<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______________ to ______________
Commission file number 1-10677
Integrated Orthopedics, Inc.
(Exact name of small business issuer as specified in its charter)
Texas 76-0203483
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5858 Westheimer, Suite 500, Houston, Texas 77057
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(713) 225-5464
--------------
(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
------------------- -------------------
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. [ X ]
Net revenues of the issuer for the fiscal year ended December 31, 1998
were $12,218,000.
The aggregate market value of Common Stock held by non-affiliates of
the issuer as of March 12, 1999 computed by reference to the closing price at
which the stock was sold, was $5,343,970.
As of March 12, 1999, 6,496,540 shares of Common Stock were outstanding
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents Incorporated by Reference
Portions of the Proxy Statement for issuer's 1999 Annual Meeting of Shareholders
are incorporated by reference in Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas corporation, was
formed on April 1, 1990 as a successor corporation in a reincorporation merger.
IOI is a national physician services company ("PSC"), which provides management,
consulting and ancillary services to orthopaedic medical practices and other
musculoskeletal-related patient businesses. As of December 31, 1998, the Company
provided a comprehensive array of management services under long-term agreements
to 27 physicians in four states. As discussed further in this report, in January
1999, the Company terminated one of its management services agreements under
which management services were provided to four physicians. 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 also operates two work hardening facilities located in
Houston, Texas, that offer rehabilitation and work reconditioning services to
injured workers.
RECENT DEVELOPMENTS
During 1998, the Physician Practice Management ("PPM") sector in general, and in
the orthopaedic single specialty area in particular, experienced significant
deterioration in its market position. IOI's management believes that the primary
reason for such deterioration was the inability of PPM companies ("PPMCs") to
demonstrate operating efficiency and to deliver value in the time frame expected
by physicians. Prior to 1998, the PPMC sector was characterized by an emphasis
on rapid growth, and capital to fuel growth was readily available. In early
1998, capital to fuel growth and acquisitions in the PPM industry became much
more scarce. As a result, the acquisition centered PPMC strategy became
relatively difficult to execute.
Due to the changes during 1998 in the equity markets, in the PPM sector in
general and the orthopaedic single specialty area in particular, IOI's
management has redefined the Company's growth strategy by considering new
alternatives relative to traditional equity-based physician affiliation models,
which involve the acquisition by a PPMC of the assets of a physician's practice
and the PPMC entering into a long-term management services agreement with the
practice. Management is offering a portfolio of physician management services
alternatives, to include consulting services and equity joint ventures for
ancillary services, as well as providing certain management services through
both the equity and non-equity models. The development of alternative financial
relationships is expected to generate broader appeal for the Company's services
within the musculoskeletal market and to expand access to physician practices
for whom equity based acquisitions are not financially appropriate or appealing.
Management also anticipates that such a portfolio of services will provide the
Company with the opportunity to achieve sustainable revenue and earnings growth
irrespective of variable conditions in the equity capital markets, while
enhancing shareholder value and return on capital.
THE ORTHOPAEDIC AND MUSCULOSKELETAL HEALTHCARE MARKET AND PSC
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
2
<PAGE> 3
services, the purchase of durable medical equipment, and payment of facility
fees charged by hospitals and outpatient treatment centers.
There are approximately 23,000 orthopaedic surgeons in the United States.
Traditionally, orthopaedic surgeons have practiced individually or in small
groups. However, several factors are driving physicians in all specialties,
including orthopedists, 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 demand for services offered by PPMCs and emerging PSCs as alternative
sources 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 requires a physician's signature approval
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
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. IOI's management believes that
PPMCs and emerging PSCs 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.
BUSINESS STRATEGY
IOI's strategic plan is to expand its operations through the offering of
selective services and financial relationships tailored to the needs of
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. IOI
expects to provide in-market growth opportunities for affiliated practices, or
for practices under other types of financial relationships, through the
development of ancillary and technical services appropriate to the healthcare
needs of each individual practice's patient population. IOI expects to assist
such practices to realize a larger portion of patient care reimbursement by
providing integrated musculoskeletal care. IOI's near term growth strategy
includes continuation of its vertical integration strategy through providing
physician practice management services in orthopaedics and orthopaedics-related
medical specialties, expansion of ancillary services at existing and acquired
locations and providing selected services on a consulting or management
fee-for-service basis.
IOI believes the variety of services and financial relationship offered by the
Company are a competitive advantage over other PPMCs.
3
<PAGE> 4
OPERATIONS
Affiliated Orthopaedic Groups
IOI began executing its orthopaedic physician practice affiliation strategy in
1997. During the last quarter of 1997, the Company completed three practice
affiliation transactions. The Company completed its fourth affiliation
transaction in March 1998. In connection with these transactions, the Company
acquired the assets of the affiliated medical practices ("Affiliated Practices")
and entered into long-term management services agreements ("MSA") with the
Affiliated Practices.
Services provided by medical providers employed by Affiliated Practices under
management by the Company include office-based diagnostic and treatment
programs, 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 by Affiliated Practices to patients who are
members of preferred provider or managed care organizations, who are covered by
workers' compensation insurance, who are Medicare or Medicaid beneficiaries, and
to a small extent, patients who are represented by personal injury attorneys.
Physicians associated with Affiliated Practices maintain staff privileges at
local hospitals and, generally, have long standing relationships with payors and
referral sources in their local markets.
All physicians and all non-physician employees involved in patient care are
employed by Affiliated Practices. 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 MSAs with
these practices, IOI is responsible for the cost of the compensation and
benefits of the non-medical personnel, and such costs are reflected in the
Company's financial statements.
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. Services provided by IOI under this
type of arrangement include, among others, development of ancillary services
(including ambulatory surgery, diagnostic imaging, physical therapy and pain
management); physician recruiting; managed care contracting; business office
management; employee and retirement benefits management; and information systems
management.
Work Hardening
The Company owns and operates two work hardening clinics in Houston, Texas under
the trade name "WorkWell." The WorkWell facilities were previously operated by a
Houston medical group with which the Company held a management contract until
its termination in November 1997.
Work hardening is a therapy philosophy based on a comprehensive,
multi-disciplinary approach to industry's need for injury prevention and
rehabilitation. Work hardening addresses the physical, psychological, behavioral
and social aspects of an injured worker's ability to return 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. WorkWell staffing includes varying
combinations of licensed occupational therapists, licensed physical therapists,
certified occupational therapy assistants,
4
<PAGE> 5
exercise physiologists, work hardening supervisors, vocational specialists and
licensed social workers. In addition, each WorkWell Clinic has available a
psychologist and a nutritionist.
EMPLOYEES
At March 30, 1999, the Company employed 125 full time and 4 part time employees.
Under the terms of its MSAs, the Company is also responsible for the
administration of the practice employment relationships of 23 physicians and 67
non-physician medical practice employees. None of the Company's or any
Affiliated Practices' employees are covered by collective bargaining agreements.
COMPETITION, MAJOR CUSTOMERS AND REIMBURSEMENT
Competition
The healthcare services market in general, and the PPM and emerging PSC
businesses in particular, are highly competitive. There are other publicly
traded companies and private companies who compete or intend to compete for the
right to manage and service 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 Affiliated 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
Substantially all of the current Company's revenue is derived from physician
practice management affiliation transactions and from the internal growth of
practices under the Company's management. As of December 31, 1998, the four
practices under Company management represented approximately 81% of the
Company's revenue, and the loss of any one of these agreements could have a
material adverse effect on the Company's operations and earnings. The medical
practice located in Bridgeport, Connecticut, whose MSA was terminated by the
Company in January 1999, contributed approximately 15% of the Company's revenue
in 1998. Subsequent to December 31, 1998, as the Company completes additional
physician practice affiliation transactions and increases its revenue base
through the offering of other selective services, the relative materiality of
each MSA will diminish.
Reimbursement.
The various services rendered by the medical practices under Company management
are generally paid 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.
SERVICE MARKS
The Company owns federal registrations for the service marks DRCA and IOI. These
marks were registered in September 1995 and January 1999, respectively. The
registrations are valid for a term of ten
5
<PAGE> 6
years and may be renewed thereafter for additional ten-year periods, as long as
the company continues to use the marks.
The Company also owns a Texas registration for the service mark WORKWELL, which
was registered with the Secretary of State of Texas in January 1990. This
registration, like the federal registrations, is valid for a term of ten years
and may be renewed thereafter for successive ten-year periods.
In addition, the Company has applied for federal registration of the following
service marks on the Principal Register of the United States Patent and
Trademark Office:
IOI AND DESIGN
MEDXPLORER
MEDOUTLOOK
MEDICALMINE
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 it 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 material
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.
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.
6
<PAGE> 7
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 are in material compliance with existing
applicable laws. Specifically, the Company believes the compensation it receives
for its management services is consistent with fair market value and will not
constitute fee splitting. In addition, the Company believes that its long-term
management agreements with physician practices do not result in the Company's
exercising control over the provision of medical services in violation of the
prohibition against the corporate practice of medicine. 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 and
as a result of increased funding by the federal government for anti-fraud
efforts, joint ventures and other transactions among health care providers have
faced increased scrutiny from both the Department of Justice and the Office of
Inspector General of the Department of Health and Human Services 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 contemplated 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 from 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's business does not fall
within certain of the current or proposed safe harbors, the Company believes
that its contemplated operations materially comply with the anti-kickback
statutes and regulations. The Company is not aware of any challenge or
investigation of the Company with respect to these matters; however, there can
be no assurance that such challenge or investigation will not occur in the
future, particularly with the implementation of new prohibitions and
regulations.
Prohibitions on Referrals to Certain Entities
The Stark Law 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, including an ownership or investment interest or compensation
arrangement, with the entity. The revised Stark Law, known as "Stark II,"
dramatically enlarged the field of designated health services to which the
referral prohibitions apply. Effective January 31, 1995, Stark II prohibits a
physician from referring Medicare or Medicaid patients to an entity in which the
physician or an immediate family member has a financial relationship for the
provision of physical therapy, occupational
7
<PAGE> 8
therapy, radiology, home health, hospital, and other services, unless an
exception applies. Exceptions include, but are not limited to, in-office
ancillary services, ambulatory surgical center services, publicly-traded
securities, and de minimis compensation, as well as office space and equipment
rentals that meet certain tests. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties. On
January 9, 1998, the Health Care Financing Administration, issued proposed rules
implementing Stark II; final rules are not expected in the near future.
Designated health services provided in violation of the Stark referral
prohibitions may not be billed to or paid by a governmental program. 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 contemplated activities are and will be in material 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 into 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 material compliance with
applicable law, but there can be no assurance that a regulatory review or civil
suit would not result in an adverse determination or that the regulatory
environment will not change in a manner which could have a material adverse
effect on the Company's operations and its expansion strategy.
