<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 SEPTEMBER 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.)
5858 Westheimer, Suite 500, Houston, Texas 77057
-------------------------------------------------
(Address of principal executive offices)
(713) 225-5464
----------------------------------------------------
(Registrant's telephone number, including area code)
Three Riverway, Suite 1430, Houston, Texas 77056
------------------------------------------------
(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 September 30, 1997, 5,299,641 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (Check One) YES NO X
--- ---
<PAGE>
INTERGRATED ORTHOPAEDICS, INC.
INDEX
Page
No.
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets (September 30, 1997
and December 31, 1996) 1
Consolidated Statements of Operations for the
three months and nine months ended
September 30, 1997 and September 30, 1996 2
Consolidated Statements of Changes in
Stockholders' Equity for the nine months
ended September 30, 1997 and September 30, 1996 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and
September 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 - 11
PART II OTHER INFORMATION
Item 1 - 6 12
SIGNATURES 13
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1997 1996
------------------- -------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and equivalents $ 5,588,181 $10,176,947
Accounts receivable, net 2,782,925 3,796,715
Income taxes receivable 810,311 82,495
Notes receivable, net 183,950 88,811
Other current assets 254,263 252,893
----------- -----------
TOTAL CURRENT ASSETS 9,619,630 14,397,861
----------- -----------
PROPERTY AND EQUIPMENT
Equipment (including equipment under capital leases) 3,460,892 3,171,495
Leasehold improvements 259,368 316,999
Furniture and fixtures 385,838 386,979
----------- -----------
4,106,098 3,875,473
Less - accumulated depreciation and amortization (3,108,342) (3,210,788)
----------- -----------
997,756 664,685
----------- -----------
OTHER ASSETS 324,934 106,165
TOTAL ASSETS $10,942,320 $15,168,711
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payables $ 1,031,472 $ 1,271,842
Accrued expenses 1,646,089 3,129,216
Income taxes payable 208,168 584,360
Current obligations under capital leases 14,379 14,081
Current portion of notes payable 103,470 1,700,699
----------- -----------
TOTAL CURRENT LIABILITIES 3,003,578 6,700,198
----------- -----------
NOTES PAYABLE 577,832 386,231
OBLIGATIONS UNDER CAPITAL LEASES 172,303 14,426
DEFERRED INCOME TAXES 160,174 160,174
----------- -----------
3,913,887 7,261,029
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 50,000,000
shares authorized, 5,313,474 and 5,302,474 issued 5,314 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 4,886,712 4,842,015
Retained earnings 2,136,169 3,060,128
Treasury shares, 13,833 shares (14) (16)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,028,432 7,907,682
----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,942,320 $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>
NINE MONTHS ENDED THREE MONTHS ENDED
-------------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 5,934,687 $12,264,848 $2,060,510 $4,063,467
Costs and expenses:
Compensation costs and
medical services 3,088,825 5,409,815 1,061,696 1,836,022
Other direct costs 910,231 2,810,247 370,578 1,006,787
General and administrative 3,023,862 1,812,357 1,144,742 599,427
Depreciation and amortization 176,182 580,007 45,771 232,786
Provision for doubtful accounts 820,878 898,711 179,502 241,600
Gain from restructuring (627,996) (149,781)
----------- ----------- ----------- -----------
7,391,982 11,511,137 2,652,508 3,916,622
INCOME (LOSS) FROM OPERATIONS (1,457,295) 753,711 (591,998) 146,845
Loss on sale of subsidiary (90,460)
Interest income 267,470 86,871
Interest expense (56,975) (101,978) (18,640) (7,244)
----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,246,800) 561,273 (523,767) 139,601
Provisions for income taxes 473,784 (202,239) 199,031 (59,820)
----------- ----------- ---------- -----------
NET INCOME (LOSS) $ (773,016) $ 359,034 $ (324,736) $ 79,781
=========== =========== ========== ===========
Earnings (loss) per common and
equivalent share:
Primary $(0.17) $0.05 $(0.07) $0.01
Fully Diluted $(0.17) $0.05 $(0.07) $0.01
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ (150,943) $ (150,943)
For Services Performed $ 9,558 $ 2 $ 9,560
Options Exercised 11,000 $ 11 $ 35,139 $ 35,150
Net Income (Loss) $ (773,016) $ (773,016)
---------- ------ ------ ---- ---------- ---------- ---- ----------
Balance -
June 30, 1997 5,313,474 $5,314 25,226 $252 $4,886,712 $2,136,169 $(14) $7,028,433
========== ====== ====== ==== ========== ========== ==== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (773,016) $ 279,253
Noncash adjustments:
Depreciation and amortization 176,182 347,221
Gain on sale of assets (32,903) 90,460
Net gain from restructuring (627,996)
Change in assets and liabilities, excluding acquisitions:
Accounts receivable, net 1,013,790 (1,047,226)
Other current assets (1,372) (108,361)
Accounts payable 295,197 (212,991)
Accrued expenses (1,494,270) 329,743
Other assets (218,767)
Income taxes receivable/payable (1,104,008) 556,249
------------ -----------
Net cash provided (used) by operating activities (2,767,163) 234,348
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (344,042) (323,983)
Net proceeds from sale of subsidiary 700,000
Proceeds from sale of assets 56,254
Issuance and additions to receivable (105,139)
Collections of notes receivable 38,541
------------ -----------
Net cash provided (used) by investing activities (392,927) 414,558
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings 1,113,294
Payments on bank borrowings (2,310,260) (949,903)
Payments on other notes, net (208,661) (887,437)
Payments on capital lease obligations (58,199) (116,767)
Issuance of common stock, net of offering costs 35,150
Issuance of preferred stock, net of offering costs 2,396,691
----------- -----------
Net cash provided (used) by financing activities (1,428,676) 442,584
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS (4,588,766) 1,091,490
CASH AND EQUIVALENTS:
BEGINNING OF YEAR 10,176,947 109,231
----------- -----------
END OF QUARTER $ 5,588,181 $ 1,200,721
----------- -----------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 56,975 $ 94,734
Income taxes paid/(recovered) $ 908,027 $ (416,653)
Property and equipment acquired with debt $ 400,568 $ 313,595
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine month period ended September 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 September 30, 1996 consolidated statements of operations
have been reclassified to conform to the September 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
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>
THREE MONTHS ENDED
------------------------------
September 30, September 30,
1997 1996
-------------- --------------
Primary
Weighted average of common shares
and common stock equivalents 5,292,228 5,466,407
========== ==========
Net Income $ (324,735) $ 79,781
Preferred dividends (50,867) (50,867)
---------- ----------
Earnings available for common shareholders (375,602) 28,914
========== ==========
Earnings Per Share $ (.07) $ .01
========== ==========
Fully diluted
Weighted average of common shares
and common stock equivalents 5,292,228 5,466,407
========== ==========
Net Income $ (324,735) $ 79,781
Preferred dividends (50,867) (50,867)
---------- ----------
Earnings available for common shareholders (375,602) 28,914
========== ==========
Earnings Per Share $ (.07) $ .01
========== ==========
NINE MONTHS ENDED
-----------------------------
September 30, September 30,
1997 1996
------------- -------------
Primary
Weighted average of common shares
and common stock equivalents 5,289,190 5,466,407
========== ==========
Net Income $ (773,016) $ 359,034
Preferred dividends (150,943) (76,300)
---------- ----------
Earnings available for common shareholders 923,955 282,734
========== ==========
Earnings Per Share $ (.17) $ .05
========== ==========
Fully diluted
Weighted average of common shares
and common stock equivalents 5,289,190 5,466,407
========== ==========
Net Income $ 773,016 $ 359,034
Preferred dividends (150,943) (76,300)
---------- ----------
Earnings available for common shareholder 923,955 282,734
========== ==========
Earnings Per Share $ (.17) $ .05
========== ==========
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
6
<PAGE>
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.
