INNOVATIVE CLINICAL SOLUTIONS LTD, 10-Q, 2000-12-21

INNOVATIVE CLINICAL SOLUTIONS LTD
10-Q, 2000-12-21
MISC HEALTH & ALLIED SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

------------------------

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________

COMMISSION FILE NUMBER 0-27568

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INNOVATIVE CLINICAL SOLUTIONS, LTD.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 65-0617076
(State of incorporation) (I.R.S. Employer Identification No.)

10 DORRANCE STREET, SUITE 400, 02903
PROVIDENCE, RHODE ISLAND (Zip Code)
(Address of principal executive
offices)
</TABLE>

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 13 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 December 8, 2000, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 11,998,972.

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INNOVATIVE CLINICAL SOLUTIONS, LTD.
QUARTERLY REPORT ON FORM 10-Q
INDEX

<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Consolidated Balance Sheets--October 31, 2000 (unaudited)
(Successor) and January 31, 2000 (Predecessor). The purchase
method of accounting was used to record the fair value of
assets and assumed liabilities of the reorganized company at
September 21, 2000. Accordingly, the accompanying balance
sheet as of October 31, 2000 is not comparable in certain
material respects to such balance sheet as of any prior
period since the balance sheet as of October 31, 2000 is
that of a reorganized entity................................ 2
Consolidated Statements of Operations (unaudited) -- Period
ended October 31, 2000 (Successor) and Three and Nine Months
Ended October 31, 1999 and Eight Weeks and Period Ended
September 20, 2000 (Predecessor)............................ 3
Consolidated Statements of Cash Flows (unaudited) -- Period
ended October 31, 2000 (Successor) and Three and Nine Months
Ended October 31, 1999 and Eight Weeks and Period Ended
September 20, 2000 (Predecessor)............................ 5
Notes to Consolidated Financial Statements (unaudited) --
Period ended October 31, 2000 (Successor) and Three and Nine
Months Ended October 31, 1999 and Eight Weeks and Period
Ended September 20, 2000 (Predecessor)...................... 6-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16-22

PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 23
Item 2. Changes in Securities and Use of Proceeds................... 23
Item 3. Defaults Upon Senior Securities............................. 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
Item 5. Other Information........................................... 23
Item 6. Exhibits and Reports on Form 8-K............................ 23
</TABLE>

i
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PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVATIVE CLINICAL SOLUTIONS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

The purchase method of accounting was used to record the fair value of
assets and assumed liabilities of the reorganized company at September 21, 2000.
Accordingly, the accompanying balance sheet as of October 31, 2000 is not
comparable in certain material respects to such balance sheet as of any prior
period since the balance sheet as of October 31, 2000 is that of a reorganized
entity.

<TABLE>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
JANUARY 31, OCTOBER 31,
2000 2000
--------- -------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 25,558 $ 7,891
Receivables:
Accounts receivable, net................................ 16,193 12,417
Other receivables....................................... 4,710 2,103
Notes receivable........................................ 7,222 1,190
Prepaid expenses and other current assets................. 394 558
Assets held for sale...................................... 2,419 --
--------- -------
Total current assets.................................. 56,496 24,159
Property, plant and equipment, net.......................... 9,099 6,053
Notes receivable............................................ 4,892 4,124
Goodwill, net............................................... 12,293 --
Reorganization value in excess of amounts allocable to
identifiable assets....................................... -- 55,221
Restricted cash............................................. 2,077 2,000
Other assets................................................ 2,454 504
--------- -------
Total assets.......................................... $ 87,311 $92,061
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Bank line of credit....................................... $ 10,463 $ 4,638
Current portion of debt and capital leases................ 1,255 2,125
Convertible subordinated debentures....................... 100,000 --
Accounts payable.......................................... 11,859 9,690
Accrued compensation...................................... 2,060 2,070
Accrued and other current liabilities..................... 23,575 22,117
--------- -------
Total current liabilities............................. 149,212 40,640
Long-term debt and capital leases........................... 4,234 2,195
Other long-term liabilities................................. 95 628
Minority interest........................................... 492 --
--------- -------
Total liabilities..................................... 154,033 43,463
--------- -------
Commitments and Contingencies

Stockholders' equity:
Common stock (new), par value $.01, 40,000 shares
authorized, 11,999 issued and outstanding at October 31,
2000.................................................... 120
Common stock (old), par value $.01, 40,000 shares
authorized, 33,387 shares issued and 32,011 shares
outstanding at January 31, 2000......................... 320 --
Treasury stock (old)...................................... (2,664) --
Additional paid in capital................................ 224,771 49,880
Accumulated deficit....................................... (289,149) (1,402)
--------- -------
Total stockholders' equity (deficit)........................ (66,722) 48,598
--------- -------
Total liabilities and stockholders' equity.................. $ 87,311 $92,061
========= =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

2
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
--------------------------- ---------
EIGHT FIVE
THREE MONTHS WEEKS WEEKS
ENDED ENDED ENDED
OCTOBER 31, SEPTEMBER 20, OCTOBER 31,
1999 2000 2000
-------------- ---------- ---------
<S> <C> <C> <C>
Net revenues from services........................... $28,429 $ 5,412 $ 3,383
Net revenues from management service agreements...... 15,895 8,895 5,559
Net revenues from real estate services............... 47 0 0
------- -------- -------
Total revenue.................................. 44,371 14,307 8,942
------- -------- -------
Operating costs and administrative expenses:
Salaries, wages and benefits....................... 13,195 3,817 2,385
Professional fees.................................. 4,689 852 532
Utilities.......................................... 1,240 252 157
Depreciation and amortization...................... 2,287 396 520
Rent............................................... 3,222 667 417
Provision for bad debts............................ 463 730 0
Nonrecurring expenses.............................. 0 1,070 0
Capitation expenses and other...................... 27,112 9,885 6,180
------- -------- -------
Total operating costs and administrative
expenses..................................... 52,208 17,669 10,191
------- -------- -------
Loss from operations................................. (7,837) (3,362) (1,249)
Interest (expense), net.............................. (2,207) (245) (153)
Income from investment in affiliates................. 58
Reorganization Items................................. 0 (666) 0
------- -------- -------
Loss before income taxes and extraordinary items..... (9,986) (4,273) (1,402)
Income Taxes (Benefit)............................... (53) 1,502 0
------- -------- -------
Loss before extraordinary item....................... (9,933) (5,775) (1,402)
Extraordinary Gain-Cancellation of Debt Income....... 100,000
------- -------- -------
Net Income (Loss).................................... $(9,933) $ 94,225 $(1,402)
======= ======== =======
Net loss per share--basic (Note 8)................... * * (.12)
Weighted average shares outstanding--basic........... * * 11,999
</TABLE>

* EPS for the Predecessor Company is not meaningful.

