<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
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 NO. 1-10677
--------
INTEGRATED ORTHOPAEDICS, INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0203483
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5858 Westheimer, Suite 500, Houston, Texas 77057
------------------------------------------------
(Address of principal executive offices)
(713) 225-5464
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act of 1934 during the preceding 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
----- -----
As of August 13, 1999, 6,496,540 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Form: YES NO X
----- ------
<PAGE> 2
INTEGRATED ORTHOPAEDICS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
June 30, 1999 and December 31, 1998............................................1
Consolidated Statements of Operations--
Three months and Six months ended June 30, 1999 and 1998.......................2
Consolidated Statement of Change in
Stockholders' Equity--
Six months ended June 30, 1999.................................................3
Condensed Consolidated Statements of Cash Flows--
Six months ended June 30, 1999 and 1998........................................4
Notes to Condensed Consolidated Financial Statements...........................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................10
PART II. OTHER INFORMATION.....................................................................14
SIGNATURE......................................................................................16
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,861 $ 6,018
Accounts receivable, net 2,851 3,269
Other current assets 750 1,566
Deferred income taxes 3,521 2,441
------------ ------------
Total Current Assets 11,983 13,294
Property and Equipment (including capital leases) 4,785 4,340
Less: Accumulated depreciation and amortization (2,373) (2,502)
------------ ------------
Net property and equipment 2,412 1,838
------------ ------------
Management services agreements, net 27,717 28,272
Other assets 171 706
============ ============
TOTAL ASSETS $ 42,283 $ 44,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 104 $ 231
Accrued liabilities 2,485 2,844
Current maturities of notes payable and capital lease obligations 555 533
------------ ------------
Total Current Liabilities 3,144 3,608
Notes Payable 868 868
Obligations under capital leases 934 351
Deferred income taxes 10,200 10,200
------------ ------------
Total Liabilities 15,146 15,027
------------ ------------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock 3 3
Common stock 7 7
Additional paid-in capital 47,987 46,744
Common stock to be issued 78 78
Accumulated deficit (20,688) (17,499)
Treasury shares (250) (250)
------------ ------------
Total Stockholders' Equity 27,137 29,083
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,283 $ 44,110
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE> 4
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 2,789 $ 3,082 $ 5,647 $ 5,720
---------- ---------- ---------- ----------
Costs and expenses:
Practice compensation and benefits 1,047 1,054 2,079 1,983
Other direct costs 1,027 1,023 1,946 1,900
General and administrative 1,809 1,880 3,200 3,295
Depreciation and amortization 437 376 890 623
Gain from divestitures and
discontinued operations -- -- -- --
---------- ---------- ---------- ----------
4,320 4,333 8,115 7,801
Loss From Operations (1,531) (1,251) (2,468) (2,081)
Interest income 58 130 127 310
Interest expense (141) (42) (345) (73)
---------- ---------- ---------- ----------
Loss Before Income Tax Benefit (1,614) (1,163) (2,686) (1,844)
Income Tax Benefit 596 368 993 586
---------- ---------- ---------- ----------
Net loss before extraordinary items $ (1,018) $ (795) $ (1,693) $ (1,258)
========== ========== ========== ==========
Extraordinary loss related to retirement
of NationBank debt, net (152) -- (152) --
---------- ---------- ---------- ----------
Net loss (1,170) (795) (1,845) (1,258)
========== ========== ========== ==========
Loss applicable to common shares $ (1,855) $ (1,409) $ (3,189) $ (2,479)
========== ========== ========== ==========
Loss per common share:
Basic and diluted $ (0.28) $ (0.22) $ (0.49) $ (0.39)
========== ========== ========== ==========
Weighted average common
shares outstanding 6,527 6,466 6,527 6,401
</TABLE>
The accompanying notes are an integral part of this statement
2
<PAGE> 5
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON
SHARES AMOUNT ADDITIONAL STOCK
------------------ ------------------ PAID IN ACCUMULATED TO BE TREASURY
COMMON PREFERRED COMMON PREFERRED CAPITAL DEFICIT ISSUED STOCK TOTAL
------ --------- ------ --------- ---------- ----------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 6,557 300 $ 7 $ 3 $ 46,744 $ (17,499) $ 78 $ (250) $ 29,083
Dividends -
Preferred Stock
Series A -- -- -- -- -- (101) -- -- (101)
Dividends -
Preferred Stock
Series B -- -- -- -- 1,243 (1,243) -- -- --
Net loss -- -- -- -- -- (1,845) -- -- (1,845)
------ --------- ------ --------- ---------- ----------- ------ -------- --------
Balance at
June 30, 1999 6,557 300 $ 7 $ 3 $ 47,987 $ (20,688) $ 78 $ (250) $ 27,137
====== ========= ====== ========= ========== =========== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 6
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,845) $ (1,258)
Non-cash expenses and changes in operating
assets and liabilities 1,095 (1,024)
---------- ----------
