<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 0-21343
MEDICAL ALLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 73-1347577
(State or other jurisdiction of) (I.R.S. Employer
incorporation or organization) Identification No.)
2445 GATEWAY DRIVE, SUITE 150
IRVING, TEXAS 75063
(Address of principal executive offices)
(Zip Code)
(972) 580-8999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 12, 1997 there were 6,131,542 shares outstanding of the
registrant's common stock, $0.002 par value.
===============================================================================
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets
December 31, 1996 and September 30, 1997 (Unaudited)................................3
Consolidated Statements of Operations -
Three and Nine months ended September 30, 1996 and 1997...............................4
(Unaudited)
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1997 (Unaudited)...........................5
Consolidated Statement of Stockholders Equity (Deficit)...................................6
Nine months ended September 30, 1997 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)....................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................................12
Signatures...............................................................................14
</TABLE>
<PAGE> 3
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 20,505,787 $ 15,610,245
Restricted cash ............................................. 31,000 -0-
Accounts receivable, less allowance for doubtful accounts
of $1,859,621 and $3,220,217 respectively .................. 4,414,860 3,114,103
Prepaid expenses and other current assets ................... 461,743 1,165,557
Deferred income taxes ....................................... 590,195 1,356,032
------------ ------------
Total current assets .................................. 26,003,585 21,245,937
Property and equipment, net ..................................... 4,550,183 5,603,091
Other assets:
Intangible assets, net of amortization of approximately
$59,080 and $135,076, respectively ......................... 154,151 896,692
------------ ------------
Total assets .......................................... $ 30,707,919 $ 27,745,720
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 2,447,108 $ 668,175
Accrued expenses ............................................ 983,905 1,297,642
Current maturities of:
Capital lease obligations ................................... 296,717 282,934
Deferred revenue ............................................ 181,662 248,734
------------ ------------
Total current liabilities ............................. 3,909,392 2,497,485
Capital lease obligations, net of current maturities ............ 58,777 290,598
Deferred income taxes ........................................... 654,837 485,197
------------ ------------
Total liabilities .................................... 4,623,006 3,273,280
============ ============
Stockholders' equity:
Common stock, $0.002 par value, 30,000,000 shares
authorized; 5,965,744 and 6,131,542 shares issued and
outstanding, respectively, .................................. 11,948 12,280
Capital in excess of par value .............................. 25,746,292 26,203,103
Retained earnings (deficit) ................................. 392,617 (1,676,999)
Treasury stock at cost, 25,703 shares ....................... (65,944) (65,944)
------------ ------------
Total stockholders' equity ........................... 26,084,913 24,472,440
------------ ------------
Total liabilities and stockholders' equity ........... $ 30,707,919 $ 27,745,720
============ ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(UNAUDITED) (UNAUDITED)
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue ..................................... $ 4,454,296 $ 4,551,191 $ 12,849,776 $ 14,702,353
Costs and expenses:
Salaries and benefits ......................... 1,405,757 1,948,730 4,154,565 6,379,918
Selling, general and
administrative ............................. 1,450,565 1,752,813 4,251,405 6,069,115
Depreciation and
amortization ............................... 436,531 793,509 1,089,241 2,367,773
Provision for uncollectible
accounts ................................... 802,746 612,011 2,225,484 3,275,918
------------ ------------ ------------ ------------
Total costs and
expenses ................................. 4,095,599 5,107,063 11,720,695 18,092,724
------------ ------------ ------------ ------------
Operating income (loss) .................... 358,697 (555,872) 1,129,081 (3,390,371)
Other (income) expense:
Interest income and other,
net ........................................ 24,853 (205,842) 12,741 (582,380)
Interest expense .............................. 94,847 25,161 245,505 88,545
------------ ------------ ------------ ------------
Total other (income) expense ............... 119,700 (180,681) 258,246 (493,835)
------------ ------------ ------------ ------------
Income(loss) before income taxes ................ 238,997 (375,191) 870,835 (2,896,536)
Provision (benefit) for income taxes ............ 109,208 (100,000) 371,900 (826,920)
------------ ------------ ------------ ------------
Net income(loss) ................................ 129,789 (275,191) 498,935 (2,069,616)
Less preferred stock dividend ................... -0- -0- (87,000) -0-
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock .... $ 129,789 $ (275,191) $ 411,935 $ (2,069,616)
============ ============ ============ ============
Net income (loss) per share ..................... $ .03 $ (.04) $ .11 $ (.33)
============ ============ ============ ============
Weighted average number of
common shares and common
share equivalents (in thousands) ............. 4,349 6,267 3,644 6,204
============ ============ ============ ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $ 498,935 $ (2,069,616)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Loss on joint venture ..................................................... 31,543 56,540
Provision for uncollectible accounts ...................................... 2,225,484 3,275,918
Depreciation and amortization ............................................. 1,089,241 2,367,773
Deferred income taxes ..................................................... 371,900 (826,920)
Changes in assets and liabilities net of effects from acquisitions:
