<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 March 31, 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
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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 May 13, 1999, 6,496,540 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Form: YES NO X
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INTEGRATED ORTHOPAEDICS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
---
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
March 31, 1999 and December 31, 1998...........................................1
Consolidated Statements of Operations--
Three Months ended March 31, 1999 and 1998.....................................2
Condensed Consolidated Statements of Cash Flows--
Three months ended March 31, 1999 and 1998.....................................3
Notes to Condensed Consolidated Financial Statements...........................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................8
PART II. OTHER INFORMATION..................................................................................12
SIGNATURES ..............................................................................14
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ....................................... $ 5,216 $ 6,018
Accounts receivable, net ........................................ 3,054 3,269
Other current assets ............................................ 1,225 1,566
Deferred income taxes ........................................... 2,838 2,441
---------- ------------
Total Current Assets .......................................... 12,333 13,294
---------- ------------
Property and equipment (including capital leases) .................. 5,186 4,340
Less: Accumulated depreciation and amortization .................... (2,664) (2,502)
---------- ------------
Net property and equipment ......................................... 2,522 1,838
---------- ------------
Management services agreements, net ................................ 27,993 28,272
Other assets ....................................................... 585 706
---------- ------------
TOTAL ASSETS ....................................................... $ 43,433 $ 44,110
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................ $ 137 $ 231
Accrued liabilities ............................................. 2,423 2,844
Current maturities of notes payable and capital lease obligations 458 533
---------- ------------
Total Current Liabilities ..................................... 3,018 3,608
---------- ------------
Notes payable ...................................................... 877 868
Obligations under capital leases ................................... 980 351
Deferred income taxes .............................................. 10,200 10,200
---------- ------------
Total Liabilities ............................................. 15,075 15,027
---------- ------------
Commitments and contingencies ...................................... -- --
Stockholders' Equity:
Preferred stock ................................................. 3 3
Common stock .................................................... 7 7
Additional paid-in-capital ...................................... 47,353 46,744
Common stock to be issued ....................................... 78 78
Accumulated deficits ............................................ (18,833) (17,499)
Treasury shares ................................................. (250) (250)
---------- ------------
Total Stockholders' Equity .................................... 28,358 29,083
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 43,433 $ 44,110
========== ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
1
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INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues ................................. $ 2,858 $ 2,638
Costs and Expenses:
Practice compensation and benefits ... $ 1,032 $ 929
Other direct costs ................... 919 877
General and administrative ........... 1,391 1,415
Depreciation and amortization ........ 453 247
---------- ----------
$ 3,795 $ 3,468
Loss from Operations ..................... $ (937) $ (830)
Interest Income .......................... 69 180
Interest Expense ......................... (204) (31)
---------- ----------
Loss Before Income Tax Benefit ........... $ (1,072) $ (681)
Income Tax Benefit ....................... 397 218
---------- ----------
Net Loss ................................. $ (675) $ (463)
========== ==========
Loss applicable to common shares ........ $ (1,334) $ (1,070)
========== ==========
Loss Per Share:
Basic and diluted ...................... $ (0.20) $ (0.17)
========== ==========
Weighted average common shares
outstanding............................. 6,527 6,336
</TABLE>
The accompanying notes are an integral part of these financial
statements.
2
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INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
------------------------
1999 1998
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................. $ (675) $ (463)
Non-cash expenses and changes in operating assets and liabilities ......................... 214 (1,037)
---------- ------------
Net Cash Used In Operating Activities ....................................... (461) (1,500)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................................................... (182) (215)
Proceeds from sale of marketable securities ............................................. -- 111
Collection on notes receivable .......................................................... -- 52
Net payments in medical practice transaction ............................................ -- (3,602)
---------- ------------
Net Cash Used in Investing Activities ........................................ (182) (3,654)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes and capital lease obligations ......................................... (159) (1,582)
---------- ------------
Net Cash Used in Financing Activities ........................................ (159) (1,582)
---------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................................................... (802) (6,736)
Cash and Cash Equivalents at Beginning of the Period ...................................... 6,018 16,642
---------- ------------
Cash and Cash Equivalents at End of the Period ............................................ $ 5,216 $ 9,906
========== ============
SUPPLEMENTAL DISCLOSURES:
Interest paid ........................................................................... $ 186 $ 11
Income taxes paid (refunded) ............................................................ $ (5) $ 135
NON CASH TRANSACTIONS AND OTHERS:
Details of medical practice 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 ............ $ 609 $ 557
Series A Preferred Stock - increase in accrued liabilities related to unpaid dividends $ 50 $ 50
Equipment acquired under capital leases .............................................. $ 663 $ --
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 6
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 March 31, 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
three months ended March 31, 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 March 31, 1999 when compared to the quarter ended
March 31, 1998, excluding the effect of new MSAs to be executed in the future.
