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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 0-21427
INTEGRATED MEDICAL RESOURCES, INC.
(Exact name of Small Business Issuer as specified in its charter)
Kansas 48-1096410
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
11320 West 79th Street, Lenexa, KS 66214
(Address of principal executive offices) (Zip code)
Issuer's Telephone Number: (913) 962-7201
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of May 1, 1998, there were 8,072,432 outstanding shares of common stock, par
value $.001 per share.
Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------------
March 31, 1998 December 31,
ASSETS (unaudited) 1997
--------------------------------------------------
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CURRENT ASSETS:
Cash and cash equivalents $ 576,791 $ 765,204
Accounts receivable, less allowance of $1,984,593 in
1998 and $2,074,660 in 1997 8,828,427 8,411,413
Supplies 381,172 407,071
Prepaid expenses 157,439 101,640
--------------------------------------------------
Total current assets 9,943,829 9,685,328
NON-CURRENT ASSETS:
Property and equipment:
Office equipment and software 1,920,454 1,920,454
Furniture, fixtures and equipment 6,365,728 6,431,249
Leasehold improvements 151,836 151,836
--------------------------------------------------
8,438,018 8,503,539
Accumulated depreciation 3,160,664 2,801,377
--------------------------------------------------
5,277,354 5,702,162
Intangible assets 156,577 182,843
Other assets 293,391 239,439
--------------------------------------------------
TOTAL ASSETS $15,671,151 $15,809,772
==================================================
See accompanying notes to financial statements
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
- -----------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
--------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,028,283 $ 3,793,008
Accrued payroll 696,177 647,582
Accrued advertising 729,371 773,468
Accrued restructuring charge 529,591 628,120
Other accrued expenses 89,361 188,980
Working capital line of credit 2,856,744 3,085,954
Current portion of long-term debt 2,902,476 2,685,491
Current portion of capital lease obligations 205,188 245,684
--------------------------------------------
Total current liabilities 11,037,191 12,048,287
NON-CURRENT LIABILITIES:
Deferred rent 202,835 195,748
Long-term debt, less current portion 2,631,799 1,325,282
Capital lease obligations, less current portion 106,564 139,898
--------------------------------------------
Total non-current liabilities 2,941,198 1,660,928
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value:
Authorized shares - 1,696,698
Issued and outstanding shares - none --- ---
Common stock, $.001 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 6,963,616 6,964 6,731
Treasury stock, at cost (11,347) (11,347)
Additional paid-in capital 18,719,548 18,219,781
Accumulated deficit (17,022,403) (16,114,608)
--------------------------------------------
Total stockholders' equity 1,692,762 2,100,557
--------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,671,151 $ 15,809,772
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See accompanying notes to financial statements
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
For the three
months ended
March 31
----------------------------------
1998 1997
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NET REVENUE: $5,333,562 $ 4,055,866
Center operating expenses:
Physician salaries 862,432 896,403
Cost of services 1,264,390 946,879
Center staff salaries 519,272 547,117
Center facilities rent 295,043 324,142
----------------------------------
Total center operating expenses 2,941,137 2,714,541
----------------------------------
Center contribution 2,392,425 1,341,325
----------------------------------
CORPORATE EXPENSES:
Advertising 1,004,460 1,362,262
Selling, general and administrative 1,563,626 1,252,574
Depreciation and amortization 488,993 557,945
Total corporate expenses 3,057,079 3,172,781
----------------------------------
Operating loss (664,654) (1,831,456)
----------------------------------
OTHER INCOME (EXPENSE):
Interest income 3,175 61,570
Interest expense (246,316) (78,027)
Other --- 6,540
----------------------------------
(243,141) (9,917)
----------------------------------
NET LOSS $ (907,795) $(1,841,373)
----------------------------------
Net loss per common share basic and diluted $ (0.13) $ (0.27)
----------------------------------
Basic and diluted weighted average common
shares outstanding 6,733,642 6,715,017
==================================
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See accompanying notes to financial statements
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
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For the three months ended
March 31
-----------------------------
1998 1997
<S> <C> <C>
Operating activities
Net loss $ (907,795) $(1,841,373)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 421,263 301,659
Amortization 67,730 256,286
Provision for bad debts (90,067) 115,059
Deferred rent 7,087 ---
Pre-opening costs incurred (1,765) (64,478)
Changes in operating assets and liabilities:
Accounts receivable (326,947) (1,006,936)
Supplies 25,899 (37,898)
Prepaid expenses (55,799) (1,896)
Accounts payable (764,725) (161,518)
Accrued payroll 48,595 41,320
Accrued advertising (44,097) 107,293
Other accrued expenses (198,148) 69,728
-----------------------------
Net cash used in operating activities (1,818,769) (2,222,754)
-----------------------------
Investing activities
Purchases of property and equipment --- (167,920)
Other (68,938) (127,515)
-----------------------------
Net cash used in investing activities (68,938) (295,435)
-----------------------------
Financing activities
Principal payments on line of credit (229,210) ---
Proceeds from issuance of convertible debt 1,600,000 ---
Principal payments on long-term debt (76,497) (273,285)
Debt issuance costs incurred (21,169) ---
Net principal payments on capital lease obligations (73,830) (96,791)
Proceeds from issuance of common stock 500,000 ---
-----------------------------
Net cash provided by (used in) financing activities 1,699,294 (370,076)
-----------------------------
Net decrease in cash and cash equivalents (188,413) (2,888,265)
Cash and cash equivalents at beginning of period 765,204 6,739,697
-----------------------------
Cash and cash equivalents at end of period $ 576,791 $ 3,851,432
=============================
Supplemental disclosures of cash flow information
Cash paid for interest $ 110,404 $ 78,027
Supplemental schedule of non-cash investing and financing
activities
Additions to property and equipment through issuance of long
term debt --- $ 492,000
=============================
See accompanying notes to financial statements
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INTEGRATED MEDICAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Integrated Medical Resources, Inc. and subsidiaries (the Company) is a
provider of management services to clinics providing disease management services
for men suffering from sexual dysfunction. At March 31, 1998, the Company
managed 28 diagnostic clinics operated under the name The Diagnostic Center for
Men in 18 states (collectively the Centers). Each of those 28 clinics has
entered into long-term management contracts and lease agreements with the
Company. Pursuant to these contracts and agreements, the Company provides a wide
array of business services to the Centers in exchange for management fees.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company, in accordance with generally accepted accounting
principles for interim financial information, and with the instructions to Form
10-QSB. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's December 31,
1997 annual report on Form 10-KSB. The results of operations for the three and
nine month periods ended March 31, 1998 are not necessarily indicative of the
operating results that may be expected for the year ended December 31, 1998.
NOTE 2 - CONTINGENCIES
The Company is subject to extensive federal and state laws and
regulations, many of which have not been the subject of judicial or regulatory
interpretation. Management believes the Company's operations are in substantial
compliance with laws and regulations. Although an adverse review or
determination by any such authority could be significant to the Company,
management believes the effects of any such review or determination would not be
material to the Company's financial condition. See "Factors That May Affect
Future Results of Operations Medicare Reimbursement."
NOTE 3 - 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 ("KMI Note").
Pursuant to the terms of the Note Purchase Agreement, KMI loaned the Company
$1,600,000 at an interest rate of 8.5%. All payments of principal and interest
under the KMI Note were deferred until September 1, 1998. The KMI Note was
convertible at the option of KMI
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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 KMI Note shifted to
an 18 month, fully amortizing term loan and was no longer convertible.
In addition, KMI agreed to provide management services to the Company,
which ended at the Company's option if the KMI Note converted or shifted to a
term loan. In connection with a Management Consulting Agreement, KMI received an
option to purchase 300,000 shares of common stock exercisable at $2.70 per share
if certain performance criteria were met prior to April 15, 1999. This option
will expire the later of: (i) 20 business days after the date the option becomes
exercisable; (ii) 90 days after April 17, 1998, the date the Management
Consulting Agreement was terminated; or (iii) 90 days after termination, for
whatever reason, of Dr. E. Stanley Kardatzke as an executive and director of the
Company, whichever is later. On May 11, 1998, the performance criteria were met
for KMI to receive the option to purchase the 300,000 shares of common stock
exercisable at $2.70 per share, as discussed above.
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 conversion of the KMI Note, aggregate
2,300,000 shares. In general, the exercise of each option is dependent on the
exercise of the earlier options and the exercise of the first option was
dependent on the conversion of the KMI Note.
Also, upon the conversion of the KMI 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 would have the option to join the Company in
the capacity of Chief Executive Officer and Chairman of the Board of Directors.
In the event that this principal assumed these positions, he would 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 31,
1998. These investors have agreed to convert these notes at the same per share
price as the conversion of the KMI Note 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. The investors have also agreed to loan the Company an additional
$600,000 on the same terms as the KMI Note, which additional loan shall also be
convertible to common stock , and the investors will receive options equivalent
to those issued to KMI in connection with the KMI Note, in the proportion that
their loan amount bears to the KMI Note amount.
On April 17, 1998, the investors agreed that the notes would
automatically convert immediately following stockholder approval of the KMI
Financing. On May 5, 1998, the investors loaned the Company the additional
$600,000 described above pursuant to convertible notes at an interest rate of
8.5%, and were granted options to purchase an aggregate of 862,500 shares of
common stock, including shares to be issued upon conversion of the $600,000
loan. In addition, on May 5, 1998, the investors agreed to loan the Company
additional amounts up to $931,875 pursuant to unsecured notes at an interest
rate of 8.5% and payable on demand after May 29, 1998. The investors have
agreed, upon stockholder approval of the KMI Financing, to use the principal and
all accrued interest pursuant to these notes to pay the exercise price for their
remaining options.