Accounts receivable ....................................................... (3,804,732) (1,975,161)
Prepaid expenses and other current assets ................................. (780,139) (703,814)
Accounts payable and accrued expenses ..................................... 591,624 (1,600,426)
Deferred revenue .......................................................... 25,879 67,072
------------ ------------
Net cash provided by (used in) operating activities ....................... 249,735 (1,408,634)
------------ ------------
Cash flows from investing activities:
Capital expenditures ......................................................... (1,611,773) (2,754,484)
Payment for acquisitions ..................................................... (518,840) (605,978)
Change in restricted cash .................................................... (6,946) 31,000
------------ ------------
Net cash used in investing activities ........................................ (2,137,559) (3,329,462)
------------ ------------
Cash flows from financing activities:
Payment of dividends on preferred stock ...................................... (87,000) -0-
Repayment of capital lease obligations ....................................... (233,402) (359,589)
Repayment of long-term debt .................................................. (275,000) -0-
Purchase of treasury shares .................................................. (56,994) -0-
Proceeds from issuance of common stock ....................................... 34,542 202,143
Proceeds from issuance of long-term debt ..................................... 1,978,634 -0-
Other ........................................................................ (16,969) -0-
------------ ------------
Net cash provided by (used in) financing activities ....................... 1,343,811 (157,446)
------------ ------------
Net decrease in cash and cash equivalents ...................................... (544,013) (4,895,542)
Cash and cash equivalents at beginning of period ............................... 1,385,654 20,505,787
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 841,641 $ 15,610,245
============ ============
Supplemental disclosures of cash flow information:
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations incurred ........................................... $ 130,554 $ 577,627
The Company has acquired businesses, as follows:
Fair value of assets acquired ................................................ 351,198 828,249
Goodwill recorded ............................................................ 167,642 815,195
Less:
Cash paid .................................................................. (518,840) (605,978)
Fair value of common stock ................................................. -0- (255,000)
------------ ------------
Liabilities assumed .......................................................... $ -0- $ 782,466
============ ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS TREASURY STOCKHOLDERS'
CAPITAL IN EXCESS (DEFICIT) STOCK EQUITY
COMMON STOCK OF PAR VALUE
---------------------- ----------- ----------- -------- -----------
SHARES AMOUNT
--------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ................. 5,965,744 $11,948 $25,746,292 $392,617 $(65,944) $26,084,913
Issuance of common stock 252,227
(unaudited)............................... 22,174 44 252,183
Options and Warrants exercised (unaudited).. 143,624 288 204,628 204,916
Net income (loss) (unaudited) ................ (2,069,616) (2,069,616)
--------- ------- ----------- ----------- -------- -----------
Balance at September 30, 1997
(unaudited)................................. 6,131,542 $12,280 $26,203,103 $(1,676,999) $(65,944) $24,472,440
========= ======= =========== =========== ======== ===========
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION OF AND FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1997, and the
consolidated statements of operations for the three months and nine months
ended September 30, 1996 and 1997, and the consolidated statements of cash
flows for the nine months ended September 30, 1996 and 1997, and the
consolidated statements of stockholders' equity (deficit) for the nine months
ended September 30, 1996 and 1997, have been prepared by the Company without
audit. The December 31, 1996 consolidated, condensed balance sheet is derived
from the audited consolidated balance sheet as of that date. In the opinion of
management, all adjustments necessary to present fairly the financial position
at September 30, 1997, and the results of operations and cash flows for all
periods presented have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for the full
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, particularly accounts
receivable, and liabilities and disclosure 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 may, in some
instances, differ from previously estimated amounts.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements
should be read in conjunction with the audited financial statements and related
notes of the Company for the fiscal year ended December 31, 1996 included in the
Company's Form 10-K.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 simplifies the standards for computing earnings per share ("EPS")
previously found in APB Opinion No. 15, Earnings Per Share ("APB 15"), and
makes them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to the APB 15. SFAS 128 also requires dual presentation of
basic and diluted EPS on the face of the income statement for entities with
complex capital structures and a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. SFAS 128 is effective for financial statements
issued for periods ending after December 15,1997, including interim periods;
earlier application is not permitted. SFAS 128 requires restatement of all
prior-period EPS data presented. The Company is currently evaluating SFAS 128;
however, management does not believe that SFAS 128 will have a material impact
on the financial statements of the Company.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 does
not require a specific format for the financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company is
currently reviewing SFAS 130, but has not yet determined when or if it will
adopt the provisions of this statement.
