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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______________ to ______________
Commission file number 1-10677
Integrated Orthopaedics, Inc.
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(Exact name of small business issuer as specified in its charter)
Texas 76-0203483
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5858 Westheimer, Suite 500, Houston, Texas 77057
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(Address of principal executive offices, including zip code)
(713) 225-5464
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required by Section 13
or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Net revenues of the issuer for the fiscal year ended December 31, 1997
were $5,715,000.
The aggregate market value of Common Stock held by non-affiliates of
the issuer as of March 13, 1998, computed by reference to the closing price at
which the stock was sold, was $24,938,635.
As of March 13, 1998, 6,296,460 shares of Common Stock were
outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents Incorporated by Reference
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Portions of the Proxy Statement for registrant's 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III.
The Exhibit Index is located on pages 45 - 48
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PART I
ITEM 1. BUSINESS
GENERAL
DESCRIPTION OF COMPANY
Integrated Orthopaedics, Inc. ("IOI" or the "Company") is a national Physician
Practice Management ("PPM") company specializing in the management of
orthopaedic medicine practices and other musculoskeletal-related patient
services. The Company provides a comprehensive array of management services
under long term agreements to 25 physicians in four states. The medical
practices affiliated with IOI provide a wide spectrum of orthopaedic office-
based and surgical services to patients with musculoskeletal illnesses and
injuries. The Company believes that the development of musculoskeletal-related
healthcare delivery systems in a predominantly outpatient setting will create
the foundation for the provision of high quality, accessible, cost effective
orthopaedic and related healthcare services that are increasingly required by
patients, physicians and payors. Through its affiliation with orthopaedic
medical practices and development of market specific musculoskeletal-related
healthcare services, IOI's strategy is to enhance each affiliated practice's
competitive position within its market while maintaining a high level of
physician autonomy regarding medical practice decisions.
IOI was formed on April 1, 1990 as a successor corporation in a reincorporation
merger. The Company has organized its operations through wholly- and majority-
owed subsidiaries. IOI's principal executive offices are located at 5858
Westheimer, Suite 500, Houston, Texas 77057, and its telephone number is (713)
225-5464.
THE ORTHOPAEDIC AND MUSCULOSKELETAL HEALTHCARE MARKET
Musculoskeletal illnesses and injuries account for approximately $150 billion in
annual healthcare costs. Healthcare providers treating patients in this segment
of the healthcare market include orthopaedic surgeons, neurosurgeons, plastic
surgeons, podiatrists, general practitioners, occupational medicine physicians,
family practitioners, chiropractors, and others. In total, reimbursements paid
to physicians represent approximately 25% or $37.5 billion of the cost of
healthcare in this sector. The remaining $112.5 billion of musculoskeletal-
related healthcare spending is related to the provision of ancillary services,
the purchase of durable medical equipment, and for facility fees charged by
hospitals and outpatient treatment centers.
There are approximately 23,000 orthopaedic surgeons in the United States. Of
this number, the Company estimates that approximately 5% are affiliated with a
management partner and only about 2% are affiliated with a single specialty PPM
company. Traditionally, orthopaedic surgeons have practiced individually or in
small groups. However, several factors are driving physicians in all
specialties, including orthopaedics, to aggregate into larger group practices.
The increasingly complex billing and collection requirements imposed by
governmental and managed care payors, the imposition of penalties for incorrect
billing practices, the cost of technology required for both business office and
medical procedures, and the need for multi-disciplinary access to advisors in
such areas as managed care contracting, facilities management, and information
systems, are fueling the need to practice in larger groups to spread increasing
costs over a larger revenue base. These same factors are the primary driving
forces behind the acceptance of single specialty PPM companies as an alternative
source of the intellectual and financial capital required to address these
issues.
Although physician reimbursement accounts for only 25% of the cost of
musculoskeletal-related healthcare, patient access to over 80% of the goods and
services rendered in this segment require a physician's signature before
treatment can be given. Physicians are required under many reimbursement models
to control patients' access to healthcare, but are simultaneously experiencing
downward pressure on reimbursement for their professional services from those
same payors. Physicians who have seen the evolution of various managed care
contracting models (HMOs, PPOs, PHOs, IPAs, etc.) are exploring alternatives
that allow them to direct patient care while also capturing reimbursement for
other healthcare services in addition to their own
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professional services. However, to capture additional reimbursement, they must
accept additional risk, both in terms of the financial capital required to
develop a captive healthcare delivery system and in terms of the treatment
outcomes of the patients they contract to treat. Single specialty PPM companies
are uniquely positioned to provide both the financial and intellectual capital
required to develop and manage such delivery systems in a cost effective manner
by spreading the cost over a significantly larger revenue base than that of any
single medical practice.
GROWTH STRATEGY
IOI's long-term strategic plan is to expand its operations through affiliations
with orthopaedic practices and related medical specialties in selected
geographic markets. Orthopaedic practices are uniquely positioned as the focal
point of a multi-disciplinary, musculoskeletal-related healthcare delivery
system, and IOI expects to provide in-market growth opportunities for all
affiliated practices through the development of ancillary and technical services
appropriate to the healthcare needs of each individual practice's patient
population. As indicated on a market-by-market basis, IOI expects to assist its
affiliated practices to realize a larger portion of patient care reimbursement
by providing integrated musculoskeletal care.
IOI expects to pursue its expansion program by affiliating with orthopaedic
practices in both new and existing geographic markets. Because of its
significant experience in physician practice management and orthopaedics-related
medical and ancillary services, IOI believes it holds a competitive advantage
in negotiating for affiliations with these practices. The Company intends to
increase the scope of these orthopaedic practices by implementing ancillary
services such as rehabilitation, ambulatory surgery, diagnostic imaging, and
pain treatment programs based upon the profile and volume of the group's
existing patient base. Targeted geographic areas for expansion will be those
with well established, reputable orthopaedic or related medical specialty
practices with a significant market share with which the Company could affiliate
by acquiring their non-medical operations and entering into long-term management
services agreements. Targeted areas would, ideally, also possess a higher than
average overall reimbursement rate, a high incidence of workers' compensation
claims, favorable workers' compensation reimbursement rates, available qualified
professionals to staff the facilities and other favorable demographic factors
such as population density and projected population and economic growth,
although expansion through affiliations with orthopaedic practices is not
limited to only such areas.
By aggregating physicians and facilities into regional musculoskeletal-related
healthcare delivery systems under the Company's management, IOI intends to
position each affiliated practice as a comprehensive solution to managed care
payors while also setting the stage to expand its business through the
acquisition and consolidation of other orthopaedic and related medical
practices. IOI's near term growth strategy includes continuation of its vertical
integration strategy through physician practice management programs in
orthopaedics and orthopaedics-related medical specialties, expansion of services
at existing and acquired locations, and the continued development in targeted
geographical markets of a broad base of referral sources among physicians,
employers, and payors.
The Company also intends to expand selectively through other means which might
include the establishment of joint ventures, strategic alliances, and management
contracts with major health care service providers and insurance carriers.
OPERATIONS OF ORTHOPAEDIC GROUPS
Services provided by medical providers under management by the Company include
office-based diagnostic and treatment programs and in- and out-patient surgical
services for patients experiencing a variety of physical or orthopaedic problems
principally related to musculoskeletal disorders common to on-the-job injuries,
sports injuries, and age-related musculoskeletal injuries and illnesses.
Services are provided to patients who are members of preferred provider or
managed care organizations, who are covered by workers' compensation
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insurance, who are Medicare or Medicaid beneficiaries, and to a small extent,
patients who are represented by personal injury attorneys. Affiliated physicians
maintain staff privileges at local hospitals and, generally, have long standing
relationships with payors and referral sources in their local markets.
IOI began executing its orthopaedic physician practice affiliation strategy in
1997. During 1997, the Company completed three practice affiliation
transactions, one of which became effective in each of the last three months of
the year. At December 31, 1997, the Company had 19 physicians in three states
under management. The Company completed its fourth affiliation transaction in
March 1998, increasing these totals to 25 physicians in four states.
All physicians and all non-physician employees involved in patient care are
employed by the affiliated medical practice. Affiliated physicians have
exclusive control and decision making authority over patient care. IOI does not
employ physicians or provide medical care to patients. However, under the terms
of the management agreements with these practices, IOI is responsible for the
cost of the compensation and benefits of the non-physician medical personnel,
and such costs are reflected in the Company's financial statements.
AFFILIATION STRUCTURE
IOI's affiliation structure provides physicians the autonomy of practicing in a
professional corporation or other legal entity that is physician owned and
controlled. Affiliated physicians retain all decision making authority with
respect to patient care and distribution of physician compensation. Designated
representatives of the physician group participate equally with IOI in decisions
relating to the use of capital and other resources. Under the management
agreement, physicians are relieved of the burden of managing the administrative
personnel and operations, which are reserved exclusively for IOI. The Company
believes that this local governance structure is a critical element of its
ability to attract affiliation candidates.
The process of identifying, qualifying, proposing, negotiating, and implementing
financially beneficial affiliation relationships with appropriate physician
groups is a lengthy and costly process. Depending on the stage of each
affiliation candidate in its own decision making, this process can take three to
nine months to complete. In connection with an affiliation transaction, the
Company acquires (either through merger, acquisition of the stock of the medical
practice, or purchase of assets) all of the non-medical operations of the
affiliated practice. The physicians typically form a new medical group that
assumes the medical operations of their old practice, and the new medical group
executes a long-term management agreement with IOI (or a subsidiary). IOI has
used various forms of consideration in connection with its affiliation
transactions, including cash, promissory notes, convertible promissory notes,
and IOI common stock. IOI stock that is issued in this regard is not registered
under the Securities Act of 1933 and may be delivered at the closing of an
affiliation transaction or at a specified future date. Additionally, each
physician receiving consideration in an affiliation transaction enters into an
employment agreement with the new medical group, typically for an initial term
of five years. These agreements call for the payment of liquidated damages to
the medical group if the physician leaves before the expiration of the initial
term of the agreement and include limitations on the physician's ability to
compete with the medical group.
All management services agreements ("MSAs") with affiliated medical groups have
contractual terms of 40 years. The MSAs can be terminated without penalty by
the affiliated medical groups only upon the Company's failure to cure a breach
of any of its material obligations under the MSAs, or the Company's bankruptcy
or dissolution. At any time, any affiliated medical group can terminate an MSA
by tendering to IOI the then unamortized portion of the consideration paid by
IOI for the group (assuming a 40-year life for IOI's acquisition costs). If the
affiliated medical group breaches the MSA, the group is responsible to pay
liquidated damages to IOI in the same amount as that which would be due if the
group terminated the MSA without cause. Under the MSAs, IOI is responsible for
the payment of all practice operating expenses (excluding compensation paid to
the physicians). The MSAs provide for the payment by the affiliated practices
to IOI of all operating expenses and a management fee. The amount of the
management fee is
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calculated based on a predetermined formula that is a function of the practice
income remaining after deducting practice operating expenses (excluding
physician compensation and management fees).
MANAGEMENT SERVICES
Under the terms of its MSAs, IOI provides comprehensive administrative and
management services to its affiliated practices that encompass all aspects of
the orthopaedic group's business operations. Management services provided by IOI
include:
Strategic and Financial Planning. Before closing each affiliation transaction,
IOI and the medical group agree on a two-year budget for the group. This
budgeting process is augmented with a strategic planning process that is
initiated within 90 days after the affiliation transaction is completed.
Governance of affiliated practices is based on a policy board that has equal
representation from the physicians and IOI. Strategic initiatives are defined by
the policy board with input from both the medical group and IOI. The Company
develops and executes the financial and operational implementation plan.
Managed Care Contracting and Reimbursement. The Company conducts a
comprehensive analysis of all business office related operations in each
affiliated practice. Complete financial analyses of reimbursement rates under
all managed care contracts are compared to the cost of those services and
recommendations are made to the policy board. All managed care contracts are
reviewed and renewal and renegotiating strategies are defined for each contract.
All coding, billing and collection procedures are reviewed and IOI's standard
operating procedures are implemented.
Financial and Management Reporting. Affiliated practices are converted to IOI's
general ledger system and financial and cash control procedures are implemented.
IOI provides monthly financial and operational reporting to the local governing
board. The Company is also responsible for all federal and state tax reporting.
Management Information Systems. The Company has adopted a strategy of
collecting and reporting practice and patient financial and operating
information utilizing and maximizing low cost technological solutions. The
Company has developed and intends to execute a strategy of extracting
information from multiple systems platforms through the use of middleware
software applications, thereby eliminating the cost and invasiveness of
replacing practice management information systems in order to produce
uniformity.
Administrative Services. The Company provides and manages all facilities
utilized by affiliated practices, and consults with the policy board regarding
the number, location, and cost of practice sites. IOI also provides evaluation,
consultation and financing regarding the acquisition of medical practice assets.
In addition, the Company provides regulatory expertise to assist affiliated
practices to comply with the increasingly complex administration of medical
services and related reimbursement.
Recruiting and Human Resources. The Company provides Human Resources
administration to all employees of IOI and its affiliated practices. The
Company reviews all personnel policies and employee benefit plans and provides
consultation regarding related matters. The Company, generally, employs and
manages the non-medical personnel. IOI is directly responsible for the
evaluation, hiring, firing, and other administrative duties with respect to
these employees. IOI also assists in recruiting physicians into affiliated
practices, both through affiliation transactions with in-market practices and
traditional recruiting activities.
OPERATIONS
OPERATIONS OVERVIEW
To implement its musculoskeletal-related 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. This building
process included the hiring of certain senior management and other key
management
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positions. In December 1997, Ronald E. Pierce (hired in October 1996 as the
Company's President and Chief Operating Officer) assumed the position of
President and Chief Executive Officer (replacing Jose E. Kauachi who assumed the
role of Non-executive Chairman of the Board of Directors). The Company is
continuing to expand its management and operations staff and, in March 1998,
announced the hiring of Mark P. Kingston as Executive Vice President and Chief
Operating Officer effective April 1, 1998. In November 1997, the Company
relocated its corporate offices to accommodate its staff expansion and provide
for future growth. In December 1997, IOI completed the sale of 250,000 shares of
Series B Preferred Stock and Contingent Warrants to acquire up to 5 million
shares of the Company's common stock to an investment group affiliated with
Robert M. Bass, yielding net cash proceeds of approximately $24.5 million. This
capital is intended primarily for use in physician practice affiliation
transactions. Effective November 30, 1997, IOI discontinued its management
relationship with a Houston based musculoskeletal-related healthcare delivery
system in a strategic move to position its physician practice management
operations as "equity model affiliation transactions" (i.e., transactions in
which the Company pays consideration for the non-medical operations of a
physician practice and for the rights to a long-term management agreement). IOI
closed its first three such transactions in the fourth quarter of 1997 and added
its fourth in March 1998. IOI ended 1997 with 19 physicians in three states
under management. The 1998 affiliation transaction increased those totals to 25
physicians in four states.
DIVESTITURE OR DISCONTINUANCE OF CERTAIN OPERATIONS
During 1996, the Company significantly altered the composition of its operations
to restructure itself for expansion as a single focus musculoskeletal-related
PPM company. Toward that goal, the Company sold a wholly-owned subsidiary which
owned the MRI center in Little Rock, Arkansas on March 29, 1996, and the Company
and its affiliated medical groups divested all occupational medicine operations
in Houston, Texas and Little Rock, Arkansas on December 31, 1996. Following the
divestiture of these operations, the Company continued to manage a
musculoskeletal-related healthcare delivery system in Houston, Texas.
IOI continued its restructuring throughout 1997 in an effort to align all
operations with the Company's primary purpose, equity model participation in
high quality orthopaedic group practices. In concert with that purpose, the
Company negotiated for the termination of its MSA with a musculoskeletal-related
healthcare delivery system in Houston, Texas effective November 30, 1997. The
Houston based practice was not an equity model transaction, had only one
physician owner, and did not provide for the same level of participation in the
practice as IOI's current transaction model. Prior to this negotiated
termination, the Company and the Houston practice jointly closed a physical
therapy center, an MRI center, and terminated a physical therapy and
occupational therapy facilities management contract with a Houston hospital.
DESCRIPTION OF OPERATIONS DIVESTED OR DISCONTINUED IN 1997
In March, 1995, the Company facilitated the creation of a medical group practice
in Houston, Texas which consolidated all medical and ancillary services
previously provided by IOI and its affiliated medical group with one orthopaedic
medicine practice. Following the divestiture of assets in 1996, the remaining
operations constituted the first musculoskeletal-related healthcare delivery
system with which the Company held a management contract. Under the terms of
the management agreement, the Company provided all operating assets, leaseholds,
non-clinical personnel, business office functions, and the management of the
non-medical aspects of the system's medical personnel, in exchange for a
management fee and the reimbursement of expenses incurred on behalf of the
group. The composition of this system included the following:
Orthopaedic Medicine. Patients were seen by the orthopaedic medicine practice
for a variety of musculoskeletal illnesses and injuries. Orthopaedic surgery
was the source of a significant portion of the revenues of this practice. In
November 1995, the medical group first added spinal reconstruction services to
this practice.
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Work Hardening. The medical group practice managed by the Company also
operated work hardening clinics in Houston, Texas under the trade name
"WorkWell". The assets utilized in these clinics were the property of the
Company and were provided to the Houston medical group pursuant to a long-term
management services contract. In conjunction with the November 1997 termination
of this relationship, IOI took over the operations of these two work hardening
centers and is presently operating them for its own account.
Work hardening is a therapy philosophy based on a comprehensive, multi-
disciplinary approach to industry's need for injury prevention and injury
rehabilitation. Work hardening addresses the physical, psychological,
behavioral and social aspects of an injured worker's ability to work. This
program is carried out in a simulated job environment. A typical program
consists of up to eight weeks, five days per week, eight hours per day.
Presently, the work hardening clinics hold a three-year certification given by
the Commission on Accreditation of Rehabilitation Facilities ("CARF"), the
highest level of certification given by CARF. The Texas Workers' Compensation
Commission ("TWCC") has recognized the quality of care inherent in a CARF-
certified work hardening program. Effective April 1, 1996, TWCC almost doubled
the reimbursement paid to CARF-certified work hardening centers. WorkWell
staffing includes varying combinations of licensed occupational therapists,
licensed physical therapists, certified occupational therapy assistants,
exercise physiologists, work hardening supervisors, vocational specialists and
licensed social workers. In addition, each WorkWell Clinic has available a
psychologist and a nutritionist.
Physical/Occupational Therapy. The medical group practice managed by the
Company operated one free standing physical therapy center and one hospital-
based physical and occupational therapy department which provided services to
four hospital-based programs on three campuses. The hospital-based physical and
occupational therapy programs were operated pursuant to a facility management
agreement with a major hospital system. The physical therapy center was closed
in April 1997 and the facility management contract was terminated in September
1997.
Magnetic Resonance Imaging ("MRI"). The medical group practice managed by the
Company operated one MRI center in Houston under the name of Spectrum Imaging
Centers. This unit operated a Hitachi MRP-20 which performed a full range of
diagnostic studies involving magnetic resonance imaging. The center was closed
in September 1997.
Chronic Pain Treatment Program. The Company had operated a chronic pain
treatment program since July 1993. In 1995, this program was consolidated into
the Houston medical group and in 1996 the psychological, cognitive, physical
conditioning and rehabilitation, and vocational services functions of this
program were absorbed by the work hardening program. Invasive pain management
services were also provided by the medical group.
DESCRIPTION OF OPERATIONS DIVESTED OR DISCONTINUED IN 1996
Occupational Medicine. Until their sale in December, 1996, the Company managed
occupational medicine clinics in Houston, Texas and Little Rock, Arkansas
pursuant to management agreements with medical groups in each location.
Operating under the name Medi-Stat Medical Centers, these clinics provided
industrial compliance testing and treatment of on-the-job injuries for both
industrial employers and workers' compensation insurance carriers.
Mobile Health Testing. Until its sale in December, 1996, the Company managed
the operation of a fleet of mobile health testing units designed to meet
industry's demands for on-site compliance with medical surveillance required by
OSHA and other regulatory agencies. Mobile testing services included hearing
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testing, heart and lung testing, drug screen specimen collection, X-ray, EKG's
and physical examinations by physicians.
Magnetic Resonance Imaging. Until its sale in March, 1996, the Company owned
and operated a wholly-owned subsidiary in Little Rock, Arkansas which operated
an MRI center under the name Spectrum Little Rock Imaging. This unit operated a
Shimadzu SMT-100X MRI which performed a full range of diagnostic studies
involving magnetic resonance imaging.
MARKETING AND BUSINESS DEVELOPMENT
IOI's marketing and business development functions fulfill two different
missions, both of which are critical elements of the Company's business
strategy. IOI pursues its PPM affiliation strategy through its business
development function. The Company's business development department presently
consists of senior management, a vice president, and director level staff, and
is currently recruiting additional personnel.
Once a practice is under management contract with IOI, the Company expects to
present the practice to the payor and patient referral markets through health
care marketing and payor relations professionals in each service area. IOI
intends to follow the strategy of marketing a practice's services both on a
stand-alone basis and as part of a vertically integrated musculoskeletal-related
healthcare delivery system.
EMPLOYEES
At March 13, 1998, the Company employed 111 full time and 8 part time employees.
Under the terms of its MSAs, the Company is also responsible for the
administration of the employment relationships of 25 physicians and 50 non-
physician medical practice employees. None of the Company's or affiliated
medical practice's employees is covered by collective bargaining agreements.
COMPETITION, MAJOR CUSTOMERS AND REIMBURSEMENT
Competition. The healthcare services market in general, and the PPM business in
particular, is highly competitive. The Company is aware of two other publicly
traded companies and several private companies which compete or intend to
compete for the right to manage orthopaedic and musculoskeletal-related medical
and ancillary service practices. In addition, several large multi-specialty
medical management companies also compete with the Company, and the Company
believes others in the healthcare industry may employ strategies similar to
those of the Company. Many of these current and potential competitors are
significantly larger and have substantially greater resources than the Company.
The success of the medical group practices presently managed by the Company and
of those practices with which the Company contracts in the future will be a
determining factor in the Company's success. These medical groups encounter
competition, in various forms, from many sources including other single- and
multi-specialty physician groups, hospitals, managed care organizations, and
sole practitioners.
Major Customers. During the fourth quarter of 1997, the Company closed three
equity model physician practice affiliation transactions and terminated its MSA
with a Houston, Texas musculoskeletal-related healthcare delivery system
Substantially all of the Company's future revenue will be derived from equity
model physician practice affiliation transactions and from the internal growth
of practices under the Company's management. As of December 31, 1997, each of
the three practices under Company management represent in excess of 25% of the
Company's revenue, and the loss of any one of these agreements would have a
material adverse effect on the Company's operations and earnings. As the
Company completes additional physician practice affiliation transactions, the
relative materiality of each agreement will diminish.
The services of eight full-time and numerous part-time physicians which were
under the Company's management throughout 1996 were included in the divestiture
of the occupational medicine business on
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December 31, 1996. From January 1, 1997 until October 1, 1997 when it closed its
first equity model physician practice affiliation transaction, the Company
provided substantially all of its services to one affiliated musculoskeletal-
related healthcare delivery system in Houston, Texas controlled by William F.
Donovan, M.D. (a Company shareholder and, then, a director) which had a total of
one full-time and three part-time physicians. During this period of time, the
loss of the services of any of the physicians could have had a material adverse
effect on the Company's revenues and profits.
Reimbursement. The various services rendered by the medical practices under
Company management are generally covered by employers, private insurance,
workers' compensation insurance, settlement or adjudication of personal injury
litigation, and Medicare or Medicaid. To some extent, professional medical
services are covered by all payors of medical care. Certain of the ancillary
services are more likely to be covered by employers and workers' compensation
insurance than by other payors due to the nature of the services rendered.
Patients pursuing personal injury claims may require the services of any or all
elements of the musculoskeletal-related healthcare delivery system.
TRADEMARKS
The Company obtained a certificate of trademark and service mark registration
for the mark WORKWELL and the mark WORKWELL AND DESIGN from the State of Texas
in January 1990. These marks are registered for a term of ten years, and the
registrations can be renewed for additional ten-year periods.
The Company has applied for registration of the following marks on the Principal
Register of the U.S. Patent Office:
INTEGRATED ORTHOPAEDICS
IOI
INTEGRATED ORTHOPAEDICS AND DESIGN
IOI AND DESIGN
Two of these applications have been allowed and are expected to issue as
registrations during 1998. The Company continues to prosecute the other
applications and expects that they will also issue as registrations.
REGULATION
GENERAL
The health care industry is highly regulated, and there can be no assurance that
the regulatory environment in which the Company operates will not change
significantly in the future. The Company believes that health care regulations
will continue to change and will monitor these changes. The Company expects to
modify its agreements and operations from time to time as the business and
regulatory environments change. While the Company believes it will be able to
structure all its agreements and operations in accordance with applicable law,
there can be no assurance that it will be able to successfully address changes
in the regulatory environment.
Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate HMOs and other managed care organizations with which affiliated
practices or their affiliated physicians may have contracts. Many states
require regulatory approval, including certificates of need, before establishing
or expanding certain types of health care facilities, offering certain services
or making expenditures for health care equipment, facilities or programs in
excess of statutory thresholds. Some states also require licensing of
collection agencies and employee leasing companies. In connection with its
operations and its expansion into new markets, the Company believes it is in
compliance with all such laws and regulations and current interpretations
thereof, but there can be no assurance that such laws, regulations, or
interpretations will not change in the future or that additional laws and
regulations will not be enacted.
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In addition to extensive, existing health care regulation, there have been
numerous federal and state initiatives for comprehensive reforms affecting the
payment for and availability of health care services. The Company believes that
such initiatives will continue. Aspects of certain of these reforms as
previously proposed, such as further reductions in insurance payments and
additional restrictions on direct or indirect physician ownership of facilities
to which they refer patients, if adopted, could adversely affect the Company.
Other aspects of such initiatives, such as universal health insurance coverage
and coverage of certain previously uncovered services, could have a positive
impact on the Company's business.
The ability of the Company to operate profitably will depend, in part, upon the
Company and its affiliated medical practices obtaining and maintaining all
necessary licenses, certificates of need and other approvals, as well as upon
operating in compliance with applicable health care regulations.
FEE SPLITTING; CORPORATE PRACTICE OF MEDICINE
The laws of many states prohibit physicians from splitting fees with non-
physicians and prohibit non-physician entities, such as the Company, from
practicing medicine. Under such laws, the Company is prohibited from exercising
control over the provision of medical services. These laws vary from state to
state and are enforced by regulatory authorities with broad discretion. The
Company believes its operations will be in compliance with existing applicable
laws. Specifically, the Company believes the consideration paid to physicians to
acquire the non-medical operations and long term management agreements
associated with their practices is consistent with fair market value in arm's-
length transactions and not intended to induce the referral of patients. There
can be no assurance, however, that review of the Company's business by courts or
regulatory authorities will not result in determinations that could adversely
affect the operations of the Company, or that changes in health care regulations
will not restrict the Company's existing or expanding operations. In addition,
the regulatory framework of certain jurisdictions may limit the Company's
ability to expand into such jurisdictions.
FRAUD AND ABUSE
Federal law prohibits the offer, payment, solicitation or receipt of any form of
remuneration in return for, or in order to induce, (i) the referral of a person
for services, (ii) the furnishing or arranging for the furnishing of items or
services, or (iii) the purchase, lease or order or arranging or recommending
purchasing, leasing or ordering of any item or service, in each case,
reimbursable under Medicare or Medicaid. Pursuant to this anti-kickback law,
the federal government has announced a policy of increased scrutiny of joint
ventures and other transactions among health care providers in an effort to
reduce potential fraud and abuse related to Medicare and Medicaid costs. Many
states have similar anti-kickback laws and in some states these laws apply to
all types of patients, not just Medicare and Medicaid beneficiaries. The
applicability of these federal and state laws to many business transactions in
the health care industry, including those intended by the Company, has not yet
been subject to significant judicial interpretation.
Noncompliance with, or violation of, the federal anti-kickback legislation can
result in exclusion for Medicare and Medicaid programs and civil and criminal
penalties. Similar penalties are provided for violation of state anti-kickback
laws. The federal government has promulgated "safe harbor" regulations that
identify certain business and payment practices which are deemed not to violate
the federal anti-kickback statute. Although the Company' business does not fall
within certain of the current or proposed safe harbors, the Company believes
that its intended operations materially comply with the anti-kickback statutes
and regulations.
PROHIBITIONS ON REFERRALS TO CERTAIN ENTITIES
The so-called "Stark Law" (named after its chief sponsor, Congressman Fortney
"Pete" Stark) originally prohibited a physician from referring a Medicare
patient to an entity for the provision of clinical laboratory services if the
physician or an immediate family member of the physician had a financial
relationship, which
10
<PAGE>
includes an ownership or investment interest or compensation arrangement, with
the entity. The revised Stark Law, known as "Stark II," dramatically enlarged
the field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Effective January 31, 1995, Stark II prohibits a
physician from referring Medicare or Medicaid patients to an entity providing
"designated health services" in which the physician has an ownership or
investment interest, or with which the physician has entered into a compensation
agreement. The penalties for violating Stark II include a prohibition on payment
by these government programs and civil penalties. Many states have similar
restrictions on referrals by physicians. The applicability of these federal and
state laws to many business transactions in the health care industry, including
those intended by the Company, has not yet been subject to significant judicial
interpretation. To the extent that the Company or any affiliated medical
practice is deemed to be subject to Stark I or II or similar state laws, the
Company believes its intended activities will materially comply with such
statutes and regulations.
HMO AND INSURANCE LAWS
Federal and state laws regulate insurance companies, HMOs and other managed care
organizations. Generally, these laws apply to entities that accept financial
risk. There is a potential that certain risk arrangements that may be entered
into by the Company could be characterized by some states as the business of
insurance or an HMO. The Company, however, believes that the acceptance of
capitation payments by a health care provider does not constitute the conduct of
the business of insurance or of an HMO. Many states also regulate the
establishment and operation of networks of health care providers. Generally,
these laws do not apply to the hiring and contracting of physicians by other
health care providers. There can be no assurance that regulators of the states
in which the Company operates would not apply these laws to require licensure of
the Company's operations as an insurer or provider network. The Company believes
that its intended activities are and will be in compliance with these laws in
the states in which it does or intends to do business, but there can be no
assurance that interpretations of these laws by the regulatory authorities in
these states or the states in which the Company may expand will not require
licensure or a restructuring of some or all of the Company's operations. In the
event that the Company is required to become licensed under these laws, the
licensure process can be lengthy and time consuming and, unless the regulatory
authority permits the Company to continue to operate while the licensure process
is progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements which the
Company may not immediately be able to meet. Further, once licensed, the
Company would be subject to continuing oversight by and reporting to the
respective regulatory agency.
ANTITRUST
As the Company expands, the Company and its affiliated medical groups will be
subject to various antitrust laws which prohibit anti-competitive conduct,
including such issues as price fixing, concerted refusal to deal and division of
markets. The Company believes it is presently in compliance with applicable
law, but there can be no assurance that a regulatory review would not result in
an adverse determination or that the regulatory environment might not change in
a manner which could have a material adverse effect on the Company's operations
and its expansion strategy.
CERTIFICATE OF NEED
A majority of states require that providers of certain health care services and
facilities obtain a Certificate of Need ("CON") prior to commencement of
construction and/or operation. The types of facilities and services covered by
CON requirements as well as the spending threshold below which CON statutes do
not apply varies on a state-by-state basis. While several states in recent
years have discontinued their CON programs altogether, there is no assurance
that some or all of these states may not at some future time institute such
programs. In addition, the Company's expansion may have or will place it in CON
states. As a result, CON regulations may have an adverse affect on the Company's
policy to expand certain services.
11
<PAGE>
ACCREDITATION
The Commission on Accreditation of Rehabilitation Facilities ("CARF") is an
independent organization that reviews rehabilitation facilities and accredits
those facilities that meet its guidelines. While participation in the CARF
accreditation is currently voluntary, some states have passed legislation
requiring that certain workers' compensation treatment be provided by CARF-
accredited facilities. Currently, all of the Company's work hardening clinics
are accredited by CARF. In the event that CARF or other accreditation
guidelines become predominantly mandatory in the future, it may have an adverse
effect on the Company's management of rehabilitation operations.
SALES TAX
The Company expects to operate in several states, each of which has its own
state sales tax regulations. Although the Company intends to comply with each
state's sales tax regulations, the Company does not intend to seek any judicial
or administrative ruling on this issue. Should a review of the Company's
operations occur and result in a determination contrary to the Company's
position, such a determination could have a material adverse effect on the
Company's earnings and could adversely impact the Company's expansion strategy.
Sales tax statutes vary from state to state and the Company's ability to
successfully contract with medical groups in certain states may be adversely
impacted by the state sales tax environment.
REGULATORY COMPLIANCE
The Company believes that regulations and statutes will continue to change and,
as a result, it regularly monitors developments in related law. Although the
Company believes its operations are, and will continue to be, in material
compliance with existing applicable laws, the Company's business operations have
not been the subject of judicial or regulatory interpretation. There can be no
assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or their
expansion into, or ability to continue operations within, such jurisdictions if
the Company is unable to modify its operational structure to conform with such
regulatory framework. The Company expects to modify its agreements and
operations from time to time as the business, statutory and regulatory
environment changes. While the Company believes it will be able to structure
all its agreements and operations in accordance with applicable laws, there can
be no assurance that its arrangements will not be successfully challenged in the
future. Any limitation on the Company's ability to expand could have an adverse
effect on the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property. All clinic facilities are leased at
commercial property rates for the size, location, and tenant finish included in
the lease. All clinical facilities are of a size and configuration and house
various types of equipment appropriate to the services rendered within the
facility. The Company leases approximately 17,000 square feet in Houston, Texas
which houses the Company's Houston central office and executive offices. All
facilities are insured and are maintained in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may be subject, from time to
time, to claims and legal actions. While the Company cannot predict the outcome
of litigation actions, it is management's opinion that these matters will not
have a material impact on the Company's financial position or results of
operations. As of March 13, 1998, no actual or unasserted material claims or
actions are pending against the Company.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During 1997, the Company's Common Stock was principally traded on the American
Stock Exchange. On March 12, 1997 the shareholders of the Company voted to
change the name of the Company to Integrated Orthopaedics, Inc. Immediately
following that vote the Board of Directors of the Company voted to change the
trading symbol of the Company from "DRC" to "IOI".
