<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
FORM 10-Q
-----------
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 1999
|_| 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 0-27568
INNOVATIVE CLINICAL SOLUTIONS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 65-0617076
(State of incorporation) (I.R.S. Employer Identification No.)
10 Dorrance Street, Suite 400, Providence, Rhode Island 02903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 831-6755
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 33 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such Reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
On September 7, 1999, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 32,353,429.
================================================================================
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, Ltd.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
----
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - July 31, 1999 (unaudited) and 3
January 31, 1999
Consolidated Statements of Operations (unaudited) - Three 4
and Six Months Ended July 31, 1999 and 1998
Consolidated Statements of Cash Flows (unaudited) - Six 5
Months Ended July 31, 1999 and 1998
Notes to Consolidated Financial Statements (unaudited) - 6-12
Three and Six Months Ended July 31, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial 13-21
Condition and Results of Operations
PART II- OTHER INFORMATION
21 Changes in Securities - Recent Sales of Unregistered 22
Securities
Item 6. Exhibits and Reports on Form 8~K 22
<PAGE>
FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVATIVE CLINICAL SOLUTIONS, LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 31, January 31,
1999 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 14,709 $ 10,137
Receivables:
Accounts receivable, net 18,079 15,276
Income tax refund receivable 10,789 10,789
Other receivables 6,314 6,760
Notes receivable 3,630 5,060
Prepaid expenses and other current assets
(including advances to shareholder) 12,337 1,260
Assets held for sale 45,133 100,795
--------- ---------
Total current assets 110,991 150,077
Property, plant and equipment, net 9,543 11,024
Notes receivable 8,481 7,274
Goodwill, net 28,525 41,007
Management service agreements, net 9,012 28,167
Other assets (including advances to shareholder) 3,931 15,302
--------- ---------
Total assets $ 170,483 $ 252,851
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $ 19,493 $ 12,192
Accounts payable 13,236 13,602
Accrued compensation 2,147 1,475
Accrued and other current liabilities 14,914 11,623
--------- ---------
Total current liabilities 49,790 38,892
Long-term debt less current maturities 4,311 5,465
Convertible subordinated debentures 100,000 100,000
Other long-term liabilities 940 1,191
Minority interest 673 1,403
--------- ---------
Total liabilities 155,714 146,951
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01, 40,000 shares authorized,
33,387 and 33,344 shares issued at July 31, 1999
and January 31, 1999, respectively, 32,457
and 32,916 shares outstanding at July 31,
1999 and January 31, 1999, respectively 325 329
Treasury stock (2,037) (1,202)
Additional paid in capital 224,778 224,715
Accumulated deficit (208,297) (117,942)
--------- ---------
Total shareholders' equity 14,769 105,900
--------- ---------
Total liabilities and shareholders' equity $ 170,483 $ 252,851
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3l, July 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues from services $ 36,668 $ 48,059 $ 80,523 $ 98,577
Net revenues from management service agreements 12,857 28,267 29,606 54,934
Net revenues from real estate services 327 1,036 387 8,044
--------- --------- --------- ---------
Total revenue 49,852 77,362 110,516 161,555
--------- --------- --------- ---------
Operating costs and administrative expenses:
Salaries, wages and benefits 16,450 22,968 35,652 46,844
Professional fees 5,146 4,046 9,422 7,606
Supplies 10,612 14,879 24,776 29,031
Utilities 1,204 1,429 2,346 2,713
Depreciation and amortization 3,184 3,570 6,813 7,144
Rent 4,223 4,875 8,699 9,669
Provision for bad debts 1,030 933 1,664 1,890
Gain on sale of assets -- (4,506) -- (5,422)
Nonrecurring expenses 15,825 5,305 15,825 5,305
Other - primarily capitation expense 19,568 22,209 41,225 43,888
--------- --------- --------- ---------
Total operating costs and administrative expenses 77,242 75,708 146,422 148,668
--------- --------- --------- ---------
Interest expense, net 2,099 1,806 4,718 3,645
Income from investment in affiliates -- (227) -- (434)
--------- --------- --------- ---------
2,099 1,579 4,718 3,211
--------- --------- --------- ---------
Income (loss) before provision for income taxes
and extraordinary item (29,489) 75 (40,624) 9,676
Income tax expense 50 24 100 3,172
--------- --------- --------- ---------
Net income (loss) before extraordinary item (29,539) 51 (40,724) 6,504
Extraordinary item, net of tax of $0 49,632 -- 49,632 --
--------- --------- --------- ---------
Net income (loss) $ (79,171) $ 51 $ (90,356) $ 6,504
========= ========= ========= =========
Net income (loss) per share - basic
Income (loss) before extraordinary item $ (0.89) $ -- $ (1.22) $ 0.20
Extraordinary item, net of tax of $0 $ (1.49) $ -- $ (1.48) $ --
Net income (loss) $ (2.38) $ -- $ (2.70) $ 0.20
Net income (loss) per share - diluted
Income (loss) before extraordinary item $ (0.89) $ -- $ (1.22) $ 0.20
Extraordinary item, net of tax of $0 $ (1.49) $ -- $ (1.48) $ --
Net income (loss) $ (2.38) $ -- $ (2.70) $ 0.20
Weighted average shares outstanding - basic 33,289 33,508 33,459 33,026
========= ========= ========= =========
Weighted average shares outstanding - diluted 33,289 33,518 33,459 33,292
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
July 31,
-------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $(90,356) $ 6,504
Noncash items included in net income:
Depreciation and amortization 6,813 7,144
Extraordinary item 49,632 --
Gain on sale of assets -- (5,422)
Nonrecurring charges 14,205 4,401
Amortization of debt issuance costs 999 72
Changes in receivables 3,912 (4,791)
Changes in accounts payable and accrued liabilities 123 (4,766)
Changes in other assets (706) (2,076)
-------- --------
Net cash provided (used) by operating activities (15,378) 1,066
-------- --------
Cash flows from investing activities:
Capital expenditures (2,456) (4,008)
Sale of assets 18,559 4,821
Notes receivable, net 416 (1,800)
Other -- 16
Acquisitions, net of cash acquired (907) (7,598)
-------- --------
Net cash provided (used) by investing activities 15,612 (8,569)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 130
Proceeds from issuance of debt 21,709 --
Offering costs and other 28 (94)
Repayment of debt (16,564) (7,131)
Purchase of treasury stock (835) --
-------- --------
Net cash provided (used) by financing activities 4,338 (7,095)
-------- --------
Increase (decrease) in cash and cash equivalents $ 4,572 $(14,598)
======== ========
Cash and cash equivalents, beginning of period $ 10,137 $ 49,536
======== ========
Cash and cash equivalents, end of period $ 14,709 $ 34,938
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
1. Organization and Basis of Presentation
The accompanying unaudited interim consolidated financial statements
include the accounts of Innovative Clinical Solutions, Ltd. ("the Company" or
"ICSL") (formerly PhyMatrix Corp.). These interim consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and the requirements of the Securities and Exchange Commission.