7
<PAGE> 8
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Medical equipment ................................. $ 5,679,297 $ 7,693,254
Furniture and fixtures ............................ 1,002,466 1,714,843
Transportation .................................... 64,760 82,378
Leasehold improvements ............................ 18,352 47,420
Equipment under capital leases .................... 976,033 1,493,533
------------ ------------
7,740,908 11,031,428
Less accumulated depreciation and amortization .... (3,190,725) (5,428,337)
------------ ------------
Net property and equipment ........................ $ 4,550,183 $ 5,603,091
============ ============
</TABLE>
Accumulated amortization related to equipment under capital leases was
approximately $646,000 and $949,000 at December 31, 1996 and September 30,
1997, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET REVENUES. Net revenues increased from $4.5 million for the three months
ended September 30, 1996, to $4.6 million for the three months ended September
30, 1997, an increase of $100,000 or 2%. The Company experienced growth in
total procedure volume, which increased from 17,644 for the three months ended
September 30, 1996, to 21,193 for the three months ended September 30, 1997, an
increase of 3,549 or 20%. Medical surgical procedures decreased from 7,258 for
the three months ended September 30, 1996, to 6,656 for the three months ended
September 30, 1997, a decrease of 602 or 8%. Aesthetic elective procedures
increased from 10,386 for the three months ended September 30, 1996, to 14,537
for the three months ended September 30, 1997, an increase of 4,151 or 40%.
The average net revenue per case decreased from $252 for the three months
ended September 30, 1996, to $215 for the three months ended September 30,
1997, a decrease of $37 per case or 15%. This decrease was attributable to a
change in case mix with aesthetic elective procedures, which during this period
had a lower average net revenue per case of $190 compared to $267 for the
medical surgical procedures, increasing as a percentage of total procedures
from 59% for the three months ended September 30, 1996, to 69% for the three
months ended September 30, 1997.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased from
$1.4 million for the three months ended September 30, 1996, to $1.9 million for
the three months ended September 30,1997, an increase of $500,000 or 36%. This
increase was due to the hiring of additional field and corporate personnel to
support the Company's growth in procedure volume. Total employees for the
Company increased from 111 on September 30, 1996, to 189 on September 30, 1997,
an increase of 78 or 70%. Salaries and benefits expense as a percentage of net
revenues increased from 31.6 % to 42.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased from $1.5 million for the three months ended
September 30, 1996, to $1.8 million for the three months ended September 30,
1997, an increase of $300,000 or 20%. This increase was due to an increase in
vehicle expense from $299,000 for the three months ended September 30, 1996, to
$454,000 for the three months ended September 30, 1997, an increase of $155,000
or 52%. This increase resulted from the increase in field personnel from 77 as
of September 30, 1996, to 132 as of September 30, 1997, each of whom is
supplied with a van for the delivery of equipment to physicians' offices. Also,
communications expense increased from $152,000 for the three months ended
September 30, 1996, to $227,000 for the three months ended September 30, 1997,
an increase of $75,000 or 49%, primarily due to the increase in field personnel
as noted above. As a percentage of net revenues, selling, general, and
administrative expense increased from 32.6% to 38.5%.
