<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 JUNE 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 August 4, 1997, there were 6,064,239 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> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets
December 31, 1996 and June 30, 1997 (Unaudited) . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations -
Three and Six months ended June 30, 1996 and 1997 . . . . . . . . . . . . . . . 4
(Unaudited)
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1997 (Unaudited) . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders Equity (Deficit) . . . . . . . . . . . . . . 6
Six months ended June 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 20,505,787 $ 16,215,322
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000 10,000
Accounts receivable, less allowance for doubtful accounts
of $1,859,621 and $3,426,191 respectively . . . . . . . . . . . . . . . . . . 4,414,860 3,094,550
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . 461,743 704,017
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 590,195 1,464,796
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 26,003,585 21,488,685
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 4,550,183 6,133,932
Other assets:
Intangible assets, net of amortization of
$59,080 and $107,464, respectively . . . . . . . . . . . . . . . . . . . 154,151 924,305
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,707,919 $ 28,546,922
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,447,108 $ 979,300
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 983,905 1,527,691
Current maturities of:
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . 296,717 347,164
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,662 226,151
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 3,909,392 3,080,306
Capital lease obligations, net of current maturities . . . . . . . . . . . . 58,777 344,563
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654,837 467,689
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 4,623,006 3,892,558
------------ ------------
Stockholders' equity:
Common stock, $0.002 par value, 30,000,000 shares
authorized; 5,965,744 and 6,075,895 shares issued and
outstanding, respectively, . . . . . . . . . . . . . . . . . . . . . . . 11,948 12,168
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . 25,746,292 26,109,948
Retained earnings(deficit) . . . . . . . . . . . . . . . . . . . . . . . . . 392,617 (1,401,808)
Treasury stock at cost, 25,703 shares . . . . . . . . . . . . . . . . . . . (65,944) (65,944)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 26,084,913 24,654,364
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 30,707,919 $ 28,546,922
============ ============
</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 JUNE 30, 1996 AND 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) (UNAUDITED)
1996 1997 1996 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . . . . $4,437,042 $ 5,282,701 $8,395,480 $10,151,162
---------- ----------- ---------- -----------
Costs and expenses:
Salaries and benefits . . . . . . . . . . . . . . . . . 1,410,982 2,640,076 2,748,810 4,431,188
Selling, general and
administrative . . . . . . . . . . . . . . . . . . . 1,405,508 2,453,906 2,800,838 4,316,302
Depreciation and
amortization . . . . . . . . . . . . . . . . . . . . 369,236 937,289 652,710 1,574,264
Provision for uncollectible
accounts . . . . . . . . . . . . . . . . . . . . . . 761,254 1,963,933 1,422,737 2,663,907
---------- ----------- ---------- -----------
Total costs and
expenses . . . . . . . . . . . . . . . . . . . . . 3,946,980 7,995,204 7,625,095 12,985,661
---------- ----------- ---------- -----------
Operating income(loss) . . . . . . . . . . . . . . . 490,062 (2,712,503) 770,385 (2,834,499)
---------- ----------- ---------- -----------
Other (income) expense:
Interest income and other,
net . . . . . . . . . . . . . . . . . . . . . . . . (254) (158,507) (12,110) (376,538)
Interest expense . . . . . . . . . . . . . . . . . . . 86,541 34,041 150,658 63,384
---------- ----------- ---------- -----------
Total other (income) expense . . . . . . . . . . . . 86,287 (124,466) 138,548 (313,154)
---------- ----------- ---------- -----------
Income before income taxes . . . . . . . . . . . . . . . 403,775 (2,588,037) 631,837 (2,521,345)
Provision (benefit) for income taxes . . . . . . . . . . 167,817 (754,940) 262,692 (726,920)
---------- ----------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 235,958 $(1,833,097) $ 369,145 $(1,794,425)
========== ============ ========== ===========
Less preferred stock dividend . . . . . . . . . . . . . . (87,000) 0 (87,000) 0
---------- ----------- ---------- -----------
Net income (loss) applicable to common stock . . . . . . $ 148,958 $(1,833,097) $ 282,145 $(1,794,425)
========== =========== ========== ===========
Net income (loss) per share . . . . . . . . . . . . . . . $ .04 $ (.29) $ .08 $ (.29)
=========== ============ ========== ===========
Weighted average number of
common shares and common
share equivalents (in
thousands) . . . . . . . . . . . . . . . . . . . . . . 3,560 6,229 3,553 6,222
========== ========== ========== ===========
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED)
1996 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 369,145 $ (1,794,425)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 56,540