The net loss for the quarter ended March 31, 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 when the final
settlements are determined. Medical service
4
<PAGE> 7
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
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 three 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 ENDED MARCH 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Medical Service Revenue $ 4,373 $ 3,976
Less: Amounts Retained by Medical Groups 1,515 1,338
---------- ----------
Revenues $ 2,858 $ 2,638
========== ==========
Management Services Agreements at period end 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 MARCH 31,
----------------------------------------------------
1999 EPS 1998 EPS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (675) $ (0.10) $ (463) $ (0.07)
Series A Preferred Stock Dividend (50) (0.01) (50) (0.01)
Series B Preferred Stock Dividend (609) (0.09) (557) (0.09)
-------- -------- -------- --------
Net loss available to common stockholders $ (1,334) $ (0.20) $ (1,070) $ (0.17)
======== ======== ======== ========
Weighted average common shares
outstanding 6,527 6,336
======== ========
</TABLE>
5
<PAGE> 8
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
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 three
months ended March 31, 1998 and 1999, 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 ended March 31, 1999 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Practice Management Services $ 2,433 $ 2,111
Work Hardening Services 376 462
Earnings before interest, taxes,
depreciation and amortization ("EBITDA"):
Practice Management Services 790 639
Work Hardening Services 69 157
Income before income taxes:
Practice Management Services 394 410
Work Hardening Services 51 145
</TABLE>
6
<PAGE> 9
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
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 ended March 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Segment income before income tax benefit $ 445 $ 555
Corporate expenses, net (1,517) (1,236)
-------- --------
Loss before income tax benefit $ (1,072) $ (681)
======== ========
</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.
7
<PAGE> 10
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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
REVENUES
Revenue for the first quarter of 1999 increased $0.2 million, or 8%, to $2.8
million, from $2.6 million for the first quarter of 1998. Of the $2.8 million
in revenue, 85% or $2.4 million was generated by the affiliated orthopaedic
practices, 13% or $376,000 was generated by the Company's owned work hardening
and
8
<PAGE> 11
physical therapy facilities, with the remaining $49,000 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. Revenue for the first quarter of 1999
includes minimal revenue from this practice of $63,000, down from $414,000 for
the first quarter of 1998. Excluding this practice, revenue growth for the
quarter was $0.6 million or 26%.
PRACTICE COMPENSATION AND BENEFITS:
Practice compensation and benefits increased $103,000, or 11%, to $1,032,000 in
the first quarter of 1999 from $929,000 in the first quarter of 1998. These
costs increased due to increased personnel for ancillary services (physical
therapy, bone densitometry and magnetic resonance imaging) at physician
practices.
OTHER DIRECT COSTS:
Other direct costs increased $42,000, or 5%, to $919, 000 in the first quarter
of 1999 from $877,000 in 1998. This increase is due to increased costs for
ancillary services at physician practices.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the first quarter of 1999 decreased
$24,000, or 2%, to $1,391,000 from $1,415,000 in 1998. This decrease is due to
a reduction of corporate personnel in the first quarter of 1999.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization for the first quarter of 1999 increased $206,000
to $453,000 from $247,000 for the first quarter of 1998. Of this increase,
$121,000 and $85,000 was attributable to the amortization of MSAs and
depreciation, respectively. The amortization period for MSAs was changed
prospectively from 40 years to 25 years, effective July 1, 1998.
