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 June 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 August 21, 2000
Common Stock, $.01 par value 1,135,699 shares
1
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income -
Three and six months ended June 30, 2000 and 1999 4
Consolidated Statement of Changes in Stockholders'
Equity - For the six months ended June 30, 2000 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
3. Quantitative and Qualitative Disclosure About 18
Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Assets 2000 1999
------ ------ -----
(Unaudited)
Current Assets:
Cash and cash equivalents $ 249,730 $ 645,389
Accounts receivable - net 14,753,873 13,806,760
Loan receivable - 50,411
Prepaid expenses and other 367,452 226,752
------- -------
Total current assets 15,371,055 14,729,312
---------- ----------
Property, Plant and Equipment - Net 8,094,461 7,754,840
--------- ---------
Deferred Tax Asset - Net 2,543,926 2,494,184
--------- ---------
Other Assets:
Due from officer 264,125 264,125
Deferred transaction and financing costs 1,036,050 905,676
Other 391,101 464,679
Investment in Atlantic Imaging Group, LLC ("AIG") 215,291 94,785
Goodwill - net 12,211,536 12,421,518
---------- ----------
Total other assets 14,118,103 14,150,783
---------- ----------
Total Assets $40,127,545 $39,129,119
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $4,065,673 $2,538,156
Current portion of capital lease obligations 1,066,709 766,338
Current portion of note payable 2,448,670 2,306,758
Income taxes payable - 6,475
--------- -----
Total current liabilities 7,581,052 5,617,727
--------- ---------
Noncurrent Liabilities:
Capital lease obligations 3,576,878 2,717,700
Borrowings under revolving line of credit 3,425,829 3,251,360
Note payable 9,063,666 10,324,538
--------- ----------
Total noncurrent liabilities 16,066,373 16,293,598
---------- ----------
Minority Interests 412,556 478,800
------- -------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.10 par value, 1,000,000 shares authorized:
Series D 8% cumulative accelerating redeemable preferred stock, 633.64 shares
outstanding at June 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, 1,135,699
outstanding at June 30, 2000 and December 31, 1999, respectively 11,357 11,357
Additional paid-in capital 20,742,679 20,742,679
Accumulated deficit (4,686,535) (4,015,105)
----------- -----------
Total stockholders' equity 16,067,564 16,738,994
---------- ----------
Total Liabilities and Stockholders' Equity $40,127,545 $39,129,119
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited) (Unaudited)
2000 1999 2000 1999
---- ---- ---- ----
Revenues $4,841,112 $5,750,799 $9,832,480 $11,773,301
---------- ---------- ---------- -----------
OPERATING EXPENSES:
Salaries 1,517,248 1,864,827 3,118,550 3,606,662
Other operating expenses 1,473,157 1,666,633 3,031,337 3,408,110
Provision for bad debts 404,378 116,256 819,894 255,248
Consulting and marketing fees 15,152 149,046 155,148 267,042
Professional fees 70,728 106,900 170,249 283,638
Depreciation and amortization 711,251 770,198 1,630,561 1,572,607
Interest 598,659 676,582 1,218,844 1,522,947
------- ------- --------- ---------
4,790,573 5,350,442 10,144,583 10,916,254
--------- --------- ---------- ----------
Income/(Loss)Before Minority Interests in
Joint Ventures and Income Taxes 50,539 400,357 (312,103) 857,047
Equity earnings in AIG 259,899 (54,364) 274,229 (30,814)
Minority Interests in Joint Ventures (142,393) (77,820) (200,831) (184,290)
--------- -------- --------- ---------
Income/(Loss) Before Income Taxes 168,045 268,173 (238,705) 641,943
Income Tax (Benefit) Provision 69,988 (520,446) (21,554) (821,264)
------ --------- -------- ---------
Net Income/(Loss) 98,057 788,619 (217,151) 1,463,207
Preferred Dividends 248,137 272,216 496,272 501,049
------- ------- ------- -------
Net (Loss)/Income Available to Common
Shareholders $(150,080) $516,403 $(713,423) $962,158
========== ======== ========== ========
Net (Loss)/Income per Common Share -
Basic $(.13) $.45 $(.63) $.85
====== ==== ====== ====
Weighted Average Common Shares
Outstanding - Basic 1,135,699 1,135,699 1,135,699 1,135,699
========= ========= ========= =========
