<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Integrated Orthopaedics, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
INTEGRATED ORTHOPAEDICS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 1999
To the Stockholders of Integrated Orthopaedics, Inc.:
The Annual Meeting of Stockholders of Integrated Orthopaedics, Inc. (the
"Company") will be held at the corporate headquarters at 5858 Westheimer, Suite
500, Houston, Texas 77057, at 8:30 a.m., local time, May 7, 1999 for the
following purposes:
1. To elect three Directors by vote of the Common Stockholders and Series
A Preferred Stockholders to serve until the 2000 Annual Meeting of
Stockholders or until their successors shall have been duly elected and
qualified;
2. To elect three Directors by vote of the Series B Preferred Stockholders
to serve until the 2000 Annual Meeting of Stockholders or until their
successors shall have been duly elected and qualified;
3. To ratify the selection by the Board of Directors of Ernst & Young LLP
as independent accountants of the Company for the fiscal year ending
December 31, 1999; and
4. To transact such other business as may properly come before the
meeting.
Common stockholders, Series A Preferred stockholders, and Series B Preferred
stockholders of record at the close of business on March 12, 1999 will be
entitled to notice of and to vote at the meeting.
By order of the Board of Directors
GERALD R. WICKER, Secretary
Houston, Texas
Dated: April 14, 1999
Please mark, date and sign the enclosed proxy card and return it in the enclosed
addressed envelope at your earliest convenience, thereby saving the Company the
expense of further solicitation of proxies. Stockholders planning to attend the
Annual Meeting in person are requested to mark the appropriate box on the
enclosed Proxy.
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
5858 Westheimer, Suite 500
Houston, TX 77057
PROXY STATEMENT
1999 Annual Meeting of Stockholders
This proxy statement is furnished in connection with the solicitation
by the Board of Directors (the "Board") of Integrated Orthopaedics, Inc. (the
"Company") of the enclosed proxy (the "Proxy") to be used at the Company's 1999
Annual Meeting of Stockholders (the "Annual Meeting") and at any adjournments
thereof for the purposes of considering and voting upon the matters set forth in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting is
to be held at the corporate headquarters at 5858 Westheimer, Suite 500, Houston,
Texas 77057, at 8:30 a.m., local time, May 7, 1999. This Proxy Statement and the
Proxy were first sent or given to the Company's stockholders on or about April
14, 1999.
Only stockholders of record on March 12, 1999 (the "record date") are
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
The Proxy, if properly executed and returned, will be voted (or
withheld or abstained from voting) according to the choices specified therein.
The Proxy will be voted in favor of (i) the election of each nominee for
director named thereon, unless a choice is indicated to withhold authority to
vote for such nominee, and (ii) each proposal described therein unless a choice
is indicated to vote against or to abstain from voting on any specific proposal.
The Proxy may be revoked (i) by providing written notice of such
revocation to Continental Stock Transfer & Trust Company, 2 Broadway, 19th
Floor, New York, NY 10004, if such notice is received prior to 5:00 P.M., New
York City time on Wednesday, May 5, 1999, or (ii) by attendance at the meeting
and voting in person.
Stockholders planning to attend the Annual Meeting in person are
requested to mark the appropriate box on the enclosed Proxy.
VOTE REQUIRED
The Common Stock, par value $.001 (the "Common Stock"), the Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock") and the
Series B Convertible Non-Redeemable Preferred Stock ("Series B Preferred Stock")
are the only voting securities of the Company. As of the record date, there were
(i) 6,557,454 shares of Common Stock issued, 6,496,540 shares outstanding and
60,914 shares held in the treasury, (ii) 25,226 shares of Series A Preferred
Stock issued and outstanding, and (iii) 274,544 shares of Series B Preferred
Stock issued and outstanding.
VOTE BY COMMON STOCKHOLDERS AND SERIES A PREFERRED STOCKHOLDERS
The presence, in person or by proxy, of a majority of the votes
represented by the aggregate of the outstanding shares of Common Stock and
Series A Preferred Stock on the record date is necessary to constitute a quorum
at the meeting for the purpose of electing three of the six nominees for
director, Messrs. Kauachi, Pierce, and Hinkle (collectively, the "Common
Nominees"). For the election of the Common Nominees and any matter that may
properly come before the meeting on which the Common stockholders and Series A
Preferred stockholders are entitled to vote, each holder of Common Stock is
entitled to one vote for each share of
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<PAGE> 4
Common Stock owned on the record date. Each holder of Series A Preferred Stock
is entitled to approximately 53.2 votes for each share of Series A Preferred
Stock owned on the record date (in aggregate, 1,340,981 votes). Assuming the
presence of a quorum for purposes of voting on the Common Nominees, the
affirmative vote of the holders of at least a majority of the votes represented
at the Annual Meeting and eligible to vote thereon is required for the approval
of Item 1 set forth in the accompanying Notice.
