<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): November 12, 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 21 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
November 12, 1997, (Commission File Number 1-10677), as set forth below:
<TABLE>
<CAPTION>
<S> <C>
Item 7 Financial Statements and Exhibits Page
(a) Financial statements of business acquired
Westside Orthopaedic Clinic
Report of Independent Accountants 8
Balance Sheet as of December 31, 1996 and 1995 9
Statement of Income for the years ended December 31, 1996 and 1995 10
Statement of Stockholders' Equity for the years ended December 31, 1996 and 1995 11
Statement of Cash Flows for the years ended December 31, 1996 and 1995 12
Notes to Financial Statements 13
Balance Sheet as of September 30, 1997 and 1996 (unaudited) 17
Statement of Income for the nine months ended
September 30, 1997 and 1996 (unaudited) 18
Statement of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited) 19
Notes to Unaudited Financial Statements 20
(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
</TABLE>
2
<PAGE>
INTRODUCTION
On November 12, 1997, Integrated Orthopaedics, Inc. acquired the accounts
receivable and all of the outstanding capital stock of Winters, Kleinschmidt,
Frensilli, and Fleming, M.D.s, Ltd. ("WKFF"). When acquired, WKFF owned a long
term management agreement with the medical practice conducted by Westside
Orthopaedic Clinic (a Professional Corporation) ("Westside"), a six physician
orthopaedic medicine practice located in Marrero, Louisiana. In exchange, the
Company delivered aggregate consideration, of approximately $3,739,000,
including (i) cash, assumed liabilities and estimated transaction costs of
approximately $2,111,000, (ii) non-negotiable subordinated convertible
promissory notes of approximately $1,085,000, and (iii) 142,402 shares of the
Company's common stock. The purchase price was determined after arms-length
negotiations between the Company and the physician owners of WKFF. 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
Winters, Kleinschmidt, Frensilli and Fleming, M.D.'s, Ltd.. transaction ( the
"WKFF Transaction" or the "Reported Transaction").
The Unaudited Pro Forma consolidated Balance Sheet has been prepared as if
the WKFF 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 WKFF 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 and WKFF's unaudited 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 WKFF by applying the management fee formula
contained in the management services agreement with WKFF 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 WKFF Transaction been completed at the
time above. This information should be read in conjunction with the Company's
and WKFF's historical financial statements.
Effective October 1, 1997, Integrated Orthopaedics, Inc., through a wholly-
owned subsidiary acquired the accounts receivable, acquired the right to manage
the non-medical operations, and entered into a long term management agreement
with the medical practice conducted by Merritt Orthopaedic Associates, P.C., a
five physician orthopaedic medicine practice located in Bridgeport, Connecticut.
Such transaction is referred to as "Completed Transaction" in the accompanying
pro forma unaudited financial statements.