INTEREST INCOME AND INTEREST EXPENSE:
Interest income decreased to $69,000 in the first quarter of 1999, compared to
$180,000 for the first quarter of 1998. This decrease was due to comparatively
lower average cash equivalent balances in the first quarter of 1999.
Interest expense increased to $204,000 for the first quarter of 1999, compared
to $31,000 for the first quarter of 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 the first quarter of 1998.
NET LOSS / LOSS PER COMMON SHARE
Net loss increased 46% to $675,000 in the first quarter of 1999, compared to a
net loss of $463,000 for the first quarter of 1998. This increase was primarily
due to an increase in loss from operations of $107,000, coupled with
unfavorable variances in interest expense, up $173,000, and interest income,
down $111,000.
9
<PAGE> 12
A portion of these unfavorable variances were offset by additional income tax
benefits which increased 82% to $397,000 in the first quarter of 1999, compared
to $218,000 for the first quarter of 1998.
Loss per basic and diluted share increased to $.20 per share in the first
quarter of 1999, compared to $.17 per share during the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities for the three months ended March 31, 1999
was $0.5 million, compared to $1.5 million for the same period of 1998. Net
cash used in investing activities decreased to $0.2 million in the first
quarter of 1999 from $3.7 in 1998, due primarily to the use of $3.6 million
cash in 1998 for a medical practice acquisition. Net cash used by financing
activities was $0.2 million in the first quarter of 1999, as compared to cash
used by financing activities of $1.5 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 $9.3 million at March 31, 1999, as compared to $9.6
million at December 31, 1998. The decrease was due primarily to a use of cash
during the first 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 Credit Facility. The Credit
Facility is available for working capital purposes, to fund acquisitions, to
finance capital expenditures and for the issuance of letters of credit. The
Credit Agreement requires the Company to meet certain conditions preceding any
borrowings. As of March 31, 1999, the Company was not in compliance with
certain financial covenants as a result of operating losses incurred during the
most recent twelve-month period, including the special charges recorded in the
fourth quarter of 1998; therefore, no funds have been advanced to the Company
under the Credit Facility as of such date. Additionally, the Company's lender
has the right to terminate its commitment to make advances under the Credit
Facility as the result of the Company's failure to meet such financial
covenants. The Company is engaged in discussions with its lender regarding
restructuring the terms of the Credit Facility. The Company intends to use its
existing cash balance, additional financing through equity investment or
strategic partnering to enter into new MSAs or other arrangements with other
orthopaedic medical groups in order to generate the additional earnings
necessary to meet the financial covenants under the Credit Agreement.
The Company anticipates that its current cash balance will be sufficient to
fund capital expenditures, working capital requirements and to fund modest
amounts of future acquisitions through 1999. There can be no assurance that
future developments in the health care industry or general economic trends will
not adversely affect the Company's operations or its ability to meet future
funding requirements.
YEAR 2000 COMPLIANCE
General
The "Year 2000 or Y2K" problem describes computer systems programming
architectures that use two rather than four digits to define the applicable
year, and therefore cannot distinguish between the year 1900 and the year 2000.
This programming flaw is present in many of the Company's computing hardware
and software systems. This same error may also exist in many of the Company's
supplementary programmable support systems such as their alarm,
telecommunications, and even medical equipment. If uncorrected, the problem
could result in major computer system failure or equipment malfunction causing
significant business disruption.
10
<PAGE> 13
Project
The Company's Year 2000 project is divided into four major segments;
application software, equipment and associated operating software,
reimbursement and vendors. The project includes education, inventory and
assessment of risk, analysis and planning, and the correction and testing of
each segment. The Company's strategy further includes the development of
contingency plans, addressing the potential disruption of operations, caused by
Y2K programming problems.
