U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For
the transition period from _____ to _____
Commission File Number 0-21427
INTEGRATED MEDICAL RESOURCES, INC.
(Name of Small Business Issuer in its Charter)
KANSAS 48-1096410
(State or other jurisdiction of (IRS Employer
of incorporation or organization) Identification No.)
11320 WEST 79TH STREET, LENEXA, KANSAS 66214
(Address of principal executive offices) Zip code
Issuer's Telephone Number: (913) 962-7201
Securities registered pursuant to Section 12(b) of the
Exchange Act:
NONE
Securities registered pursuant to Section 12 (g) of the
Exchange Act:
COMMON STOCK
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. YES X
NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year.
$11,006,774
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $12,461,676 ON MARCH 10, 1997 BASED ON THE AVERAGE BID AND ASKED PRICE ON
SUCH DATE.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: AS OF MARCH 10, 1997, THERE WERE
6,715,017 OUTSTANDING SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement relating to its 1997
Annual Meeting of Stockholders, which will be filed with the Commission within
120 days after the end of the registrant's 1996 fiscal year, are incorporated by
reference into Part III hereof.
Transitional Small Business Disclosure Format (Check one): Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Integrated Medical Resources, Inc. (the "Company") was incorporated in Kansas on
March 11, 1991, and its executive offices are located at 11320 West 79th Street,
Lenexa, Kansas 66214, telephone (913) 962-7201. Unless the context otherwise
requires, the "Company" refers to Integrated Medical Resources, Inc., a Kansas
Corporation, and its subsidiaries, and "Center" refers to The Diagnostic Center
for MenSM. The Diagnostic Center for Men is a service mark of the Company. All
other trademarks and trade names referred to in this Annual Report are the
property of their respective owners.
Integrated Medical Resources, Inc. (the "Company") is the leading provider of
disease management services for men suffering from sexual dysfunction, focusing
primarily on the diagnosis and treatment of erectile dysfunction, commonly known
as impotence. The Company provides comprehensive diagnostic, educational and
treatment services designed to address the medical and emotional needs of its
patients and their partners through the largest network of medical clinics in
the United States dedicated to the diagnosis and treatment of impotence under
the name of The Diagnostic Center for MenSM ("Centers"). The Company believes
that this market is largely underserved due to misconceptions about the causes
of impotence, the general lack of specialized knowledge by primary care
physicians about treatment alternatives and the limited focus on impotence by
medical specialists. The Company utilizes a direct marketing approach designed
to motivate impotent men to seek treatment and educate them, their partners and
other physicians about available and affordable treatment options. The Company
operated 30 Centers in 18 states at December 31, 1996.
The Company's patient volume and geographic diversity make it attractive to
pharmaceutical companies, medical device companies and contract research
organizations ("CROs") to perform clinical trials for new impotence treatments,
as well as to participate in joint marketing programs and strategic alliances
with the developers of approved impotence treatments. For example, Caverject(R),
a recently FDA approved injection treatment for impotence, has been supported by
a nationwide marketing program in which the manufacturer has involved the
Company in physician and patient education and direct advertising. MUSE(R), a
non-invasive transurethral delivery system for alprostadil, approved by the FDA
in November 1996, was launched with a nationwide marketing program, including
direct mailing to the Company's existing patient database. The Company is aware
of several new treatments currently being developed or which are in clinical
trials, and believes that the development and promotion of new treatment
alternatives may increase the number of men who seek diagnosis and treatment.
INDUSTRY BACKGROUND
Impotence is the inability to consistently achieve or maintain erections that
are satisfactory for sexual intercourse. The disease is often confused with
problems of fertility, sexual desire, premature ejaculation or the inability to
reach orgasm, none of which is included within the clinical definition of
impotence.
CAUSES OF IMPOTENCE. In a substantial majority of cases, impotence is a symptom
of an underlying physiological cause. The primary causes of impotence fall into
the following general categories: (I) Vascular Diseases such as atherosclerosis,
hypertension and other diseases; (ii) Diabetes; (iii) Psychological; (iv) Pelvic
and Abdominal Surgeries such as radical prostatectomies, cystoprostatectomies
and colectomies; (v) Traumatic Injuries involving the pelvis and spine; (vi)
Hormonal Imbalance; and (vii) Other Causes such as neurological diseases
(multiple sclerosis, Parkinson's disease and others), prescription drugs
(antihypertensive, cardiac and other medications), renal failure and dialysis,
and drug and substance abuse (particularly smoking).
MARKET SIZE. Based on industry studies, the Company estimates that over 30% of
males in the United States between the ages of 40 and 70, or approximately 14
million men, suffer from moderate to complete impotence. The rate of impotence
increases significantly with age and the incidence of diabetes. The impact of
aging suggests that as the "Baby Boom" generation approaches retirement age, the
number of cases of impotence will increase from its current level.
THERAPIES. The causes and effects of sexual dysfunction are numerous and complex
and involve physical, emotional, relational, social and psychological issues. A
number of effective treatments for impotence are available, whether the cause is
psychological or physiological. These treatments include:
INJECTION OF VASO-DILATOR MEDICATIONS - This form of treatment
involves the injection of pharmacologic agents directly into the
penis approximately five to 15 minutes prior to sexual relations.
These agents are generally vasoactive compounds such as alprostadil,
phentolamine and papaverine, which increase blood flow to the penis.
This form of treatment requires a prescription and instruction from a
health care professional on self-injection. In July 1995,
Caverject(R) became the first drug of this type to be approved by the
FDA for widespread use.
<PAGE>
TRANSURETHRAL DELIVERY OF VASO-DILATOR MEDICATIONS - In November 1996,
MUSE(R), a non-invasive transurethral system that delivers
pharmacologic agents topically to the urethral lining, received an
approval letter from the FDA.
VACUUM CONSTRICTION DEVICES - This form of treatment involves the use of
a simple mechanical system that creates a vacuum around the penis,
causing the erectile bodies to fill with blood. A constriction band
is then placed around the base of the penis to impede blood drainage
and maintain the erection. Vacuum constriction devices require a
prescription from a physician and are regulated by the FDA.
ORAL MEDICATIONS - Yohimbine hydrochloride is the primary oral
medication currently prescribed in the United States for the
treatment of mild cases of impotence. This and other oral medications
are effective in a small percentage of impotent men. Doses of
sufficient strength to be effective are available only by
prescription.
PSYCHOLOGICAL COUNSELING - Counseling by a certified sex therapist is
typically designed to increase educational awareness of the
psychogenic causes of impotence and improve partner communication.
Specific techniques are taught to the patient and his partner, which
alleviate anxiety and improve sexual performance. Psychological
counseling may also be used to support other therapies and to
mitigate the damage to self esteem often attributed to impotence.
TESTOSTERONE REPLACEMENT - Testosterone hormone replacement is the
primary pharmacological treatment for the small percentage of men
whose impotence is the result of hormone deficiency. Testosterone is
most often replaced by long-acting intramuscular injections or
patches available by prescription only.
PENILE IMPLANTS - This therapy involves the surgical implantation of a
semi-rigid or inflatable device into the penile structure to
mechanically simulate an erection. This is the most invasive
treatment alternative and only appropriate in a small percentage of
cases.
TREATMENT. Traditionally, psychological factors were considered to be the
primary causes of impotence. More recently, however, it has become generally
accepted that the majority of impotence cases can be attributed to underlying
physiological causes. Since impotence is a symptom of any of a number of
possible underlying causes, a thorough diagnostic evaluation by a qualified
medical specialist is essential to determine the most appropriate treatment. The
diagnosis and treatment of impotence has historically been conducted primarily
by urologists, as well as by general practitioners, internists and other primary
care physicians. Since these providers have not typically treated a significant
volume of impotence patients, they may lack the experience and incentive
necessary to focus on this area. The Company believes that those providers who
can offer comprehensive and dedicated diagnostic and treatment services are best
positioned to care for these patients.
THE COMPANY'S APPROACH
The Company's diagnostic experience indicates that approximately 80% of all
impotence patients suffer from a diagnosable physiological cause. The Company's
approach provides for a comprehensive diagnostic evaluation and access to all
available and appropriate non-surgical treatment alternatives in a male-oriented
environment. In the relatively few cases when surgical treatment is indicated or
preferred by the patient, the patient is referred to a local urological surgeon.
The Company provides its services through a network of medical clinics operated
under the name of The Diagnostic Center for MenSM. To promote patient
confidentiality, these Centers have discreet signage and interior design, and
directly supply all medications, devices and supplies necessary for prescribed
treatments. Most of the clinical staff are men due to the sensitivity of dealing
with the embarrassment often associated with impotence. The full-time, specialty
physician at each Center follows internally-developed patient protocols, which
include comprehensive physical examinations and diagnostic tests designed to
identify the causes of the patient's impotence. Education of the patient and his
partner is provided during each step of the diagnostic and treatment process,
and all appropriate treatment options are presented to the patient for
consideration.
COMPANY OPERATIONS
Patient inquiries come from multiple sources, including local market
direct-to-patient advertising, local public relations efforts, responses to
national market education efforts sponsored by the Company and pharmaceutical
and device companies, and men who learn of the Centers from their physicians.
All inquiries are directed to the Company's national call center where specially
trained agents provide education, discuss causes and treatment options, and
offer support and information to the patient and his partner, but do not attempt
to diagnose a caller's condition. Approximately ten percent of inquiries are
received from partners of afflicted men. The appointment agent can schedule an
appointment on-line directly with the Center nearest the patient. Each scheduled
appointment is then followed by a written confirmation, educational materials
describing the Center's services, a map to the Center and other information.
<PAGE>
Centers typically operate with a staff of three or four persons, including a
full-time physician and two or three clinical and administrative individuals who
handle patient education, insurance verification, patient data entry and assist
the physician with certain routine clinical duties. Physicians are paid a base
salary and are eligible for incentive compensation based on patient
satisfaction, Center profitability resulting from services performed by that
physician and other individual performance criteria.
When a patient arrives at a Center, he completes a detailed medical history and
responds to questions specifically designed to ascertain the severity of his
sexual dysfunction. An extensive physical examination is then performed by the
attending physician. Because of the lack of knowledge about impotence in the
general patient population, a significant portion of the initial clinical
evaluation is designed to improve patient knowledge of male sexual problems and
often includes the patient's partner. This office visit typically lasts between
one and two hours.
The Company's diagnostic protocols include a number of procedures intended to
determine the underlying cause of the patient's impotence. Specialized blood
tests including the measurement of hormone levels are used in a high percentage
of cases. Several specialized diagnostic instruments are used to measure
physiological functions in certain patients when indicated by the diagnostic
protocol. These include the Rigiscan, an in-home monitoring device worn during
the night to measure naturally occurring erections during sleep, and the Doppler
stethoscope, which is used in an office procedure that compares arterial blood
pressure with penile blood flow. Biothesiometry is used as a painless nerve
function test measuring the ability of the sensory nerves to detect a vibration
sensation. In many cases, a Pharmacological Response Test (PRT) is used to
evaluate the response to injected medication.
Once the laboratory and monitoring tests have been reviewed and the clinical
evaluation has been completed, a detailed discussion is held with the patient to
discuss the cause or causes of the dysfunction and the various treatment
options. All medications, devices and supplies used in the offered treatment
programs are available at the Center to provide maximum patient service and
confidentiality. In many cases, a complete clinical evaluation of a patient
results in the discovery of previously undiagnosed physiological problems, such
as diabetes, vascular disease or prostate cancer. In these cases, the patient is
referred to other specialty physicians for treatment of the previously
undiagnosed disease, while Center treatment continues to focus solely on
impotence.
Patients may schedule additional office visits to consider other treatment
options, whether or not the initial therapy is achieving the desired results.
Over time, Centers continue to maintain contact with their patients to resupply
therapeutic products and to continue to educate patients about developing
therapies that may become available.
FACILITIES
The following chart shows the location and opening date of each of the 31
Centers operating at March 10, 1997:
LOCATION DATE OPENED LOCATION DATE OPENED
-------- ----------- -------- -----------
Kansas City, MO April 1990 Phoenix, AZ April 1996
Dallas, TX October 1992 Chicago, IL April 1996
Pittsburgh, PA June 1993 Chicago, IL June 1996
Philadelphia, PA January 1994 Norfolk, VA July 1996
Cleveland, OH May 1994 Hartford, CT July 1996
Boston, MA June 1994 Las Vegas, NV July 1996
Detroit, MI September 1994 Laguna Hills, CA July 1996
Cincinnati, OH October 1994 Milwaukee, WI July 1996
Westchester Co., NY January 1995 Tampa, FL August 1996
Long Island, NY February 1995 San Diego, CA August 1996
Denver, CO April 1995 Walnut Creek, CA August 1996
Columbus, OH August 1995 Indianapolis, IN September 1996
Houston, TX November 1995 Jacksonville, FL September 1996
New York, NY January 1996 Oklahoma City, OK October 1996
Washington, D.C April 1996 Campbell, CA November 1996
Buffalo NY January 1997
The Company's principal executive offices and administrative support facility
are located in a leased facility in Lenexa, Kansas, a suburb of Kansas City.
<PAGE>
SALES AND MARKETING
The Company markets its services through a marketing and advertising department
which supports the advertising efforts of DraftDirect Worldwide, Inc., the
world's third largest direct response agency. The Company maintains a toll-free
telephone center staffed with trained agents during business hours six days per
week. Prior to entering a market, the Company places advertising for the new
Center in local and regional newspapers and on key radio stations. Over 90% of
new patient visits result from the Company's direct-to-patient advertising,
which is in addition to public relations efforts in the national and local
markets through the placement of articles in magazines and newspapers relating
to impotence and its treatment. All such marketing efforts are designed to
motivate men to seek treatment at a Center.
The Company seeks to establish a national brand identity for The Diagnostic
Center for MenSM through focused marketing efforts to patients and their
partners, payors and providers. The Company's centralized public relations
efforts, physician education emphasis and affiliate program combine to raise the
awareness of the general public, physicians and other health care providers as
to the availability of effective treatments for impotence offered by the
Centers.
PAYMENT SOURCES
For the year ended December 31, 1996, approximately 76% of patient billings were
covered by medical insurance plans subject to applicable deductible and other
co-pay provisions paid by the patient. Approximately 27% of patient billings
were covered by Medicare and 49% were covered by numerous other commercial
insurance plans that offer coverage for impotence treatment services.
To date, the Company has not participated in any managed care programs. The
Company believes that its extensive patient database and focused treatment
programs allow it to offer a lower cost, more specialized treatment alternative
to managed care plans with high enrollee satisfaction. The Company has developed
a patient service and billing approach aimed at providing significant cost
advantages to managed care providers for impotence treatment.
RISK FACTORS
ABILITY TO MANAGE GROWTH. The Company has recently experienced rapid growth that
has resulted in new and increased responsibilities for management personnel and
has placed increased demands on the Company's management, operational and
financial systems and resources. To accommodate this recent growth and to
compete effectively and manage future growth, the Company will be required to
continue to implement and improve its operational, financial and management
information systems, and to expand, train, motivate and manage its work force.
There can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's operations. Any failure to
implement and improve the Company's operational, financial and management
systems or to expand, train, motivate or manage employees could have a material
adverse effect on the Company's financial condition and results of operations.
The Company intends to establish Centers in new markets where it has never
before provided services. As part of its market selection analysis, the Company
has invested and will continue to invest substantial funds in the compilation
and examination of market data. There can be no assurance that the market data
will be accurate or complete or that the Company will select markets in which it
will achieve profitability.