The accompanying notes are an integral part of the consolidated financial
statements.

3
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
------------------------ -----------
NINE MONTHS PERIOD 5 WEEKS
ENDED ENDED ENDED
OCTOBER 31, SEPTEMBER 20, OCTOBER 31,
1999 2000 2000
----------- ---------- -----------
<S> <C> <C> <C>
Net revenues from services........................... $ 108,953 $ 27,560 $ 3,383
Net revenues from management service agreements...... 45,500 38,195 5,559
Net revenues from real estate services............... 434 -- 0
--------- -------- -------
Total revenue.................................. 154,887 65,755 8,942
Operating costs and administrative expenses:
Salaries, wages and benefits....................... 48,847 18,712 2,385
Professional fees.................................. 14,111 8,240 532
Utilities.......................................... 3,586 1,292 157
Depreciation and amortization...................... 9,099 1,893 520
Rent............................................... 11,921 4,049 417
Provision for bad debts............................ 2,127 1,048 0
Nonrecurring expenses.............................. 15,825 9,091 0
Capitation expenses and other...................... 93,112 42,616 6,180
--------- -------- -------
Total operating costs and administrative
expenses..................................... 198,628 86,941 10,191
--------- -------- -------
Loss from operations................................. (43,741) (21,186) (1,249)
Interest (expense), net.............................. (6,925) (4,616) (153)
Income from investment in affiliates................. 58 0 0
Reorganization Items................................. (666) 0
--------- -------- -------
Loss before income taxes and extraordinary item...... (50,608) (26,468) (1,402)
Income Taxes......................................... 47 1,456 0
--------- -------- -------
Loss before extraordinary item....................... (50,655) (27,924) (1,402)
Extraordinary Loss-write-down of discontinued
assets............................................. (49,632)
Extraordinary Gain-cancellation of debt income....... 100,000
--------- -------- -------
Net Income (Loss).................................... $(100,287) $ 72,076 $(1,402)
========= ======== =======
Net loss per share -- basic (Note 8)................. * * (.12)
Weighted average shares outstanding -- basic......... * * 11,999
</TABLE>

* EPS for the Predecessor Company is not meaningful.

The accompanying notes are an integral part of the consolidated financial
statements.

4
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(IN THOUSANDS)

<TABLE>
PREDECESSOR COMPANY SUCCESSOR
----------------------- COMPANY
NINE ---------
MONTHS PERIOD PERIOD
ENDED ENDED ENDED
OCTOBER 31, SEPTEMBER 20, OCTOBER 31,
1999 2000 2000
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(100,287) $ 72,076 $ (1,402)
Noncash items included in net income:
Extraordinary gain--cancellation of debt............. (100,000)
Extraordinary loss--write down of discontinued
assets............................................. 49,632
Depreciation and amortization........................ 9,099 1,893 520
Nonrecurring charges................................. 14,204 5,074
Other................................................ (59)
Changes in receivables................................. (4,785) 6,218 500
Changes in accounts payable and accrued liabilities.... 795 (7,254) 540
Changes in other assets................................ 13,685 990 483
--------- -------- --------
Net cash used by operating activities before
reorganization items............................... (17,716) (21,003) 641
--------- -------- --------
Operating cash flows from reorganization items:
Cancellation of accrued interest on debentures......... (4,218)
Bankruptcy-related professional fees................... 1,350
Writeoff of unamortized balance of debenture finance
costs................................................ 1,838
--------
Net Cash used by Reorganization Items.................. (1,030)
--------- -------- --------
Net Cash used by Operating Activities.................. (17,716) (22,033) 641
--------- -------- --------

Cash flows from investing activities:
Capital expenditures................................... (4,593) (547) (113)
Sale of assets......................................... 51,171 4,672
Notes receivable, net.................................. 1,344 6,550 250
Acquisitions, net of cash acquired..................... (1,404)
--------- -------- --------
Net cash provided by investing activities............ 46,518 10,675 137
--------- -------- --------

Cash flows from financing activities:
Proceeds from Revolving Credit Facility, net........... 4,638
Offering costs and other............................... 28 77
Proceeds (Repayment) of Line of Credit, net............ 521 (11,802)
Purchase of treasury stock............................. (1,471)
--------- -------- --------
Net cash provided (used) by financing activities..... (922) (11,725) 4,638
--------- -------- --------

Increase (Decrease) in cash and cash equivalents......... $ 27,880 $(23,083) $ 5,416

Cash and cash equivalents, beginning of period........... $ 10,137 $ 25,558 $ 2,475
--------- -------- --------
Cash and cash equivalents, end of period................. $ 38,017 $ 2,475 $ 7,891
========= ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

5
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(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, 2000. Operating results for the
three and nine months ended October 31, 2000 are not necessarily indicative of
results that may be expected for the year.

The Company's extensive losses in the two year period ended January 31,
2000, its negative cash flows from operations and its net negative equity, as
well as management's assessment that the Company would be unable to retire its
$100 million 6.75% Convertible Subordinated Debentures due 2003 (the
"Debentures") at maturity raised substantial doubt as of January 31, 2000 about
its ability to continue as a going concern. As a result, the Company's then
independent accountants issued a going concern opinion in their report on the
Company's financial statements for the year ended January 31, 2000.

The Company and its subsidiaries filed petitions for relief under Chapter 11
of the United States Bankruptcy Code ("Chapter 11") on July 14, 2000 (the
"Filing") seeking to recapitalize the Company through the exchange of the
Debentures for common stock pursuant to a joint prepackaged plan of
reorganization under Chapter 11 (the "Prepackaged Plan"). The Prepackaged Plan
was consummated and the Company emerged from Chapter 11 on September 21, 2000.
Throughout the pendency of the bankruptcy proceedings the Company (the
"Predecessor") operated its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). The reorganized Company (the "Successor") adopted
fresh-start reporting (Note 2) and gave effect to its emergence from bankruptcy
and consummation of the Prepackaged Plan on September 21, 2000.

Under fresh-start reporting, the final consolidated balance sheet as of
September 21, 2000 became the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting has been reflected in the
accompanying consolidated balance sheets as of October 31, 2000 the consolidated
balance sheet as of that date is not comparable in certain material respects to
any balance sheet as of any prior date or for any prior period since the balance
sheet as of October 31, 2000 is that of a reorganized entity. Accordingly, a
black line has been drawn between the Successor's balance sheet and the
Predecessor's balance sheet.