Certificate of Need
Some states require that providers of certain orthopaedic 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
8
<PAGE> 9
discontinued their CON programs altogether, there is no assurance that some or
all of these states may not at some future time reinstitute such programs. In
addition, the Company's expansion may place it in CON states. As a result, to
the extent that the CON approval process delays the construction and/or
operation of proposed services and facilities or that CON approval is denied,
CON regulations may have an adverse effect on the Company's policy to expand its
offerings of certain services.
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 more onerous and/or predominantly mandatory in the future, it
may have an adverse effect on the Company's management of rehabilitation
operations.
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 its 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 clinic 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 January 1999, the Company and a subsidiary of the Company, IOI Management
Services of Connecticut, Inc. ("IOI Regional"), filed suit against Merritt
Orthopaedic Associates, P.C. ("Merritt"), Patrick J. Carolan, M.D., ("Carolan"),
and Mark E. Wilchinsky, M.D. ("Wilchinsky") in the Superior Court for the
Judicial District of Fairfield at Bridgeport, Connecticut. The lawsuit seeks to
enforce certain repurchase obligations under the MSA by and among the Company,
IOI Regional, Merritt, Carolan and Wilchinsky. The MSA was terminated by the
Company in January 1999 due to the failure of Merritt, Carolan and Wilchinsky to
satisfy certain of their obligations thereunder. Upon such a termination for
cause, IOI Regional, in its sole discretion, is entitled under the MSA to
require Merritt to comply with certain repurchase obligations regarding assets
owned by IOI Regional and used by Merritt
9
<PAGE> 10
to provide medical services and otherwise fulfill its obligations and the MSA,
including, without limitation, real estate, improvements, accounts receivable,
contracts and intangibles. The Company believes that the total amount of
Merritt's repurchase obligations to IOI Regional presently totals approximately
$4.6 million. In addition, the Company is seeking money damages, compensatory
damages and punitive damages in connection with certain related causes of action
against Merritt, Carolan, and Wilchinsky. The Company intends to vigorously
pursue its claims in connection with this action; however, the ultimate outcome
of this lawsuit cannot be predicted with certainty.
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, the Company believes that all such claims and actions are
either adequately covered by insurance or will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
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 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During 1998, the Company's Common Stock was traded on the American Stock
Exchange ("ASE") under the symbol "IOI". Prior to March 12, 1997, the Company's
trading symbol was "DRC." At March 12, 1999, the Company had 135 shareholders of
record. A significant portion of the Company's common stock not held by
affiliates of the Company is held through securities depositories. The following
table set forth the high and low sale prices per share of the Company's Common
Stock for the periods indicated, as reported by the ASE:
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
1997
- - ----
1st Quarter
2nd Quarter $4.0000 $5.3125
3rd Quarter $4.7500 $5.5000
4th Quarter $5.2500 $9.0625
$7.6250 $8.8750
1998
- - ----
1st Quarter
2nd Quarter $6.2500 $8.1250
3rd Quarter $5.2500 $7.1250
4th Quarter $4.4375 $6.3750
$2.4375 $4.6250
</TABLE>
The Company has not declared or paid any dividend to common shareholders since
inception and does not anticipate the payment of any cash dividends in the
foreseeable future. Pursuant to the terms of the $65.0 million Revolving Credit
Facility entered into in July 1998, the Company may not declare and pay cash
dividends on any of its capital stock. Additionally, 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.
10
<PAGE> 11
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, 1998,
the Company has accrued unpaid dividends of $531,000 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, 1998, the Company has recorded the issuance
of 23,374 additional shares of Series B Preferred Stock to satisfy dividends
accrued for the year ended December 31, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
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
"Business," hereof, there can be no assurance that actual results will not
differ materially from these forward-looking statements.
RESULT OF OPERATIONS
GENERAL
In pursuing the single focus equity model musculoskeletal-related PPM company
strategy (prior to a subsequent change in strategy during the fourth quarter of
1998 to a physician services company - see Item 1 - "Business"), the Company,
during the two-year period ended December 31, 1998 entered into four equity
medical affiliation transactions and divested all operations that did not fit
within this strategic framework. Additionally, in its efforts to raise capital
to pursue the equity model PPM strategy, in December 1997, the Company sold
250,000 shares of its Series B Preferred Stock and issued contingent Warrants to
acquire up to 5 million shares of the Company's Common Stock. See Notes 4, 5 and
10 to Item 7 - "Financial Statements" for a description of these transactions.
Additionally, in pursuing this strategy, the Company began building its
corporate infrastructure during the fourth quarter of 1996 and continued through
the first half of 1998. Consequently, there has been a significant increase in
overhead costs throughout this period.
As a result of the above transactions, the Company's business portfolio,
financial position, and operating results during 1998 were significantly
different from those in 1997. The "1997 divestiture" as used in the following
discussion consisted of the termination of a management agreement with a
Houston, Texas based musculoskeletal-related healthcare delivery system, the
closure of a physical therapy center and a MRI center and the termination of a
facility management contract with a Houston hospital. In conjunction with the
1997 divestiture, the Company retained interests in two work hardening
facilities and operated these units in 1998 as a separate business segment from
its physician practice management segment.
In January 1999, the Company terminated the MSA related to the medical practice
managed by the Company in Bridgeport, Connecticut. Approximately 15% of the
Company's 1998 revenues are attributable to this MSA.
11
<PAGE> 12
OPERATIONS DATA
The following table presents revenues and the statement of operations items as
percentages of total revenues:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues 100% 100%
Practice compensation and benefits 36 45
Other direct costs 33 29
General and administrative 54 78
Depreciation and amortization 12 5
Special charges 24 22
------ -----
159% 179%
Loss from operations (59) (79)
Interest income 4 6
Interest expense (4) (2)
------ -----
Loss before income tax benefit (59)% (75)%
Income tax benefit 19 15
------ -----
Net loss (40)% (60)%
====== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES:
Revenues for the year ended December 31, 1998 were $12,218,000, an increase of
$6,503,000, or 114%, over revenues of $5,715,000 for the same period of 1997. Of
the $6,503,000 increase, $8,850,000 was contributed by the four physician
practices managed since October 1997, offset by a decrease of $2,094,000
attributable primarily to the 1997 divestiture and $253,000 attributable to the
two work hardening facilities.
PRACTICE COMPENSATION AND BENEFITS:
Overall practice compensation and benefit costs increased $1,777,000, or 68%,
from $2,597,000 in 1997 to $4,374,000 in 1998. These costs increased $3,222,000
due to the addition of the four physician practices, offset by a decrease of
$1,324,000 attributable to the 1997 divestiture and $121,000 attributable to the
two work hardening facilities.
OTHER DIRECT COSTS:
Overall other direct costs increased $2,381,000, or 143%, from $1,666,000 in
1997 to $4,047,000 in 1998. Of the increase, $3,280,000 was due to the addition
of the four physician practices, offset by a decrease of $796,000 attributable
to the 1997 divestiture and $103,000 attributable to the two work hardening
facilities.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended December 31, 1998
increased $2,162,000, or 49%, from $4,431,000 in 1997 to $6,593,000 in 1998.
Such increase was due primarily to (i) increased
12
<PAGE> 13
salary, compensation and recruiting costs related to additional senior
management and staff to support the Company's business strategy, (ii) increased
travel and communication costs related to business development and management of
the four physician practices located in various states and (iii) additional
other fixed and variable costs to support a higher level of staffing.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $1,222,000, or 396%, from $309,000 in
1997 to $1,531,000 in 1998. Of this increase, $1,108,000 was attributable to the
four physician practices, including a change of the MSA amortization period from
40 years to 25 years effective July 1, 1998, $161,000 to the corporate offices
and $28,000 to the two work hardening facilities, offset by a decrease of
$75,000 associated with the 1997 divestiture.
SPECIAL CHARGES:
During 1998, the Company recorded special charges of $2,946,000 relating to the
write down to net realizable value of its practice MSAs and corporate
restructuring charges. During 1997, the Company recorded special charges of
$1,256,000 relating to the termination of certain management and consulting
contracts and closures of certain physical therapy and magnetic resonance
imaging centers.
INTEREST INCOME:
Interest income increased by $165,000 from 1997 to 1998, with the increase
primarily attributable to investment earnings on net proceeds received from the
issuance of the Series B Preferred Stock completed in December 1997.
INTEREST EXPENSE:
Interest expense increased $358,000 from 1997 to 1998, with the increase
primarily attributable to the amortization of deferred financing costs and
commitment fees associated with the $65.0 million Revolving Credit Facility
entered into in July 1998 and capital leases entered into since October 1997.
INCOME TAX BENEFIT:
Income tax benefit increased $1,436,000 from 1997 to 1998, with the benefit
mainly attributable to the current year loss. No valuation allowance was
recorded in 1998 to offset this loss as the Company expects to realize the
benefit through future reversals of existing taxable temporary differences.
NET LOSS / LOSS PER COMMON SHARE:
Net loss, loss applicable to common shares and loss per common share for the
year ended December 31, 1998 were $4,927,000, $7,466,000 and $1.16, compared to
$3,441,000, $13,093,000 and $2.43, respectively, for the same period in 1997. Of
the decrease in loss applicable to common shares of $5,627,000, $9,333,000 was
attributable to a one-time dividend associated with the issuance in 1997 of the
Series B Preferred Stock and the related warrants, net of additional losses of
$1,486,000 during 1998 attributable to reasons noted above and an incremental
increase in annual stock dividend of $2,220,000 on the Series B Preferred Stock
during 1998. Included in 1998 and 1997 loss applicable to common shares and loss
per share were special charges of $2,008,000 and $1,179,000, or $0.31 and $0.22
per share, respectively. Weighted average shares outstanding increased 20% from
5,381,000 shares to 6,459,000 shares, primarily from shares issued since October
1997 involving the four medical practice affiliation transactions. As of
December 31, 1998, if all shares of the Company's Series A, Convertible
Preferred Stock and Series B Convertible Preferred Stock had been converted
into Common Stock the number of shares of Common Stock outstanding would have
been 16,934,669. See Item 7. Note 10 to Notes to Consolidated Financial
Statements.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended December 31, 1998 was
$2,722,000, compared to $3,310,000 for the same period of 1997, as the Company
continued to incur losses while building its management and operational
infrastructure. Net cash used in investing activities decreased $8,175,000 from
$13,169,000 in 1997 to $4,994,000 in 1998, due primarily to cash used in 1997 of
$12,879,000 to enter into three medical practice transactions, as compared to
cash used in 1998 of $4,688,000 to enter into one medical practice transaction
and to amend certain existing MSAs. Net cash used in financing activities was
$2,908,000 in 1998, as compared to net cash provided by financing activities of
$22,944,000 in 1997. The $25,852,000 decrease in investing activities was
primarily attributable to net cash proceeds of $24,804,000 received from the
issuance of the Series B Preferred Stock in 1997 and cash payments of $1,000,000
in deferred financing costs associated with the $65.0 million Revolving Credit
Facility (the "Credit Facility") entered into in July 1998.
