<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 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 November 8, 2000 29,602,741 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
September 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
September 30, 2000 and December 31, 1999........................................ 1
Consolidated Statements of Operations--
Three Months and Nine Months Ended September 30, 2000 and 1999.................. 2
Consolidated Statement of Stockholders' Equity--
Nine Months Ended September 30, 2000 ........................................... 3
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 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................................... 12
PART II. OTHER INFORMATION....................................................................... 15
SIGNATURE........................................................................................ 16
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,386 $ 1,889
Accounts receivable 2,101
Due from affiliated medical groups 227
Prepaid expenses 40 449
Note receivable 111
Other current assets 7 75
Assets to be disposed of 1,529
Net assets of discontinued operations - Ambulatory Surgery Center 2,735
------------- ------------
Total Current Assets 6,279 6,270
Property and Equipment (including capital leases) 251 4,869
Less: Accumulated Depreciation and Amortization (221) (2,532)
------------- ------------
Net Property and Equipment 30 2,337
------------- ------------
Management Services Agreements, net of amortization 20,581
Assets to be Disposed Of 895
Other Assets 133 135
------------- ------------
TOTAL ASSETS $ 6,442 $ 30,218
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11 $ 106
Accrued liabilities 871 1,741
Net liabilities of discontinued operations - Practice Management Services 16
Net liabilities of discontinued operations - Work Hardening Services 33
Current maturities of notes payable and capital lease obligations 54 432
------------- ------------
Total Current Liabilities 985 2,279
Obligations Under Capital Leases 129 542
Notes Payable 651
Deferred Income Taxes 7,255
Dividends Payable 735
------------- ------------
Total Liabilities 1,114 11,462
------------- ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock 3
Common stock 30 7
Additional paid-in capital 52,238 49,316
Accumulated deficit (46,219) (30,320)
Treasury shares (721) (250)
------------- ------------
Total Stockholders' Equity 5,328 18,756
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,442 $ 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 NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ $ $ $
------------- ------------- ------------- -------------
Costs and expenses:
General and administrative 677 1,222 2,197 2,821
Special charges 5 884 773
Depreciation and amortization 12 60 110 179
------------- ------------- ------------- -------------
689 1,287 3,191 3,773
Loss From Operations (689) (1,287) (3,191) (3,773)
Interest Income 54 45 166 172
Interest Expense (3) (14) (25) (318)
------------- ------------- ------------- -------------
Loss from Continuing Operations Before
Provision for Income Taxes (638) (1,256) (3,050) (3,919)
Income Tax Provision (14) (14) (47) (44)
------------- ------------- ------------- -------------
Loss from Continuing Operations (652) (1,270) (3,097) (3,963)
Discontinued Operations (Note 4):
Income (Loss) from operations, net of taxes 361 (7,836) 1,361
Income (Loss) from disposal of operations,
net of taxes 54 (3,236)
------------- ------------- ------------- -------------
Income (Loss) from Discontinued Operations 54 361 (11,072) 1,361
Net Loss Before Extraordinary Items (598) (909) (14,169) (2,602)
Extraordinary Loss Related to Retirement of
NationsBank debt, net (152)
------------- ------------- ------------- -------------
Net loss $ (598) $ (909) $ (14,169) $ (2,754)
============= ============= ============= =============
Loss from Continuing Operations Applicable to
Common Shares $ (909) $ (1,979) $ (4,827) $ (6,016)
============= ============= ============= =============
Loss from Continuing Operations Per Common
Share: Basic and Diluted $ (0.05) $ (0.30) $ (0.45) $ (0.93)
============= ============= ============= =============
Weighted Average Common Shares
Outstanding 19,390 6,496 10,693 6,496
============= ============= ============= =============
</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 -- -- -- -- -- (121) -- (121)
Dividends Preferred
Stock Series B -- 16 -- -- 1,609 (1,609) -- --
Treasury Stock -
received in connection
with settlement of
litigation (Note 3) -- -- -- -- 471 -- (471) --
Conversion of Preferred
Stock Series A -- (25) 2 -- -- -- -- 2
Conversion of Preferred
Stock Series B -- (317) 21 (3) 833 -- -- 851
Exercise of Stock
Options 7 -- -- -- 9 -- -- 9
Net Loss -- -- -- -- -- (14,169) -- (14,169)
------ --------- ------ --------- ---------- ------------ --------- --------
Balance at
September 30, 2000 6,564 -- $ 30 $ -- $ 52,238 $ (46,219) $ (721) $ 5,328
====== ========= ====== ========= ========== =========== ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 6
