<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment No. 1
Amendment to Application or Report
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 18, 1997
INTEGRATED ORTHOPAEDICS, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation)
1-10677 76-0203483
(Commission File Number) (I.R.S. Employer Identification No.)
5858 Westheimer, Suite 500
Houston, Texas 77057
(Address of principal executive office,
including zip code)
Registrant's telephone number, including area code: (713) 225-5464
_________________________________________________
(former name or former address, if changed since last report)
This document consists of 16 pages.
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other provisions of its Current Report on Form 8-K dated
December 18, 1997, (Commission File Number 1-10677), as set forth below:
Item 7 Financial Statements and Exhibits Page
(a) Financial statements of business acquired
Lancaster Orthopaedic Clinic
Report of Independent Accountants 8
Balance Sheets as of September 30, 1997 (audited),
December 31, 1996 (audited) and September 30, 1996
(unaudited) 9
Statement of Income and Retained Earnings for the nine
months ended September 30, 1997 (audited), for the year
ended December 31, 1996 (audited) and for the nine months
ended September 30, 1996 (unaudited) 10
Statement of Cash Flows for the nine months ended
September 30, 1997 (audited), for the year ended
December 31, 1996 (audited) and for the nine months
ended September 30, 1996 (unaudited) 11
Notes to Financial Statements 12
(b) Pro Forma financial information
Introduction 3
Unaudited Pro Forma Balance Sheet as of September 30, 1997 4
Unaudited Pro Forma Statement of Income for the
Nine Months Ended September 30, 1997 5
Unaudited Pro Forma Statement of
Income for the Year Ended December 31, 1996 6
Notes to Unaudited Pro Forma Financial Statements 7
2
<PAGE>
Introduction
On December 18, 1997, Integrated Orthopaedics, Inc. acquired (i) the
accounts receivable and (ii) (a) 70% of the outstanding capital stock of
Lancaster Orthopedic Group, Inc. ("LOG, Inc.") and (b) the irrevocable right to
acquire the remaining 30% of the outstanding capital stock of LOG, Inc. on the
same financial terms as the 70% of the capital stock acquired at the time of the
transaction. The Company anticipates acquiring one-half of the remaining 30% of
the LOG, Inc. stock in January 1998 and the balance of the outstanding LOG, Inc.
stock in July 1998. At the time of the transaction, LOG, Inc. entered into a
long-term management agreement with the medical practice conducted by Lancaster
Orthopedic Group, P.C., ("LOG, PC"), an eleven-physician orthopaedic medicine
practice located in Lancaster, Pennsylvania. Including the consideration the
Company has delivered into trust to fund the anticipated acquisition of the
remaining 30% of the LOG, Inc. stock, the Company delivered aggregate
consideration of approximately $11,847,000, including (i) cash and estimated
transaction costs of approximately $10,085,000 and (ii) 362,502 shares of the
Company's common stock. In connection with the transaction, the Company also
agreed to undertake operating leases covering the facilities from which LOG,
Inc. had historically rendered its medical services. The use of these facilities
will be provided to LOG, PC pursuant to the Company's obligations under the
management agreement. The purchase price was determined after arms-length
negotiations between the Company and the physician owners of LOG, Inc. The cash
portion of the transaction was funded from the Company's existing cash reserves.
The following Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1997 and the Unaudited Pro Forma Consolidated Statement of
Operations for the nine months ended September 30, 1997 and for the year ended
December 31, 1996 have been prepared to reflect adjustments to the Company's
historical financial position and results of operations to give effect to the
Lancaster Orthopedic Group, Inc.. transaction ( the "Lancaster Transaction" or
the "Reported Transaction").
The Unaudited Pro Forma consolidated Balance Sheet has been prepared as if
the Lancaster Transaction occurred on September 30, 1997.
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1997 and the year ended December 31, 1996 have been
prepared as if the Lancaster Transaction occurred on January 1, 1997 and 1996,
respectively.