Net working capital was $9,686,000 at December 31, 1998, as compared to
$16,241,000 at December 31, 1997. Such decrease was due primarily to cash used
during 1998 to enter into medical practice transactions, to finance operations,
to repay certain outstanding notes payable and to pay for financing costs
associated with the Credit Agreement.
On July 14, 1998, the Company entered into a credit agreement (the "Credit
Agreement"), which provides for the $65.0 million Credit Facility. The Credit
Facility is available for working capital purposes, to fund acquisitions, to
finance capital expenditures and for the issuance of letters of credit. See
Item 7 - Note 8 to Notes to Consolidated Financial Statements for a more
detailed description of the Credit Agreement. The Credit Agreement requires the
Company to meet certain conditions preceding any borrowings. As of December 31,
1998, the Company was not in compliance with certain financial covenants as a
result of operating losses incurred during the most recent twelve-month period,
including the special charges recorded in the fourth quarter of 1998; therefore,
no funds have been advanced to the Company under the Credit Facility as of such
date. Additionally, the Company's lender has the right to terminate its
commitment to make advances under the Credit Facility as the result of the
Company's failure to meet such financial covenants. The Company is engaged in
discussions with its lender regarding restructuring the terms of the Credit
Facility. The Company intends to use its existing cash balance, additional
financing through equity investment or strategic partnering to enter into new
MSAs or other arrangements with other orthopaedic medical groups in order to
generate the additional earnings necessary to meet the financial covenants under
the Credit Agreement.
The Company anticipates that its current cash balance will be sufficient to fund
capital expenditures, working capital requirements and to fund modest amounts of
future acquisitions through 1999. There can be no assurance that future
developments in the health care industry or general economic trends will not
adversely affect the Company's operations or its ability to meet future funding
requirements.
YEAR 2000 COMPLIANCE
GENERAL
The "Year 2000 or Y2K" problem describes computer systems programming
architectures that use two rather than four digits to define the applicable
year, and therefore cannot distinguish between the year 1900 and the year 2000.
This programming flaw is present in many of the Company's computing hardware and
software systems. This same error may also exist in many of the Company's
supplementary programmable support systems such as their alarm,
telecommunications, and even medical equipment. If uncorrected, the problem
could result in major computer system failure or equipment malfunction causing
significant business disruption.
14
<PAGE> 15
PROJECT
The Company's Year 2000 project is divided into four major segments; application
software, equipment and associated operating software, reimbursement and
vendors. The project includes education, inventory and assessment of risk,
analysis and planning, and the correction and testing of each segment. The
Company's strategy further includes the development of contingency plans,
addressing the potential disruption of operations, caused by Y2K programming
problems.
APPLICATION SOFTWARE
The Company recognizes that investments in information systems and
state-of-the-art medical equipment are integral to its operations. Its practice
management systems (billing, collections, and patient scheduling) are certified
by their manufacturers as Y2K compliant, and the majority of costs related to
implementation are capitalized and amortized over the life of the asset. The
Company will complete all confirmation testing of these application
certifications by July 1, 1999. The Company's financial and accounting systems
are certified as Y2K compliant by its manufacturer. The Company further plans
the implementation of a comprehensive application and database Y2K programming
error-monitoring system, designed to minimize the additional potential
occurrence of such error across the organization's information systems. The
Company does not utilize any "in-house" customized programs, relying entirely on
purchased application systems. All applications are continually monitored and
updated through annual support agreements with their respective manufacturing
vendors after purchase.
EQUIPMENT AND ASSOCIATED OPERATING SOFTWARE
The Company is currently reviewing the Y2K readiness of the medical equipment
and clinical systems used in its practices, with their respective manufacturers.
All have certified that, with minor required upgrade stipulations, their systems
are or will be Y2K compliant by the end of the third quarter of 1999. All
required system upgrades will be effected, tested, and completed during this
period. Any costs incurred through these upgrades will be expensed.
REIMBURSEMENT
The Company bills and collects from numerous third party payors for medical
services. These third parties include fiscal intermediaries that process claims
and make payments on behalf of the Medicare program as well as various insurance
companies, HMO's, and other private payors. As part of the Company's Y2K
strategy, a comprehensive survey has been sent to all significant payors to
assess their timeline for Year 2000 compliance and the impact to the Company
regarding any potential service or payment interruptions. The Company intends to
complete this assessment by July 1, 1999.
VENDORS
The Company is currently evaluating third party vendors of medical supplies and
pharmaceuticals in order to determine whether their services and products will
be interrupted or malfunction due to Y2K problems. This review is expected to be
completed by October 1, 1999.
RISKS
The failure to correct a material Y2K problem could result in an interruption
in, or failure of, certain normal business activities and operations. Such
failures could materially and adversely affect the Company's operation,
liquidity, and financial condition. Due to the general uncertainty inherent in
the Y2K problem, resulting partly from the uncertainty of the Year 2000
readiness of third party suppliers,
15
<PAGE> 16
the Company is unable to determine at this time, whether the consequences of Y2K
failures will have a material impact on the Company's operational results,
liquidity, or financial condition. The Y2K project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Y2K compliance and readiness of its material customers.
The Company believes that, with the implementation of new business systems and
completion of the Project as scheduled, the possibility of significant
interruptions of normal business operations should be reduced.
COSTS
Y2K-related costs incurred through 1998 have not been material to the Company's
results of operations. The Company is not able to reasonably estimate the total
costs to be potentially incurred for completion of its Y2K strategy. Some
replacements and upgrades would take place in the normal course of business. The
foregoing assessment is based upon information currently available to the
Company. The Company can provide no assurance that applications and equipment
that the Company believes to be Year 2000 compliant will not experience
problems. Failure by the Company or third parties on which it relies to resolve
Y2K problems could have a material adverse effect on the Company's results of
operations.
16
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements - Consolidated Financial Statements of Integrated
Orthopaedics, Inc. as of December 31, 1998 and 1997 and for the two years ended
December 31, 1998:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 18
Report of PriceWaterhouseCoopers LLP, Independent Accountants 19
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 23-24
Notes to Consolidated Financial Statements 25-38
</TABLE>
17
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Orthopaedics, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Orthopaedics, Inc. as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Integrated
Orthopaedics, Inc. at December 31, 1998, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Houston, Texas
March 19, 1999
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
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 the results of
their operations and their cash flows for the year 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 audit. We conducted our audit
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 audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 24, 1998
19
<PAGE> 20
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
------ -------------------------
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 6,018 $ 16,642
Accounts receivable, net 3,269 2,956
Income taxes receivable 47 759
Due from affiliated medical groups 240 67
Notes receivable, net 110 152
Other current assets 1,169 753
Deferred income taxes 2,441 315
-------- --------
TOTAL CURRENT ASSETS 13,294 21,644
-------- --------
PROPERTY AND EQUIPMENT
Equipment (including capital leases) 3,384 3,457
Leasehold improvements 229 263
Furniture and fixtures (including capital leases) 727 624
-------- --------
4,340 4,344
Less - accumulated depreciation and amortization (2,502) (2,815)
-------- --------
1,838 1,529
-------- --------
MANAGEMENT SERVICES AGREEMENTS, net of
accumulated amortization of $1,082 in 1998 and $78 in 1997 28,272 25,018
OTHER ASSETS 706 258
-------- --------
TOTAL ASSETS $ 44,110 $ 48,449
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 231 $ 565
Accrued liabilities 2,844 2,780
Due to affiliated medical groups 133
Current obligations under capital leases 122 87
Current portion of notes payable 411 1,838
-------- --------
TOTAL CURRENT LIABILITIES 3,608 5,403
-------- --------
NOTES PAYABLE 868 1,188
OBLIGATIONS UNDER CAPITAL LEASES 351 266
DEFERRED INCOME TAXES 10,200 8,170
-------- --------
TOTAL LIABILITIES 15,027 15,027
-------- --------
COMMITMENTS AND CONTINGENCIES
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,
274,544 shares issued and outstanding in 1998 and 251,170 in 1997 3 3
Common stock, $.001 par value, 50,000,000 shares authorized,
6,557,454 issued in 1998 and 5,885,876 in 1997 7 6
Additional paid-in capital 46,744 41,803
Common stock to be issued 78 1,643
Accumulated deficit (17,499) (10,033)
Treasury shares, 60,914 in 1998 and 13,833 shares in 1997 (250)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 29,083 33,422
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,110 $ 48,449
======== ========
</TABLE>
See accompanying notes.
20
<PAGE> 21
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES $ 12,218 $ 5,715
-------- --------
COSTS AND EXPENSES:
Practice compensation and benefits 4,374 2,597
Other direct costs 4,047 1,666
General and administrative 6,593 4,431
Depreciation and amortization 1,531 309
Special charges 2,946 1,256
-------- --------
19,491 10,259
-------- --------
LOSS FROM OPERATIONS (7,273) (4,544)
INTEREST INCOME 493 328
INTEREST EXPENSE (447) (89)
-------- --------
LOSS BEFORE INCOME TAX BENEFIT (7,227) (4,305)
INCOME TAX BENEFIT 2,300 864
-------- --------
NET LOSS $ (4,927) $ (3,441)
======== ========
LOSS APPLICABLE TO
COMMON SHARES $ (7,466) $(13,093)
======== ========
LOSS PER SHARE:
Basic $ (1.16) $ (2.43)
======== ========
Diluted $ (1.16) $ (2.43)
======== ========
Weighted average common shares outstanding 6,459 5,381
======== ========
</TABLE>
See accompanying notes.
