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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number 1-10677
Integrated Orthopaedics, Inc.
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(Exact name of small business issuer as specified in its charter)
Texas 76-0203483
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5858 Westheimer, Suite 500, Houston, Texas 77057
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(Address of principal executive offices, including zip code)
(713) 225-5464
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Net revenues of the issuer for the fiscal year ended December 31, 1999 were
$11,745,000
The aggregate market value of Common Stock held by non-affiliates of the
issuer as of March 31, 2000 computed by reference to the latest reported sale
price on the American Stock Exchange as of that date, was $5,363,925.
As of March 31, 2000, 6,496,540 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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Documents Incorporated by Reference
Portions of the Proxy Statement for issuer's 2000 Annual Meeting of Shareholders
are incorporated by reference in Part III.
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PART I
Item 1. Business
GENERAL
Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas corporation, was
formed on April 1, 1990 as a successor corporation in a reincorporation merger.
IOI was re-incorporated as a healthcare management services company, to provide
management, consulting and ancillary services to orthopaedic medical practices
and other musculoskeletal-related patient businesses. As of December 31, 1999,
the Company provided a comprehensive array of management services under
long-term agreements to 23 physicians in three states. The medical practices
affiliated with IOI provide a wide spectrum of orthopaedic office-based and
surgical services to patients with musculoskeletal illnesses and injuries. The
Company also operates two work hardening facilities located in Houston, Texas,
that offer rehabilitation and work reconditioning services to injured workers.
RECENT DEVELOPMENTS
Prior to 1998, the physician practice management ("PPM") sector was
characterized by an emphasis on rapid growth, capital to fuel growth was readily
available, and shares of publicly traded PPM companies ("PPMC") were highly
valued. In early 1998 as a result of weak operating performance by certain large
public companies, share prices fell dramatically, physicians viewed PPMs less
favorably and capital to fuel growth and acquisitions in the PPM industry became
scarcer. As a result, an acquisitions centered PPM strategy became more
difficult to execute. Similar conditions continued in 1999.
In early 1999, due to the changes during 1998 in the equity markets in the PPM
sector in general and the orthopaedic single specialty area in particular, IOI's
management redefined the Company's growth strategy by considering new
alternatives relative to traditional equity-based physician affiliation models.
The equity-based models involved the acquisition by a PPMC of the assets of a
physician's practice and the PPMC entering into a long-term management services
agreement with the practice. In 1999, management began offering a portfolio of
physician management services alternatives, to include consulting services and
equity joint ventures for ancillary services, as well as providing certain
management services through both the equity and non-equity models.
In May 1999, the Company hired a new Chief Operating Officer and a new Chief
Development Officer. Under the new management team the business strategy was
further defined to focus on the development or acquisition of ambulatory surgery
centers ("ASCs") and specialty surgical hospitals in conjunction with orthopedic
and other surgical specialty physicians. Under the new strategies IOI would own
a partial interest in the ASC or specialty surgical hospitals, and provide
management services to the ASC or specialty surgical hospital under a management
agreement. In addition, IOI would pursue the development or acquisition of other
ancillary services such as physical therapy, pain management and magnetic
resonance imaging. (See Business Strategy)
The new strategies have received increased interest from the physician
community and the Company has syndicated an ASC under this new strategy. The ASC
is located in Marrero, Louisiana which is the same market served by the
Company's Louisiana practice. It has space totaling eight thousand square feet
containing three operating rooms, a minor procedure room, a recovery area with
four recovery beds and five step down beds with associated support and business
space. The ASC will operate under the name Westbank Ambulatory Care Center, LLC.
("Westbank"). The Company has recently completed the syndication of Westbank and
it anticipates being operational in the second quarter of 2000.
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During 1999, the Company also focused on the addition of ancillary services at
its existing practices. Magnetic resonance imaging ("MRI") equipment was
purchased for its Pennsylvania and Colorado practices and MRI block-time leasing
was contracted for its Louisiana practice. In addition, its Louisiana practice
began offering bone densitometry and physical therapy services. The addition of
these ancillary services increased the combined revenues of the practices by 7%.
In January 1999, the Company terminated its management services agreement
("MSA") with its practice in Connecticut effective December 31, 1998 due to the
failure of the practice to satisfy certain of its obligations under the MSA. The
Company filed a lawsuit against the practice seeking to enforce certain
repurchase obligations under the MSA. In March 2000, a settlement was reached
between the Company and the practice.
In an effort to focus its financial and personnel resources on the new business
strategy the Company has decided to terminate its MSA with its existing
practices, contingent upon obtaining acceptable terms. As such, in December of
1999, the Company entered into discussions with its Colorado practice to
terminate its MSA and a definitive agreement was reached in January 2000 to
terminate the MSA effective December 31, 1999. The Company commenced discussions
with its Pennsylvania practice in March 2000 with a definitive agreement
executed in April 2000 to terminate its MSA, effective March 31, 2000. Upon
terminating the MSAs, the Company received termination fees. In addition, the
related practice's net accounts receivable and net property and equipment were
sold to the practice. Total combined consideration of $5,628,000 was received of
which $4,654,500 was in cash with the remaining $973,500 was structured as notes
receivable.
The Company is in preliminary discussions with its Louisiana practice in regards
to terminating its MSA.
BUSINESS STRATEGY
The Company is focusing its efforts on the acquisition and development of
ancillary services such as ambulatory surgery centers ("ASC") and specialty
surgical hospitals ("SSH") in a joint venture structure with orthopedic and
other surgical specialty physicians. The Company intends to acquire the ASC or
SSH through a limited liability corporation ("LLC"). The Company intends to then
re-syndicate the ASC or SSH allowing some or all of the current physician owners
to invest in the new LLC, along with new surgeons secured by the Company. This
re-syndication is designed to add new surgeons that will increase the volume for
the ASC. The re-syndication could result in up to 80% of the LLC being sold to
physician investors leaving the Company with a 20% ownership. The Company will
be the managing member of the LLC and will have a management agreement under
which the Company will receive a management fee equal to a percentage of net
revenue or collections. In addition, the Company will pursue the development or
acquisition of other ancillary services such as physical therapy, pain
management, and magnetic resonance imaging.
The Company also believes that there is an opportunity to differentiate itself
from other ASC development companies by pursuing the conversion of the ASCs to
surgical specialty hospitals.
The Company believes the conversion of the ASC's to SSHs would result in
increase revenue opportunities for both the physicians and the Company.
Management believes there are approximately 1,892 ASCs that are currently
independently owned and thus are targets for re-syndication. Of this amount, 919
are located in states that do not require a Certificate of Need and are
candidates for conversion into specialty surgical hospitals.
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The Company believes that outsourcing is the best way to efficiently and
effectively execute its development strategy. As such, relationships have been
formed with firms who have expertise in equipment selection, specification and
purchasing, architectural, engineering, design and construction management, and
policy and procedure development.
OPERATIONS
Affiliated Orthopaedic Groups
IOI began executing its orthopaedic physician practice affiliation strategy in
1997. During the last quarter of 1997, the Company completed three practice
affiliation transactions. The Company completed its fourth affiliation
transaction in March 1998. In connection with these transactions, the Company
acquired the assets of the affiliated medical practices ("Affiliated Practices")
and entered into long-term management services agreements ("MSA") with the
Affiliated Practices.
Services provided by medical providers employed by Affiliated Practices under
management by the Company include office-based diagnostic and treatment
programs, surgical services for patients experiencing a variety of physical or
orthopaedic problems principally related to musculoskeletal disorders common to
on-the-job injuries, sports injuries, and age-related musculoskeletal injuries
and illnesses. Services are provided by Affiliated Practices to patients who are
members of preferred provider or managed care organizations, who are covered by
workers' compensation insurance, who are Medicare or Medicaid beneficiaries, and
to a small extent, patients who are represented by personal injury attorneys.
Physicians associated with Affiliated Practices maintain staff privileges at
local hospitals and, generally, have long standing relationships with payors and
referral sources in their local markets.
All physicians and all non-physician employees involved in patient care are
employed by Affiliated Practices. Affiliated physicians have exclusive control
and decision making authority over patient care. IOI does not employ physicians
or provide medical care to patients. However, under the terms of the MSAs with
these practices, IOI is responsible for the cost of the compensation and
benefits of the non-medical personnel, and such costs are reflected in the
Company's financial statements.
Under the terms of its MSAs, IOI provides comprehensive administrative and
management services to its affiliated practices that encompass all aspects of
the orthopaedic group's business operations. Services provided by IOI under this
type of arrangement include, among others, development of ancillary services
(including ambulatory surgery, diagnostic imaging, physical therapy and pain
management); physician recruiting; managed care contracting; business office
management; employee and retirement benefits management; and information systems
management.
Ambulatory Surgery Center Services
In April 1999, the Company acquired the rights to an ambulatory surgery center
license in Marrero, Louisiana. The facility is located in the market served by
the Company's Louisiana practice. The center will operate as the Westbank
Ambulatory Care Center, LLC ("Westbank") and is eight-thousand square feet
including three operating rooms, a minor procedure room, a recovery area with
four recovery beds, and five step down beds with associated support and business
space. Westbank was under renovation from November 1999 through March 2000 and
is expected to be operational in the second quarter of 2000. The Company has
funded $517,000 in start-up costs and $412,000 in construction-in-progress as of
December 31, 1999. Westbank is available for use only by licensed physicians,
podiatrists, and Westbank will not perform emergency services.
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Work Hardening
The Company owns and operates two work hardening clinics in Houston, Texas under
the trade name "WorkWell."
Work hardening is a therapy philosophy based on a comprehensive,
multi-disciplinary approach to industry's need for injury prevention and
rehabilitation. Work hardening addresses the physical, psychological, behavioral
and social aspects of an injured worker's ability to return to work. This
program is carried out in a simulated job environment. A typical program
consists of up to eight weeks, five days per week, eight hours per day.
Presently, the work hardening clinics hold a three-year certification given by
the Commission on Accreditation of Rehabilitation Facilities ("CARF"), the
highest level of certification given by CARF. The Texas Workers' Compensation
Commission ("TWCC") has recognized the quality of care inherent in a
CARF-certified work hardening program. WorkWell staffing includes varying
combinations of licensed occupational therapists, licensed physical therapists,
certified occupational therapy assistants, exercise physiologists, work
hardening supervisors, vocational specialists and licensed social workers. In
addition, each WorkWell Clinic has available a psychologist and a nutritionist.
EMPLOYEES
At March 31, 2000, the Company employed 85 full time and 3 part time employees.
Under the terms of its MSAs, the Company is also responsible for the
administration of the practice employment relationships of 16 physicians and 52
non-physician medical practice employees. None of the Company's or any
Affiliated Practices' employees are covered by collective bargaining agreements.
COMPETITION, MAJOR CUSTOMERS AND REIMBURSEMENT
Competition
Physician Practice Management Services
The healthcare services market in general, and the PPM businesses in particular,
are highly competitive. There are other publicly traded companies and private
companies who compete or intend to compete for the right to manage and service
orthopaedic and musculoskeletal-related medical and ancillary service practices.
In addition, several large multi-specialty medical management companies also
compete with the Company, and the Company believes others in the healthcare
industry may employ strategies similar to those of the Company. Many of the
Company's competitors are significantly larger and have substantially greater
resources than the Company.
The Affiliated Practices that the Company contracts with compete in their
markets with local musculoskeletal care service providers. If the Affiliated
Practices are not able to effectively compete in the markets they serve in
regards to cost of services, accessibility and quality of services, the Company
would be adversely affected. In addition, the Affiliated Practices compete with
other providers in their local markets for managed care contracts. Other
practices and management services organizations may have more experience in
negotiating managed care contracts. As such, if the Affiliated Practice and the
Company are unsuccessful in obtaining such contracts the Affiliated Practice
would not be able to effectively compete.
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Ambulatory Surgery Center Services
The Company competes with other ASC companies and local hospitals in developing
new ASCs and acquiring existing ASCs. The local hospital may have a competitive
advantage in attracting physicians and patients due to their established
standing in the community, historical patient loyalty and convenience for
physicians making rounds and performing inpatient surgery in the hospital.
However, the Company believes that the physicians may prefer to utilize and
invest in the ambulatory surgery centers due to greater scheduling flexibility,
more consistent nurse staffing, and faster turnaround time between cases,
thereby allowing a physician to perform more surgeries in a defined period of
time.
Major Customers
Substantially all of the current Company's revenue is derived from physician
practice management affiliation transactions and from the internal growth of
practices under the Company's management. As of December 31, 1999, the three
practices under Company management represented approximately 85% of the
Company's revenue. In January 1999, the Company terminated its Management
Service Agreement ("MSA") with its Connecticut practice due to the practice's
failure to meet certain obligations under the MSA. In the first quarter of 2000,
the Company terminated its MSAs with its practices in Pennsylvania and Colorado.
The Company is terminating its MSAs in an effort to focus its financial and
personnel resources on its new business strategy. The Company's current business
strategy assumes revenue growth derived primarily from investments in ancillary
businesses such as ambulatory surgery centers or specialty surgical hospitals.
Reimbursement
The various services rendered by the Affiliated Practices under Company
management are generally paid by employers, private insurance, workers'
compensation insurance, settlement or adjudication of personal injury
litigation, and Medicare or Medicaid. To some extent, professional medical
services are covered by all payors of medical care. Certain of the ancillary
services are more likely to be covered by employers' and workers' compensation
insurance than by other payors due to the nature of the services rendered.
Patients pursuing personal injury claims may require the services of any or all
elements of the musculoskeletal-related healthcare delivery system.
SERVICE MARKS
The Company owns federal registrations for the service marks DRCA, IOI, and IOI
& Design. These marks were registered in September 1995, January 1999 and July
1999, respectively. The registrations are valid for a term of ten years and may
be renewed thereafter for additional ten-year periods, as long as the company
continues to use the marks.
The Company also owns a Texas registration for the service mark WORKWELL, and
for a design mark used in connection with its WORKWELL clinics, which were
registered with the Secretary of the State of Texas in January 1990. These
registrations, like the federal registrations, are valid for a term of ten years
and were renewed for an additional ten-year period in January 2000.
In addition, the Company has applied for federal registration of the following
service marks on the Principal Register of the United States Patent and
Trademark Office:
INTEGRATED ORTHOPAEDICS
AMAM
ANCILLARY MANAGEMENT AFFILIATION MODEL
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REGULATION
General
The healthcare industry is highly regulated, and there can be no assurance that
the regulatory environment in which the Company operates will not change
significantly in the future. The Company believes that healthcare regulations
will continue to change and it will monitor these changes. The Company expects
to modify its agreements and operations from time to time as the business and
regulatory environments change. While the Company believes it will be able to
structure all its agreements and operations in accordance with applicable law,
there can be no assurance that it will be able to successfully address changes
in the regulatory environment.
Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate HMOs and other managed care organizations with which Affiliated
Practices or their affiliated physicians may have contracts. Many states require
regulatory approval, including certificates of need, before establishing or
expanding certain types of healthcare facilities, offering certain services or
making expenditures for healthcare equipment, facilities or programs in excess
of statutory thresholds. Some states also require licensing of collection
agencies and employee leasing companies. In connection with its operations and
its expansion into new markets, the Company believes it is in material
compliance with all such laws and regulations and current interpretations
thereof, but there can be no assurance that such laws, regulations, or
interpretations will not change in the future or that additional laws and
regulations will not be enacted.
In addition to extensive, existing healthcare regulation, there have been
numerous federal and state initiatives for comprehensive reforms affecting the
payment for and availability of healthcare services. The Company believes that
such initiatives will continue. Aspects of certain of these reforms as
previously proposed, such as further reductions in insurance payments and
additional restrictions on direct or indirect physician ownership of facilities
to which they refer patients, if adopted, could adversely affect the Company.
Other aspects of such initiatives, such as universal health insurance coverage
and coverage of certain previously uncovered services, could have a positive
impact on the Company's business.
The ability of the Company to operate profitably will depend, in part, upon the
Company and its affiliated medical practices obtaining and maintaining all
necessary licenses, certificates of need and other approvals, as well as upon
operating in compliance with applicable healthcare regulations.
Fee Splitting; Corporate Practice of Medicine
The laws of many states prohibit physicians from splitting fees with
non-physicians and/or physicians and prohibit non-physician entities, such as
the Company, from practicing medicine. Under such laws, the Company is
prohibited from exercising control over the provision of medical services. These
laws vary from state to state and are enforced by regulatory authorities with
broad discretion. The Company believes its operations are in material compliance
with existing applicable laws. Specifically, the Company believes the
compensation it receives for its management services is consistent with fair
market value and will not constitute fee splitting. In addition, the Company
believes that its long-term management agreements with physician practices do
not result in the Company's exercising control over the provision of medical
services in violation of the prohibition against the corporate practice of
medicine. There can be no assurance, however, that review of the Company's
business by courts or regulatory authorities will not result in determinations
that could adversely affect the operations of the Company, or that changes in
healthcare regulations will not restrict the Company's existing or expanding
operations. In addition, the regulatory framework of certain jurisdictions may
limit the Company's ability to expand into such jurisdictions.
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Fraud and Abuse
Federal law prohibits the offer, payment, solicitation or receipt of any form of
remuneration in return for, or in order to induce, (i) the referral of a person
for services, (ii) the furnishing or arranging for the furnishing of items or
services, or (iii) the purchase, lease or order or arranging or recommending
purchasing, leasing or ordering of any item or service, in each case,
reimbursable under Medicare or Medicaid. Pursuant to this anti-kickback law and
as a result of increased funding by the federal government for anti-fraud
efforts, joint ventures and other transactions among healthcare providers have
faced increased scrutiny from both the Department of Justice and the Office of
Inspector General of the Department of Health and Human Services in an effort to
reduce potential fraud and abuse related to Medicare and Medicaid costs. Many
states have similar anti-kickback laws and in some states these laws apply to
all types of patients, not just Medicare and Medicaid beneficiaries. The
applicability of these federal and state laws to many business transactions in
the healthcare industry, including those contemplated by the Company, has not
yet been subject to significant judicial interpretation.
Noncompliance with, or violation of, the federal anti-kickback legislation can
result in exclusion from Medicare and Medicaid programs and civil and criminal
penalties. Similar penalties are provided for violation of state anti-kickback
laws. The federal government has promulgated "safe harbor" regulations that
identify certain business and payment practices which are deemed not to violate
the federal anti-kickback statute. Although the Company's business does not fall
within certain of the current or proposed safe harbors, the Company believes
that its contemplated operations materially comply with the anti-kickback
statutes and regulations. The Company is not aware of any challenge or
investigation of the Company with respect to these matters; however, there can
be no assurance that such challenge or investigation will not occur in the
future, particularly with the implementation of new prohibitions and
regulations.
Prohibitions on Referrals to Certain Entities
The Stark Law originally prohibited a physician from referring a Medicare
patient to an entity for the provision of clinical laboratory services if the
physician or an immediate family member of the physician had a financial
relationship, including an ownership or investment interest or compensation
arrangement, with the entity ("STARK I") unless an exception applied. The
revised Stark Law, known as "Stark II," dramatically enlarged the field of
designated health services to which the referral prohibitions apply. Effective
January 31, 1995, Stark II prohibits a physician from referring Medicare or
Medicaid patients to an entity in which the physician or an immediate family
member has a financial relationship for the provision of physical therapy,
occupational therapy, radiology, home health, hospital, and other services,
unless an exception applies. Exceptions to the prohibition on referrals for the
expanded designated health services include, but are not limited to, (i)
referrals for designated health services in physician's office and certain other
locations, (ii) referrals for such services to certain publicly traded
companies, (iii) referrals for designated health services to entities with which
the physician has certain space and equipment rental relationships, (iv)
referrals for services provided in an ambulatory surgery center and (v)
referrals to entities with which the physician has an employment or independent
contractor relationship. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties. On
January 9, 1998, the Healthcare Financing Administration, issued proposed rules
implementing Stark II; final rules are not expected in the near future.
Designated health services provided in violation of the Stark referral
prohibitions may not be billed to or paid by a governmental program. Many states
have similar restrictions on referrals by physicians. The applicability of these
federal and state laws to many business transactions in the healthcare industry,
including those intended by the Company, has not yet been subject to significant
judicial interpretation. To the extent that the Company or any affiliated
medical practice is deemed to be subject to Stark I or II or similar state laws,
the Company believes its intended activities will materially comply with such
statutes and regulations.
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HMO and Insurance Laws
Federal and state laws regulate insurance companies, HMOs and other managed care
organizations. Generally, these laws apply to entities that accept financial
risk. There is a potential that certain risk arrangements that may be entered
into by the Company could be characterized by some states as the business of
insurance or an HMO. The Company, however, believes that it is not engaged in
the business of insurance or of an HMO. Many states also regulate the
establishment and operation of networks of healthcare providers. Generally,
these laws do not apply to the hiring and contracting of physicians by other
healthcare providers. There can be no assurance that regulators of the states in
which the Company operates would not apply these laws to require licensure of
the Company's operations as an insurer or provider network. The Company believes
that its contemplated activities are and will be in material compliance with
these laws in the states in which it does or intends to do business, but there
can be no assurance that interpretations of these laws by the regulatory
authorities in these states or the states into which the Company may expand will
not require licensure or a restructuring of some or all of the Company's
operations. In the event that the Company is required to become licensed under
these laws, the licensure process can be lengthy and time consuming and, unless
the regulatory authority permits the Company to continue to operate while the
licensure process is progressing, the Company could experience a material
adverse change in its business while the licensure process is pending. In
addition, many of the licensing requirements mandate strict financial and other
requirements which the Company may not immediately be able to meet. Further,
once licensed, the Company would be subject to continuing oversight by and
reporting to the respective regulatory agency.