VOTE BY SERIES B PREFERRED STOCKHOLDERS
The presence, in person or by proxy, of a majority of the votes
represented by the aggregate of the outstanding shares of Series B Preferred
Stock on the record date is necessary to constitute a quorum at the meeting for
the purpose of electing three of the six nominees for director, Messrs. Gruber,
Hancock and Wolfson (collectively, the "Series B Nominees"). For the election of
the Series B Nominees and any matter that may properly come before the meeting
on which the Series B Preferred stockholders are entitled to vote, each holder
of Series B Preferred Stock is entitled to approximately 44.4 votes for each
share of Series B Preferred Stock owned on the record date (in aggregate,
12,112,736 votes). Assuming the presence of a quorum, the affirmative vote of
the holders of at least a majority of the votes represented at the Annual
Meeting and eligible to vote thereon is required for the approval of Item 2 set
forth in the accompanying Notice.
OTHER MATTERS AND VOTING REQUIREMENTS
Holders of the Common Stock, Series A Preferred Stock (on an "as
converted" basis) and the Series B Preferred Stock (on an "as converted" basis)
are eligible to vote on any matters other than Items 1 and 2 set forth in the
accompanying Notice that may properly come before the meeting. Proxies
representing Common Stock are being tallied by Continental Stock Transfer &
Trust Company for stockholders who are not present at the Annual Meeting.
Proxies representing Series A Preferred Stock and Series B Preferred Stock are
being tallied by the Company for stockholders who are not present at the Annual
Meeting. A panel of three judges appointed by the Company will tabulate the
shares which are voted by Proxy and in person at the Annual Meeting. Abstentions
and broker non-votes are counted for the purposes of determining the presence or
absence of a quorum for the transaction of business. Abstentions are counted in
tabulations of the votes cast or proposals presented to stockholders, whereas
broker non-votes are not counted for the purposes of determining whether a
proposal has been approved.
ITEMS 1 AND 2
NOMINEES, DIRECTORS AND COMMITTEES
The six persons named below, all of whom are presently directors of the Company,
have been nominated for election as directors of the Company. Three directors,
the Common Nominees, are to be elected by the holders of Common Stock and the
holders of Series A Preferred Stock (on an as converted basis). Three directors,
the Series B Nominees, are to be elected by the holders of Series B Preferred
Stock voting separately as a class. The number of directors elected to the Board
can range from two to a maximum number to be determined by a majority vote of
the Board as provided in the Company's Bylaws. At the Annual Meeting, six
directors are to be elected to hold office until the next annual meeting of
stockholders or until the successors of each shall be qualified. The three
Common Nominees are Jose E. Kauachi, Ronald E. Pierce and Clifford R. Hinkle.
The three Series B Nominees are Steven B. Gruber, Mark A. Wolfson and Scott J.
Hancock. Unless a choice is specifically indicated on the enclosed Proxy to
withhold authority to vote for a nominee, all shares represented by proxies
which are executed and received prior to the meeting will be voted for the
election of said nominees.
Messrs. Kauachi, Pierce, Hinkle, Gruber, Wolfson, and Hancock have each
consented to being named in this proxy statement and have agreed to serve if
elected. Although it is not contemplated that any of these nominees will be
unable to serve, if such a situation arises before or during the Annual Meeting,
the proxies will be voted for any nominee who shall be designated by the present
Board to fill such vacancy.
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<PAGE> 5
Appearing below is certain biographical and other information with respect to
each nominee.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
COMMON NOMINEES
Jose E. Kauachi 60 Non-executive Chairman of the Board
Ronald E. Pierce 44 President, Chief Executive Officer
and Director
Clifford R. Hinkle 50 Director
SERIES B NOMINEES
Steven B. Gruber 41 Director
Mark A. Wolfson 46 Director
Scott J. Hancock 40 Director
</TABLE>
COMMON NOMINEES
JOSE E. KAUACHI, a founder of the Company, serves as Non-executive Chairman of
the Board and has served as a director since October 1986. From October 1986 to
December 1997, Mr. Kauachi served as President, Chairman of the Board and Chief
Executive Officer of the Company. From 1984 to 1987, he was a consultant to
various healthcare related companies, including Mexican and Spanish companies
interested in establishing and developing business operations in the
Southwestern United States. Prior thereto, he held various senior management
positions with companies in the investment and banking industries, including the
Mexican Division of Financiera de Nuevo Leon, SA de CV, Banamex, International
Bank of America and Carte Blanche Corporation. Mr. Kauachi received his degree
in Mechanical Engineering Route to Business Administration in 1965 from the
University of Texas.
RONALD E. PIERCE has served as President and Chief Executive Officer since
December 1997 and as a director since May 1997. He served as President and Chief
Operating Officer of the Company from October 1996 until December 1997. With
over 18 years of healthcare management experience, Mr. Pierce was recruited to
transition the Company to a specialty focused physician practice management
strategy. From 1995 to 1996, Mr. Pierce was Vice President of Operations at
American Oncology Resources, a leading single specialty physician practice
management company focused on oncology. From 1989 to 1995, Mr. Pierce served as
Vice President at Caremark International. From 1980 to 1989, he served in
various management positions at Baxter International and American Hospital
Supply Corporation. Mr. Pierce received his Bachelor of Arts and Masters of
Science degrees from the State University of New York in 1976 and 1978,
respectively.
