U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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.
(Name of Small Business Issuer in its Charter)
Kansas 48-1096410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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. [ ]
State issuer's revenues for its most recent fiscal year. $21,004,554
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. $13,447,940 on March 20, 1998 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 20, 1998, there were
6,731,058 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 1998
Annual Meeting of Stockholders which will be filed with the Commission within
120 days after the end of the registrant's 1997 fiscal year, are incorporated by
reference into Part III hereof.
Transitional Small Business Disclosure Format (Check one): Yes No
X
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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 Men(SM). The Diagnostic Center for Men is a service mark of the Company.
This service mark will expire on November 25, 2003 unless a Section 8/15
Declaration is filed by that date. 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
management services to physicians and medical clinics caring for men suffering
from sexual dysfunction, focusing primarily on the diagnosis and treatment of
erectile dysfunction, commonly known as impotence. The Centers provide
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 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.
Five Centers were opened in 1995, growing to a total of 13 Centers managed in 8
states at December 31, 1995. In 1996, 17 Centers were opened, for a total of 30
Centers managed in 18 states at December 31, 1996. In 1997, 4 Centers were
opened in the first 2 quarters, one Center was closed in the second quarter, and
7 Centers were closed in the fourth quarter. At December 31, 1997, the Company
managed 26 Centers in 17 states. The following table summarizes operations for
the three year period ended December 31, 1997:
Clinics Managed New
Year (end of period) Patients
1995 13 9,087
1996 30 13,123
1997 26 21,448
Historically, the FDA approval and introduction of new treatment alternatives
for men with impotence has resulted in an increase in the number of men who seek
diagnosis and treatment at the Centers. This was true with the FDA approval of
Caverject(R) (Pharmacia & Upjohn) in 1995 and MUSE(R) (Vivus) in 1996, and is
projected by analysts to be the case with the approval in March 1998 of
Viagra(R) (Pfizer), which is the first oral medication approved for use in the
treatment of impotence. At the time of new treatment introductions, the Company
focuses its direct-to-consumer marketing efforts on promoting the new treatment.
This promotion, in conjunction with the increased visibility that the
manufacturers' substantial national advertising campaigns create, has resulted
in increases in call volume to the Company's centralized appointment center as
well as increases in new patients seen. The Company also participates in joint
marketing programs and strategic alliances with certain developers of these
impotence treatments, including direct mailing to the existing patient database
which brings these patients back in to consider the new treatment option.
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
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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. 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.
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 - There are several oral medications on the market that
are being prescribed by physicians in attempts to treat impotence.
Through the end of 1997, the most common has been yohimbine
hydrochloride. Currently available oral medications are effective in a
small percentage of impotent men. A new medication is expected to be
approved by the FDA in early 1998. Viagra(R) (Pfizer) would be the first
oral medication approved for use in the treatment of impotence and is
anticipated to be significantly more effective than any existing oral
impotence treatment. There a number of additional oral medications being
developed by other pharmaceutical companies for use in men with
impotence.
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 under
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.
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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's network of managed medical clinics operates under the name of The
Diagnostic Center for Men(SM). 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-consumer 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.
Centers typically operate with a staff of three or four persons, including a
salaried 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.
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 Centers use diagnostic protocols that 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
penile ultrasound, which is used in an office procedure that measures the
velocity of blood flow in the penis. 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 any indicated diagnostic 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 the
sexual dysfunction.
Within 30 days of the commencement of therapy, the Company uses patient
follow-up procedures to determine patient satisfaction. 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.
<PAGE>
Facilities
The following chart shows the location and opening date of each of the 28
Centers operating at March 15, 1998:
Location Date Location Date
Opened Opened
Kansas City, MO April 1990 Chicago, IL April 1996
Dallas, TX October 1992 Norfolk, VA July 1996
Pittsburgh, PA June 1993 Hartford, CT July 1996
Philadelphia, PA January 1994 Laguna Hills, CA July 1996
Cleveland, OH May 1994 Milwaukee, WI July 1996
Boston, MA June 1994 Tampa, FL August 1996
Detroit, MI September 1994 Walnut Creek, CA August 1996
Cincinnati, OH October 1994 Indianapolis, IN September 1996
Westchester Co., NY January 1995 Jacksonville, FL September 1996
Long Island, NY February 1995 Oklahoma City, OK October 1996
Columbus, OH August 1995 Campbell, CA November 1996
Houston, TX November 1995 Greensboro, NC May 1997
New York, NY January 1996 Greenville, SC May 1997
Washington, D.C. April 1996 St. Louis, MO January 1998
The Company's principal executive offices and administrative support facility
are located in a leased facility in Lenexa, Kansas, a suburb of Kansas City.
Sales and Marketing
The Company markets the Centers' services through a marketing and advertising
department which supports the advertising efforts of Media Direct Partners,
Inc., a large 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 initiates a direct mail campaign
to physicians in the area and holds an open house to introduce them to the new
Center. At the same time, the Company places advertising for the new Center in
local and regional newspapers and on key television stations. Over 90% of new
patient visits result from the Company's direct-to-consumer advertising, which
is in addition to public relations efforts in the national and local markets
through the placement of articles in magazines and newspapers and features on
local television stations and talk radio programs 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 Men(SM) 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, 1997, approximately 75% of patient billings were
covered by medical insurance plans subject to applicable deductible and other
co-pay provisions paid by the patient. Approximately 34% of patient billings
were covered by Medicare and 41% were covered by numerous other commercial
insurance plans that offer coverage for impotence treatment services.
To date, the Company has not participated in any HMO-type managed care programs.
Managed care system members seeking impotence treatment are typically referred
to urologists within that system. 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. In 1996, the Company experienced rapid growth that
resulted in new and increased responsibilities for management personnel and
placed increased demands on the Company's management, operational and financial
systems and resources. To accommodate this growth and to compete effectively and
manage future growth, the Company will be required to continue to
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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.
Liquidity and Cash Flow Shortages. Throughout the fourth quarter of 1997, the
Company experienced significant cash flow shortages as expenses exceeded cash
receipts and accounts receivable collections were slowed or, due to certain
Medicare reimbursement issues, suspended. As a result of these shortages, the
Company obtained the Line of Credit and the Stockholder Loan, both described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources", and in December 1997 and January
1998 implemented the expense reduction program, also described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Cash flow shortages continued during the first quarter of 1998, and in March
1998 the Company entered into the KMI Financing described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources" and in the Report on Form 8-K filed by the
Company on March 20, 1998. The proceeds of the Stockholder Loan and the initial
phase of the KMI Financing have been substantially exhausted, the Line of Credit
is drawn to capacity and the Company continues to experience cash flow
shortages. As a result, without additional cash infusion in the near term, such
as further funds contemplated by the KMI Financing and additional amounts
committed under the Stockholder Loan described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources", the Company may be unable to continue as a going concern.
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 have showed
seasonal decreases in patient volume and billings. In 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 by Third Party Payors. For the year ended December
31, 1997, approximately 75% of patient billings were covered by medical
insurance plans subject to applicable deductibles and other co-pay provisions
paid by the patient. Approximately 34% of patient billings were covered by
Medicare and 41% 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 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.
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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.
Medicare Reimbursement. Historically, the percent of patients for which
reimbursement is sought from Medicare has averaged approximately 30%
system-wide, although such average ranges from approximately 23% to 56% 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.
As of December 31, 1997, there were two DMERCs and two Service Carriers that had
notified a Center that a review is being conducted and that Medicare claims are
being held in suspense pending such review. In January 1998, the Company was
notified that the review by one Service Carrier had been completed and the
suspension lifted. The Company also learned in 1997 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
accounts receivable as of December 31, 1997 was approximately $1.1 million.
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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 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 conducted 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.
In October 1997, the Company was notified that the California Board of Medical
Examiners was investigating several physicians and Centers in California for
which the Company provides management services related to alleged infractions of
the state corporate practice of medicine rules. The California State Board of
Medical Examiners has referred the investigation to the California Attorney
General's office. No determinations have been made by the California Attorney
General's office and no assessments have been proposed. The Company is fully
cooperating in this review and believes that the pending review will be
concluded without material adverse effect on the Company.
Dependence on Rigiscans; Potential Impact of Innovations. Rigiscan patient
monitoring devices accounted for approximately 26% of the Centers' revenues for
the year ended December 31, 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
("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.
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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-consumer 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. 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.
<PAGE>
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 1997, the Company received fees of
approximately $13.1 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.
<PAGE>
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 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.
Employees
As of March 20, 1998, the Company operated Centers and its headquarters with a
combined staff of 161 full-time equivalent employees, 8 Center physicians who
were part-time, and 20 certified sex therapists who contracted their services as
independent contractors to the Centers on a part-time basis.
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
<PAGE>
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.
<PAGE>
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
"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. Stark II regulations were
proposed in January 1998, but have not yet been adopted. 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 $3,500 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 $3,863, 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, 1997.
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.
<PAGE>
Common Stock Price
HIGH LOW
Fourth Quarter - 1996 6 1/8 3
First Quarter - 1997 7 7/8 2 1/4
Second Quarter - 1997 2 7/8 1 1/2
Third Quarter - 1997 2 11/16 1 5/8
Fourth Quarter - 1997 5 3/8 1 1/4
The number of record holders of the Company's common stock as of March 20, 1998,
was 154, including brokers holding shares as nominees or in street name, but
excluding those for which they hold such shares.
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 finance company prohibits the payment of dividends without
the finance company's prior written approval.
On December 11, 1997, the Company issued a stock purchase warrant to each of the
following: Institutional Venture Partners VI Limited Partnership ("IVP"), IVP
Founders Fund I ("Founders Fund"), Institutional Venture Management VI ("IVM")
and Frazier Healthcare II, L.P. ("Frazier"). The stock purchase warrants were
issued in connection with a loan to the Company by IVP in the amount of
$752,000, by Founders Fund in the amount of $32,000, by IVM in the amount of
$16,000 and by Frazier in the amount of $600,000. The number of shares of Common
Stock issuable upon exercise of each stock purchase warrant is, with respect to
each investor, generally equal to forty percent (40%) of such investor's loan
commitment to the Company divided by the lesser of 3.125 or the per share
purchase price of one share of Common Stock in the Company's next equity
financing resulting in gross proceeds to the Company of at least $2,600,000,
excluding securities issued upon conversion of the notes corresponding to the
above-mentioned loans (the "Next Financing").
In addition, on December 11, 1997, the Company issued convertible subordinated
promissory notes in favor of IVP, Founders Fund, IVM and Frazier equal to the
loan amounts of the above-mentioned loans. Upon the closing of the Next
Financing, the outstanding principal balance of the notes shall be automatically
converted into the securities issued in the Next Financing at the lower of (i)
$2.15 per share; (ii) the average market price per share of the Company's Common
Stock for the 15 days preceding the closing of the Next Financing; or (iii) the
price per share at which such securities are actually issued in the Next
Financing.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Company is the leading provider of management services to physicians and
medical clinics caring for men suffering from sexual dysfunction, focusing
primarily on the diagnosis and treatment of erectile dysfunction, commonly known
as impotence. The Centers provide 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 manages 28 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
$140,000 and pre-opening costs for physician recruitment, organizational costs
and advertising expenses. Pre-opening costs average approximately $35,000 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 $700,000 in 1997 in
connection with the opening of 4 new Centers.
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.
<PAGE>
Centers typically operate with a staff of three or four persons,
including a full-time physician. One full-time physician can see approximately
120 new patients per month, if at capacity. 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 86% of Center
billings are related to diagnostic services, of which approximately one-fourth
are physician professional fees, and 14% of average billings are related to
treatments dispensed by the Center. Historically, average patient billings have
remained relatively constant at approximately $800, although the average patient
billings for the year ended December 31, 1997 were approximately $820.
For the year ended December 31, 1997, approximately 75% of patient billings were
covered by medical insurance plans subject to applicable deductible and other
co-pay provisions paid by the patient. Approximately 34% of patient billings
were covered by Medicare and 41% 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 revenue:
Year Ended December 31,
1997 1996
Net revenue 100.0% 100.0%
Center operating expenses:
Physician salaries 17.4 21.7
Cost of services 30.1 28.5
Center staff salaries 11.0 14.4
Center facilities rent 6.5 7.2
---- ----
Total Center operating 65.0 71.8
---- ----
expenses
Center contribution 35.0 28.2
Corporate expenses:
Advertising 26.9 39.2
Selling, general and 30.9 33.7
administrative
Depreciation and amortization 11.1 12.0
Restructuring charge 4.4 0.0
---- ----
Total corporate expenses 73.3 84.9
---- ----
Operating loss (38.3) (56.7)
Interest expense, net ( 1.6) ( 2.5)
Other expense, net ( 0.3) 0.0
------ ----
Loss before income tax benefit (40.2) ( 59.2)
Income tax benefit ( 0.0) 0.0
------ ----
Net loss (40.2) ( 59.2)
Years Ended December 31, 1997 and 1996
Net Revenue. Net revenue increased 91% from $11.0 million in 1996 to $21.0
million in 1997. This growth was attributable primarily to the full year of
revenues in 1997 from Centers open for a partial year in 1996. In addition, the
Company opened 4 new Centers in the first two quarters of 1997. The weighted
average number of clinics increased 57%, from 21 in 1996 to 33 in 1997. Fees
related to the use of Rigiscans accounted for approximately 26% of revenues in
each period.
