<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 September 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 November 12, 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
SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
September 30, 1999 and December 31, 1998................. 1
Consolidated Statements of Operations--
Three months and Nine months ended September 30, 1999
and 1998................................................. 2
Consolidated Statement of Change in
Stockholders' Equity--Nine months ended
September 30, 1999....................................... 3
Condensed Consolidated Statements of Cash Flows--
Nine months ended September 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................................................ 16
SIGNATURE .......................................................... 17
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,299 $ 6,018
Accounts receivable, net 2,789 3,269
Other current assets 867 1,566
Deferred income taxes 4,047 2,441
-------- --------
Total Current Assets 11,002 13,294
Property and Equipment (including capital leases) 5,115 4,340
Less: Accumulated depreciation and amortization (2,529) (2,502)
-------- --------
Net property and equipment 2,586 1,838
-------- --------
Management services agreements, net 27,452 28,272
Other assets 156 706
-------- --------
TOTAL ASSETS $ 41,196 $ 44,110
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 172 $ 231
Accrued liabilities 2,522 2,844
Current maturities of notes payable and capital lease obligations 385 533
-------- --------
Total Current Liabilities 3,079 3,608
Notes Payable 868 868
Obligations under capital leases 874 351
Deferred income taxes 10,200 10,200
-------- --------
Total Liabilities 15,021 15,027
-------- --------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock 3 3
Common stock 7 7
Additional paid-in capital 48,643 46,744
Common stock to be issued 78 78
Accumulated deficit (22,306) (17,499)
Treasury shares (250) (250)
-------- --------
Total Stockholders' Equity 26,175 29,083
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,196 $ 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 NINE MONTHS ENDED
-------------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 2,800 $ 3,308 $ 8,447 $ 9,028
-------- -------- -------- --------
Costs and expenses:
Practice compensation and benefits 1,095 1,115 3,174 3,098
Other direct costs 1,189 973 3,135 2,873
General and administrative 1,524 1,527 4,695 4,822
Depreciation and amortization 422 446 1,312 1,069
-------- -------- -------- --------
4,230 4,061 12,316 11,862
Loss From Operations (1,430) (753) (3,869) (2,834)
Interest income 45 105 172 415
Interest expense (45) (162) (419) (235)
-------- -------- -------- --------
Loss Before Income Tax Benefit (1,430) (810) (4,116) (2,654)
Income Tax Benefit 521 259 1,514 849
-------- -------- -------- --------
Net loss before extraordinary items $ (909) $ (551) $ (2,602) $ (1,805)
======== ======== ======== ========
Extraordinary loss related to retirement
Of NationBank debt, net -- -- (152) --
-------- -------- -------- --------
Net loss (909) (551) (2,754) (1,805)
======== ======== ======== ========
Loss applicable to common shares $ (1,618) $ (1,197) $ (4,807) $ (3,685)
======== ======== ======== ========
Loss per common share:
Basic and diluted $ (0.25) $ (0.18) $ (0.74) $ (0.57)
======== ======== ======== ========
Weighted average common
shares outstanding 6,496 6,506 6,496 6,437
</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 -- -- -- -- -- (154) -- -- (154)
Dividends -
Preferred Stock
Series B -- 19 -- -- 1,899 (1,899) -- -- --
Net loss -- -- -- -- -- (2,754) -- -- (2,754)
-------- -------- ------- ------- -------- -------- ------- -------- --------
Balance at
Sept 30, 1999 6,557 319 $ 7 $ 3 $ 48,643 $(22,306) $ 78 $ (250) $ 26,175
======== ======== ======= ======= ======== ======== ======= ======== ========
</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>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,754) $ (2,654)
Non-cash expenses and changes in operating
assets and liabilities 907 700
-------- --------
Net Cash Used in Operating Activities (1,847) (1,954)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (562) (357)
Proceed from sale of marketable securities -- 111
Collection (issuance) of notes receivable 110 (40)
Net payments in medical practice transactions -- (4,661)
-------- --------
Net cash used in investing activities (452) (4,947)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Other -- (35)
Borrowings (payments) on notes and capital lease obligations (420) (1,806)
Deferred Financing Cost -- (1,000)
-------- --------
Net Cash provided (used) in Financing Activities (420) (2,841)
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,719) (9,742)
Cash and cash equivalents beginning of period 6,018 16,642
-------- --------
Cash and cash equivalents end of period $ 3,299 6,900
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 318 $ 62
Income taxes paid (refunded) 51 192
Capital lease obligations for equipment 661 --
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 1,899 1,880
Series A Preferred Stock - increase in
accrued liabilities related to unpaid dividends 154 212
</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 September 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
Nine months ended September 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.
The net loss for the quarter ended September 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.
COMPREHENSIVE INCOME - The Company had no other comprehensive income (loss) for
the three and nine months ended September 30,1999 and 1998. Comprehensive
income (loss) equals net income (loss) for each of the periods presented on the
accompanying consolidated statement of operations.
5
<PAGE> 8
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
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 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 nine 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 NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
--------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Medical Service Revenue $ 4,178 $ 4,826 $ 12,788 $ 13,739
Less: Amounts Retained by Medical Groups 1,378 1,518 4,341 4,711
------- -------- -------- --------
Revenues $ 2,800 $ 3,308 $ 8,447 $ 9,028
======= ======== ======== ========
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.