Antitrust
As the Company expands, the Company and its affiliated medical groups will be
subject to various antitrust laws which prohibit anti-competitive conduct,
including such issues as price fixing, concerted refusal to deal and division of
markets. The Company believes it is presently in material compliance with
applicable law, but there can be no assurance that a regulatory review or civil
suit would not result in an adverse determination or that the regulatory
environment will not change in a manner which could have a material adverse
effect on the Company's operations and its expansion strategy.
Certificate of Need
Some states require that providers of certain orthopaedic healthcare services
and facilities obtain a Certificate of Need ("CON") prior to commencement of
construction and/or operation. The types of facilities and services covered by
CON requirements as well as the spending threshold below which CON statutes do
not apply, vary on a state-by-state basis. While several states in recent years
have discontinued their CON programs altogether, there is no assurance that some
or all of these states may not at some future time reinstitute such programs. In
addition, the Company's expansion may place it in CON states. As a result, to
the extent that the CON approval process delays the construction and/or
operation of proposed services and facilities or that CON approval is denied,
CON regulations may have an adverse effect on the Company's policy to expand its
offerings of certain services.
Accreditation
The Commission on Accreditation of Rehabilitation Facilities ("CARF") is an
independent organization that reviews rehabilitation facilities and accredits
those facilities that meet its guidelines. While participation in the CARF
accreditation is currently voluntary, some states have passed legislation
requiring that certain workers' compensation treatment be provided by
CARF-accredited facilities. Currently, all of the Company's work hardening
clinics are accredited by CARF. In the event that CARF or other accreditation
guidelines become more onerous and/or predominantly mandatory in the future, it
may have an adverse effect on the Company's management of rehabilitation
operations.
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Regulatory Compliance
The Company believes that regulations and statutes will continue to change and,
as a result, it regularly monitors developments in related law. Although the
Company believes its operations are, and will continue to be, in material
compliance with existing applicable laws, the Company's business operations have
not been the subject of judicial or regulatory interpretation. There can be no
assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the healthcare regulatory environment will not
change so as to restrict the Company's existing operations or its expansion
into, or ability to continue operations within, such jurisdictions if the
Company is unable to modify its operational structure to conform with such
regulatory framework. The Company expects to modify its agreements and
operations from time to time as the business, statutory and regulatory
environment changes. While the Company believes it will be able to structure all
its agreements and operations in accordance with applicable laws, there can be
no assurance that its arrangements will not be successfully challenged in the
future. Any limitation on the Company's ability to expand could have an adverse
effect on the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property. All clinic facilities are leased at
commercial property rates for the size, location, and tenant finish included in
the lease. All clinic facilities are of a size and configuration and house
various types of equipment appropriate to the services rendered within the
facility. The Company leases approximately 17,000 square feet in Houston, Texas,
which houses the Company's Houston central office and executive offices. All
facilities are insured and are maintained in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
In January 1999, the Company and a subsidiary of the Company, IOI Management
Services of Connecticut, Inc. ("IOI Regional"), filed suit against Merritt
Orthopaedic Associates, P.C. ("Merritt"), Patrick J. Carolan, M.D., ("Carolan"),
and Mark E. Wilchinsky, M.D. ("Wilchinsky"). The lawsuit sought to enforce
certain repurchase obligations under the management services agreement ("MSA")
by and among the Company, IOI Regional, Merritt, Carolan and Wilchinsky. The
Company terminated the MSA in January 1999 due to the failure of Merritt,
Carolan and Wilchinsky to satisfy certain of their obligations thereunder. In
March 2000, a settlement was reached between the Company and the practice. The
MSA and net property and equipment have been reduced to their net realizable
value at December 31, 1999 based on the terms of the agreement.
In the ordinary course of its business, the Company may be subject, from time to
time, to claims and legal actions. While the Company cannot predict the outcome
of litigation actions, the Company believes that all such claims and actions are
either adequately covered by insurance or will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange ("ASE")
under the symbol "IOI". Prior to March 12, 1997, the Company's trading symbol
was "DRC." At March 31, 2000, the Company had 124 shareholders of record. A
significant portion of the Company's common stock not held by affiliates of the
Company is held through securities depositories. The following table set forth
the high and low sale prices per share of the Company's Common Stock for the
periods indicated, as reported by the ASE:
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
1998
1st Quarter $6.2500 $8.1250
2nd Quarter $5.2500 $7.1250
3rd Quarter $4.4375 $6.3750
4th Quarter $2.4375 $4.6250
1999
1st Quarter $1.6875 $3.1875
2nd Quarter $0.7500 $1.9375
3rd Quarter $0.8750 $1.7500
4th Quarter $0.5000 $2.8750
</TABLE>
The Company has not declared or paid any dividends to common shareholders since
inception and does not anticipate the payment of any cash dividends in the
foreseeable future. Pursuant to the terms of the Company's Series A Cumulative
Convertible Preferred Stock and the Company's Series B Cumulative Convertible
Preferred Stock (collectively the "Preferred Stock"), no dividends can be paid
on the common stock until all dividends accrued on the Preferred Stock have been
paid.
Dividends on the Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") are cumulative from the date of issuance and are payable
quarterly after June 30, 1999, upon the availability of "Free Cash Flow" as
defined in the Certificate of Designation. No dividends were paid in 1999 as
there was not Free Cash Flow as defined. At December 31, 1999, the Company has
accrued unpaid dividends of $732,591 on the Series A Preferred Stock. Dividends
on the Series B Cumulative Convertible Preferred Stock ("Series B Preferred
Stock") accrue quarterly and, if not paid in cash, are paid quarterly by the
issuance of additional shares of Series B Preferred Stock. At December 31, 1999,
the Company has recorded the issuance of 25,692 additional shares of Series B
Preferred Stock to satisfy dividends accrued for the year ended December 31,
1999. At December 31, 1999 the Company has accrued unpaid dividends of $2,009
on the Series B Preferred Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain of the comments that follow or that appear elsewhere in this annual
report represent forward-looking statements with respect to the Company's future
results of operations and its related capital resources and financial condition.
The Company relies on a variety of internal and external information as well as
management judgment in order to develop such forward-looking statements. Because
of the
12
<PAGE> 13
inherent limitations in this process, the relatively volatile nature of the
industry in which the Company operates, and other risks and uncertainties
including those discussed in this annual report, particularly in Item 1 -
"Business," hereof, there can be no assurance that actual results will not
differ materially from these forward-looking statements.
RESULT OF OPERATIONS
GENERAL
In early 1999, the Company changed its business strategy to begin offering a
portfolio of physician management service alternatives, including consulting
services and equity joint ventures for ancillary services, as well as providing
certain management services through both the equity and non equity model. In May
1999, a new Chief Operating Officer and new Chief Development Officer were hired
to implement the new business model. In addition, the corporate office was
restructured to reduce corporate overhead. In August 1999, the business strategy
was further refined to focus more fully on the acquisition or development of
ancillary services such as ambulatory surgery centers and specialty surgical
hospitals in conjunction with orthopedic and other surgical specialties. In
addition, the Company would pursue the development or acquisition of other
ancillary services such as physical therapy, pain management, and magnetic
resonance imaging. As a result, 1999 was a year of strategic and management
changes and the Company did not acquire additional physician practices. However,
the Company focused on the growth and implementation of ancillary services such
as magnetic resonance imaging ("MRI"), physical therapy and bone densitometry at
its existing practices.
The Company terminated its management services agreement ("MSA") with the
Connecticut practice in January 1999, effective December 31, 1998, due to the
failure of the practice to satisfy certain of its obligations under the MSA. In
March of 2000, a settlement was reached with respect to litigation initiated by
the Company between the Company and the practice related to the failure of the
practice to satisfy certain of its obligations under its MSA. As such the MSA
and the net property and equipment were reduced to their net realizable value at
December 31, 1999, based on the terms of the agreement and are reflected as
Assets to be Disposed of in the accompanying consolidated balance sheet.
Impairment charges of $2,079,000 and $2,500,000 were recorded for the years
ended December 31, 1999 and 1998 respectively.
As a result of terminating the MSA with the Connecticut practice the number of
MSA's decreased from four in 1998 to three in 1999. During the first quarter of
2000, the Company terminated two additional MSAs as described below. In addition
to the medical practice affiliations, the Company continued to operate the work
hardening facilities in Texas during 1999.
In an effort to focus its financial and personnel resources on the new business
strategy, the Company has decided to terminate its management services
agreements with its existing practices, contingent upon acceptable terms. In
December 1999, the Company entered into discussions with its practice in
Colorado regarding terminating its MSA. In January 2000, a definitive agreement
was executed to terminate the MSA effective December 31, 1999. As a result the
MSA, net accounts receivable, and net property and equipment were reduced to
their net realizable value at December 31, 1999 based on the terms of the
agreement and are reflected as Assets to be Disposed Of in the accompanying
consolidated balance sheet. An impairment charge of $2,599,000 was recorded for
the year ended December 31, 1999.
In March 2000, the Company entered into discussions with the Pennsylvania
practice to terminate its MSA. A definitive agreement was reached in April 2000,
to terminate the MSA effective March 31, 2000.
In April 1999, the Company acquired the license for an ambulatory surgery center
("ASC") in Marrero, Louisiana, which is the same market served by the Company's
Louisiana practice. The ASC was completely renovated and is eight thousand
square feet. It includes three operating rooms, a minor procedure room, four
recovery rooms and five step-down beds. It will operate as the Westbank
Ambulatory Care Center, LLC. As of December
13
<PAGE> 14
31, 1999, the Company had funded $517,000 of start-up costs and $412,000 of
construction in progress. The syndication of the ASC was completed in March 2000
and it is expected to be operational in the second quarter of 2000.
In an effort to reduce corporate overhead costs, the corporate office was
restructured resulting in a reduction in staff from 40 in January 1999 to 19 in
December 1999.
OPERATIONS DATA
The following table presents revenues and the statement of operations items as
percentages of total revenues:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues 100% 100%
Practice compensation and benefits 37 36
Other direct costs 36 33
General and administrative 42 54
Depreciation and amortization 15 12
Impairment charges 40 20
Special charges 7 4
---- ----
177 159
Loss from operations (77) (59)
Interest income 2 4
Interest expense (4) (4)
---- ----
Loss before income tax (provision) benefit (79) (59)
Income tax (provision) benefit (5) 19
---- ----
Net loss before extraordinary items (84) (40)
Extraordinary loss on termination of credit agreement, net (1)
---- ----
Net loss (85)% (40)%
==== ====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
REVENUES:
Revenues for the year ended December 31, 1999 were $11,745,000, a decrease of
$473,000, or 4%, over revenues of $12,218,000 for the same period of 1998. The
decrease of $473,000 is a result of a $1,804,000 decrease in revenue resulting
from the termination of the management services agreement ("MSA") with the
Connecticut practice, offset by an increase in revenues of $1,331,000 from the
remaining three practices and the work hardening centers. The increase in
revenue at the remaining practices is a result of the addition of ancillary
services, which accounted for $727,000 of the increase with the remaining
increase related to same store growth.
PRACTICE COMPENSATION AND BENEFITS:
Overall practice compensation and benefit costs decreased $78,000, or 2%, from
$4,374,000 in 1998 to $4,296,000 in 1999. The decrease of $78,000 is a result of
a $627,000 decrease in compensation and benefit costs related to the termination
of the MSA with the Connecticut practice. This decrease was
14
<PAGE> 15
offset by an increase of $549,000 related to an increase in personnel for
ancillary services (physical therapy, bone densitometry and magnetic resonance)
at the remaining practices.
15
<PAGE> 16
OTHER DIRECT COSTS:
Overall other direct costs increased $244,000, or 6%, from $4,047,000 in 1998 to
$4,291,000 in 1999. Other direct costs decreased $728,000 as a result of the
termination of the MSA with the Connecticut practice. However, this decrease was
offset by a $972,000 increase in costs at the remaining practices. Of this
increase $517,000 relates to start-up costs for the Westbank Ambulatory Care
Center in Marrero, Louisiana. The remaining increase of $455,000 primarily
relates to additional rent and professional services at the Affiliated Practices
for ancillary development.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the year ended December 31, 1999
decreased $1,710,000 or 26%, from $6,593,000 in 1998 to $4,883,000 in 1999.
These costs decreased as a result of an effort to decrease corporate costs
specifically related to corporate personnel, advertising, printing, professional
services, office supplies and telephone expenses. Of the decrease, $1,056,000
relates to a decrease in corporate personnel costs as a result of restructuring
the corporate office.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization increased $223,000, or 15%, from $1,531,000 in
1998 to $1,754,000 in 1999. Of this increase $125,000 relates to an increase in
amortization and $98,000 relates to an increase in depreciation expense. The
increase in amortization expense from 1998 to 1999 is a result of an increase of
$249,000 in amortization expense related to the three remaining practices offset
by a decrease of $124,000 in amortization expense related to the termination of
the Connecticut practice MSA. Amortization expense for the three remaining
practices increased in 1999 due to a full year of amortization using a 25-year
amortization period. In 1998, a 40 year amortization period was used for the
first six months with a reduction in the amortization period as of July 1998, to
25 years. Depreciation expense increased $98,000 as a result of an increase of
$117,000 from 1998 to 1999 in depreciation expense primarily due to the
acquisition of MRI equipment for the Pennsylvania and Colorado practices offset
by a decrease of $19,000 in depreciation expense related to the termination of
the Connecticut practice MSA.
IMPAIRMENT CHARGES:
Impairment charges increased $2,178,000 or 87%, from $2,500,000 in 1998 to
$4,678,000 in 1999. In 1998, an impairment charge of $2,500,000 was recorded
related to the termination of the MSA with the Connecticut practice. In 1999, an
additional impairment charge of $2,079,000 was recorded related to the
Connecticut practice as a result of reaching a settlement with the practice. In
addition, during 1999 the Company entered into discussions with the Colorado
practice to terminate its MSA. A definitive agreement was reached in January
2000 to terminate the MSA. As a result an impairment charge of $2,599,000 was
recorded to reduce the related assets to their net realizable value at December
31, 1999 based on the terms of the agreement.
SPECIAL CHARGES:
Special charges increased $425,000 or 95%, from $446,000 in 1998 to $871,000 in
1999. The special charges relate to corporate restructuring charges. The
increase in special charges from 1998 to 1999 relates to additional
restructuring costs related to downsizing the corporate office.
INTEREST INCOME:
Interest income decreased by $291,000 from 1998 to 1999, as a result of a
decrease in the cash and investment balance throughout the year.
16
<PAGE> 17
INTEREST EXPENSE:
Interest expense increased $15,000 from 1998 to 1999, with the increase
primarily attributable to an increase in capital lease obligations during 1999.
INCOME TAX EXPENSE:
Income tax provision increased $2,937,000 from 1998 to 1999, with the increase
primarily attributable to the increase in the valuation allowance.
NET LOSS/LOSS PER COMMON SHARE:
Net loss, loss applicable to common shares and loss per common share for the
year ended December 31, 1999 were $10,047,000, $12,821,000 and $1.97, compared
to $4,927,000, $7,466,000 and $1.16, respectively, for the same period in 1998.
The increase in the loss applicable to common shares from 1998 to 1999 is a
result of additional losses of $5,120,000 during 1999 attributable to reasons
noted above and an incremental increase in the annual stock dividend of $235,000
on the Series B Cumulative Convertible Preferred Stock during 1999. Included in
1999 and 1998 loss applicable to common shares and loss per share were
impairment charges of $4,678,000 and $2,500,000, or $0.77 and $0.26 per share,
respectively. In addition included in the 1999 and 1998 loss applicable to
common shares and loss per share are special charges of $871,000 and $446,000,
or $0.14 and $0.05 per share, respectively.
Weighted average shares outstanding is comparable at December 31, 1999 to the
weighted average shares outstanding at December 31, 1998.
As of December 31, 1999, if all shares of the Company's Series A Cumulative
Convertible Preferred Stock and Series B Cumulative Convertible Preferred Stock
had been converted into Common Stock, the number of shares of Common Stock
outstanding would have been 24,682,770. Of this approximately 74% would have
resulted from the conversion by the Series A and Series B holders. See Item 7 -
Note 11 to Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended December 31, 1999 was
$3,045,000, compared to $2,765,000 for the same period of 1998. Net cash used in
investing activities decreased $4,093,000 from $4,951,000 in 1998 to $858,000 in
1999, primarily due to cash used in 1998 of $4,688,000 to enter into the
Colorado medical practice transaction, where as in 1999 there were no
acquisitions. Net cash used in financing activities was $226,000 in 1999, as
compared to net cash used in financing activities of $2,908,000 in 1998. The
$2,682,000 decrease in the cash used in financing activities is primarily due to
the refund in 1999 of $414,000 of deferred financing costs related to the
termination of the Nations Bank Credit Facility, the payment in 1998 of
$1,000,000 of deferred financing costs, and $1,505,000 of note payments related
to the acquisition of a medical practice.
Net working capital was $3,991,000 at December 31, 1999, as compared to
$7,991,000 at December 31, 1998. The decrease of $4,000,000 was due primarily to
cash of $4,129,000 being used in 1999 to fund operations, property and equipment
acquisitions and financing activities.
In 1998, the Company entered into a Credit Agreement (the "Credit Agreement")
which provided for a $65.0 million three-year Revolving Credit Facility (the
"Credit Facility"). Due to changes in the Company's business strategy and
general market conditions, the Credit Agreement and Credit Facility were
terminated on June 4, 1999.
17
<PAGE> 18
The Company's new business strategy focuses on the development of ancillary
services such as ambulatory surgery centers, specialty surgical hospitals and
other ancillary services in conjunction with orthopedic and other surgical
specialty physicians. In an effort to focus its financial and personnel
resources on the new business strategy, the Company has decided to terminate its
MSAs with its existing practices, contingent upon obtaining acceptable terms.
Subsequent to December 31, 1999, the Company terminated two of its three
remaining management services agreements. See Item 7 - Note 5.
Under the new business model the Company began renovations of the Westbank
Ambulatory Care Center in Marrero, Louisiana. As of December 31, 1999, the
Company had funded $517,000 in start-up costs and $412,000 of construction in
progress. At December 31, 1999 the Company had outstanding commitments of
$2,185,000 related to the equipment and construction of the ambulatory surgery
center. The Company has been unable to obtain financing for the equipment and
leasehold improvements as a result of the lack of capital available in the PPM
sector as well as due to the Company's continued operating losses and cash
position. The Company is currently pursuing financing from the equipment
manufacturers for the ambulatory surgery center equipment. If the Company is
unable to obtain financing it will utilize the proceeds from the divestiture of
the practices to fund the equipment and construction expenditures.
In connection with the termination of the Colorado practice MSA, the Company
received cash of $700,000 and a note receivable of approximately $974,000. In
connection with the legal settlement for the Connecticut practice MSA, the
Company received $500,000 in cash and a note receivable of $250,000. It is the
Company's intent to factor these notes. In addition, the Company received in
April 2000, $3,954,500 in cash as a result of terminating the MSA with the
Pennsylvania practice and selling the net property and equipment and net
accounts receivable.
Management's plans for addressing its liquidity and operating difficulties are
partially based upon forward looking events, which have yet to occur, as to
which there are no assurances.
Management believes it will have sufficient cash flow to fund operations and
minor additional investments for fiscal 2000. The Company does not expect to
attain a break-even cash flow position during 2000 and thus will continue to
fund operating losses from its cash balances. The Company's current business
strategy assumes revenue growth derived primarily from investments in ancillary
businesses such as ambulatory surgery centers or specialty surgical hospitals.
The Company has limited operating history related to the implementation of this
business strategy. Long-term growth of the business is expected to depend on the
Company's ability to raise debt or equity capital. There can be no assurances
that the Company will successfully raise such capital and during 1999 the
Company was unsuccessful at raising debt capital.
YEAR 2000 COMPLIANCE
In the prior year the Company described the nature and progress of its plans to
become year 2000 ready. In late 1999, the Company completed its remediation and
testing of its systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission-critical
information technology and non-information technology systems and believes those
systems responded to the year 2000 date change. The expenditures related to the
remediation of the Company's systems were not material to the consolidated
statement of operations. The Company is not aware of any material problems
resulting from the year 2000 issues, either with its internal systems or the
products and services of third parties. The Company will continue to monitor the
Company's mission-critical computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent matters that may
arise are addressed promptly.
