<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
{ X } Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
OR
{ } Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________.
COMMISSION FILE NO. 1-10677
INTEGRATED ORTHOPAEDICS, INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0203483
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 West Loop South, Suite 1030
--------------------------------
(Address of principal executive offices)
(713) 225-5464
------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days: YES X NO
---
As of August 14, 2000 29,592,741 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Form: YES NO X
------ ---
<PAGE> 2
INTEGRATED ORTHOPAEDICS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED
June 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
June 30, 2000 and December 31, 1999............................................. 1
Consolidated Statements of Operations--
Three Months and Six Months Ended June 30, 2000 and 1999........................ 2
Consolidated Statement of Stockholders' Equity--
Six Months Ended June 30, 2000 ................................................. 3
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 30, 2000 and 1999 ........................................ 4
Notes to Condensed Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 11
PART II. OTHER INFORMATION........................................................................ 16
SIGNATURE......................................................................................... 18
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,471 $ 1,889
Accounts receivable 2,101
Due from affiliated medical groups 227
Prepaid expenses 449
Note receivable 760
Other current assets 115 75
Assets to be disposed of 1,529
Net assets of discontinued operations -Work Hardening Services 16
Net assets of discontinued operations - Ambulatory Surgery Center 2,522
-------- --------
Total Current Assets 6,884 6,270
Property and Equipment (including capital leases) 1,185 4,869
Less: Accumulated Depreciation and Amortization (1,131) (2,532)
-------- --------
Net Property and Equipment 54 2,337
-------- --------
Management Services Agreements, net of amortization 20,581
Assets to be Disposed Of 895
Other Assets 184 135
-------- --------
TOTAL ASSETS $ 7,122 $ 30,218
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 85 $ 106
Accrued liabilities 885 1,741
Net liabilities of discontinued operations - Practice Management Services 13
Current maturities of notes payable and capital lease obligations 77 432
-------- --------
Total Current Liabilities 1,060 2,279
Obligations Under Capital Leases 146 542
Notes Payable 651
Deferred Income Taxes 7,255
Dividends Payable 836 735
-------- --------
Total Liabilities 2,042 11,462
-------- --------
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock 3 3
Common stock 7 7
Additional paid-in capital 51,156 49,316
Accumulated deficit (45,365) (30,320)
Treasury shares (721) (250)
-------- --------
Total Stockholders' Equity 5,080 18,756
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,122 $ 30,218
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE> 4
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues $ $ $ $
------- ------- -------- -------
Costs and expenses:
General and administrative 624 732 1,520 1,599
Special charges 884 745 884 768
Depreciation and amortization 39 59 98 119
------- ------- -------- -------
1,547 1,536 2,502 2,486
Loss From Operations (1,547) (1,536) (2,502) (2,486)
Interest Income 50 58 69 127
Interest Expense (14) (121) (22) (304)
------- ------- -------- -------
Loss from Continuing Operations Before
Provision for IncomeTaxes (1,511) (1,599) (2,455) (2,663)
Income Tax (Provision) Benefit 32 (17) (33) (30)
------- ------- -------- -------
Loss from Continuing Operations (1,479) (1,616) (2,488) (2,693)
Discontinued Operations (Note 4):
Income (Loss) from operations, net of taxes (86) 598 (7,836) 1,000
Loss from disposal of operations, net of taxes (3,248) (3,248)
------- ------- -------- -------
Income (loss) from Discontinued Operations (3,334) 598 (11,084) 1,000
Net Loss Before Extraordinary Items (4,813) (1,018) (13,572) (1,693)
Extraordinary Loss Related to Retirement of
NationsBank debt, net (152) (152)
------- ------- -------- -------
Net loss $(4,813) $(1,170) $(13,572) $(1,845)
======= ======= ======== =======
Loss from Continuing Operations Applicable to
Common Shares $(2,222) $(2,301) $ (3,961) $(4,037)
======= ======= ======== =======
Loss from Continuing Operations Per Common