CLIFFORD R. HINKLE has served as a director of the Company since November 1996.
He has served as Chairman and CEO of Flagler Holdings, Inc., a merchant banking
company, or its predecessor, since 1992. Since 1993, he has been a director of
Commercial Net Lease Realty, Inc., a New York Stock Exchange ("NYSE") listed
real estate investment trust, and a director of Prime Succession, Inc. since
1996. He was a director and CEO of MHI Group, Inc., a NYSE company, which owned
and operated funeral homes and cemeteries from 1993 until November 1995. From
1987 to 1991, Mr. Hinkle was the Executive Director and Chief Investment Officer
of the State Board of Administration of Florida and managed over $40 billion in
various trust funds.
SERIES B NOMINEES
STEVEN B. GRUBER has served as a director of the Company since February 1999. He
has served as a Vice President of Keystone, Inc. since 1992 and a managing
partner of Oak Hill Capital Management, Inc., investment advisor to Oak Hill
Capital Partners, L.P. since 1998. Mr. Gruber co-founded and serves as a
co-managing partner of Insurance Partners, L.P., and as a management partner of
the management company for Acadia Partners, L.P. He serves on the board of Grove
Worldwide, LLC, MVE Holdings, Inc. and Reliant Building Products, Inc. Prior to
joining Keystone, Inc., Mr. Gruber was a managing director and co-head of High
Yield Securities at Lehman Brothers and a managing director of its Merchant
Banking Group. Mr. Gruber holds an MBA from the University of Chicago Graduate
School of Business where he was a Merrill Fellow, and a BA degree from the
University of Michigan. Mr. Gruber is a member of the Board of the Children's
Museum of Manhattan.
4
<PAGE> 6
MARK A. WOLFSON has served as a director of the Company since December 1997. He
has served as a Vice President of Keystone, Inc. since 1995 and a managing
partner of Oak Hill Capital Management, Inc. since 1998. Mr. Wolfson is also a
principal of Arbor Investors, L.L.C. He serves on the Board of Directors of
Investment Technology Group, Oreck Corp., Da Vinci I Corp., and eGain
Communications, Inc. Mr. Wolfson holds the title of Professor at the Stanford
Graduate School of Business, where he has been a faculty member since 1977,
including a three-year term as Associate Dean. He has also taught at the Harvard
Business School and the University of Chicago and has been a Visiting Scholar at
the Sloan School of Management at Massachusetts Institute of Technology and the
Hoover Institution at Stanford University. Mr. Wolfson has been a Research
Associate at the National Bureau of Economic Research since 1988 and serves on
the Steering Committee of the Center for Economic Policy Research at Stanford
University.
SCOTT J. HANCOCK has served as a director of the Company since December 1997. He
has served as a Vice President of Keystone, Inc. since 1996 and a partner of Oak
Hill Capital Management, Inc., where he invests equity capital, primarily in the
healthcare industry. From 1993 until 1996, Mr. Hancock was with Bain Capital,
Inc. where he made private equity investments in the healthcare, information
technology and software industries. Prior to joining Bain Capital, Mr. Hancock
was Vice President, Business Development for Vivra, Inc. (1993), a specialty
healthcare services company, and a manager for Bain & Company (1989 to 1993). He
holds a BS degree from the University of California, Berkeley and an MBA from
Stanford Graduate School of Business.
COMMITTEES AND MEETINGS
The Board of Directors held four formal meetings during 1998. The Board also
took action by unanimous written consent on 28 occasions.
The Board of Directors has standing Audit, Compensation, and Acquisition
Committees. During 1998, each such committee was comprised of Messrs. Clifford
R. Hinkle, Mark A. Wolfson and Scott J. Hancock.
AUDIT COMMITTEE. The Audit Committee's functions are to monitor and review the
performance of the Company's independent accountants and recommend to the Board
from year to year a firm to be selected as the Company's independent
accountants. The Audit Committee's role also includes reviews of the Company's
policies and procedures with respect to auditing, accounting, and financial
controls, periodic informal meetings with the Company's staff regarding
accounting and financial procedures and recommendations to the Board regarding
methods of control over the audit and accounting functions. The Audit Committee
met four times during 1998.
COMPENSATION COMMITTEE. The Compensation Committee's functions are to establish
and to administer the Company's compensation plans, to recommend the adoption of
new plans or amendments to existing plans, and to recommend to the Board the
salary ranges and other remuneration payable to the officers, managerial, and
technical personnel of the Company. The Committee made recommendations regarding
compensation matters as necessary to the Board. All matters were approved by
unanimous consent of all other directors of the Company. The Compensation
Committee met four times during 1998.
