**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

 

**(MarkOne)**

| ý                                                 |   | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                   |   |                                                                                          |   |   |
| **For  the quarterly period ended September 30, 2001** |
|                                                   |   |                                                                                          |   |   |
| **OR**                                                 |
|                                                   |   |                                                                                          |   |   |
| o                                                      |   | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |   |                                                                                          |   |   |

 

**For thetransition 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 checkmark whether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý No  o

 

Indicate thenumber of shares outstanding of each of the issuer's classes of common stock,as of the latest practicable date.

 

| **Class**                     |   | **Outstanding  at November 14, 2001** |
|-------------------------------|--------|---------------------------------------|
| Common Stock,  $.01 par value |   | 1,361,703 shares                      |

 

 

#####  

##### **HEALTHCAREINTEGRATED SERVICES, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| PART I.       | FINANCIAL INFORMATION:                                                                                                  |   |
|---------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                    |   |
| Item 1.       | Financial Statements:                                                                                                   |   |
|          |                                                                                                                    |   |
|          | Condensed  Consolidated Balance Sheets - September 30, 2001 (unaudited) and December 31,  2000                          |   |
|          |                                                                                                                    |   |
|          | Condensed  Consolidated Statements of Operations (unaudited) - Three and nine months  ended September 30, 2001 and 2000 |   |
|          |                                                                                                                    |   |
|          | Condensed  Consolidated Statements of Cash Flows (unaudited) - Nine months ended  September 30, 2001 and 2000           |   |
|          |                                                                                                                    |   |
|          | Notes  to Condensed Consolidated Financial Statements                                                                   |   |
|          |                                                                                                                    |   |
| Item  2.      | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                  |   |
|          |                                                                                                                    |   |
| Item  3.      | Quantitative  and Qualitative Disclosure About Market Risk                                                              |   |
|          |                                                                                                                    |   |
| PART II.      | OTHER INFORMATION                                                                                                       |   |
|          |                                                                                                                    |   |
| Item 6.       | Exhibits and  Reports on Form 8-K                                                                                       |   |
|          |                                                                                                                    |   |
| SIGNATURES    |                                                                                                                    |
|          |                                                                                                                    |   |
| EXHIBIT INDEX |                                                                                                                    |

 

 

**HEALTHCAREINTEGRATED SERVICES, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

 
| Assets |   | **September 30, 2001** |   | **December 31, 2000** |   |
|--------|--------|------------------------|--------|-----------------------|--------|
|   |   | **(Unaudited)**        |   |                  |   |  
Current Assets:

 

 

 

 

 

 
Cash and cash equivalents

 

$

421,273

 

$

482,239

 

 
Accounts receivable – net

 

10,094,316

 

10,657,418

 

 
Loan receivable

 

-

 

186,410

 

 
Due from International Commerce Exchange Systems, Inc.

 

655,011

 

517,021

 

 
Prepaid expenses and other

 

148,093

 

82,349

 

 
Total current assets

 

11,318,693

 

11,925,437

 

 
Property, Plant and Equipment – Net

 

5,929,297

 

6,999,570

 

 
Other Assets:

 

 

 

 

 

 
Due from officer

 

264,125

 

264,125

 

 
Deferred transaction and financing costs

 

187,266

 

116,896

 

 
Other

 

188,383

 

178,637

 

 
Investment in Atlantic Imaging Group, LLC ("AIG")

 

81,573

 

188,360

 

 
Total other assets

 

721,347

 

748,018

 

 
Total Assets

 

$

17,969,337

 

$

19,673,025

 

 
 

 

 

 

 

 

 
Liabilities and Stockholders' Equity

 

 

 

 

 

 
 

 

 

 

 

 

 
Current Liabilities:

 

 

 

 

 

 
Accounts payable and accrued expenses

 

$

5,162,049

 

$

3,727,465

 

 
Dividends payable

 

2,038,060

 

1,293,654

 

 
Borrowings under revolving line of credit

 

3,037,046

 

3,015,924

 

 
Current portion of capital lease obligations

 

1,410,682

 

556,967

 

 
Current portion of note payable

 

1,802,095

 

1,811,580

 

 
Income taxes payable

 

3,517

 

10,020

 

 
Total current liabilities

 

13,453,449

 

10,415,610

 

 
Noncurrent Liabilities:

 

 

 

 

 

 
Capital lease obligations

 

2,912,863

 

4,053,783

 

 
Note payable

 

7,618,053

 

9,062,183

 

 
Total noncurrent liabilities

 

10,530,916

 

13,115,966

 

 
Commitments and Contingencies

 

 

 

 

 

 
Stockholders' Equity:

 

 

 

 

 

 
Preferred stock, $.10 par value, 1,000,000 shares authorized: Series  D 8% cumulative accelerating redeemable preferred stock, 633.647 shares  outstanding at September 30, 2001 and December 31, 2000, respectively  ($10,500 per share liquidation preference)

 

63

 

63

 

 
Common stock, $.01 par value:   50,000,000 shares authorized, 1,361,703 outstanding at September 30,  2001 and December 31, 2000, respectively

 

13,617

 

13,617

 

 
Additional paid-in capital

 

21,240,419

 

21,240,419

 

 
Accumulated deficit

 

(27,269,127

)

(25,112,650

)

 
Total stockholders' equity (Deficiency in net assets)

 

(6,015,028

)

(3,858,551

)

 
Total Liabilities and Stockholders' Equity (Deficiency in net assets)

 

$

17,969,337

 

$

19,673,025

 

 
 

 

 

 

 

 

 
See accompanying  notes to condensed consolidated financial statements.