8
<PAGE> 9
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$437,000 for the three months ended September 30, 1996, to $794,000 for the
three months ended September 30, 1997, an increase of $357,000 or 82%. This
increase was due to the addition of $2.8 million in capital equipment during
the nine months ended September 30, 1997.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
decreased from $803,000 for the three months ended September 30, 1996, to
$612,000 for the three months ended September 30, 1997, a decrease of $191,000
or 24%. This decrease was primarily due to a decrease in medical surgical
revenues from $2,458,000 to $1,776,000, a decrease of $682,000 or 28%. As a
percentage of net revenues, provision for uncollectible accounts decreased from
18.0% to 13.4%.
OPERATING INCOME (LOSS). Operating income decreased from $359,000 for the
three months ended September 30, 1996, to an operating loss of $556,000 for the
three months ended September 30, 1997, a decrease of $915,000. This decrease
was primarily due to an increase in salaries and benefits expense, selling,
general and administrative expense and depreciation and amortization as a
percentage of net revenues.
INTEREST INCOME AND OTHER, NET. Interest income and other, net, increased
from an expense of $25,000 for the three months ended September 30, 1996, to
income of $206,000 for the three months ended September 30, 1997, an increase
of $231,000. This increase was primarily due to interest income earned on the
net cash proceeds from the Company's initial public offering which was
completed during the fourth quarter of 1996.
INCOME TAX PROVISION (BENEFIT). Income tax provision decreased from
$109,000 for the three months ended September 30, 1996, to a benefit of
$100,000 for the three months ended September 30, 1997. The Company's effective
tax rate decreased from 45.7% for the three months ended September 30, 1996, to
a credit equal to 26.7% for the three months ended September 30, 1997.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income decreased from $130,000 for the three months ended September 30,
1996, to a net loss of $275,000 for the three months ended September 30, 1997,
a decrease of $405,000.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET REVENUES. Net revenues increased from $12.8 million for the nine months
ended September 30, 1996, to $14.7 million for the nine months ended September
30, 1997, an increase of $1.9 million or 15%. This increase was attributable to
the growth in total procedure volume, which increased from 50,553 for the nine
months ended September 30, 1996, to 65,896 for the nine months ended September
30, 1997, an increase of 15,343 or 30%. Medical surgical procedures remained
unchanged at 19,952 for the nine months ended September 30, 1997 compared to
19,948 for the nine months ended September 30, 1996. Aesthetic elective
procedures increased from 30,605 for the nine months ended September 30, 1996,
to 45,944 for the nine months ended September 30, 1997, an increase of 15,539
or 50%.
The average net revenue per case decreased from $254 for the nine months
ended September 30, 1996, to $223 for the nine months ended September 30, 1997,
a decrease of $31 per case or 12%. This decrease was attributable to a change
in case mix with aesthetic elective procedures, which during this period had a
lower average net revenue per case of $189 compared to $276 for the medical
surgical procedures, increasing as a percentage of total procedures from 61%
for the nine months ended September 30, 1996, to 70% for the nine months ended
September 30,1997.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased from
$4.2 million for the nine months ended September 30, 1996, to $6.4 million for
the nine months ended September 30,1997, an increase of $2.2 million or 52%.
This increase was due to the hiring of additional field and corporate personnel
to support the Company's growth in procedure volume. Total employees for the
Company increased from 111 on September 30, 1996, to 189 on September 30, 1997,
an increase of 78 or 70%. The Company added scheduling coordinators and
preverification personnel during the first quarter of 1997 as a continuation of
its efforts to reduce provisions for uncollectible accounts. Furthermore, the
Company incurred a $250,000 nonrecurring charge during the second quarter of
1997 for restructuring of its field operations. This charge included expenses
related to severance packages, relocation allowances, and recruitment fees
resulting from the restructuring of personnel. Salaries and benefits expense as
a percentage of net revenues increased from 32.3% to 43.4% due to increases in
salaries and benefits expense outpacing the increases in net revenues.