6
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
the Company's achieving increased revenues, along with gross margin and expense
levels that are reasonably consistent with its financial plans. The failure of
the Company to achieve profitable operations, notwithstanding the
recapitalization, may raise doubts about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
these uncertainties.

The Company's independent public accountants have advised the Company that,
if negative cash flow continues, this will result in their review of the
necessity for a going concern qualification in their opinion on the annual
financial statements.

2. PREPACKAGED PLAN AND FRESH-START REPORTING

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.

During the year ended January 31, 1999, the Board approved, consistent with
achieving its stated repositioning goal, a 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, home health and infusion therapy. In the second quarter of fiscal 2000,
the Company also decided to divest its investments in a surgery center and a
physician network, and sell its real estate service operations. All assets held
for sale had been sold as of April 30, 2000.

Due to market conditions affecting healthcare services companies generally,
the Company realized lower than expected proceeds from asset divestitures. The
revenue and pretax loss of these businesses which were divested or disposed for
the years ended January 31, 2000 and 1999 were $92.5 million and $70.5 million,
and $155.4 million and $96.3 million, respectively. Net loss for the years ended
January 31, 2000 and 1999 included an extraordinary item of $49.6 million (net
of tax of $0), and $96.8 million, respectively, which were primarily non-cash
charges related to these divestitures. These losses and the Company's highly
leveraged position, due principally to the Debentures, left the Company without
the financial resources to execute its strategic plan to grow the research,
clinical trials and network management sectors of its business. In order to
reduce its indebtedness, the Company entered into discussions with the owners of
more than 50% of the principal amount of the Debentures regarding the possible
exchange of some or all of the Debentures for equity in order to reduce the
Company's debt burden and improve the Company's ability to execute its strategic
plan. Subsequent negotiations resulted in the Prepackaged Plan, which provided
for the recapitalization of the Company through the exchange of newly issued
common stock of the Company (the "New Common Stock"), representing 90% of the
issued and outstanding capital stock following the recapitalization, for all of
the Debentures. In addition, under the Prepackaged Plan all issued and
outstanding Common Stock (the "Old Common Stock") was to be canceled and
replaced with New Common Stock, representing 10% of the Company's issued and
outstanding capital stock following the recapitalization.

7
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

2. PREPACKAGED PLAN AND FRESH-START REPORTING (CONTINUED)
On June 12, 2000, the Company commenced solicitation of acceptances of the
Prepackaged Plan from the beneficial holders of the Debentures (the
"Debentureholders"), the only impaired class of creditors under the Prepackaged
Plan and, accordingly, the only class entitled to vote on the Prepackaged Plan,
by causing a copy of a Pre-petition Solicitation and Disclosure Statement with
Respect to Joint Prepackaged Plan of Reorganization (the "Disclosure Statement")
together with a ballot to each Debentureholder. The voting period for the
solicitation ended on July 12, 2000. The solicitation resulted in the acceptance
of the Prepackaged Plan by the Debentureholders with respect to both the number
(more than one-half of the number of Debentureholders that actually voted) and
amount (Debentureholders holding at least two-thirds of the principal amount of
the Debentures actually voted) as required for confirmation of the Prepackaged
Plan under the Bankruptcy Code.

Following the Filing with the Bankruptcy Court on July 14, 2000 and
throughout the pendency of the bankruptcy proceedings, the Company continued to
operate its business and to pay post-petition claims of vendors and providers in
the ordinary course of business. Following a hearing held on August 23, 2000,
the Court entered an order confirming the Company's Prepackaged Plan on
August 25, 2000. Effectiveness of the Prepackaged Plan was conditioned on, among
other things, the execution and consummation of a new credit facility. (See
Note 7.) On September 21, 2000 the Company satisfied all conditions precedent to
the effectiveness of the Prepackaged Plan and, accordingly, the Prepackaged Plan
became effective on such date (the "Effective Date").

On the Effective Date, the Debentures, the Company's issued and outstanding
Old Common Stock and the Old Other Interests (defined in the Prepackaged Plan)
were canceled and extinguished and the holders thereof were entitled to receive
only the distributions, if any, to be made to such holders under the Prepackaged
Plan. Under the Prepackaged Plan, each Debenture holder received, for each
$1,000 in face amount of the Debentures held by such holder on the Effective
Date, 108 shares of New Common Stock, and each existing stockholder received for
each 31 shares of Old Common Stock held by such stockholder on the Effective
Date, 1 share of New Common Stock. New Common Stock was issued in whole shares
only, with any fractional share amounts rounded up or down, as applicable.
Since, under the Prepackaged Plan, no fractional shares of New Common Stock were
issued, any stockholder who held, as of the Effective Date, fewer than 16 shares
of Old Common Stock received no shares of New Common Stock under the Prepackaged
Plan. As a result of the Prepackaged Plan, 10.8 million shares of new Common
Stock are held by the former Debentureholders and approximately 1.2 million are
held by former holders of Old Common Stock.

Under the Prepackaged Plan, claims of all other creditors, whether secured
or unsecured, were unimpaired. The Company continued to pay all general
unsecured claims during the pendency of the bankruptcy proceedings in the
ordinary course of business. The Company's revolving credit facility from Heller
Healthcare Finance, Inc, ("Heller"), which was secured by security interests in
substantially all of the Company's assets, including inventory, accounts
receivables, general intangibles, equipment and fixtures was repaid in full on
the Effective Date with funds available to the Company from operations and asset
sales.

On the Effective Date, the Company's 2000 Stock Option Plan became effective
and the Company granted options to purchase 2,028,570 shares of its New Common
Stock to its executive officers and

8
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

2. PREPACKAGED PLAN AND FRESH-START REPORTING (CONTINUED)
certain of its non-employee directors. In addition, the Company entered into
employment agreements with the Company's President and Chief Executive Officer
and four other executive officers.

The determination of equity value included in the distributable value as of
the Effective Date was derived from an estimated enterprise value of the
reorganized Company on an unleveraged basis. The enterprise value was developed
by an independent financial advisor for purposes of preparing the Company's
Disclosure Statement, which was distributed to Debenture holders and filed in
the Bankruptcy Court on July 14, 2000. In developing the determination of the
initial equity value, the financial advisor used various assumptions and
estimates, including revenue growth, improvements in operating margins, earnings
and cash flow, improvement in techniques for managing working capital, expenses
and other elements. As a result, the initial equity value was assumed to be in
the range of $65 to $95 million. For purposes of the Disclosure Statement, the
Company determined that an equity value of $80 million represented a reasonable
estimate of the reorganized Company for purposes of determining distributable
equity value to the creditors.