Physician Salaries. Physician salaries increased 52% from $2.4 million in 1996
to $3.6 million in 1997. This increase was attributable to the full year of
operations for the 17 Centers opened in 1996 and the opening of 4 new Centers in
1997, evidenced in the 57% increase in the weighted average number of clinics.
As a percentage of net revenue, physician salaries decreased from 21.7% to
17.4%.
<PAGE>
Cost of Services. Cost of services represent direct operating expenses of the
Centers, including costs for laboratory and outsourced services, diagnostic and
treatment supplies, and treatment devices and medications dispensed through the
Centers. Cost of services increased 102% from $3.1 million in 1996 to $6.3
million in 1997 due to the full year of operations for the 17 Centers opened in
1996 and the opening of 4 new Centers in the 1997 period, evidenced in the 57%
increase in the weighted average number of clinics. As a percentage of net
revenues cost of services increased slightly, from 28.5% to 30.1%.
Center Staff Salaries. Center staff salaries increased 46% from $1.6 million in
1996 to $2.3 million in 1997 due to the full year of operations for the 17
Centers opened in 1996 and the opening of 4 additional Centers in 1997,
evidenced in the 57% increase in the weighted average number of clinics. As a
percentage of net revenue, Center staff salaries decreased from 14.4% in 1996 to
11% in 1997.
Center Facilities Rent. Center facilities rent increased 72% from $797,000 in
1996 to $1.4 million in 1997 due to the full year of operations for the 17
Centers opened in 1996 and the opening of 4 additional Centers during 1997,
evidenced in the 57% increase in the weighted average number of clinics. In
addition, average monthly Center rent increased 12.9%, from $3,100 to $3,500 per
Center, due to increased space leased to expand capacity to meet demand in
certain mature Centers, as well as higher lease rates in several high cost
markets entered in late 1996. As a percentage of net revenue, Center facilities
rent decreased from 7.2% to 6.5%.
Clinic Contribution. Clinic contribution increased 137% from $3.1 million in
1996 to $7.3 million in 1997. As a percentage of net revenue, clinic
contribution increased from 28.2% to 35%, due to the increase in net revenue at
a greater rate than the increase in expenses.
Advertising. Advertising expense increased 31% from $4.3 million in 1996 to $5.7
million in 1997 due primarily to the 57% increase in the weighted average number
of clinics. As a percentage of net revenue, advertising expense decreased
significantly from 39.2% to 26.9%, which was primarily attributable to a change
in media used to direct-response television from more costly radio, and the
engagement of an outside advertising agency in November 1996.
Selling, General and Administrative. Selling, general and administrative expense
increased 75% from $3.7 million in 1996 to $6.5 million in 1997, due principally
to a full year's expense for the addition of an experienced management team and
staff at the Company's corporate headquarters, expansion of the telephone
appointment center staff to support additional Centers and increased staffing in
billing to increase reimbursement and improve collection of accounts receivable.
As a percentage of net revenue, selling, general and administrative expense
decreased from 33.7% to 30.9%, due primarily to increased revenue.
Depreciation and Amortization. Depreciation and amortization increased 76% from
$1.3 million in 1996 to $2.3 million in 1997 due to a full year's depreciation
charges for clinical and office equipment purchased in 1996 to support new
Centers and increased staffing at the Company's headquarters and amortization of
pre-opening costs incurred with respect to the significant growth in new Centers
in 1996. As a percentage of net revenue, depreciation and amortization decreased
slightly from 12.0% to 11.1%.
Restructuring Charge. The Company incurred a restructuring charge of $919,243 in
1997, primarily representing lease termination payments and other costs of
closing 7 Centers and canceling the planned opening of a new Center.
Interest Expense, Net. Net interest expense increased from $275,000 in 1996 to
$337,000 in 1997, resulting from increased borrowings under the Company's credit
facilities to support equipment purchases and working capital at Centers opened
in late 1996 and in 1997.
Income Taxes. No income tax provision or benefit was recorded in 1996 or 1997 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 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, spanning the second and third quarters, showed 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. In 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
<PAGE>
no assurance that such seasonal fluctuations will not produce decreased revenues
and poorer financial results. In addition, the Company's quarterly results are
affected by the timing of the opening of new Centers.
Liquidity and Capital Resources
Throughout the fourth quarter of 1997, the Company experienced significant cash
flow shortages as expenses exceeded cash receipts and accounts receivable
collections were slowed or, due to certain Medicare reimbursement issues,
suspended. As a result of these shortages, the Company obtained the Line of
Credit and the Stockholder Loan, both described below, and in December 1997 and
January 1998 implemented the expense reduction program described below.
Cash flow shortages continued during the first quarter of 1998, and in March
1998 the Company entered into the KMI Financing described below and in the
Report on Form 8-K filed by the Company on March 20, 1998. The proceeds of the
Stockholder Loan and the initial phase of the KMI Financing have been
substantially exhausted, the Line of Credit is drawn to capacity and the Company
continues to experience cash flow shortages. As a result, without additional
cash infusion in the near term, such as further funds contemplated by the KMI
Financing and additional amounts committed under the Stockholder Loan, the
Company may be unable to continue as a going concern.
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
services to Centers and variances in operating results. The variances were
principally attributable to the fact that revenues at new Centers 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.
The Company has financed its operations and met its capital requirements with
cash flows from services provided to 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. The Company has a working capital line of credit (the "Line
of Credit") with a finance company under which it may borrow up to $5.0 million
through October 24, 1999, based on specified percentages of eligible accounts
receivable. At December 31, 1997, the Company had $3,085,954 outstanding under
this Line of Credit, the maximum available based on eligible accounts receivable
balances. The interest rate applicable to the Line of Credit is 2.5% above the
Bank of America prime lending rate (which prime lending rate was 8.5% at
December 31, 1997). In October 1997, the Company entered into a $500,000 term
loan agreement with the finance company which provides the Line of Credit,
secured by property and equipment, payable in monthly installments through
October 2000, bearing interest at 12.74%.
In December 1997, the Company issued $1.4 million in convertible subordinated
promissory notes to two major institutional shareholders (the "Stockholder
Loan"). Three of the Company's directors are affiliated with these institutional
shareholders. The notes are convertible into the securities issued in the
Company's next equity financing involving the receipt by the Company of, in the
aggregate, more than $3 million, at the purchase price paid by the investors in
that financing. Subsequent to December 31, 1997, the note agreements were
amended to provide for extension of the maturity date from May 31, 1998 to
November 30, 1998, in the event the notes are not converted on or before May 31,
1998. In addition, the amendment reduced the amount of the required equity
financing to $2.6 million, and provided an additional loan commitment of up to
$600,000, based on the Company meeting certain cash flow projections. Attached
to these notes are warrants to purchase the Company's common stock based upon a
stated formula. The fair value of the warrants of $209,664 has been recorded as
an offset to the related debt.
As of December 31, 1997, the Company had, for tax purposes, net operating loss
carry forwards of approximately $16.8 million, which are available to offset
future taxable income and expire in varying amounts through 2012, if unused.
At December 31, 1997, the Company had cash and cash equivalents of $765,000.
Accounts receivable, net of allowance, increased $6.0 million, from $2.4 million
at December 31, 1996 to $8.4 million at December 31, 1997. The increase in
accounts receivable is primarily due to increases in net revenue and in
receivables attributable to services to Medicare patients, which increased from
$499,000 at December 31, 1996 to $4.3 million at December 31, 1997. The December
31, 1997 accounts receivable balance includes $2.1 million pending payment or
submission for Medicare reimbursement awaiting completion of appropriate
provider registration requirements, which the Company anticipates will be
completed by the third quarter 1998. In addition, $1.1 million in Medicare
billings were under payment suspension, see "Risk Factors - Medicare
Reimbursement." At December 31, 1997, total accounts
<PAGE>
receivable reflected an average balance of 111 days of net revenue, and accounts
receivable greater than 180 days totaled approximately $3.3 million.
The Company has taken measures to reduce operating losses and improve cash flow
through the closing of 7 Centers, cancellation of the planned opening of an
additional Center and reductions in corporate staffing in January 1998. In March
1998, the Company entered into a financing arrangement (the "KMI Financing")
with Kardatzke Management Inc., ("KMI"), as evidenced by a Note Purchase
Agreement and Convertible Note. Pursuant to the terms of the Note Purchase
Agreement, KMI has loaned the Company $1.6 million at an interest rate of 8.5%.
All payments of principal and interest under the Note are deferred until
September 1, 1998. The Note may be converted at the option of KMI into common
stock of the Company at the lower of $2.15 per share or the average market price
for the 15 days prior to conversion, at any time prior to maturity. If not
converted or extended prior to September 1, 1998, the Note shifts to an 18
month, fully amortizing term loan and is no longer convertible. In addition, KMI
has agreed to provide management consulting services to the Company, which end
at the Company's option if the Note is converted or shifts to a term loan. KMI
will receive an option to purchase 300,000 shares of common stock exercisable at
$2.70 per share if certain performance criteria are met prior to April 15, 1999.
As part of the financing transaction, KMI also has four options to purchase
shares of common stock at increasing share prices and with staggered exercise
dates, which, when combined with the conversion of the Note, aggregate 2.3
million shares. The exercise of each option is dependent on the exercise of the
earlier options and the exercise of the first option is dependent on the
conversion of the Note.
Also, upon the conversion of the Note and the investment of an additional $1.0
million through the exercise of the initial option to purchase common stock, a
principal of KMI will join the Company in the capacity of Chief Executive
Officer and Chairman of the Board of Directors. In the event that this principal
assumes these positions, he will have a three year employment contract with the
Company and receive options to purchase an aggregate of 600,000 shares of common
stock at a purchase price of $2.15 per share, vesting over four years.
The Company believes that funds available under the Company's Line of Credit,
operating cash flows generated, especially if collections of accounts receivable
improve, proceeds of additional borrowings under the Stockholder Loan and the
proceeds of additional investments by KMI, if any, will be sufficient to fund
its operations and satisfy its working capital requirements for the next twelve
months.
Year 2000 Compliance
Many computer software and hardware systems currently are not, or will or may
not be, able to read, calculate or output correctly using dates after 1999, and
such systems will require significant modifications in order to be "year 2000
compliant". This issue may adversely affect the operations and financial
performance of the Company because its computer systems are an integral part of
the Company's health care delivery activities as well as its accounting and
other information systems and because the Company will have to divert financial
resources and personnel to address this issue.
The Company has begun to review its computer hardware and software systems. The
existing systems will be upgraded either through modification, or replacement.
The Company currently anticipates this upgrading to be completed by July 1,
1999.
Although the Company is not aware of any material operational impediments
associated with upgrading its computer hardware and software systems to be year
2000 compliant, the Company cannot make any assurances that the upgrade of the
Company's computer systems will be completed on schedule or that the upgraded
systems will be free of defects. If any such risks materialize, the Company
could experience material adverse consequences, material costs or both.
Year 2000 compliance may also adversely affect the operations and financial
performance of the Company indirectly by causing complications of, or otherwise
affecting, the operations of any one or more of the Company's vendors. The
Company intends to contact its significant vendors in the last half of calendar
year 1998 in an attempt to identify any potential year 2000 compliance issues
with them. The Company is currently unable to anticipate the magnitude of the
operational or financial impact on the Company of year 2000 compliance issues
with its vendors.
<PAGE>
The Company expects to incur approximately $100,000 in each fiscal period
beginning with the second quarter of 1998 through the second quarter of 1999 to
resolve the Company's year 2000 compliance issues. All expenses incurred in
connection with year 2000 compliance will be expensed as incurred, other than
acquisitions of new software or hardware, which will be capitalized.
Recently Issued Accounting Standards
Recent pronouncements of the Financial Accounting Standards Board, which are
not required to be adopted until 1998, include SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company has not yet determined the effects, if any,
the adoption will have on the Company's financial statements. Applicability of
FAS No. 130 will not impact amounts previously reported for net income.
SFAS No. 131 supersedes SFAS No. 14 and establishes new standards for the way
that public companies report selected information about operating segments in
annual financial reports and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not yet
determined the effects, if any, the adoption will have on the Company's
financial statements.
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.
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 1998 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, 1997.
Item 10. Executive Compensation.
Incorporated by reference to the Company's Proxy Statement for the 1998 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, 1997.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's Proxy Statement for the 1998 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, 1997.
Item 12. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's Proxy Statement for the 1998 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, 1997.