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:
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
--------------- ------------- ------------- -------------
Basic EPS $(.17) $ .05 $(.07) $ .01
===== ===== ===== =====
Diluted EPS $(.17) $ .05 $(.07) $ .01
===== ===== ===== =====
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.
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30,1996 SEPTEMBER 30, 1996
----------------- ------------------
Revenues (in thousands) $7,483 $2,471
Net Income (in thousand) $ 577 $ 133
Earnings per common share:
Primary $ .11 $ .02
Assuming full dilution $ .11 $ .02
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 SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 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 third quarter of 1997 decreased by approximately $2,004,000 or 49%.
Approximately $1,593,000 or 79% 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 third quarter of 1997 decreased
by approximately $774,000 or 42%. Approximately $514,000 or 66% of this
decreased cost is attributable to the divestiture of the occupational medicine
and diagnostic imaging businesses. Compensation costs and medical costs related
to on-going operations decreased by approximately $260,000.
OTHER DIRECT COSTS.
Other direct costs for the third quarter of 1997 decreased by approximately
$635,000 or 63%. Approximately $784,000 of this decrease is attributable to the
divestiture of the occupational medicine and diagnostic imaging businesses.
Other direct costs related to on-going operations increased by approximately
$149,000.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses for the third quarter of 1997 increased
approximately $546,000 or 91%. Approximately $245,000 of costs incurred in 1996
related to the divested occupational medicine and diagnostic imaging businesses.
The increase, net of divested costs, 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 third quarter decreased by approximately
$187,000 or 80%, primarily as a result of the divestiture of the occupational
medicine and diagnostic imaging businesses in 1996.
8
<PAGE>
PROVISION FOR DOUBTFUL ACCOUNTS.
Provision for doubtful accounts for the third quarter of 1997 decreased by
approximately $63,000. Approximately $61,000 or 97% of this decrease is
attributable to the divestiture of the occupational medicine and diagnostic
imaging businesses.
NET GAIN FROM RESTRUCTURING:
The Company reported a third quarter benefit of approximately $150,000 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 $87,000, reflecting earnings from increased cash
reserves arising from the Company's restructuring in 1996. Interest expense
increased by $12,000 primarily due to borrowings on notes payable and capital
leases.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
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 nine months of 1997 decreased by approximately $6,331,000 or 52%.
Approximately $4,782,000 or 76% 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 nine months of 1997
decreased by approximately $2,321,000 or 43%. Approximately $2,342,000 of this
decreased cost is attributable to the divestiture of the occupational medicine
and diagnostic imaging businesses. Compensation costs and medical costs related
to on-going operations rose by approximately $21,000.
OTHER DIRECT COSTS.
Other direct costs for the first nine months of 1997 decreased by approximately
$1,900,000 or 68%. Approximately $1,984,000 of this decrease is attributable to
the divestiture of the occupational medicine and diagnostic imaging businesses.
Other direct costs related to on-going operations rose by approximately $84,000.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses for the first nine months of 1997 increased
approximately $1,212,000 or 67%. Approximately $328,000 of costs incurred in
1996 related to the divested occupational medicine and diagnostic imaging
businesses. The increase, net of divested costs, 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.
9
<PAGE>
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization for the first nine months decreased by
approximately $404,000 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 first nine months of 1997 decreased by
approximately $79,000. Approximately $185,000 of this decrease is attributable
to the divestiture of the occupational medicine and diagnostic imaging
businesses. Provision for doubtful accounts related to on-going operations rose
by approximately $109,000. 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 nine months benefit of approximately $628,000
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 $267,000, reflecting earnings from increased cash
reserves arising from the Company's restructuring in 1996. Interest expense
decreased by $45,000. Approximately $30,000 of this decrease is attributable to
the divestiture of the occupational medicine and diagnostic imaging businesses.
Interest expense related to on-going operations rose by approximately $15,000
due to borrowings on notes payable and capital leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to $6,616,000, down $1,082,000 from
$7,698,000 at December 31, 1996. The Company used approximately $309,000 of
working capital to increase net fixed assets and other assets by $551,000 which
was partially financed by notes and capital leases of $242,000. The remainder
of the decrease is primarily due to the Company's losses in the first nine
months of 1997.
Accounts receivable decreased approximately $1,014,000 during the first nine
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 September
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 four term notes
payable to its primary commercial bank. Borrowings under the working capital and
equipment lines bear annual interest at prime +1.25% and prime +1%,
respectively. The working capital line also requires an annual fee of 1% of the
commitment. Advances under the working capital line are subject to a borrowing
base formula. There were no funds advanced under the line as of September
30,1997. Advances under the equipment line are converted into three- or four-
year term notes annually at renewal. There were no funds advanced under the
equipment line at September 30,1997. Both lines expire on May 15, 1998. On July
22, 1997 the Company converted advances under the equipment line to three-and
four-year notes of approximately $167,000 and $46,000, respectively. Term notes
bear annual interest at a floating rate of prime + 1.5% and at
10
<PAGE>
fixed rates that vary from 9.15% to 9.5%. All borrowings from the Company's
primary bank are subject to the terms of a loan agreement which includes typical
financial covenants and other provisions. 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 1997 and at least a portion of 1998.
11
<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
This item is not applicable.
Item 5 Other Information
This item is not applicable.
Item 6 (a) Exhibits and Exhibit Index
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- ------------- --------
10.35 Loan Agreement dated July 1, 1997, by and
Between the Company and Wells Fargo Bank
(Texas) National Association. /1/Same
27 Financial Data Schedule
Item 6 (b) Reports on Form 8-K
This item is not applicable.
_________________________________________
/1/ Filed herewith
12
<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: November 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:
Signature Title Date
- --------- ----- ----
By: /s/ JOSE E. KAUACHI Chairman of the Board and November 14, 1997
----------------------- Chief Executive Officer
JOSE E. KAUACHI
By: /s/ RONALD E. PIERCE President and November 14, 1997
----------------------- Chief Operating Officer
RONALD E. PIERCE
By: /s/ JEFFERSON R. CASEY Senior Vice President, November 14, 1997
----------------------- Treasurer (Principal
JEFFERSON R. CASEY Financial & Accounting
Officer), and Secretary
13
<PAGE>
July 1, 1997
Jose Kauachi, President
Integrated Orthopaedics, Inc.