Accordingly, 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 management's opinion that the
accompanying interim financial statements reflect all adjustments (which are
normal and recurring) necessary for a fair presentation of the results for the
interim periods. These interim financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended January 31, 1999.
Operating results for the three and six months ended July 31, 1999 are not
necessarily indicative of results that may be expected for the year.
2. Significant Events
During May 1998, the Company announced that the Board of Directors had
instructed management to explore various strategic alternatives for the Company
that could maximize stockholder value. During August 1998, the Company announced
that the Board of Directors approved several strategic alternatives to enhance
stockholder value. The Board authorized a series of initiatives designed to
reposition the Company as a significant company in pharmaceutical contract
research, specifically clinical trials site management and outcomes research.
The Company intends to link its nationally focused hospital affiliations and its
physician networks with its clinical trials site management and healthcare
outcomes research operations.
During August 1998, the Board approved, consistent with achieving its
stated restructuring goal, its plan to divest and exit the Company's
physician practice management ("PPM") business and certain of its ancillary
services businesses, including diagnostic imaging, lithotripsy and radiation
therapy. Subsequent to August 1998, the Company also decided to divest its
home health business and exit its infusion therapy business. During the
second quarter ended July 31, 1999, the Company also decided to terminate an
additional physician practice management agreement, divest its investments in
a surgery center and a network of physicians, and sell its real estate
service operations. Net loss for the year ended January 31, 1999 and net loss
for the three and six months ended July 31,1999 includes an extraordinary
item of $96.8 million and $49.6 million, respectively, which is primarily a
non-cash charge related to these divestitures. The $49.6 million
extraordinary charge during the second quarter consisted of (i) approximately
$14.3 million primarily due to the Company's decision in the second quarter
to exit a physician practice management agreement and dispose of its
investments in a surgery center and a network of physicians and (ii)
approximately $35.3 million resulting primarily from a revision of the
estimated proceeds, based on current fair market value estimates, for the
sale of the remaining businesses originally identified to be divested or
disposed. The $35.3 million component of the extraordinary item is primarily
attributable to the following: an approximately $19.0 million reduction in
expected proceeds from the sale of the diagnostic imaging assets, an
approximately $12.0 million reduction in expected proceeds from the sale of
the physician practices, and the balance represents a reduction in expected
proceeds from the sale of the other ancillary service businesses. The
reduction in diagnostic imaging proceeds is primarily attributable to a
reduction in the profitability of the three Florida imaging centers operated
by the Company as well as additional costs to be incurred by the Company
including assigning the Administrative Service Agreements for the imaging
centers in New York. The diagnostic imaging industry is experiencing gradual
reimbursement rate declines and in Florida there is pending legislation aimed
at decreasing personal injury revenue which affects the Company's Florida
imaging centers. The reduction in PPM proceeds is primarily attributable to
the continued decline in the PPM industry. In accordance with APB 16, the
Company is required to record these charges as an extraordinary item since
impairment losses are being recognized for divestitures and disposals
expected to be completed within two years subsequent to a pooling of
interests (the pooling of interests with Clinical Studies, Ltd. ("CSL") was
effective October 15, 1997). Based on fair market value estimates, which have
primarily been derived from purchase agreements, letters of intent, letters
of interest and discussions with prospective buyers, the Company currently
expects to realize net proceeds of approximately $45.1 million (of which
approximately $35.3 million was sold subsequent to July 31, 1999) from the
sale of the remaining businesses identified to be divested or disposed and has
recorded this amount as an asset held for sale on the balance sheet at July 31,
1999.
3. Supplemental Cash Flow Information
During the six months ended July 31, 1998, the Company acquired the
assets and/or stock, entered into management and employment agreements,
and/or assumed certain liabilities of various ancillary service companies,
networks and organizations and sold certain assets. During the six months
ended July 31, 1999 and 1998, the Company also made contingent payments and
issued shares of stock which had been committed to be issued in conjunction
with acquisitions. During the six months ended July 31, 1999, the Company
terminated several physician management and employment agreements and sold
certain ancillary service companies. The transactions had the following
non-cash impact on the balance sheets of the Company as of the indicated
dates:
-6-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
July 31,
----------------------
1999 1998
---- ----
Current assets $(49,360) $ 1,351
Property, plant and equipment (906) (2,809)
Intangibles (27,669) 25,963
Other noncurrent assets (592) 5,836
Current liabilities (3,504) (4,409)
Noncurrent liabilities 1,013 (80)
Debt (398) 3,451
Equity 49,562 (26,772)
During the six months ended July 31, 1998, the Company sold real estate
and a radiation therapy center. These sales resulted in gains of $4.5 million
and $0.9 million, respectively.
4. Assets Held for Sale
During the year ended January 31,1999, the Board approved, consistent
with achieving its stated restructuring goal, its plan to divest and exit the
Company's PPM business and certain of its ancillary services businesses,
including diagnostic imaging, lithotripsy, radiation therapy, home health and
infusion therapy. During the second quarter ended July 31, 1999, the Company
also decided to terminate an additional physician practice management
agreement, divest its investments in a surgery center and a network of
physicians, and sell its real estate service operations. During the six
months ended July 31, 1999, the Company exited its infusion therapy business,
divested seven physician practices, terminated its relationship with several
employed physicians, sold seven radiation therapy centers, sold one
diagnostic imaging center and sold its investment in a diagnostic imaging
center. Subsequent to July 31, 1999, the Company sold its remaining
diagnostic imaging centers, its remaining lithotripsy businesses, its
remaining radiation therapy center and its real estate services operations.
Based on fair market value estimates, which estimates were primarily derived
from purchase agreements, letters of intent, letters of interest or
discussions with prospective buyers, the Company currently expects to realize
net proceeds of approximately $45.1 million (of which approximately $35.3
million was sold subsequent to July 31, 1999) from the sale of the remaining
businesses identified to be divested or disposed and has recorded this amount
as an asset held for sale on the balance sheet at July 31, 1999.
5. Nonrecurring Charge
The $15.8 million charge during the quarter ended July 31, 1999 is
comprised of a $14.1 million impairment charge for a management service
organization and a physician practice management agreement and $1.7 million
primarily representing additional severance costs in conjunction with the
sale of assets and the repositioning of the Company. During the six months
ended July 31, 1998, the Company terminated several of its physician
management and employment agreements which resulted in a charge of
approximately $5.3 million. The charge is composed primarily of the write-off
of the remaining intangible assets as well as severance and legal costs.