9
<PAGE> 10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased from $4.3 million for the nine months ended
September 30, 1996, to $6.1 million for the nine months ended September 30,
1997, an increase of $1.8 million or 42%. Vehicle expense increased from
$834,000 for the nine months ended September 30, 1996, to $1.3 million for the
nine months ended September 30, 1997, an increase of $466,000 or 56%. This
increase resulted from the increase in field personnel from 77 as of September
30, 1996, to 132 as of September 30, 1997, each of whom is supplied with a van
for the delivery of equipment to physicians' offices. Repair and maintenance
expense increased from $430,000 for the nine months ended September 30, 1996 to
$733,000 for the nine months ended September 30, 1997, an increase of $303,000
or 70%. This increase was due primarily to the addition of annual maintenance
contracts on new medical equipment. Communications expense increased from
$433,000 for the nine months ended September 30, 1996, to $724,000 for the nine
months ended September 30, 1997, an increase of $291,000 or 67%. This increase
was related to the hiring of additional field personnel. Furthermore, the
Company incurred a $250,000 charge during the second quarter of 1997 for a
restructuring of its field operations. This charge includes expenses related to
the divestiture of certain delivery vans and legal/professional fees related to
accounts receivable and managed care initiatives. Selling, general and
administrative expense as a percentage of net revenues increased from 33.1% for
the nine months ended September 30, 1996, to 41.3% for the nine months ended
September 30, 1997. Without the $250,000 nonrecurring charge, selling, general
and administrative expense as a percentage of net revenues would have been
39.6% for the nine months ended September 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$1.1 million for the nine months ended September 30, 1996, to $2.4 million for
the nine months ended September 30, 1997, an increase of $1.3 million or 118%.
This increase was due to the addition of $2.8 million in capital equipment
during the nine months ended September 30, 1997.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
increased from $2.2 million for the nine months ended September 30, 1996, to
$3.3 million for the nine months ended September 30, 1997, an increase of $1.1
million or 50%, due to a nonrecurring charge of $1.2 million recorded during
the second quarter of 1997 to increase reserves for uncollectible accounts.
These reserves were necessary to offset a significant shift in the payment
trends experienced from certain noncontracted third party payors during the
second quarter of 1997. As a percentage of net revenue, provision for
uncollectible accounts increased from 17.3% to 22.3%. Without the nonrecurring
charge of $1.2 million, provision for uncollectible accounts as a percentage of
net revenues would have been 14.1% for the nine months ended September 30,
1997.
OPERATING INCOME (LOSS). Operating income decreased from $1.1 million for
the nine months ended September 30, 1996, to an operating loss of $3.4 million
for the nine months ended September 30, 1997. This decrease was primarily due
to an increase in salaries and benefits expense, selling, general and
administrative expense, provision for uncollectible accounts and depreciation
of new capital equipment as a percentage of net revenues.
INTEREST INCOME AND OTHER, NET. Interest income and other, net, increased
from an expense of $13,000 for the nine months ended September 30, 1996, to
income of $582,000 for the nine months ended September 30, 1997, an increase of
$595,000. This increase was primarily due to interest income earned on the net
cash proceeds from the Company's initial public offering which was completed
during the fourth quarter of 1996.
INTEREST EXPENSE. Interest expense decreased from $246,000 for the nine
months ended September 30, 1996, to $89,000 for the nine months ended September
30, 1997, a decrease of $157,000 or 64%. The Company's debt burden decreased
from $4.0 million as of September 30, 1996 to $574,000 as of September 30,
1997.
INCOME TAX PROVISION (BENEFIT). Income tax provision decreased from
$372,000 for the nine months ended September 30, 1996, to a benefit of $827,000
for the nine months ended September 30, 1997. The Company's effective tax rate
decreased from 42.7% for the nine months ended September 30, 1996, to a credit
equal to 28.5% for the nine months ended September 30, 1997.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income decreased from $499,000 for the nine months ended September 30,
1996, to a net loss of $2.1 million for the nine months ended September 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through 1993, the Company's operating expenses
significantly exceeded its net revenues, resulting in an accumulated retained
deficit of approximately $1.3 million as of December 31, 1993. From 1994 until
March 31, 1997, the Company recorded positive earnings, which resulted in a
retained earnings of $431,290 as of March 31, 1997. As of September 30, 1997,
the Company has an accumulated retained deficit of $1.7 million, due primarily
to
10
<PAGE> 11
nonrecurring charges of $1.4 million (net of taxes) incurred during the
second quarter of 1997. Until October 1996, the Company funded its operations
primarily through the private placement of equity securities, bank borrowings
and cash provided by operations. Prior to its initial public offering, which
was completed on October 11, 1996, the majority of the capital raised by the
Company had been raised from the private placement of $2.2 million of equity
securities, including $750,000 raised in July 1992 and approximately $1.5
million raised in November 1995. The Company obtained a $2.0 million credit
facility from NationsBank of Texas, N.A. ("NationsBank") in June 1995. This
facility was composed of several tranches bearing interest rates ranging from
prime plus 0.5% to prime plus 1.5%. The net proceeds from such facility were
used to retire outstanding debt and to purchase medical equipment. The Company's
facility with NationsBank of Texas, N.A. ("NationsBank") was increased to $4.3
million in March 1996. The NationsBank debt was paid off in full during October
1996 with a portion of the net proceeds from the Company's initial public
offering.