Item 13. Exhibits
(a) The following exhibits are filed herewith:
Exhibit Description
Number
Amended and Restated Articles of Incorporation
3(a)(ii)(1)
3(b)(ii)(4) Restated Bylaws
4(a)(1) Specimen of Common Stock Certificate
4(b)(i)(1) 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)(1) First Amendment to the Loan Agreement dated June 18, 1996 by and
among the Company, certain Centers and Citizens National Bank of
Fort Scott
4(c)(i)(4) Security Agreement dated September 30, 1997, by and between the
Company and P&C Investments
4(c)(ii)(4) Promissory Note dated September 30, 1997, in favor of P&C
Investments
4(d)(4) Revolving Loan and Security Agreement dated October 23, 1997 by and
between the Company and DVI Business Credit Corporation
4(e)(4) Loan and Security Agreement dated October 23, 1997 by and between
the Company and DVI Financial Services, Inc.
4(f)(5) Note Purchase Agreement by and between KMI and the Company, dated
March 5, 1998
4(g)(5) Convertible Note by the Company in favor of KMI, dated March 5,
1998
4(h)(i) Note and Warrant Agreement dated December 11, 1997 by and among
Institutional Venture Partners VI Limited Partnership, IVP Founders
Fund I, Institutional Venture Management VI, Frazier Healthcare II
L.P. and the Company
4(h)(ii) Amendment to the Note and Warrant Agreement dated March 5, 1998 by
and among Institutional Venture Partners VI Limited Partnership,
IVP Founders Fund I, Institutional Venture Management VI, Frazier
Healthcare II L.P. and the Company
4(h)(iii) Form of Convertible Subordinated Promissory Note in favor of each
of Institutional Venture Partners VI Limited Partnership, IVP
Founders Fund I, Institutional Venture Management VI and Frazier
Healthcare II L.P.
4(h)(iv) Form of Stock Purchase Warrant in favor of each of Institutional
Venture Partners VI Limited Partnership, IVP Founders Fund I,
Institutional Venture Management VI and Frazier Healthcare II L.P.
10(a)(6) Amended and Restated 1995 Stock Option Plan
10(d)(1) 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)(1) Form of Services Agreement by and between a Subsidiary of the
Company and a Center (Revised)
10(e)(ii)(1) Form of Promissory Note by a Center in favor of a Subsidiary of
the Company
10(e)(iii)(1)Form of Security Agreement by a Center in favor of a Subsidiary
of the Company
10(e)(iv)(1) Form of Equipment Lease by and between the Centers and a
Subsidiary of the Company
10(e)(v)(1) Form of Sublease by and between the Centers and a Subsidiary of
the Company
10(f)(1) Rigiscan Purchase Agreement dated December 1, 1995 by and
between UROHEALTH Systems, Inc. and the Company
<PAGE>
10(f)(i)(2) Amendment to the Rigiscan Purchase Agreement dated September 6,
1996 by and between UROHEALTH Systems, Inc. and the Company
10(f)(ii)(2) Amendment to the Rigiscan Purchase Agreement dated December 19,
1996 by and between UROHEALTH Systems, Inc. and the Company
10(f)(iii)(4)Amendment to the Rigiscan Purchase Agreement dated October 15,
1997 by and between Imagyn Medical Technologies, Inc. (formerly
known as UROHEALTH Systems, Inc.) and the Company
10(g)(1) VCD Purchase Agreement dated December 1, 1995 by and between
UROHEALTH Systems, Inc. and the Company
10(i)(1) Service Mark Assignment Agreement dated August 1, 1996 by and
between Troy A. Burns and the Company
10(j)(1) Office Building Lease dated December 20, 1993 by and between
Troy A. Burns and the Company
10(k)(7) Non-Employee Director Stock Option Plan
10(l)(1) 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)(1) Employment Agreement by and between William Raup and the Company
10(n)(1) Option Agreement dated September 26, 1996 by and between Troy A.
Burns, M.D. and the Company
10(o)(1) Employment Agreement dated September 30, 1996 by and between
Troy A. Burns, M.D. and the Company
Exhibit Description
Number
10(p)(1) Employment Agreement dated September 30, 1996 by and between T.
Scott Jenkins and the Company
10(q)(1) 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)(2) Advertising Agency Agreement dated December 4, 1996 by and
between DraftDirect Worldwide, Inc. and the Company
10(s)(3) Agreement dated March 1, 1997 by and between TheraCom, Inc. and
the Company
10(t)(3) Services Agreement dated January 6, 1997 by and between and
Strategem, Inc. and the Company
10(t)(i)(4) Amendment to Services Agreement dated July 1, 1997 by and
between Strategem, Inc. and the Company
10(t)(ii)(4) Termination of Services Agreement dated September 30, 1997 by
and between Strategem, Inc. and the Company
10(u)(3) Registration Rights Agreement dated January 6, 1997 by and
between Strategem, Inc. and the Company
10(v) Advertising Agency Agreement dated September 19, 1997 by and
between Media Direct Partners, Inc. and the Company
21 List of Subsidiaries of the Company
23(b) Consent of Ernst & Young LLP
27 Financial Data Schedule
- - -----------
(1) 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.
(2) Incorporated by reference to the corresponding exhibit filed on March 31,
1997 as part of Form 10-KSB for the year ended December 31, 1996.
(3) Incorporated by reference to the corresponding exhibit filed on May 15,
1997 as part of Form 10-QSB for the quarter ended March 31, 1997.
(4) Incorporated by reference to the corresponding exhibit filed on November
14, 1997 as part of Form 10-QSB for the quarter ended September 30, 1997.
(5) Incorporated by reference to the corresponding exhibit filed as part
of Form 8-K on March 20, 1998.
(6)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.
<PAGE>
(7)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
The Company filed no reports on Form 8-K for the fiscal year ended December
31, 1997.
<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
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 March 30, 1998
Troy A. Burns, M.D. (Principal Executive Officer)
/s/ BEVERLY O. ELVING Chief Financial Officer and Vice
President, Finance and Administration
(Principal Financial and Accounting March 30, 1998
Beverly O. Elving Officer)
/s/ T. SCOTT JENKINS Director
March 30, 1998
T. Scott Jenkins
/s/ SAMUEL D. COLELLA Director
March 30, 1998
Samuel D. Colella
/s/ JOHN K. TILLOTSON, Director
M.D.
March 30, 1998
John K. Tillotson
/s/ ALAN D. FRAZIER Director
March 30, 1998
Alan D. Frazier
/s/ BRUCE A. HAZUKA Director
March 30, 1998
Bruce A. Hazuka
<PAGE>
/s/ DWAYNE R. SIGLER Director
March 30, 1998
Dwayne R. Sigler
/s/ JAMES R. KAHL Director
March 30, 1998
James R. Kahl
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit Description Page
Number Number
3(a)(ii)(1) Amended and Restated Articles of Incorporation
3(b)(ii)(4) Restated Bylaws
4(a)(1) Specimen of Common Stock Certificate 4(b)(i)(1) 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)(1) First Amendment to the Loan Agreement dated June 18, 1996 by and
among the Company, certain Centers and Citizens National Bank of
Fort Scott
4(c)(i)(4) Security Agreement dated September 30, 1997, by and between the
Company and P&C Investments
4(c)(ii)(4) Promissory Note dated September 30, 1997, in favor of
P&C Investments
4(d)(4) Revolving Loan and Security Agreement dated October 23, 1997 by
and between the Company and DVI Business Credit Corporation
4(e)(4) Loan and Security Agreement dated October 23, 1997 by and between
the Company and DVI Financial Services, Inc.
4(f)(5) Note Purchase Agreement by and between KMI and the Company, dated
March 5, 1998
4(g)(5) Convertible Note by the Company in favor of KMI, dated March 5,
1998
4(h)(i) Note and Warrant Agreement dated December 11, 1997 by and among
Institutional Venture Partners VI Limited Partnership, IVP
Founders Fund I, Institutional Venture Management VI, Frazier
Healthcare II L.P. and the Company
4(h)(ii) Amendment to the Note and Warrant Agreement dated March 5, 1998 by
and among Institutional Venture Partners VI Limited Partnership,
IVP Founders Fund I, Institutional Venture Management VI, Frazier
Healthcare II L.P. and the Company
4(h)(iii) Form of Convertible Subordinated Promissory Note in favor of each
of Institutional Venture Partners VI Limited Partnership, IVP
Founders Fund I, Institutional Venture Management VI and Frazier
Healthcare II L.P.
4(h)(iv) Form of Stock Purchase Warrant in favor of each of Institutional
Venture Partners VI Limited Partnership, IVP Founders Fund I,
Institutional Venture Management VI and Frazier Healthcare II L.P.
10(a)(6) Amended and Restated 1995 Stock Option Plan
10(d)(1) 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)(1) Form of Services Agreement by and between a
Subsidiary of the Company and a Center (Revised)
10(e)(ii)(1) Form of Promissory Note by a Center in favor of a
Subsidiary of the Company
10(e)(iii)(1) Form of Security Agreement by a Center in favor of a
Subsidiary of the Company
10(e)(iv)(1) Form of Equipment Lease by and between the Centers
and a Subsidiary of the Company
10(e)(v)(1) Form of Sublease by and between the Centers and a
Subsidiary of the Company
10(f)(1) Rigiscan Purchase Agreement dated December 1, 1995 by
and between UROHEALTH Systems, Inc. and the Company
10(f)(i)(2) Amendment to the Rigiscan Purchase Agreement dated
September 6, 1996 by and between UROHEALTH Systems,
Inc. and the Company
10(f)(ii)(2) Amendment to the Rigiscan Purchase Agreement dated
December 19, 1996 by and between UROHEALTH Systems,
Inc. and the Company
10(f)(iii)(4) Amendment to the Rigiscan Purchase Agreement dated
October 15, 1997 by and between Imagyn Medical
Technologies, Inc. (formerly known as UROHEALTH
Systems, Inc.) and the Company
10(g)(1) VCD Purchase Agreement dated December 1, 1995 by and
between UROHEALTH Systems, Inc. and the Company
<PAGE>
Sequential
Exhibit Description Page
Number Number
10(i)(1) Service Mark Assignment Agreement dated August 1,
1996 by and between Troy A. Burns and the Company
10(j)(1) Office Building Lease dated December 20, 1993 by and
between Troy A. Burns and the Company
10(k)(7) Non-Employee Director Stock Option Plan
10(l)(1) 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)(1) Employment Agreement by and between William Raup and
the Company
10(n)(1) Option Agreement dated September 26, 1996 by and
between Troy A. Burns, M.D. and the Company
10(o)(1) Employment Agreement dated September 30, 1996 by and
between Troy A. Burns, M.D. and the Company
10(p)(1) Employment Agreement dated September 30, 1996 by and
between T. Scott Jenkins and the Company
10(q)(1) 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)(2) Advertising Agency Agreement dated December 4, 1996
by and between DraftDirect Worldwide, Inc. and the
Company
10(s)(3) Agreement dated March 1, 1997 by and between
TheraCom, Inc. and the Company
10(t)(3) Services Agreement dated January 6, 1997 by and
between and Strategem, Inc. and the Company
10(t)(i)(4) Amendment to Services Agreement dated July 1, 1997 by
and between Strategem, Inc. and the Company
10(t)(ii)(4) Termination of Services Agreement dated September 30,
1997 by and between Strategem, Inc. and the Company
10(u)(3) Registration Rights Agreement dated January 6, 1997
by and between Strategem, Inc. and the Company
10(v) Advertising Agency Agreement dated September 19, 1997
by and between Media Direct Partners, Inc. and the
Company
21 List of Subsidiaries of the Company
23(b) Consent of Ernst & Young LLP
27 Financial Data Schedule
- - -----------
(1)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.
(2)Incorporated by reference to the corresponding exhibit filed on March 31,
1997 as part of Form 10-KSB for the year ended December 31, 1996.
(3)Incorporated by reference to the corresponding exhibit filed on May 15,
1997 as part of Form 10-QSB for the quarter ended March 31, 1997.
(4)Incorporated by reference to the corresponding exhibit filed on November
14, 1997 as part of Form 10-QSB for the quarter ended September 30, 1997.
(5)Incorporated by reference to the corresponding exhibit filed as part
of Form 8-K on
March 20, 1998.
<PAGE>
(6)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.
(7)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.
<PAGE>
Integrated Medical Resources, Inc. and Subsidiaries
Index To Consolidated Financial Statements
Report of Independent Auditors F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1997 F-2
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
(THIS PAGE LEFT BLANK INTENTIONALLY)
<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, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1997.
