<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________TO_____________________
COMMISSION FILE NO. 1-10677
-------
INTEGRATED ORTHOPAEDICS, INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0203483
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Riverway, Suite 1430, Houston, Texas 77056
-------------------------------------------------
(Address of principal executive offices)
(713) 439-7511
----------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------
(Former Name, Address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
As of June 30, 1997, 5,288,641 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (Check One) YES NO X
---- -----
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets (June 30, 1997
and December 31, 1996) 1
Consolidated Statements of Operations for the
three months and six months ended
June 30, 1997 and June 30, 1996 2
Consolidated Statements of Changes in
Stockholders' Equity for the six months
ended June 30, 1997 and June 30, 1996 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and
June 30, 1996 4
Notes to Consolidated Financial Statements 5 - 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
PART II OTHER INFORMATION
Item 1 - 6 11
SIGNATURES 12
</TABLE>
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
-------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and equivalents $ 6,271,721 $10,176,947
Accounts receivable, net 2,336,051 3,796,715
Income taxes receivable 611,215 82,495
Notes receivable, net 143,192 88,811
Other current assets 192,516 252,893
----------- ------------
TOTAL CURRENT ASSETS 9,554,695 14,397,861
----------- ------------
PROPERTY AND EQUIPMENT
Equipment (including equipment
under capital leases) 3,319,097 3,171,495
Leasehold improvements 259,368 316,999
Furniture and fixtures 385,838 386,979
----------- ------------
3,964,303 3,875,473
Less - accumulated depreciation
and amortization (3,079,547) (3,210,788)
----------- ------------
884,756 664,685
----------- ------------
OTHER ASSETS 129,371 106,165
----------- ------------
TOTAL ASSETS $10,568,822 $15,168,711
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payables $ 899,389 $ 1,271,842
Accrued expenses 1,319,765 3,129,216
Income taxes payable 208,168 584,360
Current obligations under capital
leases 29,919 14,081
Current portion of notes payable 305,216 1,700,699
----------- ------------
TOTAL CURRENT LIABILITIES 2,762,457 6,700,198
----------- ------------
NOTES PAYABLE 244,070 386,231
OBLIGATIONS UNDER CAPITAL LEASES 33,614 14,426
DEFERRED INCOME TAXES 160,174 160,174
----------- ------------
3,200,315 7,261,029
----------- ------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
50,000,000 shares authorized,
5,302,474 and 5,301,808 issued 5,303 5,303
Preferred stock, $.01 par value
10,000,000 shares authorized,
Series A - 8% Cumulative
Convertible, 25,226 shares
issued and outstanding
(liquidating preference $100
per share, aggregating $2,522,600) 252 252
Additional paid-in capital 4,851,573 4,842,015
Retained earnings 2,511,393 3,060,128
Treasury shares, 13,833 shares (14) (16)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 7,368,507 7,907,682
----------- ------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $10,568,822 $15,168,711
=========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
-------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES $3,874,176 $8,201,381 $2,310,717 $4,139,684
Costs and expenses:
Compensation costs and
medical services 2,027,130 3,848,523 1,094,769 1,930,823
Other direct costs 539,653 1,803,460 250,128 908,420
General and administrative 1,879,731 938,200 1,154,887 510,352
Depreciation and amortization 130,411 347,221 46,978 157,242
Provision for doubtful accounts 641,376 657,111 266,000 309,800
Gain from restructuring (478,215) (63,465)
---------- ---------- ---------- ----------
4,740,086 7,594,515 2,749,297 3,816,637
INCOME (LOSS) FROM OPERATIONS (865,910) 606,866 (438,580) 323,047
Loss on sale of subsidiary (90,460)
Interest income 180,599 22,611 78,607 17,390
Interest expense (38,335) (117,345) (19,624) (51,333)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (723,646) 421,672 (379,597) 289,104
Provisions for income taxes 274,985 (142,419) 144,246 (94,323)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (448,661) $ 279,253 $ (235,351) $ 194,781
========== ========== ========== ==========
Earnings (loss) per common and