18
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements - Consolidated Financial Statements of Integrated
Orthopaedics, Inc. as of December 31, 1999 and 1998 and for the two years ended
December 31, 1999:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 20
Consolidated Balance Sheets 21
Consolidated Statements of Operations 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24-25
Notes to Consolidated Financial Statements 26-39
</TABLE>
19
<PAGE> 20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Orthopaedics, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Orthopaedics, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Integrated
Orthopaedics, Inc. at December 31, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Houston, Texas
April 12, 2000
20
<PAGE> 21
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 1,889 $ 6,018
Accounts receivable 2,101 3,140
Income taxes receivable 49 47
Due from affiliated medical groups 227 240
Prepaid expenses 449 785
Other current assets 26 494
Assets to be disposed of 1,529
-------- --------
TOTAL CURRENT ASSETS 6,270 10,724
PROPERTY AND EQUIPMENT
Equipment (including capital leases) 3,529 3,384
Leasehold improvements 351 229
Furniture and fixtures (including capital leases) 563 727
Construction in progress 426
-------- --------
4,869 4,340
Less - accumulated depreciation and amortization (2,532) (2,502)
-------- --------
2,337 1,838
MANAGEMENT SERVICES AGREEMENTS, net of
accumulated amortization of $1,670 in 1999 and $3,582 in 1998 20,581 28,272
ASSETS TO BE DISPOSED OF 895
DEFERRED INCOME TAXES 1,925 2,441
OTHER ASSETS 135 706
-------- --------
TOTAL ASSETS $ 32,143 $ 43,981
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 106 $ 231
Accrued liabilities 1,741 1,969
Current obligations under capital leases 215 122
Current portion of notes payable 217 411
-------- --------
TOTAL CURRENT LIABILITIES 2,279 2,733
OBLIGATIONS UNDER CAPITAL LEASES 542 351
NOTES PAYABLE 651 868
DIVIDENDS PAYABLE 735 531
DEFERRED INCOME TAXES 9,180 10,415
-------- --------
TOTAL LIABILITIES 13,387 14,898
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares authorized,
Series A, cumulative convertible, 25,226 shares issued and outstanding
Series B, cumulative convertible, non-redeemable,
300,236 shares issued and outstanding in 1999 and 274,544 in 1998 3 3
Common stock, $.001 par value, 50,000,000 shares authorized,
6,557,454 issued in 1999 and 1998 7 7
Additional paid-in capital 49,316 46,744
Common stock to be issued 78
Accumulated deficit (30,320) (17,499)
Treasury shares, 60,914 in 1999 and 1998 (250) (250)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 18,756 29,083
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,143 $ 43,981
======== ========
</TABLE>
See accompanying notes.
21
<PAGE> 22
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES $ 11,745 $ 12,218
COSTS AND EXPENSES:
Practice compensation and benefits 4,296 4,374
Other direct costs 4,291 4,047
General and administrative 4,883 6,593
Depreciation and amortization 1,754 1,531
Impairment charges 4,678 2,500
Special charges 871 446
-------- --------
20,773 19,491
-------- --------
LOSS FROM OPERATIONS (9,028) (7,273)
INTEREST INCOME 202 493
INTEREST EXPENSE (432) (447)
-------- --------
LOSS BEFORE INCOME TAX (PROVISION) BENEFIT (9,258) (7,227)
INCOME TAX (PROVISION) BENEFIT (637) 2,300
-------- --------
NET LOSS BEFORE EXTRAORDINARY ITEMS (9,895) (4,927)
EXTRAORDINARY LOSS ON TERMINATION OF CREDIT (152)
-------- --------
AGREEMENT, NET
NET LOSS $(10,047) $ (4,927)
======== ========
LOSS APPLICABLE TO
COMMON SHARES $(12,821) $ (7,466)
======== ========
LOSS PER SHARE BASIC AND DILUTED:
Net Loss Before Extraordinary Loss $ (1.95) $ (1.16)
Extraordinary Loss (0.02)
-------- --------
Net Loss Per Share $ (1.97) $ (1.16)
======== ========
Weighted average common shares outstanding 6,496 6,459
======== ========
</TABLE>
See accompanying notes.
22
<PAGE> 23
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND 1998
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
------------------------- ------------------------- ----------
PREFERRED COMMON PREFERRED COMMON
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 276 5,886 $ 3 $ 6 $ 41,803
Treasury stock
Repurchased at cost
Medical Practice
Transactions:
Stock issued 157 747
Value of 30,001
Shares to be issued
Delivery of common
stock to be issued 424 1 1,642
Issuance cost of
Preferred Stock
Series B (85)
Dividends on
Preferred Stock
Series A
Series B 24 2,337
Options exercised 90 300
Net Loss
---------- ---------- ---------- ---------- ----------
Balance at
December 31, 1998 300 6,557 3 7 46,744
Dividends on
Preferred Stock
Series A
Series B 26 2,572
Termination of common
stock to be issued
Net Loss
---------- ---------- ---------- ---------- ----------
Balance at
December 31, 1999 326 6,557 $ 3 $ 7 $ 49,316
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS/
STOCK TO BE ACCUMULATED TREASURY
ISSUED (DEFICIT) STOCK TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at
December 31, 1997 $ 1,643 $ (10,033) $ 33,422
Treasury stock
Repurchased at cost (250) (250)
Medical Practice
Transactions:
Stock issued 747
Value of 30,001
Shares to be issued 78 78
Delivery of common
stock to be issued (1,643)
Issuance cost of
Preferred Stock
Series B (85)
Dividends on
Preferred Stock
Series A (202) (202)
Series B (2,337)
Options exercised 300
Net Loss (4,927) (4,927)
---------- ---------- ---------- ----------
Balance at
December 31, 1998 78 (17,499) (250) 29,083
Dividends on
Preferred Stock
Series A (202) (202)
Series B (2,572)
Termination of common
stock to be issued (78) (78)
Net Loss (10,047) (10,047)
---------- ---------- ---------- ----------
Balance at
December 31, 1999 $ 0 $ (30,320) $ (250) $ 18,756
========== ========== ========== ==========
</TABLE>
See accompanying notes.
23
<PAGE> 24
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,047) $ (4,927)
Noncash adjustments:
Impairment charges 4,678 2,500
Extraordinary loss on termination of credit agreement, net 152
Depreciation and amortization 1,754 1,531
Deferred income taxes 343 (2,300)
Other 139 164
Change in assets and liabilities, excluding
acquisitions and dispositions:
Accounts receivable, net 54 421
Other assets 363 (70)
Accounts payable and accrued liabilities (401) (490)
Due from/to affiliated medical groups (78) (306)
Income taxes receivable (2) 712
-------- --------
Net cash used by operating activities (3,045) (2,765)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (858) (573)
Proceeds from sale of marketable securities 111
Proceeds from sale of equipment 199
Net payments in medical practice transactions (4,688)
-------- --------
Net cash used by investing activities (858) (4,951)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other notes (411) (1,747)
Payments on capital lease obligations (229) (126)
Refund (payment) of deferred financing costs 414 (1,000)
Payment to repurchase common shares (250)
Direct costs of preferred stock issuance (85)
Proceeds from exercise of stock options 300
-------- --------
Net cash used by financing activities (226) (2,908)
-------- --------
DECREASE IN CASH AND EQUIVALENTS (4,129) (10,624)
CASH AND EQUIVALENTS:
BEGINNING OF YEAR 6,018 16,642
-------- --------
END OF YEAR $ 1,889 $ 6,018
======== ========
</TABLE>
See accompanying notes.
24
<PAGE> 25
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
--------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 471 $ 136
Income taxes paid (refunded) 155 (509)
NON CASH TRANSACTIONS:
Details of medical practice transactions -
Common stock and additional paid-in capital issued 747
Common stock and additional paid-in capital
to be issued (terminated) (78) 78
Deferred tax liability for book and tax
basis differences 2,204
Liabilities assumed 20
Others -
Series B Preferred Stock -
Accumulated deficit related to stock dividends 2,572 2,337
Series A Preferred Stock -
Increase in dividends payable 202 202
Furniture and equipment acquired under
capital leases 760 246
</TABLE>
See accompanying notes.
25
<PAGE> 26
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas corporation, is
a healthcare management services company that provides management, consulting
and ancillary services to orthopaedic medical practices and other
musculoskeletal-related patient businesses. As of December 31, 1999, the Company
provided comprehensive management services under long-term agreements to three
orthopaedic practices in three states. These practices provide a wide spectrum
of orthopaedic office-based and surgical services to patients with
musculoskeletal injuries and illnesses. These practices were acquired under a
traditional asset purchase model. Subsequent to December 31, 1999, as part of
its new strategy, as discussed below, the Company reached agreements to
terminate two of its three Management Services Agreements (See Note 5).
In 1999, the Company changed its model from a physician practice management
model to an Ancillary Management Affiliation Model. This strategy has as its
objective the acquisition, development and management of freestanding and
in-office ambulatory surgery centers, specialty surgical hospitals, physical
therapy centers, and MRI services through affiliations with orthopaedic
specialty practices. As of December 31, 1999 the Company was in the process of
renovating an ambulatory surgery center in Louisiana.
The Company also owns and operates two work hardening facilities in Houston,
Texas.
The following is a summary of the Company's significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated.
Certain reclassifications to the prior year's financial statements have been
made to conform to the 1999 presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. Actual future results could differ from those expected at the
reporting date.
Cash Equivalents
The Company considers its investments in highly liquid debt securities with
original maturities of three months or less to be cash equivalents.
26
<PAGE> 27
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is recorded using the straight-line method over the estimated useful
lives of three to ten years for equipment, furniture and fixtures. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the terms of the respective leases, and the amortization is
included in depreciation and amortization expense.
Management Service Agreements
Management service agreements ("MSAs") consist of intangible assets attributable
to the affiliated medical practices. As a result of certain developments in the
physician practice management ("PPM") industry, the Company elected to change
the amortization period of all its MSAs from 40 years to 25 years on a
prospective basis beginning July 1, 1998. This 25 year amortization period
initiates at the execution date of the MSA. This change in accounting estimate
increased loss per share by $0.04 for the year ended December 31, 1998.
Under the agreements, the affiliated medical practices have agreed to provide
medical services on an exclusive basis only through the facilities managed by
the Company. The MSAs can be unilaterally terminated without penalty by the
affiliated medical practices only for cause. At any time, any affiliated medical
practice can terminate an MSA by tendering to IOI the MSA and the assets of the
practice. If the affiliated medical practice breaches the MSA, the group is
responsible to pay liquidated damages to IOI in the same amount as that which
would be due if the practice terminated the MSA without cause. As discussed
further in Note 5, subsequent to December 31, 1999, the Company executed
agreements with two of its affiliated medical practices to terminate the
respective MSAs.
The Company regularly evaluates the carrying value of the MSAs versus the
discounted cash benefit expected to be realized from the performance of the
underlying physician practices and adjusts for any impairment in value if there
are indicators that the value of the MSA may be impaired. Additionally, the
Company recognizes an impairment charge, if necessary, at the time a decision is
made to terminate a MSA (see Note 5) if the termination agreement results in the
Company receiving less than the recorded asset value.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis (which
approximates the interest method) over the term of the related debt, and are
included in interest expense.
Revenue Recognition
The Company's revenues represent the contractual fees earned under the MSAs with
orthopaedic groups. Under the agreements, the Company is contractually
responsible and at risk for the operating costs of the affiliated medical
practices with the exception of the amounts retained by physicians. The
Company's revenues include the reimbursement of all medical practice operating
costs and the fixed and variable contractual management fees as defined and
stipulated in the agreements. Revenues related to MSAs are accrued when
collection is probable.
Income Taxes
The Company records its income taxes under the liability method. Under this
method, deferred income tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
Company provides an allowance for tax assets not considered to be realizable
based upon expected future levels of taxable income and the turnaround effect of
deferred tax assets.
27
<PAGE> 28
Fair Values of Financial Instruments
Due generally to their short-term nature and current interest rates and terms,
where applicable, the carrying value of the Company's financial instruments is
believed to approximate their fair values unless otherwise indicated.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing loss applicable to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock on the first day of the fiscal year. However, if the
inclusion of such exercise or conversion reduces the loss per share then such
conversion or exercise would be excluded from the calculation.
Stock-Based Compensation
The Company measures stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." See Note 11 for the pro forma disclosures of the effect on
net loss and loss per common share as if the fair value-based method had been
applied in measuring compensation expense.
Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" in 1998, which replaces the "industry segment" approach
with the "management" approach. The management approach designates the internal
reporting that is used by management for reviewing performances and making
operating decisions.
NOTE 2 - OPERATING RESULTS AND LIQUIDITY
The Company incurred losses from operations of $9,028,000 and $7,273,000 for
1999 and 1998 respectively. Losses from operations, excluding impairment charges
and special charges were $3,479,000 in 1999 and $4,327,000 for 1998. In
addition, the Company's cash position has declined as a result of funding
current operations.
Management has taken the following actions:
o In May 1999, the Company hired a new Chief Operating Officer and Chief
Development Officer.
o The new senior management team redefined the Company's strategy. The
new business strategy focuses on the development and acquisition of
ancillary services such as ambulatory surgery centers and specialty
surgical hospitals as well as other ancillary services in conjunction
with orthopedic and other surgical specialty physicians.
o In an effort to focus its financial and personnel resources on the new
business strategy the Company has decided to terminate its management
services agreements with its existing practices, contingent upon
obtaining acceptable terms. Subsequent to December 31, 1999, the
Company terminated two of its three remaining management services
agreements. (See Note 5). As of April 2000, the Company has received
cash of $4,654,500 related to these divestitures.
28
<PAGE> 29
o Under the new business model the Company began renovations of an
ambulatory surgery center ("ASC") in Marrero, Louisiana. As of
December 31, 1999, the Company had funded $517,000 in start-up costs
and $412,000 of construction in progress. At December 31, 1999, the
Company had outstanding commitments of $2,185,000 related to the
equipment and construction of the ASC. The Company has been unable to
obtain financing for the equipment and leasehold improvements as a
result of the lack of capital available in the Physician Practice
Management sector as well as the Company's continued operating losses
and cash position. The Company is pursuing financing from the specific
equipment manufacturers for the ambulatory surgery center equipment.
If the Company is unable to obtain financing it will utilize the
proceeds from the divestitures of its practices (see Note 5) to fund
the equipment and construction expenditures. In addition, the Company
has the ability to control operating costs of the ASC if revenue
projections are not at the level projected.
o The Company anticipates factoring the notes receivable from the sale
of the Colorado practice. (See Note 5)
o The Company has adopted a plan to reduce corporate overhead costs. As
such, the corporate staff was decreased from 40 in January 1999 to 19
in December 1999. Subsequent to December 31, 1999 the Company
subleased its current office space and furniture and will lease
significantly less space in order to reduce its total lease expense.
Management's plans for addressing its liquidity and operating difficulties are
partially based upon forward looking events, which have yet to occur, as to
which there are no assurances. Management believes that the items addressed
above will result in sufficient cash to fund operations and minor additional
investments for fiscal 2000. The Company does not expect to attain a break-even
cash-flow position during 2000 and thus will continue to fund operating losses
from its cash balance. The Company's current business strategy assumes revenue
growth derived primarily from investments in ancillary business such as
ambulatory surgery centers or specialty surgical hospitals. Such investments
will further reduce the Company's cash position. The Company has limited
operating history related to the implementation of this business strategy.
Long-term growth of the business is expected to depend on the Company's ability
to raise debt or equity capital. There can be no assurances that the Company
will successfully raise such capital and during 1999 the Company was
unsuccessful at raising debt capital.
NOTE 3 - LOSS PER SHARE
The components of basic EPS are as follows (in thousands, except per share data)
for the years ended December 31:
<TABLE>
<CAPTION>
1999 EPS 1998 EPS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (10,047) $ (1.54) $ (4,927) $ (0.77)
Series A Preferred
stock dividends (202) (0.03) (202) (0.03)
Series B Preferred
stock dividends (2,572) (0.40) (2,337) (0.36)
--------- --------- --------- ---------
Net loss
Available to
Common
Stockholders $ (12,821) $ (1.97) $ (7,466) $ (1.16)
========= ========= ========= =========
Weighted average
Common shares
Outstanding 6,496 6,459
========= =========
</TABLE>
29
<PAGE> 30
For the years ended December 31, 1999 and 1998, the diluted weighted average
shares excluded the following as the issuance or conversion of these instruments
results in anti-dilution (shares in thousands). The number of shares listed
assumes the conversion occurred on January 1, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Employee stock options to purchase
common stock 942 $ 1.90 1,459 $ 3.71
Warrants to purchase common stock 200 2.13
Non-employee stock options to purchase
common stock 35 $ 5.00 58 4.15
Series A Preferred Stock convertible into
common stock 1,075 872
Series B Preferred Stock convertible into
common stock 9,667 4,576
</TABLE>
NOTE 4 - MEDICAL SERVICE REVENUE
Medical service revenue for services to patients by the medical practices
affiliated with the Company is recorded when services are rendered based on
established or negotiated charges reduced by contractual adjustments and
allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when the final
settlements are determined. Medical service revenue of the affiliated medical
practices is reduced by the contractual amounts retained by the medical
practices to arrive at the Company's revenue. The affiliated physician practices
maintain exclusive control of all aspects of the practice of medicine and the
delivery of medical services. With respect to the medical practice affiliations,
substantially all of the amounts retained by affiliated physician groups 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>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Medical Service Revenue $17,541 $18,454
Less Amounts Retained by Medical Groups 5,796 6,236
------- -------
Revenues $11,745 $12,218
======= =======
Management Services Agreements at year end 3 4
</TABLE>
30
<PAGE> 31
In 1999 and 1998, the physician practices under Company management represent
approximately 85% and 81% of the Company's revenue, respectively and the loss of
any one of these agreements could have a material adverse effect on the
Company's operations and earnings. Subsequent to December 31, 1999 the Company
divested two of its practices whose combined revenues represented approximately
61% of the Company's revenues in 1999. See Note 5.
For the years ended December 31, 1999 and 1998, the Company and affiliated
medical practices derived approximately 26% and 24%, respectively, of their
medical service revenue from services provided under workers' compensation
programs, 38% and 35%, respectively, from contractual, fee-for-service
arrangements with managed care programs and direct employer contracts, and 1%
and 1%, respectively, from personal injury claims subject to legal action . The
remaining 35% and 40%, respectively, was derived from services provided under
the Medicare and state Medicaid programs as well as various non-contracted
fee-for-service payors. Changes in the payor reimbursement rates can affect the
affiliated medical practices and, therefore, the Company's revenue.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes its billing activities on
behalf of its affiliated medical practices are materially in compliance with
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. Compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Under its MSAs, receivables generated by affiliated medical practices from
patient services are purchased by the Company at their net collectible value on
a full recourse basis. The Company, therefore, does not have an allowance for
doubtful accounts. As a result, the Company's accounts receivable are a function
of medical service revenue of the affiliated medical practices rather than the
Company's revenue. Such receivables are recorded by the affiliated medical
practices net of contractual adjustments and allowance for doubtful accounts and
are not collateralized.
NOTE 5 - MEDICAL PRACTICE TRANSACTIONS
Acquisitions
During 1998 and 1997, the Company entered into long-term MSAs with four
orthopaedic medical practices. The consideration paid for the medical practices
to enter into long-term MSAs and for the non-medical assets of the medical
practices, primarily receivables and fixed assets, has been accounted for as
asset purchases. Total consideration includes: (i) the assumption by the Company
of certain liabilities, (ii) the value of Common Stock issued, (iii) the
estimated value of commitments by the Company to issue common stock at specified
future dates, (iv) short-term obligations, (v) non-negotiable subordinated
convertible promissory notes, and (vi) cash payments and related transaction
costs. In 1998, the Company paid $860,000 in cash and issued $90,000 in common
stock to satisfy or amend existing MSA's.
Divestitures - Assets to Be Disposed Of
In December 1999, the Company entered into discussions with its practice in
Colorado regarding terminating its MSA. In January 2000, a definitive agreement
was executed to terminate the MSA. In conjunction with this transaction the
Company sold the related net accounts receivable and net property and equipment
to the practice and an affiliated entity of the practice. Total consideration to
be received related to the transaction
31
<PAGE> 32
is $1,674,000 of which $700,000 will be received in cash with the remaining
balance structured as a note receivable over thirty-six months. The MSA, net
accounts receivable and net property and equipment have been reduced to their
net realizable value at December 31, 1999 based upon the terms of the agreement.
The Company's net investment in the assets are reflected as Assets to be
Disposed Of in the accompanying consolidated balance sheet and are included in
the total assets of the Practice Management Services Segment. The resulting
write-down of $2,599,000 is reflected as an impairment charge at December 31,
1999 in the consolidated statement of operations. The practice's income before
taxes for 1999 and 1998 was $354,000 and $117,000, respectively.
In January 1999, the Company and a subsidiary of the Company filed a lawsuit
against the medical practice located in Connecticut seeking to enforce certain
repurchase obligations under the related MSA. The MSA was terminated by the
Company in January 1999 due to the failure of the practice to satisfy certain of
its obligations thereunder. Upon such termination for cause, the Company and its
subsidiary were entitled under the MSA to require the practice to comply with
certain repurchase obligations regarding certain assets, including, without
limitation, accounts receivable, equipment, contract and intangibles. In March
2000 a settlement of $750,000 was reached between the Company and the practice.
The MSA and net property and equipment have been reduced to their net realizable
value at December 31,1999 based on the terms of the agreement and are reflected
as Assets to Be Disposed of in the accompanying consolidated balance sheet and
is included in the total assets of the Practice Management Services Segment. A
loss of $2,079,000 and $2,500,000 on the disposal is included in impairment
charges for the years ended December 31, 1999 and 1998, respectively. During
1999, there was no operations related to the practice. The practice's income
before taxes for 1998 was $308,000.
Divestitures - Pending Transactions
In March 2000, the Company entered into discussions with its practice in
Pennsylvania regarding terminating its MSA. In April 2000, a definitive
agreement was executed to terminate the MSA. In conjunction with the
transaction, the Company will sell the related net accounts receivable and net
property and equipment to the practice. Total consideration to be received
related to the transaction is $3,954,500 in cash. At December 31, 1999 the
carrying amount of such net accounts receivable and net property and equipment,
was $1,263,000 and $732,000 respectively. The Company anticipates recording a
loss on the disposal of approximately $8.0 million. This amount represents
management's best estimate; however, the actual amount when determined may
differ from such estimate. The practice's income before taxes for 1999 and 1998
was $818,000 and $754,000, respectively.
