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, 2000
------------------
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 20, 2000
----- --------------------------------
Common Stock, $.01 par value 1,361,703 shares
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
------- ---------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income -
Three and nine months ended September 30, 2000 and 1999 4
Consolidated Statement of Changes in Stockholders Equity -
For the nine months ended September 30, 2000 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 21
Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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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 associated with
the Company's need to refinance certain near-term debt maturities, 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.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
Assets 2000 1999
------ ------ -----
(Unaudited)
Current Assets:
Cash and cash equivalents $ 405,438 $ 645,389
Accounts receivable - net 14,471,775 13,806,760
Loan receivable - 50,411
Due from International Commerce Exchange Systems, Inc. ("ICES") 504,882 -
Prepaid expenses and other 281,523 226,752
------- -------
Total current assets 15,663,618 14,729,312
---------- ----------
Property, Plant and Equipment - Net 8,130,694 7,754,840
--------- ---------
Deferred Tax Asset - Net 1,192,702 2,494,184
--------- ---------
Other Assets:
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,075,834 905,676
Other 354,886 464,679
Investment in Atlantic Imaging Group, LLC ("AIG") 242,828 94,785
Goodwill - net 12,031,873 12,421,518
---------- ----------
Total other assets 13,969,546 14,150,783
---------- ----------
Total Assets $38,956,560 $39,129,119
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $4,852,826 $2,538,156
Current portion of capital lease obligations 1,177,130 766,338
Current portion of note payable 2,522,867 2,306,758
Income taxes payable - 6,475
--------- -----
Total current liabilities 8,552,823 5,617,727
--------- ---------
Noncurrent Liabilities:
Capital lease obligations 3,715,786 2,717,700
Borrowings under revolving line of credit 3,586,505 3,251,360
Note payable 8,404,434 10,324,538
--------- ----------
Total noncurrent liabilities 15,706,725 16,293,598
---------- ----------
Minority Interests 443,217 478,800
------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.10 par value, 1,000,000 shares authorized:
Series D 8% cumulative accelerating redeemable preferred stock, 633.647
shares outstanding at September 30, 2000 and December 31, 1999, respectively
($10,500 per share liquidation preference) 63 63
Common stock, $.01 par value: 50,000,000 shares authorized, 1,361,703
outstanding at September 30, 2000 and 1,135,699 at December 31, 1999 13,617 11,357
Additional paid-in capital 21,240,419 20,742,679
Accumulated deficit (7,000,304) (4,015,105)
----------- -----------
Total stockholders' equity 14,253,795 16,738,994
---------- ----------
Total Liabilities and Stockholders' Equity $38,956,560 $39,129,119
=========== ===========
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
2000 1999 2000 1999
---- ---- ---- ----
Revenues $3,940,262 $5,384,878 $13,772,742 $17,158,179
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Salaries 1,716,570 1,720,430 4,835,120 5,327,092
Other operating expenses 1,154,668 1,749,844 4,186,005 5,157,954
Provision for bad debts 386,209 161,091 1,206,103 416,339
Consulting and marketing fees 14,278 144,746 169,426 411,788
Professional fees 121,633 159,066 291,882 442,704
Depreciation and amortization 700,504 797,087 2,331,065 2,369,694
Interest 610,626 597,848 1,829,470 2,120,795
------- ------- --------- ---------
4,704,488 5,330,112 14,849,071 16,246,366
--------- --------- ---------- ----------
(Loss)/Income Before Minority Interests in 54,766
Joint Ventures and Income Taxes (764,226) (1,076,329) 911,813
Equity earnings in AIG 127,537 22,389 401,766 (8,425)
Minority Interests in Joint Ventures (93,113) 96,335 (293,944) (87,955)
-------- ------ --------- --------
(Loss)/Income Before Income Taxes (729,802) 173,490 (968,507) 815,433
Income Tax Expense/(Benefit) Provision 1,340,091 (782,600) 1,318,537 (1,603,864)
--------- --------- --------- -----------
Net (Loss)/Income (2,069,893) 956,090 (2,287,044) 2,419,297
Preferred Dividends 250,861 322,999 747,133 824,048
------- ------- ------- -------
Net (Loss)/Income Available to Common
Shareholders $(2,320,754) $633,091 $(3,034,177) $1,595,249
========== ======== ============ ==========
Net (Loss)/Income per Common Share -
Basic $(1.88) $.56 $(2.60) $1.41
====== ==== ======= =====
Weighted Average Common Shares
Outstanding - Basic 1,231,505 1,135,699 1,167,867 1,135,699
========= ========= ========= =========
Net (Loss)/Income per Common Share-
Diluted $(1.88) $.47 $(2.60) $1.20
====== ==== ======= =====
Weighted Average Common Shares 1,231,505 2,025,871 1,167,867 2,008,092
Outstanding - Diluted ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional (Deficit) Total
Paid-in Retained Unearned Stockholders'
Capital Earnings Compensation Equity
Preferred Stock Common Stock
Shares Amount Shares Amount
BALANCE, JANUARY 1, 2000 634 $63 1,135,699 $11,357 $20,742,679 $(3,964,479) $(50,626) $16,738,994
Net (loss) (2,287,044) (2,287,044)
Unearned compensation in connection
with stock option grant
Issuance of stock 226,004 2,260 497,740 500,000
Amortization of unearned compensation
for stock options 48,978 48,978