21
<PAGE> 22
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL COMMON EARNINGS/
PAID-IN STOCK TO BE ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL ISSUED (DEFICIT) STOCK TOTAL
----------------- ----------------- ---------- ----------- ----------- -------- --------
PREFERRED COMMON REFERRED COMMON
--------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 25 5,302 $ $ 5 $ 4,843 $ 3,060 $ 7,908
Treasury stock issued
for services rendered 10 10
Medical Practice
Transactions:
Stock issued 505 1 2,303 2,304
Value of 423,917
Shares to be issued 1,643 1,643
Dividends Preferred
Stock - Series A (202) (202)
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)
Options exercised 79 413 413
Option remeasurement 281 281
Net Loss (3,441) (3,441)
----- ------ ----- ----- -------- -------- --------- ------ --------
Balance at
December 31, 1997 276 5,886 3 6 41,803 1,643 (10,033) 33,422
----- ------ ----- ----- -------- -------- --------- ------ --------
Treasury stock
Repurchased at cost (250) (250)
Medical Practice
Transactions:
Stock issued 157 747 747
Value of 30,001
Shares to be issued 78 78
Delivery of common
stock to be issued 424 1 1,642 (1,643)
Issuance cost of
Preferred Stock
Series B (85) (85)
Dividends on
Preferred Stock
Series A (202) (202)
Series B 24 2,337 (2,337)
Options exercised 90 300 300
Net Loss (4,927) (4,927)
----- ------ ----- ----- -------- -------- --------- ------ --------
Balance at
December 31, 1998 300 6,557 $ 3 $ 7 $ 46,744 $ 78 $ (17,499) $ (250) $ 29,083
===== ====== ===== ===== ======== ======== ========= ====== ========
</TABLE>
See accompanying notes.
22
<PAGE> 23
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,927) $ (3,441)
Gain from sale of marketable securities (74)
Noncash adjustments:
Special charges 2,585 9
Depreciation and amortization 1,531 309
Stock option repricing 281
Deferred income taxes (2,300) (289)
Other 153 10
Change in assets and liabilities, excluding acquisitions and dispositions:
Accounts receivable, net 421 2,072
Other current assets (102) (299)
Other assets 75 (63)
Accounts payable (535) (707)
Accrued liabilities 45 3
Due from /to affiliated medical groups (306) 66
Income taxes receivable/payable 712 (1,261)
-------- --------
Net cash used by operating activities (2,722) (3,310)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (573) (461)
Proceeds from sale of marketable securities 111
Proceeds from sale of equipment 199 65
Issuance of notes receivable (93)
Collection on notes receivable 50 106
Net payments in medical practice transactions (4,688) (12,879)
-------- --------
Net cash used by investing activities (4,994) (13,169)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank borrowings (2,061)
Payments on other notes, net (1,747)
Payments on capital lease obligations, net (126) (98)
Deferred financing costs (1,000)
Proceeds from issuance of preferred stock 25,000
Payment to repurchase common shares (250)
Direct costs of preferred stock issuance (85) (196)
Proceeds from exercise of stock options 300 299
-------- --------
Net cash (used) provided by financing activities (2,908) 22,944
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS (10,624) 6,465
CASH AND EQUIVALENTS:
BEGINNING OF YEAR 16,642 10,177
-------- --------
END OF YEAR $ 6,018 $ 16,642
======== ========
</TABLE>
See accompanying notes.
23
<PAGE> 24
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 136 $ 88
Income taxes paid (refunded) (509) 533
NON CASH TRANSACTIONS:
Details of medical practice transactions -
Notes payable issued 2,590
Common stock and additional paid-in capital issued 747 2,304
Common stock and additional paid-in capital
to be issued 78 1,643
Deferred tax liability for book and tax
basis differences 2,204 8,177
Liabilities assumed 20 62
Others -
Series B Preferred Stock -
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 2,337 117
Series A Preferred Stock -
Increase in accrued liabilities related to
unpaid dividends 202 202
Furniture and equipment acquired under
capital leases 246 422
Direct financing of insurance premiums 97 410
Accounts receivable converted to
notes receivable 717
Deferred tax benefit for options exercised 114
</TABLE>
See accompanying notes.
24
<PAGE> 25
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas corporation, is
a physician services company, which provides management, consulting and
ancillary services to orthopaedic medical practices and other
musculoskeletal-related patient businesses. As of December 31, 1998, the Company
provided comprehensive management services under long-term agreements to four
orthopaedic practices in four states. 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.
The following is a summary of the Company's significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated.
Certain reclassifications to the prior year's financial statements have been
made to conform to the 1998 presentation.
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, and related disclosure of contingent assets and
liabilities. Actual future results could differ from those expected at the
reporting date.
Cash equivalents
The Company considers its investment in highly liquid debt securities with
original maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is recorded using the straight-line method over the estimated useful
lives of three to ten years for equipment, furniture and fixtures. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the terms of the respective leases, and the amortization is
included in depreciation and amortization expense.
Management Service Agreements and Other Assets
Management service agreements ("MSAs") consist of intangible assets attributable
to the affiliated medical practices. As a result of certain developments in the
physician practice management ("PPM") industry, the Company elected to change
the amortization period of all its MSAs from 40 years to 25 years on a
prospective basis beginning July 1, 1998. This 25 year amortization period
initiates at the execution date of the MSA. This change in accounting estimate
increased loss per share by $0.04 for the year ended December 31, 1998,
excluding the effect of new MSAs to be executed in the future.
25
<PAGE> 26
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 MSA and the assets of the group. 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 Company regularly evaluates the carrying value of the MSAs versus the
discounted cash benefit expected to be realized from the performance of the
underlying physician practices and adjusts for any impairment in value if there
are indicators that the value of the MSA may be impaired.
Deferred financing costs are amortized on a straight-line basis (which
approximates the interest method) over the term of the related debt, and are
included in interest expense.
Revenue Recognition
The Company's revenues represent the contractual fees earned under the MSAs 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 MSAs are accrued when collection is probable.
Income Taxes
The Company records its income taxes under the liability method. Under this
method, deferred income tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
Company provides an allowance for tax assets not considered to be realizable
based upon expected future levels of taxable income and the turnaround effect of
deferred tax assets.
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.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing loss applicable to
common stockholders by the weighted-average number of common shares outstanding
during 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.
Stock-Based Compensation
The Company measures stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." See Note 16 for the pro forma disclosures of the effect on
net loss and loss per common share as if the fair value-based method had been
applied in measuring compensation expense.
26
<PAGE> 27
Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" in 1998, which replaces the "industry segment" approach
with the "management" approach. The management approach designates the internal
reporting that is used by management for reviewing performances and making
operating decisions.
NOTE 2. LOSS PER SHARE
The components of basic EPS are as follows (in thousands, except per share data)
for the years ended December 31:
<TABLE>
<CAPTION>
1998 EPS 1997 EPS
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Net loss $ (4,927) $ (0.77) $ (3,441) $ (0.64)
Series A Preferred
stock dividend (202) (0.03) (202) (0.04)
Series B Preferred
stock dividend (2,337) (0.36) (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
available to
common
stockholders $ (7,466) $ (1.16) $ (13,093) $ (2.43)
======== ======= ========= =======
Weighted average
common shares
outstanding 6,459 5,381
========= =========
</TABLE>
For the years ended December 31, 1998 and 1997, the diluted weighted average
shares excluded the following as the issuance or conversion of these instruments
results in anti-dilution (shares in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Employee stock options to purchase
common stock 1,459 $ 3.71 1,369 $ 4.99
Warrants to purchase common stock 200 2.13 200 2.13
Non-employee stock options to purchase
common stock 58 4.15 98 4.17
Series A Preferred Stock convertible into
common stock 872 815
Series B Preferred Stock convertible into
common stock 4,576 4,186
</TABLE>
27
<PAGE> 28
NOTE 3 - MEDICAL SERVICE 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 the affiliated medical
groups is reduced by the contractual amounts retained by the medical groups to
arrive at the Company's revenue. The affiliated physician groups maintain
exclusive control of all aspects of the practice of medicine and the delivery of
medical services. With respect to the physician practice affiliation
transactions entered into in 1998 and 1997, substantially all of the amounts
retained by affiliated physician groups for 1998 and 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.
The following represents the amounts included in the determination of the
Company's revenues (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Medical Service Revenue $ 18,454 $ 7,760
Less Amounts Retained by Medical Groups 6,236 2,045
-------- --------
Revenues $ 12,218 $ 5,715
======== ========
Management Services Agreements at year end 4 3
</TABLE>
In 1998, the four physician practices under Company management represent
approximately 81% of the Company's revenue, and the loss of any one of these
agreements could have a material adverse effect on the Company's operations and
earnings. See Note 12.
In 1997, 74% of the Company's revenues were derived from one affiliated
physician group, which was controlled 100% by William F. Donovan, M.D., a
Company shareholder and director until December 12, 1997. Effective November 30,
1997 the Company terminated its MSA with this group.
For the years ended December 31, 1998 and 1997, the Company and affiliated
physician groups derived approximately 24% and 46%, respectively, of their
medical service revenue from services provided under workers' compensation
programs, 35% and 16%, respectively, from contractual, fee-for-service
arrangements with managed care programs and direct employer contracts and 1% and
16%, respectively, from personal injury claims subject to legal action, none of
which aggregated more than 10% of medical service revenue. The remaining 40% and
22%, respectively, was derived from services provided under the Medicare and
state Medicaid programs as well as various non-contracted fee-for-service
payors. Changes in the payor reimbursement rates can affect the affiliated
physician practices and, therefore, the Company's revenue.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes its billing activities on
behalf of its affiliated physician groups are materially in compliance with
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. Compliance with
such laws and regulations can
28
<PAGE> 29
be subject to future government review and interpretation as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare
and Medicaid programs.
Under its MSAs, receivables generated by affiliated physician groups from
patient services are purchased by the Company at their net collectible value on
a full recourse basis. The Company, therefore, 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.
NOTE 4 - MEDICAL PRACTICE TRANSACTIONS
During 1998 and 1997, the Company entered into long-term MSAs with four
orthopaedic medical groups. The consideration paid for the medical groups to
enter into long-term MSAs 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.
In 1998, the Company also paid $860,000 in cash and issued $90,000 in common
stock to satisfy or amend existing MSAs. See Note 12.
NOTE 5 - SPECIAL CHARGES
During 1998, the Company recorded special charges of $2,946,000 relating to the
write down to net realizable value of its practice MSAs and corporate
restructuring charges. These amounts represent management's best estimate;
however, the actual amounts when determined may differ from such estimates.
In 1997, the Company terminated certain management and consulting contracts and
closed certain physical therapy and magnetic resonance imaging centers, and
recognized a loss of $1,256,000 as a result of these transactions.