On March 31, 1998, the Company waived a condition that the loan to KMI
be converted prior to KMI's exercise of its initial option. This waiver only
applied to the issuance of 232,558 shares of common stock at an exercise price
of $2.15 for a total consideration of $500,000. On April 17, 1998,
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KMI converted the KMI Note into 744,186 shares of common stock at a conversion
price of $2.15 per share and exercised an additional 360,464 option shares at an
exercise price of $2.15 per share, for a total additional consideration of
$775,000.
On May 5, 1998, KMI agreed to loan the Company additional amounts up
to $1,210,000 at an interest rate of 8.5% and payable on demand after May 29,
1998. Upon stockholder approval of the KMI Financing, KMI has agreed to use the
principal and all accrued interest pursuant to this note to pay the exercise
price for certain of its remaining options.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company's managed Centers are the leading provider of disease
management services for men suffering from sexual dysfunction, focusing
primarily on the diagnosis and treatment of erectile dysfunction, commonly known
as impotence. The 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.
For the quarter ended March 31, 1998, approximately 76% of patient
billings were covered by medical insurance plans subject to applicable
deductible and other co-pay provisions paid by the patient. Approximately 29% of
patient billings were covered by Medicare and 47% were covered by numerous other
commercial insurance plans that offer coverage for impotence treatment services.
Patient billings average less for Medicare patients due to restrictions on
laboratory test reimbursement and standard professional fee discounts.
Results of Operations
The following table sets forth, for the periods indicated, certain
items from the consolidated statements of operations of the Company as a
percentage of net revenue:
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For the three months
ended March 31
==================================
1998 1997
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<S> <C> <C>
Net revenue 100.0% 100.0%
Center operating expenses:
Physician salaries 16.2 22.1
Cost of services 23.7 23.3
Center staff salaries 9.7 13.5
Center facilities rent 5.5 8.0
----- -----
Total Center operating expenses 55.1 66.9
----- -----
Center contribution 44.9 33.1
Corporate expenses:
Advertising 18.8 33.6
Selling, general and administrative 29.3 30.9
Depreciation and amortization 9.2 13.8
----- -----
Total corporate expenses 57.3 78.2
----- -----
Operating loss (12.4) (45.1)
Interest expense, net (4.6) (0.2)
----- -----
Net loss (17.0) (45.3)
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Three Months Ended March 31, 1998 and 1997
Net Revenue. Net revenue increased approximately 32% from $4,055,866
in 1997 to $5,333,562 in 1998. This growth was attributable to higher revenues
in existing Centers, many of which were opened in late 1996 and early 1997. The
revenue growth resulted from more effective marketing strategies, which
increased both new patient volume and recurring revenue from existing patients.
Physician Salaries. Physician salaries decreased approximately 4%
from $896,403 in 1997 to $862,432 in 1998 due to the decrease in Centers
operating during the quarter, from 32 in 1997 to 28 in 1998, which decrease was
partially offset by an increase in average physician salary.
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, increased approximately
34% from $946,879 in 1997 to $1,264,390 in 1998 due to increased number of
patients and increased revenue. As a percentage of net revenue, cost of services
increased slightly from 23.3% to 23.7%, primarily as a result of an increase in
bad debt expense as the Company increased its provision for doubtful accounts.
Center Staff Salaries. Center staff salaries decreased approximately
5% from $547,117 in 1997 to $519,272 in 1998 due to the decrease in Centers
operating during the quarter. As a percentage of net revenue, Center staff
salaries decreased from 13.5% to 9.7%, due to increased revenues in the Centers.
Center Facilities Rent. Center facilities rent decreased
approximately 9% from $324,142 in 1997 to $295,043 in 1998 due to the decrease
in Centers operating, which decrease was partially offset by a slight increase
in average clinic rent expense due to new clinic leases and increased leased
space for certain clinics. As a percentage of net revenue, Center facilities
rent decreased from 8.0% to 5.5%, due to increased revenues in the Centers.
Center Contribution. Center contribution increased approximately 78%
from $1,341,325 in 1997 to $2,392,425 in 1998 due to the significant (32%)
increase in net revenue, while Center operating expenses increased only 8%.
Advertising. Advertising expense decreased approximately 26% from
$1,362,262 in 1997 to $1,004,460 in 1998 due primarily to a change in
advertising agencies and related elimination of agency fee, as well as to the
decrease in number of Centers. As a percentage of net revenue, advertising
expense decreased from 33.6% in 1997 to 18.8% in 1998 due to more effective
advertising which produced higher patient volumes at a lower cost per patient
seen.
Depreciation and Amortization. Depreciation and amortization
decreased approximately 12% from $557,945 in 1997 to $488,993 in 1998 due to
completion of amortization of pre-opening costs incurred with respect to the 18
new Centers opened from January 1996 to January 1997 . As a percentage of net
revenue, depreciation and amortization decreased from 13.8% to 9.2%, both as a
result of reduced expense and increased net revenue.
Selling, General and Administrative. Selling, general and
administrative expense increased approximately 25% from $1,252,574 in 1997 to
$1,563,626 in 1998 due principally to the expansion of the telephone appointment
center staff to support higher call volumes in response to more effective
advertising, additional staffing in accounting and additional staffing in
billing and collections in order to improve the accuracy of billing and
collection of outstanding accounts receivable. As a percentage of net revenue,
selling, general and administrative expense decreased from 30.9% to 29.3%.
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Interest Expense, Net. Interest expense increased from $9,917 in 1997
to $243,141 in 1998, as the Company utilized its working capital line of credit
to fund cash flow deficits resulting from operating losses and continued high
levels of accounts receivable. Additionally, the Company recognized interest
expense resulting from the $1.4 million convertible subordinated promissory
notes and attached warrants issued in December 1997 (the Stockholder Loan) and
from the $1.6 million convertible note issued in March 1998 (the KMI Financing),
both discussed in "Liquidity and Capital Resources" below.
Income Taxes. No income tax provision or benefit was recorded in 1996
or 1997 as the deferred taxes otherwise provided were offset by valuation
reserves on deferred tax assets.
Liquidity and Capital Resources
Through 1997 and the first quarter 1998, 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, the Stockholder Loan and the KMI Financing, all described below and
in the Reports on Form 8-K filed by the Company on March 20, 1998, April 14,
1998 and April 28, 1998, and implemented the expense reduction program described
below.
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 taken measures to reduce operating losses and
improve cash flow through the closing of 7 Centers in the fourth quarter 1997,
cancellation of the planned opening of an additional Center and reductions in
corporate staffing in January 1998.
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 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 March 31, 1998, the Company had $2,856,744 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 March
31, 1998). 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 were 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. On
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March 5, 1998, 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.
On April 17, 1998, the agreement relating to the Stockholder Loan was
amended to provide for automatic conversion of the Stockholder Loan into Common
Stock following the stockholder approval of the issuance of additional shares in
connection with the KMI Financing, as discussed below. On May 1, 1998, the
Company requested the additional $600,000 loan described above, pursuant to
convertible notes (the "Second IVP/Frazier Loan"), on the same terms as the KMI
Note discusssed below. In consideration for the the Second IVP/Frazier Loan, the
Company has granted options to purchase an aggregate of 862,500 shares of Common
Stock, including shares to be issued upon conversion of the Second IVP/Frazier
Loan. In addition, IVP and Frazier have agreeed to loan the Company additional
amounts up to $931,875, pursuant to unsecured notes, bearing interest on the
unpaid principal balance at the rate of 8.5% per annum and payable on demand
(the "Third IVP/Frazier Loan"). Upon stockholder approval of the KMI Financing,
IVP and Frazier have agreed to use the principal and all accrued interest
pursuant to the Third IVP/Frazier Loan to pay the exercise price for the
remaining IVP/Frazier Options.
On March 5, 1998, the Company entered into a financing arrangement
with Kardaztke Management, Inc. ("KMI"), whereby KMI loaned the Company $1.6
million and a principal of KMI had an opportunity to become involved in the
operation of the Company (the "KMI Financing"). As part of the KMI Financing,
the Company entered into a Note Purchase Agreement (the "Note Purchase
Agreement"), Convertible Note (the "KMI Note") and other related documents
discussed below. The Convertible Note was convertible into the Company's common
stock and contained options to purchase additional shares of common stock. KMI
also agreed to provide certain management consulting services to the Company.
Upon the conversion of the KMI Note and the investment of an additional $1
million through the complete exercise of the initial option, Dr. E. Stanley
Kardatzke would have the opportunity to join the Company in the capacity of
Chief Executive Officer and Chairman of the Board of Directors of the Company.
The KMI Note was in the principal amount of $1.6 million, bearing
interest on the unpaid principal balance at the rate of 8.5% per annum. All
payments of principal and interest under the KMI Note were deferred until the
initial maturity. Conversion of the KMI Note and exercise of all of the options
would result in the issuance of Common Stock that would exceed 20% of the
outstanding Common Stock and, pursuant to the rules of the NASD, requires the
approval of the Company's stockholders, which approval is being sought pursuant
to the Company's Definitive Proxy Statement dated May 8, 1998.
The initial maturity date of the KMI Note was September 1, 1998. KMI
had the sole option to extend the term of the KMI Note for three successive 90-
day periods. Upon its maturity, the principal and accrued interest on the KMI
Note would become payable over 18 equal monthly payments unless it was earlier
converted to shares of Common Stock. The KMI Note was secured by diagnostic
equipment that was acquired by the Company from a portion of the proceeds of the
KMI Note, and a second position behind the finance company which provides the
Company's Line of Credit in all of the Company's accounts, accounts receivable
and other rights to receive money, and certain computer equipment and software.
