kaare Kolstad, M.D.
3229 Locke Lane
Bellaire, Texas 77401
 
Bellaire, Texas 77401
 
Houston, Texas 77019