Preferred dividends (747,133) (747,133)
BALANCE, SEPTEMBER 30, 2000 634 $63 1,361,703 $13,617 $21,240,419 $(6,998,656) $(1,648) $14,253,795
=== ==== ========= ======= =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended
September 30,
(Unaudited)
2000 1999
---- ----
Cash Flows From Operating Activities:
Net (loss)/income available to common shareholders $(3,034,177) $1,595,249
Adjustments to reconcile net (loss)/income available to common
shareholders to net cash provided by operating activities:
Depreciation and amortization 2,331,064 2,369,694
Non-cash compensation charge 48,978 58,052
Charge associated with facility closure - 33,371
Interests in joint ventures 145,901 87,955
Allowance for doubtful accounts 1,676,000 693,000
Changes in Assets and Liabilities:
Accounts receivable (2,341,015) 179,859
Prepaid expenses and other (54,771) (189,979)
Deferred taxes 1,301,482 (1,682,000)
Goodwill (135,000) (224,539)
Other 109,793 (274,572)
Accounts payable and accrued expenses 2,314,670 217,319
Income taxes payable (6,475) (60,460)
Deferred transaction and financing costs (170,158) 54,479
--------- ------
Net cash provided by operating activities 2,186,292 2,857,428
--------- ---------
Cash Flows from Investing Activities:
Loan receivable 50,411 (150,000)
Due from ICES (504,882) -
Purchases of property, plant and equipment (48,111) (568,342)
-------- ---------
Net cash used in investing activities (502,582) (718,342)
--------- ---------
Cash Flows from Financing Activities:
Borrowings (payments) against the revolving line of credit 335,145 (39,355)
Proceeds from sale of stock 500,000 -
Distributions to limited partners of joint ventures (329,527) (325,308)
Payments on capital lease obligations (725,284) (1,245,307)
Payments on bridge financing (1,703,995) (833,783)
Payments on reserve for subleased equipment - (302,381)
---------- ---------
Net cash used in financing activities (1,923,661) (2,746,134)
----------- -----------
(Decrease) in cash and cash equivalents (239,951) (607,048)
Cash and cash equivalents at beginning of period 645,389 1,506,123
------- ---------
Cash and cash equivalents at end of period $405,438 $899,075
-------- --------
Supplemental Cash Flow Information:
Interest paid during the period $1,491 $1,863,692
====== ==========
Income taxes paid during the period $29,903 $196,115
======= ========
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Capital leases principally for computer and medical equipment $2,134,164 $50,855
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2000
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, 2000 and the related statements of
operations and cash flows for the periods ended September 30, 2000 and 1999. The
Company has recorded a net deferred tax asset of $1,192,702 as of September 30,
2000, which represents a decrease of $1,301,482 over the net deferred tax asset
of $2,494,184 as of December 31, 1999. This net deferred tax asset reflects the
benefit of approximately $2,704,000 in federal loss carryforwards that expire in
varying amounts between December 31, 2006 and December 31, 2014. This net
deferred tax asset has been recorded net of a valuation allowance of $1,381,000
as of September 30, 2000 to reflect the estimated amount of deferred tax assets
which may not be realized through generating sufficient taxable income prior to
expiration of the loss carryforwards. Realization of the remaining net deferred
tax asset may be limited pursuant to Internal Revenue Code Section 382 as a
result of any changes in ownership. If such a change were to occur with respect
to the Company, the limitation could reduce the amount of benefits that would be
available to offset future taxable income each year, starting with the year of
ownership change.
The Company had an accumulated deficit of $7,000,304 and $4,015,105 at
September 30, 2000 and December 31, 1999, respectively. The increase in
accumulated deficit is attributable primarily to the net loss incurred by the
Company during the first nine months of fiscal 2000. Cash flows provided by
operating activities were $2,186,292 and $2,857,428 for the nine months ended
September 30, 2000 and September 30, 1999, respectively. The Company is actively
engaged in discussions with two financial institutions for interim and long-term
financing to help facilitate the Company's continuing cash requirements. The
Company anticipates a significant increase in its revenues from the acquisition
of Jersey Integrated HealthPractice, Inc. ("JIHP") of approximately $13 million
(See Note 8 - Newly Formed Ventures), as well as from clinical research trials
it has recently arranged.
The results of operations for the nine months ended September 30, 2000
are not necessarily indicative of the results of operations expected for the
year ending December 31, 2000 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, 1999 which is on file with the
Securities and Exchange Commission.
On January 20, 2000, the Company effectuated a 1:10 reverse stock split
of its common stock and simultaneously therewith, commenced trading on The
American Stock Exchange under the symbol "HII". The common stock discontinued
trading on the Nasdaq National Market as of the close of business on January 19,
2000, where it was traded under the symbol "HISS". Where applicable, all
references to number of shares or per share amounts in the accompanying
financial statements and notes have been adjusted to reflect this reverse stock
split.
