<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998
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 Identification No.)
incorporation or organization)
5858 Westheimer, Suite 500, Houston, Texas 77057
------------------------------------------------
(Address of principal executive offices)
(713) 225-5464
----------------------------------------------
(Registrant's telephone number, including area code)
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 August 13, 1998, 6,475,322 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Form: YES [_] NO [X]
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1998
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
June 30, 1998 and December 31, 1997........................ 1
Consolidated Statements of Operations--
Three months and Six months ended June 30, 1998 and 1997... 2
Consolidated Statement of Change in Stockholders' Equity--
Six months ended June 30, 1998............................. 3
Condensed Consolidated Statements of Cash Flows--
Six months ended June 30, 1998 and 1997.................... 4
Notes to Condensed Consolidated Financial Statements....... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9
PART II. OTHER INFORMATION.................................................. 13
SIGNATURE................................................................... 14
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 8,373 $ 16,642
Accounts receivable, net 3,554 2,956
Other current assets 1,832 1,749
-------- --------
Total Current Assets 13,759 21,347
Property and Equipment 5,412 4,344
Less - Accumulated depreciation and amortization (3,450) (2,815)
-------- --------
Net Property and Equipment 1,962 1,529
Management Services Agreements, Net 30,676 25,018
Other Assets 282 258
-------- --------
TOTAL ASSETS $ 46,679 $ 48,152
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 275 $ 565
Accrued liabilities 2,640 3,155
Current maturities of notes payable and
current lease obligations 109 1,618
-------- --------
Total Current Liabilities 3,024 5,338
Long-term Debt 1,392 1,519
Other Long Term Liabilities 34 -
Deferred Income Taxes 10,077 7,873
-------- --------
Total Liabilities 14,527 14,730
-------- --------
Stockholders' Equity:
Preferred stock 3 3
Common stock 7 6
Additional paid-in capital 45,162 41,803
Common stock to be issued 78 1,643
Accumulated deficit (13,098) (10,033)
-------- --------
Total Stockholders' Equity 32,152 33,422
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,679 $ 48,152
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 3,082 $1,599 $ 5,720 $2,512
------- ------ ------- ------
Costs and expenses:
Practice compensation and benefits 1,054 649 1,983 1,248
Other direct costs 1,023 250 1,900 595
General and administrative 1,880 1,155 3,295 1,883
Depreciation and amortization 376 47 623 130
Gain from divestitures and
discontinued operations - (63) - (478)
------- ------ ------- ------
4,333 2,038 7,801 3,378
Loss From Operations (1,251) (439) (2,081) (866)
Interest income 130 79 310 181
Interest expense (42) (20) (73) (39)
------- ------ ------- ------
Loss Before Income Tax Benefit (1,163) (380) (1,844) (724)
Income Tax Benefit - 144 - 275
------- ------ ------- ------
Net loss $(1,163) $ (236) $(1,844) $ (449)
======= ====== ======= ======
Loss applicable to common shares $(1,777) $ (286) $(3,065) $ (549)
======= ====== ======= ======
Loss per common share:
Basic $(0.27) $(0.05) $(0.48) $(0.10)
======= ====== ======= ======
Diluted $(0.27) $(0.05) $(0.48) $(0.10)
======= ====== ======= ======
Weighted average common
shares outstanding 6,466 5,289 6,401 5,288
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON
SHARES AMOUNT ADDITIONAL STOCK
------------------------- ------------------- PAID IN ACCUMULATED TO BE
COMMON PREFERRED COMMON PREFERRED CAPITAL DEFICIT ISSUED TOTAL
----------- --------- ------ ---------- ------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -
December 31, 1997 5,886 276 $ 6 $ 3 $41,803 $(10,033) $1,643 $33,422
Dividends - Preferred
Stock - Series A (101) (101)
Dividends - Preferred
Stock - Series B 11 1,120 (1,120) -
Issuance of shares in
medical practice
transaction 139 679 78 757
Delivery of common stock
to be issued 424 1 1,642 (1,643) -
Exercise of stock options
and other 1 (82) (82)
Net loss (1,844) (1,844)
----- --- ----- ---- ------- -------- ------ -------
Balance -
June 30, 1998 6,450 287 $ 7 $ 3 $45,162 $(13,098) $ 78 $32,152
===== === ===== ==== ======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,844) $ (449)