Three Riverway, Suite 1430
Houston, TX 77056
Dear Mr. Kauachi:
This letter is to confirm that Wells Fargo Bank (Texas), National
Association ("Bank"), subject to all terms and conditions contained herein, has
agreed to make available to Integrated Orthopaedics, Inc. ("Borrower") the
following described credit accommodations (each, a "Credit" and collectively,
the "Credits"):
1. A revolving line of credit under which Bank will make advances to
Borrower from time to time up to and including May 15, 1998, not to exceed at
any time the maximum principal amount of Two Million Dollars ($2,000,000.00)
("Line of Credit"), the proceeds of which shall be used to finance Borrower's
working capital requirements.
2. A commitment under which Bank will make advances to Borrower from
time to time up to and including May 15, 1998, not to exceed the aggregate
principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Term
Commitment"), the proceeds of which shall be used to purchase equipment, and
which shall be converted to term debt under two new facilities with maturities
of May 15, 2001 and May 15, 2002, as described more fully below.
3. A term loan in the principal amount of One Hundred Sixty-Seven
Thousand Four Hundred Twenty-Eight and 86/100 Dollars ($167,428.86) ("Term Loan
A"), the proceeds of which shall be used to term out existing advances made for
purchase of equipment. Bank's commitment to grant Term Loan A shall terminate
on July 15, 1997.
4. A term loan in the principal amount of Forty-Five Thousand Eight
Hundred Sixty-Four and 99/100 Dollars ($45,864.99) ("Term Loan B"), the proceeds
of which shall be used to term out advances made for purchase of equipment.
Bank's commitment to grant Term Loan B shall terminate on July 15, 1997.
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 2
I. CREDIT TERMS:
1. LINE OF CREDIT:
(a) Line of Credit Note. Borrower's obligation to repay advances under
the Line of Credit shall be evidenced by a promissory note substantially in the
form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which
are incorporated herein by this reference.
(b) Limitation on Borrowings. Outstanding borrowings under the Line of
Credit, to a maximum of the principal amount set forth above, shall not at any
time exceed an aggregate of eighty percent (80%) of Borrower's eligible
commercial insurance and industrial accounts receivable, (defined as commercial
and industrial accounts receivable that are equal to or less, than 120 days,
less allowance for doubtful accounts at 10%) plus seventy percent (70%) of
Borrower's eligible personal injury attorneys' accounts receivable, (defined as
personal injury accounts receivable that are equal to or less than 180 days,
less allowance for doubtful accounts at 25%); All of the foregoing shall be
determined by Bank upon receipt and review of all collateral reports required
hereunder and such other documents and collateral information as Bank may from
time to time require.
Except with respect to Borrower's eligible personal injury accounts
receivable and/or the condition set forth above, "eligible accounts receivable"
shall consist solely of trade accounts created in the ordinary course of
Borrower's business, upon which Borrower's right to receive payment is absolute
and not contingent upon the fulfillment of any condition whatsoever, and in
which Bank has a perfected security interest of first priority, and shall not
include:
(i) any account which is past due more than twice Borrower's
standard selling terms;
(ii) that portion of any account for which there exists any
right of setoff, defense or discount (except regular discounts allowed
in the ordinary course of business to promote prompt payment) or for
which any defense or counterclaim has been asserted;
(iii) any account which represents an obligation of an account
debtor located in a foreign country;
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Integrated Orthopaedics, Inc.
July 1, 1997
Page 3
(iv) any account which arises from the sale or lease to or
performance of services for, or represents an obligation of, an
employee, affiliate, partner, member, parent or subsidiary of Borrower:
(v) that portion of any account which represents interim or
progress billings or retention rights on the part of the account debtor;
(vi) any account which represents an obligation of any account
debtor when twenty percent (20%) or more of Borrower's accounts from
such account debtor are not eligible pursuant to (i) above;
(vii) that portion of any account from an account debtor which
represents the amount by which Borrower's total accounts from said
account debtor exceeds twenty-five percent (25%) of Borrower's total
accounts;
(viii) any account deemed ineligible by Bank when Bank, in its
reasonable sole discretion, deems the creditworthiness or financial
condition of the account debtor, to be unsatisfactory.
(b) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.
2. TERM COMMITMENT:
(a) Term Commitment Note. Borrower's obligation to repay advances under
the Term Commitment shall be evidenced by a promissory note substantially in the
form of Exhibit B attached hereto ("Term Commitment Note"), all terms of which
are incorporated herein by this reference.
(b) Borrowing and Repayment. Borrower may from time to time during the
period in which Bank will make advances under the Term Commitment borrow and
partially or wholly repay its outstanding borrowings, and reborrow, subject to
all the limitations, terms and conditions contained herein; provided
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Integrated Orthopaedics, Inc.
July 1, 1997
Page 4
however, that the total outstanding borrowings under the Term Commitment shall
not at any time exceed the maximum principal amount available thereunder, as set
forth above. The outstanding principal balance of the Term Commitment shall be
due and payable in full on May 15, 1998; provided however, that so long as
Borrower is in compliance on said date with all terms and conditions contained
herein and in any other documents evidencing the Credits, Bank agrees to convert
the outstanding principal balance on the Term Commitment into two new facilities
with maturities of May 15, 2001 and May 15, 2002. Bank further agrees to
restructure repayment of said outstanding principal balance so that principal
and interest shall be amortized over three years and four years and shall be
repaid in 36 monthly installments and 48 monthly installments respectively, as
set forth in the promissory notes executed by Borrower on said date to evidence
the new repayment schedules.
(c) Prepayment. Borrower may repay principal on the Term Commitment at
any time, in any amount and without penalty.
3. TERM LOAN A:
(a) Term Note. Borrower's obligation to repay Term Loan A shall be
evidenced by a promissory note substantially in the form of Exhibit C attached
hereto ("Term Note A"), all terms of which are incorporated herein by this
reference.
(b) Repayment. The principal amount of Term Loan A shall be repaid in
accordance with the provisions of Term Note A.
(c) Prepayment. Borrower may prepay principal on Term Loan A solely in
accordance with the provisions of Term Note A.
4. TERM LOAN B:
(a) Term Note. Borrower's obligation to repay Term Loan B shall be
evidenced by a promissory note substantially in the form of Exhibit D attached
hereto ("Term Note B"), all terms of which are incorporated herein by this
reference.
(b) Repayment. The principal amount of Term Loan B shall be repaid in
accordance with the provisions of Term Note B.
(c) Prepayment. Borrower may prepay principal on Term Loan B solely in
accordance with the provisions of Term Note B.
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Integrated Orthopaedics, Inc.
July 1, 1997
Page 5
5. COLLATERAL:
As security for all indebtedness of Borrower to Bank, Borrower hereby
grants to Bank security interests of first priority in all Borrower's accounts
receivable and other rights to payment, general intangibles, inventory and
equipment.
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for
all costs and expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing and recording fees and costs of
appraisals, audits and title insurance.
6. GUARANTIES:
All indebtedness of Borrower to Bank shall be guaranteed by Occupational
Medicine Associates of Houston, P.A. and Physicare, L.L.P. and DRCA Houston
Clinics, Inc. in the principal amount of $3,300,000.00 each, as evidenced by
and subject to the terms of guaranties in form and substance satisfactory to
Bank.
II. INTEREST/FEES:
1. Interest. The outstanding principal balance of the Line of Credit,
Term Commitment, Term Loan A and Term Loan B shall bear interest at the rate of
interest set forth in the Line of Credit Note, Term Commitment Note, Term Note A
and Term Note B ("the Notes").