<TABLE>
<CAPTION>
CLOSING SALES PRICE
(AMERICAN STOCK EXCHANGE)
-------------------------
LOW HIGH
-------- -------
<S> <C> <C>
1996
- ----
1st Quarter 3.3750 5.6250
2nd Quarter 3.6250 5.4375
3rd Quarter 2.5625 4.0000
4th Quarter 2.9375 5.0000
1997
- ----
1st Quarter 4.0000 5.3125
2nd Quarter 4.7500 5.5000
3rd Quarter 5.2500 9.0625
4th Quarter 7.6250 8.8750
1st Quarter (through March 13, 1998) 6.5000 8.1250
</TABLE>
On March 13, 1998, the Company had 131 shareholders of record. A significant
portion of the Company's common stock not held by affiliates of the Company is
held through securities depositories.
Effective October 1, the Company, through a wholly-owned subsidiary, entered
into an agreement to acquire 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. ("MOA"). As consideration, the Company delivered certain cash
consideration and an agreement, subject to certain conditions, to deliver
$1,505,000 and 423,917 shares of the Company's Common Stock on January 5, 1998.
This common stock was issued and cash paid to MOA on January 5, 1998.
On November 12, 1997, the Company issued (i) 142,400 shares of its Common Stock
and (ii) non-negotiable subordinated convertible promissory notes (the
"Convertible Notes") with an original principal amount of approximately
$1,085,000, together with cash and other consideration in connection with the
acquisition of the accounts receivable and all of the outstanding common stock
of Winters, Kleinschmidt, Frensilli and Fleming, M.D.'s Ltd., ("WKFF"). The
Convertible Notes are convertible into shares of the Common stock at each of the
second through the sixth annual anniversaries of issuance at which time 20% of
the original principal amount of each Convertible Note is due. Payments of
principal can be converted to Company common stock at the discretion of the
holder at the rate of approximately one-fifth of one share for each dollar of
principal converted. The securities were issued to the physician shareholders
of WKFF.
13
<PAGE>
On December 12, 1997 the Company issued to two investors an aggregate of 250,000
shares of its Series B Preferred Stock (the "Series B Preferred") and warrants
(the "Warrants") to acquire, initially, up to 5,000,000 shares of the Company's
Common Stock. The Company received gross proceeds of $25,000,000 in connection
with the transaction. Initially, the Series B Preferred can be converted into
4,166,667 shares of the Company's Common Stock (at a conversion rate of $6.00
per share). The Warrants are not presently vested and have no exercise rights
upon the initial issuance, but rather vest after December 31, 1999, subject to
certain adjustments. Pursuant to the terms of the Warrants, the Company may
cause expiration of some or all of the Warrants before they have vested by
achieving certain annual financial performance criteria through the year 1999.
If any of the Warrants actually vest, the Warrants may be exercised only during
the five-year period beginning on July 1, 2000 and ending on July 1, 2005. The
initial exercise price of any vested Warrant is $8.00 per share. The conversion
price of the Series B Preferred and the exercise price of the Warrants are
subject to certain anti-dilution adjustments.
On December 18, 1997, the Company acquired (i) the accounts receivable and (ii)
70% of the outstanding capital stock of Lancaster Orthopedic Group, Inc. ("LOG")
and (b) the irrevocable right to acquire the remaining 30% of the outstanding
capital stock of LOG in 1998. Including the consideration delivered by the
Company into trust to acquire the remaining 30% of the LOG stock, the Company
delivered an aggregate of 362,502 shares of its Common Stock, together with cash
consideration. The stock was issued to the physician shareholders of LOG.
No underwriters were involved with any of the transactions described above.
Such issuances were exempt from the registration provisions of Section 5 of the
Securities Act of 1933, as amended (the "Act") by virtue of Section 4(2) of the
Act.
The Company has not declared or paid any dividend since it was formed. It is
the present policy of the Company not to pay cash dividends and to retain future
earnings to support the Company's growth. Any payment of cash dividends in the
future will be dependent upon the amount of funds legally available, the
Company's earnings, financial condition, capital requirements and other factors
that the Board of Directors may deem relevant. Pursuant to the terms of the
Company's Series A Cumulative Convertible Preferred Stock and the Company's
Series B Convertible Preferred Stock (collectively the "Preferred Stock"), no
dividends can be paid on the common stock until all dividends accrued on the
Preferred Stock have been paid. Dividends on the Series A Preferred Stock are
cumulative from the date of issuance and are payable quarterly after June 30,
1999. At December 31, 1997, the Company has accrued unpaid dividends of
$329,000 on the Series A Preferred Stock. Dividends on the Series B Preferred
Stock accrue quarterly and, if not paid in cash, are paid quarterly by the
issuance of additional shares of Series B Preferred Stock. At December 31, 1997,
the Company has recorded the issuance of 1,170 additional shares of Series B
Preferred Stock to satisfy dividends accrued for the period December 12, 1997
through December 31, 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain of the comments that follow or that appear elsewhere in this annual
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 annual report, particularly in
Item 1, hereof, there can be no assurance that actual results will not differ
materially from these forward-looking statements.
SIGNIFICANT TRANSITION EVENTS IN 1996 AND 1997
IOI undertook certain courses of action in 1996 and 1997 to transition the
Company into a single focus equity model musculoskeletal-related PPM Company.
This transition led IOI to divest itself of all operations that did
14
<PAGE>
not fit within this strategic framework. In keeping with this plan, IOI sold a
subsidiary in Little Rock, Arkansas that owned a free standing MRI center and
divested all occupational medicine-related operations in 1996. These
transactions resulted in the Company recording net gains of $3,168,000 in 1996
and $672,000 in 1997.
IOI began building its corporate infrastructure during the fourth quarter of
1996 and continued to make key employee additions throughout 1997. This build
up of key staff positions and legal and accounting costs incurred in developing
the Company's transaction structure resulted in a significant increase in
overhead costs in 1997.
During 1997, IOI and the musculoskeletal-related healthcare delivery system it
managed in Houston, Texas jointly closed a physical therapy center and a free
standing MRI center, and terminated a facility management contract with a
Houston hospital. The Company sold substantially all of the fixed assets used
in these operations (except for the MRI equipment which remained for sale as of
December 31, 1997) for a net gain of $42,000. The Company also incurred a
charge of $175,000 to write the book value of the MRI equipment down to its
estimated realizable value. Effective November 30, 1997, IOI discontinued its
management relationship with this medical group in a strategic move to position
its physician practice management operations to be comprised exclusively of
equity model affiliation transactions. The Houston medical group was controlled
by William F. Donovan, M.D., a director and, beneficially, a significant
shareholder of IOI. In terminating this contract, the Company incurred charges
of approximately $548,000. Dr. Donovan resigned as a director of IOI in December
1997.
Also in December 1997, IOI expanded its board of directors to eight seats and
Jose E. Kauachi (Chairman of the Board of Directors and a significant
shareholder) resigned as Chief Executive Officer and was elected Non-executive
Chairman of the Board of Directors. Mr. Kauachi agreed to the termination of
his employment agreement with the Company and accepted a three-year consulting
contract with IOI. Subsequently, the Company and Mr. Kauachi agreed to an early
termination of the consulting contract and the Company paid Mr. Kauachi a
discounted amount of $966,000 in cash. Mr. Kauachi also agreed to reduce to
December 31, 1999 the time in which to exercise options to purchase 50,000
shares of IOI common stock that were available to him until February 2, 2005 as
an employee. The Company recorded a non-cash charge to consulting expense and
an offsetting increase in additional paid in capital of $281,250 in conjunction
with this modification.
Simultaneously with the expansion of the board of directors, IOI completed the
sale of 250,000 shares of Series B Preferred Stock and contingent Warrants to
acquire up to 5 million shares of the Company's common stock, yielding net cash
proceeds of approximately $24.5 million. In conjunction with this transaction,
the Company recorded one-time, non-cash charges of $8,333,000 and $1,000,000 to
earnings available for common shareholders with respect to the Series B
Preferred Stock and contingent Warrants, respectively. The capital raised by
IOI in December 1997 is intended primarily for use in physician practice
affiliation transactions. IOI closed its first three such transactions in the
fourth quarter of 1997, and added its fourth in March 1998. IOI ended 1997 with
19 physicians in three states under management.
Several of the events disclosed above took place in the fourth quarter of 1997
and had an adverse effect on the Company's result of operations and earnings per
share ("EPS"). Management believes these events are unusual in nature and not
likely to reoccur, and that it is not likely for there to be any material
adjustment to these amounts recorded in the future. Excluding the effects of
these items, the Company would have reported a net loss for 1997 of $1,591,000
and a loss per share of $0.35 as compared to the reported net loss of $3,441,000
or $2.43 per share. The $1,850,000 effect of such events on the Company's
results and the $2.08 effect on earnings per share are explained as follows (in
thousands, except per share data):
15
<PAGE>
<TABLE>
<CAPTION>
EPS
General and administrative expenses: -------
<S> <C> <C>
Discounted buyout of consulting agreement $ 966 $ 0.18
Option re-pricing 281 0.05
------- ------
1,247 0.23
------- ------
Loss (gain) from divestitures and discontinued operations:
Writeoff of note receivable on Houston group termination 548 0.10
Writedown of Houston MRI to realizable value 175 0.03
------- ------
723 0.13
------- ------
Effect on net loss before taxes 1,970 0.36
Tax effect (120) (0.02)
------- ------
Effect on net loss 1,850 0.34
Series B Preferred Stock premium dividend 8,333 1.55
Series B Preferred Stock warrant dividend 1,000 0.19
------- ------
Total effect on loss available for
common shareholders $11,183 $ 2.08
======= ======
</TABLE>
Had the general and administrative expenses set forth above not been incurred,
general and administrative expenses for the fourth quarter and year would have
been $1,403,000 and $4,431,000, respectively, as compared to $2,650,000 and
$5,678,000, respectively, as reported.
CHANGE IN FINANCIAL STATEMENT PRESENTATION
At its meeting on November 20, 1997, the Emerging Issues Task Force ("EITF") of
the Financial Accounting Standards Board ("FASB") reached consensus on Issue 97-
2 ("EITF 97-2"). EITF 97-2 provides guidance to PPM companies as to whether the
financial statements of the practices they manage should be consolidated with
those of the PPM company or whether the PPM company should report its results on
a non-consolidated basis. The Company has historically reported its financial
results on a "consolidated" basis. All the Company's management services
agreements provide physician practices exclusive decision making regarding the
selection, hiring, supervision and recruiting of physicians. Accordingly,
applying the new guidance provided by EITF 97-2 to the Company's current and
historical management service arrangements indicates that the Company must
report on a "non-consolidated" basis. EITF 97-2 provides that companies which
modify their financial statement presentation to conform to the new guidance
have the option of retroactive restatement. The Company has elected to restate
its financial results retroactively on a non-consolidated basis and to adopt the
non-consolidated reporting format for future reporting periods.
The "non-consolidated" presentation recognizes that, under the terms of the
Company's management services agreements, the revenue derived from patient care
belongs to the practices it manages. This presentation also recognizes that the
compensation paid to physicians is an expense of the practice, not an expense of
the Company. Likewise, recognition is given to the fact that the Company is
contractually obligated to pay for the cost of the practices' operating expenses
(excluding physician compensation). Accordingly, the revenue available to the
Company under a non-consolidated reporting format equals patient revenue minus
physician compensation. This amount is reported as Revenue in the Company's
non-consolidated presentation. Because the operating expenses of the practices
(excluding physician compensation) are the Company's responsibility, they are
reported as "Practice Compensation and Benefits" and "Other Direct Costs" in
the non-consolidated presentation. The "Provision for Doubtful Accounts" in the
consolidated presentation is reflected in the non-consolidated presentation as a
reduction in patient revenues because that expense is exclusive to the medical
practice and is one for which the Company is not at risk.
The following table sets forth the Company's results of operations for each of
the four quarters ended March 31, June 30, September 30, and December 31, 1997
and the Company's results for the year ended December 31, 1997 on a "non-
consolidated" basis.
16
<PAGE>
<TABLE>
<CAPTION>
"NON-CONSOLIDATED" PRESENTATION 1ST 2ND 3RD 4TH
RESULTS OF OPERATIONS QTR QTR QTR QTR 1997
- ----------------------------------- ------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 913 $1,599 $1,386 $ 1,817 $ 5,715
Practice compensation & benefits 599 649 567 782 2,597
Other direct costs 345 250 370 701 1,666
General & administrative 728 1,155 1,145 2,650 5,678
Depreciation & amortization 83 47 46 133 309
Loss (gain) from divestitures and
discontinued operations (415) (63) (150) 637 9
------ ------ ------ ------- -------
1,340 2,038 1,978 4,903 10,259
------ ------ ------ ------- -------
Loss from operations (427) (439) (592) (3,086) (4,544)
Other income (expense):
Interest income 102 79 87 60 328
Interest expense (19) (20) (19) (31) (89)
------ ------ ------ ------- -------
Loss before income taxes (344) (380) (524) (3,057) (4,305)
Income tax benefit 131 144 199 390 864
------ ------ ------ ------- -------
Net loss $ (213) $ (236) $ (325) $(2,667) $(3,441)
====== ====== ====== ======= =======
</TABLE>
The following table sets forth the Company's results of operations for each of
the four quarters ended March 31, June 30, September 30, and December 31, 1997
and the Company's results for the year ended December 31, 1997 on a
"consolidated" basis, as it has been reported in the Company's historical
financial statements.
<TABLE>
<CAPTION>
"CONSOLIDATED" PRESENTATION 1ST 2ND 3RD 4TH
RESULTS OF OPERATIONS QTR QTR QTR QTR 1997
- ---------------------------------------- -------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $1,563 $2,311 $2,061 $ 2,846 $ 8,781
Compensation cost and medical services 874 1,095 1,062 1,611 4,642
Other direct costs 345 250 370 701 1,666
General & administrative 728 1,155 1,145 2,650 5,678
Depreciation & amortization 83 47 46 133 309
Provision for doubtful accounts 375 266 180 200 1,021
Loss (gain) from divestitures and
discontinued operations (415) (63) (150) 637 9
------ ------ ------ ------- -------
1,990 2,750 2,653 5,932 13,325
------ ------ ------ ------- -------
Loss from operations (427) (439) (592) (3,086) (4,544)
Other income (expense):
Interest income 102 79 87 60 328
Interest expense (19) (20) (19) (31) (89)
------ ------ ------ ------- -------
Loss before income taxes (344) (380) (524) (3,057) (4,305)
Income tax benefit 131 144 199 390 864
------ ------ ------ ------- -------
Net loss $ (213) $ (236) $ (325) $(2,667) $(3,441)
====== ====== ====== ======= =======
</TABLE>
17
<PAGE>
Presentation of the financial results on a non-consolidated basis yields the
same net income as that presented on a consolidated basis. Only the
classification of certain financial statement line items is altered for
presentation purposes.
Explanations of period to period variances in this and future reports will be
based upon the non-consolidated financial reporting presentation format.
RESULTS OF OPERATIONS
- ---------------------
The following table presents revenues by category and the statement of
operations items as percentages of total revenues:
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Operations disposed of or divested in 1996 0 % 47 % 41 %
Operations disposed of or divested in 1997 74 53 57
Practice affiliation transactions in 1997 18 0 0
Ancillary operations acquired in 1997 1 0 0
Other Revenues 7 0 2
---- ---- ----
Revenue 100 % 100 % 100 %
==== ==== ====
Practice compensation and benefits 45 % 45 % 33 %
Other direct costs 29 39 30
General and administrative 100 26 19
Depreciation and amortization 5 8 9
(Gain) loss from divestitures and discontinued operations 0 (32) 0
---- ---- ----
179 % 86 % 91 %
---- ---- ----
Income from operations (79) 14 9
Minority interests 0 0 0
Interest income 6 0 0
Interest expense (2) (2) (2)
---- ---- ----
(Loss) income before income taxes (75)% 12 % 7 %
Income taxes 15 (4) (3)
---- ---- ----
Net (loss) income (60)% 8 % 4 %
==== ==== ====
</TABLE>
Year ended December 31, 1997, compared with the year ended December 31, 1996.
Revenues
- --------
Revenues declined from 1996 to 1997 by $4,120,000 (42%). Approximately
$4,625,000 of the decrease is attributable to the occupational medicine and
diagnostic imaging businesses which were divested in 1996. Revenue from these
operations represented 47% of 1996 revenue. Approximately $970,000 of the
decrease related to the operations that were disposed or divested in 1997.
Revenue from these operations declined 19% from 1996 to 1997 (partially
reflecting only eleven months of operations in 1997) and represented 53% of
revenue in 1996 and 74% of revenue in 1997. Offsetting these declines to some
extent were increases in revenue of $1,018,000 from medical practices with which
the Company entered into management services agreements in 1997 and $77,000 from
two work hardening facilities the Company took over for its own
18
<PAGE>
account upon the dissolution of its relationship with the Houston
musculoskeletal-related healthcare delivery system in 1997. Revenue from these
operations represented 18% and 1% of 1997 revenue, respectively. An increase of
$380,000 in collection fees related to the operations divested in 1996 and
miscellaneous other fees also offset some of the decreases in revenue. These
fees represented 7% of revenue in 1997.
Practice Compensation and Benefits
Overall practice compensation and benefits decreased approximately $1,813,000
(41%) and represented 45% of revenues in 1996 and 1997. Practice compensation
and benefits at the occupational medicine and diagnostic imaging businesses
which were divested in 1996 accounted for $1,999,000 of the decrease from year
to year. Costs related to operations that were disposed or divested in 1997
declined approximately $287,000 (12%). Costs increased by $403,000 in 1997 due
to medical practices with which the Company entered into management services
agreements in 1997 and by $70,000 due to two work hardening facilities the
Company took over for its own account upon the dissolution of its relationship
with the Houston musculoskeletal-related healthcare delivery system in 1997.
Other Direct Costs
Other direct costs decreased approximately $2,142,000 (56%) and represented 39%
of revenues in 1996 and 29% in 1997. Other direct costs at the occupational
medicine and diagnostic imaging businesses which were divested in 1996 accounted
for $2,512,000 of the decrease from year to year. Costs related to operations
that were disposed or divested in 1997 increased approximately $87,000 (7%).
Costs increased by $244,000 in 1997 due to medical practices with which the
Company entered into management services agreements in 1997 and by $39,000 due
to two work hardening facilities the Company took over for its own account upon
the dissolution of its relationship with the Houston musculoskeletal-related
healthcare delivery system in 1997.
General and Administrative
General and administrative costs rose approximately $3,065,000 from 26% of
revenues in 1996 to 100% of revenues in 1997. A decrease in general and
administrative expenses related to the occupational medicine and diagnostic
imaging businesses which were divested in 1996 offset $482,000 of the overall
increase. The overall increase is primarily attributable to increased salary,
compensation and recruiting costs related to additional senior management and
staff to support the Company's PPM strategy, to legal and accounting costs
related to the development of transaction documents for practice affiliations,
and to normal operating variances. During 1997 the Company also recorded non-
recurring expenses of approximately $966,000 and a one-time $281,000 non-cash
charge as a result of negotiating a discounted early termination of a three-year
consulting agreement and the modification of an option agreement with the
Company's former Chief Executive Officer.
Depreciation and Amortization
Depreciation and amortization expense declined approximately $482,000 (61%) in
1997. Of this decline, $394,000 is attributable to the occupational medicine
and diagnostic imaging businesses which were divested in 1996. The operations
disposed of or divested in 1997 accounted for $268,000 of the decline. Costs
increased by $87,000 in 1997 due of medical practices with which the Company
entered into management services agreements in 1997 and by $3,000 due to two
work hardening facilities the Company took over for its own account upon the
dissolution of its relationship with the Houston musculoskeletal-related
healthcare delivery system in 1997. Depreciation related to corporate office
operations increased by $90,000 due to the addition of staff and other
infrastructure investments.
19
<PAGE>
Interest Income and Expense
Interest expense decreased by approximately $81,000 from 1996 to 1997. This
savings is due to the reduction and retirement of notes payable and
significantly reduced usage of the Company's line of credit during 1997 as a
result of retention of the proceeds from the operations divested in 1996.
Interest income increased $328,000 due to investment earnings on proceeds from
the operations divested in 1996.
Loss (Gain) from Divestitures and Discontinued Operations
(Gain) loss from divestitures and discontinued operations decreased $3,177,000
from 1996 to 1997. The Company recorded additional gains in 1997 of $672,000
resulting from the retirement of certain obligations related to the 1996
divestiture of the occupational medicine operations at a lower than expected
cost, yielding a net change of $2,496,000 related to this divestiture. In 1997,
the Company recorded a $548,000 write-down against a note receivable which was
acquired by the Company in conjunction with the termination of its relationship
with the Houston musculoskeletal-related healthcare delivery system. During
1997, the Company and the Houston musculoskeletal-related healthcare delivery
system jointly closed a physical therapy center and an MRI center, and
terminated a facility management contract with a Houston hospital. Assets used
in these operations were sold or written down to their expected realizable value
in 1997. The Company realized gains of $42,000 from assets sold and recorded a
$175,000 expense to write the value of an MRI unit currently held for sale down
to its expected realizable value.
Year ended December 31, 1996, compared with the year ended December 31, 1995.
Revenues
Revenues declined from 1995 to 1996 by $2,408,000 (20%). Approximately $449,000
of the decrease is attributable to the occupational medicine and diagnostic
imaging businesses which were divested in 1996. Revenue from these operations
represented 47% of 1996 revenue and 41% of 1995 revenue. Approximately
$1,724,000 of the decline related to the operations that were subsequently
disposed or divested in 1997. Revenue from these operations represented 57% of
revenue in 1995 and 53% of revenue in 1996. Another $235,000 (9%) of this
reduction is due to the one-time inclusion in 1995 of collection fee revenue (2%
of 1995 revenue) arising from an accounts receivable collection agreement
entered into in March, 1995 as one component of the creation of the Houston
musculoskeletal-related healthcare delivery system.
Practice Compensation and Benefits
Overall practice compensation and benefits increased approximately $319,000 (8%)
from 33% of revenues in 1995 to 45% of revenues in 1996. Practice compensation
and benefits at the occupational medicine and diagnostic imaging businesses
which were divested in 1996 showed a $60,000 (3%) increase from year to year.
Costs related to operations that were subsequently disposed or divested in 1997
increased approximately $259,000 (12%).
Other Direct Costs
Other direct costs increased from 1995 to 1996 by approximately $88,000 (2%)
from 30% of revenues in 1995 to 39% of revenues in 1996. Other direct costs at
the occupational medicine and diagnostic imaging businesses which were divested
in 1996 rose $15,000 (less than 1%). Costs related to operations that were
subsequently disposed or divested in 1997 increased approximately $73,000 (6%).
20
<PAGE>
General and Administrative
General and administrative costs rose approximately $437,000 from 18% of
revenues in 1995 to 27% of revenues in 1996. This increase is attributable to
increased salary, compensation and recruiting costs related to additional senior
management staff to support the Company's PPM strategy, to legal and accounting
costs related to the development of transaction documents for practice
affiliations, and to normal operating variances. During 1996 the Company
incurred approximately $482,000 in general and administrative expenses which
were directly related to the occupational medicine business divested in December
1996.
Depreciation and Amortization
Depreciation and amortization expense declined approximately $303,000 in 1996.
This decline is due primarily to (i) reduced expenses arising from the sale of a
wholly-owned subsidiary which owned a magnetic resonance imaging center in March
1996, (ii) cost savings arising from the full amortization in 1995 of a non-
competition covenant relating to the acquisition of the occupational medicine
clinics in Little Rock, Arkansas, and (iii) the full depreciation of certain
fixed assets in 1995.
Minority Interest and Other
The Company reported no minority interest or other expense in 1996. Minority
interest decreased by $34,000 from 1995 to 1996 reflecting that all partnership
interests held by the Company were terminated in 1995.
Interest Income and Expense
Interest expense decreased by approximately $133,000 from 1995 to 1996. This
savings is due to the reduction and retirement of notes payable and
significantly reduced usage of the Company's line of credit during 1996.
Loss (Gain) from Divestitures and Discontinued Operations
During 1996, the Company, in a strategic effort to restructure its operations
towards a single focus musculoskeletal-related physician practice management
company, divested its interests in eight occupational medicine centers, four
physical and medical therapy centers associated with the occupational medicine
centers, seven mobile health testing units operated in conjunction with the
occupational medicine programs in Houston, Texas and Little Rock, Arkansas, and
one magnetic resonance imaging ("MRI") center in Little Rock, Arkansas. The
Company recorded a net gain from these divestitures of $3,168,000.
MILLENNIUM COMPLIANCE
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
conducting a review of its internal computer systems and intends to query 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.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for use as consideration in equity model
physician practice affiliation transactions in which it acquires the non-medical
operations and secures long-term management agreements with orthopaedic medicine
practices and for funding operating losses during its transition into a
musculoskeletal oriented Physician Practice Management company. As of December
31, 1997, the Company had completed three physician practice affiliation
transactions with 19 physicians for which the following aggregate consideration
was paid (in thousands):
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Cash and transaction costs $12,878
Short term, and subordinated notes 2,590
Common stock issued and to be issued 3,948
Liabilities assumed 62
-------
Total Costs $19,478
=======
</TABLE>
To fund this growth and the operating losses incurred in conjunction with
transitioning the Company to a PPM company, IOI issued its Series A Preferred
Stock in June 1995, providing net cash proceeds of approximately $2.4 million.
In 1996, the Company disposed of certain operations that were not aligned with
the core business of a musculoskeletal oriented PPM company. The Company
realized net cash proceeds of approximately $8.4 million. In December 1997, the
Company issued its Series B Preferred Stock and Contingent Warrants for net cash
proceeds of approximately $24.5 million. In conjunction with this offering, the
Company also repaid approximately $600,000 of borrowings and terminated its
borrowing relationship with its primary commercial bank. Additional financing
was provided by the negotiated deferral of delivery of $1,505,000 in cash and
423,917 shares of the Company's common stock (recorded at a value of $1,643,000)
to Merritt Orthopaedic Associates, P.C. until January 5, 1998. The Company
delivered both the cash and stock as scheduled. The Company also issued non-
negotiable, subordinated, convertible promissory notes aggregating $1,085,000 to
the physician shareholders of Winters, Kleinschmidt, Frensilli and Fleming,
M.D.s, Ltd. in November 1997. These notes pay simple interest at seven percent
per annum. Payments of principal can be converted to Company common stock at
the rate of approximately one-fifth of one share for each dollar of principal
payment converted.
The Company intends in the future to aggressively pursue equity model physician
practice affiliation transactions. To execute this strategy, the Company will
require additional capital. Although no assurance can be given that capital
will be made available to the Company at the time or in the amounts required to
execute its strategy, the Company is currently exploring a number of
alternatives for additional financing, including equity investment, additional
indebtedness and strategic partnering.
As compared to a working capital position of $7,698,000 as of December 31, 1996,
as of December 31, 1997, the Company reported a working capital position of
$16,009,000 and held over $16,600,000 cash. The change in the Company's working
capital position is due mainly to the net cash proceeds from issuance of the
Company's Series B Preferred Stock, the use of cash and other short term capital
as consideration in the three physician practice affiliation transactions it
closed in 1997, and the use of cash to fund 1997 operating losses. It is the
Company's plan to utilize its working capital to build its management and
operations infrastructure as required to support the level of affiliation and
practice implementation projects resulting from the Company's business
development activities and as consideration in equity model physician practice
affiliation transactions. The Company anticipates that the cost of building the
management and operational infrastructure necessary to implement this strategy
may exceed the Company's earnings for at least a portion of 1998.
22
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements - Consolidated Financial Statements of Integrated
Orthopaedics, Inc. as of December 31, 1997 and 1996 and for the three years
ended December 31, 1997:
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Report of Independent Accountants 24
Consolidated Balance Sheet 25
Consolidated Statement of Operations 26
Consolidated Statement of Stockholders' Equity 27
Consolidated Statement of Cash Flows 28 - 29
Notes to Consolidated Financial Statements 30 - 44
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Integrated Orthopaedics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Integrated
Orthopaedics, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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.
As discussed in Note 1 to the financial statements, the Company restated the
1996 and 1995 statement of operations presentation due to a change in accounting
principle.
PRICE WATERHOUSE LLP
Houston, Texas
March 24, 1998
24
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
------ ------------------------
1997 1996
--------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 16,642 $10,177
Accounts receivable, net 2,956 3,797
Income taxes receivable 759 82
Due from affiliated medical groups 67
Notes receivable, net 152 89
Other current assets 753 253
Deferred income tax asset 18
--------- --------
TOTAL CURRENT ASSETS 21,347 14,398
--------- --------
PROPERTY AND EQUIPMENT
Equipment (including capital leases) 3,457 3,172
Leasehold improvements 263 317
Furniture and fixtures (including capital leases) 624 387
--------- --------
4,344 3,876
Less - accumulated depreciation and amortization (2,815) (3,211)
--------- --------
1,529 665
--------- --------
MANAGEMENT SERVICES AGREEMENTS, NET 25,018
OTHER ASSETS 258 106
--------- --------
TOTAL ASSETS $48,152 $15,169
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 565 $ 1,272
Accrued liabilities 3,022 3,129
Due to affiliated medical groups 133
Income taxes payable 584
Current obligations under capital leases 87 14
Current portion of notes payable 1,531 1,701
--------- --------
TOTAL CURRENT LIABILITIES 5,338 6,700
--------- --------
NOTES PAYABLE 1,253 386
OBLIGATIONS UNDER CAPITAL LEASES 266 15
DEFERRED INCOME TAXES 7,873 160
--------- --------
TOTAL LIABILITIES 14,730 7,261
--------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
10,000,000 shares authorized,
Series A, cumulative convertible,
25,226 shares issued and outstanding
Series B, cumulative convertible, non-redeemable,
251,170 shares issued and outstanding 3
Common stock, $.001 par value, 50,000,000
shares authorized, 5,885,876 and 5,302,474 issued 6 5
Additional paid-in capital 41,803 4,843
Common stock to be issued 1,643
Accumulated (deficit) retained earnings (10,033) 3,060
Treasury shares, 13,833 and 15,833 shares
--------- --------
TOTAL STOCKHOLDERS' EQUITY 33,422 7,908
--------- --------
COMMITMENTS AND CONTINGENCIES
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,152 $15,169
========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES $ 5,715 $ 9,835 $ 12,243
------------ ----------- -----------
COSTS AND EXPENSES:
Practice compensation and benefits 2,597 4,410 4,092
Other direct costs 1,666 3,808 3,720
General and administrative 5,678 2,613 2,176
Depreciation and amortization 309 791 1,094
Loss (gain) from divestitures and discontinued operations 9 (3,168)
------------ ----------- -----------
10,259 8,454 11,082
------------ ----------- -----------
(LOSS) INCOME FROM OPERATIONS (4,544) 1,381 1,161
MINORITY INTEREST AND OTHER 34
INTEREST INCOME 328
INTEREST EXPENSE (89) (170) (302)
------------ ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (4,305) 1,211 893
INCOME TAX BENEFIT (PROVISION) 864 (424) (375)
------------ ----------- -----------
NET (LOSS) INCOME $(3,441) $ 787 $ 518
============ =========== ===========
(LOSS) EARNINGS PER SHARE:
Basic $( 2.43) $ .12 $ .10
============ =========== ===========
Diluted $(2.43) $ . 12 $ .10
============ =========== ===========
Weighted average common shares outstanding 5,381 5,286 5,286
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/ COMMON
PAID-IN ACCUMULATED STOCK TO BE TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) ISSUED STOCK TOTAL
----------------- ------------------- ----------- ------------ ----------- --------- -------
COMMON PREFERRED COMMON PREFERRED
------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 5,302 $ 5 $ $ 2,471 $ 1,882 $ $ $ 4,358
Net Income 518 518
------ --------- ------ ---------- ----------- ------------ ----------- --------- -------
Balance at
December 31, 1995 5,302 5 2,471 2,400 4,876
Issuance of Preferred
Stock - Series A 25 2,523 2,523
Issuance cost of
Preferred Stock -
Series A (153) (153)
Dividends Preferred
Stock - Series A (127) (127)
Exercise of stock options 2 2
Net Income 787 787
------ --------- ------ ---------- ----------- ------------ ----------- --------- -------
Balance at
December 31, 1996 5,302 25 5 4,843 3,060 7,908
------ --------- ------ ---------- ----------- ------------ ----------- --------- -------
Dividends Preferred
Stock - Series A (202) (202)
Treasury stock issued
for services rendered 10 10
Options exercised 79 413 413
Option remeasurement 281 281
Medical Practice
Transactions:
Stock issued 505 1 2,303 2,304
Value of 423,917
Shares to be issued 1,643 1,643
Issuance of Preferred
Stock - Series B 250 3 32,836 (8,333) 24,506
Issuance of
contingent warrants 1,000 (1,000)
Dividends Preferred
Stock-Series B 1 117 (117)
Net (Loss) (3,441) (3,441)
------ --------- ------ ---------- ----------- ------------ ----------- --------- -------
Balance -
December 31, 1997 5,886 276 $ 6 $ 3 $ 41,803 $ (10,033) $ 1,643 $ $33,422
====== ========= ====== ========== =========== ============ =========== ========= =======
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,441) $ 787 $ 518
Noncash adjustments:
Loss (gain)from divestitures and discontinued operations 9 (3,168)
Depreciation and amortization 309 791 1,094
Minority interest (34)
Stock option repricing 281
Stock issued for services preformed 10
Deferred income taxes (289) (283) 348
Change in assets and liabilities, excluding
acquisitions and dispositions:
Accounts receivable, net 2,072 589 (1,752)
Other current assets (299) 35 (28)
Other assets (63) 22 (3)
Accounts payable (707) 105 98
Accrued liabilities 3 654 339
Due from /to affiliated medical groups 66
Income taxes receivable/payable (1,261) 907 (393)
-------- -------- -------
Net cash (used) provided by operating activities (3,310) 439 187
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (461) (778) (133)
Proceeds from sale of equipment 65 8,473
Issuance of notes receivable (58) (600)
Collection on notes receivable 106 205 403
Net payments in medical practice transactions (12,879)
-------- -------- -------
Net cash (used) provided by investing activities (13,169) 7,842 (330)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings 3,175 2,066
Payments on bank borrowings (2,061) (2,691) (1,780)
Payments on other notes, net (900) (408)
Payments on capital lease obligations (98) (169) (422)
Minority interest distributions (18)
Proceeds from issuance of convertible note 2,523
Proceeds from issuance of preferred stock 25,000
Direct costs of preferred stock issuance (196) (153)
Proceeds from exercise of stock options 299 2
-------- -------- -------
Net cash provided (used) by financing activities 22,944 1,787 (562)
-------- -------- -------
NET CHANGE IN CASH AND EQUIVALENTS 6,465 10,068 (705)
CASH AND EQUIVALENTS:
BEGINNING OF YEAR 10,177 109 814
-------- -------- -------
END OF YEAR $ 16,642 $ 10,177 $ 109
======== ======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ----- -------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 88 $ 148 $ 331
Income taxes paid (recovered) 533 (417) 405
NON CASH TRANSACTIONS;
Affiliations with physician practices resulted in non cash increases to
the management services agreement intangible and the following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------ ----- ------
Notes payable entered into directly with
affiliated medical groups $2,590
Common stock and additional paid-in capital
issued to affiliated medical groups 2,304
Common stock and additional paid-in capital
to be issued to affiliated medical groups 1,643
Deferred tax liability for book and tax
basis differences 8,177
Accrued liabilities assumed from
affiliated medical groups 62
The issuance of Series B Preferred Stock resulted in non cash
adjustments to preferred stock and additional paid-in capital and increases in
the following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ----- -------
Accumulated deficit related to premium dividends $8,333
Accumulated deficit related to warrant dividends 1,000
Accrued liabilities related to unpaid issuance costs 298
Accumulated deficit related to stock dividends 117
The conversion of notes payable into Series A Preferred Stock resulted
in non cash adjustments to preferred stock and additional paid-in capital and
the following:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ----- -------
Decrease in notes payable $ $2,523
Increase in accrued liabilities related to
unpaid dividends 202 127
Miscellaneous non cash transactions are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ----- -------
Furniture and equipment acquired under
capital leases $ 422 $ 107 $ 24
Direct financing of insurance premiums 168
Accounts receivable converted to
notes receivable 717
Deferred tax benefit for options exercised 114
The accompanying notes are an integral part of this statement.
