U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] 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.
(Exact name of Small Business Issuer as specified in its charter)
KANSAS 48-1096410
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11320 WEST 79TH STREET, LENEXA, KS 66214
(Address of principal executive offices) (Zip code)
Issuer's Telephone Number: (913) 962-7201
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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
AS OF AUGUST 1, 1997, THERE WERE 6,715,017 OUTSTANDING SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE.
Transitional Small Business Disclosure Format (Check one): Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
ASSETS (UNAUDITED)
------------------- --------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,881,187 $ 6,739,697
Accounts receivable, less allowance of $ 820,388 in
1997 and $605,315 in 1996 3,000,449 1,382,968
Receivable from Centers 2,023,957 499,083
Supplies 222,180 99,788
Prepaid expenses 266,877 260,619
------------------- --------------------
Total current assets 8,394,650 8,982,155
NON-CURRENT ASSETS:
Property and equipment
Office equipment and software 1,756,590 1,624,411
Furniture, fixtures and equipment 4,985,734 4,295,722
Leasehold improvements 135,500 125,476
------------------- --------------------
6,877,824 6,045,609
Accumulated depreciation 1,979,724 1,355,995
------------------- --------------------
4,898,100 4,689,614
Intangible assets 261,141 504,182
Other assets 378,866 335,947
------------------- --------------------
TOTAL ASSETS $13,932,757 $14,511,898
=================== ====================
</TABLE>
See accompanying notes to financial statements
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<PAGE>
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
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<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1996
----------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES:
Working capital line of credit $ 1,710,000 $ ---
Accounts payable 1,815,411 929,564
Accrued payroll 286,090 289,470
Accrued advertising 337,011 350,725
Other accrued expenses 210,490 41,086
Current portion of long-term debt 761,148 623,603
Current portion of capital lease obligations 291,867 320,586
---------------- ---------------
Total current liabilities 5,412,017 2,555,034
NON-CURRENT LIABILITIES:
Deferred rent 175,932 175,932
Long-term debt, less current portion 905,929 1,008,278
Capital lease obligations, less current portion 326,976 473,281
---------------- ---------------
Total non-current liabilities 1,408,837 1,657,491
STOCKHOLDERS' EQUITY:
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 6,715
Additional paid-in capital 17,960,029 17,960,029
Accumulated deficit (10,854,841) (7,667,371)
---------------- ---------------
Total stockholders' equity 7,111,903 10,299,373
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,932,757 $ 14,511,898
================ ===============
</TABLE>
See accompanying notes to financial statements
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<PAGE>
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET CENTER REVENUES $ 5,066,132 $ 2,517,866 $ 9,121,999 $ 5,151,866
Center expenses:
Physician salaries 929,924 447,690 1,826,327 809,573
Cost of services 1,156,329 821,177 2,103,208 1,180,117
--------------------------------------------------------
2,086,253 1,268,867 3,929,535 1,989,690
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Net management revenue 2,979,879 1,248,999 5,192,464 3,162,176
--------------------------------------------------------
OPERATING EXPENSES:
Center staff salaries 560,992 437,434 1,108,109 794,605
Center facilities rent 349,223 169,592 673,365 319,442
Advertising 1,343,944 989,611 2,706,206 1,603,611
Depreciation and amortization 545,080 213,889 1,103,025 366,889
Selling, general and administration 1,467,112 624,032 2,719,686 1,211,187
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4,266,351 2,434,558 8,310,391 4,295,734
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Operating loss (1,286,472) (1,185,559) (3,117,927) (1,133,558)
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OTHER INCOME (EXPENSE):
Interest income 39,163 --- 100,733 ---
Interest expense (100,602) (60,237) (178,629) (91,525)
Other 1,813 --- 8,353 ---
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(59,626) (60,237) (69,543) (91,525)
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NET LOSS $ (1,346,098) $(1.245,796 $(3,187,470) $(1,225,083)
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Net loss per common and
common equivalent share $ (0.20) $ (0.41) $ (0.47) $ (0.41)
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Weighted average common and
common equivalent shares 6,715,017 3,014,629 6,715,017 3,014,629
========================================================
</TABLE>
See accompanying notes to financial statements
<PAGE>
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30
========================================
1997 1996
------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,187,470) $(1,225,083)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 624,938 209,985
Amortization 478,087 156,904
Deferred rent --- 44,460
Pre-opening costs incurred (111,935) (446,980)
Changes in operating assets and liabilities:
Accounts receivable (1,617,481) 107,830