2. Computation and Payment. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Notes.
3. Commitment Fee. Borrower shall pay to Bank a nonrefundable commitment
fee for the Line of Credit equal to $20,000.00, which fee shall be due and
payable in full on the dated Borrower acknowledges this letter.
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 6
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this letter and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this letter.
1. Legal Status. Borrower is a corporation, duly organized and existing
and in good standing under the laws of the state of Texas, and is qualified or
licensed to do business in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
2. Authorization and Validity. This letter, the Line of Credit Note,
Term Commitment Note, Term Note A and Term Note B, and each other document,
contract or instrument deemed necessary by Bank to evidence any extension of
credit to Borrower pursuant to the terms and conditions hereof, or now or at any
time hereafter required by or delivered to Bank in connection with this letter
(collectively, the "Loan Documents") have been duly authorized, and upon their
execution and delivery in accordance with the provisions hereof will constitute
legal, valid and binding agreements and obligations of Borrower or the party
which executes the same, enforceable in accordance with their respective terms.
3. No Violation. The execution, delivery and performance by Borrower of
each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in a breach of or constitute a default under any
contract, obligation, indenture or other instrument to which Borrower is a party
or by which Borrower may be bound.
4. Litigation. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative agency
which could have a material adverse effect on the financial condition or
operation of Borrower other than those disclosed by Borrower to Bank in writing
prior to the date hereof.
5. Correctness of Financial Statement. The financial statement of
Borrower dated March 31, 1997, a true copy of which
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 7
has been delivered by Borrower to Bank prior to the date hereof, (a) is complete
and correct and presents fairly the financial condition of Borrower, (b)
discloses all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether
liquidated or unliquidated, fixed or contingent, and (c) has been prepared in
accordance with generally accepted accounting principles consistently applied.
Since the date of such financial statement there has been no material adverse
change in the condition or operation of Borrower, nor has Borrower mortgaged,
pledged, granted a security interest in or otherwise encumbered any of its
assets or properties except in favor of Bank or as otherwise permitted by Bank
in writing.
6. Income Tax Returns. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
7. No Subordination. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this letter to any other obligation of Borrower.
8. Permits, Franchises. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
all rights to trademarks, trade names, patents and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
9. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974,
as amended or recodified from time to time ("ERISA"); Borrower has not violated
any provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event,
as defined in ERISA, has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
10. Other Obligations. Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 8
any other material lease, commitment, contract, instrument or obligation.
11. Environmental Matters. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
IV. CONDITIONS:
1. Conditions of Initial Extension of Credit. The obligation of Bank to
grant any of the Credits is subject to fulfillment to Bank's satisfaction of all
of the following conditions:
(a) Documentation. Bank shall have received each of the Loan Documents,
duly executed and in form and substance satisfactory to Bank.
(b) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower or any guarantor hereunder, nor any material decline, as determined by
Bank, in the market value of any collateral required hereunder or a substantial
or material portion of the assets of Borrower or any such guarantor.
(c) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 9
2. Conditions of Each Extension of Credit. The obligation of Bank to make
each extension of credit requested by Borrower hereunder shall be subject to the
fulfillment to Bank's satisfaction of each of the following conditions:
(a) Compliance. The representations and warranties contained herein and in
each of the other Loan Documents shall be true on and as of the date of the
signing of this letter and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
default hereunder, and no condition, event or act which with the giving of
notice or the passage of time or both would constitute such a default, shall
have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents which
may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long Bank remains committed to extend credit to
Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
1. Punctual Payment. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therin.
2. Accounting Records. Maintain adequate books and records in accordance
with generally accepted accounting principles consistently applied, and permit
any representative of Bank, at any reasonable time, to inspect, audit and
examine such books and records, to make copies of the same and inspect the
properties of Borrower.
3. Financial Statements. Provide to Bank all of the following, in form
and detail satisfactory to Bank:
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 10
(a) not later than 45 days after and as of the end of each month, an
unaudited financial statement of Borrower, and within 30 days after filing, but
in no event later than each November 30, copies of Borrower's filed federal
income tax returns for such year.
(b) not later than 60 days after and as of the end of each quarter copy of
Borrower's 10Q which is submitted to the SEC.
(c) not later than 45 days after and as of the end of each month, a
borrowing base certificate, an aged listing of accounts receivable and accounts
payable.
(d) not later than 105 days after the end of each fiscal year a copy of
Borrower's form 10-K as submitted to the SEC.
(e) from time to time such other information as Bank may reasonably
request.
4. Compliance. Preserve and maintain all licenses, permits, governmental
approvals, rights, privileges and franchises necessary for the conduct of its
business; and comply with the provisions of all documents pursuant to which
Borrower is organized and/or which govern Borrower's continued existence and
with the requirements of all laws, rules, regulations and orders of a
governmental agency applicable to Borrower and/or its business.
5. Insurance. Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to that of Borrower,
including but not limited to fire, extended coverage, public liability, flood,
property damage and workers' compensation, with all such insurance carried with
companies and in amounts satisfactory to Bank, and deliver to Bank from time to
time at Bank's request schedules setting forth all insurance then in effect.
6. Facilities. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
7. Taxes and Other Liabilities. Pay and discharge when due any and all
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 11
assessments, except (a) such as Borrower may in good faith contest or as to
which a bona fide dispute may arise, and (b) for which Borrower has made
provision, to Bank's satisfaction, for eventual payment thereof in the event
Borrower is obligated to make such payment.
8. Financial Condition. Maintain Borrower's financial condition as
follows using generally accepted accounting principles consistently applied and
used consistently with prior practices (expect to the extent modified by the
definitions herein):
(a) Current Ratio not at any time less than 1.1 to 1.0, with "Current
Ratio" defined as total current assets divided by total current liabilities.
(b) Tangible Net Worth not at any time less than $3,450,000.00, with
"Tangible Net Worth" defined as the aggregate of total equity plus subordinated
debt less any intangible assets.
(c) Total Liabilities divided by Tangible Net Worth not at any time greater
than 1.5 to 1.0, with "Total Liabilities" defined as the aggregate of current
liabilities and non-current liabilities less subordinated debt, and the
"Tangible Net Worth" as defined above.
9. Other Indebtedness. Not create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, in excess of $50,000.00 except (a) the liabilities of Borrower
to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed
to Bank prior to, the date hereof.
10. Merger, Consolidation, Transfer of Assets. Not merge into or
consolidate with any other entity; nor make any substantial change in the nature
of Borrower's business as conducted as of the date hereof; nor acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business.
11. Guaranties. Not guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 12
business), accommodation endorser or otherwise for, nor pledge or hypothecate
any assets of Borrower as security for, any liabilities or obligations of any
other person or entity, except any of the foregoing in favor of subsidiaries,
affiliates and the Bank.
12. Loans, Advances, Investments. Not make any loans or advances to or
investments in any person or entity, except those subsidiaries and affiliates in
which the bank maintains a security interest in the assets of the entity or
those entities who guarantee the debt obligations of Borrower to the Bank.
13. Dividends, Distributions. Not declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding except pertaining to any agreement currently in place
as of the date of this agreement, nor redeem, retire, repurchase or otherwise
acquire any shares of any class of Borrower's stock now or hereafter
outstanding.