Net Cash Used in Operating Activities (750) (2,282)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (892) (358)
Proceed from sale of marketable securities -- 111
Collection on notes receivable 110 52
Net payments in medical practice transactions -- (4,018)
---------- ----------
Net cash used in investing activities (782) (4,213)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Other -- (49)
Payments on notes and capital lease obligations 375 (1,725)
---------- ----------
Net Cash Used in Financing Activities 375 (1,774)
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,157) (8,269)
Cash and cash equivalents beginning of period 6,018 16,642
---------- ----------
Cash and cash equivalents end of period $ 4,861 $ 8,373
========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 89 $ 30
Income taxes paid (refunded) (5) 135
NON CASH TRANSACTIONS AND OTHERS:
Details of medical transaction -
Liabilities assumed -- (20)
Deferred tax liability for book and tax basis difference -- (2,204)
Common stock and additional paid in capital
issued and to be issued -- (757)
Others -
Series B Preferred Stock - accumulated
deficit related to stock dividends 1,243 1,120
Series A Preferred Stock - increase in
accrued liabilities related to unpaid dividends 101 101
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 7
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - 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 June 30, 1999, the Company
provided comprehensive management services under long-term agreements to three
orthopaedic practices in three states. The Company also owns and operates two
work hardening facilities in Houston, Texas.
BASIS OF PRESENTATION. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of those of a normal recurring nature) considered necessary for
a fair presentation have been included. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 1998, as filed with the
Securities and Exchange Commission on the Company's Annual Report on Form
10-KSB.
As a result of certain developments in the physician services industry, the
Company elected to change the amortization period of all its management service
agreements ("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 $0.02
in the quarter ending June 30, 1999 when compared to the quarter ended June 30,
1998, excluding the effect of new MSAs to be executed in the future.
The net loss for the quarter ended June 30, 1998 has been restated to reflect
the allocation of quarterly income tax benefits recognized at December 31, 1998.
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the disclosures of contingent assets and
liabilities. Because of the inherent uncertainties in this process, actual
future results could differ from those expected at the reporting date.
NOTE 2 - MEDICAL SERVICE REVENUE
Medical service revenue for services to patients by the medical groups
affiliated with the Company is recorded when the 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
5
<PAGE> 8
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
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. Substantially all of the amounts retained by
affiliated physician groups under management in the first six months of 1999
were contractually guaranteed as a minimum percentage of practice gross profit.
The following represents the amounts included in the determination of the
Company's revenues (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Medical Service Revenue $ 4,237 $ 4,937 $ 8,610 $ 8,913
Less: Amounts Retained by Medical Groups 1,448 1,855 2,963 3,193
---------- ---------- ---------- ----------
Revenues $ 2,789 $ 3,082 $ 5,647 $ 5,720
========== ========== ========== ==========
Management Services Agreements at period end 3 4 3 4
</TABLE>
NOTE 3 - LOSS PER COMMON SHARE
Basic loss per share excludes dilution and is computed by dividing loss
available to common stockholders by the weighted average number of common shares
outstanding for the period.
The components of basic loss per share are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------
1999 EPS 1998 EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (1,170) $ (0.18) $ (795) $ (0.12)
Series A Preferred Stock Dividend (51) (0.01) (50) (0.01)
Series B Preferred Stock Dividend (634) (0.10) (564) (0.09)
---------- ---------- ---------- ----------
Loss applicable to common shares $ (1,855) $ (0.28) $ (1,409) $ (0.22)
========== ========== ========== ==========
Weighted average common shares
outstanding 6,527 6,466
========== ==========
</TABLE>
6
<PAGE> 9
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------------------------------
1999 EPS 1998 EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (1,845) $ (0.28) $ (1,258) $ (0.20)
Series A Preferred Stock Dividend (101) (0.02) (100) (0.02)
Series B Preferred Stock Dividend (1,243) (0.19) (1,121) (0.17)
---------- ---------- ---------- ----------
Loss applicable to common shares $ (3,189) $ (0.49) $ (2,479) $ (0.39)
========== ========== ========== ==========
Weighted average common shares
outstanding 6,527 6,401
========== ==========
</TABLE>
Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, the computation of diluted EPS
shall not assume conversion, exercise, or contingent issuance of securities that
would have an anti-dilutive effect on earnings per share. For the quarterly
period and six months ended June 30, 1999 and 1998, basic loss per share and
diluted loss per share are the same as the conversion of outstanding stock
options, warrants and convertible stock would have an anti-dilutive effect on
earnings per share.