Unaudited Pro Forma Financial Data
The following unaudited pro forma financial information is as of and for the
year ended December 31, 1999 (dollars in thousands, except per share amounts)
assumes the above dispositions occurred on January 1, 1999. Accordingly the pro
forma information excludes the impairment of $4,678,000 on the disposition of
the Colorado and Connecticut practices. The unaudited pro forma financial
information below does not purport to present the financial position or results
of operations of the Company had the above transactions occurred on the date
specified, nor are they necessarily indicative of results of operations that may
be expected in the future.
32
<PAGE> 33
<TABLE>
<CAPTION>
1999
--------
<S> <C>
REVENUES $ 4,582
========
LOSS FROM OPERATIONS $ (5,598)
========
LOSS BEFORE EXTRAORDINARY LOSS $ (5,950)
EXTRAORDINARY LOSS (152)
--------
NET LOSS $ (6,102)
========
NET LOSS ATTRIBUTABLE TO COMMON SHARES $ (8,876)
========
LOSS PER SHARE BASIC AND DILUTED:
NET LOSS BEFORE EXTRAORDINARY LOSS $ (1.35)
EXTRAORDINARY LOSS (0.02)
--------
NET LOSS PER SHARE $ (1.37)
========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,496
========
1999
--------
ASSETS
CURRENT ASSETS:
Cash & Equivalents $ 6,644
Accounts Receivable 838
Other Current Assets 637
Notes Receivable 739
--------
TOTAL CURRENT ASSETS 8,858
NET PROPERTY AND EQUIPMENT 1,605
MANAGEMENT SERVICES AGREEMENTS, NET 4,826
DEFERRED INCOME TAXES 1,925
NOTES RECEIVABLE 894
OTHER ASSETS 122
--------
TOTAL ASSETS $ 18,230
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 1,617
Current Obligations Under Capital Leases 162
Current Maturities of Notes Payable 217
--------
TOTAL CURRENT LIABILITIES 1,996
NOTES PAYABLE 651
OBLIGATIONS UNDER CAPITAL LEASES 341
DIVIDENDS PAYABLE 735
DEFERRED INCOME TAXES 3,744
--------
TOTAL LIABILITIES 7,467
STOCKHOLDERS' EQUITY
Preferred Stock 3
Common Stock 7
Additional Paid-in-Capital 49,313
Accumulated Deficit (38,310)
Treasury Shares (250)
--------
TOTAL STOCKHOLDERS' EQUITY 10,763
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,230
========
</TABLE>
33
<PAGE> 34
NOTE 6 - SPECIAL CHARGES
During 1999 and 1998, the Company recorded special charges of $871,000 and
$446,000 respectively, relating to corporate restructuring charges.
NOTE 7 - INCOME TAXES
The Company's income tax provision (benefit) consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Continuing Operations
Current:
Federal $ $(1,191)
State 202 (233)
Deferred:
Federal 305 (732)
State 130 (144)
------- -------
Total Income Tax Provision (Benefit) from Continuing Operations 637 (2,300)
Income Tax Benefit from Extraordinary Loss (91)
------- -------
Total Income Tax Provision (Benefit) $ 546 $(2,300)
======= =======
</TABLE>
The difference between the effective income tax rate and the amount which would
be determined by applying the statutory U.S. income tax rate to loss before
income tax (provision) benefit is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Income tax benefits
at U.S. statutory rates $ 3,174 $ 2,287
State income taxes, net of federal benefit 341 250
Change in valuation allowance (3,865)
Nondeductible expenses and other (287) (237)
------- -------
$ (637) $ 2,300
======= =======
</TABLE>
34
<PAGE> 35
Deferred income taxes at December 31 are comprised of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 21 $ 281
Allowance for doubtful accounts 395 296
Special charges not currently deductible for tax 923
Net operating loss carryforward 5,883 1,257
Other 193
-------- --------
6,299 2,950
Valuation allowance (4,374) (509)
-------- --------
1,925 2,441
-------- --------
Deferred tax liabilities:
Other (975) (215)
Intangible assets, net of amortization (MSAs) (8,003) (10,127)
Depreciation (202) (73)
-------- --------
(9,180) (10,415)
-------- --------
Net deferred tax liability $ (7,255) $ (7,974)
======== ========
</TABLE>
At December 31, 1999, the Company has a net operating loss carry forward of
approximately $15,595,000 available for federal income tax purposes. A portion
of the net operating loss, $3,381,000 expires in 2012 and $3,433,000, expires in
2018. The current year's portion, or $8,782,000, expires in 2019. The Company
increased its valuation allowance from $509,000 at December 31,1998 to
$4,374,000 at December 31, 1999. The increase in the valuation allowance
resulted from subsequent events which led to management's determination that a
portion of the deferred tax asset related to the Company's net operating loss
may not be realized.
NOTE 8 - SEGMENT DATA
The Company's reportable segments are strategic business units that offer
different services. They are managed separately because each business requires
different operating and marketing strategies. During 1999, the Company has three
reportable segments: (i) orthopaedic medical practice management services (ii)
ambulatory surgery centers and (ii) work hardening services. Under 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 ambulatory surgery centers ,
the Company develops or acquires ambulatory surgery centers and provides
comprehensive management services. Under the work hardening services, the
Company offers work injury prevention and rehabilitation services to workers.
The accounting policies of the segments are the same as those described in Note
1. The Company evaluates the performance of its segments based on segment
profit. Segment profit for each segment includes revenue and expenses directly
attributable to the segment. It excludes certain costs that are managed outside
the reportable segments such as corporate expenses, income taxes and special
charges. There are no intercompany transfers between segments.
35
<PAGE> 36
Segment information as of and for the years ended December 31, 1999 and 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Practice Management Services $ 9,806 $ 9,862
Ambulatory Surgery Centers
Work Hardening Services 1,826 1,822
Earnings (loss) before interest, taxes,
depreciation, amortization, impairment
charges, and corporate overhead
Practice Management Services 2,950 2,663
Ambulatory Surgery Centers (517)
Work Hardening Services 612 664
Depreciation and amortization:
Practice Management Services 1,454 1,195
Ambulatory Surgery Centers
Work Hardening Services 63 93
Interest:
Practice Management Services 139 78
Ambulatory Surgery Centers
Work Hardening Services 10 12
Income (loss) before corporate
overhead, impairment charges, and
income taxes:
Practice Management Services 1,357 1,390
Ambulatory Surgery Centers (517)
Work Hardening Services 540 560
Total assets:
Practices Management Services 26,716 33,085
Ambulatory Surgery Centers 412
Work Hardening Services 9,428 9,194
Capital Expenditures:
Practices Management Services 1,074 261
Ambulatory Surgery Centers 412
Work Hardening Services 53 35
</TABLE>
A reconciliation of the Company's segment revenue, segment income before income
tax benefit and segment assets to the corresponding consolidated amounts as of
and for the years ended December 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Segment revenue $ 11,632 $ 11,684
Other revenue (a) 113 534
-------- --------
Total revenue $ 11,745 $ 12,218
======== ========
Segment income before income tax (provision) benefit $ 1,380 $ 1,950
Corporate expenses, net (5,089) (6,253)
Divested operations 22
Impairment Charges (4,678) (2,500)
Special charges (871) (446)
-------- --------
Loss before income tax (provision) benefit $ (9,258) $ (7,227)
======== ========
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Segment assets $ 36,556 $ 42,279
Corporate assets 40,978 46,648
Intercompany elimination (45,391) (44,946)
-------- --------
Total assets $ 32,143 $ 43,981
======== ========
</TABLE>
- ----------
(a) Represents consulting revenue and miscellaneous income.
NOTE 9 - INDEBTEDNESS
Indebtedness at December 31, 1999 and 1998 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Non-negotiable subordinated convertible note payable $ 868 $1,085
Capital lease obligations (See Note 10) 757 473
Other 194
------ ------
1,625 1,752
Less: current maturities (432) (533)
------ ------
$1,193 $1,219
====== ======
</TABLE>
Revolving Credit Facility
In 1998, the Company entered into a credit agreement (the "Credit Agreement"),
which provided for a $65.0 million three-year Revolving Credit Facility (the
"Credit Facility"). Due to changes in its business strategy and general market
conditions, the Credit Agreement and Credit Facility were terminated on June 4,
1999 and the Company was refunded $414,000 of related financing costs by the
bank. The termination resulted in an extraordinary loss related to the write-off
of deferred financing costs which were not refunded of $152,000 (net of income
taxes $91,000). The Company incurred approximately $1.0 million in financing
costs in connection with the Credit Agreement and recorded amortization expense
related to the financing costs of $139,000 and $164,000 in 1999 and 1998,
respectively.
Non-negotiable Subordinated Convertible Notes Payable
Pursuant to a practice affiliation transaction in 1997, the Company issued
non-negotiable subordinated convertible promissory notes to certain physicians.
These notes bear simple interest at seven percent per annum. Payments of
principal plus the amount of interest accrued to date on the outstanding
principal are due in five equal installments on the second through sixth
anniversaries of issuance date. At each principal due date, the holder of the
note may elect to receive payment in cash for both principal and interest or
take payment in the form of Company common stock. If the holder elects to take
payment in the form of Company common stock, the Company will issue
approximately one-fifth of one share for each dollar of principal payment
converted. If payment is taken in the form of Company stock, the accrued
interest is waived by the holder.
37
<PAGE> 38
If the Company fails to make payment under any of the notes, the respective
physician group can terminate the related MSA for cause.
Future principal maturities (in thousands) are $217 in 2000, $217 in 2001, $217
in 2002, $217 in 2003 and $-0- thereafter.
Other Debt
Other debt at December 31, 1998 consisted primarily of unsecured notes. These
obligations matured in various installments through 1999 at interest rates
ranging from 7.5% to 8.25% in 1998.
NOTE 10 - LEASES
The Company leases property and equipment under cancelable and non-cancelable
leases. Future minimum operating and capital lease payments for the next five
years and thereafter are (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
Year ending December 31:
2000 $ 285 $ 867
2001 261 767
2002 220 729
2003 119 359
2004 18 308
Years after 2004 0 3,044
------ ------
Total minimum lease payments 903 $6,074
======
Less: Amount representing interest (146)
------
Present value of net minimum lease payments $ 757
======
</TABLE>
Future minimum lease payments under operating leases have been reduced for
sublease rentals of $1,371,000. Rental expense was $1,260,000 and $1,065,000 for
1999 and 1998, respectively. Rental expense has been reduced for sublease rental
income of $166,000 and $200,000 in 1999 and 1998, respectively.
The following summarized amounts relate to assets leased by the Company under
capital leases (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
----- -----
<S> <C> <C>
CLASSES OF PROPERTY
-------------------
Equipment $ 806 $ 330
Furniture and Fixtures 354 354
Less: Accumulated amortization (362) (147)
----- -----
$ 798 $ 537
===== =====
</TABLE>
Amortization of assets recorded under capital leases is included with
depreciation expense in the statement of operations.
38
<PAGE> 39
NOTE 11 - STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK - The Company has authorized capital stock consisting
of (i) 50,000,000 shares of Common Stock, $.001 par value, and (ii) 10,000,000
shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued in
such series and have such rights, preferences and other provisions as may be
determined by the Board of Directors without approval by the holders of Common
Stock. As of December 31, 1999, the Company has designated 26,000 shares and
400,000 shares of its authorized Preferred Stock as Series A Preferred Stock
(the "Series A Preferred") and Series B Preferred Stock (the "Series B
Preferred"), of which 25,226 and 300,236 were issued and outstanding,
respectively.
Holders of Common Stock are entitled to one vote per share in the election of
five of eight of the Company's directors and on all other matters submitted to a
vote at a meeting of shareholders. Holders of Series A Preferred and Series B
Preferred have weighted voting rights equal to that number of shares of Common
Stock into which it can be converted. Holders of Series B Preferred also have
certain exclusive rights regarding the election of three of the Company's eight
directors, and in an event of a breach by the Company of certain financial
covenants, can elect a majority of the directors of the Company. As of December
31, 1999, the Company was not in compliance with these financial covenants. As a
result, the holders of Series B Preferred have the permanent right to designate
a majority of the directors of the Company. The holders of Series B Preferred
currently have not designated any additional directors of the Company.
In addition, the consent of the holders of Series A Preferred and Series B
Preferred, voting as a class, are necessary for certain matters, including but
not limiting to merger, consolidation, change in the capital structure,
affiliation transactions and capital expenditures.
The Series A Preferred provides for quarterly, cumulative dividends that accrue
at the following rate per share per annum: (i) $8.00 for the period commencing
on the date of issuance though June 30, 2001; (ii) $10.00 from July 1, 2001
through June 30, 2002; (iii) $12.00 from July 1, 2002 through June 30, 2003, and
(iv) $16.00 after July 1, 2003. Such dividends shall be first payable on June
30, 1999, subject to certain extensions, in preference and priority to any
dividends paid to holders of Common Stock and on parity with the holders of the
Series B Preferred. No dividends were paid in 1999 as there was not available
cash flow. At December 31, 1999 $733,000 or $29.06 per share of dividends are in
arrears related to the Series A Preferred Stock. In the event of liquidation,
the holder of each Series A Preferred will be entitled to receive a liquidation
payment of $100 per share plus any accrued but unpaid dividends. The Series A
Preferred is convertible into shares of Common Stock at a rate equal to the
liquidation payment divided by a factor of the lesser of (i) $3.50 or (ii) the
average closing sales price of common Stock for the twenty trading days
immediately preceding the conversion. Holders of Series A Preferred may elect to
convert at any time into Common Stock at the then established conversion rate.
If such conversion had occurred on December 31, 1999 the Series A Preferred
Stock would have converted into 1,778,793 shares of common stock. If shares of
the Series A Preferred are outstanding after June 30, 2001, the Company's board
of directors shall be increased by one, and the holders of such shares, voting
as a separate series, shall be entitled to elect a director to fill such newly
created directorship.
The Series B Preferred provides for quarterly, cumulative dividends that accrue
at the rate of $9.00 per share per annum, subject to certain adjustments. No
cash dividends were paid in 1999 or 1998. Payment of such dividends shall be in
preference and priority to any dividends paid to holders of the Common Stock and
on parity with the holders of the Series A Preferred. At the option of the
Company, such dividends may be paid in shares of Series B Preferred. In the
event of liquidation, the holder of each Series B Preferred will be entitled to
receive a liquidation payment of $100 per share plus any accrued but unpaid
dividends. The Series B Preferred is convertible into shares of Common Stock at
a rate equal to the liquidation payment divided by a factor of the lesser of (i)
$6.00 or (ii) the average closing sales price of Common Stock for the twenty
trading days immediately preceding the conversion. Holders of the Series B
Preferred may elect to convert at any time into
39
<PAGE> 40
Common Stock at the then established conversion rate. If such conversion had
occurred on December 31, 1999 the Series B Preferred Stock would have converted
into 16,407,437 shares of common stock.
The Company may elect to require the conversion of Series B Preferred into
Common Stock at the then established conversion rate any time after the fifth
anniversary of the Series B Preferred issuance date.
If both the Series A and the Series B holders had converted their shares on
December 31, 1999, the common shares outstanding would be as follows:
<TABLE>
<CAPTION>
<S> <C>
Common Stock prior to conversion Series A and B holders 6,496,540
Converted Series A 1,778,793
Converted Series B 16,407,437
----------
Total Common Shares 24,682,770
==========
</TABLE>
WARRANTS - In conjunction with the issuance of the Series B Preferred, the
Company issued contingent warrants ("Warrants"), giving the holders of the
Warrants the right to acquire five million shares ("Warrant Shares") of the
Company's Common Stock at the lesser of (i) $8.00 per share, (ii) the average
closing sales price of the Common Stock for the twenty trading days immediately
following March 29, 1999 or (iii) the average closing sales price of the Common
Stock for the twenty trading days immediately following public disclosure of the
Company's earnings for calendar year 1999. The Warrants are not exercisable
until June 30, 2000 and shall expire in its entirety if the Company achieves all
financial performance objectives as set forth in the Warrant Agreement. The
Company did not achieve the financial performance objectives in 1998 or 1999
thus none of the Warrants expired. Vested Warrants may be exercised at any time
until June 30, 2005, at which time all vested but unexercised Warrants will
expire. Other provisions of the Warrant notwithstanding, the Warrant shall
become exercisable immediately upon a Change of Control, as defined in the
Warrant Agreement.
In February 1989, the Company issued warrants to purchase 100,000 shares of
Common Stock each to Jose E. Kauachi, the Company's Chairman of the Board and
William F. Donovan, M.D., a then member of the Board. These warrants were issued
as compensation for services rendered and for each individual's personal
guarantee of corporate debt and other obligations. By amendments effective in
February 1994 and 1995, the expiration date of the warrants was extended to
February 22, 1999 and the exercise price was adjusted from $1.75 to the then
market value of $2.125 per share. Such warrants were not exercised on February
22, 1999 and as such have expired.
STOCK OPTIONS - The Company has two stock option plans, the 1988 Stock Option
Plan (the "1988 Plan") and the 1997 Long Term Incentive Plan (the "1997 Plan"),
that provide for the granting of either incentive stock options ("ISO"),
non-qualified stock options ("NQO") and stock appreciation rights to key
employees, non-employee members of the Company's Board of Directors and
consultants. Individual option vesting and related terms are set by the Board of
Directors. All individual option grants generally vest over time or based on
pre-determined performance targets. Both plans provide that ISOs may not be
granted at less than fair market value and NQOs cannot be granted at less than
85% of fair market value as of the date of grant. There are a total of 1,000,000
shares and 2,500,000 available for grant in the 1988 Plan and the 1997 Plan,
respectively. As of December 31, 1999, options to purchase 50,000 shares of
Common Stock were outstanding under the 1988 Plan at exercise price of $2.50 per
share, 50,000 were exercisable and no shares were available for future grant.
Options to purchase 892,000 shares of Common Stock were outstanding under the
1997 Plan at exercise prices of $0.80 to $8.38 per share, 246,000 were
exercisable and 1,608,000 were available for future grant.
40
<PAGE> 41
The following summarizes the activity for the 1999 and 1998 option plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance, December 31, 1997 1,368,500 $ 4.99
Granted 682,500 $ 5.40
Exercised (89,750) $ 3.34
Expired or Forfeited (502,750) $ 5.66
----------
Balance, December 31, 1998 1,458,500 $ 3.71
----------
Granted 769,500 $ 0.90
Expired or Forfeited (1,286,000) $ 4.88
----------
Balance, December 31, 1999 942,000 $ 1.90
==========
Exercisable at December 31, 1999 296,000 $ 2.62
==========
Available for Future Grant 1,608,000
==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/99 CONTRACTUAL LIFE PRICE AT 12/31/99 PRICE
-------- ----------- ------------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$2.50 and
under 776,000 9.3 years $0.95 210,000 $1.27
$2.51 - $5.00 22,500 8.7 years $4.06
$5.01 - $7.50 67,000 6.7 years $5.22 62,000 $5.13
$7.51 + 76,500 7.9 years $8.00 24,000 $8.00
------- -------
942,000 296,000
======= =======
</TABLE>
41
<PAGE> 42
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for fixed options granted to Company employees. The Company's
pro forma information for the years ended December 31, 1999 and 1998 under the
fair value method of SFAS No. 123 is as follows (in thousands, except for
earnings per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss - as reported $ (9,895) $ (4,927)
Net loss - pro forma $ (10,017) $ (4,949)
Earnings per share - as reported:
Basic and Diluted $ (1.97) $ (1.16)
Earnings per share - pro forma:
Basic and Diluted $ (1.99) $ (1.16)
</TABLE>
42
<PAGE> 43
Options granted in 1999 and 1998 had weighted average fair values of $0.57 and
$2.16, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 81% 37%
Expected life 5 years 5 years
Risk-free interest rate 5.9% 4.7%
</TABLE>
As of December 31, 1999, non-employee options to purchase 35,000 shares of
Common Stock, granted under certain other agreements, were outstanding at an
exercise prices of $5.00 per share, all of which were vested.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS - As of December 31, 1999, the Company had capital expenditure
purchase commitments outstanding of approximately $2,185,000 associated with the
construction of an ambulatory surgery center in Louisiana.
PROFESSIONAL AND LIABILITY RISKS - In the ordinary course of its business, the
Company may be subject, from time to time, to claims and legal actions. While
the Company cannot predict the outcome of litigation actions, the Company
believes that all such claims and actions are either adequately covered by
insurance or will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
The Company and its affiliated medical groups maintain professional liability
insurance with respect to medical malpractice risks on a claims-made basis in
amounts believed to be customary and adequate. In conjunction with the
termination of its management agreement with the Houston musculoskeletal related
healthcare delivery system, the Company purchased an unlimited extended
reporting period endorsement ("tail coverage") for itself and all Houston, Texas
based medical and ancillary services which had been under its management through
November 30, 1997. Management is not aware of any outstanding claims or
unasserted claims likely to be asserted against it or its affiliated medical
groups which would have a material impact on the Company's financial position or
results of operation.