<PAGE>
Note 2. - Earnings Per Share
Basic (loss) earnings per common share are computed by dividing net
(loss) income available to common shareholders by the weighted average number of
common shares outstanding for the nine month period ended September 30, 2000 and
1999, as applicable. Diluted (loss) earnings per common share are computed by
dividing net (loss) income available to common shareholders by the weighted
average number of common shares outstanding for the nine month period ended
September 30, 2000 and 1999, 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended September 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
----------- -----------
Income(Loss) Shares Per Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basis EPS
Net (Loss)Income
Available to
Common Shareholders $(2,320,754) 1,231,505 $(1.88) $ 633,091 1,135,699 $.56
Add:
Preferred Dividends - 322,999 -
Effect of Dilutive
Securities
Stock Options - - 17,779
Series D Stock - - 872,393
-------- ----------- --------- -------
Diluted EPS
Net (Loss)/Income $(2,320,754) 1,231,505 $(1.88) $956,090 2,025,871 $.47
========== ========= ===== ======== ========= ====
For the Nine Months Ended September 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
----------- -----------
Income(Loss) Shares Per Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basis EPS
Net (Loss)Income
Available to
Common Shareholders $(3,034,177) 1,167,867 $(2.60) $1,595,249 1,135,699 $1.41
Add:
Preferred Dividends - 824,048 -
Effect of Dilutive
Securities
Stock Options - - -
Series D Stock - - 872,393
-------- ---------- --------- -------
Diluted EPS
Net (Loss)/Income $(3,034,177) 1,167,867 $(2.60) $2,419,297 2,008,092 $1.20
========== ========= ====== ========= ========= =====
</TABLE>
Note 3. Company Name Change and Relocation of Corporate Office
Effective August 1, 1999, the Company's corporate name was changed to
HealthCare Integrated Services, Inc. ("HIS") 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.
Note 4. - Beran Acquisition
On October 2, 1998 (effective October 1, 1998), HIS Imaging
LLC., a wholly-owned subsidiary of the Company, acquired (the "Beran
Acquisition") all of the assets and business of, and assumed 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 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 887.385 shares
of Series D Cumulative Accelerating Redeemable Preferred Stock of the Company
(the "Series D Stock") having an aggregate liquidation preference of
$9,317,542.50 (i.e., $10,500 per share liquidation preference). The purchase
price was subject to an adjustment based on the value of the Beran Entities'
accounts receivable as of the closing date and, in accordance therewith, 15.642
shares of Series D Stock having an aggregate liquidation preference of $164,241
were transferred back to the Company and canceled. 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 (the "Beran Loan") an aggregate of $2.5 million, which loan
bore interest at 8% per annum and was to mature upon the terms and conditions
contained in the related promissory notes, but in no event later then December
31, 1999. As of December 31, 1999, the Beran Entities repaid the Beran Loan in
shares of Series D Stock (i.e., 238.096 shares of Series D Stock were
transferred back to the Company and cancelled in repayment of this loan). The
Company used the proceeds of a $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 Loan").
The DFS Loan bears interest at 12% per annum. The initial
repayment schedule of the DFS Loan was as follows: 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. In September 1999, the Company renegotiated the DFS Loan 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 Loan at the time of renegotiation was $13,166,217. In
addition, options to purchase 40,000 shares of the Company's Common Stock, at an
exercise price of $10.3125 per share, were issued to DFS for providing the DFS
Loan. The Beran Acquisition was accounted for as a purchase.
<PAGE>
In July 1999, the Company ceased operations at its Monroe Diagnostic
Imaging Center (the "Williamstown Facility") located in Williamstown, New
Jersey. The facility, historically and since its acquisition by the Company in
October 1998, had operated unprofitably. Following its acquisition, the Company
was unsuccessful in its attempts 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
Williamstown Facility resulted in a one-time charge to operations during the
quarter ended September 30, 1999 of approximately $33,000, which was primarily
comprised of a reserve for estimated future cash outflows relating to the leased
premises.
Note 5. - Deferred Transaction and Financing Costs
Deferred transaction and financing costs relate to (i) legal and accounting
fees incurred in connection with the Company's proposed acquisition of JIHP and
other pending acquisitions or management services contracts and (ii) costs
incurred in connection with the Company's ongoing discussions with financial
institutions for interim and long-term financing. In the event any of such
proposed acquisitions or financing is not consummated or any such management
services contract is not executed, the related deferred costs will be expensed.
Note 6. - Segment Information
The Company currently operates in two industry segments: (i)
diagnostic imaging and (ii) physician management/consulting and clinical
research operations. The diagnostic imaging segment primarily involves operating
fixed-site diagnostic imaging facilities. The physician management/consulting
and clinical research segment, which commenced operations during the second
quarter of fiscal 1998, consists of providing management and consulting services
to independent physician practices and providing clinical research opportunities
to such practices and others.
The following table shows net revenues and operating income by
industry segment for the three and nine month periods ended September 30, 2000.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Nine Months
Ended Ended
Sept. 30, 2000 Sept. 30, 2000
-------------- --------------
(Unaudited) (Unaudited)
Net revenues:
Diagnostic imaging $3,615,380 $12,798,925
Physician management/consulting
and clinical research 320,000 968,935
---------- -----------
Total $3,935,380 $13,767,860
========== ===========
Operating (loss)/income:
Diagnostic imaging $(972,726) $(1,641,238)
Physician management/consulting
and clinical research 203,618 560,027
------- -------
Total $(769,108) $(1,081,211)
========== ============
</TABLE>
<PAGE>
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 was recorded by the Company as goodwill and is being amortized
over a period of ten years.
