UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-19636
HEALTHCARE INTEGRATED SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3119929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Broad Street, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
(732) 544-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 15, 1999
Common Stock, $.01 par value 11,356,974 shares
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three and nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders Equity -
For the nine months ended September 30, 1999 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 17
Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
- ------ ------ -----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $899,075 $1,506,123
Accounts receivable - net 12,036,029 9,869,696
Accounts receivable acquired in the Beran Acquisition 1,614,639 4,653,831
Loan receivable 2,700,000 2,550,000
Prepaid expenses and other 418,737 228,758
------- -------
Total current assets 17,668,480 18,808,408
---------- ----------
Property, Plant and Equipment - Net 8,318,001 9,578,807
--------- ---------
Deferred Tax Asset - Net 1,730,325 48,325
--------- ------
Other Assets:
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,067,696 1,122,175
Other 548,547 273,975
Goodwill - net 12,593,686 12,858,838
---------- ----------
Total other assets 14,474,054 14,519,113
---------- ----------
Total Assets $42,190,860 $42,954,653
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Borrowings under revolving line of credit $2,798,920 $2,838,275
Accounts payable and accrued expenses 2,340,235 2,122,916
Current portion of capital lease obligations 840,560 1,505,510
Current portion of note payable 2,238,916 14,000,000
Reserve for subleased equipment 25,780 294,790
Income taxes payable 46,122 106,582
-------- -------
Total current liabilities 8,290,533 20,868,073
--------- ----------
Noncurrent Liabilities:
Capital lease obligations 2,911,388 3,440,890
Note payable 10,927,301 -
---------- ----------
Total noncurrent liabilities 13,838,689 3,440,890
---------- ---------
Minority Interests 659,051 896,404
------- -------
Commitments and Contingencies
Stockholders' Equity:
Cumulative accelerating redeemable preferred stock, 871.7
shares outstanding at September 30, 1999 and December 31,
1998, respectively ($10,500 per share liquidation preference) 87 87
Common stock, $.01 par value: 50,000,000 shares authorized,
11,356,974 outstanding at September 30, 1999 and December
31, 1998, respectively 113,570 113,570
Additional paid-in capital 23,136,160 23,050,076
Accumulated deficit (3,847,230) (5,414,447)
----------- -----------
Total stockholders' equity 19,402,587 17,749,286
---------- ----------
Total Liabilities and Stockholders' Equity $42,190,860 $42,954,653
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $5,384,878 $3,257,547 $17,158,179 $9,760,201
---------- ---------- ----------- ----------
OPERATING EXPENSES:
Salaries 1,720,430 930,326 5,327,092 2,620,030
Other operating expenses 1,684,237 951,194 5,166,379 2,969,915
Provision for bad debts 204,309 - 416,339 -
Consulting and marketing fees 144,746 139,161 411,788 513,361
Professional fees 159,066 119,210 442,704 370,974
Depreciation and amortization 797,087 412,654 2,369,694 1,262,899
Interest 597,848 167,328 2,120,795 554,777
Gain on sale of property, plant and
equipment - - - (151,767)
--------- --------- ----------- ---------
5,307,723 2,719,873 16,254,791 8,140,189
--------- --------- ---------- ---------
Income Before Minority Interests in Joint
Ventures and Income Taxes 77,155 537,674 903,388 1,620,012
Minority Interests in Joint Ventures 96,335 (132,230) (87,955) (379,950)
------ --------- -------- ---------
Income Before Income Taxes 173,490 405,444 815,433 1,240,062
Income Tax (Benefit) Provision (782,600) 13,014 (1,603,864) 32,500
--------- ------ ----------- ------
Net Income 956,090 392,430 2,419,297 1,207,562
Preferred Dividends 322,999 - 824,048 -
------- -------- ------- ---------
Net Income Available to Common
Shareholders $633,091 $392,430 $1,595,249 $1,207,562
======== ======== ========== ==========
Net Income per Common Share - Basic $.06 .04 $.14 $.12
==== === ==== ====
Weighted Average Common Shares
Outstanding - Basic 11,356,974 10,512,017 11,356,974 10,236,835
========== ========== ========== ==========
Net Income per Common Share- Diluted $.05 $.04 $.12 $.11
==== ==== ==== ====
Weighted Average Common Shares