6
<PAGE> 9
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The components of basic loss per share are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30,
--------------------------------------
1999 EPS 1998 EPS
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss $ (909) $(0.14) $ (551) $(0.08)
Series A Preferred Stock Dividend (53) (0.01) (50) (0.01)
Series B Preferred Stock Dividend (656) (0.10) (596) (0.09)
------- ------ ------- ------
Loss applicable to common shares $(1,618) $(0.25) $(1,197) $(0.18)
======= ====== ======= ======
Weighted average common shares
outstanding 6,496 6,506
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30,
-------------------------------------
1999 EPS 1998 EPS
------ ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $(2,754) $(0.42) $(1,805) $(0.28)
Series A Preferred Stock Dividend (154) (0.02) (151) (0.02)
Series B Preferred Stock Dividend (1,899) (0.30) (1,729) (0.27)
------- ------ -------- ------
Loss applicable to common shares $(4,807) $(0.74) $(3,685) $(0.57)
======= ====== ======== ======
Weighted average common shares
outstanding 6,496 6,437
======= ========
</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 nine months ended September 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.
7
<PAGE> 10
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
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 and nine months ended
September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Practice Management Services $2,437 $2,520 $7,284 $7,212
Work Hardening Services 352 680 1,075 1,617
EBITDA
Practice Management Services $ 457 $ 698 $1,899 $2,140
Work Hardening Services 54 414 155 718
Income Before Income Tax
Practice Management Services $ 102 $ 307 $ 768 $1,273
Work Hardening Services 35 394 100 632
</TABLE>
8
<PAGE> 11
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of the Company's segment income before income tax benefit to
the corresponding consolidated amounts as of and for the three months and nine
months ended September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment Income before
Income Tax Benefit $ 137 $ 701 $ 868 $ 1,905
Corporate expense, net $(1,567) (1,511) (4,984) (4,559)
------- ------- ------- -------
$(1,430) $ (810) $(4,116) $(2,654)
======= ======= ======= =======
</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.
9
<PAGE> 12
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
During the second and third quarter of 1999 the Company adapted to changes in
the market place by adopting an approach which focuses on the development of
ancillary services for orthopaedic medical practices. As such, the Company has
developed new products, reorganized the Company and hired a new senior
management team. As part of the reorganization a comprehensive plan was
implemented to reduce corporate overhead costs. Therefore, the Company incurred
non-recurring employee severance costs in the amount of $650,000. The Company
continues to provide management, consulting and ancillary services to four
existing orthopaedic practices in four states. In addition, it operates two
work hardening facilities in Texas.
In January 1999, the Company terminated the management services agreement
("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.
10
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998.
REVENUES
Revenues for the three months ended September 30, 1999 decreased $500,000
million, or 15%, to $2.8 million from $3.3 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, and $352,000, or 14%, was generated by the
Company's wholly-owned work hardening and physical therapy facilities,
In January 1999, the Company terminated the MSA with the medical practice
located in Bridgeport, Connecticut. As a result no revenue was reported for the
three months ended September 30, 1999 for this practice. Excluding this
practice, revenue decreased for the three months ended September 30, 1999 by
$74,000, or 3%
PRACTICE COMPENSATION AND BENEFITS:
Practice compensation and benefits decreased $20,000, or 2%, to $1,095,000 in
the three months ended September 30, 1999 from $1,115,000 for the same period
in 1998. These costs decreased $156,000 due to not incurring practice
compensation and benefits for the Connecticut clinic offset by an increase of
$136,000 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 $216,000 to $1,189,000 in the three months ended
September 30, 1999 from $973,000 for the same period in 1998. These costs
increased due to additional rent and professional services at the physician
practices for ancillary development.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative costs for the three months ended September 30, 1999
decreased by $3,000, or 1%, to $1,524,000 from $1,527,000 for the same period
in 1998. During the third quarter of 1999 employee severance payments in the
amount of $240,000 were incurred. Without the non-recurring severance payments
the general and administrative costs for the three months ended September 30,
1999 would have been reduced from $1,524,000 to $1,284,000, compared to the
general and administrative costs for the three months ended September 30, 1998
of $1,527,000.
In addition, during the three months ended September 30,1999, the Company
incurred $185,000 in costs related to the start-up of an ambulatory surgery
center in Louisiana which similar costs were not incurred for the same period
in 1998.
11
<PAGE> 14
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization for the three months ended September 30, 1999
decreased $24,000 to $422,000 from $446,000 for the same period in 1998. The
decrease was due to there not being any amortization for the Connecticut
practice MSA for the three months ended September 30, 1999. 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 September 30, 1999 decreased $60,000
to $45,000 from $105,000 for the same period in 1998. This decrease was due to
comparatively lower average cash equivalent balances in 1999.
Interest expense decreased $117,000 to $45,000 for the three months ended
September 30, 1999 from $162,000 for the same period in 1998. Interest expense
decreased due to the termination of the $65 million credit facility as of June
4, 1999.
NET LOSS / LOSS PER COMMON SHARE
Net loss for the three months ended September 30, 1999 increased 65% to
$909,000 compared to a net loss of $551,000 for the same period in 1998. The
net loss for the three months ended September 30, 1998 was restated for the tax
benefit in 1998.
Loss per basic and diluted shares increased to $0.25 per share for the three
months ended September 30, 1999 compared to $0.18 per share for the same period
in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998.
REVENUES
Revenues for the nine months ended September 30, 1999 were $8,447,000, a
decrease of $581,000, or 6%, from revenues of $9,028,000 for the same period of
1998. As previously indicated, in January 1999 the Company terminated the MSA
with the medical practice in Bridgeport Connecticut. Despite such termination
revenue of $62,824 was reported for the nine months ended September 30, 1999
for this practice. Excluding this practice, revenue increased $707,000, or 9%,
for the nine months ended September 30, 1999.