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 provides
day-to-day administrative and management services to Atlantic Imaging, and both
the Company and HAI 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 has agreed to utilize the network on an
exclusive basis for any MRI services it refers claimants to 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. The network
presently consists of 85 diagnostic imaging facilities in New Jersey and
currently provides services to 18 automobile insurance carriers including:
Allstate Insurance Company, Palisades Safety and Insurance Associates, National
General Insurance Company, Metropolitan, National Continental Progressive
Insurance Company and Highlands Insurance Group.
In addition, in September 1999 the Company established clinical
research operations through a wholly-owned subsidiary, HIS Clinical Research Co.
LLC ("HISCR"). HISCR focuses on arranging clinical research trials for
pharmaceutical companies. To date, HISCR has arranged 20 clinical studies in the
areas of rheumatology pain management medication, chronic prostatitis
medication, diabetes drug therapies, chronic bronchitis, diabetic
polyneuropathy, respiratory track infections, sinusitis, smoking reduction,
hypertension, asthma medication, pulmonary function and pneumonia medication on
behalf of various leading pharmaceutical companies including ASTA Medica, Inc.;
Abbott Laboratories; Merck & Co., Inc.; Ortho-McNeil Pharmaceutical, Inc.;
SmithKline Beecham Corporation; Takeda America Research & Development Center,
Inc.; Bristol Meyers Squibb Company; American Biosystems, Inc; Pfizer; and Glaxo
Wellcome, Inc. HISCR has exclusive five-year agreements with two New
Jersey-based multi-specialty physician practices to arrange and coordinate
clinical research trials on behalf of their over 100 physicians and 160,000
patients and a New Jersey based primary care physician practice with 4
physicians and over 25,000 patients. Amounts attributable to the operations of
CliniCure.com for the nine months ended September 30, 2000 are not significant.
In January 2000, the Company formed CliniCure.com, LLC ("Clinicure.com"), a
wholly-owned subsidiary, to provide web-based outreach for clinical research
trials by physicians, universities, hospitals and pharmaceutical companies.
CliniCure.com's Web site is intended to be an easy to navigate medical
<PAGE>
web site which will facilitate access to medical clinical trials for both
patients and physicians alike. It is expected that patient users will be able to
research new clinical trials beginning in a variety of areas and, if interested,
will be able to apply for participation in these trials. Additionally,
physicians and researchers will be able to utilize the site as a referral source
in the recruitment of candidates for clinical trials. Amounts attributable to
the operations of CliniCure.com for the nine months ended September 30, 2000 are
not significant.
Physician Management and Consulting Operations
Since February 1999, the Company has been providing management
and consulting services to a New Jersey-based multi-specialty physician
practices, North Jersey Health, P.A. ("NJ Health"). NJ Health is one of the
largest independent multi-specialty physician practices in New Jersey,
consisting of 32 physicians, 16 offices and 80,000 active patients. In December
1999, the Company entered into a letter of intent with NJ Health setting forth
the terms of an agreement which provides for, among other things, management and
consulting services pursuant to an administrative services agreement with an
initial term of five years, during which period the Company will provide NJ
Health with certain non-medical, management and consulting services. In
accordance with the agreement, NJ Health will pay to the Company a fixed
management fee of $500,000 per annum. In addition to the fixed management fee,
additional management fees will be paid to the Company from NJ Health's net
income related to ancillary services. The agreement also enables the Company to
acquire the assets of NJ Health, subject to certain financial milestones being
achieved, as well as the satisfaction of certain additional conditions, during
the first three years of the agreement.
The Company has continued to expand its strategic focus into the
area of physician management and consulting and, in connection therewith, in
July 2000, the Company announced that it had entered into several agreements
including (1) a merger agreement relating to the acquisition of JIHP, the
management services organization which manages Pavonia Medical Associates, P.A.
("PMA"), and (2) a multi-year administrative services agreement with PMA which
includes a minimum management fee of $1.0 million per year.
The merger agreement with PMA provides for the acquisition by
the Company of PMA's approximately 72% equity interest in JIHP in exchange for
the issuance to PMA of preferred stock of the Company which will automatically
convert into 1.0 million shares of common stock of the Company upon the approval
of such issuance by the Company's stockholders. In connection with the
prospective merger, PMA has entered into a 26-year administrative services
agreement with the Company (subject to earlier termination under certain
specified conditions), pursuant to which PMA will pay the Company a management
fee of $1.0 million per annum payable in equal monthly installments plus an
additional management fee of 10% of PMA's annual revenues over $20.0 million.
Among other things, the consummation of the acquisition of JIHP is subject to
execution of definitive acquisition documents with Liberty HealthCare System,
Inc., the owner of the remaining equity interest in JIHP. The Company had
previously entered into an exclusive five year agreement with PMA to arrange and
coordinate clinical research trials on its behalf.
PMA is one of the largest multi-specialty medical practices in
the state of New Jersey comprised of 72 physicians serving over 80,000 patients.
Its principal office is located in Jersey City, New Jersey and it also has
offices in two other locations in northern New Jersey. The Company has been
providing management services to PMA for over two years.
<PAGE>
MedicalEdge Technologies, Inc.
On September 26, 2000, the Company executed an amended letter of intent
with MedicalEdge Technologies, Inc., an acute care/physician services e-commerce
healthcare company ("MedicalEdge"), with respect to its acquisition, by way of
reverse merger (the "Merger"), of the Company. This letter of intent (the "ME
Letter") was subsequently amended and reexecuted as of September 26, 2000.
