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 March 31, 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 May 22, 2000
Common Stock, $.01 par value 1,135,699 shares
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
Three months ended March 31, 2000 and 1999 4
Consolidated Statement of Changes in Stockholders Equity -
For the three months ended March 31, 2000 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 16
Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
Assets 2000 1999
- ------ ------ -----
(Unaudited)
Current Assets:
Cash and cash equivalents $ 32,542 $ 645,389
Accounts receivable - net 14,443,649 13,806,760
Loan receivable - 50,411
Prepaid expenses and other 295,786 226,752
------- -------
Total current assets 14,771,977 14,729,312
---------- ----------
Property, Plant and Equipment - Net 8,524,801 7,754,840
Deferred Tax Asset - Net 2,595,914 2,494,184
Other Assets:
Due from officer 264,125 264,125
Deferred transaction and financing costs 948,289 905,676
Other 394,242 464,679
Investment in Atlantic Imaging Group, LLC ("AIG") 64,115 94,785
Goodwill - net 12,250,152 12,421,518
---------- ----------
Total other assets 13,920,923 14,150,783
---------- ----------
Total Assets $39,813,615 $39,129,119
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $2,972,298 $2,538,156
Current portion of capital lease obligations 1,026,925 766,338
Current portion of note payable 2,376,655 2,306,758
Income taxes payable - 6,475
--------- -----
Total current liabilities 6,375,878 5,617,727
--------- ---------
Noncurrent Liabilities:
Capital lease obligations 3,769,845 2,717,700
Borrowings under revolving line of credit 3,380,415 3,251,360
Note payable 9,703,511 10,324,538
--------- ----------
Total noncurrent liabilities 16,853,771 16,293,598
---------- ----------
Minority Interests 382,360 478,800
------- -------
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 March 31, 2000 and
December 31, 1999, respectively ($10,500 per share liquidation
preference) 63 63
Common stock, $.01 par value: 50,000,000 shares authorized,
1,135,699 outstanding at March 31, 2000 and December 31,
1999, respectively 11,357 11,357
Additional paid-in capital 20,742,679 20,742,679
Accumulated deficit (4,552,493) (4,015,105)
----------- -----------
Total stockholders' equity 16,201,606 16,738,994
---------- ----------
Total Liabilities and Stockholders' Equity $39,813,615 $39,129,119
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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HEALTHCARE INTEGRATED SERVICES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
(Unaudited)
2000 1999
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Revenues $4,991,368 $6,022,502
---------- ----------
OPERATING EXPENSES:
Salaries 1,601,302 1,741,835
Other operating expenses 1,558,179 1,741,477
Provision for bad debts 415,516 138,992
Consulting and marketing fees 139,996 117,996
Professional fees 99,522 176,738
Depreciation and amortization 919,310 802,409
Interest 620,185 846,365
------- -------
5,354,010 5,565,812
(Loss)/Income Before Minority Interests in
Joint Ventures and Income Taxes (362,642) 456,690
Equity earnings in AIG 14,330 23,550
Minority Interests in Joint Ventures (58,438) (106,470)
-------- ---------
(Loss)/Income Before Income Taxes (406,750) 373,770
Income Tax Benefit (91,542) (300,818)
-------- ----------
Net (Loss)/Income (315,208) 674,588
Preferred Dividends 248,135 228,833
------- -------
Net (Loss)/Income Available to Common
Shareholders $(563,343) $445,755
========= ========
Net (Loss)/Income per Common Share -
Basic $(.50) $.39
====== ====
Weighted Average Common Shares
Outstanding - Basic 1,135,699 1,135,699
========= =========
Net (Loss)/Income per Common Share -
Diluted $(.50) $.33
===== ====
Weighted Average Common Shares 1,135,699 2,061,844
Outstanding - Diluted ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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) (315,208) (315,208)
Amortization of unearned
compensation for stock options 25,955 25,955
Preferred dividends (248,135) (248,135)
--------- ------- ----------- ------- ----------- ----------- -------- ------------
BALANCE, MARCH 31, 2000 634 $63 1,135,699 $11,357 $20,742,679 $(4,527,822 $(24,671) $16,201,606
========= ======== =========== ======= =========== ============ ========= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(Unaudited)
2000 1999
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss)/income available to common
shareholders $(563,343) $445,755
Adjustments to reconcile net (loss)/income
available to common shareholders to net
cash provided by operating activities:
Depreciation and amortization 919,310 802,409
Non-cash compensation charge 25,955 -
Interests in joint ventures 89,108 82,920
Allowance for doubtful accounts 553,000 190,000
Changes in Assets and Liabilities:
Accounts receivable (1,189,889) (361,608)
Prepaid expenses and other (69,034) (107,631)
Deferred taxes (101,730) (332,700)
Goodwill - (44,699)
Other 70,437 (70,076)
Accounts payable and accrued expenses 434,142 145,369
Income taxes payable (6,475) (39,054)
Deferred transaction and financing costs (42,613) 53,770
-------- ------
Net cash provided by operating activities 118,868 764,455
------- -------
Cash Flows from Investing Activities:
Loan receivable 50,411 (49,726)
Purchases of property, plant and equipment (23,915) (157,407)
-------- ---------
Net cash provided by (used in) investing
activities 26,496 (207,133)
------ --------
Cash Flows from Financing Activities:
Borrowings (Payments) against the revolving line
of credit 129,055 (39,508)
Capital Contributions by minority investors - 5,000
Distributions to limited partners of joint ventures (154,878) -
Payments on capital lease obligations (181,258) (411,806)
Payments on bridge financing (551,130) (17,816)
Payments on reserve for subleased equipment - (208,268)
-------- --------
Net cash used in financing activities (758,211) (672,398)
--------- ---------
Decrease in cash and cash equivalents (612,847) (115,076)
Cash and cash equivalents at beginning of period 645,389 1,506,123
------- ---------
Cash and cash equivalents at end of period $32,542 $1,391,047
------- ----------
Supplemental Cash Flow Information:
Interest paid during the period $574,255 $644,524
-------- --------
Income taxes paid during the period $ 29,795 $ 70,936
--------- --------
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Capital leases principally for computer and medical
equipment $1,493,990 $ -
========== ============
</TABLE>
See accompanying notes to consolidated financial
statements.
6
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HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 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 March 31, 2000 and the related statements of operations
and cash flows for the periods ended March 31, 2000 and 1999. The Company has
recorded a net deferred tax asset of $2,595,914, an increase of $101,730 during
the three months ended March 31, 2000, reflecting the benefit of approximately
$3,720,000 in federal loss carryforwards that expire in varying amounts between
December 31, 2006 and December 31, 2014. Realization of this net deferred tax
asset is dependent upon generating sufficient taxable income prior to expiration
of the loss carryforwards. The Company had taxable income of over $1,000,000 in
1999 and over $2,000,000 in 1998. Although realization of this net deferred
tax asset is not assured, management believes it is more likely than not
that all of the net deferred tax asset will be realized through future
profitable operations.
The Company has an accumulated deficit of $4,552,493 and $4,015,105 at
March 31, 2000 and December 31, 1999. The increase is attributable primarily to
the net loss incurred by the Company during the first quarter of 2000. Cash
flows provided by operating activities were $118,868 and $764,455 for the three
months ended March 31, 2000 and March 31, 1999, respectively. The Company is
actively engaged in discussions with two financial institutions for interrim and
long-term financing to help facilitate the Company's continuing cash
requirements.
The results of operations for the three months ended March 31, 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.
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 three month period ended March 31, 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 three month period ended
March 31, 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 (loss) earnings per share computations:
7
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For the Three Months Ended March 31,
2000 1999
---- ----
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Income/(Loss) Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net (Loss)/Income
Available to Common
Shareholders $(563,343) 1,135,699 $(.50) $ 445,755 1,135,699 $.39
Add:
Preferred Dividends - - 228,833 -
Effect of Dilutive
Securities
Stock Options - - - 53,752
Series C Stock - - - -
Series D Stock - - - 872,393
------------ ------------- ------------ -------------
$(563,343) 1,135,699 $(.50) $ 674,588 2,561,344 $.33
Diluted EPS
Net (Loss)/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. Since January 20,
2000, the Common Stock has been listed on the American Stock Exchange ("AMEX")
under the symbol "HII". Prior thereto, it has been included in The Nasdaq Stock
Market under the symbol "HISS".
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
8
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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 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 Loan. The Beran Acquisition was accounted for as
a purchase.