ACQUISITION COMMITTEE. The Acquisition Committee's functions are to establish
financial and operational guidelines for the Company's affiliation transactions
with medical practices, to monitor the Company's compliance with such
guidelines, and to approve exceptions to such guidelines when appropriate. The
Acquisition Committee also monitors the financial and operational performance of
affiliated practices. The Acquisition Committee met four times during 1998.
The Company has no nominating committee or any committee serving a similar
function.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH
OF THE INDIVIDUALS NOMINATED FOR ELECTION AS DIRECTOR.
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<PAGE> 7
ITEM 3
RATIFICATION OF INDEPENDENT ACCOUNTANTS
Ernst & Young LLP has been selected by the Board to serve as the Company's
independent accountants for the fiscal year ending December 31, 1999. Ernst &
Young, LLP is a nationally recognized accounting firm.
The Board of Directors recommends that the selection of Ernst & Young LLP be
ratified by the stockholders. Ratification of the selection of accountants is
not required; however, the Board is submitting this matter to the stockholders
in order to enhance their participation in this aspect of the Company's affairs.
If the stockholders do not ratify the selection of Ernst & Young LLP, this
selection of independent accountants will be reconsidered by the Board.
By unanimous written consent on February 3, 1999, the Company's Board of
Directors dismissed the firm of PricewaterhouseCoopers LLP as the Company's
principal accountant and engaged the accounting firm of Ernst & Young LLP as
principal accountant to audit the Company'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 the Company for the past two years
contained no adverse opinion or disclaimer of opinion. Neither such opinion was
qualified or modified as to uncertainty, audit scope or accounting principles.
A representative of Ernst & Young LLP is expected to be present at the Annual
Meeting and will have the opportunity to make a statement if he/she desires to
do so and is expected to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS.
EXECUTIVE OFFICERS
The following table lists the present executive officers of the Company as of
the date hereof and the capacities in which they serve.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL AGE CAPACITY
<S> <C> <C>
Ronald E. Pierce 44 President and Chief Executive Officer
Gerald R. Wicker 54 Executive Vice President, Chief Financial Officer,
Secretary and Treasurer
</TABLE>
Biographical information with respect to Mr. Pierce was previously described
under Item 1.
GERALD R. WICKER, CPA, has served as Executive Vice President, Chief Financial
Officer ("CFO") and Treasurer since joining the Company on November 30, 1998,
and was appointed Secretary on February 16, 1999. Mr. Wicker was Senior Vice
President and CFO of the Physician Practice Management ("PPM") division of
MedPartners, Inc. from January 1998 through July 1998. Until his promotion to
Senior Vice President & CFO of the PPM division, Mr. Wicker served as Senior
Vice President and CFO of the PPM - East division of MedPartners, Inc. from
December 1996 until December 1997. Prior thereto, Mr. Wicker served as CFO,
Treasurer and Vice President of Administration of PowerCerv Corporation, a
publicly traded software company, which primarily provides a broad range of
client/server development tools, application products and consulting
6
<PAGE> 8
services. He began his professional career with KPMG Peat Marwick in 1967 and
was elected to its partnership in 1979. From July 1985 until June 1995, Mr.
Wicker served as Audit Partner-In-Charge for KPMG Peat Marwick in Tampa,
Florida. Mr. Wicker holds a BS degree in Accounting from Newberry College.
Each executive officer has been elected to serve until the Annual Meeting, which
will be held May 7, 1999. The Company anticipates that all officers will be
re-elected to their positions at that time.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
On March 12, 1999, there was no person who owned of record, and none were known
to the Company to own beneficially, more than 5% of the Common Stock and Series
B Preferred Stock, except as set forth below. Ownership of the Series A
Preferred Stock is included in the Common Stock column below because the holders
of the Series A Preferred Stock will vote with the holders of Common Stock with
respect to the election of directors at the Annual Meeting.
<TABLE>
<CAPTION>
COMMON STOCK SERIES B PREFERRED STOCK
---------------------------------- ------------------------------
AMOUNT AND AMOUNT AND
NAME AND ADDRESS OF NATURE OF PERCENT NATURE OF PERCENT
BENEFICIAL OWNERS BENEFICIAL OWNER OF CLASS BENEFICIAL OWNER OF CLASS
----------------- ---------------- -------- ---------------- --------
<S> <C> <C> <C> <C>
Sharon Ann Donovan 1,157,850 shares (a) 17.7% -- --
11430 I-10 East Freeway
Suite 360
Houston, Texas 77029
Jose E. Kauachi 1,264,787 shares (b) 19.2% -- --
P.O. Box 1846/1847
Edwards, Colorado 81632
Chartwell Capital Investors, L.P. 1,340,981 shares (c) 17.1% -- --
1610 Independent Square
Jacksonville, Florida 32202
FW Integrated Orthopaedics
Investors I, LP 6,151,243 shares (d) 49.0% 137,272 50%
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
FW Integrated Orthopaedics 6,151,243 shares (e) 49.0% 137,272 50%
Investors II, LP
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
</TABLE>
-------------------
(a) Includes 1,023,500 shares owned directly and 84,350 shares and an
option to purchase 50,000 shares owned by William F. Donovan, M.D., the
spouse of Sharon Ann Donovan. Sharon Ann Donovan disclaims any
beneficial ownership with respect to securities owned by Dr. Donovan.
