10QSB 1 v08492_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 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: 0-23511 ---------------------------- Integrated Healthcare Holdings, Inc. (Exact name of small business issuer as specified in its charter) Nevada 87-0412182 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 695 Town Center Drive, Suite 260, Costa Mesa, California 92626 (Address of principal executive offices) (Zip Code) (714) 434-9191 (Issuer's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) ---------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 |_| As of November 8, 2004, there were outstanding 20,390,000 shares of the issuer's common stock, par value $0.0001 per share. Transitional Small Business Disclosure Format (Check one): Yes |_|; No |X| INTEGRATED HEALTHCARE HOLDINGS, INC. FORM 10-QSB TABLE OF CONTENTS -------------------------------------------------------------------------------- Page Number PART I FINANCIAL INFORMATION Item 1. Financial Statements: Unaudited Consolidated Balance Sheet as of September 30, 2004 and December 31, 2003 1 Unaudited Consolidated Statement of Operations for the three and nine months ended September 30, 2004 and 2003 2 Unaudited Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 and 2003 3 Notes to Unaudited Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis or Plan of Operation 12 Item 3. Controls and Procedures 13 PART II OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits 15 SIGNATURES 16 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED BALANCE SHEET September 30, December 31, 2004 2003 ------------ ----------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 14,464 $ 265,000 --------- --------- Total current assets 14,464 265,000 Property and equipment: Office equipment 39,834 26,537 Furniture and fixtures 27,347 21,095 --------- --------- 67,181 47,632 Accumulated depreciation (8,474) (651) --------- --------- 58,707 46,981 Intangible asset, net of accumulated amortization of $44,971 and $6,424 57,819 96,366 Due from shareholders -- 60,000 Deposits 7,794 -- --------- --------- Total assets $ 138,784 $ 468,347 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 70,797 $ 15,727 Accrued compensation and benefits 739,540 -- Notes payable to shareholders 60,000 -- Note payable -- 100,000 ----------- ----------- Total current liabilities 870,337 115,727 Commitments and contingencies -- -- Stockholders' equity: Common stock, $0.001 par value; 50,000,000 shares authorized; 24,380,000 and 19,380,000 shares issued and outstanding, respectively 20,100 19,380 Additional paid in capital 920,302 551,021 Deficit accumulated during the development stage (1,671,955) (217,781) ----------- ----------- Total stockholders' equity (731,553) 352,620 ----------- ----------- Total liabilities and stockholders' equity $ 138,784 $ 468,347 =========== =========== The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements 1 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
Cumulative from inception Three Months Ended Nine Months Ended (July 31, 1984) --------------------------- ---------------------------- through September 30, September September September September 2004 30, 2004 30, 2003 30, 2004 30, 2003 ------------ ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue $ -- $ -- $ -- $ -- $ -- General and administrative expenses 1,631,569 491,048 3,838 1,413,788 23,635 ------------ ------------ ------------ ------------ ------------ Loss from operations before provision for income taxes (1,631,569) (491,048) (3,838) (1,413,788) (23,635) Provision for income taxes -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net loss $ (1,631,569) $ (491,048) $ (3,838) $ (1,413,788) $ (23,635) ============ ============ ============ ============ ============ Basic and diluted net loss per share ($0.02) ($0.00) ($0.07) ($0.02) Weighted average shares outstanding 20,115,652 1,342,000 19,781,971 1,342,000
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements 2 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended -------------------------- Cumulative From Inception (July 31, 1984) Through September 30, September 30, September 30, 2004 2004 2003 ------------------------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $(1,631,569) $(1,413,788) $ (23,635) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization expense 53,445 46,370 Noncash expense 39,255 -- Stock issued for relief of debt 1,000 -- Increase in accounts payable 60,797 45,070 Increase in accrued compensation and benefits 739,540 739,540 Increase in accounts payable - related parties -- -- 18,080 Increase in due to officers -- -- 4,355 ----------- ----------- ----------- Net cash used in operating activities (737,532) (582,808) -- ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (67,181) (19,549) -- Acquisition of MMG Inc., net of cash acquired 8,536 8,536 -- ----------- ----------- ----------- Net cash used in investing activities (58,645) (11,013) -- Cash flows from financing activities: Proceeds from issuance of stock 897,356 370,000 -- Repayment of promissory note (100,000) (100,000) -- Advances from shareholders 13,285 73,285 -- ----------- ----------- ----------- Net cash provided by financing activities 810,641 343,285 -- ----------- ----------- ----------- Net increase (decrease) in cash 14,464 (250,536) -- Cash and cash equivalents, beginning of period -- 265,000 -- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 14,464 $ 14,464 $ -- =========== =========== =========== Supplemental cash flow information: Cash paid for interest and income taxes $ -- $ -- $ -- Supplemental Schedule of Noncash Financing Activities: Issuance of a promissory note and common stock in exchange for a letter of indemnification $ 102,790 $ -- $ -- Issuance of promissory notes for acquisition of Mogel Management Group, Inc. $ 60,000 $ 60,000 $ --
