<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 FOR THE QUARTERLY PERIOD
ENDED APRIL 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
</TABLE>
COMMISSION FILE NUMBER 0-27568
------------------------
INNOVATIVE CLINICAL SOLUTIONS, LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 65-0617076
(State of incorporation) (IRS 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 June 13, 2000, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 37,198,845.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements........................................
Consolidated Balance Sheets--April 30, 2000 (unaudited) and
January 31, 2000........................................... 3
Consolidated Statements of Operations (unaudited)--Three
Months Ended April 30, 2000 and 1999....................... 4
Consolidated Statements of Cash Flows (unaudited)--Three
Months Ended April 30, 2000 and 1999....................... 5
Notes to Consolidated Financial Statements
(unaudited)--Three Months Ended April 30, 2000 and 1999.... 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations...................................... 13-21
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 22
</TABLE>
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNOVATIVE CLINICAL SOLUTIONS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
2000 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 13,403 $ 25,558
Receivables:
Accounts receivable, net................................ 16,304 16,193
Other receivables....................................... 8,577 4,710
Related party and other notes receivables............... 6,082 7,222
Prepaid expenses and other current assets................. 1,414 394
Assets held for sale...................................... -- 2,419
--------- ---------
Total current assets.................................. 45,780 56,496
Property, plant and equipment, net.......................... 8,903 9,099
Notes receivable............................................ 4,573 4,892
Goodwill, net............................................... 3,587 3,681
Management service agreements, net.......................... 8,520 8,612
Restricted cash............................................. 2,102 2,077
Other assets................................................ 2,255 2,454
--------- ---------
Total assets.......................................... $ 75,720 $ 87,311
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases................ $ 9,925 $ 11,718
Convertible subordinated debentures....................... 100,000 100,000
Accounts payable.......................................... 11,259 11,859
Accrued compensation...................................... 1,768 2,060
Accrued and other current liabilities..................... 24,489 23,575
--------- ---------
Total current liabilities............................. 147,441 149,212
Long-term debt and capital leases........................... 1,247 4,234
Other long-term liabilities................................. 41 95
Minority interest........................................... 492 492
--------- ---------
Total liabilities..................................... 149,221 154,033
Commitments and contingencies
Stockholders' equity:
Common stock par value $.01, 40,000 shares authorized
38,575 and 33,387 shares issued at April 30, 2000 and
January 31, 2000, respectively, 37,199 and 32,011 shares
outstanding at April 30, 2000 and January 31, 2000,
respectively 372 320
Treasury stock............................................ (2,664) (2,664)
Additional paid in capital................................ 225,790 224,771
Accumulated deficit....................................... (296,999) (289,149)
--------- ---------
Total stockholders' equity.................................. (73,501) (66,722)
--------- ---------
Total liabilities and stockholders' equity.................. $ 75,720 $ 87,311
========= =========
</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
APRIL 30,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Net revenues from services.................................. $11,011 $ 43,855
Net revenues from management service agreements............. 14,643 16,749
Net revenues from real estate services...................... -- 60
------- --------
Total revenue........................................... 25,654 60,664
------- --------
Operating costs and administrative expenses:
Salaries, wages and benefits.............................. 8,023 19,202
Professional fees......................................... 3,940 4,276
Supplies.................................................. 2,010 14,164
Utilities................................................. 437 1,142
Depreciation and amortization............................. 742 3,628
Rent...................................................... 1,843 4,476
Provision for bad debts................................... 173 634
Capitation expenses and other............................. 14,437 21,658
------- --------
Total operating costs and administrative expenses....... 31,605 69,180
------- --------
Loss from operations........................................ (5,951) (8,516)
------- --------
Interest expense, net....................................... 1,918 2,619
------- --------
Loss before provision for income taxes...................... (7,869) (11,135)
Income tax expense (benefit)................................ (19) 50
------- --------
Net loss................................................ $(7,850) $(11,185)
======= ========
Net loss per share--basic (Note 7).......................... $ (0.21) $ (0.33)
Net loss per share--diluted (Note 7)........................ $ (0.21) $ (0.33)
Weighted average shares outstanding--basic.................. 37,199 33,529
======= ========
Weighted average shares outstanding--diluted................ 37,199 33,529
======= ========
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (7,850) $(11,185)
Noncash items included in net income:
Depreciation and amortization........................... 742 3,628
Amortization of debt issuance costs..................... 193 744
Other................................................... -- 7
Changes in receivables.................................... (3,978) (1,445)
Changes in accounts payable and accrued liabilities....... 1,092 (2,851)
Changes in other assets................................... (1,013) (2,522)
-------- --------
Net cash used by operating activities................. (10,814) (13,624)
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (360) (914)
Sale of assets............................................ 2,419 4,694
Notes receivable, net..................................... 1,459 (148)
Other..................................................... -- 38
-------- --------
Net cash provided by investing activities............. 3,518 3,670
-------- --------
Cash flows from financing activities:
Advances from shareholder................................. -- 270
Proceeds from issuance of debt............................ 13,493 21,672
Restricted cash........................................... (25) --
Offering costs and other.................................. -- (2)
Repayment of debt......................................... (18,327) (12,101)
Purchase of treasury stock................................ -- (552)
-------- --------
Net cash provided (used) by financing activities...... (4,859) 9,287
-------- --------
Decrease in cash and cash equivalents....................... $(12,155) $ (667)
======== ========
Cash and cash equivalents, beginning of period.............. $ 25,558 $ 10,137
======== ========
Cash and cash equivalents, end of period.................... $ 13,403 $ 9,470
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 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 months ended April 30, 2000 are not necessarily indicative of results that
may be expected for the year.