 
 

 

**HEALTHCARE INTEGRATED SERVICES, INC.AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

 

**Three Months Ended September 30,**

 

**Nine Months Ended  September 30,**

 

 

 

**(Unaudited)**

 

**(Unaudited)**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

Revenues

 

$

2,332,941

 

$

3,940,262

 

$

10,865,363

 

$

13,772,742

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Salaries

 

1,409,310

 

1,716,570

 

4,432,673

 

4,835,120

 

Other operating expenses

 

1,259,303

 

1,154,668

 

3,906,279

 

4,186,005

 

Provision for bad debts

 

417,179

 

386,209

 

1,181,514

 

1,206,103

 

Consulting and marketing fees

 

57,347

 

14,278

 

160,150

 

169,426

 

Professional fees

 

180,244

 

121,633

 

385,651

 

291,882

 

Depreciation and amortization

 

446,532

 

700,504

 

1,386,067

 

2,331,065

 

Interest

 

524,888

 

610,626

 

1,593,669

 

1,829,470

 

Gain on sale of property, plant and equipment

 

(67,001

)

-

 

(798,532

)

-

 

Total Operating Expenses

 

4,227,802

 

4,704,488

 

12,247,471

 

14,849,071

 

Loss Before Minority Interests in Joint Ventures and Income Taxes

 

(1,894,861

)

(764,226

)

(1,382,108

)

(1,076,329

)

Equity (loss)/earnings in AIG

 

85,368

 

127,537

 

(24,787

)

401,766

 

Minority Interests in Joint Ventures

 

-

 

(93,113

)

-

 

(293,944

)

Loss Before Income Taxes

 

(1,809,493

)

(729,802

)

(1,406,895

)

(968,507

)

Income Tax Provision

 

100

 

1,340,091

 

5,176

 

1,318,537

 

Net Loss

 

(1,809,593

)

(2,069,893

)

(1,412,071

)

(2,287,044

)

Preferred Dividends

 

250,862

 

250,861

 

744,406

 

747,133

 

Loss Available to Common Shareholders

 

$

(2,060,455

)

$

(2,320,754

)

$

(2,156,477

)

$

(3,034,177

)

Loss per Common Share - Basic

 

$

(1.51

)

$

(1.88

)

$

(1.58

)

$

(2.60

)

Weighted Average Common Shares Outstanding - Basic

 

1,361,703

 

1,231,505

 

1,361,703

 

1,167,867

 

Loss per Common Share- Diluted

 

$

(1.51

)

$

(1.88

)

$

(1.58

)

$

(2.60

)

Weighted Average Common Shares Outstanding - Diluted

 

1,361,703

 

1,231,505

 

1,361,703

 

1,167,867

 

 

See accompanyingnotes to condensed consolidated financial statements.

 

 

**HEALTHCARE INTEGRATED SERVICES, INC.AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

**Nine Months Ended  September 30,**

 

 

 

**(Unaudited)**

 

 

 

**2001**

 

**2000**

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net loss available to common shareholders

 

$

(2,156,477

)

$

(3,034,177

)

Adjustments to reconcile net loss available to common shareholders to  net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,386,067

 

2,331,064

 

Gain on transfer of capital lease

 

(67,001

)

-

 

Non-cash compensation charge

 

-

 

48,978

 

Gain on sale of property, plant and equipment

 

(798,532

)

-

 

Interests in joint ventures

 

106,787

 

145,901

 

Allowance for doubtful accounts

 

1,848,013

 

1,676,000

 

Changes in Assets and Liabilities:

 

 

 

 

 

Accounts receivable

 

(1,284,911

)

(2,341,015

)

Due from ICES – Interest Income

 

(40,490

)

(4,882

)

Prepaid expenses and other

 

(65,744

)

(54,771

)

Deferred taxes

 

-

 

1,301,482

 

Goodwill

 

-

 

(135,000

)

Other

 

(9,746

)

109,793

 

Accounts payable and accrued expenses

 

1,434,584

 

1,021,016

 

Preferred dividends payable

 

744,406

 

1,293,654

 

Income taxes payable

 

(6,503

)

(6,475

)

Deferred transaction and financing costs

 

(70,370

)

(170,158

)

Net cash provided by operating activities

 

1,020,083

 

2,181,410

 

Cash Flows from Investing Activities:

 

 

 

 

 

Loan payments from the buyers of the Wayne facility

 

186,410

 

-

 

Due from ICES – principal

 

(97,500

)

(500,000

)

Proceeds from the Beran Entities

 

-

 

50,411

 

Purchases of property, plant and equipment

 

(122,405

)

(48,111

)

Proceeds from sale of property, plant and equipment net of closing  costs

 

804,113

 

-

 

Net cash provided by (used in) investing activities

 

770,618

 

(497,700

)

Cash Flows from Financing Activities:

 

 

 

 

 

Borrowings against the revolving line of credit

 

21,122

 

335,145

 

Proceeds from sale of stock

 

-

 

500,000

 

Payments on capital lease obligations

 

(419,174

)

(725,284

)

Distributions to limited partners of joint ventures

 

-

 

(329,527

)

Payments on note payable

 

(1,453,615

)

(1,703,995

)

Net cash used in financing activities

 

(1,851,667

)

(1,923,661

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(60,966

)

(239,951

)

Cash and cash equivalents at beginning of period

 

482,239

 

645,389

 

Cash and cash equivalents at end of period

 

$

421,273

 

$

405,438

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid during the period

 

$

1,605,945

 

$

1,819,491

 

Income taxes paid during the period

 

$

12,049

 

$

29,903

 

Supplemental Schedule of Non-Cash Investing and Financing Activities:

 

 

 

 

 

Non-cash proceeds in connection with the sale of property, plant and  equipment

 

$

115,001

 

-

 

Capital leases principally for medical equipment

 

$

643,162

 

$

2,134,164

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

**HEALTHCARE INTEGRATED SERVICES, INC.AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1. – Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10–Qand Rule 10–01 of Regulation S–X. Accordingly, certain information and footnote disclosures normallyincluded in annual consolidated financial statements have been omitted from theaccompanying interim consolidated financial statements.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements contain alladjustments necessary to present fairly the Company's financial position as ofSeptember 30, 2001 and the related statements of operations and cash flows forthe periods ended September 30, 2001 and 2000. The condensed consolidated balance sheet as of December 31, 2000 wasderived from audited financial statements but does not include all disclosuresrequired by generally accepted accounting principles.