(b) Represents 1,164,037 shares directly owned, 750 shares owned by Mr.
Kauachi's wife and an option to purchase 100,000 shares, which option
is currently exercisable. Mr. Kauachi disclaims any beneficial
ownership with respect to securities owned by his wife.
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<PAGE> 9
(c) Represents the shares obtainable upon conversion of (i) 25,226 shares
of the Series A Preferred Stock and (ii) 5,700 shares of Series A
Preferred Stock that may be issued related to accrued unpaid dividends
as of March 12, 1999.
(d) Represents 94,875 shares owned directly and 6,056,368 shares obtainable
upon conversion of (i) 137,272 shares of the Series B Preferred Stock
and (ii) 2,403 shares of Series B Preferred Stock that may be issued
related to accrued unpaid dividends as of March 12, 1999.
(e) Represents 94,875 shares owned directly and 6,056,368 shares obtainable
upon conversion of (i) 137,272 shares of the Series B Preferred Stock
and (ii) 2,403 shares of Series B Preferred Stock that may be issued
related to accrued unpaid dividends as of March 12, 1999.
MANAGEMENT EQUITY OWNERSHIP
Listed in the table below are the equity securities beneficially owned as of
March 12, 1999, by directors, named executive officers and directors and
executive officers as a group and the percent of class represented by the equity
securities owned by each person or group.
<TABLE>
<CAPTION>
COMMON STOCK SERIES B PREFERRED STOCK
---------------------------------- ------------------------------
AMOUNT AND AMOUNT AND
NAME AND ADDRESS OF NATURE OF PERCENT NATURE OF PERCENT
BENEFICIAL OWNERS BENEFICIAL OWNER OF CLASS BENEFICIAL OWNER OF CLASS
----------------- ---------------- -------- ---------------- --------
<S> <C> <C> <C> <C>
Jose E. Kauachi 1,264,787 (b) 19.2% -- --
P.O. Box 1846/1847
Edwards, Colorado 81632
Mark P. Kingston 220,000 (c) 3.3% -- --
10 Cheshire Bend Dr.
Sugar Land, Texas 77479
Ronald E. Pierce 167,369 (d) 2.6% -- --
5858 Westheimer, Suite 500
Houston, Texas 77057
Clifford R. Hinkle 31,000 (e) * -- --
P.O. Box 351
Tallahassee, Florida 32302
Scott J. Hancock 12,000 (f) * -- --
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Mark A. Wolfson 12,000 (g) * -- --
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Steven B. Gruber --
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Directors and Executive Officers 1,708,156 (h) 24.8% -- --
as a group (eight persons)
</TABLE>
- ----------------------
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<PAGE> 10
* Less than one percent
(a) The information as to beneficial ownership has been furnished by the
respective directors and named executive officers. Each person or group
has sole voting and investment power unless otherwise indicated.
(b) Represents 1,164,037 shares directly owned, 750 shares owned by Mr.
Kauachi's wife and an option to purchase 100,000 shares, which option
is currently exercisable. Mr. Kauachi disclaims any beneficial
ownership with respect to securities owned by his wife.
(c) Represents 20,000 shares directly owned and an option to purchase
200,000 shares, which option is currently exercisable until July 31,
1999.
(d) Represents 107,179 shares directly owned, 190 shares owned by Mr.
Pierce's wife and an option to purchase 60,000 shares, which option is
currently exercisable.
(e) Includes 5,000 shares directly owned, 10,000 shares owned by Flagler
Holdings, Inc. of which Mr. Hinkle exercises sole voting and
dispositive powers and an option to purchase 16,000 shares, which
option is currently exercisable.
(f) Includes an option to purchase 12,000 shares, which option is currently
exercisable.
(g) Includes an option to purchase 12,000 shares, which option is currently
exercisable.
(h) Represents 1,308,156 shares owned and options to purchase 400,000
shares, which options are exercisable within 60 days of March 12, 1999.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid, distributed or accrued for
services rendered in all capacities to the Company during the fiscal years ended
December 31, 1998, 1997 and 1996 to the Company's Chief Executive Officer, and
the four most highly compensated executive officers other than the Chief
Executive Officer whose total compensation exceeds $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
(a) (b) (c) (g) (i)
SECURITIES
UNDERLYING
OPTIONS/SARS OTHER
NAME AND PRINCIPLE POSITION YEAR SALARY (#) COMPENSATION
===================================== =============== ================= ======================== ======================
<S> <C> <C> <C> <C>
Ronald E. Pierce, 1998 $250,000 -- $ 1,085(1)
President and CEO 1997 $188,462 350,000 $ 288(2)
1996 $ 31,731 150,000 $ 288(2)
Mark P. Kingston 1998 $150,000 200,000 $ 985(1)
Executive Vice President
and COO
</TABLE>
1) Amount paid by the Company to purchase $1.0 million dollar term life
insurance for the beneficiary of the named executive officer.