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, 1997, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 11 to the consolidated financial statements, the Company's
recurring losses from operations and net working capital deficiency raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 11. The 1997 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 4, 1998
F-1
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
Assets (Notes 3 and 4)
Current assets:
Cash and cash equivalents $
765,204
Accounts receivable, less allowance of 8,411,413
$2,074,660
Supplies 407,071
Prepaid expenses 101,640
-----------
Total current assets 9,685,328
Property and equipment (Note 2):
Office equipment and software 1,920,454
Furniture, fixtures and equipment 6,431,249
Leasehold improvements 151,836
-----------
8,503,539
Accumulated depreciation 2,801,377
-----------
-----------
5,702,162
Intangible assets 182,843
Other assets 239,439
===========
Total assets $15,809,772
===========
F-2
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Balance Sheet (continued)
December 31, 1997
Liabilities and stockholders' equity Current liabilities:
Accounts payable $
3,793,008
Accrued payroll 647,582
Accrued advertising 773,468
Other accrued expenses 188,980
Accrued restructuring charge (Note 10) 628,120
Working capital line of credit (Note 3) 3,085,954
Current portion of long-term debt (Note 4) 2,685,491
Current portion of capital lease obligations 245,684
(Note 2)
-----------
Total current liabilities 12,188,480
Deferred rent 195,748
Long-term debt, less current portion (Note 4) 1,325,282
Capital lease obligations, less current portion 139,898
(Note 2)
Stockholders' equity (Notes 4, 6 and 8):
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 - 6,731,058 6,731
Treasury stock, at cost (11,347)
Additional paid-in capital 18,219,781
Accumulated deficit (16,114,608)
-----------
Total stockholders' equity 2,100,557
===========
Total liabilities and stockholders' equity $15,809,772
===========
See accompanying notes.
F-3
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1997 1996
------------------------
Net revenue $21,004,554 $11,006,774
Center operating expenses:
Physician salaries 3,646,894 2,393,556
Cost of services 6,332,429 3,131,855
Center staff salaries 2,310,516 1,582,380
Center facilities rent 1,368,459 796,658
------------------------
Total Center operating expenses 13,658,298 7,904,449
------------------------
Center contribution 7,346,256 3,102,325
Corporate expenses:
Advertising 5,654,802 4,309,419
Selling, general and administrative 6,498,720 3,714,119
Depreciation and amortization 2,328,676 1,322,353
Restructuring charge 919,243 -
------------------------
Total corporate expenses 15,401,441 9,345,891
------------------------
Operating loss (8,055,185) (6,243,566)
Other income (expense):
Interest income 118,787 81,730
Interest expense (455,572) (356,710)
Other (55,267) -
------------------------
(392,052) (274,980)
------------------------
Loss before income tax benefit (8,447,237) (6,518,546)
Income tax benefit (Note 5) - -
========================
Net loss $(8,447,237) $(6,518,546)
========================
Net loss per common share -- basic
and diluted $ (1.26) $ (1.82)
========================
Basic and diluted weighted
average common shares 6,719,706 3,573,910
outstanding ========================
See accompanying notes.
F-4
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Additional
--------------------------
Series A Series B Common Treasury Paid-In Accumulated
Convertible Convertible Stock Stock Capital Deficit Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,081 $ -- $2,907 $ $ 4,367,235 $ 3,222,398
-- $(1,148,852)
Issuance of 222,222 shares of -- 222 -- 924,549 -- 924,771
Series B
Convertible preferred stock,
net of issuance costs of $75,228
Issuance of 5,500 shares of -- -- 5 30,244 -- 30,249
common stock to employee
Issuance of 2,500,000 shares -- -- 2,500 12,638,001 -- 12,640,501
of common stock in initial public
offering, net of issuance
costs of $2,359,499
Conversion of preferred stock (1,081) (222) 1,303 -- -- --
to common stock
Net loss -- -- -- -- (6,518,546) (6,518,546)
---------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- 6,715 17,960,029 (7,667,371) 10,299,373
Issuance of 16,041 shares of -- -- 16 50,088 -- 50,104
common stock
Repurchase of 5,500 shares of -- -- -- (11,347) -- (11,347)
common stock
Fair value of warrants issued in -- -- 209,664 209,664
November 1997
Net loss -- -- -- (8,447,237) (8,447,237)
---------------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- $ -- $6,731 $(11,347) $18,219,781 $(16,114,608) $2,100,557
=======================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1997 1996
------------------------
Operating activities
Net loss $(8,447,237) $(6,518,546)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 1,423,540 779,176
Amortization 905,136 543,177
Provision for bad debts 1,687,847 250,761
Deferred rent 19,816 96,687
Pre-opening costs incurred (138,399) (782,108)
Restructuring charge 919,243 --
Changes in operating assets and
liabilities:
Accounts receivable (7,731,881) (1,251,910)
Supplies (94,343) (178,313)
Prepaid expenses 166,439 (111,200)
Accounts payable 1,905,305 705,731
Accrued payroll 79,532 381,819
Accrued advertising 422,743 266,985
Other accrued expenses (143,229) (48,991)
---------- ----------
Net cash used in operating activities (9,025,488) (5,866,732)
Investing activities
Purchases of property and equipment (458,397) (1,682,641)
Proceeds from the sale of property and 23,551 --
equipment
Other (186,274) (276,000)
---------- ----------
Net cash used in investing activities (621,120) (1,958,641)
F-6
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1997 1996
------------------------
Financing activities
Borrowings on line of credit $ 5,069,258 $ 1,100,000
Principal payments on line of credit (1,983,304) (1,100,000)
Proceeds from issuance of 1,400,000 --
convertible debt
Proceeds from issuance of
notes payable and long-term 990,000 303,400
debt
Principal payments on long-term debt (1,277,444) (1,143,585)
Debt issuance costs incurred (115,375) (15,000)
Principal payments on capital lease (449,777) (298,060)
obligations
Purchase of treasury stock (11,347) --
Proceeds from issuance of preferred -- 924,771
stock
Proceeds from issuance of common stock 50,104 12,670,750
------------------------
Net cash provided by financing 3,672,115 12,442,276
activities
------------------------
Net increase (decrease) in cash
and cash equivalents (5,974,493) 4,616,903
Cash and cash equivalents at 6,739,697 2,122,794
beginning of year
------------------------
========================
Cash and cash equivalents at end $ 765,204 $ 6,739,697
of year ========================
Supplemental disclosures of cash
flow information
Cash paid for interest $ 385,725 $ 356,710
========================
Supplemental schedule of noncash
investing and financing activities
Additions to equipment through
issuance of capital lease $2,042,734 $2,509,216
obligations or long-term debt ========================
See accompanying notes.
F-7
<PAGE>
Integrated Medical Resources, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business
Integrated Medical Resources, Inc. and subsidiaries (the Company) is a provider
of management services to clinics providing disease management services for men
suffering from sexual dysfunction. At December 31, 1997, the Company operated 26
diagnostic clinics under the name The Diagnostic Center for Men in 17 states
(collectively the Centers). Each of those 26 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
In November 1997, the Emerging Issues Task Force (EITF) reached consensus on
issue No. 97-2, "Application of APB Opinion No. 16 and FASB Statement No. 94 to
Medical Entities." This EITF requires the consolidation of physician practice
management entities (PPM) and physician practices when a PPM has a controlling
financial interest in a physician practice without directly owning any of its
equity instruments. The Company has elected to early adopt the provisions of the
EITF. Accordingly, the 1996 financial statements have been reclassified to
conform with the new presentation.
The consolidated financial statements include the accounts of Integrated Medical
Resources, Inc., its wholly-owned subsidiaries and the Centers. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-8
<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,
1997
-------------
Debt issuance costs $ 189,895
Pre-opening costs 1,005,523
Other 22,914
-------------
1,218,332
Less accumulated 1,035,489
amortization
-------------
$ 182,843
=============
F-9
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Debt issuance costs represent cost incurred in obtaining the line of credit
facility (see Note 3) and term loan (see Note 4). 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.
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
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,
1997 and 1996 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.
F-10
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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 on the date of grant. Prior
to completion of its initial public offering in 1996 (see Note 6), 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, "Accounting for
Stock-Based Compensation," 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
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share." SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS 128 requirements.
Concentration of Credit Risk
The Company grants credit to individual patients and third-party payors
(including insurers and Medicare) who meet preestablished credit requirements.
At December 31, 1997, approximately 38% of patient accounts receivable were due
from individual patients and 62% were due from third-party payors. Generally,
the Company does not require collateral from patients or third-party payors.
Reserves for credit losses are provided for as Center operating expenses. In
1997, the Company increased the reserve for credit losses by approximately $1.7
million. Accounts receivable write-offs amounted to $197,491 and $263,578 during
the years ended December 31, 1997 and 1996, respectively.
Major Payors
The Company had revenues from Medicare amounting to 34% and 27% of net revenues
during the years ended December 31, 1997 and 1996, respectively.
F-11
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain amounts within the 1996 financial statements have been reclassed to
conform with the 1997 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, 1997 were as
follows:
December 31,
1997
-------------
Office equipment $1,450,140
Less accumulated amortization 940,646
-------------
$ 509,494
=============
The Company leases its office and clinic facilities under long-term,
noncancelable operating leases. In addition, the Company rents certain office
equipment under 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 $1,631,006
and $935,554 for the years ended December 31, 1997 and 1996, respectively.
F-12
<PAGE>
2. Leases (continued)
Future minimum lease payments under capital leases and noncancelable operating
leases consisted of the following at December 31, 1997:
Year ending Capital Operating
December 31 Leases Leases
-----------------------------------------------------------------
1998 $295,319 $1,403,594
1999 136,269 1,268,366
2000 23,599 1,084,830
2001 -- 1,069,006
2002 -- 1,069,006
Thereafter -- 3,346,228
------------------------------------
Total minimum lease payments 445,187 $9,241,030
==========
Less amounts representing interest 69,605
-------
Present value of minimum lease
payments 385,582
Less current portion 245,684
-------
$139,898
3. Line of Credit
In October 1997, the Company entered into a line of credit agreement with a
finance company providing for borrowings up to $5,000,000 based on specified
percentages of eligible accounts receivable, with interest at 2.5% above the
Bank of America prime rate (8.5% at December 31, 1997). Borrowings outstanding
under this line of credit agreement at December 31, 1997 were $3,085,954. The
line of credit, which expires in October 1999, is collateralized by accounts
receivable and the property and equipment securing the $500,000 term loan with
the same finance company entered into in October 1997 (see Note 4). The line of
credit agreement requires the Company to maintain compliance with certain
covenants including limitations on the payment of dividends and collection of
certain levels of accounts receivable.
During 1997, the Company had a separate 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.
This line of credit was paid in full and retired in October 1997.
The weighted average interest rate on all line of credit borrowings in 1997 and
1996 was 9.69% and 9.25%, respectively.
F-13
<PAGE>
4. Notes Payable and Long-Term Debt
The Company's notes payable and long-term debt are as follows:
December 31, 1997
---------------------------
Equipment note payable, interest at
5.75%, due in monthly installments
through August 1999 $ 846,296
Equipment note payable, interest at
5.22%, due in monthly installments
through November 1999 216,341
Equipment note payable, interest at
5.75%, due in monthly installments
through September 2000 1,297,483
Term loan, interest at 12.74%, payable
in monthly installments through
October 2000 460,317
Convertible subordinated promissory
notes, interest 8.5%, lump sum
payment due November 1998 1,190,336
---------------------------
4,010,773
Less current maturities 2,685,491
---------------------------
Long-term debt $1,325,282
===========================
The equipment notes payable listed above were incurred to finance the purchase
of equipment to be used in providing clinic services. An officer of the
equipment vendor serves as a director of the Company.
At December 31, 1997, the Company is contractually obligated to acquire an
additional $1,476,000 of equipment with the same vendor.
In October 1997, the Company entered into a $500,000 term loan agreement with
the finance company which provides the $5,000,000 line of credit (see Note 3),
secured by property and equipment.
In December 1997, the Company issued $1.4 million in convertible subordinated
promissory notes to two major institutional shareholders. Three of the Company's
directors are affiliated with these institutional shareholders. The notes are
convertible into the securities issued in the Company's next equity financing
involving the receipt by the Company of, in the aggregate, more than $3 million,
at the purchase price paid by the investors in that financing. The notes, which
are secured by a pledge of 400,000 shares of common stock of the Company held by
an officer, mature May 31, 1998. Subsequent to December 31, 1997, the note
agreements were amended to provide for extension of the
F-14
<PAGE>
4. Notes Payable and Long-Term Debt (continued)
maturity date to November 30, 1998, in the event the notes are not converted on
or before May 31, 1998. In addition, the amendment reduced the amount of the
required equity financing to $2.6 million. Attached to these notes are warrants
to purchase the Company's common stock (see Note 6), valued at $209,664, which
have been recorded as an offset to the related debt. As a result, the effective
interest rate on the debt is approximately 30%.
Principal maturities under the $4,010,773 of notes payable and long-term debt
outstanding as of December 31, 1997 for each of the next three years ending
December 31 are as follows:
1998 $2,685,491
1999 887,771
2000 437,511
F-15
<PAGE>
5. Income Taxes
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,
1997
------------------------
Deferred tax assets:
Net operating loss carryforwards $ 6,725,978
Accounts payable 278,869
Accrued expenses 237,345
Accrued restructuring costs 241,460
Other 52,780
------------------------
7,536,432
Deferred tax liabilities:
Accounts receivable (564,615)
Prepaid expenses (78,186)
Other assets (187,766)
Other (358,706)
------------------------
(1,189,273)
------------------------
Valuation reserves (6,347,159)
------------------------
Net deferred taxes $ --
========================
During 1997, the Company elected to file its income tax returns on the accrual
basis versus cash-basis. The deferred tax assets and liabilities at December 31,
1996 related to the previous cash-basis tax balance sheet will be amortized over
four years. However, due to the uncertainty of the Company's ability to utilize
the net deferred tax assets, the amount has been fully reserved.