29
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas corporation, is
a physician practice management company specializing in the management of
orthopaedic medicine practices and other musculoskeletal-related patient
services. The Company provides comprehensive management services under long-
term agreements to three orthopaedic practices in three states at December 31,
1997. These practices provide a wide spectrum of orthopaedic office-based and
surgical services to patients with musculoskeletal injuries and illnesses. The
Company also owns and operates two work hardening facilities in Houston, Texas.
Effective March 12, 1997, the Company changed its legal name from DRCA Medical
Corporation to Integrated Orthopaedics, Inc.
The following is a summary of the Company's significant accounting policies:
Principles of Consolidation
Historically the Company has consolidated the operations of its affiliated
physician practices for financial reporting purposes. In November 1997, the
Emerging Issues Task Force issued authoritative guidance on the financial
presentation of physician practice operations affiliated with a physician
practice management company. Upon application of the guidance, management
determined that the Company's current and previous physician practice
affiliations did not meet the requirements for consolidation. The Company, in
accordance with the authoritative guidance, elected to restate the 1996 and 1995
statements of operations to reflect the adoption of non consolidated accounting.
The restatement had no impact on the Company's reported net income or loss for
the three years presented.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated. The equity of limited partner investors in consolidated
partnerships is reflected as minority interest in 1995.
Use of Estimates
The preparation of consolidated 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 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.
Cash equivalents and investments
The Company considers its investment in highly liquid debt securities with
original maturities of three months or less to be cash equivalents.
The Company considers all investments in equity securities as available for use
in current operations and therefore has classified them as available for sale at
December 31, 1997. Realized gains and losses and permanent declines in value as
well as investment earnings are included in income.
30
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company's revenues represent the contractual fees earned under long-term
management service agreements with orthopaedic groups. Under the agreements,
the Company is contractually responsible and at risk for the operating costs of
the medical groups with the exception of the amounts retained by physicians. The
Company's revenues include the reimbursement of all medical practice operating
costs and the fixed and variable contractual management fees as defined and
stipulated in the agreements. Revenues related to management services
agreements are accrued when collection is probable.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of three to ten years for equipment, furniture and fixtures and the
remaining lease term for leasehold improvements.
Management Service Agreements
Management service agreements consist of the costs of purchasing the rights to
manage orthopaedic medical groups. These costs are amortized on a straight-line
basis over the initial 40-year terms of the related management service
agreements. Under the long-term agreements, the medical groups have agreed to
provide medical services on an exclusive basis only through the facilities
managed by the Company. The MSAs can be terminated without penalty by the
affiliated medical groups only for cause. At any time, any affiliated medical
group can terminate an MSA by tendering to IOI the then unamortized portion of
the consideration paid by IOI for the group (assuming a 40-year life for IOI's
acquisition costs). If the affiliated medical group breaches the MSA, the group
is responsible to pay liquidated damages to IOI in the same amount as that which
would be due if the group terminated the MSA without cause.
The carrying value of the management services agreements is reviewed for
impairment when events or changes in circumstances indicate their recorded costs
may not be recoverable. If the review indicates that the undiscounted cash
flows from operations of the related management services agreement over the
remaining amortization period is less than the recorded amount of the management
services agreement, the Company's carrying value of the management services
agreement will be reduced to its estimated fair value.
Income Taxes
Deferred income taxes are provided using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company's assets and liabilities. Deferred income taxes are measured using the
rates in effect when the temporary differences are expected to be included in
the Company's consolidated tax return. In estimating future tax consequences,
all expected future events are considered other than enactments of changes in
the tax laws or rates. It is the Company's policy to provide an allowance for
tax assets not considered to be realizable based upon expected future levels of
taxable income.
Fair Values of Financial Instruments
Due, generally, to their short term nature and current interest rates and terms,
where applicable, the carrying value of the Company's assets and liabilities is
believed to approximate their fair values unless otherwise indicated.
31
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Loss) Earnings Per Share
Statement of Financial Accounting Standards No. 128 established standards for
computing and presenting earnings or loss per share (EPS). Basic EPS excludes
dilution and is computed by dividing income or loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The components of basic earnings per share are as follows (in thousands except
per share data):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1997 EPS 1996 EPS 1995 EPS
------------ -------- ------------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $ (3,441) $(0.64) $ 787 $ 0.15 $ 518 $0.10
Series A Preferred
stock dividend (202) (0.04) (127) (0.03)
Series B Preferred
stock dividend (117) (0.02)
Series B Preferred
Stock premium
dividend (8,333) (1.55)
Series B Preferred
Stock warrant
dividend (1,000) (0.18)
------------ -------- ------------- ------- ------------ ------
Net (loss) income
available to
common
stockholders $(13,093) $(2.43) $ 660 $ 0.12 $ 518 $0.10
======== ====== ====== ====== ====== ======
Weighted average
common shares
outstanding 5,381 5,286 5,286
======== ====== ======
</TABLE>
The Company had total dilutive options and warrants which relate to 170,048
shares in 1996 and 150,583 shares in 1995. The effect of increasing the EPS
denominator by these share amounts yields the same diluted EPS amount as basic
EPS. In addition, the diluted weighted average shares in 1996 excluded the
assumed conversion of Series A Preferred Stock into 757,076 shares of common
stock, as the assumed conversion results in anti-dilution.
For 1997 the diluted weighted average shares excluded,(i) options to purchase
1,368,500 shares of common stock at a weighted average per share price of $4.99,
(ii) warrants to purchase 200,000 shares of common stock at a weighted average
purchase price of $2.13 per share, (iii) non employee options to purchase 97,750
shares of common stock at a weighted average purchase price of $4.17, (iv)
Series A Preferred Stock convertible into 814,736 shares of common stock, and
(v) Series B Preferred Stock convertible into 4,186,187 shares of common stock.
The issuance or conversion of these instruments results in anti-dilution.
NOTE 2 - REVENUE
Medical service revenue for services to patients by the medical groups
affiliated with the Company is recorded when 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 revenue of
32
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the affiliated medical groups is reduced by the contractual amounts retained by
the medical groups to arrive at the Company's revenue. With respect to the
physician practice affiliation transactions entered into in 1997, substantially
all of the amounts retained by affiliated physician groups for 1997 were
contractually guaranteed as a minimum percentage of practice gross profit. The
amounts retained by affiliated physician groups under management prior to 1997
were determined by combinations of fixed monthly and hourly amounts plus
variable amounts based on various measures of practice operations in 1997, 1996
and 1995.
The following represents the amounts included in the determination of the
Company's revenues (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Medical Service Revenue $7,760 $12,896 $14,646
Less Amounts Retained by Medical Groups 2,045 3,061 2,403
------ ------- -------
Revenues $5,715 $ 9,835 $12,243
====== ======= =======
Management Services Agreements at year end 3 1 2
</TABLE>
In 1997, 74% of the Company's revenues were derived from one affiliated
physician group, which was the only group that provided 10% or more of the
revenues. This affiliated group was controlled 100% by William F. Donovan,
M.D., a Company shareholder and a director until December 12, 1997. Effective
November 30, 1997 the Company terminated its management services agreement with
this group.
In 1996, 100% of the Company's revenues were derived from one affiliated
physician group, which was controlled 100% by William F. Donovan, M.D. In 1995,
100% of the Company's revenues were derived from two affiliated physician groups
which were controlled 100% by William F. Donovan, M.D.
For the years ended December 31, 1997, 1996 and 1995, the Company and affiliated
physician groups derived approximately 46%, 41% and 47%, respectively, of their
medical service revenue from services provided under workers' compensation
programs and 16%, 20% and 15%, respectively, from contractual, fee-for-service
arrangements with managed care programs and direct employer contracts and 16%,
16% and 12%, respectively, from personal injury claims subject to legal action,
none of which aggregated more than 10% of medical service revenue. The
remaining 22%, 23% and 26%, respectively, was derived from services provided
under the Medicare and state Medicaid programs as well as various non-contracted
fee-for-service payors. Capitation revenues were less than 1% of total revenue
in 1997, 1996 and 1995. Changes in the payor reimbursement rates, particularly
with respect to workers' compensation due to its concentration, can affect the
affiliated physician practice's and, therefore, the Company's revenue.
Receivables from workers' compensation programs are considered to have minimal
credit risk and no other payor class comprised more than 10% of accounts
receivable at December 31, 1997.
Under its management services agreements, receivables generated by affiliated
physician groups from patient services are purchased by the Company at their net
collectible value on a full recourse basis, therefore, the Company does not have
an allowance for doubtful accounts. As a result, the Company's accounts
receivable are a function of medical service revenue of the affiliated physician
groups rather than the Company's revenue. Such receivables are recorded by the
affiliated physician groups net of contractual adjustments and allowance for
doubtful accounts and are not collateralized.
33
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MEDICAL PRACTICE TRANSACTIONS
During 1997, the Company entered into long-term management services agreements
with three orthopaedic medical groups on the effective dates indicated as
follows: October 1, Merritt Orthopaedic Associates, P.C. of Bridgeport,
Connecticut, total consideration of $4,092,000 including 423,917 shares of
Common Stock to be issued with a value of $1,643,000; November 1, Westside
Orthopaedic Clinic, P.C. of Marrero, Louisiana, total consideration of
$3,670,000 including 142,000 shares of Common Stock issued with a value of
$542,000; December 1, Lancaster Orthopaedic Group, Inc. of Lancaster,
Pennsylvania, total consideration of $11,716,000 including 362,502 shares of
Common Stock issued with a value of $1,762,000.
The consideration paid for the medical groups to enter into long-term management
services agreements and for the non-medical assets of the medical groups,
primarily receivables and fixed assets, has been accounted for as asset
purchases. Total consideration includes (i) the assumption by the Company of
certain liabilities, (ii) the value of Common Stock issued, (iii) the estimated
value of commitments by the Company to issue common stock at specified future
dates, (iv) short-term obligations, (v) non-negotiable subordinated convertible
promissory notes, and (vi) cash payments and related transaction costs.
Total consideration to effect the medical practice transactions described above
is comprised of the following (in thousands):
1997
---------
Cash and transaction costs $12,879
Short term, and subordinated notes 2,590
Common stock issued and to be issued 3,947
Liabilities assumed 62
-------
19,478
-------
Book/tax basis difference - stock purchase 8,177
Allocation to assets purchased (2,559)
-------
25,096
Amortization (78)
-------
Management services agreements, net $25,018
=======
NOTE 4 - INDEBTEDNESS
Indebtedness consists of the following (in thousands):
1997 1996
------ -------
Credit facility $ $2,061
Short term obligation 1,505
Non-negotiable subordinated convertible note payable 1,085
Financing note payable 168
Other 26 26
------ ------
2,784 2,087
Less: current maturities 1,531 1,701
------ ------
$1,253 $ 386
====== ======
34
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Facility
In conjunction with the Series B Preferred Stock offering in December 1997, the
Company repaid all outstanding indebtedness and terminated its borrowing
relationship with its primary commercial bank. The Company is without a
commercial credit facility and is currently in discussions with several
institutions to secure additional financing.
Short Term Obligation
On October 1, 1997 the Company entered into a non-interest bearing promissory
note maturing on January 5, 1998. The obligation is payable to a medical
practice with which the Company entered into a long-term management agreement.
Non-negotiable Subordinated Convertible Notes Payable
The non-negotiable subordinated convertible promissory notes are payable to
physicians with whom the Company entered into practice affiliation transactions.
These notes pay simple interest at seven percent per annum. Payments of
principal plus the amount of interest accrued to date on the outstanding
principal are due at the second through sixth anniversaries of issuance. At
each principal due date, the holder of the note may elect to receive payment in
cash for both principal and interest or take payment in the form of Company
common stock. If the holder elects to take payment in the form of Company
common stock, the Company will issue approximately one-fifth of one share for
each dollar of principal payment converted. If payment is taken in the form of
Company stock, the accrued interest is waived by the holder.
If the Company fails to make payment under any of the notes, the respective
physician group can terminate the related management services agreement for
cause.
Maturities
Future principal maturities (in thousands) are $1,531 in 1998, $348 in 1999,
$254 in 2000, $217 in 2001, $217 in 2002 and a total of $217 thereafter.
NOTE 5 - INCOME TAXES:
The Company's income tax (provision) benefit consists of the following (in
thousands):
YEAR ENDED DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
Federal:
Current $ 719 $(539) $ 15
Deferred 259 251 (337)
State (114) (136) (53)
----- ----- -----
$ 864 $(424) $(375)
===== ===== =====
35
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (loss) income
before income taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ----- -------
(Provision) benefit for income taxes
at U.S. statutory rates $ 1,500 $(412) $ (304)
State income taxes, net of federal benefit (75) (90) (35)
Nondeductible expenses and other (52) 78 (36)
Valuation allowance (509)
------ ----- -------
$ 864 $(424) $ (375)
====== ===== =======
Deferred income taxes at December 31 are comprised of:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ $ 108
Allowance for doubtful accounts 45
Depreciation 18 79
Stock Option accruals 227
Other 70 7
------- -------
315 239
------- -------
Deferred tax liabilities:
Intangible assets, net of amortization (8,170)
Cash basis for certain revenues for tax reporting (321)
------- -------
(8,170) (321)
------- -------
Net deferred tax liability $(7,855) $ (82)
======= =======
</TABLE>
At December 31, 1997, the Company has a net operating loss carryforward of
approximately $1,498,000 available for federal income tax purposes which expires
in 2012. The net operating loss has resulted in a net deferred tax asset of
$509,000. Because the Company has a recent history of losses, management has
provided a valuation allowance in full for the net operating loss deferred tax
asset.
NOTE 6 - STOCK OPTIONS
The Company's 1988 Stock Option Plan (1988 Plan) provides that employees may be
granted options to purchase Common Stock. There are a total of 1,000,000 shares
available for grant in the 1988 Plan. The 1988 Plan provides for the issuance
of Incentive Stock Options ("ISO"), non-qualified stock options ("NQO") and
Stock Appreciation Rights ("SAR"). Individual option vesting and related terms
are determined by the Board of Directors; however, the 1988 Plan provides that
ISOs may not be granted at less than fair market value and NQOs cannot be
granted at less than 85% of fair market value as of the date of grant. As of
December 31, 1997, options to purchase 495,250 shares of Common Stock were
outstanding under the 1988 Plan at exercise prices of $2.50 to $5.25 per share,
226,750 were exercisable and no shares were available for future grant.
The Company's 1997 Long Term Incentive Plan (1997 Plan) provides that employees,
Company directors and designated consultants may be granted options to purchase
Common Stock. There are a total of 2,500,000 shares available for grant in the
1997 Plan. The 1997 Plan provides for the issuance of Incentive Stock
36
<PAGE>
Options ("ISO"), non-qualified stock options ("NQO") and Stock Appreciation
Rights ("SAR"). Individual option vesting and related terms are determined by
the Board of Directors; however, the 1997 Plan provides that ISOs may not be
granted at less than fair market value and NQOs cannot be granted at less than
85% of fair market value as of the date of the grant. All individual option
grants vest over time or based on pre-determined performance targets. As of
December 31, 1997, options to purchase 873,250 shares of Common Stock were
outstanding at exercise prices of $5.13 to $8.38 per share, 66,000 were
exercisable and 1,626,750 were available for future grant.
The following summarizes the activity for the 1988 and 1997 option plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Balance, December 31, 1994 240,000 $3.73
Granted 141,750 $2.56
Expired or Forfeited (40,000) $3.96
---------
Balance, December 31, 1995 341,750 $3.22
Granted 265,000 $3.49
Exercised (666) $2.50
Expired or Forfeited (19,502) $3.71
---------
Balance, December 31, 1996 586,582 $3.33
Granted 1,145,250 $5.69
Exercised (78,500) $3.81
Expired or Forfeited (284,832) $4.62
---------
Balance, December 31, 1997 1,368,500 $4.99
=========
Exercisable 292,750 $3.50
=========
Available for Future Grant 1,626,750
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
- ------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.50 and under 116,250 7.09 years $2.50 116,250 $2.50
$2.51 - $5.00 367,500 7.94 years $3.50 104,500 $3.44
$5.01 - $7.50 654,250 9.45 years $5.17 70,000 $5.13
$7.51 + 230,500 9.83 years $8.10 2,000 $8.25
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No.123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for fixed
options granted to Company employees. Had compensation cost for the Company's
stock option plan been determined based on the fair market value at grant for
awards in 1997,
37
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996, and 1995 consistent with the provisions of SFAS No. 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Net (loss) income - as reported (in thousands) $(3,441) $ 787 $ 518
Net (loss) income - pro forma (in thousands) $(3,685) $ 783 $ 406
Earnings per share - as reported:
Basic $ (2.43) $ .12 $ .10
Diluted $ (2.43) $ .12 $ .10
Earnings per share - pro forma:
Basic $ (2.48) $ .12 $ .07
Diluted $ (2.48) $ .12 $ .07
</TABLE>
Options granted in 1997, 1996 and 1995 had weighted average fair values of
$2.89, $1.95 and $1.34, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
1997 1996 1995
-------- -------- --------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 46% 44% 35%
Expected life 5 years 7 years 7 years
Risk-free interest rate 5.7% 6.3% 7.5%
NOTE 7 - STOCKHOLDER'S EQUITY
As of December 31, 1997, the Company's authorized capital stock consisted of (i)
50,000,000 shares of Common Stock, $.001 par value, of which (a) 5,885,876
shares were issued, (b) 423,917 shares were to be issued in conjunction with a
medical practice transaction, (c) 13,833 shares were held in treasury, and (d)
5,872,043 shares were outstanding; and (ii) 10,000,000 shares of Preferred
Stock, $.01 par value, of which (a) a series of 26,000 shares of the Company's
Series A Preferred Stock, $.01 par value, has been designated and authorized,
and of which 25,226 shares are issued and outstanding and (b) a series of
400,000 shares of the Company's Series B Preferred Stock, $.01 par value, has
been designated and authorized, and of which 251,170 shares are issued and
outstanding.
Holders of Common Stock are entitled to one vote per share in the election of
five of eight of the Company's directors and on all other matters submitted to a
vote at a meeting of shareholders. The holders of the Company's Series B
Preferred Stock have certain exclusive rights regarding the election of three of
the Company's eight directors. The Company has designated 26,000 shares of
Preferred Stock as Series A Preferred Stock.
The Series A Preferred Stock (the "Series A Preferred") provides for quarterly,
cumulative dividends that accrue at the rate of (i) $8.00 per share of stock per
annum for the period beginning on the date of issuance and ending on June 30,
2001; (ii) $10.00 per share per annum for the period beginning July 1, 2001 and
ending on June 30, 2002; (iii) $12.00 per share per annum for the period
beginning July 1, 2002 and ending on June 30, 2003, and (iv) $16.00 per share
per annum after July 1, 2003, and shall be first payable on June 30, 1999
(subject to certain extensions).
38
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Payment of such dividends shall be in preference and priority to any dividends
paid to holders of the Common Stock and on parity with the holders of the Series
B Preferred Stock (the "Series B Preferred"). The Series A Preferred is
convertible into shares of Common Stock at a rate equal to that amount to be
received for each share of Series A Preferred in liquidation ($100 per share
plus accrued but unpaid dividends) divided by a factor of $3.50 (subject to
adjustment). Each holder of the Series A Preferred is entitled to voting rights
with respect to any matters put before the Company's stockholders, in an amount
of votes equal to the number of whole shares into which the shares of Series A
Preferred are convertible at the time of such vote. In addition, the consent of
the holders of two-thirds of the Series A Preferred, voting as a class, is
necessary for the Company to sell all or substantially all of its assets or
effect any merger, consolidation or share exchange. If shares of the Series A
Preferred are outstanding after June 30, 2001, the Company's board of directors
shall be increased by one, and the holders of such shares, voting as a separate
series, shall be entitled to elect a director to fill such newly created
directorship. Upon the liquidation of the Company, the holders of the Series A
Preferred and Series B Preferred are entitled to receive liquidation proceeds in
an amount equal to $100 per share plus any accrued and unpaid dividends, on a
parity basis, prior to any distributions being made to the holders of any other
class of the Company's stock.
The Company has designated 400,000 shares of Preferred Stock as Series B
Preferred of which 250,000 shares were issued on December 12, 1997. The Series
B Preferred provides for quarterly, cumulative dividends that accrue at the rate
of $9.00 per share (subject to adjustment) per annum. Payment of such dividends
shall be in preference and priority to any dividends paid to holders of the
Common Stock and on parity with the holders of the Series A Preferred. At the
option of the Company, such dividends may be paid by the Company with additional
shares of the Series B Preferred. The Series B Preferred is convertible,
initially, into 4,166,167 shares of Common Stock at a rate equal to that amount
to be received for each share of Series B Preferred in liquidation ($100 per
share plus accrued but unpaid dividends) divided by a factor of $6.00 (subject
to adjustment). The holders of the Series B Preferred may convert the Series B
Preferred to Common Stock at the then established conversion rate at any time.
The Company may force the holders of the Series B Preferred to convert to Common
Stock at the then established conversion rate at any time after the fifth
anniversary of the issuance of the Series B Preferred. Except with respect to
the election of directors, each holder of the Series B Preferred is entitled to
voting rights with respect to any matters put before the Company's stockholders,
in an amount of votes equal to the number of whole shares into which the shares
of Series B Preferred are convertible at the time of such vote. The holders of
the Series B Preferred, acting as a class, have the exclusive right to elect
three of the Company's eight directors, but do not vote on an "as converted"
basis in the election of the remaining five directors. Upon a breach by the
Company of certain financial covenants, the holders of the Series B Preferred,
acting as a class, can elect a majority of the directors of the Company. In
addition, the consent of the holders of a majority of the Series B Preferred,
voting as a class, is necessary for the Company to (i) make or commit any
capital expenditures (a) exceeding $1.0 million for purposes other than the
affiliation with physician practice groups and (b) exceeding $10.0 million in
total consideration for an affiliation with any physician practice group, (ii)
make any change in the capital structure of the Company (including debt
financings), or (iii) merge or consolidate with or into or transfer all or
substantially all of its assets to any person or entity. A majority of the
holders of the Series B Preferred, acting as a class, have the right to
designate two of the three members of the Company's Acquisitions and Budget
Committee of the Board of Directors, which committee controls the Company's
investments in affiliation agreements with physician practices and other
entities. The Company has also agreed to maintain certain financial ratio
covenants in conjunction with the Series B Preferred. Upon the liquidation of
the Company, the holders of the Series A Preferred and Series B Preferred are
entitled to receive liquidation proceeds in an amount equal to $100 per share
plus any accrued and unpaid dividends, on a parity basis, prior to any
distributions being made to the holders of any other class of the Company's
stock.
In conjunction with the issuance of the Series B Preferred, the Company also
issued contingent warrants ("Warrants") giving the holders of the Warrants the
right to acquire five million shares ("Warrant Shares") of the Company's Common
Stock at $8.00 per share (the "Conversion Price"). However, the right to
exercise the Warrants shall vest only if the Company fails to achieve certain
financial performance objectives set forth in the
39
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant Agreement. Both the number of Warrant Shares to be issued and the
Conversion Price are subject to adjustment. Except as provided below, the
Warrants do not vest and are not exercisable until June 30, 2000. If the Company
achieves all financial performance objectives set forth in the Warrant
Agreement, the Warrants expire unexercised on June 30, 2000. If the Company
achieves a portion, but not all of the financial performance objectives set
forth in the Warrant Agreement, a portion of the Warrants will become vested. If
the Company fails to achieve any of the financial performance objectives set
forth in the Warrant Agreement, all Warrants will become vested. Vested Warrants
may be exercised at any time until June 30, 2005, at which time all vested but
unexercised Warrants will expire. Other provisions of the Warrant
notwithstanding, the Warrant shall become exercisable immediately upon (i) the
acquisition of 35% or more of the outstanding Common Stock (other than through a
merger, consolidation or business combination with another physician practice
management company approved by the holders of the Warrants), (ii) a majority
change in the Board of Directors over a 12 month period, (iii) a merger,
consolidation, or other similar transaction with another entity in which the
Company is not the surviving entity or in which the Company's shareholders do
not own a majority of the shares in the combined entity, or (iv) a sale of all
or substantially all of the Company's assets.
The Series B Preferred Stock was issued with an initial conversion price of
$6.00 per share. The market value of the Company's common stock on the date of
issuance of the Series B Preferred Stock was $8.00 per share. The $2.00 per
share difference ($8,333,334) was recorded as a one-time, non-cash dividend on
the Series B Preferred Stock. The Warrants were valued by an independent
appraiser at $1,000,000, which amount was also recorded as a one-time, non-cash
dividend on the Series B Preferred Stock. These two charges were recorded as
reductions to retained earnings and increases to additional paid in capital.
Certain of the provisions of the Series B Preferred Stock and the Warrants
described above were subject to shareholder approval when issued. On February
11, 1998, the Company held a Special Meeting of Shareholders to consider the
approval of these provisions. All provisions were approved by an affirmative
vote of 85% of the voting securities of the Company eligible to vote on the
matter and represented at the meeting in person or by proxy.
As of December 1997, non-employee options to purchase 97,750 shares of Common
Stock were outstanding at exercise prices of $2.75 to $5.00 per share of which
95,587 were vested.
In February 1989, the Company issued warrants to purchase 100,000 shares of
common stock each to Jose E. Kauachi, then the Company's Chairman of the Board
and Chief Executive Officer ("Kauachi") and William F. Donovan, M.D.,
("Donovan") then a member of the Board. These warrants were issued as
compensation for services rendered and for Kauachi's and Donovan's personal
guarantee of corporate debt and other obligations. The warrant exercise price
was $1.75 per share and was originally exercisable through February 22, 1994.
By amendments effective in February 1994 and 1995, the expiration dates of the
warrants were extended to February 22, 1999 and the exercise price was adjusted
to the then market value of $2.125 per share.
NOTE 8 - LOSS (GAIN) FROM DIVESTITURES AND DISCONTINUED OPERATIONS:
During 1997, the Company, in its continued strategic effort to restructure its
operations towards a single focus equity model musculoskeletal-related physician
practice management company, terminated its management agreement with a Houston,
Texas based musculoskeletal-related healthcare delivery system. Also in 1997,
the Company and the musculoskeletal-related healthcare delivery system jointly
closed a physical therapy center and a magnetic resonance imaging center, and
terminated a facility management contract with a Houston hospital. Related to
this termination, the Company also assumed the operation of two work hardening
facilities for its own account. During 1996, the Company divested its interests
in eight occupational medicine
40
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
centers, four physical and medical therapy centers associated with the
occupational medicine centers, seven mobile health testing units operated in
conjunction with the occupational medicine programs in Houston, Texas and Little
Rock, Arkansas, and one magnetic resonance imaging ("MRI") center in Little
Rock, Arkansas.
The results of these actions are set forth in the table below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
------------ ---------
<S> <C> <C>
Loss on sale of Little Rock MRI subsidiary $ $ 104
Gain from sale of Occupational Medicine ("OccMed") Operations (3,272)
Change in estimated cost related to the OccMed Operations (672)
Write-off of note receivable due to Houston group termination 548
Write-down of Houston MRI to realizable value 175
Gain from sale of assets and other (42)
--------- -------
(Loss) gain from divestitures and discontinued operations $ 9 $(3,168)
========= =======
</TABLE>
NOTE 9 - PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information assumes that (i) the sale of the
occupational medicine business and the Little Rock MRI subsidiary, (ii) the
termination of the management agreement with the Houston, Texas based
musculoskeletal-related healthcare delivery system, (iii) the closing of a
physical therapy center and a magnetic resonance imaging center, (iv) the
termination of a facility management contract with a Houston hospital, (v) the
assumption of operations of two work hardening facilities, and (vi) the three
medical practice affiliation transactions occurred on January 1, 1996. The pro
forma information does not purport to be indicative of the results of operations
that actually would have been attained if the sale had occurred at these earlier
dates or of results which may occur in the future.
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
-------------- --------
Revenues (in thousands) $ 9,878 $8,796
Net (loss) income (in thousands) (1,660) 27
Earnings per common share:
Basic $ (2.10) $ (.02)
Diluted $ (2.10) $ (.02)
The following unaudited pro forma information assumes that the sale of the
occupational medicine business, and the Little Rock MRI subsidiary occurred on
January 1, 1995. The pro forma information does not purport to be indicative of
the results of operations that actually would have been attained if the sale had
occurred at these earlier dates or of results which may occur in the future.
YEAR ENDED DECEMBER 31,
----------------------
1996 1995
----------------------
Revenues (in thousands) $6,460 $6,847
Net Income (in thousands) 1,238 804
Earnings per common share:
Basic $ .20 $ .15
Diluted $ .20 $ .15
41
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LEASES
The Company leases offices space, clinic facilities and certain equipment under
noncancelable operating and capital leases expiring through the year 2011.
The following is an analysis of the leased property under capital leases by
major classes (in thousands):
DECEMBER 31,
---------------
1997 1996
------- ------
CLASSES OF PROPERTY
-------------------
Computer Software $ 139 $
Furniture & Fixtures 236
Office Equipment 109 60
----- -----
Less: Accumulated amortization (44) (15)
----- -----
$ 440 $ 45
===== =====
The following is a schedule by years of future minimum lease payments under
operating and capital leases together with the present value of the net minimum
capital lease payments as of December 31, 1997 (in thousands):
CAPITAL OPERATING
-------- ---------
Year ending December 31:
1998 $131 $ 818
1999 125 742
2000 89 660
2001 75 637
2002 60 600
Years after 2002 3,518
------ ------
Total minimum lease payments 480 $6,975
======
Less: Amount representing estimated executory costs
(such as taxes, maintenance, and insurance) including
profit thereon, included in total minimum lease payments (38)
----
Net minimum lease payments 442
Less: Amount representing interest (89)
----
Present value of net minimum lease payments $353
====
42
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule shows the composition of total future, undiscounted
rental expense for all operating leases except those with terms of a month or
less that were not renewed (in thousands):
YEAR ENDED
DECEMBER 31,
1997
------------
Minimum rentals $ 8,905
Less: Sublease rentals (1,930)
---------
Total $ 6,975
=========
Rent expense for all noncancellable operating leases amounted to $764,201 in
1997, $1,060,934 in 1996 and $1,128,783 in 1995.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company and its affiliated medical groups maintain professional liability
insurance with respect to medical malpractice risks on a claims-made basis in
amounts believed to be customary and adequate. In conjunction with the
termination of its management agreement with the Houston musculoskeletal related
healthcare delivery system, the Company purchased an unlimited extended
reporting period endorsement ("tail coverage") for itself and all Houston, Texas
based medical and ancillary services which had been under its management through
November 30, 1997. Management is not aware of any outstanding claims or
unasserted claims likely to be asserted against it or its affiliated medical
groups which would have a material impact on the Company's financial position or
results of operation.
NOTE 12 - RELATED PARTY TRANSACTIONS
In December 1997, IOI expanded its board of directors to eight seats and Jose E.
Kauachi (Chairman of the Board of Directors and a significant shareholder)
resigned as Chief Executive Officer and was elected Non-executive Chairman of
the Board of Directors. Mr. Kauachi agreed to the termination of his employment
agreement with the Company and accepted a three-year consulting contract with
IOI. Subsequently, the Company and Mr. Kauachi agreed to an early termination
of the consulting contract and the Company paid Mr. Kauachi a discounted amount
of $966,000 in cash. Mr. Kauachi also agreed to reduce to December 31, 1999 the
time in which to exercise options to purchase 50,000 shares of IOI common stock
that were available to him until February 2, 2005 as an employee. The Company
recorded a non-cash charge to consulting expense and an offsetting increase in
additional paid in capital of $281,250 in conjunction with this modification.
The Company, either directly or through an affiliated medical group, paid
William F. Donovan, M.D., a Company director, and Northshore Orthopedics Assoc.
("NSO"), a professional corporation owned by Dr. Donovan, $668,042 in 1997,
$728,731 in 1996 and $504,878 in 1995 for Dr. Donovan's professional medical
services to patients of an affiliated medical group, medical director's fees,
equipment and leasehold rentals, and contracted services. Effective December 1,
1997 the Company terminated its management services agreement with this
affiliated medical group. In terminating this agreement, the Company incurred
charges of $548,000 to reduce a note receivable from NSO to its estimated
realizable value.
43
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996, the Company converted a $2,522,603 loan with Chartwell Capital
Investors (Chartwell) into 25,226 shares of cumulative, convertible preferred
stock. In addition, Chartwell received $48,501 in 1997 and $30,215 in 1996 in
management fees relating to investment consultations.
From September 1992 until October 1996, the Company leased several office suites
used for clinic and administrative functions at prevailing market rates from
Pacati, Inc., a company which is jointly owned by Mr. Kauachi and Dr. Donovan.
The leases were canceled in October, 1996, as a result of Pacati, Inc.'s sale of
the property to an unrelated party. The Company paid Pacati, Inc. $160,623 in
1996 and $210,099 in 1995 under the rental arrangements.
NOTE 13 - SUBSEQUENT EVENTS
As of March 1, 1998, the Company has entered into a long-term management
services agreement with an orthopaedic group located in Longmont, Colorado in
exchange for consideration of $4,577,000 including 139,693 shares of Common
Stock with a value of $679,000 issued at closing and 30,001 shares of Common
Stock to be issued on the fifth anniversary of the transaction with a value of
$78,000.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's definitive proxy
statement to be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year.