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements 3 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - First Deltavision, Inc. (the "Company") was organized under the laws of the State of Utah on July 31, 1984 under the name of Aquachlor Marketing. The Company never engaged in business activities and was suspended for failure to file annual reports and tax returns. In December 1988, all required reports and tax returns were filed and the Company was reinstated by the State of Utah. In December 1988, the Company merged with Aquachlor, Inc., a Nevada corporation incorporated on December 20, 1988. The Nevada corporation became the surviving entity and changed its name to Deltavision, Inc. In March 1997, the Company received a Certificate of Revival from the State of Nevada using the name First Deltavision, Inc. Effective March 4, 2004, the Company's board of directors changed the Company's name to "Integrated Healthcare Holdings, Inc." Company Operations - The Company has not engaged in any business activities that have produced revenues and, therefore, is considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. The Company seeks to acquire, own, and operate hospitals and surgical services throughout the United States. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. The Company generated losses from continuing operations of $1,413,788 and $1,631,569 during the nine months ended September 30, 2004 and from inception (July 31, 1984) through September 30, 2004, respectively. In addition, the Company had negative working capital of $855,873 as of September 30, 2004. The Company has raised $370,000 through stock sales during the nine months ended September 30, 2004. Management believes the Company has sufficient funds, the ability to raise additional capital, and the ability to reduce administrative expenses to meet its continuing obligations for the foreseeable future. Basis of Presentation - In January 2004, the Company's board of directors changed the Company's fiscal year end from June 30 to December 31. The accompanying financial statements have been audited for the transitional six month period ended December 31, 2003. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2004 and for the nine months period then ended have been made. Condensed Financial Statements - The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2004 and 2003 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2003 audited financial statements. The results of operations for the periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results for the full year. 4 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 Cash and Cash Equivalents - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America required management to make estimates and assumptions that effect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated by management. Stock-Based Compensation - Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in previously issued standards. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the fair market value of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation is charged to expense over the shorter of the service or vesting period. Stock options issued to non-employees are recorded at the fair value of the services received or the fair value of the options issued, whichever is more reliably measurable, and charged to expense over the service period. Fair Value of Financial Instruments - The Company considers all liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments generally mature between three months and six months from the purchase date. All cash and short-term investments are classified as available for sale and are recorded at market using the specific identification method; unrealized gains and losses are reflected in other comprehensive income. Cost approximates market for all classifications of cash and short-term investments. Net Loss per Common Share - Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that options are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Impairment of Long-Lived Assets - The Company continually monitors events or changes in circumstances that could indicate that the carrying amount of long-lived assets to be held and used, including intangible assets, may not be recoverable. The determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. When impairment is indicated for a long-lived asset, the amount of impairment loss is the excess of net book value over fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. As of September 30, 2004, the Company has determined that no impairment of its long-lived assets exists. Goodwill and Intangible Assets - On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. Under these new standards, all acquisitions subsequent to June 30, 2001 must be accounted for using the purchase method of accounting. The cost of intangible assets with indefinite lives and goodwill are no longer amortized, but are subject to an annual impairment test based upon its fair value. 