Non-cash expenses and changes in
operating assets and liabilities (438) (1,569)
------- -------
Net cash used in operating activities (2,282) (2,018)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net payments in medical practice transaction (4,018) -
Purchase of property and equipment, net (358) (318)
Proceed from sale of marketable securities
and other assets 111 36
(Issuance of) collection on note receivable 52 (54)
------- -------
Net cash used in investing activities (4,213) (336)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank borrowings - (1,400)
Payments on note payable and capital lease obligations (1,725) (151)
Other (49) -
------- -------
Net cash used in financing activities (1,774) (1,551)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,269) (3,905)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 16,642 10,177
------- -------
END OF PERIOD $ 8,373 $ 6,272
======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 30 $ 38
Income taxes paid, net of refunds 135 908
NON CASH TRANSACTIONS AND OTHERS:
Details of medical practice transaction -
Liabilities assumed (20) -
Deferred tax liability for book and tax basis difference (2,204) -
Common stock and additional paid in capital
issued and to be issued (757) -
Others-
Dividends accrued on Series A & B preferred stock 1,221 100
Equipment acquired under capital leases - 49
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Integrated Orthopaedics, Inc. ("IOI" or the "Company") is a
physician practice management ("PPM") company specializing in the management of
orthopaedic medicine practices and other musculoskeletal-related patient
services. As of June 30, 1998, the Company provides comprehensive management
services under long-term agreements to four orthopaedic practices in four
states. The Company also owns and operates two work hardening facilities in
Houston, Texas.
BASIS OF PRESENTATION. The accompanying unaudited condensed 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
quarterly period and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 1997, as filed with the Securities and Exchange Commission on Form 10-KSB
Annual Report.
For periods prior to and ending September 30, 1997, the Company consolidated the
operations of its affiliated physician practices for financial reporting
purposes. In compliance with FASB EITF 97-2, the Company commenced reporting
its financial results on a non consolidated basis, beginning with the year ended
December 31, 1997. Accordingly, results for the quarter and six months ended
June 30, 1997 have been restated to reflect the adoption of non-consolidated
accounting.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting and disclosure of comprehensive income and
its components in the financial statements. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity to be included in
other comprehensive income. The adoption of this pronouncement had no impact on
the Company's net loss or stockholders' equity.
As a result of certain recent developments in the PPM industry, the Company has
elected to change the amortization period of its management service agreements
from 40 years to 25 years on a prospective basis beginning July 1, 1998. This 25
years amortization period will initiate at the execution of the management
service agreement. The Company expects this change in accounting estimate to
decrease its earnings per share by approximately $0.02 per quarter beginning in
the quarter ending September 30, 1998, excluding the effect of new management
service agreements to be executed in the future.
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.
NOTE 2 - MEDICAL SERVICE REVENUE
Medical service revenue for services delivered by the medical groups affiliated
with the Company is recorded when the services are rendered based on established
or negotiated charges reduced by contractual adjustments and allowances for
doubtful accounts. Differences between estimated contractual adjustments and
final settlements are reported in the period when the final settlements are
determined. Medical service
5
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
revenue of the affiliated medical groups is reduced by the contractual amounts
retained by the medical groups to arrive at the Company's revenue. Substantially
all of the amounts retained by affiliated physician groups under management in
the first six months of 1998 were contractually guaranteed as a minimum
percentage of practice gross profit.