The Company's extensive losses in the past two years, its negative cash
flows from operations and its net negative equity, as well as management's
assessment that the Company will be unable to retire its $100 million 6.75%
Convertible Subordinated Debentures due 2003 (the "Debentures") at maturity
raise substantial doubt about its ability to continue as a going concern. The
Company's independent accountants, PricewaterhouseCoopers LLP, have issued a
going concern opinion in their report on the Company's financial statements for
the year ended January 31, 2000. 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 the uncertainties giving rise to the accountants' going
concern opinion.
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 physician networks with its clinical trials site
management and healthcare outcomes research operations.
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 have 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 have been 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
6
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
2. SIGNIFICANT EVENTS (CONTINUED)
$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 $100 million Debentures, have 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. The Company
therefore has determined that it needs to reduce its indebtedness in order to
implement fully its strategic plan.
During the process of implementing its strategic plan to reposition the
Company, owners of more than 50% of the principal amount of the Debentures (the
"Majority Holders") approached the Company to discuss 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. In this
connection, in November 1999, the Company retained the services of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") to advise it in connection with
any refinancings, repurchases or restructuring of its outstanding securities and
indebtedness with the goal of substantially reducing the outstanding principal
amount of the Debentures. The Majority Holders subsequently formed a steering
committee of Debentureholders (the "Steering Committee") to negotiate with the
Company regarding the terms of a recapitalization as a means of improving the
Company's capital structure and its ability to effect its strategic plan. The
Company sought DLJ's assistance and advice in connection with these negotiations
which have resulted in the proposed plan to recapitalize the Company (the
"Recapitalization") described below.
The Recapitalization involves the exchange of 10,800,000 shares 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. As part of the Recapitalization, the Company intends to
cancel all issued and outstanding Common Stock (the "Old Common Stock") and
replace it with 1,200,000 shares of New Common Stock representing 10% of the
Company's issued and outstanding capital stock following the Recapitalization.
In addition, the Company intends to cancel any options or other rights to
purchase the Old Common Stock and to issue options to purchase up to 16% of New
Common Stock, on a fully diluted basis, after the Recapitalization. Of these
options, 1% will be issued to non-employee directors and 15% will be issued or
reserved for issuance to executive officers and key employees of the Company.
Under the Prepackaged Plan, a Debentureholder shall be entitled to receive
for every $1,000 principal amount of Debentures, 108 shares of New Common Stock
and the existing stockholders shall be entitled to receive for every 31 shares
of Old Common Stock held by such stockholders, 1 share of New Common Stock. New
Common Stock shall be issued in whole shares only, with any fractional share
amounts to be rounded up or down as applicable. Since, under the Prepackaged
Plan, no fractional shares of New Common Stock will be issued, any stockholder
currently holding less than 16 shares of Old Common Stock will not receive any
shares of New Common Stock under the Prepackaged Plan.
The Company intends to commence voluntary bankruptcy cases (the "Bankruptcy
Cases") to effect the Recapitalization through a joint prepackaged plan of
reorganization (the "Prepackaged Plan") of the Company and its subsidiaries
under chapter 11 ("Chapter 11") of Title 11 of the United States Code (the
"Bankruptcy Code"). Virtually all of the Company's operations are conducted
through its subsidiaries. Because the Debentures are guaranteed by certain of
the Company's subsidiaries and because its operations are conducted through its
subsidiaries, the Company believes it prudent that all of its
7
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
2. SIGNIFICANT EVENTS (CONTINUED)
subsidiaries participate in any bankruptcy proceeding in order to extinguish any
guarantor liability under the Debentures and to avoid potential disruption to
its businesses.
On June 12, 2000, the Company commenced solicitation of acceptances of the
Prepackaged Plan from the Debentureholders. The Company will not solicit
acceptances of the Prepackaged Plan from any other holder of a claim against the
Company or its subsidiaries, because the Company and its subsidiaries intend to
pay such claims (to the extent they are allowed), in the ordinary course,
according to existing payment terms (or such other terms as the holders of these
claims and the Company may agree) in accordance with the Bankruptcy Code.