NOTE 6 - INCOME TAXES
The Company's income tax benefit consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
-------- -------
<S> <C> <C>
Federal:
Current $ 1,191 $ 719
Deferred 732 259
State 377 (114)
-------- ------
$ 2,300 $ 864
======== ======
</TABLE>
29
<PAGE> 30
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 before
income tax benefit is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Income tax benefits
at U.S. statutory rates $ 2,287 $ 1,500
State income taxes, net of federal benefit (250) (75)
Nondeductible expenses and other 237 (52)
Valuation allowance (509)
-------- --------
$ 2,300 $ 864
======== ========
</TABLE>
Deferred income taxes at December 31 are comprised of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 281 $
Allowance for doubtful accounts 296
Depreciation 18
Special charges not currently deductible for tax 923
Net operating loss carryforward 1,257 509
Stock Option accruals 227
Other 193 70
-------- --------
2,950 824
Valuation allowance (509) (509)
-------- --------
2,441 315
-------- --------
Deferred tax liabilities:
Intangible assets, net of amortization (MSAs) (10,127) (8,170)
Depreciation (73)
-------- --------
(10,200) (8,170)
-------- --------
Net deferred tax liability $ (7,759) $ (7,855)
======== ========
</TABLE>
At December 31, 1998, the Company has a net operating loss carryforward of
approximately $5,000,000 available for federal income tax purposes. A portion of
the net operating loss, $1,498,000, expires in 2012. The current year's portion,
or $3,502,000, expires in 2018. The Company has a valuation allowance of
$509,000 recorded relating to the estimated net operating loss from 1997. No
valuation allowance was recorded in 1998 as the Company expects to realize the
benefit through future reversals of existing taxable temporary differences.
NOTE 7- SEGMENT DATA
The Company's reportable segments are strategic business units that offer
different services. They are managed separately because each business requires
different operating and marketing strategies. During 1998, the Company has two
reportable segments: (i) orthopaedic medical practice management services and
(ii) work hardening services. Under the practice management services, the
Company provides comprehensive administrative and management services to its
affiliated practices that encompass all aspects of the orthopaedic group's
business operations. Under the work hardening services, the Company offers work
injury prevention and rehabilitation services to workers.
30
<PAGE> 31
The accounting policies of the segments are the same as those described in Note
1. The Company evaluates the performance of its segments based on segment
profit. Segment profit for each segment includes revenue and expenses directly
attributable to the segment. It excludes certain costs that are managed outside
the reportable segments such as corporate expenses, income taxes and special
charges. There are no intercompany transfers between segments. Prior to December
1997, work reconditioning was offered as an ancillary service in conjunction
with an existing managed physician practice located in Houston that was
subsequently divested in November 1997. Accordingly, the Company did not
maintain separate balance sheet and capital expenditures information for the two
work hardening facilities prior to December 1997. Income statement information
is furnished to the extent it is practical.
Segment information as of and for the years ended December 31, 1998 and 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revenue:
Practice Management Services $ 9,862 $ 3,286
Work Hardening Services 1,822 2,075
Earnings before interest, taxes,
depreciation and amortization ("EBITDA")
Practice Management Services 2,663 405
Work Hardening Services 664 693
Depreciation and amortization:
Practice Management Services 1,195 163
Work Hardening Services 93 64
Interest:
Practice Management Services 78 35
Work Hardening Services 12 1
Income before income taxes:
Practice Management Services 1,390 206
Work Hardening Services 560 628
Total assets:
Practices Management Services 33,147 28,833
Work Hardening Services 9,547 9,428
Capital Expenditures:
Practices Management Services 261 461
Work Hardening Services 35 (a)
</TABLE>
A reconciliation of the Company's segment revenue, segment income before income
tax benefit and segment assets to the corresponding consolidated amounts as of
and for the years ended December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Segment revenue $ 11,684 $ 5,361
Divested operations
Other revenue (b) 534 354
-------- --------
Total revenue $ 12,218 $ 5,715
======== ========
Segment income before income tax benefit $ 1,950 $ 834
Corporate expenses, net (6,253) (3,883)
Divested operations 22
Special charges (2,946) (1,256)
-------- --------
Loss before income tax benefit $ (7,227) $ (4,305)
======== ========
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Segment assets $ 42,694 $ 38,261
Corporate assets 42,906 43,883
Intercompany elimination (41,490) (33,992)
-------- --------
Total assets $ 44,110 $ 48,152
======== ========
</TABLE>
- - ------------------------------
(a) Amounts included with other segment amounts.
(b) Represents primarily gains associated with divested operations and from sale
of investments.
NOTE 8 - INDEBTEDNESS
Indebtedness at December 31, 1998 and 1997 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Short term obligation $ $ 1,505
Non-negotiable subordinated convertible note payable 1,085 1,085
Capital lease obligations 473 353
Other 194 436
--------- --------
1,752 3,379
Less: current maturities 533 1,925
--------- --------
$ 1,219 $ 1,454
========= ========
</TABLE>
Revolving Credit Facility
On July 14, 1998, the Company entered into a credit agreement (the "Credit
Agreement"), which provided for a $65.0 million three-year Revolving Credit
Facility (the "Credit Facility"). The Credit Facility is available for (i)
general corporate purposes, including funding working capital needs,
acquisitions and capital expenditures, and (ii) issuance of letters of credit up
to $5.0 million, with a maximum working capital commitment of $15.0 million. The
Credit Facility will expire on July 10, 2001. Borrowings under the Credit
Facility bear interest at the Company's option, at (i) LIBOR plus a margin
ranging from 1.0% to 2.25% or (ii) the higher of the Federal Funds Rate plus .5%
or the prime rate, plus a margin ranging from 0.0% to .5%. The Company is
required to pay annual commitment fees ranging from .25% to .5% of the unused
portion of the Credit Facility. Letters of credit under the Credit Facility
require annual fees ranging from 1.0% to 2.25% of the outstanding amount of the
letters of credit.
The Credit Facility is secured by a first priority interest in the capital stock
of substantially all of the Company's present and future subsidiaries. The terms
of the Credit Agreement include certain restrictive covenants. Among other
restrictions, the covenants include limitations on investments, borrowings,
liens, acquisitions and dispositions of assets and transactions with affiliates,
and require maintenance of certain ratios regarding interest and fixed charge
coverage, leverage and minimum net worth. As of December 31, 1998, the
Company was not in compliance with certain financial covenants as a result of
operating losses incurred during the most recent twelve-month period, including
the special charges recorded in the fourth quarter of 1998; therefore, no funds
have been advanced to the Company under the Credit Facility as of such date.
Additionally, the Company's lender has the right to terminate its commitment to
make advances under the Credit Facility as the result of the Company's failure
to meet such financial covenants. The Company is engaged in discussions with its
lender regarding restructuring the terms of the Credit Facility. The Company
incurred approximately $1.0 million in financing costs in connection with the
Credit Agreement, which is being amortized over a three-year period. The Company
recorded amortization expense of $153,000 in 1998.
32
<PAGE> 33
Non-negotiable Subordinated Convertible Notes Payable
Pursuant to a practice affiliation transaction in 1997, the Company issued
non-negotiable subordinated convertible promissory notes to certain physicians.
These notes bear simple interest at seven percent per annum. Payments of
principal plus the amount of interest accrued to date on the outstanding
principal are due in five equal installments on the second through sixth
anniversaries of issuance date. 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 MSA for cause.
Other Debt
Other debt at December 31, 1998 and 1997 consisted primarily of unsecured notes.
These obligations mature in various installments through 1999 at interest rates
ranging from 7.5% to 8.25% in 1998 and 8.25% in 1997.
Maturities
Future principal maturities (in thousands) are $533 in 1999, $333 in 2000, $328
in 2001, $315 in 2002, and $243 in 2003.
NOTE 9 - LEASES
The Company leases property and equipment under cancelable and non-cancelable
leases. Future minimum operating and capital lease payments for the next five
years and thereafter are (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C> <C>
Year ending December 31:
1999 $ 171 $ 925
2000 152 755
2001 132 726
2002 107 677
2003 27 243
Years after 2003 1,849
------ -------
Total minimum lease payments 589 $ 5,715
=======
Less: Amount representing interest (116)
------
Present value of net minimum lease payments $ 473
======
</TABLE>
Future minimum lease payments under operating leases have been reduced for
sublease rentals of $2,741,000. Rental expense was $1,065,000 and $764,000 for
1998 and 1997, respectively. Rental expense has been reduced for sublease rental
income of $200,000 and $17,000 in 1998 and 1997, respectively.
33
<PAGE> 34
The following summarized amounts relate to assets leased by the Company under
capital leases (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
CLASSES OF PROPERTY
Equipment $ 330 $ 248
Furniture & Fixtures 354 236
------- -------
Less: Accumulated amortization (147) (44)
------- -------
$ 537 $ 440
======= =======
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK - The Company has authorized capital stock consisting
of (i) 50,000,000 shares of Common Stock, $.001 par value, and (ii) 10,000,000
shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued in
such series and have such rights, preferences and other provisions as may be
determined by the Board of Directors without approval by the holders of Common
Stock. As of December 31, 1998, the Company has designated 26,000 shares and
400,000 shares of its authorized Preferred Stock as Series A Preferred Stock
(the "Series A Preferred") and Series B Preferred Stock (the "Series B
Preferred"), of which 25,226 and 274,544 were issued and outstanding,
respectively.
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. Holders of Series A Preferred and Series B
Preferred have weighted voting rights equal to that number of shares of Common
Stock into which it can be converted. Holders of Series B Preferred also have
certain exclusive rights regarding the election of three of the Company's eight
directors, and in an event of a breach by the Company of certain financial
covenants, can elect a majority of the directors of the Company. In addition,
the consent of the holders of Series A Preferred and Series B Preferred, voting
as a class, are necessary for certain matters, including but not limiting to
merger, consolidation, change in the capital structure, affiliation transactions
and capital expenditures.
As of December 31, 1998, the Company was not in compliance with certain
financial covenants of the Series B Preferred Securities Purchase Agreement. As
a result, the holders of Series B Preferred have the right to designate a
majority of the directors of the Company. The holders of Series B Preferred
currently have not designated any additional directors of the Company.
The Series A Preferred provides for quarterly, cumulative dividends that accrue
at the following rate per share per annum: (i) $8.00 for the period commencing
on the date of issuance though June 30, 2001; (ii) $10.00 from July 1, 2001
through June 30, 2002; (iii) $12.00 from July 1, 2002 through June 30, 2003, and
(iv) $16.00 after July 1, 2003. Such dividends shall be first payable on June
30, 1999, subject to certain extensions, in preference and priority to any
dividends paid to holders of Common Stock and on parity with the holders of the
Series B Preferred. In the event of liquidation, the holder of each Series A
Preferred will be entitled to receive a liquidation payment of $100 per share
plus any accrued but unpaid dividends. The Series A Preferred is convertible
into shares of Common Stock at a rate equal to the liquidation payment divided
by a factor of the lesser of (i) $3.50 or (ii) the average closing sales price
of Common Stock for the twenty trading days immediately preceding the
conversion. Holders of Series A Preferred may elect to convert at any time into
Common Stock at the then established conversion rate. 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.
The Series B Preferred provides for quarterly, cumulative dividends that accrue
at the rate of $9.00 per share per annum, subject to certain adjustments.