equivalent share:
Primary $(0.10) $0.05 $(0.05) $0.03
Fully Diluted $(0.10) $0.05 $(0.05) $0.03
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------------- ----------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ------- --------------- ------ ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -
December 31, 1996 5,302,474 $5,303 25,226 $252 $4,842,015 $3,060,128 $(16) $7,907,682
Dividends - Preferred
Stock - Series A $ (100,074) $ (100,074)
Treasury Stock
Distributed for
Services Performed $ 9,558 $ 2 $ 9,560
Net Income (Loss) $ (448,661) $ (448,661)
--------- ------ ------ ---- ---------- ---------- ---- ----------
Balance -
June 30, 1997 5,302,474 $5,303 25,226 $252 $4,851,573 $2,511,393 $(14) $7,368,507
========= ====== ====== ==== ========== ========== ==== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
--------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (448,661) $ 279,253
Noncash adjustments:
Depreciation and amortization 130,411 347,221
Loss/(Gain) on sale of assets (20,050) 90,460
Net gain from restructuring (478,215)
Change in assets and liabilities,
excluding acquisitions:
Accounts receivable, net 1,460,664 (1,047,226)
Other current assets 60,376 (108,361)
Accounts payable 163,114 (187,556)
Accrued expenses (1,957,318) 304,308
Other assets (23,206)
Income taxes receivable/payable (904,912) 556,249
----------- -----------
Net cash provided (used) by
operating activities (2,017,797) 234,348
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (317,984) (323,983)
Net proceeds from sale of subsidiary 700,000
Proceeds from sale of assets 36,254
Issuance and additions to notes
receivable (54,381)
Collections of notes receivable 38,541
----------- -----------
Net cash provided (used) by
investing activities (336,111) 414,558
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings $ 900,000
Payments on bank borrowings (2,300,000) (949,903)
Payments on other notes, net (137,642) (887,437)
Payments on capital lease obligations (13,676) (116,767)
Issuance of preferred stock, net of
offering costs 2,396,691
----------- -----------
Net cash provided (used) by
financing activities (1,551,318) 442,584
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS $(3,905,226) $ 1,091,490
CASH AND EQUIVALENTS:
BEGINNING OF PERIOD 10,176,947 109,231
----------- -----------
END OF PERIOD $ 6,271,721 $ 1,200,721
----------- -----------
SUPPLEMENTAL DISCLOSURE
Interest paid $ 38,335 $ 94,734
Income taxes paid/(recovered) $ 908,027 $ (416,653)
Property and equipment acquired with
debt $ 48,700 $ 313,595
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
NOTE 1 BASIS OF PRESENTATION:
- ------ ----------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of those of a normal
recurring nature) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1996.
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the disclosures of contingent assets and
liabilities. Because of the inherent uncertainties in this process, actual
future results could differ from those expected at the reporting date.
Certain amounts in the June 30, 1996 consolidated statements of operations have
been reclassified to conform to the June 30, 1997 presentation, the most
significant of which is the reclassification of sales and marketing expense from
general and administrative costs to compensation costs and medical services.
This reclassification did not affect net income.
NOTE 2 EARNINGS PER COMMON SHARE:
- ------ -------------------------
Primary earnings per common share is computed by dividing net income reduced by
preferred dividends by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the period. Common stock
equivalents include stock options and warrants.
Fully diluted earnings per common share is the more dilutive result of the
following alternate calculations: (1) Reduce net income by preferred stock
dividends, producing earnings available for common shareholders (EACS). Divide
EACS by the weighted average of common stock and dilutive common stock
equivalents outstanding during the period; or (2) Calculate fully diluted shares
by adding the weighted average of common and dilutive common stock equivalents
outstanding plus the number of shares of common stock which would be issued
assuming the conversion of the convertible preferred stock and accrued dividends
thereon into common stock. Divide net income by fully diluted shares.