PRACTICE COMPENSATION AND BENEFITS:
Overall practice compensation and benefit costs increased $76,000, or 2%, to
$3,174,000 in 1999 from $3,098,000 for the same period in 1998. These costs
increased due to the addition of personnel at the physician practices for
ancillary development.
12
<PAGE> 15
OTHER DIRECT COSTS:
Overall direct costs increased $262,000, or 9%, to $3,135,000 for the nine
months ended September 30, 1999 from $2,873,000 for the same period in 1998.
These costs increased due to additional rent and professional services at the
physician practices for ancillary development.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the nine months ended September 30,
1999 decreased $127,000, or 3%, to $4,695,000 for the nine months ended
September 30, 1999 from $4,822,000 for the same period in 1998. These costs
decreased as a result of an effort to decrease corporate costs specifically
related to corporate personnel, advertising, supplies and delivery costs.
During the nine moths ended September 30, 1999 employee severance payments in
the amount of $650,000 were incurred. Without the non-recurring severance
payments the general and administrative costs for the nine months ended
September 30, 1999 would have been reduced from $4,695,000 to $4,045,000,
compared to the general and administrative costs for the same period in 1998 of
$4,822,000.
In addition, during the nine months ended September 30,1999, the Company
incurred $259,000 in costs related to the start-up of an ambulatory surgery
center in Louisiana which similar costs were not incurred for the same period
in 1998.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $243,000 by 23% to $1,312,000 for the
nine months ended September 30, 1999 from $1,069,000 for the same period of
1998. Of this increase, $152,000 and $91,000 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 $243,000 for the nine months ended June 30, 1999
to $172,000 from $415,000 for the same period in 1998. The decrease was due to
comparatively lower average cash equivalent balances in 1999 compared to 1998.
Interest expense increased by $184,000 to $419,000 for 1999 from $235,000 for
the same period in 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 nine months ended September 30, 1999 increased 52% to
$2,754,000 from $1,805,000 for the same period in 1998. The 1998 financials
were restated due to income tax benefits for the year.
13
<PAGE> 16
Loss per basic and diluted share increased to $0.74 per share for the period
compared to $0.57 per share for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities for the nine months ended September 30,
1999 was $1.8 million, compared to $1.9 million for the same period of 1998.
Net cash used in investing activities decreased to $1.1 million for the nine
months ended September 30,1999 from $4.9 million during the same period in
1998, due primarily to the use of $4.7 million cash in 1998 for a medical
practice acquisition. Net cash used by financing activities was $0.2 million
for the nine months ended September 30, 1999, as compared to cash used by
financing activities of $2.8 million for the nine months ended September 30,
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 $7.9 million at September 30, 1999, as compared to $9.7
million at December 31, 1998. The decrease is due primarily to a use of cash
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. However, 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 based on 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 programmable support systems such as alarm,
telecommunications, and even medical equipment. If the Company is unable to
successfully identify and correct these problems, the result could be computer
system failure or equipment malfunctions causing business disruptions.
14
<PAGE> 17
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 taken the steps
recommended by the manufacturer to update the affected software systems to
achieve compliance.
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
Company believes that it has completed all manufacturer-released upgrades to
such equipment. 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 quarter. 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 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.
15
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the second quarter 10QSB filed on August 13, 1999 by the
Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
10. Executive Employment Agreement for Douglas P. Badertscher
dated September 23, 1999
Executive Employment Agreement for J. Rodney Seay dated
September 23, 1999
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
b) Reports on Form 8-K:
8K filed on September 15, 1999 regarding the resignation of
Gerald Wicker as Senior Vice President and Chief Financial
Officer and the hiring of Laurie Hill Gutierrez as Senior Vice
President and Chief Financial Officer.
16
<PAGE> 19
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: November 12, 1999 By: /s/ Laurie H. Gutierrez
-------------------------
Laurie Hill Gutierrez
Chief Financial Officer
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10. Executive Employment Agreement for Douglas P. Badertscher dated
September 23, 1999
Executive Employment Agreement for J. Rodney Seay dated
September 23, 1999
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 23 day of September, 1999, by and between Integrated
Orthopaedics Inc., a Texas corporation (the "Company"), and J. Rodney Seay (the
"Executive").
WHEREAS, the Company and the Executive executed an Executive Employment
Agreement dated as of May 3, 1999 (the "Original Agreement"); and
WHEREAS, the Company and the Executive desire to amend and restate the Original
Agreement as herein set forth;
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. Prior Agreement. Upon execution of this Amended and Restated Executive
Employment Agreement, the Original Agreement hereby is terminated and shall be
of no further force and effect.
2. Employment. The Company hereby agrees to continue to employ, at will, the
Executive, and the Executive hereby agrees to continue to be employed
exclusively by the Company, for a period commencing on May 3, 1999 (the
"Commencement Date") and ending upon , February 29, 2000. After February 29,
2000 this agreement shall renew on the first day of each month until it is
terminated under Section 6 hereof (the "Employment Period").
3. Position and Duties. The Executive, during the Employment Period, shall
continue to serve as Senior Vice President - Chief Development Officer shall
report to the Chief Executive Officer and 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 position 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.
4. Compensation and Benefits:
(a) Base Salary. From the May 3, 1999 to September 30, 1999, the Executive
shall receive an annual base salary ("Base Salary") of $150,000. From
October 1, 1999 and during the remainder of the Employment Period
(subject to Section 6 (c) hereof), the Executive shall receive an
annual base ("Base Salary") salary of $163,000. 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, currently twice per month.