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 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 is 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 legal and accounting
fees incurred in connection with the Company's proposed acquisition of a
management services organization ("MSO") and other pending acquisitions or
management services contracts. Deferred financing costs relate to costs incurred
in connection with the Company's proposed new financing of the Company's
expansion plans. 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
9
<PAGE>
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 month period ended March 31, 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:
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
(Unaudited)
Net revenues:
Diagnostic imaging $4,662,733 $5,754,659
Physician management/consulting
and clinical research 328,635 267,843
------- -------
Total $4,991,368 $6,022,502
========== ==========
Operating (loss)/income:
Diagnostic imaging $(533,849) $326,206
Physician management/consulting
and clinical research 185,537 130,484
------- -------
Total $(348,312) $456,690
========== ========
Note 7. - Acquisition of Limited Partners' Interest
Prior to May 1, 1999, the Company's MRI facility 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% interest 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 10 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 in New Jersey
including: Allstate
10
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Insurance Company, Palisades Safety and Insurance Association, 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 18 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 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; 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. Amounts attributable to the operations of HISCR for the three
months ended March 31, 2000 are not significant.
In January 2000, the Company formed CliniCure.com, LLC, 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 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.
Physician Management and Consulting Operations
During fiscal 1997, the Company decided to expand its strategic focus
into the area of physician management and consulting and, in connection
therewith, in January 1998 entered into letters of intent with respect to the
acquisition of all of the outstanding capital stock of Jersey Integrated
HealthPractice, Inc. ("JIHP"), a management services organization ("MSO") formed
and owned by Pavonia Medical Associates, P.A. ("PMA") and Liberty HealthCare
Systems, Inc. ("Liberty"). JIHP provides management services to PMA, which is
one of the largest independent, multi-specialty practices in New Jersey,
comprised of over 70 physicians servicing over 80,000 patients in three
locations in New Jersey. The consummation of the transaction was subject to
several material conditions including, among others, the receipt of necessary
financing, the approval of the issuance of the stock by the Company's
stockholders, the negotiation of definitive documentation, the absence of
adverse changes and the satisfactory completion of due diligence. No definitive
acquisition agreements or long-term administrative services agreement have yet
been executed by all the parties. However, the Company has been providing
management and consulting services to PMA since April 1998.
Given the significant declines in the financial performance of many of
the leading publicly-traded physician practice management companies during
1998-1999, the availability of financing for the JIHP acquisition (as well as
other physician practice acquisitions) has been extremely limited. This
constriction in the financing market has had, and is likely to continue to have,
an
11
<PAGE>
adverse impact on the Company's ability to effect its physician practice
management acquisitions. The Company is in the process of actively renegotiating
the terms of the JIHP acquisition. The Company believes that such renegotiation
efforts will be successful and that the merger consideration, including the cash
portion, will be significantly reduced.
Since February 1999, the Company has also been providing management and
consulting services to another 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 25 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.
12
<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 Three Months Ended March 31, 2000 vs. March 31, 1999
For the three months ended March 31, 2000 revenues were $4,991,368 as
compared to $6,022,502 for the three months ended March 31, 1999, a decrease of
approximately $1,031,000 or 17%. This decrease was primarily due to a marked
decline in the number of MRI and other diagnostic imaging referrals to the
Company's New Jersey facilities in January 2000 which resulted from certain
changes enacted and penalties implemented by automobile insurance carriers in
December 1999 to pre-certification requirements of diagnostic imaging procedures
and the uncertainties associated with these changes. By March 2000, revenues had
returned to a level more consistent with historical norms. For the three months
ended March 31, 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 $602,000, and revenues
from the Company's Monmouth, Edgewater and Wayne MRI facilities had decreased by
approximately $461,000.
For the three months ended March 31, 2000, operating expenses were
$5,354,010 as compared to $5,565,812 for the three months ended March 31, 1999,
a decrease of approximately $211,802 or 4%. This decrease was primarily due to
(i) decreased interest expense (approximately $226,000) as a result of a
decrease in interest payments to DVI Financial Services Inc. ("DVI") 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 salary expense relating to the Beran Facilities as a result of the
elimination of several management and administrative positions in connection
with, among other things, the consolidation of billing functions (approximately
$141,000). These decreases in operating expenses were partially offset by (A) an
increase in depreciation and
13
<PAGE>
amortization expenses relating to additional equipment acquired during the first
quarter of 2000 (approximately $117,000), (B) an increase in bad debt expense
relating to the Beran accounts receivable in the (approximately $277,000),
(C) an increase in marketing and consulting fees (approximately $22,000)
and miscellaneous office expenses (approximately $20,000) and (D) an
increase in expenses relating to the Company's physician practice
management/consulting and clinical research operations (approximately
$143,000).