2) Amount paid by the Company into 401(k) account as an employer matching
contribution.
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<PAGE> 11
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
HELD AT FY-END (#) OPTIONS/SARS AT FY-END ($)
------------------------------------- -----------------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
======================= ================ ================ ================= =================== =============== ===================
<S> <C> <C> <C> <C> <C> <C>
Ronald E. Pierce 0 $0 60,000 440,000 $0 $0
Mark P. Kingston 0 $0 0 200,000 $0 $0
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR MARKET PRICE
OPTIONS/SARS EMPLOYEES IN FISCAL BASE PRICE DATE OF GRANT EXPIRATION
NAME GRANTED # YEAR ($/SH) ($/SH) DATE
(a) (b) (c) (d)(1) (d)(2) (e)
=========================== ================== ===================== =================== ================== ===================
<S> <C> <C> <C> <C> <C>
Ronald E. Pierce -- -- -- -- --
Mark P. Kingston 200,000 29.3% $6.4375 $6.4375 7/31/1999
</TABLE>
(1) Mr. Kingston resigned from the Company on January 29, 1999. Pursuant to an
agreement dated February 9, 1999 between the Company and Mr. Kingston, his
option became fully vested and expires on July 31,1999.
EXECUTIVE EMPLOYMENT CONTRACTS
On December 12, 1997, the Company entered into an employment agreement with
Ronald E. Pierce to serve as the Company's President and Chief Executive Officer
for a period of three years. Compensation during the term of the agreement
includes a base salary of $250,000 per year, all Company's benefits,
participation in the Company's bonus plan, eligibility for stock options under
the Company's stock option plans, paid medical insurance for immediate family
members, long term disability insurance coverage equal to one-half base salary,
and a $1.0 million dollar term life insurance policy. If the agreement is
terminated by the Company without cause, base salary and the value of benefits
will be paid to Mr. Pierce through the expiration date of the agreement;
provided however, if such termination without cause occurs after July 1, 1999,
payment of the same shall be made in a lump sum and shall include payments due
through a point in time that is the later of one year from the date of the
termination without cause or the expiration date of the agreement. If the
agreement is terminated without cause, all options then granted to Mr. Pierce
will become immediately vested and Mr. Pierce will have ninety days following
the date of termination during which to exercise all such options. Mr. Pierce
10
<PAGE> 12
may resign at any time upon giving thirty days notice to the Company.
Compensation to Mr. Pierce will cease as of his last day of employment if he
resigns from the Company. Mr. Pierce has agreed not to compete with the Company
during the term and for a period of one year following the termination of this
agreement.
On April 1, 1998, the Company entered into an employment agreement with Mark P.
Kingston to serve as the Company's Executive Vice President and Chief Operating
Officer for a period of one year. Mr. Kingston resigned from the Company on
January 29, 1999. See "Related Party Transactions." Compensation during the term
of the agreement included a base salary of $200,000 per year, all Company's
benefits, participation in the Company's bonus plan, eligibility for stock
options under the Company's stock option plans, paid medical insurance for
immediate family members, long term disability insurance coverage equal to
one-half base salary, and a $1.0 million dollar term life insurance policy. The
Agreement provided that if it was terminated by the Company without cause, base
salary would be paid to Mr. Kingston through a point in time that is the later
of one year from the date of the termination without cause or the expiration
date of the Agreement. If the Agreement was terminated by the Company without
cause, all options then granted to Mr. Kingston would become immediately vested
and Mr. Kingston would have ninety days following the date of termination during
which to exercise all such options. The Agreement provided that Mr. Kingston may
resign at any time upon giving thirty days notice to the Company, and the
compensation to Mr. Kingston would cease as of his last day of employment if he
resigned from the Company. Mr. Kingston agreed not to compete with the Company
during the term and for a period of one year following the termination of this
Agreement.
DIRECTORS' COMPENSATION
All directors other than Mr. Kauachi, the Non-executive Chairman and Mr. Pierce,
the President and Chief Executive Officer, receive compensation for their
services as Company's directors. Directors receive cash compensation of $5,000
annually plus $1,000 for each board meeting actually attended. When first
elected to the Board, these directors are granted options to purchase 12,000
shares of the Company's Common Stock at an exercise price equal to the fair
market value of the Company's Common Stock as of the date of their election.
These options vest 1,000 shares per month over the first twelve months of
service as a director and are exercisable only during such time as the optionee
is serving as a Company's director. In addition to the above, Mr. Hinkle
received options to purchase 4,000 shares of Common Stock when first elected to
the Board of Directors on November 14, 1996. The right to exercise such options
vests equally over the two-year period following the grant of the option and
vested options are exercisable until November 13, 1999. All directors are
entitled to reimbursement for reasonable travel expenses incurred in attending
meetings of the Company's directors.
On December 12, 1997, the Company and Jose E. Kauachi entered into a three-year
consulting agreement, the early termination of which was negotiated between the
Company and Mr. Kauachi effective December 31, 1997. See " Related Party
Transactions."