(b) Commissions. In addition to the Base Salary, the Executive shall
continue to be eligible to receive sales commissions, calculated per
the terms of the Company commission plan as determined by
recommendation of the Compensation Committee and approval by the Board
of Directors. Commissions will initially be calculated as a percentage
(the "Commission Rate" multiplied by the first year cash contributions
(EBITDA) from all sources of business obtained by the Company
1 of 7
<PAGE> 2
effective after the hire date. The initial Commission Rate will be 5%.
On September 30, 2000 the Commission Rate will be reduced from 5% to
3.5%. In the case of ancillary services and start up operations, the
one year commission period will begin upon commencement of any
operations that begin rendering services within 24 months of the first
signed contract with the relevant physician group.
Until September 30, 2000, commissions for non-ancillary services will
be paid within 30 days of deal closing based on estimated first year
cash contribution multiplied by the Commission Rate. Beginning October
1, 2000 for non-ancillary and immediately for all ancillary services,
commission will be determined on a "trailing" basis, calculated as
five percent (5%) of actual EBITDA from the previous calendar month of
operations. Except as set forth above, commissions earned during the
employment period will be paid monthly, during the term of employment
for up to twelve months and after termination under contract
termination provisions Section 6 (a) and (c) and (e). In the event
that Executive's employment was terminated under termination
provisions 6 (b) and (d), commission payments will cease as of the
termination date.
The Executive shall be entitled to receive a cash draw against
unearned commissions in the amount of $2,083.33 per calendar month, to
be applied against future commissions earned under the Company
commission plan. In the event the Executive's employment hereunder is
terminated for whatever reason, the Executive shall on the effective
date of such termination immediately repay to the Company any amounts
previously drawn that have not then been earned under the Company
commission plan (the "Unearned Commissions"). The Executive agrees
that the Company may deduct from any amounts that the Company would
otherwise owe to the Executive pursuant to the terms of this Agreement
the full amount of the Unearned Commissions, with the Executive
remaining liable for any amounts thereof not so offset.
(c) Stock Option Eligibility; Amended Options. In addition to the 125,000
stock options previously granted, the Executive shall receive an
additional grant of one hundred twenty five thousand (125,000) company
stock options effective on the date of execution of this agreement.
The exercise price for these stock options shall be the closing price
of the Company's common stock on date this Agreement is signed. At
December 31, 1999 this exercise price will be adjusted downward, but
not upward, to the lowest average share price, calculated over a 10
business day period ending no later than December 31, 1999.
Options with respect to 25,000 shares of this new option grant will
vest immediately. Options with respect to 50,000 shares of this new
option grant will vest with respect to 2,500 shares at the end of each
calendar quarter during a five-year period beginning on the date
hereof, with the first such vesting occurring on September 30, 1999.
Options with respect to the final 50,000 shares of this new option
grant will vest with respect to 2,500 shares at the end of each
calendar quarter during a five-year period beginning on the date
hereof, with the first such vesting occurring on September 30, 2000,
provided that certain performance criteria, as hereinafter set forth,
have been met. The first measurement period shall be the period
October 1, 1999 - September 30, 2000. If the aggregate commissions
earned by the Executive during such period equal or exceed $60,000,
options with respect to 10,000 shares shall vest on September 30,
2000. If the aggregate commissions paid/owed by the Company to the
Executive during such period are less than $40,000, no options shall
vest with respect to such period. If the aggregate commissions
paid/owed during such period equal or exceed $40,000 but are less than
$60,000, options for such period shall vest pro rata, e.g., if
commissions paid/owed equal $50,000, options with respect to 5,000
shares shall vest.
For the four remaining years of the vesting period, the remaining
40,000 options shall vest based upon the attainment of budgeted EBITDA
hurdles as determined by the Compensation Committee and the Board of
Directors from time to time. The options with respect to the initial
125,000 shares granted prior to the date hereof hereby are amended to
conform to the provisions of this Section 4(c).
2 of 7
<PAGE> 3
The unvested portion of the additional 125,000 stock options granted
to Executive as of the date of this agreement will immediately vest
upon any change of control of the Company. During the Employment
Period, and for the remainder of the period the Executive is employed,
the Executive shall be eligible to receive additional stock option
grants, including annual performance stock option grants, pursuant to
the Company's stock option plans in effect from time to time, all at
the discretion of the Compensation Committee and the Board of
Directors
In the event of a change of control of the Company 33% of the
Executive's unvested options will immediately vest.
(d) Fringe Benefits. During the Employment Period, the Executive shall
continue to 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. The Company
will continue to pay the full cost of family coverage for health and
dental insurance premiums excluding any "out of network" cost incurred
by the Executive. The Company will also pay the cost of Executives
long and short term disability coverage for up to 60% of Executive's
base salary and provide a new $1 million term life insurance policy.
5. 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 Senior Vice President, subject to and in accordance
with the expense and reimbursement policies that may be adopted by the Company
from time to time. Expenses will be reimbursed weekly, upon receipt of
acceptable documentation.
6. Termination. This Agreement shall terminate immediately 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 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. Unpaid
commissions will continue to be paid per the terms outlined in Section
4 (b).
(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.