As discussed above, the Company's Prepackaged Plan was consummated on
September 21, 2000 and ICSL emerged from Chapter 11. Pursuant to the AICPA's
Statement of Position No. 90-7, FINANCIAL REPORTING BY ENTITIES IN
REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7"), the Company adopted
fresh-start reporting in the accompanying consolidated balance sheet as of
September 21, 2000 to give effect to the reorganization as of such date.
Fresh-start reporting required the Company to restate its assets and liabilities
to reflect their reorganization value, which approximates fair value at the date
of the reorganization. In so restating, SOP 90-7 required the Company to
allocate its reorganization value to its assets based upon their fair values in
accordance with the procedures specified by Accounting Principles Board (APB)
Opinion No. 16, BUSINESS COMBINATIONS, for transactions reported on the purchase
method. The amount of the reorganization value that exceeded the amounts
allocable to the specific tangible and the identifiable intangible assets has
been allocated to a specific intangible referred to as "Reorganization value in
excess of amounts allocable to identifiable assets" ("EXCESS REORGANIZATION
VALUE"), which is amortized in accordance with APB Opinion No.17, INTANGIBLE
ASSETS, over a life not to exceed 15 years. Each liability existing on the date
the Prepackaged Plan was confirmed by the Bankruptcy Court, other than deferred
taxes, is stated at the present value of the amounts to be paid, determined
using an appropriate discount rate. Deferred taxes are not recorded in the
accompanying financial statements due to the uncertainty regarding future
operating results. Any benefits derived from pre-confirmation net operating
losses will first reduce the Excess Reorganization Value (Goodwill) and other
intangibles until exhausted and thereafter be reported as a direct addition to
additional paid-in capital. Finally, any accounting principle changes required
to be adopted in the financial statements of the Company within the twelve
months following the adoption of fresh-start reporting were adopted at the time
fresh-start reporting was adopted.

The significant consummation and fresh start reporting adjustments
(excluding the write-off of the Old Common Stock) resulted in a charge of
$666,000. (See Note 4) This charge is presented as "Reorganization Expenses"
pursuant to adoption of fresh-start reporting in the consolidated statement of
operations for the eight week period ended September 20, 2000.

The fresh-start reporting reorganization value was primarily derived from a
discounted cash flow analysis of our business based on the Company's projected
earnings before interest, taxes and

9
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INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

2. PREPACKAGED PLAN AND FRESH-START REPORTING (CONTINUED)
depreciation and amortization ("EBITDA") through our 2006 fiscal year and
discounted to present value using the Company's weighted average cost of capital
rate of 19.5%. The discount rate utilized by the Company reflected a relatively
high-risk investment.

The Company's reorganization value represented the value of the
"reconstituted entity". This value was viewed as the fair value of the Company
on an unleveraged basis (I.E., without giving effect to capital structure) and
approximated the amount a willing buyer would have paid for the assets of the
Company immediately after the reorganization was completed. The Company's
"enterprise value", as defined in the Prepackaged Plan and later re-estimated by
management, represented the reorganization value calculated above.

Subsequent to the distribution of the Disclosure Statement and the Effective
Date, a number of events occurred which impacted the determination of equity
value under fresh-start reporting, including but not limited to, the initial
trading prices of the New Common Stock, lack of liquidity of Company stock,
information regarding the Company's third quarter performance, and the final
fiscal 2001 financial plan.

The Company employed a similar valuation method to that utilized by its
independent financial advisor in the Disclosure Statement under fresh-start
reporting to determine its equity value and arrived at the revised equity value
of $50 million. The changes in assumptions used to calculate the revised
reorganization value were primarily a reduction in assumed growth and an
increase in the discount rate. Management believes these changes are appropriate
given changes at the Company and the economy since the original reorganization
value was calculated.

The Company's reorganization value of $50 million was more than the market
value of its assets at September 21, 2000, which was approximately $33.3 to
$39.7 million. Management believes that the Debentureholders accepted the
Prepackaged Plan and the corresponding reorganization value, despite the
inherent future business risks, primarily because the Company's reorganization
value exceeded its liquidation value and the Debentureholders believed that it
was in the Company's best interest to emerge from bankruptcy at that time. In
accordance with the purchase method of accounting, the excess of the
reorganization value over revalued net assets was allocated to reorganization
value in excess of amount allocable to identifiable assets.

The calculated revised reorganization value was based upon a variety of
estimates and assumptions about circumstances and events that have not yet taken
place. Such estimates and assumptions are inherently subject to significant
economic and competitive uncertainties beyond the control of the Company,
including but not limited to those with respect to the future course of the
Company's business activity.

3. SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended October 31, 2000 and 1999, the Company made
contingent payments and issued shares of stock which had been committed to be
issued in conjunction with acquisitions. Additionally, the Company terminated
several physician management and employment

10
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

3. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
agreements, and sold certain assets. The transactions had the following non-cash
impact on the balance sheets of the Company as of the indicated dates: (In
$000s)

<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Current Assets.......................................... $(80,392) $ --
Property, plant and equipment........................... 75 --
Intangibles............................................. (26,873) --
Other non-current assets................................ (485) --
Current liabilities..................................... (5,722) (11,217)
Non current liabilities................................. 1,512 --
Debt.................................................... (1,649) --
Loss on discontinued operations......................... (49,562) --
Cancellation of debentures.............................. 100,000
Reorganization value of successor Company............... 50,000
</TABLE>

Cash paid for interest during the 2001 and 2000 Period was $1.2 million and
$1.7 million, respectively. Cash paid for income taxes for the 2001 and 2000
Period was $75,000 and $125,000, respectively.

4. REORGANIZATION ITEMS AND EXTRAORDINARY GAIN

REORGANIZATION ITEMS

The Company provided for or incurred the following expenses and income items
during 2000 directly associated with the Chapter 11 reorganization proceedings
and the resulting restructuring of its operations:

<TABLE>
<S> <C>
Administrative and other claims............................. $(1,100,000)
Change of control payments and emergence from bankruptcy
bonuses................................................... (1,697,000)
Write-off of unamortized balance of debentures finance
costs..................................................... (1,837,946)
Additional professional fees................................ (250,000)
Cancellation of accrued interest on Debentures.............. 4,218,750
-----------
Total reorganization items.............................. $ (666,196)
===========
</TABLE>

ADMINISTRATIVE AND OTHER CLAIMS, ETC.: Administrative and other claims
represented estimates of expenses incurred, primarily for legal, consulting and
accounting services provided to the Company and the creditors committee.

CHANGE OF CONTROL PAYMENT AND EMERGENCE FROM BANKRUPTCY BONUSES: Under the
terms of the Prepackaged Plan, the Company paid Michael T. Heffernan $897,000
pursuant to his former employment contract with the Company and cash emergence
from bankruptcy bonuses aggregating $800,000 to four executive officers pursuant
to a retention plan approved by the Company's Board of Directors in
December 1999.