43
<PAGE> 44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the Company's fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the Company's fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the Company's fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the Company's fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- ------------- --------
<S> <C> <C>
2.1 Stock Purchase Agreement by and among Integrated
Orthopaedics, Inc., Kenneth J. Cavanaugh, M.D., Thomas
J. Darrah, M.D., Robert E. FitzGibbons, M.D., Gerald R.
Rupp, M.D., and Samuel E. Smith, M.D. dated March 12, 1998. (11)Exhibit 2.4
2.2 Stock Purchase and Sale Agreement by and between Integrated
Orthopaedics, Inc. and Merritt Orthopaedic Associates, P.C.,
dated July 17, 1998. (12)Exhibit 2.4
3.1 Articles of Incorporation of the Company, as
amended to date. (7)Exhibit 3.1
3.2 Bylaws of the Company, as amended to date. (10)Exhibit 3.2
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C> <C>
4.1 Certificate of Designation and Determination of rights and
Preferences of Cumulative Convertible Preferred Stock,
Series A of the Company. (9)Exhibit 4.01
4.2 Certificate of Designation, Rights and Preferences of Series B
Convertible, Non-Redeemable Preferred Stock of the
Company. (9)Exhibit 4.02
4.3 Warrant Agreement dated as of December 12, 1997, by and
Among the Company, FW Integrated Orthopaedics Investors,
L.P. and FW Integrated Orthopaedics Investors II, L.P. (9)Exhibit 4.03
4.4 Warrant Certificate dated December 12, 1997, issued to
FW Integrated Orthopaedics Investors, L.P. (9)Exhibit 4.04
4.5 Warrant Certificate dated December 12, 1997, issued to
FW Integrated Orthopaedics Investors II, L.P. (9)Exhibit 4.05
4.6 Specimen of Common Stock Certificate, $.001
par value, of the Company. (1)Exhibit 4.1
10.1 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America. (2)Exhibit 10.1*
10.2 Amendment of 1988 Stock Option Plan. (3)Exhibit 10.2*
10.3 Administrative Services Agreement between DRCA Houston
Clinics, Inc. and the Company dated effective
August 1, 1993. (4)Exhibit 10.57
10.4 Incentive Stock Option Agreement between the Company and
William F. Donovan, M.D. dated February 2, 1995. (5)Exhibit 10.85*
10.5 Investment Agreement by and between the Company and
Chartwell Capital Investors, L.P. dated April 12, 1996. (6)Exhibit 10.50
10.6 Executive Employment Agreement between the Company and
Jose E. Kauachi dated November 15, 1997 (10)Exhibit 10.11
10.7 Termination of Employment Agreement between the Company
and Jose Kauachi dated December 12, 1997. (10)Exhibit 10.12
10.8 Consulting Agreement between the Company and Jose E.
Kauachi dated December 12, 1997. (10)Exhibit 10.14
10.9 Termination and Release Agreement between the Company
and Jose E. Kauachi dated December 31, 1997 (10)Exhibit 10.15
10.10 Integrated Orthopaedics, Inc.'s 1997 Long Term Incentive
Plan (10)Exhibit 10.16
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C> <C>
10.11 Securities Purchase Agreement dated as of December 12,
1997 by and among the Company, FW Integrated Orthopaedics
Investors, L.P., FW Integrated Orthopaedics Investors II,
L.P. and certain other signatories (9)Exhibit 99.01
10.12 Registration Rights Agreement dated as of December 12, 1997,
by and among the Company, FW Integrated Orthopaedics
Investors, L.P. and FW Integrated Orthopaedics Investors II, L.P. (9)Exhibit 99.02
10.13 Management Services Agreement effective September 22, 1997
Among Integrated Orthopaedics, Inc., IOI Management Services
of Connecticut, Inc., Merritt Orthopaedic Associates, P.C.,
Patrick J. Carolan, M.D., and Mark E. Wilchinsky, M.D. (8)Exhibit 1
10.14 Agreement to Change Effective Date from September 22, 1997
to October 1, 1997, effective September 29, 1997 among
Integrated Orthopaedics, Inc., IOI Management Services of
Connecticut, Inc., Merritt Orthopaedic Associates, P.C., Patrick
J. Carolan, M.D., Mark E. Wilchinsky, M.D., Beverly Carolan,
M.D., and Girard J. Girasole, M.D. (8)Exhibit 2
10.15 Amendment, effective July 17, 1998, to Mangement Services
Agreement effective September 22, 1997, among Integrated
Orthopaedics, Inc., IOI Management Services of
Connecticut, Inc., Merritt Orthopaedic Associates, P.C., Patrick
J. Carolan, M.D. and Mark E. Wilchinsky, M.D. (12)Exhibit 10.28
10.16 $65 Million Revolving Credit Agreement dated as of
July 10, 1998, among Integrated Orthopaedics, Inc.,
Borrower, Nationsbank, N.A., Administrative Agent,
and the Lenders named therein. (12)Exhibit 10.29
10.17 Executive Employment Agreement between the Company and
Douglas P. Badertscher dated September 23, 1999. (15)Exhibit 10
10.18 Executive Employment Agreement between the Company and
J. Rodney Seay dated September 23, 1999. (15)Exhibit 10
10.19 Asset Purchase Agreement dated January 27, 2000, by and
between IOI Management Services of Colorado, Inc. and
Front Range Orthopedic Clinic, P.C. (16)Exhibit 10.1
10.20 Asset Purchase Agreement dated January 27, 2000, by and
between IOI Management Services of Colorado, Inc. and
FROC, P.C. (16)Exhibit 10.2
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C>
10.21 Agreement to terminate the Management Agreement effective
as of December 31, 1999, by and between FROC, P.C. and IOI
Management Services of Colorado, Inc. (16)Exhibit 10.3
10.22 Asset Purchase Agreement dated April 12, 2000, by and
between IOI Management Services of Pennsylvania, Inc. and
Lancaster Orthopedic Group, P.C. (17)Same
10.23 Agreement to Terminate the Management Agreement dated
April 12, 2000, by and between IOI Management Services of
Pennsylvania, Inc. and Lancaster Orthopedic Group, P.C. (17)Same
10.24 Amendment of Integrated Orthopaedics, Inc.'s 1997 (17)Same
Long Term Incentive Plan
11.1 Statement re computation of per share earnings as of
December 31, 1998. (14)Exhibit 11
11.2 Statement re computation of per share earnings as of
December 31, 1999. (17)Same
16 Letter on change in certifying accountant. (13)Exhibit 16
21 Subsidiaries of the Company. (17)Same
23.1 Consent of Ernst & Young LLP, Independent Auditors to
incorporation by reference of their report contained in
this Report on Form 10-KSB into the Company's Registration
Statement on Form S-8, Registration No. 33-42624, filed
with the Securities and Exchange Commission ("SEC") on
September 6, 1991, and the Company's Registration
Statement on Form S-8, Registration No. 333-50257, filed
with the SEC on April 16, 1998. (17)Same
27 Financial Data Schedule. (17)Same
</TABLE>
(1)Incorporated by reference to the Company's Annual Report on 10-K dated March
28, 1991 (under the exhibit number indicated in the column titled "Filed As").
(2)Incorporated by reference to the Doctors Rehabilitation Corporation of
America Registration Statement on Form 10, Registration No. 0-17006 (under the
exhibit number indicated in the column titled "Filed As").
(3)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/93 dated November 12, 1993 (under the exhibit number
indicated in the column titled "Filed As").
(4)Incorporated by reference to the Company's Annual Report on Form 10-KSB dated
March 30, 1994 (under the exhibit number indicated in the column titled "Filed
As").
47
<PAGE> 48
(5)Incorporated by reference to the Company's Annual Report on Form 10-KSB dated
March 30, 1995 (under the exhibit number indicated in the column titled "Filed
As").
(6)Incorporated by reference to the Company's Current Report on Form 8-K dated
December 31, 1996 (under the exhibit number indicated in the column titled
"Filed As").
(7)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 3/31/97 dated May 15, 1997 (under the exhibit number
indicated in the column titled "Filed As").
(8)Incorporated by reference to the Company's Current Report on Form 8-K dated
October 1, 1997 (under the exhibit number indicated in the column titled "Filed
As").
(9)Incorporated by reference to the Company's Current Report on Form 8-K dated
December 12, 1997 (under the exhibit number indicated in the column titled
"Filed As").
(10)Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended 12/31/97 dated March 27, 1998 (under the exhibit number indicated
in the column titled "Filed As").
(11)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 3/31/98 dated May 14, 1998 (under the exhibit number
indicated in the column titled "Filed As").
(12)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended 9/30/98 dated November 14, 1998 (under the exhibit number
indicated in the column titled "Filed As").
(13)Incorporated by reference to the Company's Current Report on Form 8-K dated
February 10, 1998 (under the exhibit number indicated in the column titled
"Filed As").
(14)Incorporated by reference to the Company's Annual report on Form 10-KSB
dated March 30,1999 (under the exhibit number indicated in the column titled
"Filed As").
(15)Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1999 dated November 15, 1999 (under the
exhibit number indicated in the column titled "Filed As").
(16)Incorporated by reference to the Company's Current Report on Form 8-K dated
February 11, 2000 (under the exhibit number indicated in the column titled
"Filed As").
(17)Filed herewith.
(b) Reports on Form 8-K
None.
48
<PAGE> 49
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ Laurie Hill Gutierrez
--------------------------------------------------
Laurie Hill Gutierrez
Senior Vice President and Chief Financial Officer
Dated: April 14, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By /s/ Jose E. Kauachi Chairman of the Board and April 14, 2000
----------------------------------------- President (Principal Executive Officer)
JOSE E. KAUACHI
By: /s/ Laurie Hill Gutierrez Senior Vice President, Chief April 14, 2000
----------------------------------------- Financial Officer, Treasurer
LAURIE HILL GUTIERREZ and Secretary (Principal Financial
Officer, Principal Accounting Officer)
By /s/ Steven B. Gruber Director April 14, 2000
-----------------------------------------
STEVEN B. GRUBER
By: /s/ Clifford R. Hinkle Director April 14, 2000
-----------------------------------------
CLIFFORD R. HINKLE
By: /s/ Mark A. Wolfson Director April 14, 2000
-----------------------------------------
MARK A. WOLFSON
By: /s/ Scott J. Hancock Director April 14, 2000
-----------------------------------------
SCOTT J. HANCOCK
</TABLE>
49
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE FILED AS
- ----------- ------------- --------
<S> <C> <C>
10.22 Asset Purchase Agreement dated April 12, 2000, by and
between IOI Management Services of Pennsylvania, Inc. and
Lancaster Orthopedic Group, P.C. (17)Same
10.23 Agreement to Terminate the Management Agreement dated
April 12, 2000, by and between IOI Management Services of
Pennsylvania, Inc. and Lancaster Orthopedic Group, P.C. (17)Same
10.24 Amendment of Integrated Orthopaedics, Inc.'s 1997 (17)Same
Long Term Incentive Plan
11.2 Statement re computation of per share earnings as of
December 31, 1999. (17)Same
21 Subsidiaries of the Company. (14)Exhibit 21
23.1 Consent of Ernst & Young LLP, Independent Auditors to
incorporation by reference of their report contained in
this Report on Form 10-KSB into the Company's Registration
Statement on Form S-8, Registration No. 33-42624, filed
with the Securities and Exchange Commission ("SEC") on
September 6, 1991, and the Company's Registration
Statement on Form S-8, Registration No. 333-50257, filed
with the SEC on April 16, 1998. (14)Exhibit 23.1
27 Financial Data Schedule. (14)Exhibit 27
</TABLE>
<PAGE> 1
EXHIBIT 10.22
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of April 12, 2000, to be effective as of 11:59 p.m. on March 31, 2000,
by and among Lancaster Orthopedic Group, P.C., a Pennsylvania professional
corporation ("Buyer"), the shareholders of Buyer who are signatories hereto
(collectively, the "Shareholders"), IOI Management Services of Pennsylvania,
Inc., a Pennsylvania corporation ("Seller), and Integrated Orthopaedics, Inc., a
Texas corporation ("Parent").
RECITALS
A. Seller is the owner of certain assets as identified in Section 1.1
of this Agreement.
B. Buyer desires to purchase such assets from Seller, and Seller is
willing to sell such assets to Buyer, in each case on the terms and subject to
the conditions contained in this Agreement.
C. Parent is the owner of all the issued and outstanding shares of
capital stock of Seller, and is entering into this Agreement as a condition to
the willingness of Buyer to enter into this Agreement.
D. The Shareholders are the owners, in the aggregate, of all the issued
and outstanding shares of capital stock of Buyer, and are entering into this
Agreement, strictly for the purposes described in Sections 4.2 and 4.3 hereof,
as a condition to the willingness of Seller to enter into this Agreement.
NOW, THEREFORE, for and in consideration of the premises and promises
herein contained, and for other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties, intending to be legally bound hereby,
agree as follows:
ARTICLE I
THE TRANSACTION
1.1. Purchase and Sale of Assets. Subject to the terms and conditions
contained herein, Seller hereby sells, transfers, assigns and delivers to Buyer,
and Buyer hereby purchases from Seller, all right, title and interest in and to
the following assets (collectively, the "Assets"):
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(a) the furniture, fixtures and equipment (excluding Seller's
video/telephone conferencing equipment) and supplies of Seller, including
without limitation those items listed on Exhibit "A" hereto;
(b) all outstanding accounts receivable of Seller, as
previously purchased by Seller from Buyer; and
(c) all rights and obligations of Seller, arising on or after
April 1, 2000, under the contracts listed on Exhibit "B" hereto (collectively,
the "Contracts").
1.2. Payment of Purchase Price. As payment in full for all the Assets,
Buyer is delivering to Seller, simultaneously with the execution and delivery of
this Agreement, a cash payment in the amount of Two Million Four Thousand Five
Hundred Nine Dollars ($2,004,509).
1.3. No Assumption of Liabilities. With the exception of the
obligations arising under the Contracts on or after April 1, 2000, Buyer is not
assuming, and shall not be liable for, any obligations, liabilities or debts of
Seller, known or unknown, absolute or contingent.
ARTICLE II
SELLER'S AND PARENT'S REPRESENTATIONS AND WARRANTIES
Seller and Parent, jointly and severally, hereby warrant and represent
to Buyer, as of the date of this Agreement, as follows:
2.1. Legal Authority. Seller is a business corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania. Seller has all necessary corporate power and authority to enter
into the transactions contemplated hereby.
2.2. Execution, Delivery and Performance of Agreement; Authority.
Seller is not in violation of its Articles of Incorporation or Bylaws, or of any
Contract or other agreement to which Seller is a party. The execution, delivery
and performance of this Agreement by Seller will not, with or without the giving
of notice or the passage of time, or both, (i) violate, conflict with, result in
a default, right to accelerate or loss of rights under, or result in the
creation of any "Lien" (as defined herein) pursuant to, any provision of
Seller's Articles of Incorporation or Bylaws or any agreement, contract, note,
mortgage, indenture, lease, instrument, permit,
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<PAGE> 3
concession, franchise or license to which Seller is a party or by which it or
its properties or assets may be bound or affected (except to the extent a
violation of a "Lease" (as such term is defined in Section 4.2 hereof) is caused
by the failure to obtain the consents to be obtained under Section 4.2 of this
Agreement), or, (ii) conflict with or result in any violation, in any material
respect, of any statute, law, rule, regulation, judgment, order, decree or
ordinance (collectively, "Law") applicable to Seller, its properties or assets.
Seller has the full power and authority to enter into this Agreement and to
carry out the transactions contemplated hereby. All proceedings required to be
taken by Seller to authorize the execution, delivery and performance of this
Agreement and the agreements relating hereto have been properly taken. This
Agreement constitutes a valid and binding obligation of Seller, enforceable
against Seller in accordance with its terms.
2.3. Ownership; Condition of Assets. Seller has, and is transferring to
Buyer pursuant to this Agreement, good and valid title to all the Assets, free
and clear of all security interests, liens, claims, pledges, agreements,
options, or other encumbrances of any nature whatsoever (collectively, "Liens"),
except for the Lien in favor of Copelco Capital, Inc. evidenced by the UCC-1
Financing Statement filed with the Secretary of the Commonwealth of Pennsylvania
on February 22, 1999 (Filing Number 29940451), and, if applicable, any related
filings in Lancaster County, Pennsylvania. The tangible Assets are in good
condition and repair, and have been maintained and serviced as necessary in the
normal course of business.
2.4. Consents. With the exception of consents to the assignment of the
rights and obligations of Seller under the "Leases" (as such term is defined in
Section 4.2 hereof), Seller has obtained in writing all consents by third
parties that are required for the consummation of the transactions contemplated
hereby, and has provided to Buyer copies of such executed consents.
2.5. No Regulatory Action. No action, consent or approval by, or filing
with, any federal, state, municipal, foreign or other court or governmental or
administrative body or agency, or any other regulatory body, is required in
connection with the execution and delivery by Seller of this Agreement or the
consummation by Seller of the transactions contemplated hereby.
2.6. No Claims. There is no claim, action, suit, proceeding,
arbitration, investigation or inquiry, of which Seller has notice or is
otherwise aware, before any federal,
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<PAGE> 4
state, municipal, foreign or other court or governmental or administrative body
or agency, any securities or commodities exchange, other regulatory body or any
private arbitration tribunal now pending or threatened against or relating to
Seller that would adversely affect the ability of Seller to consummate the
transactions contemplated by this Agreement.
2.7. Disclosure. No statement by Seller contained in this Agreement or
the Exhibits attached hereto contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made.
ARTICLE III
BUYER REPRESENTATIONS AND WARRANTIES
Buyer hereby warrants and represents to Seller, as of the date of this
Agreement, as follows:
3.1. Legal Authority. Buyer is a professional corporation duly
organized, validly existing and in good standing under the laws of the State of
Pennsylvania. Buyer has all necessary corporate power and authority to enter
into the transactions contemplated hereby.
3.2. Execution Delivery and Performance of Agreement; Authority. Buyer
is not in violation of its Articles of Incorporation or Bylaws, or of any
contract or other agreement to which Buyer is a party. The execution, delivery,
and performance of this Agreement by Buyer will not, with or without the giving
of notice or the passage of time, or both, (i) violate, conflict with, result in
a default, right to accelerate or loss of rights under or result in the creation
of any Lien pursuant to, any provision of Buyer's Articles of Incorporation or
Bylaws or any agreement, contract, note, mortgage, indenture, lease, instrument,
permit, concession, franchise or license to which Buyer is a party or by which
it or its properties or assets may be bound or affected, or (ii) conflict with
or result in any violation, in any material respect, of any Law applicable to
Buyer, its properties or assets. Buyer has the full power and authority to enter
into this Agreement and to carry out the transactions contemplated hereby. All
proceedings required to be taken by Buyer to authorize the execution, delivery
and performance of this Agreement and the agreements relating hereto have been
properly take. This Agreement constitutes a valid and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms.
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3.3. No Regulatory Action. No action, consent or approval by, or filing
with, any federal, state, municipal, foreign or other court or governmental or
administrative body or agency, or any other regulatory body is required in
connection with the execution and delivery by the Buyer of this Agreement or the
consummation by the Buyer of the transactions contemplated hereby.
3.4. No Claim. There is no claim, action, suit, proceeding,
arbitration, investigation or inquiry of which Buyer has notice or is otherwise
aware, before any federal, state. municipal, foreign or other court or
governmental or administrative body or agency, any securities or commodities
exchange, other regulatory body, or any private arbitration tribunal now
pending, or threatened against or relating to Buyer that would adversely affect
the ability of Buyer to consummate the transactions contemplated by this
Agreement.
3.5. Disclosure. No statement by Buyer contained in this Agreement or
the Exhibits attached hereto contains any untrue statement of a material fact or
omits to state material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances under which they
were made.
ARTICLE IV
OTHER COVENANTS AND AGREEMENTS
4.1. Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its best efforts to take or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws, rules and regulations to
consummate and make effective the transactions contemplated by this Agreement.
If at any time hereafter Seller shall be advised that any further deeds,
assignments or assurances in law or in any other things are necessary, desirable
or proper to vest, perfect or confirm in Buyer title to any of the Assets,
Seller agrees that it shall execute and deliver all such proper deeds,
assignments and assurances in law and do all things necessary, desirable or
proper to vest, perfect or confirm title to such Assets in Buyer and to
otherwise carry out the purpose of this Agreement.
4.2. Leases. The parties acknowledge that, notwithstanding anything to
the contrary contained herein, consents to the assignment of the rights and
obligations of Seller,
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<PAGE> 6
arising on or after April 1, 2000, under the following leases have not been
obtained as of the date hereof, but are expected to be obtained by Buyer at a
future date: (a) the capital lease, dated February 4, 1999, for imaging
equipment, between Copelco Capital, Inc., as lessor, and Seller, as lessee,
including without limitation all "Equipment Schedules" thereto (the "Copelco
Lease"); (b) the Lease Agreement, dated May 6, 1991 between Granite Properties,
as landlord, and Seller, as tenant, and any and all amendments thereto; (c) the
Office Sharing Agreement, dated July 1, 1995 between Charles M. Evans, as
landlord, and Seller, as tenant, and any and all amendments thereto; and, (d)
the Lease, dated April 27, 1988 between Sugo Associates, as landlord, and
Seller, as tenant, and any and all amendments thereto. The leases described in
the immediately preceding sentence, together with the Sublease Agreement, dated
May 15, 1997 between Seller, as sublessor, and HealthSouth Holdings, Inc., as
sublessee, and any and all amendments thereto, are referred to collectively
herein as the "Leases". Buyer shall use its best efforts to obtain the
applicable consents required to the assignment of the Leases as described herein
as soon as possible after the date hereof; provided, however, that if one or
more of the lessors under the Leases are unwilling to agree to such an
assignment, the parties agree that they shall cooperate to cause Buyer to have
the sole economic benefit and the right to use and all other rights of Seller
with respect to the equipment and real estate that is the subject of the Leases
at all times on or after April 1, 2000. Buyer agrees that it shall be
responsible for all obligations and liabilities of Seller and Parent arising on
or after April 1, 2000 under each of the Leases. Buyer and the Shareholders,
jointly and severally, shall indemnify and hold harmless Seller and Parent of
and from all such obligations and liabilities of Seller or Parent arising on or
after April 1, 2000 under the Leases.