5 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 Goodwill and intangible assets principally result from business acquisitions. The Company accounts for business acquisitions by assigning the purchase price to tangible and intangible assets and liabilities. Assets acquired and liabilities assumed are recorded at their fair values; the excess of the purchase price over the net assets acquired is recorded as goodwill. Recently Enacted Accounting Standards - Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", SFAS No. 147, "Acquisitions of Certain Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9", SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123", SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", and SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", were recently issued. SFAS No. 144, 146, 147, 148, 149 and 150 have no current applicability to the Company or their effect on the financial statements would not have been significant. Restatement - The financial statements have been restated for all periods presented to reflect a 4-for-1 forward stock split on April 4, 2002, a 248.399-for-1 reverse stock split on April 23, 1997 and a 5-for-1 forward stock split on December 9, 1988. NOTE 2 - ACQUISITIONS AND RESCISSION OF ACQUISITION On April 9, 2002, the Company entered into a share exchange agreement with KyoMedix Corporation ("KyoMedix"). The agreement called for the Company to issue 15,166,550 shares of common stock to the shareholders of KyoMedix for all of the issued and outstanding shares of common stock of KyoMedix. The agreement also called for the repurchase and cancellation of 746,592 shares of common stock for a $250,000 note payable and effecting a 4-for-1 forward stock split. The $250,000 note payable was due 90 days from signing and was secured by 13,916,000 shares of common stock of the Company. Any unpaid portion of the note was to accrue interest at 10% per annum after the 90-day term. The agreement also called for the resignation of the Company's officers and directors, the adoption of the 2002 Stock Plan of KyoMedix, changing the name of the Company to KyoMedix, Inc. and the grant of similar options to replace the options previously granted by KyoMedix. The acquisition closed April 9, 2002; however, subsequently, former and current shareholders of the Company sued to rescind the merger claiming that certain conditions of the agreement were not satisfied. On November 11, 2002, the Company signed a Compromise and Settlement Agreement and the Company cancelled the 15,166,550 shares of common stock that had been issued to the shareholders of KyoMedix. As part of the rescission agreement, the Company reissued 746,592 shares of common stock to the previous shareholder and the $250,000 note payable was voided. As part of the rescission agreement, the Company's former officers and directors were re-appointed, the adoption of the 2002 Stock Plan of KyoMedix was voided and options granted to KyoMedix option holders were cancelled. The financial statements have been restated to reflect the acquisition as having been rescinded. 6 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 On January 1, 2004, the Company entered into a Securities Purchase Agreement and Plan of Reorganization with Mogel Management Group, Inc. ("MMG"), an entity with certain common ownership with the Company, and the shareholders of MMG. The Company purchased all of the issued and outstanding stock of MMG, 48 million shares, in exchange for the issuance of three promissory notes to the stockholders of MMG with a total face value of $60,000. The stockholders of MMG, Inc. are also the officers and directors of the Company. The fair value of the tangible assets acquired in excess of liabilities assumed amounted to $15,000, which resulted in goodwill of $45,000. During the three months ended June 30, 2004, the Company recorded an impairment charge of $45,000 related to the goodwill from the MMG, Inc. acquisition. The notes bear interest at 6% per annum and are due and payable on December 31, 2004. MMG was organized under the laws of the State of Nevada on October 2, 2003 and has not engaged in any business activities that have produced any revenues and, therefore, is considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. On September 29, 2004, the Company entered into an Asset Sale Agreement with Tenet Healthcare Corp. ("Tenet") to purchase four hospitals located in Orange County, California (AHM CGH, Inc., Health Resources Corporation of America-California, SHL/O Corp., and UWMC Hospital Corporation) (the "Hospitals"). The Company will be acquiring substantially all of the assets of the Hospitals for $70 million, less certain defined items including (a) the amount of the seller's capital lease obligations with respect to the Hospitals closing date, if any, that are assumed by the purchaser pursuant to Section 1.11 of the Asset Sale Agreement, less (b) the net present value on the closing date of the employee loan liabilities, less (c) $750,000, reflecting the credit made available to the purchaser hereunder for