EXTRAORDINARY GAIN

<TABLE>
<S> <C>
Extraordinary Gain from cancellation of Debentures:......... 100,000,000
</TABLE>

11
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

5. ASSETS HELD FOR SALE

During the year ended January 31, 1999, the Board approved, consistent with
achieving its stated repositioning goal, a plan to divest and exit the Company's
PPM business and certain of its ancillary services businesses, including
diagnostic imaging, lithotripsy and radiation therapy, home health and infusion
therapy. In August 1999, the Company also decided to divest its investments in a
surgery center and a physician network, and sell its real estate service
operations. Net loss for the nine months ended October 31, 1999 included an
extraordinary item of $49.6 million, which is primarily a non-cash charge
related to these divestitures. 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).
All assets held for sale had been sold as of April 30, 2000.

6. NONRECURRING CHARGES

The $9.1 million charge during the period ended September 20, 2000 includes
$3.1 million restructuring charge, a $3.0 million valuation reserve to recognize
the decline in market value of Assets Held For Sale and $3.0 million of lease
commitments for closed sites that are below market value.

The $15.8 million charge during the nine months ended October 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.

7. REVOLVING LINE OF CREDIT

Prior to the Effective Date, the Company had a $30.0 million revolving line
of credit with Heller based upon eligible accounts receivable (the "Heller
Loan"). The Heller Loan bore interest at prime plus 1.0% and fees were 0.0875%.
The Heller Loan was secured by the assets of the Company and its subsidiaries,
limited the ability of the Company and its subsidiaries to incur certain
indebtedness and to make certain dividend payments and required the Company to
comply with other customary covenants. The Company entered into an agreement
with Heller, effective May 30, 2000, pursuant to which Heller waived certain
previously declared defaults, which defaults were disputed by the Company. The
waiver was conditioned upon the Company and its subsidiaries maintaining no less
than $3.0 million of cash on hand and complying with certain lock box
arrangements. In addition, the parties agreed to reduce the Company's aggregate
borrowing availability under the Heller Loan to $5.0 million. Upon the Company's
filing of a voluntary petition under Chapter 11 of the Bankruptcy Code on
July 14, 2000, the interest rate on the Heller Loan increased to 12%. The Heller
Loan was paid in full on the Effective Date with available cash.

On the Effective Date, the Company entered into a $10.0 million revolving
credit facility (the "New Credit Facility") with Ableco Finance LLC ("Ableco").
The $10.0 million New Credit Facility has a two-year term and availability based
upon eligible accounts receivable. The New Credit Facility bears interest at
prime plus 2.00% and provides for an unused line fee of .50%. The New Credit
Facility is secured by all assets of the Company and its subsidiaries, limits
the ability of the Company and its subsidiaries to incur certain indebtedness
and make certain dividend payments and requires the Company to comply with other
customary covenants.

8. TREASURY STOCK

During 1998, the Board of Directors authorized a share repurchase plan
pursuant to which the Company could repurchase up to $15.0 million of its Old
Common Stock from time to time on the open market at prevailing market prices.
Through October 31, 2000, the Company had repurchased a total of approximately
1,260,000 shares of Old Common Stock at a net purchase price of approximately
$2.2 million and returned

12
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
(UNAUDITED)

8. TREASURY STOCK (CONTINUED)
120,000 shares of Old Common Stock to the treasury in exchange for notes
receivable of $0.4 million. No purchases of Old Common Stock were made during
the nine months ended October 31, 2000. The successor's Board of Directors has
not authorized a share repurchase plan for the new Common Stock.

9. NET LOSS PER SHARE

Net loss per share for periods prior to September 20, 2000 is for the
Predecessor and is not comparable to net loss per share for the Successor, which
reflects the exchange of New Common Stock for the Debentures and Old Common
Stock. Net loss per share for the 5 weeks ending October 31, 2000 was $(.12).
Basic and fully diluted earnings per share are the same because the effect of
Common Stock equivalents would be anti-dilutive. The Predecessor Company
earnings per share is not meaningful and therefore has not been presented.

10. RATIO OF EARNINGS TO FIXED CHARGES

For both the Predecessor and the Successor for all fiscal year 2001 periods
presented, the ratio of earnings to fixed charges was less than 1.0. The
Company's earnings were inadequate to cover fixed charges. Fixed charges include
interest, and operating rental expense.

11. ACCOUNTING CHANGES AND PRONOUNCEMENTS

In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. The Company does not believe it will have a
material impact on the financial statements.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION--AN INTERPRETATION OF APB OPINION NO. 25 ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.

12. SEGMENT INFORMATION

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 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. Because the reorganized Company has
only five weeks of operations, comparative segment information for the
Predecessor and Successor would not be meaningful and, accordingly, has not been
presented.

13
<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 has focused its operations on two integrated business lines:
pharmaceutical services, including investigative site management, clinical and
outcomes research and disease management and single-specialty provider network
management. The company believes there is value in integrating the two business
lines, however the market has not adequately valued the combined entities.
Therefore, the company will explore other strategic alternatives for its Network
Management Operations in order to maximize shareholder value and increase
liquidity. From its initial public offering in 1996 until mid 1998, the Company
had evolved into an integrated medical management company that provided 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 has completed 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, in August 1999 sold its real estate services
business. As of April 30, 2000, the Company had exited all of its physician
practice management ("PPM") and ancillary medical service businesses.

Based upon asset appraisals and comparable sales within the industry, the
Company believed that it could generate sufficient cash from operations and
proceeds from asset sales to repay its long term debt obligations, including its
$100 million 6 3/4% Convertible Subordinated Debentures due 2003 (the
"Debentures"), thereby permitting it to focus on its core business lines without
the burden of the interest obligations associated with the Debentures. However,
continued decline in its industry resulted in the Company's failure to generate
sufficient cash proceeds from the asset divestitures to repay the Debentures.
The Company's extensive losses in the two year period ended January 31, 2000,
its negative cash flows from operations and its net negative equity position, as
well as management's assessment that the Company would be unable to retire the
Debentures at maturity, raised substantial doubt about the Company's ability to
continue as a going concern. As a result, the Company's then independent
accountants issued a going concern opinion in their report on the Company's
financial statements for the year ended January 31, 2000.