44
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- -------------------------------------------------------------- -----------------
<S> <C> <C>
2.1 Stock and Asset Purchase Agreement dated December 31, 1996
among OccuCenters, Inc.., Occupational Health Centers of the
Southwest, P.A. and DRCA Medical Corporation, William F.
Donovan, M.D., PhysiCare, L.L.P., and DRCA Houston
Clinics, Inc. /16/Exhibit 2.1
2.2 Stock Purchase Agreement by and among Integrated
Orthopaedics, Inc., Jack L. Winters, M.D., A.G. Kleinschmidt, Jr.,
M.D., Joseph J. Frensilli, M.D., Robert A. Fleming, Jr., M.D.
Chris J. DiGrado, M.D., and Ralph P. Katz, M.D. dated
November 12, 1997 /22/Exhibit 1
2.3 Stock Purchase Agreement by and among Integrated
Orthopaedics, Inc., Wayne Conrad, MD, J. Paul Lyet, MD,
Timothy Tymon, MD, Raymond Peart, MD,, I. Stanley Porter,
MD, Gary Zartman, MD, and Mark K. Perezous, MD dated
December 15, 1997. /24/Exhibit 99.01
3.1 Articles of Incorporation of the Company, as
amended to date. /18/Exhibit
3.2 Bylaws of the Company, as amended to date. /25/Same
4.1 Certificate of Designation and Determination of rights and
Preferences of Cumulative Convertible Preferred Stock,
Series A of the Company /23/Exhibit 4.01
4.2 Certificate of Designation, Rights and Preferences of Series B
Convertible, Non-Redeemable Preferred Stock of the
Company /23/Exhibit 4.02
4.3 Warrant Agreement dated as of December 12, 1997, by and
Among the Company, FW Integrated Orthopaedics Investors, L.P.
and FW Integrated Orthopaedics Investors II, L.P. /23/Exhibit 4.03
4.4 Warrant Certificate dated December 12, 1997, issued to
FW Integrated Orthopaedics Investors, L.P. /23/Exhibit 4.04
4.5 Warrant Certificate dated December 12, 1997, issued to
FW Integrated Orthopaedics Investors II, L.P. /23/Exhibit 4.05
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- -------------------------------------------------------------- -----------------
<S> <C> <C>
4.6 Specimen of Common Stock Certificate, $.001
par value, of the Company. /1/Exhibit 4.1
4.7 Warrant Agreement between the Company and
Jose E. Kauachi dated February 23, 1989. /3/Exhibit 4.3*
4.8 Warrant Agreement extension between the Company
and Jose E. Kauachi dated February 22, 1994. /11/Exhibit 4.3*
4.9 Warrant Agreement Amendment between the Company
and Jose E. Kauachi dated November 21, 1994 and
effective February 22, 1994 /12/Exhibit 4.4*
4.10 Warrant Agreement between the Company and
William F. Donovan, M.D. dated February 23, 1989. /3/Exhibit 4.5*
4.11 Warrant Agreement extension between the Company
and William F. Donovan, M.D. dated February 22, 1994. /11/Exhibit 4.5*
4.12 Warrant Agreement Amendment between the Company
and William F. Donovan, M.D. dated November 21, 1994
and effective February 22, 1994. /12/Exhibit 4.7*
4.13 Second Warrant Agreement Amendment dated February 2,
1995 between the Company and Jose E. Kauachi /12/Exhibit 4.11*
4.14 Second Warrant Agreement Amendment dated February 2,
1995 between the Company and William F. Donovan, M.D. /12/Exhibit 4.12*
10.1 Guaranty Agreement dated effective January 3, 1992
by the Company for the benefit of Medi-Stat, Inc. /2/Exhibit 10.39
10.2 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America. /4/Exhibit 10.1*
10.3 Amendment of 1988 Stock Option Plan /10/Exhibit 10.2*
10.4 Stock Option Agreement dated September 1, 1992 between
Ray Bishop and the Company /9/Exhibit 10.35
10.5 Administrative Services Agreement between DRCA Houston
Clinics, Inc. and the Company dated effective
August 1, 1993. /11/Exhibit 10.57
10.6 Incentive Stock Option Agreement between the Company and
William F. Donovan, M.D. dated February 2, 1995 /12/Exhibit 10.85*
10.7 Executive Employment Agreement between the Company and
Jefferson R. Casey dated January 22, 1995 /12/Exhibit 10.91*
46
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- ---------------------------------------------------- ---------
<S> <C> <C>
10.8 Investment Agreement by and between the Company and
Chartwell Capital Investors, L.P. dated April 12, 1996 /16/Exhibit 10.50
10.9 Option Agreement between the Company and Thomas M.
Conner dated April 11, 1996 /16/Exhibit 10.51
10.10 Option Agreement between the Company and Victor M.
Rivera, M.D. dated April 11, 1996 /16/Exhibit 10.52
10.11 Executive Employment Agreement between the Company and
Jose E. Kauachi dated November 15, 1997 /25/Same
10.12 Termination of Employment Agreement between the Company
and Jose Kauachi dated December 12, 1997. /25/Same
10.13 Consulting Agreement between the Company and John B.
McGinty, M.D. dated October 6, 1997 /25/Same
10.14 Consulting Agreement between the Company and Jose E.
Kauachi dated December 12, 1997. /25/Same
10.15 Termination and Release Agreement between the Company
and Jose E. Kauachi dated December 31, 1997 /25/Same
10.16 Integrated Orthopaedics, Inc.'s 1997 Long Term Incentive
Plan /25/Same
10.17 Loan Agreement dated July 1, 1997 by and between the
Company and Wells Fargo Bank (Texas) N.A. /20/Exhibit 10.35
10.18 Employment Agreement between the Company and
Alex Lukianov dated effective April 21, 1997. /19/Exhibit 10.33
10.19 Employment Agreement between the Company and
G. Rogan Fry dated effective April 21, 1997. /19/Exhibit 10.34
10.20 Executive Employment Agreement between the Company
and Ronald E. Pierce dated December 12, 1997. /25/Same
10.21 Employment Contract between the Company and Kerry
N. Lowery dated September 30, 1997. /25/Same
10.22 Securities Purchase Agreement dated as of December 12, 1997
by and among the Company, FW Integrated Orthopaedics
Investors, L.P., FW Integrated Orthopaedics Investors II, L.P.
and certain other signatories /23/Exhibit 99.01
10.23 Registration Rights Agreement dated as of December 12, 1997,
by and among the Company, FW Integrated Orthopaedics
Investors, L.P. and FW Integrated
Orthopaedics Investors II, L.P. /23/Exhibit 99.02
47
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- -------------- --------
<S> <C> <C>
10.24 Termination Agreement dated as of November 30, 1997, by and
among the Company, IOI Management Services of Houston, Inc.,
PhysiCare, L.L.P., WIlliam F. Donovan, M.D., Northshore
Orthopedics Assoc. and Ocupational Medicine Associates
of Houston, P.A. /23/Exhibit 99.03
10.25 Donovan Termination Agreement dated as of December 12, 1997,
by and among PhysiCare, L.L.P., William F. Donovan, MD.,
Northshore Orthopedics Assoc. and Occupational Medicine
Associates of Houston, P.A. /23/Exhibit 99.04
10.26 Management Services Agreement effective September 22, 1997
Among Integrated Orthopaedics, Inc., IOI Management Services
of Connecticut, Inc., Merritt Orthopaedic Associates, P.C.,
Patrick J. Carolan, M.D., and Mark E. Wilchinsky, M.D. /21/Exhibit 1
10.27 Agreement to Change Effective Date from September 22, 1997
to October 1, 1997, effective September 29, 1997 among
Integrated Orthopaedics, Inc., IOI Management Services of
Connecticut, Inc., Merritt Orthopaedic Associates, P.C.,
Patrick J. Carolan, M.D., Mark E. Wilchinsky, M.D., Beverly
Carolan, M.D., and Girard J. Girasole, M.D. /21/Exhibit 2
11 Calculations for Primary and Fully Diluted earnings per
share /25/Same
21 Subsidiaries of the Company. /25/Same
23 Consent of Independent Accountant to incorporation
by reference of their report contained
in this Report on Form 10-KSB into the Company's
Registration Statement on Form S-8, Registration
No. 33-42624, filed with the Securities and Exchange
Commission on September 6, 1991 /25/Same
27 Financial Data Schedule. /25/Same
</TABLE>
/1/Incorporated by reference to the Company's Annual Report on 10-K dated March
28, 1991 (under the exhibit number indicated in the column titled "Filed As").
/2/Incorporated by reference to the Company's Annual Report on 10-K dated March
26, 1992, (under the exhibit number indicated in the column titled "Filed As").
/3/Incorporated by reference to Post-Effective Amendment No. 1 to the Doctors
Rehabilitation Corporation of America Registration Statement on Form S-1,
Registration No. 33-31691 (under the exhibit number indicated in the column
titled "Filed As").
/4/Incorporated by reference to the Doctors Rehabilitation Corporation of
America Registration Statement on Form 10, Registration No. 0-17006 (under the
exhibit number indicated in the column titled "Filed As").
/5/Incorporated by reference to the Company's Current Report on Form 8-K dated
November 1, 1990 (under the exhibit number indicated in the column titled "Filed
As").
48
<PAGE>
/6/Incorporated by reference to the Company's Form 8 dated December 31, 1990,
amending the Company's Current Report on Form 8-K dated November 1, 1990 (under
the exhibit number indicated in the column titled "Filed As").
/7/Incorporated by reference to the Company's Current Report on Form 8-K dated
January 17, 1992 (under the exhibit number indicated in the column titled "Filed
As").
/8/Incorporated by reference to the Company's Current Report on Form 8-K dated
February 4, 1993 (under the exhibit number indicated in the column titled "Filed
As").
/9/Incorporated by reference to the Company's Annual Report on Form 10-KSB dated
March 30, 1993, (under the exhibit number indicated in the column titled "Filed
As").
/10/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/93 dated November 12, 1993 (under the exhibit number
indicated in the column titled "Filed As").
/11/Incorporated by reference to the Company's Annual Report on Form 10-KSB
dated March 30, 1994 (under the exhibit number indicated in the column titled
"Filed As").
/12/Incorporated by reference to the Company's Annual Report on Form 10-KSB
dated March 30, 1995 (under the exhibit number indicated in the column titled
"Filed As").
/13/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 6/30/95 dated August 11, 1995 (under the exhibit number
indicated in the column titled "Filed As").
/14/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 3/31/96 dated May 14, 1996(under the exhibit number
indicated in the column titled "Filed As").
/15/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 6/30/96 dated August 11, 1996 (under the exhibit number
indicated in the column titled "Filed As").
/16/Incorporated by reference to the Company's Current Report on Form 8-K dated
December 31, 1996 (under the exhibit number indicated in the column titled
"Filed As").
/17/Incorporated by reference to the Company's Annual Report on Form 10-KSB
dated March 30, 1996 (under the exhibit number indicated in the column titled
"Filed As").
/18/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 3/31/97 dated May 15, 1997 (under the exhibit number
indicated in the column titled "Filed As").
/19/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 6/30/97 dated August 14, 1997 (under the exhibit number
indicated in the column titled "Filed As").
/20/Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/97 dated November 14, 1997 (under the exhibit number
indicated in the column titled "Filed As").
/21/Incorporated by reference to the Company's Current Report on Form 8-K dated
October 1, 1997 (under the exhibit number indicated in the column titled "Filed
As").
49
<PAGE>
/22/Incorporated by reference to the Company's Current Report on Form 8-K dated
November 12, 1997 (under the exhibit number indicated in the column titled
"Filed As").
/23/Incorporated by reference to the Company's Current Report on Form 8-K dated
December 12, 1997 (under the exhibit number indicated in the column titled
"Filed As").
/24/Incorporated by reference to the Company's Current Report on Form 8-K dated
December 18, 1997 (under the exhibit number indicated in the column titled
"Filed As").
/25/Filed herewith
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
1. The Company filed a report on Form 8-K on December 29, 1997 with respect to
the Securities Purchase Agreement dated December 12, 1997 by and among the
Company, FW Integrated Orthopaedics Investors, L.P. and FW Integrated
Orthopaedics Investors II, L.P.
2. The Company filed a report on Form 8-K on November 26, 1997 with respect to
the Stock Purchase Agreement dated November 12, 1997 by and among the
Company, Jack L. Winters, M.D., A.G. Kleinschmidt Jr., M.D., Jose J.
Frensilli, M.D., Robert A. Fleming Jr., M.D., Chris J. DiGrado, M..D., and
Ralph P. Katz.
3. The Company filed a report on Form 8-K and Form 8-K/A on October 15, 1997
and December 15, 1997 , respectively, dated October 1, 1997 with respect to
the Management Services Agreement effective September 22,2 1997 by and
among the Company, IOI Management Services of Connecticut, Inc., Merritt
Orthopaedic Associates, P.C., Patrick J. Carolan, M.D., and Mark E.
Wilchinsky, M.D.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Ronald E. Pierce
--------------------------------
RONALD E. PIERCE
President and Chief Executive Officer
Dated: March 27, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By: /s/ Jose E. Kauchi Non-executive Chairman of the Board March 27, 1998
----------------------------
JOSE E. KAUACHI
By: /s/ Ronald E. Pierce President, Chief Executive March 27, 1998
---------------------------- Officer and Director
RONALD E. PIERCE
By: /s/ Jefferson R. Casey Senior Vice President, Treasurer March 27, 1998
---------------------------- (Principal Financial & Accounting
JEFFERSON R. CASEY Officer), and Secretary
By: /s/ John B. McGinty, M.d. Director March 27, 1998
-----------------------------
JOHN B. McGINTY, M.D.
By: /s/ Clifford R. Hinkle Director March 27, 1998
----------------------------
CLIFFORD R. HINKLE
By: /s/ J. Taylor Crandall Director March 27, 1998
----------------------------
J. TAYLOR CRANDALL
By: /s/ Mark A. Wolfson Director March 27, 1998
----------------------------
MARK A. WOLFSON
By: /s/ Scott J. Hancock Director March 27, 1998
----------------------------
SCOTT J. HANCOCK
</TABLE>
51
<PAGE>
EXHIBIT 3.2
<PAGE>
FIRST AMENDED AND RESTATED BYLAWS OF
INTEGRATED ORTHOPAEDICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
ARTICLE I. NAMES AND OFFICES................................ 1
1.01 Name............................................. 1
1.02 Principal Office................................. 1
1.03 Other Offices.................................... 1
ARTICLE II. SHAREHOLDERS' MEETINGS........................... 1
2.01 Place of Meetings................................ 1
2.02 Annual Meeting................................... 1
2.03 Special Meetings................................. 1
2.04 Notice........................................... 1
2.05 Quorum........................................... 2
2.06 Majority Vote; Withdrawal of Quorum.............. 2
2.07 Method of Voting................................. 2
2.08 Voting List...................................... 3
2.09 Record Date; Closing Transfer Books.............. 3
2.10 Registered Shareholders.......................... 3
2.11 Action Without Meeting........................... 3
2.12 Order of Business at Meetings; Rules of Meeting.. 3
ARTICLE III. DIRECTORS........................................ 4
3.01 Management....................................... 4
3.02 Number; Qualifications; Election; Term........... 4
3.03 Change in Number................................. 5
3.04 Removal.......................................... 5
3.05 Vacancies........................................ 5
3.06 Election of Directors............................ 5
3.07 Chairman of the Board of Directors............... 5
3.08 Place of Meetings................................ 5
3.09 First Meeting.................................... 5
3.10 Regular Meetings................................. 5
</TABLE>
i
<PAGE>
3.11 Special Meetings................................. 6
3.12 Quorum; Majority Vote............................ 6
3.13 Compensation..................................... 6
3.14 Procedure........................................ 6
3.15 Action Without Meeting........................... 6
3.16 Interested Directors, Officers and Shareholders.. 6
ARTICLE IV. COMMITTEES....................................... 7
4.01 Designation...................................... 7
4.02 Number; Qualification; Term...................... 7
4.03 Authority........................................ 7
4.04 Regular Meetings................................. 8
4.05 Special Meetings................................. 8
4.06 Quorum; Majority Vote............................ 9
4.07 Minutes.......................................... 9
4.08 Compensation..................................... 9
4.09 Responsibility................................... 9
4.10 Acquisition and Budget Committee................. 9
ARTICLE V. NOTICE........................................... 9
5.01 Method........................................... 9
5.02 Waiver........................................... 10
ARTICLE VI. OFFICERS AND AGENTS.............................. 10
6.01 Number; Qualification; Election; Term............ 10
6.02 Removal.......................................... 11
6.03 Vacancies........................................ 11
6.04 Authority........................................ 11
6.05 Compensation..................................... 11
6.06 Executive Chairman of the Board.................. 11
6.07 Chief Executive Officer.......................... 11
6.08 President........................................ 11
6.09 Vice President................................... 12
6.10 Secretary........................................ 12
6.11 Assistant Secretary.............................. 12
6.12 Treasurer........................................ 12
6.13 Assistant Treasurer.............................. 13
ii
<PAGE>
ARTICLE VII. CERTIFICATES AND SHAREHOLDERS.................... 13
7.01 Certificates..................................... 13
7.02 Issuance......................................... 13
7.03 Payment for Shares............................... 14
7.04 Subscriptions.................................... 14
7.05 Lien............................................. 14
7.06 Lost, Stolen or Destroyed Certificates........... 14
7.07 Registration of Transfer......................... 15
7.08 Registered Owner................................. 15
ARTICLE VIII. GENERAL PROVISIONS............................... 16
8.01 Dividends and Reserves........................... 16
8.02 Books and Records................................ 16
8.03 Annual Statement................................. 16
8.04 Checks and Notes................................. 17
8.05 Fiscal Year...................................... 17
8.06 Seal............................................. 17
8.07 Indemnification of Officers and Directors........ 17
8.08 Resignation...................................... 17
8.09 Limitation of Liability.......................... 17
8.10 Contracts........................................ 17
8.11 Loans............................................ 17
8.12 Nonexecutive Chairman of the Board............... 18
8.14 Conflicts........................................ 18
8.15 Persons and Numbers.............................. 18
8.16 Construction and Interpretation.................. 18
8.17 Table of Contents; Headings...................... 18
iii
<PAGE>
FIRST AMENDED AND RESTATED BYLAWS
OF
INTEGRATED ORTHOPAEDICS, INC.
(A TEXAS CORPORATION)
ARTICLE I. NAMES AND OFFICES
1.01 Name. The name of the Corporation shall be Integrated Orthopaedics,
Inc.
1.02 Principal Office. The principal office shall be 5858 Westheimer,
Suite 500, Houston, Texas 77057.
1.03 Other Offices. The Corporation may also have an office or offices at
such other place or places, within or without the State of Texas, as the Board
of Directors may from time to time designate or the business of the Corporation
may require.
ARTICLE II. SHAREHOLDERS' MEETINGS
2.01 Place of Meetings. All meetings of the shareholders for the election
of Directors shall be held at such time and place, within or without the State
of Texas, as shall be stated in the Notice of the Meeting or in a duly executed
Waiver of Notice thereof.
2.02 Annual Meeting. An Annual Meeting of the shareholders shall be held
at such place, within or without the State of Texas, on such date and at such
time as the Board of Directors shall fix each year as set forth in the notice of
meeting for the purpose of electing Directors and for the transaction of any and
all such other business as may be properly brought before or submitted to the
meeting.
2.03 Special Meetings. Special Meetings of the shareholders, for any
purpose or purposes, may be called by the President, the Board of Directors, or
the holders of fifty percent (50%) of all the shares entitled to vote at the
meetings. Business transacted at a Special Meeting shall be confined to the
objects stated in the Notice of the meeting.
2.04 Notice. Written or printed notice stating the place, day and hour of
the meeting and, in case of a Special Meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than ten (10) or more than
sixty (60) days before the date of the meeting, either personally or by mail, by
or at the direction of the President, the Secretary, or
<PAGE>
the officer or person calling the meeting, to each shareholder of record
entitled to vote at the meeting. If mailed, such Notice shall be deemed to be
delivered when deposited in the United States mail addressed to the shareholder
at his address as it appears on the stock transfer books of the Corporation,
with postage thereon prepaid.
2.05 Quorum. The holders of a majority of the shares issued and
outstanding and entitled to vote, represented in person or represented by proxy,
shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by statute, by the Articles
of Incorporation of the Corporation (the "Articles of Incorporation"), or by
these Bylaws. If a quorum is not present or represented at a meeting of the
shareholders, the shareholders entitled to vote, present in person or
represented by proxy, shall have power to adjourn the meeting until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified.
2.06 Majority Vote; Withdrawal of Quorum. When a quorum is present at any
meeting, the vote of the holders of a majority of the shares having voting
power, present in person or represented by proxy, shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of the statutes or of the Articles of Incorporation or of these
Bylaws, a vote of a greater number is required, in which case such express
provision shall govern and control the decision of such question. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2.07 Method of Voting. Each outstanding share, regardless of class, shall
be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders, except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation. At any
meeting of the shareholders, every shareholder having the right to vote may vote
either in person or by proxy executed in writing by the shareholder or by his
duly authorized attorney-in-fact. No proxy shall be valid after eleven (11)
months from the date of its execution, unless otherwise provided in the proxy.
Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless otherwise made irrevocable by law. Each proxy shall be
filed with the Secretary of the Corporation prior to or at the time of the
meeting. Voting for Directors shall be in accordance with Section 3.06 of these
Bylaws. Any vote may be taken by voice or by show of hands unless someone
entitled to vote objects, in which case written ballots shall be used. At all
elections of Directors, or any other case in which the inspectors may act, two
inspectors of election may be appointed by
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the Chairman of the meeting; provided that, the failure to appoint inspectors of
election shall not invalidate any action taken at any shareholders' meeting.
2.08 Voting List. At least ten (10) days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, with the address of each and the number
of voting shares held by each, shall be prepared by the officer or agent having
charge of the stock transfer books. The list, for a period of ten (10) days
prior to the meeting, shall be kept on file at the registered office of the
Corporation and shall be subject to inspection by any shareholder at any time
during usual business hours. The list shall also be produced and kept open at
the time and place of the meeting during the whole time thereof, and shall be
subject to the inspection of any shareholder during the whole time of the
meeting.
2.09 Record Date; Closing Transfer Books. The Board of Directors may fix
in advance a record date for the purpose of determining shareholders entitled to
notice of or to vote at a meeting of the shareholders, the record date to be not
less than ten (10) nor more than sixty (60) days prior to the meeting; or the
Board of Directors may close the stock transfer books for such purpose for a
period of not less than ten (10) nor more than sixty (60) days prior to such
meeting. In the absence of any action by the Board of Directors, the date upon
which the notice of the meeting is mailed shall be the record date.
2.10 Registered Shareholders. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact of
such share or shares for all purposes, and accordingly shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have express or other notice of
such claim or interest, except as expressly provided by the laws of the State of
Texas.
2.11 Action Without Meeting. Any action required by statute to be taken at
a meeting of the shareholders, or any action which may be taken at a meeting of
the shareholders, may be taken without a meeting, without prior notice, and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by holders of shares having not less than the minimum number of
votes that would be necessary to take such action at a meeting at which the
holders of all shares entitled to vote on the action were present and voted.
The signed consent, or a signed copy, shall be placed in the Minute Book.
2.12 Order of Business at Meetings; Rules of Meeting. The order of
business at Annual Meetings and, so far as practicable, at other meetings of
shareholders, shall be as
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follows unless changed by the Board of Directors in its sole discretion and
without notice requirements:
(1) Call to order;
(2) Proof of due notice of meeting;
(3) Determination of quorum and examination of proxies;
(4) Announcement of availability of voting list (see Bylaw 2.08);
(5) Announcement of distribution of annual statement (see Bylaw
7.03);
(6) Reading and disposing of minutes of last meeting of shareholders;
(7) Reports of officers and committees;
(8) Appointment of voting inspectors;
(9) Election of Directors;
(10) Report of voting inspectors;
(11) Unfinished business;
(12) New business; and
(13) Adjournment.
The rules that shall govern the meeting shall be those established by the Board
of Directors.
ARTICLE III. DIRECTORS
3.01 Management. The business and affairs of the Corporation shall be
managed by the Board of Directors who may exercise all such powers of the
Corporation and do all such lawful acts and things as are not (by statue or by
the Articles of Incorporation or by these Bylaws) directed or required to be
exercised or done by the shareholders.
3.02 Number; Qualifications; Election; Term. The Board of Directors shall
consist of at least two (2) Directors, none of whom need to be shareholders or
residents of any particular state. The first Board of Directors shall consist
of the number of Directors named in the Articles of Incorporation. Thereafter,
the number of Directors which shall constitute the entire Board of Directors
shall be determined by resolution of the Board of Directors at any meeting
thereof or by the shareholders at any meeting thereof; provided, however, that
at all times during which shares of the Corporation's Series B Convertible, Non-
Redeemable Preferred Stock, par value $0.01 per share (the "Series B
Preferred"), shall be outstanding, such number of Directors constituting the
entire Board of Directors shall not be greater than eight without the prior
affirmative vote (at a meeting duly called and held) or written consent of the
holders of two-thirds of the outstanding shares of Series B Preferred. The
Directors shall be elected at the Annual Meeting of the shareholders, except as
provided in Bylaws 3.03 and
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3.05. Each Director elected shall hold office until his successor shall be
elected and shall qualify.
3.03 Change in Number. Subject to the restrictions set forth in Section
3.02, the number of Directors may be increased or decreased from time to time by
amendment to these Bylaws, but no decrease shall have the effect of shortening
the term of any incumbent Director. Any directorship to be filled by reason of
an increase in the number of Directors shall be filled by election at an Annual
Meeting or at a Special Meeting of Shareholders called for that purpose.
3.04 Removal. Any Director may be removed, with or without cause, at any
Special or Annual Meeting of Shareholders by the affirmative vote of a majority
in number of shares of the shareholders present in person or by proxy at such
meeting and entitled to vote for the election of such Director if notice of
intention to act upon such matter shall have been given in the notice calling
such meeting.
3.05 Vacancies. Any vacancy occurring in the Board of Directors (by death,
resignation, removal or otherwise) may be filled by an affirmative vote of a
majority of the Directors then in office though less than a quorum of the Board
of Directors. A Director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office.
3.06 Election of Directors. Directors shall be elected by majority vote.
3.07 Chairman of the Board of Directors. The Board of Directors may elect
a Chairman to preside at all meetings of the Board of Directors and the
shareholders, and invest him with such powers and delegate to him such duties as
the Board of Directors may from time to time designate. In the event no
Chairman is elected, or the designated Chairman is unable to act, the President
shall preside at meetings of the Board of Directors.
3.08 Place of Meetings. Meetings of the Board of Directors, Regular or
Special, may be held either within or without the State of Texas.
3.09 First Meeting. The first meeting of each newly elected Board shall be
held without further notice, immediately following the Annual Meeting of
Shareholders, and at the same place, unless (by unanimous consent of the
Directors then elected and serving) such time or place shall be changed.
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3.10 Regular Meetings. Regular Meetings of the Board of Directors may be
held without notice at such time and place as shall from time to time be
determined by the Board.
3.11 Special Meetings. Special Meetings of the Board of Directors may be
called by the Chairman of the Board of Directors or the President on three (3)
days' notice to each Director, either personally or by mail or by telegram.
Special Meetings shall be called by the President or Secretary in like manner
and on like notice by a majority of the Directors. Except as otherwise
expressly provided by statute, or by the Articles of Incorporation, or by these
Bylaws, neither the business to be transacted at, nor the purpose of, any
Special Meeting need be specified in a Notice or Waiver of Notice.
3.12 Quorum; Majority Vote. At all meetings of the Board of Directors, a
majority of the Directors shall constitute a quorum for the transaction of
business. The act of a majority of the Directors present at any meeting at
which a quorum is present shall be the act of the Board of Directors, unless the
act of a greater number is required by statute or by the Articles of
Incorporation or by these Bylaws. If a quorum is not present at a meeting of
the Board of Directors, the Directors present may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.13 Compensation. By resolution of the Board of Directors, the Directors
may be paid their expenses, if any, of attendance at each meeting of the Board
of Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as Director. No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefore. Members of the executive committee or of a
special or standing committee may, by resolution of the Board of Directors, be
allowed like compensation for attending committee meetings.
3.14 Procedure. The Board of Directors shall keep regular minutes of its
proceedings. The Minutes shall be placed in the Minute Book of the Corporation.
3.15 Action Without Meeting. Any action required or permitted to be taken
at a meeting of the Board of Directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all the
members of the Board of Directors. Such consent shall have the same force and
effect as an unanimous vote at a meeting. The signed consent, or a signed copy,
shall be placed in the Minute Book.
3.16 Interested Directors, Officers and Shareholders. No contract or other
transaction between the Corporation and any of its Directors, officers or
shareholders (or any
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corporation or firm which any of them are directly or indirectly interested)
shall be invalid solely because of this relationship or because of the presence
of such Director, officer or shareholder at the meeting authorizing such meeting
or authorization provided that (a) the material facts of the relationship or
interest of each such Director, officer or shareholder are known or disclosed
and (b) the contract of transaction is fair to the Corporation as of the time it
is authorized or ratified by the Board of Directors, a committee of the Board or
the shareholders.
ARTICLE IV. COMMITTEES
4.01 Designation. The Board of Directors may, by resolution adopted by a
majority of the entire Board of Directors, designate one or more committees.
4.02 Number; Qualification; Term. The Board of Directors, by resolution
adopted by a majority of the entire Board of Directors, shall designate one or
more of its members as members of any committee and may designate one or more of
its members as alternate members of any committee, who may, subject to any
limitations imposed by the Board of Directors, replace absent or disqualified
members at any meeting of that committee. The number of committee members may
be increased or decreased from time to time by resolution adopted by a majority
of the entire Board of Directors. Each committee member shall serve as such
until the earliest of (i) the expiration of his term as Director, (ii) his
resignation as a committee member or as a Director, or (iii) his removal, as a
committee member or as a Director.
4.03 Authority. Each committee, to the extent expressly provided herein or
in the resolution establishing such committee, shall have and may exercise all
of the authority of the Board of Directors, including, without limitation, the
authority to authorize a distribution and to authorize the issuance of shares of
the Corporation. Notwithstanding the foregoing, however, no committee shall
have the authority of the Board of Directors in reference to:
(a) amending the Articles of Incorporation, except that a committee
may, to the extent provided in the resolution designating that
committee, exercise the authority of the Board of Directors
vested in it in accordance with Article 2.13 of the Texas
Business Corporation Act;
(b) proposing a reduction of the stated capital of the Corporation in
the manner permitted by Article 4.12 of the Texas Business
Corporation Act;
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(c) approving a plan of merger or share exchange of the Corporation;
(d) recommending to the shareholders the sale, lease, or exchange of
all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of its
business;
(e) recommending to the shareholders a voluntary dissolution of the
Corporation or a revocation thereof;
(f) amending, altering, or repealing these Bylaws or adopting new
Bylaws of the Corporation;
(g) filling vacancies in the Board of Directors;
(h) filling vacancies in, or designating alternate members of, any
committee;
(i) filling any directorship to be filled by reason of an increase in
the number of Directors;
(j) electing or removing officers of the Corporation or members or
alternate members of any committee;
(k) fixing the compensation of any member or alternate member of any
committee; or
(l) altering or repealing any resolution of the Board of Directors
that by its terms provides that it shall not be amendable or
repealable.
4.04 Regular Meetings. Regular meetings of any committee may be held
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
4.05 Special Meetings. Special meetings of any committee may be held
whenever called by any committee member. The committee member calling any
Special Meeting shall cause Notice of such Special Meeting, including therein
the time and place of such Special Meeting, to be given to each committee member
at least two days before such Special Meeting. Neither the business to be
transacted at, nor the purpose of, any Special Meeting of any committee need be
specified in the Notice or Waiver of Notice of any Special Meeting.
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4.06 Quorum; Majority Vote. At meetings of any committee, a majority of
the number of members designated by the Board of Directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the Articles of Incor poration, or
these Bylaws.
4.07 Minutes. Each committee shall cause minutes of its proceedings to be
prepared and shall report the same to the Board of Directors upon the request of
the Board of Directors. The minutes of the proceedings of each committee shall
be delivered to the secretary of the Corporation for placement in the Minute
Book of the Corporation.
4.08 Compensation. Committee members may, by resolution of the Board of
Directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
4.09 Responsibility. The designation of any committee and the delegation
of authority to it shall not operate to relieve the Board of Directors or any
Director of any responsibility imposed upon it or such Director by law.
4.10 Acquisition and Budget Committee. Notwithstanding any other provision
hereof, without the affirmative recommendation of a majority of the members of
the acquisition and budget committee of the Board of Directors, the Board of
Directors shall not (a) authorize or approve, and shall not permit any officer,
employee or representative of the Corporation to cause, the Corporation or any
subsidiary of the Corporation, directly or indirectly, to acquire all or a
substantial portion of the assets, properties or capital stock of, or otherwise
combine with, any individual, corporation, partnership, association, trust or
other entity or (b) authorize or approve a budget for the Corporation.
ARTICLE V. NOTICE
5.01 Method. Whenever by statute or the Articles of Incorporation or these
Bylaws, notice is required to be given to a Director or shareholder, and no
provision is made as to how the notice shall be given, it shall not be construed
to mean personal notice, but any such notice may be given (a) in writing, by
mail, postage prepaid, addressed to the Director or shareholder at the address
appearing on the books of the Corporation, or (b) in any other method permitted
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by law. Any notice required or permitted to be given by mail shall be deemed
given at the time when the same is thus deposited in the United States mails.
5.02 Waiver. Whenever, by statute or the Articles of Incorporation or
these Bylaws, notice is required to be given to a shareholder or Director, a
Waiver thereof in writing signed by the person or persons entitled to such
notice, whether before or after the time stated in such notice, shall be
equivalent to the giving of such notice. Attendance of a Director at a meeting
shall constitute a Waiver of Notice of such meeting, except where a Director
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
ARTICLE VI. OFFICERS AND AGENTS
6.01 Number; Qualification; Election; Term.
(a) The Corporation shall have:
(1) A President, a Vice President, a Secretary, and a Treasurer,
and
(2) Such other officers (including an Executive Chairman of the Board,
a Nonexecutive Chairman of the Board, a Chief Executive Officer and additional
Vice Presidents) and assistant officers and agents as the Board of Directors may
think necessary; provided, that, prior to April 1, 1999, the Executive Chairman
of the Board and the Chief Executive Officer of the Corporation must be elected
by at least three-fourths of the entire Board of Directors.