Receivable from centers (1,524,874) (356,506)
Supplies (122,392) (16,144)
Prepaid expenses (6,258) (194,642)
Accounts payable 885,847 285,176
Accrued payroll (3,380) ---
Accrued advertising (13,714) (72,714)
Other accrued expenses 169,404 (27,725)
------------------- --------------------
Net cash used in operating activities (4,429,228) (1,535,439)
------------------- --------------------
INVESTING ACTIVITIES
Purchases of property and equipment (341,424) (1,183,825)
Other (166,030) (15,525)
------------------- --------------------
Net cash used in investing activities (507,454) (1,199,350)
------------------- --------------------
FINANCING ACTIVITIES
Borrowings on line of credit 1,710,000 400,000
Principal payments on long-term debt (456,804) (105,197)
Principal payments on capital lease obligations (175,024) (10,012)
Net proceeds from issuance of preferred stock --- 924,771
------------------- --------------------
Net cash provided by financing activities 1,078,172 1,209,562
------------------- --------------------
Net decrease in cash and cash equivalents (3,858,510) (1,525,227)
Cash and cash equivalents at beginning of period 6,739,697 2,122,794
------------------- --------------------
Cash and cash equivalents at end of period $ 2,881,187 $ 597,567
=================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 165,093 $ 117,208
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Additions to property and equipment through
issuance of long term debt $ 492,000 ---
------------------- --------------------
</TABLE>
See accompanying notes to financial statements
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<PAGE>
INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 June 30, 1997, the Company operated 33 diagnostic clinics under
the name The Diagnostic Center for Men in 19 states (collectively the Centers).
Each of those 33 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.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company, in accordance with generally accepted accounting
principals for interim financial information, and with the instructions to Form
10-QSB. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's December 31,
1996 annual report on Form 10-KSB. The results of operations for the three and
six month periods ended June 30, 1997 are not necessarily indicative of the
operating results that may be expected for the year ended December 31, 1997.
NOTE 2 - 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. See "Factors That May Affect
Future Results of Operations - Medicare Reimbursement."
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 33
Centers in 19 states.
For the quarter ended June 30, 1997, approximately 72% of patient
billings were covered by medical insurance plans subject to applicable
deductible and other co-pay provisions paid by the patient. Approximately 32% of
patient billings were covered by Medicare and 40% 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 consolidated statements of operations of the Company as a percentage of
net Center revenues:
<TABLE>
<CAPTION>
============================= =============================
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
============================= =============================
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net center revenues 100.0% 100.0% 100.0% 100.0%
Center expenses 41.2 50.4 43.1 38.6
---- ---- ---- ----
Net management revenue 58.8 49.6 56.9 61.4
Operating expenses:
Center staff salaries 11.1 17.4 12.1 15.4
Center facilities rent 6.9 6.7 7.4 6.2
Advertising 26.5 39.3 29.7 31.2
Depreciation and amortization 10.8 8.5 12.1 7.1
Selling, general and
administrative 28.9 24.8 29.8 23.5
---- ---- ---- ----
Total operating expenses 84.2 96.7 91.1 83.4
---- ---- ---- ----
Operating loss (25.4) (47.1) (34.2) (22.0)
Interest expense, net (1.2) (2.4) (0.7) (1.8)
----- ----- ----- -----
Net loss (26.6) (49.5) (34.9) (23.8)
============== ============== ============== ==============
</TABLE>
<PAGE>
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Net Center Revenues. Net Center revenues increased approximately 101%
from $2,517,866 in 1996 to $5,066,132 in 1997. This growth was attributable not
only to the increase in the number of Centers open during each period which grew
from 18 at June 30, 1996 to 33 at June 30, 1997, but also to higher revenues in
existing Centers. The increase in existing clinics resulted from more effective
marketing strategies, which increased both new patient volume and recurring
revenue from existing patients. Further, marketing strategies utilized in the
second quarter 1997 were effective in countering the seasonal downturn the
Company had experienced in the summer months (May through September) in years
prior to 1997.
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
approximately 64% from $1,268,867 in 1996 to $2,086,253 in 1997 due to the
operation of additional Centers during the 1997 period. As a percentage of net
Center revenues, Center expenses decreased from 50.4% to 41.2%. This decrease
results from efficiencies of scale, as the Centers are able to treat increased
numbers of patients without a corresponding increase in baseline center
expenses.
Net Management Revenue. Net management revenue increased approximately
139% from $1,248,999 in 1996 to $2,979,879 in 1997. As a percentage of net
Center revenue, net management revenue increased from 49.6% to 58.8%.