In addition, the Company may pursue acquisitions of medical clinics or practices
providing male sexual health services. There are various risks associated with
the Company's acquisition strategy, including the risk that the Company will be
unable to identify, recruit or acquire suitable acquisition candidates or to
integrate and manage the acquired clinics or practices. There can be no
assurance that clinics and practices will be available for acquisition by the
Company on acceptable terms, or that any liabilities assumed in an acquisition
will not have a material adverse effect on the Company's financial condition and
results of operations.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY RESULTS. The Company's historical
quarterly revenues and financial results have demonstrated a seasonal pattern in
which the first and fourth quarters are typically stronger than the second and
third quarters. The summer months of May through August have shown seasonal
decreases in patient volume and billings. The Company expects this seasonality
to continue and there can be no assurance that seasonal fluctuations will not
produce decreased revenues and poorer financial results. The failure to open new
Centers on anticipated schedules, the opening of multiple Centers in the same
quarter or the timing of acquisitions may also have the effect of increasing the
volatility of quarterly results. Any of these factors could have a material
adverse impact on the Company's stock price.
DEPENDENCE ON REIMBURSEMENT BY THIRD PARTY PAYORS. For the year ended December
31, 1996, approximately 76% of patient billings were covered by medical
insurance plans subject to applicable deductibles and other co-pay provisions
paid by the patient. Approximately 27% of patient billings were covered by
Medicare and 49% were covered by numerous other commercial insurance
<PAGE>
plans that offer coverage for impotence treatment services. The health care
industry is undergoing cost containment pressures as both government and
non-government third party payors seek to impose lower reimbursement and
utilization rates and to negotiate reduced payment schedules with providers.
This trend may result in a reduction from historical levels of per-patient
revenue for such health care providers. Further reductions in third party
payments to physicians or other changes in reimbursement for health care
services could have a direct or indirect material adverse effect on the
Company's financial condition and results of operations. In addition, as managed
Medicare arrangements continue to become more prevalent, there can be no
assurance that the Centers will qualify as a provider for relevant arrangements,
or that participation in such arrangements would be profitable. Any loss of
business due to the increased penetration of managed Medicare arrangements could
have a material adverse effect on the Company's financial condition and results
of operations.
The Company's net income is affected by changes in sources of the Centers'
revenues. Rates paid by commercial insurers, including those which provide
Medicare supplemental insurance, are generally based on established provider
charges, and are generally higher than Medicare reimbursement rates. A change in
the payor mix of the Company's patients resulting in a decrease in patients
covered by commercial insurance could adversely affect the Company's financial
condition and results of operations.
HEALTH CARE INDUSTRY AND REGULATION. The health care industry is highly
regulated at both the state and federal levels. The Company and the Centers are
subject to a number of laws governing issues as diverse as relationships between
health care providers and their referral sources, prohibitions against a
provider referring patients to an entity with which the provider has a financial
relationship, licensure and other regulatory approvals, professional advertising
restrictions, corporate practice of medicine, Medicare billing regulations,
dispensing of pharmaceuticals and regulation of unprofessional conduct of
providers, including fee-splitting arrangements. Many facets of the contractual
and operational structure of the Company's relationships with each of the
Centers have not been the subject of judicial or regulatory interpretation. An
adverse review or determination by any one of such authorities, or changes in
the regulatory requirements, or otherwise, could have a material adverse effect
on the operations, financial condition and results of operations of the Company.
In addition, expansion of the operations of the Company into certain
jurisdictions may require modifications to the Company's relationships with the
Centers located there. These modifications could include changes in such states
in the way in which the Company's services and lease fees are determined and the
way in which the ownership and control of the Centers is structured. Such
modifications may have a material adverse effect on the Company's financial
condition and results of operations.
In recent years, numerous legislative proposals have been introduced or proposed
in the United States Congress and in some state legislatures that would effect
major changes in the United States health care system at both the national and
state level. It is not clear at this time which proposals, if any, will be
adopted or, if adopted, what effect such proposals would have on the Company's
business. There can be no assurance that currently proposed or future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
Company's financial condition and results of operations.
Furthermore, there can be no assurance that the method of payment for the
products and services furnished by the Centers will not be radically altered in
the future by changes in the health care industry. Changes in the system of
reimbursement, including Medicare, for the products and services provided by the
Centers that increase the difficulty of obtaining payment for medical services
could have a material adverse effect on the Company's financial condition and
results of operations, as the Company's income stream depends upon revenues of
the Centers. If revenues of the Centers are diminished, either in quantity or in
continuity, the Company will be adversely affected.
CORPORATE PRACTICE OF MEDICINE. Most states limit the practice of medicine to
licensed individuals or professional organizations comprised of licensed
individuals. Many states also limit the scope of business relationships between
business entities such as the Company and licensed professionals and
professional corporations, particularly with respect to fee-splitting between a
physician and another person or entity and non-physicians exercising control
over physicians engaged in the practice of medicine. Most of the Centers are
organized as professional corporations, entities authorized to employ
physicians, so as to comply with state statutes and state common law prohibiting
the corporate practice of medicine. Because the laws governing the corporate
practice of medicine vary from state to state and the application of those laws
is often ambiguous, any expansion of the operations of the Company to a state
with strict corporate practice of medicine laws, or the application of these
laws in states with existing Centers, may require the Company to modify its
operations with respect to one or more Centers, which could result in increased
financial risk to the Company. Further, there can be no assurance that the
Company's arrangements will not be successfully challenged as constituting the
unauthorized practice of medicine or that certain provisions of its services
agreements with the Centers (the "Services Agreements"), options to designate
ownership of the professional corporations, employment agreements with
physicians or covenants not to compete will be enforceable. Alleged violations
of the corporate practice of medicine doctrine have also been used successfully
by physicians to declare a contract to be void as against public policy.
<PAGE>
There can be no assurance that a state or professional regulatory agency
would not attempt to revoke or suspend a physician's license or the corporate
charter or license of a professional corporation owning a Center or the
corporate charter of the Company or one of its subsidiaries.
DEPENDENCE ON RIGISCANS; POTENTIAL IMPACT OF INNOVATIONS. Rigiscan patient
monitoring devices accounted for approximately 25% of the Centers' revenues for
the year ended December 31, 1996. As a consequence, any material adverse
development with respect to the Rigiscan devices, limitation in the availability
of such devices or material increase in the costs of such devices could have a
material adverse effect on the financial condition and results of operations of
the Company. In addition, innovations in diagnostic tools and therapies for male
sexual dysfunction or changes in reimbursement practices by third party payors
for such diagnostic procedures could have a material adverse effect on the
financial condition and results of operations of the Company.
COMPETITION. Competition in the diagnosis and treatment of impotence stems from
a wide variety of sources. The Centers face competition from urologists, general
practitioners, internists and other primary care physicians who treat impotent
patients, as well as hospitals, physician practice management companies
("PPMs"), HMOs and non-physician providers of services related to sexual
dysfunction. If federal or state governments enact laws that attract other
health care providers to the male sexual dysfunction market, the Company may
encounter increased competition from other parties which seek to increase their
presence in the managed care market and which have substantially greater
resources than the Company. Any of these providers, many of which have far
greater resources than the Company, could adversely affect the Centers or
preclude the Company from entering those markets that can sustain only limited
competition. There can be no assurance that the Centers will be able to compete
effectively with their competitors, or that additional competitors will not
enter the market.
There are also many companies that provide management services to medical
practices, and the management industry continues to evolve in response to
pressures to find the most cost-effective method of providing quality health
care. There can be no assurance that the Company will be able to compete
effectively with its competitors, that additional competitors will not enter the
market, or that such competition will not make it more difficult to acquire the
assets of, and provide management services for, medical practices on terms
beneficial to the Company.
DEVELOPING MARKET; UNCERTAIN ACCEPTANCE OF THE COMPANY'S SERVICE. Over 90% of
new patient visits result from the Company's direct to patient advertising. The
market for the Company's services has only recently begun to develop, and there
can be no assurance that the public will accept the Company's services on a
widespread basis. The Company's future operating results are highly dependent
upon its ability to continually attract new patients. There can be no assurance
that demand for the Company's services will continue in existing markets, or
that it will develop in new markets. The Company makes significant expenditures
for advertising, and there can be no assurance that such advertising will be
effective in increasing market acceptance of, or generating demand for, the
Company's services. Failure to achieve widespread market acceptance of the
Company's services or to continually attract new patients could have a material
adverse effect on the Company's financial condition and results of operations.
COMPETITION
The Company is not aware of any company providing similar services on a
nationwide basis at this time. Competition in the diagnosis and treatment of
male sexual impotence varies from market to market. The Centers face competition
from general practitioners, urologists, internists and other physicians, as well
as hospitals, PPMs, HMOs and non-physician providers of services related to
sexual dysfunction. Any of these providers, including those with far greater
capital than the Company, could preclude the Company from entering markets which
can only sustain limited competition. The Company believes that the programs and
quality of care provided by the Centers, the reputation of Centers and the level
of their charges for services are significant competitive factors in its favor.
The Centers seek to meet local competition through their focus on the needs of
each patient and the low cost for services.
Furthermore, there are many companies that provide management services to
medical practices like the Centers, and the management industry continues to
evolve in response to pressures to find the most cost-effective method of
providing quality health care. Although the Company focuses on providing
services to physician practices that treat male impotence, it competes for
management contracts with national and regional providers of physician
management services, as well as hospitals and hospital-sponsored management
services organizations.
CORPORATE ORGANIZATION AND CENTER MANAGEMENT SERVICES
The Company's organizational structure is designed to maximize managerial and
administrative efficiency and standardize clinic operations while maintaining
physician control of patient diagnosis and treatment. Each Center is organized
as a separate corporation and, where required, it is organized as a professional
corporation licensed to practice medicine. In accordance with state laws, the
Centers are operated by corporations qualified to practice medicine and as a
result, most Centers are owned by corporations controlled by Dr. Burns.
<PAGE>
Dr.Burns receives no financial benefit from his ownership of the Centers. In
states in which Dr. Burns is not a licensed physician and an existing Center
cannot be used, a physician licensed and practicing in such states acts as the
owner of the Center. The Company has a noncancelable option to designate the
holder of the common stock of each Center through the right to force each
current holder to sell, at any time, the outstanding shares of the professional
corporations operating the Centers to the Company's designee for a nominal
amount which management believes is deeply discounted from the fair value of the
stock of the corporations. The amount to be paid represents the reimbursement of
the direct expenses of the stockholder in forming the corporation operating the
Center, and normally ranges from $100 to $500. In general, the Company is
legally prohibited from owning the common stock of the Centers. See "Certain
Transactions."
The Company, directly or indirectly provides all management services necessary
to operate the Centers under several long-term agreements including a Services
Agreement and an Equipment Lease. The revenues generated at the Centers, after
payment of physician salaries, other operating expenses including laboratory
costs, prescription drugs, treatment supplies and devices, have historically
approximated the fees owed to the Company. In 1996, the Company received fees of
approximately $5.5 million under its agreements with the Centers.
SERVICES AGREEMENT. Under the Services Agreement, each Center appoints the
Company as its sole and exclusive manager and administrator of all of the
Center's day-to-day non-medical operations. The physicians employed at the
Centers perform all medical functions and are responsible for the provision of
medical services provided at the Centers.
The management and administrative services provided by the Company include: (i)
operation of a national call center for appointment scheduling; (ii) staffing of
all non-medical personnel required to operate the Center; (iii) billing and
collection of all patient invoices; (iv) bookkeeping and related financial
services of the Center; (v) telephone support services; (vi) advertising and
promotional activities; and (vii) other administrative and management services.
In exchange for these management services, the Center pays the Company monthly
fees. Personnel staffing fees are charged on a fully-burdened cost-plus basis,
the billing and collection services fee is a minimum amount plus a per patient
charge, bookkeeping, financial and appointment scheduling services are provided
at fixed amounts, and advertising and promotional services are charged on a
percentage of the Company's advertising purchases. The Company has the
unilateral right to increase its fees each year to account for any factors that
may increase the value, the extent or the cost of the services provided.
The initial term of the Services Agreement is 40 years with automatic renewal
for successive 40-year terms. A Center may terminate its Services Agreement only
if the Center is in compliance with the Agreement's terms and the Company
breaches a material obligation which the Company fails to cure within 60 days of
being notified of such breach. The Company may terminate the Agreement at any
time with or without cause. Upon termination of the Services Agreement, the
Center must, among other things, cease using the Company's methods and
procedures and must comply with a covenant not to compete. The covenant not to
compete prohibits Center officers, directors, stockholders, and/or partners from
providing any of the types of services offered by the Company for two years
after termination of the Services Agreement within any metropolitan area where
the Company operates or manages a medical practice.
The Services Agreement prohibits the Center from taking actions that could
adversely affect the Company, such as liquidating, selling assets, paying
dividends, adding new shareholders, incurring indebtedness, and increasing
physician salaries. The Services Agreement does not restrict the Company from
developing multiple Diagnostic Centers for Men in the same metropolitan area.
EQUIPMENT LEASE. Each Center enters into an Equipment Lease covering all
equipment and other personal property required for the operation of the Center,
including Rigiscans. Although the terms can vary, the typical Equipment Lease
has a 5-year term. The Center assumes all costs and expenses for repairs, taxes,
and loss or damage of the equipment and is also required to acquire and maintain
personal injury property damage insurance on the equipment. The Equipment Lease,
the equipment, and any interest therein may not be assigned or transferred. All
equipment remains the sole and exclusive property of the Company throughout the
term of the lease and thereafter. The fees for the equipment are determined on a
per Center basis, with the exception of the fees for the Rigiscan medical
diagnostic equipment. The rental fees for Rigiscans are determined by a monthly
fee that increases based upon monthly usage.
OTHER AGREEMENTS. In addition to the Services Agreement and Equipment Lease, the
Company's relationship with a Center typically involves several other
agreements, including physician employment agreements.
The physician at each Center is not the owner of the professional corporation
operating that Center and enters into two employment agreements- one with the
Company for non-medical services and one with the Center. Generally, these
employment agreements are for initial two year terms. Under the employment
agreement with the Center, the physician receives a base salary and the
opportunity to receive a performance bonus of up to 20% of his base salary.
Under the employment agreement with the Company, the physician provides certain
non-medical advisory and consulting services in exchange for a minimal salary
and the opportunity to receive Company stock options.
<PAGE>
EMPLOYEES
As of March 10, 1997, the Company operated Centers and its headquarters with a
combined staff of 151 full-time equivalent employees, 4 Center physicians who
were part-time, and 25 certified sex therapists who contracted their services as
independent contractors to the Centers on a part-time basis. Of the full-time
employees, 9 were in senior management, 26 were Center physicians, 66 were
Center staff, 21 were in marketing and advertising, 13 were in accounting,
billing and collection, and 16 were involved with training, development and
administration. The Company believes its relations with its employees are good.
GOVERNMENT REGULATION
Various state and federal laws regulate the relationship between providers of
health care services and physicians, and as a business in the health care
industry, the Company and the Centers are subject to these laws and regulations.
The Company is also subject to laws and regulations relating to business
corporations in general. Although many aspects of the Company's business
operations have not been the subject of state or federal regulatory
interpretation, the Company believes its operations will not result in any
material liability under these laws. There can be no assurance, however, that a
review of the Company's or the Centers' businesses by courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of the Company or the Centers or that the health care regulatory
environment will not change so as to restrict or affect the Company's or the
Centers' existing operations or their expansion. See "Risk Factors-Health Care
Industry."
LICENSURE. Every state imposes licensing requirements on individual physicians
and on certain types of health care providers and facilities. Many states
require regulatory approval, including licenses to render care before
establishing certain types of health care facilities. The Centers and their
physicians are subject to licensing requirements, including continuing medical
education and license fees. While the performance of management services on
behalf of a medical practice does not currently require any regulatory approval
on the part of the Company, there can be no assurance that such activities will
not be subject to licensure in the future.