(b) No officer or agent need be a shareholder, a Director, or a
resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be elected by the Board
of Directors on the expiration of an officer's term or whenever a vacancy
exists. Officers and agents named in Section 5.01(a)(2) may be elected by the
Board at any meeting.
(d) Unless otherwise specified by the Board at the time of election or
appointment, or in an employment contract approved by the Board, each officer's
and agent's term shall end at the first meeting of Directors after the next
Annual Meeting of Shareholders. He shall serve until the end of his term or, if
earlier, his death, resignation, or removal.
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(e) Any two or more offices may be held by the same person.
6.02 Removal. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interests of the Corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
6.03 Vacancies. Any vacancy occurring in any office of the Corporation (by
death, resignation, removal or otherwise) may be filed by the Board of
Directors.
6.04 Authority. Officers and agents shall have such authority and perform
such duties in the management of the Corporation as are provided in these Bylaws
or as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws.
6.05 Compensation.
(a) The compensation of officers and agents shall be fixed from time
to time by the Board of Directors; provided, however, that all salary voted must
be no more than reasonable compensation for services rendered or to be rendered
to the Corporation.
(b) Any payments made to an officer of the Corporation such as salary,
commission, bonus, interest, rent, or entertainment expenses incurred by him,
which shall be disallowed in whole or in part as a deductible expenses by the
Internal Revenue Service, shall be reimbursed by such officer to the Corporation
to the full extent of such disallowance. It shall be the duty of the Directors,
as a Board, to enforce payment of such amount disallowed.
6.06 Executive Chairman of the Board. The Executive Chairman of the Board
shall have such powers and duties as may be prescribed by the Board of
Directors.
6.07 Chief Executive Officer. Unless otherwise provided by resolution of
at least three-fourths of the entire Board of Directors, the Executive Chairman
of the Board shall serve as Chief Executive Officer of the Corporation and shall
have such powers and duties as may be prescribed by the Board of Directors.
6.08 President. The President shall be the Chief Operating Officer of the
Corporation and shall perform such duties and have such authority and powers as
the Board of Directors and the Chief Executive Officer, if any, may from time to
time prescribe.
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6.09 Vice President. The Vice Presidents in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the Chairman of the Board or President, perform the duties and
have the authority and exercise the powers of the Chairman of the Board or
President. They shall perform such other duties and have such other authority
and powers as the Board of Directors may from time to time prescribe or as the
Chairman of the Board or President may from time to time delegate.
6.10 Secretary.
(a) The Secretary shall attend all meetings of the Board of Directors
and all meetings of the shareholders and record all votes and the Minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the Executive Committee when required.
(b) He shall give, or cause to be given, notice of all meetings of the
shareholders and Special Meetings of the Board of Directors
(c) He shall keep in safe custody the seal of the Corporation and,
when authorized by the Board of Directors or the Executive Committee, affix the
name to any instrument requiring it, and when so affixed, it shall be attested
by his signature or by the signature of the Treasurer or an Assistant Secretary.
(d) He shall be under the supervision of the President. He shall
perform such other duties and have such other authority and powers as the Board
of Directors may from time to time prescribe or as the President may from time
to time delegate.
6.11 Assistant Secretary. The Assistant Secretaries in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Secretary, perform the duties and have the
authority to exercise the powers of the Secretary. They shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe or as the President may from time to time delegate.
6.12 Treasurer.
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements of the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designed by the Board of Directors.
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(b) He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the President and Directors, at the Regular Meetings of the
Board, or whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Corporation.
(c) If required by the Board of Directors, he shall give the
Corporation a bond in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the Board for the faithful performance of the duties
of his office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property at whatever kind in his possession or under his control
belonging to the Corporation.
(d) He shall perform such other duties and have such other authority
and powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.
6.13 Assistant Treasurer. The Assistant Treasurers in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Treasurer, perform the duties and have the
authority to exercise the powers of the Treasurer. They shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe or the President may from time to time delegate.
ARTICLE VII. CERTIFICATES AND SHAREHOLDERS
7.01 Certificates. Certificates in the form determined by the Board of
Directors shall be delivered representing all shares to which shareholders are
entitled. Certificates shall be consecutively numbered and shall be entered in
the books of the Corporation as they are issued. Each certificate shall state
on the face thereof the holder's name, the number and class of shares, the par
value of shares or a statement that such shares are without par value, and such
other matters as may be required by law. They shall be signed by the President
or a Vice President and such other officer or officers as the Board of Directors
shall designate, and may be sealed with the seal of the Corporation or a
facsimile thereof. If any certificate is countersigned by a transfer agent, or
an assistant transfer agent or registered by a registrar (either of which is
other than the Corporation or an employee of the Corporation), the signature of
any such officer may be a facsimile.
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7.02 Issuance. Shares (both treasury and authorized but unissued) may be
issued for such consideration (not less than par value) and to such persons as
the Board of Directors may determine from time to time. Shares may not be issued
until the full amount of the consideration, fixed as provided by law, has been
paid.
7.03 Payment for Shares.
(a) Kind. The consideration for the issuance of shares shall consist
of money paid, labor done (including services actually performed for the
Corporation), or property (tangible or intangible) actually received. Neither
promissory notes nor the promise of future services shall constitute payment for
shares.
(b) Valuation. In the absence of fraud in the transaction, the
judgment of the Board of Directors as to the value of consideration received
shall be conclusive.
(c) Effect. When consideration, fixed as provided by law, has been
paid, the shares shall be deemed to have been issued and shall be considered
fully paid and nonassessable.
(d) Allocation of Consideration. The consideration received for
shares shall be allocated by the Board of Directors, in accordance with law,
between stated capital and capital surplus accounts.
7.04 Subscriptions. Unless otherwise provided, subscription of shares,
whether made before or after organization of the Corporation, shall be paid in
full at such time or in such installments and at such times as shall be
determined by the Board of Directors. Any call made by the Board of Directors
for payment on subscriptions shall be uniform as to all shares of the same
series, as the case may be. In case of default in the payment on any
installment or call when payment is due, the Corporation may proceed to collect
the amount due in the same manner as any debt due to the Corporation.
7.05 Lien. For any indebtedness of a shareholder to the Corporation, the
Corporation shall have a first and prior lien on all shares of its stock owned
by him and on all dividends or other distributions declared thereon.
7.06 Lost, Stolen or Destroyed Certificates. The Corporation shall issue a
new certificate in place of any certificate for shares previously issued if the
registered owner of the certificate:
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(a) Claim. Makes proof in affidavit form that it has been lost,
destroyed or wrongfully taken;
(b) Timely Request. Requests the issuance of a new certificate before
the Corporation has notice that the certificate has been acquired by a purchaser
for value in good faith and without notice of an adverse claim;
(c) Bond. Gives a bond in such form, and with such surety or
sureties, with fixed or open penalty, as the Corporation may direct, to
indemnify the Corporation (and its transfer agent and registrar, if any) against
any claim that may be made on account of the alleged loss, destruction, or theft
of the certificate; and
(d) Other Requirements. Satisfies any other reasonable requirements
imposed by the Corporation. When a certificate has been lost, apparently
destroyed or wrongfully taken, and the holder of record fails to notify the
Corporation within a reasonable time after he has notice of it, and the
Corporation registers a transfer of the shares represented by the certificate
before receiving such notification, the holder of record is precluded from
making any claim against the Corporation for the transfer or for a new
certificate.
7.07 Registration of Transfer. The Corporation shall register the transfer
of a certificate for shares presented to it for transfer if:
(a) Endorsement. The certificate is properly endorsed by the
registered owner or by his duly authorized attorney;
(b) Guaranty and Effectiveness of Signature. The signature of such
person has been guaranteed by a national banking association or member of the
New York Stock Exchange, or reasonable assurance is given that such endorsements
are effective;
(c) Adverse Claims. The Corporation has no notice of an adverse claim
or has discharged any duty to inquire into such a claim; and
(d) Collection of Taxes. Any applicable law relating to the
collection of taxes has been complied with.
7.08 Registered Owner. Prior to due presentation for registration for
transfer of a certificate for shares, the Corporation may treat the registered
owner as the person exclusively
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entitled to vote, to receive notices and otherwise to exercise all the rights
and powers of a shareholder.
ARTICLE VIII. GENERAL PROVISIONS
8.01 Dividends and Reserves.
(a) Declaration and Payment. Subject to provisions of applicable
statutes and the Articles of Incorporation, dividends may be declared by the
Board of Directors at any regular or Special Meeting and may be paid in cash, in
property, or in shares of the Corporation. The declaration and payment shall be
at the discretion of the Board of Directors.
(b) Record Date. The Board of Directors may fix in advance a record
date for the purpose of determining shareholders entitled to receive payment of
any dividend, the record date to be not more than sixty (60) days prior to the
payment date of such dividend, or the Board of Directors may close the stock
transfer books for such purpose for a period of not more than sixty (60) days
prior to the payment date of such dividend. In the absence of any action by the
Board of Directors, the date upon which the Board of Directors adopts the
resolution declaring the dividend shall be the record date.
(c) Reserves. By resolution the Board of Directors may create such
reserve or reserves out of the earned surplus of the Corporation as the
Directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the Corporation, or for any other purpose they think beneficial to the
Corporation. The Directors may modify or abolish any such reserve in the manner
in which it was created.
8.02 Books and Records. The Corporation shall keep correct and complete
books of account and shall keep Minutes of the proceedings of its shareholders
and Board of Directors, and shall keep at its registered office or principal
place of business, or at the office of its transfer agent or register, a record
of its shareholders, giving the names and addresses of all shareholders and the
number and class of the shares held by each.
8.03 Annual Statement. At the request of any holder of record of any
shares, the Corporation shall mail to each shareholder within a reasonable time
an annual statement for its last fiscal year showing in reasonable detail its
assets and liabilities, and the results of its operations. The Corporation
shall also mail to each shareholder its most recent interim statement if such
statement has been filed for public record.
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8.04 Checks and Notes. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
8.05 Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
8.06 Seal. The Corporate seal (of which there may be one or more
exemplars) shall contain the name of the Corporation and the name of the state
of incorporation. The seal may be used by impressing it or reproducing a
facsimile of it.
8.07 Indemnification of Officers and Directors. Each Director or officer,
whether or not then in office, subject always to the provisions of the laws of
the State of Texas and the Articles of Incorporation, shall be indemnified by
the Corporation against all costs and expenses (including counsel fees)
reasonably incurred by or imposed upon him in connection with or arising out of
any action, suit or proceeding which he may be for any reason involved by reason
of his being or having been a director or officer of the Corporation, such
expense to include the costs of any settlement which has been approved by the
Board of Directors (other than amounts to be paid to the Corporation itself),
made with the view to curtailment of costs of litigation. Such indemnification
shall be to the full extent as provided for in Article 2.02-1, as it presently
exists and as it is amended.
8.08 Resignation. Any Director, officer or agent may resign by giving
written notice to the President or the Secretary. The resignation shall take
effect at the time specified therein, or immediately if no time is specified
therein. Unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
8.09 Limitation of Liability. Each Director shall be availed of the
provisions of any limitation of director liability as provided for in the
Articles of Incorporation.
8.10 Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
8.11 Loans. No loan shall be contracted on behalf of the Corporation and
no evidence of indebtedness shall be issued in its name unless authorized by
resolution of the Board of Directors. Such authority may be general or confined
to specific instances
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8.12 Nonexecutive Chairman of the Board. The Board of Directors may
appoint a Nonexecutive Chairman of the Board. The Nonexecutive Chairman of the
Board shall not be an officer of the Corporation and shall have no power or
authority to manage the business or affairs of the Corporation (or otherwise
bind the Corporation in any manner). The Nonexecutive Chairman of the Board
may, but need not be, a Director of the Corporation and shall serve such roles
as may be prescribed by the Board of Directors.
8.13 Amendment of Bylaws. Subject to any limitations imposed by the
Articles of Incorporation (or any Certificate of Designation filed in connection
therewith), these Bylaws may be altered, amended or repealed at any meeting of
the Board of Directors at which a quorum is present by the affirmative vote of a
majority of the Directors present at such meeting, provided notice of the
proposed alteration, amendment or repeal is contained in the notice of such
meeting.
8.14 Conflicts. In the event of a direct conflict between the provisions
of these Bylaws and the mandatory provisions of the Texas Business Corporation
Act or the provisions of the Articles of Incorporation (including any
Certificate of Designation thereto), such provisions of the Texas Business
Corporation Act or the Articles of Incorporation, as the case may be, will be
controlling.
8.15 Persons and Numbers. Whenever the context so requires, the masculine
shall include the feminine and neuter, and the singular shall include the
plural, and conversely.
8.16 Construction and Interpretation. The place of these Bylaws, their
status and their forum shall be at all times in the State of Texas; and these
Bylaws shall be governed by the laws of the State of Texas as to all matters
relating to their validity, construction and interpretation. In the event that
any Court of competent jurisdiction shall adjudge any portion of these Bylaws to
be invalid or inoperative, then, so far as is reasonable and possible:
(a) The remainder of these Bylaws shall be considered valid and
operative; and
(b) Effect shall be given to the intent manifested by the portion of
these Bylaws held invalid or inoperative.
8.17 Table of Contents; Headings. The Table of Contents and headings are
for organization, convenience, and clarity. In interpreting these Bylaws, they
shall be subordinated in importance to the other written material.
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I HEREBY CERTIFY that the foregoing is a true, complete and correct
copy of the Bylaws of Integrated Orthopaedics, Inc., a Texas corporation, as in
effect on the date hereof.
IN WITNESS WHEREOF, I hereunder set my hand and affix the seal of the
Corporation, this the ___ day of December, 1997.
INTEGRATED ORTHOPAEDICS, INC.
By_____________________________________
JEFFERSON R. CASEY, Secretary
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EXHIBIT 10.11
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into to be
effective on November 15, 1997 between Integrated Orthopaedics, Inc., f/k/a DRCA
Medical Corporation, a Texas corporation (the "Company"), and Jose E. Kauachi an
individual resident of the State of Texas (the "Executive").
W I T N E S S E T H
WHEREAS, the Company and the Executive are currently parties to an
Executive Employment Agreement dated November 15, 1994 (the "1994 Agreement");
WHEREAS, the Company and the Executive desire to replace the 1994 Agreement
with this Agreement and provide for the continued employment of the Executive by
the Company upon the terms and subject to the conditions set forth herein;
NOW THEREFORE, in consideration of the premises, the mutual covenants and
agreements herein contained, and other good and valuable consideration, the
receipt, adequacy and sufficiency of which hereby are acknowledged, the parties
agree as follows:
1. Employment. The Company hereby employs the Executive, and the
Executive hereby accepts such employment upon the terms and subject to the
conditions set forth in this Agreement. During the term of his employment, the
Executive shall perform such duties and services as the Chairman of the Board of
Directors of the Company (the "Board") and Chief Executive Officer of the
Company (the "CEO") as shall be lawfully prescribed by the Board in connection
with the business and operations of the Company.
2. Term.. The Executive shall be employed by the Company for a period
commencing on November 15, 1997 and, except as otherwise provided herein, ending
three years from such date; provided. however, that if this Agreement is not
terminated pursuant to the provisions hereof, this Agreement shall be
automatically extended for successive one-year periods. The period of the
Executive's employment hereunder, including any extensions pursuant to the
foregoing sentence, is referred to hereinafter as the "Term of Employment."
3. Nature of Service. During the Term of Employment, the Executive
agrees to perform such services consistent with his position as may from time to
time be assigned to him by the Board. In the event the Executive is removed or
voluntarily resigns as the Chief Executive Officer of the Company and continues
to serve as Chairman of the Board during the term of this Agreement, the
Executive's responsibilities hereunder (hereinafter, the "Executive's
Responsibilities") will include the following: (1) management of the Board's
activities, including dissemination of information to and communications with
the members of the Board, scheduling regular and special meetings of the Board,
review of Board recruitment, expansion, and compensation issues; (2) management
of the Company's
EXECUTIVE EMPLOYMENT AGREEMENT
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investment banking relations, including search, evaluation, and negotiation for
services; (3) participation in the Company's relations with the American Stock
Exchange (and such other securities exchanges in which the Company's securities
are traded); (4) involvement in the Company's merger and acquisition activities;
(5) participation in the formulation of the Company's corporate strategy; (6)
participation in the Company's audit, compensation, and acquisitions committees.
The Executive's level of involvement in the Executive's Responsibilities will be
commensurate with the Executive's experience and seniority. The Executive shall
not, during the Term of Employment, be engaged in, or represent any party other
than the Company in connection with, any sale or provision of any services which
are directly competitive with services provided by the Company, whether or not
during normal business hours. The Executive shall perform his duties under this
Agreement with fidelity and loyalty, and in a manner consistent with the level
of his responsibilities. However, nothing in this Section 3 shall be construed
to prevent the Executive from investing his time or personal assets in such form
or manner in the operation of the affairs of any other companies or enterprises
so long as the Executive fulfills his obligations under this Agreement
(hereinafter referred to as the "Permitted Activities").
4. Compensation.
(a) During the Term of Employment, the Company shall pay to the
Executive a base salary in equal monthly installments to be paid in accordance
with established payroll practices of the Company. The amount of the base
salary for the Term of Employment shall be an aggregate of $300,000.00 per year
commencing November 15, 1997.
(b) The Executive shall be entitled to receive salary increases or other
forms of compensation commensurate with the policies of the Company as
administered and approved by the Board.
(c) The Executive shall be entitled to participate in all plans approved
by the Board for incentive stock options or cash bonuses for executive
employees, at levels not less than those at which the Executive is currently
participating, based upon the business, operations, affairs and condition
(financial or otherwise) of the Company.
(d) The Executive will retain all rights to options or warrants granted
by the Company to the Executive under any previous option, warrant or
compensation plans of the Company.
5. Benefits. The Executive shall receive the employee benefits set forth
on Exhibit A attached hereto as well as such other reasonable insurance
(including directors and officers liability insurance if obtained for any
officer or director), pension and other employee benefits as may be provided by
the Company from time to time to employees of the Company holding executive
offices and positions, all as approved by the Board of Directors of the Company.
EXECUTIVE EMPLOYMENT AGREEMENT
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6. Reimbursement of Expenses. The Company shall reimburse the Executive
for all reasonable and proper travel and out-of-pocket expenses incurred by him
for the purposes of and in connection with the performance of his duties
pursuant to this Agreement, all in accordance with the policies relating to the
allowable amount of such expenses and the provision of itemized reports with
respect thereto that may from time to time be adopted by the Board.
7. Automobile and Phone. During the Term of Employment, the Executive
shall have the full use of an automobile and wireless telephone provided by the
Company for the performance of the Executive's duties hereunder. The Company
shall reimburse the Executive for the costs and expenses incurred in connection
with the operation of such automobile and telephone upon presentation by the
Executive to the Company of an itemized account of such costs and expenses, to
be rendered to the Company in accordance with established reporting procedures
of the Company.
8. Termination.
(a) Termination for Cause.
(1) The Executive's employment under this Agreement may be
terminated for cause at any time, effective upon ten (10) days prior written
notice after formal action by the Board at a special meeting duly called for the
purpose of considering the termination of the Executive for cause where the
Board decides to terminate for cause, as defined herein. The Executive shall
have the right to receive notice of and appear at such meeting to respond to any
allegations made against him concerning the contemplated termination. As used in
this Agreement, "cause" shall be deemed to mean one or more of the following:
(i) the Executive's embezzlement or misappropriation of funds, (ii) the
Executive's conviction of a felony involving moral turpitude, (iii) the
Executive's commission of material acts of dishonesty, fraud, or deceit, (iv)
the Executive's breach of any material provision of this Agreement, (v) the
Executive's habitual or willful neglect of his duties, (vi) the Executive's
breach of fiduciary duty to the Company involving personal profit, or (vii) the
Executive's material violation of any other material duty to the Company or its
shareholders imposed by law or by the Board.
(2) In the event that the Board acts to terminate the Executive
for cause in accordance with subsection (1) above, the Executive shall be paid
all compensation and other sums due to him through the date of such termination,
including, without limitation, reimbursements for allowable expenses incurred by
the Executive.
(b) Termination Without Cause.
(1) The Company may, at any time, terminate this Agreement without
cause upon at least sixty (60) days prior written notice to the Executive. The
effective date of any such termination without cause shall be the last day of a
calendar month (hereinafter, the "Without Cause Termination Date"). As used in
this Agreement,
EXECUTIVE EMPLOYMENT AGREEMENT
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termination out cause" means termination of employment other than as follows:
(i) termination pursuant to Section 8 (a) of this Agreement; (ii) termination
pursuant to Section 8(c) of this Agreement; or (iii) termination pursuant to
Section 8(d) of this Agreement. Termination of employment without cause also
includes any change, without the Executive's prior written consent, in the
Executive's positions or titles with the Company on the date of this Agreement,
including, without limitation, the removal of the Executive, by either the vote
of the shareholders or the Board, as a director or as Chairman of the Board, or
any material change in the Executive's duties and responsibilities or benefits
or compensation as they exist on the date of this Agreement, including, without
limitation, a material change in the Executive's Responsibilities following
removal or voluntary resignation of the Executive as CEO.
(2) Commencing with the date immediately subsequent to the Without
Cause Termination Date and continuing until the later of (i) November 15, 2001
or (H) one year following the Without Cause Termination Date (the "Severance
Period"), the Executive shall be paid $300,000 per year payable in accordance
with normal payroll practices of the Company, but no less frequently than in
monthly installments, plus any cash or property approved for payment by the
Board under any plans for incentive stock options or cash bonuses to executive
employees with duties and responsibilities comparable to those held by the
Executive immediately prior to the Severance Period (the "Severance Payments").
(3) During the Severance Period, the Executive shall be entitled
to continued coverage under any health and life insurance plans or policies
maintained by the Company for the Executive individually or as a Company benefit
for some or all employees of the Company. Such coverage shall be on the same
terms and conditions as are in effect on the effective date of the Executive's
termination without cause. In addition, during the first year of the Severance
Period, the Executive shall be entitled to the automobile and related expenses
benefits on the terms described in Section 7 of this Agreement. If the Executive
is a participant in an incentive stock option or other equity participation
plan, his unvested stock options will be deemed vested on the Without Cause
Termination Date and thereafter exercisable as provided for in such plan.
(4) If the Executive's employment with the Company is terminated
without cause, the Company shall release the Executive from liability for any
and all acts or omissions of the Executive except for the Executive's gross
negligence or willful misconduct.
(c) Termination Upon Death or Disability, If the Executive dies or
becomes permanently disabled to the extent that he is unable to perform his
duties under this Agreement, at such time as he is determined to be permanently
disabled or upon his death (hereinafter, the "Death or Disability Date"), his
employment shall be deemed terminated; provided, however, the Executive, his
heirs, or assigns, as applicable, shall receive a death or disability benefit
(hereinafter, the "Death or Disability Benefit") equal to all amounts the
Executive would be entitled to receive, including, without limitation, Base
EXECUTIVE EMPLOYMENT AGREEMENT
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Salary (as in effect on the date immediately prior to the Death or Disability
Date), incentive stock options, and cash bonuses that would have been payable,
if the Agreement had not terminated, from the Death or Disability Date through
the later of (i) November 15, 2000 or (ii) one year following the Death or
Disability Date. The Death or Disability Benefit shall be paid in accordance
with the normal payroll practices of the Company, but no less frequently than
monthly, commencing with the date of termination. Additionally, if the
Executive is a participant in an incentive stock option or other equity
participation plans, his unvested stock options will be deemed vested on the
Death or Disability Date and thereafter exercisable as provided for in such
plans. Except as provided herein, the Executive or his heirs or assigns, as
applicable, shall be entitled to no other benefits following the Death or
Disability Date. For purposes of this Agreement the term "permanently disabled"
shall mean the Executive's inability to perform services by reason of illness or
incapacity for a period of more than two (2) consecutive fun calendar months,
established by medical evidence reasonably satisfactory to the Company.
(d) Voluntary Termination by Executive. The Executive may terminate his
employment hereunder by giving the Company at least thirty days' prior written
notice of the effective date of his termination of employment. The Executive
shall be paid all compensation and other sums due to him through the date of
termination under this Section 8(d), including, without limitation,
reimbursements for allowable expenses incurred by the Executive.
9. Certain Covenants of the Executive.
(a) Except for the Permitted Activities, the Executive agrees that
during the Term of Employment and for a period of one year thereafter (the
"Prohibited Period") he will not (i) engage pr invest in any business in direct
competition with the business of the Company, or (ii) otherwise act as a
director, officer, employee, agent, owner, partner or consultant to any such
business that is in direct competition with the Company. By way of example and
without in any way limiting the Permitted Activities, it is understood and
agreed that the Executive shall not be deemed to be in default with respect to
this Section 9 as a result of any investment he may make in not more than one
percent of the outstanding shares or other units of any security registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. As
used in this Section 9, "competition" shall mean the act of providing services
that directly or indirectly relate to the acquisition and management of
orthopaedic medical practices.
(b) During the Prohibited Period, neither the Executive nor any business
in which he serves as a director, officer, employee, agent, owner, partner or
consultant will (i) employ any person who possesses Proprietary Information (as
hereinafter defined) and who is then an employee of the Company, (ii) engage in
any action intended to influence or result in the employment of any such person
by the Executive or any such business or (iii) solicit the business of persons
or entities that were customers, patients or clients of the Company during the
Prohibited Period for the same or similar services that the Executive or
EXECUTIVE EMPLOYMENT AGREEMENT
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the Company provided to such customers, patients or clients during the Term of
Employment.
(c) During the Term of Employment or at any time thereafter, the
Executive shall not disclose or permit or cause to be disclosed, either directly
or indirectly, to any person any Trade Secrets (as defined below) without first
obtaining the written consent of the Company. During the Term of Employment and
the Prohibited Period, the Executive shall not disclose or permit or cause to be
disclosed, either directly or indirectly, to any person any Proprietary
Information. Notwithstanding the foregoing, (i) if any such Trade Secret or
Proprietary Information is or becomes generally available to the public (other
than as a result of disclosure directly or indirectly by the Executive), or (ii)
if any such Trade Secret or Proprietary Information is required to be disclosed
by any federal or state law, rule or regulation or by any applicable judgment,
order or decree or any court or governmental body or agency having jurisdiction
in the premises, the Executive shall be under no obligation of confidentiality
with respect to such information. Upon termination of this Agreement, the
Executive promptly shall return all originals and copies of such papers, lists,
documents and records of the Company that are in his possession, custody or
control. As used herein 'Trade Secrets" shall mean the whole or any portion or
phrase of technical information, design, process, procedure, formula or
improvement known or used by the Company or any of its affiliates that is
valuable and secret (in the sense that it is not generally known to competitors
of the Company). To the extent consistent with the foregoing, Trade Secrets
include (without limitation) the specialized information and technology that
provide the Company with an advantage over competitors or potential competitors
in its industry. As used herein, "Proprietary Information!" shall mean any and
all general and specific knowledge, experience and information and rights with
respect thereto, other than Trade Secrets, including, without limitation, know-
how, technical data, data bases, computer programs, processes, methods, plans,
customers, patient and client fists, designs, inventions, discoveries,
specifications, characteristics and technical information (patentable or
unpatentable), that is confidential or proprietary of the Company or any of its
affiliates.
(d) If the provisions contained in this Section 9 are more restrictive
than permitted by applicable law, the parties agree that the covenants contained
in this Section 9 shall be enforceable and in force to the extent permitted by
law.
10. Indemnification. The Company will indemnify, the Executive (and his
legal representatives or other successors) to the fullest extent permitted
(including payment of expenses in advance of final disposition of a proceeding)
by the laws of the jurisdiction of incorporation of the Company, as in effect at
the time of the subject acts or omission, or by the Articles of Incorporation
and Bylaws of the Company, as in effect at such time or on the effective date of
this Agreement, or by the terms of any indemnification agreement between the
Company and the Executive, whichever affords or afforded greatest protection to
the Executive, and the Executive, shall be entitled to the protection of any
insurance policies
EXECUTIVE EMPLOYMENT AGREEMENT
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the Company may elect to maintain generally for the benefit of its directors and
officers (and to the extent of the coverage available for any Company officer or
director), against all costs, charges and expenses whatsoever incurred or
sustained by him or his legal representatives at the time such costs, charges
and expenses are incurred or sustained, in connection with any action, suit or
proceeding to which he (or his legal representatives or other successors) may be
made a party by reason of his being or having been a director, officer or
employee of the Company, or any of its affiliates, or his serving or having
served any other enterprise as a director, officer, or employee at the request
of the Company.
11. Specific Performance. The Executive acknowledges and agrees that any
breach of his agreements or covenants contained in this Agreement would cause
irreparable injury to the Company for which the Company would have no adequate
remedy at law. In addition to any other remedy to which the Company may be
entitled, the Executive agrees that temporary and permanent injunctive relief
and other equitable relief and specific performance may be granted without proof
of actual damages or inadequacy of legal remedy in any proceeding that may be
brought by the Company to enforce any of the provisions of this Agreement.
12. Amendment. This Agreement may not be modified or amended except by a
written instrument executed by or on behalf of each of the parties.
13. Waivers. The observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) by the party entitled to enforce such term, but such waiver shall
be effective only if in a writing signed by the party or parties against which
such waiver is to be asserted. Unless otherwise expressly provided herein, no
delay or omission on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any waiver on
the part of any party of any right, power or privilege hereunder operate as a
wavier of any other right, power or privilege hereunder nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any right, power or privilege
hereunder. All remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
14. Entire Agreement. This Agreement and the documents expressly referred
to herein constitute the entire agreement between the parties with respect to
the matters covered hereby, and any other prior or contemporaneous oral or
written understandings or agreements with respect to the matters covered hereby
are expressly superseded by this Agreement. There are no unwritten or oral
agreements between the parties.
15. Severability. If any provision of this Agreement, or the application
of such provision to any person or circumstance, shall be declared judicially to
be invalid, unenforceable or void, such decision will not have the effect of
invalidating or voiding the remainder of this Agreement or affect the
application of such provision to other persons or circumstances, and the parties
agree that the part or parts of this Agreement so held to be invalid,
unenforceable or void will be deemed to have been stricken herefrom and the
EXECUTIVE EMPLOYMENT AGREEMENT
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remainder of this Agreement will have the same force and effect as if such part
or parts had never been included herein. Any such finding of invalidity or
unenforceability shall not prevent the enforcement of such provision in any
other jurisdiction to the maximum extent permitted by applicable law.
16. Notices. Unless otherwise expressly provided herein, all notices,
requests, demands, consents, waivers, instructions, approvals and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered to or mailed, certified mail, return receipt
requested, first-class postage paid, addressed as follows:
If to the Company: Integrated Orthopaedics, Inc.
5858 Westheimer, Ste. 500
Houston, Texas 77057
Attn: Board of Directors
If to the Executive: Jose E. Kauachi
4840 Post Oak Timber
Houston, Texas 77056
or to such other address or to such other individual as any party shall have
last designated by notice to the other party. All notices and other
communications given to any party in accordance with the provisions of this
Agreement shall be deemed to have been given when delivered or sent to the
intended recipient thereof in accordance with the provisions of this Section 16.
17. Governing Law: Forum: Consent to Jurisdiction. This Agreement shall
be construed in accordance with, and the rights of the parties governed by, the
laws of the State of Texas without regard to the principles of conflict of laws.
The parties agree that all disputes in any way relating to, arising under,
connected with, or incident to this Agreement, and over which the federal courts
have subject matter jurisdiction, shall be litigated, if at all, exclusively in
the United States District Court for the Southern District of Texas, Houston
Division, and, if necessary, the corresponding appellate courts. The parties
further agree that all disputes in any way relating to, arising under, connected
with, or incident to this Agreement, and over which the federal courts do not
have subject matter jurisdiction shall be litigated, if at all, exclusively in
the Courts of the State of Texas, in Harris County, and, if necessary, the
corresponding appellate, courts. The parties expressly submit themselves to the
personal jurisdiction of the State of Texas.
18. Successors and Assigns.
(a) Except as otherwise expressly provided herein, the Executive
agrees on behalf of himself and his executors and administrators, heirs,
legatees, distributees and any other person or persons claiming any benefit
under him by virtue of this Agreement, that this Agreement and the rights,
interests and benefits hereunder shall not be assigned,
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transferred, pledged or hypothecated in any way by the Executive or any
executor, administrator, heir, legatee, distributee or person claiming under the
Executive by virtue of this Agreement and shall not be subject to execution,
attachment or similar process. Any attempt at assignment, transfer, pledge or
hypothecation or other disposition of this Agreement or of such rights, interest
and benefits contrary to the foregoing provision, or the levy of any attachment
or similar process thereupon, shall be null and void and without effect.
(b) The Company's covenants and agreements hereunder shall inure to the
benefit of and be enforceable by or against the Company's successors or assigns.
The terms "successors" and "assigns" shall include the Company or any person
that owns or operates the business of the Company after a change of control.
The term "change of control" shall mean: (i) the acquisition by another person
or group of persons of 35% of shares of common stock of the Company (other than
through a merger, consolidation, or business combination with another physician
practice or management company), (ii) a majority change in the Board, (iii) a
merger, consolidation, or similar transaction with another entity in which the
Company is not the surviving entity or in which the Company's shareholders do
not own a majority of the shares in the combined entity, or (iv) a sale or all
or substantially all of the Company's assets.
19. Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person or entity not
a party to this Agreement (except as provided in Section 18).
20. Obligations of the Company. Subject to Section 18, the Executive
agrees to look solely to the Company for the performance of all of the Company's
obligations under this Agreement, and no other person or entity, including
without limitation any shareholder or creditor of the Company, shall, have any
liability for the performance of any of the obligations of the Company under
this Agreement.
21. Headings. The section headings in this Agreement are for convenience
of reference only and shall not be deemed to alter or affect the meaning or
interpretation of any provisions hereof.
22. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument. I
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered to
be effective as of the date first above written.
THE COMPANY:
Integrated Orthopedics, Inc.
By:______________________________
Name:____________________________
Title:___________________________
THE EXECUTIVE
_________________________________
Jose E. Kauachi
EXECUTIVE EMPLOYMENT AGREEMENT
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EXHIBIT A
EXECUTIVE BENEFITS
During the Term of Employment, the Executive shall be entitled to the
following benefits, in addition to those provided for elsewhere in this
Agreement:
1. Major medical health insurance coverage as provided by the Company to all
of its employees, but in addition coverage on the same terms for the
members of the immediate family of the Executive.
2. Long-term disability insurance coverage equal to 50% of the annual Base
Salary of the Executive.