The Company currently intends to solicit votes only from the
Debentureholders. The Company has also distributed the Disclosure Statement
related to the Prepackaged Plan to its existing stockholders for informational
purposes. While existing stockholders are entitled to receive a distribution
under the Prepackaged Plan (assuming the stockholder holds more than 15 shares
of Old Common Stock), the Company intends to seek an order from the bankruptcy
court (the "Class 6 Procedures Order") authorizing the Company and its
subsidiaries to refrain from soliciting stockholder votes on the grounds that
stockholder approval of the Prepackaged Plan is not necessary to the
confirmation of the Prepackaged Plan because (i) the Prepackaged Plan provides
stockholders with a distribution that is not less than the distribution that a
stockholder would receive if the Company and its subsidiaries were liquidated
under Chapter 7 of the Bankruptcy Code and (ii) no holder of an interest that is
junior to stockholders' interests will receive or retain any property under the
Prepackaged Plan.
Assuming the bankruptcy court grants the Class 6 Procedures Order, the
Prepackaged Plan can be confirmed by the bankruptcy court and thereby made
binding upon all stockholders and Debentureholders if it is accepted by
(i) Debentureholders holding at least two-thirds ( 2/3) of the principal amount
of the Debentures actually voted on the Prepackaged Plan (which will be
determined by dividing the principal amount of Debentures voted in favor of the
Prepackaged Plan by the total principal amount of Debentures voted on the
Prepackaged Plan) and (ii) more than one-half ( 1/2) in number of the
Debentureholders that actually vote on the Prepackaged Plan (the "Requisite
Acceptances"). Each member of the Steering Committee has entered into a
Forbearance, Lock-up and Voting Agreement pursuant to which it has agreed to
forebear from exercising any rights or remedies it may have with respect to any
default arising under the Debentures and to vote in favor of the Prepackaged
Plan. The Prepackaged Plan also must be confirmed by a United States bankruptcy
court.
Because only votes cast for or against the Prepackaged Plan are counted for
purposes of determining acceptance or rejection of the Prepackaged Plan, a
failure to vote will not be counted and it is therefore possible that the
Company may obtain the necessary acceptances of the Prepackaged Plan by the
affirmative vote of (a) Debentureholders holding significantly less than
two-thirds ( 2/3) of the aggregate principal amount of the Debentures and
(b) significantly less than one-half ( 1/2) in number of the entire class of
Debentureholders. Furthermore, notwithstanding that stockholders are not
entitled to vote on the Prepackaged Plan, if the Prepackaged Plan is confirmed
by the bankruptcy court and consummated in accordance with its terms, then all
stockholders of the Company will be bound by the terms of the Prepackaged Plan.
8
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
2. SIGNIFICANT EVENTS (CONTINUED)
Unless extended, Debentureholders will have until 5:00 p.m. on July 12, 2000
to vote on the Prepackaged Plan. If the Company receives the Requisite
Acceptances of the Prepackaged Plan, the Company and its subsidiaries intend to
commence the Bankruptcy Cases. The Company anticipates that the Bankruptcy Cases
will be commenced before it is in default on the next interest payment on the
Debentures which is due on June 15, 2000 and is subject to a 30 day grace period
thereafter. However, the commencement of the Bankruptcy Cases would constitute
an Event of Default under the Indenture governing the Debentures.
After completion of the Recapitalization, the Company believes it will have
established a capital structure that should allow the expansion of its
operations and further integration of its business lines. The Recapitalization
also should improve the Company's ability to access capital and to use its
equity both for targeted acquisitions and as incentive compensation to attract
and retain key personnel who will be integral to the success of its strategic
plan.
3. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended April 30, 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 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:
<TABLE>
<CAPTION>
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Current Assets............................................. -- $(1,580)
Property, plant and equipment.............................. -- 923
Intangibles................................................ -- 1,424
Other noncurrent assets.................................... -- (587)
Current liabilities........................................ -- (3,961)
Noncurrent liabilities..................................... -- 102
Debt....................................................... -- (984)
Equity..................................................... 1,071 (70)
</TABLE>
Cash paid for interest during the 2001 and 2000 Quarter was $0.8 million and
$1.5 million, respectively. Cash paid for income taxes for the 2001 and 2000
Quarter was $35,000 and $115,000, respectively.
4. 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 year ended January 31, 2000 and 1999 included an
extraordinary item of $49.6 million and $96.8 million, respectively, which is
primarily a non-cash charge related to these divestitures. In accordance with
APB 16, the Company is required to
9
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
4. ASSETS HELD FOR SALE (CONTINUED)
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 have been sold as of April 30, 2000.