Center Staff Salaries. Center staff salaries increased approximately 28%
from $437,434 in 1996 to $560,992 in 1997 due to the operation of additional
Centers. As a percentage of net Center revenue, Center staff salaries decreased
from 17.4% to 11.1%. The effect of the reduction in average staff size from 3 to
4 employees per clinic in 1996 to 2 to 3 employees per clinic in 1997 was offset
partially by lower revenues per clinic in 1997 as patient volumes continue to
grow over the initial six months of operations at newly opened centers.
Center Facilities Rent. Center facilities rent increased approximately
106% from $169,592 in 1996 to $349,223 in 1997 due primarily to the operation of
additional Centers during the period, higher rental rates in new markets, and
increased rent at the Company's corporate offices. As a percentage of net Center
revenue, Center facilities rent increased from 6.7% to 6.9%.
Advertising. Advertising expense increased approximately 36% from
$989,611 in 1996 to $1,343,944 in 1997 due to the increased number of Centers.
As a percentage of net Center revenue, advertising expense decreased from 39.3%
to 26.5% due to more effective advertising which produced higher patient volumes
at a lower cost per patient seen.
Depreciation and Amortization. Depreciation and amortization increased
approximately 155% from $213,889 in 1996 to $545,080 in 1997 due to increased
depreciation charges for clinical and office equipment purchased to support new
Centers, increased staffing at the Company's headquarters, and increased
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 8.5% to 10.8%, due primarily to the amortization of
pre-opening costs for 17 new clinics opened from June 1996 to June 1997 compared
to 7 new clinics opened from June 1995 to June 1996. Pre-opening costs are
amortized over a 12 month period.
Selling, General and Administrative. Selling, general and administrative
expense increased approximately 135% from $624,032 in 1996 to $1,467,112 in 1997
due principally to the addition of an experienced management team and additional
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,
<PAGE>
selling, general and administrative expense increased from 24.8% to 28.9%, due
primarily to the increased staffing needed to support the Company's planned
growth and the opening of new Centers.
Interest Expense, Net. Interest expense increased slightly from $60,237
in 1996 to $61,439 in 1997.
Income Taxes. No income tax provision or benefit was recorded in 1996 or
1997 as the deferred taxes otherwise provided were offset by valuation reserves
on deferred tax assets.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net Center Revenues. Net Center revenues increased approximately 77%
from $5,151,866 in 1996 to $9,121,999 in 1997. This growth was attributable
primarily to the increase in the number of Centers open during each period which
grew from 18 at June 30, 1996 to 33 at June 30, 1997.
Center Expenses. Center expenses increased approximately 98% from
$1,989,690 in 1996 to $3,929,535 in 1997 due to the operation of additional
Centers during the 1997 period. As a percentage of net Center revenues, Center
expenses increased from 38.6% to 43.1%.
Net Management Revenue. Net management revenue increased approximately
64% from $3,162,176 in 1996 to $5,192,464 in 1997. As a percentage of net Center
revenue, net management revenue decreased from 61.4% to 56.9%.
Center Staff Salaries. Center staff salaries increased approximately 39%
from $794,605 in 1996 to $1,108,109 in 1997 due to the operation of additional
Centers. As a percentage of net Center revenue, Center staff salaries decreased
from 15.4% to 12.1%. The effect of the reduction in average staff size from 3 to
4 employees per clinic in 1996 to 2 to 3 employees per clinic in 1997 was
partially offset by lower revenues per clinic in 1997 as patient volumes
continue to grow over the initial six months of operations at newly opened
centers.
Center Facilities Rent. Center facilities rent increased approximately
111% from $319,442 in 1996 to $673,365 in 1997 due primarily to the operation of
additional Centers during the period, higher rental rates in new markets and
increased rent at the Company's corporate offices. As a percentage of net Center
revenue, Center facilities rent increased from 6.2% to 7.4% due primarily to the
fact that a large number of clinics were opened in late 1996 and early 1997.
Advertising. Advertising expense increased approximately 69% from
$1,603,611 in 1996 to $2,706,206 in 1997 due to the increased number of Centers.
As a percentage of net Center revenue, advertising expense decreased from 31.2%
to 29.7% due to more effective advertising which produced higher patient volumes
at a lower cost per patient seen.
Depreciation and Amortization. Depreciation and amortization increased
approximately 200% from $366,889 in 1996 to $1,103,025 in 1997 due to increased
depreciation charges for clinical and office equipment purchased to support new
Centers, increased staffing at the Company's headquarters, and increased
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 7.1% to 12.1%, due primarily to the amortization of
pre-opening costs for 17 new clinics opened from June 1996 to June 1997 compared
to 7 new clinics opened from June 1995 to June 1996. Pre-opening costs are
amortized over a 12 month period.