CORPORATE PRACTICE OF MEDICINE. Most states limit the practice of medicine to
licensed individuals or professional organizations comprised of licensed
individuals. Many states also limit the scope of business relationships between
business entities such as the Company and licensed professionals and
professional corporations, particularly with respect to fee-splitting between a
physician and another person or entity and non-physicians exercising control
over physicians engaged in the practice of medicine. Most of the Centers are
organized as professional corporations-entities authorized to employ
physicians-so as to comply with state statutes and state common law prohibiting
the corporate practice of medicine. Accordingly, the Company attempts to
structure all of its operations so that they comply with the relevant state
statutes and state common law and believes that its operations and planned
activities do not and will not result in any material liability under these
laws. However, because the laws governing the corporate practice of medicine
vary from state to state and the application of those laws is often ambiguous,
any expansion of the operations of the Company to a state with strict corporate
practice of medicine laws, or the application of these laws in states with
existing Centers, may require the Company to modify its operations with respect
to one or more Centers, which could result in increased financial risk to the
Company. Further, there can be no assurance that the Company's arrangements will
not be successfully challenged as constituting the unauthorized practice of
medicine or that certain provisions of the Services Agreements, employment
agreements with physicians, options to designate ownership of the professional
corporations, or covenants not to compete will be enforceable. Alleged
violations of the corporate practice of medicine doctrine have also been used
successfully by physicians to declare a contract to be void as against public
policy. There can be no assurance that a state or professional regulatory agency
would not attempt to revoke or suspend a physician's license or the corporate
charter or license of a professional corporation owning a Center or the
corporate charter of the Company or one of its subsidiaries.
FEE-SPLITTING PROHIBITIONS. The laws of some states prohibit physicians from
splitting professional fees. These statutes are sometimes quite broad and as a
result prohibit otherwise legitimate business arrangements. New York, for
example, prohibits compensation arrangements under which the amount received in
payment for furnishing space, facilities, equipment or personnel services used
by a licensed physician constitutes a percentage of or is otherwise dependent
upon, the income or receipts of the licensed physician from such physician
practice. Other states, such as Florida, only prohibit fee-splitting
arrangements that are based on referrals. Penalties for violating these
fee-splitting statutes or regulations may include revocation, suspension, or
probation of the physician's license, or other disciplinary action, as well as
monetary penalties.
Pursuant to the terms of the Services Agreements with the Centers, the Company
will receive a monthly management fee from the Centers for most services. While
the Company believes that its compensation arrangements comply with state
fee-splitting laws, there can be no assurance that these compensation structures
will not be construed by state or judicial authorities as being proscribed
fee-splitting laws.
<PAGE>
STATE ANTI-KICKBACK AND SELF-REFERRAL LAWS. A number of states have enacted laws
that prohibit the payment for referrals and other types of kickback
arrangements. Such state laws typically apply to all patients regardless of
their insurance coverage. In addition, a number of states have enacted laws
which, to varying degrees, prohibit physician self-referrals. Illinois, for
example, has a broad self-referral law which regulates all health care workers
(including physicians), regardless of the patient's source of payment. Subject
to certain limited exceptions, the Illinois law prohibits referrals for health
services provided by or through licensed health care workers to an entity
outside the health care worker's office or group practice in which the health
care worker is an investor, unless the health care worker directly provides
health services within the entity and will be personally involved with the
provision of care to the referred patient. In April-1992, the State of Florida
enacted a Patient Self-Referral Act that severely restricts patient referrals
for certain services, prohibits mark-ups of certain procedures and requires
health care providers to disclose ownership in businesses to which patients are
referred. It is possible that more states will adopt similar legislation. The
Company believes that its operations comply with current statutory provisions,
although there can be no assurance that state anti-kickback and self-referral
laws will not be interpreted more broadly or amended in the future to be more
expansive. In addition, expansion of the operations of the Company to certain
jurisdictions may require it to comply with such jurisdictions' regulations
which could lead to structural and organizational modifications of the Company's
form or relationships with Centers. Governmental interpretation of these laws
could limit reimbursements to the Centers, which could have an adverse effect on
the Company.
FEDERAL MEDICARE RELATED REGULATION. There are a number of federal laws
prohibiting certain activities and arrangements relating to services or items
which are reimbursable by Medicare. Certain provisions of the Social Security
Act, commonly referred to as the "Anti-Kickback Amendments," prohibit the offer,
payment, solicitation or receipt of any form of remuneration either in return
for the referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or services that are covered by Medicare or state health
programs. The Anti-Kickback Amendments are broad in scope and have been broadly
interpreted by courts in many jurisdictions. Read literally, the statute places
at risk many otherwise legitimate business arrangements, potentially subjecting
such arrangements to lengthy, expensive investigations and prosecutions
initiated by federal and state governmental officials. In particular, the Office
of the Inspector General of the U.S. Department of Health and Human Services has
expressed concern that the acquisition of physician practices by entities in a
position to receive referrals of business reimbursable by Medicare from such
practices could violate the Anti-Kickback Amendments.
In July-1991, in part to address concerns regarding the Anti-Kickback
Amendments, the federal government published regulations that provide
exceptions, or "safe harbors," for certain transactions that will be deemed not
to violate the Anti-Kickback Amendments. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal Services Agreements and employee relationships.
Additional safe harbors were published in September 1993 offering protections
under the Anti-Kickback Amendments to eight new activities, including referrals
within group practices consisting of active investors. Proposed amendments to
clarify these safe harbors were published in July 1994 which, if adopted, would
cause substantive retroactive changes to the 1991 regulations. Violation of the
Anti-Kickback Amendments is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs. Although the Company
believes that its current operations are not in violation of the Anti-Kickback
Amendments, there can be no assurance that regulatory authorities will not
determine that the Company's operations are in violation of the Anti-Kickback
Amendments.
Significant prohibitions against physician self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" (which applied only to clinical
laboratory referrals) by dramatically enlarging the list of services and
investment interests to which the referral prohibitions apply. Effective January
1, 1995 and subject to certain exceptions, Stark II prohibits a physician from
billing Medicare or Medicaid with respect to any Medicare or Medicaid patients
who are referred to any entity providing "designated health services" in which
the physician or a member of his immediate family has an ownership or investment
interest, or with which the physician has entered into a compensation
arrangement, including the physician's own group practice unless such practice
satisfies the "group practice" exception. The designated health services include
the provision of clinical laboratory services, radiology services, including
magnetic resonance imaging, computerized axial tomography scans and ultrasound
services, radiation therapy services and supplies, physical and occupational
therapy services, durable medical equipment and supplies, parenteral and enteral
nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices
and supplies, outpatient prescription drugs, home health services and inpatient
and outpatient hospital services. The penalties for violating Stark II include a
prohibition on Medicaid and Medicare reimbursement and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
<PAGE>
"circumvention scheme." The Company believes that its and the Centers'
operations currently are not in violation of Stark I or II; however, the Stark
legislation is broad and ambiguous. Interpretative regulations clarifying the
provisions of Stark I were issued on August 14, 1995 and Stark II regulations
have yet to be proposed. While the Company believes it is in compliance with the
Stark legislation, governmental interpretations or future regulations could
require the Company to modify the nature of its relationships with the Centers.
Private parties may institute legal action against healthcare providers alleging
violations of Stark II or of the Anti-Kickback Amendments. Moreover, the
violation of Stark I or II or of the Anti- Kickback Amendments by the Company or
by the Centers could result in significant fines and loss of reimbursement which
would adversely affect the Company. There can be no assurance that claims or
litigation alleging such violations will not be brought against the Company or
the Centers.
ITEM 2. DESCRIPTION OF PROPERTY
All Centers operate in leased facilities of approximately 2000 square feet. (See
"Facilities" for a list of Center locations.) Rents are payable in equal monthly
installments which average $3,200 per Center. Length of the leases range from 5
to 10 years, with termination options at 5 years. Center leases provide options
to renew for periods averaging 5 years.
The Company's headquarters consists of approximately 15,400 square feet of
leased office space in Lenexa, Kansas. The headquarters lease has a term of 10
years at a base rental rate of $13,255 per month through August 31, 2001, and
$14,581 per month thereafter through August 31, 2006. In addition, the lease
provides for monthly payment of estimated real estate taxes, insurance and
common area maintenance in the amount of $2,635, said estimate to be adjusted
annually. Upon expiration of the initial 10 year lease term, the Company will
have the option to extend the term of the lease for an additional 5 years at the
annual base rental increased by a percentage factor equal to the increase in the
Consumer Price Index for Kansas City, Missouri established by the United States
of America for the date of February 28, 2006 over February 28, 1996.
The Company believes that the leased facilities of each Center and of the
Company's headquarters are in good condition, adequately covered by insurance
and sufficient to meet the needs at that location for the foreseeable future.
The Company owns substantially all equipment used in its facilities.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company began trading in November 1996 (subsequent to
the public offering) on the Nasdaq National Market under the symbol "IMRI". The
following table sets forth the high and low quotations from the National
Association of Securities Dealers Automated Quotation System "NASDAQ". Prior to
the offering in November 1996, no established public trading market existed.
COMMON STOCK PRICE
HIGH LOW
Fourth Quarter - 1996 7 7/8 3
The number of record holders of the Company's common stock as of March 10, 1997,
was 96, including brokers holding shares as nominees or in street name, but
excluding those for which they hold such shares.
The following table sets forth the Company's sales of unregistered securities
during the fiscal year ended December 31, 1996. In each instance, the Company
claims exemption from registration for these issuances under Section 4(2) of the
Securities Act of 1933. No underwriters were involved in any of such sales nor
were any commissions or similar fees paid by the Company with respect thereto.
DATE OF TITLE OF AMOUNT OF SECURITIES
SALE SECURITIES SOLD SOLD OR EXCHANGED IDENTITY OF PURCHASER
3/29/96 Series B Preferred 222,222 Frazier Healthcare II, L.P.(1)
7/17/96 Common 5,500 Julian M. Parreno (2)
(1) Facts relied upon to make the Section 4(2) exemption available are as
follows: Series B Preferred Stock was sold exclusively to Frazier Healthcare
II, L.P., a sophisticated institutional investor, in the form of a private
placement. The price per share was $4.50. No securities exchanges or public
distribution mechanisms were involved. Total proceeds of the offering, net
of offering costs of $75,228, amounted to $924,771.
(2) Facts relied upon to make the Section 4(2) exemption available are as
follows: The sale was a private placement of 5,500 shares of Common Stock at
$5.50 per share. Purchaser was an executive officer of the Company and was,
accordingly, an insider having access to the type of information which would
be disclosed if the securities had been registered under the Securities Act
of 1933. No securities exchanges or public distribution mechanisms were
involved. Total proceeds of the sale amounted to $30,250.
The Company has not paid a dividend with respect to its common stock nor does
the Company anticipate paying dividends in the foreseeable future. The Company's
line of credit with a bank prohibits the payment of dividends without the bank's
prior written approval.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Company is the leading provider of disease management services for men
suffering from sexual dysfunction, focusing primarily on the diagnosis and
treatment of erectile dysfunction, commonly known as impotence. The Company
provides comprehensive diagnostic, educational and treatment services designed
to address the medical and emotional needs of its patients and their partners
through the largest network of medical clinics in the United States dedicated to
the diagnosis and treatment of impotence. The Company currently operates 31
Centers in 18 states.
The cost of opening a new Center includes capital expenditures for diagnostic
and office equipment, furniture and fixtures in the approximate amount of
$125,000 and pre-opening costs for physician recruitment, organizational costs
and advertising expenses. Pre-opening costs average approximately $32,500 per
Center and are amortized over a one year period. The Company finances new
Centers during the initial months of operations until patient volume generates
cash flow sufficient to cover the Center's operating expenses. Total pre-opening
costs, including capital expenditures, were approximately $2,950,000 in 1996 in
connection with the opening of 17 new Centers.
<PAGE>
For new Centers, substantially all patient volume can be attributable to the
Company's advertising and public relations efforts. As Centers mature, patients
from other sources such as other physicians and broader educational programs
provide additional patient volume, although advertising remains the major source
of new patients. As a result, advertising and promotional expenses remain a
large cost to the Company. The Company has in the past received, and may
continue in the future to receive, funds for market development and patient and
physician education from pharmaceutical companies that develop impotence
treatments.
Centers typically operate with a staff of three or four persons, including a
full-time physician. On average, the physician at each Center can see
approximately 100 to 120 new patients per month. The Centers recognize revenues
at the time services are rendered. These services include physician professional
fees, diagnostic tests conducted at the Centers and laboratory tests
subcontracted to a national reference laboratory, use of specialized diagnostic
equipment, including the Rigiscan patient monitor, and the dispensing of
treatment devices, medications and supplies. Approximately 80% of Center
billings are related to diagnostic services, of which approximately one-third
are physician professional fees, and 20% of average billings are related to
treatments dispensed by the Center. Historically, average new patient billings
for diagnosis and initial treatment have remained relatively constant at
approximately $800, although the average new patient billings for the year ended
December 31, 1996 was approximately $850.
For the year ended December 31, 1996, approximately 76% of patient billings were
covered by medical insurance plans subject to applicable deductible and other
co-pay provisions paid by the patient. Approximately 27% of patient billings
were covered by Medicare and 49% were covered by numerous other commercial
insurance plans that offer coverage for impotence treatment services. Patient
billings average less for Medicare patients due to restrictions on laboratory
test reimbursement and standard professional fee discounts.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the statement of operations of the Company as a percentage of net Center
revenues:
YEAR ENDED DECEMBER 31,
1995 1996
Net Center revenues 100.0% 100.0%
Center expenses 39.9 50.2
---- ----
Net management revenue 60.1 49.8
Operating expenses:
Center staff salaries 14.8 14.4
Center facilities rent 5.6 7.2
Advertising 22.8 39.2
Depreciation and amortization 4.8 12.0
Selling, general and administrative 25.2 33.7
---- ----
Total operating expenses 73.2 106.5
---- -----
Operating loss (13.1) ( 56.7)
Interest expense, net ( 3.5) ( 2.5)
Other income, net 0.2 0.0
--- ---
Loss before income tax benefit (16.4) ( 59.2)
Income tax benefit ( 0.4) 0.0
------ -------
Net loss (16.0) ( 59.2)
===== =====
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET CENTER REVENUES. Net Center revenues increased 52% from $7.2 million in 1995
to $11.0 million in 1996. This growth was attributable primarily to the increase
in the number of Centers open at the end of each period from 13 to 30. In
addition, 1996 includes a full year of revenues from Centers open for a partial
year in 1995. Fees related to the use of Rigiscans accounted for approximately
25% of revenues in each period.
CENTER EXPENSES. Center expenses represent direct operating expenses of the
Centers, including physician salaries, costs for laboratory and outsourced
services, diagnostic and treatment supplies, and treatment devices and
medications dispensed through the Centers. Center expenses increased 92% from
$2.9 million in 1995 to $5.5 million in 1996 due to the operation of additional
<PAGE>
Centers in the 1996 period. As a percentage of net Center revenues, Center
expenses increased from 39.9% to 50.2%, which was primarily attributable to a
change in the mix of payors and services provided at certain existing Centers
and the fact that revenues at new Centers generally increase with patient
volumes over the first six months of operations while Center expenses are
substantially fixed after the first month of operation.
NET MANAGEMENT REVENUE. Net management revenue increased 26% from $4.3 million
in 1995 to $5.5 million in 1996. As a percentage of net Center revenue, net
management revenue decreased from 60.1% to 49.8%, primarily due to the timing of
opening new Centers.
