<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 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)
5858 Westheimer, Suite 500, Houston, Texas 77057
------------------------------------------------
(Address of principal executive offices)
(713) 225-5464
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days:
YES X NO
----- -----
As of May 9, 2000, 6,161,026 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
March 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
March 31, 2000 and December 31, 1999............................................ 1
Consolidated Statements of Operations--
Three months ended March 31, 2000 and 1999...................................... 2
Consolidated Statement of Stockholders' Equity--
Three months ended March 31, 2000 .............................................. 3
Condensed Consolidated Statements of Cash Flows--
Three months ended March 31, 2000 and 1999 ..................................... 4
Notes to Interim Condensed Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 10
PART II. OTHER INFORMATION....................................................................... 15
SIGNATURE........................................................................................ 16
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 804 $ 1,889
Accounts receivable 620 2,101
Other current assets 1,694 751
Assets to be disposed of 3,955 1,529
------------ ------------
Total Current Assets 7,073 6,270
Property, equipment, construction in progress (including capital leases) 4,767 4,869
Less: Accumulated depreciation and amortization (2,233) (2,532)
------------ ------------
Net property and equipment 2,534 2,337
------------ ------------
Management services agreements, net 4,773 20,581
Other assets 972 135
Assets to be disposed of 895
Deferred income taxes 1,925 1,925
------------ ------------
TOTAL ASSETS $ 17,277 $ 32,143
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 32 $ 106
Accrued liabilities 1,251 1,741
Current maturities of notes payable and capital lease obligations 341 432
------------ ------------
Total Current Liabilities 1,624 2,279
Notes payable 761 651
Obligations under capital leases 339 542
Dividend payable 785 735
Deferred income taxes 3,813 9,180
Minority interest 12
------------ ------------
Total Liabilities 7,334 13,387
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock 3 3
Common stock 7 7
Additional paid-in capital 50,411 49,316
Accumulated deficit (39,809) (30,320)
Treasury shares (669) (250)
------------ ------------
Total Stockholders' Equity 9,943 18,756
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,277 $ 32,143
============ ============
</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
------------------------------
MARCH 31, MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 2,370 $ 2,858
------------ ------------
Costs and expenses:
Practice compensation and benefits 961 1,032
Other direct costs 912 919
General and administrative 1,013 1,391
Depreciation and amortization 359 453
Impairment charges 7,830
------------ ------------
11,075 3,795
Loss From Operations (8,705) (937)
Interest income 36 69
Interest expense (39) (204)
------------ ------------
Loss Before Income Tax (Provision) Benefit (8,708) (1,072)
Income Tax (Provision) Benefit (51) 397
------------ ------------
Net loss $ (8,759) $ (675)
============ ============
Loss applicable to common shares $ (9,489) $ (1,334)
============ ============
Loss per common share:
Basic and diluted $ (1.47) $ (0.20)
============ ============
Weighted average common
shares outstanding 6,437 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 IN ACCUMULATED TREASURY
COMMON PREFERRED COMMON PREFERRED 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 -- -- -- -- -- (54) -- (54)
Dividends -
Preferred Stock
Series B -- 7 -- -- 676 (676) -- --
Treasury Stock- received
in connection with settlement
of litigation -- -- -- -- 419 -- (419) --
Net loss -- -- -- -- -- (8,759) -- (8,759)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
March 31, 2000 6,557 333 $ 7 $ 3 $ 50,411 $(39,809) $ (669) $ 9,943
======== ======== ======== ======== ======== ======== ======== ========
</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>
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,759) $ (675)
Non-cash adjustments:
Impairment charge 7,830
Loss on disposal of assets 51
Depreciation and amortization 359
Changes in operating assets and liabilities 100 214
------------ ------------
Net Cash Used in Operating Activities (419) (461)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,247) (182)
Collection of notes receivable 448
------------ ------------
Net cash used in investing activities (799) (182)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority Interest 75
Borrowings (payments) on notes and capital lease obligations 58 (159)
------------ ------------
Net Cash provided (used) in Financing Activities 133 (159)
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,085) (802)
Cash and cash equivalents beginning of period 1,889 6,018
------------ ------------
Cash and cash equivalents end of period $ 804 $ 5,216
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 24 $ 186
Income taxes paid (refunded) 3 (5)
Capital lease obligations for equipment 663
NON CASH TRANSACTIONS AND OTHERS:
Others -
Series B Preferred Stock - accumulated
deficit related to stock dividends 676 609
Series A Preferred Stock - increase in
accrued liabilities related to unpaid dividends 54 50
Receipt of Company stock in connection with
Settlement of litigation 419
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 7
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas
corporation, is a healthcare management services company which provides
management, consulting and ancillary development services to orthopaedic medical
practices and other surgical specialty physicians.