RELATED PARTY TRANSACTIONS
In February 1999, pursuant to an agreement entered into between the Company and
Mr. Mark Kingston in conjunction with his resignation as Executive Vice
President and Chief Operating Officer, the Company paid Mr. Kingston $231,330
and forgave principal and accrued interest totaling $87,643 that was associated
with a promissory note issued in July 1998 to assist Mr. Kingston with his
relocation to Houston. Additionally, the Company accelerated vesting of an
option granted to Mr. Kingston to purchase 200,000 shares of Common Stock at
$6.4375 per share. Mr. Kingston will have until July 31, 1999 to exercise such
option at which time any portion that is not exercised shall be forfeited and
canceled.
In December 1997, the Company paid Mr. Jose E. Kauachi, a significant
shareholder and the Company's Non-executive Chairman of the Board 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
of $281,250 in conjunction with such modification.
11
<PAGE> 13
In 1995, the Company assisted in the formation of a professional limited
liability partnership named PhysiCare, L.L.P. ("PhysiCare"). Two of the partners
of PhysiCare were entities controlled by William F. Donavan, M.D. ("Donovan"),
then a director of the Company and the beneficial holder of in excess of 10% of
the Company's Common Stock. The Company, either directly or through PhysiCare,
paid Donovan and Northshore Orthopedics Assoc. ("NSO"), a professional
association owned by Donovan which was one of the partners of PhysiCare,
approximately $688,000 in 1997 for certain services rendered and equipment and
leasehold rentals. In addition, PhysiCare incurred approximately $4,443,000 in
cost reimbursement and management fee expenses to a subsidiary of the Company in
1997. In connection with the formation of PhysiCare, the Company agreed to
advance certain loans to be collateralized by certain assets of PhysiCare. In
December 1997, the Company terminated its management services agreement with
PhysiCare and, in connection therewith, a subsidiary of the Company forgave
approximately $577,000 (of the then outstanding $1,237,000 indebtedness of
PhysiCare) in exchange for net assets of PhysiCare in a like amount. NSO assumed
the balance of approximately $660,000 on a non-recourse basis. In December 1997,
the Company took charges of $548,000 to write down the note receivable from NSO
to its estimated realizable value.
In December 1997, the Company entered into a Securities Purchase Agreement with
FW Integrated Orthopaedics Investors, LP and FW Integrated Orthopaedics
Investors II, LP (collectively, the "Purchasers") pursuant to which, in exchange
for aggregate consideration of $25,000,000, the Company issued to each of such
entities (i) 125,000 shares of the Company's Series B Preferred Stock and (ii)
warrants to purchase 2,500,000 shares of the Company's Common Stock. The
Purchasers have certain exclusive rights regarding the election of three of the
Company's 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.
Messrs. Gruber, Wolfson, and Hancock, directors of the Company, are currently
director designees of the Purchasers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors and executive officers, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC"). Directors, executive officers
and greater than 10% beneficial owners are required by SEC regulation to furnish
the Company with copies of all Section 16(a) Forms 3, 4 and 5 they file. Based
solely upon a review of such Forms 3, 4 and 5 and any amendments thereto
furnished to the Company, and written representations from certain reporting
persons that no Forms 5 were required, the Company believes that all such
applicable filing requirements were complied with by each of the executive
officers, directors and greater than 10% shareholders.
OTHER MATTERS
Management is not aware of any other matters to be presented for action at the
meeting. However, if any other matter is properly presented, it is the intention
of the persons named in the enclosed form of proxy to vote in accordance with
their best judgment on such matter.
A copy of the Company's Annual Report for the year ended December 31, 1998,
including audited financial statements, as filed with the SEC as its Annual
Report on Form 10-KSB (except for exhibits thereto), accompanies this proxy
statement. The Annual Report does not form any part of the material for
solicitation of proxies, but contains important information regarding the
Company's business and financial condition. The Annual Report contains a list
describing all the exhibits thereto and any exhibit is available to a
stockholder upon written request to the President of the Company at the address
of the Company set forth on the first page hereof accompanied by payment to the
Company of $35.00 plus $0.25 per page for each exhibit requested, which amount
represents reasonable expenses incurred by the Company in furnishing a copy of
an exhibit.
12
<PAGE> 14
The Company will bear the costs of the solicitation of proxies from its
stockholders. In addition to the use of mail, proxies may be solicited by
directors, officers and regular employees of the Company in person or by
telephone or other means of communication. The directors, officers and employees
of the Company will not be compensated additionally for the solicitation but may
be reimbursed for out-of-pocket expenses in connection with the solicitation.
Arrangements are also being made with brokerage houses and also any other
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of the Company, and the Company will reimburse the brokers,
custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses.
STOCKHOLDER PROPOSALS
Proposals by stockholders intended to be presented at the 2000 Annual Meeting of
Stockholders must be received by the Company for inclusion in the Company's
Proxy Statement and form of proxy relating to that meeting not later than
December 13, 1999.