The pro forma financial statements have been prepared by the Company based
on the Company's unaudited and LOG, Inc.'s audited financial statements as of
and for the nine months ended September 30, 1997 and the audited financial
statements for the year ended December 31, 1996. For purposes of preparing the
pro forma financial statements, the Company has estimated revenues for the
periods prior to the Company's acquisition of LOG, Inc. by applying the
management fee formula contained in the management services agreement with LOG,
PC to the historical medical practice revenue. These pro forma financial
statements are presented for illustrative purposes only and are not necessarily
indicative of the results that would have been obtained had the Lancaster
Transaction been completed at the time above. This information should be read in
conjunction with the Company and LOG, Inc.'s historical financial statements.
On October 1, 1997 and November 12, 1997 the Company entered into
affiliation transactions with Merritt Orthopaedic Associates, P.C. and Westside
Orthopaedic Clinic, P.C., respectively. Such transactions are referred to as
"Completed Transactions" in the accompanying pro forma unaudited financial
statements.
On December 12, 1997, the Company completed the sale of (i) 250,000 shares
of Series B Preferred Stock, par value $0.01, which is initially convertible
into 4,166,667 shares of the Company's common stock (subject to adjustment) and
(ii) contingent warrants to purchase up to 5 million shares of the Company's
common stock at an initial exercise price of $8.00 per share (both the number of
shares and strike price being subject to adjustment). This transaction is
referred to in the accompanying pro forma unaudited financial statements as the
"Preferred Stock Offering".
3
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
PRO FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
$ in (000's)
<TABLE>
<CAPTION>
HISTORICAL (1) PROFORMA HISTORICAL PROFORMA
-------------------------- ------------------------- ------------- --------------------------------------
INTEGRATED COMPLETED REPORTED PREFERRED
ORTHOPAEDICS, COMPLETED TRANSACTION REPORTED TRANSACTION STOCK AS
INC. TRANSACTIONS ADJUSTMENTS(2) COMBINED TRANSACTION(3) ADJUSTMENTS OFFERING(11) ADJUSTED
------------- ------------ -------------- ---------- -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash & Equivalents $ 5,588 $ 176 $(3,061) $ 2,703 $ 218 $(10,033)(4) $24,804 $17,692
Accounts Receivable,
net 2,783 1,040 3,823 997 4,820
Income Taxes Receivable 810 810 810
Notes Receivable, net 184 184 184
Other Current Assets 254 104 (2) 356 185 541
------- ------ ------- ------- ------ -------- ------- -------
Total Current Assets 9,619 1,320 (3,063) 7,876 1,400 (10,033) 24,804 24,047
Property & Equipment, net 998 62 (31) 1,029 371 1,400
Other Assets 325 122 (122) 325 58 (68)(5) 315
Management Services
Agreements 6,737 6,737 10,278 (6) 17,015
------- ------ ------- ------- ------ -------- ------- -------
TOTAL ASSETS 10,942 1,504 3,521 15,967 1,829 177 24,804 42,777
======= ====== ======= ======= ====== ======== ======= =======
Current Liabilities
Accounts Payable 1,032 358 (295) 1,095 736 (732)(5) 1,099
Accrued Expenses 1,646 342 (155) 1,833 136 (7) 304 2,273
Income Taxes Payable 208 34 (34) 208 48 131 (8) 387
Current Obligations
Under Capital Lease 14 14 14
Current Portion of
Notes Payable 104 1,505 1,609 126 (126)(5) 1,609
------- ------ ------- ------- ------ -------- ------- -------
TOTAL CURRENT LIABILITIES 3,004 734 1,021 4,759 910 (591) 304 5,382
Note Payable 578 1,085 1,663 177 (177)(5) 1,663
Obligations Under Capital
Lease 172 172 172
Deferred Income Taxes 160 315 (315) 160 188 (274)(5) 74
------- ------ ------- ------- ------ -------- ------- -------