assuming accrued sick pay to hired employees, less (d) the accrued paid time off amount on the closing date. In October 2004, the Company made a good faith deposit to Tenet of $10 million in connection with the purchase. The balance of the purchase price defined in the Asset Sale Agreement is due at the closing date, which is contemplated to be November 30, 2004, if all closing conditions have been met. On September 29, 2004, in connection with the Company's Asset Sale Agreement with Tenet, the Company entered into a secured promissory note with Dr. Kali Chaudhuri for $10 million. The note bears interest at 7.25% and is due at the earlier of (a) the closing of the Asset Sale Agreement with Tenet noted above or (b) the termination, for any reason, of the Asset Sale Agreement with Tenet noted above. Interest only is payable on the first business day of each calendar quarter beginning January 2, 2005. The Company received the proceeds from this note in October 2004 and used the proceeds as its good faith deposit in connection with the Asset Sale Agreement with Tenet noted above. On September 29, 2004, the Company entered into a secured convertible note purchase agreement with Dr. Kali Chaudhuri, whereby the Company issued a 5% Secured Promissory Note. The original face amount of the note of $500,000 is presently convertible into up to 160,000,000 shares of the Company's Common Stock. The Company may draw advances on this note to be used for certain defined Company purposes. As of September 30, 2004, the Company has not made any draws on this note. If the Company is not able to obtain financing to close the Asset Sale Agreement with Tenet, Dr. Kali Chaudhuri may elect to proceed to obtain his own financing and close the Tenet transaction without the Company's participation. In addition, if the Asset Sale Agreement with Tenet fails to close, for a period of 30 days, the Company shall have the opportunity to repay all advances made under the convertible secured note with accrued interest and thus causing the conversion right of the note to lapse. All or any portion of the outstanding principal and interest accrued under this note may be converted, at the option of the note holder, into shares of the Company's common stock at a conversion price of $0.003125 per share. Dr. Kali Chaudhuri will receive preemptive rights to participate in additional issuances of the Company's stock shares, and receive piggyback registration rights relating to his stock. 7 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 In connection with the two promissory notes entered into with Dr. Kali Chaudhuri noted above, the Company entered into an Option Agreement dated September 29, 2004 with Dr. Kali Chaudhuri. Pursuant to this Option Agreement, the Company granted Dr. Kali Chaudhuri an option to acquire all of the real estate of the Hospitals, which the Company intends to acquire from Tenet (i.e. Western Medical Center- Santa Ana, Western Medical Center - Anaheim, and Coastal Community Hospital) for the price of $5 million. The option has a term of five years subsequent to the close of the Company's Asset Sale Agreement with Tenet. NOTE 3 - COMMON STOCK The Company issued 91,452 shares of stock upon incorporation for $57,576. During the year ended June 30, 1989, the Company issued 96,640 shares of common stock for $1,200. During 1996, the Company issued 611,908 shares of common stock for consulting fees valued at $38,000 (or $.25 per share) resulting in a change in control of the Company. During the year ended June 30, 1998, the Company issued 142,000 shares of common stock for services rendered. Total proceeds amounted to $1,255 (or $.04 per share). The Company previously reported the issuance as 140,000 shares of common stock. The financial statements have been restated for the years ended June 30, 1999 and 1998 to reflect the issuance of an additional 2,000 shares of common stock related to services previously rendered. On December 9, 1988, the Company effected a 5-for-1 forward stock split. On April 23, 1997, the Company effected a 248.399-for-1 reverse stock split. On April 4, 2002, the Company effected a 4-for-1 forward stock split. The financial statements for all periods presented have been restated to reflect these stock splits. In January 2000, the board of directors approved a compensation agreement that included the issuance of a total of 400,000 shares of common stock to two shareholders, 200,000 to each, for services rendered which were valued at $1,000. The shares were issued in August 2000 for $.0025 per share. In November 2003, the board of directors approved the issuance of 16,128,000 shares of common stock to three individuals ("the Purchasers") for $100,000, pursuant to a certain Stock Purchase Agreement. In connection with this stock sale, the Company issued a promissory note for $100,000 to the former president and director of the Company and 450,000 shares of common stock to the former president and director of the Company, and a shareholder, in exchange for a certain letter of indemnification. The letter of indemnification holds the Company and the Purchasers harmless from and against any and all liabilities of any type or nature, whatsoever, of the Company that existed prior to the closing of the Stock Purchase Agreement, including fees of legal counsel for the Company in connection with the completion of the Stock Purchase Agreement and the promissory note due to the former president and director of the Company. 