Share: Basic and Diluted $ (0.36) $ (0.35) $ (0.63) $ (0.62)
======= ======= ======== =======
Weighted Average Common Shares
Outstanding 6,155 6,527 6,296 6,527
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of this statement
2
<PAGE> 5
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES AMOUNT ADDITIONAL
----------------- ---------------- PAID ACCUMULATED TREASURY
COMMON PREFERRED COMMON PREFERRED IN CAPITAL DEFICIT STOCK TOTAL
------ --------- ------ --------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 6,557 326 $ 7 $ 3 $49,316 $(30,320) $(250) $ 18,756
Dividends - Preferred
Stock Series A -- -- -- -- -- (104) -- (104)
Dividends Preferred Stock
Series B -- 14 -- -- 1,369 (1,369) -- --
Treasury Stock - received
in connection with
settlement of
litigation (Note 3) -- -- -- -- 471 -- (471) --
Exercise of Stock
Options 5 -- -- -- -- -- --
Net Loss -- -- -- -- -- (13,572) -- (13,572)
----- --- --- --- ------- -------- ----- --------
Balance at
June 30, 2000 6,562 340 $ 7 $ 3 $51,156 $(45,365) $(721) $ 5,080
===== === === === ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 6
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,572) $ (1,845)
Non-cash adjustments:
Impairment charge 10,969
Minority interest in loss (75)
Depreciation and amortization 550
Changes in operating assets and liabilities 499 1,095
-------- --------
Net Cash Used in Operating Activities (1,629) (750)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,388) (892)
Proceeds from sale of assets 4,697
Collection of note receivable 821 110
-------- --------
Net Cash Provided (Used) in Investing Activities 3,130 (782)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority Interest 75
Net borrowings on notes and capital lease obligations 6 375
-------- --------
Net Cash Provided in Financing Activities 81 375
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,582 (1,157)
Cash and cash equivalents beginning of period 1,889 6,018
-------- --------
Cash and cash equivalents end of period $ 3,471 $ 4,861
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 47 $ 89
Income taxes paid (refunded)
(5)
NON CASH TRANSACTIONS AND OTHERS:
Series B Preferred Stock - accumulated deficit 1,369 1,243
related to stock dividends
Series A Preferred Stock - increase in accrued
liabilities related to unpaid dividends 104 101
Receipt of Company stock in connection with
settlement of litigation 471
Capital lease receivable for sublease of furniture 156
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 7
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Integrated Orthopaedics, Inc. ("IOI"" or the "Company"), a Texas
corporation, was organized to provide management, consulting and ancillary
development services to orthopedic medical practices and other surgical
specialty physicians. In May 2000, the Company decided to discontinue its
physician service operations due to difficult financing markets and limited
investor support for physician service companies. The Company had previously
terminated its management services agreement ("MSA") with its Colorado practice
in January 2000, effective December 31, 1999 and terminated its MSA with the
Pennsylvania practice effective March 31, 2000. The Company is in the process of
selling its remaining assets which include an orthopedic practice and an
ambulatory surgery center in Louisiana, and two work hardening centers in Texas.
Concurrently, the Company is evaluating possible business opportunities in order
to acquire new operations through an acquisition or merger.
The Company provided comprehensive management services under agreements to its
Louisiana practice for six months and its Pennsylvania practice for three months
during the six months ended June 30, 2000. The Company completed construction of
an ambulatory surgery center ("ASC") in Louisiana in April 2000, which was
operational in May of 2000. The Company owns a majority interest in the ASC and
also provides management services to the ASC. In addition, the Company also owns
and operates two work hardening facilities in Texas.
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000 (See Note
4). These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 1999, as filed with the Securities and Exchange Commission on the Company's
Annual Report on Form 10-KSB.
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the disclosures of contingent assets and
liabilities. Because of the inherent uncertainties in this process, actual
future results could differ from those expected at the reporting date.