The Company recently decided to terminate its management services agreements
("MSA") with its existing practices, contingent upon obtaining acceptable terms.
As such, in December 1999 the Company entered into discussions with it's
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. The Company is in preliminary discussions with its Louisiana practice
regarding terminating its MSA. For the three months ended March 31, 2000, the
Company provided comprehensive management services under long-term agreements to
two orthopaedic practices. The Company also owns and operates two work hardening
facilities in Houston, Texas.
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of those of a normal recurring nature) considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2000, 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 three months ended March 31, 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 - 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 three months of 2000 were contractually
guaranteed as a minimum percentage of practice gross profit.
The following represents the amounts included in the determination of the
Company's revenues (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Medical Service Revenue $ 3,519 $ 4,373
Less: Amounts Retained by Medical Groups 1,149 1,515
------------ ------------
Revenues $ 2,370 $ 2,858
============ ============
Management Services Agreements at period end 2 3
</TABLE>
NOTE 3 - MEDICAL PRACTICE 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 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. At March 31, 2000 the carrying amount of
such net accounts receivable and net property and equipment, was $1,373,000 and
$710,000 respectively. The MSA, net accounts receivable and net property and
equipment have been reduced to their net realizable value at March 31, 2000
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 condensed
consolidated balance sheets and are included in the total assets of the Practice
Management Services Segment. The resulting write-down of $7.8 million is
reflected as an impairment charge at March 31, 2000 in the consolidated
statement of operations. The practice's income before taxes for the three months
ended March 31, 2000 and 1999 was $233,000 and $241,000, respectively.
6
<PAGE> 9
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - LOSS PER COMMON SHARE
Basic loss per share excludes dilution and is computed by dividing loss
available to common stockholders by the weighted average number of common shares
outstanding for the period.
The components of basic loss per share are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
2000 EPS 1999 EPS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (8,759) $ (1.36) $ (675) $ (0.10)
Series A Preferred Stock Dividend (54) (0.01) (50) (0.01)
Series B Preferred Stock Dividend (676) (0.10) (609) (0.09)
------------ ------------ ------------ ------------
Loss applicable to common shares $ (9,489) $ (1.47) $ (1,334) $ (0.20)
============ ============ ============ ============
Weighted average common shares
outstanding 6,437 6,506
============ ============
</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 quarterly period ended March 31, 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.
7
<PAGE> 10
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - SEGMENT DATA
The Company's reportable segments are strategic business units that offer
different services. They are managed separately because each business requires
different operating and marketing strategies. The Company has three reportable
segments: (i) orthopaedic medical practice management services (ii) ambulatory
surgery centers and (iii) 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 Company evaluates the performance of its segments based on segment profit.
Segment profit for each segment includes revenue and expenses directly
attributable to the segment. It excludes certain costs that are managed outside
the reportable segments such as corporate expenses, income taxes and special
charges. There are no intercompany transfers between segments.
Segment information as of and for the three months ended March 31, 2000 and 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenue:
Practice Management Services $ 2,031 $ 2,433
Ambulatory Surgery Centers
Work Hardening Services 339 376
EBITDA
Practice Management Services $ 533 $ 790
Ambulatory Surgery Centers (93)
Work Hardening Services 42 69
Income Before Income Tax
Practice Management Services $ 250 $ 394
Ambulatory Surgery Centers (93)
Work Hardening Services 25 51
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Total Assets
Practice Management Services $ 12,141 $ 26,716
Ambulatory Surgery Centers 1,816 412
Work Hardening Services 9,498 9,428
</TABLE>
8
<PAGE> 11
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of the Company's segment income before income tax benefit to
the corresponding consolidated amounts as of and for the three months ended
March 31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Segment Income,(loss) before
Income Tax (Provision) Benefit $ 182 $ 445
Impairment charges (7,830)
Corporate expense, net (1,060) (1,517)
---------- ----------
$ (8,708) $ (1,072)
========== ==========
</TABLE>
A reconciliation of the Company's segment assets to the corresponding
consolidated amounts as of March 31, 2000 and December 31, 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Total Assets
Segment assets $ 23,455 $ 36,556
Corporate assets 35,407 40,978
Intercompany elimination (41,585) (45,391)
--------- ---------
Total Assets $ 17,277 $ 32,143
========= =========
</TABLE>
NOTE 6 - 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 335,514
shares of Company stock. The stocks are held in treasury and are recorded at
market value as of the settlement date.