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . 1,422,737 2,663,907
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 652,710 1,574,264
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,442 (726,920)
Changes in assets and liabilities net of effects from
acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,253,080) (1,285,547)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . (210,190) (255,475)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 504,432 (1,473,310)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,495) 44,488
----------- ------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . 594,701 (1,196,478)
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,499,190) (2,355,500)
Payment for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . (493,840) (605,978)
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,046) 21,000
----------- ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (1,997,076) (2,940,478)
----------- ------------
Cash flow from financing activities:
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . . . . (151,113) (241,394)
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . (183,336) 0
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . 34,542 87,885
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . 1,728,635 -0-
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,022) -0-
----------- ------------
Net cash provided by (used in) financing activities . . . . . . . . . . . . 1,421,706 (153,509)
----------- ------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 19,331 (4,290,465)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 1,385,654 20,505,787
----------- ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 1,404,985 $ 16,215,322
=========== ============
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations incurred . . . . . . . . . . . . . . . . . . . . . . 65,000 577,627
The Company has acquired businesses, as follows:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . 351,198 828,249
Goodwill recorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,642 815,195
Less:
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (493,840) (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 SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
RETAINED TOTAL
CAPITAL IN EARNINGS TREASURY STOCKHOLDERS'
COMMON STOCK EXCESS (DEFICIT) STOCK EQUITY
------------ --------- ----- ------
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
(unaudited) . . . . . . . . . 22,174 44 252,183 252,227
Options and Warrants exercised
(unaudited) . . . . . . . . . 87,977 176 111,473 111,649
Net income (loss) (unaudited) . . (1,794,425) (1,794,425)
--------- -------- ------------ ----------- -------- -----------
Balance at June 30, 1997
(unaudited) . . . . . . . . 6,075,895 $ 12,168 $ 26,109,948 $(1,401,808) $(65,944) $24,654,364
========= ======== ============ =========== ======== ===========
</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 SIX MONTH PERIOD ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of June 30, 1997, and the consolidated
statements of operations for the three and six months ended June 30, 1996 and
1997, and the consolidated statements of cash flows for the six months ended
June 30, 1996 and 1997, and the consolidated statements of stockholders' equity
for the six months ended June 30, 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 June 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 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, JUNE 30,
1996 1997
---- ----
<S> <C> <C>
Medical equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,679,297 $ 7,591,579
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002,466 1,633,358
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,760 32,909
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 18,352 44,993
Equipment under capital leases . . . . . . . . . . . . . . . . . . . . . . 976,033 1,493,533
----------- -----------
7,740,908 10,796,372
Less accumulated depreciation and amortization . . . . . . . . . . . . . . (3,190,725) (4,662,440)
----------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . $ 4,550,183 $ 6,133,932
=========== ===========
</TABLE>
Accumulated amortization related to equipment under capital leases was
approximately $646,000 and $838,000 at December 31, 1996 and June 30, 1997,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
NET REVENUES. Net revenues increased from $4.4 million for the three months
ended June 30, 1996, to $5.3 million for the three months ended June 30, 1997,
an increase of $900,000 or 20%. This increase was attributable to the growth in
total procedure volume, which increased from 17,642 for the three months ended
June 30, 1996, to 23,717 for the three months ended June 30, 1997, an increase
of 6,075 or 34%. Medical surgical procedures increased from 6,592 for the
three months ended June 30, 1996, to 6,789 for the three months ended June 30,
1997, an increase of 197 or 3%, which contributed to 3% of the total increase
in procedure volume. Aesthetic elective procedures increased from 11,050 for
the three months ended June 30, 1996, to 16,928 for the three months ended June
30, 1997, an increase of 5,878 or 53%, which contributed to 97% of the total
increase in procedure volume.