CENTER STAFF SALARIES. Center staff salaries increased 48% from $1.1 million in
1995 to $1.6 million in 1996 due the operation of additional Centers in 1996. As
a percentage of net Center revenue, Center staff salaries decreased from 14.8%
in 1995 to 14.4% in 1996 due to the reduction of average staff size from 3-4
employees per clinic in 1995 to 2-3 employees per clinic in 1996. As the Company
continues to open new Centers, the expenses of Center staff may increase as a
percentage of net Center revenue in subsequent periods because new Centers
experience lower initial patient counts and revenue over the first six months of
operations.
CENTER FACILITIES RENT. Center facilities rent increased 96% from $406,000 in
1995 to $797,000 in 1996 due to the operation of additional Centers during the
period. As a percentage of net Center revenue, Center facilities rent increased
from 5.6% to 7.2%. As the Company continues to open new Centers, Center
facilities rent may increase as a percentage of net Center revenue in subsequent
periods because new Centers experience lower initial patient counts and revenue
over the first six months of operation.
ADVERTISING. Advertising expense increased 162% from $1.6 million in 1995 to
$4.3 million in 1996 due primarily to the increased number of Centers. As a
percentage of net Center revenue, advertising expense increased from 22.8% to
39.2%, which was primarily attributable to a change in media used from print
advertising to more costly broadcast media for a portion of the year, which
generated lower patient volumes, and the engagement of an outside advertising
agency in November 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 280% from
$348,000 in 1995 to $1.3 million in 1996 due to depreciation charges for
clinical and office equipment purchased to support new Centers, increased
staffing at the Company's headquarters and amortization of pre-opening costs
incurred with respect to the significant growth in new Centers. As a percentage
of net Center revenues, depreciation and amortization increased from 4.8% to
12.0%, due primarily to the amortization of pre-opening costs for 8 new clinics
opened in 1995 and 17 opened in 1996, which pre-opening costs are amortized over
a 12-month period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense
increased 104% from $1.8 million in 1995 to $3.7 million in 1996 due principally
to the addition of an experienced management team and staff at the Company's
corporate headquarters and expansion of the telephone appointment center staff
to support additional Centers. As a percentage of net Center revenues, selling,
general and administrative expense increased from 25.2% to 33.7% due primarily
to the increased staffing needed to support the Company's future growth and the
opening of new Centers.
INTEREST EXPENSE, NET. Interest expense increased from $251,000 in 1995 to
$275,000 in 1996, resulting from increased leasing activity under agreements
accounted for as capital leases and increased borrowings under the Company's
credit facilities to support equipment purchases and working capital at new
Centers.
INCOME TAXES. The Company recorded a deferred tax benefit in 1995 of $26,000
related to the write-off of deferred tax liabilities recorded in 1994. No income
tax provision or benefit was recorded in 1996 as the deferred tax benefit
otherwise provided was offset by valuation reserves on deferred tax assets.
SEASONALITY
The Company's historical quarterly revenues and financial results have
demonstrated a seasonal pattern in which the first and fourth quarters are
typically stronger than the second and third quarters. The summer months of May
through August, spanning the second and third quarters, have shown seasonal
decreases in patient volume and billings. Because impotence is not an acute
condition, has typically persisted for some time in most patients, and usually
does not present immediate health risks, the Company believes that some patients
postpone scheduling visits with the Centers during the summer months. The
Company believes that this seasonality trend will likely continue. In addition,
the Company's quarterly results are affected by the timing of the opening of new
Centers.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements with
cash flows from existing Centers, proceeds from private placements of equity
securities, an initial public offering of equity securities, the utilization of
bank lines of credit, bank loans and capital lease obligations. In December 1995
and March 1996, the Company raised $4.0 million and $1.0 million, respectively,
from the issuance of Series A Preferred Stock and Series B Preferred Stock which
was converted to Common Stock upon the consummation of the initial public
offering. The Company raised $12.6 million in net proceeds from its initial
public offering completed in November 1996. The Company has a working capital
line of credit with its bank under which it may borrow up to $2.0 million
through December 31, 1997, based on specified percentages of eligible accounts
receivable. At December 31, 1996, the Company had no borrowings outstanding
under this line of credit, and $1.1 million was available under this line of
credit based on eligible accounts receivable balances. The interest rate
applicable to the line of credit is 1% above the bank's prime lending rate
(which prime lending rate was 8.25% at December 31, 1996).
Effective December 1995, the Company entered into an arrangement with a vendor
to finance the purchase of equipment to be used in providing clinical services
at the Centers, subsequent to December 31, 1995. The total obligation under the
agreement was $1.8 million, of which the Company was required to pay 25% in
January 1996, and will be incurred as the Company takes delivery of the
diagnostic equipment securing the obligation. At December 31, 1996, $1.1 million
was outstanding under this financing arrangement. The balance of the obligation
is payable in equal installments on a 36 month straight-line basis following
equipment delivery plus interest at 5.75%. The Company purchased $295,000 in
additional equipment from this vendor with terms equivalent to the original
agreement. As of December 31, 1996, $235,000 was outstanding for this additional
purchase.
In September 1996, the Company entered into an additional agreement with this
vendor to purchase equipment. The total obligation under the agreement is
$410,000, of which the Company was required to pay 25% at execution of the
agreement, and will be incurred as the Company takes delivery of the diagnostic
equipment securing the obligation. At December 31, 1996, $308,000 was
outstanding under this agreement. The balance of the obligation is payable in
equal installments on a 36 month straight-line basis following equipment
delivery plus interest at 5.22%.
In December 1996, the Company entered into an additional agreement with the
vendor to finance the purchase of equipment to be used in providing clinic
services subsequent to December 31, 1996. The total obligation under the
agreement is $2,952,000. Under the agreement, the Company will purchase
specified quantities of equipment through 1998, with 25% of the obligation for
each shipment received being due upon delivery. The balance of the obligation is
payable in equal installments on a 36 month straight-line basis following
equipment delivery plus interest at 5.75%.
As of December 31, 1996, the Company had, for tax purposes, net operating loss
carryforwards of approximately $8.8 million, which are available to offset
future taxable income and expire in varying amounts through 2011, if unused.
Due to the growth in the number of new Center openings, the Company has
experienced increased and varied operating cash flow deficits from 1994 through
1996. This resulted primarily from differences in working capital levels
required to accommodate the increased Center operations and variances in
operating results. The variances were principally attributable to the fact that
revenues at new Centers and, accordingly, net management revenues have generally
increased with patient volumes over the first six months of operations while
operating expenses have remained relatively fixed from the first month of
operation. In addition, the Company had increased corporate staff, expanded the
national call center and increased advertising costs to support new Center
openings, thereby significantly increasing administrative expenses in advance of
expected revenues.
At December 31, 1996, the Company had cash and cash equivalents of $6.7 million.
The Company believes that existing cash balances, funds available under the
Company's credit lines and operating cash flows generated by management services
provided to the more mature Centers, will be sufficient to fund its operations
and satisfy its capital expenditures and working capital requirements for the
next twelve months. Despite the Company's existing resources, opportunities may
arise for new Center openings or acquisitions that management believes would
enhance the value of the Company which could require financing not
currently provided for.
At December 31, 1996, total patient accounts receivable, before allowances,
reflected an average balance of 77 days of net revenue. Due to the seasonality
of revenues discussed above, the ratio of patient accounts receivable to the
most recent quarterly net Center revenue is typically greater at the end of the
second and third quarters as compared to the fourth and first quarters. As of
December 31, 1996, patient accounts receivable greater than 180 days totaled
approximately $1,005,000, of which there were no material individual balances
due.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
For a list of financial statements filed as part of this report, see index to
financial statements at F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference to the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
<PAGE>
ITEM 13. EXHIBITS
(a) The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION
*3 (a) (ii) Amended and Restated Articles of Incorporation
*3 (b) (ii) Restated Bylaws
*4 (a) Specimen of Common Stock Certificate
*4 (b) (i) Loan Agreement dated December 29, 1995 by and among the
Company, certain Centers and Citizens National Bank of Fort
Scott, Kansas (the "Loan Agreement")
*4 b) (ii) First Amendment to the Loan Agreement dated June 18,
1996 by and among the Company, certain Centers and Citizens
National Bank of Fort Scott
*10 (a) Amended and Restated 1995 Stock Option Plan
*10 (d) Amended and Restated Investors Rights Agreement dated March
29, 1996 by and among the Company, Institutional Venture
Management VI, Institutional Venture Partners VI, IVP Founders
Fund I, L.P. and Frazier Healthcare II, L.P.
*10 (e)(i) Form of Services Agreement by and between a Subsidiary of
the Company and a Center (Revised)
*10 (e) (ii) Form of Promissory Note by a Center in favor of a
Subsidiary of the Company *10 (e) (iii) Form of Security
Agreement by a Center favor of a Subsidiary of the Company
*10 (e) (iv) Form of Equipment Lease by and between the Centers and a
Subsidiary of the Company
*10 (e) (v) Form of Sublease by and between the Centers and a Subsidiary of
the Company *10 (f) Rigiscan Purchase Agreement dated December
1, 1995 by and between UROHEALTH Systems, Inc. and the Company
10 (f) (i) Amendment to the Rigiscan Purchase Agreement dated September 6,
1996 by and between UROHEALTH Systems, Inc. and the Company
10 (f) (ii) Amendment to the Rigiscan Purchase Agreement dated December 19,
1996 by and between UROHEALTH Systems, Inc. and the Company
*10 (g) VCD Purchase Agreement dated December 1, 1995 by and between
UROHEALTH Systems, Inc. and the Company
*10 (i) Service Mark Assignment Agreement dated August 1, 1996 by and
between Troy A. Burns and the Company
*10 (j) Office Building Lease dated December 20, 1993 by and between
Troy A. Burns and the Company
*10 (k) Non-Employee Director Stock Option Plan
*10 (l) Form of Non-Competition and Non-Solicitation Agreement by and
between each of Troy A. Burns, M. D. and T. Scott Jenkins and
the Company
*10 (m) Employment Agreement by and between William Raup and the
Company
*10 (n) Option Agreement dated September 26, 1996 by and between
Troy A. Burns, M.D. and the Company
*10 (o) Employment Agreement dated September 30, 1996 by and between
Troy A. Burns, M.D. and the Company
*10 (p) Employment Agreement dated September 30, 1996 by and between T.
Scott Jenkins and the Company
*10 (q) Agreement dated September 30, 1996 by and among the Company,
Institutional Venture Management VI, Institutional Venture
Partners VI, IVP Founders Fund I, L.P., Stanford University,
Virgil A. Place, Leland Wilson, S.F. Growth Fund, Frazier
Healthcare II, L.P., Troy A. Burns, M.D., Troy A. Burns
Revocable Trust, Catherine P. Burns Revocable Trust, James
Marvine and T. Scott Jenkins
10(r) Advertising Agency Agreement dated December 4, 1996 by and
between DraftDirect Worldwide, Inc. and the Company
11 Statement regarding computation of per share earnings
21 List of Subsidiaries of the Company
27 Financial Data Schedule
- -----------
* Incorporated by reference to the corresponding exhibit filed as part of
Registration Statement No. 333-5414-D, as amended, originally filed on
August 12, 1996.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K for the fiscal year ended
December 31, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTEGRATED MEDICAL RESOURCES, INC.
By: /s/ TROY A. BURNS, M.D.
-----------------------------------
Troy A. Burns, M.D., Chief Executive Officer,
Chief Medical Officer,
Chairman of the Board and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE
/s/ TROY A. BURNS, M.D. Chief Executive Officer,
Chief Medical Officer,
________________________ Chairman of the Board and Director ____
Troy A. Burns, M.D. (Principal Executive Officer) Date
/s/ BEVERLY O. ELVING Chief Financial Officer and Vice President,
Finance and Administration
_______________________ (Principal Financial and Accounting Officer) ____
Beverly O. Elving Date
/s/ T. SCOTT JENKINS Director, President and Chief Operating
Officer
----------------------- ----
T. Scott Jenkins Date
/s/ SAMUEL D. COLELLA Director
----------------------- ----
Samuel D. Colella Date
/s/ JOHN K.TILLOTSON, M.D. Director
----------------------- ----
John K. Tillotson, M.D. Date
/s/ ALAN D. FRAZIER Director
----------------------- ----
Alan D. Frazier Date
/s/ BRUCE A. HAZUKA Director
---------------------- ----
Bruce A. Hazuka Date
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
*3 (a) (ii) Amended and Restated Articles of Incorporation
*3 (b) (ii) Form of Restated Bylaws
*4 (a) Specimen of Common Stock Certificate
*4 (b) (i) Loan Agreement dated December 29, 1995 by and among the
Companpy, certain Centers and Citizens National Bank of Fort
Scott, Kansas (the "Loan Agreement")
*4 (b) (ii) First Amendment to the Loan Agreement dated June 18, 1996
by and among the Company, certain Centers and Citizens National
Bank of Fort Scott
*10 (a) Amended and Restated 1995 Stock Option Plan
*10 (d) Amended and Restated Investors Rights Agreement dated March
29, 1996 by and among the Company, Institutional Venture Management
VI, Institutional Venture Partners VI, IVP Founders Fund I, L.P.
and Frazier Healthcare II, L.P.
*10 (e) (i) Form of Services Agreement by and between a Subsidiary of the
Company and a Center (Revised)
*10 (e) (ii) Form of Promissory Note by a Center in favor of a Subsidiary of the
Company
*10 (e)(iii) Form of Security Agreement by a Center in favor of a Subsidiary of
the Company
*10 (e)(iv) Form of Equipment Lease by and between the Centers and a Subsidiary
of the Company
*10 (e) (v) Form of Sublease by and between the Centers and a Subsidiary of the
Company *10 (f) Rigiscan Purchase Agreement dated December 1, 1995
by and between UROHEALTH Systems, Inc. and the Company
10 (f) (i) Amendment to the Rigiscan Purchase Agreement dated September 6,
1996 by and between UROHEALTH Systems, Inc. and the Company
10 (f) (ii) Amendment to the Rigiscan Purchase Agreement dated December 19,
1996 by and between UROHEALTH Systems, Inc. and the Company
*10 (g) VCD Purchase Agreement dated December 1, 1995 by and between
UROHEALTH Systems, Inc. and the Company
*10 (i) Service Mark Assignment Agreement dated August 1, 1996 by and
between Troy A. Burns and the Company
*10 (j) Office Building Lease dated December 20, 1993 by and between Troy
A. Burns and the Company
*10 (k) Non-Employee Director Stock Option Plan
*10 (l) Form of Non-Competition and Non-Solicitation Agreement by and
between each of Troy A. Burns, M. D. and T. Scott Jenkins and the
Company
*10 (m) Employment Agreement by and between William Raup and the Company
*10 (n) Option Agreement dated September 26, 1996 by and between Troy A.
Burns, M.D. and the Company
*10 (o) Employment Agreement dated September 30, 1996 by and between Troy
A. Burns, M.D. and the Company
*10 (p) Employment Agreement dated September 30, 1996 by and between T.
Scott Jenkins and the Company
*10 (q) Agreement dated September 30, 1996 by and among the Company,
Institutional Venture Management VI, Institutional Venture Partners
VI, IVP Founders Fund I, L.P., Stanford University, Virgil A.
Place, Leland Wilson, S.F. Growth Fund, Frazier Healthcare II,
L.P., Troy A. Burns, M.D., Troy A. Burns Revocable Trust, Catherine
P. Burns Revocable Trust, James Marvine and T.Scott Jenkins
10 (r) Advertising Agency Agreement dated December 4, 1996 by and between
DraftDirect Worldwide, Inc. and the Company
11 Statement re computation of per share earnings
21 List of Subsidiaries of the Company
27 Financial Data Schedule
<FN>
- -----------
* Incorporated by reference to the corresponding exhibit filed as part of
Registration Statement No. 333-5414-D, as amended, originally filed on
August 12, 1996.