3. $1,000,000 term life insurance coverage on the life of the Executive, with
the Executive having the sole right to name the beneficiary.
4. The Executive will have the unlimited right to "piggyback" on any public
registration statement filed by the Company. Whenever the Company shall
propose to file a registration statement under the Securities Act of 1933,
as amended, ("Securities Act") relating to the public offering of
securities of the Company, including, without limitation, in connection
with any stock option plan or stock purchase, savings or similar plan, or
an acquisition, merger or exchange of common stock, or the public offering
of any security convertible into common stock the Company shall (a) give
written notice at least thirty (30) days prior to the filing thereof to the
Executive, specifying the date on which the Company proposes to file such
registration statement and advising the Executive of his right to have any
or all of the Executive's securities included, and (b) at the written
request of the Executive given to the Company prior to the proposed filing
date (which request shall specify the securities to be registered and/or
sold), include among the securities covered by such registration statement
the securities which the Executive shall have requested be so included,
without expense to the Executive (except for the fees and expenses of
consultants to the Executive and any underwriters, or brokers, commissions,
SEC filing fees or expenses applicable to the securities being sold by the
Executive), for sale in the same manner and under the same terms and
conditions as contemplated for the securities originally to be included in
such registration statement.
EXECUTIVE EMPLOYMENT AGREEMENT
Page 11
<PAGE>
EXHIBIT 10.12
<PAGE>
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
December 12, 1997
Mr. Jose E. Kauachi
4840 Post Oak Timber
Houston, Texas 77056
Re: Termination of Employment Agreement
Dear Mr. Kauachi:
The purpose of this letter agreement is to set forth our agreement as to
certain matters pertaining to your relationship with Integrated Orthopaedics,
Inc., a Texas corporation (the "Company"). Reference is made to (i) that
certain Securities Purchase Agreement, dated as of December 12, 1997 (the
"Purchase Agreement"), by and among FW Integrated Orthopaedics Investors, L.P.,
a Texas limited partnership ("FW IOI"), FW Integrated Orthopaedics Investors II,
L.P., a Texas limited partnership (together with FW IOI, the "Purchasers"), the
Company, and, for certain limited purposes, certain other parties thereto, which
provides for the purchase by Purchasers of certain securities of the Company;
and (ii) that certain Executive Employment Agreement, dated as of November 14,
1997 (the "November 1997 Employment Agreement"), by and between you and the
Company.
In connection with the consummation of the transactions evidenced by the
Purchase Agreement and in consideration thereof, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, you and
the Company hereby (i) terminate the November 1997 Employment Agreement and you
hereby (without the necessity of any other documentation) forever discharge and
release the Company in all respects from any and all obligations of the Company
to you under the November 1997 Employment Agreement, including, but not limited
to, any obligation of the Company to pay money and/or provide other benefits to
you that might otherwise be required if your employment with the Company
terminated; and (ii) agree to enter into a Consulting Agreement in substantially
the form attached hereto, which Consulting Agreement shall control your
relationship with the Company following the date hereof.
<PAGE>
Mr. Jose E. Kauachi
December 12, 1997
Page 2
Attached hereto is a list of all options and warrants for common stock of
the Company granted to you as an employee of the Company under any previous
option, warrant or compensation plans of the Company (collectively, "Options"),
indicating the grant date, exercise price, number of shares, and vesting
schedule for each Option. Notwithstanding the termination of the November 1997
Employment Agreement and notwithstanding any provisions to the contrary
contained in the Options, related agreements, or the Consulting Agreement, the
parties hereto acknowledge and agree that you will retain all rights under the
Options.
You hereby acknowledge and agree that you, in your capacity as a
shareholder of the Company, have received, or will receive, as valuable and
independent consideration for the termination of the November 1997 Employment
Agreement and the waiver and release set forth in this letter agreement,
monetary benefits derived from the consummation of the transactions contemplated
by the Purchase Agreement.
The validity, interpretation, construction and performance of this letter
agreement shall be governed by the substantive laws of the State of Texas,
without giving effect to the principles of conflict of laws of such State.
If the foregoing sets forth the agreement of you and the Company with
regard to the matters addressed herein, please so evidence by signing the
attached duplicate original of this letter in the space provided for your
signature and returning it to the undersigned, whereupon the provisions hereof
will constitute a binding agreement.
Sincerely,
INTEGRATED ORTHOPAEDICS, INC.
By:________________________________
Title:_____________________________
AGREED TO AND ACCEPTED:
______________________________
JOSE E. KAUACHI
<PAGE>
Mr. Jose E. Kauachi
December 12, 1997
Page 3
JOSE E. KAUACHI
<TABLE>
<CAPTION>
Number of Date Expiration Strike
Type of Security Shares Granted Granted Date Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warrant 100,000 02/23/89 02/22/1999 $2.125
Employee Stock Option (1988 Plan) 50,000 02/02/95 02/01/2005 $2.500
Employee Stock Option (1997 Plan) 50,000 06/30/97 06/29/2007 $5.125
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.13
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT is made as of the 6th day of October, 1997, by and between
Integrated Orthopaedics, Inc., a Texas corporation (the "Company") and John B.
McGinty, M.D. ("Consultant").
W I TN E S S E T H
WHEREAS, the purpose of this Consulting Agreement (the "Agreement") is to
confirm the engagement of Consultant by the company to render certain consulting
services to the Company; and
WHEREAS, the parties hereto desire to set forth in writing their
understanding and agreement;
NOW THEREFORE, in consideration of the foregoing of the mutual promises
hereinafter set forth, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto, intending
to be legally bound, hereby agree as follows:
I.
GENERAL TERMS
Pursuant to this Agreement, Consultant will endeavor to do the following:
1. Identify and evaluate potential practice affiliations that clearly
would be mutually beneficial to the practice and the Company, and when
appropriate, provide an introduction to these practices.
2. Identify meetings and conferences which would expose the Company to
the orthopaedics community.
3. Provide general advice and insight into the physicians perspective as
new products, marketing techniques, advertising and promotions are developed for
potential acquisitions.
4. Provide to the Company the equivalent of one day per week in pursuit
of the above-referenced endeavors.
II.
TERM OF AGREEMENT
1. Initial Term. This Agreement shall be for a period of 12 months from
the date hereof. If not extended as provided below, this Agreement shall
terminate automatically at the end of the initial term.
<PAGE>
2. Extension of Agreement. At the end of the initial term and each 12
month term thereafter, this Agreement shall be extended for an additional term
of 12 months, provided that Consultant has satisfactorily performed its
obligations under this Agreement. Determination as to satisfactory performance
by Consultant shall be at the sole discretion of the Board of Directors of the
Company, a majority vote of which shall be required to either extend or
terminate the Agreement. Notice of extension or termination must be given in
writing to Consultant at least 30 days before the expiration of any 12 month
term.
3. Sole Remedy. The Company's sole remedy if it is dissatisfied with
Consultant's performance hereunder shall be to elect not to extend the Agreement
and to seek recovery of any fees previously paid Consultant hereunder. The
Company hereby waives any and all rights to claim consequential damages.
III.
COMPENSATION
As compensation for the services of Consultant hereunder, the Company shall
pay Consultant the sum of $4,000.00 per month, which amount is intended to cover
Consultant's fee. All reasonable and customary out-of-pocket expenses incurred
by Consultant in its performance under the Agreement will be reimbursed to
Consultant, provided that any single expense, other than travel related
expenses, in excess of $300.00 must be pre-approved by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date and year set forth above.
By: ____________________________
Name: John B. McGinty, M.D.
Date: __________________________
Integrated Orthopaedics, Inc.
By: ____________________________
Name: __________________________
Title: _________________________
Date: __________________________
<PAGE>
EXHIBIT 10.14
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (together with Exhibit A hereto, this
"Agreement") is entered into as of the 12th day of December, 1997, by and
between Integrated Orthopaedics, Inc., a Texas corporation (the "Company"), and
Jose E. Kauachi (the "Consultant").
WHEREAS, the Company desires to avail itself of the experience,
sources of information, advice and assistance of the Consultant on the terms and
conditions described in this Agreement; and
WHEREAS, the Consultant desires to make available to the Company his
experience, sources of information, advice and assistance on the terms and
conditions described in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
1. Consultation. The Consultant hereby agrees to render Consulting
Services (as hereinafter defined) to the Company during the Consulting Period
(as hereinafter defined). "Consulting Services" mean such management consulting
services as the Company may reasonably request from time to time. The
Consultant agrees to devote such of his business time and efforts to providing
the Consulting Services as is reasonably requested by the Company, but shall not
be required to devote more than 140 hours per month to the provision of such
Consulting Services. Notwithstanding any provision to the contrary contained
herein, the Consultant shall have no power or authority, and shall not directly
or indirectly hold himself out as having any power or authority, to act as an
executive, employee or agent of the Company or any of its subsidiaries or to
bind the Company or any of its subsidiaries to any oral or written contract,
commitment or arrangement.
2. Consulting Period. The Consultant shall render Consulting
Services to the Company for a period commencing on December 12, 1997 and ending
upon the earlier to occur of December 31, 2000 or the termination of this
Agreement pursuant to Section 5 hereof (the "Consulting Period").
3. Compensation and Benefits.
(a) Retainer Fee. As consideration for rendering the Consulting
Services, the Company agrees to pay the Consultant, during the Consulting Period
(and
1
<PAGE>
thereafter to the extent expressly provided in this Agreement), a monthly
retainer fee equal to $25,000 (to be grossed up for any incremental taxes due to
self employment, social security, medicare, and taxable benefits), payable on
the first business day of each calendar month during such period for the
immediately preceding calendar month.
(b) Non-Cash Compensation. During the Consulting Period (and
thereafter to the extent expressly provided in this Agreement), the Consultant
shall receive the special non-cash compensation set forth on Exhibit A attached
hereto.
4. Independent Relationship. At all times during the Consulting
Period, the Consultant is and shall be an independent contractor in providing
the Consulting Services hereunder. Nothing contained in this Agreement shall be
deemed or construed to create a partnership or joint venture, to create the
relationship of employee/employer or principal/agent, or otherwise create any
liability whatsoever as partners, joint venturers, employer, employee,
principal, or agent for either the Company or the Consultant.
5. Termination.
(a) Death or Disability. This Agreement shall terminate
automatically upon the death or total disability of the Consultant. For purposes
of this Agreement, "total disability" shall be deemed to have occurred if
Consultant shall have been unable to provide Consulting Services to the Company
for a period of three (3) consecutive months or for any sixty (60) working days
out of any period of six (6) consecutive months. Upon such termination for death
or total disability, the Company shall pay to the Consultant or his estate,
heirs or legal representative, as the case may be, a termination fee equal to
the amount of retainer fees set forth in Section 3(a) hereof (payable in
accordance with Section 3(a) hereof) through the later to occur of December 31,
2000 or the first anniversary of the date of death or total disability. Upon the
death of the Consultant, the Company will provide, through the later to occur of
December 31, 2000 or the first anniversary of the date of death, to the
Consultant's estate, heirs, legal representative, or family members, as the case
may be, the non-cash compensation items set forth in paragraphs 2 and 5 of
Exhibit A attached hereto. Upon the total disability of the Consultant, the
Company will provide, through December 31, 2000, to the Consultant (or his legal
representative, as the case may be) all of the non-cash compensation items set
forth on Exhibit A attached hereto. Except for the foregoing, the Company shall
have no further obligations to pay the Consultant or his estate, heirs or legal
representative any other fees or provide any other cash or non-cash compensation
pursuant to this Agreement upon the death or total disability of the Consultant.
(b) Termination for Cause. The Company may terminate this
Agreement for Cause (as hereinafter defined) upon ten (10) days' prior written
notice to the
2
<PAGE>
Consultant after formal action by the Board of Directors of the Company at a
regular or special meeting duly called where the Board of Directors of the
Company decides to terminate the Consultant for Cause. The Consultant shall have
the right to receive notice of and appear at such meeting to respond to any
allegations made against him concerning the contemplated termination. For
purposes of this Agreement, "Cause" shall be deemed to include (i) material acts
of fraud, dishonesty or deceit, (ii) competition with the Company or its
subsidiaries, (iii) unauthorized use of any of the Company's or its
subsidiaries' trade secrets or Confidential Information, (iv) conviction of a
felony involving moral turpitude, (v) any material violation of any other
material duty to the Company or its shareholders imposed by law or the Board of
Directors, or (vi) any breach of Consultant's representations, covenants, duties
and responsibilities hereunder. Upon such termination for Cause, the Company
shall pay to the Consultant, as soon as practicable after such termination, all
compensation of the Consultant accrued but unpaid in respect of periods ending
on or prior to such termination and the Company shall have no further
obligations to pay the Consultant any other fees or provide any other cash or
non-cash compensation pursuant to this Agreement.
(c) Termination Without Cause. The Company may terminate this
Agreement without Cause upon sixty (60) days' prior written notice to
Consultant. Upon such termination without Cause, the Company shall (i) pay to
the Consultant a termination fee (payable in accordance with Section 3(a)
hereof) equal to the amount of retainer fees set forth in Section 3(a) hereof
through December 31, 2001, (ii) provide, through December 31, 2001, to the
Consultant all of the non-cash compensation items set forth on Exhibit A
attached hereto, and (iii) release the Consultant from liability for any acts or
omissions of the Consultant except for the Consultants' gross negligence or
willful misconduct. Termination of this Agreement without Cause shall include
any action by the Board of Directors of the Company that results in the
Consultant being voted out as Nonexecutive Chairman of the Board of the Company
prior to December 31, 2000 (other than removal for cause in accordance with the
Articles of Incorporation and Bylaws of the Company as consistent with
definition of "Cause" set forth in Section 5(b) above).
(d) Termination by Consultant. The Consultant may terminate this
Agreement upon thirty (30) days' prior written notice to the Company. Upon
termination by the Consultant, the Company shall pay to the Consultant, as soon
as practicable after such termination, all compensation of the Consultant
accrued but unpaid in respect of periods ending on or prior to such termination
and the Company shall have no further obligations to pay the Consultant any
other fees or provide any other cash or non-cash compensation pursuant to this
Agreement.
6. Expense Reimbursement. Upon submission of properly documented
expense account reports, the Company shall reimburse the Consultant for all
reasonable travel
3
<PAGE>
and entertainment expenses incurred by the Consultant in the course of providing
Consulting Services to the Company; provided, however, that the Consultant shall
obtain the written consent of the Company prior to incurring any reimbursable
expense in excess of $5,000.
7. Representations by the Consultant. The Consultant hereby
represents and warrants to the Company that (a) the Consultant's execution and
delivery of this Agreement and his performance of his duties and obligations
hereunder will not conflict with, cause a breach or default under, or give any
party a right to damages under (or to terminate) any other agreement to which
the Consultant is a party or by which he is bound, and (b) there are no
restrictions, agreements or understandings that would make unlawful the
Consultant's execution or delivery of this Agreement or the performance of his
obligations hereunder.
8. Taxes and Other Deductions. The Consultant agrees that he will
be responsible for paying and withholding all taxes with respect to the fees and
other non-cash compensation payable hereunder, including without limitation,
income tax withholding and taxes, self-employment taxes, social security
contributions, and medicare contributions.
9. Confidentiality.
(a) Non-Disclosure Obligation. During the Consulting Period or
at any time thereafter, irrespective of the time, manner or cause of the
termination of this Agreement, the Consultant will not directly or indirectly
reveal, divulge, disclose or communicate to any person or entity, other than
authorized officers, directors, and employees of the Company, in any manner
whatsoever, any Confidential Information (as hereinafter defined) without the
prior written consent of the Company.
(b) Definition. As used herein, "Confidential Information" means
information disclosed to or known by the Consultant as a direct or indirect
consequence of providing the Consulting Services to the Company, or through his
prior service as an executive officer of the Company, about the Company or its
subsidiaries or their respective businesses, products and practices which
information is not generally known in the business in which the Company or its
subsidiaries, as the case may be, is or may be engaged. However, Confidential
Information shall not include under any circumstances any information with
respect to the foregoing matters which is (i) available to the public from a
source other than the Consultant or persons who are not under similar
obligations of confidentiality to the Company and who are not parties to this
Agreement, (ii) obtained by the Consultant from a third party not under a
similar obligation of confidentiality to the Company, (iii) required to be
disclosed by any court process or any government or agency or department of any
government, or (iv) the subject of a written waiver executed by the Company for
the benefit of the Consultant.
4
<PAGE>
(c) Return of Property. Upon termination of this Agreement, the
Consultant will surrender to the Company all Confidential Information, including
without limitation, all lists, charts, schedules, reports, financial statements,
books and records of the Company and its subsidiaries, and all copies thereof,
and all other property belonging to the Company. The Consultant shall be
accorded reasonable access to such Confidential Information subsequent to the
Consulting Period for any proper purpose as determined in the reasonable
judgment of the Company.
10. Non-Competition.
(a) Term and Scope. Subject to the other provisions of this
Section 10, from and after the date hereof until the date which is one year
after the termination of this Agreement in accordance with the terms hereof (the
"Noncompetition Term"), without the prior written consent of the Company, the
Consultant shall not directly or indirectly participate as a stockholder,
proprietor, partner, trustee, consultant, employee, director, officer, lender,
or investor in any entity that is engaged in a Competing Business (as defined
below) within a thirty mile radius of (i) any location in which the Company or
its subsidiaries presently conducts business or (ii) any location in which the
Company or its subsidiaries, during the Noncompetition Term, (x) has initiated
business acquisition or affiliation discussions with physician groups, (y) has
expressed a bona fide intent to conduct business or (z) conducts business. The
term "Competing Business" shall mean any business that competes with any
business engaged in by the Company or its subsidiaries during the Consulting
Period or during the period in which the Consultant was employed by the Company.
(b) Exception. Nothing contained herein shall limit the right of
the Consultant to hold and make investments in securities of any corporation or
limited partnership that is registered on a national securities exchange or
admitted to trading privileges thereon or actively traded in a generally
recognized over-the-counter market, provided the Consultant's equity interest
therein does not exceed 5% of the total outstanding shares or interests in such
corporation or partnership.
(c) Extension for Noncompliance. If, during any period within
the Noncompetition Term, the Consultant is not in compliance with the terms of
this Section 10, the Company shall be entitled to, among other remedies,
compliance by the Consultant with the terms of this Section 10 for an additional
period equal to the period of such noncompliance. For purposes of this
Agreement, the term "Noncompetition Term" shall also include such additional
period.
(d) Reasonableness. The Consultant hereby acknowledges that the
geographic boundaries, scope of prohibited activities and the time duration of
the provisions of
5
<PAGE>
this Section 10 are reasonable and are no broader than are necessary to protect
the legitimate business interests of the Company.
11. Non-Solicitation and Non-Interference. During the Noncompetition
Term, the Consultant shall not, directly or indirectly, (a) solicit the
employment of any current or future employee of the Company or its subsidiaries
without the prior written consent of the Company, (b) request, induce or attempt
to influence any employee of the Company or any of its subsidiaries to terminate
his or her employment with the Company or such subsidiary, or (c) request,
induce or attempt to influence any supplier, customer, patient or client of the
Company or any of its subsidiaries to terminate his, her or its relationship
with the Company or such subsidiary.
12. Injunctive Relief. The Consultant acknowledges that the breach
of the confidentiality, non-competition and non-solicitation covenants specified
in Sections 9 through 11 may give rise to irreparable injury to the Company,
inadequately compensable in money damages. Accordingly, the Company shall be
entitled to injunctive relief to prevent or cure breaches or threatened breaches
of such provisions of this Agreement and to enforce specific performance of the
terms and provisions hereof in any court of competent jurisdiction, in addition
to any other legal or equitable remedies which may be available. The Consultant
waives any requirements for the posting of a bond in connection with the
issuance of such an injunction. The Consultant further acknowledges and agrees
that the covenants contained herein are necessary for the protection of the
Company's legitimate business interests and are reasonable in scope and content.
13. Indemnification. The Company will indemnify and hold harmless
the Consultant from and against any liabilities, damages, costs (including
reasonable fees of attorneys) and expenses ("Damages") incurred by the
Consultant which arise out of or relate to the services provided by the
Consultant hereunder except to the extent such Damages result from the gross
negligence or willful misconduct of the Consultant. The Company will reimburse
the Consultant for such reasonable expenses (including legal fees and costs) in
advance of the final disposition of any proceeding involving the Consultant and
for which he is entitled to indemnification hereunder. The parties hereto
acknowledge that (a) the indemnification of the Consultant as a former employee
of the Company and as a director of the Company will be governed by the Articles
of Incorporation of the Company, the Bylaws of the Company, and the Company's
insurance coverage in effect at the applicable time (whichever affords the
Consultant the greater protection), and (b) such indemnification permits
(pursuant to Article 2.02-1K of the Texas Business Corporation Act) the
reimbursement of reasonable expenses (including legal fees and costs) in advance
of the final disposition of the proceeding involving the director or officer.
6
<PAGE>
14. Assignment. This Agreement will be binding upon the parties
hereto and their respective successors and permitted assignees. Because the
Consultant's duties and services hereunder are special, personal and unique in
nature, the Consultant may not transfer, sell or otherwise assign his rights,
obligations or benefits under this Agreement (and any attempt to do so will be
void).
15. Headings. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way affect, limit or
amplify the provisions hereof.
16. Notices. All notices and other communications required or
permitted hereunder must be in writing and (i) delivered personally, (ii)
delivered by a nationally recognized overnight courier service, or (iii) sent by
registered or certified mail, postage prepaid, as follows:
(a) If to the Company, to:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Attention: Chief Executive Officer
(b) If to the Consultant, to:
Jose E. Kauachi
4840 Post Oak Timber
Houston, Texas 77056
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Section 16 will (i) if delivered
personally or by overnight courier service, be deemed given upon delivery; and
(ii) if sent by registered or certified mail, be deemed given when received.
Any party from time to time may change its address for the purpose of notices to
that party by giving a similar notice specifying a new address, but no such
notice will be deemed to have been given until it is actually received by the
party sought to be charged with the contents thereof.
17. Invalid Provisions. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable under present or future laws, such
provision shall be fully severable, and this Agreement shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part of this Agreement; the remaining
7
<PAGE>
provisions of this Agreement shall remain in full force and effect and shall not
be affected by the illegal, invalid, or unenforceable provision or by its
severance from this Agreement. In lieu of each such illegal, invalid, or
unenforceable provision, there shall be added automatically as a part of this
Agreement a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and enforceable.
18. Entire Agreement; Amendments. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, if any, relating to the
subject matter hereof. This Agreement may be amended in whole or in part only
by an instrument in writing setting forth the particulars of such amendment and
duly executed by an executive officer of the Company and by the Consultant.
19. Waiver. No delay or omission by any party hereto to exercise any
right or power hereunder shall impair such right or power or be construed as a
waiver thereof. A waiver by any party hereto of any of the covenants to be
performed by any other party or any breach thereof shall not be construed to be
a waiver of any succeeding breach thereof or of any other covenant herein
contained. Except as otherwise expressly set forth herein, all remedies
provided for in this Agreement shall be cumulative and in addition to and not in
lieu of any other remedies available to any party at law, in equity or
otherwise.
20. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall constitute an original, and all of which
together shall constitute one and the same agreement.
21. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Texas, without regard to conflict of
laws principles thereof.
8
<PAGE>
IN WITNESS WHEREOF, the Company and the Consultant have executed this
Agreement as of the date first above written.
COMPANY:
INTEGRATED ORTHOPAEDICS, INC.
By:______________________________
Name:__________________________
Title:_________________________
CONSULTANT:
___________________________________
Jose E. Kauachi
9
<PAGE>
EXHIBIT A
NON-CASH COMPENSATION
The following benefits will be provided to the Consultant during the
Consulting Period (and thereafter to the extent expressly provided in this
Agreement):
1. The Company shall provide the Consultant with an automobile and wireless
telephone.
2. The Company shall provide major medical health insurance coverage for the
Consultant and those members of his immediate family whose primary residence is
the same as Consultant's primary residence. For purposes of the health
insurance coverage referenced in this subparagraph, the Consultant shall be
entitled to the same continuation coverage rights as would be available to an
employee of Company pursuant to the Consolidated Omnibus Budget Reconciliation
Act of 1985 (COBRA), 29 U.S.C. (S) 1168.
3. The Company shall provide long-term disability insurance coverage for the
Consultant equal to 50% of the monthly retainer fee payable pursuant to Section
3(a) of this Agreement.
4. The Company shall provide term life insurance coverage having a death
benefit of $1,000,000, payable, upon the death of the Consultant, to the
beneficiary or beneficiaries selected by the Consultant.
5. The Company shall provide the following registration rights to the
Consultant:
(a) Piggy-back Rights. Subject to the provisions of hereof, if the
Company at any time proposes to file on its behalf and/or on behalf of any of
its equity holders a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), on any form (other than a registration statement
on Form S-8 or any successor form for securities to be offered to employees of
the Company pursuant to any employee benefit plan) with respect to the
registration of shares of Common Stock, par value $.001 per share, of the
Company ("Common Stock"), the Company will give written notice to the
Consultant, at least 30 days before the initial filing with the Securities and
Exchange Commission of such registration statement, which notice shall set forth
the intended method of disposition of the Common Stock proposed to be registered
by the Company. Subject to the provisions hereof, the notice shall offer to
include in such filing the aggregate amount of shares of Common Stock that the
Consultant may request without expense to the Consultant (except for the fees
and expenses of the Consultant and any underwriters or brokers commissions, SEC
filing fees or expenses applicable to the securities being sold by the
Consultant).
(b) Procedure. The Consultant shall so advise the Company, in
writing, within 20 business days after the date of receipt of such offer from
the Company, setting forth
A-1
<PAGE>
the number of shares of Common Stock for which registration is requested by the
Consultant. The Company shall thereupon include in such filing the amount of
such Common Stock for which registration is so requested, subject to the next
two sentences, and shall use best efforts to effect registration under the
Securities Act of such Common Stock. If the managing underwriter of a proposed
public offering shall advise the Company in writing that, in its opinion,
including all the Common Stock requested by the Consultant to be included in
such registration would materially and adversely affect the price or success of
the offering (a "Material Adverse Effect"), then in such event the Common Stock
to be included in such offering shall be allocated first to the Company or the
holder initiating such request for registration, as appropriate, and then, to
the extent that any additional Common Stock can, in the opinion of such managing
underwriter or underwriters, be sold without any such Material Adverse Effect,
pro rata among the Consultant and other holders requesting their Common Stock to
be registered pursuant to similar piggy-back registration rights on the basis of
the number of shares of Common Stock requested to be included in such
registration of the Consultant and the number of shares of Common Stock
requested to be included in such registration of each other holder having
similar piggy-back registration rights. If the managing underwriter of a
proposed public offering shall advise the Company in writing that, in its
opinion, the distribution of any of the Common Stock requested by the Consultant
to be included in the registration concurrently with the Common Stock being
registered by the Company or such other equity holder would materially and
adversely affect the distribution of such Common Stock by the Company or such
other equity holder, then the Consultant shall have no right to have any of his
shares of Common Stock included in such registration. The Company may
discontinue registration of any of its Common Stock, subject to any rights of
other holders to the contrary, at any time prior to the effective date of the
registration statement relating thereto.
(c) Unlimited Rights. The Consultant shall be entitled to the
registration rights set forth in this section for so long as the Consultant owns
Common Stock or is entitled to receive Common Stock upon exercise of the warrant
held by the Consultant for 100,000 shares of Common Stock, regardless of the
number of times the Consultant is offered or has exercised such rights.
A-2
<PAGE>
EXHIBIT 10.15
<PAGE>
TERMINATION AND RELEASE AGREEMENT
THIS TERMINATION AND RELEASE AGREEMENT (this "Agreement") dated as of
December 31, 1997 (the "Effective Date"), is by and between INTEGRATED
ORTHOPAEDICS, INC., a Texas corporation ("IOI"), and JOSE E. KAUACHI
("Kauachi").
WHEREAS, pursuant to the terms of that certain Consulting Agreement
dated as of December 12, 1997 (the "Consulting Agreement"), by and between IOI
and Kauachi, Kauachi agreed to provide certain consulting services to IOI in
consideration of a retainer fee and other good and valuable consideration; and
WHEREAS, both IOI and Kauachi have determined that it is in their
respective best interests to terminate certain provisions of the Consulting
Agreement in accordance with the terms and provisions of this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Consulting Agreement. Notwithstanding the
foregoing, for purposes of this Agreement and the Consulting Agreement, (i) the
term "Consulting Period" shall mean the period commencing on December 12, 1997
and ending on December 31, 2000 and (ii) the term "Noncompetition Term" shall
mean the four-year period beginning on the Effective Date, except to the extent
that such time period is extended pursuant to Section 10(c) of the Consulting
Agreement.
2. As consideration for termination of certain provisions of the
Consulting Agreement, IOI hereby agrees to pay to Kauachi, on or before February
28, 1998, a lump sum amount equal to Eight Hundred Ten Thousand and No/100
Dollars ($810,000.00). Such payment shall be made by cashier's check, wire
transfer or other immediately available funds, as directed by Kauachi.
3. Except for Sections 3(b) (but only with respect to item 5
reflected on Exhibit A), 8, 9, 10, 11, 12, and 14 through 21 of the Consulting
Agreement which shall survive this Agreement, the Consulting Agreement is hereby
terminated in all respects effective as of the Effective Date. In accordance
with Section 9(c) of the Consulting Agreement, Kauachi hereby confirms that he
has delivered to IOI all Confidential Information in his possession or control.
4. As consideration for Kauachi's agreement to continue to be subject
to non-competition restrictions reflected in the surviving portions of the
Consulting Agreement as modified by this Agreement, IOI shall (i) extend the
period during which Kauachi can exercise certain of his IOI stock options as
reflected in Section 5 below and (ii) pay to Kauachi, on or before February 28,
1998, a lump sum amount equal to One Hundred Fifty-Six Thousand and
-1-
<PAGE>
No/100 Dollars ($156,000.00), such payment to be made by cashier's check, wire
transfer or other immediately available funds, as directed by Kauachi.
5. Kauachi's right to exercise options to purchase 100,000 shares of
IOI common stock (options to acquire 50,000 shares granted under the 1988 Stock
Option Plan and options to acquire and additional 50,000 shares granted under
the 1997 Long-Term Incentive Plan (the "1997 Plan")), notwithstanding any
termination of his status as Nonexecutive Chairman of the Board of IOI, shall
continue in effect for a period of two years following the Effective Date.
Further, the 50,000 options granted to Kauachi under the 1997 Long Term
Incentive Plan shall be amended to state that all such options are fully vested
as of the date hereof.
6. In the event that Kauachi is voted out as Nonexecutive Chairman of
the Board of IOI prior to December 31, 2000 (other than his resignation or
removal for Cause in accordance with the Articles of Incorporation and Bylaws of
IOI), IOI shall pay to Kauachi twelve (12) equal monthly payments of Twenty-Nine
Thousand Ninety-Eight and No/100 ($29,098.00) each, such payments to begin on
January 1, 2001.
7. Except for the rights and the obligations arising out of this
Agreement and the surviving provisions of the Consulting Agreement (Sections
3(b) (but only with respect to item 5 reflected on Exhibit A), 8, 9, 10, 11, 12,
and 14 through 21), Kauachi hereby releases, discharges and acquits IOI and its
officers, directors, shareholders, employees, agents, successors and assigns
from any and all claims, liability, damages, costs or expenses arising out of
the Consulting Agreement.
8. Except for the rights and obligations arising out of this
Agreement and the surviving provisions of the Consulting Agreement (Sections
3(b) (but only with respect to item 5 reflected on Exhibit A), 8, 9, 10, 11, 12,
and 14 through 21), IOI hereby releases, discharges and acquits Kauachi from any
and all claims, liability, damages, costs or expenses arising out of the
Consulting Agreement.
9. Further, each of IOI and Kauachi hereby agrees to do all such
things, and to execute, acknowledge and deliver all such documents or
instruments as the other party hereto may reasonably request in order to
effectuate the agreements contained in this Agreement.
10. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES
THEREOF.
11. This Agreement may be executed in multiple counterparts, each of
which shall constitute an original, and all of which together shall constitute
but one and the same agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
INTEGRATED ORTHOPAEDICS, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
-------------------------------
JOSE E. KAUACHI
-3-
<PAGE>
EXHIBIT 10.16
<PAGE>
Integrated Orthopaedics Inc.
Long Term Incentive Plan
I. PURPOSES
Integrated Orthopaedics Inc. (the "Company") desires to afford certain
of its key employees, the key employees of any subsidiary corporation or parent
corporation of the Company now existing or hereafter formed or acquired, its
directors and certain consultants who are responsible for the continued growth
of the Company an opportunity to acquire a proprietary interest in the Company,
and thus to create in such key employees, directors and consultants an increased
interest in and a greater concern for the welfare of the Company and its
subsidiaries.
The Company, by means of this Long Term Incentive Plan (the "Plan"),
seeks to retain the services of persons now holding key positions and to secure
the services of persons capable of filling such positions.
The stock options ("Options"), stock appreciation rights ("Rights")
and awards of shares of common stock ("Restricted Shares") offered pursuant to
the Plan are a matter of separate inducement and are not in lieu of any salary
or other compensation for the services of any key employee.
The Options granted under the Plan are intended to be either incentive
stock options ("Incentive Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or options that do not
meet the requirements for Incentive Options ("Non-Qualified Options"), but the
Company makes no warranty as to the qualification of any Option as an Incentive
Option.
II. AMOUNT OF STOCK SUBJECT TO THE PLAN
The total number of shares of common stock of the Company which may be
issued pursuant to the Plan, purchased pursuant to the exercise of Options
granted under the Plan or acquired pursuant to the exercise of Rights granted
under the Plan shall not exceed, in the aggregate, two million five hundred
thousand (2,500,000) shares of the authorized common stock, $.001 par value per
share, of the Company (the "Shares"). The aggregate number of Shares as to
which restrictions shall lapse in any fiscal year of the Company shall not
exceed two million five hundred thousand (2,500,000), and the aggregate number
of Shares which may be awarded as Restricted Shares or with respect to which
Options or Rights may be granted to any one employee pursuant to the Plan shall
not exceed two million five hundred thousand (2,500,000). Shares, which are
subject to Rights and related Options, shall be counted only once in determining
whether the maximum number of Shares, which may be purchased or awarded under
the Plan, has been exceeded.
Shares, which may be awarded or acquired under the Plan, may be either
authorized but unissued Shares, Shares of issued stock held in the Company's
treasury, or both, at the discretion of the Company. If and to the extent that
Options or Rights granted under the Plan expire or terminate without having been
exercised, the Shares covered by such expired or terminated Options or Rights
shall again become available for award under the Plan, or if Restricted Shares
awarded pursuant to the
<PAGE>
Plan are resold to the Company or forfeited as provided in Article V(d), such
resold or forfeited Shares shall again become available for award under the
Plan; provided that the grant and the terms of such new Restricted Shares,
Options or Rights shall in all respects comply with the provisions of the Plan.