REPOSITIONING AND RECAPITALIZATION

Due to market conditions affecting healthcare services companies generally,
the Company realized lower than expected proceeds from the asset divestitures
described above. The revenue and pretax loss of these businesses which were
identified to be divested or disposed for the years ended January 31, 2000 and
1999 were $92.5 million and $70.5 million, and $155.4 million and
$96.3 million, respectively. Net loss for the years ended January 31, 2000 and
1999 included an extraordinary item of $49.6 million (net of tax of $0), and
$96.8 million, respectively, which were primarily non-cash charges related to
these divestitures. These losses and the Company's highly leveraged position,
due principally to the Debentures, left the Company without the financial
resources to execute its strategic plan to grow the research, clinical trials
and network management sectors of its business. In order to reduce its
indebtedness, the Company entered into discussions with the owners of more than
50% of the principal

14
<PAGE>
amount of the Debentures regarding the possible exchange of some or all of the
Debentures for equity in order to reduce the Company's debt burden and improve
the Company's ability to execute its strategic plan. Subsequent negotiations
resulted in the Prepackaged Plan, which provided for the recapitalization of the
Company through the exchange of newly issued common stock of the Company (the
"New Common Stock"), representing 90% of the issued and outstanding capital
stock following the recapitalization, for all of the Debentures. In addition,
under the Prepackaged Plan all issued and outstanding Common Stock (the "Old
Common Stock") was to be canceled and replaced with New Common Stock,
representing 10% of the Company's issued and outstanding capital stock following
the recapitalization.

On June 12, 2000, the Company commenced solicitation of acceptances of the
Prepackaged Plan from the beneficial holders of the Debentures (the
"Debentureholders") The class of Debentureholders, as the only impaired class of
creditors under the Prepackaged Plan was the only class entitled to vote on the
Prepackaged Plan, The Company solicited this acceptance by delivering a copy of
the Pre-petition Solicitation and Disclosure Statement with Respect to Joint
Prepackaged Plan of Reorganization (the "Disclosure Statement") together with a
ballot to each Debentureholder. The voting period for the solicitation ended on
July 12, 2000. The solicitation resulted in the acceptance of the Prepackaged
Plan by the Debentureholders with respect to both the number (more than one-half
of the number of Debentureholders that actually voted) and amount
(Debentureholders holding at least two-thirds of the principal amount of the
Debentures actually voted) as required for confirmation of the Prepackaged Plan
under the Bankruptcy Code.

On the Effective Date, the Debentures, the Company's issued and outstanding
Old Common Stock and the Old Other Interests (defined in the Prepackaged Plan)
were canceled and extinguished and the holders thereof were entitled to receive
only the distributions, if any, as options, warrants and other rights to acquire
the capitol stock of the Company, to be made to such holders under the
Prepackaged Plan. Under the Prepackaged Plan, each Debentureholder received, for
each $1,000 in face amount of the Debentures held by such holder on the
Effective Date, 108 shares of New Common Stock, and each existing stockholder
received 1 share of New Common Stock for each 31 shares of Old Common Stock held
by such stockholder on the Effective Date. New Common Stock was issued in whole
shares only, with any fractional share amounts rounded up or down, as
applicable. Since, under the Prepackaged Plan, no fractional shares of New
Common Stock were issued, any stockholder who held, as of the Effective Date,
less than 16 shares of Old Common Stock received no shares of New Common Stock
under the Prepackaged Plan. As a result of the Prepackaged Plan, the former
Debenture holders hold 10.8 million shares of new Common Stock and approximately
1.2 million are held by former holders of our Old Common Stock.

Under the Prepackaged Plan, claims of all other creditors, whether secured
or unsecured, were unimpaired. During the pendency of the bankruptcy
proceedings, the Company continued to pay all general unsecured claims in the
ordinary course of business. The revolving credit facility from Heller
Healthcare Finance, Inc, ("Heller"), which was secured by security interests in
substantially all of our assets, including inventory, accounts receivables,
general intangibles, equipment and fixtures was repaid in full on the Effective
Date with funds available to the Company from operations and asset sales.

Throughout the pendency of the bankruptcy proceedings, the Company (the
"Predecessor") operated its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). The reorganized Company

15
<PAGE>
(the "Successor") adopted fresh-start reporting (see Note 2 to Consolidated
Financial Statements) and gave effect to its emergence from bankruptcy and
consummation of the Prepackaged Plan on September 21, 2000.

Under fresh-start reporting, the final consolidated balance sheet as of
September 21, 2000 became the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting has been reflected in the
accompanying consolidated balance sheets as of October 31, 2000 the consolidated
balance sheet as of that date is not comparable in certain material respects to
any balance sheet as of any prior date or for any prior period because the
balance sheet as of October 31, 2000 is that of a reorganized entity.
Accordingly, a black line has been drawn between the Successor's balance sheet
and the Predecessor's balance sheet.

Management believes the Company's ability to meet its financial obligations
and make planned capital expenditures will depend on the Company's future
operating performance, which will be subject to financial, economic and other
factors affecting the business and operations of the Company, including factors
beyond its control. Further improvements in operating profitability and
achievement of expected cash flows from operations is critical to providing
adequate liquidity and is dependent upon the Company's achieving increased
revenues, along with gross margin and expense levels that are reasonably
consistent with its financial plans. The failure of the Company to achieve
profitable operations, notwithstanding the recapitalization, may raise doubts
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that might result from these uncertainties.

RESULTS OF OPERATIONS

Except as specifically stated otherwise, the following discussion reflects
the combined operations of both the Predecessor and the Successor. 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 NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues................................................ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Salaries, wages and benefits................................ 26.7% 29.7% 28.2% 31.5%
Depreciation and amortization............................... 4.0% 5.2% 3.2% 5.9%
Rent expense................................................ 4.7% 7.3% 6.0% 7.7%
Provision for bad debts..................................... 3.1% 1.0% 1.4% 1.4%
Non-recurring expenses...................................... 4.6% 0% 12.2% 10.2%
Capitation expenses and other............................... 76.8% 74.4% 79.0% 71.5%
----- ----- ----- -----
Total operating costs and administrative expenses....... 119.9% 117.6% 130.0% 128.2%
----- ----- ----- -----
Interest Expense, net....................................... (1.7)% (5.0)% (6.4)% (4.5)%
Restructuring Items......................................... (2.9)% 0% (1.0)% 0%
----- ----- ----- -----
(Loss) before taxes and extraordinary item.................. (24.5)% (22.6)% (37.4)% (32.7)%
Income tax expense (benefit)................................ 6.5% (0.1)% 1.9% (0.0)%
----- ----- ----- -----
(Loss) before extraordinary item............................ (31.0)% (22.5)% (39.3)% (32.7)%
Extraordinary gain (loss), net of tax....................... 430.1% 0% 133.9% (32.0)%
----- ----- ----- -----
Net income (loss)........................................... 399.1% (22.5)% 94.6% (64.7)%
===== ===== ===== =====
</TABLE>

16
<PAGE>
THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO THE THREE AND NINE
MONTHS ENDED OCTOBER 31, 1999

The following discussion reviews the results of operations for the three and
nine months ended October 31, 2000 (the "2001 Quarter" and the "2001 Period"),
respectively, compared to the three and nine months ended October 31, 1999 (the
"2000 Quarter" and the "2000 Period"), respectively. Note: Totals presented in
the comparative discussion for the October 31, 2000 Quarter combine the eight
week Predecessor and the five week Successor companies for comparative purposes.