9
<PAGE> 12
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain of the comments that follow or that appear elsewhere in this quarterly
report represent forward-looking statements with respect to the Company's future
results of operations and its related capital resources and financial condition.
The Company relies on a variety of internal and external information as well as
management judgment in order to develop such forward-looking statements. Because
of the inherent limitations in this process, the relatively volatile nature of
the industry in which the Company operates, and other risks and uncertainties
including those discussed in this quarterly report and the Company's annual
report on Form 10-KSB, there can be no assurance that actual results will not
differ materially from these forward-looking statements.
RESULTS OF OPERATIONS
GENERAL
During the first quarter of 2000 the Company focused its efforts on a strategy
of acquiring or developing 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 has recently terminated its management services agreements with two
of its practices which were acquired under a traditional asset purchase model
and is in preliminary discussions with its remaining practice to terminate its
MSA. 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 three months ended March 31, 2000 do not
include the operations of the Colorado practice. The Consolidated Statement of
Operations includes an impairment charge of $7.8 million related to the
reduction of the assets of the Pennsylvania practice to their net realizable
value at March 31, 2000 based on the terms of the agreement.
10
<PAGE> 13
In April 1999, the Company acquired the license for an ambulatory surgery
center ("ASC") in Marrero, Louisiana, which is in 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 ("Westbank ASC"). The syndication of Westbank ASC was
completed in March 2000. The renovations of Westbank ASC continued during the
first quarter of 2000 and were completed in April of 2000 and the center opened
in May of 2000.
In an effort to reduce corporate overhead, in March of 2000 the Company
subleased approximately half of its 17,000 square feet of corporate office space
with the remaining half of the space being subleased effective June 1, 2000.
Effective June 1, 2000 the Company is leasing approximately 6,000 square feet of
office space at 1800 West Loop South, Suite 1030, Houston, Texas 77027 and is
moving its corporate office to such location.
11
<PAGE> 14
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999.
REVENUES
Revenues for the three months ended March 31, 2000 decreased $488,000, or 17%,
to $2.4 million in the three months ended March 31, 2000 from $2.9 million for
the same period in 1999. Of the $2.3 million in revenue, $2.0 million, or 86%,
was generated by the affiliated orthopaedic practices, and $339,000, or 14%, was
generated by the Company's wholly-owned work hardening and physical therapy
facilities.
In January 2000, the Company entered into an agreement to terminate the MSA with
the medical practice located in Colorado effective December 31, 1999. As a
result no revenue was reported for the three months ended March 31, 2000 for
this practice. Excluding this practice, revenue increased for the three months
ended March 31, 2000 by $14,000, or 1%.
PRACTICE COMPENSATION AND BENEFITS:
Practice compensation and benefits decreased $71,000, or 7%, to $961,000 in the
three months ended March 31, 2000 from $1,032,000 for the same period in 1999.
These costs decreased $192,000 due to not incurring practice compensation and
benefits for the Colorado practice offset by an increase of $91,000 due to
increased personnel for ancillary services (physical therapy, bone densitometry,
and magnetic resonance imaging) at the physician practices and an increase of
$30,000 related to the Westbank ASC.
OTHER DIRECT COSTS:
Other direct costs decreased $7,000, or 1%, to $912,000 in the three months
ended March 31, 2000 from $919,000 for the same period in 1999. These costs
decreased $132,000 due to the disposition of the Colorado clinic offset by an
increase of $125,000 in the remaining operations. Of this increase $63,000
relates to start up costs for the Westbank ASC and the remaining increase
relates to additional rent and professional services associated with the
addition of ancillary services.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the three months ended March 31, 2000
decreased $378,000, or 27%, from $1,391,000 in 1999 to $1,013,000 in 2000. The
decrease is primarily due to a $397,000 decrease in corporate personnel costs as
a result of restructuring the corporate office, a decrease of $39,000 in
advertising, a $55,000 decrease in travel offset by a loss on subleasing the
office space, furniture, and telephone system of $108,000.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization for the three months ended March 31, 2000
decreased $94,000 to $359,000 for the three months ended March 31, 2000 from
$453,000 for the same period in 1999. The decrease was due to the elimination of
depreciation and amortization for the Colorado practice MSA and equipment for
the three months ended March 31, 2000.