Except as provided in Article XXIII, the Company may, from time to
time during the period beginning June 30, 1997, (the "Effective Date") and
ending June 29, 2007 (the "Termination Date"), grant to certain key employees of
the Company, or of any subsidiary corporation or parent corporation of the
Company now existing or hereafter formed or acquired, Options, Rights and/or
Restricted Shares under the terms hereinafter set forth.
Provisions of the Plan which pertain to Options or Rights granted to
an employee shall apply to Options, Rights or a combination thereof.
As used in the Plan, the term "subsidiary corporation" and "parent
corporation" shall mean, respectively, a corporation coming within the
definition of such terms contained in Sections 424(f) and 424(e) of the Code.
III. ADMINISTRATION
The board of directors of the Company (the "Board of Directors") shall
administer the Plan. The aggregate number of Shares as to which restriction
shall lapse in any fiscal year of the Company shall not exceed two million five
hundred thousand (2,500,000), and the aggregate number of Shares which may be
awarded as Restricted Shares or with respect to which Options or Rights may be
granted to any one employee pursuant to the Plan shall not exceed two million
five hundred thousand (2,500,000). Shares, which are subject to Rights and
related Options, shall be counted only once in determining whether the maximum
number of Shares, which may be purchased or awarded under the Plan, has been
exceeded.
Subject to the express provisions of the Plan, the Board of Directors
(or committee thereof) shall have authority, in its discretion, to determine the
employees to whom Restricted Shares, Options or Rights shall be granted, the
time when such Restricted Shares, Options or Rights shall be granted, the number
of Restricted Shares to be awarded and the number of Shares which shall be
subject to each Option or Right, the purchase price or exercise price of each
Restricted Share, Option or Right, the period(s) during which such Options or
Rights shall be exercisable (whether in whole or in part), the restrictions to
be applicable to Restricted Shares and the other terms and provisions thereof
(which need not be identical).
Subject to the express provisions of the Plan, the Board of Directors
(or committee thereof) also shall have authority to construe the Plan and the
Stock Agreements (as defined in Article V hereof), Options and Rights granted
thereunder, to prescribe, amend and rescind rules and regulations relating to
the Plan, to determine the terms and provisions of the respective Stock
Agreements (which need not be identical), Options (which need not be identical)
and Rights (which need not be identical) and to make all other determinations
necessary or advisable for administering the Plan. The Board of Directors (or
committee thereof) also shall have the authority to require, in its discretion,
as a condition of the granting of any such Restricted Share, Option or Right,
that the employee agree (i) not to sell or otherwise dispose of Shares acquired
pursuant to the award of Restricted Shares, Options or Rights for a period of
six (6) months following the lapse of restriction on
<PAGE>
such Shares or the date of acquisition of such Shares and (ii) that in the event
of termination of employment of such employee, shall have 30 calendar days from
the date of termination to exercise vested options.
The determination of the Board of Directors (or committee thereof) on
matters referred to in this Article III shall be conclusive.
The Board of Directors may employ such legal counsel, consultants and
agents as it may deem desirable for the administration of the Plan and may rely
upon any opinion received from any such counsel or consultant and any
computation received from any such consultant or agent. Expenses incurred by
the Board of Directors in the engagement of such counsel, consultant or agent
shall be paid by the Company. No member of the Board of Directors shall be
liable for any action or determination made in good faith with respect to the
Plan or any award of Restricted Shares, Options or Rights granted hereunder.
IV. ELIGIBILITY
Incentive Options, which may be granted only to salaried key employees
of the Company or of any subsidiary corporation or parent corporation of the
Company. Restricted Shares, Options and Rights may be granted to any salaried
key employee, director, or consultant or advisor of (provided that such
consultant or advisor is providing bona fide services to the Company not in
connection with the offer or sale of securities in a capital-raising
transaction) the Company or of any subsidiary corporation or parent corporation
of the Company (such persons referred to herein collectively as "employees").
The Plan does not create a right in any employee to Participate in the
Plan nor does it create a right in any employee to have any Restricted Shares,
Options or Rights granted to him or her.
V. RESTRICTED SHARES AND RESTRICTIONS ON TRANSFER
(a) The Board of Directors shall grant awards of Restricted Shares
hereunder in accordance with the terms and conditions set forth in an agreement
between the Company and the employee (a "Stock Agreement"). Each Stock
Agreement shall contain such individual and corporate performance goals,
restrictions, terms and conditions as the Board of Directors may require,
including without limitation the price, if any, which an employee shall be
required to pay for the Shares.
(b) The Company shall issue a certificate for Shares covered by an
award, bearing such legend as may be required under Article XVI, in the name of
the employee, as soon as reasonably practicable after the employee has executed
the Stock Agreement and paid the purchase price, if any, for the Shares.
<PAGE>
(c) Unless and until any restrictions on the Shares shall have lapsed in
the manner described in Article V (e), an employee shall have no right to sell,
transfer, assign, give, place in trust, or otherwise dispose of, or pledge,
grant a security interest in, or otherwise encumber, any such Shares, and any
such attempted disposition or encumbrance shall be void and unenforceable
against the Company. An employee shall be entitled to exercise and enjoy all
other rights and entitlements of ownership of Shares, including by way of
illustration and not limitation, the right to vote on matters which come before
stockholders of the Company and the right to receive dividends, whether or not
such Shares are subject to the aforesaid restrictions or are held in custody.
(d) Except as otherwise provided in a Stock Agreement, upon
termination of employment of an employee, all of such Shares with respect to
which restrictions have not lapsed shall be deemed to be offered for sale by the
employee to the Company for a period of thirty (30) days after the date of such
termination of employment at a price equal to the lesser of (y) the fair market
value of the Shares at such time or (z) fair market value of the shares on the
date of grant plus interest thereon from the date of the award of such
Restricted Shares through and including the date of the Company's payment for
such Shares, at the prime rate announced from time to time by Texas Commerce
Bank, N.A. - Houston, Texas.
(e) Restrictions upon Shares granted as an award hereunder shall lapse
at such time or times and on such terms, conditions and performance criteria as
the Board of Directors may, in its sole discretion, determine and as set forth
in a Stock Agreement; provided, however, that the restrictions upon such Shares
shall lapse only if the employee, on the date of such lapse, is then and has
continuously been an employee from the date of the award. In the event of
termination of employment as a result of the death or permanent and total
disability of an employee, the Board of Directors, in its sole discretion, may
determine that the restrictions upon some or all Shares awarded to the employee
shall thereupon immediately lapse. The Board of Directors also may decide at
any time, in its sole discretion and on such terms and conditions as it deems
appropriate; to remove restrictions upon Shares granted to any employee as an
award hereunder.
VI. OPTION PRICE AND PAYMENT
The purchase price of each Share subject to a Non-Qualified Option
under the Plan shall be determined by the Board of Directors prior to granting
the option. The Board of Directors shall set the purchase price for each Share
subject to a Non-Qualified Option at either the fair market value of each Share
on the date the option is granted, or at such other price as the Board of
Directors in its sole discretion shall deem appropriate; provided, however, that
in no event shall the purchase price of a Share subject to a Non-Qualified
Option under the Plan be less than 85% or more of the fair market value of such
Share on the date the option is granted.
The price for each Share purchasable under any Incentive Option
granted hereunder shall be such amount as the Board of Directors shall, in its
best judgment, determine to be not less than one hundred percent (100%) of the
fair market value per Share at the date the Option is granted; provided,
however, that in the case of an Incentive Option granted to a person who, at the
time such Incentive Option is granted, owns shares of the Company or any
subsidiary corporation or parent corporation of the Company which possess more
than ten percent (10%) of the total combined voting power of all classes of
shares of the Company or of any subsidiary corporation or parent corporation of
the Company, the purchase price for each share shall be such amount as the Board
of Directors, in its
<PAGE>
best judgment, shall determine to be not less than one hundred ten percent
(110%) of the fair market value per share at the date the Option is granted. In
determining stock ownership of an employee for any purposes under the Plan, the
rules of Section 424(d) of the Code shall be applied, and the Board of Directors
may rely on representations of fact made to it by the employee and believed by
it to be true.
If the Shares are listed on a national securities exchange in the
United States on any date on which the fair market value per Share is to be
determined, the fair market value per Share shall be deemed to be the average of
the high and low quotations at which such Shares are sold on such national
securities exchange on the date such Option is granted. If the Shares are
listed on a national securities exchange in the United States on such date but
the Shares are not traded on such date, or such national securities exchange is
not open for business on such date, the fair market value per Share shall be
determined as of the closest preceding date on which such exchange shall have
been open for business and the Shares were traded. If the Shares are listed on
more than one national securities exchange in the United States on the date on
which the fair market value per Share is to be determined, the Board of
Directors shall determine which national securities exchange shall be used for
the purpose of determining the fair market value per Share or, if such Shares
are not listed or traded on any national securities exchange, then the average
of the reported "high" and "low" sales prices for such Shares in the over-the-
counter market, as reported on the National Association of Securities Dealers
Automated Quotations System, or, if such prices shall not be reported thereon,
the average between the closing bid and asked prices so reported, or, if such
prices shall not be reported, then the average closing bid and asked prices
reported by the National Quotation Bureau Incorporated, or, in all other cases,
the value established by the Board of Directors in good faith.
For purposes of this Plan, the determination by the Board of Directors
of the fair market value of a Share shall be conclusive.
Upon the exercise of an Option granted hereunder, the Company shall
cause the purchased Shares to be issued only when it shall have received the
full purchase price for the Shares in cash or by certified check; provided,
however, that in lieu of cash, the holder of an Option may, if and to the extent
the terms of such Option so provide and to the extent permitted by applicable
law, exercise an Option (a) in whole or in part, by delivering to the Company
shares of common stock of the Company (in proper form for transfer and
accompanied by all requisite stock transfer tax stamps or cash in lieu thereof)
owned by such holder having a fair market value equal to the exercise price
applicable to that portion of the Option being exercised by the delivery of such
Shares or (b) in part, by delivering to the Company an executed promissory note
on such terms and conditions as the Board of Directors shall determine, at the
time of grant, in its sole discretion; provided, however, that the principal
amount of such note shall not exceed ninety percent (90%) (or such lesser
percentage as would be permitted by applicable margin regulations) of the
aggregate purchase price of the Shares then being purchased pursuant to the
exercise of such Option. The fair market value of the stock so delivered shall
be determined as of the date immediately preceding the date on which the Option
is exercised, or as may be required in order to comply with or to conform to the
requirements of any applicable laws or regulations.
<PAGE>
VII. USE OF PROCEEDS
The cash proceeds of the sale of Shares pursuant to the Plan are to be
added to the general funds of the Company and used for its general corporate
purposes as the Board of Directors shall determine.
VIII. TERM OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE
Any Option shall be exercisable at such times, in such amounts and
during such period or periods as the Board of Directors shall determine at the
date of the grant of such Option; provided, however, that an Incentive Option
shall not be exercisable after the expiration of ten (10) years from the date
such Option is granted; and provided further that, in the case of an Incentive
Option granted to a person who, at the time such Option is granted, owns stock
of the Company or any subsidiary corporation or parent corporation of the
Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any subsidiary corporation or
parent corporation of the Company, such Option shall not be exercisable after
the expiration of five (5) years from the date such Option is granted.
Except to the extent otherwise provided under the Code, to the extent
that the aggregate fair market value of stock with respect to which Incentive
Options are exercisable for the first time by an employee during any calendar
year (under all stock option plans of the Company and of any parent corporation
or subsidiary corporation of the Company) exceeds one hundred thousand dollars
($100,000), such Options shall be treated as Non-Qualified Options. For
purposes of this limitation, (i) the fair market value of stock is determined as
of the time the Option is granted, (ii) the limitation will be applied by taking
into account Options in the order in which they were granted.
Subject to the provisions of Article XIX, the Board of Directors shall
have the right to accelerate, in whole or in part, from time to time,
conditionally or unconditionally, rights to exercise any Option granted
hereunder.
To the extent that an Option is not exercised within the period of
exercisability specified therein, it shall expire as to the then unexercised
part.
In no event shall an Option granted hereunder be exercised for a
fraction of a Share.
IX. EXERCISE OF OPTIONS AND VESTING SCHEDULE
Options granted hereunder will vest 100% on the fifth anniversary of
the date of grant ("Cliff Vesting"), provided however that vesting may occur at
an earlier date if the following criteria is met ("Accelerated Vesting").
Accelerated Vesting shall occur at the rate of 25% for each 50 physicians added
to the Company's Network following the date of grant. The Company's Network is
defined as the number of full-time physicians who are employed by medical groups
that have created a long-term management services agreement with the Company or
a subsidiary of the Company. (The basis for all options granted at the
inception of the plan shall be zero doctors. The basis for all grants issued
after inception shall be the actual number of doctors practicing in the IOI
network at the date of
<PAGE>
the grant.)
IOI will use a five-year cliff as the vesting methodology.
Years of Service Vesting Percentage
---------------- ------------------
0-5 0
Over 5 Years 100
IOI Accelerated Vesting Schedule
Number of Doctors Under Contract With IOI Vesting Percentage
------------------------------------------- ------------------
0-49 0
50-99 25
100-149 50
150-199 75
200 and Over 100
NOTE 1: The employee must not have more than one break in service to receive
vesting continuous credit. Any break in service for more than one year will
loose all vesting credit.
NOTE 2: An employee must work at least six full months in a plan year to
receive vesting credit for that year.
NOTE 3: The accelerated vesting schedule is based on the increase of physicians
(increments of 50 physicians to 25% vesting) entering the IOI network on or
after the date the employee is issued options.
The aforementioned vesting schedule notwithstanding, the Board of Directors of
the Company, acting upon a three-fourths majority vote, in its sole discretion,
may establish a vesting schedule on any option granted hereunder that is
different than the vesting schedule set forth above.
X. STOCK APPRECIATION RIGHTS
In the discretion of the Board of Directors, a Right may be granted
(i) alone, (ii) simultaneously with the grant of an option (either Incentive or
Non-Qualified) and in conjunction therewith or in the alternative thereto or
(iii) subsequent to the grant of a Non-Qualified Option and in conjunction
therewith or in the alternative thereto.
The exercise price of a Right granted alone shall be determined by the Board of
Directors, but shall not be less than one hundred percent (100%) of the fair
market value of one Share on the date of grant of such Right. A Right granted
simultaneously with or subsequent to the grant of an Option and in conjunction
therewith or in the alternative thereto shall have the same exercise price as
the related Option, shall be transferable only upon the same terms and
conditions as the related Option, and shall be exercisable only to the same
extent as the related Option; provided, however, that a Right, by its terms,
shall be exercisable only when the fair market value of the Shares subject to
the Right and related Option exceeds the exercise price thereof.
Upon exercise of a Right granted simultaneously with or subsequent to
an Option and
<PAGE>
in the alternative thereto, the number of Shares for which the related Option
shall be exercisable shall be reduced by the number of Shares for which the
Right shall have been exercised. The number of Shares for which a Right shall be
exercisable shall be reduced upon any exercise of a related Option by the number
of Shares for which such Option shall have been exercised.
Any right shall be exercisable upon such additional terms and
conditions as may from time to time be prescribed by the Board of Directors.
A Right shall entitle the holder upon exercise thereof to receive from
the Company, upon a written request filed with the Secretary of the Company at
its principal offices (the "Request"), a number of Shares (with or without
restrictions as to substantial risk of forfeiture and transferability, as
determined by the Board of Directors in its sole discretion), an amount of cash,
or any combination of Shares and cash, as specified in the Request (but subject
to the approval of the Board of Directors in its sole discretion, at any time up
to and including the time of payment, as to the making of any cash payment),
having an aggregate fair market value equal to the product of (i) the excess of
the fair market value, on the day of such Request, of one Share over the
exercise price per Share specified in such Right or its related Option,
multiplied by (ii) the number of Shares for which such Right shall be exercised.
Any election by a holder of a Right to receive cash in full or partial
settlement of such Right, and any exercise of such Right for cash, may be made
only by a Request filed with the Corporate Secretary of the Company during the
period beginning on the third business day following the date of release for
publication by the Company of quarterly or annual summary statements of earnings
and ending on the twelfth business day following such date. Within thirty (30)
days of the receipt by the Company of a Request to receive cash in full or
partial settlement of a Right or to exercise such Right for cash, the Board of
Directors shall, in its sole discretion, either consent to or disapprove, in
whole or in part, such Request. A Request to receive cash in full or partial
settlement of a Right or to exercise a Right for cash may provide that, in the
event the Board of Directors shall disapprove such Request, such Request shall
be deemed to be an exercise of such Right for Shares.
If the Board of Directors disapproves in whole or in part any election
by a holder to receive cash in full or partial settlement of a Right or to
exercise such Right for cash, such disapproval shall not affect such holder's
right to exercise such Right at a later date, to the extent that such Right
shall be otherwise exercisable, or to elect the form of payment at a later date,
provided that an election to receive cash upon such later exercise shall be
subject to the approval of the Board of Directors. Additionally, such
disapproval shall not affect such holder's right to exercise any related Option
or Options granted to such holder under the Plan.
A holder of a Right shall not be entitled to request or receive cash
in full or partial payment of such Right, if such Right or the related Option
shall have been exercised during the first six (6) months of its respective
term; provided, however, that such prohibition shall not apply if the holder of
such Right dies or becomes disabled (within the meaning of Section 22(e)(3) of
the Code) prior to the expiration of such six-month period, or if such holder is
not a director or officer of the Company or a beneficial owner of the Company
who is described in Section 16(a) of the Exchange Act.
A Right shall be deemed exercised on the last day of its term, if not
otherwise exercised by the holder thereof, provided that the fair market value
of the Shares subject to the Right exceeds the exercise price thereof on such
date.
<PAGE>
For all purposes of this Article X, the fair market value of Shares
shall be determined in accordance with the principles set forth in Article VI.
XI. NONTRANSFERABILITY OF OPTIONS AND STOCK APPRECIATION RIGHTS
Neither an Option nor a Right granted hereunder shall be transferable,
whether by operation of law or otherwise, other than by will or the laws of
descent and distribution, and any Option or Right granted hereunder shall be
exercisable, during the lifetime of the holder, only by such holder.
XII. TERMINATION OF EMPLOYMENT
Upon termination of employment of any employee with the Company and
all subsidiary corporations and parent corporations of the Company, (i) all
Restricted Shares with respect to which restrictions have not lapsed shall be
dealt with as discussed in Article V (d), and (ii) any Option or Right
previously granted to the employee, unless otherwise specified by the Board of
Directors in the Option or Right, shall, to the extent not theretofore
exercised, terminate and become null and void, provided that:
(a) if the employee shall die while in the employ of such corporation
or during either the three (3) month or one (1) year period, whichever is
applicable, specified in clause (b) below and at a time when such employee
was entitled to exercise an Option or Right as herein provided, the legal
representative of such employee, or such person who acquired such Option or
Right by bequest or inheritance or by reason of the death of the employee,
may, not later than one (1) year from the date of death, exercise such
Option or Right, to the extent not theretofore exercised, in respect of any
or all of such number of Shares as specified by the Board of Directors in
such Option or Right;
(b) if the employment of any employee to whom such Option or related
Right shall have been granted shall terminate by reason of the employee's
retirement (at such age or upon such conditions as shall be specified by
the Board of Directors), disability (as described in Section 22(e)(3) of
the Code) or dismissal by the employer other than for cause (as defined
below), and while such employee is entitled to exercise such Option or
Right as herein provided, such employee shall have the right to exercise
such Option or Right so granted, to the extent not theretofore exercised,
in respect of any or all of such number of Shares as specified by the Board
of Directors in such Option or Right, at any time up to and including (i)
thirty (30) days after the date of such termination of employment in the
case of termination by reason of retirement or dismissal other than for
cause and (ii) one (1) year after the date of termination of employment in
the case of termination by reason of disability; and
<PAGE>
(c) if the Board of Directors (or a committee thereof) shall deem, in
its sole discretion, that an extension to any employee's right to exercise
an Option or Right beyond the time period otherwise set forth or
contemplated by this Article XII or the Option or Right as previously
granted, is in the best interest of the Company or its shareholders, the
Board of Directors (or a committee thereof) shall have the right to grant
such an extension and, with the consent of such employee, to impose other
terms and conditions on the exercise of Options or Rights and/or the sale
of shares received pursuant to such exercise in consideration for the
extension of the time period during which such exercise could take place;
provided however, that (i) the rights granted to the Board of Directors (or
a committee thereof) under this sub-paragraph shall not diminish the then
existing rights of any employee under a previously granted Option or Right
and (ii) any extension or other modification made to a previously granted
Option or Right shall not extend for more than 24 months following an
employee's termination of employment.
In no event, however, shall any person be entitled to exercise any
Option or Right after the expiration of the period of exercisability of such
Option or Right as specified therein.
If an employee voluntarily terminates his or her employment, or is
discharged for cause, any Option or Right granted hereunder shall, unless
otherwise specified by the Board of Directors in the Option or Right, forthwith
terminate with respect to any unexercised portion thereof.
If an Option or Right granted hereunder shall be exercised by the
legal representative of a deceased employee or former employee, or by a person
who acquired an Option or Right granted hereunder by bequest or inheritance or
by reason of the death of any employee or former employee, written notice of
such exercise shall be accompanied by a certified copy of letters testamentary
or equivalent proof of the right of such legal representative or other person to
exercise such Option or Right.
For the purposes of the Plan, the term "for cause" shall mean (i) with
respect to an employee who is a party to a written agreement with, or,
alternatively, participates in a compensation or benefit plan of the Company or
a subsidiary corporation or parent corporation of the Company, which agreement
or plan contains a definition of "for cause" or "cause" (or words of like
import) for purposes of termination of employment thereunder by the Company or
such subsidiary corporation or parent corporation of the Company, "for cause" or
"cause" as defined in the most recent of such agreements or plans, or (ii) in
all other cases, as determined by the Board of Directors, in its sole
discretion, (a) the willful commission by an employee of a criminal or other act
that causes or probably will cause substantial economic damage to the Company or
a subsidiary corporation or parent corporation of the Company or substantial
injury to the business reputation of the Company or a subsidiary corporation or
parent corporation of the Company; (b) the commission by an employee of an act
of fraud in the performance of such employee's duties on behalf of the Company
or a subsidiary corporation or parent corporation of the Company; or (c) the
continuing willful failure of an employee to perform the duties of such employee
to the Company or a subsidiary corporation or parent corporation of the Company
(other than such failure resulting from the employee's incapacity due to
physical or mental illness) after written notice thereof (specifying the
particulars thereof in reasonable detail) and a reasonable opportunity to be
heard and cure such failure are given to the employee by the Board of Directors.
For purposes of the Plan, no act, or failure to act, on the employee's part
shall be
<PAGE>
considered "willful" unless done or omitted to be done by the employee not in
good faith and without reasonable belief that the employee's action or omission
was in the best interest of the Company or a subsidiary corporation or parent
corporation of the Company.
For the purposes of the Plan, an employment relationship shall be
deemed to exist between an individual and a corporation if, at the time of the
determination, the individual was an "employee" of such corporation for purposes
of Section 422(a) of the Code. If an individual is on military, sick leave or
other bona fide leave of absence such individual shall be considered an
"employee" for purposes of the exercise of an Option or Right and shall be
entitled to exercise such Option or Right during such leave if the period of
such leave does not exceed one-hundred and twenty (120) days, or, if longer, so
long as the individual's right to reemployment with the corporation granting the
option (or a related corporation) is guaranteed either by statute or by
contract. If the period of leave exceeds one-hundred and twenty (120) days, the
employment relationship shall be deemed to have terminated on the one-hundred
and twenty-first (121) day of such leave, unless the individual's right to
reemployment is guaranteed by statute or contract.
A termination of employment shall not be deemed to occur by reason of
(i) the transfer of an employee from employment by the Company to employment by
a subsidiary corporation or a parent corporation of the Company (ii) the
transfer of an employee from employment by a subsidiary corporation or a parent
corporation of the Company to employment by the Company or by another subsidiary
corporation or parent corporation of the Company.
In the event of the complete liquidation or dissolution of a
subsidiary corporation, or in the event that such corporation ceases to be a
subsidiary corporation, any unexercised Options or rights theretofore granted to
any person employed by such subsidiary corporation will be deemed canceled
unless such person is employed by the Company or by any parent corporation or
another subsidiary corporation after the occurrence of such event. In the event
an Option or Right is to be canceled pursuant to the provisions of the previous
sentence, notice of such cancellation will be given to each employee holding
unexercised Options, and such holder will have the right to exercise such
Options or Rights in full (without regard to any limitation set forth or imposed
pursuant to Article VIII) during the 30 day period following notice of such
cancellation.
XIII. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTIONS
In the event of any change in the outstanding Shares through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange of shares, or
other like change in capital structure of the Company, an adjustment shall be
made to each outstanding Option and Right such that each such Option and Right
shall thereafter be exercisable for such securities, cash and/or other property
as would have been received in respect of the Shares subject to such Option or
Right had such Option or Right been exercised in full immediately prior to such
change, and such an adjustment shall be make successively each time any such
change shall occur. The term "Shares" after any such change shall refer to the
securities, cash and/or property then receivable upon exercise of an Option or
Right. In addition, in the event of any such change, the Board of Directors
shall make any further adjustment as may be appropriate to the maximum number of
Shares subject to the Plan, the maximum number of Shares for which an award of
Restricted Shares may be granted to any one employee, the maximum number of
Shares as to which
<PAGE>
restrictions shall lapse in any fiscal year, and the number of Shares and price
per Share subject to outstanding Options or Rights as shall be equitable to
prevent dilution or enlargement of rights under such Options or Rights, and the
determination of the Board of Directors as to these matters shall be conclusive.
Notwithstanding the foregoing, (i) each such adjustment with respect to an
Incentive Option and any related Right shall comply with the rules of Section
424(a) of the Code, and (ii) in no event shall any adjustment be made which
would render any Incentive Option granted hereunder other than an incentive
stock option for purposes of Section 422 of the Code.
In the event of a "change in control" of the Company, then (i) all
restrictions on the sale of Restricted Shares (as described in Article V(e),
above) shall become null and void and cease to exist, and any Restricted Shares
held in custody shall be released to the appropriate employee, and (ii) all then
outstanding Options and Rights shall immediately become exercisable. For
purposes of the Plan, a "change in control" of the Company occurs if:
(a) A change in control of the direction and administration of the
Company's business of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A (or any successor
rule or regulation) promulgated under the Exchange Act, whether or not the
Company is then subject to such reporting requirement; or
(b) Any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act but excluding any employee benefit plan of the Company)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined voting power of
the Company's outstanding securities then entitled ordinarily (and apart
from rights accruing under special circumstances) to vote for the election
of directors; or
(c) During any period of two (2) consecutive years, the individuals
who at the beginning of such period constitute the Board or any individuals
who would be "Continuing Directors" (as hereinafter defined) cease for any
reason to constitute at least a majority thereof; or
(d) The Board shall approve a sale of all or substantially all of the
assets of the Company; or
(e) The Board shall approve any merger, consolidation, or like
business combination or reorganization of the Company, the consummation of
which would result in the occurrence of any event described in clause (b)
or (c) above;
provided, however, that none of the foregoing events shall constitute a Change
in Control if such event occurs as a result of an agreement or transaction
approved by the "Continuing Directors," either before or after the occurrence of
such event, and the Continuing Directors in approving such agreement or
transaction determine that it is not in the best interest of the Company for
such agreement or transaction to constitute a Change in Control for purposes of
the Plan.
For purposes of the Plan, "Continuing Directors" shall mean the
directors of the Company in office on the Effective Date and any successor to
any such director and any additional director who after the Effective Date (i)
was nominated or selected by a majority of the Continuing
<PAGE>
Directors in office at the time of his nomination or selection and (ii) is not
an "affiliate" or "associate" (as defined in Regulation 12B under the Exchange
Act) at the time of his nomination or selection of any person who is the
beneficial owner, directly or indirectly, of securities representing ten percent
(10%) or more of the combined voting power of the Company's outstanding
securities then entitled ordinarily to vote for the election of directors.
The Board of Directors, in its discretion, may determine that, upon
the occurrence of a transaction described in the second preceding paragraph,
each Option or Right outstanding hereunder shall terminate within a specified
number of days after notice to the holder, and such holder shall receive, with
respect to each Share subject to such Option or Right, cash in an amount equal
to the excess of the fair market value of such Share immediately prior to the
occurrence of such transaction over the exercise price per Share of such Option
or Right.
XIV. RIGHT TO TERMINATE EMPLOYMENT
The Plan shall not impose any obligation on the Company or on any
subsidiary corporation or parent corporation thereof to continue the employment
of any holder of Restricted Shares, Options or Rights; and it shall not impose
any obligation on the part of any holder of Restricted Shares, Options or Rights
to remain in the employ of the Company or of any subsidiary corporation or
parent corporation thereof.
XV. PURCHASE FOR INVESTMENT
Except as hereinafter provided, the Board of Directors may require an
employee, as a condition to receipt of a particular award of Restricted Shares
or upon exercise of any Option or Right granted hereunder, to execute and
deliver to the Company (a) stock powers with respect to Shares underlying a
particular award or Option or Right and required to be held by a custodian, and
(b) a written statement, in form satisfactory to the Board of Directors, in
which the employee represents and warrants that Shares are being acquired for
such person's own account, for investment only and not with a view to the resale
or distribution thereof. The employee shall, at the request of the Board of
Directors, be required to represent and warrant in writing that, to the extent
permitted by the terms of the award, any subsequent resale or distribution of
Shares by the employee shall be made only pursuant to either (i) a Registration
Statement on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act"), which Registration Statement has become effective and is
current with regard to the Shares being sold, or (ii) a specific exemption from
the registration requirements of the Securities Act, but in claiming such
exemption the employee shall, prior to any offer of sale or sale of such Shares,
obtain a prior favorable written opinion of counsel, in form and substance
satisfactory to counsel for the Company, as to the application of such exemption
thereto. The foregoing restriction shall not apply to (i) issuances by the
Company so long as the Shares being issued are registered under the Securities
Act and a prospectus in respect thereof is current or (ii) reofferings of Shares
by affiliates of the Company (as defined in Rule 405 or any successor rule or
regulation promulgated under the Securities Act) if the Shares being reoffered
are registered under the Securities Act and a prospectus in respect thereof is
current.
<PAGE>
XVI. ISSUANCE OF CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES
Upon any award of Restricted Shares or any exercise of an Option or
Right which may be granted hereunder and, in the case of an Option or award of
Restricted Shares, payment of the purchase price, a certificate or certificates
for the Shares shall be issued by the Company in the name of the person
receiving the award of Restricted Shares or exercising the Option or Right and
shall be delivered to or upon the order of such person or persons.
The Company may endorse such legend or legends upon the certificates
for Shares issued pursuant to the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such Shares as, in its
discretion, it determines to be necessary or appropriate to (i) prevent a
violation of, or to perfect an exemption from, the registration requirements of
the Securities Act, (ii) implement the provisions of the Plan and any agreement
between the Company and the optionee or grantee with respect to such Shares, or
(iii) permit the Company to determine the occurrence of a disqualifying
disposition, as described in Section 421(b) of the Code, of Shares transferred
upon exercise of an Incentive Option granted under the Plan.
The Company shall pay all issue or transfer taxes with respect to the
issuance or transfer of Shares, as well as all fees and expenses necessarily
incurred by the Company in connection with such issuance or transfer, except
fees and expenses which may be necessitated by the filing or amending of a
Registration Statement under the Securities Act, which fees and expenses shall
be borne by the recipient of the Shares unless such Registration Statement has
been filed by the Company for its own corporate purposes (and the Company so
states) in which event the recipient of the Shares shall bear only such fees and
expenses as are attributable solely to the inclusion of the Shares he or she
receives in the Registration Statement.
All Shares issued as provided herein shall be fully paid and non-
assessable to the extent permitted by law.
XVII. WITHHOLDING TAXES
The Company may require an employee receiving an award of Restricted
Shares or exercising a Right or a Non-Qualified Option granted hereunder, or
disposing of Shares acquired pursuant to the exercise of an Incentive Option in
a disqualifying disposition (within the meaning of Section 421(b) of the Code),
to reimburse the corporation that employs such employee for any taxes required
by any government to be withheld or otherwise deducted and paid by such
corporation in respect of the issuance or disposition of such Shares. In lieu
thereof, the corporation that employs such employee shall have the right to
withhold the amount of such taxes from any other sums due or to become due from
such corporation to the employee upon such terms and conditions as the Board of
Directors shall prescribe. The corporation that employs such employee may, in
its discretion, hold the stock certificate to which such employee is entitled
upon the award of Restricted Shares or exercise of an Option as security for the
payment of such withholding tax liability, until cash sufficient to pay that
liability has been accumulated. In addition, at any time that the Company
becomes subject to a withholding obligation under applicable law with respect to
the exercise of a Right or Non-Qualified Option (the "Tax Date"), except as set
forth below, a holder of a Right or Non-Qualified Option may elect to satisfy,
in whole or in part, the holder's related personal tax liabilities (an
"Election") by (i) directing the Company to withhold from Shares issuable in the
related exercise either a specified number of Shares or Shares having a
specified value (in each case) not in excess of the related personal tax
liabilities), (ii) tendering Shares previously issued pursuant to the exercise
of an Option or Right or
<PAGE>
other shares of the Company's common stock owned by the holder or (iii)
combining any or all of the foregoing options in any fashion. An Election shall
be irrevocable. The withheld Shares and other shares tendered in payment should
be valued at their fair market value (determined in accordance with the
principles set forth in Article VI of the Plan) on the Tax Date. The Board of
Directors may disapprove of any Election, suspend or terminate the right to make
Elections or provide that the right to make Elections shall not apply to
particular grants, Shares or exercises. If a holder is a person subject to
Section 16 of the Exchange Act then (1) any Election by such holder must be made
(i) at least six months prior to the relevant Tax Date or (ii) on or prior to
the relevant Tax Date and during a period that begins on the third business day
following the date of release of publication of the Company's quarterly or
annual summary statements of sales and earnings and that ends on the twelfth
business day following such date and (2) the Election may not be made with
respect to an exercise, or the withholding obligation arising thereon, if the
relevant Right or Non-Qualified Option was granted six months or less prior to
the date of Election. The Board of Directors may impose any other conditions or
restrictions on the right to make an Election as it shall deem appropriate.