TOTAL LIABILITIES 3,914 1,049 1,791 6,754 1,275 (1,042) 304 7,291
------- ------ ------- ------- ------ -------- ------- -------
Common Stock 5 193 (193) 5 1 (9)(10) 6
Preferred Stock 3 3
Treasury Stock (204) 204
APIC 4,887 2,185 7,072 1,761 (10) 24,497 33,330
Retained Earnings 2,136 466 (466) 2,136 553 (542)(9) 2,147
------- ------ ------- ------- ------ -------- ------- -------
Total Stockholder's
Equity (Net Worth) 7,028 455 1,730 9,213 554 1,219 24,500 35,486
------- ------ ------- ------- ------ -------- ------- -------
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY $10,942 $1,504 $ 3,521 $15,967 $1,829 $ 177 $24,804 $42,777
======= ====== ======= ======= ====== ======== ======= =======
</TABLE>
4
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
PRO FORMA STATEMENT OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
$'S IN (000'S) EXCEPT FOR SHARE CALCULATIONS
<TABLE>
<CAPTION>
HISTORICAL (1) PROFORMA HISTORICAL PROFORMA
--------------------------- ------------------------- ------------- ------------------------------
INTEGRATED COMPLETED REPORTED
ORTHOPAEDICS, COMPLETED TRANSACTION REPORTED TRANSACTION AS
INC. TRANSACTIONS ADJUSTMENTS(2) COMBINED TRANSACTION(3) ADJUSTMENTS ADJUSTED
------------- ------------ --------------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 5,935 4,281 $ (1,525) $ 8,691 $ 5,194 $ (2,161) (12) $ 11,724
Cost & Expenses:
Compensation costs and
medical services 3,089 2,976 (1,085) 4,980 4,032 (2,322) (13)(14) 6,690
Other direct costs 910 199 1,109 268 1,377
General and administrative 3,024 1,036 (1,036) 3,024 765 (765) (14) 3,024
Depreciation and
amortization 176 22 116 314 108 193 (15) 615
Provision for doubtful
accounts 821 821 821
Gain from restructuring (628) (628) (628)
------------- ------------ -------------- ---------- -------------- ----------- ---------
7,392 4,233 (2,005) 9,620 5,173 (2,894) 11,899
------------- ------------ -------------- ---------- -------------- ----------- ---------
Income From Operations (1,457) 48 480 (929) 21 733 (175)
Interest Expense 57 6 130 193 19 (19) (16) 193
Interest and Other Income 267 267 2 (2) (16) 267
------------- ------------ -------------- ---------- -------------- ----------- ---------
Earnings Before Taxes (1,247) 42 350 (855) 4 750 (101)
Income Taxes 474 (29) (124) 321 (7) (294) (17) 20
------------- ------------ -------------- ---------- -------------- ----------- ---------
Net Income $ (773) $ 13 $ 226 $ (534) $ (3) $ 456 $ (81)
============= ============ ============== ========== ============== =========== =========
Loss Per Share $ (0.17) $ (0.12) $ (0.04)
Weighted Average Shares
Outstanding 5,289,190 5,855,509 6,218,011
============= ========== =========
</TABLE>
5
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
PRO FORMA STATEMENT OF INCOME (UNAUDITED)
FOR THE PERIOD ENDED DECEMBER 31, 1996
$'S IN (000'S) EXCEPT FOR SHARE CALCULATIONS
<TABLE>
<CAPTION>
HISTORICAL (1) PROFORMA HISTORICAL PROFORMA
-------------------------- ------------------------- ------------- ---------------------------------
INTEGRATED COMPLETED REPORTED
ORTHOPAEDICS, COMPLETED TRANSACTION REPORTED TRANSACTION AS
INC. TRANSACTIONS ADJUSTMENTS(2) COMBINED TRANSACTION(3) ADJUSTMENTS ADJUSTED
------------- ------------ -------------- --------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 14,313 $ 5,660 $ (2,133) $ 17,840 $ 7,045 $ (3,368) $ 21,517
Cost & Expenses:
Compensation costs and
medical services 7,471 3,995 (1,653) 9,813 5,509 (3,875) (13)(14) 11,447
Other direct costs 3,807 257 4,064 385 4,449
General and administrative 2,613 1,186 (1,186) 2,613 918 (918) (14) 2,613
Depreciation and
amortization 792 26 156 974 147 257 (15) 1,378
Provision for doubtful
accounts 1,417 1,417 1,417
Gain from restructuring (3,168) (3,168) (3,168)