REVENUES

During the 2001 Quarter the Company derived revenues primarily from the
provider network management and site management organizations segments. During
the 2001 Period the Company additionally derived revenues from 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 assets
held for sale are derived primarily from providing the following services: PPM,
diagnostic imaging, radiation therapy, home healthcare, infusion therapy, real
estate services and lithotripsy.

Net revenues were $23.3 million and $74.7 million during the 2001 Quarter
and 2001 Period, respectively. Of this amount, $14.5 million and $43.8 million
or 62.2% and 58.6% of such revenues was attributable to provider network
management; $9.0 million and $25.7 million or 39.1% and 34.5% was related to
site management organizations; and $0 and $5.3 million or 0% and 7.1% was
attributable to assets held for sale.

Net revenues were $44.4 million and $154.9 million during the 2000 Quarter
and 2000 Period, respectively. Of this amount, $12.9 million and $43.6 million
or 29.0% and 28.2% of such revenues was attributable to provider network
management; $9.2million and $26.8 million or 20.7% and 17.3% was related to site
management organizations; and $22.1million and $84.2 million or 49.9% and 54.4%
was attributable to assets held for sale.

The Company's net revenues from provider network management services
increased by $1.6 million from $12.9 million for the 2000 Quarter to
$14.5 million for the 2001 Quarter and by $.2 million from $43.6 million for the
2000 Period to $43.8 million for the 2001 Period.()The increase in revenue is
primarily due to a shift in network management business away from the
multi-specialty line of business and growing the single specialty line of
business.

The Company's net revenues from site management organizations decreased by
$200,000 from $9.2 million for the 2000 Quarter to $9.0 million for the 2001
Quarter and by $1.1 million from $26.8 million for the 2000 Period to
$25.7 million for the 2001 Period. The decrease in revenues was due to
transitioning several owned sites to the staffing model, which has temporarily
reduced revenues.

The Company's net revenues from assets held for sale, including real estate
operations, decreased by $22.1 million from $22.1 million for the 2000 Quarter
to $0 for the 2001 Quarter and by $78.9 million from $84.2 million for the 2000
Period to $5.3 million for the 2001 Period due to the asset divestitures.

EXPENSES

The Company's salaries, wages and benefits decreased by $7.0 million from
$13.2 million or 29.7% of net revenues during the 2000 Quarter to $6.2 million
or 26.7% of net revenues during the 2001 Quarter and by $27.7 million from
$48.8 million or 31.5% of net revenues during the 2000 Period to

17
<PAGE>
$21.1 million or 28.2% of net revenues during the 2001 Period. The decrease in
dollars is primarily attributable to the reductions in personnel in conjunction
with the asset divestitures.

The Company's depreciation and amortization expense decreased by
$1.4 million from $2.3 million during the 2000 Quarter or 5.2% of net revenues
to $.9 million or 3.9% of net revenues during the 2001 Quarter and by $6.7.
million from $9.1 million or 5.9% of net revenues during the 2000 Period to
$2.4 million or 3.2% of net revenues for the 2001 Period. The decrease is due to
assets sold and a $36.1 million goodwill impairment write-down taken in the
fourth quarter of fiscal 2000 with respect to certain unprofitable operations,
both in clinical studies and network management, which reduced amortization
expense for future periods.

The Company's rent expense decreased by $2.1 million from $3.2 million or
7.3% of net revenues during the 2000 Quarter to $1.1 million or 4.7% of net
revenues during the 2001 Quarter and by $7.2 million from $11.9 million or 7.7%
of net revenues during the 2000 Period to $4.5 million or 6.0% of net revenues
during the 2001 Period. The decrease in dollars is the result of the asset
divestitures as well as the termination of leases of discontinued operations the
expense of which has been reclassified to restructuring expense.

The Company's nonrecurring charge of $15.8 million during the 2000 Period
represents a $14.1 million impairment charge for a physician practice management
agreement and 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 nonrecurring charge of
$1.1 million during the 2001 Quarter and $9.1 million during the 2001 Period
represent $1.1 million of additional reserve for equipment lease commitments for
closed sites and a $3.0 million restructuring charge, a $3.0 million valuation
reserve to recognize the decline in market value of Assets Held for Sale and
$2.0 million of facility lease commitments for closed sites that are below
market value.

The Company's other expenses, which include professional fees, utilities,
supplies and provision for bad debt, and capitation expenses and other decreased
by $14.9 million from $33.5 million or 75.5% of net revenues during the 2000
Quarter to $18.6 million or 80.0% of net revenues during the 2001 Quarter and by
$52.8 million from $112.9 million or 72.9% of net revenues during the 2000
Period to $60.1 million or 80.4% of net revenues during the 2001 Period. The
decrease in other expenses is primarily due to the discontinued operations.

The Company's interest expense decreased by $1.8 million from $2.2 million
or 5.0% of net revenues during the 2000 Quarter to $.4 million or 1.7% of net
revenues during the 2001 Quarter and decreased by $2.1 million from
$6.9 million or 4.5% of net revenues during the 2000 Period to $4.8 million or
6.4% of net revenues during the 2001 Period. The 2000 Period included
amortization of debt issuance cost of $0.7 million due to a previous line of
credit that was terminated. The interest expense for the 2001 Period includes
accrual of interest of $4.2 million on the Debentures, which was reversed in the
2001 Quarter as of the Effective Date.

The Company's extraordinary gain of $100 million during the 2001 Quarter and
Period arose from the cancellation of debentures. The Company's extraordinary
loss of $49.6 million during 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.

Reorganization items resulted in net charges of $.6 million during the 2001
Quarter and Period. These net charges related directly to the Chapter 11
proceedings and associated restructuring of the Company's capital structure and
are discussed in Note 2 to the Consolidated Financial Statements.

18
<PAGE>
The tax expense in the 2001 Quarter of $1.4 million represents an assessment
of tax for prior years which is currently being reviewed.

The Company's loss prior to income taxes and extraordinary item during the
2001 Quarter was $5.7 million compared to $10.0 million for the 2000 Quarter and
$27.9 million for the 2001 Period compared to $50.6 million for the 2000 Period.
The reduction in the loss during the 2001 Quarter and Period is primarily due to
the sale of unprofitable businesses related to the asset divestitures.