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 in shares
of Series B Preferred. In the event of liquidation,
34
<PAGE> 35
the holder of each Series B Preferred will be entitled to receive a liquidation
payment of $100 per share plus any accrued but unpaid dividends. The Series B
Preferred is convertible into shares of Common Stock at a rate equal to the
liquidation payment divided by a factor of the lesser of (i) $6.00 or (ii) the
average closing sales price of Common Stock for the twenty trading days
immediately preceding the conversion. Holders of the Series B Preferred may
elect to convert at any time into Common Stock at the then established
conversion rate.
The Company may elect to require the conversion of Series B Preferred into
Common Stock at the then established conversion rate any time after the fifth
anniversary of the Series B Preferred issuance date.
As of December 31, 1998, the Company was not in compliance with certain
financial covenants of the Series B Preferred Securities Purchase Agreement. As
a result, the holders of Series B Preferred have the right to designate a
majority of the directors of the Company. The holders of Series B Preferred
currently have not designated any additional directors of the Company.
During 1997, the Company recorded a one-time non-cash dividend of $9,333,000 on
the Series B Preferred. Of this amount, $8,333,000 represented the difference in
the initial Series B Preferred conversion price of $6.00 per share and the
market value of the Company's Common Stock of $8.00 on the issuance date of the
Series B Preferred. The remaining $1,000,000 represented the value of certain
warrants issued in conjunction with the Series B Preferred as described below,
as determined by an independent appraiser. Such non-cash dividends were recorded
as a reduction to accumulated deficit and an increase to additional paid in
capital.
WARRANTS - In conjunction with the issuance of the Series B Preferred, the
Company 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 the lesser of (i) $8.00 per share, (ii) the average
closing sales price of the Common Stock for the twenty trading days immediately
following March 29, 1999 or (iii) the average closing sales price of the Common
Stock for the twenty trading days immediately following public disclosure of the
Company's earnings for calendar year 1999. The Warrants are not exercisable
until June 30, 2000 and shall expire in its entirety if the Company achieves all
financial performance objectives as set forth in the Warrant Agreement. If the
Company achieves a portion, but not all of the financial performance objectives,
a portion of the 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 a Change of Control, as
defined in the Warrant Agreement.
In February 1989, the Company issued warrants to purchase 100,000 shares of
Common Stock each to Jose E. Kauachi, the Company's Chairman of the Board and
William F. Donovan, M.D., a then member of the Board. These warrants were issued
as compensation for services rendered and for each individual's personal
guarantee of corporate debt and other obligations. By amendments effective in
February 1994 and 1995, the expiration date of the warrants was extended to
February 22, 1999 and the exercise price was adjusted from $1.75 to the then
market value of $2.125 per share. Such warrants were not exercised on February
22, 1999.
STOCK OPTIONS - The Company has two stock option plans, the 1988 Stock Option
Plan ( the "1988 Plan") and the 1997 Long Term Incentive Plan (the "1997 Plan"),
that provide for the granting of either incentive stock options ("ISO"),
non-qualified stock options ("NQO") and stock appreciation rights to key
employees, non-employee members of the Company's Board of Directors and
consultants. Individual option vesting and related terms are set by the Board of
Directors. All individual option grants generally vest over time or based on
pre-determined performance targets. Both plans provide 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. There are a total of 1,000,000
shares and 2,500,000 available for grant in the 1988 Plan and the 1997 Plan,
respectively. As of December 31, 1998, options to purchase 267,000 shares of
Common Stock were
35
<PAGE> 36
outstanding under the 1988 Plan at exercise prices of $2.50 to $5.25 per share,
163,800 were exercisable and no shares were available for future grant. Options
to purchase 1,191,500 shares of Common Stock were outstanding under the 1997
Plan at exercise prices of $5.13 to $8.38 per share, 98,000 were exercisable and
1,308,500 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, 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
---------
Granted 682,500 $ 5.40
Exercised (89,750) $ 3.34
Expired or Forfeited (502,750) $ 5.66
---------
Balance, December 31, 1998 1,458,500 $ 3.71
=========
Exercisable at December 31, 1998 261,800 $ 4.08
=========
Available for Future Grant 1,308,500
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 CONTRACTUAL LIFE PRICE AT 12/31/98 PRICE
-------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.50 and under
$2.51 - $5.00 100,000 6.1 years $2.50 100,000 $2.50
$5.01 - $7.50 416,500 9.1 years $3.37 63,000 $3.31
$7.51 + 823,500 8.9 years $5.78 62,800 $5.13
118,500 8.9 years $8.03 36,000 $8.00
--------- --------
1,458,500 261,800
========= ========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for fixed options granted to Company employees. The Company's
pro forma information for the years ended December 31, 1998 and 1997 under the
fair value method of SFAS No. 123 is as follows (in thousands, except for
earnings per share data):
36
<PAGE> 37
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss - as reported $ (4,927) $ (3,441)
Net loss - pro forma $ (4,949) $ (3,685)
Earnings per share - as reported:
Basic $ (1.16) $ (2.43)
Diluted $ (1.16) $ (2.43)
Earnings per share - pro forma:
Basic $ (1.16) $ (2.48)
Diluted $ (1.16) $ (2.48)
</TABLE>
Options granted in 1998 and 1997 had weighted average fair values of $2.16 and
$2.89, 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:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 37% 46%
Expected life 5 years 5 years
Risk-free interest rate 4.7% 5.7%
</TABLE>
As of December 31, 1998, non-employee options to purchase 57,503 shares of
Common Stock, granted under certain other agreements, were outstanding at
exercise prices of $2.75 to $5.00 per share, all of which were vested.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LITIGATION - In January 1999, the Company and a subsidiary of the Company, IOI
Management Services of Connecticut, Inc. ("IOI Regional"), filed suit against
the medical practice located in Bridgeport, Connecticut, seeking to enforce
certain repurchase obligations under the existing MSA. The MSA was terminated by
the Company in January 1999 due to the failure of the practice to satisfy
certain of its obligations thereunder. Upon such a termination for cause, the
Company and its subsidiary are entitled under the MSA to require the practice to
comply with certain repurchase obligations regarding certain assets, including,
without limitation, real estate, improvements, accounts receivable, contracts
and intangibles. The Company believes that the total amount of the medical
practice's repurchase obligations totals approximately $4.6 million. In
addition, the Company is seeking money damages, compensatory damages and
punitive damages in connection with certain related causes of action. The
Company intends to vigorously pursue its claims in connection with this action;
however, the ultimate outcome of this lawsuit cannot be predicted with
certainty.
PROFESSIONAL AND LIABILITY RISKS - 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, the Company
believes that all such claims and actions are either adequately covered by
insurance or will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
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.
37
<PAGE> 38
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 13 - RELATED PARTY TRANSACTIONS
During 1997, the Company paid Mr. Jose E. Kauachi, a significant shareholder and
the Company's Chairman of the Board of Directors and former Chief Executive
Officer, $966,000 to terminate a three-year consulting contract with the
Company. Mr. Kauachi also agreed to change the expiration date of an option to
purchase 50,000 shares of IOI common stock from February 2, 2005 to December 31,
1999. 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 such modification.
The Company, either directly or through an affiliated medical group, paid
William F. Donovan, M.D., a then member of the Company's Board of Directors, and
Northshore Orthopedics Assoc. ("NSO"), a professional corporation owned by Dr.
Donovan, $668,000 in 1997 for certain services rendered and equipment and
leasehold rentals. In December 1997, in conjunction with terminating the MSA
with this affiliated medical group, the Company recorded a charge of $548,000 to
write down a note receivable from NSO to its estimated realizable value.
NOTE 14. QUARTERLY DATA (Unaudited)
The following table summarizes the Company's quarterly financial data for the
year ended December 31, 1998 to reflect the reallocation of income tax benefits
to the appropriate quarterly periods:
<TABLE>
<CAPTION>
LOSS APPLICABLE LOSS
NET TO PER
QUARTERS LOSS COMMON SHARES SHARE
-------- ------- --------------- -------
<S> <C> <C> <C>
First
Previously Reported $ (681) $ (1,288) $ (0.20)
Effect of Income Tax Benefit
Restated 218 218 0.03
------- ------- -------
(463) (1,070) (0.17)
------- ------- -------
Second
Previously Reported $ (1,163) $ (1,777) $ (0.27)
Effect of Income Tax Benefit 372 372 0.05
------- ------- -------
Restated (791) (1,405) (0.22)
------- ------- -------
Third
Previously Reported $ (810) $ (1,456) $ (0.22)
Effect of Income Tax Benefit 259 259 0.04
------- ------- -------
Restated (551) (1,197) (0.18)
------- ------- -------
Fourth $ (3,122) $ (3,794) $ (0.58)
------- ------- -------
Total $ (4,927) $ (7,466) $ (1.16)
======= ======= =======
</TABLE>
38
<PAGE> 39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
By unanimous written consent on February 3, 1999, the Company's Board of
Directors dismissed the firm of PricewaterhouseCoopers LLP as IOI's principal
accountant and engaged the accounting firm of Ernst & Young LLP as principal
accountant to audit IOI's financial statements for the year ended December 31,
1998. During the two most recent fiscal years ended December 31, 1997 and the
subsequent interim period preceding the dismissal, there have been no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference thereto in
their report on the financial statements for such years. PricewaterhouseCoopers
LLP's report on the financial statements of IOI for the past two years contained
no adverse opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
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.
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 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. (11)Exhibit (1)
2.2 Stock Purchase Agreement by and among Integrated
Orthopaedics, Inc., Wayne Conrad, M.D., I. Stanley Porter,
M.D., Gary Zartman M.D., and Mark K. Perezous, M.D. dated
December 15, 1997. (11)Exhibit 99.01
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- - ----------- ------------------------------------------------------------------ --------
<S> <C> <C>
2.3 Stock Purchase Agreement by and among Integrated (15) Exhibit 2.4
Orthopaedics, Inc., Kenneth J. Cavanaugh, M.D., Thomas J.
Darrah, M.D., Robert E. FitzGibbons, M.D., Gerald R. Rupp,
M.D., and Samuel E. Smith, M.D. dated March 12, 1998.
2.4 Stock Purchase and Sale Agreement by and between Integrated (16) Exhibit 2.4
Orthopaedics, Inc. and Merritt Orthopaedic Associates, P.C.,
dated July 17, 1998.