The following represents the amounts included in the determination of the
Company's revenues (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- --------------------
1998 1997 1998 1997
------------ ------- ---------- -------
<S> <C> <C> <C> <C>
Medical Service Revenue $4,937 $2,311 $8,913 $3,874
Less: Amounts Retained by Medical Groups 1,855 712 3,193 1,362
------ ------ ------ ------
Revenues $3,082 $1,599 $5,720 $2,512
====== ====== ====== ======
Management Services Agreements at period end 4 1 4 1
</TABLE>
NOTE 3 - LOSS PER COMMON SHARE
Basic loss per share excludes dilution and is computed by dividing loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
The components of basic loss per share are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-----------------------------------------
1998 EPS 1997 EPS
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Net loss $(1,163) $(0.18) $ (236) $(0.04)
Series A Preferred Stock Dividend (50) (0.01) (50) (0.01)
Series B Preferred Stock Dividend (564) (0.08) - -
------- ------ ------ ------
Loss applicable to common shares $(1,777) $(0.27) $ (286) $(0.05)
======= ====== ====== ======
Weighted average common shares
outstanding 6,466 5,289
======= ======
SIX MONTHS ENDED JUNE 30
---------------------------------------
1998 EPS 1997 EPS
------- ------ ------ ------
Net loss $(1,844) $(0.29) $ (449) $(0.08)
Series A Preferred Stock Dividend (100) (0.02) (100) (0.02)
Series B Preferred Stock Dividend (1,121) (0.17) - -
------- ------ ------ ------
Loss applicable to common shares $(3,065) $(0.48) $ (549) $(0.10)
======= ====== ====== ======
Weighted average common shares
outstanding 6,401 5,288
======= ======
</TABLE>
6
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
For the quarterly period and six months ended June 30, 1998 and 1997, the
diluted weighted average shares excluded the following as the issuance or
conversion of these instruments results in anti-dilution (shares in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Employee stock options to purchase
common stock 1,716 $4.86 1,362 $4.34
Warrants to purchase common stock 200 2.13 200 2.13
Non employee stock options to purchase
common stock 94 4.19 100 4.16
Series A Preferred Stock convertible into
common stock 843 - 786 -
Series B Preferred Stock convertible into
common stock 4,373 - - -
</TABLE>
NOTE 4 - MEDICAL PRACTICE TRANSACTION
On March 12, 1998, the Company acquired certain assets and entered into a long-
term management agreement, effective March 1, 1998, with a six-physician
orthopaedic medical practice group in Longmont, Colorado ("Front Range
Orthopedic Center") for consideration totaling approximately $4.6 million. Such
consideration consisted primarily of (i) cash and estimated transaction costs
totaling $3.8 million and (ii) issuance of common stock valued at $757,000 for
169,694 shares of the Company's common stock, of which 30,001 shares will be
delivered on March 11, 2003. The consideration paid for the medical group to
enter into the long-term management service agreement ("MSA") and for the non-
medical assets of the medical group, primarily receivables and fixed assets, has
been accounted for as an asset purchase. The Company recorded MSA costs of $5.8
million, including a $2.2 million deferred tax liability related to the
recognition of book and tax basis differences of assets acquired in the medical
practice transaction, which is being amortized on a straight line basis over an
estimated useful life of 25 years (40 years prior to July 1, 1998). The results
of Front Range Orthopedic Center have been included in the operations of the
Company since March 1, 1998.
The following unaudited pro forma consolidated results of operations for the six
months ended June 30, 1998 and 1997 assume that the following transactions were
consummated on January 1, 1997: (i) the affiliation transaction with Front Range
Orthopedic Center in March 1998, (ii) the issuance of the Series B Preferred
Stock in December 1997, (iii) the affiliation transactions with three medical
practices during the three months ended December 31, 1997 and (iv) the
divestiture of the affiliated musculoskeletal-related healthcare delivery system
in Houston, Texas in November 1997, with the Company retaining the operations
of two work hardening facilities. The pro forma information does not purport to
be indicative of the results of operations that actually would have been
attained if the transactions described above occurred on January 1, 1997 ($ in
thousands, except loss per share):
7
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 1997(A)
------------ --------------
<S> <C> <C>
Revenue $ 6,052 $ 5,968
======= =======
Net income (loss) $(1,766) $ 148
======= =======
Loss applicable to common shares $(2,987) $(1,073)
======= =======
Loss per common share
Basic $ (0.46) $ (0.17)
======= =======
Diluted $ (0.46) $ (0.17)
======= =======
</TABLE>
- ---------------
(a) Includes $478,000 gain from divestitures and discontinued operations related
to the 1996 sale of the Company's occupational medicine businesses due to
the completion of certain transactions at lower than expected costs.