5
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Primary
Weighted average of common shares
and common stock equivalents 5,288,641 5,461,340
========== ==========
Net Income/(Loss) $ (235,351) $ 178,398
Preferred dividends (50,313) (25,433)
---------- ----------
Earnings/(Loss) available for common shareholders (285,664) 152,965
========== ==========
Earnings/(Loss) Per Share $ (.05) $ .03
========== ==========
Fully diluted
Weighted average of common shares
and common stock equivalents 5,288,641 5,461,340
========== ==========
Net Income/(Loss) $ (235,351) $ 178,398
Preferred dividends (50,313) (25,433)
---------- ----------
Earnings/(Loss) available for common shareholders (285,664) 152,965
========== ==========
Earnings/(Loss) Per Share $ (.05) $ .03
========== ==========
SIX MONTHS ENDED
-----------------------
June 30, June 30,
1997 1996
---------- ----------
Primary
Weighted average of common shares
and common stock equivalents 5,287,647 5,460,155
========== ==========
Net Income/(Loss) $ (448,661) $ 279,253
Preferred dividends (100,074) (25,433)
---------- ----------
Earnings/(Loss) available for common shareholders (548,735) 253,820
========== ==========
Earnings/(Loss) Per Share $ (.10) $ .05
========== ==========
Fully diluted
Weighted average of common shares
and common stock equivalents 5,287,647 5,460,155
Preferred conversion shares N/A 728,010
---------- ----------
Fully diluted shares 5,287,647 6,188,165
========== ==========
Net Income/(Loss) $ (448,661) $ 279,253
==========
Preferred Dividends (100,000)
----------
Earnings/(Loss) available for common shareholders (548,735)
==========
Earnings/(Loss) Per Share $ (.10) $ .05
========== ==========
</TABLE>
Statement of Financial Accounting Standards No. 128 was issued on February 17,
1997, and establishes standards for computing and presenting earnings per share
(EPS). This Statement simplifies the previous standards for computing earnings
per share, and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS, and
requires dual presentation of basic and diluted EPS.
6
<PAGE>
Basic EPS excludes dilution, and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stocks were exercised or converted
into common stock. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15.
This statement is effective for financial statements for both interim and annual
period ending after December 15, 1997. Earlier application is not permitted.
However, entities are encouraged to disclose pro forma EPS amounts computed
using this Statement in the notes to the financial statements prior to adoption.
Such pro forma information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Basic EPS $(.08) $ .05 $(.04) $ .03
===== ===== ===== =====
Diluted EPS $(.10) $ .05 $(.05) $ .03
===== ===== ===== =====
</TABLE>
NOTE 3 - PRO FORMA INFORMATION
During 1996, the Company, in a strategic effort to restructure its operations
towards a single focus musculoskeletal-related physician practice management
company, divested its interests in eight occupational medicine centers, four
physical and medical therapy centers associated with the occupational medicine
centers, seven mobile health testing units operated in conjunction with the
occupational medicine programs in Houston, Texas and Little Rock, Arkansas, and
one magnetic resonance imaging ("MRI") center in Little Rock, Arkansas.
The following unaudited pro forma information assumes that the sale of the
occupational medicine business occurred on January 1,1996. The pro forma
information does not purport to be indicative of the results of operations that
actually would have been attained if the sale had occurred at this earlier date
or results which may occur in the future.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, 1996 June 30, 1996
---------------- ------------------
<S> <C> <C>
Revenues (in thousands) $5,012 $2,494
Net Income (in thousand) $ 475 $ 269
Earnings per common share:
Primary $ .08 $ .04
Assuming full dilution $ .08 $ .04
</TABLE>
7
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS:
Three months ended June 30, 1997 compared with three months ended June 30, 1996.
REVENUES.
The Company's revenues are stated net of contractual allowances that relate to
gross patient billings. Contractual allowances are based on accounting
estimates which the Company reviews and adjusts on a periodic basis. Revenues
for the second quarter of 1997 decreased by approximately $1,829,000 or 44%.