F-16
<PAGE>
5. Income Taxes (continued)
A reconciliation of the income tax benefit to the amounts computed at the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
--------------------------------------
<S> <C> <C>
Federal income tax benefit at
statutory rate $(2,872,061) $(2,216,306)
State income taxes, net of federal tax
benefit (506,834) (391,113)
Change in valuation reserve 3,370,999 2,554,831
Other 7,896 52,588
--------------------------------------
$ -- $ --
======================================
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $16,815,000 which are available to offset future taxable income
and expire in varying amounts through 2012, if unused. Additionally, utilization
of a portion of the net operating loss may be limited under certain ownership
change provisions of the Internal Revenue Code.
6. Stockholders' Equity
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, 1,081,080
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.
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.
F-17
<PAGE>
6. Stockholders' Equity (continued)
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.
In conjunction with the $1.4 million in convertible notes issued in December
1997 (see Note 4), the Company issued warrants to purchase a certain number of
shares of common stock based upon a stated formula. The fair value of the
warrants of $209,664 was determined using the Black Scholes method based upon an
assumed stock price of $3.13 and an estimated life of five years. The warrants
expire in December 2002.
7. 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 $63,551 and $26,542 for the years ended December 31, 1997 and 1996,
respectively.
8. 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 June 1996,
shares awarded under the 1994 Plan 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.
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 nonvoting common shares originally reserved under the 1994 Plan, for
issuance to employees and consultants.
F-18
<PAGE>
8. Stock Option Plans (continued)
In March 1996, the Company amended and restated the 1995 Plan. 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).
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 shares on the date of grant. The option price for
nonqualified stock options is determined by the Compensation Committee at the
date of grant. 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.
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.
In December 1996, the Board of Directors authorized the repricing of certain
$5.50 and $7.00 per share options previously issued to the company officers to
$3.88 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. Options to
purchase 70,064 shares of common stock were issued in 1996, but did not become
exercisable and were subsequently canceled in December 1997.
F-19
<PAGE>
8. Stock Option Plans (continued)
In May 1997, the Company amended the restated 1995 Plan, increasing the number
of shares reserved for issuance to 1,160,000 shares.
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price per Exercise
Shares Share Price Exercisable
------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 19,450 $3.70 $3.70 7,540
Exercised -- -- -- --
Granted 686,014 $3.70 - $7.00 $4.81 81,973
Canceled/Expired (177,300) $3.70 - $7.00 $5.27 --
------------------------------------------------------------
Outstanding at December 31, 1996 528,164 $3.70 - $7.00 $4.54 89,513
Exercised (13,451) $3.70 $3.70 (13,451)
Granted 317,214 $1.88 - $4.81 $2.66 83,197
Canceled/Expired (337,828) $2.06 - $7.00 $4.34 --
------------------------------------------------------------
Outstanding at December 31, 1997 494,099 $1.88 - $7.00 $3.60 159,259
============================================================
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Weighted Average Number Average Exercise
Exercise Price Outstanding Exercise Price Exercisable Price
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.88 11,700 $1.88 -- --
$2.00 - $2.06 150,900 $2.04 75,000 $2.00
$2.25 - $2.50 17,895 $4.21 -- --
$3.70 - $3.88 216,039 $3.76 64,395 $3.76
$4.50 - $4.81 32,265 $4.79 8,197 $4.81
$7.00 65,300 $7.00 11,667 $7.00
</TABLE>
F-20
<PAGE>
8. Stock Option Plans (continued)
In August 1996, the Company adopted a Non-Employee Director Stock Option Plan
(the Director Plan) and reserved 100,000 shares of common stock for issuance of
options to non-employee directors. In May 1997, the Company amended the Director
Plan, increasing the number of shares reserved for issuance to 140,000 shares.
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price per Exercise
Shares Share Price Exercisable
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 -- -- -- --
Granted 40,000 $7.00 $7.00 13,332
Canceled/Expired -- -- -- --
-------------------------------------------------------------
Outstanding at December 31, 1996 40,000 $7.00 $7.00 13,332
Exercised -- -- -- --
Granted 72,500 $2.25 $2.25 --
Canceled/Expired -- -- -- --
-------------------------------------------------------------
Outstanding at December 31, 1997 112,500 $2.25 - $7.00 $3.94 13,332
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Weighted Average Number Average Exercise
Exercise Price Outstanding Exercise Price Exercisable Price
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.25 72,500 $2.25 -- --
$7.00 40,000 $7.00 13,332 $7.00
</TABLE>
9. 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, 1997
and 1996.
10. Restructuring Charge
During 1997, the Company incurred a restructuring charge of $919,243. This
charge primarily represents lease termination payments and other costs of
closing 7 clinics and canceling the planned opening of a new clinic.
F-21
<PAGE>
11. Going Concern Matters
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, during the years ended December 31, 1997 and 1996 the
Company incurred losses of $8,447,237 and $6,518,546, respectively, and has used
net cash in operating activities of $9,025,488 and $5,866,732, respectively.
These factors among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing or refinancing as may be required, and ultimately to attain
profitability.
The Company has taken measures to reduce operating losses and improve cash flow
by closing certain clinics (see Note 10), and has located additional sources of
debt and potential equity financing in order to achieve positive earnings and
cash flow (see Note 13).
12. 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.
F-22
<PAGE>
13. Subsequent Events
In March 1998, the Company entered into a financing arrangement with Kardatzke
Management, Inc. ("KMI"), as evidenced in part by a Note Purchase Agreement
("Note Purchase Agreement") and Convertible Note ("Note"). Pursuant to the terms
of the Note Purchase Agreement, KMI has loaned the Company $1,600,000 at an
interest rate of 8.5%. All payments of principal and interest under the Note are
deferred until September 1, 1998. The Note may be converted at the option of KMI
into common stock of the Company at the lower of $2.15 per share or the average
market price for the 15 days prior to conversion, at any time prior to maturity.
If not converted or extended prior to September 1, 1998, the Note shifts to an
18 month, fully amortizing term loan and is no longer convertible.
In addition, KMI has agreed to provide management consulting services to the
Company, which end at the Company's option if the Note is converted or shifts to
a term loan. KMI will receive an option to purchase 300,000 shares of common
stock exercisable at $2.70 per share if certain performance criteria are met
prior to April 15, 1999.
As a part of the financing transaction, KMI also has four options to purchase
shares of common stock at increasing share prices and with staggered exercise
dates, which, when combined with the conversion of the Note, aggregate 2,300,000
shares. The exercise of each option is dependent on the exercise of the earlier
options and the exercise of the first option is dependent on the conversion of
the Note.
Also, upon the conversion of the Note and the investment of an additional
$1,000,000 through the exercise of the initial option to purchase common stock,
a principal of KMI will join the Company in the capacity of Chief Executive
Officer and Chairman of the Board of Directors. In the event that this principal
assumes these positions, he will have a three year employment contract with the
Company and will receive options to purchase an aggregate of 600,000 shares of
common stock at a purchase price of $2.15 per share, vesting over four years.
The Company has $1,400,000 in convertible subordinated promissory notes
outstanding from two major institutional investors that are due May 1, 1998 (see
Note 4). These investors have agreed to convert these notes at the same per
share price as the conversion of the KMI loan in the event that KMI converts its
loan and exercises its first option to invest an additional $1,000,000 in shares
of common stock.
F-23
<PAGE>
EX-4(h)(i)
Note and Warrant Agt
INTEGRATED MEDICAL RESOURCES, INC.
NOTE AND WARRANT AGREEMENT
This Agreement is made effective as of December 11, 1997, among Integrated
Medical Resources, Inc., a Kansas corporation (the "Company"), with its
principal office at 11320 West 79th Street, Lenexa, Kansas 66214 and the
Investors set forth on the signature pages hereto (collectively, the
"Investors").
1. Sale and Issuance of the Notes and the Warrants.
1.1 The Investors severally agree, on the terms of and subject to the
conditions specified in this Agreement, to lend to the Company the sum set forth
on the signature page of this Agreement. Each Investor's loan shall be evidenced
by a convertible subordinated promissory note (the "Note") dated as of the
Closing Date in the form attached hereto as Exhibit A. These Notes, together
with the other notes issued pursuant to this Agreement, are collectively
referred to as the "Notes." The securities into which the Notes are convertible
are referred to as the "Conversion Stock."
1.2 At the Closing, the Company shall issue to each Investor a Stock
Purchase Warrant (the "Warrant") dated as of the Closing Date in the form
attached hereto as Exhibit B to purchase a number of the class and/or series of
shares of the Company's capital stock issued in the Next Financing (as defined
in the Note). The capital stock expected to be issued in the Next Financing is
Common Stock of the Company. These Warrants, together with the other stock
purchase warrants issued pursuant to this Agreement, are collectively referred
to as the "Warrants." The securities for which the Warrants are exercisable are
referred to as the "Exercise Stock." The Notes and the Conversion Stock, and the
Warrants and the Exercise Stock, are collectively referred to as the
"Securities."
1.3 The above-referenced loans will be secured by a pledge of 400,000
shares of Common Stock of the Company held by Troy Burns pursuant to a Security
Agreement, in the form attached hereto as Exhibit C (the "Security Agreement").
1.4 The closing of these transactions (the "Closing") will be held at
the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California at 10:00 a.m. on the date hereof, or at such other time and
place as the parties shall mutually agree (the "Closing Date").
1.5 Delivery. At the Closing, the Company shall deliver to each
Investor a Note in the principal amount set forth on the signature page hereof
and a Warrant to purchase shares of the Company's capital stock. At the Closing,
each Investor shall deliver the amount of such Investor's loan as set forth on
the signature page hereof. At the Closing, the Company and the Investors will
deliver executed copies of the Securit Agreement.
1
<PAGE>
1.6 Subsequent Loans. At any time prior to the completion of the Next
Financing (as defined in the Note), the Company may request that each Investor
loan to the Company additional funds equal to up to the difference between each
Investor's loan commitment set forth on the signature pages hereto less the
amount of each Investor's initial loan. Each such request shall be made in
writing and shall request that the Investors loan the Company an amount of at
least $400,000.00. Any such additional loans shall be made by each Investor on a
pro rata basis based on the amount of each Investor's initial loan.
2. The Company's Representations and Warranties
The Company hereby represents and warrants to the Investors as
follows, except as set forth on the Disclosure Schedule attached hereto:
2.1 Organization and Standing. The Company is a corporation duly
organized and validly existing under, and by virtue of, the laws of Kansas and
is in good standing under such laws. The Company has the requisite corporate
power to own and operate its properties and assets, and to carry on its business
as presently conducted. The Company is qualified to do business as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a materially adverse impact on the business or financial condition of the
Company taken as a whole.
2.2 Corporate Power. The Company will have at the Closing Date all
requisite legal and corporate power to execute and deliver this Agreement, to
sell and issue the Notes and the Warrants hereunder, to issue the Warrant Shares
upon exercise of the Warrants, to issue the Conversion Stock issuable upon
conversion of the Notes and the Warrant Shares and to carry out and perform its
obligations under the terms of this Agreement.
2.3 Subsidiaries. The Company has no subsidiaries or affiliated
companies and does not otherwise own or control, directly or indirectly, any
other corporation, association or business entity.
2.4 Authorization. All corporate action on the part of the Company,
its directors and shareholders necessary for the sale and issuance of the Notes
and Warrants and the performance of the Company's obligations under this
Agreement, the Notes and the Warrants will be taken prior to the Closing. This
Agreement, each Investor's Note and each Investor's Warrant are valid, binding
and enforceable obligations of the Company, subject to applicable bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditor's rights and to the availability of the remedy of
specific performance. The execution and delivery of the Agreements, the Notes
and the Warrants and the performance by the Company of their respective terms do
not violate, conflict with or result in a material breach of (i) the Company's
Articles of Incorporation, as amended through the Closing Date; (ii) the
Company's Bylaws; (iii) any judgment, order or decree of any court or arbitrator
to which the Company is a party; or (iv) any contract, undertaking, indenture or
other agreement or instrument by which the
2
<PAGE>
Company is now bound or to which it is now a party. The Company is not a party
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or arbitrator or government agency or instrumentality. Except for
notices required or permitted to be filed with certain state and federal
securities commissions, which notices the Company agrees to file on a timely
basis, the execution, delivery and performance by the Company of this Agreement,
the Notes and the Warrants in compliance with their respective provisions do not
require any governmental consent or approval.
2.5 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the filing pursuant to
Section 25102(f) of the California Corporate Securities Law of 1968, as amended,
and the rules thereunder, which filing will be effected within 15 days of the
sale of the Notes and Warrants hereunder.