8 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 In December 2003, the Company issued 1,460,000 shares of its common stock at $0.25 per share for cash proceeds of $365,000. In January 2004, the Company issued an additional 200,000 shares of its common stock at $0.25 per share for cash proceeds of $50,000. During the three months ended March 31, 2004, the Company issued 200,000 and 150,000 shares of its common stock at $0.25 and $1.00 per share, respectively, for net cash proceeds of $200,000. During the three months ended June 30, 2004 the Company issued an additional 50,000 shares of its common stock at $1.00 per share for net cash proceeds of $50,000. In July, 2004, the Board of Directors approved the issuance of one additional common share for each common share purchased at $1.00 per share during the six months ended June 30, 2004. As a result, the Company issued an additional 200,000 common shares to these investors. During the three months ended September 30, 2004, the Company issued 240,000 shares of its common stock at $0.50 per share for net cash proceeds of $120,000. On August 25, 2004, the Company's Board of Directors resolved to amend to increase the number of authorized shares of its common stock to 250,000,000. This amendment is subject to shareholder approval. NOTE 4 - NOTES PAYABLE In connection with the Company's sale of 16,128,000 shares of its common stock in November 2003, the Company issued a promissory note to the former president and director of the Company in the amount of $100,000. The Company received a letter of indemnification which holds the Company and the Purchasers harmless from and against any and all liabilities of any type or nature, whatsoever, of the Company that existed prior to the closing of the Stock Purchase Agreement, including fees of legal counsel for the Company in connection with the completion of the Stock Purchase Agreement and the promissory note due to the former president and director of the Company. The promissory note dated November 18, 2003 had a term of 90 days and bears interest at 10% per annum. The Company repaid the promissory note in full on February 18, 2004. In connection with the Company's purchase of all of the issued and outstanding stock of MMG, Inc. (see Note 2), the Company issued three promissory notes to the stockholders of MMG, Inc. with a total face value of $60,000. The stockholders of MMG, Inc. are also the officers and directors of the Company. The notes bear interest at 6% per annum and are due and payable on December 31, 2004. For the nine months ended September 30, 2004, the Company incurred interest expense of $2,700. NOTE 5 - INTANGIBLE ASSET In connection with the Company's stock sale of 16,128,000 shares of its common stock in November 2003, the Company issued a promissory note of $100,000 and 450,000 shares of its common stock in exchange for a letter of indemnification from the Company's former President and shareholder. The 450,000 shares of common stock were valued by the Company at $0.0062 per share. The letter of indemnification holds the Company and the Purchasers harmless from and against any and all liabilities of any type or nature, whatsoever, of the Company that existed prior to the closing of the Stock Purchase Agreement, including fees of legal counsel for the Company in connection with the completion of the Stock Purchase Agreement and the promissory note due to the former president and director of the Company. The Company has recorded the letter of indemnification as an intangible asset of $102,790 based on the total fair market value of the promissory note and common stock issued. The Company is amortizing the intangible asset using the straight-line method over the enforceable life of the letter of indemnification of two years. During the nine months ended September 30, 2004 and 2003, the Company incurred amortization expense of $38,547 and nil, respectively. 9 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 NOTE 6 - INCOME TAXES The Company has not made a provision for income taxes because of its financial statement and tax losses since its inception on July 31, 1984. A valuation allowance has been used to offset the recognition of any deferred tax assets related to net operating loss carryforwards due to the uncertainty of future realization. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" which requires the liability approach for the effect of income taxes. At September 30, 2004 and December 31, 2003, the Company had unused operating loss carryforwards of approximately $1,300,000 and $116,000, respectively, which may be applied against future taxable income in various years through 2023. If certain substantial changes in the Company's ownership should occur, there could be an annual limitation on the amount of net operating loss carryforwards which can be utilized. The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect of the loss carryforwards, therefore, no deferred tax asset has been recognized for the loss carryforwards. The net deferred federal and state tax assets were approximately $561,000 and $41,000 at September 30, 2004 and December 31, 2003, respectively, with an offsetting