5
<PAGE> 8
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
COMPREHENSIVE INCOME - The Company had no other comprehensive income (loss) for
the six months ended June 30, 2000 and 1999. Comprehensive income (loss) equals
net income (loss) for each of the periods presented on the accompanying
consolidated statement of operations.
NOTE 2 - LOSS PER COMMON SHARE
Basic loss per share excludes dilution and is computed by dividing loss
available to common stockholders by the weighted average number of common shares
outstanding for the period.
The components of basic loss per share are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 EPS 1999 EPS
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net Loss from Continuing Operations $(2,488) $ (0.39) $(2,693) $ (0.41)
Series A preferred Stock Dividend (104) (0.02) (101) (0.02)
Series B Preferred Stock Dividend (1,369) (0.22) (1,243) (0.19)
------- --------- ------- ---------
Loss from Continuing Operations
Applicable to Common Shares $(3,961) $ (0.63) $(4,037) $ (0.62)
======= ========= ======= =========
Weighted Average Common Shares
Outstanding 6,296 6,527
======= =======
</TABLE>
Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock on the first day of the fiscal year. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
the computation of diluted EPS shall not assume conversion, exercise, or
contingent issuance of securities that would have an anti-dilutive effect on
earnings per share. For the six months ended June 30, 2000 and 1999, basic loss
per share and diluted loss per share are the same as the conversion of
outstanding stock options, warrants and convertible stock would have an
anti-dilutive effect on earnings per share.
6
<PAGE> 9
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - LEGAL PROCEEDINGS
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 a 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 was reached between the Company and the practice. The
settlement is composed of cash, notes receivable and the return of 376,836
shares of Company stock. The shares are held in treasury and are recorded at
market value as of the settlement date.
NOTE 4 - DISCONTINUED OPERATIONS
On May 24, 2000 the Board of Directors of the Company adopted a plan to
discontinue the operations of its Practice Management Services, Ambulatory
Surgery Center and Work Hardening Services operating segments due to difficult
financing markets and limited investor support for physician service companies.
Loss on Disposal of Discontinued Operations
The Company is currently in discussions with its practice in Louisiana regarding
terminating its management services agreement effective August 31, 2000. In
conjunction with the transaction, the Company will sell the related net accounts
receivable and net property and equipment to the practice. The MSA, net accounts
receivable and net property and equipment have been reduced to their net
realizable value at June 30, 2000 based upon management's best estimate; as
such, the actual amount when determined may differ from such estimate. The
Company's net investment in the assets is reflected as Net Liabilities of
Discontinued Operations - Practice Management Services in the accompanying
condensed consolidated balance sheet. The resulting write-down of $2,738,000
(net of tax) is included in the loss from disposal of discontinued operations
in the June 30, 2000 consolidated statement of operations.
The Company is also in discussions with two parties to sell its work hardening
facilities in Texas. In conjunction with the planned transactions, the Company
will sell the net property and equipment of the facilities. Total consideration
to be received related to the planned transaction is estimated to be $81,000 in
cash. The Company anticipates completing the transaction by August 31, 2000. The
net property and equipment have been reduced to their net realizable value at
June 30, 2000 based upon management's best estimate; however, the actual amount
when determined may differ from such estimate. The Company's net investment in
the assets is reflected as Net Assets of Discontinued Operations - Work
Hardening Services in the accompanying condensed consolidated balance sheet. The
resulting write-down of $44,000 (net of tax) is included in the loss from
disposal of
7
<PAGE> 10
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
discontinued operations in the June 30, 2000 consolidated statement of
operations.
The Company is also pursuing the sale of its ambulatory surgery center ("ASC")
in Louisiana. A write-down in the net investment of the ASC is not deemed
necessary at this time based on management's best estimate, however, the actual
amount realized may differ from such estimate. The Company's net investment in
the assets is reflected as Net Assets of Discontinued Operations - Ambulatory
Surgery Center in the accompanying condensed consolidated balance sheet. It is
anticipated that the ASC will incur losses through its disposal date, which is
projected to be September 30, 2000. These estimated losses ($186,000 net of tax)
are included in the loss from disposal of discontinued operations in the June
30, 2000 consolidated statement of operations.