2.6 Litigation. There is no action, suit, proceeding or investigation
pending or currently threatened against the Company which questions the validity
of this Agreement or the right of the Company to enter into it, or to consummate
the transactions contemplated hereby, or which might result, either individually
or in the aggregate, in any material adverse changes in the assets, condition,
affairs or prospects of the Company, financially or otherwise, or any change in
the current equity ownership of the Company, nor is the Company aware that there
is any basis for the foregoing. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
arbitrator or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
3. Representations, Warranties of the Investors. Each Investor, for that
Investor alone, represents and warrants to the Company upon the acquisition of
the Note and the Warrant and upon conversion of the Note and upon exercise of
the Warrant as follows:
3.1 Binding Obligation. Each of this Agreement, the Note and the
Warrant issued to the Investor is a valid, binding and enforceable obligation of
the Investor, subject to applicable bankruptcy, insolvency, reorganization or
similar laws relating to or affecting the enforcement of creditor's rights and
to the availability of the remedy of specific performance.
3.2 Investment Experience. The Investor is either an accredited
investor within the meaning of Regulation D prescribed by the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Act"), or (by virtue of the Investor's experience in evaluating and investing
in private placement transactions of securities in companies similar to the
Company) the Investor is capable of evaluating the merits and risks of the
Investor's investment in the Company and has the capacity to protect the
Investor's own interests.
3
<PAGE>
3.3 Investment Interest. The Investor is acquiring the Securities for
investment for the Investor's own account and not with a view to, or for resale
in connection with, any distribution thereof. The Investor understands that the
Securities have not been registered under the Act by reason of a specific
exemption from the registration provisions of the Act that depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
3.4 Rule 144. The Investor acknowledges that the Securities must be
held indefinitely unless subsequently registered under the Act, or unless an
exemption from such registration is available. The Investor is aware of the
provisions of Rules 144 and 144A promulgated under the Act that permit limited
resale of securities purchased in a private placement subject to the
satisfaction of certain conditions.
3.5 Discussions with Management. The Investor has had an opportunity
to discuss the Company's business, management, and financial affairs with the
Company's management and to review the Company's facilities.
3.6 Transfer Among Affiliates. Without in any way limiting the
representations set forth in this Section 3, an Investor may transfer all or any
portion of the Securities to its partners or affiliated funds if the Company and
its counsel are satisfied that the transfer is exempt from the registration
requirements of federal and applicable state securities laws.
4. Conditions to Closing
4.1 Conditions to Obligations of the Investors. Each Investor's
obligations at the Closing are subject to the fulfillment, on or prior to the
Closing Date, of all of the following conditions, any of which may be waived in
whole or in part by the Investor:
(a) The representations and warranties made by the Company in
Section 2 shall be true and correct when made, and shall be true and correct on
the Closing Date with the same force and effect as if they had been made on and
as of the same date.
(b) Except for the notices required or permitted to be filed
after the Closing Date with certain federal and state securities commissions,
the Company shall have obtained all governmental approvals required in
connection with the lawful sale and issuance of the Securities.
(c) At the Closing, the sale and issuance by the Company, and
the purchase by the Investor, of the Securities shall be legally permitted by
all laws and regulations to which the Investor or the Company is subject.
<PAGE>
(d) The Security Agreement in the form attached hereto as
Exhibit C shall have been executed by the parties thereto.
(e) All corporate and other proceedings in connection with the
transactions contemplated at the Closing and all documents and instruments
incident to such transaction shall be reasonably satisfactory in substance and
form to the Investor.
4.2 Conditions to Obligations of the Company. The Company's obligation
to issue and sell the Securities at the Closing is subject to the fulfillment,
to the Company's satisfaction on or prior to the Closing Date, of the following
conditions, any of which may be waived in whole or in part by the Company:
(a) Except for the notices required or permitted to be filed
after the Closing Date with certain federal and state securities commissions,
the Company shall have obtained all governmental approvals required in
connection with the lawful sale and issuance of the Securities.
(b) At the Closing, the sale and issuance by the Company, and
the purchase by the Investor, of the Securities shall be legally permitted by
all laws and regulations to which the Investor or the Company is subject.
5. Registration Rights
5.1 Grant of Rights. The Company hereby grants to the Investor, with
respect to the "Registrable Securities" (as defined below) the Registration
Rights set forth in the Company's Investors Rights Agreement entered into in
connection with the Company's December 1995 financing (as the same may be have
been amended to date). Each Investor hereby agrees to be bound by and subject to
the Investors Rights Agreement. For purposes hereof, Registrable Securities
shall mean the Common Stock issued or issuable upon (i) conversion of the Notes
and (ii) exercise of the Warrants.
5.2 Acceptance by Investors. Each Investor accepts the grant of
registration rights in the Restated Investors Rights Agreement and hereby agrees
to be bound by and subject to the aforementioned sections of the Restated
Investors Rights Agreement.
6. Miscellaneous
6.1 Waivers and Amendments. With the written consent of the record
holders of more than 50% of the principal amount of Notes then outstanding, the
obligations of the Company and the rights of the holders of the Securities under
this Agreement may be waived (either generally or in a particular instance,
either retroactively or prospectively and either for a specified period of time
or indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this
5
<PAGE>
Agreement; provided, however, that no such waiver or supplemental agreement
shall reduce the aforesaid percentage of the principal amount of Notes the
holders of which are required to consent to any waiver or supplemental
agreement. Upon the effectuation of each such waiver, consent, agreement,
amendment or modification the Company shall promptly give written notice thereof
to the record holders of the Securities who have not previously consented
thereto in writing. Neither this Agreement nor any provisions hereof may be
changed, waived, discharged or terminated orally, but only by a signed statement
in writing.
6.2 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
6.3 Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any Investor and
the Closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder as of the date of such certificate or instrument.
6.4 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
6.5 Entire Agreement. This Agreement (including the exhibits attached
hereto) and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
6.6 Notices, etc. All notices and other communications required or
permitted hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person, by telecopy, electronic mail, overnight delivery
service or U.S. mail, in which event it may be mailed by first-class, certified
or registered, postage prepaid, addressed (a) if to an Investor, at such
Investor's address set forth on the signature page of this Agreement, or at such
other address as such Investor shall have furnished the Company in writing, or,
until any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Securities who has so furnished an address to
the Company, or (b) if to the Company, at its address set forth at the beginning
of this Agreement, or at such other address as the Company shall have furnished
to the Investor and each such other holder in writing.
6.7 Separability of Agreements; Severability of this Agreement . The
Company's agreement with each Investor is a separate agreement and the sale of
the Securities to each Investor is a separate sale. If any provision of this
Agreement shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and
6
<PAGE>
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
6.8 Payment of Fees and Expenses. The Company and the Investor shall
each bear their own expenses incurred with respect to this transaction;
provided, however, that the Company will pay the fees and expenses of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, special counsel to the
Investors, in an amount not to exceed $7,500.
6.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Note and Warrant
Agreement to be duly executed and delivered as of the day and year first written
above.
THE COMPANY: INTEGRATED MEDICAL RESOURCES, INC.
By: /s/ Troy A. Burns, M.D.
---------------------------------
Title: Chief Executive Officer
8
<PAGE>
THE INVESTORS:
INSTITUTIONAL VENTURE PARTNERS VI LIMITED PARTNERSHIP
By Institutional Venture Management VI, its
General Partner
By: /s/ Samuel D. Colella
---------------------
Samuel D. Colella,
General Partner
Amount of Initial Loan: $537,142.00
Amount of Loan Commitment: $752,000.00
IVP FOUNDERS FUND I
By Institutional Venture Management VI, its
General Partner
By: /s/ Samuel D. Colella
---------------------
Samuel D. Colella,
General Partner
Amount of Initial Loan: $ 22,857.00
Amount of Loan Commitment: $ 32,000.00
INSTITUTIONAL VENTURE MANAGEMENT VI
By: /s/ Samuel D. Colella
---------------------
Samuel D. Colella,
General Partner
Amount of Initial Loan: $ 11,429.00
Amount of Loan Commitment: $ 16,000.00
3000 Sand Hill Road, Bldg. 2, Suite 290
Menlo Park, California 94025
9
<PAGE>
FRAZIER HEALTHCARE II L.P.
By FHM II LLC, its
General Partner
By Frazier Management LLC,
its Managing Member
By: /s/ Alan D. Frazier
-------------------
Alan D. Frazier, Member
Amount of Initial Loan: $428,572.00
Amount of Loan Commitment: $600,000.00
Two Union Square, Suite 2110
Seattle, WA 98101
10
<PAGE>
Exhibit 4(h)(ii)
Amendment to Note Agreement
INTEGRATED MEDICAL RESOURCES, INC.
NOTE AMENDMENT AGREEMENT
This Agreement is made effective as of March 5, 1998, among Integrated
Medical Resources, Inc., a Kansas corporation (the "Company"), with its
principal office at 11320 West 79th Street, Lenexa, Kansas 66214, the Investors
(the "Investors") in the Note and Warrant Agreement dated December 11, 1997 (the
"Note Agreement") and Kardatzke Management, Inc. (the "New Investor").
WHEREAS, the New Investor will be making certain loans to the Company
pursuant to a Note Purchase Agreement (the "KMI Loan Agreement") and related
Promissory Note (the "KMI Note") of even date herewith and, in consideration of
the New Investor's provision of such loans, the Investors have agreed to make
certain modifications to the terms of their existing loans.
1. Amendments and Modifications to Terms of Existing Notes.
1.1 Modification of Note Terms. Each Investor severally agrees to
modify its note (individually a "Note" and collectively the "Notes") issued
pursuant to the Note Agreement as follows:
(a) In the event that the KMI Note has not been converted into
Common Stock on or prior to May 31, 1998, each Investor will severally enter
into a new loan transaction with the Company which will have the effect of
replacing such Investor's existing loan with such new loan. Such new loan shall
be on such terms as are mutually acceptable to the Investors, the Company and
KMI. Such new loan shall have a maturity date that is on or prior to November
30, 1998.
(b) The term "Next Financing" as used in the Notes, the Note
Agreement and the warrants issued pursuant to the Note Agreement shall mean the
Company's first equity financing after the date of the Note Agreement resulting
in gross proceeds to the Company of at least $2,000,000 excluding securities
issued upon conversion of the Notes issued pursuant to the Note Agreement). The
conversion price for conversion of the Notes upon the completion of the Next
Financing shall be the lower of (i) $2.15 per share, (ii) the market price per
share of the Company's Common Stock as of the closing of the Next Financing or
(iii) the price per share at which securities are actually issued in the Next
Financing. In no event shall the Investors be required to purchase any
securities, either by conversion of the Notes or otherwise, in the Next
Financing or in any other approximately contemporaneous financing of the Company
on terms less favorable than those extended to other participants in any such
financing.
1.2 Conditions to Modification of Note Terms. The foregoing
modifications to the terms of the Notes shall become effective upon the closing
of the transactions contemplated by the KMI Loan Agreement, including the
receipt by the Company of the proceeds of the loan evidenced by the KMI Note.
1
<PAGE>
2. Additional Loan Commitment
2.1 Subsequent Loans. Each Investor severally agrees that, if
requested by the Company and KMI, such Investor will loan the Company the amount
set forth opposite such Investor's name on the signature pages hereto (the
"Additional Loan Amount") on the following terms and conditions: (i) One-half of
each Investor's Additional Loan Amount may be called by the Company and KMI if
the Company's cash flow for the month of March 1998 is below the March 1998
worst case cash flow projection set forth on Exhibit B hereto and (ii) one-half
of each Investor's Additional Loan Amount may be called by the Company and KMI
if the Company's cash flow for the month of April 1998 is below the April 1998
worst case cash flow projection set forth on Exhibit B hereto. In the event that
any such additional loans are made by the Investors, such loans shall be on the
same terms and conditions, including security and collateralization, as the
loans made by KMI pursuant to the KMI Loan Agreement. In addition, in the event
that the Company obtains debt financing from any person or entity other than its
existing senior secured financial institution lenders at any time that any
Additional Loans are outstanding, the Additional Loans shall be on terms no less
favorable to the Investors than the terms provided to the lenders in such other
debt financing transactions.
3. Relative Priorities of Loans.
3.1 KMI Loans and Existing Investor Loans. KMI and the Investors
hereby agree that, as between them as creditors of the Company, any unsecured
portion of the loans made by KMI pursuant to the KMI Loan Agreement shall be
pari passu with the loans made by the Investors pursuant to the Note Agreement.
For purposes hereof, unsecured amounts shall consist of any portion of the KMI
Loan remaining unsatisfied after KMI has exhausted its remedies with respect to
the collateral securing the KMI loans. KMI and the Investors further agree that,
in the event the Investors make any Additional Loans, as set forth in Section
2.1, such Additional Loans shall be pari passu with the KMI Loans in all
respects.
4. Miscellaneous.
4.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
4.2 Amendment. This Agreement may be amended only pursuant to a
written instrument executed by all parties hereto.