3
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
PRO FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL (1) PROFORMA HISTORICAL PROFORMA
-------------------------- -------------------------- -------------- -----------------------------
INTEGRATED COMPLETED REPORTED
ORTHOPAEDICS, COMPLETED TRANSACTION REPORTED TRANSACTION AS
INC. TRANSACTION ADJUSTMENTS (2) COMBINED TRANSACTION (3) ADJUSTMENTS ADJUSTED
----------- ----------- -------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash & Equivalents $ 5,588,181 $115,302 $ (980,243) $ 4,723,240 $ 60,573 $(2,080,898) (4) $ 2,702,915
Accounts Receivable, net 2,782,925 516,000 0 3,298,925 523,809 0 3,822,734
Income Taxes Receivable 810,311 0 0 810,311 0 0 810,311
Notes Receivable, net 183,950 0 0 183,950 0 0 183,950
Other Current Assets 254,263 2,093 (2,093) 254,263 101,810 0 356,073
----------- -------- ---------- ----------- --------- ----------- -----------
9,619,630 633,395 (982,336) 9,270,689 686,192 (2,080,898) 7,875,983
Euipment 3,460,892 175,333 ( 175,333) 3,460,892 252,106 0 3,712,998
Leasehold Improvements 259,368 2,622 (2,622) 259,368 60,160 0 319,528
Furniture & Fixtures 385,838 0 0 385,838 128,888 0 514,726
----------- -------- ---------- ----------- --------- ----------- -----------
4,106,098 177,955 (177,955) 4,106,098 441,154 0 4,547,252
Less : Accumulated Depreciation 3,108,342 147,417 (147,417) 3,108,342 410,175 0 3,518,517
----------- -------- ---------- ----------- --------- ----------- -----------
Net PP&E 997,756 30,538 (325,372) 997,756 30,979 0 1,028,735
Other Assets 324,934 0 0 324,934 122,183 (122,183) (5) 324,934
Management Services Agreement (MSA) 0 0 3,594,230 3,594,230 0 3,143,203 (6) 6,737,433
Less : Accumulated Amortization 0 0 0 0 0 0 0
----------- -------- ---------- ----------- --------- ----------- -----------
Net MSA 0 0 3,594,230 3,594,230 0 3,143,203 6,737,433
----------- -------- ---------- ----------- --------- ----------- -----------
TOTAL NON-CURRENT 1,322,690 30,538 3,268,858 4,916,920 153,162 3,021,020 8,091,102
----------- -------- ---------- ----------- --------- ----------- -----------
TOTAL ASSETS $10,942,320 $663,933 $2,286,522 $14,187,609 $ 839,354 $ 940,122 $15,967,085
=========== ======== ========== =========== ========= =========== ===========
Current Liabilities
Accounts Payable $ 1,031,472 $ 9,743 $ (9,743) $ 1,031,472 $ 347,763 $ (285,562) (5) $ 1,093,673
Accrued Expenses 1,646,089 0 97,059 1,743,148 341,730 (252,105) (5)(7) 1,832,773
Income Taxes Payable 208,168 33,527 (33,527) 208,168 0 0 208,168
Current Obligations Under Capital
Lease 14,379 0 0 14,379 0 0 14,379
Current Portion of Notes Payable 103,470 0 1,505,000 1,608,470 0 0 1,608,470
----------- -------- ---------- ----------- --------- ----------- -----------
TOTAL CURRENT 3,003,578 43,270 1,558,789 4,605,637 689,493 (537,667) 4,757,463
Note Payable 577,832 0 0 577,832 0 1,085,100 (8) 1,662,932
Obligations Under Capital Lease 172,303 0 0 172,303 0 0 172,303
Deferred Income Taxes 160,174 191,766 (191,766) 160,174 123,153 (123,153) (5) 160,174
----------- -------- ---------- ----------- --------- ----------- -----------
TOTAL NON-CURRENT 910,309 191,766 (191,766) 910,309 123,153 961,947 1,995,409
----------- -------- ---------- ----------- --------- ----------- -----------
TOTAL LIABILITIES 3,913,887 235,036 1,367,023 5,515,946 812,646 424,280 6,752,872
----------- -------- ---------- ----------- --------- ----------- -----------
Common Stock 5,314 1,200 $ (776) 5,738 192,165 (192,022) (9)(10) 5,881
Preferred Stock 252 0 0 252 0 0 252
Treasury Stock (14) 0 0 (14) (203,898) 203,898 (9) (14)
Additional Paid In Capital 4,886,712 0 1,642,806 6,529,518 0 542,407 (10) 7,071,925