6. Revolving Line of Credit
During March 1999, the Company entered into a $30.0 million revolving line
of credit which has a three-year term and availability based upon eligible
accounts receivable. The line of credit bears interest at prime plus 1.0% and
fees are 0.0875%. Approximately $9.2 million of proceeds from the new line of
credit were used to repay the previous line of credit, and approximately $2.0
million were used as cash collateral for a $2.0 million letter of credit. The
line of credit is secured by the assets of the Company, limits the ability of
the Company to incur certain indebtedness and make certain dividend payments and
requires the Company to comply with other customary covenants. As of July 31,
1999, there was $17.6 million outstanding under the line of credit, which is
included in the current portion of debt and capital leases.
7. Treasury Stock
The Board of Directors of the Company authorized a share repurchase plan
pursuant to which the Company may repurchase up to $15.0 million of its Common
Stock from time to time on the open market at prevailing market prices.
-7-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
Through July 31, 1999, the Company has repurchased a total of 806,000 shares
at a net purchase price of approximately $1.7 million.
-8-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
8. Net Income per Share
The following is a reconciliation of the numerators and denominators of
the basic and fully diluted earnings per share computations for net income:
(Loss) Per Share
(In thousands, except per share data) Income Shares Amount
-------- ------ ---------
Three Months Ended July 31, 1999
Basic loss per share
Loss available to common stockholders $(29,539) 33,289 $(0.89)
Extraordinary item (49,632) -- (1.49)
-------- ------ ------
Net loss available to common stockholders (79,171) 33,289 (2.38)
Effect of dilutive securities -- -- --
-------- ------ ------
Diluted loss per share $(79,171) 33,289 $(2.38)
Three Months Ended July 31, 1998
Basic earnings per share
Income available to common stockholders $ 51 33,508 $ 0.00
Effect of dilutive securities:
Stock options -- 10 --
-------- ------ ------
Diluted earnings per share $ 51 33,518 $ 0.00
======== ====== ======
Six Months Ended July 31, 1999
Basic loss per share
Loss available to common stockholders $(40,724) 33,459 $(1.22)
Extraordinary item (49,632) 33,459 (1.48)
-------- ------ ------
Net loss available to common stockholders (90,356) 33,459 (2.70)
Effect of dilutive securities -- -- --
-------- ------ ------
Diluted loss per share $(90,356) 33,459 $(2.70)
======== ====== ======
Six Months Ended July 31, 1998
Basic earnings per share
Income available to common stockholders $ 6,504 33,026 $ 0.20
Effect of dilutive securities:
Stock options -- 28 --
Convertible debt 49 238 --
-------- ------ ------
Diluted earnings per share $ 6,553 33,292 $ 0.20
======== ====== ======
For the three and six months ended July 31, 1999 and 1998, no additional
securities or related adjustments to income were made for the common stock
equivalents related to the Debentures since the effect would be antidilutive.
-9-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
9. Ratio of Earnings to Fixed Charges
For the three and six months ended July 31, l999, the ratio of earnings to
fixed charges was less than 1.0. For purposes of computing the ratio of earnings
to fixed charges, earnings represent income (loss) from operations before
minority interest and income taxes, plus fixed charges. Earnings also includes
the equity in less-than-fifty percent-owned investments only to the extent of
distributions. Fixed charges include interest, amortization of financing costs
and the portion of operating rental expense which management believes is
representative of the interest component of the rental expense. For the three
and six months ended July 31, 1999, for purposes of computing the ratio of
earnings to fixed charges, the Company's earnings were inadequate to cover fixed
charges by $29.5 million and $40.6 million, respectively.
10. Accounting Changes and Pronouncements
In 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 97-2 concerning the consolidation of physician
practice revenues, PPMs are required to consolidate financial information of a
physician where the PPM acquires a "controlling financial interest" in the
practice through the execution of a contractual management agreement even though
the PPM does not own a controlling equity interest in the physician practice.
EITF 97-2 outlines six requirements for establishing a controlling financial
interest. EITF-92 was effective for the Company's financial statements for the
year ended January 31, 1999. Adoption of this statement reduced previously
reported revenues for the three and six months ended July 31, 1998 by $17.6
million and $34.8 million, respectively. During August 1998, the Company
announced its plan to divest and exit the PPM business. The majority of these
assets which have not yet been divested are recorded as assets held for sale at
July 31, 1999.
During the year ended January 31, 1999, the company adopted SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information." This
Statement requires reporting of summarized financial results for operating
segments as well as established standards for related disclosures about products
and services, geographic areas and major customers. Primary disclosure
requirements include total segment revenues, total segment profit or loss and
total segment assets.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued in June 1998. It establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, Statement 133 was
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. In August 1999, the FASB issued Statement No. 137 which amended
FASB Statement No. 133, and deferred its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. The adoption of
this statement is not expected to have a material impact on the Company's
results of operations, financial position or cash flows or to produce any
major changes in current disclosures.
11. Related Party Transactions
The Company provided construction management, development marketing and
consulting services to entities principally owned by Abraham D. Gosman
(former Chairman of the Board and former Chief Executive Officer) in
connection with the development and operation by such entities of several
healthcare related facilities (including a medical office building and a
retirement community). During the years ended January 31, 1999 and 1998, the
Company recorded revenues in the amount of $1.4 million and $10.5 million,
respectively, related to such services. As of July 31, 1999, the Company
advanced $10.9 million, which is due in July 2000, to a company principally
owned by Mr. Gosman relating to the development of a healthcare facility.
Interest on the advance accrues at the prime rate. The Company provides these
services to such affiliated parties on terms no more or less favorable to the
Company than those provided to unaffiliated parties.
12. Legal Proceedings
On October 18, 1997, the Florida Board of Medicine, which governs
physicians in Florida, declared that the payment of percentage-based fees by
a physician to a physician practice management company in connection with
practice-enhancement activities subjects a physician to disciplinary action
for a violation of a statute which prohibits fee-splitting. Some of the
Company's contracts with Florida physicians include provisions providing for
such payments. The Company appealed the ruling to a Florida District Court of
Appeals and the Board stayed the enforceability of its ruling pending the
appeal. Oral arguments were held on May 26, 1999, and the judge upheld the
Board of Medicine's ruling. The Company may be forced to renegotiate those
provisions of the contracts which are affected by the ruling. While these
contracts call for renegotiation in the event that a provision is not found
to comply with state law, there can be no assurance that the Company would be
able to renegotiate such provisions on acceptable terms. The contracts
affected by this ruling are with the physician practices the Company has
identified to be divested or disposed and for which the assets are included
in assets held for sale at July 31, 1999.
-10-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
In conjunction with a physician practice management agreement with a
physician practice in Florida, the Company has filed suit against the
practice to enforce the guarantees executed in connection with the management
agreement. The practice has filed a counterclaim. The Company intends to
prosecute and defend the case.