The following is a summary of the loss from discontinued operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues: $ 644 $ 2,761 $ 3,029 $ 5,570
-------- -------- -------- --------
Costs and Expenses:
Practice compensation and benefits 318 1,047 1,277 2,079
Other direct costs 267 1,017 1,172 1,926
General and administrative 61 288 163 728
Depreciation and amortization 90 377 390 770
Interest Expense 16 22 46 42
(Gain) Loss on disposal of assets (200) 7,630
-------- -------- -------- --------
552 2,751 10,678 5,545
Income (Loss) From Discontinued
Operations Before Income Taxes 92 10 (7,649) 25
Income Tax Provision (Benefit) (178) 588 (187) 975
-------- -------- -------- --------
Income (Loss) from Discontinued
Operations, Net of Taxes $ (86) $ 598 $ (7,836) $ 1,000
======== ======== ======== ========
Income (Loss) from Discontinued
Operations per Common Share: Basic
and Diluted $ (0.01) $ 0.09 $ (1.24) $ 0.15
======== ======== ======== ========
</TABLE>
The Company had net assets of $2,525,000, which are associated with the
discontinued operations.
8
<PAGE> 11
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Medical Service Revenue
Medical service revenue for services to patients by the affiliated medical
practices with the Company is recorded when the services are rendered based on
established or negotiated charges reduced by contractual adjustments and
allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when the final
settlements are determined. Medical service revenue of the affiliated medical
practices is reduced by the contractual amounts retained by the medical
practices to arrive at the Company's revenue. The affiliated medical practices
maintain exclusive control of all aspects of the practice of medicine and the
delivery of medical services. All of the amounts retained by affiliated medical
practices under management in the first six months of 2000 were contractually
guaranteed as a minimum percentage of practice gross profit. As of June 30,
2000, all affiliated medical practices had been sold or are carried as
discontinued operations pending sale.
Divestitures
In April 2000, a definitive agreement was executed to terminate the Company's
management services agreement ("MSA") with its Pennsylvania practice effective
March 31, 2000. In conjunction with the transaction, the Company sold the
related net accounts receivable and net property and equipment to the practice.
Total consideration received related to the transaction was $3,954,500 in cash.
A write-down of $7.6 million is included in the loss from discontinued
operations in the consolidated statement of operations for the six months ended
June 30, 2000.
NOTE 5 - SPECIAL CHARGES
For the six months ended June 30, 2000 and 1999, the Company recorded special
charges of $884,000 and $768,000 respectively relating to corporate
restructuring charges. The charges for the six months ended June 30, 2000
include severance costs for ten corporate employees, an impairment charge
related to the corporate fixed assets, and lease termination costs. Management
expects all severance costs to be paid prior to December 31, 2000.
NOTE 6 - SUBSEQUENT EVENTS
Conversion of Convertible Preferred Stock
On August 2, 2000, the Company issued 2,373,863 shares of its Common Stock in
connection with the conversion and cancellation of all its Series A Preferred
Stock and the related accrued and unpaid dividends of $207,342. The Series A
Preferred Shareholder irrevocably waived, assigned and transferred to the
Company $643,026 of its accrued and unpaid dividends. In addition, the Company
issued 21,092,174 shares of it's Common Stock in connection with the
9
<PAGE> 12
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
conversion and cancellation of 242,560 shares of its Series B Preferred Stock.
The Series B Preferred Shareholders irrevocably waived, assigned and transferred
to the Company 73,796 of its Series B Preferred Stock and $2,786 of accrued and
unpaid dividends.