The KMI Note provided that KMI may, at its option, convert all or any
portion of the outstanding principal amount of the KMI Note and/or accrued and
unpaid interest thereon into Common
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Stock at the lesser of $2.15 per share of Common Stock or the average of the
closing market price for the Common Stock for the fifteen trading days prior to
the conversion. The KMI Note further granted options to KMI to purchase Common
Stock at increasing share prices and with staggered exercise dates, which, when
combined with conversion of the KMI Note, aggregate 2,300,000 shares. In
general, the exercise of each option is dependent on the exercise of the earlier
options and the exercise of the first option was dependent on the conversion of
the KMI Note.
On March 31, 1998, the Company waived a condition that the KMI Note be
converted prior to KMI's exercise of its initial option. This waiver only
applied to the issuance of 232,558 shares of Common Stock at an exercise price
of $2.15, for a total consideration of $500,000, which was paid by KMI. On April
17, 1998, KMI converted the KMI Note into 744,186 shares of Common Stock at a
conversion price of $2.15 per share and exercised an additional 360,464 option
shares at an exercise price of $2.15 per share, for a total additional
consideration of $775,000.
On May 5, 1998, KMI agreed to loan the Company additional amounts up
to $1,210,000, pursuant to one or more unsecured notes, bearing interest on the
unpaid principal balance at the rate of 8.5% per annum and payable on demand
beginning May 29, 1998 (the "Additional KMI Note"). In consideration for this
additional loan, the Company agreed to amend the KMI Note to revise the exercise
price of certain option shares from $3.15 to $2.15 per share if exercised prior
to May 31, 1998. Upon stockholder approval of the KMI Financing, KMI has agreed
to use the principal and all accrued interest pursuant to the Additional KMI
Note to pay the exercise price for certain of its remaining options.
As part of the KMI Financing, the Company also entered into several
related agreements with KMI. Under the Management Consulting Agreement between
the Company and KMI dated as of March 5, 1998 (the "Consulting Agreement"), KMI
agreed to perform certain management consulting services as requested by the
Company. In consideration for such services, the Company would pay KMI $25,000
per month; provided, however, that one-half of such fee was deferred until KMI
converted the KMI Note. The Consulting Agreement was terminated on April 17,
1998, the date of conversion of the KMI Note. The Consulting Agreement further
granted KMI an option to purchase 300,000 shares of the Company's Common Stock
(the "Consulting Option"). The Consulting Option became exercisable only if and
at such time as the closing price of the Company's Common Stock averaged $6.00
or above per share for ten consecutive trading days before April 15, 1999. The
Consulting Option has an exercise price of $2.70 per share. After it has vested,
the Consulting Option shall expire upon the later of twenty business days after
the date it becomes exercisable or ninety days after termination of the
Consulting Agreement, or termination, for whatever reason, of Dr. Kardatzke as a
director or executive officer of the Company. The Consulting Option vested and
became exercisable on May 11, 1998.
The Company and Dr. Kardatzke also entered into an Employment
Agreement on April 20, 1998, following the conversion, on April 17, 1998, of the
KMI Note and the exercise of the initial option to purchase additional shares of
Common Stock as described above. At that time, Dr. Kardatzke was appointed Chief
Executive Officer and Chairman of the Board of Directors of the Company. The
Employment Agreement has a term of three years (subject to earlier termination)
and provides for a base salary and bonus compensation in each of 1998 and 1999
if the Company meets certain earnings targets in those years. Pursuant to the
Employment Agreement, the Company also granted options to Dr. Kardatzke to
separately purchase 200,000 and 300,000 shares of Common Stock at an exercise
price of $2.15 per share, vesting ratably over three and four years,
respectively, in consideration of Dr. Kardatzke's services as a director and
Chief Executive Officer. The Company also granted options to Dr. Kardatzke to
purchase 100,000 shares of Common Stock at an exercise price of $2.15 per share
which vest only if the Company meets certain earnings targets. These options are
subject to ratification by the stockholders of the Company pursuant to the
Company's Definitive Proxy Statement dated as of May 8, 1998.
12
<PAGE>
As of March 31, 1998, the Company had, for tax purposes, net operating
loss carry forwards of approximately $17.6 million, which are available to
offset future taxable income and expire in varying amounts through 2012, if
unused.
At March 31, 1998, the Company had cash and cash equivalents of
$577,000. Accounts receivable, net of allowance, increased $417,014, from
$8,411,413 at December 31, 1997 to $8,828,427 at March 31, 1998. The increase in
accounts receivable is primarily due to increases in net revenue. The March 31,
1998 amount includes $1.75 million pending submission for Medicare reimbursement
awaiting completion of appropriate provider registration requirements or
recently submitted following completion of those requirements, which the Company
anticipates will be completed by the third quarter 1998. In addition, $769,000
in Medicare billings were under payment suspension, see "Factors That May Affect
Future Results of Operations - Medicare Reimbursement."
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 Additional KMI
Note and Third IVP/Frazier Loan, and proceeds of the conversion of additional
options by KMI, IVP and Frazier, if any, will be sufficient to fund its
operations and satisfy its working capital requirements for the next twelve
months.
As a result of the losses reported in the Form 10-KSB for the year
ended December 31, 1998, the Company no longer met the requirements for
continued listing on the NASDAQ National Market(R) under their maintenance
standard number 1. Marketplace Rule 4450 (a) (3) of the NASDAQ National
Market(R) requires that a NASDAQ National Market(R) issuer have net tangible
assets of at least $4 million, which the Company did not meet as of December 31,
1997.
The Company was notified of a NASDAQ review on April 12, 1998, and was
subsequently notified on May 4, 1998 of NASDAQ's intent to delist the company
effective May 11, 1998. The Company has appealed this decision, and NASDAQ has
agreed to defer delisting until after a hearing that is scheduled in June 1998.
As a result of the additional equity resulting from the KMI Financing and
conversion of the Additional KMI Note, Stockholder Loan and Second and Third
IVP/Frazier Loans, to be completed by May 31, 1998 (assuming approval by Company
shareholders on May 29, 1998), the Company will have approximately $7.5 million
in net tangible assets as of May 31, 1998. At that date the Company believes
that it will be back in compliance with the net tangible assets requirement of
the NASDAQ National Market(R) maintenance standard number 1 and the Company
believes that NASDAQ will agree to allow the Company to continue its listing on
the NASDAQ National Market(R).
Factors That May Affect Future Results of Operations
Ability to Manage Growth. In 1996, the Company experienced rapid
growth that resulted in new and increased responsibilities for management
personnel and has placed increased demands on the Company's management,
operational and financial systems and resources. To accommodate this growth and
to compete effectively and manage future growth, the Company will be required to
continue to implement and improve its operational, financial and management
information systems, and to expand, train, motivate and manage its work force.
There can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's operations. Any failure to
implement and improve the Company's operational, financial and management
systems or to expand, train, motivate or manage employees could have a material
adverse effect on the Company's financial condition and results of operations.
The Company intends to establish Centers in new markets where it has
never before provided services. As part of its market selection analysis, the
Company has invested and will continue to invest substantial funds in the
compilation and examination of market data. There can be no assurance that the
13
<PAGE>
market data will be accurate or complete or that the Company will select markets
in which it will achieve profitability.
In addition, the Company may pursue acquisitions of medical clinics or
practices providing male sexual health services. There are various risks
associated with the Company's acquisition strategy, including the risk that the
Company will be unable to identify, recruit or acquire suitable acquisition
candidates or to integrate and manage the acquired clinics or practices. There
can be no assurance that clinics and practices will be available for
acquisition by the Company on acceptable terms, or that any liabilities assumed
in an acquisition will not have a material adverse effect on the Company's
financial condition and results of operations.
Seasonality and Fluctuations in Quarterly Results. The Company's
historical quarterly revenues and financial results prior to 1997 demonstrated a
seasonal pattern in which the first and fourth quarters were typically stronger
than the second and third quarters. The summer months of May through August have
shown 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 quarter
ended March 31, 1998, approximately 76% of patient billings were covered by
medical insurance plans subject to applicable deductibles and other co-pay
provisions paid by the patient. Approximately 29% of patient billings were
covered by Medicare and 47% 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.
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
14
<PAGE>
or regulatory interpretation. An adverse review or determination by any one of
such authorities, or changes in the regulatory requirements, or otherwise, could
have a material adverse effect on the operations, financial condition and
results of operations of the Company. In addition, expansion of the operations
of the Company into certain jurisdictions may require modifications to the
Company's relationships with the Centers located there. These modifications
could include changes in such states in the way in which the Company's services
and lease fees are determined and the way in which the ownership and control of
the Centers are structured. Such modifications may have a material adverse
effect on the Company's financial condition and results of operations.
In recent years, numerous legislative proposals have been introduced
or proposed in the United States Congress and in some state legislatures that
would effect major changes in the United States health care system at both the
national and state level. It is not clear at this time which proposals, if any,
will be adopted or, if adopted, what effect such proposals would have on the
Company's business. There can be no assurance that currently proposed or future
health care legislation or other changes in the administration or interpretation
of governmental health care programs will not have a material adverse effect on
the Company's financial condition and results of operations.
Furthermore, there can be no assurance that the method of payment for
the products and services furnished by the Centers will not be radically altered
in the future by changes in the health care industry. Changes in the system of
reimbursement, including Medicare, for the products and services provided by the
Centers that increase the difficulty of obtaining payment for medical services
could have a material adverse effect on the Company's financial condition and
results of operations, as the Company's income stream depends upon revenues of
the Centers. If revenues of the Centers are diminished, either in quantity or in
continuity, the Company will be adversely affected.