Outstanding - Diluted 20,258,686 10,950,834 20,080,895 11,248,767
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulate
Additional (Deficit) Total
Paid-in Retained Unearned Stockholders'
Capital Earnings Compensation Equity
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 872 $87 11,356,974 $113,570 $23,050,076 $(5,414,447) $17,749,286
Net income 2,419,297 2,419,297
Unearned compensation in connection
with stock option grant 86,084 (86,084)
Amortization of unearned compensation
for stock options 58,052 58,052
Preferred dividends (824,048) (824,048)
BALANCE, SEPTEMBER 30, 1999 872 $87 11,356,974 $113,570 $23,136,160 $(3,819,198)$(28,032) $19,402,587
========= ======== =========== ========= =========== =========== ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income available to common shareholders $1,595,249 $1,207,562
Adjustments to reconcile net income available to common
shareholders to net cash provided
by operating activities:
Depreciation and amortization 2,369,694 1,262,899
Gain on sale of property, plant and equipment - (151,767)
Non-cash compensation charge 58,052 -
Charge associated with facility closure 33,371 -
Minority interests in joint ventures 87,955 379,950
Allowance for doubtful accounts 693,000 742,000
Changes in Assets and Liabilities:
Accounts receivable 179,859 (2,187,328)
Prepaid expenses and other (189,979) 24,531
Deferred taxes (1,682,000) -
Goodwill (224,539) -
Other (274,572) 13,577
Accounts payable and accrued expenses 217,319 457,939
Income taxes payable (60,460) 942
Deferred transaction and financing costs 54,479 (882,674)
------ ---------
Net cash provided by operating activities 2,857,428 867,631
--------- -------
Cash Flows from Investing Activities:
Loan receivable (150,000) -
Proceeds from sale of property, plant and equipment - 655,000
Purchases of property, plant and equipment (568,342) (32,339)
--------- --------
Net cash (used in) provided by investing
activities (718,342) 622,661
Cash Flows from Financing Activities:
(Payments) borrowings against the revolving line of
credit (39,355) 395,169
Distributions to limited partners of joint ventures (325,308) (85,995)
Payments on capital lease obligations (1,245,307) (1,496,102)
Payments on bridge financing (833,783) -
Payments on reserve for subleased equipment (302,381) (53,460)
Net cash used in financing activities (2,746,134) (1,240,388)
----------- -----------
(Decrease) increase in cash and cash equivalents (607,048) 249,904
Cash and cash equivalents at beginning of period 1,506,123 70,626
--------- ------
Cash and cash equivalents at end of period $899,075 $320,530
-------- --------
Supplemental Cash Flow Information:
Interest paid during the period $1,863,691 $557,796
---------- --------
Income taxes paid during the period $196,115 $ 31,558
-------- ---------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital leases principally for computer and medical
equipment $50,855 $2,427,063
</TABLE>
See accompanying notes to consolidated financial statements.
6
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1999
Note 1. - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in annual consolidated financial statements have
been omitted from the accompanying interim consolidated financial statements. In
the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the Company's
financial position as of September 30, 1999 and the related statements of income
and cash flows for the periods ended September 30, 1999 and 1998. There is no
substantial income tax provision for the three and nine month periods ended
September 30, 1998 due to the availability of net operating loss carryforwards.
For the three and nine month periods ended September 30, 1999 an income tax
benefit has been recorded based on the estimated effective income tax benefit
rate for the full year. The income tax benefit results from management's
judgement that a valuation allowance against deferred tax assets, which amounted
to $2,428,888 at December 31, 1998, will no longer be required at December 31,
1999 because the realization of the deferred tax assets is considered more
likely than not as a result of the Company's achieving profitable operations.
The results of operations for the nine months ended September 30, 1999
are not necessarily indicative of the results of operations expected for the
year ending December 31, 1999 or any other period. The consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 which is on file with the
Securities and Exchange Commission.