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,169) $ (2,754)
Non-cash adjustments:
Impairment charge 11,618 --
Minority interest in loss (175) --
Depreciation and amortization 684 1,312
Changes in operating assets and liabilities (395) (405)
-------- --------
Net Cash Used in Operating Activities (2,437) (1,847)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,509) (562)
Proceeds from sale of assets 4,707 --
Collection of note receivable 1,701 110
-------- --------
Net Cash Provided (Used) in Investing Activities 3,899 (452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority Interest 75 --
Proceeds from exercise of stock options 9 --
Net borrowings on notes and capital lease obligations (49) (420)
-------- --------
Net Cash Provided in Financing Activities 35 (420)
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,497 (2,719)
Cash and cash equivalents beginning of period 1,889 6,018
-------- --------
Cash and cash equivalents end of period $ 3,386 $ 3,299
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 34 $ 318
Income taxes paid (refunded) $ 111 $ 51
Capital lease obligations for equipment $ -- $ 661
NON CASH TRANSACTIONS AND OTHERS:
Series B Preferred Stock - accumulated deficit
related to stock dividends $ 1,609 $ 1,899
Series A Preferred Stock - increase in accrued
liabilities related to unpaid dividends $ 121 $ 154
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 its
Pennsylvania practice in April 2000 effective March 31, 2000. The Company
terminated its MSA with its Louisiana practice in September 2000, effective
August 31, 2000. In addition, it sold the fixed assets related to its work
hardening centers, effective August 31, 2000. The Company is in the process of
pursuing the sale of its remaining operating asset, which is an ambulatory
surgery center in Louisiana.
The Company provided comprehensive management services under agreements to its
Louisiana practice for eight months, and its Pennsylvania practice for three
months, during the nine months ended September 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 operated two work hardening centers in Texas for eight months during the
nine months ended September 30, 2000.
On September 15, 2000, the Company signed a merger agreement with PowerBrief,
Inc. ("PowerBrief") a private company developing integrated online solutions for
legal professionals. Following the merger, existing shareholders of the Company
will own approximately 34.1% of the post merger outstanding common stock of the
surviving company, and existing shareholders, warrants holders and option
holders of the Company will own approximately 39.7% of the outstanding common
stock of the surviving company on a fully diluted basis. These percentages are
subject to further adjustment as set forth in greater detail in the merger
agreement, based on the amount of cash and liabilities the Company has following
the merger, which will depend, in part on the amount for which the Company can
sell its ambulatory surgery center in Louisiana.
Although there can be no assurances that the merger will close, the merger is
expected to be completed during the first quarter of 2001. The completion of the
merger depends on meeting a number of conditions, including, without limitation,
that the shares of the Company's common stock issuable in the merger be listed
on the American Stock Exchange. In the event that these conditions are not met
the merger may not be completed. If the merger is not completed the Company will
evaluate other possible alternatives.
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
5
<PAGE> 8
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature. Operating results for the nine months ended
September 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.
COMPREHENSIVE INCOME - The Company had no other comprehensive income (loss) for
the nine months ended September 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>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2000 EPS 1999 EPS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Loss From Continuing Operations $ (652) $ (0.04) $ (1,270) $ (0.19)
Series A Preferred Stock Dividend (17) -- (53) (0.01)
Series B Preferred Stock Dividend (240) (0.01) (656) (0.10)
-------- -------- -------- --------
Loss Applicable to Common Share $ (909) $ (0.05) $ (1,979) $ (0.30)
======== ======== ======== ========
Weighted Average Common Shares
Outstanding 19,390 6,496
======== ========
</TABLE>
6
<PAGE> 9
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2000 EPS 1999 EPS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Loss From Continuing Operations $ (3,097) $ (0.29) $ (3,963) $ (0.61)
Series A Preferred Stock Dividend (121) (0.01) (154) (0.03)
Series B Preferred Stock Dividend (1,609) (0.15) (1,899) (0.29)
-------- -------- -------- --------
Loss Applicable to Common Share $ (4,827) $ (0.45) $ (6,016) $ (0.93)
======== ======== ======== ========
Weighted Average Common Shares
Outstanding 10,693 6,496
======== ========
</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 nine months ended September 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.