Medicare Reimbursement. Historically, the percent of DCM patients for
which reimbursement is sought from Medicare has averaged approximately 30%
system-wide, although such average ranges from approximately 20% to 54% 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.
Currently, there are two DMERCs and two Service Carriers that have
notified a DCM that a review is being conducted and that Medicare claims are
being held in suspense pending such review. The Company 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 March 31, 1998 was
approximately $769,000.
The Company is fully cooperating in these reviews and believes that
its billing practices and procedures are proper. One earlier review by another
DMERC has been concluded and the amounts suspended have been 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.
15
<PAGE>
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 State
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 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 24% of the Centers'
revenues for the quarter ended March 31, 1998. 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
treatments 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.
In March 1998, the FDA approved Viagra(R) (Pfizer), the first oral
medication approved for use in the treatment of impotence. The Company
anticipates that the revenue generated for diagnosis, testing and treatment of
impotence with Viagra will be lower than historical levels on a per patient
basis. As the treatment has only been available for a few weeks, the ultimate
impact on the Company's patient volume, revenue and earnings is unknown.
However, the impact could be materially adverse.
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
16
<PAGE>
resources than the Company. Any of these providers, many of which have far
greater resources than the Company, could adversely affect the Centers or
preclude the Company from entering those markets that can sustain only limited
competition. There can be no assurance that the Centers will be able to compete
effectively with their competitors, or that additional competitors will not
enter the market.
There are also many companies that provide management services to
medical practices, and the management industry continues to evolve in response
to pressures to find the most cost-effective method of providing quality health
care. There can be no assurance that the Company will be able to compete
effectively with its competitors, that additional competitors will not enter the
market, or that such competition will not make it more difficult to acquire the
assets of, and provide management services for, medical practices on terms
beneficial to the Company.
Developing Market; Uncertain Acceptance of the Company's Services.
Over 90% of new patient visits result from the Company's direct-to-patient
advertising. The market for the Company's services has only recently begun to
develop, and there can be no assurance that the public will accept the Company's
services on a widespread basis. The Company's future operating results are
highly dependent upon its ability to continually attract new patients. There can
be no assurance that demand for the Company's services will continue in existing
markets, or that it will develop in new markets. The Company makes significant
expenditures for advertising, and there can be no assurance that such
advertising will be effective in increasing market acceptance of, or generating
demand for, the Company's services. Failure to achieve widespread market
acceptance of the Company's services or to continually attract new patients
could have a material adverse effect on the Company's financial condition and
results of operations.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 18, 1998, Draft Worldwide, Inc. ("Draft Worldwide") filed
a complaint in the United States District Court for the District of Kansas
against the Company for breach of contract. The lawsuit arises out of a
December 10, 1996 agreement between Draft Worldwide and the Company under
which the Company retained Draft Worldwide as its direct advertising agency
for the Centers. The term of that agreement was for one year, and during
the term of the agreement a dispute arose as to the services allegedly
provided. Accordingly, the Company withheld payment. Draft Worldwide is
seeking $400,000 for services allegedly performed under the agreement. The
Company disputes the amount owed and intends to defend this matter
vigorously. In addition, on April 30, 1998, the Company filed counterclaims
against Draft Worldwide in the United States District Court for the
District of Kansas for breach of contract, breach of fiduciary duty and
defamation. The Company is seeking unspecified damages in excess of
$75,000.
ITEM 2. CHANGES IN SECURITIES
The following sets forth all sales of unregistered securities by the
Company for the quarter ended March 31, 1998. No underwriters were involved
in any sale, nor were any commissions or similar fees paid by the Company
with respect thereto. The Company relied on Section 4(2) of the Securities
Act of 1933 for an exemption in each such case:
On March 5, 1998, Kardatzke Management, Inc. ("KMI") loaned $1,600,000
to the Company as evidenced by a note purchase agreement (the "Note
Purchase Agreement") and convertible note (the "KMI Note"). Pursuant to the
KMI Note, the Company granted options to KMI to purchase shares of Common
Stock of the Company as follows: (a) conditioned on previous conversion of
the KMI Note, an option ("Option A") to purchase the number of shares that
equals the sum of (i) $1,600,000 divided by the lesser of $2.15 per share
of Common Stock or the average of the closing market price for the Common
Stock for the fifteen (15) trading days prior to conversion (the
"Conversion Price") and (ii) $1,000,000 divided by the Conversion Price if
exercised at the same time, or by $2.15 if later, with such option expiring
upon the later of conversion of the KMI Note to a term loan or prepayment
of the KMI Note, conversion of the KMI Note to shares of Common Stock, or
May 31, 1998; (b) conditioned on exercise of Option A above, an option
("Option B") to purchase the number of shares that equals 2,000,000 minus
the number of shares issued pursuant to Option A above, times 0.5 at $2.15
per share through May 31, 1998 (subject to adjustment) and thereafter at
$2.70 per share, with such option expiring upon the later of conversion of
the KMI Note to a term loan or prepayment of the KMI Note, the conversion
of the KMI Note to shares of Common Stock, or December 31, 1998; (c)
conditioned on exercise of Option B above, an option ("Option C") to
purchase the number of shares that equals 2,000,000 minus the number of
shares issued pursuant to Options A and B above, at $3.15 or $3.75 per
share, with expiration dates of December 31, 1999 and December 31, 2000,
respectively, and subject further to expiration upon the later of
conversion of the KMI Note to a term loan or prepayment of the KMI Note or
the conversion of the KMI Note to shares of Common Stock (the exercise
price of this Option C was later amended to $2.15 if exercised prior to May
31, 1998); and (d) conditioned on conversion of the KMI Note to Common
Stock, an option to purchase 300,000 shares at an exercise price of $2.15
per share, which expires on March 5, 2000. The total number of
18
<PAGE>
shares which KMI may receive upon conversion of the KMI Note and exercise
of the options is 2,300,000.
On March 31, 1998, the Company waived a condition that the loan to KMI
be converted prior to KMI's exercise of Option A. This waiver only applied
to the issuance of 232,558 shares of Common Stock at an exercise price of
$2.15, for a total consideration of $500,000. On March 31, 1998, KMI
purchased these 232,558 unregistered shares of Common Stock of the Company
by exercising a portion of Option A.
In addition, in the fourth quarter of 1997, the Company issued to
Frazier Healthcare II, L.P. ("Frazier") and to Institutional Venture
Partners VI Limited Partnership, IVP Founders Fund I and Institutional
Venture Management VI (collectively, "IVP") convertible notes and stock
purchase warrants for Common Stock of the Company in connection with a loan
to the Company by Frazier and IVP in the aggregate amount of $1,400,000.
The notes, as amended as of March 5, 1998, (in the aggregate principal
amount of $1,400,000) convert into shares of Common Stock of the Company at
a price of $2.15 per share. The total number of shares issuable upon
exercise of the stock purchase warrants, as amended as of March 5, 1998, is
generally equal to forty percent (40%) of the principal amount of the
$1,400,000 loan from Frazier and IVP divided by $2.15.
Part I of this Form 10-QSB, Item 2, Liquidity and Capital Resources,
is incorporated by reference to further provide the dates, titles and
amounts of securities sold, as well as the conversion and exercise terms
thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
19
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-B
4(g)(ii) Amendment to Convertible Note by and between the Company and
Kardatzke Management, Inc. ("KMI") dated as of May 5, 1998.
4(j) Promissory Note by the Company in favor of KMI in the
original principal amount of $350,000 dated May 5, 1998.
4(k)(i) Form of Convertible Note in favor of each of Frazier
Heathcare II, L.P. ("Frazier"), Institutional Venture
Partners VI Limited Partnership ("IVP"), Institutional
Venture Management VI ("IVM") and IVP Founders Fund I ("IVP-
FF") dated May 5, 1998.
4(k)(ii) Agreement Regarding Certain Provisions of Convertible Notes
by and among Frazier, IVP, IVM and IVP-FF dated as of May 5,
1998.
4(l) Form of Promissory Note by the Company in favor of each of
Frazier, IVP, IVM and IVP-FF dated May 5, 1998.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On March 20, 1998, the Company filed Form 8-K reporting under Item 5,
Other Events, a financing arrangement entered into on March 5, 1998 with
KMI, and the amendment to the conversion provision of a $1,400,000 loan
from its two major outside investors. There were no financial statements
filed with the Form 8-K.
20
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTEGRATED MEDICAL RESOURCES, INC.
Date: May 15, 1998 By: /s/ Beverly O. Elving
------------------------------
Beverly O. Elving
Chief Financial Officer and Vice President,
Finance and Administration
(Authorized Officer and Principal Financial
and Accounting Officer)
21
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Exhibit 4(g)(ii)
----------------
AMENDMENT TO CONVERTIBLE NOTE
May 5, 1998
Integrated Medical Resources, Inc. (the "Company") and Kardatzke
Management, Inc. ("KMI") hereby amend certain provisions of that Convertible
Note in the principal amount of $1,600,000, dated March 5, 1998, as amended (the
"Note"), as follows:
1. The parties acknowledge and agree that the provisions of Sections 6.6
through 6.8 and Sections 12 through 23 of the Note shall survive any
conversion or payment of the Note.