 

The results ofoperations for the three and nine months ended September 30, 2001 are notnecessarily indicative of the results of operations expected for the yearending December 31, 2001 or any other period. The consolidated financial statements included herein should be read inconjunction with the consolidated financial statements and notes theretocontained in the Company's Annual Report on Form 10–K for the year endedDecember 31, 2000.

 

The Company has adeficiency in net assets attributable primarily to the cash operating lossesand the write-off of certain intangible assets and deferred costs.  Management has introduced, and continues tointroduce, various measures to reduce operating expenses and increaserevenues.  The Company believes thatcash to be provided by the Company's operating activities, together withborrowings available from the Company's revolving line of credit, will besufficient to fund its anticipated cash requirements for its presentoperations.  The Company is alsoprepared to adopt additional expense reduction measures if its estimates as toits cash requirements and satisfaction thereof prove to be inaccurate.

 

**Note 2. – Basic and Diluted NetLoss Per Share**

 

Basic earnings pershare ("EPS") excludes dilution and is computed by dividing (loss)income applicable to common stockholders by the weighted average number ofcommon shares outstanding for the period. Diluted EPS is based upon the weighted average number of common sharesoutstanding during the period plus the additional weighted average commonequivalent shares during the period. Common equivalent shares are not included in the per share calculationswhere the effect of their inclusion would be anti-dilutive.  Common equivalent shares result from theassumed exercise of outstanding stock options and warrants, the proceeds ofwhich are then assumed to have been used to repurchase outstanding shares ofcommon stock (the "treasury stock method").

 

For the three andnine months ended September 30, 2001 and 2000, the Company had stock optionsand warrants outstanding that were anti-dilutive.  These securities could potentially dilute basic EPS in the futureand were not included in the computation of diluted EPS because to do so wouldhave been anti-dilutive for the periods presented.  Consequently, there were no differences between basic and dilutedEPS for these periods.

 

**Note 3. - Borrowings**

 

***Notes Payable***

 

In January 2001,in an effort to improve the Company's working capital position, the Companyrenegotiated the terms of its notes payable with DVI Financial Services, Inc.("DFS"), the outstanding balances of which aggregated $10,324,538 atDecember 31, 2000 (the "DFS Bridge Loan").  Prior to this renegotiation, the repayment date of the DFS BridgeLoan was May 1, 2004, with principal and interest (at the rate of 12% perannum) payments of $308,000 due monthly throughout the remaining term of theDFS Bridge Loan.

 

As a result of therenegotiation in January 2001, the DFS Bridge Loan is now evidenced by threeseparate notes with differing interest rates (ranging from 12% to 13%): (i) anote representing the principal amount of $2,352,507 (as at December 31, 2000)with payments over sixty months, through December 2005, as follows:  no payments due in months one, two and three(i.e., January, February and March 2001), monthly principal and interestpayments of $24,417 in months four through twelve (i.e., April through December2001), monthly principal and interest payments of $39,993 in months thirteenthrough twenty-four (i.e., January through December 2002) and monthly principaland interest payments $75,817 in months twenty-five through sixty (i.e.,January 2003 through December 2005); (ii) a second note representing theprincipal amount of $2,352,507 (as at December 31, 2000) with payments oversixty months, through December 2005, as follows:  no payments due in months one, two and three (i.e., January,February and March 2001), monthly principal and interest payments of $24,415 inmonths four through twelve (i.e., April through December 2001), monthlyprincipal and interest payment of $39,663 in months thirteen throughtwenty-four (i.e., January through December 2002) and monthly principal andinterest payments of $75,189 in months twenty-five through sixty (i.e., January2003 through December 2005); and (iii) a note representing the principal amountof $5,619,524 (as at December 31, 2000) with monthly principal and interestpayments of $167,749 due in each of 41 months through May 2004.

 

In January 2001,the Company also issued a secured promissory note payable to DFS for $549,225(bearing interest at the rate of 10% per annum) in payment of certain past dueleases and DFS Bridge Loan obligations. At December 31, 2000, this indebtedness was included in the currentportion of notes payable.  In March2001, this note was paid in full.

 

 

Notes payable at September 30, 2001 are as follows:

 

 

 

**DFS  Bridge Laon**

 

 

 

 

 

 

 

**Note  (i)**

 

**Note  (ii)**

 

**Note  (iii)**

 

**Secured  Note**

 

**Total**

 

Balance, December 31,  2000

 

$

2,352,507

 

$

2,352,507

 

$

5,619,524

 

$

549,225

 

$

10,873,763

 

Interest Accrued to  Principal

 

218,841

 

213,651

 

464,647

 

-

 

897,139

 

Principal Payments

 

146,503

 

145,289

 

1,509,737

 

549,225

 

2,350,754

 

Balance, September 30,  2001

 

$

2,424,845

 

$

2,420,869

 

$

4,574,434

 

$

-

 

$

9,420,148

 

 

***Revolving Line of Credit***

 

Effective December26, 1996, the Company entered into a Loan and Security Agreement with DVIBusiness Credit Corporation ("DVIBC"), an affiliate of DFS, toprovide a revolving line of credit to the Company.  The agreement contains customary affirmative and negativecovenants including covenants requiring the Company to maintain certain financialratios and minimum levels of working capital. The maximum amount available under this credit facility is currently$4.0 million with advances limited to 75% of eligible accounts receivable, asdetermined by DVIBC.  Borrowings underthe revolving line of credit bear interest at the rate of 3% over theprevailing prime lending rate and currently is repayable on December 15,2001.  At September 30, 2001, theCompany had $3,037,046 of borrowings under this credit facility.