------------- ------------ -------------- --------- -------------- ----------- ----------
12,932 5,464 (2,683) 15,713 6,959 (4,536) 18,136
------------- ------------ -------------- --------- -------------- ----------- ----------
Income From Operations 1,381 196 550 2,127 86 1,168 3,381
Interest Expense 170 13 168 351 40 (40) (16) 351
Interest Income (16)
------------- ------------ -------------- --------- -------------- ----------- ----------
Earnings Before Taxes 1,211 183 382 1,776 46 1,208 3,030
Income Taxes (424) (83) (134) (641) (27) (451) (17) (1,119)
------------- ------------ -------------- --------- -------------- ----------- ----------
Net Income $ 787 $ 100 $ 248 $ 1,135 $ 19 $ 757 $ 1,911
============= ============ ============== ========= ============== =========== ==========
Earnings Per Share $ 0.12 $ 0.17 $ 0.17
Weighted Average
Shares Outstanding 5,456,08 6,022,399 10,551,568
============= ========= ==========
</TABLE>
6
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
Notes to Unaudited Pro Forma financial Statements
(1) The columns include unaudited September 30, 1997 and audited December 31,
1996 historical financial information of Integrated Orthopaedics, Inc.
("IOI"), Merritt Orthopaedic Associates, P.C. and Winters, Kleinschmidt,
Frensilli and Fleming, M.D's, Ltd. (the "Completed Transactions").
(2) This column includes the pro forma adjustments previously reported on the
Completed Transactions.
(3) This column includes the audited September 30, 1997 and December 31, 1996
historical financial information of Lancaster Orthopedic Group, Inc.
("Lancaster").
(4) Adjustment to reflect payment of cash consideration of $9,896,003,
transaction costs of $53,421 and $83,000 of cash retained by the Lancaster
physicians.
(5) Adjustment to eliminate assets not acquired and liabilities not assumed in
the Lancaster transaction.
(6) Adjustment to reflect the cost of the Lancaster management services
agreement, estimated for purposes of the pro forma balance sheet, as
$10,278,000. The Company does not expect this estimate to change materially
when the Company completes its valuations of acquired assets and assumed
liabilities.
(7) Adjustment to reflect $136,000 of accrued transaction costs.
(8) Adjustment to reflect IOI's acquisition of a $131,000 income tax liability.
(9) Adjustment to eliminate the historical ownership interest of Lancaster.
(10) Adjustment to reflect the issuance of 142,402 shares of Common Stock to
Lancaster affiliated physicians.
(11) Adjustment to reflect the sale of 250,000 shares of Series B Preferred
Stock, par value $0.01, and contingent warrants to purchase up to 5 million
shares of Company common stock at $8.00 per share (subject to adjustment)
on December 12, 1997. Gross proceeds of $25 million are reflected net of
$196,000 in cost incurred at the time of closing and $304,000 in accrued
offering costs.
(12) Adjustment to eliminate medical practice revenues of Lancaster which would
not constitute revenue to the Company pursuant to the management services
agreements.
(13) Adjustment to eliminate Lancaster physician compensation that would not
constitute expense to the Company pursuant to the management services
agreement.
(14) Adjustment to reclassify general and administrate expenses of Lancaster to
Compensation Costs and Medical Services expense pursuant to the management
services agreement.
(15) Adjustment to reflect additional amortization attributable to the newly
obtained management services agreements over its contractual term of 40
years.
(16) Adjustment to eliminate interest income earned by Lancaster and interest
expense paid by Lancaster.
(17) Adjustment to reflect the tax (provision)/benefit of the Lancaster
transaction and related pro forma adjustments.