Selling, General and Administrative. Selling, general and
administrative expense increased approximately 125% from $1,211,187 in 1996 to
$2,719,686 in 1997 due principally to the addition of an
<PAGE>
experienced management team and additional 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 23.5% to 29.8%, due primarily to the
increased staffing needed to support the Company's planned growth and the
opening of new Centers.
Interest Expense, Net. Interest expense decreased from $91,525 in 1996
to $77,896 in 1997.
Income Taxes. No income tax provision or benefit was recorded in 1996 or
1997 as the deferred taxes otherwise provided were offset by valuation reserves
on deferred tax assets.
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 March 1996, the Company raised $1.0 million from the issuance of 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 June 30, 1997, the Company had $1,710,000
outstanding under this line. The interest rate applicable to the line of credit
is 1% above the bank's prime lending rate (which prime lending rate was 8.5% at
June 30, 1997).
As of June 30, 1997, the Company had, for tax purposes, net operating
loss carry forwards of approximately $11.9 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
1997. This resulted primarily from differences in working capital levels
(particularly, accounts receivable) 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.
Accounts receivable, net of allowance, increased $1,617,481 from
$1,382,968 at December 31, 1996 to $3,000,449 at June 30, 1997 due to increases
in net Center revenues. Receivable from Centers, which relates to Medicare
receivables due to the Centers, increased approximately $1.5 million, primarily
due to an increase in receivables attributable to services to Medicare patients
$1,448,446 at December 31, 1996 to $2,544,427 at June 30, 1997. The June 30,
1997 amount includes $1.1 million pending submission for Medicare reimbursement
awaiting completion of appropriate provider registration requirements, which the
Company anticipates will be completed in the third quarter 1997. In addition,
$476,000 in Medicare billings were under payment suspension. See "Factors That
May Affect Future Results of Operations - Medicare Reimbursement.".
At June 30, 1997, the Company had cash and cash equivalents of $2.88
million. The Company is currently in discussions with a lender to provide a
revolving line of credit up to $5.0 million, secured by accounts receivable, and
up to $2.0 million in term financing secured by fixed assets. No assurance can
be given that these discussions will result in a completed borrowing
transaction.
<PAGE>
Despite the Company's existing resources and those provided from additional
debt, 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Ability to Manage Growth. The Company 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 prior to 1997 demonstrated a
seasonal pattern in which the first and fourth quarters were typically stronger
than the second and third quarters. The summer months of May through August
showed seasonal decreases in patient volume and billings. Through June 30, 1997,
this seasonal downturn was not indicated in patient volumes. The Company cannot
predict that this seasonality will not be demonstrated in the future and there
can be no assurance that such 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 bv Third Party Payors. For the quarter ended
June 30, 1997, approximately 72% of patient billings were covered by medical
insurance plans subject to applicable deductibles and other co-pay provisions
paid by the patient. Approximately 32% of patient billings were covered by
Medicare and 40% were covered by numerous other commercial insurance 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
<PAGE>
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 are 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.
Medicare Reimbursement. Historically, the percent of DCM patients for
which reimbursement is sought from Medicare has averaged approximately 30%
system-wide, although such average ranges from approximately 25% to 45% among
individual Centers. Medicare reimbursements for professional services are
processed by numerous carriers ("Service Carriers") and reimbursements for
durable medical equipment are handled by four regional carriers ("DMERCs").
These Service Carriers and DMERCs routinely review the billing practices and
procedures of health care providers and during such reviews these Carriers often
temporarily suspend all reimbursement payments to the providers whether or not
related to the billing issue being reviewed.
<PAGE>
Currently, there are two DMERCs and four Service Carriers that have
notified a DCM that a review is being conducted and that Medicare claims are
being held in suspense pending such review. The Company has also learned that
the Federal Bureau of Investigation is reviewing certain aspects of its Medicare
billing practices. System-wide, the total amount of billings under suspension
and included in Receivables from Centers as of June 30, 1997 was approximately
$476,000.
The Company is fully cooperating in these reviews and believes that its
billing practices and procedures are proper. One earlier review by another DMERC
has been concluded and the amounts suspended are being released to the Company.
However, in the event the other carriers were to disallow the reimbursement
requests under review, some or all of the suspended payments would not be
collected. In addition, depending upon the particular facts and circumstances
involved in the review, the carriers could seek repayment of prior
reimbursements and deny reimbursement for such claims in the future. Under
certain circumstances, the submission of improper Medicare reimbursement claims
can result in civil and criminal penalties and disqualification from seeking any
reimbursement from Medicare in the future.