Liquidity and Capital Resources of the Company
- ----------------------------------------------
As of March 31, 2000, the Company had a cash balance of $32,542, current
assets of $14,771,977 and working capital of $8,396,099. While the Company's
working capital benefitted 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
payment 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 in January 2000, as discussed
above, which decline resulted from certain changes enacted and 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. By March 2000, revenues had
returned to a level more consistent with historical norms.
The Company also is actively engaged in discussions with two financial
institutions for interim and long-term financing to help facilitate the
Company's continuing cash requirements. Furthermore, the Company is also
prepared to adopt additional expense reduction measures if its estimates as to
its cash requirements and satisfaction thereof prove to be inaccurate.
Additionally, the Company anticipates a significant increase in its revenues
from the acquisition of JIHP which it expects to consummate during the third
quarter of fiscal 2000, as well as, from clinical research trials it has
recently arranged.
Cash flows provided by operating activities were $118,868 for the three
months ended March 31, 2000, which consisted primarily of (i) a net loss of
$563,343, (ii) depreciation and amortization expenses of $919,310, (iii) an
increase in the allowance for doubtful accounts receivable of $553,000 and (iv)
interests in joint ventures of $89,108. Other significant components of cash
flows provided by operating activities include (A) an increase in accounts
receivable, net of $636,889 resulting, in part, from a delay in payment by
automobile insurance carriers adjusting to the implementation of new laws,
regulations, and policies (B) an increase in deferred tax asset of $101,730 (C)
an increase in prepaid expenses and other of $69,034, and (D) an increase in
accounts payable and accrued expenses of $434,142.
Cash flows provided by investing activities were $26,496, which related
to interest income of $50,411 associated with a $2.5 million loan to the Beran
entities in connection with the Beran Acquisition and purchases of property,
plant and equipment of $23,915. The loan to the Beran entities 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 than 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).
Cash flows used in financing activities were $758,211, which consisted
primarily of payments on capital lease obligations of $181,258, payments on the
DFS Loan of $551,130 and distributions to limited partners of joint venture of
$154,878, all of which were partially offset by borrowings under the Company's
revolving line of credit, as discussed below of $129,055.
In December 1997, the Company agreed to guarantee a $1.0 million loan
from DFS to Jersey Integrated HealthPractice, Inc. ("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
14
<PAGE>
at $26,330 per month. At March 31, 2000, approximately $517,159 of the loan was
outstanding. Pavonia Medical Associates, P.A. ("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 $2,000,000, 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 March 31, 2000, the
Company had $3,380,415 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.
The Company is currently negotiating the purchase of the limited
partners' ownership interests in its MRI facility located in Wayne, New Jersey
or, in the alternative, the sale of the Company's interest in such facility 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 professional, who also provide
consulting services to 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 or in an alternative, to sell its interest
in this facility to the limited partners.
In July 1999, the Company closed its MRI facility in Williamstown, New
Jersey. The facility, historically and since its acquisition 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
15
<PAGE>
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
and the sale of Series C Convertible Preferred Stock in February 1996. Continued
expansion of the Company's business, including the expansion of the Company's
physician management/consulting operations and clinical research 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. The Company
has instituted measures to improve its revenues, including the formation of
Atlantic Imaging Group, LLC in April 1999 with HealthMark Alliance, Inc. to
develop, market and manage statewide networks of diagnostic imaging facilities.,
the establishment of clinical research operations and the launching of
CliniCure.com to provide web-based outreach for clinical research trials by
physicians, universities, hospitals and pharmaceutical companies, and is also
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.
Continued expansion of the Company's business, including the expansion of
the Company's physician management/consulting and clinical research
operations, will require additional sources of financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
16
<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) The Company did not file any reports on Form 8-K during the
quarter ended March 31, 2000.
17
<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: May 22, 2000 /s/ Elliott H. Vernon
---------------------
Elliott H. Vernon
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: May 22, 2000 /s/ Robert D. Baca
------------------
Robert D. Baca
President and Chief Operating
Officer
(Principal Financial and Accounting
Officer)
18
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<PERIOD-END> MAR-31-2000
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