4.3. Sale of Assets. Buyer and the Shareholders, jointly and severally,
covenant and agree that, during the five (5) year period following the date
hereof, Buyer shall not enter into any transaction in which all or substantially
all the assets of Buyer are transferred, assigned or sold to any other person or
entity, unless the transferee, assignee or buyer in such transaction agrees in
writing to assume the obligations of Buyer under this Agreement.
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ARTICLE V
SURVIVAL AND INDEMNIFICATION
5.1. Survival. All representations, warranties, covenants, and
agreements contained in this Agreement or in any document delivered pursuant
hereto shall be deemed to be material and to have been relied upon by the
applicable party hereto. All representations, warranties, covenants, and
agreements contained herein shall survive the Closing and be fully effective and
enforceable for a period of five (5) years following the date hereof. Any claim
for indemnification asserted in writing during such survival period shall
survive until resolved or judicially determined.
5.2. Seller's and Parent's Indemnification. Seller and Parent, jointly
and severally, shall indemnify, hold harmless and defend Buyer, and Buyer's
shareholders, officers, directors, representatives, subsidiaries, affiliates,
successors, assigns, heirs and devisees, from and against all damages, losses
(including court costs and reasonable attorneys' fees at all levels of trial and
through all levels of appeal and expenses and costs of investigation), suits,
actions, claims, deficiencies, liabilities or obligations (collectively,
"Losses") related to, caused by or arising from (i) any misrepresentation,
breach of warranty or failure to fulfill any covenant or agreement of Seller
contained herein or in any agreement or other document delivered pursuant
hereto; and (ii) any and all claims of third parties made based upon facts
alleged that, if true, would constitute such a misrepresentation, breach or
failure.
5.3. Buyer' Indemnification. Buyer shall indemnify, hold harmless and
defend Seller and Parent, and their respective shareholders, officers,
directors, representatives, subsidiaries, affiliates, successors, assigns, heirs
and devisees, from and against all Losses related to, caused by or arising from
(i) any misrepresentation, breach of warranty or failure to fulfill any covenant
or agreement of Buyer contained herein or in any agreement or other document
delivered pursuant hereto, and (ii) any and all claims of third parties made
based upon facts alleged that, if true, would constitute such a
misrepresentation, breach or failure.
5.4. Indemnification Procedure; Defense Against Asserted Claims. Any
party seeking indemnification (the "Indemnified Party") shall give written
notice to the indemnifying party or parties (the "Indemnifying Party") of the
facts and the circumstances giving rise to any such claim (the "Notice"). The
Indemnified Party shall not settle or compromise any claim by a
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<PAGE> 8
third party for which the Indemnified Party is entitled to indemnification
hereunder without the prior written consent of the Indemnifying Party (which
consent shall not be unreasonably withheld), unless legal action shall have been
instituted against the Indemnified Party and the Indemnifying Party shall not
have taken reasonable control of such suit within fifteen (15) days after
notification thereof as provided herein. In connection with any claim giving
rise to indemnification hereunder resulting from or arising out of any claim or
legal proceeding by a person other than the Indemnified Party, the Indemnifying
Party may, upon notice to the Indemnified Party, assume the defense of any such
claim or legal proceeding without prejudice to the right of the Indemnifying
Party thereafter to contest its obligation to indemnify the Indemnified Party in
respect to the claims asserted therein and, in such a case, the Indemnifying
Party shall select counsel (subject to the approval of the Indemnified Party,
which approval shall not be unreasonably withheld) to conduct the defense in
such claims and legal proceedings and at its sole cost and expense shall take
all steps necessary in the defense or settlement thereof. The Indemnifying Party
shall not consent to a settlement of, or the entry of any judgment arising from,
any claim or legal proceeding, without the prior written consent of the
Indemnified Party, unless the Indemnifying Party admits in writing its liability
to hold the Indemnified Party harmless from and against any loss, damages,
expenses and liabilities arising out of such settlement. The Indemnified Party
shall be entitled to participate in the defense of any such action with its own
counsel and at its own expense. If the Indemnifying Party does not assume the
defense of any such claim or litigation resulting therefrom in accordance with
the terms hereof, the Indemnified Party may defend such claim or litigation in
such a manner as it may deem appropriate, including settling such claim or
litigation, after giving notice of the same to the Indemnifying Party, on such
terms as the Indemnified Party may deem appropriate and after action by the
Indemnified Party seeking indemnification from the Indemnifying Party in
accordance with the provisions of this Section; in such case, the Indemnifying
Party shall not be entitled to question the manner in which the Indemnified
Party defended such claim or litigation or the amount or nature of any such
settlement. In the event of a claim by a third party, the Indemnified Party
shall cooperate with the Indemnifying Party in the defense of such action
(including making a personal contact with the third party if deemed beneficial)
and the relevant records of each party shall be made available on a timely
basis.
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ARTICLE VI
GENERAL PROVISIONS
6.1. Attorneys' fees. In the event any adversarial legal action arises
between any of the parties as a result of this Agreement, the prevailing party
shall be entitled to recover from the other party its reasonable attorney's fees
and costs incurred at all pre-trial, trial and appellate proceedings,
6.2. Parties in Interest. This Agreement and all of the terms,
covenants and conditions herein shall bind and inure to the benefit of the
parties named herein and their respective permitted successors and assigns. No
party may assign its rights and/or duties hereunder without the prior written
consent of the other parties.
6.3. Entire Agreement and Modification. This Agreement and the Exhibits
attached hereto contain the entire understanding among the parties with respect
to the transactions contemplated hereby, and no representations, warranties or
agreements have been made or, if made, have been relied upon by any party except
those specifically referred to herein. This Agreement may be amended, modified
or supplemented only by written instrument signed by all of the parties hereto.
6.4. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal substantive laws of the Commonwealth of
Pennsylvania. Venue with respect to any legal action arising under or pursuant
to this Agreement shall be in Lancaster County, Pennsylvania.
6.5. Severability. If any provision of this Agreement is found to
violate any statute, regulation, rule, order or decree of any governmental
authority court, agency or exchange, such invalidity shall not be deemed to
affect any other provision hereof or the validity of the remainder of this
Agreement, and such invalid provision shall be deemed deleted from this
Agreement to the minimum extent necessary to cure such violation.
6.6. Rights Cumulative. All rights contained in this Agreement are
cumulative and are in addition to all other rights and remedies that are
otherwise available, pursuant to the terms of this Agreement or applicable law.
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6.7. Notices. All notices and other communications under this Agreement
shall be given in writing or by overnight delivery service, charges prepaid, or
by registered or certified mail, return receipt requested, postage prepaid, or
hand delivered, personally addressed to the parties set forth below at the
stated addresses or at such other address as any party shall designate in a
notice to the other.
To Seller or Parent: Integrated Orthopaedics, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
Attention: Doug P. Badertscher,
Senior Vice President/Chief Operating Officer
With a copy to: McDermott, Will & Emery
Miami Center, 22nd Floor
201 South Biscayne boulevard
Miami, Florida 33131-4336
Attention: Ira J. Coleman, Esq.
To Buyer: Lancaster Orthopedic Group, P.C.
231 Granite Run Drive
Lancaster, PA 17601-6816
Attention: President
With a copy to: Stevens & Lee, P.C.
One Penn Square
PO Box 1594
Lancaster, PA 17608-1594
Attention: James W. Saxton, Esq.
All notices shall be deemed effective when received, or if delivery is
refused, on the date of such refusal.
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6.8. Waiver. A waiver of any breach or violation of any term, provision
or covenant contained herein shall not be deemed a continuing waiver, or a
waiver of any future or past breach or violation, or a waiver of any other term,
provision or covenant of this Agreement. All waivers must be in writing.
6.9. Confidentiality. Each of the parties hereto agrees to keep all
terms of this Agreement confidential, except as otherwise mutually agreed in
writing; except to the extent disclosure is required by applicable law or by
applicable regulatory filings; and, except with respect to communications the
undersigned has with: (a) its advisors, such as accountants or attorneys, to
assist in interpreting or enforcing the terms of this Agreement and the
documents and agreements executed pursuant to the terms of this Agreement, and
(b) third parties as necessary to carry out the terms of this Agreement as long
as the undersigned divulges only the minimal information necessary to carry out
the terms of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
BUYER:
LANCASTER ORTHOPEDIC GROUP, P.C.
By:
--------------------------------------------
Print Name:
Print Title:
SELLER:
IOI MANAGEMENT SERVICES OF PENNSYLVANIA, INC.
By:
--------------------------------------------
Print Name:
Print Title:
PARENT:
INTEGRATED ORTHOPAEDICS, INC.
By:
--------------------------------------------
Print Name:
Print Title:
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SHAREHOLDERS:
------------------------------
WAYNE R. CONRAD, M.D.
------------------------------
J. PAUL LYET, M.D.
------------------------------
TIMOTHY P. TYMON, M.D.
------------------------------
RAYMOND E. PEART, M.D.
------------------------------
I. STANLEY PORTER, M.D.
------------------------------
GARY M. ZARTMAN, M.D.
------------------------------
MARK K. PEREZOUS, M.D.
------------------------------
GREGG J. FASULO, M.D.
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EXHIBIT "A"
SELLER'S FURNITURE, FIXTURES, EQUIPMENT AND SUPPLIES
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EXHIBIT "B"
CONTRACTS
Capital Lease, dated February 4, 1999, for imaging equipment, between Copelco
Capital, Inc., as lessor, and Seller, as lessee
Lease Agreement, dated May 6, 1991 between Granite Properties, as landlord, and
Seller, as tenant
Office Sharing Agreement, dated July 1, 1995 between Charles M. Evans, as
landlord, and Seller, as tenant
Lease, dated April 27, 1988 between Sugo Associates, as landlord, and Seller, as
tenant
Sublease Agreement, dated May 15, 1997 between Seller, as sublessor, and
HealthSouth Holdings, Inc., as sublessee
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<PAGE> 1
EXHIBIT 10.23
AGREEMENT TO TERMINATE THE MANAGEMENT AGREEMENT
This Agreement to Terminate the Management Agreement ("Termination
Agreement"), executed on April 12, 2000, to be effective as of 11:59 p.m. on
March 31, 2000 (the "Effective Date"), is made by and among IOI MANAGEMENT
SERVICES OF PENNSYLVANIA, INC., a Pennsylvania business corporation ("IOI
Management Corporation"), and LANCASTER ORTHOPEDIC GROUP, P.C., a Pennsylvania
professional corporation ("Medical Practice") (the parties, at times, are
collectively referred to herein as the "Parties").
RECITALS
WHEREAS, currently IOI Management Corporation and Medical Practice are
parties to that certain Management Services Agreement dated December 15, 1997,
pursuant to which IOI Management Corporation provides management services to
Medical Practice (the "Management Agreement"); and
WHEREAS, Medical Practice desires to, and IOI Management Corporation
agrees to, terminate the Management Agreement, and in consideration thereof,
Medical Practice agrees to and shall pay to IOI Management Corporation One
Million Nine Hundred Fifty Thousand Dollars ($1,950,000) upon the execution and
delivery of this Termination Agreement, as described further in Section 2
hereinbelow.
NOW, THEREFORE, for and in consideration of the mutual covenants and
consideration set forth herein, the receipt and sufficiency of which is
acknowledged by all the Parties hereto, the Parties hereto agree as follows:
TERMS AND CONDITIONS
1. Recitals. The above recitals are true and correct as stated and are
incorporated herein by this reference.
2. Termination of Management Agreement. Each of IOI Management Corporation
and Medical Practice agree that effective as of the Effective Date, the
Management Agreement shall be terminated, null and void and of no further force
and effect. In consideration for IOI Management Corporation's agreement to
terminate the Management Agreement, Medical Practice agrees to pay to IOI
Management Corporation One Million Nine Hundred Fifty Thousand Dollars
($1,950,000), payable by wire transfer to IOI Management Corporation's
designated account upon the execution and delivery of this Termination
Agreement. Medical Practice understands and agrees that as of the Effective
Date, neither IOI Management Corporation nor its parent corporation, Integrated
Orthopaedics, Inc. ("IOI"), has any duty or obligation to provide any services
of any nature whatsoever to Medical Practice, except as otherwise expressly
stated in this Termination Agreement. Furthermore, Medical Practice understands
and agrees that as of the Effective Date, IOI Management Corporation and IOI
shall have no liability whatsoever with respect to "Medical Practice Expenses"
(as defined in the Management Agreement) payable after the Effective Date and
that as of the Effective Date, neither IOI Management Corporation nor IOI shall
have any liability with respect to any obligations, costs or expenses relating
to operation of Medical Practice.
<PAGE> 2
3. March Management Fee. On or before April 20, 2000, IOI Management
Corporation and Medical Practice shall agree upon (i) the amount of all "Medical
Practice Expenses" (as such term is defined in the Management Agreement)
incurred by Medical Practice or IOI Management Corporation with respect to the
calendar month of March, 2000, and (ii) the amount of the "Management Fee" (as
such term is defined in the Management Agreement) due and payable to IOI
Management Corporation with respect to the calendar month March, 2000, and
Medical Practice shall make payment to IOI Management Corporation of the
appropriate amount due on account of such Management Fee by no later than the
close of business on April 20, 2000. Medical Practice shall have no obligation
to pay any Management Fee with respect to any period commencing on or after
April 1, 2000.
4. Financial Packages/Tax Filings. IOI Management Corporation shall
prepare and deliver to Medical Practice, with respect to all periods ending on
or before March 31, 2000, such financial reporting packages, tax filings and
other items as IOI Management Corporation has previously prepared in the
ordinary course of business with respect to Medical Practice; provided, however,
that IOI Management Corporation shall have no obligation to prepare or file the
federal or state income tax returns of Medical Practice for the fiscal year
ended December 31, 1999. IOI Management Corporation represents and warrants to
Medical Practice that IOI Management Corporation has accrued on the books of
Medical Practice the estimated federal and state income tax liability of Medical
Practice for the 1999 fiscal year, and that IOI Management Corporation has
applied or will apply, on a timely basis, for an extension of time to file
Medical Practice's federal and state tax returns for the 1999 fiscal year, and
has made or will make to the Internal Revenue Service and Pennsylvania, on a
timely basis, all required estimated payments in connection therewith. IOI
Management Corporation shall make available to Medical Practice and its
representatives such information as is in the possession of IOI Management
Corporation and is reasonably necessary or appropriate in connection with the
preparation of the federal and state income tax returns of Medical Practice for
the fiscal year ended December 31, 1999.
5. Termination of Joint Policy Board. The parties agree that the "Joint
Policy Board" (as defined in the Management Agreement) is terminated as of the
Effective Date and that IOI Management Corporation's representatives on the
Joint Policy Board have resigned effective as of the Effective Date.
6. Accounts Payable Reconciliation. The Parties acknowledge that as of the
Effective Date, Medical Practice is responsible for payment of all payables of
Medical Practice. However, to ensure a smooth transition from the Effective Date
through the date of execution hereof, the Parties acknowledge that certain
procedures with respect to Medical Practice payables were followed and that, as
a result of such procedures, certain amounts need to be reimbursed to IOI
Management Corporation. In order to effectuate such reimbursement to IOI
Management Corporation and in order to reconcile outstanding Medical Practice
payables issues, the Parties acknowledge and agree as follows:
6.1 Medical Practice has three (3) existing bank accounts, described as
follows: (i) the local "Fulton" lockbox account ("Practice Account #1"); (2) the
local "Bank of Lancaster" lockbox account ("Practice Account #2"); and (3) the
Lancaster "Wells Fargo" account ("Practice Account #3"). Practice Account #3 is
a "zero" balance account that is automatically funded out of that certain IOI
Management Corporation corporate account (the "IOI Corporate Account").
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<PAGE> 3
6.2 Medical Practice acknowledges and agrees that during the period
commencing after the Effective Date and continuing through April 11, 2000: (i)
Medical Practice has paid certain of its accounts payable by cutting checks from
Practice Account #3, that such checks were automatically funded or will be
automatically funded out of the IOI Corporate Account, and that IOI Management
Corporation must be reimbursed for the total amount of all such checks; and (ii)
IOI Management Corporation has directly paid certain payables of Medical
Practice (the total amount of (i) and (ii) shall be referred to herein as the
"Check Funding Amount"). Furthermore, the Parties acknowledge and agree that the
payroll checks of Medical Practice to be disbursed on April 14, 2000, have
already been transmitted and funded from the IOI Corporate Account and/or
Practice Account #3. For this reason, Medical Practice agrees that IOI
Management Corporation must be reimbursed for the total amount of such payroll
funding (the "Payroll Funding Amount"). The Parties hereby agree and acknowledge
that the total of the Check Funding Amount and the Payroll Funding Amount equals
One Hundred Nineteen Thousand Four Hundred Seven Dollars and 49/100 Cents
($119,407.49) (the "Total Reimbursement Amount") and that IOI Management
Corporation shall be reimbursed for the Total Reimbursement Amount pursuant to
the procedures set forth below.
6.3 In order for IOI Management Corporation to receive reimbursement
for the Total Reimbursement Amount, the Parties agree that on the date of
execution hereof, IOI Management Corporation shall sweep the Total Reimbursement
Amount, and only the Total Reimbursement Amount, from Practice Account #1 and/or
Practice Account #2. After sweeping the Total Reimbursement Amount from such
practice accounts, IOI Management Corporation agrees that it shall no longer
have any access to Practice Account #1 nor Practice Account #2 and that Medical
Practice shall have all rights and obligations pertaining to Practice Account #1
and Practice Account #2 following the sweep of the Total Reimbursement Amount.
Following IOI Management Corporation's sweep of the Total Reimbursement Amount,
IOI Management Corporation shall immediately take all necessary steps to (i)
remove IOI Management Corporation, its officers, employees, agents and
representatives, as authorized signatories on Practice Account #1 and Practice
Account #2; and (ii) cause Medical Practice to have sole access to and signatory
authority with respect to Practice Account #1 and Practice Account #2.
6.4 With respect to Practice Account #3, the Parties agree that after
April 11, 2000, Medical Practice shall no longer have any access to and shall no
longer cut any checks from Practice Account #3. Following the execution hereof,
Medical Practice shall immediately take all necessary steps to (i) remove
Medical Practice, its officers, employees, agents and representatives, as
authorized signatories on Practice Account #3; and (ii) cause IOI Management
Corporation to have sole access to and signatory authority with respect to
Practice Account #3. IOI Management Corporation agrees not to close Practice
Account #3 until all checks that have been cut from such account prior to April
12, 2000, have cleared and agrees that the IOI Corporate Account shall continue
to fund Practice Account #3 until all such checks have cleared. The Parties
agree that IOI Management Corporation shall close Practice Account #3 once all
checks written off such account have cleared.
6.5 The Parties acknowledge and agree that Medical Practice has very
recently established a new Medical Practice checking account in its name and
that, commencing on the date of execution hereof, Medical Practice shall draft
checks for its accounts payable out of such new practice account. In connection
with such new account, the Parties acknowledge that Medical Practice will be
utilizing the "Acuity Program", and IOI Management Corporation
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agrees to provide Medical Practice with verbal assistance, as reasonably
requested by Medical Practice, with respect to implementing and operating the
Acuity Program in connection with Medical Practice's payments of its payables
through its new bank account. IOI Management Corporation agrees to provide such
verbal assistance for at least the sixty (60) day period directly following the
execution of this Termination Agreement.
6.6 With respect to that certain Sublease Agreement between IOI
Management Corporation and HealthSouth Holdings, Inc. ("HealthSouth"), the
Parties acknowledge that the original check for the sublease payment owed by
HealthSouth for February, 2000, was lost or misplaced, that HealthSouth
cancelled such original check, and that IOI Management Corporation never
received the sublease payment for February, 2000. The Parties also acknowledge
that HealthSouth delivered a replacement check for Fourteen Thousand Nine
Hundred Dollars and 87/100 Cents ($14,900.87) to Medical Practice to cover the
February, 2000 sublease payment. Medical Practice is currently in possession of
such replacement check and shall have the right to retain and deposit such check
into a Medical Practice account after the execution hereof. However, in order to
reimburse IOI Management Corporation for the amount of such check, the Parties
agree that on the date of execution hereof, IOI Management Corporation shall
sweep Fourteen Thousand Nine Hundred Dollars and 87/100 Cents ($14,900.87) from
Practice Account #1 and/or Practice Account #2 into the IOI Corporate Account.
7. Wide Area Network. For a period commencing on the Effective Date and
continuing for a period of sixty (60) days thereafter, IOI Management
Corporation will continue to grant Medical Practice access and linkage to the
"Wide Area Network" of IOI for the purposes for which Medical Practice currently
utilizes such network, including without limitation the accounts payable and
general ledger functions of Medical Practice and the maintenance of Medical
Practice's web site.