The Company is conducting an internal review of the matters that have
been raised by the carriers and believes that these pending reviews and
inquiries will be concluded without any material adverse effect on the Company.
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. 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 27% of the Centers'
revenues for the quarter ended June 30, 1997. 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 tools and therapies 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
<PAGE>
("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 Services. 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not Applicable
ITEM 2: CHANGES IN SECURITIES
Not Applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The annual meeting of shareholders was held on May 30, 1997.
At that meeting, the shareholders elected Alan D. Frazier
and John K. Tillotson, M.D. as Class I Directors to serve on
the Board of Directors of the Company, in each case for a term
of three years ending in the year 2000. The Board placed in
nomination Alan D. Frazier and John K. Tillotson, M.D. No
other nominations for Director were presented at the meeting.
Mr. Frazier received 5,825,124 votes in favor of his election,
and votes withheld were 28,400. Dr. Tillotson received 5,826,124
votes in favor of his election, and votes withheld were 27,400.
There were no broker non-votes for either director.
The shareholders ratified the appointment of Ernst & Young LLP as
the Company's independent auditors for the 1997 fiscal year.
There were 5,826,374 shares voted in favor of, 26,000 shares
voted against, and 1,150 shares abstained from voting on the
resolution. There were no broker non-votes.
The shareholders also approved a proposal to amend the 1995 Stock
Option Plan of the Company (the "Plan") to increase the number of
shares of Common Stock, par value $.001 per share, available for
options under the Plan by 460,000 shares. There were 4,150,348
shares voted in favor of, 383,450 shares voted against, 1,294,126
broker non-votes, and 25,600 shares abstained from voting on the
resolution.
Finally, the shareholders approved a proposal to amend the
Non-Employee Director Stock Option Plan of the Company (the
"Director Plan") to increase the number of shares of Common
Stock, par value $.001 per share, available for options under the
Plan by 40,000 shares. There were 4,337,248 shares voted in favor
of, 198,550 shares voted against, 1,292,426 broker non-votes and
25,300 shares abstained from voting on the resolution.
ITEM 5: OTHER INFORMATION
Not Applicable
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-B
* 10(a) 1995 Stock Option Plan, as amended
** 10(b) Non-Employee Director Stock Option Plan, as amended
11 Statement re: computation of per share earnings
27 Financial Data Schedule
* Incorporated by reference to Appendix A to the Company's
Definitive Proxy Statement for the annual meeting held on
May 30, 1997, File No. 0-21427, filed with the Securities
and Exchange Commission on April 28, 1997.
** Incorporated by reference to Appendix B to the Company's
Definitive Proxy Statement for the annual meeting held on
May 30, 1997, File No. 0-21427, filed with the Securities
and Exchange Commission on April 28, 1997.
(b) REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements 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.
Date: August 14, 1997 By: /s/ Beverly O. Elving
---------------------
Beverly O. Elving
Chief Financial Officer and Vice
President, Finance and Administration
Authorized Officer and Principal Financial
and Accounting Officer)
<PAGE>
EXHIBIT 11
INTEGRATED MEDICAL RESOURCE'S INC. AND CENTERS
NET LOSS per COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
For the three months ended June 30 For the six months ended June 30
1997 1996 1997 1996
---------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Net Loss per Common and
Common Equivalent Share
Net loss $(1,346,098) $(1,245,796) $(3,187,470) $(1,225,083)
================================== ================================
Weighted average common shares
outstanding 6,715,017 2,906,215 6,715,017 2,906,215
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") 0 108,414 0 108,414
---------------------------------- --------------------------------
Weighted average common and common
equivalent shares outstanding 6,715,017 3,014,629 6,715,017 3,014,629
================================== ================================
Net loss per common and
common equivalent share $ (0.20) $ (0.41) $ (0.47) $ (0.41)
================================== ================================
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,881,187
<SECURITIES> 0
<RECEIVABLES> 5,844,794
<ALLOWANCES> 820,388
<INVENTORY> 222,180
<CURRENT-ASSETS> 8,394,650
<PP&E> 6,877,824
<DEPRECIATION> 1,979,724
<TOTAL-ASSETS> 13,932,757
<CURRENT-LIABILITIES> 5,412,017
<BONDS> 0
0
0
<COMMON> 6,715
<OTHER-SE> 7,105,188
<TOTAL-LIABILITY-AND-EQUITY> 13,932,757
<SALES> 5,066,132
<TOTAL-REVENUES> 5,066,132
<CGS> 2,086,253
<TOTAL-COSTS> 6,352,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,626
<INCOME-PRETAX> (1,346,098)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,346,098)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