Net (Loss)/Income per Common Share-
Diluted $(.13) $.38 $(.63) $.71
====== ==== ====== ====
Weighted Average Common Shares 1,135,699 2,052,308 1,135,699 2,058,717
Outstanding - Diluted ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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) (217,151) (217,151)
Unearned compensation in
connection with stock option
grant
Amortization of unearned
compensation for stock options 41,993 41,993
Preferred dividends (496,272) (496,272)
-------- -------- --------- ------- ------------- -------- --------- ---------
BALANCE, JUNE 30, 2000 634 $63 1,135,699 $11,357 $20,742,679 $(4,677,902) $(8,633) $16,067,564
======== ======== ========= ======= ============= ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
(Unaudited)
2000 1999
---- ----
Cash Flows From Operating Activities:
Net (loss)/income available to common shareholders $(713,423) $962,158
Adjustments to reconcile net (loss)/income available to common
shareholders to net cash provided by operating activities:
Depreciation and amortization 1,630,561 1,572,607
Non-cash compensation charge 41,993 40,245
Interests in joint ventures 80,324 184,290
Allowance for doubtful accounts 1,118,000 403,000
Changes in Assets and Liabilities:
Accounts receivable (2,065,113) (198,091)
Prepaid expenses and other (140,700) (143,138)
Deferred taxes (49,742) (862,700)
Goodwill (135,000) (144,699)
Other 73,578 (159,390)
Accounts payable and accrued expenses 1,527,518 95,046
Income taxes payable (6,475) (84,795)
Deferred transaction and financing costs (130,374) 142,726
--------- -------
Net cash provided by operating activities 1,231,147 1,807,259
--------- ---------
Cash Flows from Investing Activities:
Loan receivable 50,411 (99,589)
Purchases of property, plant and equipment (30,988) (356,694)
-------- ---------
Net cash provided (used in) by investing activities 19,423 (456,283)
------ ---------
Cash Flows from Financing Activities:
Borrowings (payments) against the revolving line of credit 174,469 (5,920)
Distributions to limited partners of joint ventures (267,076) (187,552)
Payments on capital lease obligations (434,662) (835,889)
Payments on bridge financing (1,118,960) (528,438)
Payments on reserve for subleased equipment - (254,181)
---------- ---------
Net cash used in financing activities (1,646,229) (1,811,980)
----------- -----------
Decrease in cash and cash equivalents (395,659) (461,004)
Cash and cash equivalents at beginning of period 645,389 1,506,123
------- ---------
Cash and cash equivalents at end of period $249,730 $1,045,119
======== ==========
Supplemental Cash Flow Information:
Interest paid during the period $1,217,157 $1,259,179
========== ==========
Income taxes paid during the period $29,795 $180,325
======= ========
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Capital leases principally for medical equipment $1,594,211 $ -
========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HEALTHCARE INTEGRATED SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 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 June 30, 2000 and the related statements of operations
and cash flows for the periods ended June 30, 2000 and 1999. The Company has
recorded a net deferred tax asset of $2,543,926, an increase of $49,742 during
the six months ended June 30, 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. 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 $4,686,535 and $4,015,105 at
June 30, 2000 and December 31, 1999, respectively. The increase is attributable
primarily to the net loss incurred by the Company during the first six months of
2000. Cash flows provided by operating activities were $1,231,147 and $1,807,259
for the six months ended June 30, 2000 and June 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") (See
Note 8 - Newly Formed Ventures), as well as from Clinical Research trials it has
recently arranged.
The results of operations for the six months ended June 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.
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 six month period ended June 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 six month period ended June 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.