14. Pledge of Assets. Not mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, all or any portion of Borrower's assets now
owned or hereafter acquired, except, (i) purchase money security interest, or
(ii) any of the foregoing in favor of Bank or which are existing as of, and
disclosed to Bank in writing prior to, the date hereof.
VI. DEFAULT, REMEDIES:
1. Default, Remedies. Upon the violation of any term or condition of any
of the Loan Documents, or upon the occurrence of any default or defined event of
default under any of the Loan Documents: (a) all principal and accrued and
unpaid interest outstanding under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, or any notices
of any kind, including without limitation notice of nonperformance, notice of
protest, protest, notice of dishonor, notice of intention to accelerate or
notice of acceleration, all of which are hereby expressly waived by each
Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to resort
to any or all security for any of the Credits and to exercise any
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Integrated Orthopaedics, Inc.
July 1, 1997
Page 13
or all of the rights of a beneficiary or secured party pursuant to applicable
law. All rights, powers and remedies of Bank may be exercised at any time by
Bank and from time to time after the occurrence of any such breach or default,
are cumulative and not exclusive, and shall be in addition to any other rights,
powers or remedies provided by law or equity.
2. No Waiver. No delay, failure or discontinuance of Bank in exercising
any right, power or remedy under any of the Loan Documents shall affect or
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind by Bank of
any breach of or default under any of the Loan Documents must be in writing and
shall be effective only to the extent set forth in such writing.
VII. MISCELLANEOUS:
1. Notices. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set forth
above, or to such other address as any party may designate by written notice to
all other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
2. Costs, Expenses and Attorneys' Fees. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel to the extent
permissible), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this letter and the other Loan Documents, Bank's
continued administration hereof and thereof, and the preparation of amendments
and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the
collection of any amounts which become due to Bank under any of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation, any action for
declaratory relief, whether
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 14
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred din connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
3. Successors, Assignment. This letter shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without Bank's prior written consent.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
benefits under each of the Loan Documents. In connection therewith Bank may
disclose all documents and information which Bank now has or hereafter may
acquire relating to any of the Credits, Borrower or its business, [any guarantor
hereunder or the business of such guarantor,] or any collateral required
hereunder.
4. Amendment. This letter may be amended or modified only in writing
signed by each party hereto.
5. No Third Party Beneficiaries. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their respective
permitted successors and assigns, and no other person or entity shall be a third
party beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this letter or any other of the Loan Documents to which it is
not a party.
6. Severability of Provisions. If any provision of this letter shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
letter.
7. Governing Law. This letter shall be governed by and construed in
accordance with the laws of the State of Texas.
8. Savings Clause. It is the intention of the parties to comply strictly
with applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in the Loan Documents, in no event shall any Loan Documents require the
payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under
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Integrated Orthopaedics, Inc.
July 1, 1997
Page 15
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If any
such excess interest is called for, contracted for, charged, taken, reserved or
received in connection with any Loan Documents, or in any communication by Bank
or any other person to Borrower or any other person, or in the event that all or
part of the principal or interest hereof or thereof shall be prepaid or
accelerated, so that under any of such circumstances or under any other
circumstance whatsoever the amount of interest contracted for, charged, taken,
reserved or received on the amount of principal actually outstanding from time
to time under the Loan Documents shall exceed the Maximum Rate, then in such
event it is agreed that: (i) the provisions of this paragraph shall govern and
control; (ii) neither Borrower nor any other person or entity now or hereafter
liable for the payment of any Loan Documents shall be obligated to pay the
amount of such interest to the extent it is in excess of the Maximum Rate; (iii)
any such excess interest which is or has been received by Bank,
not withstanding this paragraph, shall be credited against the then unpaid
principal balance hereof or thereof, or if any of the Loan documents has been or
would be paid in full by such credit, refunded to Borrower; and (iv) the
provisions of each of the Loan Documents, and any other communication to
Borrower, shall immediately be deemed reformed and such excess interest reduced,
without the necessity of executing any other document, to the Maximum rate. The
right to accelerate the maturity of the Loan Documents does not include the
right to accelerate, collect or charge unearned interest, but only such interest
that has otherwise accrued as of the date of acceleration. Without limiting the
foregoing, all calculations of the rate of interest contracted for, charged,
taken, reserved or received in connection with any of the Loan Documents which
are made for the purpose of determining whether such rate exceeds the Maximum
Rate shall be made to the extent permitted by applicable laws by amortizing,
prorating, allocating and spreading during the period of the full term of such
Loan Documents, including all prior and subsequent renewals and extensions
hereof or thereof, all interest at any time contracted for, charged, taken,
reserved or received by Bank. The terms of this paragraph shall be deemed to be
incorporated into each of the other Loan Documents.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes
is relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right
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Integrated Orthopaedics, Inc.
July 1, 1997
Page 16
subsequently to change such method in accordance with applicable law, as the
same may be amended or modified from time to time.
9. Right of Setoff; Deposit Accounts. Upon and after the occurrence of
an Event of Default, (a) Borrower hereby authorizes Bank, at any time and from
time to time, without notice, which is hereby expressly waived by each Borrower,
and whether or not Bank shall have declared the Credits to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities under the Loan
Documents (whether matured or unmatured, fixed or contingent, liquidated or
unliquidated), any and all amounts owing by Bank to Borrower (whether payable in
U.S. dollars or any other currency, whether matured or unmatured, and in the
case of deposits, whether general or special (except trust and escrow accounts),
time or demand and however evidenced), and (b) pending any such action, to the
extent necessary, to hold such amounts as collateral to secure such obligations
and liabilities and to return as unpaid for insufficient funds any and all
checks and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in all
deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of Borrower
to Bank under the Loan Documents.
10. Business Purpose. Borrower represents and warrants that the Credits
are for a business, commercial, investment, agricultural or other similar
purpose and not primarily for a personal, family or household use.
11. Arbitration.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this letter. A "Dispute" shall mean any action, dispute, claim
or controversy of any kind, whether in contract or tort, statutory or common
law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 17
arbitration of a Dispute. Any party who fails or refuses to submit to
arbitration following a lawful demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in Texas selected
by the AAA or other administrator. If there is any inconsistency between the
terms hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to any
arbitration proceeding. All discovery activities shall be expressly limited
to matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. (S)91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the Texas State Bar with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Texas, (ii) may grant any
remedy or relief that a court of the state of Texas could order or grant
within the scope hereof and
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 18
such ancillary relief as is necessary to make effective any award, and (iii)
shall have the power to award recovery of all costs and fees, to impose
sanctions and to take such other actions as they deem necessary to the same
extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas
Rules of Civil Procedure or other applicable law. Any Dispute in which the
amount in controversy is $5,000,000 or less shall be decided by a single
arbitrator who shall not render an award of greater than $5,000,000 (including
damages, costs, fees and expenses). By submission to a single arbitrator, each
party expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be decided
by majority vote of a panel of three arbitrators; provided however, that all
three arbitrators must actively participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
Texas, and (iii) the parties shall have in addition to the grounds referred to
in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
Texas. Judgment confirming an award in such a proceeding may be entered only if
a court determines the award is supported by substantial evidence and not based
on legal error under the substantive law of the state of Texas.