 

**Note 4. – SignificantTransactions**

 

***Dispositions***

 

On July 31, 2001,the Company transferred the magnetic resonance imaging (“MRI”) equipmentlocated in its Edgewater facility to an unaffiliated third party, PennsylvaniaOpen MRI of Roosevelt Plaza, L.P. (“Pennsylvania Open”), in connection with itsplanned closing of the Edgewater facility on September 30, 2001.  Under the terms of the transfer,Pennsylvania Open assumed, as of July 31, 2001, the Company’s remaining capitallease obligations for the MRI equipment in the amount of $511,000, withoutrecourse to the Company, resulting in a gain on the transfer of the capitallease of $67,000.  The Company, however,retained the right to utilize the MRI equipment until September 30, 2001, onwhich date the Edgewater facility was closed and the MRI equipment was removedfrom the premises.  The closure of theEdgewater facility resulted in a $28,000 charge to operations during thequarter ended September 30, 2001, primarily relating to the write-off ofleasehold improvements.  During thequarter ended December 31, 2000, the Company had recorded a charge of $272,000with respect to the recurring lease payments under the Edgewater facility leasein connection with the then planned closing of this facility.

 

During the latterpart of the second quarter of fiscal 2001, the Company discontinued its MRIoperations at its Lower Manhattan facility. The Company had contemplated discontinuing its operations at thisfacility during the fourth quarter of 2000 and had recorded a reserve forexpected shutdown expenses of $400,000 at December 31, 2000.  The Company believes that the previouslyrecorded reserve will cover expected future costs, including obligations underits facility lease, which extends until January 31, 2010.  The Company is actively pursuing an earlytermination of this facility lease and expects to reach a definitive agreementwith the landlord by the end of the fourth quarter of 2001.

 

On March 5, 2001,the Company sold certain assets including medical and office equipment relatingto its diagnostic imaging facility located in the Rittenhouse Square ofPhiladelphia, Pennsylvania to Rittenhouse Imaging Center, L.P.  The cash sales price of the assets sold was$800,000, which was paid to the Company at the closing.  Under the terms of the sale, as contingentpayments, the Company is also entitled to receive 25% of the revenue generatedby the facility that exceeds $250,000 in any quarter, up to a maximum of$700,000.  However, if the purchaserrenovates the facility for the purpose of removing and repairing certainmedical equipment, it shall be entitled to a credit against the contingentpayments.  The results of operations forthe nine months ended September 30, 2001 include a gain on the sale of assetsof $751,000.  To date, the Company hasnot received any contingent payments.

 

In November 2000,the Company sold certain of its assets relating to its diagnostic imagingfacility in Brooklyn, New York.  At thetime of the sale, the Company retained the MRI equipment and related furniture,fixtures and other equipment.  Duringthe first quarter of 2001, the Company subsequently sold the MRI equipmentlocated in Brooklyn to an unaffiliated third party and recorded a gain on thesale of $48,000.

 

***Cancelled Acquisition***

 

In April 2001, the Company announced that, as a resultof a restructuring of Pavonia Medical Associates, P.A. ("PMA") intoseveral smaller specialty physician practice groups, it would no longer proceedwith its acquisition of Jersey Integrated HealthPractice, Inc.("JIHP"), the management services organization that managed PMA, norwould it continue to provide management services to PMA as a single providerentity.  In lieu of this globalmanagement agreement, the Company had entered into administrative servicesagreements with several of the smaller specialty physician practice groupsformed as a result of the restructuring of PMA as well as exclusive three tofive-year agreements to arrange and coordinate clinical research trials onbehalf of these groups and the other physician practice groups formed as aresult of the restructuring of PMA. However, effective October 1, 2001, as a result of the unprofitabilityof the Company’s physician management and consulting operations, it ceasedthese operations and terminated these administrative services agreements.  In connection with the difficultiesencountered by the Company in its physician management and consultingoperations in fiscal 2000, the Company wrote off all of its assets pertainingto these operations in the fourth quarter of fiscal 2000.  Accordingly, the Company does not expect toincur any additional costs in connection with the cessation of theseoperations.  The Company is currentlysubleasing the diagnostic imaging facility located at PMA’s former principaloffices in Jersey City, New Jersey.  TheCompany expects to acquire the diagnostic imaging equipment at this facilityfrom JIHP in the bankruptcy proceedings discussed below.

 

On June 4, 2001,JIHP filed for protection under Chapter 11 of the United States BankruptcyCode.  The Company is a guarantor of a$1.0 million loan, with a balance of $300,000 at September 30, 2001, from DFSto JIHP.  The Company had previouslyreached agreement with PMA and each physician stockholder of PMA that, to theextent that the Company is or becomes liable in respect of any obligation orother liability or obligation of either PMA or JIHP, and the acquisition by theCompany 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 theCompany harmless from and against any and all such liabilities andobligations.  The Company has notaccrued any liabilities as a result of this guarantee.  The Company expects that this loan will besatisfied through the collection of certain receivables and/or the personalguarantees of the physician stockholders of PMA.

 

***Proposed Transaction***

 

On September 26,2000, the Company executed an amended letter of intent with MedicalEdgeTechnologies, Inc., an acute care/physician services e-commerce healthcarecompany ("MedicalEdge"), with respect to its acquisition, by way ofreverse merger (the "Merger"), of the Company.  MedicalEdge is currently an indirectsubsidiary of International Commerce Exchange Systems, Inc., a “Silicon Alley”based Internet services and technology holding company ("ICES").  The Merger, when completed, will reorientpart of the Company's focus to the provision of healthcare and related servicesthrough the Internet and will provide for the sale and disposition of all or aportion of the Company’s diagnostic imaging business.  Among other things, the Merger is subject to the approval of theCompany’s stockholders.  The Company iscurrently negotiating the definitive terms of the merger agreement.  It is expected that the merger considerationto be payable to the MedicalEdge shareholders will equal, in the aggregate, 67%of the issued and outstanding common stock of the Company immediately after theMerger (after giving effect to the consummation of all of the transactionscontemplated by the Merger, including the disposition of the Company’sdiagnostic imaging business).  Duringthe period subsequent to the execution of the MedicalEdge letter of intent, theCompany’s diagnostic imaging operations have continued to encounter an adverseoperating environment.  In anticipationof the completion of the Merger, the Company has begun to explore the sale ofits remaining diagnostic imaging operations. However, given the recent performance of these operations and thesubstantial debt associated with these operations, the failure of severalpublic diagnostic imaging companies and the constrained lending environment,the Company expects that completion of the disposition of its diagnosticimaging operations will be more difficult than previously expected.  This expectation has been supported byrecent discussions with potential interested parties, none of which haveindicated a willingness to acquire the diagnostic imaging operations subject toall of its related debt.