5. 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%. 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. Proceeds from asset sales must be used to repay the line of credit to
the extent the sold assets included eligible accounts receivable. As of
April 30, 2000, there was $7.5 million outstanding under the line of credit,
which is included in the current portion of debt and capital leases.
The Company has entered into an agreement with its lender effective May 30,
2000, pursuant to which the lender waived certain previously declared defaults,
which defaults were disputed by the Company. The waiver is 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
revolving credit agreements to $5.0 million. As of June 13, 2000, there was
$2.8 million outstanding under the line of credit. The Company believes that,
assuming the Recapitalization is effected, cash flow from operations and
available cash, together with available borrowings under its revolving line of
credit, will be adequate to meet its liquidity needs through the first quarter
of fiscal year 2002, although there can be no assurances that this will be the
case.
The Company anticipates that it will arrange for new working capital
financing in conjunction with the proposed Recapitalization. There can be no
assurances, however, that the Company will be able to obtain such working
capital financing on terms favorable to the Company or at all.
6. TREASURY STOCK
During 1998, the Board of Directors 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. Through
April 30, 2000, the Company has repurchased a total of approximately 1,260,000
shares at a net purchase price of approximately $2.2 million and returned
120,000 shares to the treasury in exchange for notes receivable of
$0.4 million.
10
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
7. 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:
<TABLE>
<CAPTION>
PER SHARE
(LOSS) SHARES AMOUNT
-------- -------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
THREE MONTHS ENDED APRIL 30, 2000
Basic loss per share
Loss available to common stockholders.......... $ (7,850) 37,199 $(0.21)
Effect of dilutive securities.................... -- -- --
-------- ------ ------
Diluted loss per share........................... $ (7,850) 37,199 $(0.21)
======== ====== ======
THREE MONTHS ENDED APRIL 30, 1999
Basic loss per share
Loss available to common stockholders.......... $(11,185) 33,529 $(0.33)
Effect of dilutive securities.................... -- -- --
-------- ------ ------
Diluted loss per share........................... $(11,185) 33,529 $(0.33)
======== ====== ======
</TABLE>
For the three months ended April 30, 2000 and 1999, no additional securities
or related adjustments to income were made for the common stock equivalents
since the effect would be antidilutive. The common stock equivalents that would
have been included were 4.6 million and 4.8 million, respectively.
8. RATIO OF EARNINGS TO FIXED CHARGES
For the three months ended April 30, 2000, 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
months ended April 30, 2000, for purposes of computing the ratio of earnings to
fixed charges, the Company's earnings were inadequate to cover fixed charges
(including accrued interest on the Debentures) by $2.5 million.
9. 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
11
<PAGE>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED APRIL 30, 2000 AND 1999
(UNAUDITED)
9. ACCOUNTING CHANGES AND PRONOUNCEMENTS (CONTINUED)
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.
10. SEGMENT INFORMATION
For the fiscal year ending January 31, 1999, the Company adopted SFAS 131.
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. 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 HELD FOR RECONCILING CONSOLIDATED
MANAGEMENT ORGANIZATION SALE ITEMS (1) TOTALS
---------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Quarter ended April 30, 2000
Net Revenues.......................... $14,643 $8,157 $ 2,854 $ -- $25,654
Income (loss) before income taxes..... 209 (3,710) (58) (4,310) (7,869)
Net assets............................ 8,494 14,373 15,051 (111,419) (73,501)
Quarter ended April 30, 1999
Net Revenues.......................... $18,191 $8,796 $33,677 $ -- $60,664
Loss before income taxes.............. (1,598) (2,536) (1,388) (5,613) (11,135)
Net assets............................ 43,490 22,226 108,655 (80,135) 94,236
</TABLE>
------------------------
(1) Reconciling items consist of corporate expenses and corporate net assets
(primarily the Debentures, net of cash) which are not allocated.
11. SUBSEQUENT EVENTS
The Company is highly leveraged due to its $100 million Debentures. This
hampers its ability to execute its strategic plan to grow the research, clinical
trials and network management sectors of its business. The Company therefore has
determined that it needs to reduce its indebtedness in order to implement fully
its strategic plan. The Company's plans to convert the Debentures into common
equity are described in Note 2--Significant Events.
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, and multi and single-specialty
provider network management. Until recently, the Company has been 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 has 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 over the past two years, its negative cash flows
from operations and its net negative equity position, as well as management's
assessment that the Company will be unable to retire the Debentures at maturity,
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's independent accountants, PricewaterhouseCoopers LLP, have
issued a going concern opinion in their report on the Company's financial
statements for the year ended January 31, 2000. In response to those factors,
the Company has developed plans to improve profitability of its core business
operations and to recapitalize the Company by converting the Debentures into
common equity as described below under "Repositioning".
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 physician networks with its clinical trials site
management and healthcare outcomes research operations.