Note 2. - Earnings Per Share
Basic earnings per common share are computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding for the three and nine month periods ended September 30, 1999 and
1998, as applicable. Diluted earnings per common share are computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding for the three and nine month periods ended September
30, 1999 and 1998, as applicable, plus the incremental shares that would have
been outstanding upon the assumed exercise of dilutive stock option awards and
conversion of the preferred shares.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
7
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<TABLE>
<CAPTION>
For the Three Months Ended September 30,
1999 1998
-------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income Available t $633,091
Common Shareholders o 11,356,974 $.06 $ 392,430 10,512,017 $.04
Add:
Preferred Dividends 322,999 - - -
Effect of Dilutive
Securities
Stock Options - 177,791 - 358,317
Series C Stock - - - 80,500
Series D Stock - 8,723,921 - -
------------ ------------- ------------ -------------
$956,090 20,258,686 $.05 $ 392,430 10,950,834 $.04
Diluted EPS
Net Income
============ ============= =========== ============ ============= ===========
For the Nine Months Ended September 30,
1999 1998
-------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net Income Avail.to $1,595,249
Common Shareholders 11,356,974 $.14 $1,207,562 10,236,835 $.12
Add:
Preferred Dividends 824,048 - - -
Effect of Dilutive
Securities
Stock Options - - - 646,188
Series C Stock - - - 365,744
Series D Stock - 8,723,921 - -
------------ ------------- ------------ -------------
$2,419,297 20,080,895 $.12 $1,207,562 11,248,767 $.11
Diluted EPS
Net Income
============ ============= =========== ============ ============= ===========
</TABLE>
Note 3. - Relocation of Corporate Offices and Company Name Change
Effective August 1, 1999, the Company's corporate name was changed to
HealthCare Integrated Services, Inc. and its corporate offices were relocated to
Shrewsbury Executive Center II, 1040 Broad Street, Shrewsbury, New Jersey 07702.
In conjunction with the relocation of the Company's corporate offices, the
Company entered into a five year lease for approximately 10,300 square feet of
space. The lease provides for fixed annual rent in each of years one and two of
$196,308 and $206,640 in each of years three through five. The Company's trading
symbol on The Nasdaq Stock Market, HISS, was not affected by this name change.
Note 4. - Beran Acquisition
On October 2, 1998 (effective October 1, 1998), HIS Imaging Co., a
wholly-owned subsidiary of the Company (which, effective July 1, 1999, was
merged into another wholly-owned subsidiary, HIS Imaging, LLC), acquired (the
"Beran Acquisition") all of the assets and business of, and assumed
8
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certain liabilities relating to (i) a fixed-site MRI facility in Voorhees, New
Jersey, (ii) a multi-modality diagnostic imaging facility in Northfield, New
Jersey and a radiology facility in Ocean City, New Jersey, (iii) a
multi-modality diagnostic imaging facility in Bloomfield, New Jersey and (iv) a
multi- modality diagnostic imaging facility in Voorhees and Williamstown, New
Jersey (the "Monroe Facility") and a radiology facility in Atco and
Williamstown, New Jersey (collectively, the "Beran Entities"). The consideration
given by the Company in the Beran Acquisition was (x) the assumption of certain
obligations and liabilities of the Beran Entities, (y) cash in the amount of
$11.5 million and (z) the issuance of 871.743 shares of Series D Cumulative
Accelerating Redeemable Preferred Stock of the Company (the "Series D Stock")
having an aggregate liquidation preference of $9,153,301.50 (i.e., $10,500 per
share liquidation preference). The Company also assumed certain contractual
obligations of the Beran Entities on a going-forward basis under the contracts
assigned to the Company in the Beran Acquisition (including operating leases and
equipment maintenance agreements). The Company also loaned the Beran Entities an
aggregate of $2.5 million, which loan bears interest at 8% per annum and matures
upon the terms and conditions contained in the related promissory notes, but in
no event later then December 31, 1999. The Company used the proceeds of a
short-term $14.0 million bridge loan from DVI Financial Services Inc. ("DFS") to
pay the cash portion of the purchase price and to fund the loan to the Beran
Entities (the "DFS Bridge Loan"). The DFS Bridge Loan bears interest at 12% per
annum with no payment due in month one (i.e., November 1998), interest only
payments of $140,000 in each of months two through four (i.e., December 1998,
January 1999 and February 1999), principal and interest payments of
approximately $308,000 in each of months five and six (i.e., March 1999 and
April 1999), with a balloon payment of $13,951,804 due in month seven (i.e., May
1999), which balloon payment date was extended to August 1, 1999. As noted
below, in September 1999, the DFS Bridge Loan was restructured and now matures
in May 2004. In addition, options to purchase 400,000 shares of common stock,
par value $.01 per share, of the Company at an exercise price of $1.03125 per
share were issued to DFS for providing the DFS Bridge Loan. The Beran
Acquisition is being accounted for as a purchase.