Retained Earnings 2,136,169 427,697 (427,697) 2,136,169 38,441 (38,441) (9) 2,136,169
----------- -------- ---------- ----------- --------- ----------- -----------
Total Stockholder's Equity
(Net Worth) 7,028,433 428,897 1,214,333 8,671,663 26,708 515,842 9,214,213
----------- -------- ---------- ----------- --------- ----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS
EQUITY $10,942,320 $663,933 $2,581,356 $14,187,609 $ 839,354 $ 940,122 $15,967,085
=========== ======== ========== =========== ========= =========== ===========
</TABLE>
4
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
PRO FORMA STATEMENT OF INCOME (UNAUDITED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL(1) PROFORMA HISTORICAL PROFORMA
-------------------------- -------------------------- -------------- -----------------------------
INTEGRATED COMPLETED REPORTED
ORTHOPAEDICS, COMPLETED TRANSACTION REPORTED TRANSACTION AS
INC. TRANSACTION ADJUSTMENTS (2) COMBINED TRANSACTION (3) ADJUSTMENTS ADJUSTED
----------- ----------- -------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 5,934,687 $2,029,645 $ (881,353) $ 7,082,979 $2,251,528 $(643,580) (11) $8,690,927
Cost & Expenses:
Compensation costs and
medical services 3,088,825 1,474,575 (770,767) 3,792,633 1,501,342 (314,201) (12)(13) 4,979,774
Other direct costs 910,231 66,761 0 976,992 132,593 0 1,109,585
General and administrative 3,023,862 436,763 (436,763) 3,023,862 598,799 (598,799) (13) 3,023,862
Depreciation and amortization 176,182 10,086 57,306 243,574 12,394 58,935 (14) 314,903
Provision for doubtful accounts 820,878 0 0 820,878 0 0 820,878
Gain from restructuring (627,996) 0 (627,996) 0 (627,996)
----------- ---------- ----------- ----------- ---------- --------- ----------
7,391,982 1,988,185 (1,150,224) 8,229,943 2,245,128 (854,065) 9,621,006
----------- ---------- ----------- ----------- ---------- --------- ----------
Income From Operations (1,457,295) 41,460 268,871 (1,146,964) 6,400 210,485 (930,079)
Interest Expense 56,975 0 78,796 135,771 6,142 50,826 (15)(16) 192,739
Interest Income 267,470 0 0 267,470 476 (476)(16) 267,470
----------- ---------- ----------- ----------- ---------- --------- ----------
Earnings Before Taxes (1,246,800) 41,460 190,075 (1,015,265) 734 159,183 (855,348)
Income Taxes 473,784 (19,350) 72,228 382,206 (9,451) (51,317) (17) 321,438
----------- ---------- ----------- ----------- ---------- --------- ----------
Net Income $ (773,016) $ 22,110 $ 117,847 $ (633,059) $ (8,717) $ 107,866 $ (533,910)
=========== ========== =========== =========== ========== ========= ==========
Loss Per Share $ (.17) $ (.14) $ (.12)
----------- ----------- ----------
Weighted Average Share
Outstanding 5,289,190 5,713,107 5,855,509
----------- ----------- ----------
</TABLE>
5
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
PRO-FORMA STATEMENTS OF INCOME (UNADUITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL(1) PROFORMA HISTORICAL PROFORMA
-------------------------- -------------------------- -------------- -----------------------------
INTEGRATED COMPLETED REPORTED
ORTHOPAEDICS, COMPLETED TRANSACTION NEW REPORTED TRANSACTION AS
INC. TRANSACTION ADJUSTMENTS (2) COMBINED TRANSACTION (3) ADJUSTMENTS ADJUSTED
----------- ----------- -------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $14,313,154 $2,411,977 $(1,040,074) $15,685,057 $3,247,817 $(1,092,616) (11) $17,840,258
Cost & Expenses:
Compensation costs and
medical services 7,471,423 1,647,079 (796,218) 8,322,284 2,347,909 (856,349) (12)(13) 9,813,844
Other direct costs 3,807,499 75,296 0 3,882,795 182,054 0 4,064,849