8. Plan Funding Issue. The Parties acknowledge and agree that the plan
administrator (the "Administrator") for IOI Management Corporation's 401(k) plan
is performing an audit of the funding made under such plan with respect to
certain employees for calendar year 1999. After completing the Administrator's
audit, the Administrator will deliver the results of such audit to Medical
Practice and/or IOI Management Corporation. If only one Party receives a copy of
the written results of such audit, such Party shall deliver a copy of same to
the other Party hereto. If as a result of such audit, the Administrator
determines that IOI Management Corporation underpaid certain amounts with
respect to funding the plan, then IOI Management Corporation or IOI will pay any
such determined amounts to the plan, as determined by the Administrator. If as a
result of the audit, the Administrator determines that IOI Management
Corporation overpaid certain amounts with respect to funding the plan, then
Medical Practice shall pay to IOI Management Corporation or make arrangements
for IOI Management Corporation to receive the overpayment amounts, as determined
by the Administrator.
9. Miscellaneous.
9.1 Attorneys' Fees. If any Party institutes litigation or arbitration
to interpret or enforce this Termination Agreement, or to recover damages for
breach of this Termination Agreement, the non-prevailing party shall bear the
attorneys' fees and litigation costs (including any attorneys' fees and costs
for appeals) incurred by the prevailing party.
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9.2 Further Acts. Each Party will do such further acts, including
executing and delivering additional agreements or instruments as the other may
reasonably require, to consummate, perform, evidence or confirm the covenants
and conditions contained in this Termination Agreement.
9.3 Applicable Law and Venue. This Termination Agreement shall be
construed, interpreted and enforced according to the laws of the State of
Pennsylvania without giving effect to the laws of the domicile of any
nonresident party, and venue for any action arising hereunder shall be in
Lancaster County, Pennsylvania.
9.4 Integration. The making, execution and delivery of this Termination
Agreement by the Parties has not been induced by any representations,
statements, warranties, or agreements other than those expressed in this
Termination Agreement. Except as otherwise set forth in this Termination
Agreement and the documents and agreements executed by the Parties hereto in
connection with this Termination Agreement, this Termination Agreement embodies
the entire understanding of the Parties with respect to the subject matter of
this Termination Agreement.
9.5 Preparation of Agreement. Each Party represents and warrants that
it was represented by, or had the opportunity to be represented by, counsel in
connection with the negotiation of this Termination Agreement, and each Party
hereto and its counsel participated in the negotiation and drafting of this
Termination Agreement. Accordingly, this Termination Agreement shall not be
construed more favorably for any party hereto regardless of who is responsible
for its preparation.
9.6 Parties in Interest. This Termination Agreement and all of the
terms, covenants and conditions herein shall bind and inure to the benefit of
the Parties hereto and their respective permitted successors and assigns. This
Termination Agreement may not be assigned by any Party hereto without the other
Party's written consent.
9.7 Severability. If any provision of this Termination Agreement is
found to violate any statute, regulation, rule, order or decree of any
governmental authority, court, agency or exchange, such invalidity shall not be
deemed to affect any other provision hereof or the validity of the remainder of
this Termination Agreement, and such invalid provision shall be deemed deleted
from this Termination Agreement to the minimum extent necessary to cure such
violation.
9.8 Headings. The section and other headings contained in this
Termination Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Termination Agreement.
9.9 Waiver. A waiver of any breach or violation of any term, provision,
or covenant contained herein shall not be deemed a continuing waiver, or a
waiver of any future or past breach or violation, or a waiver of any other term,
provision or covenant of this Termination Agreement.
9.10 Confidentiality. Each of the Parties agrees to keep all terms of
this Termination Agreement and all terms of any other documents executed
pursuant to the terms of this Termination Agreement confidential; except to the
extent disclosure is required by applicable law or by applicable regulatory
filings; except as otherwise mutually agreed to in writing by the
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Parties; and except with respect to communications the undersigned has with: (i)
its advisors, such as accountants or attorneys, to assist in drafting,
interpreting or enforcing the terms of this Termination Agreement and any
documents executed pursuant to the terms of this Termination Agreement; and (ii)
third parties as necessary to carry out the terms of this Termination Agreement
as long as the undersigned divulges only the minimal information necessary to
carry out the terms of this Termination Agreement.
9.11 No Disparagement. Medical Practice agrees that it shall not make
any disparaging statements about IOI Management Corporation, any of IOI
Management Corporation's affiliated corporations, or any directors, officers or
employees of IOI Management Corporation or IOI Management Corporation's
affiliated corporations. Medical Practice agrees that IOI Management Corporation
has a legitimate business interest justifying such no disparagement condition
and agreement. IOI Management Corporation agrees that it shall not make any
disparaging statements about Medical Practice or its shareholders. IOI
Management Corporation agrees that Medical Practice has a legitimate business
interest justifying such no disparagement condition and agreement.
In witness whereof, the Parties hereto have executed this Termination
Agreement to be effective as of the day and year above written.
MEDICAL PRACTICE:
LANCASTER ORTHOPEDIC GROUP,
P.C., a Pennsylvania professional
corporation
By:
--------------------------------------------
Print Name:
------------------------------------
Print Title:
-----------------------------------
IOI MANAGEMENT CORPORATION:
IOI MANAGEMENT SERVICES OF PENNSYLVANIA, INC., a
Pennsylvania business corporation
By:
--------------------------------------------
Print Name:
------------------------------------
Print Title:
-----------------------------------
6
<PAGE> 1
EXHIBIT 10.24
INTEGRATED ORTHOPAEDICS, INC.
1997 AMENDED AND RESTATED LONG TERM INCENTIVE PLAN
R E C I T A L S
WHEREAS, the Company adopted the Integrated Orthopaedics, Inc. 1997
Long Term Incentive Plan effective June 30, 1997 (the "Plan"); and
WHEREAS, the Company, through its Board of Directors, wishes to
simplify many of the provisions of the Plan by amending and restating the Plan;
and
WHEREAS, this simplifying amendment shall be effective as of June 30,
1997, the original effective date of the Initial Plan; and
WHEREAS, all previous grants of Options and Restricted Stock prior to
the date of this amendment and restatement shall remain in full effect and force
pursuant to its terms,
NOW, THEREFORE, pursuant to the provisions of the Plan, the Plan is
hereby amended and restated as follows:
SECTION 1
PURPOSE
This Plan is established (i) to offer selected Employees, Directors and
Consultants of the Company or its Subsidiaries or any predecessor entity an
equity ownership interest in the financial success of the Company, (ii) to
provide the Company an opportunity to attract and retain the best available
personnel for positions of substantial responsibility, and (iii) to encourage
equity participation in the Company by eligible Participants. This Plan provides
for the grant by the Company of (i) Options to purchase Shares, and (ii) shares
of Restricted Stock. Options granted under this Plan may include nonstatutory
options as well as incentive stock options intended to qualify under section 422
of the Code.
SECTION 2
DEFINITIONS
"ADMINISTRATOR" shall have the meaning set forth in Section 3(a) of
this Plan.
"BOARD OF DIRECTORS" shall mean the board of directors of the Company,
as duly elected from time to time.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and as
interpreted by the regulations thereunder.
"COMMITTEE" shall mean the Compensation Committee of the Company, or
such other Committee as may be appointed by the Board of Directors from time to
time, which shall be composed solely of two (2) or more Non-employee Directors.
"COMPANY" shall mean Integrated Orthopaedics, Inc., a Texas
corporation.
"CONSULTANT" shall mean any individual that is expressly designated and
compensated as a consultant of the Company or its Subsidiaries by the
Administrator in its sole discretion; provided, however, that the term
"Consultant" shall not include directors who are paid only a director's fee by
the Company.
"DATE OF GRANT" shall mean the date on which the Administrator resolves
to grant an Option to an Optionee or grant Restricted Stock to a Participant, as
the case may be.
"DIRECTOR" shall mean any person who is a member of the Board of
Directors.
"EMPLOYEE" shall include every individual performing Services to the
Company or its Subsidiaries if the relationship between such individual and the
Company or its Subsidiaries is the legal relationship of employer and
<PAGE> 2
employee. This definition of "Employee" is qualified in its entirety and is
subject to the definition set forth in section 3401(c) of the Code and the
regulations thereunder. Neither service as a member of the Board of Directors
nor payment of a director's fee shall in itself constitute "Services" for
purposes of this definition.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and as interpreted by the rules and regulations promulgated thereunder.
"EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Administrator in the
applicable Stock Option Agreement, but in no event less than the par value per
Share.
"FAIR MARKET VALUE" shall mean such amount as the Administrator, in its
sole discretion, shall determine; provided, however, that if there is a public
market for the securities, the Fair Market Value shall be the mean of the bid
and asked prices of the securities per share or unit, as the case may be, as
reported in the Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
System) as of the date in question or, in the event the securities are listed on
a stock exchange, the Fair Market Value shall be the closing sales price of the
securities per share or unit, as the case may be, on such exchange, as reported
in the Wall Street Journal, as of the date in question.
"ISO" shall mean a stock option which is granted to an individual and
which meets the requirements of section 422(b) of the Code, pursuant to which
the Optionee has no tax consequences resulting from the grant or, subject to
certain holding period requirements, exercise of the option and the employer is
not entitled to a business expense deduction with respect thereto.
"NON-EMPLOYEE DIRECTOR" shall mean any person who at the time of grant
is a member of the Board of Directors but is not an Employee of the Company or
any Affiliate; does not receive compensation, directly or indirectly, from the
Company or any Affiliate for services rendered as a consultant or in any
capacity other than Director, except for an amount that does not exceed the
dollar amount to which disclosure would be required under 17 C.F.R Section
229.404(a); does not possess an interest in any other transaction for which
disclosure would be required under 17 C.F.R. Section 229.404(a); and is not
engaged in a business relationship to which disclosure would be required under
17 C.F.R. Section 229.404(b).
"NONSTATUTORY OPTION" shall mean any Option granted by the
Administrator that does not meet the requirements of sections 421 through 424 of
the Code, as amended.
"OPTION" shall mean either an ISO or Nonstatutory Option, as the
context requires.
"OPTIONEE" shall mean a Participant who holds an Option.
"PARTICIPANTS" shall mean those individuals described in Section 1 of
this Plan selected by the Administrator who are eligible under Section 4 of this
Plan for grants of either Options or Restricted Stock under this Plan.
"PERMANENT AND TOTAL DISABILITY" shall mean that an individual is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than twelve (12) months. An individual shall not be considered to
suffer from Permanent and Total Disability unless such individual furnishes
proof of the existence thereof in such form and manner, and at such times, as
the Administrator may reasonably require. The scope of this definition shall
automatically be reduced or expanded to the extent that section 22(e)(3) of the
Code is amended to reduce or expand the scope of the definition of Permanent and
Total Disability thereunder.
"PLAN" shall mean this 1997 Amended and Restated Long Term Incentive
Plan, as amended from time to time.
"PLAN AWARD" shall mean the grant of either an Option or Restricted
Stock, as the context requires.
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"RESTRICTED STOCK" shall have that meaning set forth in Section 7(a) of
this Plan.
"RESTRICTED STOCK ACCOUNT" shall have that meaning set forth in Section
7(a)(ii) of this Plan.
"RESTRICTED STOCK CRITERIA" shall have that meaning set forth in
Section 7(a)(iv) of this Plan.
"RESTRICTION PERIOD" shall have that meaning set forth in Section
7(a)(iii) of this Plan.
"SERVICES" shall mean services rendered to the Company or any
predecessor entity or any of its Subsidiaries as an Employee or Consultant, as
the context requires.
"SHARE" shall mean one share of Stock, as adjusted in accordance with
Section 9 of this Plan (if applicable).
"STOCK" shall mean the common stock of the Company, par value $.001 per
share.
"STOCK OPTION AGREEMENT" shall mean the agreement executed between the
Company and an Optionee that contains the terms, conditions, and restrictions
pertaining to the granting of an Option. Any inconsistencies between this Plan
and any Stock Option Agreement shall be controlled by this Plan.
"SUBSIDIARY" shall mean any corporation as to which more than fifty
(50%) percent of the outstanding voting stock or shares shall now or hereafter
be owned or controlled directly by a person, any Subsidiary of such person, or
any Subsidiary of such Subsidiary.
"TEN-PERCENT SHAREHOLDER" shall mean a person that owns more than ten
percent (10%) of the total combined voting power of all classes of outstanding
stock of the Company or any Subsidiary, taking into account the attribution
rules set forth in section 424 of the Code, as amended. For purposes of this
definition of "Ten Percent Shareholder" the term "outstanding stock" shall
include all stock actually issued and outstanding immediately after the grant of
an Option to an Optionee. "Outstanding stock" shall not include reacquired
shares or shares authorized for issuance under outstanding Options held by the
Optionee or by any other person.
"VEST DATE" shall have that meaning set forth in Section 7(a)(v) of
this Plan.
SECTION 3
ADMINISTRATION
(a) GENERAL ADMINISTRATION. This Plan shall be administered by the
Board of Directors or by a Committee (either of which may hereinafter be
referred to as the "Administrator"). In the case a Committee is chosen to
administer the Plan, the members of the Committee shall be appointed by the
Board of Directors for such terms as the Board of Directors may determine. The
Board of Directors may from time to time remove members from, or add members to,
the Committee. Vacancies on the Committee, however caused, shall be filled by
the Board of Directors.
(b) COMMITTEE PROCEDURES. The Board of Directors shall designate
one of the members of the Committee as chairman. The Committee may hold meetings
at such times, places, and in such manner as it shall determine. The acts of a
majority of the Committee members present at meetings at which a quorum exists,
or acts reduced to or approved in writing by a majority of all Committee
members, shall be valid acts of the Committee. A majority of the Committee shall
constitute a quorum.
(c) AUTHORITY OF COMMITTEE. This Plan shall be administered by, or
under the direction of, the Administrator constituted in such a manner as to
comply at all times with Rule 16b-3 (or any successor rule) under the Exchange
Act. The Administrator shall administer this Plan so as to comply at all times
with the Exchange Act and, subject to the Code, shall otherwise have absolute
and final authority to interpret this Plan and to make all determinations
specified in or permitted by this Plan or deemed necessary or desirable for its
administration or for the conduct of the Administrator's business including
without limitation the authority to take the following actions:
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(i) To interpret this Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and
forms relating to this Plan;
(iii) To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of this Plan;
(iv) To determine when Plan Awards are to be granted under
this Plan;
(v) To select the Optionees and Participants;
(vi) To determine the number of Shares to be made subject
to each Plan Award;
(vii) To prescribe the terms, conditions and restrictions
of each Plan Award, including without limitation the Exercise Price and the
determination whether an Option is to be classified as an ISO or a Nonstatutory
Option;
(viii) To amend any outstanding Stock Option Agreement or
the terms, conditions and restrictions of a grant of Restricted Stock, subject
to applicable legal restrictions and the consent of the Optionee or Participant,
as the case may be, who entered into such agreement;
(ix) To establish procedures so that an Optionee may
obtain a loan through a registered broker-dealer under the rules and regulations
of the Federal Reserve Board, for the purpose of exercising an Option;
(x) To establish procedures for an Optionee (1) to have
withheld from the total number of Shares to be acquired upon the exercise of an
Option that number of Shares having a Fair Market Value, which, together with
such cash as shall be paid in respect of fractional shares, shall equal the
Exercise Price, and (2) to exercise a portion of an Option by delivering that
number of Shares already owned by an Optionee having a Fair Market Value which
shall equal the partial Exercise Price and to deliver the Shares thus acquired
by such Optionee in payment of Shares to be received pursuant to the exercise of
additional portions of the Option, the effect of which shall be that an Optionee
can in sequence utilize such newly acquired shares in payment of the Exercise
Price of the entire Option, together with such cash as shall be paid in respect
of fractional shares;
(xi) To establish procedures whereby a number of Shares
may be withheld from the total number of Shares to be issued upon exercise of an
Option, to meet the obligation of withholding for federal and state income and
other taxes, if any, incurred by the Optionee upon such exercise; and
(xii) To take any other actions deemed necessary or
advisable for the administration of this Plan.
All interpretations and determinations of the Administrator made with
respect to the granting of Plan Awards shall be final, conclusive, and binding
on all interested parties. The Administrator may make grants of Plan Awards on
an individual or group basis. No member of the Administrator shall be liable for
any action that is taken or is omitted to be taken if such action or omission is
taken in good faith with respect to this Plan or grant of any Plan Award.
(d) HOLDING PERIOD. The Administrator may in its sole discretion
require as a condition to the granting of any Plan Award, that a Participant
agree not to sell or otherwise dispose of a Plan Award, any Shares acquired
pursuant to a Plan Award, or any other "derivative security" (as defined by Rule
16a-1(c) under the Exchange Act) for a period of time determined by the
Administrator including, without limitation, a period of six (6) months
following the later of (i) the date of the grant of such Plan Award, or (ii) the
date when the Exercise Price of an Option is fixed if such Exercise Price is not
fixed on the Date of Grant.
SECTION 4
ELIGIBILITY
(a) GENERAL RULE. Subject to the limitations set forth in
subsection (b) below, Participants shall be eligible to participate in this
Plan.
(b) NON-EMPLOYEE INELIGIBLE FOR ISOS. In no event shall an ISO be
granted to any individual who is not an Employee on the Date of Grant.
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(c) FORMER EMPLOYEES. Employees and former employees of any
predecessor entity of the Company may be eligible to participate in this Plan if
selected by the Administrator.
SECTION 5
SHARES SUBJECT TO PLAN
(a) BASIC LIMITATION. Shares offered under this Plan may be
authorized but unissued Shares or Shares that have been reacquired by the
Company. The aggregate number of Shares that are available for issuance under
this Plan shall not exceed two million five hundred thousand (2,500,000) Shares,
subject to adjustment pursuant to Section 9 of this Plan. The Administrator
shall not issue more Shares than are available for issuance under this Plan. The
number of Shares that are subject to unexercised Options at any time under this
Plan shall not exceed the number of Shares that remain available for issuance
under this Plan. The Company, during the term of this Plan, shall at all times
reserve and keep available sufficient Shares to satisfy the requirements of this
Plan.
(b) ADDITIONAL SHARES. In the event any outstanding Option for any
reason expires, is canceled or otherwise terminates, the Shares allocable to the
unexercised portion of such Option shall again be available for issuance under
this Plan. In the event that Shares issued under this Plan revert to the Company
prior to the Vest Date under a grant of Restricted Stock, such Shares shall
again be available for issuance under this Plan.
SECTION 6
TERMS AND CONDITIONS OF OPTIONS
(a) TERM OF OPTION. The term of each Option shall be ten (10)
years from the Date of Grant or such shorter term as may be determined by the
Administrator; provided, however, in the case of an ISO granted to a Ten-Percent
Shareholder, the term of such ISO shall be five (5) years from the Date of Grant
or such shorter time as may be determined by the Administrator.
(b) VESTING OF OPTIONS. The Administrator shall determine the
vesting requirements for each Option granted pursuant to this Plan. The vesting
requirements determined by the Administrator for each Option may consist of a
time-related vesting schedule, performance-based vesting, or a combination of
both time and performance vesting. The Administrator shall be authorized to
recognize for vesting purposes any Services provided to any predecessor entity
of the Company.
(c) EXERCISE PRICE AND METHOD OF PAYMENT.
(I) EXERCISE PRICE. The Exercise Price shall be such
price as is determined by the Administrator in its sole discretion and set forth
in the Stock Option Agreement; provided, however, in the case of a Nonstatutory
Option granted to an Optionee, the Exercise Price shall not be less than 85% of
the Fair Market Value of the Shares subject to such option on the Date of Grant;
provided, further, in the case of a Nonstatutory Option intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Exercise Price shall not be less than 100% of the Fair Market Value of
the Shares subject to such option on the Date of Grant ; provided, further, in
the case of an ISO granted to an Optionee, the Exercise Price shall not be less
than 100% of the Fair Market Value of the Shares subject to such option on the
Date of Grant (or 110% in the case of an Option granted to a Participant who is
a Ten-Percent Shareholder on the Date of Grant).
(II) PAYMENT OF SHARES. Payment for the Shares upon
exercise of an Option shall be made in cash, by certified check, or if
authorized by the Administrator, by delivery of other Shares having a Fair
Market Value on the date of delivery equal to the aggregate exercise price of
the Shares as to which said Option is being exercised or by any combination of
such methods of payment or by any other method of payment as may be permitted
under applicable law and authorized by the Administrator.
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(d) EXERCISE OF OPTION.
(i) PROCEDURE FOR EXERCISE; RIGHTS OF SHAREHOLDER. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as shall be determined by the Administrator, including without
limitation performance criteria with respect to the Company and/or the Optionee,
and in accordance with the terms of this Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the Stock
Option Agreement by the Optionee entitled to exercise the Option and full
payment for the Shares and any withholding and other applicable taxes with
respect to which the Option is exercised has been received by the Company. Full
payment may, as authorized by the Administrator, consist of any form of
consideration and method of payment allowable under Section 6(c)(ii) of this
Plan. Upon the receipt of notice of exercise and full payment for the Shares and
taxes, the Shares shall be deemed to have been issued and the Optionee shall be
entitled to receive such Shares and shall be a shareholder with respect to such
Shares, and the Shares shall be considered fully paid and nonassessable. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date on which the stock certificate is issued, except as
provided in Section 9 of this Plan.
Each exercise of an Option shall reduce, by an equal number, the total
number of Shares that may thereafter be purchased under such Option.
(ii) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT.