The following table shows the effects of the conversion of convertible
preferred stock on the Company's basic and diluted loss per share assuming the
conversion took place on January 1, 2000 (in thousands, except per share data):
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
------------- -------------
Proforma Loss from Continuing
Operations Applicable to Common
Shares ($ 1,479) $ (2,488)
======== ========
Proforma Loss from Continuing
Operations per Common Share:
Basic and Diluted $ (0.05) $ (0.08)
======== ========
Proforma Weighted Average
Common Shares Outstanding 29,621 29,762
======== ========
10
<PAGE> 13
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain of the comments that follow or that appear elsewhere in this quarterly
report represent forward-looking statements with respect to the Company's future
results of operations and its related capital resources and financial condition.
The Company relies on a variety of internal and external information as well as
management judgment in order to develop such forward-looking statements. Because
of the inherent limitations in this process, the relatively volatile nature of
the industry in which the Company operates, and other risks and uncertainties
including those discussed in this quarterly report and the Company's annual
report on Form 10-KSB, there can be no assurance that actual results will not
differ materially from these forward-looking statements.
RESULTS OF OPERATIONS
GENERAL
The Company's principal business activity during the six months ended June 30,
2000 was to provide management and ancillary development services to orthopedic
practices and other surgical specialty physicians. In May 2000, the Company
adopted a plan to discontinue its operations due to difficult financing markets
and limited investor support for physician services companies. The Company had
previously terminated its management services agreements with its Colorado
practice and its Pennsylvania practice on December 31, 1999 and March 31, 2000,
respectively. The Company is in the process of selling its remaining assets,
which include an orthopedic practice and an ambulatory surgery center in
Louisiana, and two work hardening centers in Texas. Concurrently, the Company is
evaluating possible business opportunities in order to acquire operations
through an acquisition or merger.
The Company is in the process of reviewing and evaluating several business
ventures for possible acquisition or participation by the Company. The Company
has not entered into or become engaged in a transaction as of the date of this
filing. The Company continues to investigate, review, and evaluate business
opportunities as they become available and will seek to acquire or become
engaged in business opportunities at such time as specific opportunities
warrant.
A decision to participate in a specific business opportunity will be made upon
the Company's Directors analysis regarding the quality of the other firm's
management and personnel, the asset base of such firm or enterprise, the
anticipated acceptability of new products or marketing concepts, the merit of
the firms business plan, and numerous other factors which are difficult to
analyze through the application of any objective criteria.
11
<PAGE> 14
The Company will not restrict its search to any particular business, industry or
geographical location, and management reserves the right to evaluate and enter
into any type of business in any location. The Company may participate in a
newly organized business venture or engage in a transaction with a more
established company entering a new phase of growth or in need of additional
capital to overcome existing financial problems. Participation in a new business
venture entails greater risks since in many instances the management of such
venture will not have proven its ability, the eventual market of such venture's
product or services will not likely be established, and thus profitability of
the venture will be unproven and cannot be predicted accurately. If the Company
engages in a transaction with a more established firm with existing financial
problems, it may be subjected to risk because the financial resources of the
Company may not be adequate to eliminate or reverse the circumstances leading to
such financial problems.
The analysis of the new businesses will be undertaken by or under the
supervision of the Directors of the Company. In analyzing prospective
businesses, the Directors will consider, to the extent applicable, the available
technical, financial and managerial resources; working capital and other
prospects for the future; the nature of present and expected competition; the
quality and experience of the management services which may be available and the
depth of the management team; the potential for further research, development,
or exploration; the potential for the growth expansion; the potential for
profit; the perceived public recognition or acceptance of products, services, or
trade or service marks; name identification; and other relevant factors. It is
anticipated that the results of operations of a specific firm may not
necessarily be indicative of the potential for the future because of the
requirement to substantially shift marketing approaches, expand significantly,
change product emphasis, change or substantially augment management, and other
factors.