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 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 have 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 have been identified to be
divested or disposed for the years ended January 31, 2000 and 1999 were
13
<PAGE>
$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 $100 million Debentures, have 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. The Company therefore has
determined that it needs to reduce its indebtedness in order to implement fully
its strategic plan.
During the process of implementing its strategic plan to reposition the
Company, owners of more than 50% of the principal amount of the Debentures (the
"Majority Holders") approached the Company to discuss 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. In this
connection, in November 1999, the Company retained the services of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") to advise it in connection with
any refinancings, repurchases or restructuring of its outstanding securities and
indebtedness with the goal of substantially reducing the outstanding principal
amount of the Debentures. The Majority Holders subsequently formed a steering
committee of Debentureholders (the "Steering Committee") to negotiate with the
Company regarding the terms of a recapitalization as a means of improving the
Company's capital structure and its ability to effect its strategic plan. The
Company sought DLJ's assistance and advice in connection with these negotiations
which have resulted in the proposed plan to recapitalize the Company (the
"Recapitalization") described below.
The Recapitalization involves the exchange of 10,800,000 shares 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. As part of the Recapitalization, the Company intends to
cancel all issued and outstanding Common Stock (the "Old Common Stock") and
replace it with 1,200,000 shares of New Common Stock representing 10% of the
Company's issued and outstanding capital stock following the Recapitalization.
In addition, the Company intends to cancel any options or other rights to
purchase the Old Common Stock and to issue options to purchase up to 16% of New
Common Stock, on a fully diluted basis, after the Recapitalization. Of these
options, 1% will be issued to non-employee directors and 15% will be issued or
reserved for issuance to executive officers and key employees of the Company.
Under the Prepackaged Plan, a Debentureholder shall be entitled to receive
for every $1,000 principal amount of Debentures, 108 shares of New Common Stock
and the existing stockholders shall be entitled to receive for every 31 shares
of Old Common Stock held by such stockholders, 1 share of New Common Stock. New
Common Stock shall be issued in whole shares only, with any fractional share
amounts to be rounded up or down as applicable. Since, under the Prepackaged
Plan, no fractional shares of New Common Stock will be issued, any stockholder
currently holding less than 16 shares of Old Common Stock will not receive any
shares of New Common Stock under the Prepackaged Plan.
The Company intends to commence voluntary bankruptcy cases (the "Bankruptcy
Cases") to effect the Recapitalization through a joint prepackaged plan of
reorganization (the "Prepackaged Plan") of the Company and its subsidiaries
under chapter 11 ("Chapter 11") of Title 11 of the United States Code (the
"Bankruptcy Code"). Virtually all of the Company's operations are conducted
through its subsidiaries. Because the Debentures are guaranteed by certain of
the Company's subsidiaries and because its operations are conducted through its
subsidiaries, the Company believes it prudent that all of its subsidiaries
participate in any bankruptcy proceeding in order to extinguish any guarantor
liability under the Debentures and to avoid potential disruption to its
businesses.
On June 12, 2000, the Company commenced solicitation of acceptances of the
Prepackaged Plan from the Debentureholders. The Company will not solicit
acceptances of the Prepackaged Plan from any other holder of a claim against the
Company or its subsidiaries, because the Company and its subsidiaries intend to
pay such claims (to the extent they are allowed), in the ordinary course,
according to existing payment
14
<PAGE>
terms (or such other terms as the holders of these claims and the Company may
agree) in accordance with the Bankruptcy Code.
The Company currently intends to solicit votes only from the
Debentureholders. The Company has also distributed the Disclosure Statement
related to the Prepackaged Plan to its existing stockholders for informational
purposes. While existing stockholders are entitled to receive a distribution
under the Prepackaged Plan (assuming the stockholder holds more than 15 shares
of Old Common Stock), the Company intends to seek an order from the bankruptcy
court (the "Class 6 Procedures Order") authorizing the Company and its
subsidiaries to refrain from soliciting stockholder votes on the grounds that
stockholder approval of the Prepackaged Plan is not necessary to the
confirmation of the Prepackaged Plan because (i) the Prepackaged Plan provides
stockholders with a distribution that is not less than the distribution that a
stockholder would receive if the Company and its subsidiaries were liquidated
under Chapter 7 of the Bankruptcy Code and (ii) no holder of an interest that is
junior to stockholders' interests will receive or retain any property under the
Prepackaged Plan.
Assuming the bankruptcy court grants the Class 6 Procedures Order, the
Prepackaged Plan can be confirmed by the bankruptcy court and thereby made
binding upon all stockholders and Debentureholders if it is accepted by
(i) Debentureholders holding at least two-thirds ( 2/3) of the principal amount
of the Debentures actually voted on the Prepackaged Plan (which will be
determined by dividing the principal amount of Debentures voted in favor of the
Prepackaged Plan by the total principal amount of Debentures voted on the
Prepackaged Plan) and (ii) more than one-half ( 1/2) in number of the
Debentureholders that actually vote on the Prepackaged Plan (the "Requisite
Acceptances"). Each member of the Steering Committee has entered into a
Forbearance, Lock-up and Voting Agreement pursuant to which it has agreed to
forebear from exercising any rights or remedies it may have with respect to any
default arising under the Debentures and to vote in favor of the Prepackaged
Plan. The Prepackaged Plan also must be confirmed by a United States bankruptcy
court.