13. Segment Information
For the fiscal year ending January 31, 1999, the Company adopted SFAS
131. The prior year's segment information has been restated to present the
Company's reportable segments. The Company has determined that its reportable
segments are those that are based on its current method of internal
reporting. The reportable segments are: provider network management, site
management organization, real estate services and assets held for sale. The
accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies" in the Company's Annual Report
on Form 10-K. There are no intersegment revenues and the Company does not
allocate corporate overhead to its segments. The tables below present
revenue, pretax income (loss) and net assets of each reportable segment for
the indicated periods:
<TABLE>
<CAPTION>
Provider Site Assets
Network Management Real Held for Reconciling Consolidated
Management (2) Organizations Estate Sale Items (1) Totals
-------------- ------------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended July 31, 1999
Net revenues $ 13,375 $ 8,831 $ 327 $ 27,259 $ 60 $ 49,852
Income (loss) before income taxes and
extraordinary item (14,188) (2,909) (1,237) (4,022) (7,133) (29,489)
Quarter ended July 31, 1998
Net revenues $ 18,421 $ 9,107 $ 1,036 $ 48,798 $ -- $ 77,362
Income (loss) before income taxes and
extraordinary item 1,023 (511) 3,407 1,713 (5,557) 75
Six months ended July 31, 1999
Net revenues $ 30,727 $ 17,627 $ 387 $ 61,715 $ 60 $ 110,516
Income (loss) before income taxes and
extraordinary item (15,633) (5,445) (1,881) (4,926) (12,739) (40,624)
Net assets 16,153 20,783 8,007 45,133 (75,307) 14,769
Six months ended July 31, 1998
Net revenues $ 37,533 $ 19,157 $ 8,044 $ 96,523 $ 298 $ 161,555
Income (loss) before income taxes and
extraordinary item 2,810 585 7,980 7,876 (9,575) 9,676
Net assets 37,460 22,482 20,536 230,346 (66,433) 244,391
</TABLE>
(1) Reconciling items consist of corporate expenses and corporate net assets
(primarily the convertible subordinated debentures, net of cash) which are
not allocated.
(2) Provider Network Management loss for the three and six months ending
July 31, 1999 includes an $11.2 million nonrecurring charge.
-11-
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended July 31, 1999 and 1998 (Unaudited)
14. Subsequent Events
Subsequent to July 31, 1999, the Company has sold its remaining
diagnostic imaging centers, its remaining radiation therapy center, its
remaining lithotripsy business and its real estate service operations.
Proceeds from these asset sales were approximately $35.3 million.
15. Reclassifications
Certain prior period balances have been reclassified to conform with the
current period presentation. Such reclassifications had no material effect on
the previously reported consolidated financial position, results of operations
or cash flows of the Company,
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
ICSL is repositioning itself as a company that provides diverse
services supporting the needs of the pharmaceutical and managed care
industries. The Company is focusing its operations on two integrated business
lines: pharmaceutical services, including investigative site management,
clinical and outcomes research and disease management, as well as multi and
single-specialty provider network management. Historically, the Company has
been an integrated medical management company that provides medical
management services to the medical community, certain ancillary medical
services to patients and medical real estate development and consulting
services to related and unrelated third parties. In August 1998, the Company
announced that it planned to change this business model. The Company is in
the process of terminating its management of individual and group physician
practices and divesting itself of related assets, and selling and divesting
itself of its ancillary medical service businesses, such as diagnostic
imaging, radiation therapy, lithotripsy services, home healthcare and
infusion therapy. In conjunction with the change in the business model, the
Company also significantly downsized and then, subsequent to July 31, 1999,
sold the operation of its real estate services. The Company currently
estimates that by the end of its current fiscal year it will have exited the
majority of its physician practice management ("PPM") and ancillary medical
service businesses.
Repositioning
During May 1998, the Company announced that the Board of Directors had
instructed management to explore various strategic alternatives for the Company
that could maximize stockholder value. During August 1998, the Company announced
that the Board of Directors approved several strategic alternatives to enhance
stockholder value. The Board authorized a series of initiatives designed to
reposition the Company as a significant company in pharmaceutical contract
research, specifically clinical trials site management and outcomes research,
The Company intends to link its nationally focused hospital affiliations and its
physician networks with its clinical trials site management and outcomes
research operations.
During the year ended January 31, 1999, the Board approved, consistent
with achieving its stated restructuring goal, its plan to divest and exit the
Company's PPM business and certain of its ancillary services businesses,
including diagnostic imaging, lithotripsy, radiation therapy, home health and
infusion therapy. During the second quarter ended July 31, 1999, the Company
also decided to terminate an additional physician practice management
agreement and divest its investments in a surgery center and a network of
physicians. The revenue and pretax loss of these businesses which have been
identified to be divested or disposed for the six months ended July 31, 1999
were $61.7 million and $4.9 million, respectively. Net loss for the three and
six months ended July 31, 1999 included an extraordinary item of $49.6
million which is primarily a non-cash charge related to these divestitures.
Based on fair market value estimates, which have primarily been derived from
purchase agreements, letters of intent, letters of interest and discussions
with prospective buyers, the Company currently expects to realize net
proceeds of approximately $45.1 million (of which approximately $35.3 million
was sold subsequent to July 31, 1999) from the sale of the remaining
businesses identified to be divested or disposed and has recorded this amount
as an asset held for sale on the balance sheet at July 31, 1999.
During the fourth quarter ended January 31,1999, the Company made the
decision to significantly downsize its real estate services segment and
recorded a goodwill impairment write-down of approximately $9.1 million which
eliminated the remaining goodwill of the real estate services segment.
Subsequent to July 31, 1999 the Company sold the remaining operations of the
real estate services segment.
Accounting Treatment
The terms of the Company's relationships with its remaining affiliated
physicians are set forth in various asset and stock purchase agreements,
management services agreements and employment and consulting agreements. Through
the asset and/or stock purchase agreement, the Company acquired the equipment,
furniture, fixtures, supplies and, in certain instances, service agreements, of
a physician practice at the fair market value of the assets. The accounts
receivable typically were purchased at the net realizable value. The purchase
price of the practice generally consisted of cash, notes and/or Common Stock of
the Company and the assumption of certain debt, leases
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<PAGE>
and other contracts necessary for the operation of the practice, The management
services or employment agreements delineate the responsibilities and obligations
of each party.
Net revenues from services is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. The provision
and related allowance are adjusted periodically, based upon an evaluation of
historical collection experience with specific payors for particular services,
anticipated reimbursement levels with specific payors for new services, industry
reimbursement trends, and other relevant factors. Included in net revenues from
services are revenues from the diagnostic imaging centers in New York which the
Company operates pursuant to Administrative Service Agreements. These revenues
are reported net of payments to physicians.