4.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
4.4 Entire Agreement. This Agreement and the other documents
2
<PAGE>
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
4.5 Notices, etc. All notices and other communications required or
permitted hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person, by telecopy, electronic mail, overnight delivery
service or U.S. mail, in which event it may be mailed by first-class, certified
or registered, postage prepaid, addressed (a) if to an Investor, at such
Investor's address set forth on the signature page of this Agreement, or at such
other address as such Investor shall have furnished the Company in writing, or,
until any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Securities who has so furnished an address to
the Company, (b) if to the Company, at its address set forth at the beginning of
this Agreement, or at such other address as the Company shall have furnished to
the Investor and each such other holder in writing or (c) if to KMI, at such
address as KMI shall have furnished the Investors and the Company in writing.
4.6 Separability of Agreements; Severability of this Agreement . The
Company's agreement with each Investor is a separate agreement. If any provision
of this Agreement shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
4.7 Payment of Fees and Expenses. The Company and the Investors shall
each bear their own expenses incurred with respect to this transaction;
provided, however, that the Company will pay the fees and expenses of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, special counsel to the
Investors, in an amount not to exceed $5,000.
4.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Note Amendment Agreement
to be duly executed and delivered as of the day and year first written above.
THE COMPANY: INTEGRATED MEDICAL RESOURCES, INC.
By: /s/ Troy A. Burns, M.D.
---------------------------------
Title: Chief Executive Officer
4
<PAGE>
THE INVESTORS:
INSTITUTIONAL VENTURE PARTNERS VI LIMITED PARTNERSHIP
By Institutional Venture Management VI, its
General Partner
By: /s/ Samuel D. Colella
---------------------
Samuel D. Colella,
General Partner
Amount of Additional Loan Commitment: $322,286.00
IVP FOUNDERS FUND I
By Institutional Venture Management VI, its
General Partner
By: /s/ Samuel D. Colella
---------------------
Samuel D. Colella,
General Partner
Amount of Additional Loan Commitment: $ 13,714.00
INSTITUTIONAL VENTURE MANAGEMENT VI
By: /s/ Samuel D. Colella
---------------------
Samuel D. Colella,
General Partner
Amount of Loan Commitment: $ 6,857.00
3000 Sand Hill Road, Bldg. 2, Suite 290
Menlo Park, California 94025
5
<PAGE>
FRAZIER HEALTHCARE II L.P.
By FHM II LLC, its
General Partner
By Frazier Management LLC,
its Managing Member
By: /s/ Alan D. Frazier
-------------------
Alan D. Frazier, Member
Amount of Additional Loan Commitment: $257,143.00
Two Union Square, Suite 2110
Seattle, WA 98101
KARDATZKE MANAGEMENT, INC.
By: /s/ Stanley Kardatzke, M.D.
---------------------------
Title: Chairman and Chief Executive Officer
6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
IMR Cash Flow/Cash Needs Forecast
2-12-98
000's omitted Dec-actual Jan-actual Feb Mar April May June Steady State
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue $1,777 $1,839 $1,749 $1,982 $2,042 $1,981 $2,190 $2,200
Receipts:
worst case $1,450 $1,550 $1,850 $2,100 $2,000 $1,900
high $1,604 $1,441 $1,700 $2,100 $2,600 $2,900 $2,600 $2,200
Cash Infusion $1,400 $1,000
Disbursements $1,920 $1,686 $1,850 $1,800 $1,850 $1,900 $1,900 $1,900
Payables Clean Up $670 $600 $150 $313 $500 $100
Cash Flow:
worst case $0 -$400 -$313 -$300 $0 $0
high $414 $245 $250 $150 $437 $500 $600 $300
Cash Balance:
worst case $413 $13 -$300 -$600 -$600 -$600
high $658 $413 $663 $813 $1,250 $1,750 $2,350 $2,650
</TABLE>
<PAGE>
Exhibit 4(h)(iii)
Form of Subordinated Note
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
INTEGRATED MEDICAL RESOURCES, INC.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
Lenexa, Kansas
$____________ December 11, 1997
1. Principal and Interest.
INTEGRATED MEDICAL RESOURCES, INC. (the "Company"), a Kansas
corporation, for value received, hereby promises to pay to the order of
____________________ or holder ("Payee") in lawful money of the United States at
the address of Payee set forth below, the principal amount of ________________
Dollars ($__________), or if less, the amount actually lent by Payee to the
Company pursuant to that certain Note and Warrant Agreement of even date
herewith (the "Agreement"), together with simple interest at a rate equal to the
sum of the prime rate as quoted by the Bank of America NT & SA, calculated as of
the date hereof, plus one percent (1.0%), per annum.
The loans made by the Payee to the Company shall be as specified on
the schedule of advances following the signature page hereto. Upon the making of
a loan by the Payee, such loan shall be reflected on such schedule.
The principal of and accrued interest on this Note is due and payable
on May 31, 1998. This Note may be prepaid without penalty, in whole or in part,
at any time.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Company for cancellation.
<PAGE>
2. Subordination.
(a) "Senior Indebtedness" means the principal of and premium, if any,
and interest on indebtedness of the Company for money borrowed from commercial
banks, equipment lessors or other financial institutions under a secured or
unsecured line of credit, term loan or equipment lease.
(b) The Company agrees and the holder of each Note, by acceptance
thereof, agrees, expressly for the benefit of the present and future holders of
Senior Indebtedness, that, except as otherwise provided herein, upon (i) an
event of default under any Senior Indebtedness, or (ii) any dissolution, winding
up, or liquidation of the Company, whether or not in bankruptcy, insolvency or
receivership proceedings, the Company shall not pay, and the holder of such Note
shall not be entitled to receive, any amount in respect of the principal and
interest of such Note unless and until the Senior Indebtedness shall have been
paid or otherwise discharged. Upon (1) an event of default under any Senior
Indebtedness, or (2) any dissolution, winding up or liquidation of the Company,
any payment or distribution of assets of the Company, which the holder of this
Note would be entitled to receive but for the provisions hereof, shall be paid
by the liquidating trustee or agent or other person making such payment or
distribution directly to the holders of Senior Indebtedness ratably according to
the aggregate amounts remaining unpaid on Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of Senior Indebtedness pursuant
to this paragraph 2(b)) to receive payments or distributions of assets of the
Company applicable to the Senior Indebtedness.
(c) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of Senior Indebtedness) and the holder of
this Note, the unconditional and absolute obligation of the Company to pay the
principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holders of Senior Indebtedness. Nothing in this Note shall prevent the holder of
this Note from exercising all remedies otherwise permitted by applicable law
upon default under the Note, subject to the rights, if any, of the holders of
Senior Indebtedness in respect to cash, property or securities of the Company
received upon the exercise of any such remedy.
3. Conversion.
(a) The outstanding principal balance of this Note shall be
automatically converted upon the closing of the Company's next equity financing
(the "Next Financing") involving the receipt by the Company of, in the
aggregate, more than $3,000,000 (excluding amounts received on conversion of the
Notes), into the securities issued in the next equity financing (the
"Securities") at the purchase price paid for the
<PAGE>
Securities by the investors in the Next Financing.
(b) Upon automatic conversion of this Note, the outstanding principal
shall be converted automatically without any further action by the holder and
whether or not the Note is surrendered to the Company or its transfer agent. The
Company shall not be obligated to issue certificates evidencing the shares of
the securities issuable upon such automatic conversion unless such Notes are
either delivered to the Company or its transfer agent, or the holder notifies
the Company or its transfer agent that such Note has been lost, stolen or
destroyed and executes an agreement satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with such Note. The Company
shall, as soon as practicable after such delivery, or such agreement and
indemnification, issue and deliver at such office to such holder of such Note, a
certificate or certificates for the securities to which the holder shall be
entitled and a check payable to the holder in the amount of any accrued and
unpaid interest on such Note and any cash amounts payable as the result of a
conversion into fractional shares of the Securities. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of closing of the transaction causing automatic conversion. The person or
persons entitled to receive securities issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such securities on
such date.
4. Security. This Note is secured by a pledge by Troy Burns of shares of
the Company's Common Stock pursuant to a Security Agreement of even date
herewith. Upon the failure of the Company to pay this Note when due, the Payee
may, in its sole discretion, proceed against the Company or against such
collateral, or against both the Company and such collateral.
5. Attorneys' Fees. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, the Company agrees to pay, in addition to the principal and
interest payable hereunder, reasonable attorneys' fees and costs incurred by
Payee.
6. Notices. Any notice, other communication or payment required or
permitted hereunder shall be in writing and shall be deemed to have been given
upon delivery if personally delivered or upon deposit if deposited in the United
States mail for mailing by certified mail, postage prepaid, and addressed as
follows:
If to Payee: At the address set forth on the signature page of
the Agreement
If to Company: At the address of the Company's principal
executive office set forth on page 1 of the Agreement.
Each of the above addressees may change its address for purposes of this
paragraph by giving to the other addressee notice of such new address in
conformance with this paragraph.
7. Acceleration. This Note shall become immediately due and payable if (i)
the Company commences any proceeding in bankruptcy or for dissolution,
liquidation, winding-up,
<PAGE>
composition or other relief under state or federal bankruptcy laws; or (ii) such
proceedings are commenced against the Company, or a receiver or trustee is
appointed for the Company or a substantial part of its property, and such
proceeding or appointment is not dismissed or discharged within 60 days after
its commencement.
8. Waivers. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor. No
delay on the part of Payee in exercising any right hereunder shall operate as a
waiver of such right or any other right. This Note is being delivered in and
shall be construed in accordance with the laws of the State of California,
without regard to the conflicts of laws provisions thereof.
INTEGRATED MEDICAL RESOURCES, INC.
By: ____________________________________
Title: _______________________________
Schedule of Advances:
December 11, 1997 (initial advance) $_____________________
____________, 199_ $_____________________
____________, 199_ $_____________________
<PAGE>
Exhibit 4(h)(iv)
Form of Stock Purchase
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
STOCK PURCHASE WARRANT
To Purchase Shares of Common Stock of
INTEGRATED MEDICAL RESOURCES, INC.
THIS CERTIFIES that, for value received, ________________________ (the
"Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or prior to the close of business on the
date five (5) years after the date hereof, but not thereafter, to subscribe for
and purchase, from INTEGRATED MEDICAL RESOURCES, INC., a Kansas corporation (the
"Company"), a number of shares of Common Stock determined as set forth below.
The number of shares of Common Stock issuable upon exercise of this Warrant
shall equal:
[(A* .20)/B] +[(C *.20)/B], where
A equals the amount of the Investor's loan commitment to the Company set
forth on the signature pages of that certain Note and Warrant Agreement (the
"Agreement") of even date herewith;
B equals the lesser of (i) the per share purchase price of one share of
Common Stock in the Next Financing (as defined below) and (ii) the last reported
sale price per share of the Company's Common Stock (as reported by Nasdaq) on
the trading day immediately preceding the date of this Warrant; and
C equals the amount actually lent by the Investor to the Company pursuant
to the Agreement.
For purposes hereof, (i) the "Next Financing" shall mean the Company's
first equity financing after the date hereof resulting in gross proceeds to the
Company of at least $____________ excluding securities issued upon conversion of
the Notes issued pursuant to the Agreement) and (ii) Common Stock shall be
deemed to refer to the class and/or series of equity securities of the Company
issued in the Next Financing.
<PAGE>
The purchase price for one share of Company Common Stock under this
Warrant shall equal the lesser of lesser of (i) the per share purchase price of
one share of Common Stock in the Next Financing and (ii) the last reported sale
price per share of the Company's Common Stock (as reported by Nasdaq) on the
trading day immediately preceding the date of this Warrant.
The purchase price and the number of shares for which the Warrant is
exercisable shall be subject to adjustment as provided herein. The class and
series of shares of capital stock of the Company issuable upon exercise of this
Warrant is also subject to adjustment pursuant to Section 9 hereof.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company,
referred to in Section 2 hereof, by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant together with the Assignment
Form annexed hereto properly endorsed.
2. Exercise of Warrant.
(a) The purchase rights represented by this Warrant are exercisable
by the registered holder hereof, in whole or in part, at any time before the
close of business on the date five (5) years after the date hereof, by the
surrender of this Warrant and the Subscription Form annexed hereto duly executed
at the office of the Company, in Lenexa, Kansas (or such other office or agency
of the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company), and
upon payment of the purchase price of the shares thereby purchased (by cash or
by check or bank draft payable to the order of the Company or by cancellation of
indebtedness of the Company to the holder hereof, if any, at the time of
exercise in an amount equal to the purchase price of the shares thereby
purchased); whereupon the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Preferred Stock so purchased. The
Company agrees that if at the time of the surrender of this Warrant and purchase
the holder hereof shall be entitled to exercise this Warrant, the shares so
purchased shall be and be deemed to be issued to such holder as the record owner
of such shares as of the close of business on the date on which this Warrant
shall have been exercised as aforesaid.