Because only votes cast for or against the Prepackaged Plan are counted for
purposes of determining acceptance or rejection of the Prepackaged Plan, a
failure to vote will not be counted and it is therefore possible that the
Company may obtain the necessary acceptances of the Prepackaged Plan by the
affirmative vote of (a) Debentureholders holding significantly less than
two-thirds ( 2/3) of the aggregate principal amount of the Debentures and
(b) significantly less than one-half ( 1/2) in number of the entire class of
Debentureholders. Furthermore, notwithstanding that stockholders are not
entitled to vote on the Prepackaged Plan, if the Prepackaged Plan is confirmed
by the bankruptcy court and consummated in accordance with its terms, then all
stockholders of the Company will be bound by the terms of the Prepackaged Plan.
Unless extended, Debentureholders will have until 5:00 p.m. on July 12, 2000
to vote on the Prepackaged Plan. If the Company receives the Requisite
Acceptances of the Prepackaged Plan, the Company and its subsidiaries intend to
commence the Bankruptcy Cases. The Company anticipates that the Bankruptcy Cases
will be commenced before it is in default on the next interest payment on the
Debentures which is due on June 15, 2000 and is subject to a 30 day grace period
thereafter. However, the commencement of the Bankruptcy Cases would constitute
an Event of Default under the Indenture governing the Debentures.
After completion of the Recapitalization, the Company believes it will have
established a capital structure that should allow the expansion of its
operations and further integration of its business lines. The Recapitalization
also should improve the Company's ability to access capital and to use its
equity both for targeted acquisitions and as incentive compensation to attract
and retain key personnel who will be integral to the success of its strategic
plan.
15
<PAGE>
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 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 for the three months ended April 30, 1999 are revenues from the
diagnostic imaging centers in New York, which the Company operated pursuant to
Administrative Service Agreements prior to the sale of these centers in
September 1999. These revenues are reported net of payments to physicians. The
Company had no revenues from the diagnostic imaging centers during the three
months ended April 30, 2000.
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. During August 1998, the Company announced its plan to divest
and exit the PPM business. The Company has completed these divestitures as of
April 30, 2000.
16
<PAGE>
RESULTS OF OPERATIONS
The Company's extensive losses in the past two years, its negative cash
flows from operations and its net negative equity, as well as management's
assessment that the Company will be unable to retire its $100 million Debentures
at maturity raises substantial doubt about its ability to continue as a going
concern. The Company's independent accountants, PricewaterhouseCoopers LLP, have
issued a going concern opinion in their report on the Company's financial
statements for the year ended January 31, 2000. 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 the uncertainties giving rise to the
accountants' going concern opinion.
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
APRIL 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net Revenues................................................ 100.0% 100.0%
Salaries, wages and benefits................................ 31.3% 31.7%
Supplies.................................................... 7.8% 23.3%
Depreciation and amortization............................... 2.9% 6.0%
Rent expense................................................ 7.2% 7.4%
Provision for bad debts..................................... 0.7% 1.0%
Capitation expenses and other............................... 73.3% 44.6%
------ ------
Total operating costs and administrative expenses......... 123.2% 114.0%
Interest Expense, net....................................... 7.5% 4.3%
------ ------
Loss before taxes........................................... (30.7%) (18.3%)
Income tax expense (benefit)................................
Net loss.................................................... (30.6%) (18.4%)
====== ======
</TABLE>
THE THREE MONTHS ENDED APRIL 30, 2000 COMPARED TO THE THREE MONTHS ENDED
APRIL 30, 1999
The following discussion reviews the results of operations for the three
months ended April 30, 2000 (the "2001 Quarter"), compared to the three months
ended April 30, 1999 (the "2000 Quarter").
REVENUES
During the 2001 Quarter the Company derived revenues primarily from the
following segments: provider network management, site management organizations
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 assets
held for sale are derived primarily from providing the following services:
physician practice management, diagnostic imaging, radiation therapy, home
healthcare, infusion therapy, real estate services and lithotripsy.
17
<PAGE>
Net revenues were $25.7 million during the 2001 Quarter. Of this amount,
$14.6 million or 56.8% of such revenues was attributable to provider network
management; $8.2 million or 31.9% was related to site management organizations;
and $2.9 million or 11.3% was attributable to assets held for sale.