Net revenues from management services agreements include the revenues
generated by the physician practices net of payments to physicians. The Company,
in most cases, is responsible and at risk for the operating costs of the
physician practices. Expenses include the reimbursement of all medical practice
operating costs as required under the various management agreements. For
providing services under management services agreements entered into prior to
April 30, 1996, physicians generally received a fixed percentage of net revenue
of the practice. "Net revenues" is defined as all revenue computed on an accrual
basis generated by or on behalf of the practice after taking into account
certain contractual adjustments or allowances. The revenue is generated from
professional medical services furnished to patients by physicians or other
clinicians under physician supervision. In several of the practices, the Company
has guaranteed that the net revenues of the practice will not decrease below the
net revenues that existed immediately prior to the agreement with the Company.
Under most management services agreements entered into after April 30, 1996, the
physicians receive a portion of the operating income of the practice which
amounts vary depending on the profitability of the practice, In 1997, the
Emerging Issues Task Force of the Financial Accounting Standards Board issued
EITF 97-2 concerning the consolidation of physician practice revenues. PPMs are
required to consolidate financial information of a physician where the PPM
acquires a "controlling financial interest" in the practice through the
execution of a contractual management agreement even though the PPM does not own
a controlling equity interest in the physician practice. EITF 97-2 outlines six
requirements for establishing a controlling financial interest. The Company
adopted EITF 97-2 in the fourth quarter of its fiscal year ended January 31,
1999. Adoption of this statement reduced previously reported revenues and
expenses for the three and six months ended July 31, 1998 by $17.6 million and
$34.8 million, respectively. During August 1998, the Company announced its plan
to divest and exit the PPM business. The Company is currently working to
complete these divestitures and the majority of these assets are recorded as
assets held for sale at July 31, 1999.
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Results of Operations
The following table shows the percentage of net revenue represented by
various expense categories reflected in the Consolidated Statements of
Operations. The information that follows should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
------ ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Salaries, wages and benefits 33.0% 29.7% 32.3% 29.0%
Supplies 21.3% 19.2% 22.4% 18.0%
Depreciation and amortization 6.4% 4.6% 6.2% 4.4%
Rent expense 8.5% 6.3% 7.9% 6.0%
Provision for bad debts 2.1% 1.2% 1.5% 1.2%
Gain on sale of assets 0.0% (5.8%) 0.0% (3.4%)
Non-recurring expenses 31.7% 6.9% 14.3% 3.3%
Other (primarily capitation expense) 51.9% 35.8% 47.9% 33.5%
------ ----- ----- -----
Total operating costs and administrative expenses 154.9% 97.9% 132.5% 92.0%
Interest expense, net 4.2% 2.3% 4.3% 2.3%
(Income) from investment in affiliate 0.0% (0.3%) 0.0% (0.3%)
------ ----- ----- -----
Income (loss) before taxes and extraordinary item (59.1%) 0.1% (36.8%) 6.0%
Income tax expense 0.1% 0.0% 0.0% 2.0%
------ ----- ----- -----
Income (loss) before extraordinary item (59.2%) 0.1% (36.8%) 4.0%
Extraordinary item, net of tax 99.6% 0.0% 44.9% 0.0%
------ ----- ----- -----
Net income (loss) (158.8%) 0.1% (81.7%) 4.0%
====== ===== ===== =====
</TABLE>
The Three and Six Months Ended July 31, 1999 Compared to the Three and Six
Months Ended July 31, 1998
The following discussion reviews the results of operations for the three
and six months ended July 31, 1999 (the "2000 Quarter" and "2000 Period"),
respectively, compared to the three and six months ended July 31, 1998 (the
"1999 Quarter" and "1999 Period"), respectively.
Revenues
During the 2000 Quarter and the 2000 Period the Company derived
revenues primarily from the following segments: provider network management,
site management organizations, real estate services and assets held for sale.
Revenues from provider network management are derived from management
services to management service organizations and administrative services to
health plans which include reviewing, processing and paying claims and
subcontracting with specialty care physicians to provide covered services.
Revenues from site management organizations are derived primarily from
services provided to pharmaceutical companies for clinical trials. Revenues
from real estate services are derived from the provision of a variety of
services which include development fees, general contracting management fees,
leasing and marketing fees, project cost savings income and consulting fees.
Revenues from assets held for sale are derived primarily from providing the
following services: physician practice management, diagnostic imaging,
radiation therapy, home healthcare, infusion therapy and lithotripsy.
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<PAGE>
Net revenues were $49.9 million and $110.5 million during the 2000
Quarter and 2000 Period, respectively. Of this amount, $13.4 million and
$30.7 million or 26.8% and 27.8% of such revenues was attributable to
provider network management, $8.8 million and $17.6 million or 17.7% and
15.9% was related to site management organizations; $0.3 million and $0.4
million or 0.7% and 0.4% was attributable to real estate services; and $27.3
million and $61.7 million or 54.7% and 55.8% was attributable to assets held
for sale.
Net revenues were $77.4 million and $161.6 million during the 1999
Quarter and 1999 Period, respectively. Of this amount, $18.4 million and
$37.5 million or 23.8% and 23.2% of such revenues was attributable to
provider network management; $9.1 million and $19.2 million or 11.8% and
11.9% was related to site management organizations; $1.0 million and $8.0
million or 1.3% and 5.0% was attributable to real estate services; and $48.8
million and $96.5 million or 63.1% and 59.7% was attributable to assets held
for sale.
The Company's net revenues from provider network management services
decreased by $5.0 million from $18.4 million for the 1999 Quarter to $13.4
million for the 2000 Quarter and by $6.8 million from $37.5 million for the
1999 Period to $30.7 million for the 2000 Period. The decrease is primarily
attributable to a reduction in capitation revenue from one contract managed
by the Company. The Company's net revenues from site management organizations
decreased by $0.3 million from $9.1 million for the 1999 Quarter to $8.8
million for the 2000 Quarter and by $1.6 million from $19.2 million for the
1999 Period to $17.6 million for the 2000 Period. The Company's net revenues
from real estate services decreased by $0.7 million from $1.0 million for the
1999 Quarter to $0.3 million for the 2000 Quarter and by $7.6 million from
$8.0 million for the 1999 Period to $0.4 million for the 2000 Period,
primarily due to the Company's decision in the fourth quarter ended January
31, 1999 to significantly downsize its real estate services segment in
connection with the repositioning of the Company and in part due to the
resignation of Bruce A. Rendina as Chief Executive Officer of this segment.
The Company's net revenues from assets held for sale decreased by $21.5
million from $48.8 million for the 1999 Quarter to $27.3 million for the 2000
Quarter and by $34.8 million from $96.5 million for the 1999 Period to $61.7
million for the 2000 Period primarily attributable to the asset divestitures.
The Company is currently negotiating the termination of a management services
agreement to manage a network of over 100 physicians. The ultimate resolution
of the negotiations and collection of any receivables due from the beginning
of the year is uncertain; therefore the Company has not recorded revenue from
the agreement for the 2000 Quarter and the 2000 Period. For the 1999 Quarter
and the 1999 Period, the Company recorded $5.1 million and $10.1 million of
net revenues (which are included in revenues from the assets held for sale
segment) from this agreement.