The time frame in which the Company may participate in a business cannot be
predicted and will depend on circumstances beyond the Company's control,
including the availability of businesses, the time required for the Company to
complete its investigation and analysis of prospective businesses, the time
required to prepare appropriate documents and agreements providing for the
Company's participation, and other circumstances.
In implementing a structure for a particular business acquisition, the Company
may become a party to a merger, consolidation, or other reorganization with
another corporation or entity; joint venture; license; purchase and sale of the
assets; or purchase and sale of stock, the exact nature of which cannot now be
predicted. Notwithstanding the above, the Company does not intend to participate
in a business through the purchase of a minority stock positions. On the
consummation of a transaction, it is likely that the present management and
shareholders of the Company will not be in control of the Company. In addition,
a majority of the Company's Directors may, as part of the terms of the
acquisition transaction, resign and be replaced by new directors without a vote
of the Company's shareholders.
It is anticipated that any securities issued in any such reorganization would be
issued in reliance on exemptions from registration under applicable federal and
state securities laws. In some circumstances, however, as a negotiated element
of the transaction, the Company may agree to register such securities either at
the time the transaction is consummated, under certain conditions, or at a
specified times thereafter. Although the terms of such registration rights and
12
<PAGE> 15
the number of securities, if any which may be registered cannot be predicted it
may be expected that registration of securities by the Company in these
circumstances would entail substantial expense to the Company.
The issuance of substantial additional securities and their potential sale into
any trading market which may develop in the Company's securities may have a
depressive effect on such market.
The manner in which the Company participates in a business will depend on the
nature of the business, the respective needs and desires of the Company and
other parties, the management of the business, and the relative negotiating
strength of the Company and such other management.
The Company will participate in a business only after negotiations and execution
of appropriate written agreements. Although the terms of such agreements cannot
be predicted, generally such agreements will require specific representations
and warranties by all of the parties thereto, will specify certain events of
default, will detail their terms of the closing and the conditions which must be
satisfied by each of the parties prior to such closing, will outline the manner
of bearing costs if the transaction is not closed, will set forth remedies on
default, and will include miscellaneous other terms.
Discontinued Operations
The loss from discontinued operations for the six months ended June 30, 2000
includes the loss on the termination of the management services agreement with
the Pennsylvania practice (as further described below) and the loss from
operations of the practice management services, work hardening services and
ambulatory surgery center business segments from January 1, 2000 through May 31,
2000. In addition, it includes the corporate office costs associated with
supporting the discontinued segments. The loss from operations for the three
months ended June 30, 2000 includes the loss from operations of the three
business segments as well as the corporate office costs associated with
supporting the discontinued operations for the period of April 1, 2000 through
May 31, 2000.
During the first quarter of 2000, definitive agreements were reached with the
Colorado and the Pennsylvania practices to terminate their MSAs effective
December 31, 1999 and March 31, 2000, respectively. As such the Consolidated
Statements of Operations for the six months ended June 30, 2000 do not include
the operations of the Colorado practice and only include three months of
operations of the Pennsylvania practice. The loss from discontinued operations
for the six months ended June 30, 2000 includes a charge of $7.6 million related
to the termination of the Pennsylvania practice management services agreement
("MSA") and the sale of the related practice assets.
13
<PAGE> 16
Loss from Disposal of Discontinued Operations
The loss from disposal of discontinued operations for the three and six months
ended June 30, 2000 reflects the loss on the disposal of the Louisiana
orthopedic practice and the two work hardening centers, the operating losses for
these three facilities as well as the Louisiana ASC from June 1, 2000 until
their disposal date, and the corporate office costs associated with supporting
these discontinued segments.
The Company is currently in discussion with its practice in Louisiana regarding
terminating its MSA effective August 31, 2000. In conjunction with the
transaction, the Company will sell the net accounts receivable and net property
and equipment to the practice. The MSA, net accounts receivable and net property
and equipment have been reduced to their net realizable value at June 30, 2000
based on management's best estimate, however, the actual amount when determined
may be different from such estimate. The resulting write-down of $2,738,000 is
included in the loss from disposal of discontinued operations in the June 30,
2000 consolidated statement of operations.