7
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Lancaster Orthopedic Group, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Lancaster Orthopedic Group, Inc. at
September 30, 1997 and December 31, 1996, and the results of its operations and
its cash flows for the nine months ended September 30, 1997 and year ended
December 31, 1996 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
November 19, 1997
8
<PAGE>
<TABLE>
<CAPTION>
LANCASTER ORTHOEPDIC GROUP, INC.
BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1996 1996
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and equivalents $ 217,915 $ 19,745 $ 356,031
Accounts receivable, net of allowance for doubtful
accounts of $116,684, $117,806 and 122,147 996,742 1,006,334 1,043,836
Prepaid assets 151,600 138,262 185,963
Other current assets 33,190 19,728 26,152
------------- ------------ -------------
Total current assets 1,399,447 1,184,069 1,611,982
------------- ------------ -------------
Property and equipment:
Furniture and equipment 1,106,869 1,099,710 1,078,308
Leasehold improvements 147,416 147,416 147,416
------------- ------------ -------------
1,254,285 1,247,128 1,225,724
Less-accumulated depreciation (882,863) (774,706) (737,999)
------------- ------------ -------------
Total property and equipment 371,422 472,420 487,725
------------- ------------ -------------
Deferred tax assets 28,901 50,985 47,743
Other assets 29,500 29,500 29,500
------------- ------------ -------------
Total assets $ 1,829,270 $ 1,736,974 $ 2,176,950
============= ============ =============
LIABILITIES AND STOCKHOLDERS; EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 736,657 $ 552,807 $ 978,252
Income taxes payable 47,893 20,002 139,301
Deferred income tax liability 188,553 251,334 112,799
Current portion of long-term debt 125,875 199,541 46,732
------------- ------------ -------------
Total current liabilities 1,098,978 943,684 1,277,084
Notes payable 176,683 236,273 355,813
------------- ------------ -------------
Total liabilities 1,275,661 1,179,957 1,632,897
------------- ------------ -------------
Stockholders' equity:
Common stock - no par value: authorized 600 shares,
480 shares issued, 320 outstanding 500 500 500
Retained earnings 553,109 556,517 543,553
------------- ------------ -------------
Total stockholders' equity 553,609 557,017 544,053
------------- ------------ -------------
Total liabilities and stockholders' equity $ 1,829,270 $ 1,736,974 $ 2,176,950
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
LANCASTER ORTHOPEDIC GROUP, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
- -------------------------------------------------------------------------------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
(UNAUDITED)
<S> <C> <C> <C>
Net patient revenues $ 5,102,030 $ 6,954,880 $ 5,331,804
Other revenues 92,425 90,545 66,735
------------- ------------ -------------
5,194,455 7,045,425 5,398,539
------------- ------------ -------------
Cost and expenses:
Compensation costs and medical services 4,031,431 5,509,070 4,272,284
Other direct costs 268,351 385,011 276,670
Sellings, general and administrative 765,278 918,085 694,642
Depreciation and amortization 108,157 146,828 110,121
------------- ------------ -------------
5,173,217 6,958,994 5,353,717
------------- ------------ -------------
Income from operations 21,238 86,431 44,822
Interest expense (19,080) (40,520) (32,260)
Interest and other income 1,630 4,391
------------- ------------ -------------
Income before income taxes 3,788 45,911 16,953
Provision for income taxes (7,196) (27,247) (11,253)
------------- ------------ -------------
Net income/(loss) (3,408) 18,664 5,700
Retained earnings:
Beginning of period 556,517 537,853 537,853
------------- ------------ -------------
End of period $ 553,109 $ 556,517 $ 543,553
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
LANCASTER ORTHOPEDIC GROUP, INC.
STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities: -
Net income /(loss) $ (3,408) $ 18,664 $ 5,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 108,157 146,828 110,121
Change in deferred income taxes (40,697) 7,245 (128,048)
Changes in assets and liaibilities:
Accounts receivable, net 9,592 (172,770) (210,272)
Prepaid assets (13,338) 7,659 (40,042)
Other current assets (13,462) (12,086) (18,510)
Other assets (13,500) (13,500)
Accounts payable and accrued expenses 183,850 188,738 614,183
Taxes payable 27,891 20,002 139,301
------------- ------------ -------------
Net cash provided by operating activities 258,585 190,780 458,933
------------- ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (7,159) (31,350) (9,948)
------------- ------------ -------------
Net cash used by investing activities (7,159) (31,350) (9,948)
------------- ------------ -------------
Cash flows from financing activities:
Proceeds from bank line of credit, net 104,019
Payments on notes payable (157,275) (193,487) (146,756)
------------- ------------ -------------
Net cash used by financing activities (53,256) (193,487) (146,756)
------------- ------------ -------------
Net change in cash and equivalents 198,170 (34,057) 302,229
Cash and equivalents:
Beginning of period 19,745 53,802 53,802
------------- ------------ -------------
End of period $ 217,915 $ 19,745 $ 356,031
============= ============ =============
Supplemental disclosures:
Interest paid $ 19,080 $ 40,520 $ 32,260
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Lancaster Orthopedic Group, Inc.
Notes to Financial Statements
September 30, 1997 and December 31, 1996
- --------------------------------------------------------------------------------
1. Business and Summary of Significant Accounting Policies
Lancaster Orthopedic Group, Inc. (the Company), a Pennsylvania professional
service corporation, is a physician-owned group practice serving the
Lancaster, Pennsylvania area. The Company was incorporated on June 18, 1985
for the purpose of rendering professional orthopedic, orthopedic related
services, and occupational and physical rehabilitation.
The following is a summary of the Company's significant accounting policies:
Use of Estimates
The preparation of the Company's financial statements in conformity 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 disclosures of contingent
assets and liabilities. Because of inherent uncertainties in this process,
actual future results could differ from those expected at the reporting
date.
Revenue Recognition
Revenues for services rendered to patients by the Company are recognized
when the services are provided based on established charges reduced to the
net amounts estimated to be collectible for patients covered under
contractual programs and by allowances for doubtful accounts.
For the nine months ended September 30, 1997 and the year ended December 31,
1996, approximately 14% and 13%, respectively, of the Company's net revenues
were derived from Workers' Compensation and 20% and 22%, respectively, were
derived from Medicare.
Property and Equipment
Property and equipment is stated at cost. Depreciation for equipment,
furniture and fixtures is provided using the straight-line method over the
estimated useful lives of the respective assets of five to seven years.
Leasehold improvements are depreciated over the term of the lease.
Income Taxes
Income taxes are recognized based on the liability method. Deferred income
tax assets or liabilities are recorded based upon temporary differences
between the tax basis of assets and liabilities and their carrying values
for financial reporting purposes. Deferred income tax expense or benefit is
the result of changes in the deferred income tax assets and liabilities
during the period.
Pharmaceuticals and Supplies
Pharmaceuticals and supplies are expensed as acquired due to their rapid
utilization and insignificance of quantities on hand.
Cash and Equivalents
For purposes of reporting cash flows, the Company considers short-term
marketable securities with an original maturity date of three months or less
to be cash equivalents.
12
<PAGE>
Lancaster Orthopedic Group, Inc.
Notes to Financial Statements
September 30, 1997 and December 31, 1996
- --------------------------------------------------------------------------------
2. Notes Payable
The Company has the following debt outstanding:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Notes payable to MetLife, interest payable
monthly ranging from 7.5% to 8.25%,
collateralized by furniture and equipment,
maturing at various dates from December 1997
to October 1998 $ 20,936 $130,814
Notes payable to bank; interest payable
monthly at 8.95%, collateralized by furniture
and equipment, maturing at various dates from
December 1997 to July 2000 177,603 225,000
Bank line of credit; interest payable monthly
at prime plus 0.5% (8.75% at September 30,
1997), maturing March 10, 1998 104,019
-------- --------
302,558 355,814
Less - current portion 125,875 119,541
-------- --------
$176,683 $236,273
======== ========
</TABLE>
As of September 30, 1997, future principal payments for all long-term debt
are as follows: 1998 - $82,850, 1999 - $86,735, 2000 - $7,098.