Effective July 14, 1999, the Company closed the Monroe Facility. The
facility, historically and since its acquisition, has operated unprofitably.
Following the acquisition, the Company was unsuccessful at its attempt to
profitably operate the facility. It was decided that the Company had to either
invest in certain equipment upgrades to modernize the facility or cease its
operations. After analysis of the pertinent factors, the Company determined to
close the facility. The closure of the Monroe Facility, resulted in a one-time
charge to operations during the quarter ended September 30, 1999 of
approximately $33,000, which is primarily comprised of a reserve for estimated
future cash outflows relating to the leased premises. The Company will continue
to review the performance of the facilities acquired in the Beran
Acquisition, as well as its other facilities, and may
make additional modifications to there operations as conditions warrant.
In September 1999, the Company restructured the DFS Bridge Loan with DFS
into a long-term liability. As a result, the repayment date of the debt is now
May 1, 2004, with principal and interest payments of approximately $308,000
payable by the Company in each of the 56 months commencing October 1, 1999. The
outstanding balance of the DFS Bridge Loan at the time of restructuring was
$13,166,217. The debt bears interest at 12% per annum.
Note 5. - Deferred Transaction and Financing Costs
Deferred transaction and financing costs relate to expenses incurred in
connection with the Company's proposed acquisition of a management services
organization ("MSO") and the related
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financing therefore. In the event such proposed acquisition is not consummated,
the related deferred transaction and financing costs will be expensed.
Note 6. - Segment Information
The Company currently operates in two industry segments -- diagnostic
imaging and physician practice management. The diagnostic imaging segment
primarily involves operating fixed-site diagnostic imaging facilities. The
physician practice management segment, which commenced operations during the
second quarter of fiscal 1998, consists of providing management services to
independent physician practices.
The following table shows net revenues and operating income by industry
segment for the three and nine month periods ended September 30, 1999. Assets
are not identified by industry segment. Operating income consists of revenues
less direct operating expenses. All corporate operating expenses have been
allocated to the diagnostic imaging segment:
Three and Nine Months
Ended Ended
Sept. 30, 1999
Net revenues:
Diagnostic imaging $5,066,475 16,262,908
Physician practice management 318,403 895,271
---------- -----------
Total $5,384,878 $17,158,179
========== ===========
Operating income:
Diagnostic imaging $(132,348) $438,611
Physician practice management 209,503 464,777
------- -------
Total $ 77,153 $903,388
=========== ========
Note 7. - Acquisition of Limited Partners' Interest
Prior to May 1, 1999, the Company's MRI facility located in
Philadelphia, Pennsylvania was operated as a joint venture among a wholly-owned
subsidiary of the Company (as the general partner holding a 60% partnership
interest) and certain individual medical professionals and others (as limited
partners holding in the aggregate the remaining 40% partnership interests).
Effective May 1, 1999, the Company's subsidiary consummated the purchase of the
limited partners' 40% partnership interests for $100,000 in cash. At April 30,
1999, the net book value of this 40% partnership interest was $0. The $100,000
purchase price will be recorded by the Company as goodwill and amortized over a
period of ten years.
Additionally, the Company is in the process of negotiating the purchase of
the limited partners' ownership interest in the Company's facility located in
Wayne, New Jersey (the "Wayne Facility"). This facility is operated as a joint
venture is among a wholly-owned subsidiary of the Company (as the general
partner holding a 51% partnership interest) and two individual medical
professionals, who also provide consulting services to this facility the reading
radiologists at this facility (as limited partners holding in the aggregate the
remaining 49% partnership interest). However, there can be no assurance, that
the Company will be successful in its negotiations to acquire the limited
partners' ownership interest in the Wayne Facility.
10
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Note 8. Newly Formed Ventures
Effective April 1999, the Company, in a 50/50 joint venture with
HealthMark Alliance, Inc. ("HAI"), formed Atlantic Imaging Group, LLC ("Atlantic
Imaging") to develop, market and manage statewide networks of diagnostic imaging
facilities. The initial scope of the network is New Jersey. The Company will
provide day-to-day administrative and management services to Atlantic Imaging,
and both the Company and HAI will provide marketing services. Atlantic Imaging
has entered into a five-year arrangement with National Healthcare Resources,
Inc. ("NHR"), which provides medical case management services to several
insurance carriers, whereby, among other things, NHR agreed to utilize the
network on an exclusive basis for any MRI services for which it refers claimants
on behalf of its clients (unless otherwise instructed by such client) and will
utilize the network for other radiology services to the extent practicable.