Net revenues were $60.7 million during the 2000 Quarter. Of this amount,
$18.2 or 30.0% of such revenues was attributable to provider network management;
$8.8 million or 14.5% was related to site management organizations; and
$33.7 million or 55.5% was attributable to assets held for sale.
The Company's net revenues from provider network management services
decreased by $3.6 million from $18.2 million for the 2000 Quarter to
$14.6 million for the 2001 Quarter. The decrease is primarily attributable to
the termination of an unprofitable practice management agreement and the
restructuring of a number of payor contracts. The Company's net revenues from
site management organizations decreased by $0.6 million from $8.8 million for
the 2000 Quarter to $8.2 million for the 2001 Quarter. 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 $30.8 million from
$33.7 million for the 2000 Quarter to $2.9 million for the 2001 Quarter due to
the asset divestitures, including the sale of the real estate service
operations.
EXPENSES
The Company's salaries, wages and benefits decreased by $11.2 million from
$19.2 million or 31.7% of net revenues during the 2000 Quarter to $8.0 million
or 31.3% of net revenues during the 2001. The decrease in dollars is primarily
attributable to the reductions in personnel in conjunction with the asset
divestitures.
The Company's supplies expense decreased by $12.2 million from
$14.2 million or 23.3% of net revenues during the 2000 Quarter to $2.0 million
or 7.8% of net revenues during the 2001 Quarter. The decrease in supplies
expense is a result of the asset divestitures.
The Company's depreciation and amortization expense decreased by
$2.9 million from $3.6 million during the 2000 Quarter or 6.0% of net revenues
to $0.7 million or 2.9% of net revenues during the 2001 Quarter. 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 $2.6 million from $4.5 million or
7.4% of net revenues during the 2000 Quarter to $1.9 million or 7.2% of net
revenues during the 2001. The decrease in dollars is primarily a result of the
asset divestitures.
The Company's other expenses, which also include professional fees,
utilities, and provision for bad debt decreased by $8.7 million from
$27.7 million or 45.6% of net revenues during the 2000 Quarter to $19.0 million
or 74.0% of net revenues during the 2001. 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 decreased by $0.7 million from $2.6 million
or 4.3% of net revenues during the 2000 Quarter to $1.9 million or 7.5% of net
revenues during the 2001. The decrease is a result of the reduction in
borrowings due to the proceeds from asset sales which were used to reduce the
line of credit. Also, the 2000 Quarter included amortization of debt issuance
costs of $0.7 million due to a previous line of credit which was terminated
March 1999. The interest expense includes accrual of interest of $1.7 million on
the Debentures. If the proposed Recapitalization is effected pursuant to the
Prepackaged Plan, quarterly interest expense of approximately $1.7 million on
the Debentures will be eliminated.
18
<PAGE>
The Company's loss prior to income taxes during the 2001 Quarter was
$7.9 million compared to loss prior to income taxes during the 2000 Quarter
$11.1 million. The reduction of loss during the 2001 Quarter is primarily due to
the sale of unprofitable businesses related to the asset divestitures.
The Company's loss per share was $0.21 and $0.33 for the 2001 and 2000
Quarter, respectively. The reduction in the loss per share in the 2001 Quarter
was due to the reduced loss incurred in the 2001 Quarter as well as the issuance
of 5.2 million shares of stock during the 2001 Quarter in connection with a 1998
acquisition, and offset by the $0.7 million treasury stock repurchase since the
2000 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities was $10.8 million during the 2001 Quarter
and $13.6 million during the 2000 Quarter. At April 30, 2000, the Company's
principal sources of liquidity consisted of $13.4 million in cash. The Company
also had $147.4 million of current liabilities, including approximately
$109.9 million of current indebtedness, which is comprised primarily of
$7.5 million outstanding under the line of credit and $100 million of Debentures
due 2003 which have been reclassified to current liabilities on the balance
sheet as of April 30, 2000 and January 31, 2000, as the Company is not in full
compliance with the Indenture governing the Debentures (see below for further
discussion of the line of credit and Debentures).
Cash provided by investing activities was $3.5 million during the 2001
Quarter and primarily represented the net cash received from the sale of assets
of $2.4 million, receipts from notes receivable of $1.5 million, and offset by
the funds required by the Company for capital expenditures of $0.4 million. Cash
provided by investing activities was $3.7 million during the 2000 Quarter and
primarily represented the net cash received from the sale of assets of
$4.7 million, offset by the funds required by the Company for capital
expenditures of $0.9 million and advances under notes receivable of
$0.1 million.
Cash used by financing activities was $4.9 million during the 2001 Quarter
and primarily represented the net reduction of the line of credit of
$4.8 million. Cash provided by financing activities was $9.3 million during the
2000 Quarter and primarily represented the net borrowings of $9.6 million on the
line of credit, offset by the purchase of treasury stock of $0.6 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 $4.4 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. The contingent payment will
equal 10% of the excess gross revenue, as defined, provided the gross operating
margins exceed 30%.