Expenses
The Company's salaries, wages and benefits decreased by $6.5 million from
$23.0 million or 29.7% of net revenues during the 1999 Quarter to $16.5 million
ox 33.0% of net revenues during the 2000 Quarter and by $11.1 million from $46.8
million or 29.0% of net revenues during the 1999 Period to $35.7 million or
32.3% of net revenues during the 2000 Period. The decrease in dollars is
primarily attributable to the reductions in personnel in conjunction with the
asset divestitures.
The Company's supplies expense was $14.9 million or 19.2% of net
revenues during the 1999 Quarter and $10.6 million or 21.3% of net revenues
during the 2000 Quarter and was $29.0 million or 18.0% of net revenues during
the 1999 Period and $24.8 million or 22.4% of net revenues during the 2000
Period. The increase in supplies expense as a percentage of net revenues was
primarily due to the relative increase, due to other asset divestitures, in
the size of the Company's infusion and cancer service businesses, which are
more supply intensive and for which the cost of pharmaceutical supplies is
higher.
The Company's rent expense decreased by $0.7 million from $4.9 million or
6.3% of net revenues during the 1999 Quarter to $4.2 million or 8.5% of net
revenues during the 2000 Quarter and by $1.0 million from $9.7 million or 6.0%
of net revenues during the 1999 Period to $8.7 million or 7.9% of net revenues
during the 2000 Period. The decrease in dollars is primarily a result of the
asset divestitures.
The Company's gain on sale of assets of $4.5 million and $5.4 million
during the 1999 Quarter and 1999 Period, respectively, represented gains from
the sale of real estate of approximately $4.5 million during July 1998 and from
the sale of a radiation therapy center of approximately $0.9 million during
February 1998.
The Company's nonrecurring charge of $5.3 million during the 1999
Quarter and 1999 Period represents the charge resulting from the termination
of several physician management and employment agreements. The Company's
nonrecurring charge of $15.8 million during the 2000 Quarter and 2000 Period
represents a $14.1 million
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<PAGE>
impairment charge for a physician practice management agreement and a
management service organization and the balance primarily represents
additional severance costs in conjunction with the sale of assets and the
repositioning of the Company.
The Company's other expenses decreased by $1.8 million from $27.7 million
or 35.8% of net revenues during the 1999 Quarter to $25.9 million or 52.0% of
net revenues during the 2000 Quarter and by $1.2 million from $54.2 million or
33.6% of net revenues during the 1999 Period to $53.0 million or 48.0% of net
revenues during the 2000 Period. The increase in other expenses as a percentage
of net revenues is primarily due to an increase in capitation revenues related
to the Company's provider network management services as a percentage of total
revenues.
The Company's interest expense increased by $0.3 million from $1.8 million
or 2.3% of net revenues during the 1999 Quarter to $2.1 million or 4.2% of net
revenues during the 2000 Quarter and by $1.1 million from $3.6 million or 2.3%
of net revenues during the 1999 Period to $4.7 million or 4.3% of net revenues
during the 2000 Period. The acceleration of the amortization of debt issuance
costs related to the line of credit which was repaid during the 2000 Period
resulted in increased interest expense of $0.3 million during the 2000 Period.
The Company's extraordinary item of $49.6 million during the 2000
Quarter and the 2000 Period represents the charge resulting from divestitures
or disposals that had occurred subsequent to August 1998 as well as the
write-down of the assets of the businesses being held for sale at July 31,
1999. The carrying value of the assets of these businesses was written down
to their estimated net realizable value (less costs to sell). The $49.6
million extraordinary charge during the second quarter consisted of (i)
approximately $14.3 million primarily due to the Company's decision in the
second quarter to exit a physician practice management agreement and dispose
of its investments in a surgery center and a network of physicians, and (ii)
approximately $35.3 million primarily resulting from the revision of the
estimated proceeds, based on current fair market value estimates, for the
sale of the remaining businesses originally identified to be divested or
disposed. The $35.3 million component of the extraordinary item is primarily
attributable to the following: an approximately $19.0 million reduction in
expected proceeds from the sale of the diagnostic imaging assets, an
approximately $12.0 million reduction in expected proceeds from the sale of
the physician practices, and the balance represents a reduction in expected
proceeds from the sale of the other ancillary service businesses. The
reduction in diagnostic imaging proceeds is primarily attributable to a
reduction in the profitability of the three Florida imaging centers operated
by the Company as well as additional costs to be incurred by the Company
including assigning the Administrative Service Agreements for the imaging
centers in New York. The diagnostic imaging industry is experiencing gradual
reimbursement rate declines and in Florida there is pending legislation aimed
at decreasing personal injury revenue which affects the Company's Florida
imaging centers. The reduction in PPM proceeds is primarily attributable to
the continued decline in the PPM industry.
The Company's loss prior to income taxes and extraordinary item during
the 2000 Quarter and 2000 Period was $29.5 million and $40.6 million compared
to income prior to income taxes during the 1999 Quarter and 1999 Period of
$0.1 million and $9.7 million. The deterioration of income during the 2000
Quarter and 2000 Period is primarily due to several factors including: (i)
The downsizing of the real estate services segment which was done in
connection with the repositioning of the Company, and in part due to the
resignation of Bruce A. Rendina as Chief Executive Officer of the Company's
real estate services segment (the real estate services segment generated a
pretax loss of $1.2 million and $1.9 million during the 2000 Quarter and the
2000 Period compared to pretax income of $3.4 million and $8.0 million during
the 1999 Quarter and the 1999 Period), (ii) the deterioration of the
operating results of certain of the businesses divested or to be divested
(the assets held for sale segment generated a pretax loss of $4.0 million and
$4.9 million during the 2000 Quarter and the 2000 Period compared to pretax
income of $1.7 million and $7.9 million during the 1999 Quarter and the 1999
Period), and (iii) the Company is in the process of repositioning and
building infrastructure to expand and integrate its two primary business
lines: provider network management and pharmaceutical services (site
management organizations) (combined these businesses generated a pretax loss,
prior to nonrecurring charges, of $5.9 million and $9.9 million during the
2000 Quarter and the 2000 Period compared to pretax income of $0.5 million
and $3.4 million during the 1999 Quarter and the 1999 Period).
The Company's income tax expense decreased by $3.1 million from $3.2
million or 2.0% of pretax income during the 1999 Period to $0.1 million or 0.0%
of pretax loss during the 2000 Period, which is primarily due to the Company
having a net loss for the 2000 Period.
Real Estate Services
Prior to the repositioning, the Company had historically derived
significant revenues from real estate services. During August 1998, Bruce A.