7
<PAGE>
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 June 30,
2000 1999
---------------------------------------------- ----------------------------------------------
(Unaudited) (Unaudited)
---------------------------------------------- ----------------------------------------------
Income(Loss) Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net (Loss)Income Available to
Common Shareholders $(150,080) 1,135,699 $(.13) $ 516,403 1,135,699 $.45
Add:
Preferred Dividends - 272,216 -
Effect of Dilutive Securities
Stock Options - - 44,216
Series D Stock - - 872,393
-------------- ----------------- -------------- ----------
$(150,080) 1,135,699 $(.13) $ 788,619 2,052,308 $.38
Diluted EPS
Net (Loss)/Income
============== ================= ============= ============== ================ ==============
For the Six Months Ended June 30,
2000 1999
----------------------------------------------- ----------------------------------------------
(Unaudited) (Unaudited)
----------------------------------------------- ----------------------------------------------
Income(Loss) Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net (Loss)Income Available
to Common Shareholders $(713,423) 1,135,699 $(.63) $ 962,158 1,135,699 $.85
Add:
Preferred Dividends - 501,049 -
Effect of Dilutive Securities
Stock Options - - 50,625
Series D Stock - - 872,393
--------------- ----------------- -------------- ----------------
$(713,423) 1,135,699 $(.63) $1,463,207 2,058,717 $.71
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 had been included in
The Nasdaq Stock Market under the symbol "HISS".
8
<PAGE>
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 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
9
<PAGE>
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 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 six month periods ended June 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 Six Months
Ended Ended
June 30, 2000 June 30, 2000
(Unaudited) (Unaudited)
Net revenues:
Diagnostic imaging $4,520,812 $9,183,545
Physician management/consulting
and clinical research 320,300 648,935
---------- -----------
Total $4,841,112 $9,832,480
========== ==========
Operating (loss)/income:
Diagnostic imaging $(120,334) $(668,513)
Physician management/consulting
and clinical research 170,873 356,410
------- -------
Total $50,549 $(312,103)
======= ==========
</TABLE>
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
10
<PAGE>
holding a 60% partnership interest) and certain individual medical professionals
and others (as limited partners holding in the aggregate the remaining 40%
partnership interests). Effective May 1, 1999, the Company's subsidiary
consummated the purchase of the limited partners' 40% partnership interests for
$100,000 in cash. At April 30, 1999, the net book value of this 40% partnership
interest was $0. The $100,000 purchase price will be recorded by the Company as
goodwill and amortized over a period of ten years.
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 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 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 six
months ended June 30, 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.
11
<PAGE>
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 decided 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 consideration for such
payment, 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 Jersey Integrated is subject to execution of
definitive acquisition documents with Liberty HealthCare System, Inc., the owner
of the remaining equity interest in Jersey Integrated. The Company had
previously entered into an exclusive five year agreement with PMA to manage
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.
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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 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.
For the Six Months Ended June 30, 2000 vs. June 30, 1999
For the six months ended June 30, 2000, revenues were $9,832,480
as compared to $11,773,301 for the six months ended June 30, 1999, a decrease of
approximately $1,941,000 or 16%. For the six months ended June 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 $976,000, and revenues from the
Company's Monmouth, Edgewater and Wayne MRI facilities had decreased by
approximately $1,054,000. Interest income decreased by $229,000. These decreases
were partially offset by increases at the Company's Brooklyn and Lower Manhattan
facilities of approximately $318,000. 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 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 six months ended June 30, 2000, operating expenses were
$10,144,583 as compared to $10,916,254 for the six months ended June 30, 1999, a
decrease of approximately $772,000 or 7%. This decrease was primarily due to (i)
decreased interest expense (approximately $304,000) 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
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 $488,000), (iii) decreased
consulting, marketing and professional fees (approximately $225,000) and (iv)
decreased overall general and administrative expenses
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(approximately $378,000). These decreases are a result of the Company's overall
expense reduction efforts that have recently been instituted. The decreases in
operating expenses were partially offset by (A) an increase in depreciation and
amortization expenses relating to additional medical equipment acquired during
the first six months of 2000 (approximately $58,000) and (B) an increase in bad
debt expense relating to the Beran receivables (approximately $565,000).
Earnings for the six months ended June 30, 2000, as a result of
the Company's 50% ownership interest in Atlantic Imaging, a 50/50 joint venture
formed in April 1999 with HAI to develop, market and manage statewide networks
of diagnostic imaging facilities (See Note 8 to accompanying financial
statement) increased by approximately $305,000. 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 June 30, 2000 vs. June 30, 1999
For the three months ended June 30, 2000, revenues were
$4,841,112 as compared to $5,750,799 for the three months ended June 30, 1999, a
decrease of approximately $909,000 or 16%.