General and administrative 2,612,645 518,324 (518,324) 2,612,645 667,426 (667,426) (13) 2,612,645
Depreciation and
amortization 790,523 12,265 77,591 880,379 13,323 78,580 (14) 972,282
Provision for doubtful
accounts 1,417,485 0 0 1,417,485 0 0 1,417,485
Gain from restructuring (3,167,701) 0 (3,167,701) 0 (3,167,701)
----------- ---------- ----------- ----------- ---------- ----------- -----------
12,931,874 2,252,964 (1,236,951) 13,947,887 3,210,712 (1,445,195) 15,713,404
---------- --------- ---------- ---------- --------- ---------- -----------
Income From Operations 1,381,280 159,013 196,877 1,737,170 37,105 352,579 2,126,854
Interest Expense 170,577 0 105,350 275,927 13,033 62,924 (15)(16) 351,884
Interest Income 0 0 0 0 (1,023) 1,023 (16) 0
----------- ---------- ----------- ----------- ---------- ----------- -----------
Earnings Before Taxes 1,210,703 159,013 91,527 1,461,243 23,049 290,678 1,774,970
Income Taxes 423,591 61,986 32,023 517,600 20,884 101,737 (17) 640,221
----------- ---------- ----------- ----------- ---------- ----------- -----------
Net Income $ 787,112 $ 97,027 $ 59,504 $ 943,643 $ 2,165 $ 188,941 $ 1,134,749
=========== ========== =========== =========== ========== =========== ===========
Earnings Per Share $ .12 $ .14 $ .17
----------- ----------- -----------
Weighted Average Shares
Outstanding 5,456,080 5,879,997 6,022,399
----------- ----------- -----------
</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") and Merritt Orthopaedic Associates, P.C. (the "Completed
Transaction").
(2) This column includes the pro forma adjustments previously reported on the
Completed Transaction.
(3) This column includes the unaudited September 30, 1997 and audited December
31, 1996 historical financial information of Winters, Kleinschmidt,
Frensilli and Fleming, M.D's, Ltd ("WKFF").
(4) Adjustment to reflect payment of cash consideration of $1,908,500,
transaction costs of $112,875 and $59,523 of cash retained by the WKFF
physicians.
(5) Adjustment to eliminate assets not acquired and liabilities not assumed in
the WKFF transaction (including IOI's assumption of $62,201 of WKFF
liabilities).
(6) Adjustment to reflect the cost of the WKFF management services agreement,
estimated for purposes of the pro forma balance sheet, as $3,143,203. 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 $89,625 of accrued transaction costs.
(8) Adjustment to reflect $1,085,100 payable to WKFF affiliated physicians in
five equal annual installments beginning on the second anniversary of the
WKFF transaction.
(9) Adjustment to eliminate the historical ownership interest of WKFF.
(10) Adjustment to reflect the issuance of 142,402 shares of Common Stock to
WKFF affiliated physicians.
(11) Adjustment to eliminate medical practice revenues of WKFF which would not
constitute revenue to the Company pursuant to the management services
agreements.
(12) Adjustment to eliminate WKFF physician compensation that would not
constitute expense to the Company pursuant to the management services
agreement.
(13) Adjustment to reclassify general and administrate expenses of WKFF to
Compensation Costs and Medical Services expense pursuant to the management
services agreement.
(14) Adjustment to reflect additional amortization attributable to the newly
obtained management services agreements over its contractual term of 40
years.
(15) Adjustment to reflect the impact of interest expense on the $1,085,100
payable to WKFF affiliated physicians at 7% interest.
(16) Adjustment to eliminate interest income earned by WKFF and interest expense
paid by WKFF.
(17) Adjustment to reflect the tax (provision)/benefit of the WKFF transaction
and related pro forma adjustments.