The average net revenue per case decreased from $252 for the three months
ended June 30, 1996, to $223 for the three months ended June 30, 1997, a
decrease of $29 per case or 12%. This decrease was attributable to a change in
case mix with aesthetic elective procedures, which had a lower average net
revenue per case of $187, compared to $291 for the medical surgical procedures,
increasing as a percentage of total procedures from 63% for the three months
ended June 30, 1996, to 71% for the three months ended June 30, 1997.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased from
$1.4 million for the three months ended June 30, 1996, to $2.6 million for the
three months ended June 30,1997, an increase of $ 1.2 million or 86%. 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 115 on June 30, 1996, to 183 on June 30, 1997, an
increase of 68 or 59%. Furthermore, the Company incurred a $250,000 charge
during the three months ended June 30, 1997 for a restructuring of its field
operations. This charge includes expenses related to severance packages,
relocation allowances, and recruitment fees as a result of the restructuring
and realignment of personnel. Salaries and benefits expense as a percentage of
net revenues increased from 31.8% for the three months ended June 30, 1996, to
50% for the three months ended June 30, 1997. Without the $250,000
nonrecurring charge, salaries and benefits expense as a percentage of net
revenues would have been 45.2% for the three months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased from $1.4 million for the three months ended
June 30, 1996, to $2.5 million for the three months ended June 30, 1997, an
increase of $1.1 million or 79%. This increase was partially due to an increase
in vehicle expense from $288,000 for the three months ended June 30, 1996, to
$498,000 for the three months ended June 30, 1997, an increase of $210,000 or
73%. This increase was necessitated by the increase in field personnel from 79
as of June 30, 1996, to 133 as of June 30, 1997, each of whom is supplied with
a van for the delivery of equipment to physicians' offices. In addition,
repair and maintenance expense increased from $148,000 for the three months
ended June 30, 1996, to $322,000 for the three
8
<PAGE> 9
months ended June 30, 1997, an increase of $174,000 or 118%. This increase was
primarily due to the addition of a preventive maintenance contract on equipment
to increase operational efficiencies. Also, communications expense increased
from $147,000 for the three months ended June 30, 1996, to $277,000 for the
three months ended June 30, 1997, an increase of $130,000 or 88%, due to the
increase in field personnel. Furthermore, the Company incurred a $250,000
charge during the three months ended June 30, 1997 for a restructuring of its
field operations. This charge includes expenses related to the divestiture of
certain delivery vans and certain medical equipment currently under operating
leases 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 31.7% for the three months ended June 30, 1996,
to 46.5% for the three months ended June 30, 1997. Without the $250,000
nonrecurring charge, selling, general and administrative expense as a
percentage of net revenues would have been 41.7% for the three months ended
June 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$369,000 for the three months ended June 30, 1996, to $937,000 for the three
months ended June 30, 1997, an increase of $568,000 or 154%. This increase was
due to the addition of $1.5 million and $2.4 million in capital equipment
during the six months ended June 30, 1996 and six months ended June 30, 1997,
respectively and a nonrecurring charge of $150,000 in the three months ended
June 30, 1997, related to the redeployment and or disposition of certain
medical equipment in selected markets.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
increased from $761,000 for the three months ended June 30, 1996, to $1,964,000
for the three months ended June 30, 1997, an increase of $ 1.2 million or 158%.
As a percentage of net revenue, provision for uncollectible accounts increased
from 17.2% to 37.2%, due primarily to a nonrecurring charge of $1.2 million 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 three months ended June 30, 1997.
Without the nonrecurring charge of $1.2 million, provision for uncollectible
accounts as a percentage of net revenues would have been 14.5% for the three
months ended June 30, 1997.
OPERATING INCOME (LOSS). Operating income decreased from $490,000 for the
three months ended June 30, 1996, to a loss of $2.7 million for the three months
ended June 30, 1997. As a percentage of net revenues, operating income decreased
from 11.0% for the three months ended June 30, 1996, to (51.3%) for the three
months ended June 30, 1997. This decrease was primarily due to nonrecurring
charges totaling $1.85 million described above. Without these nonrecurring
charges of $1.85 million, the operating loss would have been $863,000.
INTEREST INCOME & OTHER, NET. Interest income and other, net increased
from $254 for the three months ended June 30, 1996, to $159,000 for the three
months ended June 30, 1997, an increase of $159,000. This increase resulted
from interest income on the cash proceeds from the initial public offering
which was completed during the fourth quarter of 1996.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income decreased from $149,000 for the three months ended June 30, 1996, to
a loss of $1.8 million for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
NET REVENUES. Net revenues increased from $8.4 million for the six months
ended June 30, 1996, to $10.2 million for the six months ended June 30, 1997,
an increase of $1.8 million or 21%. This increase was attributable to the
growth in total procedure volume, which increased from 32,909 for the six
months ended June 30, 1996, to 44,703 for the six months ended June 30, 1997,
an increase of 11,794 or 36%. Medical surgical procedures increased from
12,690 for the six months ended June 30,1996 to 13,296 for the six months ended
June 30, 1997, an increase of 606 or 5%, which contributed to 5% of the total
increase in procedure volume. Aesthetic elective procedures increased from
20,219 for the six months ended June 30, 1996, to 31,407 for the six months
ended June 30, 1997, an increase of 11,188 or 55%, which contributed to 95% of
the total increase in procedure volume.