2. Section 6.6(c) of the Note is hereby deleted in its entirety and the
following text is inserted in lieu thereof:
(c) an option to purchase the number of shares that equals 2,000,000,
minus the number of shares issued pursuant to (a) and (b) above, at $2.15
per share through May 31, 1998, which option expires upon the later of (i)
conversion to a term loan or prepayment of the Convertible Note, (ii)
conversion of the Convertible Note under Section 6.2, or (iii) May 31,
1998; at $2.70 per share from June 1, 1998 through December 31, 1998, which
option expires upon the later of (i) conversion to a term loan or
prepayment of the Convertible Note, (ii) conversion of the Convertible Note
under Section 6.2, or (iii) December 31, 1998; at $3.15 per share from
January 1, 1999 through December 31, 1999, which option expires upon the
later of (i) conversion to a term loan or prepayment of the Convertible
Note, (ii) conversion of the Convertible Note under Section 6.2, or (iii)
December 31, 1999; or at $3.75 from January 1, 2000 through December 31,
2000, which option expires upon the later of (i) conversion to a term loan
or prepayment of the Convertible Note, (ii) conversion of the Convertible
Note under Section 6.2, or (iii) December 31, 2000. The exercise of this
option is contingent upon the option under (b) above being exercised.
3. All other provisions of the Note remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Amendment of Convertible
Note as of the date first above written.
INTEGRATED MEDICAL RESOURCES, INC.
By: /s/ Troy A. Burns
------------------------------
Name: Troy A. Burns
Title: President
Acknowledged and agreed to
as of May 5, 1998
KARDATZKE MANAGEMENT, INC.
By: /s/ E. Stanley Kardatzke
-----------------------------------
Name: E. Stanley Kardatzke
Title: Chairman and CEO
2
<PAGE>
Exhibit 4(j)
------------
PROMISSORY NOTE
---------------
$350,000.00 Lenexa, Kansas
May 5, 1998
FOR VALUE RECEIVED, the undersigned, Integrated Medical Resources, Inc., a
Kansas corporation, (the "Maker"), hereby promises to pay on demand, at any time
beginning May 29, 1998, to the order of Kardatzke Management, Inc., a Florida
corporation (together with its successors and assigns, the "Holder"), the
principal sum of Three Hundred Fifty Thousand Dollars ($350,000.00), together
with interest at the rate of eight and one-half percent (8.5%) per annum,
compounded monthly on the unpaid principal balance hereof. Interest shall be
computed on the basis of a 360-day year.
1. Prepayment. The Maker reserves the right to prepay all or any portion
of this Promissory Note at any time and from time to time without premium or
penalty of any kind.
2. Payment Instructions and Allocations. All principal and interest
payments made hereunder shall be made in lawful currency of the United States of
America or, at the option of the Maker and the Holder, as credit towards the
exercise price of one or more options to purchase securities of the Maker which
were granted to Holder by Maker pursuant to a Convertible Note dated March 5,
1998, as amended, in the original principal amount of $1,600,000.00.
3. Assignment. The rights and obligations of the Maker and the Holder of
this Promissory Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
4. Amendment/Modification. Any provision of this Promissory Note may be
amended, waived or modified upon the written consent of the Holder and the
Maker.
5. Notices. All notices or other communications required to be made
hereunder shall be in writing, mailed postage prepaid, or delivered by hand,
recognized courier or telecopier, and shall be sent to the Maker or to the
Holder at the following addresses:
If to the Maker, to:
-------------------
Integrated Medical Resources, Inc.
11320 West 79th Street
Lenexa, Kansas 66214
Attention: Troy A. Burns, M.D.
Facsimile: (913) 962-7719
If to the Holder, to:
--------------------
<PAGE>
Kardatzke Management, Inc.
701 Destacada Avenue
Coral Gables, Florida 33156
Attention: E. Stanley Kardatzke, M.D.
Facsimile: (305) 663-9180
or to such other addresses or facsimile numbers as either shall give notice
of to the other under this section.
6. Governing Law. This Promissory Note shall be governed by and construed
and enforced in accordance with the laws of the State of Kansas.
7. Headings. All headings used herein are used for convenience only and
shall not be used to construe or interpret this Note.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned had duly caused this Promissory Note to
be executed and delivered at the place specified above and as of the date first
written above.
Integrated Medical Resources, Inc.
By: /s/ Troy A. Burns
--------------------------------
Name: Troy A. Burns
-------------------------------
Title: President
-----------------------------
3
<PAGE>
Exhibit 4(k)(i)
---------------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"), OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS.
UNLESS THEY ARE SOLD PURSUANT TO RULE 144A OR RULE 144 PROMULGATED BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER SAID ACT, THEY MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IN ABSENCE OF SUCH REGISTRATION AND QUALIFICATION WITHOUT
AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
CONVERTIBLE NOTE
$________________________ May 5, 1998
FOR VALUE RECEIVED, the undersigned, INTEGRATED MEDICAL RESOURCES, INC., a
Kansas corporation (the "Company"), hereby promises to pay to __________
_________________. (the "Holder"), by wire transfer, the principal sum of
________________________________________________________________ ($__________)
in lawful money of the United States of America, together with interest on the
unpaid principal balance from day-to-day remaining computed from the last
interest payment date until the Maturity Date (as that term is hereinafter
defined) at the rate of 8.5% per annum, at the Holder's principal place of
business or such other address as the Holder shall notify the Company in
writing.
This Convertible Note (the "Convertible Note") has been issued in
connection with that certain Agreement Regarding Certain Provisions of
Convertible Notes dated as of May 5, 1998 (the "Provision Agreement"), between
the Holder, the Company and certain other parties.
1. (a) After July 15, 1998 the Convertible Note is prepayable by the
Company upon fifteen business days notice.
-1-
<PAGE>
(b) For purpose of calculating interest accrued hereon, interest on
this Convertible Note shall be calculated on the basis of the actual days
elapsed over a 365-or 366-day year, as the case may be.
(c) All outstanding principal and all then accrued and unpaid
interest on this Convertible Note shall be due and payable on the Maturity Date.
2. For purposes hereof, the "Maturity Date" shall mean September 1, 1998.
The Holder has the sole option to extend the term of the Convertible Note for
three successive 90-day periods until maturity. If the conversion right in
Section 6 is not exercised, the note shall become an 18-months term loan from
such date with equal monthly payments of principal and interest including
accrued interest.
3. Should the principal of, or any installment of the principal or
interest on, this Convertible Note become due and payable on any day other than
a business day, the Maturity Date thereof shall be extended to the next
succeeding business day and interest shall be payable with respect to such
extension. As used herein, the term "business day" shall mean any day except a
Saturday, a Sunday or a day on which banking institutions are legally authorized
to close in the City of Lenexa, Kansas.
4. No waiver by the Holder of any of its rights or remedies hereunder or
under any other document evidencing or securing this Convertible Note or
otherwise shall be considered a waiver of any other subsequent right or remedy
of the Holder; no delay or omission in the exercise or enforcement by the Holder
of any rights or remedies shall ever be construed as a waiver of any right or
remedy of the Holder; and no exercise or enforcement of any such rights or
remedies shall ever be held to exhaust any right or remedy of the Holder.
5. If any one or more of the following events shall occur after the date
hereof for any reason whatsoever (whether such occurrence shall be voluntary or
involuntary or be effected by operations of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or other governmental body), it shall be deemed an "Event of
Default" hereunder:
(a) default by the Company in the due and punctual payment of the
principal, interest or both on this Convertible Note when and as the same of
each such obligation shall become due and payable, whether at the Maturity Date
or at a date fixed for prepayment or by acceleration 30 days after the receipt
of notice thereof from the Holder;
(b) default by the Company in the due and punctual payment of the
principal, interest or both on any indebtedness for borrowed money (including
the current portion thereof), when and as the same of each such obligation shall
become due and payable, and the passage of any applicable cure period;
-2-
<PAGE>
(c) a reduction in the Company's cash receipts in any two consecutive
months to less than $840,000 per month as a result of a payor withholding
payment due to any actions of the Company taken prior to February 1, 1998 (a
"Defined Default");
(d) the Company's becoming insolvent or unable to meet its
obligations as they mature, making a general assignment for the benefit of
creditors, or consenting to the appointment of a trustee or a receiver, or
admitting in writing its inability to pay its debts as they mature;
(e) the appointment of a trustee or receiver for the Company or for a
substantial part of the properties of the Company without the consent of the
Company and such trustee or receiver not being discharged within 30 days;
(f) the institution of bankruptcy, reorganization, arrangement,
insolvency or liquidation proceedings by or against the Company and, if
instituted against it, the same being consented to by the Company or remaining
undismissed for a period of 30 days;
(g) the rendering of any final judgment against the Company for the
payment of money in an amount in excess of $500,000;
(h) any substantial part of the property of the Company being
sequestered or attached and not being returned to the possession of the Company
or released from such attachment within 30 days;
(i) upon the effective date of a merger, reorganization or sale of
substantially all of the assets of the Company in which the stockholders of the
Company immediately prior to such transaction own less than 50 percent (50%) of
the voting securities of the surviving or controlling entity immediately after
such transaction;
(j) an "Event of Default" occurs under any of the Senior Debt (as
defined in Section 11.1 below).
If any such Event of Default shall occur and be continuing, the Holder may,
at the Holder's option, declare the entire unpaid balance of principal and
unpaid interest on this Convertible Note to be immediately due and payable,
whereupon the maturity of the then unpaid balance on this Convertible Note shall
be accelerated and the principal and all interest accrued thereon shall
forthwith become due and payable without presentment, demand, protest or notice
of any kind, all of which are hereby expressly waived, anything contained herein
or in this Convertible Note to the contrary notwithstanding, and the Holder may
exercise and shall have any and all remedies accorded the Holder by law.
-3-
<PAGE>
6. Conversion Rights and Option Rights.
-----------------------------------
6.1 As used herein:
(a) "Common Stock" means the common stock, $.001 par value per
share, of the Company.