valuation allowance of the same amount resulting in a change in the valuation allowance of approximately $520,000 during the nine months ended September 30, 2004. NOTE 7 - RELATED PARTY TRANSACTIONS Due to/from Shareholders and Officers - During the nine months ended September 30, 2004 and 2003, the Company's President paid expenses on behalf of the Company totaling nil and $1,676, respectively. At September 30, 2004 and December 31, 2003, the total amount due to the Company's president was nil and $38,031, respectively. At September 30, 2004 and December 31, 2003, the total amount due from the Company's officers and majority shareholders was nil and $60,000, respectively. The amounts due from shareholders and officers bear no interest and are due when funds are available. The Company's corporate facility is leased by a company with certain common ownership and officers with the Company. There is no sub-lease agreement and management of the Company intends to assume this lease. See Note 9 for a description of this lease. The Company receives the full benefit of the leased office and is responsible for paying the lease payments. A relative of an officer and shareholder of the Company is employed by the Company to perform administrative duties in 2004. During the nine months ended September 30, 2004 and 2003 this relative earned approximately $35,000 and nil, respectively, from the Company. 10 INTEGRATED HEALTHCARE HOLDINGS, INC. (A Development Stage Enterprise) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 NOTE 8 - LOSS PER SHARE The following data show the amounts used in computing loss per share for the periods presented:
Three Months Ended Nine Months Ended ---------------------------- ---------------------------- September 30 September 30, September 30, September 30, 2004 2003 2004 2003 ------------------------------------------------------------ (Unaudited) (Unaudited) Loss from continuing operations available to common shareholders (numerator) $ (491,048) $ (3,838) $ (1,413,788) $ (23,635) Weighted average number of common shares used in loss per share during the period (denominator) 20,115,652 1,342,000 19,781,971 1,342,000
Dilutive loss per share was not presented, as the Company had no common equivalent shares for all periods presented that would effect the computation of diluted loss per share. NOTE 9 - COMMITMENTS AND CONTINGENCIES Contingencies - In the ordinary course of business, the Company is subject to legal proceedings and claims. The Company is not currently aware of any legal proceedings or claims that the Company believes are likely to have a material adverse effect on the Company's financial position and results of operations. Commitments - The Company leases its operating facility under an operating lease agreement. The Company's facility lease expires in January 2006. Future minimum lease payments under the non-cancelable lease agreement as of September 30, 2004 are: September 30, ------------- 2005 $51,960 2006 17,320 ------- $69,280 ======= 11 INTEGRATED HEALTHCARE HOLDINGS, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 INTRODUCTION As used in this report, the terms "we", "us", "our", "the Company" or "Integrated Healthcare Holdings" mean Integrated Healthcare Holdings, Inc., unless otherwise indicated. In the first quarter of 2004, the Board of Directors and shareholders of the Company approved a change in the Company's name to "Integrated Healthcare Holdings, Inc." from "First Deltavision, Inc." to better reflect our planned operations. The name change became effective on May 18, 2004. This Quarterly Report on Form 10-QSB contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks discussed under the caption "Risk Factors" in our Transition Report on Form 10-K filed on April 15, 2004, that may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. During the quarter ended September 30, 2004, the Company earned no revenues. The Company had $491,048 in general and administrative expenses during the quarter, relating primarily to the transactions described below. On September 29, 2004, the Company entered into a definitive agreement to acquire four hospitals located in Orange County, California from subsidiaries of Tenet Healthcare Corporation (collectively, "Tenet"). The four hospitals are: o 280-bed Western Medical Center - Santa Ana; o 188-bed Western Medical Center - Anaheim; o 114-bed Chapman Medical Center in Orange; and o 178-bed Coastal Communities Hospital in Santa Ana. The net purchase price to the Company for the acquisition of these facilities will be approximately $70 million, subject to certain closing adjustments. The purchase is expected to close on or before November 30, 2004, subject to customary closing conditions, including regulatory approvals. On September 29, 2004, the Company entered into definitive forms of agreements with Dr. Kali P. Chaudhuri involving a new investment in the Company and financial support to enable the Company to acquire hospitals and healthcare facilities from Tenet. The following material terms were agreed to by the Company and Dr. Chaudhuri: 12 o Dr. Chaudhuri will invest $500,000 in the Company in the form of a Convertible Secured Promissory Note, and may provide additional financing directly to the Company as needed; o Dr. Chaudhuri will loan $10 million to the Company to be