The average net revenue per case decreased from $255 for the six months
ended June 30, 1996, to $227 for the six months ended June 30, 1997, a decrease
of $28 per case or 11%. This decrease was attributable to a change in case mix
with aesthetic elective procedures, which had a lower average net revenue per
case of $189, compared to $280 for the medical surgical procedures, increasing
as a percentage of total procedures from 61% for the six months ended June 30,
1996, to 70% for the six months ended June 30,1997.
9
<PAGE> 10
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased
from $2.7 million for the six months ended June 30, 1996, to $4.4 million for
the six months ended June 30, 1997, an increase of $1.7 million or 63%. 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 115 on June 30, 1996, to 183 on June 30, 1997, an
increase of 68 or 59%. The Company added scheduling coordinators and
preverification personnel as a continuation of its efforts to reduce provisions
for uncollectible accounts. Furthermore, the Company incurred a $250,000 charge
during the six months ended June 30, 1997 for a restructuring of its field
operations. This charge includes expenses related to severance packages,
relocation allowances, and recruitment fees as a result of the restructuring
and realignment of personnel. Salaries and benefits expense as a percentage of
net revenues increased from 32.7% to 43.7% due to increases in salaries and
benefits expense exceeding the increases in net revenues. Without the $250,000
nonrecurring charge, salaries and benefits expense as a percentage of net
revenues would have been 41.2% for the six months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased from $2.8 million for the six months ended
June 30, 1996, to $4.3 million for the six months ended June 30, 1997, an
increase of $1.5 million or 54%. Vehicle expense increased from $535,000 for
the six months ended June 30, 1996 to $836,000 for the six months ended June
30, 1997, an increase of $301,000 or 56%. This increase was necessitated by
the increase in field personnel from 79 as of June 30, 1996, to 133 as of June
30, 1997, each of whom is supplied with a van for the delivery of equipment to
physicians' offices. Repair and maintenance expense increased from $260,000
for the six months ended June 30, 1996 to $574,000 for the six months ended
June 30, 1997, an increase of $314,000 or 121%. This increase was due
primarily to the addition of preventive maintenance contracts on certain
equipment to enhance operational efficiencies. Communications expense
increased from $281,000 for the six months ended June 30, 1996, to $497,000 for
the six months ended June 30, 1997, an increase of $216,000 or 77%. This
increase was related to the hiring of additional field personnel. Furthermore,
the Company incurred a $250,000 charge during the six months ended June 30,
1997 for a restructuring of its field operations. This charge includes expenses
related to the divestiture of certain delivery vans and certain medical
equipment currently under operating leases 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 33.4% for
the six months ended June 30, 1996, to 42.5% for the six months ended June 30,
1997. Without the $250,000 nonrecurring charge, selling, general and
administrative expense as a percentage of net revenues would have been 40.1%
for the six months ended June 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
from $653,000 for the six months ended June 30, 1996, to $1.6 million for the
six months ended June 30, 1997, an increase of $947,000 or 145%. This increase
was due to the addition of $1.5 million and $2.4 million in capital equipment
during the six months ended June 30, 1996 and six months ended June 30, 1997,
respectively and a nonrecurring charge of $150,000 in the six months ended June
30, 1997, related to the redeployment and or disposition of certain medical
equipment in selected markets.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible
accounts increased from $1.4 million for the six months ended June 30, 1996, to
$2.7 million for the six months ended June 30, 1997, an increase of $1.3
million or 93%. As a percentage of net revenue, provision for uncollectible
accounts increased from 16.9% to 26.2%, due to a nonrecurring charge of $1.2
million 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.
Without the nonrecurring charge of $1.2 million, provision for uncollectible
accounts as a percentage of net revenues would have been 14.4% for the six
months ended June 30, 1997.
OPERATING INCOME (LOSS). Operating income decreased from $770,000 for the
six months ended June 30, 1996 to a loss of $2.8 million for the six months
ended June 30, 1997. As a percentage of net revenues, operating income
decreased from 9.1% for the six months ended June 30, 1996, to a (27.9%) for
the six months ended June 30, 1997. This decrease was primarily due to the
nonrecurring charges totaling $1.85 million described above. Without these
nonrecurring charges of $1.85 million, the operating loss would have been
$984,000.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $12,000 for the six months ended June 30, 1996, to $377,000 for the six
months ended June 30, 1997, an increase of $365,000. This increase resulted
from interest income on the cash proceeds from the initial public offering
which was completed during the fourth quarter of 1996.
10
<PAGE> 11
NET INCOME (LOSS). As a result of the items discussed above, the
Company's net income decreased from $282,000 for the six months ended June 30,
1996, to a loss of $1.8 million for the six months ended June 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 had resulted in
a retained earnings of $431,290 as of March 31, 1997. As of June 30, 1997, the
Company has an accumulated retained deficit of $1.4 million, due to the
nonrecurring charges of $1.4 million (net of taxes) recorded in 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 equity 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 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 Initial Public Offering.