Approximately $1,646,000 or 90% of this decrease is attributable to the
Company's 1996 divestiture of certain of its occupational medicine and
diagnostic imaging businesses and the remainder results from lower net
collectibility expectations on patient billings than that estimated a year ago.
COMPENSATION COSTS AND MEDICAL SERVICES AND OTHER DIRECT COSTS.
Compensation costs and medical services for the second quarter of 1997 decreased
by approximately $837,000 or 43%. Approximately $922,000 of this decreased cost
is attributable to the divestiture of the occupational medicine and diagnostic
imaging businesses. The cost of on-going operations rose by approximately
$85,000.
OTHER DIRECT COSTS.
Other direct costs for the second quarter of 1997 decreased by approximately
$655,000 or 72%. Approximately $616,000 or 94% of this decrease is attributable
to the divestiture of the occupational medicine and diagnostic imaging
businesses. The cost of on-going operations was lower by approximately $39,000.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses for the second quarter of 1997 increased
approximately $644,000 or 126%. This increase is attributable to the addition
of management and operating infrastructure relating to the Company's expansion
as a physician practice management company and to increased legal and accounting
costs.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization for the second quarter decreased by approximately
$111,000 or 70%, primarily as a result of the divestiture of the occupational
medicine and diagnostic imaging businesses in 1996.
PROVISION FOR DOUBTFUL ACCOUNTS.
Provision for doubtful accounts for the second quarter of 1997 decreased by
approximately $44,000 resulting primarily from a decrease in the estimate of
future collections on accounts receivable. The provision for doubtful accounts
is an accounting estimate which the Company reviews and adjusts on a periodic
basis.
8
<PAGE>
NET GAIN FROM RESTRUCTURING:
The Company reported a second quarter benefit of approximately $63,000 related
to the 1996 net gain from restructuring. This adjustment reflects that the
Company was able to complete certain transactions relating to the restructuring
at a lower than expected cost.
INTEREST INCOME AND EXPENSE:
Interest income increased by $61,000, reflecting earnings from increased cash
reserves arising from the Company's restructuring in 1996. Interest expense
decreased by $32,000 primarily due to decreased borrowings under the Company's
working capital credit facility.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996.
REVENUES.
The Company's revenues are stated net of contractual allowances that relate to
gross patient billings. Contractual allowances are based on accounting
estimates which the Company reviews and adjusts on a periodic basis. Revenues
for the first six months of 1997 decreased by approximately $4,327,000 or 53%.
Approximately $3,189,000 or 74% of this decrease is attributable to the
Company's 1996 divestiture of certain of its occupational medicine and
diagnostic imaging businesses and the remainder results from lower net
collectibility expectations on patient billings than that estimated a year ago.
COMPENSATION COSTS AND MEDICAL SERVICES AND OTHER DIRECT COSTS.
Compensation costs and medical services for the first six months of 1997
decreased by approximately $1,821,000 or 47%. Approximately $1,828,000 of this
decreased cost is attributable to the divestiture of the occupational medicine
and diagnostic imaging businesses. The cost of on-going operations rose by
approximately $7,000.
OTHER DIRECT COSTS.
Other direct costs for the first six months of 1997 decreased by approximately
$1,263,000 or 70%. Approximately $1,200,000 or 95% of this decrease is
attributable to the divestiture of the occupational medicine and diagnostic
imaging businesses. The cost of on-going operations was lower by approximately
$63,000.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses for the first six months of 1997 increased
approximately $942,000 or 100%. This increase is attributable to the addition
of management and operating infrastructure relating to the Company's expansion
as a physician practice management company and to increased legal and accounting
costs.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization for the first six months decreased by
approximately $217,000 or 62%, primarily as a result of the divestiture of the
occupational medicine and diagnostic imaging businesses in 1996.