NOTE 5 - SUBSEQUENT EVENTS
On July 14, 1998, the Company entered into a credit agreement (the "Credit
Agreement"), which provided for a $65.0 million three-year Revolving Credit
Facility (the "Credit Facility"). The Credit Facility is available for (i)
general corporate purposes, including funding working capital needs,
acquisitions and capital expenditures, and (ii) issuance of letters of credit up
to $5.0 million, with a maximum working capital commitment of $15.0 million. The
Credit Facility will expire on July 10, 2001. Borrowings under the Credit
Facility bear interest at the Company's option, at (i) LIBOR plus a margin
ranging from 1.0% to 2.25% or (ii) the higher of the Federal Funds Rate plus .5%
or the prime rate, plus a margin ranging from 0.0% to .5%. The Company is
required to pay annual commitment fees ranging from .25% to .5% of the unused
portion of the Credit Facility. Letters of credit under the Credit Facility
require annual fees ranging from 1.0% to 2.25% of the outstanding amount of the
letters of credit.
The Credit Facility is secured by a first priority interest in the capital stock
of substantially all of the Company's present and future subsidiaries. The terms
of the Credit Agreement include certain restrictive covenants. Among other
restrictions, the covenants include limitations on investments, borrowings,
liens, acquisitions and dispositions of assets and transactions with affiliates,
and require maintenance of certain ratios regarding interest and fixed charge
coverage, leverage and minimum net worth. As of August 14, 1998, as a result of
operating losses incurred during the most recent 12-month period, the Company
was not in compliance with certain financial covenants. The Company cannot
borrow under the Credit Facility until it is in compliance with the conditions
specified in the Credit Agreement. See discussion under Part I - Item 2
"Liquidity and Capital Resources." The Company expects to incur approximately
$1.0 million in deferred financing costs in connection with the Credit
Agreement, which will be amortized over a three-year period.
On July 17, 1998, the Company paid $500,000 to an affiliated medical group, of
which $250,000 was to repurchase 47,081 shares of the Company's common stock
and $250,000 was to fulfill a contingent earnings agreement stated within the
MSA.
8
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain of the comments that follow or that appear elsewhere in this quarterly
report represent forward-looking statements with respect to the Company's future
results of operations and its related capital resources and financial condition.
The Company relies on a variety of internal and external information as well as
management judgment in order to develop such forward-looking statements. Because
of the inherent limitations in this process, the relatively volatile nature of
the industry in which the Company operates, and other risks and uncertainties
including those discussed in this quarterly report and the Company's annual
report on Form 10-KSB, there can be no assurance that actual results will not
differ materially from these forward-looking statements.
RESULTS OF OPERATIONS
GENERAL
Since October 1, 1997, the Company has entered into long term management service
agreements ("MSA") with four orthopaedic medicine practices. In December 1997,
IOI terminated its MSA with a Houston, Texas musculoskeletal-related healthcare
delivery system (the "1997 divestiture"), which represented substantially all of
its business from January 1, 1997 to October 1, 1997. In December 1997, the
Company also completed the issuance of its Series B Preferred Stock for net
proceeds of $24.5 million. Additionally, to implement its musculoskeletal-
related physician practice management ("PPM") expansion strategy, the Company
began building its corporate infrastructure during the fourth quarter of 1996
and continued to make key employee additions throughout 1997 and the 1998 year-
to-date period. Accordingly, the Company's financial position and portfolio of
operating entities for the quarterly period and six months ended June 30, 1998
were significantly different from those in the 1997 comparable periods.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997.