Net cash provided by (used in) the Company's operations was $595,000 and
$(1,196,000) for the six months ended June 30, 1996 and 1997, respectively.
For its investing activities, the Company consumed $1,997,000 and $2,940,000
for the six months ended June 30, 1996 and 1997, respectively, primarily for
the purchase of medical equipment and payment for acquisitions. Capital
expenditures were $1,499,000 and $2,356,000 for the six months ended June 30,
1996 and 1997, respectively. Net cash provided by (used in) financing
activities were $1,422,000 and $(154,000) for the six months ended June 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 is terminated and of no further force or effect. The Company further
seeks a declaration that the Company is 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 has denied and
asserted affirmative defenses to the counterclaim.
Discovery is not complete in regard to this matter, and it is not possible
to predict the outcome of this case.
ITEM 2. CHANGES IN SECURITIES.
None.
11
<PAGE> 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
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)
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)
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
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)
</TABLE>
- ------------
(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.
14
<PAGE> 15
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: August 14, 1997
Signature Title
--------- ----
/s/ Paul Herchman President and
---------------------------------
Paul R. Herchman Chief Executive Officer
/s/ Mike Wallace Senior Vice President and
--------------------------------
Michael G. Wallace Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 11.1
MEDICAL ALLIANCE, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 235,958 $ (1,833,097) $ 369,145 $(1,794,425)
Less: Series A Preferred dividends . . . . . . . . . . . . . . . 87,000 -0- 87,000 -0-
----------- ------------ ---------- -----------
Net Income applicable to common stock . . . . . . . . . . . . . . 148,958 (1,833,097) 282,145 (1,794,425)
Weighted average common shares outstanding before SAB
Topic 4-D shares . . . . . . . . . . . . . . . . . . . . . . . 2,339,361 6,014,089 2,332,613 6,006,834
SAB Topic 4-D computation: (1)
Incremental common shares outstanding applicable to
options issued within one year of the offering (2) . . . . . 174,380 N/A 174,380 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,079,604 6,014,089 3,072,856 6,006,834
=========== ============ ========== ===========
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) . . . . . . . . . . . . . . . . . . . . . 480,445 214,950 480,445 214,950
----------- ------------ ---------- -----------
Primary shares outstanding . . . . . . . . . . . . . . . . . . . 3,560,049 6,229,039 3,553,301 6,221,784
=========== ============ ========== ===========
Primary earnings per common share (4) . . . . . . . . . . . . . . $ 0.04 $ (0.29) $ 0.08 $ (0.29)
=========== ============ ========== ===========
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,445 214,950 480,445 214,950
Incremental common shares outstanding applicable to
Series A Preferred Stock (3) . . . . . . . . . . . . . . . . . . 679,035 N/A 679,035 N/A
----------- ------------ ---------- -----------
Fully diluted shares outstanding . . . . . . . . . . . . . . . . 4,239,084 6,229,039 4,232,336 6,221,784
=========== ============ ========== ===========
Fully diluted earnings per common share (5) . . . . . . . . . . . $ 0.06 $ (0.29) $ .09 $ (0.29)
=========== ============ ========== ===========
</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 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 20,536,787 16,225,322
<SECURITIES> 0 0
<RECEIVABLES> 6,274,481 6,520,741
<ALLOWANCES> 1,859,621 3,426,191
<INVENTORY> 0 0
<CURRENT-ASSETS> 26,003,585 21,488,685
<PP&E> 7,740,908 10,796,372
<DEPRECIATION> 3,190,725 4,662,440
<TOTAL-ASSETS> 30,707,919 28,546,922
<CURRENT-LIABILITIES> 3,909,392 3,080,306
<BONDS> 355,494 691,727
0 0
0 0
<COMMON> 11,948 12,168
<OTHER-SE> 26,072,965 24,642,196
<TOTAL-LIABILITY-AND-EQUITY> 30,707,919 28,546,922
<SALES> 0 0
<TOTAL-REVENUES> 17,350,384 10,151,162
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,408,360 2,663,907
<INTEREST-EXPENSE> 269,532 63,384
<INCOME-PRETAX> 1,602,240 (2,521,345)
<INCOME-TAX> 683,240 (726,920)
<INCOME-CONTINUING> 919,000 (1,794,425)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 919,000 (1,794,425)
<EPS-PRIMARY> .24 (.29)
<EPS-DILUTED> .24 (.29)
</TABLE>