3 of 7
<PAGE> 4
(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, as
soon as practical after such termination, all compensation of the
Executive accrued but unpaid in respect of periods ending on or prior
to such termination. In addition, if a notice of termination without
Cause is delivered to the Executive following the inception of
employment of a new Chief Executive Officer of the Company, the
Company shall continue to pay the Executive the Base Salary in
accordance with the Company's customary payroll practices for a
period, calculated from the effective date of such termination, equal
to the greater of (i) the remainder of the Employment period or (ii)
90 calendar days. In addition, unpaid commissions will continue to be
paid per the terms outlined in Section 4 (b). Upon the effective date
of any such termination, the Executive will receive immediate
accelerated vesting of options previously granted with respect to an
additional 25,000 shares. The Executive shall have six months after
such termination to exercise any vested stock options. All vested
stock options that are not exercised within such six month period
shall be forfeited and cancelled.
(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.
(e) Constructive Termination. Any change in Executive's title, general
responsibilities and authority, or work location, without Executive's
prior consent, will constitute "constructive termination". Upon such
termination, the Company shall pay to the Executive, as soon as
practical after such termination, all compensation of the Executive
accrued but unpaid in respect of periods ending on or prior to such
termination. In addition, if such termination occurs following the
inception of employment of a new Chief Executive Officer of the
Company, the Company shall continue to pay the Executive the Base
Salary in accordance with the Company's customary payroll practices
for a period, calculated from the effective date of such termination,
equal to the greater of (i) the remainder of the Employment period or
(ii) 90 calendar days. In addition, unpaid commissions will continue
to be paid per the terms outlined in Section 4 (b). Upon the effective
date of any such termination, the Executive will receive immediate
accelerated vesting of options previously granted with respect to an
additional 25,000 shares. The Executive shall have six months after
such termination to exercise any vested stock options. All vested
stock options that are not exercised within such six-month period
shall be forfeited and cancelled.
7. Representations by the Executive. The Executive hereby represents and
warrants to the Company that (a) the Executive's execution and delivery of this
Agreement and 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.
8. Confidentiality.
(a) Non-Disclosure Obligation. During the Employment Period or at any time
thereafter, irrespective of the time, manner or cause of the
termination of this Agreement, the Executive will not directly or
indirectly reveal, divulge, disclose or communicate to any person or
entity, other than authorized officers, directors, and employees of
the Company, in any manner whatsoever, any Confidential Information
(as hereinafter defined) without the prior written consent of the
Company.
4 of 7
<PAGE> 5
(b) Definition. As used herein, "Confidential Information" means
information disclosed to or known by the Executive as a direct or
indirect consequence of his employment hereunder about the Company or
its subsidiaries or their respective businesses, products and
practices which information is not generally known in the business in
which the Company or its subsidiaries, as the case may be, is or may
be engaged. However, Confidential Information shall not include under
any circumstances any information with respect to the foregoing
matters which is (i) available to the public from a source other than
the Executive or persons who are not under similar obligations of
confidentiality to the Company and who are not parties to this
Agreement, (ii) required to be disclosed by any court process or any
government or agency or department of any government, or (iii) the
subject of a written waiver executed by the Company for the benefit of
the executive.
(c) Return of Property. Upon termination of this Agreement, the Executive
will surrender to the Company all Confidential Information, including
without limitation, all lists, charts, schedules, reports, financial
statements, books and records of the Company and its subsidiaries, and
all copies thereof, and all other property belonging to the Company.
9. Non-Competition.
(a) Term and Scope. Subject to the other provisions of this Section 9,
from and after the date hereof until the date which is one year after
the expiration 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 provides
management services to medical practices within the musculoskeletal
specialty 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.
(c) Extension for Noncompliance. If, during any period within the
Noncompetition Term, the Executive is not in compliance with the terms
of this Section 9, the Company shall be entitled to, among other
remedies, compliance by the Executive with the terms of this Section 9
for an additional period equal to the period of such noncompliance.
(d) Reasonableness. The Executive hereby acknowledges that the geographic
boundaries, scope of prohibited activities and the time duration of
the provisions of this Section 9 are reasonable and are not broader
than are necessary to protect the legitimate business interests of the
Company.
10. Non-Solicitation and Non-Interference. During the Noncompetition Term, the
Executive shall not, directly or indirectly, (a) solicit the employment of any
current or future employee of the Company without the prior written consent of
the Board of Directors of the Company, (b) request, induce or attempt to
influence any employee of the Company to terminate his or her employment with
the Company, or (c) request, induce or attempt to influence any supplier,
customer, patient or client of the Company to terminate his, her or its
relationship with the Company.
5 of 7
<PAGE> 6
11. 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 10, may give rise to irreparable injury to the Company,
inadequately compensable in money damages. Accordingly, the Company shall be
entitled to injunctive relief to prevent or cure breaches or threatened 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.
12. Assignment. This Agreement will be binding upon the parties hereto and their
respective successors and permitted assignees. Because the Executive's duties
and services hereunder are special, personal and unique in nature, the Executive
may not transfer, sell or otherwise assign his rights, obligations or benefits
under this Agreement (and any attempt to do so will be void).
13. Headings. The captions, headings and arrangements used in this Agreement are
for convenience only and do not in any way affect, limit or amplify the
provisions hereof.
14. Notices. All notices and other communications required or permitted
hereunder must be in writing and (a) delivered personally, (b) sent by
telefacsimile, (c) delivered by a nationally recognized overnight courier
service, or (d) sent by registered or certified mail, postage prepaid, as
follows:
(i) If to the Company, to:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Facsimile No.: (713) 339-2858
Attention: Chief Executive Officer
(ii) To the Executive, to:
J. Rodney Seay
141 Kings Crest Lane
Pelham, AL 35124
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.
15. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws, such provision
shall be fully severable, and this Agreement shall be construed and enforced as
if such illegal, invalid, or unenforceable provision had never comprised a part
of this Agreement; the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement. In lieu of each
such illegal, invalid, or unenforceable provision, there shall be added
automatically as a part of this Agreement a provision as similar in terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
16. Entire Agreement: Amendments. This Agreement contains the entire agreement
of the
6 of 7
<PAGE> 7
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, if any, relating to the subject matter
hereof. This Agreement may be amended in whole or in part only by an instrument
in writing setting forth the particulars of such amendment and duly executed by
an executive officer of the Company and by the Executive.
17. Waiver. No delay or omission by any party hereto to exercise any right or
power hereunder shall impair such right or power or be construed as a waiver
thereof. A waiver by any party 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.
18. Counterparts. This Agreement may be executed in multiple counterparts, each
of which shall constitute an original, and all of which together shall
constitute one and the same agreement.
19. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the State of Texas, without regard to conflict of law
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:
Title:
EXECUTIVE:
By:
-------------------------------------
Name: J. Rodney Seay
7 of 7
<PAGE> 8
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is
entered into as of the 23 day of September, 1999, by and between Integrated
Orthopaedics Inc., a Texas corporation (the "Company"), and Douglas P.
Badertscher (the "Executive").
WHEREAS, the Company and the Executive executed an Executive Employment
Agreement dated as of May 3, 1999 (the "Original Agreement"); and
WHEREAS, the Company and the Executive desire to amend and restate the Original
Agreement as herein set forth;
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. Prior Agreement. Upon execution of this Amended and Restated Executive
Employment Agreement, the Original Agreement hereby is terminated and shall be
of no further force and effect.
2 . Employment. The Company hereby agrees to continue to employ, at will, the
Executive, and the Executive hereby agrees to continue to be employed
exclusively by the Company, for a period commencing on May 3, 1999 (the
"Commencement Date") and ending upon , February 29, 2000. After February 29,
2000 this agreement shall renew on the first day of each month until it is
terminated under Section 6 hereof (the "Employment Period").
3. Position and Duties. The Executive, during the Employment Period, shall
continue to serve as Senior Vice President - Chief Operating Officer shall
report to the Chief Executive Officer and 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 position 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.
4. Compensation and Benefits:
(a) Base Salary. From the May 3, 1999 to September 30, 1999, the Executive
shall receive an annual base salary ("Base Salary") of $150,000. From
October 1, 1999 and during the remainder of the Employment Period
(subject to Section 6 (c) hereof), the Executive shall receive an
annual base ("Base Salary") salary of $163,000. 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, currently twice per month.
(b) Commissions. In addition to the Base Salary, the Executive shall
continue to be eligible to receive sales commissions, calculated per
the terms of the Company commission plan as determined by
recommendation of the Compensation Committee and approval by the Board
of Directors. Commissions will initially be calculated as a percentage
(the "Commission Rate" multiplied by the first year cash contributions
(EBITDA) from all sources of business obtained by the Company
1 of 7
<PAGE> 9
effective after the hire date. The initial Commission Rate will be 5%.
On September 30, 2000 the Commission Rate will be reduced from 5% to
3.5%. In the case of ancillary services and start up operations, the
one year commission period will begin upon commencement of any
operations that begin rendering services within 24 months of the first
signed contract with the relevant physician group.
Until September 30, 2000, commissions for non-ancillary services will
be paid within 30 days of deal closing based on estimated first year
cash contribution multiplied by the Commission Rate. Beginning October
1, 2000 for non-ancillary and immediately for all ancillary services,
commission will be determined on a "trailing" basis, calculated as
five percent (5%) of actual EBITDA from the previous calendar month of
operations. Except as set forth above, commissions earned during the
employment period will be paid monthly, during the term of employment
for up to twelve months and after termination under contract
termination provisions Section 6 (a) and (c) and (e). In the event
that Executive's employment was terminated under termination
provisions 6 (b) and (d), commission payments will cease as of the
termination date.
The Executive shall be entitled to receive a cash draw against
unearned commissions in the amount of $2,083.33 per calendar month, to
be applied against future commissions earned under the Company
commission plan. In the event the Executive's employment hereunder is
terminated for whatever reason, the Executive shall on the effective
date of such termination immediately repay to the Company any amounts
previously drawn that have not then been earned under the Company
commission plan (the "Unearned Commissions"). The Executive agrees
that the Company may deduct from any amounts that the Company would
otherwise owe to the Executive pursuant to the terms of this Agreement
the full amount of the Unearned Commissions, with the Executive
remaining liable for any amounts thereof not so offset.
(c) Stock Option Eligibility; Amended Options. In addition to the 125,000
stock options previously granted, the Executive shall receive an
additional grant of one hundred twenty five thousand (125,000) company
stock options effective on the date of execution of this agreement.
The exercise price for these stock options shall be the closing price
of the Company's common stock on date this Agreement is signed. At
December 31, 1999 this exercise price will be adjusted downward, but
not upward, to the lowest average share price, calculated over a 10
business day period ending no later than December 31, 1999.
Options with respect to 25,000 shares of this new option grant will
vest immediately. Options with respect to 50,000 shares of this new
option grant will vest with respect to 2,500 shares at the end of each
calendar quarter during a five-year period beginning on the date
hereof, with the first such vesting occurring on September 30, 1999.