3. Income Taxes
The Company's income tax expense consists of the following:
<TABLE>
<CAPTION>
Nine months
Ended Year ended
September 30, December 31,
1997 1996
<S> <C> <C>
Federal:
Current $ 36,353 $14,281
Deferred (34,323) 6,110
State:
Current 11,540 5,721
Deferred (6,374) 1,135
-------- -------
$ 7,196 $27,247
======== =======
</TABLE>
13
<PAGE>
Lancaster Orthopedic Group, Inc.
Notes to Financial Statements
September 30, 1997 and December 31, 1996
- --------------------------------------------------------------------------------
Deferred income tax assets (liabilities) arise primarily from differences
between the cash basis accounting used for income tax purposes and the
accrual basis accounting used for financial reporting purposes. The
Company's deferred income tax assets (liabilities) are comprised of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Accounts receivable $(423,051) $(423,370)
Accounts payable and accrued liabilities 297,412 229,415
Other prepaid assets (62,914) (57,379)
Excess tax depreciation 28,901 50,985
--------- ---------
$(159,652) $(200,349)
========= =========
</TABLE>
As a professional service corporation, the Company is taxed at a federal
rate of 35%.
The difference between the effective income tax rate and the amount which
would be determined by applying the statutory U.S. income tax rate to income
before income taxes is as follows:
<TABLE>
<CAPTION>
Nine months
ended Year ended
September 30, December 31,
1997 1996
<S> <C> <C>
Provision for income taxes at
U.S. statutory rates 35.0% 35.0%
State income taxes 29.8 10.6
Nondeductible expenses
Meals and entertainment 75.8 8.3
Keyman life insurance premiums 49.3 5.5
----- ----
189.9% 59.4%
===== ====
</TABLE>
4. Profit Sharing/401(k) Plan
The Company has a profit sharing/401(k) plan (the Plan) in which
substantially all employees are eligible to participate after completion of
one year of service, as defined by the Plan's agreement. Employees can
contribute up to 15% of total compensation during the plan year. Employer
contributions to the Plan are discretionary and are determined by the
Company on an annual basis. Employees are fully vested at all times in their
elective contributions. Employees vest in the Company's contributions over a
seven-year period. Company contributions to the Plan for the nine months
ended September 30, 1997 and the year ended December 31, 1996 were
approximately $108,962 and $266,778, respectively.
14
<PAGE>
Lancaster Orthopedic Group, Inc.
Notes to Financial Statements
September 30, 1997 and December 31, 1996
- --------------------------------------------------------------------------------
5. Lease Commitments
At September 30, 1997, future minimum payments under noncancelable operating
lease obligations for office space and various property and equipment, were
as follows:
<TABLE>
<S> <C>
1998 $ 425,407
1999 425,407
2000 425,407
2001 425,407
----------
$1,701,628
==========
</TABLE>
Rental expense under noncancelable operating leases was $319,059 and
$404,587 for the nine months ended September 30, 1997 and for the year ended
December 31, 1996, respectively.
6. Commitments and Contingencies
The Company maintains insurance with respect to medical malpractice risks on
a claims-made basis in amounts management believes to be adequate.
Management is not aware of any outstanding claims which would exceed
insurance coverage or would have a material impact on the Company's
financial position or results of operations upon resolution.
7. Subsequent Event
The Company has entered into a letter of intent to negotiate the sale of
substantially all of its operating assets. The physicians are also
negotiating an agreement whereby the purchaser will manage the physicians'
medical practice on a long-term basis.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
INTEGRATED ORTHOPAEDICS, INC.
(Registrant)
Date: March 3, 1998 By /s/ Ronald E. Pierce
----------------------------
Ronald E. Pierce
President
16