</FN>
</TABLE>
<PAGE>
INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 1996 F-3
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996 and 1995 F-6
1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Integrated Medical Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Integrated
Medical Resources, Inc. and subsidiaries (the Company) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Integrated Medical
Resources, Inc. and subsidiaries at December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 14, 1997
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Balance Sheet
December 31, 1996
ASSETS (Note 3)
Current assets:
Cash and cash equivalents $ 6,739,697
Accounts receivable, less allowance of $605,315 1,382,968
Receivable from Centers 499,083
Supplies 99,788
Prepaid expenses 260,619
----------------
Total current assets 8,982,155
Property and equipment (Note 2):
Office equipment and software 1,624,411
Furniture, fixtures and equipment 4,295,722
Leasehold improvements 125,476
----------------
6,045,609
Accumulated depreciation 1,355,995
----------------
4,689,614
Intangible assets 504,182
Other assets 335,947
----------------
Total assets $14,511,898
================
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 929,564
Accrued payroll 289,470
Accrued advertising 350,725
Other accrued expenses 41,086
Current portion of long-term debt (Note 3) 623,603
Current portion of capital lease obligations (Note 2) 320,586
----------------
Total current liabilities 2,555,034
Deferred rent 175,932
Long-term debt, less current portion (Note 3) 1,008,278
Capital lease obligations, less current portion (Note 2) 473,281
Stockholders' equity (Notes 3, 5 and 7):
Preferred stock, $.001 par value:
Authorized shares - 1,696,698
Issued and outstanding shares - none
Common stock, $.001 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 6,715,017 6,715
Additional paid-in capital 17,960,029
Accumulated deficit (7,667,371)
----------------
Total stockholders' equity 10,299,373
================
Total liabilities and stockholders' equity $14,511,898
================
See accompanying notes.
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1996 1995
----------------------------------
Net Center revenues $11,006,774 $ 7,219,085
Center expenses:
Physician salaries 2,393,556 1,221,677
Cost of services 3,131,855 1,660,922
----------------------------------
5,525,411 2,882,599
----------------------------------
Net management revenue 5,481,363 4,336,486
Operating expenses:
Center staff salaries 1,582,380 1,068,127
Center facilities rent 796,658 406,066
Advertising 4,309,419 1,644,759
Depreciation and amortization 1,322,353 348,166
Selling, general and administrative 3,714,119 1,816,769
----------------------------------
11,724,929 5,283,887
----------------------------------
Operating loss (6,243,566) (947,401)
Other income (expense):
Interest income 81,730 1,547
Interest expense (356,710) (253,036)
Other - 18,438
----------------------------------
(274,980) (233,051)
----------------------------------
Loss before income tax benefit (6,518,546) (1,180,452)
Income tax benefit (Note 4) - (26,121)
----------------------------------
Net loss $ (6,518,546) $(1,154,331)
==================================
Net loss per common and common equivalent
share
$ (1.82) $ (.38)
==================================
Weighted average common and common equivalent
shares 3,573,910 3,009,435
==================================
Pro forma:
Net loss per common and common equivalent
share assuming conversion of preferred
stock into common stock at the beginning
of the period $ (1.35) $ (.35)
==================================
Weighted average common and common
equivalent shares 4,814,129 3,044,977
==================================
See accompanying notes.
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------- ADDITIONAL RETAINED
SERIES A SERIES B COMMON PAID-IN EARNINGS
CONVERTIBLE CONVERTIBLE STOCK CAPITAL (DEFICIT) TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ - $ - $ 580 $ 441,449$ 5,506 $ 447,535
Fifty-for-one stock split and change
in par value - - 2,320 (2,320) - -
Issuance of 1,081,080 shares of Series
A Convertible preferred stock, net of
issuance costs of $95,803 1,081 - - 3,903,113 - 3,904,194
Issuance of 6,757 shares of common
stock for services - - 7 24,993 - 25,000
Net loss - - - - (1,154,331) (1,154,331)
---------------------------------------------------------------------------------------
Balance at December 31, 1995 1,081 - 2,907 4,367,235 (1,148,825) 3,222,398
Issuance of 222,222 shares of Series B
Convertible preferred stock, net of
issuance costs of $75,228 - 222 - 924,549 - 924,771
Issuance of 5,500 shares of common
stock to employee - - 5 30,244 - 30,249
Issuance of 2,500,000 shares of common
stock in initial public offering, net
of issuance costs of $2,359,499 - - 2,500 12,638,001 - 12,640,501
Conversion of preferred stock to
common stock (1,081) (222) 1,303 - - -
Net loss - - - - (6,518,546) (6,518,546)
---------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - $ - $6,715 $17,960,029 $(7,667,371) $10,299,373
=======================================================================================
</TABLE>
See accompanying notes.
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,518,546) $(1,154,331)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 779,176 327,502
Amortization 543,177 20,664
Deferred income tax benefit - (26,121)
Deferred rent 96,687 48,030
Pre-opening costs incurred (782,108) (106,968)
Compensatory common stock issuance - 25,000
Gain on sale of property and equipment - (3,853)
Changes in operating assets and liabilities:
Accounts receivable (455,647) (927,321)
Receivable from Centers (376,934) 691,348
Supplies (57,151) (42,637)
Prepaid expenses (113,912) (138,702)
Accounts payable 551,111 319,905
Accrued payroll 191,262 34,288
Accrued advertising 266,985 (220,260)
Other accrued expenses 9,168 16,797
-------------- -----------------
Net cash used in operating activities (5,866,732) (1,136,659)
INVESTING ACTIVITIES
Purchases of property and equipment (3,847,441) (511,653)
Proceeds from the sale of property and equipment - 10,706
Acquisition of distribution rights - (70,161)
Other (276,000) (62,442)
--------------- -----------------
Net cash used in investing activities (4,123,441) (633,550)
</TABLE>
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Borrowings on line of credit $ 1,100,000 $ 439,538
Principal payments on line of credit (1,100,000) (439,538)
Proceeds from issuance of notes payable
and long-term debt 2,468,200 823,200
Principal payments on long-term debt (1,143,585) (647,783)
Debt issuance costs incurred (15,000) (59,520)
Principal payments on capital lease obligations (298,060) (187,095)
Proceeds from issuance of preferred stock 924,771 3,904,194
Proceeds from issuance of common stock 12,670,750 -
----------------------------------
Net cash provided by financing activities 14,607,076 3,832,996
----------------------------------
Net increase in cash and cash equivalents 4,616,903 2,062,787
Cash and cash equivalents at beginning of year 2,122,794 60,007
----------------------------------
Cash and cash equivalents at end of year $ 6,739,697 $ 2,122,794
==================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 356,710 $ 253,036
==================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Additions to property and equipment through
issuance of capital lease obligations $ 344,416 $ 384,956
==================================
See accompanying notes.
</TABLE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Integrated Medical Resources, Inc. and subsidiaries (the Company) is a provider
of disease management services for men suffering from sexual dysfunction. At
December 31, 1996, the Company operated 30 diagnostic clinics under the name The
Diagnostic Center for Men in 18 states (collectively the Centers). Each of those
30 clinics is owned directly or beneficially by an officer and stockholder of
the Company and has entered into long-term management contracts and lease
agreements with the Company. Pursuant to these contracts and agreements, the
Company provides a wide array of business services to the Centers in exchange
for management fees. The Company has a noncancelable option to designate the
holder of the common stock of each Center through the right to force each
current holder to sell, at any time, the outstanding shares of the professional
corporations operating the Centers to the Company's designee for a nominal
amount which management believes is deeply discounted from the fair value of the
stock of the corporations. The amount to be paid represents the reimbursement of
the direct expenses of the stockholder in forming the corporation operating the
Center, and normally ranges from $100 to $500. In general, the Company is
legally prohibited from owning the common stock of the Centers.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Integrated Medical
Resources, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company and the Centers have entered into long-term management contracts
(Contracts) with initial terms of 40 years, which renew automatically and
perpetually for successive 40 year periods and may be terminated only for cause
by the Center. The Company may unilaterally terminate the agreement without
cause.
The Company directly or indirectly provides all management services necessary to
operate the Centers under the Contracts and lease agreements. Under the
Contracts, each Center appoints the Company as its sole and exclusive manager
and administrator of all the Center's day-to-day business functions. The
management and administrative services provided by the Company include: (i)
operation of a national call center for appointment scheduling; (ii) staffing of
all non-medical personnel required to operate the Center, (iii) billing and
collection of patient invoices; (iv) bookkeeping and related financial services
of the Center (v) telephone support services; (vi) advertising and promotional
activities; and (vii) other administrative and management services. In exchange
for these services, the Center pays the Company monthly fees. Personnel staffing
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fees are charged on a fully burdened cost-plus basis, the billing and collection
service fee is a minimum amount plus a per patient charge, bookkeeping,
financial services and appointment
scheduling services are provided at fixed amounts, and advertising and
promotional services are charged on a cost-plus basis. The Company has the
unilateral right to increase its fees each year to account for any factors that
may increase the value, the extent or the cost of the services provided.
Each Center also enters into an equipment and facility lease with the Company
which provides for all equipment and property required for operation of the
Center. The related rental fees are determined on a per Center basis, except for
certain diagnostic equipment for which fees are charged based on the level of
usage at each Center.
Although the Company does not consolidate the Centers, for display purposes, and
in order to appropriately reflect the nature of the Company's operations and its
relationship to the Centers, the accompanying statements of operations reflect
"Net Management Revenue" as the gross billings of the Centers, less direct
Center expenses which are not provided by the Company under the Contracts or
lease agreements and any residual profits of the Centers. Direct Center expenses
include physician compensation at a base salary plus discretionary incentive
compensation of up to 20% of base salary, laboratory costs, prescription drugs,
treatment supplies and devices and other miscellaneous costs. Deferred billings
represent billable management fees in excess of net management revenues.
The "Net Management Revenue" for the years ended December 31, 1996 and 1995 is
comprised of the following (in thousands):
YEAR ENDED DECEMBER 31
1996 1995
-----------------------------
Call center $ 650 $ 376
Non-medical personnel 2,386 1,266
Bookkeeping, billing and collection 1,373 788
Advertising and promotions 4,956 3,089
Facility and equipment leases 1,851 1,085
Other administrative services - 52
Deferred billings (5,735) (2,320)
-----------------------------
Total $5,481 $4,336
=============================
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds and short-term
invest-ments with an original maturity of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
Years
------------
Office equipment and software 3-5
Furniture, fixtures and equipment 5-7
Leasehold improvements are depreciated over the shorter of the lease term or the
estimated useful life of the asset.
INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
1996
------------------
Debt issuance costs $ 74,520
Pre-opening costs 861,584
Distribution rights 70,161
Other 22,155
------------------
1,028,420
Less accumulated amortization 524,238
------------------
$ 504,182
==================
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Debt issuance costs represent cost incurred in obtaining the line of credit
facility (see Note 3). Debt issuance costs are being amortized over the two-year
term of the line of credit using the straight-line method.
Pre-opening costs represent certain start-up costs capitalized prior to the
opening of each Center. Pre-opening costs are being amortized over one year
using the straight-line method.
Distribution rights represent the costs of obtaining exclusive rights to
distribute certain products related to the treatment of impotence. Distribution
rights are being amortized over 15 years using the straight-line method.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, and long-term debt, as
reported in the accompanying balance sheet, approximates fair value.
INCOME TAXES
The Company accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." The liability method provides that deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
REVENUE RECOGNITION
Center revenues are recorded at estimated net amounts to be received from
third-party payors and individual patients at the time services are rendered.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred, except for direct-response
advertising which is capitalized and amortized over its expected period of
future benefits. Direct-response advertising costs capitalized at December 31,
1996 and 1995 were not material. The Company has an arrangement with a major
supplier who has agreed to underwrite a portion of costs incurred to educate
physicians and patients regarding impotence. Advertising expense for the
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years ended December 31, 1996 and 1995 is net of $450,000 and $150,000,
respectively, contributed by the major supplier.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its stock options. The Company has established
the exercise prices of options granted at fair value. Prior to completion of its
initial public offering in 1996 (see Note 5), fair value was determined by sales
of common stock to unrelated third parties in arms-length transactions at or
about the date of grant. In accordance with APB No. 25, no compensation is
recognized in such circumstances. The effect of applying the fair value method
required by SFAS No. 123 to the Company's stock options results in net loss and
net loss per share that are not materially different from amounts reported in
the consolidated statements of operations.
NET INCOME (LOSS) PER SHARE
Net loss per share is computed using the weighted average number of common and
common equivalent shares outstanding during each period. Shares issuable upon
exercise of all stock options, granted prior to the Company's initial public
offering at exercise prices less than the offering price, still outstanding at
December 31, 1996 have been considered outstanding for all periods prior to the
initial public offering, using the treasury stock method.
Pro forma net loss per share as presented on the statements of operations
reflects the Company's per share operating results as if the conversion of all
shares of preferred stock into an equal number of shares of common stock had
occurred at the date of issuance of the preferred stock.
Supplementary net loss per share amounts for the years ended December 31, 1996
and 1995, calculated to give effect to the reduction of interest expense and the
increase in the weighted average number of common and common equivalent shares
outstanding sufficient to retire certain indebtedness as if the retirement had
occurred at the beginning of the periods affected or the date of issuance of the
related debt, whichever is later, would not be materially different than
reported per share amounts.
CONCENTRATION OF CREDIT RISK
The Centers grant credit to individual patients and third-party payors
(including insurers and Medicare) who meet preestablished credit requirements.
The Center's net accounts receivable, except those related to patient billings
covered by Medicare, have been assumed by the Company
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
as provided under the Contracts. At December 31, 1996, approximately 36% of
patient accounts receivable were due from individual patients and 64% were due
form third-party payors. Generally, the Centers do not require collateral from
their patients or third-party payors. Reserves for credit losses are provided
for as a direct expense of the Centers and such losses have consistently been
within management's expectations. Accounts receivable write-offs amounted to
approximately $263,578 and $71,000 during the years ended December 31, 1996 and
1995, respectively.
All of the Company's net management revenue is generated from services provided
to the Centers, and the revenue generated from no individual Center comprises a
significant portion of those revenues.
MAJOR PAYORS
The Centers had revenues from Medicare amounting to 27% and 30% of total
revenues during the years ended December 31, 1996 and 1995, respectively.
RECLASSIFICATIONS
Certain amounts within the 1995 financial statements have been reclassed to
conform with the 1996 presentation.
2. LEASES
The Company leases certain office equipment under agreements accounted for as
capital leases. Obligations under these capital leases are collateralized by the
leased equipment, and certain of the leases are guaranteed by an officer and
stockholder. Amortization of assets under capital lease is included in
depreciation expense. Assets under capital leases at December 31, 1996 were as
follows:
DECEMBER 31,
1996
-----------------
Office equipment $ 1,408,648
Less accumulated amortization 648,685
-----------------
$ 759,963
=================
<PAGE>
2. LEASES (CONTINUED)
The Company leases its office and clinic facilities under long-term,
noncancelable operating leases. Rent expense for operating leases with scheduled
rent increases is accounted for on the straight-line basis over the respective
lease terms. Rent expense for all operating leases totaled $935,554 and $208,866
for the years ended December 31, 1996 and 1995, respectively.