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 Company terminated the MSA in
January 1999 due to the failure of the practice to satisfy certain of its
obligations thereunder. Upon such a termination for cause, the Company and its
subsidiary 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.
In May 2000 a physician, formerly employed by the Company's Louisiana practice,
filed suit against the Company and the Louisiana practice for an unspecified
amount of damages. The Louisiana practice hired this physician in July 1999. On
February 1, 2000, the Louisiana practice notified the physician that his
employment was being terminated effective 90 days from the date of such notice
pursuant to the terms of his employment contract. The physician alleged that the
Company and the Louisiana practice misrepresented the condition of the
7
<PAGE> 10
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Louisiana practice and that such misrepresentations induced him to leave his
former practice. He is also claiming breach of contract, tortuous interference
by the Company with his contract with the Louisiana practice, and violations of
the Louisiana Whistleblower Protection Act and other laws. He has also made
claims for payment of medical malpractice coverage, vacation pay and continuing
medical education leave. The Company has denied such claims. This case is
pending in Louisiana.
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 pursuing the sale of its ambulatory surgery center ("ASC") in
Louisiana. The Company's net investment in the asset is reflected as Net Assets
of Discontinued Operations - Ambulatory Surgery Center in the accompanying
condensed consolidated balance sheet.
8
<PAGE> 11
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The following is a summary of the loss from discontinued operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---------------------
<S> <C> <C>
Revenues: $ 3,029 $ 8,359
-------- --------
Costs and Expenses:
Practice compensation and benefits 1,277 3,174
Other direct costs 1,172 3,135
General and administrative 163 1,016
Depreciation and amortization 390 1,133
Interest Expense 46 53
Loss on disposal of assets 7,630
-------- --------
10,678 8,511
Loss From Discontinued
Operations Before Income Taxes (7,649) (152)
Income Tax Provision (Benefit) (187) 1,513
-------- --------
Income (Loss) from Operations, Net of Taxes $ (7,836) $ 1,361
Loss from Disposal of Operations, Net of Taxes
$ (3,236) $ --
-------- --------
Income (Loss) from Discontinued Operations $(11,072) $ 1,361
======== ========
Income (Loss) from Discontinued Operations per
Common Share: Basic and Diluted $ (1.04) $ (0.21)
======== ========
</TABLE>
For the three months ended September 30, 2000 and 1999, earnings per common
share from discontinued operations was $0.0 and $(0.06), respectively. The
Company had net assets of $2,686,000, which are associated with the discontinued
operations.
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
9
<PAGE> 12
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
retained by affiliated medical practices under management in the first nine
months of 2000 were contractually guaranteed as a minimum percentage of practice
gross profit. As of September 30, 2000, all affiliated medical practices had
been sold.
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 $4,210,000, which is
comprised of cash and the assumption by the Pennsylvania practice of certain
liabilities. A write-down of $7.6 million is included in the loss from
discontinued operations in the consolidated statement of operations for the nine
months ended September 30, 2000.
In September 2000, a definitive agreement was executed to terminate the
company's MSA with its Louisiana practice effective August 31, 2000. In
connection with the transaction, the Company sold the related net accounts
receivable and net property and equipment to a newly formed entity owned by the
partner physicians of the practice. In addition, the new entity assumed certain
liabilities and forgave certain debts of the Company. Total consideration
received related to the transaction was $1,266,000, which includes cash,
forgiveness of debt and the assumption of debt. A write down of $2,732,000 is
included in the loss from disposal of discontinued operations in the
consolidated statement of operations for the nine months ended September 30,
2000.