XVIII. LISTING OF SHARES AND RELATED MATTERS
The Board of Directors may delay any award, issuance or delivery of
Shares if it determines that listing, registration or qualification of Shares or
the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the sale or purchase of
Shares under the Plan, until such listing, registration, qualification, consent
or approval shall have been effected or obtained, or otherwise provided for,
free of any conditions not acceptable to the Board of Directors.
XIX. AMENDMENT OF THE PLAN
The Board of Directors may, from time to time, amend the Plan;
provided, however, that any amendment that would require shareholder approval
under Texas law, the code or any other applicable law shall be subject to the
approval of the shareholders of the Company. The Board of Directors shall be
authorized to amend the Plan and the Options granted thereunder to permit the
Incentive Options granted thereunder to qualify as incentive stock options
within the meaning of Section 422 of the Code. The rights and obligations under
any Stock Agreement, Option or Right granted before amendment of the Plan or any
unexercised portion of such Option or Right shall not be adversely affected by
amendment of the Plan or the Stock Agreement, Option or Right without the
consent of the holder of the Stock Agreement, Option or Right.
<PAGE>
XX. TERMINATION OR SUSPENSION OF THE PLAN
The Board of Directors may at any time suspend or terminate the Plan.
The Plan, unless sooner terminated under Article XXIII or by action of the Board
of Directors, shall terminate at the close of business on the Termination Date.
Restricted Shares, Options or Rights may not be granted while the Plan is
suspended or after it is terminated. Rights and obligations under any Stock
Agreement, Option or Right granted while the Plan is in effect shall not be
altered or impaired by suspension or termination of the Plan, except upon the
consent of the person to whom the Restricted Shares, Options or Rights were
granted. The power of the Board of Directors to construe and administer any
Stock Agreements, Options or Rights granted prior to the termination or
suspension of the Plan under Article III nevertheless shall continue after such
termination or during such suspension.
XXI. GOVERNING LAW
The Plan, such Restricted Shares, Stock Agreements, Options and Rights
as may be granted thereunder and all related matters shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware
from time to time obtaining.
XXII. PARTIAL INVALIDITY
The invalidity or illegality of any provision herein shall not be
deemed to affect the validity of any of other provision.
XXIII. EFFECTIVE DATE
The Plan shall become effective at 5:00 P.M., Houston, Texas time, on
the Effective Date, the date as of which the Plan was adopted by the Board of
Directors; provided, however, that if the Plan is not approved by a vote of the
shareholders of the Company at an annual meeting or any special meeting or by
unanimous written consent within twelve (12) months before or after the
Effective Date, the Plan and any Stock Agreements, Options and Rights granted
thereunder shall terminate.
<PAGE>
EXHIBIT 10.20
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into
as of the 12th day of December, 1997, by and between Integrated Orthopaedics,
Inc., a Texas corporation (the "Company"), and Ronald E. Pierce (the
"Executive").
WHEREAS, the Board of Directors of the Company recognizes that the
Executive's contribution to the growth and success of the Company is expected to
be substantial and desires to assure the Company of the Executive's employment
in an executive capacity and to compensate him therefor; and
WHEREAS, the Executive desires to commit himself to serve the Company
on the terms and subject to the conditions herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
1. Employment. The Company hereby agrees to employ the Executive,
and the Executive hereby agrees to be employed exclusively by the Company, for a
period commencing on December 12, 1997 (the "Commencement Date") and ending upon
the earlier of the third anniversary of the Commencement Date or the termination
of this Agreement pursuant to Section 5 hereof (the "Employment Period").
2. Position and Duties. The Executive, during the Employment
Period, shall serve as the President and Chief Executive Officer of the Company,
reporting only to the Board of Directors. The Executive shall have such powers
and duties as may from time to time be prescribed by the Board of Directors so
long as such duties are consistent with the Executive's positions on the date
hereof. The Executive shall devote substantially all of his working time and
efforts to the business and affairs of the Company, shall perform his duties
hereunder diligently and in a prudent and businesslike manner, and shall act in
the best interests of the Company.
3. Compensation and Benefits.
(a) Base Salary. During the Employment Period (subject to Section
5(c) hereof), the Executive shall receive an annual base salary of $250,000
("Base Salary"), subject to annual review by the Compensation Committee of the
Board of Directors (the
<PAGE>
"Compensation Committee"). The Base Salary may be increased, but not decreased,
during the Employment Period upon recommendation of the Compensation Committee
and approval by the Board of Directors, which recommendation and approval may be
withheld at the sole discretion of the Compensation Committee and the Board of
Directors, respectively. The Base Salary shall be payable in installments in
accordance with the Company's customary payroll practices but not less
frequently than monthly.
(b) Bonus. In addition to the Base Salary, the Executive shall be
eligible to receive bonus compensation in such amounts and payable at such times
as determined by recommendation of the Compensation Committee and approval by
the Board of Directors, which recommendation and approval may be withheld at the
sole discretion of the Compensation Committee and the Board of Directors,
respectively, at all times during the Employment Period.
(c) Stock Option Eligibility. During the Employment Period, the
Executive shall be eligible to receive additional stock option grants, including
annual performance stock option grants, pursuant to the Company's stock option
plans in effect from time to time, all at the discretion of the Compensation
Committee and the Board of Directors.
(d) Fringe Benefits. During the Employment Period (subject to
Section 5(c) hereof), the Executive shall receive the fringe benefits described
on Exhibit A attached hereto. In addition, during the Employment Period, the
Executive shall be eligible to participate in such retirement, profit sharing
and pension plans and life and other insurance programs, as well as other
benefit programs, which are available to senior executive officers of the
Company, subject to the Company's policies with respect to all of such benefits
or insurance programs or plans; provided, however, that except as expressly set
forth herein, the Company shall not be obligated to institute or maintain any
particular benefit or insurance program or plan or aspect thereof.
4. Expenses. Upon submission of properly documented expense account
reports, the Company shall reimburse the Executive for all reasonable travel,
entertainment and work-related expenses incurred by the Executive in connection
with the performance of his duties as Chief Executive Officer of the Company,
all subject to and in accordance with the expense and reimbursement policies
that may be adopted by the Company from time to time.
5. Termination. This Agreement shall terminate on the third
anniversary of the Commencement Date (the period from the Commencement Date to
and including the third
2
<PAGE>
anniversary of the Commencement Date being referred to herein as the "Base
Term"), unless earlier terminated pursuant to any one or more of the following
provisions:
(a) Death or Disability. This Agreement shall terminate automatically
upon the death or total disability of Executive. For purposes of this
Agreement, "total disability" shall be deemed to have occurred if Executive
shall have been unable to perform his duties hereunder for a period of three (3)
consecutive months or for any sixty (60) working days out of any period of six
(6) consecutive months. Upon such termination for death or total disability,
the Company shall pay to the Executive or his estate, heirs or legal
representative, as the case may be, all compensation of the Executive accrued
but unpaid in respect of periods ending on or prior to such termination for
death or total disability and the Company shall have no further obligations to
pay the Executive or his estate, heirs or legal representative any other
compensation or provide any other benefits pursuant to this Agreement.
(b) Termination for Cause. The Company may terminate this Agreement
for Cause upon ten (10) days' written notice to the Executive. For purposes of
this Agreement, "Cause" shall be deemed to include (i) material acts of fraud,
dishonesty or deceit, (ii) competition with the Company or its subsidiaries,
(iii) unauthorized use of any of the Company's or its subsidiaries' trade
secrets or Confidential Information, (iv) conviction of a felony involving moral
turpitude, (v) any material violation of any other material duty to the Company
or its shareholders imposed by law or the Board of Directors, or (vi) any
material breach of Executive's representations, covenants, duties and
responsibilities hereunder. Upon such termination for Cause, the Company shall
pay to the Executive, as soon as practicable after such termination, all
compensation of the Executive accrued but unpaid in respect of periods ending on
or prior to such termination and the Company shall have no further obligations
to pay the Executive any other compensation or provide any other benefits
pursuant to this Agreement.
(c) Termination Without Cause. The Company may terminate this
Agreement without Cause upon 30 days' written notice to Executive. Upon such
termination without Cause, the Company shall pay to the Executive a termination
fee equal to the amount of compensation and benefits that would otherwise be
payable or provided to the Executive pursuant to Section 3(a) and the first
sentence of Section 3(d) hereof through the later of (i) the remainder of the
Base Term as if this Agreement had remained in full force and effect for the
remainder of the Base Term (payable or provided in accordance with Section 3(a)
or Exhibit A hereof, as the case may be) and (ii) one year after the effective
date of the termination without Cause; provided, however, that if the Executive
is terminated without Cause at any time after
3
<PAGE>
July 1, 1999, in lieu of, and not in addition to, any compensation payable or
benefits required to be provided pursuant to this Section 5(c), the Company
shall make a lump sum payment to the Executive within thirty days after such
termination without Cause equal to the amount of compensation that would
otherwise be payable to the Executive pursuant to Section 3(a), plus the cash
replacement value of benefits described in the first sentence of Section 3(d)
hereof, through the later of (i) the remainder of the Base Term as if this
Agreement had remained in full force and effect for the remainder of the Base
Term and (ii) one year after the effective date of the termination without
Cause. In addition, upon such termination without Cause, all options to purchase
capital stock of the Company and all restricted stock of the Company held by the
Executive at the time of such termination without Cause shall be deemed vested
immediately prior to such termination without Cause. The Executive shall have 90
days after such termination to exercise any such stock options. All such stock
options that are not exercised within such 90-day period shall be forfeited and
canceled.
(d) Termination by Executive. The Executive may terminate this
Agreement upon thirty (30) days' written notice to the Company. Upon
termination by the Executive, the Company shall pay to the Executive, as soon as
practicable after such termination, all compensation of the Executive accrued
but unpaid in respect of periods ending on or prior to such termination and the
Company shall have no further obligations to pay the Executive any other
compensation or provide any other benefits pursuant to this Agreement; provided,
however, that if the Executive terminates his employment hereunder because he
has been permanently relocated by the Board of Directors, without his prior
consent, to an office located more than fifty (50) miles away from the Company's
current principal executive offices or his executive titles, duties or authority
are materially diminished by action of the Board of Directors of the Company,
the Executive shall be entitled to the severance compensation provided in
Section 5(c) as if the Executive were terminated by the Company without Cause.
6. Additional Positions. During the Employment Period, the
Executive agrees that, in the event the Board of Directors (subject, as
required, to shareholder vote) requests the Executive to serve as a director of
the Company and/or any of its subsidiaries, as a member of one or more
committees of the respective Boards of Directors of the Company and any of its
subsidiaries, and in one or more executive offices of any of the Company's
subsidiaries as the Executive may from time to time be elected, he will so serve
without further compensation.
7. Representations by the Executive. The Executive hereby
represents and warrants to the Company that (a) the Executive's execution and
delivery of this Agreement and
4
<PAGE>
his performance of his duties and obligations hereunder will not conflict with,
cause a breach or default under, or give any party a right to damages under (or
to terminate) any other agreement to which the Executive is a party or by which
he is bound, and (b) there are no restrictions, agreements or understandings
that would make unlawful the Executive's execution or delivery of this Agreement
or the performance of his obligations hereunder.
8. Confidentiality.
(a) Non-Disclosure Obligation. During the Employment Period or at
any time thereafter, irrespective of the time, manner or cause of the
termination of this Agreement, the Executive will not directly or indirectly
reveal, divulge, disclose or communicate to any person or entity, other than
authorized officers, directors, and employees of the Company, in any manner
whatsoever, any Confidential Information (as hereinafter defined) without the
prior written consent of the Company.
(b) Definition. As used herein, "Confidential Information" means
information disclosed to or known by the Executive as a direct or indirect
consequence of his employment hereunder about the Company or its subsidiaries or
their respective businesses, products and practices which information is not
generally known in the business in which the Company or its subsidiaries, as the
case may be, is or may be engaged. However, Confidential Information shall not
include under any circumstances any information with respect to the foregoing
matters which is (i) available to the public from a source other than the
Executive or persons who are not under similar obligations of confidentiality to
the Company and who are not parties to this Agreement, (ii) required to be
disclosed by any court process or any government or agency or department of any
government, or (iii) the subject of a written waiver executed by the Company for
the benefit of the Executive.
(c) Return of Property. Upon termination of this Agreement, the
Executive will surrender to the Company all Confidential Information, including
without limitation, all lists, charts, schedules, reports, financial statements,
books and records of the Company and its subsidiaries, and all copies thereof,
and all other property belonging to the Company.
9. Non-Competition.
(a) Term and Scope. Subject to the other provisions of this Section
9, from and after the date hereof until the date which is one year after the
expiration or earlier termination of this Agreement in accordance with the terms
hereof (the "Noncompetition
5
<PAGE>
Term"), without the prior written consent of the Board of Directors of the
Company, the Executive shall not directly or indirectly participate as a
stockholder, proprietor, partner, trustee, consultant, employee, director,
officer, lender, or investor in any corporation, business or professional
enterprise that provides management services to medical practices within the
musculoskeletal specialty or other specialties practiced by any medical practice
subject to a management services contract or arrangement during the
Noncompetition Term with the Company or any of its subsidiaries, in each case
within a thirty mile radius of (i) any location in which the Company or its
subsidiaries presently conducts business or (ii) any location in which the
Company or its subsidiaries, during the Noncompetition Term, (x) has initiated
business acquisition or affiliation discussions with physician groups, (y) has
expressed a bona fide intent to conduct business or (z) conducts business.
(b) Exception. Nothing contained herein shall limit the right of the
Executive to hold and make investments in securities of any corporation or
limited partnership that is registered on a national securities exchange or
admitted to trading privileges thereon or actively traded in a generally
recognized over-the-counter market, provided the Executive's equity interest
therein does not exceed 5% of the total outstanding shares or interests in such
corporation or partnership.
(c) Extension for Noncompliance. If, during any period within the
Noncompetition Term, the Executive is not in compliance with the terms of this
Section 9, the Company shall be entitled to, among other remedies, compliance by
the Executive with the terms of this Section 9 for an additional period equal to
the period of such noncompliance. For purposes of this Agreement, the term
"Noncompetition Term" shall also include such additional period.
(d) Reasonableness. The Executive hereby acknowledges that the
geographic boundaries, scope of prohibited activities and the time duration of
the provisions of this Section 9 are reasonable and are no broader than are
necessary to protect the legitimate business interests of the Company.
10. Non-Solicitation and Non-Interference. During the Noncompetition
Term, the Executive shall not, directly or indirectly, (a) solicit the
employment of any current or future employee of the Company without the prior
written consent of the Board of Directors of the Company, (b) request, induce or
attempt to influence any employee of the Company to terminate his or her
employment with the Company, or (c) request, induce or attempt to influence any
supplier, customer, patient or client of the Company to terminate his, her or
its relationship with the Company.
6
<PAGE>
11. Injunctive Relief. The Executive acknowledges that the breach of
any of the agreements contained herein, including, without limitation, any of
the confidentiality, non-competition and non-solicitation covenants specified in
Sections 8 through 10, may give rise to irreparable injury to the Company,
inadequately compensable in money damages. Accordingly, the Company shall be
entitled to injunctive relief to prevent or cure breaches or threatened breaches
of the provisions of this Agreement and to enforce specific performance of the
terms and provisions hereof in any court of competent jurisdiction, in addition
to any other legal or equitable remedies which may be available. The Executive
waives any requirements for the posting of a bond in connection with the
issuance of such an injunction. The Executive further acknowledges and agrees
that the covenants contained herein are necessary for the protection of the
Company's legitimate business interests and are reasonable in scope and content.
12. Assignment. This Agreement will be binding upon the parties
hereto and their respective successors and permitted assignees. Because the
Executive's duties and services hereunder are special, personal and unique in
nature, the Executive may not transfer, sell or otherwise assign his rights,
obligations or benefits under this Agreement (and any attempt to do so will be
void).
13. Headings. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way affect, limit or
amplify the provisions hereof.
14. Notices. All notices and other communications required or
permitted hereunder must be in writing and (a) delivered personally, (b) sent by
telefacsimile, (c) delivered by a nationally recognized overnight courier
service, or (d) sent by registered or certified mail, postage prepaid, as
follows:
(i) If to the Company, to:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Facsimile No.: (713) 339-2858
Attention: Board of Directors
7
<PAGE>
(ii) If to the Executive, to:
Ronald E. Pierce
4918 Cambridge Street
Sugarland, Texas 77479
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Section 14 will (x) if delivered
personally or by overnight courier service, be deemed given upon delivery; (y)
if delivered by telefacsimile or similar facsimile transmission, be deemed given
when electronically confirmed; and (z) if sent by registered or certified mail,
be deemed given when received. Any party from time to time may change its
address for the purpose of notices to that party by giving a similar notice
specifying a new address, but no such notice will be deemed to have been given
until it is actually received by the party sought to be charged with the
contents thereof.
15. Invalid Provisions. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable under present or future laws, such
provision shall be fully severable, and this Agreement shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part of this Agreement; the remaining provisions of this Agreement
shall remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance from this Agreement. In
lieu of each such illegal, invalid, or unenforceable provision, there shall be
added automatically as a part of this Agreement a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
16. Entire Agreement; Amendments. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, if any, relating to the
subject matter hereof. This Agreement may be amended in whole or in part only
by an instrument in writing setting forth the particulars of such amendment and
duly executed by an executive officer of the Company and by the Executive.
17. Waiver. No delay or omission by any party hereto to exercise any
right or power hereunder shall impair such right or power or be construed as a
waiver thereof. A waiver by any party hereto of any of the covenants to be
performed by any other party or any breach thereof shall not be construed to be
a waiver of any succeeding breach thereof or of any other covenant herein
contained. Except as otherwise expressly set forth herein, all remedies
8
<PAGE>
provided for in this Agreement shall be cumulative and in addition to and not in
lieu of any other remedies available to any party at law, in equity or
otherwise.
18. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall constitute an original, and all of which
together shall constitute one and the same agreement.
19. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Texas, without regard to conflict of
laws principles thereof.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
9
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
COMPANY:
INTEGRATED ORTHOPAEDICS, INC.
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
EXECUTIVE:
---------------------------------------
Ronald E. Pierce
10
<PAGE>
EXHIBIT A
SCHEDULE OF FRINGE BENEFITS
1. The Company shall provide major medical health insurance coverage for the
Executive and those members of his immediate family whose primary residence is
the same as Executive's primary residence.
2. The Company shall provide long-term disability insurance coverage for the
Executive equal to 50% of the Executive's Base Salary payable pursuant to
Section 3(a) of this Agreement.
3. The Company shall provide term life insurance coverage having a death
benefit of $1,000,000, payable, upon the death of the Executive, to the
beneficiary or beneficiaries selected by the Executive.
11
<PAGE>
EXHIBIT 10.21
<PAGE>
EMPLOYMENT CONTRACT
AGREEMENT dated and effective this 30th day of September by and between
Kerry N. Lowery, a resident of Spring, Texas ("Employee"), and Integrated
Orthopaedics, Inc. (the "Company").
WITNESSETH
For and in consideration of the mutual promises and covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee agree as
follows:
ARTICLE I
DUTIES
1.1 DUTIES. During the term of this Agreement, the Company agrees to
employ Employee as Senior Vice President of Development for the Company, and
Employee agrees to serve the Company in such capacity or in such other
capacities as the President of the Company may direct, all upon the terms and
subject to the conditions set forth in this Agreement.
1.2 TERM. The term of this Agreement shall commence on the date and year
first written and shall continue for a period of one-year (the "Initial Term");
unless sooner terminated in accordance with the provisions of the Agreement
hereinafter set forth. The Initial Term shall automatically be extended on each
anniversary of this Agreement for an additional one-year term (each an
"Extension Term") unless either party hereto notifies the other of intent to
terminate this Agreement as hereinafter set forth.
1.3 COMPENSATION AND BENEFITS.
A. As compensation for services rendered hereunder, Employee is paid in the
following manner: $150,000 for one year. If this agreement continues beyond the
initial time frame, the raises will be determined by Company policy. In
addition to such amount, the Company, may on, it's sole discretion, may award to
Employee a bonus of up to 50% of the current year's salary. The bonus will be
based on annual performance objectives as set by the Company.
B. Employee shall be entitled to receive all of the employee benefits that
may, from time to time, be provided by the Company to its employees. Employee
shall also be entitled to receive liability insurance covering those acts,
omissions, or other conditions specifically related to or resulting from the
course and scope of Employee's duties as Senior Vice President of Development
for the Company.
1.4 LONG TERM INCENTIVE PLAN. If Employee is eligible, participation in the
Long Term Incentive Plan will be offered in separate documents. Only Employees
who are eligible will receive contracts.
1.5 EXPENSES: The Company shall reimburse Employee for all expenses
reasonably incurred by Employee on behalf of the Company in accordance with the
prevailing practice and policy of the Company.
<PAGE>
1.6 CONFIDENTIAL INFORMATION: Employee acknowledges that in and as a result
of his employment hereunder, he will be making use of, acquiring, and/or adding
to confidential information of a special and unique nature and value relating to
such matters as the Company's trade secrets, systems, procedures, manuals,
confidential reports, and lists of clients, ("Confidential Information"). As a
material inducement to the Company to enter into this Agreement and to pay to
Employee the compensation and benefits stated herein, Employee covenants and
agrees that he shall not, at any time during or for one (1) year following the
term of his employment, directly or indirectly, divulge or disclose for any
purpose whatsoever any Confidential Information that has been obtained by, or
disclosed to, him as a result of his employment by the Company. In the event of
a breach or threatened breach by Employee of any of the provisions of this
paragraph, the Company, in addition to and not in limitation of, any other
rights, remedies, or damages available to the Company at law or in equity, shall
be entitled to a permanent injunction in order to prevent or restrain any such
breach by Employee or Employee's partners, agents, representatives, servants,
employers, employees, and/or any and all persons directly or indirectly acting
for or with him. This section shall not apply to the extent information divulged
or accessed by Employee (i) is already known to him at the time of disclosure,
(ii) is generally available to the public or otherwise was part of public domain
at the time of disclosure, (iii) became generally available to the public after
disclosure through no act or omission of Employee, (iv) was disclosed to
Employee by a third party who had no obligation to restrict disclosure, and (v)
Employee can show that such information was independently developed by Employee
without use of any Confidential Information.
1.7 RESTRICTIVE COVENANT. Employee acknowledges that the services he is to
render are of a special and unusual character with a unique value to the
Company, the loss of which cannot adequately be compensated by damages in an
action at law. In view of the unique value to the Company of the services of
Employee for which the Company has contracted hereunder, because of the
confidential information to be obtained by or disclosed to Employee, as
hereinabove set forth, and as a material inducement to the Company to enter into
this Agreement and to pay to Employee the compensation stated herein as well as
any additional benefits stated in Section 1.3 of this Agreement, as well as any
additional benefits stated herein.
For the period commencing with the date of the Agreement and ending one (1)
year following the termination of this Agreement (severance period), for
whatever reason, the Employee agrees that he will not directly or indirectly,
for his own account or for the account of others, whether as principal or agent
or through the agency of any corporation, partnership, association or other
business entity, engage in any business activity which shall be competitive to
any business of the Company. For purposes hereof, a business will be deemed,
until proven otherwise, to be competitive if it involves providing physician
practice management or network development services, including consulting
services related to physician practice management companies, related to
orthopaedics or the treatment of musculoskeletal injuries or illnesses.
Activities specifically excluded from the definition of competitive business,
for purposes hereof, are (i) accepting employment to directly manage an
independent individual physician practice not associated with a competitive
physician practice management company and (ii) providing individual self-
employed consulting services directly representing an individual physician
practice, but not representing a company providing physician practice management
or network development services to multiple physician practices. The Employee
agrees further that, for a period commencing with the date of this Agreement and
ending one (1) year following termination of this Agreement, for whatever
reason, Employee shall not, directly or indirectly, make known to any person,
firm or corporation, the names and addresses of any clients, customers,
employees or any other information pertaining to them nor call on, solicit, take
away, contract with, employ or hire or attempt to call on, solicit, take away,
contract with,
<PAGE>
employ or hire any of the clients, customers, or employees, including, but not
limited to, those upon whom the Employee called or with whom he became
acquainted during the performance of the services pursuant to this Agreement,
whether for personal purposes or for any other person, firm or corporation.
Nothing contained in this Section 1.7 shall prohibit the Employee from
purchasing and holding as an investment not more than 5% of any class of the
issued and outstanding and publicly traded (on a recognized national or regional
securities exchange or in the over-the-counter market) capital stock of any such
corporation which conducts a business in competition with the business of the
Company. Should the foregoing covenant not to compete be held invalid or
unenforceable because of the scope of the actions restricted thereby, or the
period of time within which such agreement is operative in the judgment of a
court of competent jurisdiction, the parties agree that and hereby authorize
such court to define the maximum actions subject to and restricted by this
Section 1.7 and the period of time during which such agreement is enforceable.
The provisions of this Section 1.7 shall be applicable for the period indicated,
regardless of the termination of this Agreement for any reason prior to the
expiration of such period.
1.8 PROPRIETARY PROPERTY ASSIGNMENT. Any files or lists, notes, reference
materials, client lists, sketches, diagrams, manuals, reproductions, training or
education material, memoranda, documentation, and records incorporating or
reflecting any of the information or proprietary property, or developed as a
result of Employee's services to the Company (hereinafter collectively referred
to as "Proprietary Property"), shall belong exclusively to the Company and shall
be delivered to the Company upon termination of this Agreement for whatever
reason said termination occurs.
1.9 SPECIFIC PERFORMANCE. Employee acknowledges that a remedy at law for
any breach or attempted breach of Sections 1.6, 1.7 and 1.8 of this Agreement
will be inadequate; (i) Employee agrees that the Company shall be entitled to
specific performance and injunctive and other equitable relief in case of any
such breach or attempted breach; and (ii) the remedy provided in this Section
1.9 is in addition to, and not in lieu of, any other rights and remedies
available to the Company under law and in equity.
1.10 CERTAIN ACTIVITIES. Unless otherwise agreed to in writing by the
parties hereto, all income generated by Employee from his/her services and other
activities for or on behalf of the Company, including, but not limited to,
consulting activities, speaking engagements, publication of articles and
research, shall be the property of the Company.
ARTICLE II
TERMINATION
2.1 TERMINATION FOR CAUSE. Notwithstanding any other provision hereof,
the Company may terminate Employee's employment under this Agreement at any time
for cause. The termination shall be evidenced by written notice thereof to the
Employee, which shall specify the cause for termination. For purposes hereof,
the term "cause" shall include, without limitation, the inability of the
Employee, through sickness or other incapacity, to perform his duties under this
Agreement for a period in excess of 120 substantially consecutive days;
dishonesty; theft; conviction of a crime; unethical business conduct; and a
material breach of this Agreement. The term "cause" shall also include the
failure of Employee for any reason, within 5 days after receipt by Employee of
written notice thereof from the Company, to correct, cease, or otherwise alter
any insubordination, failure to comply with instructions, or other action or
omission to act that in the opinion of the Company does or may materially or
adversely affect its business or operations. The Company's obligations hereunder
shall terminate upon any
<PAGE>
termination for cause pursuant to this Section 2.1; provided, however, if such
termination results from sickness or other incapacity of Employee, the Company
may, in its sole discretion (without any obligation), extend to Employee certain
benefits relating to such termination.
2.2 TERMINATION WITHOUT CAUSE. Notwithstanding any other provision
hereof, the Company or Employee may terminate this Agreement without cause upon
30 days prior written notice thereof given to the other party hereto. In the
event the Company terminates this Agreement without cause pursuant to this
paragraph, the Company shall pay Employee, 9 months of his annual base salary,
through the regularly scheduled payroll cycle. In addition, the Company shall
extend to the Employee health, dental, Long Term Disability & Life Insurance
Benefits until end of severance period or upon employment with another employer,
which ever comes first under Section 1.3 hereof. Payment by the Company in
accordance with this paragraph shall constitute Employee's full severance pay
and the Company shall have no further obligation to Employee arising out of or
subsequent to such termination.
ARTICLE III
ARBITRATION
Any controversy of any nature whatsoever, including but not limited to tort
claims or contract disputes, between the parties to this Agreement or between
the Employee, his heirs, executors, administrators, legal representatives,
successors, and assigns and the Company and its affiliates, arising out of or
related to the Employee's employment with the Company, any resignation from or
termination of such employment and/or the terms and conditions of the Agreement,
including the implementation. applicability and interpretation thereof, shall,
upon the written request of one party served upon the other, be submitted to and
settled by arbitration in accordance with the provisions of the Federal
Arbitration Act, 9 U.S.C. ~(S) 1-15, as amended. Each of the parties to this
Agreement shall appoint one person as an arbitrator to hear and determine such
disputes, and if they should be unable to agree, then the two arbitrators shall
choose a third arbitrator from a panel made up of experienced arbitrators
selected pursuant to the procedures of the American Arbitration Association (the
"AAA") and. once chosen, the third arbitrator's decision shall be final, binding
and conclusive upon the parties to this Agreement. Each party shall be
responsible for the fees and expenses of its arbitrator and the fees and
expenses of the third arbitrator shall be shared equally by the parties. The
terms of the commercial arbitration rules of AAA shall apply except to the
extent they conflict with the provisions of this paragraph. It is further agreed
that any of the parties hereto may petition the United States District Court for
the District of Houston, Texas, for a judgment to be entered upon any award
entered through such arbitration proceedings.
ARTICLE IV
MISCELLANEOUS
4.1 NOTICES. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been delivered on the date personally delivered or on the date mailed, postage
prepaid, by certified mail, return receipt requested, or telegraphed or telexed
and confirmed if addressed to the respective parties as follows:
If to the Employee:
Kerry N. Lowery
17206 Kettle Creek
Spring, Texas 77379
<PAGE>
If to the Company:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, TX 77057
Attn: Human Resources
provided, however, that any party shall have the right to change such party's
address for notice hereunder to any location by giving of notice to the other
party in the manner set forth hereinabove.
4.2 GOVERNING LAW: This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas and venue for any
dispute arising hereunder shall be deemed proper in Harris County, Texas.
4.3 WAIVER. The waiver of any provision hereof shall not be deemed to
constitute the waiver of such provision or any other provisions hereof
4.4 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
4.5 BINDING EFFECT. Subject to the provisions of Section 2.2 hereof, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and the successors and assigns of the Company and Employee.
4.6 CAPTIONS AND HEADINGS. The section and paragraph headings in this
Agreement are for reference purposes only and in no way define, limit or
describe the scope or content of this Agreement or any paragraph hereof.
4.7 ENTIRE AGREEMENT: AMENDMENT. This Agreement represents the entire
agreement by and between the parties hereto relating to the subject matter
hereof this Agreement may not be changed except by written agreement duly
executed by the parties hereto.
4.8 SUCCESSORS AND ASSIGNS
A. Except as otherwise expressly provided herein, Employee agrees on behalf
of his executors and administrators, heirs, legatees, distributees and any other
person or persons claiming any benefits under his by virtue of this Agreement,
that this Agreement and the rights, interests and benefits hereunder shall not
be assigned, transferred, pledged or hypothecated in any way by Employee or any
executor, administrator, heir, legatee, distributee or person claiming under
Employee by virtue of this Agreement and shall not be subject to execution,
attachment or similar process. An attempt at assignment, transfer, pledge or
hypothecation or other disposition of this Agreement or of such rights, interest
and benefits contrary to the foregoing provision, or the levy of any attachment
or similar process thereupon, shall be null and void and without effect except
as provided in Section 4.2.
<PAGE>
B. The Company shall be permitted to assign this Agreement to its
successors and assigns and all covenants and agreements hereunder shall inure to
the benefit of and be enforceable by or against such successors or assigns. The
terms "successors" and "assigns" shall include any person that buys all or
substantially all of the Company's assets, or at least thirty-five percent (35%)
of its voting equity, or with which the Company merges or consolidates.
4.9 THIRD PARTY BENEFICIARIES. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person or entity not
a party to this Agreement (except as provided in Section 4.9).
4.10 OBLIGATIONS OF THE COMPANY. Subject to Section 4.9, Employee agrees
to look solely to the Company for the performance of all of the Company's
obligations under this Agreement, and no other person or entity, including
without limitation any shareholder or creditor of the Company, shall have any
liability for the performance of any of the obligations of the Company under
this Agreement.
4.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts; each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
EMPLOYEE
-----------------------------------
Kerry N. Lowery
-----------------------------------
Date
COMPANY:
Integrated Orthopaedics, Inc.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-----------------------------------
Date
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
INTEGRATED ORTHOPAEDICS, INC.
SCHEDULE RE: (LOSS) EARNINGS PER SHARE
For the three years ended December 31, 1997
1997 1996 1995
--------------- --------------- ------------
<S> <C> <C> <C>
Basic
Weighted average common shares outstanding 5,381 5,286 5,286
=============== =============== ============
Net (loss) income $ (3,441) $ 787 $ 518
Series A Preferred Stock Dividend (202) (127)
Series B Preferred Stock Dividend (117)
Series B Preferred Stock Premium Dividend (8,333)
Series B Preferred Stock Warrant Dividend (1,000)
--------------- --------------- ------------
Net (loss) income after dividends $(13,093) $ 660 $ 518
=============== =============== ============
(Loss) earnings per share $ (2.43) $ 0.12 $ 0.10
=============== =============== ============
Diluted
Weighted average shares outstanding 5,381 5,286 5,286
Net effect of dilutive stock options
and warrants, based on treasury
stock method using average
market price 170 151
--------------- --------------- ------------
Diluted common shares outstanding 5,381 5,456 5,437
=============== =============== ============
Net (loss) income $ (3,441) $ 787 $ 518
Series A Preferred Stock Dividend (202) (127)
Series B Preferred Stock Dividend (117)
Series B Preferred Stock Premium Dividend (8,333)
Series B Preferred Stock Warrant Dividend (1,000)
--------------- --------------- ------------
Net (loss) income after dividends $(13,093) $ 660 $ 518
=============== =============== ============
(Loss) earnings per share $(2.43) $ 0.12 $ 0.10
=============== =============== ============
</TABLE>
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
DELAWARE CORPORATIONS:
IOI Management Services of Connecticut, Inc.
LOUISIANA CORPORATIONS:
IOI Management Services of Louisiana, Inc.
PENNSYLVANIA CORPORATIONS:
IOI Management Services of Pennsylvania, Inc.
TEXAS CORPORATIONS:
IOI Management Services of Houston, Inc.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-42624) of Integrated Orthopaedics, Inc. of our
report dated March 24, 1998 appearing on page 24 of this Form 10-KSB.
PRICE WATERHOUSE LLP
Houston, Texas
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,642
<SECURITIES> 0
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0
3
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</TABLE>