The Merger, when completed, will reorient part of the focus of
the Company to the provision of healthcare and related services through the
Internet. MedicalEdge is currently an indirect subsidiary of International
Commerce Exchange Systems, Inc., a "Silicon Alley" based Internet services and
technology holding company ("ICES").
The ME Letter provides that in the Merger the MedicalEdge
stockholders will be issued shares of the Company's Common Stock representing,
in the aggregate, 72% of the issued and outstanding Common Stock immediately
after the Merger (on a fully-diluted basis). The Merger is subject to, among
other closing conditions, the final negotiation of a merger agreement,
satisfactory completion of due diligence, stockholder approval and the
disposition by the Company of its diagnostic imaging business.
In order to provide certain protection to the stockholders of
the Company as of September 26, 2000, the ME Letter provides that in the event
that the average per share closing sales price of the Common Stock for the 20
consecutive trading days prior to the first anniversary of the closing of the
Merger is not equal to $2.50 or more, each such stockholder of the Company shall
have the right to require the Company to purchase, in whole or in part, the
shares of Common Stock such stockholder owned as of September 26, 2000 and which
it still owns as of such anniversary date, for a per share purchase price of
$2.50.
The ME Letter further provides that upon execution the Company will issue
to MedicalEdge 100 shares of its preferred stock convertible at the closing of
the Merger into 100,000 shares of Common Stock. These shares will constitute a
portion of the 72% of the Common Stock to be issued to the MedicalEdge
stockholders in the Merger as hereinbefore discussed. If the Merger is not
consummated for any reason prior to the nine-month anniversary of the execution
of the ME Letter, other than as a result of MedicalEdge's inability or refusal
to proceed, then MedicalEdge shall have the option to require the Company to
repurchase all of these shares of preferred stock for either cash (and, under
certain specified conditions, a one-year promissory note) equal to the fair
market value of these 100,000 shares of Common Stock or 100,000 shares of Common
Stock, as the Company shall determine.
In conjunction with the execution of the ME Letter, the Company
raised $500,000 through an agreement to sell 226,004 shares of Common Stock to
Huntington Street Company, and VentureTek L.P. for a per share purchase price of
$2.212. These proceeds were loaned to ICES (the "ICES Loan") for the development
of the business, products and services to be operated, owned and provided by the
surviving company after the Merger. The outstanding principal and accrued
interest of the ICES Loan is payable in full in cash on or prior to the
earlier of the 30th day after the closing of the Merger and the 180th day after
the execution of the ME Letter; provided, however, that if the Merger has not
been consummated prior to such 180th day and MedicalEdge is using its reasonable
efforts in good faith to close the Merger, and the Merger is not consummated as
a consequence of the Company's inability or refusal to proceed, then in lieu of
such cash repayment,
<PAGE>
the Company shall be issued class A common stock of ICES having an aggregate
value equal to such repayment, based upon an ICES valuation of $500 million. In
addition, if the Merger has not been consummated prior to the 180th day after
the execution of the ME Letter and the Company is using its reasonable efforts
in good faith to close the Merger, and the Merger is not consummated as a
consequence of MedicalEdge's inability or refusal to proceed, then the Company
shall have the option to receive either repayment of the ICES Loan in full in
cash or class A common stock of ICES and MedicalEdge shall reimburse the Company
for its actual out-of-pocket expenses incurred in connection with the Merger, up
to an aggregate of $200,000, one-half of which reimbursement shall consist of
cash and one-half of which shall consist of class A common stock of ICES.
The Company has agreed to file a registration statement covering
these 226,004 shares of Common Stock within 30 days after the closing of
this sale and the issuance of the requisite shares; and, to issue additional
shares of Common Stock to these investors if the market price of the Common
Stock at the earlier of 90 days from the closing of the sale or the effective
date of the registration statement is less than $2.88 in order to provide the
investors with a 130% return on their investment (valuing all shares at the then
market price). The issuance of these 226,004 shares of Common Stock has been
delayed pending the receipt of certain consents.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the Nine Months Ended September 30, 2000 vs. September 30, 1999
For the nine months ended September 30, 2000, revenues were $13,772,742 as
compared to $17,158,179 for the nine months ended September 30, 1999, a decrease
of approximately $3,385,000 or 20%. For the nine months ended September 30,
2000, revenues from the four New Jersey-based diagnostic imaging facilities (the
"Beran Facilities") acquired effective as of October 1, 1998 (the "Beran
Acquisition") had decreased by approximately $1,830,000, and revenues from the
Company's Monmouth, Edgewater and Rittenhouse MRI facilities had decreased by
approximately $1,650,000. Interest income decreased by $278,000. These decreases
in revenues were partially offset by increases at the Company's Brooklyn and
Wayne MRI facilities of approximately $641,000. The Company's working capital
was adversely affected by the marked decline in the number of MRI and other
diagnostic imaging referrals to the Company's New Jersey facilities, which
decline resulted from certain changes enacted and significant penalties
implemented by automobile insurance carriers in late December 1999 to
pre-certification requirements of diagnostic imaging procedures and the
uncertainties associated with these changes.