The Company is also in discussions with two parties to sell its work hardening
facilities in Texas as of August 31, 2000. In conjunction with the transaction
the Company will sell the net property and equipment of the facilities. The net
property and equipment have been reduced to their net realizable value at June
30, 2000 based on management's best estimate, however, the actual amount when
determined may be different from such estimate. The resulting write-down of
$44,000 is included in the loss from disposal of discontinued operations in the
June 30, 2000 consolidated statement of operations.
The Company completed renovations of an ambulatory surgery center ("ASC") in
Louisiana in April of 2000 and completed its syndication in March of 2000. The
ASC was operational in May 2000. As a result of the Company's decision to
discontinue its operations in the ambulatory surgery center segment it is
pursuing the sale of its ASC in Louisiana. A write-down of the net investment in
the ASC is not deemed necessary at this time based on management's best
estimate, however, the actual amount when determined may be different from such
estimate. It is anticipated that the ASC will incur losses through its disposal
date, which is projected to be September 30, 2000. The losses of $186,000 are
included in the loss from disposal of discontinued operations in the June 30,
2000 consolidated statement of operations.
Special Charges
Special charges of $884,000 were recorded in the second quarter related to
restructuring the corporate office. The charges include severance costs for ten
corporate employees, an impairment charge related to the corporate fixed assets,
and lease termination costs.
As the Company is discontinuing the operations of its three business segments,
the Company is omitting as not meaningful additional discussion herein of
results of operations for the quarter and year-to-date periods as compared to
the equivalent prior year periods.
14
<PAGE> 17
Liquidity and Capital Resources
The Company currently expects to be able to satisfy its cash requirements for
the next twelve months by using its current available cash of $3.5 million as
well as the proceeds from the sale of its assets. At June 30, 2000 the Company
had outstanding commitments of $194,000 related to the equipment and
construction of the ambulatory surgery center.
15
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 8, 2000 for the
purpose of considering 1) Proposal 1 - the election of a Director of the
Company to serve until the 2001 Annual Meeting by shareholders of common
stock and Series A Preferred Stock; 2) Proposal 2 - the election of three
directors of the Company to serve until the 2001 Annual Meeting by
shareholders of Series B Preferred Stock, and 3) the ratification of the
selection of Ernst & Young, LLP as independent accountants to the Company
for the fiscal year ending December 31, 2000. The results of the voting for
each proposal are as follows:
<TABLE>
<CAPTION>
FOR WITHHOLD
----------------- --------------------
<S> <C> <C>
PROPOSAL 1:
Jose E. Kauachi 8,677,559 1,000
</TABLE>
<TABLE>
<CAPTION>
FOR WITHHOLD
----------------- --------------------
<S> <C> <C>
PROPOSAL 2:
Scott J. Hancock 28,563,086 0
Mark A. Wolfson 28,563,086 0
Steven B. Gruber 28,563,086 0
</TABLE>
PROPOSAL 3:
The results of the voting for ratification of Ernst & Young, LLP as the
Company's independent accountant for the fiscal year ending December 31,
2000, were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
----------------- -------------------- -------------------
<S> <C> <C>
37,258,370 2,000 5,875
</TABLE>
16
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
27. Financial Data Schedule.
b) Reports on Form 8-K:
8-K dated April 12, 2000 filed on April 27, 2000 reporting under
Item 2 the termination of the Lancaster Orthopedic Group, P.C.
management services agreement and the related sell of assets, and
filing under Item 7 the required proforma financial information
and the related agreements with respect to the transaction.
17
<PAGE> 20
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
Date: August 21, 2000 By: /s/ Laurie H. Gutierrez
----------------------------
Laurie Hill Gutierrez
Chief Financial Officer
18
<PAGE> 21
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