Future minimum lease payments under capital leases and noncancelable operating
leases consisted of the following at December 31, 1996:
YEAR ENDING CAPITAL OPERATING
DECEMBER 31 LEASES LEASES
-------------------------------------------------------------------------------
1997 $ 442,043 $ 1,436,052
1998 329,987 1,410,394
1999 196,007 1,353,828
2000 41,958 1,257,379
2001 - 1,279,597
Thereafter - 5,315,345
-----------------------------
Total minimum lease payments 1,009,995 $12,052,595
===============
Less amount representing interest 216,128
---------------
Present value of minimum lease payments 793,867
Less current portion 320,586
---------------
$ 473,281
===============
3. NOTES PAYABLE AND LONG-TERM DEBT
On December 29, 1995, the Company entered into a line of credit agreement with a
bank providing for borrowings up to $2,000,000 based on specified percentages of
eligible accounts receivable, with interest at 1% above the bank's prime rate
(8.25% at December 31, 1996). There were no borrowings outstanding under this
line of credit agreement at December 31, 1996. The line of credit, which expires
on December 31, 1997, is collateralized by substantially all assets of the
Company and is guaranteed by two officers and stockholders of the Company. The
line of credit agreement requires the Company to maintain compliance with
certain covenants including limitations on the payment of dividends and
maintenance of various financial operating ratios. The weighted average interest
rate on all line of credit borrowings in 1996 and 1995 was 9.25% and 9.92%,
respectively.
Effective December 1995, the Company entered into an agreement with a vendor to
finance the purchase of equipment to be used in providing clinic services
subsequent to December 31, 1995.
<PAGE>
3. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
An officer of the vendor serves as a director of the Company. The total
obligation under the agreement is $1,763,000, $440,000 of which was paid by the
Company at the execution of the agreement in January 1996. The remaining balance
will be paid in monthly installments over the three-year period following
equipment delivery plus interest at 5.75%. As of December 31, 1996, $1,089,403
was outstanding under this agreement. The Company purchased additional equipment
from this vendor for which it owed $295,200 under a separate note payable with
terms equivalent to the original agreement. As of December 31, 1996, $234,978
was outstanding under this agreement.
Effective September 1996, the Company entered into an additional agreement with
the vendor to purchase equipment. The total obligation under the agreement is
$410,000, $102,500 of which was paid by the Company at the execution of the
agreement. The remaining balance will be paid in monthly installments over the
three-year period plus interest at 5.22%. As of December 31, 1996, $307,500 was
outstanding under this agreement.
Principal maturities under the $1,631,881 of long-term vendor notes payable
outstanding as of December 31, 1996 for each of the next three years ending
December 31 are as follows:
1997 $623,603
1998 659,878
1999 348,400
In December 1996, the Company entered into an additional agreement with the
vendor to finance the purchase of equipment to be used in providing clinic
services subsequent to December 31, 1996. The total obligation under the
agreement is $2,952,000. Under the agreement, the Company will purchase
specified quantities of equipment through 1998, with 25% of the obligation for
each shipment received being due upon delivery. The remaining balance will be
paid in monthly installments over the three-year period following equipment
delivery plus interest at 5.75%.
<PAGE>
4. INCOME TAXES
The Company files cash-basis income tax returns. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
DECEMBER 31,
1996
-----------------
Deferred tax assets:
Net operating loss carryforwards $3,520,126
Accounts payable 371,826
Accrued expenses 272,512
Other 70,373
-----------------
4,234,837
Deferred tax liabilities:
Accounts receivable (553,187)
Receivable from Centers (199,633)
Prepaid expenses (104,248)
Intangible and other assets (210,439)
Other (191,169)
-----------------
(1,258,676)
-----------------
Valuation reserves (2,976,161)
-----------------
Net deferred taxes $ -
=================
<PAGE>
4. INCOME TAXES (CONTINUED)
The income tax provision (benefit) consists of the following:
YEAR ENDED DECEMBER 31
1996 1995
------------------------------
Current:
Federal $ - $ -
State - -
------------------------------
- -
Deferred:
Federal - (22,203)
State - (3,918)
------------------------------
- (26,121)
------------------------------
$ - $(26,121)
==============================
A reconciliation of the income tax provision (benefit) to the amounts computed
at the federal statutory rate is as follows:
YEAR ENDED DECEMBER 31
1996 1995
------------------------------
Federal income tax provision
(benefit) at statutory rate $(2,216,306) $(401,354)
State income taxes, net of federal
tax benefit (391,113) (70,827)
Change in valuation reserve 2,554,831 421,330
Other 52,588 24,730
------------------------------
$ - $ (26,121)
==============================
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $8,800,000 which are available to offset future taxable income and
expire in varying amounts through 2011, if unused.
5. STOCKHOLDERS' EQUITY
In December 1995, the stockholders of the Company approved an Amendment and
Restatement of the Company's Articles of Incorporation which authorized the
Company to issue 10,000,000 shares of $.001 par value common stock and 1,081,080
shares of $.001 par value Series A Convertible preferred stock. In addition, the
Company effected a stock split and change in par value, in which each issued and
outstanding share of $.01 par value common stock was
<PAGE>
5. STOCKHOLDERS' EQUITY (CONTINUED)
converted to 50 shares of $.001 par value common stock. All references in the
consolidated financial statements to average number of shares outstanding, per
share amounts and stock option plan data have been restated to reflect the stock
split.
In December 1995, the Company also sold 1,081,080 shares of Series A Convertible
preferred stock to investors at $3.70 per share. Proceeds of the offering, net
of offering costs of $95,803, amounted to $3,904,194.
In March 1996, the stockholders of the Company approved an Amendment and
Restatement of the Company's Articles of Incorporation which authorized the
Company to issue 10,000,000 shares of $.001 par value common stock, 1,000,000
shares of $.001 par value Class A common stock, 1,081,080 shares of $.001 par
value Series A Convertible preferred stock, 222,222 shares of $.001 par value
Series B Convertible preferred stock and 1,696,698 shares of $.001 par value
undesignated preferred stock.
The 1,000,000 shares of Class A common stock were reserved for issuance under
the Company's stock option plan (see NOTES 7 and 9). These shares contain no
voting privileges, and dividends on these shares are subordinate and inferior to
all current and future classes of stock. The Class A common stock may be
converted into common stock at the option of the holder upon a public offering
of any class of Company stock, or in the event certain transactions affecting
the control of the Company are consummated, at a conversion ratio established at
the discretion of the Board of Directors.
In March 1996, the Company sold 222,222 shares of the Series B Convertible
preferred stock to investors at $4.50 per share. Proceeds of the offering, net
of offering costs of $75,228, amounted to $924,771. Simultaneous with the
closing, certain common stock-holders sold 651,621 shares of common stock to the
same investor for $2,410,998.
In November 1996, the Company sold 2,500,000 shares of its $.001 par value
common stock at $6.00 per share in its initial public offering. Proceeds from
the offering, net of offering costs of $2,359,499, amounted to $12,640,501.
Simultaneous with the initial public offering, the Series A and B Convertible
preferred stock was automatically converted into 1,303,302 shares of common
stock. The authorized shares of Series A and B Convertible preferred stock were
then retired, leaving only 1,696,698 shares of undesignated preferred stock
authorized.
<PAGE>
6. EMPLOYEE BENEFITS AND COMPENSATION
Effective January 1, 1996, the Company implemented a 401(k) retirement plan. All
employees of the Company over 21 years of age who have completed six months of
service are eligible for participation in the plan. Employees may contribute up
to 15% of their annual compensation subject to annual Internal Revenue Code
maximum limitations. The Company will match 50% of each employee's contribution
up to a maximum of 4% of the employee's salary. The Company may also make
discretionary contributions under this plan. Company contributions to the plan
amounted to $26,542 for the year ended December 31, 1996.
7. STOCK OPTION PLANS
During 1994, the Company approved a stock incentive plan (the 1994 Plan) to
provide certain employees with restricted shares of common stock. In March 1995,
29,050 shares of restricted common stock were awarded to employees under the
1994 Plan, the fair value of which was deemed to be immaterial. The shares,
which are unissued and held by the Company, vest at the completion of the
employee's third year of employment with the Company and are subject to
forfeiture upon termination prior to completion of the vesting period. During
1996 and 1995, 2,700 shares and 8,750 shares, respectively, were forfeited as
the result of employee terminations. In June 1996, these awards were converted
to options to purchase an equivalent number of shares of common stock with an
estimated fair market option price of $3.70 per share. Such options become
exercisable in March 1998. At December 31, 1996 and 1995, options to purchase
17,600 and 20,300 shares of common stock, respectively, remain outstanding under
this arrangement.
In December 1995, the Company approved an employee stock option plan (the 1995
Plan) and reserved 303,550 shares of $.001 par value common stock, in addition
to the 20,300 nonvoting common shares originally reserved under the 1994 Plan,
for issuance to employees and consultants. In December 1995, the Company issued
options for 20,000 shares of common stock to a consultant, which were rescinded
in June 1996 under the revised terms of the 1995 Plan as discussed below.
In March 1996, the Company amended and restated the 1995 Plan. Under the terms
of the restated 1995 Plan, the Company reserved 1,000,000 shares of $.001 par
value Class A common stock in addition to previously reserved shares of common
stock, for issuance to employees and consultants of the Company. Options granted
under the restated 1995 Plan are either incentive stock options qualified under
the Internal Revenue Code or nonqualified, nonstatutory stock options. Terms of
exercise are determined by the Compensation Committee of the Board of Directors
(the Compensation Committee).
<PAGE>
7. STOCK OPTION PLANS (CONTINUED)
Options granted under the restated 1995 Plan expire up to 10 years after date of
grant, except for those granted to stockholders who own greater than 10% of the
voting stock of the Company, which expire up to five years after date of grant.
The number of options granted to individual employees cannot exceed 100,000
shares in any fiscal year, with the exception of options granted upon initial
employment. The option price for an incentive stock option may not be less than
the fair market value of the related shares on the date of grant, or in the case
of individual stockholders owning more than 10% of the outstanding voting stock
of the Company, the option price may not be less than 110% of the fair market
value of the shares on the date of grant. The option price for nonqualified
stock options is determined by the Compensation Committee at the date of grant.
In June 1996, the Company issued incentive and nonqualified stock options for
the purchase of 275,850 shares of common stock at $3.70 per share. Prior to
December 31, 1996, 43,150 of those options were forfeited as a result of
employee terminations. The exercise schedule of these options provides that 25%
of the options become exercisable one year after the date of grant and 1/48 of
the total options granted become exercisable each month thereafter.
Additionally, as discussed above, the optionholders converted the remaining
17,600 shares of restricted common stock awarded under the 1994 Plan to
incentive stock options to purchase 17,600 shares of common stock at $3.70 per
share. These options become exercisable in March 1998. As of December 31, 1996,
total options to purchase 250,300 shares of common stock at $3.70 per share were
outstanding.
In August 1996, the Company amended and restated the 1995 Plan, including
increasing the number of shares of common stock reserved for issuance under the
restated 1995 Plan to 700,000 shares and eliminating the shares of Class A
common stock previously reserved. Additionally, the Company adopted a
Non-Employee Directors Stock Option Plan (the Director Plan) and reserved
100,000 shares of common stock for issuance of options to non-employee
directors.
In August through October 1996, the Company issued options to purchase 50,000
shares of common stock at $5.50 per share and options to purchase 240,000 shares
of common stock at $7.00 per share under the restated 1995 Plan, and options to
purchase 40,000 shares of common stock at $7.00 per share under the Director
Plan. During 1996, 8,200 options issued under the restated 1995 Plan were
forfeited.
<PAGE>
7. STOCK OPTION PLANS (CONTINUED)
In December 1996, the Board of Directors authorized the repricing of certain
$5.50 and $7.00 per share options previously issued to company officers to
$3.875 per share, fair value on the date of repricing. The total amount of
options repriced was 160,000 options. In December 1996, the Board of Directors
also approved the 1997 Executive Bonus Plan, an unfunded bonus compensation
agreement in which certain members of management are awarded bonuses comprised
of both cash and stock options based on the ability of the employee and the
Company to achieve certain 1997 goals. Any stock options awarded pursuant to the
1997 Executive Bonus Plan are granted under the restated 1995 Plan. In
accordance with the Executive Bonus Plan, options to purchase 57,909 shares of
common stock at $3.875 and 12,155 shares of common stock at $4.2625 were issued
in 1996, but do not become exercisable unless the specified 1997 goals are
achieved.
8. RELATED-PARTY TRANSACTIONS
The Company leases clinic space from an officer and stockholder. Rent payments
to this stockholder totaled $27,300 in each of the years ended December 31, 1996
and 1995.
9. CONTINGENCIES
The Company is subject to extensive federal and state laws and regulations, many
of which have not been the subject of judicial or regulatory interpretation.
Management believes the Company's operations are in substantial compliance with
laws and regulations. Although an adverse review or determination by any such
authority could be significant to the Company, management believes the effects
of any such review or determination would not be material to the Company's
financial condition.
<PAGE>
EXHIBIT 10 (F) (I)
Osbon Medical Systems (logo)
September 6, 1996
Mr. T. Scott Jenkins
President/Chief Operating Officer
Integrated Medical Resources, Inc.
8326 Melrose Drive
Lenexa, Kansas 66214
Dear Scott:
I enjoyed lunch and meeting with you this past Tuesday.I will call you the week
of September 9th to schedule an appointment prior to the end of the month to
pick up the down payment on the deal we agreed upon, which is as follows:
IMR HAS AGREED TO PURCHASE ONE HUNDRED (100) RIGISCANS PRIOR TO DECEMBER 31,
1996, AT A COST OF $8200.00 PER RIGISCAN, WITH A 25% DOWN PAYMENT OF
$205,000.00. THIS DOWN PAYMENT IS TO BE RECEIVED BY OSBON MEDICAL SYSTEMS, LTD,
A DIVISION OF UROHEALTH SYSTEMS INC., NO LATER THAN SEPTEMBER 23, 1996 THE
INITIAL SHIPMENT OF FIFTY (50) RIGISCANS WILL BE INVOICED AND SHIPPED TO IMR ON
SEPTEMBER 30, 1996. FINANCIAL TERMS: THE BALANCE OF EACH ORDER IS TO BE
AMORTIZED OVER A PERIOD OF THIRTY SIX (36) MONTHS AT THE APPLICABLE FEDERAL
RATE, DUE THE FIRST OF EACH MONTH AFTER THE UNITS ARE DELIVERED. THE REMAINING
BALANCE OF THE FIFTY (50) UNIT RIGISCAN ORDER, TO IMR, IS TO BE RECEIVED BY
OSBON MEDICAL SYSTEMS, LTD. PRIOR TO DECEMBER 31, 1996, WITH THE ABOVE TERMS TO
APPLY. FOR ADDITIONAL TERMS, PLEASE REFER TO THE ATTACHED RIGISCAN PURCHASE
AGREEMENT, DATED DECEMBER 1, 1995.
IN TURN, OSBON MEDICAL SYSTEMS, LTD, A DIVISION OF UROHEATH SYSTEMS, INC., WILL
PROVIDE TO IMR A CREDIT OF $100,000.00, TO BE USED TOWARD THE PURCHASE OF 1,000
IMPOWER VACUUM DEVICES, WHICH WILL BE ORDERED AS NEEDED BY IMR.
Good luck with your IPO, and I look forward to seeing you again during the
latter part of September. As we discussed, I am planning to spend some time with
you in October, during which I would like to review the possibility of
establishing the Dura II Penile Prosthesis as IMR's penile implant of choice.
Thank you again for your time and hospitality. I look forward to cementing our
mutually beneficial relationship and working to make it a success. Please feel
free to contact me at any time.
Sincerely,
/s/ Paul Peterson
Paul Peterson
Sr. Vice President, Sales and Marketing
PEP/mlm
cc: Julian Parreno
Randy Condie
<PAGE>
EXHIBIT 10 (F) (II)
December 19, 1996
RIGISCAN PURCHASE AGREEMENT AND TERMS
AMENDMENT TO AGREEMENT
DATED DECEMBER 1, 1995
This Amendment to the December 1,1995 Agreement which is attached, is an
Agreement made and entered into, effective the 19th day of December, 1996, by
and between Integrated Medical Resources, Inc. ("IMR") (Buyer) and UROHEALTH
Systems, Inc, ("UROHEALTH") (Seller and Leaseholder) and expiring on December
31, 1998.