NOTE 4- 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. 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.
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.
Segment information as of and for the three months and six months ended June 30,
1999 and 1998 are as follows (in thousands):
7
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Practice Management Services $ 2,414 $ 2,581 $ 4,847 $ 4,692
Work Hardening Services 347 475 723 937
EBITDA
Practice Management Services $ 657 $ 810 $ 1,447 $ 1,442
Work Hardening Services 32 169 101 304
Income Before Income Tax
Practice Management Services $ 276 $ 555 $ 670 $ 966
Work Hardening Services 14 118 65 238
</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 three months and six months ended June 30, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Segment Income before
Income Tax Benefit $ 290 $ 673 $ 735 $ 1,204
Corporate expense, net (2,144) (1,836) (3,661) (3,049)
---------- ---------- ---------- ----------
$ (1,854) $ (1,163) $ (2,926) $ (1,845)
========== ========== ========== ==========
</TABLE>
NOTE 5 - LEGAL PROCEEDINGS
In January 1999, the Company and a subsidiary of the Company, IOI Management
Services of Connecticut, Inc. ("IOI Regional"), filed suit in the State Superior
Court, Fairfield District, Bridgeport, Connecticut, against the medical practice
located in Bridgeport, Connecticut, seeking to enforce certain repurchase
obligations under the existing MSA. The Company terminated the MSA 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.
8
<PAGE> 11
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain of the comments that follow or that appear elsewhere in this quarterly
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 quarterly report and the Company's annual
report on Form 10-KSB, there can be no assurance that actual results will not
differ materially from these forward-looking statements.
RESULTS OF OPERATIONS
GENERAL
In pursuing a single focus equity model musculoskeletal-related physician
practice management ("PPM") company strategy (prior to a subsequent change in
strategy during the fourth quarter of 1998 to a physician services company), 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. 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. 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.
Due to the changes during 1998 in the equity markets, in the PPM sector in
general and the orthopaedic single specialty area in particular, the Company has
redefined its strategy by considering new alternatives relative to traditional
equity-based physician affiliation models. The Company has reduced its corporate
personnel costs in the first quarter of 1999 to fit this recent strategy.
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 were attributable to this MSA.
9
<PAGE> 12
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
REVENUES
Revenues for the three months ended June 30, 1999 decreased $0.3 million, or 10%
to $2.8 million from $3.1 million for the same period in 1998. Of the $2.8
million in revenue, $2.4 million or 86% was generated by the affiliated
orthopaedic practices, $347,000 or 12% was generated by the Company's
wholly-owned work hardening and physical therapy facilities, with the remaining
$28,000 balance generated from previously divested business, other than the
medical practice located in Bridgeport, Connecticut.
As previously reported, the Company filed suit against the medical practice
located in Bridgeport, Connecticut. No revenue was reported for the three months
ended June 30, 1999 for this practice. Excluding this practice, revenue growth
for the three months ended June 30, 1999 was $0.2 or 8%.
PRACTICE COMPENSATION AND BENEFITS:
Practice compensation and benefits increased $7,000 or 1% to $1,047,000 in the
three months ended June 30, 1999 from $1,054,000 for the same period in 1998.
These costs increased due to increased personnel for ancillary services
(physical therapy, bone densitometry, and magnetic resonance imaging) at the
physician practices.
OTHER DIRECT COSTS:
Other direct costs increased $4,000 to $1,027,000 in the three months ended June
30, 1999 from $1,023,000 in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative costs for the three months ended June 30, 1999
decreased by $71,000 or 4%, to $1,809,000 from $1,880,000 in 1998. The reduction
is due to a decrease in advertising, contract labor, travel and telephone
expense.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization for the three months ended June 30, 1999 increased
$61,000 to $437,000 from $376,000 in 1998. The amortization period for MSA's was
changed prospectively from 40 years to 25 years, effective July 1, 1998.
INTEREST INCOME:
Interest income for the three months ended June 30, 1999 decreased $72,000 to
$58,000 from $130,000 in 1998. This decrease was due to comparatively lower
average cash equivalent balances in 1999.
Interest expense increase $99,000 to $141,000 for the three months ended June
30, 1999 from $42,000 in 1998. Interest expense increased due to the
amortization of deferred financing
10
<PAGE> 13
costs and commitment fees associated with a $65 million revolving credit
facility entered into in July, 1998 and additional capital leases entered into
since 1998.