Atlantic Imaging is being accounted for by the Company using the equity method.
Amounts attributable to the Company's investment in Atlantic Imaging for the
three and nine months ended September 30, 1999 are not significant.
In addition, in September 1999 the Company announced its establishment
of clinical research operations through a wholly-owned subsidiary, HIS Clinical
Research Co. LLC ("HISCR"). HISCR will focus on arranging clinical research
trials for pharmaceutical companies. To date, HISCR has arranged four clinical
studies in the areas of rheumatology pain management medication, chronic
prostatitis medication, diabetes drug therapies and pneumonia medication.
Amounts attributable to the operations of HISCR for the three and nine months
ended September 30, 1999 are not significant.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. Statements in this Quarterly Report that are not historical facts
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Any statements contained herein which are not
historical facts or which contain the words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "should," and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, but not limited to, the
risk that the Company may not be able to implement its growth strategy in the
intended manner including the integration of acquisitions, risks regarding
currently unforeseen competitive pressures affecting participants in the health
care market and risks affecting the Company's industry, such as increased
regulatory compliance and changes in regulatory requirements, changes in payor
reimbursement levels and technological changes. In addition, the Company's
business, operations and financial conditions are subject to the risks,
uncertainties and assumptions which are described in the Company's reports and
statements filed from time to time with the Securities and Exchange Commission.
For the Nine Months Ended September 30, 1999 vs. September 30, 1998
For the nine months ended September 30, 1999, revenues were $17,158,179
as compared to $9,760,201 for the nine months ended September 30, 1998, an
increase of approximately $7,398,000 or 76%. This increase was primarily due to
(i) revenues associated with the operation of five New Jersey-based diagnostic
imaging facilities (the "Beran Facilities") acquired effective as of October 1,
1998 (approximately $7,319,000) (the "Beran Acquisition") and (ii) revenues
associated with the Company's physician practice management operations
(approximately $505,000), all of which were partially offset by the closure of
the Company's fixed-site MRI facility in Secaucus, New Jersey (the "Secaucus
Facility") in May 1998 (approximately $414,000).
For the nine months ended September 30, 1999, operating expenses were
$16,254,791 as compared to $8,140,189 for the nine months ended September 30,
1998, an increase of approximately $8,115,000 or 100%. This increase was
primarily due to (i) expenses incurred in connection with the operation of the
Beran Facilities acquired in October 1998 (approximately $6,562,000), (ii)
increased expenses associated with facilities that were operated by the Company
for both of the nine month periods ended September 30, 1999 and 1998
(approximately $1,269,145) primarily due to increased salary expenses relating
to new personnel, temporary help costs, and increased depreciation and
amortization and maintenance agreement costs relating to new equipment, (iii)
increased interest expense (approximately $358,000) relating to deferred
financing costs incurred in connection with the Beran Acquisition which are
being expensed over the applicable agreement term, (iv) expenses relating to the
Company's physician practice management operations (approximately $300,000) and
(v) a gain on sale of property, plant and equipment in the second quarter of
fiscal 1998 relating to the sale of the mobile MRI unit utilized at the Secaucus
Facility to an unaffiliated party (approximately $152,000), all of which were
partially offset by decreased consulting and marketing fees
12
<PAGE>
(approximately $216,000) and the closure of the Secaucus Facility in May 1998
(approximately $258,000).
For the Three Months Ended September 30, 1999 vs. September 30, 1998
For the three months ended September 30, 1999, revenues were $5,384,878
as compared to $3,257,547 for the three months ended September 30, 1998, an
increase of approximately $2,127,000 or 65%. This increase was primarily due to
(i) revenues associated with the operation of the Beran Facilities acquired in
October 1998 (approximately $2,294,000) and (ii) revenues associated with the
Company's physician practice management operations (approximately $123,000), all
of which were partially offset by the closure of the Secaucus Facility in May
1998 (approximately $57,000) and a decrease in revenues associated with
facilities that were operated by the Company for both of the quarters ended
September 30, 1999 and 1998 (approximately $234,000). The same facility decline
in revenues for the quarter ended September 30, 1999, is attributable in part,
to The New Jersey Automobile Cost Reduction Act of 1998 (the "ACR Act") which
was implemented in the third quarter of fiscal 1999. The ACR Act allows for the
pre-certification of MRI and other diagnostic imaging procedures reimbursable
through automobile insurance carriers before each procedure is performed. This
requirement has caused some delays and decreases in MRI and other diagnostic
imaging referrals during the third quarter of fiscal 1999 at various of the
Company's facilities.