 

In conjunctionwith the execution of the letter of intent with MedicalEdge, the Company raised$500,000 through an agreement to sell 226,004 shares of Common Stock(constituting approximately 19.9% of the outstanding Common Stock before suchsale) to Lindsay Rosenwald, M.D. d/b/a Huntington Street Company, andVentureTek L.P. for a per share purchase price of $2.212 for the purpose of theMedicalEdge transaction.  Thesepurchasers are also entitled to additional shares (or a cash payment orpromissory note from the Company) under terms of the related purchaseagreement.  The proceeds of this salewere loaned to ICES in accordance with the letter of intent (the "ICESLoan") for the development of the business, products and services to beoperated, owned and provided by the surviving company after the Merger.  The outstanding principal and accruedinterest of the ICES Loan is payable in full in cash on or prior to the earlierof the 30th day after the closing of the Merger and the 180th day after theexecution of the letter of intent with MedicalEdge; provided, however,thatif the Merger has not been consummated prior to such 180th day and MedicalEdgeis using its reasonable efforts in good faith to close the Merger, and theMerger is not consummated as a consequence of the Company's inability orrefusal to proceed, then in lieu of such cash repayment, the Company shall beissued class A common stock of ICES having an aggregate value equal to suchrepayment, based upon an ICES valuation of $500 million.  In addition, if the Merger has not beenconsummated prior to the 180th day after the execution of the letter of intentwith MedicalEdge and the Company is using its reasonable efforts in good faithto close the Merger, and the Merger is not consummated as a consequence ofMedicalEdge's inability or refusal to proceed, then the Company shall have theoption to receive either repayment of the ICES Loan in full in cash or class Acommon stock of ICES, and MedicalEdge shall reimburse the Company its actualout-of-pocket expenses incurred in connection with the Merger, up to anaggregate of $200,000, one-half of which reimbursement shall consist of cashand one-half of which shall consist of class A common stock of ICES.  The Company and ICES have agreed to extendthe term of the ICES Loan to March 31, 2002 in conjunction with thefinalization of the merger agreement.

 
***Joint Venture***
 

On July 23, 2001,Helios Ventures, Inc. (“Helios”), a joint venture owned 40% by the Company, 40%by MedicalEdge and 20% by an unaffiliated third party, IntelliComInternational, Ltd. (“IntelliCom”), acquired the assets of Helios Health, Inc.(“Helios Health”), which was under bankruptcy protection under Chapter 7 of theUnited States Bankruptcy Code.  Prior toits bankruptcy, Helios Health had operated the largest network of healthcare-focusedkiosks in the United States, with nearly 1,400 e-Station kiosks withInternet-based interactive education stations in the waiting rooms of doctors’offices.  Helios acquired this network,as well as Helios Health’s website.

 

In connection withthe Helios Health acquisition and the Merger, the Company agreed to loan toICES, through a Convertible Revolving Promissory Note ("ConvertibleNote"), up to $150,000 at an interest rate of ten percent (10%) per annum.  As of September 30, 2001, $97,500 had beenloaned under the Convertible Note, primarily to fund the operations ofHelios.  The outstanding principal andinterest of the Convertible Note is due and payable in May 2002.  The Convertible Note further provides thatif the Merger does not occur on or prior to December 31, 2001, the principalamount of the Convertible Note, and any accrued but unpaid interest thereon,may, at the option of the Company, be repaid in cash or be converted into suchnumber of shares ("Conversion Shares") of common stock ofMedicalEdge, equal to the quotient obtained by dividing (i) the outstandingprincipal amount of the Convertible Note by (ii) eighty percent (80%) of thelowest price per share at which MedicalEdge sold its shares in any"Offering" (as defined in the Convertible Note) after the issuance ofthe Convertible Note and prior to the conversion thereof.

 

***Other Matters***

 

The Company iscurrently negotiating the exchange of its outstanding Series D Stock intosubordinated promissory notes in the aggregate principal amount equal to theaggregate liquidation preference of the outstanding Series D Stock plus accruedand unpaid dividends.  However, theaccompanying unaudited financial statements do not give effect to any exchangethat may result from these negotiations.

 

**Note 5. - Lease Obligations**

 

During the ninemonths ended September 30, 2001, the Company entered into a capital leaseagreement with DFS for certain diagnostic imaging equipment.  The lease, in the principal amount of$643,000, commenced on June 22, 2001 and terminates on July 22, 2006.

 

**Note 6. – Segment Information**

 

Through the end of thethird quarter of fiscal 2001, the Company operated in two industry segments:(i) diagnostic imaging and (ii) physician management/consulting and clinicalresearch operations.  The diagnosticimaging segment primarily involves operating fixed–site diagnosticimaging facilities.  The physicianmanagement/consulting and clinical research segment, which commenced operationsduring the second quarter of fiscal 1998, consisted of providing management andconsulting services to independent physician practices and providing clinicalresearch opportunities to such practices and others.  Effective October 1, 2001, as a result of the unprofitability ofthe physician management/consulting operations, the Company ceased suchoperations.