7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Westside Orthopaedic Clinic
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 Westside Orthopaedic Clinic at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended 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
August 13, 1997
8
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
ASSETS
Cash and equivalents $ 139,982 $ 187,715
Accounts receivable, net of allowance for
doubtful accounts of $70,446 and $64,162 591,116 519,211
Prepaid assets 59,958 19,249
Other current assets 43,531 46,058
---------- ----------
Total current assets 834,587 772,233
---------- ----------
Property and equipment:
Equipment 246,049 235,673
Leasehold improvements 60,160 60,160
Furniture and fixtures 128,888 128,888
---------- ----------
435,097 424,721
Less - accumulated depreciation (397,780) (384,457)
---------- ----------
37,317 40,264
Deferred income tax benefits 161,281 153,312
Other assets 18,750
---------- ----------
Total assets $1,033,185 $ 984,559
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 171,854 $ 314,829
Book overdrafts 222,246 2,147
Deferred income tax liability 152,800 123,947
Due to former stockholder 85,948
Other liabilities 37,320 31,320
---------- ----------
Total current liabilities 584,220 558,191
Deferred compensation 413,540 393,108
---------- ----------
Total liabilities 997,760 951,299
---------- ----------
Stockholders' equity:
Common stock - no par value;
authorized 600 shares.
480 shares issued, 320 outstanding 192,165 192,165
Treasury stock, 160 shares at cost (203,898) (203,898)
Retained earnings 47,158 44,993
---------- ----------
Total stockholders' equity 35,425 33,260
---------- ----------
Total liabilities and
stockholders' equity $1,033,185 $ 984,559
---------- ----------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net patient revenues $ 2,947,561 $ 3,289,083
Premium revenues 216,662 160,158
Other revenues 83,594 114,721
----------- -----------
3,247,817 3,563,962
----------- -----------
Costs and expenses:
Compensation costs and medical services 2,347,909 2,862,604
Other direct costs 182,054 191,750
Selling, general and administrative 667,426 660,426
Depreciation 13,323 18,241
----------- -----------
3,210,712 3,733,021
----------- -----------
Income (loss) from operations 37,105 (169,059)
Interest expense (13,033) (29,247)
Interest and other income (expense) (1,023) 23,379
Life insurance proceeds 250,000
----------- -----------
Income before income taxes 23,049 75,073
(Provision for) benefit from income taxes (20,884) 55,540
----------- -----------
Net income $ 2,165 $ 130,613
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- TREASURY RETAINED
SHARES AMOUNT STOCK EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994 480 $ 192,165 $ (203,898) $ (85,620) $ (97,353)
Net income for 1995 130,613 130,613
------- --------- ---------- --------- ---------
Balance at December 31,
1995 480 $ 192,165 $ (203,898) $ 44,993 $ 33,260
Net income for 1996 2,165 2,165
------- --------- ---------- --------- ---------
Balance at December 31,
1996 480 $ 192,165 $ (203,898) $ 47,158 $ 35,425
------- --------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activies: -
Net income $ 2,165 $ 130,613
Adjustments to reconcile net income to net cash
provided by operating activies:
Depreciation 13,323 18,241
Change in deferred income taxes 20,884 (55,540)
Changes in assets and liabilities:
Accounts receivable, net (71,905) 78,919
Prepaid assets (40,709) 141,859
Other current assets 2,527 (9,375)
Other assets 18,750
Accounts payable and accrued expenses (142,975) 12,771
Book overdrafts 220,099 (104,184)
Deferred compensation 20,432 (11,227)
Other liabilities 6,000 19,320
--------- ----------
Net cash proivded by operating activities 48,591 221,397
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment (10,376) (3,288)
--------- ----------
Net cash used by investing activties (10,376) (3,288)
--------- ----------
Cash flows from financing activities:
Payments to former stockholder (85,948) (44,548)
--------- ----------
Net cash used by financing activities (85,948) 173,561
--------- ----------
Net change in cash and equivalents (47,733) (44,548)
Cash and equivalents:
Beginning of year 187,715 14,154
--------- ----------
End of year $ 139,982 $ 187,715
--------- ----------
Supplemental disclosures:
Interest paid $ 13,033 $ 29,247
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Winters, Kleinschmidt, Frensilli, and Fleming, M.D.'s, Ltd. d/b/a Westside
Orthopaedic Clinic (the Company), a Louisiana professional service
corporation, is a physician-owned group practice serving the New Orleans,
Louisiana area. The Company was incorporated on August 1, 1970 for the
purpose of rendering professional orthopedic and orthopedic related
services, 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 1996 and 1995, approximately 20% and 19%, respectively, of the
Company's net revenues were derived from Workers' Compensation and 18% and
26%, respectively, were derived from Medicare. At December 31, 1996 and
1995, 12% and 11%, respectively, of the Company's accounts receivable are
due from Medicare.