12
<PAGE> 15
IMPAIRMENT CHARGES:
At March 31, 2000 an impairment charge of $7,830,000 was recorded related to the
termination of its MSA with the Pennsylvania practice. The impairment charge was
recorded to reduce the related assets to their net realizable value at March 31,
2000 based on the terms of the agreement.
INTEREST INCOME:
Interest income for the three months ended March 31, 2000 decreased $33,000 to
$36,000 for the three months ended March 31, 2000 from $69,000 for the same
period in 1999. This decrease was due to a decrease in the cash and investment
balances for the three months ended March 31, 2000 as compared to the same
period in 1999.
INTEREST EXPENSES:
Interest expense decreased $165,000 to $39,000 for the three months ended March
31, 2000 from $204,000 for the same period in 1999. Interest expense decreased
due to the termination of the $65 million credit facility in June of 1999.
INCOME TAX (PROVISION) BENEFIT:
Income tax provision increased $448,000 due to a provision of $51,000 for the
three months ended in March 31, 2000 from a benefit of $397,000 for the same
period in 1999. The increase is due to a valuation allowance for the deferred
tax asset not being recorded as of March 31, 1999 as the Company anticipated
utilizing the deferred tax asset. However, during the three months ended March
31, 2000 a valuation allowance is being recorded against the deferred tax
asset as the Company does not consider it to be realizable based upon future
levels of taxable income.
NET LOSS / LOSS PER COMMON SHARE
Net loss for the three months ended March 31, 2000 increased by $8,084,000 to
$8,759,000 for the three months ended March 31, 2000 compared to a net loss of
$675,000 for the same period in 1999. The increase in the net loss is primarily
due to the $7,830,000 loss on the termination of the MSA with the Pennsylvania
practice and the increase of $448,000 in the income tax provision.
Loss per basic and diluted shares increased to $1.47 per share for the three
months ended March 31, 2000 compared to $.20 per share for the same period in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended March 31, 2000
was $419,000 compared to $461,000 for the same period of 1999. Net cash used in
investing activities increased $617,000 from $182,000 for the three months ended
March 31, 1999 to $799,000 for the same period in 2000, primarily due to cash
used in 2000 of $1,247,000 for the purchase of property, equipment and leasehold
improvements for the Westbank ASC offset by $448,000 of collections on notes
receivable. Net cash provided in financing activities was $133,000 for the three
months ended March 31, 2000, as compared to net cash used in financing
activities of $159,000 for the three months ended March 31, 1999. The $292,000
increase in net cash
13
<PAGE> 16
provided by financing activities is primarily due to the sale of $75,000 of
units in the Westbank ASC and the addition of $100,000 in notes payable.
During the three months ended March 31, 2000, the Company terminated two of its
three remaining management services agreements.
The Company began renovations of Westbank ASC in Marrero, Louisiana in November
1999. As of March 31, 2000, the Company had funded $673,000 in start-up costs
and $1,633,000 of construction in progress. At March 31, 2000 the Company had
outstanding commitments of $881,000 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 lack of
capital available in the physician practice management sector as well as the
Company's continued operating losses and cash position. 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, 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 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.
14
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
27. Financial Data Schedule.
b) Reports on Form 8-K:
8-K filed on January 27, 2000 reporting under Item 2 the
termination of the Front Range Orthopedic, P.C. management
services agreement and the related sell of assets.
8-K filed on April 27, 2000 reporting under Item 2 the termination
of Lancaster Orthopaedic Group, P.C. management services agreement
and the related sell of assets.
15
<PAGE> 18
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: May 15, 2000 By: /s/ Laurie H. Gutierrez
-----------------------
Laurie Hill Gutierrez
Chief Financial Officer
16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27. Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 804
<SECURITIES> 0
<RECEIVABLES> 620
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,073
<PP&E> 4,767
<DEPRECIATION> 2,233
<TOTAL-ASSETS> 17,277
<CURRENT-LIABILITIES> 1,624
<BONDS> 1,100
3
0
<COMMON> 7
<OTHER-SE> 9,933
<TOTAL-LIABILITY-AND-EQUITY> 17,277
<SALES> 2,370
<TOTAL-REVENUES> 2,370
<CGS> 11,075
<TOTAL-COSTS> 11,075
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> (8,708)
<INCOME-TAX> 51
<INCOME-CONTINUING> (8,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,759)
<EPS-BASIC> 1.47
<EPS-DILUTED> 1.47
</TABLE>