REVENUES
Revenues for the three months ended June 30, 1998 were $3.1 million, an increase
of $1.5 million, or 92.7%, over revenues of $1.6 million for the same period of
1997. Of the $1.5 million increase, $2.6 million was contributed by the four
physician practices managed since October 1997, offset by a decrease of $898,000
attributable to the 1997 divestiture and $192,000 attributable to the two work
hardening facilities retained from the 1997 divestiture
PRACTICE COMPENSATION AND BENEFITS:
Overall practice compensation and benefit costs increased $405,000, or 62.4%,
from $649,000 in 1997 to $1.1 million in 1998. These costs increased by
$865,000 due to the addition of the four physician practices and decreased by
$460,000 largely as a result of the 1997 divestiture.
OTHER DIRECT COSTS:
Overall direct costs increased $773,000, or 309.2%, from $250,000 in 1997 to
$1.0 million in 1998. Of the increase, $906,000 was due primarily to the
addition of the four physician practices, offset by a decrease of $133,000
attributable to the 1997 divestiture.
9
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the second quarter increased $725,000,
or 62.8%, from $1.2 million in 1997 to $1.9 million in 1998. Such increase was
due primarily to (i) increased salary, compensation and recruiting costs related
to additional senior management and staff to support the Company's PPM strategy,
(ii) increased travel and communication costs related to business development
and management of the four physician practices located in various states and
(iii) additional costs to support a higher level of staffing.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $329,000 over the same period of 1997,
of which $236,000 was attributable to the four physician practices, $72,000 to
the corporate offices and $21,000 to the two work hardening facilities.
GAIN FROM DIVESTITURES AND DISCONTINUED OPERATIONS:
The Company reported a gain from divestitures and discontinued operations of
$63,000 during the second quarter of 1997 as related to the 1996 sale of its
occupational medicine businesses due to the completion of certain transactions
at lower than expected costs.
INTEREST INCOME:
Interest income increased by $51,000 from 1997 to 1998, with the increase
primarily attributable to investment earnings on net proceeds received from the
issuance of the Series B Preferred Stock completed in December 1997.
NET LOSS / LOSS PER COMMON SHARE
Net loss for the quarter ended June 30, 1998 was $1.2 million, as compared to
$236,000 for the same period in 1997. Because the Company has a recent history
of losses, management continues to provide a valuation allowance in full for the
net operating loss deferred tax asset. Accordingly, no tax benefit has been
recognized on the 1998 operating loss. The Company anticipates additional losses
for at least a portion of 1998.
Loss per common share was $0.27 in 1998, as compared with $0.05 for the same
period of 1997, on a 22.3% increase in shares outstanding and an incremental
increase in dividends payable to preferred stockholders of $564,000. The
increase in shares outstanding was attributable to shares issued since October
1997 involving the four medical practice transactions. The increase in
dividends payable to preferred stockholders was attributable to the issuance of
the Series B Preferred Stock in December 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997.
REVENUES
Revenues for the six months ended June 30, 1998 were $5.7 million, an increase
of $3.2 million, or 127.7%, over revenues of $2.5 million for the same period of
1997. Of the $3.2 million increase, $4.7 million was contributed by the four
physicians practices managed since October 1997, offset by a decrease of $1.4
million attributable to the 1997 divestiture and $102,000 attributable to the
two work hardening facilities.
PRACTICE COMPENSATION AND BENEFITS:
Overall practice compensation and benefit costs increased $735,000, or 58.9%
from $1.2 million in 1997 to $2.0 million in 1998. These costs increased by
$1.6 million due to the addition of the four physician practices and decreased
by $870,000 largely as a result of the 1997 divestiture.
10
<PAGE>
OTHER DIRECT COSTS:
Overall direct costs increased $1.3 million, or 219.3%, from $595,000 in 1997 to
$1.9 million in 1998. Of the increase, $1.6 million was due primarily to the
addition of the four physician practices, offset by a decrease of $340,000
attributable to the 1997 divestiture.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the six months ended June 30, 1998
increased $1.4 million, or 75.0%, from $1.9 million in 1997 to $3.3 million in
1998. Such increase was due primarily to (i) increased salary, compensation and
recruiting costs related to additional senior management and staff to support
the Company's PPM strategy, (ii) increased travel and communication costs
related to business development and management of the four physician practices
located in various states and (iii) additional costs to support a higher level
of staffing.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $493,000 over the same period of 1997,
of which $437,000 was attributable to the four physician practices and $89,000
to the corporate offices, net of a decrease of $33,000 associated with the 1997
divestiture.