WHEREAS, IMR to insure availability and delivery of all Rigiscan requirements
for calendar year 1997 and 1998 which it estimates to be 360 units and UROHEALTH
has offered non-recourse financing terms desirous by IMR which includes
amortizing the purchase price over 36 months at a favorable rate.
NOW, THEREFORE, for good and valuable consideration, receipt and sufficiency of,
which is hereby acknowledged, the parties agree as follows:
1. The price and all price conditions in the December 1, 1995 agreement
prevail and shall be extended through December 31, 1998.
2. The payment terms shall be:
a. 25% of the total purchase price due payable according to the following
schedule:
UNIT PURCHASE DEPOSIT
SCHEDULE DUE DATE QUANTITY PRICE AMOUNT DUE 25%
- -------- -------- -------- ----- ------ -------
I. March 1, 1997 60 8,200 $ 492,000 $ 123,000
II. May 15, 1997 60 8,200 492,000 123,000
III. August 15,1997 60 8,200 492,000 123,000
IV. November 15,1997 60 8,200 492,000 123,000
V. March 1, 1998 120 8,200 984,000 246,000
The balance of each purchase amount shall be amortized on a 36 month straight
line basis plus interest at rates consistent with the current Agreement
(December 1,1995 Agreement) and begins 30 days after projected Due Date of the
Schedule above.
3. Seller will retain first position security interest in all Rigiscan
units until IMR has paid in full its obligations or returned the units.
UCC filings will occur on these units.
4. This Agreement shall be binding on and inure to the benefit of the
successors and assigns of both UROHEALTH and IMR.
5. This Agreement shall be interpreted in accordance with the laws of the
State of California.
IN WITNESS WHEREOF, the parties hereto have executed, signed and sealed this
Agreement to the effective the day and year first written above.
UROUHEALTH SYSTEMS, INC,
By: /s/ Randall A. Condie
- -------------------------
Title: Vice President of National Accounts
INTEGRATED MEDICAL RESOURCES, INC.
By: /s/ T. Scott Jenkins
- ------------------------
Title: President
<PAGE>
EXHIBIT 10 (R)
DRAFTDIRECTWORLDWIDE LETTERHEAD
December 4, 1996
Integrated Medical Resources, Inc.
8326 Melrose Drive
Lenexa, Kansas 66214
Attn: Julian Parreno
Vice President Marketing and Sales
Dear Mr. Parreno:
This letter (this "Agreement") sets forth the terms whereby DraftDirect
Worldwide, Inc. ("DraftDirect") has agreed to serve, and Integrated Medical
Resources, Inc. ("Client") has agreed to employ DraftDirect, as the direct
advertising agency of Client for Client's Diagnostic Centers for Men ("Product"
or "DCMs"). As used in this Agreement: (i) "we", "us" and "our" shall be deemed
to mean DraftDirect; and (ii) "you" and "your" shall be deemed to mean Client.
1) Services and Duties: As your direct marketing agency, we will devote our
best professional efforts toward conceiving, developing, and implementing
effective direct marketing programs for Client as set forth on the Scope of
Work attached hereto and made a part hereof as Appendices A1 and A2.
2) Approvals: Written estimates in respect of each program conceived by us
hereunder will be submitted by us to you before we incur any expense in
respect of such program and reimbursable by you hereunder, and no
commitment will be made by us on your behalf unless specifically authorized
by you in advance; provided, however, that in those situations where time
or circumstances will not permit giving you a specific written estimate in
advance, we may proceed with your verbal approval of such estimated cost
and as soon thereafter as is practical, we will give you a specific written
estimate and you shall give us written confirmation of such approval.
Approval of estimates shall constitute approval of the costs and charges
included therein. DraftDirect will not distribute, publish, broadcast or
otherwise disseminate any material which has not been approved by you in
advance, and all modifications, revisions, combinations or reconfigurations
of any previously approved materials shall require your additional
approval.
3) Charges: Charges for all services and materials shall be transmitted to you
in accordance with the DraftDirect Statement of Billing Policy (a copy of
which is annexed hereto and made a part hereof as Appendix B) and in
accordance with paragraph 4 of this Agreement. You will pay those charges
as set forth in Appendix B and paragraph 4.
<PAGE>
4) Billing Practice: Media, radio and television time and talent will be
billed to you and will be due as provided in Appendix B, as will publication
space, should any be placed by DraftDirect on the Client's behalf and you
agree to pay such bills within the time specified on Appendix B. Bills for
all non-media costs will be rendered to you monthly, as provided in Appendix
B and, unless otherwise specified, such bills will be due and payable within
fifteen (15) days from Client's receipt. Client has the right to audit
timesheets and billings at any time upon reasonable notice to DraftDirect.
5. Releases: We will be responsible for securing all rights, releases, licenses
and authorizations with respect to any proprietary or copyrighted materials,
artwork, photographs, names, likenesses, endorsements or any other property
or rights belonging to any third party that may be required in connection
with the advertising prepared by us pursuant to this Agreement, unless
otherwise specified by Client.
6. Indemnification
(a) You shall be responsible for the accuracy, completeness and propriety
of information concerning your organization, products, competitors'
products and services which you furnish to DraftDirect in connection
with the performance of this Agreement. Accordingly, you shall indemnify
and hold DraftDirect harmless from and against any loss, damage,
liability, claim, demand, suit and expense (including reasonable
attorney's fees) ("Loss") which may be incurred by DraftDirect as the
result of any claim, suit or proceeding made or brought against
DraftDirect based upon the inaccuracy, incompleteness, or impropriety of
such information.
You shall also similarly indemnify and hold DraftDirect harmless in
respect of any Loss which DraftDirect may sustain resulting from any
claim, demand, suit or proceeding made or brought against it arising out
of the nature or use of any of your products or services, as well as
claims of infringement arising out of (i) DraftDirect's adherence to
your instructions or directions which do not involve items of
DraftDirect's origin, design or selection, (ii) your use of any
materials in violation of any third party's rights therein when we
previously notified you in writing of the existence of such rights, or
(iii) material created by DraftDirect which you substantially changed.
(b) DraftDirect will defend and indemnify you from any action, suit or
proceeding (including reasonable attorneys' fees) based upon or arising
out of any final judgment for money damages resulting from:
(i) libel, slander, defamation, or
(ii) any infringement of copyright or of title or slogan, or
<PAGE>
(iii) piracy, plagiarism, or unfair competition or idea
misappropriation under implied contract, or
(iv) any invasion of privacy, committed or alleged to have been
committed in any advertisement, publicity article, broadcast or
telecast and arising out of DraftDirect's services to you
hereunder, except for such claims which arise out of the
circumstances set forth in paragraph 6(a) above.
(c) Upon the assertion of any claim or the commencement of any suit or
proceeding against an indemnitee by any third party that may give rise to
liability of an indemnitor hereunder, the indemnitee shall promptly notify
the indemnitor of the existence of such claim and shall give the indemnitor
a reasonable opportunity to defend and/or settle the claim at its own
expense and with counsel of its own selection. The indemnitee shall make
available to the indemnitor all books and records relating to the claim and
the parties agree to render to each other such assistance as may reasonably
be requested in order to ensure a proper and adequate defense. An
indemnitee shall not make any settlement of any claims which might give
rise to liability of an indemnitor hereunder without the prior written
consent of the indemnitor.
(d) In the event of any proceeding against you by any regulatory agency or
in the event of any court action or self-regulatory action challenging any
advertising prepared by us pursuant to this Agreement, which claim or
action is not covered by obligations to hold harmless herein, we will
assist you in the preparation of the defense of such action or proceeding
and cooperate with you and your attorneys. You will reimburse us for any
out-of-pocket costs we may incur in connection with any such action or
proceeding.
(e) This paragraph, insofar as it applies to work undertaken while this
Agreement is in effect, shall survive the termination of this Agreement.
7) Duties on Third Party Contracts: DraftDirect's agreements with the Screen
Actors Guild ("SAG") and the American Federation of Television and Radio
Artists, ("AFTRA") provide for DraftDirect to be ultimately liable to performers
for payments that may become due because of use of commercials by you or the
DCMs. Therefore, you will indemnify DraftDirect against any Loss DraftDirect may
sustain resulting from any claim, suit or proceeding made or brought against
DraftDirect for use of any DraftDirect produced commercials used by you, your
employees, the DCMs, authorized agents or by anyone who obtained the materials
from you when such claim, suit or proceeding arises out of DraftDirect's
obligations under the applicable SAG and AFTRA union codes or contracts relating
to the production of commercials. The provisions of this paragraph will survive
the termination of this Agreement.
8) Insurance: We agree to obtain and maintain in force during the term of this
Agreement, at our sole expense, an Advertising Agency Liability Insurance policy
having a minimum limit of liability of $1,000,000.
9) Copyright: We will endeavor to obtain for you to the extent you may request
and at your sole expense, copyright protection with respect to any
advertising created for you pursuant to this Agreement.
10) Term of Agreement/Termination: The initial term of this Agreement shall
be the period beginning on October 2, 1996 and ending on September 30,
1997. Notwithstanding the preceding sentence, either party hereto may
elect an early termination of this Agreement to be effective on or after
May 1, 1997 by giving written notice to the other party at least sixty
(60) days prior to the early termination date. Further, notwithstanding
anything in this Agreement to the contrary, should Pharmacia & Upjohn,
Inc. ("PUI"), pursuant to the Conflict of Interest Agreement between PUI
and DraftDirect, request that either: (i) a "firewall" be constructed
between the DraftDirect teams handling your account and the PUI account;
or (ii) DraftDirect move your account to DraftDirect's Chicago office,
then you may elect to terminate this Agreement ("Special Termination")
by giving written notice to DraftDirect at least thirty (30) days
<PAGE>
prior to such Special Termination date. Either party hereto may terminate
this Agreement as of the end of the initial term by giving written notice
to the other party on or before August 1 1997. If this Agreement is not
terminated as of the end of the initial term, then thereafter the term of
this Agreement shall continue from month to month until such time as it is
terminated at the end of a month by one of the parties hereto giving
written notice to the other party at least sixty (60) days prior to the
termination date. Upon termination, the following shall apply:
(a) Upon the termination of this Agreement, we shall cease all work in
process and return all property belonging to and paid for by you which is
in our possession. Any work in process completed as of the termination date
and paid for by you shall be turned over to you. We will cooperate with you
to minimize the interruption of the flow of work caused by the termination
and the appointment of another advertising agency.
(b) Any non-cancelable contract or commitment made with your written
authorization, and still existing at the expiration of this Agreement,
shall be carried to completion by DraftDirect and paid for by you unless
mutually agreed in writing to the contrary, in accordance with the
provisions of this Agreement. Any materials or services DraftDirect has
committed to purchase for you (or any uncompleted work previously approved
by you either specifically or as part of plan), shall be paid for by you
and DraftDirect shall receive applicable compensation as outlined in
Appendix B. DraftDirect will not enter into any non-cancelable contract or
agreement extending beyond the initial term of this Agreement without the
written authorization of Client.
(c) We will reasonably cooperate with you in transferring to you, with the
approval of the third parties in interest, all reservations and contracts
for time, space, talent, direct mail services and other materials entered
into by us for your benefit pursuant to this Agreement upon being duly
released from the obligation thereof. You will arrange for you to become
directly responsible for the timely payment or timely cancellation of all
such reservations and contracts, including residuals. To the extent that we
remain liable for any payments on such reservations and contracts, you
shall reimburse us for any such payments made by us regardless of whether
such payments are made before or after the termination date.
(d) As between you and us, all trademarks, trade names, slogans, ideas,
logotypes and copyrightable materials created for you or at your direction
pursuant to this Agreement which are paid for by you shall be your sole and
exclusive property, and we will render all reasonable assistance to serve
and perfect such rights in you as you may direct. We agree to turn over to
you any copy, artwork, plates or other physical embodiment of the creative
work relating to such trademarks, trade names, slogans, ideas, logotypes
and copyrightable materials which may be in our possession on termination.
(e) We will not be entitled to any payment from you in respect to any
services or facilities rendered or used, or any time, space, talent,
services or materials secured, purchased, or contracted for by us for you
in connection with advertising published, broadcast or printed or otherwise
presented or displayed after the termination date of this Agreement except:
when art, mechanical production, television or radio commercials are
purchased by us, or commissionable list rentals are committed to, in each
case with your approval before termination, and are used only after the
effective date of termination, we shall be entitled to payment for the
original cost of such art, mechanical production, television or
<PAGE>
radio commercial or on the amount of rental with respect to such list, if
applicable.
11) Notice: Notice of termination and any other notice to be given pursuant
to this Agreement shall be in writing and sent to the addresses listed
above by postage prepaid mail or overnight courier service or by
facsimile (with a confirming copy mailed) to a number provided by the
other party or to such other address or facsimile number as shall last
have been specified in accordance herewith. Any notice sent by mail
shall be deemed to have been given five (5) business days after being
mailed. Any other notice shall be deemed to have been given upon actual
receipt thereof by the other party hereto.
12) Equal Employment Opportunity. Our policy with respect to equal
employment opportunity and affirmative action is attached as Appendix
C, and is hereby incorporated by reference as if fully set forth herein.
13) Personal Service Contract: This is a personal service contract and is
not assignable without the prior written consent of the non-assigning
party.
14) Agent Status: All liabilities, obligations and duties imposed on
DraftDirect pursuant to the purchase of services, materials or media
on your behalf hereunder shall be purchased as agent for a disclosed
principal.
15) Confidentiality: DraftDirect shall take reasonable steps to ensure that
proprietary information supplied by you is not disclosed to any person,
firm or corporation, and DraftDirect agrees that it will not use such
proprietary information other than in connection with its rendering of
services hereunder. DraftDirect may disclose proprietary information
already known to DraftDirect prior to disclosure by you, or information
that is in the public domain, or information which is independently
developed by DraftDirect, or as otherwise required by any government or
court order. In the course of performing the services required of
DraftDirect under this Agreement DraftDirect may disclose proprietary
information as you shall have approved for disclosure. DraftDirect shall
inform you of all requests for such information by third parties and
shall only provide same when legally compelled to do so.
16) Protection of Client's Property: DraftDirect shall take reasonable
precautions to safeguard your property entrusted to DraftDirect's
custody or control, but in the absence of gross negligence on its part,
DraftDirect will not be responsible for its loss, damage, destruction or
unauthorized use by others.
17) Right To Modify Plans: You reserve the right to modify, reject, cancel
or stop any and all plans, schedules or work in process. In such event,
DraftDirect will immediately take proper steps to carry out your
instructions. In turn, you agree to assume DraftDirect's liability for
all authorized commitments; to reimburse DraftDirect for all expenses
incurred; to pay DraftDirect any related service charges in accordance
with the provisions of this Agreement; and to indemnify DraftDirect for
all claims and actions by third parties for damages and expenses that
result from carrying out your instructions.
18) Failure of Media and Suppliers: DraftDirect shall endeavor to guard
against any loss to you as the result of the failure of media or
suppliers to properly execute their commitments, but DraftDirect will
not be responsible for their failure, as long as DraftDirect is diligent
in the oversight and management of such suppliers.
<PAGE>
19) Service to Your Designees: Should you request DraftDirect to make
purchases or render services to third parties (such as dealers,
distributors or franchisees), you and such third party shall be jointly
and severally liable to DraftDirect even though DraftDirect may render
invoices to, or in the name of the third party.
20) Entire Agreement: This Agreement constitutes the entire agreement with
respect to the subject matter hereof, and may only be modified or
amended in a writing signed by the party to be charged with such
modification or amendment.