Application Software
The Company recognizes that investments in information systems and
state-of-the-art medical equipment are integral to its operations. Its practice
management systems (billing, collections, and patient scheduling) are certified
by their manufacturers as Y2K compliant, and the majority of costs related to
implementation are capitalized and amortized over the life of the asset. The
Company will complete all confirmation testing of these application
certifications by July 1, 1999. The Company's financial and accounting systems
are certified as Y2K compliant by its manufacturer. The Company further plans
the implementation of a comprehensive application and database Y2K programming
error-monitoring system, designed to minimize the additional potential
occurrence of such error across the organization's information systems. The
Company does not utilize any "in-house" customized programs, relying entirely
on purchased application systems. All applications are continually monitored
and updated through annual support agreements with their respective
manufacturing vendors after purchase.
Equipment and Associated Operating Software
The Company is currently reviewing the Y2K readiness of the medical equipment
and clinical systems used in its practices, with their respective
manufacturers. All have certified that, with minor required upgrade
stipulations, their systems are or will be Y2K compliant by the end of the
third quarter of 1999. All required system upgrades will be effected, tested,
and completed during this period. Any costs incurred through these upgrades
will be expensed.
Reimbursement
The Company bills and collects from numerous third party payors for medical
services. These third parties include fiscal intermediaries that process claims
and make payments on behalf of the Medicare program as well as various
insurance companies, HMO's, and other private payors. As part of the Company's
Y2K strategy, a comprehensive survey has been sent to all significant payors to
assess their timeline for Year 2000 compliance and the impact to the Company
regarding any potential service or payment interruptions. The Company intends
to complete this assessment by July 1, 1999.
Vendors
The Company is currently evaluating third party vendors of medical supplies and
pharmaceuticals in order to determine whether their services and products will
be interrupted or malfunction due to Y2K problems. This review is expected to
be completed by October 1, 1999.
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<PAGE> 14
Risks
The failure to correct a material Y2K problem could result in an interruption
in, or failure of, certain normal business activities and operations. Such
failures could materially and adversely affect the Company's operation,
liquidity, and financial condition. Due to the general uncertainty inherent in
the Y2K problem, resulting partly from the uncertainty of the Year 2000
readiness of third party suppliers, the Company is unable to determine at this
time, whether the consequences of Y2K failures will have a material impact on
the Company's operational results, liquidity, or financial condition. The Y2K
project is expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem and, in particular, about the Y2K compliance and
readiness of its material customers. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal business
operations should be reduced.
Costs
Y2K-related costs incurred through March 31, 1999 have not been material to the
Company's results of operations. The Company is not able to reasonably estimate
the total costs to be potentially incurred for completion of its Y2K strategy.
Some replacements and upgrades would take place in the normal course of
business. The foregoing assessment is based upon information currently
available to the Company. The Company can provide no assurance that
applications and equipment that the Company believes to be Year 2000 compliant
will not experience problems. Failure by the Company or third parties on which
it relies to resolve Y2K problems could have a material adverse effect on the
Company's results of operations.
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
12
<PAGE> 15
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
27.1 Financial Data Schedule
b) Reports on Form 8-K:
On February 10, 1999 the Registrant filed a current report on Form 8-K
to report (i) a change in Registrant's certifying accountant, (ii) the
resignation of the Registrant's Executive Vice President and Chief
Operating Officer, and (iii) the filing of suit against a medical
practice located in Bridgeport, Connecticut, seeking to enforce
certain repurchase obligations under an existing MSA.
13
<PAGE> 16
SIGNATURES
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: May 14, 1999 By: /s/ Gerald R. Wicker
------------------------------------
GERALD R. WICKER
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,216
<SECURITIES> 0
<RECEIVABLES> 3,054
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,333
<PP&E> 5,186
<DEPRECIATION> (2,664)
<TOTAL-ASSETS> 43,433
<CURRENT-LIABILITIES> 3,018
<BONDS> 0
0
3
<COMMON> 7
<OTHER-SE> 28,348
<TOTAL-LIABILITY-AND-EQUITY> 43,433
<SALES> 0
<TOTAL-REVENUES> 2,858
<CGS> 0
<TOTAL-COSTS> 3,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204
<INCOME-PRETAX> (1,072)
<INCOME-TAX> 397
<INCOME-CONTINUING> (675)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (675)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