GAIN FROM DIVESTITURES AND DISCONTINUED OPERATIONS:
The Company reported a gain from divestitures and discontinued operations of
$478,000 during the first half of 1998 as related to the 1996 sale of its
occupational medicine businesses due to the completion of certain transactions
at lower than expected costs.
INTEREST INCOME:
Interest income increased by $129,000 from 1997 to 1998, with the increase
primarily attributable to investment earnings on net proceeds received from the
issuance of the Series B Preferred Stock completed in December 1997.
NET LOSS/LOSS PER COMMON SHARE
Net loss for the six months ended June 30, 1998 was $1.8 million, as compared to
$449,000 for the same period in 1997. Because the Company has a recent history
of losses, management continues to provide a valuation allowance in full for the
net operating loss deferred tax asset. Accordingly, no tax benefit has been
recognized on the 1998 operating loss. The Company anticipates additional losses
for at least a portion of 1998.
Loss per common share was $0.48 in 1998, as compared with $0.10 for the same
period of 1997, on a 21.0% increase in shares outstanding and an incremental
increase in dividends payable to preferred stockholders of $1.1 million. The
increase in shares outstanding was attributable to shares issued since October
1997 involving the four medical practice transactions. The increase in
dividends payable to preferred stockholders was attributable to the issuance of
the Series B Preferred Stock in December 1997.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities for the six months ended June 30, 1998 was
$2.3 million, compared to $2.0 million for the same period of 1997, as the
Company continues to incur losses while building its management and operational
infrastructure as a PPM company. Net cash used in investing activities
increased $3.9 million from $336,000 in 1997 to $4.2 million in 1998, due
primarily to the use of $4.0 million in 1998 in medical practice transactions.
Net cash used in financing activities was $1.8 million in 1998, as compared to
$1.6 million in 1997. The cash used in 1998 was to pay a non-interest bearing
obligation issued in October 1997 in a physician medical practice transaction.
The 1997 payment represented amounts paid on bank borrowings.
11
<PAGE>
Net working capital was $10.7 million at June 30, 1998, as compared to $16.0
million at December 31, 1997. The decrease was due primarily to a use of cash
during 1998 in a medical practice transaction and losses incurred in the first
half of 1998.
On July 14, 1998, the Company entered into a credit agreement (the "Credit
Agreement"), which provides for a revolving line of credit in the amount of
$65.0 million (the "Credit Facility"). The Credit Facility is available for
working capital purposes, to fund acquisitions, to finance capital expenditures
and for the issuance of letters of credit. See Item 1 - Note 5 for a more
detailed description of the Credit Agreement. The Credit Agreement requires the
Company to meet certain conditions preceding any borrowings. As of August 14,
1998, the Company was not in compliance with certain financial covenants as a
result of operating losses incurred during the most recent 12-month period.
Management anticipates that the Company will be able to meet all conditions
under the Credit Agreement and have access to the Credit Facility as the needs
arise. The Company intends to use its existing cash balance, additional
financing through equity investment or strategic partnering to enter into MSA's
with other orthopaedic medical groups in order to generate the additional
earnings necessary to meet the financial covenants under the Credit Agreement.
The Company anticipates that its current cash balance and borrowings under the
Credit Facility, subject to meeting all pre-borrowing conditions as noted above,
will be sufficient to fund future acquisition, capital expenditure and working
capital requirements through 1998. There can be no assurance that future
developments in the PPM industry or general economic trends will not adversely
affect the Company's operations or its ability to meet future funding
requirements.