(b) "Conversion Price" shall initially mean the lesser of $2.15
or the average of the closing market price for the Common Stock for the fifteen
trading days prior to conversion and shall be subject to adjustment pursuant to
Sections 6.6 and 6.7 hereof.
6.2 Subject to and in compliance with provisions of this Article 6,
the Holder may, at its option, by surrender of this Convertible Note as
hereinafter provided, convert all or any portion of the outstanding principal
amount of this Convertible Note and/or accrued and unpaid interest hereon into
such number of fully paid and nonassessable shares of Common Stock determined by
dividing the amount of principal hereof and/or accrued and unpaid interest
hereon to be so converted by the Conversion Price then in effect. If the Holder
chooses to exercise the option in Section 6.6(a) below, shares to be issued upon
conversion of this Convertible Note shall be deemed to be a part of and not in
addition to, the shares issued upon exercise of such option.
6.3 Subject to the other provisions of this Convertible Note, the
option for conversion of this Convertible Note pursuant to Section 6.2 hereof
may be exercised at any time during the period beginning on the date hereof and
ending upon the earlier of (i) the repayment or redemption in full of the
principal, together with any accrued but unpaid interest, of this Convertible
Note or (ii) the conversion of this Note to an 18-month term note as set forth
in Section 2 above; provided, however, that this Note may not be converted until
the Company has received the necessary Stockholder approval.
6.4 (a) The surrender of this Convertible Note for conversion
pursuant to Section 6.2 hereof shall be made by the holder hereof to the Company
at its office in Lenexa, Kansas, accompanied by written notice to the Company,
in the form of the Conversion Request attached as Annex 1 to this Convertible
Note (the "Conversion Request"), that such holder elects to convert all or a
portion of the principal and/or accrued and unpaid interest of this Convertible
Note in accordance with the provisions hereof. Upon surrender of this
Convertible Note for conversion, it shall be marked "cancelled" or "paid-in-
full". Any such notice of election to convert shall constitute a contract
between the holder of this Convertible Note and the Company, whereby such holder
shall be deemed to subscribe for the number of shares of Common Stock which it
shall be entitled to receive upon such conversion, and in payment and
satisfaction of such subscription, to surrender this Convertible Note and to
release the Company from all liability hereon in respect of the principal and/or
accrued and unpaid interest hereon being converted, and including interest
accruing after the date of the receipt of the notice of conversion on the
portion of the principal hereof being converted, and whereby the Company shall
be deemed to agree that
-4-
<PAGE>
the surrender of such Convertible Note and the extinguishment of liability
hereon shall constitute full payment for the shares of Common Stock so
subscribed for and to be issued upon such conversion.
(b) Subject to the further provisions of this Section 6.4(b) and
subject to shareholders' approval, as soon as practicable after the receipt of
such Conversion Request and this Convertible Note, and in any event, within ten
business days thereafter, the Company shall issue and shall deliver at said
office to such holder (i) a certificate or certificates for the number of full
shares of Common Stock issuable upon the conversion of this Convertible Note in
accordance with the provisions hereof, (ii) a check or cash in respect of any
fraction of a share as provided in Section 6.5 hereof and (iii) in the event of
a partial conversion of this Convertible Note, a new Convertible Note (in form
substantially identical to this Convertible Note) for the unpaid principal
amount of this Convertible Note that was not converted. Such conversion shall be
deemed to have been effected immediately prior to the close of business on the
date on which the Company shall have received such Conversion Request and this
Convertible Note; conversion shall be at the Conversion Price then in effect;
any and all interest on the principal of this Convertible Note to be converted
pursuant to such Conversion Request shall cease to accrue pursuant to this
Convertible Note from the date of receipt of the Conversion Request; and the
holder of this Convertible Note shall be deemed to have become on said date the
holder of record of the shares of Common Stock issuable to such holder upon such
conversion; provided, however, that, in the event the holder of this Convertible
Note effects any such surrender of this Convertible Note on any date when the
securities transfer books of the Company shall be closed, such holder shall not
be deemed to be the record holder of such shares of Common Stock for any purpose
until the close of business on the next succeeding day on which such securities
transfer books shall be open.
6.5 The Company shall not be required to issue fractions of shares
upon conversion of this Convertible Note (or portion thereof). If any fractional
interest in a share shall be deliverable upon the conversion of this Convertible
Note (or portion thereof), the Company shall purchase such fractional interest
for an amount in cash equal to the Conversion Price then in effect times the
amount of such fractional interest.
6.6 Option Terms. The Holder will have the option to buy shares of
the Company's Common Stock as described below:
(a) an option to purchase _______ shares at an exercise price
equal to the Conversion Price. This option expires upon the later of (x)
conversion to a term loan or prepayment of the Convertible Note, (y) conversion
of the Convertible Note under Section 6.1, or (z) May 31, 1998. Exercise of this
option is contingent upon conversion of this Convertible Note under Section 6.2
as part of the exercise price of this option (a).
-5-
<PAGE>
(b) an option to purchase ______ shares at $2.15 per share
through May 31, 1998 (which date shall be extended for the same number of days
as the initial maturity of this Convertible Note under Section 2) and thereafter
at $2.70 per share. This option expires upon the later of (i) conversion to a
term loan or prepayment of the Convertible Note, (ii) conversion of the
Convertible Note under Section 6.2, or (iii) December 31, 1998. The exercise of
this option is contingent upon the option under (a) above being exercised.
(c) an option to purchase ______ shares at $2.15 per share
through May 31, 1998; $2.70 per share from June 1, 1998 through December 31,
1998; $3.15 per share from January 1, 1999 through December 31, 1999; or at
$3.75 per share from January 1, 2000 through December 31, 2000. This option
expires upon the later of (i) conversion to a term loan or prepayment of the
Convertible Note, (ii) conversion of the Convertible Note under Section 6.2 or
(iii) December 31, 2000. The exercise of this option is contingent upon the
option under (b) above being exercised.
(d) an option to purchase ______ shares at an exercise price of
$2.15 per share, which expires on March 5, 2000. Exercise of this option is
contingent upon conversion of the Convertible Note under Section 6.2.
6.7 The Conversion Price then in effect of this Convertible Note
shall be subject to adjustment as follows:
(a) In case the Common Stock shall be split or subdivided into a
greater, or reverse split or combined into a lesser, number of shares (whether
with or without par value), the Conversion Price then in effect shall be
decreased or increased, as the case may be, to an amount which shall bear the
same relation to the Conversion Price in effect immediately prior to such split
or subdivision or reverse split or combination as the total number of shares of
Common Stock outstanding immediately prior thereto bears to the total number of
shares of Common Stock outstanding immediately after such split or subdivision
or reverse split or combination. A stock dividend shall be considered a split or
subdivision of shares for the purpose of this Section 6.7(a).
(b) In case of any capital reorganization or any
reclassification of the capital stock of the Company or in case of the
consolidation of the Company with or the merger of the Company with or into any
other corporation or of the sale of the properties and assets of the Company as,
or substantially as, an entirety to any other corporation, this Convertible Note
shall after such capital reorganization, reclassification of capital stock,
consolidation, merger or sale be convertible into that number of securities, or
amount or value of property, of the Company, or of the corporation resulting
from such consolidation or surviving such merger or to which such sale shall be
made, as the case may be, to which the holder of shares of Common Stock issuable
(at the time of such capital reorganization, reclassification of capital stock,
consolidation, merger or sale) upon conversion of this Convertible Note would
have been entitled upon such capital reorganization, reclassification of capital
stock, consolidation, merger or sale had this Convertible
-6-
<PAGE>
Note been converted prior thereto; and in any such case, if necessary, the
provisions set forth in this Section 6 shall be appropriately adjusted so as to
be applicable, as nearly as may reasonably be, to any securities or property
thereafter deliverable on the conversion of this Convertible Note. The
provisions of this Section 6.7(b) shall similarly apply to successive capital
reorganizations, reclassification of capital stock, consolidations, mergers or
sales. The split or subdivision or reverse split or combination of shares of
Common Stock issuable upon conversion of this Convertible Note into a greater or
lesser number of shares of Common Stock shall not be considered a consolidation,
merger or sale for the purposes of this Section 6.7(b).
(i) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held shall be considered an issue or sale of Common Stock for the
purposes of this Section 6.7.
(ii) Stock Dividends. In case any additional shares of Common Stock
shall be issued as a dividend on Common Stock, the Conversion Price shall
be adjusted as provided in Section 6.7(a) hereof. In case any additional
shares of Common Stock shall be issued as a dividend on any class of stock
of the Company other than Common Stock, or in case any obligations or stock
convertible into or exchangeable for shares of Common Stock (such
convertible or exchangeable obligations or stock being hereinafter called
"Convertible Securities") shall be issued as a dividend on any class of
stock of the Company, such shares of Common Stock or Convertible Securities
shall be deemed to have been issued without consideration on the day next
succeeding the date for the determination of stockholders entitled to such
dividend.
(iii) Record Date. For purposes of this Section 6.7 in case the
Company shall take a record of the holders of its Common Stock for the
purpose of entitling them (a) to receive a dividend or other distribution
payable in Equity Stock or any options or warrants exercisable for shares
of Common Stock or any securities convertible into Common Stock, or (b) to
subscribe for or purchase Equity Stock or any options or warrants
exercisable for shares of Common Stock or any securities convertible into
Common stock, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making or such other
distribution or the date of the granting of such right or subscription or
purchase, as the case may be.