3.1 Articles of Incorporation of the Company, as amended to
date. (7) Exhibit 3.1
3.2 Bylaws of the Company, as amended to date. (14) Exhibit 3.2
4.1 Certificate of Designation and Determination of rights and
Preferences of Cumulative Convertible Preferred Stock,
Series A of the Company. (12) Exhibit 4.01
4.2 Certificate of Designation, Rights and Preferences of Series B
Convertible, Non-Redeemable Preferred Stock of the
Company. (12) 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. (12) Exhibit 4.03
4.4 Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors, L.P. (12) Exhibit 4.04
4.5 Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors II, L.P. (12) Exhibit 4.05
4.6 Specimen of Common Stock Certificate, $.001
par value, of the Company. (1) Exhibit 4.1
10.2 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America. (2) Exhibit 10.1*
10.3 Amendment of 1988 Stock Option Plan. (3) Exhibit 10.2*
10.5 Administrative Services Agreement between DRCA Houston
Clinics, Inc. and the Company dated effective
August 1, 1993. (4) Exhibit 10.57
10.6 Incentive Stock Option Agreement between the Company and
William F. Donovan, M.D. dated February 2, 1995. (5) Exhibit 10.85*
</TABLE>
40
<PAGE> 41
<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. (6) Exhibit 10.50
10.10 Option Agreement between the Company and Victor M.
Rivera, M.D. dated April 11, 1996 (6) Exhibit 10.52
10.11 Executive Employment Agreement between the Company and
Jose E. Kauachi dated November 15, 1997 (14) Exhibit 10.11
10.12 Termination of Employment Agreement between the Company
and Jose Kauachi dated December 12, 1997. (14) Exhibit 10.12
10.13 Consulting Agreement between the Company and John B.
McGinty, M.D. dated October 6, 1997 (14) Exhibit 10.13
10.14 Consulting Agreement between the Company and Jose E.
Kauachi dated December 12, 1997. (14) Exhibit 10.14
10.15 Termination and Release Agreement between the Company
and Jose E. Kauachi dated December 31, 1997 (14) Exhibit 10.15
10.16 Integrated Orthopaedics, Inc.'s 1997 Long Term Incentive
Plan (14) Exhibit 10.16
10.17 Loan Agreement dated July 1, 1997 by and between the
Company and Wells Fargo Bank (Texas) N.A. (9) Exhibit 10.35
10.18 Employment Agreement between the Company and Alex Lukianov
dated effective April 21, 1997. (8) Exhibit 10.33
10.19 Employment Agreement between the Company and G. Rogan Fry
dated effective April 21, 1997. (8) Exhibit 10.34
10.20 Executive Employment Agreement between the Company and
Ronald E. Pierce dated December 12, 1997. (14) Exhibit 10.20
10.21 Employment Contract between the Company and Kerry N.
Lowery dated September 30, 1997. (14) Exhibit 10.21
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 (12) 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. (12) Exhibit 99.02
</TABLE>
41
<PAGE> 42
<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 Occupational Medicine
Associates of Houston, P.A. (12) 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. (12) 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. (10) 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. (10) Exhibit 2
10.28 Amendment, effective July 17, 1998, to Mangement 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. (16) Exhibit 10.28
10.29 $65 Million Revolving Credit Agreement dated as of
July 10, 1998, among Integrated Orthopaedics, Inc.,
Borrower, Nationsbank, N.A., Administrative Agent,
and the Lenders named therein. (16) Exhibit 10.29
10.30 Executive Employment Agreement between the Company and
Mark P. Kingston dated April 1, 1998. (18) Same
10.31 Executive Employment Agreement between the Company and
Gerald R. Wicker dated November 30, 1998. (18) Same
11 Statement re computation of per share earnings. (18) Same
16 Letter on change in certifying accountant. (17) Exhibit 16
21 Subsidiaries of the Company. (18) Same
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- - ----------- ------------------------------------------------------------------ --------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors 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 ("SEC") on
September 6, 1991, and the Company's Registration
Statement on Form S-8, Registration No. 333-50257, filed
with the SEC on April 16, 1998. (18) Same
23.2 Consent of PricewaterhouseCoopers LLP.. (18) Same
27 Financial Data Schedule. (18) 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 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").
(3)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").
(4)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").
(5)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").
(6)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").
(7)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").
(8)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").
(9)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").
(10)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").
(11)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").
43
<PAGE> 44
(12)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").
(13)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").
(14)Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended 12/31/97 dated March 27, 1998 (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 3/31/98 dated May 14, 1998 (under the exhibit number
indicated in the column titled "Filed As").
(16)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/98 dated November 14, 1998 (under the exhibit number
indicated in the column titled "Filed As").
(17)Incorporated by reference to the Company's Current Report on Form 8-K dated
February 10, 1998 (under the exhibit number indicated in the column titled
"Filed As").
(18)Filed herewith
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
None.
44
<PAGE> 45
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 31, 1999
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. Kauachi Non-executive March 31 , 1999
------------------------------------------------ Chairman of the Board
JOSE E. KAUACHI
By: /s/ Ronald E. Pierce President, Chief Executive March 31 ,1999
------------------------------------------------ Officer and Director
RONALD E. PIERCE
By: /s/ Gerald R. Wicker Executive Vice President, Chief March 31, 1999
------------------------------------------------ Financial Officer, Treasurer
GERALD R. WICKER and Secretary
By: /s/ Steven B. Gruber Director March 31, 1999
------------------------------------------------
STEVEN B. GRUBER
By: /s/ Clifford R. Hinkle Director March 31, 1999
------------------------------------------------
CLIFFORD R. HINKLE
By: /s/ Mark A. Wolfson Director March 31, 1999
------------------------------------------------
MARK A. WOLFSON
By: /s/ Scott J. Hancock Director March 31, 1999
------------------------------------------------
SCOTT J. HANCOCK
</TABLE>
45
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- - ----------- ------------------------------------------------------------------ --------
<S> <C> <C>
2.1 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. (11)Exhibit (1)
2.2 Stock Purchase Agreement by and among Integrated
Orthopaedics, Inc., Wayne Conrad, M.D., I. Stanley Porter,
M.D., Gary Zartman M.D., and Mark K. Perezous, M.D. dated
December 15, 1997. (11)Exhibit 99.01
2.3 Stock Purchase Agreement by and among Integrated (15) Exhibit 2.4
Orthopaedics, Inc., Kenneth J. Cavanaugh, M.D., Thomas J.
Darrah, M.D., Robert E. FitzGibbons, M.D., Gerald R. Rupp,
M.D., and Samuel E. Smith, M.D. dated March 12, 1998.
2.4 Stock Purchase and Sale Agreement by and between Integrated (16) Exhibit 2.4
Orthopaedics, Inc. and Merritt Orthopaedic Associates, P.C.,
dated July 17, 1998.
3.1 Articles of Incorporation of the Company, as amended to
date. (7) Exhibit 3.1
3.2 Bylaws of the Company, as amended to date. (14) Exhibit 3.2
4.1 Certificate of Designation and Determination of rights and
Preferences of Cumulative Convertible Preferred Stock,
Series A of the Company. (12) Exhibit 4.01
4.2 Certificate of Designation, Rights and Preferences of Series B
Convertible, Non-Redeemable Preferred Stock of the
Company. (12) 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. (12) Exhibit 4.03
4.4 Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors, L.P. (12) Exhibit 4.04
4.5 Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors II, L.P. (12) Exhibit 4.05
4.6 Specimen of Common Stock Certificate, $.001
par value, of the Company. (1) Exhibit 4.1
10.2 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America. (2) Exhibit 10.1*
10.3 Amendment of 1988 Stock Option Plan. (3) Exhibit 10.2*
10.5 Administrative Services Agreement between DRCA Houston
Clinics, Inc. and the Company dated effective
August 1, 1993. (4) Exhibit 10.57
10.6 Incentive Stock Option Agreement between the Company and
William F. Donovan, M.D. dated February 2, 1995. (5) Exhibit 10.85*
</TABLE>
<PAGE> 47
<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. (6) Exhibit 10.50
10.10 Option Agreement between the Company and Victor M.
Rivera, M.D. dated April 11, 1996 (6) Exhibit 10.52
10.11 Executive Employment Agreement between the Company and
Jose E. Kauachi dated November 15, 1997 (14) Exhibit 10.11
10.12 Termination of Employment Agreement between the Company
and Jose Kauachi dated December 12, 1997. (14) Exhibit 10.12
10.13 Consulting Agreement between the Company and John B.
McGinty, M.D. dated October 6, 1997 (14) Exhibit 10.13
10.14 Consulting Agreement between the Company and Jose E.
Kauachi dated December 12, 1997. (14) Exhibit 10.14
10.15 Termination and Release Agreement between the Company
and Jose E. Kauachi dated December 31, 1997 (14) Exhibit 10.15
10.16 Integrated Orthopaedics, Inc.'s 1997 Long Term Incentive
Plan (14) Exhibit 10.16
10.17 Loan Agreement dated July 1, 1997 by and between the
Company and Wells Fargo Bank (Texas) N.A. (9) Exhibit 10.35
10.18 Employment Agreement between the Company and Alex Lukianov
dated effective April 21, 1997. (8) Exhibit 10.33
10.19 Employment Agreement between the Company and G. Rogan Fry
dated effective April 21, 1997. (8) Exhibit 10.34
10.20 Executive Employment Agreement between the Company and
Ronald E. Pierce dated December 12, 1997. (14) Exhibit 10.20
10.21 Employment Contract between the Company and Kerry N.
Lowery dated September 30, 1997. (14) Exhibit 10.21
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 (12) 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. (12) Exhibit 99.02
</TABLE>
<PAGE> 48
<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 Occupational Medicine
Associates of Houston, P.A. (12) 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. (12) 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. (10) 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. (10) Exhibit 2
10.28 Amendment, effective July 17, 1998, to Mangement 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. (16) Exhibit 10.28
10.29 $65 Million Revolving Credit Agreement dated as of
July 10, 1998, among Integrated Orthopaedics, Inc.,
Borrower, Nationsbank, N.A., Administrative Agent,
and the Lenders named therein. (16) Exhibit 10.29
10.30 Executive Employment Agreement between the Company and
Mark P. Kingston dated April 1, 1998. (18) Same
10.31 Executive Employment Agreement between the Company and
Gerald R. Wicker dated November 30, 1998. (18) Same
11 Statement re computation of per share earnings. (18) Same
16 Letter on change in certifying accountant. (17) Exhibit 16
21 Subsidiaries of the Company. (18) Same
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- - ----------- ------------------------------------------------------------------ --------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors 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 ("SEC") on
September 6, 1991, and the Company's Registration
Statement on Form S-8, Registration No. 333-50257, filed
with the SEC on April 16, 1998. (18) Same
23.2 Consent of PricewaterhouseCoopers LLP.. (18) Same
27 Financial Data Schedule. (18) 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 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").
(3)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").
(4)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").
(5)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").
(6)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").
(7)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").
(8)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").
(9)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").
(10)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").
(11)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").
<PAGE> 50
(12)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").
(13)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").