Net cash provided by (used in) the Company's operations was $250,000 and
$(1,409,000) for the nine months ended September 30, 1996 and 1997,
respectively. For its investing activities, the Company consumed $2,138,000 and
$3,329,000 for the nine months ended September 30, 1996 and 1997, respectively,
primarily for the purchase of medical equipment and payment for acquisitions.
Capital expenditures were $1,612,000 and $2,754,000 for the nine months ended
September 30, 1996 and 1997, respectively. Net cash provided by (used in)
financing activities were $1,344,000 and $(157,000) for the nine months ended
September 30, 1996 and 1997, respectively. The cash provided from financing
activities in such periods were primarily provided by the proceeds from bank
borrowings.
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is the plaintiff in an action entitled Medical Alliance, Inc.
vs. Palomar Medical Technologies, Inc. and Cosmetic Technology International,
Inc., pending in the United States District Court for the Northern District of
Texas, Dallas Division, Civil Action No. 3-9CV0627-D. The Company sued Palomar
and CTI ("defendants") regarding a Master Services Agreement ("Agreement")
dated June 3, 1996. The Agreement concerned the delivery of a product called
the Epilaser, a medical laser for use in hair removal. The Company seeks a
declaration from the court that (i) the Agreement required FDA approval for
hair removal as a condition to performance and/or formation; and (ii) the
Agreement was terminated and of no further force or effect. The Company further
seeks a declaration that the Company was not liable to Palomar for any damages
allegedly sustained or for expenses incurred pursuant to the Agreement. The
Company seeks recovery of its attorneys' fees. Palomar and CTI filed a
counterclaim against the Company and a third party complaint against Thermolase
Corporation. In the counterclaim, the defendants sued the Company for breach of
contract, breach of implied covenant of good faith and fair dealing, and for an
equitable accounting. Defendants seek a judgment against the Company for an
unspecified amount of compensatory damages, punitive damages, costs including
reasonable attorneys' fees, and prejudgment interest. Defendants also seek an
accounting from the Company for all gross revenues allegedly received or earned
for procedures using the device covered by the Agreement. Further, defendants
sued Thermolase Corporation for tortious interference with advantageous
contractual relationships arising from the Company's agreement with Thermolase
Corporation for the supply of cosmetic lasers.
The Company believes it has reached an agreement in principle with regard
to the settlement of this litigation, on terms believed by management to be
favorable to the Company. Finalization of this agreement is subject to the
execution of the appropriate documents by all parties involved and there can be
no assurance that all parties will join in the execution of this agreement.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
<PAGE> 12
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
2.1 Asset Purchase Agreement, dated October 30, 1995, between the Company
and Mobile Surgical Services of Central Florida, Inc. (1)(5)
2.2 Asset Purchase Agreement, dated March 18, 1996, between the Company
and Maasai Inc. (1)(5)
2.3 Asset Purchase Agreement, dated June 10, 1996, between the Company and
Mobile Laser Services, Inc. (1)(5)
2.4 Asset Purchase Agreement, dated as of January 21, 1997 among Stone
Treatment Center of New England, Inc., Gregory A. Mercurio, Vincent A.
Catallozzi, M.D., Alexander Calenda, M.D., Gerald Marsocci, M.D.