In August 2000, a definitive agreement was executed to sell the fixed assets of
the Company's work hardening practices effective August 31, 2000. Total
consideration received related to the transaction was $120,000 in cash and notes
receivable. A write down of $35,000 is included in the loss from disposal of
discontinued operations for the nine months ended September 30, 2000.
NOTE 5 - SPECIAL CHARGES
For the nine months ended September 30, 2000 and 1999, the Company recorded
special charges of $884,000 and $773,000 respectively relating to corporate
restructuring charges. The charges for the nine months ended September 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 March 31, 2001.
10
<PAGE> 13
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - 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 its Common Stock in connection with the 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.
NOTE 7 - COMMITMENTS
As of September 30, 2000, the Company had capital expenditure purchase
commitments outstanding of approximately $116,000 associated with the
construction of the ambulatory surgery center in Louisiana.
NOTE 8 - SUBSEQUENT EVENTS
In conjunction with the merger agreement with PowerBrief, Inc. dated September
15, 2000, the companies entered into a promissory note, which allows PowerBrief,
Inc. to borrow up to $3.0 million from the Company at an annual interest rate of
12%. The principal of the note is due and payable at the earlier of March 31,
2001 or the date in which the merger agreement is terminated. As of November 8,
2000 PowerBrief, Inc. had borrowed $500,000 under the promissory note.
11
<PAGE> 14
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.
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 nine months ended September
30, 2000 was to provide management and ancillary development services to
orthopedic practices and an ambulatory surgery center. 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 effective December 31, 1999 and March 31,
2000, respectively. In September 2000, the Company terminated its MSA with its
practice in Louisiana effective August 31, 2000. In addition, it sold the fixed
assets related to its work hardening division effective August 31, 2000. The
Company is in the process of pursuing the sale of its remaining operating asset,
which is an ambulatory surgery center in Louisiana.
On September 15, 2000, the Company signed a merger agreement with PowerBrief,
Inc. ("PowerBrief") a private company developing integrated online solutions for
legal professionals. Following the merger, existing shareholders of the Company
will own approximately 34.1% of the post merger outstanding common stock of the
surviving company, and existing shareholders, warrants holders and option
holders of the Company will own approximately 39.7% of the outstanding common
stock of the surviving company on a fully diluted basis. These percentages are
subject to further adjustment, as set forth in greater detail in the merger
agreement, based on the amount of cash and liabilities the Company has following
the merger, which will depend, in part on the amount for which the Company can
sell its ambulatory surgery center in Louisiana.
Although there can be no assurances that the merger will close, the merger is
expected to be completed during the first quarter of 2001. The completion of the
merger depends on meeting
12
<PAGE> 15
a number of conditions, including, without limitation, the shares of the
Companies common stock issuable in the merger be listed on the American Stock
Exchange. In the event that these conditions are not met the merger may not be
completed. If the merger is not completed the Company will evaluate other
possible opportunities in order to acquire operations through an acquisition or
merger.
Discontinued Operations
The loss from discontinued operations for the nine months ended September 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.
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 nine months ended September 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 nine months ended September 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.
Loss from Disposal of Discontinued Operations
The loss from disposal of discontinued operations for the three and nine months
ended September 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 executed a definitive agreement in September 2000 with its practice
in Louisiana regarding terminating its MSA effective August 31, 2000. In
conjunction with the transaction, the Company sold the net accounts receivable
and net property and equipment to a newly formed entity owned by the partner
physicians of the practice. The resulting write-down of $2,732,000 is included
in the loss from disposal of discontinued operations in the September 30, 2000
consolidated statement of operations.
In the third quarter, the Company executed definitive agreements with two
parties to sell the fixed assets of its work hardening facilities as of August
31, 2000. The resulting write-down of $35,000 is included in the loss from
disposal of discontinued operations in the September 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
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2000. As a result of the Company's decision to discontinue its operations in the
ambulatory surgery center segment it is pursuing the sell of its ASC in
Louisiana. A write-down in the net investment in the ASC is not deemed necessary
at September 30, 2000 based on management's best estimate, however, the actual
amount when determined may be different from such estimate.
Special Charges
Special charges of $884,000 were recorded in June 2000 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.