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 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. As of January 31, 2000, the Company had committed to
issue $1.1 million of Common Stock of the Company using the methodology
discussed above and in April 2000 issued 5,187,627 million shares of Common
Stock. This relationship was terminated in May 2000.
19
<PAGE>
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 be exposed to a maximum loss of $3.7 million. A reserve has been
established to reflect the probable loss.
In 1999 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 April 30, 2000 the Company has repurchased approximately 1.3 million
shares at a net purchase price of approximately $2.2 million. The Company has
repurchased no additional shares since the third quarter of fiscal 2000.
The Company's Common Stock was delisted from the NASDAQ National Market as
of the close of business on December 8, 1999. The Company's Common Stock is now
trading on the OTC Bulletin Board. As a result, current information regarding
bid and asked prices for the Common Stock may be less readily available to
brokers, dealers and/or their customers. As a result of reduced availability of
current information, there may be a reduction in the liquidity of the market for
the Common Stock which, in turn, could result in decreased demand for the Common
Stock, a decrease in the stock price and an increase in the spread between the
bid and asked prices for the Common Stock.
During March 1999, the Company obtained 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 of
0.0875%. The line of credit is collateralized 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.
Proceeds from asset sales must be used to repay the line of credit to the extent
the sold assets included eligible accounts receivable. At April 30, 2000,
approximately $7.5 million was outstanding under the line.
The Company has entered into an agreement with its lender effective May 30,
2000, pursuant to which the lender waived certain previously declared defaults,
which defaults were disputed by the Company. The waiver is 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
revolving credit agreements to $5.0 million. As of June 13, 2000, there was
$2.8 million outstanding under the line of credit. The Company believes that,
assuming the Recapitalization is effected, cash flow from operations and
available cash, together with available borrowings under its revolving line of
credit, will be adequate to meet its liquidity needs through the first quarter
of fiscal year 2002, although there can be no assurances that this will be the
case.
The Company anticipates that it will arrange for new working capital
financing in conjunction with the proposed Recapitalization. There can be no
assurances, however, that the Company will be able to obtain such working
capital financing on terms favorable to the Company or at all.
The Company currently has outstanding $100 million in face amount of
Debentures which bear interest at an annual rate of 6 3/4% payable semi-annually
on each June 15 and December 15. The next interest installment on the Debentures
is due June 15, 2000 and the Debentures mature on June 15, 2003. The Debentures
are unsecured obligations of the Company and are guaranteed by certain of the
Company's wholly-owned subsidiaries. The Debentures are convertible into Common
Stock of the Company, at a conversion price of $28.20 per share, subject to
adjustment. The Company has the right to redeem the Debentures at various
redemption prices declining from 103.86% of the principal amount to par on and
after June 18, 1999. Debentureholders have the right to require the Company to
purchase all or any part of their Debentures upon the occurrence of a "change in
control" (as defined in the Indenture) on or before June 1, 2003 for 100% of the
principal amount thereof, together with accrued and unpaid interest. The
commencement by the Company or any subsidiary of any voluntary care or
proceeding under any bankruptcy, insolvency, reorganization or other similar law
as contemplated by the Recapitalization
20
<PAGE>
described above under "Repositioning" would constitute an Event of Default under
the Indenture governing the Debentures. The Company has reclassified the
Debentures as current as of April 30, 2000 and January 31, 2000, as it is not in
full compliance with the terms of the Indenture governing the Debentures.
In early April 2000, Moody's Investors Service downgraded the Debentures
from B3 to Caa3. According to Moody's, this rating action was in response to the
Company's declining revenue and continued operating losses in recent quarters.
In May 2000, Moody's downgraded the Debentures from Caa3 to C, based upon the
Company's announcement that it intended to complete a recapitalization in
bankruptcy as described above under "Repositioning".
The Company's extensive losses in the past two years, its negative cash flow
from operations and its net negative equity position, as well as management's
assessment that the Company is unable to retire the Debentures at maturity,
raise substantial doubt about the Company's ability to continue as a going
concern. In response, the Company has developed plans to improve profitability
of its core business operations and to recapitalize the Company by converting
the Debentures into common equity as described above in "Repositioning".
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.
21
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.9(a) Agreement dated May 30, 2000 among Heller Healthcare
Finance Inc. f/k/a HCFP Funding, Inc. and the Company and its subsidiaries.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 12, 2000 with the
Securities and Exchange Commission reporting that the Company had commenced the
solicitation of acceptances to the Prepackaged Plan.
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 15th day of June 2000.
<TABLE>
<S> <C> <C>
INNOVATIVE CLINICAL SOLUTIONS, LTD.
By: /s/ GARY S. GILLHEENEY
-----------------------------------------
</TABLE>