(iv) Current Market Price. The Current Market Price at any date
shall mean, in the event the Common Stock or the Equity Stock, as the case
may be, is publicly traded, the average of the daily closing prices per
shares of such equity security for 30 consecutive trading days ending no
more than 15 business days before such date (as adjusted for any stock
dividend, split, combination or reclassification that took effect during
such 30 trading day period). The closing price for each day shall be the
last reported sale price
-7-
<PAGE>
or, in case no such reported sale takes place on such day, the average of
the last closing bid and asked prices in either case on the principal
national securities exchange on which such equity security is listed or
admitted to trading, or if not listed or admitted to trading on any
national securities exchange, the closing date price for such day reported
by NASDAQ, if such equity security is traded over-the-counter and quoted in
the National Market System, or if such equity security is so traded, but
not so quoted, the average of the closing reported bid and asked prices of
such equity security as reported by NASDAQ or any comparable system or, if
such equity security is not listed on NASDAQ or any comparable system, the
average of the closing bid and asked prices as furnished by two members of
the National Association of Securities Dealers, Inc., selected in good
faith from time to time by the Board of Directors of the Company for that
purpose. If such equity security is not traded in such manner that the
quotations referred to above are available for the period required
hereunder, Current Market Price per shares of such equity security shall be
deemed to be the fair value as determined in good faith by the Board of
Directors of the Company and the Holder or, if the Board of Directors of
the Company and the Holder cannot agree, by an independent appraiser
mutually selected by the Board of Directors of the Company and the Holder.
(c) No Adjustment. Anything in this Section 6 to the contrary
notwithstanding, the Company shall not be required, except as hereinafter in
this Section 6.7(c) provided, to make any adjustment of the Conversion Price
then in effect in any case in which the amount by which such Conversion Price
would be reduced in accordance with the provisions of this Section 6.7 would be
less than $.05, but in such case any adjustment that would otherwise be required
then to be made will be carried forward and made at the time of and together
with the next subsequent adjustment which, together with any and all adjustments
so carried forward, shall amount to $.05 or more. In the event of any
subdivision or combination of shares of Common Stock said amount of $.05 (as
therefore decreased or increased by any previous subdivision or combination)
shall be proportionately decreased or increased.
(d) Notice of Holders. In the event the Company shall propose
to take any action of the types described in Section 6.7(b), the Company shall
give written notice to the Holder, which notice shall specify the record date,
if any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Conversion
Price then in effect and the number, kind or class of shares or other securities
or property which shall be deliverable or purchasable upon the occurrence of
such action or deliverable upon conversion of this Convertible Note. In the case
of any action that would require the fixing of a record date, such notice shall
be given at least ten days prior to the date so fixed, and in case of all other
action, such notice shall be given at least ten days prior to the taking of such
proposed action.
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<PAGE>
(e) Shares Free and Clear. All shares of Common Stock issued in
connection with the conversion provisions set forth herein shall be, upon
issuance by the Company, validly issued, fully paid and nonassessable and free
from all taxes, liens or charges with respect thereto created or imposed by the
Company.
(f) Common Stock Reserved. Upon appropriate amendment to its
Articles of Incorporation, the Company shall reserve and keep available out of
its authorized but unissued shares of Common Stock such number of shares of
Common Stock as shall from time to time be sufficient to effect conversion of
this Convertible Note.
6.8 Whenever the Conversion Price then in effect shall be adjusted as
required by the provisions of Section 6.7 hereof, the Company shall forthwith
mail a certificate setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjustment or readjustment is based
to the Holder at such Holder's address as it appears herein or at the last
address of which the Holder has given the Company written notice, but failure to
receive such notice, or any defects therein, or in the mailing thereof, shall
not affect such adjustment in such Conversion Price. The Company shall, upon the
written request at any time of the Holder, furnish or cause to be furnished to
such holder a like certificate setting forth (a) such adjustments and
readjustments, (b) the Conversion Price at that time in effect, and (c) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of this Convertible Note.
7. At any time after July 15, 1998, the Company may prepay, upon 15
business days' prior written notice to the Holder, its obligation pursuant to
this Convertible Note, in whole or in part, at any time by tendering to the
Holder 100% (expressed in percentages of the principal amount), together with
accrued but unpaid interest hereon.
The foregoing notwithstanding, it is acknowledged and agreed to by the
Company that, unless such rights have expired pursuant to Section 6.3 hereof,
the Holder may exercise its conversion rights pursuant to Section 6.7 hereof at
any time prior to the second business day immediately preceding the proposed
date of such prepayment, whether before or after receipt of such prepayment
notice from the Company.
8. Notwithstanding anything contained in this Convertible Note to the
contrary, the Holder shall never be deemed to have contracted for or be entitled
to receive, collect or apply as interest on this Convertible Note any amount in
excess of the amount permitted and calculated at the Maximum Rate (defined
below), and in the event the Holder ever receives, collects or applies as
interest any amount in excess of the amount permitted and calculated at the
Maximum Rate, such amount which would be excessive interest shall be applied to
the reduction of the unpaid principal balance of this Convertible Note, and, if
the principal balance of this Convertible Note is paid in full, any remaining
excess shall forthwith be paid to the Company.
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<PAGE>
The term "Maximum Rate", as used herein, shall mean, with respect to the
Holder, the maximum nonusurious interest rate, if any, that at any time, or from
time to time, may be contracted for, taken, reserved, charged or received on the
indebtedness evidenced by this Convertible Note under the laws which are
presently in effect of the United States and the State of Kansas applicable to
such holder and such indebtedness or, to the extent permitted by applicable law,
under such applicable laws of the United States and the State of Kansas which
may hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
9. This Convertible Note is being executed and delivered, and is intended
to be performed in the State of Kansas. Except to the extent that the laws of
the United States may apply to the terms hereof, the substantive laws of the
State of Kansas shall govern the validity, construction, enforcement and
interpretation of this Convertible Note. Each of the Company and the Holder
hereto consent to the jurisdiction of the State of Kansas or state or federal
courts located therein for all disputes arising under this Convertible Note.
Each of the Company and the Holder hereby knowingly, voluntarily and
intentionally waive (a) any right to trial by jury the Company and or the Holder
may have in any action or proceeding, in law or in equity, in connection with
this Convertible Note or the transactions related hereto and (b) any right to
contest enforcement of provisions of the last sentence of the immediately
preceding paragraph of this Section 9 on the basis of forum non conveniens.
10. If this Convertible Note is placed in the hands of an attorney for
collection, and if it is collected through any legal proceedings at law or in
equity or in bankruptcy, receivership or other court proceedings, the Company
promises to pay all costs and expenses of collection, including, but not limited
to, court costs and the reasonable attorneys' fees of the holder hereof.
11. Whenever this Convertible Note requires or permits any consent,
approval, notice, request or demand from one party to another, the consent,
approval, notice, request or demand must be in writing to be effective and shall
be deemed to have been given when delivered by facsimile or reliable courier or
five days after being deposited in the United States mails registered or
certified, return receipt requested, addressed to the party to be notified at
the address set forth below (or at such other address as may have been
designated by written notice).
11.1 (a) The Company for itself, its successors and assigns,
covenants and agrees, that (i) the payment of the principal of and interest on
this Convertible Note is hereby expressly subordinated, to the extent and in the
manner set forth in Section 11.2 hereof, in right of payment to the prior
payment in full of all Senior Debt (as defined in Section 11.1(b) hereof) of the
Company, and (ii) this Convertible Note is also subject to any further
restrictions herein for the protection of the holders of Senior Debt.
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<PAGE>
(b) As used herein, the term "Senior Debt" shall mean the
principal of and premium, if any, and interest on and any renewals, extensions
or refinancings (of no greater amounts than the original loan amounts) of the
following:
Senior Debt
-----------
<TABLE>
<CAPTION>
Lender Loan Amount
- ------ -----------
<S> <C>
DVI Financial Services $448,596
- -Term Note Payable
DVI Business Credit Corporation Up to $5,000,000
- -Revolving Credit Line Current outstanding
$3,085,954
</TABLE>
11.2 (a) In the event of any insolvency or bankruptcy proceedings,
or any receivership, liquidation, reorganization, arrangement, readjustment,
composition or other similar judicial proceedings in connection therewith,
relative to the Company, or its property, or in the event of any proceedings for
voluntary liquidation, dissolution or other winding-up of the Company, whether
or not involving insolvency or bankruptcy, or in the event of any assignment by
the Company for the benefit of creditors or in the event of any other marshaling
of the assets of the Company (collectively referred to as an "Insolvency Event")
then the holders of the Senior Debt shall be entitled to receive payment in full
of all principal, premium, interest, fees, penalties and charges on all Senior
Debt (including interest thereon accruing after the commencement of any such
proceedings) before the holder of this Convertible Note is entitled to receive
any payment on account of principal, interest or other amounts due under this
Convertible Note, and to that end the holders of the Senior Debt shall be
entitled to receive for application and payment thereof any payment or
distribution of any kind or charge, whether in cash or property or securities,
which may be payable or deliverable in any such proceedings in respect of this
Convertible Note (excluding securities provided for by a plan of reorganization
or readjustment that are equity securities or are subordinated in right of
payment to all indebtedness issued to the holders of Senior Debt in such plan of
reorganization or readjustment to the same extent as, or to a greater extent
than, this Convertible Note is subordinated to the Senior Debt as provided
herein).
(b) If, notwithstanding the provisions of this Section 11.2, any
payment or distribution of any character shall be received by the holder hereof
in contravention of this Section 11.2 and while Senior Debt shall be
outstanding, such payment, distribution or security shall be held in trust for
the benefit of, and shall be immediately paid over or delivered or transferred
to, the holders of the Senior Debt as their interest may appear, or their duly
appointed agents, for application to the payment of all Senior Debt then
outstanding, until all of the Senior Debt shall have been paid in full.