Joseph C. Cambio, M.D. and the Company. (3)(5)
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended an Restated Bylaws of the Company. (1)
4.1 Specimen of Company Common Stock Certificate. (1)
4.2 Series A Convertible Preferred Stock Purchase Agreement dated July 10,
1992, between the Company and Mapleleaf Capital, Ltd. (1)
4.3 Warrant to Purchase 60,000 shares of Series A Convertible Preferred
Stock of the Company dated July 10, 1992, between the Company and
Mapleleaf Capital, Ltd. (1)
4.4 Series B Convertible Preferred Stock Purchase Agreement, dated
November 17, 1995, by and among the Company and Satana Corporation,
Mapleleaf Capital, Ltd., Sunwestern Investment Fund III, Sunwestern
Cayman 1988 Partners, Montgomery Jessup & Company, L.L.P., Morris
Moreland, DLJSC F. B.O. Michael Wallace, IRA, Sid Bonner, Clyde
Hutchinson, Marc Johnson, Thomas A. Montgomery, Hazelle Blair, Lloyd
Jones, Bart Tucker, Jay Farris and Kevin O'Brien. (1)
4.5 Warrant to Purchase 468,300 Shares of Common Stock of the Company
dated July 10, 1992 between the Company and Satana Corporation. (1)
4.6 Warrant to Purchase 23,416 Shares of Common Stock of the Company dated
August 15, 1993 between the Company and Columbia General Corporation.
(1)
4.7 Warrant to Purchase 2,810 Shares of Common Stock of the Company dated
October 17, 1993 between the Company and Robert J. Mathews, M.D. (1)
4.8 Warrant to Purchase 2,342 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Shelly Burks. (1)
4.9 Warrant to Purchase 1,873 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (1)
4.10 Warrant to Purchase 6,556 Shares of Common Stock of the Company dated
September 1, 1994 between the Company and Thomas A. Montgomery. (1)
4.11 Warrant to Purchase 15,561 Shares of Common Stock of the Company dated
July 27, 1995 between the Company and Paul R. Herchman. (1)
10.1 Amended and Restated Revolving Credit and Term Loan Agreement dated
March 20, 1996 between the Company and NationsBank of Texas, N.A. (1)
10.2 Agreement between the Company and Coherent Medical Group. (1)
10.3 Master Lease agreement dated July 20, 1995 between the Company and
Cabot Medical Corporation. (1)
10.4 Master Service Agreement dated June 3, 1996 between the Company and
Cosmetic Technologies International. (2)
10.5 Joint Venture Agreement dated March 25, 1996 between the Company and
Coherent-AMT Inc. (2)
10.6 Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive
Plan. (2)
10.7 Employment Agreement between the Company and Paul Herchman. (1)
12
<PAGE> 13
10.8 Employment Agreement between the Company and Kevin O'Brien. (1)
10.9 Employment Agreement between the Company and Michael G. Wallace. (1)
10.10 Lease Agreement between the Company and Graymont Partners. Ltd. (1)
10.11 Strategic Alliance Agreement, dated as of December 19, 1996, by and
between Laserscope and the Company. (3)
10.12 Exclusive Provider Agreement, dated as of January 21, 1997, by and
between Thermolase Corporation and the Company. (3)
10.13 Strategic Alliance Agreement, dated as of January 1, 1997, by and
between Valleylab, Inc. and the Company. (3)
10.14 Exclusive Provider Agreement, dated as of February 9, 1997, by and
between Imagyn Medical, Inc. and the Company. (3)
11.1 Statement regarding computation of per share earnings. (4)
12.1 Subsidiaries of the Company. (1)
27.1 Financial Data Schedule(4)
- --------------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-09815) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (No. 333-18545) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, and incorporated herein by
reference.
(4) Filed herewith.
(5) Schedules and similar attachments to this Exhibit have not been filed
herewith. The Company agrees to furnish a copy of any such omitted
schedules and attachments to the Commission upon request.
(b) Reports on Form 8-K
None.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Alliance, Inc.