Liquidity and Capital Resources
The Company currently expects to be able to satisfy its current requirements for
the next 12 months by using its current available cash of $3.4 million as well
as the proceeds from the sale of its assets. At September 30, 2000 the Company
had outstanding commitments of $116,000 related to the equipment and
construction of the ambulatory surgery center. However, upon completion of the
merger, in order to execute its business strategy, the Company will need to
raise additional capital in the second or third quarter of 2001, or possibly
earlier depending upon the ability of the Company to sell the Louisiana
Ambulatory Surgery Center for cash. This additional capital could come from the
sale of common stock or preferred stock, the exercise of outstanding options or
warrants, or from borrowings, including using the Louisiana Ambulatory Surgery
Center as collateral for such borrowings. The Company cannot guarantee that
additional financing or equity will be available on terms acceptable to it, or
at all.
In conjunction with the merger agreement with PowerBrief, Inc. dated September
15, 2000, the companies entered into a promissory note which allows PowerBrief,
Inc. to borrow up to $3.0 million from IOI at an annual interest rate of twelve
percent. As of November 8, 2000 PowerBrief, Inc. has borrowed $500,000 under the
promissory note.
In the event the merger is not completed, and PowerBrief is unable to repay the
amount borrowed under the promissory note, it would result in the Company having
limited financial resources to develop and implement an alternative business
strategy. In addition, if the Company is unable to sell its ambulatory surgery
center in Louisiana in an acceptable time frame or at an acceptable price it
would result in insufficient funds being available to lend under the promissory
note.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
2.1 Agreement and Plan of Merger dated September 15, 2000
between the Company and PowerBrief, Inc. (Incorporated by
reference to Exhibit 99.2 of the Company's Current Report
on Form 8-K filed September 21, 2000)
10.1 Voting Agreement dated September 15, 2000 among the
Company, Robert W. Ohnesorge and K. Wade Bennett.
10.2 Promissory note dated September 15, 2000 between the
Company and PowerBrief, Inc.
10.3 Asset purchase agreement dated September 18, 2000 by and
between IOI Management Services of Louisiana, Inc. and
Doctors Katz and DiGrado, Inc. (Incorporated by reference
to Exhibit 2.1 of the Company's Current Report on Form 8-K
filed October 3, 2000)
10.4 Agreement to Terminate the Management Agreement dated
September 18, 2000 by and between IOI Management Services
of Louisiana, Inc. and Westside Orthopaedics Clinic, PC.
(Incorporated by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-k filed October 3, 2000)
27. Financial Data Schedule.
b) Reports on Form 8-K:
8-K dated September 15, 2000 filed on September 21, 2000 reporting
under Item 5 the merger of Integrated Orthopaedics, Inc. and
PowerBrief, Inc. and filing under Item 7 the required text of the press
release and the related agreements with respect to the transaction.
8-K dated September 18, 2000 filed on October 3, 2000 reporting under
Item 2 the termination of the Westside Orthopaedic Center, 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.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRATED ORTHOPAEDICS, INC.
Date: November 14, 2000 By: /s/ Laurie H. Gutierrez
------------------------------
Laurie Hill Gutierrez
Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated September 15, 2000 between the
Company and PowerBrief, Inc. (Incorporated by reference to Exhibit 99.2
of the Company's Current Report on Form 8-K filed September 21, 2000)
*10.1 Voting Agreement dated September 15, 2000 among the Company, Robert W.
Ohnesorge and K. Wade Bennett.
*10.2 Promissory note dated September 15, 2000 between the Company and
PowerBrief, Inc.
10.3 Asset purchase agreement dated September 18, 2000 by and between IOI
Management Services of Louisiana, Inc. and Doctors Katz and DiGrado,
Inc. (Incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed October 3, 2000)
10.4 Agreement to Terminate the Management Agreement dated September 18,
2000 by and between IOI Management Services of Louisiana, Inc. and
Westside Orthopaedics Clinic, PC. (Incorporated by reference to Exhibit
2.2 of the Company's Current Report on Form 8-k filed October 3, 2000)
*27. Financial Data Schedule.
</TABLE>
* Filed herewith.