Rendina resigned as CEO and President of DASCO (the Company's real estate
services subsidiary) and Vice Chairman of the Company. During September 1998,
Mr. Rendina entered into a Business Agreement (the "Business Agreement") with
the Company. The Business Agreement was entered into in settlement of certain
claims by both the Company and Mr. Rendina relating to Mr. Rendina's future
competition with the Company. The Business Agreement provides that the
Company has the exclusive development rights to 27 separate projects located
in 12 separate states. In addition, the Company and Mr. Rendina agreed to
share fees with respect to five asset conversion projects and six medical
facility development projects whereby Mr. Rendina is entitled to the first
25% of the projected development fees received on any shared fee project and
the Company and Mr. Rendina evenly split the remaining portion of the fees
for such projects. The Business Agreement also permits
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<PAGE>
Mr. Rendina and his affiliates to pursue independently the development of six
separate projects in five states. Finally, the Company and Mr. Rendina have
provided mutual releases of each other with respect to any event related to the
business and employment relationships of the parties.
During the year ended January 31, 1999, the Company recorded a goodwill
impairment write-down of $9.1 million which eliminated the remaining goodwill
of the real estate services segment. The asset of goodwill was determined to
have been impaired because of the Company's decision to significantly
downsize the real estate segment. Subsequent to July 31, 1999, the Company
sold the remaining operations of the real estate services segment.
During the 2000 Quarter and the 2000 Period, the Company's real estate
services generated revenues of $0.3 million and $0.4 million and a pretax loss
of $1.2 million and $1.9 million, respectively.
Liquidity and Capital Resources
Cash used by operating activities was $15.4 million during the 2000
Period. Cash provided by operating activities was $1.1 million during the
1999 Period. At July 31, 1999, the Company's principal sources of liquidity
consisted of working capital of $61.2 million which included $14.7 million in
cash, $10.8 million in a tax refund receivable (which payment was received by
the Company subsequent to July 31, 1999) and $45.1 million in assets held for
sale (see below for further discussion of assets held for sale) offset by the
current portion of debt and capital leases. The Company also had $49.8
million of current liabilities, including approximately $19.5 million of
indebtedness which is comprised primarily of $17.6 million outstanding under
the line of credit (see below for further discussion of the line of credit).
Cash provided by investing activities was $15.6 million during the 2000
Period and primarily represented the net cash received from the sale of
assets of $18.6 million, offset by the funds required by the Company for
capital expenditures of $2.5 million and additional purchase price of $0.9
million. Cash used by investing activities was $8.6 million during the 1999
Period. This primarily represents the total funds required by the Company for
acquisitions and capital expenditures of $11.6 million and advances under
notes receivable of $1.8 million offset by the cash received from the sale of
assets of $4.8 million.
Cash provided by financing activities was $4.3 million during the
2000 Period and primarily represented proceeds from the issuance of debt of
$21.7 million, offset by the repayment of debt of $16.6 million and
the purchase of treasury stock of $0.8 million. Cash used by financing
activities was $7.1 million during the 1999 Period and primarily represented the
repayment of debt of $7.1 million.
In conjunction with various acquisitions that have been completed, the
Company may be required to make various contingent payments in the event that
the acquired companies attain predetermined financial targets during established
periods of time following the acquisitions. If all of the applicable financial
targets were satisfied, for the periods covered, the Company would be required
to pay an aggregate of approximately $17.3 million over the next four years, of
which $4.0 million is accrued as a current liability at July 31, 1999 and $5.0
million represents a minimum option price for an additional 29% ownership
interest in a network which may be required to be purchased by the Company
during November 1999. The payments, if required, are payable in cash and/or
Common Stock of the Company. In addition, in conjunction with the acquisition of
a clinical research center and in conjunction with a joint venture entered into
by the Company during the year ended January 31, 1998, the Company may be
required to make additional contingent payments based on revenue and
profitability measures over the next five years. The contingent payment will
equal 10% of the excess gross revenue, as defined, provided the gross operating
margins exceed 30%.
During July 1997, the Company entered into a management services agreement
to manage a network of over 100 physicians in New York, In connection with this
transaction, the Company may expend, in certain circumstances, up to $40.0
million (of which none has been expended as of July 31, 1999) to be utilized for
the expansion of the network. The Company is currently in the process of
terminating this management agreement which, if terminated, is expected to
result in the elimination of any additional expenditures to expand this network.
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During February 1998, the Company completed the formation of an MSO in New
York, one-third of which it owns. The owners of the remaining two-thirds of the
MSO have the right to require the Company to purchase their interests at the
option price, which is based upon earnings, during years six and seven.
In conjunction with certain of its acquisitions the Company has agreed to
make payments in shares of Common Stock of the Company at a predetermined future
date. The number of shares to be issued are generally determined based upon the
average price of the Company's Common Stock during the five business days prior
to the date of issuance. As of July 31, 1999, the Company had committed to issue
$1.1 million of Common Stock of the Company using the methodology discussed
above. This amount is included in other long-term liabilities on the balance
sheet. The Company also guarantees a loan in the amount of $3.5 million which
matures in March 2000.
In conjunction with the repositioning (as described earlier in
"Significant Events"), during the year ended January 31, 1999 the Board of
Directors approved its plan to divest and exit the Company's PPM business and
certain of its ancillary services businesses including diagnostic imaging,
lithotripsy, radiation therapy, home health and infusion therapy. During the
second quarter ended July 31, 1999, the Company also decided to terminate an
additional physician practice management agreement, divest its investments in
a surgery center and a network of physicians, and sell its real estate
service operations. The revenue and pretax loss of these businesses which
have been identified to be divested or disposed for the six months ended July
31, 1999 were $61.7 million and $4.9 million, Based on fair market value
estimates, which have primarily been derived from purchase agreements,
letters of intent, letters of interest and discussions with prospective
buyers, the net realizable value of the remaining assets identified to be
divested or disposed was $45.1 million at July 31, 1999 (of which
approximately $35.3 million was sold subsequent to July 31, 1999) which has
been reflected as an asset held for sale on the balance sheet at July 31,
1999.
In conjunction with a physician practice management agreement with a
physician practice in Florida, the Company has filed suit against the
practice to enforce the guarantees executed in connection with the management
agreement. The practice has filed a counterclaim. The Company intends to
prosecute and defend the case.
The Board of Directors of the Company authorized a share repurchase plan
pursuant to which the Company may repurchase up to $15.0 million of its Common
Stock from time to time on the open market at prevailing market prices. As of
July 31, 1999 the Company has repurchased 806,000 shares at a net purchase price
of approximately $1.7 million.
The development and implementation of the Company's management information
system will require ongoing capital expenditures. The Company has estimated the
total costs to be incurred for completion of its Year 2000 strategy is
approximately $3.0 million, which includes costs for new systems and system
upgrades which would have been incurred regardless of the need to remedy the
Year 2000 issue. The Company expects that its working capital of $61.2 million
at July 31, 1999, which includes cash of $14.7 million and the expected cash to
be generated from the assets held for sale, will be adequate to satisfy the
Company's cash requirements for the next 12 months. The Company's capital needs
over the next several years may exceed capital generated from operations.