(f) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between
<PAGE>
Integrated Orthopaedics, Inc.
July 1, 1997
Page 19
the parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on June 15, 1997,
unless this letter is acknowledged by Borrower and returned to Bank on or before
that date.
Sincerely,
WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
By: _________________________
David Massin
Relationship Manager
Acknowledged and accepted as of _________________________:
Integrated Orthopaedics, Inc.
By:
__________________________
Title: CEO
_______________________
<PAGE>
EXHIBIT A
REVOLVING LINE OF CREDIT NOTE
$2,000,000.00 Houston, Texas
July 1, 1997
FOR VALUE RECEIVED, the undesigned INTEGRATED ORTHOPAEDICS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION ("Bank") at its office at 1000 Louisiana, Houston, Texas, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of Two
Million Dollars ($2,000,000.00), or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the date
of its disbursement as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at the
lesser of (i) a rate per annum one and one quarter of one percent (1.25%) above
the Prime Rate in effect from time to time, or (ii) the Maximum Rate. The "Prime
Rate" is a base rate that Bank from time to time establishes and which serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto. Each change in the rate of interest hereunder shall
become effective on the date each Prime Rate change is announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be due and
payable on the 15th day of each February, May, August and November, commencing
August 15, 1997.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on May 15, 1998.
<PAGE>
(b) Advances. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Jose E. Kauachi, Ronald E. Pierce or Jeff R. Casey, any one acting alone,
who are authorized to request advances and direct the disposition of any
advances until written notice of the revocation of such authority is received by
the holder at the office designated above, or (ii) any person, with respect to
advances deposited to the credit of any account of any Borrower with the holder,
which advances, when so deposited, shall be conclusively presumed to have been
made to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority to draw
against such account. The holder shall have no obligation to determine whether
any person requesting an advance for deposit to any account of Borrower with
Bank is or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor of
this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
2
<PAGE>
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed
in connection with or securing this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and accrued
and unpaid interest outstanding hereunder to be immediately due and payable
without presentment, demand, or any notices of any kind, including without
limitation notice of nonperformance, notice of protest, protest, notice of
dishonor, notice of intention to accelerate or notice of acceleration, all of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel to the extent permissible), expended or
incurred by the holder in connection with the enforcement of the holder's rights
and/or the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
3
<PAGE>
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) Savings Clause. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any provision
to the contrary in this Note, or in any contract, instrument or document
evidencing or securing the payment hereof or otherwise relating hereto (each, a
"Related Document"), in no event shall this Note or any Related Document require
the payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under applicable laws that exceed the
maximum amount permitted by such laws, as the same may be amended or modified
from time to time (the "Maximum Rate"). If any such excess interest is called
for, contracted for, charged, taken, reserved or received in connection with
this Note or any Related Document, or in any communication by Bank or any other
person to Borrower or any other person, or in the event that all or part of the
principal or interest hereof or thereof shall be prepaid or accelerated, so that
under any such circumstances or under any other circumstance whatsoever the
amount of interest contracted for, charged, taken, reserved or received on the
amount of principal actually outstanding from time to time under this Note shall
exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrower nor
any other person or entity now or hereafter liable for the payment of this Note
or any Related Document shall be obligated to pay the amount of such interest to
the extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall be
credited against the then unpaid principal balance hereof or thereof, or if this
Note or any Related Document has been or would be paid in full by such credit,
refunded to Borrower; and (iv) the provisions of this Note and each Related
Document, and any other communication to Borrower, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the Maximum Rate. The right to accelerate the maturity of
this Note or any Related Document does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has otherwise
accrued as of the date of acceleration. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved or
received in connection with this Note and any Related Document which are made
for the purpose of determining whether such rate exceeds the Maximum Rate shall
be made to the extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full term of this Note or such
4
<PAGE>
Related Document, including all prior and subsequent renewals and extensions
hereof or thereof, all interest at any time contracted for, charged, taken,
reserved or received by Bank. The terms of this paragraph shall be deemed to be
incorporated into each Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statues
is relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right subsequently to change such method in accordance with applicable law, as
the same may be amended or modified from time to time.
(e) Right of Setoff; Deposit Accounts. Upon and after the occurrence of
an Event of Default, (i) Borrower hereby authorizes Bank, at any time and from
time to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared this Note to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities under this Note
(whether matured or unmatured, fixed or contingent, liquidated or unliquidated),
any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars
or any other currency, whether matured or unmatured, and in the case of
deposits, whether general or special (except trust and escrow accounts), time or
demand and however evidenced), and (ii) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in all
deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of Borrower
to Bank under this Note.
(f) Business Purpose. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment, agricultural
or other similar purpose and not primarily for a personal, family or household
use.
(g) Certain Tri-Party Accounts. Borrower and Bank agree that Tex. Rev.
Civ. Stat. Ann. Art. 5056, ch. 15 (which regulates certain revolving credit
loan accounts and revolving triparty accounts) shall not apply to any revolving
loan accounts created under this Note or maintained in connection herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS EVIDENCED
HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN OR THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR
5
<PAGE>
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE INDEBTEDNESS
EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of
the date first written above.
INTEGRATED ORTHOPAEDICS, INC.
By: ________________________________
Title: ______________________________
6
<PAGE>
EXHIBIT B
TERM COMMITMENT NOTE
$500,000.00 Houston, Texas
July 1, 1997
FOR VALUE RECEIVED, the undersigned INTEGRATED ORTHOPAEDICS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION ("Bank") at its office at 1000 Louisiana, Houston, Texas, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of Five
Hundred Thousand Dollars ($500,000.00), or so much thereof as may be advanced
and be outstanding, with interest thereon, to be computed on each advance from
the date of its disbursement as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at the
lesser of (i) a rate per annum one percent (1.00%) above the Prime Rate in
effect from time to time, or (ii) the Maximum Rate. The "Prime Rate" is a base
rate that Bank from time to time establishes and which serves as the basis upon
which effective rates of interest are calculated for those loans making
reference thereto. Each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank.
(b) Payment of Interest. Interest accrued on this Note shall be due and
payable on the 15th day of each February, May, August and November, commencing
August 15, 1997.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the term
of this Note borrow, partially or wholly repay its outstanding borrowings, and
reborrow, subject to all of the limitations, terms and conditions of this Note
and of any document executed in connection with or governing this Note; provided
however, that the total outstanding borrowings under this Note shall not at any
time exceed the principal amount stated above. The unpaid principal balance of
this obligation at any time shall be the total amounts advanced hereunder by the
holder thereof less the amount of principal payments made hereon by or for the
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on May 15, 1998. Outstanding principal balance of this Note on May 15, 1998
shall
<PAGE>
be converted to term debt under two new facilities with maturities of May 15,
2001 and May 15, 2002.