DATE: November 14, 1997
Signature Title
--------- -----
/s/ PAUL R. HERCHMAN President and
Paul R. Herchman Chief Executive Officer
/s/ MICHAEL G. WALLACE Senior Vice President and
-------------------------- Chief Financial Officer
Michael G. Wallace
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -----_----- -----------
<S> <C>
11.1 Statement regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
MEDICAL ALLIANCE, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income (loss) ........................................................ $ 129,789 $ (275,191) $ 498,935 $(2,069,616)
Less: Series A Preferred dividends ....................................... -0- -0- 87,000 -0-
----------- ----------- ----------- -----------
Net Income (loss) applicable to common stock ............................. 129,789 (275,191) 411,935 (2,069,616)
Weighted average common shares outstanding before SAB
Topic 4-D shares ....................................................... 2,375,149 6,101,059 2,349,158 6,038,243
SAB Topic 4-D computation: (1)
Incremental common shares outstanding applicable to
options issued within one year of the offering (2) .................. 169,424 N/A 169,424 N/A
Incremental common shares outstanding applicable to
the Series B Preferred Stock issued within one year
of the Offering (3) ................................................ 565,863 N/A 565,863 N/A
----------- ----------- ----------- -----------
Common Stock outstanding including all SAB Topic 4-D
Shares .................................................................. 3,110,436 6,101,059 3,084,445 6,038,243
=========== =========== =========== ===========
COMPUTATION OF PRIMARY SHARES OUTSTANDING:
Incremental common shares outstanding applicable to
"In the money" options and warrants based on the
estimated average fair market value of the stock
during the quarter(2) .................................................. 559,854 165,511 559,854 165,511
----------- ----------- ----------- -----------
Primary shares outstanding ............................................... 3,670,290 6,266,570 3,644,299 6,203,754
=========== =========== =========== ===========
Primary earnings per common share (4) .................................... $ 0.04 $ (0.04) $ 0.11 $ (0.33)
=========== =========== =========== ===========
COMPUTATION OF FULLY DILUTED SHARES OUTSTANDING:
Incremental common shares outstanding applicable
to "In the Money" options and warrants based on
the estimated quarterly ending fair market value of the
stock (2) ................................................................ 559,854 165,511 559,854 165,511
Incremental common shares outstanding applicable to
Series A Preferred Stock (3) ............................................. 679,035 N/A 679,035 N/A
----------- ----------- ----------- -----------
Fully diluted shares outstanding ......................................... 4,349,325 6,266,570 4,323,334 6,203,754
=========== =========== =========== ===========
Fully diluted earnings per common share (5) .............................. $ 0.03 $ (0.04) $ 0.11 $ (0.33)
=========== =========== =========== ===========
</TABLE>
(1) SAB Topic 4-D requires the Company to report common stock, convertible
preferred stock, options, warrants and other common stock equivalents
issued within one year of an offering as issued and outstanding for all
periods prior to the offering.
(2) Determined using the Treasury Stock Method.
(3) Determined using the "If Converted" Method.
(4) Computed as net income applicable to common shares divided by primary
shares outstanding.
(5) Computed as the more dilutive of either primary earning per share or net
income divided by fully diluted shares outstanding.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 SEP-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 20,536,787 15,610,245
<SECURITIES> 0 0
<RECEIVABLES> 6,274,481 6,334,320
<ALLOWANCES> 1,859,621 3,220,217
<INVENTORY> 0 0
<CURRENT-ASSETS> 26,003,585 21,245,937
<PP&E> 7,740,908 11,031,428
<DEPRECIATION> 3,190,725 5,428,337
<TOTAL-ASSETS> 30,707,919 27,745,720
<CURRENT-LIABILITIES> 3,909,392 2,497,485
<BONDS> 355,494 573,532
0 0
0 0
<COMMON> 11,948 12,280
<OTHER-SE> 26,072,965 24,460,160
<TOTAL-LIABILITY-AND-EQUITY> 30,707,919 27,745,720
<SALES> 0 0
<TOTAL-REVENUES> 17,350,384 14,702,353
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,408,360 3,275,918
<INTEREST-EXPENSE> 269,532 88,545
<INCOME-PRETAX> 1,602,240 (2,896,536)
<INCOME-TAX> 683,240 (826,920)
<INCOME-CONTINUING> 919,000 (2,069,616)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 919,000 (2,069,616)
<EPS-PRIMARY> .24 (.33)
<EPS-DILUTED> .24 (.33)
</TABLE>