YEAR 2000 COMPLIANCE:
The Company has completed the process of conducting a review of its internal
computer systems. All of the Company's software products, including without
limitation, any parts or components thereof, when used prior to, during, and
after the turn of the century, are programmed to process turn-of-the-century
dates. This capability includes, without limitation, date formats that have
multi-century formulas and date values, date interface values that reflect the
century, and calculations that accommodate the occurrence of leap year. The
Company is in the process of querying its vendors and clients regarding any
millennium compliance issues that could have a material impact on the Company or
its results of operations. To date, the Company has not incurred any material
expense regarding millennium compliance issues and any future expense that might
be incurred is not considered at this time to be material. There can be no
assurance, however, that the year 2000 compliance will not present unforeseen
problems in the systems of the Company and the third parties with which the
Company deals, such as third party payors. Failure of the Company's or third
parties' computer systems could materially and adversely impact the Company's
operations.
12
<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 the
amount of damages sought.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 6, 1998, for the
purpose of considering 1) Proposal 1 - the election of four directors of the
Company to serve until the 1999 Annual Meeting by shareholders of common
stock and Series A Preferred Stock and 2) - Proposal 2 - the election of
three directors of the Company to serve until the 1999 Annual Meeting by
shareholders of Series B Preferred Stock. The results of the voting for each
proposal are as follows:
<TABLE>
<CAPTION>
PROPOSAL 1:
-----------
FOR WITHHOLD
----------- --------
<S> <C> <C>
Jose E. Kauachi 5,496,362 825
--------- ---
Ronald E. Pierce 5,496,362 825
--------- ---
John B. McGinty, M.D. 5,496,362 825
--------- ---
Clifford R. Hinkle 5,496,362 825
--------- ---
PROPOSAL 2:
-----------
FOR WITHHOLD
-------- --------
J. Taylor Crandall 251,170 0
--------- ---
Mark A. Wolfson 251,170 0
--------- ---
Scott J. Hancock 251,170 0
--------- ---
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11 Statement re computation of per share earnings.
27 Financial Data Schedule.
b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
Date: August 13, 1998 By: /s/ Ronald E. Pierce
-----------------------------------------
RONALD E. PIERCE
President and Chief Executive Officer
(Acting Chief Accounting Officer
and Principal Financial Officer)
14
<PAGE>
EXHIBIT 11
INTEGRATED ORTHOPAEDICS, INC.
SCHEDULE RE: LOSS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Basic:
Net Loss $(1,163) $ (236) $(1,844) $ (449)
Series A Preferred Stock Dividend (50) (50) (100) (100)
Series A Preferred Stock Dividend (564) (1,121)
------- ------ ------- ------
Net loss after dividends $(1,777) $ (286) $(3,065) $ (549)
======= ====== ======= ======
Weighted average common
shares outstanding 6,466 5,289 6,401 5,288
======= ====== ======= ======
Loss per share $(0.27) $(0.05) $(0.48) $(0.10)
======= ====== ======= ======
Diluted:
Net loss $(1,163) $ (236) $(1,844) $ (449)
Series A Preferred Stock Dividend (50) (50) (100) (100)
Series A Preferred Stock Dividend (564) (1,121)
------- ------ ------- ------
Net loss after dividends $(1,777) $ (286) $(3,065) $ (549)
======= ====== ======= ======
Weighted average common
shares outstanding 6,466 5,289 6,401 5,288
Net effect of dilutive stock options
and warrants, based on treasury
stock method using average
market price
------- ------ ------- ------
Diluted common shares 6,466 5,289 6,401 5,288
======= ====== ======= ======
Loss per share $(0.27) $(0.05) $ (0.48) $(0.10)
======= ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,373,000
<SECURITIES> 0
<RECEIVABLES> 10,829,000
<ALLOWANCES> 7,275,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,759,000
<PP&E> 5,412,000
<DEPRECIATION> 3,450,000
<TOTAL-ASSETS> 46,679,000
<CURRENT-LIABILITIES> 3,024,000
<BONDS> 1,392,000
3,000
0
<COMMON> 7,000
<OTHER-SE> 32,142,000
<TOTAL-LIABILITY-AND-EQUITY> 46,679,000
<SALES> 5,720,000
<TOTAL-REVENUES> 5,720,000
<CGS> 7,801,000
<TOTAL-COSTS> 7,801,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,000
<INCOME-PRETAX> (1,844,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,844,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,844,000)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