9
<PAGE>
PROVISION FOR DOUBTFUL ACCOUNTS.
Provision for doubtful accounts for the first six months of 1997 decreased by
approximately $15,000 resulting primarily from a decrease in the estimate of
future collections on accounts receivable. The provision for doubtful accounts
is an accounting estimate which the Company reviews and adjusts on a periodic
basis.
NET GAIN FROM RESTRUCTURING:
The Company reported a first six months benefit of approximately $478,000
related to the 1996 net gain from restructuring. This adjustment reflects that
the Company was able to complete certain transactions relating to the
restructuring at a lower than expected cost.
INTEREST INCOME AND EXPENSE:
Interest income increased by $158,000, reflecting earnings from increased cash
reserves arising from the Company's restructuring in 1996. Interest expense
decreased by $80,000 primarily due to decreased borrowings under the Company's
working capital credit facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to $6,793,000, down $905,000 from
$7,698,000 at December 31, 1996. The Company used working capital to increase
net fixed assets and other assets by $243,000 and decrease notes and capital
leases by $122,000. The remainder of the decrease is explained principally by
the Company's first six month loss of $449,000.
Accounts receivable decreased approximately $1,461,000 during the first six
months due primarily to the net effect of lower accounting estimates of the
collectibility of existing accounts receivable. Personal injury accounts
receivable relating to the Houston musculoskeletal-related healthcare delivery
system represented a substantial portion of accounts receivable as of June 30,
1997. Although currently due, personal injury claims usually take significantly
longer to collect than claims billed to insurance carriers and employers.
The Company presently has a $2,000,000 line of credit for working capital
purposes, a $500,000 line of credit for equipment purchases and a term note
payable to its primary commercial bank. Borrowings under the working capital
and equipment lines bear interest at prime+1.25% and prime+1%, respectively, and
the term note bears interest at prime +1.5%. The working capital line also
requires an annual fee of 1% of the commitment. Advances under the equipment
line are converted into three- and four-year term notes annually at renewal. On
July 22, 1997 the Company funded $167,000 and $46,000 in three- and four-year
term notes, respectively. Advances under the working capital line are subject
to a borrowing base formula under which the Company presently has sufficient
collateral to support approximately 85% of the total line of credit. There were
no funds advanced under the line as of June 30, 1997. Advances under both
credit facilities as well as other borrowings from the Company's primary lender
are also subject to the terms of a loan agreement which includes typical
financial ratio covenants and other provisions. Both credit facilities expire
on May 15, 1998. The Company believes these credit facilities, its cash on
hand, and cash provided by operations will be sufficient to provide its working
capital needs for at least the next twelve months for its existing operations.
However, to pursue its physician practice management growth strategy of
acquiring or developing orthopaedic practices and musculoskeletal-related
healthcare delivery systems, additional capital is required. The Company is
currently exploring a number of alternatives for additional financing, including
equity investment, additional indebtedness, asset dispositions, and strategic
partnering. The Company anticipates that the cost of building the management
and operational infrastructure necessary to implement this strategy may exceed
the Company's earnings for at least a portion of 1997.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is not a party to any pending litigation other than routine
litigation incidental to the business or that which is immaterial in
amount of damages sought.
ITEM 2 CHANGES IN SECURITIES
This item is not applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
This item is not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 9, 1997. The
following persons were elected to the Company?s Board of Directors to hold
office for the ensuing year.
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
Jose E. Kauachi 5,031,299 102,650
William F. Donovan, M.D. 5,036,399 78,950
Victor M. Rivera, M.D. 5,040,299 114,950
Ronald E. Pierce 5,060,099 8,100
Clifford R. Hinkle 5,065,099 3,100
</TABLE>
The results of the voting for ratification of Price Waterhouse to serve as
the Company's independent accountant for the fiscal year ending December
31, 1997, were as follows:
For: 5,060,199 Against: 6,000 Abstained: 2,000
ITEM 5 OTHER INFORMATION
This item is not applicable.