NET LOSS/LOSS PER COMMON SHARE
Net loss for the three months ended June 30, 1999 increased 47% to $1,170,000
compared to a net loss of $795,000 in 1998. The net loss for the three months
ended June 30, 1998 was restated for the tax benefit in 1998.
Loss per basis and diluted shares increased to $0.28 per share in 1999 compared
to $0.22 per share in 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
REVENUES
Revenues for the six months ended June 30, 1999 were $5,647,000, a decrease of
$73,000, or 1%, from revenues of $5,720,000 for the same period of 1998.
PRACTICE COMPENSATION AND BENEFITS:
Overall practice compensation and benefit costs increased $96,000, or 5% to
$2,079,000 in 1999 from $1,983,000 in 1998. These costs increased due to the
addition of personnel at the physician practices for ancillary development.
OTHER DIRECT COSTS:
Overall direct costs increased $46,000, or 2%, to $1,946,000 for the six months
ended June 30, 1999 from $1,900,000 in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the six months ended June 30, 1999
decreased $95,000 or 3%, to $3,200,000 for the six months ended June 30, 1998
from $3,295,000.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $267,000 by 43% to $890,000 for the six
months ended June 30, 1999 from $623,000 for the same period of 1998. Of this
increase, $207,000 and $60,000 was attributable to the amortization of MSAs and
depreciation, respectively. The amortization of the period for MSAs was changed
prospectively from 40 years to 25 years, effective July 1, 1998.
INTEREST INCOME:
Interest income decreased by $183,000 for the six months ended June 30, 1999 to
$127,000 from $310,000 in 1998. The decrease was due to comparatively lower
average cash equivalent balances in 1999 compared to 1998.
11
<PAGE> 14
Interest expense increased by $272,000 to $345,000 for 1999 from $73,000 for
1998. Interest expense increased due to the amortization of deferred financing
costs and commitment fees associated with a $65 million revolving credit
facility entered into in July 1998 and additional capital leases entered into
since 1998.
NET LOSS/LOSS PER COMMON SHARE
Net loss for the six months ended June 30, 1999 increased 47% to $1,845,000 from
$1,258,000 in 1998. The 1998 financials were restated due to income tax benefits
for the year.
Loss per basic and diluted share increased to $0.49 per share in 1999 compared
to $0.39 per share in 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities for the six months ended June 30, 1999 was
$0.8 million, compared to $2.3 million for the same period of 1998. Net cash
used in investing activities decreased to $0.8 million in the second quarter of
1999 from $4.2 in 1998, due primarily to the use of $4.0 million cash in 1998
for a medical practice acquisition. Net cash used by financing activities was
$0.4 million in the second quarter of 1999, as compared to cash used by
financing activities of $1.8 million in 1998. The cash used in 1998 was to pay a
non-interest-bearing obligation issued in October 1997 in a physician medical
practice transaction.
Net working capital was $8.8 million at June 30, 1999, as compared to $9.7
million at December 31, 1998. The decrease was due primarily to a use of cash
during the second quarter of 1999 for operations.
On July 14, 1998, the Company entered into a credit agreement (the "Credit
Agreement"), which provides for the $65 million revolving credit facility (the
"Credit Facility"). The Credit Facility was established for working capital
purposes, to fund acquisitions, to finance capital expenditures and for the
issuance of letters of credit. On June 4, 1999, the Company terminated the
Credit Agreement which, also terminated the Credit Facility.
The Company anticipates that its current cash balance will be sufficient to fund
capital expenditures, working capital requirements and to fund 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.
As a result of the company's internal analysis and certain information provided
by equipment manufacturers and third party vendors, the Y2K programming flaw was
identified in some of the Company's computing hardware and software systems.
This same error may have also existed in many of the Company's supplementary
12
<PAGE> 15
programmable support systems such as alarm, telecommunications, and even medical
equipment that have been replaced or updated. If uncorrected the Y2K problem
could result in computer system failure or equipment malfunctions causing
business disruptions.
PROJECT
The Company has undertaken an internal analysis to evaluate all hardware and
software that could be effected by the Y2K problem. Steps have been taken and
are being taken to replace or update any equipment that is not Y2K compliant. In
addition, all software applications have been either certified by the
appropriate manufacturer as Y2K compliant, or the Company has been notified that
necessary steps have been or will be taken by the manufacturer to update the
affected software systems in the next quarter.
SOFTWARE AND EQUIPMENT
The Company has reviewed the Y2K readiness of all-appropriate medical equipment
and systems at its practices and has been assured by each manufacturer that the
equipment is or with minor upgrades will be ready for the year 2000. The few
minor upgrades needed to ensure Y2K compliance have been expensed and planned
for completion over the next quarter. In addition, all necessary software in use
at all locations has been certified Y2K compliant by the manufacturer. Any minor
upgrades deemed necessary by the manufacturer are either in place or will be
included in any final upgrades released over the next two quarters.