(b) In lieu of the cash payment set forth in paragraph 2(a) above,
the Holder shall have the right ("Conversion Right") to convert this Warrant in
its entirety (without payment of any kind) into that number of shares of Common
Stock equal to the quotient obtained by dividing the Net Value (as defined
below) of the shares issuable upon exercise of this Warrant by the Fair Market
Value (as defined below) of one share of Common Stock. As used herein, (A) the
Net Value of the Shares means the aggregate Fair Market Value of the shares of
Common Stock subject to this Warrant minus the aggregate purchase price; and (B)
the Fair Market Value of one share of Common Stock means:
2
<PAGE>
(i) if the exercise occurs at a time during which the Company's
Common Stock is traded on a national securities exchange or on the Nasdaq
National Market, the Fair Market Value of one share of Common Stock means the
average last reported or closing sale price for the Company's Common Stock on
such exchange or market for the three trading days ending one business day
before the exercise of this Warrant;
(ii) if the exercise is in connection with a merger, sale of
assets or other reorganization transaction as described in Section 9(a) below,
the Fair Market Value of one share of Common Stock means the value received by
the holders of the Company's Common Stock pursuant to such Merger Transaction;
and
(iv) in all other cases, the Fair Market Value of one share of
Common Stock shall be determined in good faith by the Company's Board of
Directors.
(c) Certificates for shares purchased hereunder shall be delivered to
the holder hereof within a reasonable time after the date on which this Warrant
shall have been exercised as aforesaid. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be fully
paid and nonassessable and free from all taxes, liens and charges in respect of
the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).
3. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon the exercise of
this Warrant, an amount equal to such fraction multiplied by the then current
price at which each share may be purchased hereunder shall be paid in cash to
the holder of this Warrant.
4. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
5. No Rights as Shareholders. This Warrant does not entitle the holder
hereof to any voting rights or other rights as a shareholder of the Company
prior to the exercise thereof.
3
<PAGE>
6. Exchange and Registry of Warrant. This Warrant is exchangeable, upon
the surrender hereof by the registered holder at the above-mentioned office or
agency of the Company, for a new Warrant of like tenor and dated as of such
exchange.
The Company shall maintain at the above-mentioned office or agency a
registry showing the name and address of the registered holder of this Warrant.
This Warrant may be surrendered for exchange, transfer or exercise, in
accordance with its terms, at such office or agency of the Company, and the
Company shall be entitled to rely in all respects, prior to written notice to
the contrary, upon such registry.
7. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
make and deliver a new Warrant of like tenor and dated as of such cancellation,
in lieu of this Warrant.
8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or a Sunday or shall be a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding day not a
legal holiday.
9. Merger, Reclassification, etc.
(a) Merger, Sale of Assets, etc. If at any time the Company proposes
to merge with or into any other corporation, effect a reorganization, or sell or
convey all or substantially all of its assets to any other entity, then the
surviving entity shall be obligated to assume the obligations of this Warrant
and it shall be exercisable for the number of shares of stock or other
securities or property which the holder of this Warrant would have received in
the transaction if the holder had exercised the Warrant prior to the
consummation of the transaction. The exercise price shall, in such event, be
proportionately adjusted based on the exchange ratio for shares of the Company's
Common Stock in such transaction.
(b) Reclassification, etc. If the Company at any time shall, by
subdivision, combination or reclassification of securities or otherwise, change
any of the securities to which purchase rights under this Warrant exist into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter be to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities which
were subject to the purchase rights under this Warrant immediately prior to such
subdivision, combination, reclassification or other change. If shares of the
Company's Common Stock are subdivided or combined into a greater or smaller
number of shares of Common Stock, the purchase price under this
4
<PAGE>
Warrant shall be proportionately reduced in case of subdivision of shares or
proportionately increased in the case of combination of shares, in both cases by
the ratio which the total number of shares of Common Stock to be outstanding
immediately after such event bears to the total number of shares of Common Stock
outstanding immediately prior to such event.
(c) Cash Distributions. No adjustment on account of cash dividends or
interest on the Company's Common Stock or other securities purchasable hereunder
will be made to the purchase price under this Warrant.
(d) Authorized Shares. The Company covenants that, from and after the
completion of the Next Financing and through the period the Warrant is
outstanding, it will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of Common Stock upon the
exercise of any purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of the Company's Common
Stock upon the exercise of the purchase rights under this Warrant.
10. Miscellaneous.
(a) Issue Date. The provisions of this Warrant shall be construed and
shall be given effect in all respect as if it had been issued and delivered by
the Company on the date hereof. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of the State of California and for all purposes shall be
construed in accordance with and governed by the laws of said state.
(b) Restrictions. The holder hereof acknowledges that the Common
Stock acquired upon the exercise of this Warrant may have restrictions upon its
resale imposed by state and federal securities laws.
(c) Waivers and Amendments. With the consent of the Holders (as
defined below) holding rights to purchase more than fifty percent (50%) of the
shares issuable upon exercise of the then outstanding Warrants (as defined
below), the obligations of the Company and the right of the Holders may be
waived (either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely), and
with the same consent the Company may enter into a supplementary agreement for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Warrants; provided, however, that no such waiver or
supplemental agreement shall reduce the aforesaid percentage which is required
for consent to any waiver or supplemental agreement, without the consent of all
of the Holders of the then outstanding Warrants. As used in this paragraph
10(c), (i) the "Warrants" shall be the warrants issued pursuant to the Agreement
of even date herewith, and (ii) the "Holders" shall be the record holders of the
Warrants.
5
<PAGE>
IN WITNESS WHEREOF, INTEGRATED MEDICAL RESOURCES, INC. has
caused this Warrant to be executed by its officers thereunto duly
authorized.
Dated: ________, 1997
INTEGRATED MEDICAL RESOURCES,
INC.
By: /s/ Troy A. Burns, M.D.
Title: Chief Executive Officer
6
<PAGE>
NOTICE OF EXERCISE
To: INTEGRATED MEDICAL RESOURCES, INC.
(1) The undersigned hereby elects to purchase ____________ shares of
Common Stock of INTEGRATED MEDICAL RESOURCES, INC. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price in full,
together with all applicable transfer taxes, if any.
(2) Please issue a certificate of certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
-----------------------------------------------
(Name)
-----------------------------------------------
-----------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares.
- - --------------------------
- - ------------------------------------------
(Date) (Signature)
7
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute this form and supply
required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to
- - ------------------------------------------------------------------------
(Please Print)
whose address is
- - ----------------------------------------------------------------
(Please Print)
- - ------------------------------------------------------------------------
Dated:
_____________________, 19____.
Holder's Signature: --------------------------
Holder's Address: ---------------------------
- - -----------------------------------------------
Signature Guaranteed: -----------------------------------------------------
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
8
<PAGE>
Exhibit 10(v)
Advertising Agt
September 19, 1997
Ms. Desiree DuMont
Managing Director
Media Direct Partners, Inc.
650 Fifth Avenue, 32nd Floor
New York, NY 10019
1. Integrated Medical Resources, Inc. (referred to as IMRI) on behalf of
The Diagnostic Center For Men hereby appoint the undersigned as our exclusive
agent and broker for the buying, scheduling and placement for all of our print,
broadcast and cable media advertising ("Media Placement") during the term of
this Agreement, and agree that we will neither accept Media Placement services
from any third party nor engage in Media Placement for our own account during
such term. The initial term of this Agreement shall be for a period of one year
commencing on the date hereof (the "Initial Term"). Thereafter, this Agreement
shall be automatically renewed for consecutive periods of one year (each, a
"Renewal Term" and collectively with the Initial Term, the "Term") unless either
of us gives notice to the other of its intention not to renew this Agreement not
less than 60 days prior to the expiration of the Initial Term or any Renewal
Term. We may also terminate this Agreement at any time and without notice if you
fail or refuse to perform any of your obligations (monetary or non-monetary)
under this Agreement. We may terminate at any time upon 60 days notice for any
reason.
2. We agree to furnish advertising to you sufficiently in advance of its
scheduled use to permit us to place such advertising (as you shall direct or
approve) in the ordinary course of business. Such advertising shall (i) be in
form ready for delivery to media, (ii) comply with the Creative Code of the
American Association of Advertising Agencies and all other applicable rules and
codes and (iii) to our knowledge be free from infringement of the copyrights,
trademarks and rights of privacy and publicity of others and from libelous,
slanderous and defamatory material, it being understood that we will not review
advertising for any such matters. By delivering advertising to you, we will be
representing to you that such advertisement to our knowledge does not infringe
upon any rights of third parties, that we have obtained fully effective
permission to place such advertisement, and that such advertisement is free of
libelous, slanderous and defamatory material.
3. We shall pay a usage fee determined by the following schedule:
Fee Annual Purchase of Media
15% 0-$1,000,000
12% $1,000,001-$4,000,000
10% $4,000,001-$10,000,000
8% Over $10,000,000
<PAGE>
The calendar year for determining annual purchases shall commence on the date of
this contract. The usage fee shall be payable on all Media Placement effected by
you for us or effected by you or by any third party for you during the Term. The
usage fee shall be earned and payable when we direct placement of the
advertisement (even if the "run" date shall fall after the end of the Term). We
shall reimburse you for all of your out-of-pocket expenses, including
pre-approved travel expenses, incurred in connection with Media Placement
effected for us. Purchase price shall mean the gross amount less discounts and
rebates charged by the media. MDP will disclose to us any rebates and discounts.
4. We agree to pay for Media Placement (i) not later than thirty (30) days
prior to first "run" date if our credit has not been accepted by the media, or
(ii) not later than thirty days after invoice from the media, if our credit has
been accepted by the media. We shall be directly liable to the media for the
cost of all media purchased, and you in our discretion may bill us for the
purchase price of media plus our fees and disbursements, or may pass media bills
directly on to us and bill separately for our fees and disbursements. We agree
to promptly deliver any financial information respecting you which is reasonably
requested by media. If any Media Placement is canceled after being ordered, our
usage fee with respect to the canceled media placement shall be reduced to 5%.
For late payment of fees and/or media costs, we shall pay a late fee equal to
the lesser of 1.5% per month or the maximum legal rate, together with all of our
costs of collection, including fees and expenses of counsel.
5. It is expressly agreed that you are acting solely as an agent and
broker and shall have no liability to third parties as a result of our services
to be performed hereunder including, without limitation, liability for the
matters referred to in the second paragraph of this letter or for the costs of
purchased media.
6. We agree to indemnify the undersigned and its employees, officers,
directors, shareholders, licensees and agents against all losses, costs,
liabilities and expenses (including reasonable attorneys' fees) you or such
other party may incur as the result of any claim, suit or proceeding made or
brought against the undersigned (i) in connection with rendering services
pursuant to this Agreement or (ii) based upon any advertising or publicity which
we delivered to you for placement (including, without limitation, any claim
pertaining to libel, slander, defamation, copyright infringement, trademark
infringement or diminishment, invasion of privacy, piracy, and/or plagiarism and
any personal injury claims arising from use of our products). If either we or
the undersigned shall default in its obligations hereunder and it becomes
necessary for the other party to employ the services of any attorney to enforce,
terminate or advise with respect to this Agreement (whether or not litigation
ensues), then the prevailing party shall be entitled to reimbursement for its
attorneys' fees and disbursements incurred in connection therewith.
<PAGE>
7. This Agreement shall be binding upon and inure to the benefit of us and the
undersigned and our respective successors and assigns; provided, however, that
we may not assign this Agreement without your prior written consent.
8. This Agreement shall be governed by and interpreted and construed in
accordance with the laws of the State of New York without regard to conflict of
laws principles.
9. All of the terms and provisions hereof (except your appointment as our
agent for Media Placement) shall survive the termination of this Agreement.
If the foregoing is in accordance with your understanding, please sign the copy
of this letter
MEDIA DIRECT PARTNERS, INC. Accepted and Agreed To:
IMR, Inc.
BY: /s/ Desiree DuMont BY: /s/ T. Scott Jenkins
TITLE: Managing Director TITLE: President
<PAGE>
EXHIBIT 21
INTEGRATED MEDICAL RESOURCES, INC. SUBSIDIARIES
(AS OF 12/31/97)
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 Missouri, Inc. Missouri
IMR of Nevada, Inc. Nevada
IMR of North Carolina, Inc. North Carolina
IMR of Ohio, Inc. Ohio
IMR of South Carolina, Inc. South Carolina
IMR of Virginia, Inc. Virginia
IMR of Wisconsin, Inc. Wisconsin
Integrated Diagnostics, Inc. New York
Integrated Medical Resources, Inc. Kansas
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
<PAGE>
Exhibit 23(b)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30529) pertaining to the Amended and Restated 1995 Stock Option Plan
of Integrated Medical Resources, Inc. and the Registration Statement (Form S-8
No. 333-24485) pertaining to the Non-Employee Director Stock Option Plan of
Integrated Medical Resources, Inc. of our report dated March 4, 1998, with
respect to the consolidated financial statements of Integrated Medical
Resources, Inc. included in the Annual Report (Form 10-KSB) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 30, 1998
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