For the nine months ended September 30, 2000, operating expenses
were $14,849,071 as compared to $16,246,366 for the nine months ended September
30, 1999, a decrease of approximately $1,397,000 or 9%. This decrease was
primarily due to (i) decreased interest expense (approximately $291,000) under
the $14.0 million bridge loan (the "DFS Loan") provided to the Company in
October 1998 in connection with the Beran Acquisition (which loan was
renegotiated in September 1999 from a short-term bridge loan into a long-term
liability), (ii) decreased overall salary expense relating to the elimination of
several management and administrative positions in connection with, among other
things, the consolidation of billing functions (approximately $492,000), (iii)
decreased consulting, marketing and professional fees (approximately $242,000)
and (iv) decreased general and administrative expenses (approximately $972,000).
A substantial portion of these decreases are a result of the Company's expense
reduction efforts. The decreases in operating expenses were partially offset by
an increase in bad debt expense relating to certain receivables of the Beran
Facilities (approximately $790,000).
Earnings for the nine months ended September 30, 2000 from the
Company's 50% ownership interest in Atlantic Imaging increased by approximately
$410,000. This increase is a result of the joint venture being in operation for
the entire period and increased volume at the network's facilities.
For the Three Months Ended September 30, 2000 vs. September 30, 1999
For the three months ended September 30, 2000, revenues were
$3,940,262 as compared to $5,384,878 for the three months ended September 30,
1999, a decrease of approximately $1,445,000 or 27%. For the three months ended
September 30, 2000, revenues from the four Beran Facilities had decreased by
approximately $855,000, and revenues from the Company's Monmouth, Edgewater and
Rittenhouse MRI facilities had decreased by approximately $750,000. Interest
income decreased by $51,000. These decreases in revenues were partially offset
by increases at the Company's Brooklyn and Wayne MRI facilities of approximately
$205,000. The Company's working capital was adversely affected by the marked
decline in the number of MRI and other diagnostic imaging referrals to the
Company's New Jersey facilities, which decline resulted from certain changes
enacted and
<PAGE>
penalties implemented by automobile insurance carriers in late December 1999 to
pre-certification requirements of diagnostic imaging procedures and the
uncertainties associated with these changes.
For the three months ended September 30, 2000, operating
expenses were $4,704,488 as compared to $5,330,112 for the three months ended
September 30, 1999, a decrease of approximately $626,000 or 12%. This decrease
was primarily due to (i) decreased consulting, marketing and professional fees
(approximately $130,000), (ii) decreased general and administrative expenses
(approximately $595,000) and (iii) decreased depreciation and amortization
expense relating to fully depreciated assets (approximately $97,000). A
substantial portion of these decreases are a result of the Company's recently
institued expense reduction efforts. The decreases in operating expenses were
partially offset by an increase in bad debt expense relating to certain
receivables of the Beran Facilities (approximately $225,000).
Earnings for the three months ended September 30, 2000 from the
Company's 50% ownership interest in Atlantic Imaging increased by approximately
$105,000. This increase is a result of the joint venture being in operation for
the entire period and increased volume at the network's facilities.
Liquidity and Capital Resources of the Company
As of September 30, 2000, the Company had a cash balance of
$405,438, current assets of $15,663,618, current liabilities of $8,552,823 and
working capital of $7,110,795.
While the Company's working capital benefited from the Company's
renegotiation in September 1999 of the DFS Loan into a long-term liability
(which renegotiation resulted in an extended repayment date of May 1, 2004, with
monthly principal and interest payments of approximately $308,000), the
Company's working capital was adversely affected by the marked decline in the
number of MRI and other diagnostic imaging referrals to the Company's New Jersey
facilities.
The Company is actively engaged in discussions with two financial
institutions for interim and long-term financing to help facilitate the
Company's continuing cash requirements. The Company has also instituted certain
expene reduction measures which has resulted in a decrease in the Company's
operating expenses as hereinbefore discussed. The Company is also prepared to
adopt additional expense reduction measures if its estimates as to its cash
requirements and sources thereof prove to be inaccurate.
Cash flows provided by operating activities were $2,186,292 for
the nine months ended September 30, 2000, which consisted primarily of (i) net
loss of $3,034,177, (ii) depreciation and amortization of $2,331,064, (iii) an
increase in the allowance for doubtful accounts receivable of $1,676,000, (iv)
minority interests in joint ventures of $145,901 and (v) a reserve for the
valuation of the deferred tax asset of $1,381,000. Other significant components
of cash flows provided by operating activities include (A) an increase in
accounts receivable, net of $665,015, (B) an increase in deferred tax asset of
$79,518, (C) an increase in prepaid expenses and other of $54,771, and (D) an
increase in accounts payable and accrued expenses of $2,314,670.
Cash flows used in investing activities for the nine months ended September
30, 2000 were $502,582, which related to the loan issued to ICES of $504,882,
interest income of $50,411 associated with a $2.5 million loan to the Beran
Entities and purchases of property, plant and equipment of $48,111. The loan to
ICES bears interest at 9.5% per annum and matures on or prior to the earlier of
the 30th day after the closing of the Merger and the 180th day after the
execution of the ME Letter; provided however,
<PAGE>
that if the Merger has not been consummated prior to such 180th day and
MedicalEdge is using its reasonable efforts in good faith to close the Merger,
and the Merger is not consummated as a consequence of the Company's inability or
refusal to proceed, then in lieu of such cash repayment, the Company shall be
issued class A common stock of ICES having an aggregate value equal to such
repayment, based upon an ICES valuation of $500 million. The loan to the Beran
Entities bore interest at 8% per annum and matured December 31, 1999. As of
December 31, 1999, the Beran entities repaid this loan in shares of Series D
Cumulative Accelerating Redeemable Preferred Stock (i.e., 238.096 shares of
Series D Stock were transferred back to the Company and cancelled in repayment
of this loan), except for the $50,411 in interest which was paid in cash in
January 2000.