(b) Advances. Advances hereunder, to the total amount of the principal sum
stated above, may be made by the holder at the oral or written request of (i)
Joe E. Kauachi, Ronald E. Pierce or Jeff R. Casey, any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made to
or for the benefit of each Borrower regardless of the fact that persons other
than those authorized to request advances may have authority to draw against
such account. The holder shall have no obligation to determine whether any
person requesting an advance for deposit to any account of Borrower with Bank is
or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges when
due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor of
this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debt as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any
2
<PAGE>
Borrower or Third Party Obligor which is a corporation, partnership, joint
venture or other type of entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party Obligor
to Bank proves to be incorrect, false or misleading in any material respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and accrued
and unpaid interest outstanding hereunder to be immediately due and payable
without presentment, demand, or any notices of any kind, including without
limitation notice of nonperformance, notice of protest, protest, notice of
dishonor, notice of intention to accelerate or notice of acceleration, all of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel to the extent permissible), expended or
incurred by the holder in connection with the enforcement of the holder's rights
and/or the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
3
<PAGE>
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) Savings Clause. It is the intention of the parties to comply strictly
with applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in this Note, or in any contract, instrument or document evidencing or
securing the payment hereof or otherwise relating hereto (each, a "Related
Document"), in no event shall this Note or any Related Document require the
payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under applicable laws that exceed the
maximum amount permitted by such laws, as the same may be amended or modified
from time to time (the "Maximum Rate"). If any such excess interest is called
for, contracted for, charged, taken, reserved or received in connection with
this Note or any Related Document, or in any communication by Bank or any other
person to Borrower or any other person, or in the event that all or part of the
principal or interest hereof or thereof shall be prepaid or accelerated, so that
under any of such circumstances or under any other circumstance whatsoever the
amount of interest contracted for, charged, taken, reserved or received on the
amount of principal actually outstanding from time to time under this Note shall
exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrower nor
any other person or entity now or hereafter liable for the payment of this Note
or any Related Document shall be obligated to pay the amount of such interest to
the extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall be
credited against the then unpaid principal balance hereof or thereof, or if this
Note or any Related Document has been or would be paid in full by such credit,
refunded to Borrower; and (iv) the provisions of this Note and each Related
Document, and any other communication to Borrower, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the Maximum Rate. The right to accelerate the maturity of
this Note or any Related Document does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has otherwise
accrued as of the date of acceleration. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved or
received in connection with this Note and any Related Document which are made
for the purpose of determining whether such rate exceeds the Maximum Rate shall
be made to the extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full term of this Note or such
4
<PAGE>
Related Document, including all prior and subsequent renewals and extensions
hereof or thereof, all interest at any time contracted for, charged, taken,
reserved or received by Bank. The terms of this paragraph shall be deemed to be
incorporated into each Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right subsequently to change such method in accordance with applicable law, as
the same may be amended or modified from time to time.
(e) Right of Setoff; Deposit Accounts. Upon and after the occurrence of an
Event of Default, (i) Borrower hereby authorizes Bank, at any time and from time
to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared this Note to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities under this Note
(whether matured or unmatured, fixed or contingent, liquidated or unliquidated),
any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars
or any other currency, whether matured or unmatured, and in the case of
deposits, whether general or special (except trust and escrow accounts), time or
demand and however evidenced), and (ii) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in all
deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of Borrower
to Bank under this Note.
(f) Business Purpose. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment, agricultural
or other similar purpose and not primarily for a personal, family or household
use.
(g) Certain Tri-Party Accounts. Borrower and Bank agree that Tex. Rev. Civ.
Stat. Ann. Art. 5056, ch. 15 (which regulates certain revolving credit loan
accounts and revolving triparty accounts) shall not apply to any revolving loan
accounts created under this Note or maintained in connection herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS EVIDENCED
HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR
5
<PAGE>
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE INDEBTEDNESS
EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
INTEGRATED ORTHOPAEDICS, INC.
By:
------------------------------
Title:
---------------------------
6
<PAGE>
EXHIBIT C
PROMISSORY NOTE
$167,428.66 Houston, Texas
July 1, 1997
FOR VALUE RECEIVED, the undersigned INTEGRATED ORTHOPAEDICS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION ("Bank") at its office at 1000 Louisiana, Houston, Texas, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of One
Hundred Sixty-Seven Thousand Four Hundred Twenty-Eight and 86/100 Dollars
($167,428.86), with interest thereon as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed, unless
such calculation would result in a usurious rate, in which case interest shall
be computed on the basis of a 365/366-day year, as the case may be, actual days
elapsed) at the lesser of (i) a rate per annum nine and one half of one percent
(9.50%), or (ii) the Maximum Rate.
REPAYMENT AND PREPAYMENT:
(a) Repayment. Principal and interest shall be payable on the 10th day of
each month in installments of Five Thousand Three Hundred Sixty-Three and 24/100
Dollars ($5,363.24) each, commencing August 10, 1997, and continuing up to and
including June 10, 2000, with a final installment consisting of all remaining
unpaid principal and accrued interest due and payable in full on July 10, 2000.
If interest due on the outstanding principal balance of this Note at any time
exceeds the amount of the scheduled installment of principal and interest then
due from Borrower, the full amount of such excess interest shall be added to the
amount of said scheduled installment and shall be due and payable in full on the
date such installment is due.
(b) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
(c) Prepayment. Borrower may prepay principal on this Note at any time, in
any amount and without penalty. All prepayments of principal shall be applied on
the most remote principal installment or installments then unpaid.
<PAGE>
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges when
due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor of
this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party Obligor
to Bank proves to be incorrect, false or misleading in any material respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provisions of, or any defined event or
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
2
<PAGE>
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and accrued
and unpaid interest outstanding hereunder to be immediately due and payable
without presentment, demand, or any notices of any kind, including without
limitation notice of nonperformance, notice of protest, protest, notice of
dishonor, notice of intention to accelerate or notice of acceleration, all of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel to the extent permissible), expended or
incurred by the holder in connection with the enforcement of the holder's rights
and/or the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) Savings Clause. It is the intention of the parties to comply strictly
with applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in this Note, or in any contract, instrument or document evidencing or
securing the payment hereof or otherwise relating hereto (each, a "Related
Document"), in no event shall this Note or any Related Document require the
payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under applicable laws that exceed the
maximum amount permitted by such laws, as the state may be amended or modified
from time to time (the "Maximum Rate"). If any such excess interest is called
for, contracted for, charged, taken, reserved or received in connection with
this Note or any Related Document, or in any consummation by Bank or any other
person to Borrower or any other person, or in the event that all or part of the
3
<PAGE>
principal or interest hereof or thereof shall be prepaid or accelerated, so that
under any of such circumstances or under any other circumstances whatsoever the
amount of interest contracted for, charged, taken, reserved or received on the
amount of principal actually outstanding from time to time under this Note shall
exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrower nor
any other person or entity now or hereafter liable for the payment of this Note
or any Related Document shall be obligated to pay the amount of such interest to
the extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall be
credited against the then unpaid principal balance hereof or thereof, or if this
Note or any Related Document has been or would be paid in full by such credit,
refunded to Borrower; and (iv) the provisions of this Note and each Related
Document, and any other communication to Borrower, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the Maximum Rate. The right to accelerate the maturity of
this Note or any Related Document does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has otherwise
accrued as of the date of acceleration. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved or
received in connection with this Note and any Related Document which are made
for the purpose of determining whether such rate exceeds the Maximum Rate shall
be made to the extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full term of this Note or such
Related Document, including all prior and subsequent renewals and extensions
hereof or thereof, all interest at any time contracted for, charged, taken,
reserved or received by Bank. The terms of this paragraph shall be deemed to be
incorporated into each Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right subsequently to change such method in accordance with applicable law, as
the same may be amended or modified from time to time.