During March 1999, the Company obtained a new $30.0 million revolving
line of credit which has a three-year term and availability based upon
eligible accounts receivable. Approximately $9.2 million of proceeds from the
new line of credit were used to repay the previous line of credit. The new
line of credit is secured by the assets of the Company, limits the ability of
the Company to incur certain indebtedness and make certain dividend payments,
and requires the Company to comply with customary covenants. At July 31,
1999, approximately $17.6 million was outstanding under the line.
Risks Associated With Year 2000
The Year 2000 date change issue is believed to affect virtually all
companies and organizations. If not corrected, many computer applications could
fail or create erroneous results by or at the year 2000. The Company recognizes
the need to ensure its operations will not be adversely impacted by the
inability of the Company's information systems to process data having dates on
or after January 1, 2000 (the "Year 2000" issue). The Company has completed its
full assessment of the Year 2000 issue.
The Company has a committee, led by its Chief Information Officer, to
build, develop and implement the information systems required for its
pharmaceutical and provider network management services business lines and to
assess and remediate the effect of the Year 2000 issue on the Company's
operations. The Company is contacting its clients, principal suppliers and other
vendors to assess whether their Year 2000 issues, if any, will affect the
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<PAGE>
Company. There is no guarantee that the systems of other companies on which the
Company relies will be corrected in a timely manner or that the failure to
correct such systems will not have a material adverse effect on the Company's
systems. Many Year 2000 deficiencies have already been identified and addressed
through planned systems and infrastructure evolution, replacement or
elimination. The continuing program described below is designed to permit the
Company to identify and address all remaining Year 2000 systems and deficiencies
well in advance of the millenium change.
The first and second phases of the program, which are, conducting an
inventory of all systems and deficiencies that may be affected by the Year
2000 issue as well as the assessment and categorization of all the
inventoried systems and deficiencies by level of priority, reflecting their
potential impact on business continuation, are substantially complete. Based
on this prioritization, the third phase of developing detailed plans to
address each Year 2000 issue, and bring each system to full compliance as
well as a general contingency plan in the event that any critical systems
cannot be made fully compliant by January 1, 2000, is underway.
The Company's information technology systems ("IT Systems") can be broadly
categorized into the following areas: (i) clinical studies information systems,
(ii) managed care information systems, (iii) other administrative information
systems including financial accounting, payroll, human resource and other
desktop systems and applications and (iv) information systems of business held
for sale.
The Company recognizes that investment in information systems is integral
to its operations. The majority of the Company's technology expenditures are
related to the development and implementation of both clinical information and
managed care information systems that are Year 2000 compliant. The clinical
information systems, currently implemented in the Clinical Studies locations,
are expected to be fully operational at all sites by November 30, 1999. The
managed care information systems are expected to be fully operational by
December 31, 1999. The Company believes that the Year 2000 issue-related
remediation costs incurred through the 2000 Quarter have not been material to
its results of operations. The Company has estimated the total costs to be
incurred for completion of its Year 2000 strategy is approximately $3.0 million,
which includes costs for new systems and system upgrades which would have been
incurred regardless of the need to remedy the Year 2000 issue.
The Company's financial accounting system is fully Year 2000 compliant
at a total cost of approximately $30,000. The Company expects to complete
within the next month the disposition of the majority of the remaining assets
held for sale. The Company is in the process of completing the first and
second phases of the program discussed above for these remaining assets held
for sale in the event that there are assets which are not sold or divested
prior to December 31, 1999. The Company expects to have these phases complete
within the next 30 days and will develop detailed contingency plans to
address each Year 2000 issue identified in the event the assets have not yet
been sold at that time. The Company believes that it will be able to
adequately identify and address any Year 2000 issues that may arise related
to the assets currently included in assets held for sale which are not sold
by December 31, 1999.
Risks involved in the managed care applications include the risk that
failures in the Company's managed care systems causing a backlog of claims or
failures at one or more of the Company's payers will cause a delay in the
payment of claims and capitation payments, either of which could negatively
affect cash flows of the Company. The Company intends to develop contingency
plans for failures at the Company's electronic trading partners. The Company
intends to have contingency plans in place by October 1999. The nature of the
Year 2000 issue, and the lack of historical experience in addressing it,
however, could result in unforeseen risks.
The Company bills and collects for medical services from numerous third
party payors in operating its business. These third parties include fiscal
intermediaries that process claims and make payments on behalf of the
Medicare program as well as insurance companies, HMO's and other private
payors. As part of the Company's Year 2000 strategy, a comprehensive survey
has been sent to all significant payors to assess their timeline for Year
2000 compliance and the impact to the Company of any potential interruptions
in services or payments. The Company is working to accumulate the results by
September 30, 1999. The Company is in the process of contacting its principal
clients, suppliers and other vendors concerning the state of their Year 2000
compliance. Until that effort is completed, the Company cannot be assured
that such third party systems are or will be Year 2000 compliant and the
Company is unable to estimate at this time the impact on the Company if one
or more third party systems is not Year 2000 compliant.
The foregoing assessment is based on information currently available to
the Company. The Company can provide no assurance that applications and
equipment that the Company believes to be Year 2000 compliant will not
experience problems. Failure by the Company or third parties on which it relies
to resolve Year 2000 problems could have a material adverse effect on the
Company's results of operations.
-20-
<PAGE>
Factors to be Considered
The part of this Quarterly Report on Form 10-Q captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain forward-looking statements which involve risks and
uncertainties, Readers should refer to a discussion under "Factors to be
Considered" contained in Part I, Item 1 of the Company's Annual Report on Form
10-K for the year ended January 31, 1999 concerning certain factors that could
cause the Company's actual results to differ materially from the results
anticipated in such forward-looking Statements. This discussion is hereby
incorporated by reference into this Quarterly Report.
-21-
<PAGE>
PART II--OTHER INFORMATION
Item 2. Changes in Securities -- Recent Sales of Unregistered Securities
During April 1999, the Company issued 42,585 shares of Common Stock
pursuant to an acquisition agreement entered into during the fiscal year
ended January 31, 1998. The sale of these shares and the acquisition in
connection with which they were sold were reported and described in the
Company's Annual Report on Form 10-K for the year ended January 31, 1999. The
sale of the aforementioned shares of Common Stock were not registered under
the Securities Act of 1933, as amended, in reliance upon Section 4(2) thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of September, 1999.
INNOVATIVE CLINICAL SOLUTIONS, LTD.
By: /s/ Michael Heffernan
--------------------------------------
Chairman, Chief Executive Officer,
President and Chief Accounting Officer
-23-
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