BY ORDER OF THE BOARD OF DIRECTORS
GERALD R. WICKER, Secretary
Houston, Texas
April 14, 1999
13
<PAGE> 15
INTEGRATED ORTHOPAEDICS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald E. Pierce and Gerald R. Wicker, each
with full power of substitution, as proxies and authorizes each of them, acting
individually, to vote as designated below, all shares of Series B Convertible,
Non-Redeemable Preferred Stock of Integrated Orthopaedics, Inc. (the "Company")
owned by the undersigned at the Annual Meeting of Shareholders of the Company
to be held at the Company's headquaters at 5858 Westheimer, Suite 500, Houston,
Texas 77057 at 8:30 a.m. (local time) May 7, 1999, or any adjournment thereof.
The undersigned hereby revokes any proxies heretofore given to vote upon or
act with respect to such shares, and hereby ratifies and confirms all that said
attorneys, agents, proxies, the substitutes or any of them may lawfully do by
virtue hereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2 and 3.
1. [Voting on Item 1 is reserved to the holders of the Company's Common Stock
and Series A Preferred Stock]
2. ELECTION OF DIRECTORS OF THE COMPANY
[ ] FOR all nominees listed below (except as marked to the contrary)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below:
Mark A. Wolfson Scott J. Hancock Steven B. Gruber
INSTRUCTIONS: To withhold authority for any individual nominee, write nominee's
name on the space provided below:
------------------ --------------------- -------------------
3. Ratification of the appointment of ERNST & YOUNG, LLP as independent
accountants of the Company for the current year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the proxies are authorized to vote as they deem
appropriate upon any other matter that properly may come before the meeting
or any adjournment thereof.
(Please sign on reverse side)
<PAGE> 16
This proxy, when properly executed, will be voted in the manner
directed herein by the stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 2 and 3. If more than one of the proxies designated hereby
shall be present in person or by substitution at the Annual Meeting, or at any
adjournment thereof, the majority of said proxies present and voting, either in
person or by substitution, shall exercise all the powers herein given.
-----------------------------------------
-----------------------------------------
DATED: , 1999
-----------------
Please date, sign exactly as your name
appears hereon and mail this proxy card
in the enclosed envelope. No postage is
required. Where there is more than one
owner, each should sign. When signing as
an attorney, administrator, executor,
guardian or trustee, please add your
title as such. If executed by a
partnership, this proxy should be signed
in the partnership name by an authorized
person. If executed by a corporation,
this proxy should be signed by a duly
authorized officer.
[ ] Please check this box if you plan on
attending the Annual Meeting.
<PAGE> 17
INTEGRATED ORTHOPAEDICS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald E. Pierce and Gerald R. Wicker,
each with full power of substitution, as proxies and authorizes each of them,
acting individually, to vote as designated below, all shares of Common Stock
and Series A Cumulative Convertible Preferred Stock of Integrated Orthopaedics,
Inc. (the "Company") owned by the undersigned at the Annual Meeting of
Shareholders of the Company to be held at the Company's headquarters at 5858
Westheimer, Suite 500, Houston, Texas 77057 at 8:30 a.m. (local time) May 7,
1999, or any adjournment thereof.
The undersigned hereby revokes any proxies heretofore given to vote upon
or act with respect to such shares, and hereby ratifies and confirms all that
said attorneys, agents, proxies, the substitutes or any of them may lawfully do
by virtue hereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. ELECTION OF DIRECTORS OF THE COMPANY
[ ] FOR all nominees listed below (except as marked to the contrary)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below:
Jose E. Kauachi Ronald E. Pierce Clifford R. Hinkle
INSTRUCTIONS: To withhold authority for any individual nominee, write nominee's
name on the space provided below:
---------------- ----------------- --------------------
2. [Voting on Item 2 is reserved to the holders of the Company's Series B
Preferred Stock]
3. Ratification of the appointment of ERNST & YOUNG, LLP as independent
accountants of the Company for the current year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the proxies are authorized to vote as they deem
appropriate upon any other matter that properly may come before the
meeting or any adjournment thereof.
(Please sign on reverse side)
<PAGE> 18
This proxy, when properly executed, will be voted in the manner
directed herein by the stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 1 and 3. If more than one of the proxies designated hereby
shall be present in person or by substitution at the Annual Meeting, or at any
adjournment thereof, the majority of said proxies present and voting, either in
person or by substitution, shall exercise all the powers herein given.
________________________________________
________________________________________
Dated: ______________, 1999
Please date, sign exactly as your name
appears hereon and mail this proxy card
in the enclosed envelope. No postage is
required. Where there is more than one
owner, each should sign. When signing as
an attorney, administrator, executor,
guardian or trustee, please add your
title as such. If executed by a
partnership, this proxy should be signed
in the partnership name by an authorized
person. If executed by a corporation,
this proxy should be signed by a duly
authorized officer.
[] Please check this box if you plan on
attending the Annual Meeting.
IMPORTANT: Complete appropriate FORM on reverse.