(e) Right of Setoff; Deposit Accounts. Upon and after the occurrence of an
Event of Default, (i) Borrower hereby authorizes Bank, at any time and from time
to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared this Note to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities
4
<PAGE>
under this Note (whether matured or unmatured, fixed or contingent, liquidated
or unliquidated), any and all amounts owing by Bank to Borrower (whether payable
in U.S. dollars or any other currency, whether matured or unmatured, and in the
case of deposits, whether general or special (except trust and escrow accounts),
time or demand and however evidenced), and (ii) pending any such action, to the
extent necessary, to hold such amounts as collateral to secure such obligations
and liabilities and to return as unpaid for insufficient funds any and all
checks and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in all
deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of Borrower
to Bank under this Note.
(f) Business Purpose. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment, agricultural
or other similar purpose and not primarily for a personal, family or household
use.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS EVIDENCED
HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE
INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
INTEGRATED ORTHOPAEDICS, INC.
By:
-------------------------------------
Title:
----------------------------------
5
<PAGE>
EXHIBIT D
PROMISSORY NOTE
$45,864.99 Houston, Texas
July 1, 1997
FOR VALUE RECEIVED, the undersigned INTEGRATED ORTHOPAEDICS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION ("Bank") at its office at 1000 Louisiana, Houston, Texas, or at such
other place as the holder hereof may designate, in lawful money of the United
States of America and in immediately available funds, the principal sum of
Forty-Five Thousand Eight Hundred Sixty-Four and 99/100 Dollars ($45,864.99),
with interest thereon as set forth herein.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed, unless
such calculation would result in a usurious rate, in which case interest shall
be computed on the basis of a 365/366-day year, as the case may be, actual days
elapsed) at the lesser of (i) a rate per annum nine and one half of one percent
(9.50%), or (ii) the Maximum Rate.
REPAYMENT AND PREPAYMENT:
(a) Repayment. Principal and interest shall be payable on the 10th day of
each month in installments of One Thousand One Hundred Fifty-Two and 27/100
Dollars ($1,152.27) each, commencing August 10, 1997, and continuing up to and
including June 10, 2000, with a final installment consisting of all remaining
unpaid principal and accrued interest due and payable in full on July 10, 2000.
If interest due on the outstanding principal balance of this Note at any time
exceeds the amount of the scheduled installment of principal and interest then
due from Borrower, the full amount of such excess interest shall be added to the
amount of said scheduled installment and shall be due and payable in full on the
date such installment is due.
(b) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
(c) Prepayment. Borrower may prepay principal on this Note at any time, in
any amount and without penalty. All prepayments of principal shall be applied on
the most remote principal installment or installments then unpaid.
<PAGE>
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instruments or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
2
<PAGE>
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder
of this holder of this Note, at the holder's option, may declare all sums of
principal and accrued and unpaid interest outstanding hereunder to be
immediately due and payable without presentment, demand, or any notices of any
kind, including without limitation notice of nonperformance, notice of protest,
protest, notice of dishonor, notice of intention to accelerate or notice of
acceleration, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorney's fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel to the
extent permissible), expended or incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any amounts which
become due to the holder under this Note, and the prosecution or defense of any
action in any way related to this Note, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) Savings Clause. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any provision
to the contrary in this Note, or in any contract, instrument or document
evidencing or securing the payment hereof or otherwise relating hereto (each, a
"Related Document"), in no event shall this Note or any Related Document require
the payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under applicable laws that exceed the
maximum amount permitted by such laws, as the same may be amended or modified
from time to time (the "Maximum Rate"). If any such excess interest is called
for, contracted for, charged, taken, reserved or received in connection with
this Note or any Related Document, or in any communication by Bank or any other
person to Borrower or any other person, or in the event that all or part of the
3
<PAGE>
principal or interest hereof or thereof shall be prepaid or accelerated, so that
under any of such circumstances or under any other circumstance whatsoever the
amount of interest contracted for, charged, taken, reserved or received on the
amount of principal actually outstanding from time to time under this Note shall
exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrower nor
any other person or entity now or hereafter liable for the payment of this Note
or any Related Document shall be obligated to pay the amount of such interest to
the extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall be
credited against the then unpaid principal balance hereof or thereof, or if this
Note or any Related Document has been or would be paid in full by such credit,
refunded to Borrower; and (iv) the provisions of this Note and each Related
Document, and any other communication to Borrower, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the Maximum Rate. The right to accelerate the maturity of
this Note or any Related Document does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has otherwise
accrued as of the date of acceleration. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved or
received in connection with this Note and any Related Document which are made
for the purpose of determining whether such rate exceeds the Maximum Rate shall
be made to the extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full terms of this Note or
such Related Document, including all prior and subsequent renewals and for,
charged, taken, reserved or received by Bank. The terms of this paragraph shall
be deemed to be incorporated into each Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right subsequently to change such method in accordance with applicable law, as
the same may be amended or modified from time to time.
(e) Right of Setoff; Deposit Accounts. Upon and after the occurrence of an
Event of Default, (i) Borrower hereby authorizes Bank, at any time and from
time to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared this Note to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities
<PAGE>
under this Note (whether matured or unmatured, fixed or contingent, liquidated
or unliquidated), any and all amounts owing by Bank to Borrower (whether
payable in U.S. dollars or any other currency, whether matured or unmatured, and
in the case of deposits, whether general or special (except trust and escrow
accounts), time or demand and however evidenced), and (ii) pending any such
action, to the extent necessary, to hold such amounts as collateral to secure
such obligations and liabilities and to return as unpaid for insufficient funds
any and all checks and other items drawn against any deposits so held as Bank,
in its sole discretion, may elect. Borrower hereby grants to Bank a security
interest in all deposits and accounts maintained with Bank and with any other
financial institution to secure the payment of all obligations and liabilities
of Borrower to Bank under this Note.
(f) Business Purpose. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment, agricultural
or other similar purpose and not primarily for a personal, family or household
use.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS EVIDENCED
HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCED OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE
INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
INTEGRATED ORTHOPAEDICS, INC.
By:
------------------------------
Title:
--------------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,588,181
<SECURITIES> 0
<RECEIVABLES> 6,837,652
<ALLOWANCES> 4,054,727
<INVENTORY> 0
<CURRENT-ASSETS> 9,619,630
<PP&E> 4,106,098
<DEPRECIATION> 3,108,342
<TOTAL-ASSETS> 10,942,320
<CURRENT-LIABILITIES> 3,003,578
<BONDS> 867,984
0
252
<COMMON> 5,314
<OTHER-SE> 7,022,866
<TOTAL-LIABILITY-AND-EQUITY> 10,942,320
<SALES> 5,934,687
<TOTAL-REVENUES> 5,934,687
<CGS> 8,019,974
<TOTAL-COSTS> 8,019,974
<OTHER-EXPENSES> (627,996)
<LOSS-PROVISION> 820,878
<INTEREST-EXPENSE> 56,975
<INCOME-PRETAX> (1,246,800)
<INCOME-TAX> 473,784
<INCOME-CONTINUING> (773,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (773,016)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