Options with respect to the final 50,000 shares of this new option
grant will vest with respect to 2,500 shares at the end of each
calendar quarter during a five-year period beginning on the date
hereof, with the first such vesting occurring on September 30, 2000,
provided that certain performance criteria, as hereinafter set forth,
have been met. The first measurement period shall be the period
October 1, 1999 - September 30, 2000. If the aggregate commissions
earned by the Executive during such period equal or exceed $60,000,
options with respect to 10,000 shares shall vest on September 30,
2000. If the aggregate commissions paid/owed by the Company to the
Executive during such period are less than $40,000, no options shall
vest with respect to such period. If the aggregate commissions
paid/owed during such period equal or exceed $40,000 but are less than
$60,000, options for such period shall vest pro rata, e.g., if
commissions paid/owed equal $50,000, options with respect to 5,000
shares shall vest.
For the four remaining years of the vesting period, the remaining
40,000 options shall vest based upon the attainment of budgeted EBITDA
hurdles as determined by the Compensation Committee and the Board of
Directors from time to time. The options with respect to the initial
125,000 shares granted prior to the date hereof hereby are amended to
conform to the provisions of this Section 4(c).
2 of 7
<PAGE> 10
The unvested portion of the additional 125,000 stock options granted
to Executive as of the date of this agreement will immediately vest
upon any change of control of the Company. During the Employment
Period, and for the remainder of the period the Executive is employed,
the Executive shall be eligible to receive additional stock option
grants, including annual performance stock option grants, pursuant to
the Company's stock option plans in effect from time to time, all at
the discretion of the Compensation Committee and the Board of
Directors
In the event of a change of control of the Company 33% of the
Executive's unvested options will immediately vest.
(d) Fringe Benefits. During the Employment Period, the Executive shall
continue to 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. The Company
will continue to pay the full cost of family coverage for health and
dental insurance premiums excluding any "out of network" cost incurred
by the Executive. The Company will also pay the cost of Executives
long and short term disability coverage for up to 60% of Executive's
base salary and provide a new $1 million term life insurance policy.
5. 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 Senior Vice President, subject to and in accordance
with the expense and reimbursement policies that may be adopted by the Company
from time to time. Expenses will be reimbursed weekly, upon receipt of
acceptable documentation.
6. Termination. This Agreement shall terminate immediately 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 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. Unpaid
commissions will continue to be paid per the terms outlined in Section
4 (b).
(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.
3 of 7
<PAGE> 11
(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, as
soon as practical after such termination, all compensation of the
Executive accrued but unpaid in respect of periods ending on or prior
to such termination. In addition, if a notice of termination without
Cause is delivered to the Executive following the inception of
employment of a new Chief Executive Officer of the Company, the
Company shall continue to pay the Executive the Base Salary in
accordance with the Company's customary payroll practices for a
period, calculated from the effective date of such termination, equal
to the greater of (i) the remainder of the Employment period or (ii)
90 calendar days. In addition, unpaid commissions will continue to be
paid per the terms outlined in Section 4 (b). Upon the effective date
of any such termination, the Executive will receive immediate
accelerated vesting of options previously granted with respect to an
additional 25,000 shares. The Executive shall have six months after
such termination to exercise any vested stock options. All vested
stock options that are not exercised within such six month period
shall be forfeited and cancelled.
(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.
(e) Constructive Termination. Any change in Executive's title, general
responsibilities and authority, or work location, without Executive's
prior consent, will constitute "constructive termination". Upon such
termination, the Company shall pay to the Executive, as soon as
practical after such termination, all compensation of the Executive
accrued but unpaid in respect of periods ending on or prior to such
termination. In addition, if such termination occurs following the
inception of employment of a new Chief Executive Officer of the
Company, the Company shall continue to pay the Executive the Base
Salary in accordance with the Company's customary payroll practices
for a period, calculated from the effective date of such termination,
equal to the greater of (i) the remainder of the Employment period or
(ii) 90 calendar days. In addition, unpaid commissions will continue
to be paid per the terms outlined in Section 4 (b). Upon the effective
date of any such termination, the Executive will receive immediate
accelerated vesting of options previously granted with respect to an
additional 25,000 shares. The Executive shall have six months after
such termination to exercise any vested stock options. All vested
stock options that are not exercised within such six-month period
shall be forfeited and cancelled.
7. Representations by the Executive. The Executive hereby represents and
warrants to the Company that (a) the Executive's execution and delivery of this
Agreement and 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.
8. Confidentiality.
(a) Non-Disclosure Obligation. During the Employment Period or at any time
thereafter, irrespective of the time, manner or cause of the
termination of this Agreement, the Executive will not directly or
indirectly reveal, divulge, disclose or communicate to any person or
entity, other than authorized officers, directors, and employees of
the Company, in any manner whatsoever, any Confidential Information
(as hereinafter defined) without the prior written consent of the
Company.
4 of 7
<PAGE> 12
(b) Definition. As used herein, "Confidential Information" means
information disclosed to or known by the Executive as a direct or
indirect consequence of his employment hereunder about the Company or
its subsidiaries or their respective businesses, products and
practices which information is not generally known in the business in
which the Company or its subsidiaries, as the case may be, is or may
be engaged. However, Confidential Information shall not include under
any circumstances any information with respect to the foregoing
matters which is (i) available to the public from a source other than
the Executive or persons who are not under similar obligations of
confidentiality to the Company and who are not parties to this
Agreement, (ii) required to be disclosed by any court process or any
government or agency or department of any government, or (iii) the
subject of a written waiver executed by the Company for the benefit of
the executive.
(c) Return of Property. Upon termination of this Agreement, the Executive
will surrender to the Company all Confidential Information, including
without limitation, all lists, charts, schedules, reports, financial
statements, books and records of the Company and its subsidiaries, and
all copies thereof, and all other property belonging to the Company.