Except as provided in Subsections 6(d)(iii) and 6(d)(iv) below and unless
provided otherwise in the Stock Option Agreement, an Optionee holding an Option
who ceases to be an Employee or Consultant of the Company may, but only until
the earlier of the date (i) the Option held by the Optionee expires, or (ii) (y)
in the case of an ISO, ninety (90) days, and (z) in the case of a Nonstatutory
Option, six (6) months, after the date such Optionee ceases to be an Employee or
a Consultant (or in each case, such shorter period as may be provided in the
Stock Option Agreement), exercise the Option to the extent that the Optionee was
entitled to exercise it on such date, unless the Administrator terminates or
further extends such period in its sole discretion. To the extent that the
Optionee was not entitled to exercise an Option on such date, or if the Optionee
does not exercise it within the time specified herein, such Option shall
terminate. The Administrator shall have the authority (i) to determine the date
an Optionee ceases to be an Employee or a Consultant and (ii) to shorten or
terminate the exercise periods provided above in the event the Optionee resigns
and/or ceases for "cause" to be an Employee or a Consultant.
(iii) PERMANENT AND TOTAL DISABILITY. Notwithstanding the
provisions of Section 6(d)(ii) above, in the event an Optionee is unable to
continue to perform Services for the Company or any of its Subsidiaries as a
result of such Optionee's Permanent and Total Disability, (and, for ISOs, at the
time such Permanent and Total Disability begins, the Optionee was an Employee
and had been an Employee since the Date of Grant), such Optionee may exercise an
Option in whole or in part to the extent that the Optionee was entitled to
exercise it on such date, but only until the earlier of the date (i) the Option
held by the Optionee expires, or (ii) twelve (12) months from the date of
termination of Services due to such Permanent and Total Disability. To the
extent the Optionee is not entitled to exercise an Option on such date or if the
Optionee does not exercise it within the time specified herein, such Option
shall terminate, unless the Administrator further extends such period in its
sole discretion.
(iv) DEATH OF AN OPTIONEE. Upon the death of an Optionee,
any Option held by an Optionee shall terminate and be of no further effect;
provided, however, notwithstanding the provisions of Section 6(d)(ii) above, in
the event an Optionee's death occurs during the term of an Option held by such
Optionee and, at the time of death, the Optionee was an Employee or Consultant
(and, for ISOs, at the time of death, the Optionee was an Employee and had been
an Employee since the Date of Grant), the Option may be exercised in whole or in
part to the extent that the Optionee was entitled to exercise it on such date,
but only until the earlier of the date (i) the Option held by the Optionee
expires, or (ii) twelve (12) months from the date of the Optionee's death, by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance. To the extent the Option is not entitled to be
exercised on such date or if the Option is not exercised within the time
specified herein, such Option shall terminate, unless the Administrator further
extends such period in its sole discretion.
6
<PAGE> 7
(v) RETURN OF PROCEEDS.
(a) The Administrator, in its discretion, may include
as a term of any Optionee's Stock Option Agreement a provision that, if within
one year after ceasing to be an Employee or Consultant (whether voluntarily or
involuntarily), an Optionee shall, directly or indirectly, engage in an activity
that competes with the business of the Company or a Subsidiary as conducted at
the time the Optionee ceased to be an Employee or Consultant (as determined by
the Board of Directors in its sole discretion and good faith) and such Optionee
had exercised Options within six months of the date the Optionee ceased to be an
Employee or Consultant, the Optionee shall be required to remit to the Company
in good funds within 5 business days of receipt of written demand therefore an
amount equal to (i) the excess of (A) the Fair Market Value per share of Common
Stock on the date of exercise of such Option(s) less (B) the aggregate option
exercise price for such number of shares of Common Stock multiplied by (ii) the
number of shares with respect to which the Options were exercised (the
"Proceeds").
(b) The Administrator, in its discretion, may include
as a term of any Optionee's Stock Option Agreement a provision requiring the
remittance by an Optionee to the Company in good funds within 5 business days of
receipt of written demand therefore of Proceeds by an Optionee that has
exercised Options within six months of the date the Optionee ceased to be an
Employee or Consultant (whether voluntarily or involuntarily). The Administrator
shall have the authority in its discretion to include such other conditions
and/or terms in an Optionee's Stock Option Agreement that it deems appropriate
or desirable in furtherance of the foregoing provisions.
(e) NON-TRANSFERABILITY OF OPTIONS. No Option granted under this
Plan may be sold, pledged, assigned, hypothecated, transferred or disposed of in
any manner other than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act, or the rules thereunder, and
no Option granted under this Plan is assignable by operation of law or subject
to execution, attachment or similar process. Any Option granted under this Plan
can only be exercised during the Optionee's lifetime by such Optionee unless
exercised pursuant to Section 6(d)(iv). Any attempted sale, pledge, assignment,
hypothecation or other transfer of the Option contrary to the provisions hereof
and the levy of any execution, attachment or similar process upon the Option
shall be null and void and without force or effect. No transfer of the Option by
will or by the laws of descent and distribution shall be effective to bind the
Company unless the Company shall have been furnished written notice thereof and
an authenticated copy of the will and/or such other evidence as the
Administrator may deem necessary to establish the validity of the transfer and
the acceptance by the transferee or transferees of the terms and conditions of
the Option. The terms of any Option transferred by will or by the laws of
descent and distribution shall be binding upon the executors, administrators,
heirs and successors of Optionee.
(f) TIME OF GRANTING OPTIONS. Any Option granted hereunder shall
be deemed to be granted on the Date of Grant. Written notice of the
Administrator's determination to grant an Option to an Employee, evidenced by a
Stock Option Agreement, dated as of the Date of Grant, shall be given to such
Employee within a reasonable time after the Date of Grant.
(g) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Within the
limitations of this Plan, the Administrator may modify, extend or renew
outstanding Options or may accept the cancellation of outstanding Options (to
the extent not previously exercised) for the granting of new Options in
substitution therefor. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair the
Optionee's rights or obligations under such Option.
(h) RESTRICTIONS ON TRANSFER OF SHARES. Any Shares issued upon
exercise of an Option shall be subject to such rights of repurchase and other
transfer restrictions as the Administrator may determine in its sole discretion.
Such restrictions shall be set forth in the applicable Stock Option Agreement.
(i) SPECIAL LIMITATION ON ISOs. To the extent that the aggregate
Fair Market Value (determined on the Date of Grant) of the Shares with respect
to which ISOs are exercisable for the first time by an individual during any
calendar year under this Plan, and under all other plans maintained by the
Company, exceeds $100,000, such Options shall be treated as Options that are not
ISOs.
(j) LEAVES OF ABSENCE. Leaves of absence approved by the
Administrator which conform to the policies of the Company shall not be
considered termination of employment if the employer-employee relationship as
defined under the Code or the regulations promulgated thereunder otherwise
exists.
7
<PAGE> 8
(k) EARLY EXERCISE. In the Administrator's sole and absolute
discretion, an Option may include a provision whereby the Optionee may elect at
anytime while an Employee or Consultant to exercise the Option as to any part or
all of the Shares subject to the Option prior to the full vesting of the Option.
Any unvested Shares so purchased shall be subject to a repurchase right in favor
of the Company, with the repurchase price to be equal to the original purchase
price of the Shares, or to any other restriction the Administrator determines to
be appropriate, provided however, that (i) the right to repurchase at the
original purchase price shall lapse at a rate equal to the remaining portion of
the original vesting schedule of the Shares so purchased, (ii) such repurchase
right shall be exercisable by the Company within (A) the ninety (90) day period
following the termination of employment or relationship as a Consultant for any
reason whatsoever, or (B) such longer period as may be agreed to by the Company
and the Optionee (for example, for purposes of satisfying the requirements of
Section 1202(c)(3) of the Code (regarding "qualified small business stock")),
and (iii) such repurchase right shall be exercisable for cash or cancellation of
purchase money indebtedness for the Shares. Should the right of repurchase be
assigned by the Company, the assignee shall pay the Company cash equal to the
difference between the original purchase price and stock's fair market value if
the original purchase price is less than the stock's fair market value.
SECTION 7
RESTRICTED STOCK
(a) AUTHORITY TO GRANT RESTRICTED STOCK. The Administrator shall
have the authority to grant Shares to Participants that are subject to certain
terms, conditions, and restrictions (the "Restricted Stock"). The Restricted
Stock may be granted by the Administrator either separately or in combination
with Options. The terms, conditions and restrictions of the Restricted Stock
shall be determined from time to time by the Administrator without limitation,
except as otherwise provided in this Plan; provided, however, that each grant of
Restricted Stock to an Employee shall require the Employee to remain an Employee
of the Company or any of its Subsidiaries for at least six (6) months from the
Date of Grant. The granting, vesting, and issuing of the Restricted Stock shall
also be subject to the following provisions:
(i) NATURE OF GRANT. Restricted Stock shall be granted to
Participants for Services rendered and at no additional cost to Participant;
provided, however, that the value of the Services performed must, in the opinion
of the Administrator, equal or exceed the par value of the Restricted Stock to
be granted to the Participant.
(ii) RESTRICTED STOCK ACCOUNT. The Company shall establish
a restricted stock account (the "Restricted Stock Account") for each Participant
to whom Restricted Stock is granted, and such Restricted Stock shall be credited
to such account. No certificates will be issued to the Participant with respect
to the Restricted Stock until the Vest Date as provided herein. Every credit of
Restricted Stock under this Plan to a Restricted Stock Account shall be
considered "contingent" and unfunded until the Vest Date. Such contingent
credits shall be considered bookkeeping entries only, notwithstanding the
"crediting" of "dividends" as provided herein. Such accounts shall be subject to
the general claims of the Company's creditors. The Participant's rights to the
Restricted Stock Account shall be no greater than that of a general creditor of
the Company. Nothing contained herein shall be construed as creating a trust or
fiduciary relationship between the Participants and the Company, the Board of
Directors or the Administrator.
(iii) RESTRICTIONS. The terms, conditions, and restrictions
of the Restricted Stock shall be determined by the Administrator on the Date of
Grant. The Restricted Stock may not be sold, assigned, transferred, redeemed,
pledged or otherwise encumbered during the period in which the terms, conditions
and restrictions apply (the "Restriction Period"). More than one grant of
Restricted Stock may be outstanding at any one time, and the Restriction Periods
may be of different lengths. Receipt of the Restricted Stock is conditioned upon
satisfactory compliance with the terms, conditions and restrictions of this Plan
and those imposed by the Administrator.
(iv) RESTRICTED STOCK CRITERIA. At the time of each grant
of Restricted Stock, the Administrator in its sole discretion may establish
certain criteria to determine the times at which restrictions placed on
Restricted Stock shall lapse (i.e., the termination of the Restriction Period),
which criteria may include without limitation performance measures and targets
and/or holding period requirements (the "Restricted Stock Criteria"). The
Administrator may establish a corresponding relationship between the Restricted
Stock Criteria and (i) the number of Shares of Restricted Stock that may be
earned, and (ii) the extent to which the terms, conditions and restrictions on
the Restricted Stock shall lapse. Restricted Stock Criteria may vary among
grants of Restricted
8
<PAGE> 9
Stock; provided, however, that once the Restricted Stock Criteria are
established for a grant of Restricted Stock, the Restricted Stock Criteria shall
not be modified with respect to that grant.
(v) VESTING. On the date the Restriction Period
terminates, the Restricted Stock shall vest in the Participant (the "Vest
Date"), who may then require the Company to issue certificates evidencing the
Restricted Stock credited to the Restricted Stock Account of such Participant.
(vi) DIVIDENDS. The Administrator may provide from time to
time that amounts equivalent to dividends shall be payable with respect to the
Restricted Stock held in the Restricted Stock Account of a Participant. Such
amounts shall be credited to the Restricted Stock Account and shall be payable
to the Participant on the Vest Date.
(vii) TERMINATION OF SERVICES. If a Participant (x) with
the consent of the Administrator, ceases to be an Employee of, or otherwise
ceases to provide Services to, the Company or any of its Subsidiaries, or (y)
dies or suffers from Permanent and Total Disability, the vesting or forfeiture
(including without limitation the terms, conditions and restrictions) of any
grant under this Section 7 shall be determined by the Administrator in its sole
discretion, subject to any limitations or terms of this Plan. If the Participant
ceases to be an Employee of, or otherwise ceases to provide Services to, the
Company or any of its Subsidiaries for any other reason, all grants of
Restricted Stock under this Plan shall be forfeited (subject to the terms of
this Plan).
(b) DEFERRAL OF PAYMENTS. The Administrator may establish
procedures by which a Participant may elect to defer the transfer of Restricted
Stock to the Participant. The Administrator shall determine the terms and
conditions of such deferral in its sole discretion.
(c) PAYMENT OF TAXES. Notwithstanding the provisions of Section
7(a)(v) above, the Company will not be required to issue any Restricted Stock
unless and until the Participant shall pay to the Company an amount equal to any
withholding and other applicable taxes related to the issuance of the Restricted
Stock. Such payment shall be made in cash, by certified check, or if authorized
by the Administrator, by delivery of other Shares having a Fair Market Value on
the date of delivery equal to such payment or by any combination of such methods
of payment or by any other method of payment as may be permitted under
applicable law and authorized by the Administrator.
SECTION 8
ISSUANCE OF SHARES
As a condition to the transfer of any Shares issued under this Plan,
the Company may require an opinion of counsel, satisfactory to the Company, to
the effect that such transfer will not be in violation of the Securities Act of
1933, as amended (the "Securities Act"), or any other applicable securities
laws, rules or regulations, or that such transfer has been registered under
federal and all applicable state securities laws. The Company may refrain from
delivering or transferring Shares issued under this Plan until the Administrator
has determined that the Participant has tendered to the Company any and all
applicable federal, state or local tax owed by the Participant as the result of
the receipt of a Plan Award, the exercise of an Option or the disposition of any
Shares issued under this Plan, in the event that the Company reasonably
determines that it might have a legal liability to satisfy such tax. The Company
shall not be liable to any person or entity for damages due to any delay in the
delivery or issuance of any stock certificate evidencing any Shares for any
reason whatsoever.
SECTION 9
CAPITALIZATION ADJUSTMENTS; MERGER
(a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, the aggregate number of Shares that have been
authorized for issuance under this Plan, the maximum number of Shares that an
Employee may receive rights to pursuant to Section 6(k) of this Plan, and the
number of Shares of Restricted Stock credited to any Restricted Stock Account of
a Participant (as well as the Exercise Price covered by any outstanding Option),
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, payment of a stock dividend with
respect to the Stock or any other increase or decrease in the number of issued
Shares effected without receipt of consideration by the Company. Such adjustment
shall be made by the Administrator in its sole discretion, which adjustment
shall be final, binding, and conclusive. Except as expressly
9
<PAGE> 10
provided herein, no issuance by the Company of shares of stock of any class
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
(b) DISSOLUTION, LIQUIDATION, SALE OF ASSETS OR MERGER. In the
event of the proposed dissolution or liquidation of the Company, or a proposed
sale of all or substantially all of the assets of the Company, or the proposed
merger of the Company with or into another corporation where the Company is not
the surviving entity, any Options and grants of Restricted Stock shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided in the Stock Option Agreement or by the Administrator. The
Administrator may, in the exercise of its sole discretion, in such instances
declare that any Option shall terminate as of a date fixed by the Administrator
and give each Optionee the right to exercise the Optionee's Option as to all or
any part of the Shares covered by such Option, including Shares as to which the
Option would not otherwise be exercisable. Notwithstanding the provisions of
Section 6(b) to the contrary, the Administrator may, in the exercise of its sole
discretion, provide in any Stock Option Agreement or under any grant of
Restricted Stock that the applicable Plan Award shall become immediately vested
in the event of a change in control of the Company or other extraordinary events
as defined by the Administrator.
SECTION 10
NO EMPLOYMENT RIGHTS
No provision of this Plan, under any Stock Option Agreement or under
any grant of Restricted Stock shall be construed to give any Participant any
right to remain an Employee of, or provide Services to, the Company or any of
its Subsidiaries or to affect the right of the Company to terminate any
Participant's service at any time, with or without cause.
SECTION 11
SHAREHOLDER APPROVAL
With respect to any amendment to this Plan adopted by the Administrator
that is required to be approved by the Company's shareholders pursuant to the
terms of Section 12 of this Plan, such approval shall be obtained within twelve
(12) months after the date such amendment is adopted by the Administrator;
provided, that such amendment shall not become effective until such approval has
been obtained.
If the Company is required to comply with section 14(c) of the Exchange
Act, the approval by the Company's shareholders of this Plan, and their approval
of any subsequent amendment to this Plan requiring their approval, shall be
solicited substantially in accordance with section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder. If the Company is not required
to comply with section 14(a) of the Exchange Act at the time of seeking such
approval and such approval is not solicited substantially in accordance with the
rules and regulations, if any, in effect under section 14(a) of the Exchange Act
at the time of such approval, the Company shall furnish in writing to the
holders of record of the securities entitled to vote for this Plan substantially
the same information concerning this Plan which would be required by the rules
and regulations in effect under section 14(a) of the Exchange Act at the time
that such information is furnished, if proxies to be voted with respect to the
approval or disapproval of this Plan were then being solicited, on or prior to
the date of the first annual meeting of security holders held subsequent to the
later of: (i) the first registration of an equity security under Section 12 of
the Act or (ii) the acquisition of an equity security which exemption from
section 16(b) under the Exchange Act is claimed.
SECTION 12
TERM OF PLAN; EFFECT OF AMENDMENT OR TERMINATION
(a) TERM OF PLAN. This Plan shall become effective upon its
adoption by the Board of Directors subject to the condition subsequent that this
Plan is approved by the shareholders of the Company. This Plan shall continue in
effect for a term of ten (10) years unless sooner terminated under this Section
12.
(b) AMENDMENT AND TERMINATION. The Administrator, in its sole
discretion, may amend, alter, suspend or terminate this Plan; provided, that the
Company shall obtain shareholder approval of any such action to the extent
necessary or desirable under applicable law.
(c) EFFECT OF TERMINATION. In the event this Plan is terminated,
no Shares shall be issued under this Plan nor shall any Shares of Restricted
Stock be credited to a Restricted Stock Account, except upon exercise of an
10
<PAGE> 11
Option granted prior to such termination or issuance of Shares of Restricted
Stock previously credited to a Restricted Stock Account. The termination of this
Plan, or any amendment thereof, shall not affect any Shares previously issued to
a Participant, any Option previously granted under this Plan or any Restricted
Stock previously credited to a Restricted Stock Account.
SECTION 13
GOVERNING LAW
THIS PLAN AND ANY AND ALL STOCK OPTION AGREEMENTS AND AGREEMENTS
RELATING TO THE GRANT OF RESTRICTED STOCK EXECUTED IN CONNECTION WITH THIS PLAN
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
11
<PAGE> 1
EXHIBIT 11.2
INTEGRATED ORTHOPAEDICS, INC.
SCHEDULE RE: LOSS PER SHARE
For the two years ended December 31, 1999
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Basic
Weighted average common shares outstanding 6,496 6,459
======== ========
Net loss $(10,047) $ (4,927)
Series A Preferred Stock Dividend (202) (202)
Series B Preferred Stock Dividend (2,572) (2,337)
-------- --------
Net loss after dividends $(12,821) $ (7,466)
======== ========
Loss per share $ (1.97) $ (1.16)
======== ========
Diluted
Weighted average shares outstanding 6,496 6,459
Net effect of dilutive stock options
and warrants, based on treasury
stock method using average
market price
-------- --------
Diluted common shares outstanding 6,496 6,459
======== ========
Net loss $(10,047) $ (4,927)
Series A Preferred Stock Dividend (202) (202)
Series B Preferred Stock Dividend (2,572) (2,337)
-------- --------
Net loss after dividends $(12,821) $ (7,466)
======== ========
Loss per share $ (1.97) $ (1.16)
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
COLORADO CORPORATIONS:
IOI Management Services of Colorado, Inc.
DELAWARE CORPORATIONS:
IOI Management Services of Connecticut, Inc.
Westbank Ambulatory Care Center, LLC
LOUISIANA CORPORATIONS:
IOI Management Services of Louisiana, Inc.
IOI Ancillaries of Louisiana, Inc.
PENNSYLVANIA CORPORATIONS:
IOI Management Services of Pennsylvania, Inc.
TEXAS CORPORATIONS:
IOI Management Services of Houston, Inc.
IOI Management Services of Texas, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-42624 and No. 333-50257) of Integrated Orthopaedics, Inc., of
our report dated April 12, 2000, with respect to the consolidated financial
statements of Integrated Orthopaedics, Inc., included in the Annual Report (Form
10-KSB) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Houston, Texas
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,889
<SECURITIES> 0
<RECEIVABLES> 2,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,270
<PP&E> 4,869
<DEPRECIATION> 2,532
<TOTAL-ASSETS> 32,143
<CURRENT-LIABILITIES> 2,279
<BONDS> 1,193
3
0
<COMMON> 7
<OTHER-SE> 18,746
<TOTAL-LIABILITY-AND-EQUITY> 32,143
<SALES> 11,745
<TOTAL-REVENUES> 11,745
<CGS> 20,773
<TOTAL-COSTS> 20,773
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 432
<INCOME-PRETAX> (9,258)
<INCOME-TAX> 637
<INCOME-CONTINUING> (9,895)
<DISCONTINUED> 0
<EXTRAORDINARY> (152)
<CHANGES> 0
<NET-INCOME> (10,047)
<EPS-BASIC> (1.97)
<EPS-DILUTED> (1.97)
</TABLE>