Cash flows used in financing activities for the nine months ended September
30, 2000 were $1,923,661, which consisted primarily of payments on capital lease
obligations of $725,284, payments on the DFS Bridge Loan of $1,703,995 and
distributions to limited partners of joint venture of $329,527, all of which
were partially offset by borrowings under the Company's revolving line of credit
of $335,145 and proceeds from the sale of stock of $500,000.
In connection with the Company's efforts to reorient part of its
focus to the provision of healthcare and related services through the Internet
and to divest itself of its diagnostic imaging business, the Company is
currently negotiating the sale of its interest in its MRI facility located in
Wayne, New Jersey to the limited partners. This facility is operated as a joint
venture among a wholly-owned subsidiary of the Company (as the general partner
holding a 51% partnership interest) and two individual medical professionals (as
limited partners holding in aggregate the remaining 49% partnership interest).
The sale is expected to close in November 2000 and result in a gain to the
Company. Proceeds of the sale will be used to reduce outstanding liabilities.
In addition to the above transaction, the Company is also
negotiating the sale of its MRI facility located in Brooklyn, New York to an
unrelated third party, The sale is currently structured as an asset purchase and
is expected to close in November 2000, resulting in a gain to the Company.
Proceeds of the sale will be used to reduce outstanding liabilities.
On September 26, 2000, the Company executed an amended letter of intent
with respect to the acquisition, by way of reverse merger, of MedicalEdge
Technologies, Inc. ("MedicalEdge"), an acute care/physician services e-commerce
healthcare company. The ME Letter was subsequently amended and reexecuted as of
September 26, 2000.
The Merger, when completed, will reorient part of the focus of
the Company to the provision of healthcare and related services through the
Internet. MedicalEdge is currently an indirect subsidiary of International
Commerce Exchange Systems, Inc., a "Silicon Alley" based Internet services and
technology holding company ("ICES").
The ME Letter provides that in the Merger the MedicalEdge
stockholders will be issued shares of the Company's Common Stock representing,
in the aggregate, 72% of the issued and outstanding Common Stock immediately
after the Merger (on a fully-diluted basis). The Merger is subject to, among
other closing conditions, the final negotiation of a merger agreement,
satisfactory completion of due diligence, stockholder approval and the
disposition by the Company of its diagnostic imaging business.
In order to provide certain protection to the stockholders of
the Company as of September 26, 2000, the ME Letter provides that in the event
that the average per share closing sales price of the Common Stock for the 20
consecutive trading days prior to the first anniversary of the closing of the
Merger is not equal to $2.50 or more, each such stockholder of the Company shall
have the right to require the Company to purchase, in whole or in part, the
shares of Common Stock such stockholder owned as of September 26, 2000 and which
it still owns as of such anniversary date, for a per share purchase price of
$2.50.
The ME Letter further provides that upon execution the Company will issue
to MedicalEdge 100 shares of its preferred stock convertible at the closing of
the Merger into 100,000 shares of Common Stock. These shares will constitute a
portion of the 72% of the Common Stock to be issued to the MedicalEdge
stockholders in the Merger as hereinbefore discussed. If the Merger is not
consummated for any reason prior to the nine-month anniversary of the execution
of the ME Letter, other than as a result of MedicalEdge's inability or refusal
to proceed, then MedicalEdge shall have the option to require the Company to
repurchase all of these shares of preferred stock for either cash (and, under
certain specified conditions, a one-year promissory note) equal to the fair
market value of these 100,000 shares of Common Stock or 100,000 shares of Common
Stock, as the Company shall determine.
In conjunction with the execution of the ME Letter, the Company
raised $500,000 through an agreement to sell 226,004 shares of Common Stock to
Huntington Street Company, and VentureTek L.P. for a per share purchase price of
$2.212. These proceeds were loaned to ICES (the "ICES Loan") for the development
of the business, products and services to be operated, owned and provided by the
surviving company after the Merger. The outstanding principal and accrued
interest of the ICES Loan is payable in full in cash on or prior to the
earlier of the 30th day after the closing of the Merger and the 180th day after
the execution of the ME Letter; provided, however, that if the Merger has not
been consummated prior to such 180th day and MedicalEdge is using its reasonable
efforts in good faith to close the Merger, and the Merger is not consummated as
a consequence of the Company's inability or refusal to proceed, then in lieu of
such cash repayment,
<PAGE>
the Company shall be issued class A common stock of ICES having an aggregate
value equal to such repayment, based upon an ICES valuation of $500 million. In
addition, if the Merger has not been consummated prior to the 180th day after
the execution of the ME Letter and the Company is using its reasonable efforts
in good faith to close the Merger, and the Merger is not consummated as a
consequence of MedicalEdge's inability or refusal to proceed, then the Company
shall have the option to receive either repayment of the ICES Loan in full in
cash or class A common stock of ICES and MedicalEdge shall reimburse the Company
its actual out-of-pocket expenses incurred in connection with the Merger, up to
an aggregate of $200,000, one-half of which reimbursement shall consist of cash
and one-half of which shall consist of class A common stock of ICES.