used by the Company as a good faith deposit towards the Company's proposed acquisition of hospitals from Tenet; o Dr. Chaudhuri will provide a personal guaranty of up to $10 million to cover Tenet's post-closing liability on a lease for the Chapman Hospital that the Company proposes to acquire from Tenet. If the Company acquires the Chapman Hospital, it will assign to Dr. Chaudhuri the underlying lease and operating assets relating to the hospital; o Dr. Chaudhuri will have an option to acquire all of the real estate which the Company acquires from Tenet for $5 million, and will assume the underlying debt and other obligations relating to the real estate; o The Convertible Secured Promissory Note will be initially convertible into 160 million shares of the Company's Common Stock, or 88.8% of the Company's outstanding shares after giving effect to the new issuance (and possibly an additional 10 million shares if additional financing is provided to the Company); and o Dr. Chaudhuri will receive pre-emptive rights to participate in additional issuances of Company shares, and receive piggyback registration rights relating to his stock. The Company's plan of operation over the next 12 months is to complete the pending transactions discussed above and successfully integrate and manage the newly acquired healthcare facilities. The Company expects that, upon completion of its acquisition of the facilities, most or all of the current employees of the acquired facilities (approximately 2,500 individuals) will become employees of the Company or its subsidiaries. In connection with its acquisition of the Tenet facilities and related transactions, the Company expects that it will need to raise additional funds over the next 12 months, which will likely take the form of sales of additional equity securities and/or borrowings. Currently there are four full time employees of the Company. As of the September 30, 2004, the Company had no off-balance sheet arrangements, as defined by Regulation S-B Item 303(c). ITEM 3. CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 15d-15(e). The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching the Company's desired disclosure control objectives. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company's certifying officers have concluded that the Company's disclosure controls and procedures are effective in reaching that level of assurance. 13 As of the end of the period of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. On September 29, 2004, the Company entered into an agreement with Dr. Kali P. Chaudhuri involving a new investment in the Company. Pursuant to this agreement, Dr. Chaudhuri will invest $500,000 in the Company in the form of a Convertible Secured Promissory Note which will be initially convertible into 160 million shares of the Company's Common Stock, or 88.8% of the Company's outstanding shares after giving effect to the new issuance based on the Company's current capitalization, and possibly an additional 10 million shares if additional financing is provided to the Company. Dr. Chaudhuri will also receive pre-emptive rights to participate in additional issuances of Company shares, and receive piggyback registration rights relating to his stock. Also pursuant to this agreement, Dr. Chaudhuri agreed to provide financial support to enable the Company to acquire hospitals and healthcare facilities from subsidiaries of Tenet Healthcare Corporation. The definitive form of the agreement with Dr. Chaudhuri is filed as Exhibit 10.1 to this Report, and is incorporated by reference herein in its entirety. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On or about August 31, 2004, holders of 16,128,000 shares of our common stock, constituting a majority of the outstanding shares of our common stock, took action by written consent to approve the amendment of the Company's Articles of Incorporation to increase the authorized shares of common stock to 250,000,000 shares. Shareholders of the Company received notice of this action in a definitive Information Statement on Schedule 14C mailed to shareholders of record at the close of business on August 31, 2004. The amendment became effective on or about November 9, 2004. 14 ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. Exhibit Number Description ------- ----------- 3.1 Certificate of Amendment to Articles of Incorporation (incorporated by reference to Appendix A to Registrant's Definitive Information Statement on Schedule 14C filed on October 20, 2004). 10.1 Secured Convertible Note Purchase Agreement, dated as of September 28, 2004, by and between the Registrant and Kali P. Chaudhuri, M.D. (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on October 5, 2004). 10.2 Asset Sale Agreement, dated September 29, 2004, by and among AHM CGH, Inc., Health Resources Corporation of America - California, SHL/O Corp., UWMC Hospital Corporation, and the Registrant (incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K filed on October 5, 2004). 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 15 SIGNATURE In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTEGRATED HEALTHCARE HOLDINGS, INC. Dated: November 15, 2004 By: /s/ James Ligon ------------------------------------- James Ligon Chief Financial Officer and Secretary (Principal Financial Officer) 16