PREMIUM REVENUE
The Company has agreements with various Health Maintenance Organizations
(HMOs) to provide medical services to subscribing participants. Under
these agreements, the Company receives monthly capitation payments based on
the number of each HMO's participants, regardless of services actually
performed by the Company.
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.
13
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
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.
2. INCOME TAXES
The Company's income tax (expense) benefit consists of the following:
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1995
Federal - deferred $ (18,742) $ 49,844
State (2,142) 5,696
--------- ---------
$ (20,884) $ 55,540
--------- ---------
Deferred income tax assets (liabilities) are comprised of the following:
YEAR ENDED
DECEMBER 31,
------------------------
1996 1995
Accounts receivable $ (230,535) $ (206,239)
Accounts payable and accrued expenses 35,008 32,976
Prepaid assets (8,829) (7,504)
Deferred compensation 161,281 153,312
Net operating loss 51,556 56,820
---------- ----------
$ 8,481 $ 29,365
---------- ----------
As a professional service corporation, the Company is taxed at a federal rate of
35%.
14
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
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:
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
Provision for income taxes at
U.S. statutory rates 35.0% 35.0%
State income taxes 4.0 (4.0)
Nontaxable life insurance proceeds (116.6)
Nondeductible expenses:
Meals and entertainment 4.3 1.0
Keyman life insurance premiums 42.5 14.0
Other 4.8 (3.4)
----- ------
Effective rate 90.6% (74.0)%
----- ------
3. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan in which substantially all employees
are eligible to participate after completion of one year of service, as
defined by the profit sharing plan agreement. Contributions to the profit
sharing plan are discretionary and are determined by the Company on an
annual basis. Employees vest in the Company's contributions over seven
years and stockholders of the Company are the trustees of the profit
sharing plan. Company contributions to the profit sharing plan for 1996
and 1995 were approximately $40,866 and $57,820, respectively.
The Company has a 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 six-
year period. Company contributions to the Plan for 1996 and 1995 were
approximately $22,040 and $26,340, respectively.
15
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
4. LEASE COMMITMENTS
At December 31, 1996, future minimum payments under noncancelable operating
lease obligations for office space and various property and equipment, were
as follows:
1997 $ 201,792
1998 41,952
1999 41,952
2000 41,952
2001 41,952
Thereafter 125,856
----------
$ 495,456
----------
Rental expense under noncancelable operating leases was $188,586 in 1996
and $206,130 in 1995.
5. 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.
6. 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.