-11-
<PAGE>
(c) The provisions of this Section 11.2 shall continue to be
effective or be reinstated, as the case may be, if at any time payment of Senior
Debt is rescinded or must otherwise be returned by any holder of such Senior
Debt upon the insolvency, bankruptcy or reorganization of the Company, as though
such payment had not been made.
(d) The provisions of this Section 11 are intended solely for
the purpose of defining the relative rights of the holder of this Convertible
Note and of the holders of the Senior Debt, and nothing herein shall be or is
intended, as between the Company, its creditors other than the holders of Senior
Debt, and the holder of this Convertible Note, to impair or suspend in any
manner, whatsoever the obligation of the Company, which, notwithstanding any
other provision of this Section 11 to the contrary, is unconditional and
absolute, to pay to the holder of this Convertible Note the principal hereof as
and when the same shall become due, whether at maturity or otherwise, and
interest thereon in accordance with the terms hereof, or to affect the relative
rights of the holder of this Convertible Note and creditors of the Company other
than the holder or holders of the Senior Debt, nor shall anything herein,
notwithstanding any provisions of this Section 11 to the contrary, prevent the
holder hereof from exercising any and all remedies permitted by applicable law
upon default hereunder.
12. Registration Rights. Any shares of Common Stock received by the
Holder pursuant to the provisions hereof shall be deemed Registrable Securities,
as that term is defined in the Investors Rights Agreement between the Holder,
the Company and certain other parties and shall be subject to the provisions
thereof.
13. (a) The address for the Company for all purposes contained in this
Convertible Note and for all the notices hereunder shall be: 11320 W. 79th
Street, Lenexa, Kansas 66214, Attention: Troy Burns, M.D.
(b) The address of the Holder for all purposes contained in this
Convertible Note and for all notices hereunder shall be:
__________________________________________.
(c) Each of the Company and the Holder may change its address for
purposes hereof by providing notice to the other in the manner described in
Section 11 hereof.
14. Neither this Convertible Note nor any term hereof may be changed,
waived, discharged or terminated orally or in writing, provided that any term of
this Convertible Note may be amended or the observance of such term may be
waived (either generally or in a particular instance and either retroactively or
prospectively) with, but only with, the written consent of the Company and
Holder.
15. The provisions of Sections 6.6, 6.7, 6.8 and 12 shall survive any
conversion or payment of this Convertible Note.
-12-
<PAGE>
Executed as of the day and year first above written.
INTEGRATED MEDICAL RESOURCES, INC.
By:____________________________________
E. Stanley Kardatzke, M.D.
Chief Executive Officer
-13-
<PAGE>
Annex 1
-------
CONVERSION REQUEST
------------------
TO: INTEGRATED MEDICAL RESOURCES, INC.
The undersigned holder of this Convertible Note hereby irrevocably
exercises the option to convert this Convertible Note, or portion hereof below
designated, into shares of Common Stock in accordance with the terms of this
Convertible Note, and directs that the securities issuable and deliverable upon
the conversion, together with any check in payment for fractional amounts, and
any Convertible Note representing any unconverted amount hereof, be issued and
delivered to the holder hereof at the address specified below.
Dated:_________________ ___________________________________
Signature (for conversion use only)
Amount to be converted (if less than all):
$______________
- -------------------------
- -------------------------
- ------------------------- ----------------------------------
Please print name and Please insert Social Security or
address (including zip other Taxpayer Identification Number
code number)
-14-
<PAGE>
Exhibit 4(k)(ii)
----------------
AGREEMENT REGARDING CERTAIN PROVISIONS OF CONVERTIBLE NOTES
This Agreement Regarding Certain Provisions of Convertible Notes, dated as
of May 5, 1998 (the "Agreement"), is entered into by and among Frazier
Healthcare II, L.P. ("Frazier"), Institutional Venture Partners VI Limited
Partnership ("IVP"), Institutional Venture Management VI ("IVM") and IVP
Founders Fund I (IVP-FF) (collectively, Frazier, IVP, IVM and IVP-FF may be
referred to herein as the "Holders").
WHEREAS, Frazier holds a convertible note dated May 5, 1998 by Integrated
Medical Resources, Inc. (the "Company") in the principal amount of $257,143.00
(the "Frazier Note"); and
WHEREAS, IVP holds a convertible note dated May 5, 1998 by the Company in
the principal amount of $322,286.00 (the "IVP Note"); and
WHEREAS, IVP-FF holds a convertible note dated May 5, 1998 by the Company
in the principal amount of $13,714.00 (the "IVP-FF Note"); and
WHEREAS, IVM holds a convertible note dated May 5, 1998 by the Company in
the principal amount of $6,857.00 (the "IVM Note"); and
WHEREAS, in addition to other rights and obligations, the Frazier Note, the
IVP Note, the IVP-FF Note and the IVM Note (collectively, the "Notes") permit
the holders thereof (i) to convert the outstanding principal balance and/or
accrued and unpaid interest pursuant to such Notes into shares of common stock
of the Company (the "Conversion Right"); and (ii) to exercise certain options
granted pursuant to the Notes (the "Options").
NOW THEREFORE, in consideration of the premises, the mutual promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Each Holder shall exercise its Conversion Right immediately following
approval by the stockholders of the Company of the issuance of shares pursuant
to the Notes.
2. No Holder shall exercise any Option unless each other Holder
simultaneously exercises its corresponding Option.
3. The provisions of Section 6.6, 6.7, 6.8 and 12 of each of the Notes
shall survive any conversion or payment of the Notes and shall be binding on the
respective parties thereto.
1
<PAGE>
4. This Agreement shall be governed in all respects by the laws of the
State of Kansas as such laws are applied to agreements between Kansas residents
entered into and to be performed entirely within Kansas.
5. This Agreement may be amended only pursuant to a written instrument
executed by all parties hereto and consented to in writing by the Company.
6. 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.
7. 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.
8. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which taken together shall be
considered one and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
FRAZIER HEALTHCARE II, L.P.
By: /s/ Alan D. Frazier
---------------------------------------
Alan D. Frazier
President, Frazier & Company, Inc.
Member, Frazier Management
Member, FHM II, L.L.C.
General Partner, Frazier Healthcare II, L.P.
3
<PAGE>
INSTITUTIONAL VENTURE PARTNERS VI
LIMITED PARTNERSHIP
By: Institutional Venture Management VI,
its General Partner
By: /s/ Samuel D. Colella
-------------------------------------
Samuel D. Colella
General Partner
INSTITUTIONAL VENTURE MANAGEMENT VI
By: /s/ Samuel D. Colella
-------------------------------------
Samuel D. Colella
General Partner
IVP FOUNDERS FUND I
By: Institutional Venture Management VI,
its General Partner
By: /s/ Samuel D. Colella
-------------------------------------
Samuel D. Colella
General Partner
4
<PAGE>
Agreed to and Acknowledged
as of the 5th day of May, 1998:
INTEGRATED MEDICAL RESOURCES, INC.
By /s/ E. Stanley Kardatzke
------------------------------
Name: E. Stanley Kardatzke
--------------------------
Title: Chairman & CEO
------------------------
5
<PAGE>
Exhibit 4(l)
------------
PROMISSORY NOTE
---------------
$_______________ Lenexa, Kansas
May 5, 1998
FOR VALUE RECEIVED, the undersigned, Integrated Medical Resources, Inc., a
Kansas corporation (the "Maker"), hereby promises to pay on demand, at any time
beginning May 29, 1998, to the order of _____________________________ (together
with its successors and assigns, the "Holder"), the principal sum of
__________________________________ _____________________ ($__________), together
with interest at the rate of eight and one-half percent (8.5%) per annum,
compounded monthly on the unpaid principal balance hereof. Interest shall be
computed on the basis of a 360-day year.
1. Prepayment. The Maker reserves the right to prepay all or any portion
of this Promissory Note at any time and from time to time without premium or
penalty of any kind.
2. Payment Instructions and Allocations. All principal and interest
payments made hereunder shall be made in lawful currency of the United States of
America or, at the option of the Maker and the Holder, as credit towards the
exercise price of one or more options to purchase securities of the Maker which
were granted to Holder by Maker pursuant to a Convertible Note dated May 5,
1998, as amended, in the original principal amount of $__________.
3. Assignment. The rights and obligations of the Maker and the Holder of
this Promissory Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
4. Amendment/Modification. Any provision of this Promissory Note may be
amended, waived or modified upon the written consent of the Holder and the
Maker.
5. Notices. All notices or other communications required to be made
hereunder shall be in writing, mailed postage prepaid, or delivered by hand,
recognized courier or telecopier, and shall be sent to the Maker or to the
Holder at the following addresses:
If to the Maker, to:
-------------------
Integrated Medical Resources, Inc.
11320 West 79th Street
Lenexa, Kansas 66214
Attention: Troy A. Burns, M.D.
Facsimile: (913) 962-7719
<PAGE>
If to the Holder, to:
____________________________
____________________________
____________________________
Attention: ________________
Facsimile: ________________
or to such other addresses or facsimile numbers as either shall give notice
of to the other under this section.
6. Governing Law. This Promissory Note shall be governed by and construed
and enforced in accordance with the laws of the State of Kansas.
7. Headings. All headings used herein are used for convenience only and
shall not be used to construe or interpret this Note.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned had duly caused this Promissory Note to
be executed and delivered at the place specified above and as of the date first
written above.
Integrated Medical Resources, Inc.
By: _____________________________
Name: E. Stanley Kardatzke
-----------------------------
Title: Chairman & CEO
----------------------------
3
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INTEGRATED MEDICAL RESORUCES, INC.
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