For the three months ended September 30, 1999, operating expenses were
$5,307,723 as compared to $2,719,873 for the three months ended September 30,
1998, an increase of approximately $2,588,000 or 97%. This increase was
primarily due to (i) expenses incurred in connection with the operation of the
Beran Facilities acquired in October 1998 (approximately $2,214,000), (ii)
increased expenses associated with facilities that were operated by the Company
for both of the quarters ended September 30, 1999 and 1998 (approximately
$374,000) primarily due to increased salary expenses relating to new personnel,
professional fees, temporary help costs, and increased maintenance agreement
costs relating to new equipment not covered by a manufacturer's warranty and
(iii) expenses relating to the Company's physician practice management
operations (approximately $38,000).
The operating results for the Company continue to be negatively impacted
by the Company's fixed-site MRI facility located in Brooklyn, New York (the
"Brooklyn Facility"). For the three and nine months ended September 30, 1999,
the Brooklyn Facility generated losses of $123,299 and $445,428, respectively,
as compared to $100,233 and $577,942, respectively, for the three and nine
months ended September 30, 1998 . The Brooklyn Facility continues to operate at
a loss, even after the September 1998 restructuring of the lease arrangement
with respect to this facility which reduced the monthly lease payments by
approximately $13,500 per month. Although the Company continues to implement
certain revenue enhancement measures, including excess capacity arrangements,
there can be no assurance that the procedures generated at the Brooklyn Facility
will be sufficient to better support the operations of the Brooklyn Facility.
In furtherance of the Company's previously announced expanded strategic
focus into the area of establishing physician practice management operations in
New Jersey, New York and Philadelphia, Pennsylvania, the Company is assessing
affiliations with several primary care and multi-specialty physician practices
including Pavonia Medical Associates, P.A. (""PMA"), as well as the faculty
practices of certain hospitals. Initially, the Company focused on the
establishment of its physician practice management operations through the
acquisition of physician practices. In this regard, the
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<PAGE>
Company entered into various letters of intent, however, no definitive
acquisition agreements or long-term administrative service agreements were
executed. Given the significant declines in the financial performance of many of
the leading publicly-traded physician practice management companies during the
past year, the availability of financing for these acquisitions has been
extremely limited. This constriction in the financing market has had, and
is likely to continue to have, an adverse impact on the Company's ability to
effect its physician practice management acquisitions. The Company has now
shifted its focus from the acquisition of physician practices to affiliations
with them and has been providing management services to PMA and another New
Jersey based multi-specialty physician practice for the past several months.
Liquidity and Capital Resources of the Company
- ----------------------------------------------
As of September 30, 1999, the Company had a cash balance of $899,075,
current assets of $17,668,480 and working capital of $9,377,947. The significant
improvement in the Company's working capital is a result of the Company's
restructuring of a short-term $14.0 million bridge loan (the "DFS Bridge Loan")
with DVI Financial Services Inc. ("DFS"). As a result of this restructuring, the
repayment date of the debt is now May 1, 2004, with principal and interest
payments of approximately $308,000 payable by the Company in each of the 56
months commencing with October 1, 1999. The outstanding balance of the DFS
Bridge Loan at the time of restructuring was $13,166,217. The restructured debt
bears interest at 12% per annum. The DFS Bridge Loan was funded in October 1998
in connection with the Beran Acquisition and bore interest at 12% per annum with
no payment due in month one (i.e., November 1998), interest only payments of
$140,000 in each of months two through four (i.e., December 1998, January 1999
and February 1999), principal and interest payments of approximately $308,000 in
each of months five and six (i.e., March 1999 and April 1999) with a balloon
payment of $13,951,804 due in month seven (i.e., May 1999), which balloon
payment date had been extended to August 1, 1999.
Cash flows provided by operating activities were $2,857,428 for the nine
months ended September 30, 1999, which consisted primarily of (i) net income of
$1,595,249, (ii) depreciation and amortization of $2,369,694, (iii) an increase
in the allowance for doubtful accounts receivable of $693,000 and (iv) minority
interests in joint ventures of $87,955. Other significant components of cash
flows provided by operating activities include (x) an increase in accounts
receivable, net of $2,166,333, (y) an increase in deferred tax asset of
$1,682,000 and (z) an increase in prepaid expenses and other of $189,979, all of
which were partially offset by a decrease in the accounts receivable acquired in
the Beran Acquisition of $3,039,192 and an increase in accounts payable and
accrued expenses of $217,319.