 

The followingtable shows net revenues and operating losses by industry segment for thenine-month periods ended September 30, 2001 and September 30, 2000.  Assets are not identified by industry segment.  Operating income consists of revenues lessdirect operating expenses.  Allcorporate operating expenses have been allocated to the diagnostic imagingsegment:

 

 

 

**Three  Months**

 

**Nine  Months**

 

 

 

**Ended**

 

**Ended**

 

 

 

**September  30, 2001**

 

**September  30, 2001**

 

 

 

**(Unaudited)**

 

**(Unaudited)**

 

Net revenues:

 

 

 

 

 

Diagnostic imaging

 

$

2,275,351

 

$

10,711,792

 

Physician management/consulting and clinical  research

 

57,590

 

153,571

 

Total

 

$

2,332,941

 

$

10,865,363

 

 

 

 

 

 

 

Operating loss:

 

 

 

 

 

Diagnostic imaging

 

$

(1,819,708

)

$

(1,152,029

)

Physician management/consulting and clinical  research

 

(75,153

)

(230,079

)

Total

 

$

(1,894,861

)

$

(1,382,108

)

 

 

**Note 7. - Other Transactions**

 

***Medical Billing Services***

 

In March 2001, theCompany, in its continuing efforts to reduce expenses, entered into anagreement with an unaffiliated third party, Practical Billing Solutions, Inc.("PBS"), to provide medical billing services for its diagnosticimaging operations.  The Company wasable to reduce its headcount by 23 employees as the result of this outsourcingarrangement.  The agreement providesthat PBS will bill insurance companies, patients and other payors, on behalf ofthe Company, for a percentage of collections plus postage expenses.  The term of the agreement is for 36 monthsand automatically renews for additional periods of 24 months each, with a rightto terminate after one year with 90 days written notice

 

**Note 8. – Subsequent Events**

 

***Relocation of Corporate Offices***

 

The Company’sagreement with PBS resulted in excess office space at its former billing officein Ocean Township.  As an additionalexpense reduction measure, the Company has sublet all of its corporate officesin Shrewsbury, New Jersey, effective December 1, 2001, and will relocate its corporateoffices to the Ocean Township facility by that date.  The consolidation of the Company’s office operations is expectedto yield savings of $20,000 per month.

 

 

**Item 2.        Management's Discussion and Analysis ofFinancial Condition and Results of Operations**

 

***Note Regarding Forward-Looking Statements***

 

Statements in thisForm 10-Q that are not statements or descriptions of historical facts are"forward-looking statements" under Section 21E of the SecuritiesExchange Act of 1934, as amended, and the Private Securities Litigation ReformAct of 1995 and are subject to numerous risks and uncertainties.  These forward-looking statements cangenerally be identified by the use of such terms as  "anticipate," "believe,""continue," "estimate," "expect,""intend," "may," "should," or similar variationsor the negative thereof.  Suchstatements reflect the current view of the Company with respect to futureevents and are subject to certain risks, uncertainties and assumptions,including, but not limited to, the risk that the Company may not be able toimplement its growth strategy in the intended manner including the integrationof acquisitions, risks associated with the Company’s need to refinance certainnear-term debt maturities, risks relating to the Company's ability to generatesufficient cash to meet its operating requirements, risks regarding currentlyunforeseen competitive pressures affecting participants in the health caremarket and risks affecting the Company’s industry, such as increased regulatorycompliance and changes in regulatory requirements, changes in payorreimbursement levels and technological changes.  In addition, the Company’s business, operations and financialconditions are subject to the risks, uncertainties and assumptions described inthe Company’s reports and statements filed from time to time with theSecurities and Exchange Commission.  TheCompany assumes no obligation to update any such forward-looking statements.

 

***Results of Operations***

 

*Nine months ended September 30, 2001vs. nine months ended September 30, 2000*

 

For the ninemonths ended September 30, 2001, the Company reported a net loss of $1.4million as compared to a net loss of $2.3 million for the similar period in2000.  During each of the nine-monthperiods in 2001 and 2000, the Company recorded dividends to preferredstockholders of $744,000 and $747,000, respectively, resulting in net lossesapplicable to common stockholders of $2.1 million, or $1.58 per share, in 2001,and $3.0 million, or $2.60 per share, in 2000.

 

For the ninemonths ended September 30, 2001, the Company’s total revenues were $10.9million, a decrease of $2.9 million, or 21.1%, from the Company’s totalrevenues of $13.8 million for the nine months ended September 30, 2000.  The decrease in revenues was primarilyattributable to the elimination of $3.3 million in revenue generated in fiscal2000 at the Company’s former facilities in Brooklyn, Wayne, and RittenhouseSquare, which facilities were sold in November 2000, December 2000 and March2001, respectively, and Lower Manhattan, at which site scans were discontinuedin the latter part of the second quarter of 2001, which was offset by anincrease of $200,000 in revenue at the other New Jersey facilities.

 

During thenine-month period ended September 30, 2001, total operating expenses, excludinggain on the sale of assets, were $13.1 million as compared to $14.8 million inthe comparable period in 2000, a decrease of $1.7 million, or 11.7%.  This decrease is primarily comprised of (i)decreases of $350,000 and $750,000 in depreciation and amortization and otheroperating expenses, respectively, resulting from the sale of the Brooklyn,Wayne and Rittenhouse facilities and the closing of the Lower Manhattanfacility; (ii) a decrease of $150,000 in other operating expenses, primarilyemployee benefits and office expenses, relating to the outsourcing of the medical billing function; (iii) adecrease of $900,000 in salaries expense, which is comprised of $550,000 insalary reductions resulting from the sale or closure of the Company’s Brooklyn,Wayne, Rittenhouse and Lower Manhattan facilities, plus $350,000 in salaryreductions from outsourcing the medical billing function; and (iv) a reductionin interest expense of $250,000 relating to reduced balances on outstandingborrowings and the renegotiation of capital lease obligations.  These decreases were offset by (i) anincrease of $350,000 in other operating expenses relating to the Pavoniafacility; (ii) an increase of $300,000 in other operating expenses representingfees paid for outsourced medical billing operations; and (iii) an increase of$500,000 in salaries, of which $250,000 is related to the Pavonia diagnosticimaging facility and the remaining $250,000 is related to additional salariesin connection with diagnostic imaging operations and corporate staff.  In addition, in fiscal 2000, the Companyrecognized $600,000 of amortization of goodwill, the balance of which waswritten off at December 31, 2000.