ITEM 6(A) EXHIBITS AND EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- --------------------------------- --------------
10.33 Employment Agreement between the Company
and Alexis Lukianov dated effective April 21, 1997. /1/ Same
10.34 Employment Agreement between the Company
and G. Rogan Fry dated effective April 21, 1997. /1/ Same
27 Financial Data Schedule /1/ Same
ITEM 6 (B) REPORTS ON FORM 8-K
This item is not applicable.
_________________________________________
/1/ Filed herewith
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ JOSE E. KAUACHI
--------------------------------
JOSE E. KAUACHI,
Chairman of the Board,
and Chief Executive Officer
Dated: August 14, 1997
In Accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By: /s/ JOSE E. KAUACHI Chairman of the Board and August 14, 1997
- ---------------------------- Chief Executive Officer
JOSE E. KAUACHI
By: /s/ RONALD E. PIERCE President and Chief Operating August 14, 1997
- --------------------------- Officer
RONALD E. PIERCE
By:/s/ JEFFERSON R. CASEY Senior Vice President, Treasurer August 14, 1997
- -------------------------- (Principal Financial & Accounting
JEFFERSON R. CASEY Officer), and Secretary
</TABLE>
12
<PAGE>
EXHIBIT 10.33
[LOGO OF INTEGRATED ORTHOPAEDICS, INC. APPEARS HERE]
April 21, 1997
Mr. Alexis V. Lukianov
18 Elmtree Lane
Huntington Station, NY 11746
Dear Alex:
This letter is to serve as an offer of employment with Integrated
Orthopaedics, Inc. ("IOI") according and subject to the terms described below:
1. You are offered the position of Vice President, General Manager, an officer
of IOI.
2. The specific duties of the position will be agreed upon between you and
IOI's President within ninety (90) days after execution of this letter.
3. Your total cash compensation during your first twelve months of employment
will be no less than $175,000 to be paid in a combination of Base Salary and
Bonus (if you are employed for fewer than twelve months in any year, cash
compensation will be reduced ratably.). Starting Base Salary will be
$120,000. The future allocation of this cash compensation between Base
Salary and Bonus will be agreed upon between you and IOI's President within
ninety (90) days after execution of this letter.
4. When it is completed, you will participate in the executive compensation
plan currently under review by IOI's Compensation Committee and any
contradictions between that plan and this letter (except for the first year
compensation and option grants) will be resolved in conformance with the
plan.
5. Concurrently with your employment, you will receive options to purchase
32,500 shares of IOI common stock, par value $.001. These options will have
an exercise price equal to $5.00 per share. These options will be
substantially in the form attached to this letter.
6. Upon completion of a compensation plan, you will also receive options to
purchase no less than 100,000 shares of IOI common stock, par value $.001,
which amount may be increased, but not decreased, depending on the structure
of the executive compensation plan, when finalized. These options will have
an exercise price equal to the closing price of IOI's common stock on the
American Stock Exchange on the day prior to the date of your grant. These
options will vest at the rate of 20% per year over a five year period and
will expire on the anniversary date in 2007.
7. In partial consideration for the issuance of the above referenced 32,500
options, you will agree not to compete with IOI for the duration of your
employment as set forth in Section 7.2 of the Asset Purchase Agreement
between BackCare Group, Inc. and IOI of even date herewith. The exact nature
of the non-compete language and duration of the post-employment clause may
be altered and is subject to the same conditions that will be imposed on
other IOI officers.
. If required, IOI will provide a relocation program in accordance with the
attached addendum.
8. Your employment is subject to the closing of IOI's acquisition of
substantially all the assets of BackCare Group, Inc.
<PAGE>
If this offer is acceptable to you please sign where indicated below. We
look forward to a long and mutually satisfying relationship.