9. Non-Competition.
(a) Term and Scope. Subject to the other provisions of this Section 9,
from and after the date hereof until the date which is one year after
the expiration 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 provides
management services to medical practices within the musculoskeletal
specialty 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.
(c) Extension for Noncompliance. If, during any period within the
Noncompetition Term, the Executive is not in compliance with the terms
of this Section 9, the Company shall be entitled to, among other
remedies, compliance by the Executive with the terms of this Section 9
for an additional period equal to the period of such noncompliance.
(d) Reasonableness. The Executive hereby acknowledges that the geographic
boundaries, scope of prohibited activities and the time duration of
the provisions of this Section 9 are reasonable and are not broader
than are necessary to protect the legitimate business interests of the
Company.
10. Non-Solicitation and Non-Interference. During the Noncompetition Term, the
Executive shall not, directly or indirectly, (a) solicit the employment of any
current or future employee of the Company without the prior written consent of
the Board of Directors of the Company, (b) request, induce or attempt to
influence any employee of the Company to terminate his or her employment with
the Company, or (c) request, induce or attempt to influence any supplier,
customer, patient or client of the Company to terminate his, her or its
relationship with the Company.
5 of 7
<PAGE> 13
11. 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 10, may give rise to irreparable injury to the Company,
inadequately compensable in money damages. Accordingly, the Company shall be
entitled to injunctive relief to prevent or cure breaches or threatened 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.
12. Assignment. This Agreement will be binding upon the parties hereto and their
respective successors and permitted assignees. Because the Executive's duties
and services hereunder are special, personal and unique in nature, the Executive
may not transfer, sell or otherwise assign his rights, obligations or benefits
under this Agreement (and any attempt to do so will be void).
13. Headings. The captions, headings and arrangements used in this Agreement are
for convenience only and do not in any way affect, limit or amplify the
provisions hereof.
14. Notices. All notices and other communications required or permitted
hereunder must be in writing and (a) delivered personally, (b) sent by
telefacsimile, (c) delivered by a nationally recognized overnight courier
service, or (d) sent by registered or certified mail, postage prepaid, as
follows:
(i) If to the Company, to:
Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Facsimile No.: (713) 339-2858
Attention: Chief Executive Officer
(ii) To the Executive, to:
Douglas P. Badertscher
208 St. James Park
Osprey, FL 34225
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.
15. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws, such provision
shall be fully severable, and this Agreement shall be construed and enforced as
if such illegal, invalid, or unenforceable provision had never comprised a part
of this Agreement; the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement. In lieu of each
such illegal, invalid, or unenforceable provision, there shall be added
automatically as a part of this Agreement a provision as similar in terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
6 of 7
<PAGE> 14
16. Entire Agreement: Amendments. This Agreement contains the entire agreement
of the parties hereto with respect to the subject matter hereof and supersedes
all prior agreements and understandings, if any, relating to the subject matter
hereof. This Agreement may be amended in whole or in part only by an instrument
in writing setting forth the particulars of such amendment and duly executed by
an executive officer of the Company and by the Executive.
17. Waiver. No delay or omission by any party hereto to exercise any right or
power hereunder shall impair such right or power or be construed as a waiver
thereof. A waiver by any party 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.
18. Counterparts. This Agreement may be executed in multiple counterparts, each
of which shall constitute an original, and all of which together shall
constitute one and the same agreement.
19. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the State of Texas, without regard to conflict of law
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: Scott J. Hancock
Title: Director
EXECUTIVE:
By:
-------------------------------------
Name: Douglas P. Badertscher
7 of 7
<PAGE> 1
EXHIBIT 11
INTEGRATED ORTHOPAEDICS, INC.
SCHEDULE RE: (LOSS) EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Basic and diluted
Weighted average common shares outstanding 6,496 6,506 6,496 6,437
================== ================== ================== ==================
Net (loss) income $ (909) $ (551) $ (2,754) $ (1,805)
Series A Preferred Stock Dividend (53) (50) (154) (151)
Series B Preferred Stock Dividend (656) (596) (1,899) (1,729)
------------------ ------------------ ------------------ ------------------
Net (loss) income after dividends $ (1,618) $ (1,197) $ (4,807) $ (3,685)
================== ================== ================== ==================
(Loss) earnings per share $ (0.25) $ (0.18) $ (0.74) $ (0.57)
================== ================== ================== ==================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 3,299 6,018
<SECURITIES> 0 0
<RECEIVABLES> 2,789 3,269
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,002 13,294
<PP&E> 5,115 4,340
<DEPRECIATION> 2,529 2,502
<TOTAL-ASSETS> 41,196 44,110
<CURRENT-LIABILITIES> 3,079 3,608
<BONDS> 0 0
0 0
3 3
<COMMON> 7 7
<OTHER-SE> 26,165 29,073
<TOTAL-LIABILITY-AND-EQUITY> 41,196 44,110
<SALES> 2,800 8,447
<TOTAL-REVENUES> 2,800 8,447
<CGS> 0 0
<TOTAL-COSTS> 4,230 12,316
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 45 419
<INCOME-PRETAX> (1,430) (4,116)
<INCOME-TAX> (521) (1,514)
<INCOME-CONTINUING> (909) (2,602)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (152)
<CHANGES> 0 0
<NET-INCOME> (909) (2,754)
<EPS-BASIC> (0.25) (0.74)
<EPS-DILUTED> (0.25) (0.74)
</TABLE>