 

During the firstquarter ended March 31, 2001, the Company sold certain assets, includingmedical office equipment, relating to its diagnostic imaging facility locatedat Rittenhouse Square.  During the firstquarter of 2001, the Company also sold certain assets relating to its formerfacility in Brooklyn, which was sold in November 2000.  During the third quarter of 2001, theCompany transferred the magnetic resonance imaging equipment located in itsEdgewater facility in connection with its planned closing of this facility onSeptember 30, 2001.  Under the terms ofthe transfer of this equipment, the Company’s remaining capital leaseobligations were assumed by an unaffiliated third party.  Results of operations for the nine-monthperiod ended September 30, 2001 includes gain on the sale of assets of $900,000relating to the disposition of these assets.

 

*Three months ended September 30,2001 vs. three months ended September 30, 2000*

 

For the threemonths ended September 30, 2001, the Company reported a net loss of $1.8million as compared to a net loss of $2.1 million for the comparable period in2000.  During each of the three-monthperiods ended September 30, 2001 and 2000, the Company recorded dividends topreferred stockholders of $251,000, resulting in net losses applicable tocommon stockholders of $2.1 million, or $1.51 per share, in 2001, and $2.3million, or $1.88 per share, in 2000.

 

For the threemonths ended September 30, 2001, the Company’s total revenues were $2.3million, a decrease of $1.6 million, or 40.8%, from the Company’s totalrevenues of $3.9 million for the three months ended September 30, 2000.  The decrease in total revenues was primarilyattributable to (i) the elimination of $1.2 million in revenue generated infiscal 2000 at the Company’s former facilities in Brooklyn, Wayne, RittenhouseSquare and Lower Manhattan; and (ii) a decrease of $400,000 in revenue from theCompany’s Monmouth, Edgewater and Lower Manhattan facilities, which decreaseswere due to a decline in the number of MRI and other diagnostic referrals inthe fiscal 2001 third quarter.

 

During thethree-month period ended September 30, 2001, total operating expenses,excluding gain on the sale of assets, decreased by $400,000, or 8.7%, to $4.3million from $4.7 million in the comparable period in fiscal 2000.  This decrease is primarily comprised of (i)decreases of $100,000 and $300,000 in depreciation and amortization and otheroperating expenses, respectively, resulting from the sale of the Brooklyn,Wayne and Rittenhouse facilities and the closing of the Lower Manhattanfacility; (ii) a decrease of $50,000 in other operating expenses, primarilyemployee benefits and office expenses, relating to the outsourcing of themedical billing function; (iii) a decrease of $500,000 in salaries, which iscomprised of $300,000 in salary reductions resulting from the sale or closureof the Company’s Brooklyn, Wayne, Rittenhouse and Lower Manhattan facilities,plus $200,000 in salary reductions from outsourcing the medical billingfunction; and (iv)  a reduction ininterest expense of $100,000 relating to reduced balances on outstanding creditfacilities and the renegotiation of capital lease obligations.  These decreases were offset by (i) anincrease of $150,000 in other operating expenses relating to the Pavoniafacility; (ii) an increase of $100,000 in other operating expenses representingfees paid for outsourced medical billing operations; (iii) an increase of$200,000 in other operating expenses relating to equipment maintenance andfacilities expenses; and (iv) an increase of $200,000 in salaries, of which$100,000 is related to the Pavonia diagnostic imaging facility and theremaining $100,000 is related to additional salaries in connection withdiagnostic imaging operations and corporate staff.  In addition, in fiscal 2000, the Company had recognized $100,000of amortization of goodwill, the balance of which was written off at December31, 2000.

 

During the thirdquarter of 2001, the Company transferred the magnetic resonance imagingequipment located in its Edgewater facility in connection with its plannedclosing of this facility on September 30, 2001.  Under the terms of the transfer of this equipment, the Company’sremaining capital lease obligations were assumed by an unaffiliated thirdparty, resulting in a gain on the transfer of the equipment of $67,000, whichwas recorded in the third quarter of fiscal 2001.

 

***Liquidity and Capital Resources***

 

Over the past fewyears, the Company's results of operations have been negatively impacted byseveral developments in the health care field. Among other things, the trend in the industry towards managed care andhealth maintenance organizations has resulted in lower reimbursement rates formedical procedures, including diagnostic imaging, and an increased demand forlower overall health care costs.  TheCompany is addressing this trend by actively pursuing contracts for itsdiagnostic imaging operations that contain favorable reimbursement rates andeliminating agreements with payors who have reduced reimbursement ratessignificantly below the current Medicare fee schedule.

 

Although theCompany has implemented various measure to improve its revenues during the pastseveral years, including the formation of Atlantic Imaging Group in April 1999,the establishment of clinical research operations in September 1999 and theformation of CliniCure.com in January 2000, these efforts have not beensufficient to eliminate the Company's operating losses.  Accordingly, during the latter part of 2000and the first half of 2001, the Company took a number of additional steps tofurther streamline its cost structure and eliminate its least profitableoperations.  Among the actions taken bythe Company were the leasing of its employees in June 2000; the sale of certaindiagnostic imaging facilities located in Brooklyn, New York in November 2000,in Wayne, New Jersey in December 2000, and in Philadelphia, Pennsylvania inMarch 2001; the outsourcing of its billing operation in March 2001; the closureof its diagnostic imaging facility in Lower Manhattan during the latter part ofthe second quarter of 2001; and the renegotiation of certain of its creditfacilities and leasing arrangements.  Inaddition, the Company closed its Edgewater facility in September 2001 and transferredthe related MRI equipment.  The Companyalso ceased its physician management/consulting operations, effective October1, 2001, and expects to consolidate its office operations during the fourthquarter of 2001.  The Company does notexpect to incur any additional costs in connection with the cessation of theseoperations.