Documentation from each manufacturer is on file with the appropriate clinic or
at the corporate office.
VENDORS
The Company has also taken steps to evaluate the Y2K readiness of all critical
third party vendors to the Company. Each such vendor has provided
representations and documentation to the Company certifying that it is or will
be Y2K compliant.
RISKS
The Company believes that it has taken substantial steps to insure its readiness
for the Year 2000. Those steps include, but are not limited to, testing and
replacement of computer related equipment, certification of business critical
hardware and software from its respective manufacturers, and upgrading all
software and hardware per manufacturer specifications to achieve compliance.
While some level of uncertainty exists due to the general reliance that the
Company must place on each vendor/manufacturer and to the uncertainty that the
Y2K problem will have in general, the Company believes that the completion of
its Y2K project will reduce the risk of any significant disruption to the
Company's business.
13
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, the Company and a subsidiary of the Company, IOI
Management Services of Connecticut, Inc. ("IOI Regional"), filed suit
in the State Superior Court, Fairfield District, Bridgeport,
Connecticut, against the medical practice located in Bridgeport,
Connecticut, seeking to enforce certain repurchase obligations under
the existing MSA. The Company terminated the MSA 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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 7, 1999 for
the purpose of considering 1) Proposal 1 the election of four directors
of the Company to serve until the 1999 Annual Meeting by shareholders
of common stock and Series A Preferred Stock; 2) - Proposal 2 - the
election of three directors of the Company to serve until the 1999
Annual Meeting by shareholders of Series B Preferred Stock, and 3) the
ratification of the selection of Ernst & Young, L.L.P. as independent
accountants to the Company for the fiscal year ending December 31,
1999. The results of the voting for each proposal are as follows:
<TABLE>
<CAPTION>
PROPOSAL 1:
FOR WITHHOLD
------- --------
<S> <C> <C>
Jose E. Kauachi 5,641,674 47,155
--------- ----------
Ronald E. Pierce 5,569,372 29,455
--------- ----------
Clifford R. Hinkle 5,663,374 25,455
--------- ----------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
PROPOSAL 2:
FOR WITHHOLD
---------- --------
<S> <C> <C>
Steven B. Gruber 12,112,736 0
---------- -----
Mark A. Wolfson 12,112,736 0
---------- -----
Scott J. Hancock 12,112,736 0
---------- -----
</TABLE>
PROPOSAL 3:
The results of the voting for ratification of Ernst & Young, L.L.P. as
the Company's independent accountant for the fiscal year ending
December 31, 1999, were as follows:
For: 19,966,257 Against 4,620 Abstained: 8,900
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
b) Reports on Form 8-K:
None.
15
<PAGE> 18
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
Date: August 13, 1999 By: /s/ Jose E. Kauachi
---------------------
JOSE E. KAUACHI
President
(Acting Chief Accounting Officer
and Principal Financial Officer)
16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11 Statement re computation of per share earnings.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 11
INTEGRATED ORTHOPAEDICS, INC.
SCHEDULE RE: (LOSS) EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic and diluted
Weighted average common shares outstanding 6,527 6,466 6,527 6,401
========== ========== ========= ========
Net (loss) income $(1,170) $ (795) $ (1,845) $ (1,258)
Series A Preferred Stock Dividend (51) (50) (101) (100)
Series B Preferred Stock Dividend (634) (564) (1,243) (1,121)
---------- ---------- --------- --------
Net (loss) income after dividends $ (1,855) $ (1,409) $ (3,189) $ (2,478)
========== ========== ========= ========
(Loss) earnings per share $ (0.28) $ (0.22) $ (0.49) $ (0.39)
========== ========== ========= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,861
<SECURITIES> 0
<RECEIVABLES> 2,851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,983
<PP&E> 4,785
<DEPRECIATION> (2,373)
<TOTAL-ASSETS> 42,283
<CURRENT-LIABILITIES> 3,144
<BONDS> 0
0
3
<COMMON> 7
<OTHER-SE> 27,137
<TOTAL-LIABILITY-AND-EQUITY> 42,283
<SALES> 0
<TOTAL-REVENUES> 5,647
<CGS> 0
<TOTAL-COSTS> 8,115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (345)
<INCOME-PRETAX> (2,686)
<INCOME-TAX> 993
<INCOME-CONTINUING> (1,693)
<DISCONTINUED> 0
<EXTRAORDINARY> (152)
<CHANGES> 0
<NET-INCOME> (1,845)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