Cash flows used in investing activities were $718,342, which related to
interest income of $150,000 associated with a $2.5 million loan to the Beran
Entities and purchases of property, plant and equipment of $568,342. The loan to
the Beran Entities bears interest at 8% per annum and matures upon the terms and
conditions contained in the related promissory notes, but in no event later then
December 31, 1999.
Cash flows used in financing activities were $2,746,134, which consisted
primarily of payments on capital lease obligations of $1,245,307, payments on
the DFS Bridge Loan of $833,783, payments on obligations related to subleased
equipment of $302,381 and distributions to limited partners of joint venture of
$325,308.
14
<PAGE>
In December 1997, the Company agreed to guarantee a $1.0 million loan
from DFS to Jersey Integrated HealthPractice, Inc. which provides management
services to PMA, ("JIHP"). This loan was funded by DFS to JIHP on January 8,
1998 and bears interest at 12% per annum and is repayable over 48 months
commencing in February 1998 at $26,330 per month. At September 30, 1999,
approximately $639,000 of the loan was outstanding. PMA and each physician
stockholder of PMA have acknowledged that such extension of credit is for their
benefit and have agreed that to the extent that the Company is or becomes liable
in respect of any indebtedness or other liability or obligation of either PMA or
JIHP, and the acquisition by the Company of 100% of the outstanding capital
stock of JIHP is not consummated, then PMA and each physician stockholder of PMA
agree to indemnify and hold the Company harmless from and against any and all
such liabilities and obligations.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit Corporation ("DVIBC"), an affiliate
of DFS, to provide a revolving line of credit to the Company. The maximum amount
available under such credit facility initially was $2.0 million, which amount
increased to $3.0 million in October 1998 in connection with the Beran
Acquisition, with advances limited to 75% of eligible accounts receivable, as
determined by DVIBC. Borrowings under the line of credit bear interest at the
rate of 3% over the prime lending rate and were originally repayable on May 1,
1999, which maturity date had been extended to August 1, 1999. The Company has
been notified by DVIBC that it is prepared to further extend the term of the
revolving line of credit until October 1, 2000, subject to the negotiation of
terms and conditions acceptable to DVIBC. The Company's obligations under the
credit facility are collateralized through a grant of a first security interest
in all eligible accounts receivable. The agreement contains customary
affirmative and negative covenants including covenants requiring the Company to
maintain certain financial ratios and minimum levels of working capital.
Borrowings under this credit facility may be used to fund working capital needs
as well as acquiring businesses which are complementary to the Company. At
September 30, 1999 and December 31, 1998, respectively, the Company had
$2,798,920 and $2,838,275, respectively, of borrowings under this credit
facility.
Prior to May 1, 1999, the Company's MRI facility located in
Philadelphia, Pennsylvania was operated as a joint venture among a wholly-owned
subsidiary of the Company (as the general partner holding a 60% partnership
interest) and certain individual medical professionals and others (as limited
partners holding in the aggregate the remaining 40% partnership interests).
Effective May 1, 1999, the Company's subsidiary consummated the purchase of the
limited partners' 40% partnership interests for $100,000 in cash. At April 30,
1999, the net book value of this 40% partnership interest was $0. The $100,000
purchase price will be recorded by the Company as goodwill and amortized over a
period of ten years.
Additionaly, the Company is in the process of negotiating the purchase of
the limited partners' ownership interest in the Company's facility located in
Wayne, New Jersey (the "Wayne Facility"). This facility is operated as a joint
venture is among a wholly-owned subsidiary of the Company (as the general
partner holding a 51% partnership interest) and two individual medical
professionals, who also provide consulting services to this facility the reading
radiologists at this facility (as limited partners holding in the aggregate the
remaining 49% partnership interest). However, there can be no assurance, that
the Company will be successful in its negotiations to acquire the limited
partners' ownership interest in the Wayne Facility.