16
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
BALANCE SHEET
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
ASSETS
<S> <C> <C>
Cash and equivalents $ 60,563 $ 48,230
Accounts receivalbe, net of allowance for doubtful accounts
of $60,821 and $64,498 553,809 582,511
Prepaid assets 61,552 71,662
Other current assets 40,258 45,285
--------- ---------
Total current assets 686,192 747,688
--------- ---------
Property and equipment:
Equipment 252,106 243,800
Leasehold improvements 60,160 60,160
Furniture and fixtures 128,888 128,888
--------- ---------
441,154 432,848
Less - accumulated depreciation (410,175) (394,450)
--------- ---------
30,979 38,398
Deferred income tax benefits 122,183 175,144
Other assets 18,750
--------- ---------
Total assets $ 839,354 $ 979,980
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 332,202 $ 270,294
Book overdrafts 15,561 17,251
Deferred income tax liability 123,153 158,558
Other liabilities 28,440 37,320
--------- ---------
Total current liabilities 499,356 483,423
Deferred compensation 313,290 449,086
--------- ---------
Total liabilities 812,646 932,509
--------- ---------
Stockholders' equity:
Common stock - no par value; authorized 600 shares,
480 shares issued, 320 outstanding 192,165 192,165
Treasury stock, 160 shares at cost (203,898) (203,898)
Retained earnings 38,441 59,204
--------- ---------
Total stockholders' equity 26,708 47,471
--------- ---------
Total liabilities and stockholders' equity $ 839,354 $ 979,980
--------- ---------
</TABLE>
17
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
STATEMENT OF INCOME AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net patient revenues $ 1,976,853 $ 2,316,799
Premium revenues 221,982 160,105
Other revenues 52,693 64,957
----------- -----------
2,251,528 2,541,861
----------- -----------
Costs and expenses:
Compensation costs and medical services 1,501,342 1,706,736
Other direct costs 132,593 176,978
Selling, general and administrative 598,799 587,459
Depreciation 12,394 9,992
----------- -----------
2,245,128 2,481,165
----------- -----------
Income from operations 6,400 60,696
Interest expense (6,142) (10,981)
Interst and other income (expense) 476 (10,225)
----------- -----------
Income before income taxes 734 39,490
Provision for income taxes (9,451) (25,279)
----------- -----------
Net income (loss) (8,717) 14,211
Retained earnings:
Beginning of period 47,158 44,993
----------- -----------
End of period $ 38,441 $ 59,204
----------- -----------
</TABLE>
18
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
STATEMENT OF CASH FLOWS
NINE MONTHES ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operaing activities:
Net income (loss) $ (8,717) $ 14,211
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 12,394 9,992
Change in deferred income taxes 9,451 12,779
Change in assets and liabilities:
Accounts receivable, net 67,307 (63,300)
Prepaid assets (1,594) (52,413)
Other current assets 3,273 773
Accounts payable and accrued expenses 160,348 (44,535)
Book overdrafts (206,684) 15,104
Deferred compensation (100,250) 55,978
Other liabilities (8,880) 6,000
------------ -----------
Net cash used by operating activities (73,352) (45,411)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (6,057) (8,126)
------------ -----------
Net cash used by investing activities (6,057) (8,126)
------------ -----------
Cash flows from financing activities:
Payments to former stockholder (85,948)
------------ -----------
Net cash used by financing activities (85,948)
------------ -----------
Decrease in cash and equivalents (79,409) (139,485)
Cash and equivalents:
Beginning of period 139,982 187,715
------------ -----------
End of period $ 60,563 $ 48,230
------------ -----------
Supplemental disclosures:
Interest paid $ 6,142 $ 10,981
------------ -----------
</TABLE>
19
<PAGE>
WESTSIDE ORTHOPAEDIC CLINIC
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Winters, Kleinschmidt,
Frensilli and Fleming, M.D.'s Ltd. d/b/a Westside Orthopaedic Clinic have
been prepared in accordance with generally accepted accounting principles
for interim financial reporting and in accordance with Rule 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
completed financial statements. In the opinion of management, the
unaudited financial statements contained in this report reflect all
adjustments, consisting of only normal recurring adjustments considered
necessary for a fair presentation of the financial position and results of
operations for the interim periods presented. Operating results for
interim periods are not necessarily indicative of results for the full
year. These unaudited financial statements and the notes thereto should be
read in conjunction with the Company's most recent annual audited financial
statements.
20
<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: January 26, 1998 By /s/ Ronald E. Pierce
------------------------------------------
Ronald E. Pierce
President
21