 

In January 2001,in an effort to improve the Company's working capital position, the Companyrenegotiated the terms of it notes payable with DVI Financial Services, Inc.("DFS"), the outstanding balances of which aggregated $10.3 millionat December 31, 2000 (the "DFS Bridge Loan").  Prior to this renegotiation, the paymentdate of the DFS Bridge Loan was May 1, 2004, with principal and interest (atthe rate of 12% per annum) payments of $308,000 due monthly throughout theremaining term of the DFS Bridge Loan.

 

As a result of theJanuary 2001 renegotiation, the DFS Bridge Loan is now evidenced by threeseparate notes with differing interest rates (ranging from 12% to 13%) andextended the maturity date for two of the three notes (to December 31,2005).  Under the terms of the DFSBridge Loan restructuring, no payments of principal and interest were due forthe first quarter of 2001.  At September30, 2001, the outstanding balances of these notes aggregated $9.4 million.

 

Effective December26, 1996, the Company entered into a Loan and Security Agreement with DVIBusiness Credit Corporation ("DVIBC"), an affiliate of DFS, toprovide a revolving line of credit to the Company.  The agreement contains customary affirmative and negativecovenants including covenants requiring the Company to maintain certainfinancial ratios and minimum levels of working capital.  The maximum amount available under thiscredit facility is currently $4.0 million with advances limited to 75% of eligibleaccounts receivable, as determined by DVIBC. Borrowings under the revolving line of credit bear interest at the rateof 3% over the prevailing prime lending rate and currently is repayable onDecember 15, 2001.  At September 30,2001, the Company had $3.0 million of borrowings under this credit facility.

 

As of September30, 2001, the Company had a cash balance of $400,000, a net decrease of$100,000 from the end of the prior year.

 

During thenine-month period ended September 30, 2001, the Company generated $1.0 millionfrom operating activities, as compared to $2.2 million of cash generated fromoperating activities during the comparable period in fiscal 2000.  Net cash provided by operating activitiesincluded $800,000 of proceeds received from the sale of assets.

 

Cash flowsprovided by investing activities were $800,000, which includes: (i) proceedsreceived by the Company from the sale of property, plant and equipment of$800,000, relating to the Rittenhouse and Brooklyn facilities; (ii) collectionof a $200,000 loan receivable due at December 31, 2000, relating to the sale ofthe Wayne facility; (iii) payments totaling $100,000 for purchases of property,plant and equipment; and (iv) advances aggregating $100,000 to InternationalCommerce Exchange Systems, Inc. (“ICES”) under a Convertible RevolvingPromissory Note.  The advances to ICESwere made in connection with the Company’s purchase of 40% of the common stockof Helios Ventures, Inc. (“Helios”) and the Company’s contemplated merger withMedicalEdge Technologies, Inc., an indirect subsidiary of ICES, which alsopurchased 40% of the common stock of Helios.

 

During the ninemonth period ended September 30, 2001, the Company utilized $1.9 million ofcash in its financing activities, which is comprised of (i) payments of $1.5million pertaining to the DFS Bridge Loan, and (ii) payments of $400,000 oncapital lease obligations.

 

The nature of theCompany's operations requires significant capital expenditures which generallyhave been financed through the issuance of debt and capital leases.  Continued expansion of the Company'sbusiness, including the implementation of its new business model, will requiresubstantial cash resources and will have an impact on the Company's liquidity.

 

The Company believesthat cash to be provided by the Company's operating activities, together withcontinuing availability of funds under the Company's revolving line of credit, will be sufficient to fund itsanticipated cash requirements for its present operations.  The revolving line of credit matures onDecember 15, 2001. The Company is negotiating an extension of such maturitydate, but there can be no assurance that such negotiations will be successfullyconcluded.

 

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Not Applicable.
****
 

**PARTII - OTHER INFORMATION**

 

Items 1 through 5have been omitted because the related information is either inapplicable or hasbeen previously reported.

 

**Item6.  Exhibits and Reports on Form  8-K**

 

(a)       Exhibits.

 

10.82       Amendment to the Loan and SecurityAgreement, entered into as of July 31, 2001, by and between HealthCareIntegrated Services, Inc.; HIS of Rittenhouse Square, Inc. (successor byassignment from Rittenhouse Square Imaging Associates, L.P.); HIS Imaging, LLC(successor by assignment from HIS Imaging Co.) and DVI Business CreditCorporation.

 

10.83       Letter Agreement, dated October 30, 2001,by and between HealthCare Integrated Services, Inc.; HIS of Rittenhouse Square,Inc. (successor by assignment from Rittenhouse Square Imaging Associates,L.P.); HIS Imaging, LLC (successor by assignment from HIS Imaging Co.) and DVIBusiness Credit Corporation.

 

 

(b)       Reportson Form 8-K.

 

None.

 

 
**SIGNATURES**
 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 

HEALTHCARE INTEGRATED  SERVICES, INC.

 

(Registrant)

 

 

 

 

 

 

Date: November 19, 2001

/s/ Elliott H. Vernon

 

Elliott H. Vernon

 

Chairman of the Board  and Chief Executive Officer

 

**EXHIBIT INDEX**

 

 

**Exhibit**

 

 

**Number**

 

**Description**

 

 

 

10.82

 

Amendment to the Loan  and Security Agreement, entered into as of July 31, 2001, by and between  HealthCare Integrated Services, Inc.; HIS of Rittenhouse Square, Inc.  (successor by assignment from Rittenhouse Square Imaging Associates, L.P.);  HIS Imaging, LLC (successor by assignment from HIS Imaging Co.) and DVI  Business Credit Corporation.

 

 

 

10.83

 

Letter Agreement,  dated October 30, 2001, by and between HealthCare Integrated Services, Inc.;  HIS of Rittenhouse Square, Inc. (successor by assignment from Rittenhouse  Square Imaging Associates, L.P.); HIS Imaging, LLC (successor by assignment  from HIS Imaging Co.) and DVI Business Credit Corporation.

 

 

 

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