Very truly yours, AGREED and ACCEPTED:
/s/ RONALD E. PIERCE /s/ ALEXIS V. LUKIANOV
Ronald E. Pierce Alexis V. Lukianov
President & COO Date: 4-21-97
--------------
<PAGE>
EXHIBIT 10.34
[LOGO OF INTEGRATED ORTHOPAEDICS, INC. APPEARS HERE]
April 21, 1997
Mr. G. Rogan Fry
9545 Gwynnbrook Cove
Germantown, TN 38139-5655
Dear Rogan:
This letter is to serve as an offer of employment with Integrated
Orthopaedics, Inc. ("IOI") according and subject to the terms described below:
1. You are offered the position of Vice President, General Manager, an officer
of IOI.
2. The specific duties of the position will be agreed upon between you and
IOI's President within ninety (90) days after execution of this letter.
3. Your total cash compensation during your first twelve months of employment
will be no less than $150,000 to be paid in a combination of Base Salary and
Bonus (if you are employed for fewer than twelve months in any year, cash
compensation will be reduced ratably.). Starting Base Salary will be
$120,000. The future allocation of this cash compensation between Base
Salary and Bonus will be agreed upon between you and IOI's President within
ninety (90) days after execution of this letter.
4. When it is completed, you will participate in the executive compensation
plan currently under review by IOI's Compensation Committee and any
contradictions between that plan and this letter (except for the first year
compensation and option grants) will be resolved in conformance with the
plan.
5. Concurrently with your employment, you will receive options to purchase
32,500 shares of IOI common stock, par value $.001. These options will have
an exercise price equal to $5.00 per share. These options will be
substantially in the form attached to this letter.
6. Upon completion of a compensation plan, you will also receive options to
purchase no less than 100,000 shares of IOI common stock, par value $.001,
which amount may be increased, but not decreased, depending on the structure
of the executive compensation plan, when finalized. These options will have
an exercise price equal to the closing price of IOI's common stock on the
American Stock Exchange on the day prior to the date of your grant. These
options will vest at the rate of 20% per year over a five year period and
will expire on the anniversary date in 2007.
7. In partial consideration for the issuance of the above referenced 32,500
options, you will agree not to compete with IOI for the duration of your
employment as set forth in Section 7.2 of the Asset Purchase Agreement
between BackCare Group, Inc. and IOI of even date herewith. The exact nature
of the non-compete language and duration of the post-employment clause may
be altered and is subject to the same conditions that will be imposed on
other IOI officers.
8. If required, IOI will provide a relocation program in accordance with the
attached addendum.
9. Your employment is subject to the closing of IOI's acquisition of
substantially all the assets of BackCare Group, Inc.
<PAGE>
If this offer is acceptable to you please sign where indicated below. We
look forward to a long and mutually satisfying relationship.
Very truly yours, AGREED and ACCEPTED:
/s/ RONALD E. PIERCE /s/ G. ROGAN FRY
Ronald E. Pierce G. Rogan Fry
President & COO Date: April 21, 1997
--------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-QSB FOR
JUNE, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,271,721
<SECURITIES> 0
<RECEIVABLES> 5,909,459
<ALLOWANCES> 3,573,408
<INVENTORY> 0
<CURRENT-ASSETS> 9,554,695
<PP&E> 3,964,303
<DEPRECIATION> 3,079,547
<TOTAL-ASSETS> 10,568,821
<CURRENT-LIABILITIES> 2,762,457
<BONDS> 612,819
5,303
0
<COMMON> 252
<OTHER-SE> 7,362,952
<TOTAL-LIABILITY-AND-EQUITY> 10,568,821
<SALES> 3,874,176
<TOTAL-REVENUES> 3,874,176
<CGS> 5,218,310
<TOTAL-COSTS> 5,218,301
<OTHER-EXPENSES> (478,215)
<LOSS-PROVISION> 641,376
<INTEREST-EXPENSE> 38,335
<INCOME-PRETAX> (723,646)
<INCOME-TAX> 274,985
<INCOME-CONTINUING> (448,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (448,661)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