For the three months ended June 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 $374,000, and revenues from the Company's Monmouth, Edgewater and
Rittenhouse MRI facilities had decreased by approximately $690,000. These
decreases were partially offset by increases at the Company's Brooklyn and Lower
Manhattan facilities of approximately $155,000. 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 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 June 30, 2000, operating expenses
were $4,790,573 as compared to $5,350,442 for the three months ended June 30,
1999, a decrease of approximately $560,000 or 10%. This decrease was primarily
due to (i) decreased interest expense (approximately $78,000) 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 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 $348,000), (iii) decreased
consulting, marketing and professional fees (approximately $170,000), (iv)
decreased overall general and administrative expenses (approximately $193,000)
and (v) decreased depreciation and amortization expense relating to fully
depreciated assets (approximately $59,000). These decreases are a result of the
Company's overall expense reduction efforts that have recently been instituted.
The decreases in operating expenses were partially offset by an increase in bad
debt expense relating to the Beran receivables (approximately $288,000).
Earnings for the three months ended June 30, 2000, as a result
of the Company's 50% ownership interest in Atlantic Imaging, a 50/50 joint
venture formed in April 1999 with HAI to develop, market and manage statewide
networks of diagnostic imaging facilities (See Note 8 to accompanying financial
statement) increased by approximately $314,000. This increase is a result of
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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 June 30, 2000, the Company had a cash balance of $249,730,
current assets of $15,371,055, current liabilities of $7,581,052 and a working
capital of $7,790,003.
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 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, 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.
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. 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, as well as, from clinical research trials it has
recently arranged.
Cash flows provided by operating activities were $1,231,147 for
the six months ended June 30, 2000, which consisted primarily of (i) net loss of
$713,423, (ii) depreciation and amortization of $1,630,561, (iii) an increase in
the allowance for doubtful accounts receivable of $1,118,000 and (iv) minority
interests in joint ventures of $80,324. Other significant components of cash
flows provided by operating activities include (A) an increase in accounts
receivable, net of $947,113, (B) an increase in deferred tax asset of $49,742,
(C) an increase in prepaid expenses and other of $140,700, and (D) an increase
in accounts payable and accrued expenses of $1,527,518.
Cash flows provided by investing activities were $19,423, which
related to interest income of $50,411 associated with a $2.5 million loan to the
Beran Entities and purchases of property, plant and equipment of $30,988. The
loan to the Beran Entities bears interest at 8% per annum and matures upon the
terms and conditions contained in the related promissory notes, but in no event
later then December 31, 1999. 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 $1,646,229, which
consisted primarily of payments on capital lease obligations of $434,662,
payments on the DFS Bridge Loan of $1,118,960 and distributions to limited
partners of joint venture of $267,076, all of which were partially offset by
borrowing under the Company's revolving line of credit, as discussed below of
$174,469.
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
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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 consideration for such
payment, 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 Jersey Integrated is subject to execution of
definitive acquisition documents with Liberty HealthCare System, Inc., the owner
of the remaining equity interest in Jersey Integrated. The Company had
previously entered into an exclusive five year agreement with PMA to manage
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 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 June 30, 2000, approximately $453,179
of the loan was outstanding. PMA and each physician stockholder of PMA have
acknowledged that such extension of credit is for their benefit and have agreed
that to the extent that the Company is or becomes liable in respect of any
indebtedness or other liability or obligation of either PMA or JIHP, and the
acquisition by the Company of 100% of the outstanding capital stock of JIHP is
not consummated, then PMA and each physician stockholder of PMA agree to
indemnify and hold the Company harmless from and against any and all such
liabilities and obligations.
Effective December 26, 1996, the Company entered into a Loan and
Security Agreement with DVI Business Credit Corporation ("DVIBC"), an affiliate
of DFS, to provide a revolving line of credit to the Company. The maximum amount
available under such credit facility initially was $2,000,000, 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
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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 June 30, 2000, the Company had $3,425,829 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 professionals, 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
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 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 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
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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.
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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 June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHCARE INTEGRATED SERVICES, INC.
(Registrant)
Date: August 21, 2000 /s/ Elliott H. Vernon
----------------------
Elliott H. Vernon
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 21, 2000 /s/ Alfred Beltrani
--------------------
Alfred Beltrani
Vice President - Controller
(Principal Financial and
Accounting Officer)
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