The Company has agreed to file a registration statement covering
these 226,004 shares of Common Stock within 30 days after the closing of this
sale and to issue additional shares of Common Stock to these investors if the
market price of the Common Stock at the earlier of 90 days from the closing of
the sale or the effective date of the registration statement is less than $2.88
in order to provide the investors with a 130% return on their investment
(valuing all shares at the then market price).
In July 2000, the Company announced that it had entered into
several agreements including (1) a merger agreement relating to the acquisition
of JIHP, the management services organization which manages Pavonia Medical
Associates, P.A. ("PMA"), and (2) a multi-year administrative services agreement
with PMA which includes a minimum management fee of $1.0 million per year.
The merger agreement with PMA provides for the acquisition by
the Company of PMA's approximately 72% equity interest in JIHP in exchange for
the issuance to PMA of preferred stock of the Company which will automatically
convert into 1.0 million shares of common stock of the Company upon the approval
of such issuance by the Company's stockholders. In connection with such merger,
PMA has entered into a 26-year administrative services agreement with the
Company (subject to earlier termination under certain specified conditions),
pursuant to which PMA will pay the Company a management fee of $1.0 million per
annum payable in equal monthly installments plus an additional management fee of
10% of PMA's annual revenues over $20.0 million. Among other things, the
consummation of the acquisition of JIHP is subject to execution of definitive
acquisition documents with Liberty HealthCare System, Inc., the owner of the
remaining equity interest in JIHP. The Company had previously entered into an
exclusive five year agreement with PMA to arrange and coordinate clinical
research trials on its behalf.
PMA is one of the largest multi-specialty medical practices in
the state of New Jersey comprised of 72 physicians serving over 80,000 patients.
Its principal office is located in Jersey City, New Jersey and it also has
offices in two other locations in northern New Jersey. The Company has been
providing management services to PMA for over two years.
When completed, the Company expects the acquisition of JIHP to add $13
million in revenues to the Company and will act as a platform from which the
Company hopes to continue to build its physician practice management and
consulting division, its clinical research trials division and its clinical
trials website, CliniCure.com, and is intended to be a launching pad for the
e-commerce expansion of its business, selling products and services to
physicians and patients alike. Continued expansion of these businesses may
require additional sources of financing in the future.
In December 1997, the Company agreed to guarantee a $1.0 million
loan from DFS to 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, 2000, approximately
$387,243 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.
In June 2000, the Company entered into a lease agreement with
Stratus Services Group, Inc. ("Stratus"), which is an employment leasing company
and also provides a wide range of other staffing and outsourcing services.
Effective June 19, 2000, all Company employees (aggregating
<PAGE>
approximately 150 employees) except certain officers and radiologists became
employees of Stratus and then were leased back to the Company. Stratus is a
public company traded on Nasdaq under the symbol "SERV" and the CEO of Stratus
is a former director of the Company. As of September 30, 2000, the Company had
paid Stratus $1,340,133 for such lease arrangement (which represents the leased
employees' compensation plus a leasing and administrative fee to Stratus related
to taxes and insurance and for payroll, human resources and accounting services)
and had an outstanding balance owed to Stratus in the amount of $167,847. The
term of the lease agreement is for one year and automatically renews on an
annual basis with a right to terminate with 30 days written notice.
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 $2,000,000, which amount
increased to $3,000,000 in October 1998 in connection with the Beran Acquisition
and further increased to $4,000,000 in December 1999, 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 are repayable on May 26, 2001. 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 are used to fund working capital needs as well as acquiring
businesses which are complementary to the Company. At September 30, 2000, the
Company had $3,586,505 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 has been recorded by the Company as goodwill and is being
amortized over a period of ten years.
In July 1999, the Company closed its MRI facility in
Williamstown, New Jersey. The facility, historically and since its acquisition
by the Company in October 1998 as part of the Beran Acquisition, had operated
unprofitably. Following its acquisition, the Company was unsuccessful in its
attempts 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 this 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 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 and
redeemable warrants in November 1991, the subsequent exercise of such redeemable
warrants, the sale of Series C Convertible Preferred Stock in February 1996 and
the recent agreement to issue 226,004 shares of common stock. Continued
expansion of the Company's business, including the
<PAGE>
expansion of the Company's physician management/consulting and clinical research
operations, will require substantial cash resources and will have an impact on
the Company's liquidity. The Company is actively engaged in discussions with two
financial institutions for interim and long-term financing to help facilitate
the Company's continuing cash requirements. The Company has instituted measures
to improve its revenues, including the formation of Atlantic Imaging in April
1999 and the launching of CliniCure.com, the pending merger with JIHP and is
also actively considering various other strategic alternatives, including
additional joint ventures, the sale and/or other disposition of all or a portion
of its diagnostic imaging operations and expansion of its e-commerce operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not Applicable.
<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 2 - Letter of Intent date as of September 26,
2000 between HealthCare Integrated Services,
Inc. and MedicalEdge Technologies, Inc.
Exhibit 10 - Stock Purchase Agreement dated August 23,
2000 among HealthCare Integrated Services,
Inc. and Huntington Street Company and
Venturetek, L.P.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
<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 20, 2000 /s/ Elliott H. Vernon
Elliott H. Vernon
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: November 20, 2000 /s/ Alfred Beltrani
Alfred Beltrani
Vice President - Controller
(Principal Financial and
Accounting Officer)