(14)Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended 12/31/97 dated March 27, 1998 (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 3/31/98 dated May 14, 1998 (under the exhibit number
indicated in the column titled "Filed As").
(16)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/98 dated November 14, 1998 (under the exhibit number
indicated in the column titled "Filed As").
(17)Incorporated by reference to the Company's Current Report on Form 8-K dated
February 10, 1998 (under the exhibit number indicated in the column titled
"Filed As").
(18)Filed herewith
* Management contract or compensatory plan or arrangement
<PAGE> 1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 30th day of November, 1998, by and between Integrated
Orthopaedics Inc., a Texas corporation (the "Company"), and Gerald R.
Wicker (the "Executive").
WHEREAS, the Chief Executive Officer and Board of Directors of
the Company recognize 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 November 30, 1998 (the "Commencement Date") and ending upon
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 Chief Financial Officer of the Company, reporting to the
Chief Executive Officer. The Executive shall have such powers and duties as may
from time to time be prescribed by the Chief Executive Officer 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
interest 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
("Base Salary") salary of $225,000 during the first twelve
months, increasing by $25,000 for each subsequent twelve month
period for the duration of the Base Term, the period from the
Commencement Date to and including the third (3rd) anniversary
of the Commencement Date being referred to herein as the "Base
Term." Base Salary is subject to annual review by the
Compensation Committee of the Board of Directors (the
"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.
<PAGE> 2
(b) Bonus. In addition to the Base Salary, the Executive shall be
eligible to receive bonus compensation, up to fifty percent
(50%) of base salary, 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. On January 1, 1999, 2000, and 2001, the Executive will
be guaranteed payment of the first $25,000 of the total amount
of bonus earned each year. In the event the Executive
terminates this Agreement, pursuant to Section 5 (D),
Executive shall forfeit, and return to the Company if prepaid,
the pro-rata unearned bonus guarantee for that year. Executive
shall receive a signing bonus of $25,000.
(c) Stock Option Eligibility. The Executive shall receive a grant
of two hundred thousand (200,000) company stock options to be
delivered on the first date of full time employment and an
additional fifty thousand (50,000) company stock options to be
delivered on the first anniversary of that date. The basis
price for the stock options shall be the closing price on the
date of delivery. Vesting of stock options is performance
based, and is explained in the company's 1997 Long Term
Incentive Plan. During the Employment Period, the Executive
shall be eligible to receive additional stock option grants,
including annual performance stock option grants, pursuant to
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
plan; 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 Financial Officer of the Company,
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 (3rd)
anniversary of the Commencement Date (first date of full time employment),
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 the 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
<PAGE> 3
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 to
periods ending on or prior to such termination 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 in 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; 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 has 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 the event
of a change in control of the company resulting in any
involuntary reduction in title, responsibility and/or
compensation may be considered by Executive as termination
without Cause. Upon any 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
<PAGE> 4
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.
6. 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 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
understanding that would make unlawful the Executive's execution or delivery of
this Agreement or the performance of his obligations hereunder.
7. 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.
8. 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
"Non-competition 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
<PAGE> 5
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 Non-competition 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
Non-competition Term, (x) has initiated business acquisition
or affiliation discussions with physician groups, (y) has
expressed a bona fide interest 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
there on 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 interest in such corporation or partnership.
(b) Extension for Noncompliance. If, during any period within the
Noncompetition Term, the Executive is not in compliance with
the terms of this Section 8, the Company shall be entitled to,
among other remedies, compliance by the Executive with the
terms of this Section 8 for an additional period equal to the
period of such noncompliance.
(d) Reasonableness. The Executive hereby acknowledges that the
geographic boundaries, scope of prohibited activities and the
time duration of the provisions of this Section 8 are
reasonable and are not broader than are necessary to protect
the legitimate business interests of the Company.
9. 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 for 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.
10. Injunctive Relief. The Executive acknowledges that the breach of
any of the agreements contained herein, including, without limitation, any of
the confidentiality, Noncompetition and non-solicitation covenants specified in
Section 7 through 9, 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 breached
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 necessary for the protection of the Company's
legitimate business interests and are reasonable in scope and content.
11. 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).
<PAGE> 6
12. 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
13. 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: Chief Executive Officer
(ii) To the Executive, to:
Gerald R. Wicker
562 Castlebridge Lane
Birmingham, AL 35242
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 charges with the
contents thereof.
14. 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.
15. 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.
16. 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 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 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.
<PAGE> 7
17. 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.
18. 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.
IN WITNESS THEREOF, the Company and the Executive have
executed this Agreement as of the date first above written.
COMPANY:
INTEGRATED ORTHOPAEDICS, INC.
By:
Name: Ronald E. Pierce
Title: President & CEO
EXECUTIVE:
By:
Name: Gerald R. Wicker
<PAGE> 8
EXHIBIT A
SCHEDULE OF FRINGE BENEFITS
1. 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.
2. 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.
3. The Company will provide reimbursable relocation expenses, including
closing costs to seller (current home), closing costs to purchaser (new
home), transportation of household goods and temporary living expenses
(inclusive of temporary residence, on-site living expenses such as
meals, and travel from primary residence). Nondeductible relocation
expenses reimbursement will be grossed up. Total relocation expenses
(including gross up) are estimated to be no more than one hundred
thousand dollars ($100,000). Any variance in which actual relocation
expenses are more than five percent (5%) above that amount must be
pre-approved by the Company.
<PAGE> 1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 1st day of April, 1998, by and between Integrated
Orthopaedics Inc., a Texas corporation (the "Company"), and Mark Kingston (the
"Executive").
WHEREAS, the Chief Executive Officer and Board of Directors of
the Company recognize 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 March 17, 1998 (the "Commencement Date") and ending upon
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 Executive Vice President and Chief Operating Officer of the
Company, reporting to the Chief Executive Officer. The Executive shall have such
powers and duties as may from time to time be prescribed by the Chief Executive
Officer 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 interest 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
$200,000 ("Base Salary"), subject to annual review by the Compensation
Committee of the Board of Directors (the "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.
<PAGE> 2
(b) Bonus. In addition to the Base Salary, the Executive shall be
eligible to receive bonus compensation, up to fifty percent (50%) of
base salary, 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 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 plan; 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 Operating 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 anniversary of
the Commencement Date (the period from the Commencement Date to and including
the 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 the 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 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 in include (i)
material acts of fraud, dishonesty or
<PAGE> 3
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; 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 has 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.
6. 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 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
understanding that would make unlawful the Executive's execution or delivery of
this Agreement or the performance of his obligations hereunder.
<PAGE> 4
7. 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.
8. 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 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 interest to conduct business or (z)
conducts business.
<PAGE> 5
(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 there on 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 interest 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 8, the Company shall be entitled to, among other
remedies, compliance by the Executive with the terms of this Section 8
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 8 are reasonable and are not
broader than are necessary to protect the legitimate business interests
of the Company.
9. 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 for 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.
10. 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
Section 7 through 9, 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 breached
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 necessary for the protection of the Company's
legitimate business interests and are reasonable in scope and content.
11. 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).
12. 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.
<PAGE> 6
13. 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: Chief Executive Officer
(ii) To the Executive, to:
Mark Kingston
336 Dogwood Trail
Coppell, TX 75019
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 charges with the
contents thereof.
14. Invalid Provisions. If any provisions 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.
15. 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.
16. 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 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 or of any other covenant herein contained.
<PAGE> 7
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.
17. 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.
18. 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.
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: Ronald E. Pierce
Title: President & CEO
EXECUTIVE:
-------------------------------------------
Mark P. Kingston
<PAGE> 8
EXHIBIT A
SCHEDULE OF FRINGE BENEFITS
1. 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.
2. 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.
3. The Company shall provide up to a maximum of $50,000 in reimbursable
relocation expenses. Reimbursable expenses include closing costs to
seller (current home), closing costs to purchaser (new home),
transportation of household goods and temporary living expenses
(inclusive of temporary residence, on-site living expenses such as
meals, and travel from primary residence).
<PAGE> 1
EXHIBIT 11
INTEGRATED ORTHOPAEDICS, INC.
SCHEDULE RE: (LOSS) EARNINGS PER SHARE
For the two years ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Basic
Weighed average common shares outstanding 6,459 5,381
======== ========
Net (loss) income $ (4,927) $ (3,441)
Series A Preferred Stock Dividend (202) (202)
Series B Preferred Stock Dividend (2,337) (117)
Series B Preferred Stock Premium Dividend (8,333)
Series B Preffered Stock Warrant Dividend (1,000)
-------- --------
Net (loss) income after dividends $ (7,466) $(13,093)
======== ========
(Loss) earnings per share $ (1.16) $ (2.43)
======== ========
Diluted
Weighted average shares outstanding 6,459 5,381
Net effect of dilutive stock options
and warrants, based on treasury
stock method using average
market price
-------- --------
Diluted common shares outstanding 6,459 5,381
======== ========
Net (loss) income $ (4,927) $ (3,441)
Series A Preferred Stock Dividend (202) (202)
Series B Preferred Stock Dividend (2,337) (117)
Series B Preferred Stock Premium Dividend (8,333)
Series B Preffered Stock Warrant Dividend (1,000)
-------- --------
Net (loss) income after dividends $ (7,466) $(13,039)
======== ========
(Loss) earnings per share $ (1.16) $ (2.43)
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
COLORADO CORPORATIONS:
IOI Management Services of Colorado Inc.
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.
IOI Management Services of Texas, Inc.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-42624 and No. 333-50257) of Integrated
Orthopaedics, Inc. of our report dated March 19, 1999, with respect to the
consolidated financial statements of Integrated Orthopaedics, Inc. included in
the Annual Report (Form 10-KSB) for the year ended December 31, 1998.
Ernst & Young LLP
Houston, Texas
March 26, 1999
<PAGE> 1
EXHIBIT 23.2
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-42624) of Integrated Orthoopaedics, Inc. of our
report dated March 24, 1998 appearing on page 19 of this Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Houston, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,018,000
<SECURITIES> 0
<RECEIVABLES> 3,269,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,294,000
<PP&E> 4,340,000
<DEPRECIATION> 2,502,000
<TOTAL-ASSETS> 44,110,000
<CURRENT-LIABILITIES> 3,608,000
<BONDS> 1,219,000
3,000
0
<COMMON> 7,000
<OTHER-SE> 29,073,000
<TOTAL-LIABILITY-AND-EQUITY> 44,110,000
<SALES> 12,218,000
<TOTAL-REVENUES> 12,218,000
<CGS> 19,491,000
<TOTAL-COSTS> 19,491,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 447,000
<INCOME-PRETAX> (7,227,000)
<INCOME-TAX> (2,300,000)
<INCOME-CONTINUING> (4,927,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,927,000)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