The loss per new share for the 5 week period ending October 31, 2000 was
$.12 per share which included a $.04 per share expense for amortization of
Goodwill capitalized under Fresh Start Accounting.

LIQUIDITY AND CAPITAL RESOURCES

Cash used by operating activities was $21.4 million during the 2001 Period
and $17.7 million during the 2000 Period. At October 31, 2000, the Company's
principal sources of liquidity consisted of $7.9 million in cash and $5 million
availability under its revolving credit facility. The Company had $40.6 million
of current liabilities, including $4.6 million outstanding under the Revolving
Credit Facility. The $100 million of Debentures due 2003 which were reclassified
as current liabilities on the balance sheet as of January 31, 2000 were
converted into New Common Stock on the Effective Date pursuant to the
Prepackaged Plan as described under "Positioning and Recapitalization."

Cash provided by investing activities was $10.8 million during the 2001
Period and primarily represented the net cash received from the sale of assets
of $4.7 million, receipts from notes receivable of $6.5 million, and offset by
the funds required by the Company for capital expenditures of $0.7 million. Cash
provided by investing activities was $46.5 million during the 2000 Period and
primarily represented the net cash received from the sale of assets of
$51 million, offset by the funds required by the Company for capital
expenditures of $4.6 million and additional purchase price of $1.4 million.

Cash used by financing activities was $11.7 million during the 2001 Period
and primarily represented the payoff of the prior Line of Credit. Cash used by
financing activities was $.9 million during the 2000 Period and primarily
represented the purchase of treasury stock of $0.8 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 $2.0 million over the next three years. 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,
an ownership interest in a network 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 four years.

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 is generally determined based upon the
average price of the Company's Common Stock during the five business days prior
to the date of issuance. In April 2000 the Predecessor Company issued
5,187,627 million shares of Common Stock using the methodology discussed above.

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 vigorously
prosecute and defend the case. However, if the Company is not successful it
could

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be exposed to a maximum loss of $3.7 million. A reserve has been established to
reflect the probable loss.

The Predecessor repurchased approximately 1.3 million shares of Old Common
Stock at a net purchase price of approximately $2.2 million pursuant to a
repurchase plan authorized by its Board of Directors in 1999. The Successor
Company has not authorized a share repurchase plan.

The Company's Old Common Stock was de-listed from the NASDAQ National Market
as of the close of business on December 8, 1999. The Company's New Common Stock
is now trading on the OTC Bulletin Board under the symbol "ICSN.OB".

Prior to the Effective Date, the Company had a $30.0 million revolving line
of credit with Heller based upon eligible accounts receivable (the "Heller
Loan"). The Heller Loan bore interest at prime plus 1.0% and fees were 0.0875%.
The Heller Loan was secured by the assets of the Company and its subsidiaries,
limited the ability of the Company and its subsidiaries to incur certain
indebtedness and make certain dividend payments and required the Company to
comply with other customary covenants. The Company entered into an agreement
with Heller effective May 30, 2000, pursuant to which Heller waived certain
previously declared defaults, which defaults were disputed by the Company. The
waiver was conditioned upon the Company and its subsidiaries maintaining no less
than $3.0 million of cash on hand and complying with certain lock box
arrangements. In addition, the parties agreed to reduce the Company's aggregate
borrowing availability under the Heller Loan to $5.0 million. Upon the Company's
filing of a voluntary petition under Chapter 11 of the Bankruptcy Code on
July 14, 2000, the interest rate on the Heller Loan increased to 12%. The Heller
Loan was paid in full on the Effective Date with available cash.

Prior to the Effective Date, the Company had outstanding $100 million in
face amount of Debentures. The Debentures bore interest at an annual rate of
6 3/4% payable semi-annually on each June 15 and December 15 and matured on
June 15, 2003. The Debentures were unsecured obligations of the Company,
guaranteed by certain of the Company's wholly owned subsidiaries, and were
convertible into Common Stock of the Company at a conversion price of $28.20 per
share, subject to adjustment. The Company reclassified the Debentures as current
as of January 31, 2000, as it was not in full compliance with the terms of the
Indenture governing the Debentures. On the Effective Date, the Debentures were
exchanged for 10.8 million shares of New Common Stock representing 90% of the
Company's equity.

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, 2000 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.

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PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As described above under Part I, Item 2, Management's Discussion and
Analysis of Results of Operations, the Company and its wholly-owned subsidiaries
emerged from Chapter 11 on September 21, 2000.

There are no material legal proceedings pending or, to the knowledge of
management threatened against the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

As of the Effective Date, the Company filed an amendment to its Certificate
of Incorporation which prohibits the Company from issuing non-voting securities
as required by Section 1123 of the Bankruptcy Code. In addition, the amended
Certificate of Incorporation differs from the Certificate of Incorporation
existing prior to the Effective Date in that (i) the Company is no longer able
to issue preferred stock without stockholder approval; (ii) the Company's Board
of Directors is no longer divided into classes with staggered terms; (iii) a
special meeting of the stockholders can be called by holders of 25% of the
capital stock of the Company; (iv) the Company may now amend its bylaws by
action of the Board of Directors or a simple majority vote of the holders of the
Company's capital stock; (v) the Company stockholders may now act by written
consent; and (vi) except as required by law, no action of the stockholders
requires a supermajority vote.

In addition, each of the Company's subsidiaries amended its respective
charter document to prohibit the issuance of non-voting common stock as required
by Section 1123 of the Bankruptcy Code. This prohibition on the issuance of
non-voting securities will apply to the Company and each subsidiary only for so
long as it is required by Section 1123 of the Bankruptcy Code.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of the Filing, the Company had defaulted in the payment of the June 15,
2000 interest payment of $3.4 million due under the Debentures. Under the
Prepackaged Plan, the Debentures were converted into New Common Stock
representing 90% of the Company's outstanding capital stock after the
Recapitalization and all interest obligations were canceled.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 27 Financial Data Schedule

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K on October 4, 2000 with the
Securities and Exchange Commission reporting that the Company's Prepackaged
Plan had been implemented.

(c)

Three Months Ended October 31, 2000, and 1999, and Nine Months Ended
October 31, 2000, and 1999, Exhibit 27, Summary Statistics for EDGAR filing
with SEC.

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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 21st day of December 2000.

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<S> <C> <C>
INNOVATIVE CLINICAL SOLUTIONS, LTD.

By: /s/ GARY S. GILLHEENEY
-----------------------------------------
Gary S. Gillheeney,
CHIEF FINANCIAL OFFICER
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