The nature of the Company's operations require significant capital
expenditures which generally have been financed through the issuance of debt and
capital leases and proceeds received from the sale of equity securities,
including the Company's initial public offering of Common Stock
15
<PAGE>
and redeemable warrants in November 1991, the subsequent exercise of such
redeemable warrants and the sale of Series C Convertible Preferred Stock in
February 1996. Continued expansion of the Company's business, including the
establishment of physician practice management operations, will require
substantial cash resources and will have an impact on the Company's liquidity.
The Company believes that cash to be provided by the Company's operating
activities together with borrowings available from the Company's revolving line
of credit will enable the Company to meet its anticipated cash requirements for
its present operations for the next twelve months. Continued expansion of the
Company's business, including the establishment of physician practice management
operations, will require additional sources of financing. The Company has been
notified by DVIBC that they are prepared to further extend the term of the
revolving line of credit until October 1, 2000, subject to the negotiation of
terms and conditions acceptable to them.
Effect of Year 2000 Issue
The "Year 2000 issue" is a result of computer programs written using two
digits instead of four digits to refer to a particular year. Therefore, these
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activity.
The Company has not yet fully completed its assessment of the impact of
the Year 2000 issue on its computer systems and technology, including (i)
information technology such as software and hardware relating to its medical
billing systems, accounting/finance systems, payroll systems, desktop
applications and servers, and (ii) non-information systems or embedded
technology such as micro controllers contained in various medical equipment,
safety systems, facilities and utilities (including telephones, facsimile
machines, time clocks and postage meters). The Company is evaluating its state
of readiness through surveys of its sites as well as through discussions with
its significant vendors to determine the readiness of those vendors whose
failure to correct year 2000 issues would materially impact the Company. The
Company has completed its site assessments and hopes to complete its assessment
of the state of readiness of its significant vendors by the end of the third
quarter of fiscal 1999.
The cost to the Company to correct its internal Year 2000 issues is
estimated to be $88,500, consisting of $30,500 related to the upgrading of its
corporate server, $54,500 relating to the upgrading of personal computers and
$3,500 related to the upgrading of medical equipment. However, the Company does
not consider all of these upgrades to be Year 2000 related because they would
have been made otherwise in the ordinary course of business irrespective of a
Year 2000 issue. The Company anticipates that these costs will be funded through
operating cash flows. During the third quarter of fiscal 1999, the Company
completed the process of upgrading its corporate server and personal computers
at a cost of approximately $73,000. The Company is currently in the process of
replacing those non-compliant personnel computers in certain of the Company's
facilities with the more modern computers from the Company's corporate office.
The Company expects to complete the requisite upgrading of medical equipment by
the end of the fourth quarter of fiscal 1999.
While the Company believes its efforts are adequate to attain internal
Year 2000 compliance, the Year 2000 readiness of its vendors may lag behind the
Company's efforts and it has not yet determined the extent to which the Company
is vulnerable to the failure of its vendors to remediate their own Year 2000
issues. There can be no guarantee that the systems of these third parties will
16
<PAGE>
be timely converted or that a failure to convert will not have a material impact
on the Company's business, financial condition or results of operations. The
Company is not yet in a position to assess any such third party's compliance
efforts or the impact on the Company if any such efforts fail.
The Company's current estimates of the amount of time and costs
necessary to modify and test its computer systems and technology and determine
its state of readiness are based on management's best estimates including
assumptions regarding future events, including the continued availability of
certain resources, Year 2000 modification plans and other factors. New
developments may occur that could affect the Company's estimates of the amount
of time and costs necessary to modify and test its systems for Year 2000
compliance, including, but not limited to (i) the availability and cost of
personnel trained in this area, (ii) the ability to locate and correct all
relevant computer codes and equipment and (iii) the Year 2000 compliance
attained by its significant vendors. The Company has not developed, nor does it
plan to develop, any contingency plans for any unplanned noncompliance issues
from internal or external sources. There can be no guarantee that any unplanned
noncompliance issues from internal or external sources will not have a material
impact on the Company's business, financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
17
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 5 have been omitted because the related information is
either inapplicable or has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on August 9, 1999 relating to
the issuance of its Press Release on August 5, 1999 announcing
the name change of the Company and the relocation of its
corporate offices.
18
<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.
HEALTHCARE INTEGRATED SERVICES, INC.
(Registrant)
Date: November 15, 1999 /s/ Elliott H. Vernon
---------------------
Elliott H. Vernon
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 /s/ Scott P. McGrory
--------------------
Scott P. McGrory
Vice President - Controller
(Principal Financial and
Accounting Officer)
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