21) Waiver: No waiver of any provision or of any breach of this Agreement
shall constitute a waiver of all other provisions or any other breach,
and no such waiver shall be effective unless made in writing and signed
by an authorized representative of such party. In the event that any
provision or this Agreement shall be illegal or otherwise unenforceable,
such provision shall be severed, and the balance of the Agreement shall
continue in full force and effect.
22) Construction: This Agreement shall be deemed made under and shall be
governed by the substantive laws of the State of Kansas, excluding its
conflicts of laws rules.
23) Exclusivity: During the term of this Agreement, except for the companies
listed on Appendix D, we agree not to render marketing or advertising
services for individuals or entities (other than Client and the DCM's
hereunder) in the business of the diagnosis and treatment of male sexual
dysfunction.
If the foregoing is in accordance with your understanding and is agreeable to
you, please so indicate by signing and returning to us the enclosed duplicate
original of this letter, the Scope of Work attached as Appendix A and the
Statement of Billing Policy attached as Appendix B.
Sincerely,
DraftDirect Worldwide, Inc.
BY: /s/ Howard Draft
- --------------------
TITLE: President
Dated: December 4, 1996
AGREED AND ACCEPTED:
NAME: Integrated Medical Resources, Inc.
BY: /s/ T. Scott Jenkins
- ------------------------
TITLE: President
Dated: December 16, 1996
<PAGE>
(APPENDIX A1)
DRAFTDIRECT WORLDWIDE, INC.
SCOPE OF WORK
DraftDirect will serve as the Direct Marketing consultant for IMR, dedicated to
the establishment of a direct marketing management system and creation of
long-term creative and marketing positionings.
In coordination with IMR, the Agency will evaluate existing creative, media
strategies, evaluate performance by area and recommend resting and/or strategic
changes with the intent of maximizing traffic into the centers as well as
improving the percentage of patients who complete the two-visit process.
With respect to each of the Agency's individual disciplines, DraftDirect will
provide services including:
Account Management
- ------------------
1. Strategic development, evaluation and analysis leading to specific marketing
and creative recommendations that establish DCM as the preeminent provider
of impotence treatments.
2. Marketing counsel, overall as detailed above and including
market-by-market evaluations.
3. Strategic input leading to recommendations for media and creative driven
testing.
4. Strategic input leading to recommendations for promotional offers and/or
opportunities,
as deemed appropriate.
5. Strategic input, in conjunction with Media, on evaluating new markets.
6. Development of formal creative briefing documents.
7. Presentation to Client, revisions as appropriate and marshaling same through
Client approval process.
8. Sheparding the creative process.
DraftDirect Media Planning
1. Review all existing media plans, schedules and buys for DCM.
2. Assess media mix by market. media vehicle, weight levels, broadcast station
and newspaper.
3. Recommend strategic and executional revisions for existing markets, with
the goal of reduced CPL and CPP.
4. Revise media plans, per above assessment, for all existing markets.
5. Develop launch and on-going media plans for all new markets.
6. Design media and non-media (e.g. creative, promotion) tests to ensure
readable, projectable tests that:
- isolate variables
- determine adequate samples
- assess statistical significance of results
DTG
Will be determined by separate agreement.
<PAGE>
(APPENDIX B)
DRAFTDIRECT WORLDWIDE, INC.
STATEMENT OF BILLING POLICY
For the purposes of this Statement of Billing Policy: "Client" shall mean
Integrated Medical Resources, Inc.; and "Client's Product Line" shall mean
Client's Diagnostic Centers For Men.
The term "net cost", as used herein, shall mean the gross rate charged
DraftDirect Worldwide, Inc. ("DraftDirect ") by a third party, less any and all
related discounts (other than cash discounts), rebates, commissions,
differentials, and similar items paid or allowed by a third party to
DraftDirect.
All cash discounts allowed by media are offered to the Client predicated on the
understanding that the advertiser's funds are in the hands DraftDirect at the
time DraftDirect is required to make payment.
A. BILLING PROCEDURES
---------------------
1. Charges for DraftDirect Staff
-----------------------------
Client will pay DraftDirect on a fee basis as its sole compensation
under this Agreement as follows:
a) Client will pay DraftDirect a Direct Marketing Management System Fee of
$336,400 for the initial term of the Agreement (as defined in the first
sentence of Section 10 of the Agreement) to compensate DraftDirect for the
services described in the Scope of Work attached hereto as Appendix A1.
DraftDirect will send an invoice at the beginning of each month to Client
for $28,033 per month, commencing effective October 2, 1996. Should either
party elect early termination pursuant to Section 10 of the Agreement or
should you elect a Special Termination pursuant to Section 10 of the
Agreement, the Direct Marketing Management System Fee shall be equal to
$28,033 per month through the effective date of such early termination.
Should this Agreement extend beyond the initial term, the parties hereto
will agree in writing to the Direct Marketing Management System Fee for
periods subsequent to September 30, 1997.
b) Client will pay DraftDirect an Agency Fee of $800,400 for the initial
term of the Agreement (as defined in the first sentence of Section 10 of
the Agreement) to compensate DraftDirect for the services described in the
Scope of Work attached hereto as Appendix A2. DraftDirect will send an
invoice at the beginning of each month to Client for $66,700 per month,
commencing effective October 2, 1996. Should either party elect early
termination pursuant to Section 10 of the Agreement or should you elect a
Special Termination pursuant to Section 10 of the Agreement, the Agency Fee
shall be equal to $66,700 per month through the effective date of such
early termination. Should this Agreement extend beyond the initial term,
the parties hereto will agree in writing to the Agency Fee for periods
subsequent to September 30, 1997.
c) DraftDirect will record all time spent by DraftDirect's people
performing the services set forth in the Scope of Work attached hereto as
Appendices A1 and A2, at DraftDirect's
<PAGE>
standard hourly rates. Current rates are shown on Schedule 1 attached
hereto, but are subject to change upon not less than thirty days prior
notice if DraftDirect initiates a rate increase for all clients served by
the same DraftDirect office. If, at the end of the initial term of the
Agreement (as defined in Section 10 of the Agreement) the Direct Marketing
Management System Fee and/or the Agency Fee exceeds the amount due under
DraftDirect's standard hourly rates, DraftDirect will in either or both
cases rebate such excess to Client. If, at the end of the initial term of
the Agreement (as defined in Section 10 of the Agreement) the amount due
under DraftDirect's standard hourly rates exceeds the Direct Marketing
Management System Fee and/or the Agency Fee, no additional amounts will be
due DraftDirect by Client.
d) Client and DraftDirect will agree in writing on DraftDirect's
compensation for any service beyond the services described in the
Scope of Work attached hereto as Appendix A.
2. Media Advertising
-----------------
All media advertising will be billed to Client at DraftDirect's net
cost.
3. Charges for Creative and Production Services
--------------------------------------------
Any purchased creative and preproduction services, including layout, art
production (photography and illustration, photostats, model fees,
keylining, etc.), and engravings or separations for direct mail or other
print media will be billed at DraftDirect's net cost. Broadcast
production, studio time, artwork, audio/visual production materials and
duplicates of video tapes, films, or recordings also will be billed at
DraftDirect's net cost. The estimate of the charges for creative and
production services during the initial term of the Agreement is attached
hereto as Appendix E. This estimate will not be exceeded unless approved
in writing by Client.
4. Charges for DirectMail Advertising
----------------------------------
While Client will handle all printing, addressing, and mailing, should
DraftDirect be asked to perform these duties, all printing, paper and
lettershop services will be charged at DraftDirect's net cost.
5. Charges for Our-of-Pocket Expenses
----------------------------------
Expenses for travel must be approved in writing by Client. Messenger and
overnight delivery services, and other approved out-of-pocket
expenditures needed for management of Client's account will be billed by
DraftDirect and charged at DraftDirect net cost. All travel expenses
will be estimated in a monthly travel budget to be approved in advance
by Client and billed to Client at DraftDirect net cost. The estimate of
the charges for travel and miscellaneous out-of-pocket expenses during
the initial term of the Agreement is attached hereto as Appendix E. This
estimate will not be exceeded unless approved in writing by Client
6. Charges for Research and Other Forms of Advertising
Out-of-pocket expenses incurred in conducting research and advertising
other than media advertising or direct mail advertising will be billed
at DraftDirect's net cost.
<PAGE>
Postage and Office Expense
DraftDirect will pay all United States postage incidental to the
necessary routine conduct of business. This covers correspondence
between DraftDirect and Client, suppliers, publishers, etc. and includes
postage on mailing of orders, cancellations and revisions, etc.
Should DraftDirect be required to advance postage for a mailing on the Client's
behalf, DraftDirect will bill the Client for the cost of postage plus a seven
percent (7%) service charge.
B. INVOICE AND REPORT SCHEDULE
<TABLE>
<CAPTION>
Payment
Example Schedule
------- --------
<S> <C> <C>
1. Media Payments Secured By
a Letter of Credit
To the extent that DraftDirect's liability for media payments is secured by
a Letter of Credit from Client's Bank, the Invoicing and Payment Schedule
will be as follows:
a. DRTV Network 15 days
------------ -------
Prebill invoiced on the 30th of October broadcast schedule
the broadcast month is invoiced by Oct. 30
Reconciliation of Prebill invoices October DRTV Prebills
during 2nd month following reconciled and invoiced
broadcast month or credited by Dec. 31
</TABLE>
<PAGE>
SCHEDULE I
DRAFTDIRECT WORLDWIDE, INC.
STANDARD HOURLY BILLING RATES
1996
CHICAGO & NEW YORK OFFICES
- --------------------------
JOB FUNCTION BILLING RATE
------------ ------------
Chairman $250
President/General Manager $250
Senior Management $185
Research Director $185
Account Management $145
Account Staff $95
Creative Management $145
Copy Supervisor/Art Director $105
Creative Staff $85
Production Management $145
Media/Production Director $105
Media Buyer/Planner $75
Media/Production Staff $55
Support Management $70
Support Services $35
DTG GROUP
- ---------
JOB FUNCTION BILLING RATE
------------ ------------
Director $225
Senior Management $185
Practice Management $150
Project Management $135
Senior Consultant/Manager $100
Senior Data Analyst $100
Senior Programmer $100
Consultant $80
Programmer $80
Data Analyst $80
Associate Consultant $60
Data Entry $40
Support Management $70
Support Services $35
<PAGE>
(APPENDIX D)
1. Pharmacia & Upjohn Company
Product - Caverject
<PAGE>
(APPENDIX E)
DRAFTDIRECT WORLDWIDE LETTERHEAD
November 21. 1996
Julian Parreno
V.P. Marketing & Sales
IMR
8326 Melrose Drive
Lenexa Kansas 66214
Dear Julian;
In light of our conversation yesterday, I thought it would be helpful to clarify
our production budget discussion in writing.
Our original production budget estimate called for $130,000 to cover the
production of generic masters of print. radio and TV which would then be
tailored. Additionally we had $24,000 identified to cover travel and
miscellaneous expenses (see attached). As discussed, these amounts are not
indicated in the monthly agency fee included in the contract. Instead, as
outlined in the contract, these expenses will be estimated on a project or
quarterly basis
Now, in light of your budgetary constraints, we will seek to confine the total
production. travel and miscellaneous costs to $154,000, including tailoring. To
accomplish this, we have asked Martha to provide us with the costs incurred
modifying your current creative for tagging and we'll need to continue to
monitor these tailoring expenses.
I hope this is helpful. Please call me with any questions.
Cordially,
/s/ Lawrence M. Kimmel
Lawrence M. Kimmel
Senior Vice President
Group Account Director
cc: S. Jenkins, B. Elving, M. Welshans, M. Cohen
<PAGE>
(APPENDIX E)
PRELIMINARY OOP ESTIMATES
- -------------------------
ADVERTISING PRODUCTION
Newspaper: 10 ads* (6 ongoing, 4 test) $50,000
Radio: 4 second (live voice-over*) $5,000
DRTV: 1 spot** $75,000
-------
SUBTOTAL $130,000
Travel $20,000
Miscellaneous $4,000
TOTAL $154,000
* Through "generic" ad production
** Contingent on availability of stock and/or existing footage
<PAGE>
EXHIBIT 11
INTEGRATED MEDICAL RESOURCE'S INC. AND CENTERS
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
--------------------------------------
<S> <C> <C>
NET LOSS PER COMMON AND
COMMON EQUIVALENT SHARE
Net loss $ (6,518,546) $ (1,154,331)
======================================
Weighted average common shares
outstanding 3,481,832 2,899,680
Shares of common stock issuable upon
exercise of options issued with an
exercise price below the initial public
offering price (determined using the
"treasury stock method") 92,078 109,755
--------------------------------------
Weighted average common and common
equivalent shares outstanding 3,573,910 3,009,435
======================================
Net loss per common and
common equivalent share $ (1.82) $ (0.38)
======================================
PRO FORMA NET LOSS PER COMMON
AND COMMON EQUIVALENT SHARE
Net loss $ (6,518,546) $ (1,154,331)
======================================
Weighted average common shares
outstanding 3,481,832 2,899,680
Shares of common stock issuable upon
exercise of options issued with an
exercise price below the initial public
offering price (determined using the
"treasury stock method") 92,078 109,755
Additional shares of common stock
outstanding as if conversion of all shares
of preferred stock into common stock had
occurred at the date of issuance of the
preferred stock 1,240,219 35,542
--------------------------------------
Weighted average common and common
equivalent shares outstanding 4,814,129 3,044,977
======================================
Net loss per common and
common equivalent share $ (1.35) $ (0.38)
======================================
</TABLE>
<PAGE>
EXHIBIT 21
INTEGRATED MEDICAL RESOURCES, INC. SUBSIDIARIES
(AS OF 12/31/96)
STATE OF
NAME* INCORPORATION
----- -------------
IMR Integrated Diagnostics, Inc. Texas
IMR Integrated Diagnostics of Florida, Inc. Florida
IMR Integrated Diagnostics of Oklahoma, Inc. Oklahoma
IMR of Arizona, Inc. Arizona
IMR of Connecticut, Inc. Connecticut
IMR of Illinois, Inc. Illinois
IMR of Indiana, Inc. Indiana
IMR of Michigan, Inc. Michigan
IMR of Nevada, Inc. Nevada
IMR of Ohio, Inc. Ohio
IMR of Virginia, Inc. Virginia
IMR of Wisconsin, Inc. Wisconsin
Integrated Diagnostics, Inc. New York
Integrated Medical Resources of California, Inc. California
Integrated Medical Resources of Colorado, Inc. Colorado
Integrated Medical Resources of Massachusetts, Inc. Massachusetts
Integrated Medical Resources of Pennsylvania, Inc. Pennsylvania
* None of the subsidiaries are operating or doing business under a fictitious
name
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
INTEGRATED MEDICAL RESOURCES, INC.
</LEGEND>
<CIK> 0000918591
<NAME> INTEGRATED MEDICAL RESOURCES, INC.
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,739,697
<SECURITIES> 0
<RECEIVABLES> 2,487,366
<ALLOWANCES> 605,315
<INVENTORY> 99,788
<CURRENT-ASSETS> 8,982,155
<PP&E> 6,045,609
<DEPRECIATION> 1,355,995
<TOTAL-ASSETS> 14,511,898
<CURRENT-LIABILITIES> 2,555,034
<BONDS> 0
0
0
<COMMON> 6,715
<OTHER-SE> 10,292,658
<TOTAL-LIABILITY-AND-EQUITY> 14,511,898
<SALES> 11,006,774
<TOTAL-REVENUES> 11,006,774
<CGS> 5,525,411
<TOTAL-COSTS> 17,250,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274,890
<INCOME-PRETAX> (6,518,546)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,518,546)
<EPS-PRIMARY> (1.82)
<EPS-DILUTED> (1.82)
</TABLE>
