<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, 1998
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 7, 1998, there were 6,223,195 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, 1997 and June 30, 1998 (Unaudited) ............ 3
Consolidated Statements of Operations
Three and Six months ended June 30, 1997 and 1998 ............ 4
(Unaudited)
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1998 (Unaudited) ........ 5
Consolidated Statement of Stockholders' Equity .................. 6
Six months ended June 30, 1998 (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>
2
<PAGE> 3
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 14,902,578 $ 14,896,466
Accounts receivable, less allowance for doubtful accounts
of $2,554,705 and $1,627,941 respectively ....................... 2,715,446 1,904,311
Prepaid expenses and other current assets ....................... 1,290,038 1,145,375
Refundable federal and state income taxes ....................... 1,253,910 871,205
------------ ------------
Total current assets ...................................... 20,161,972 18,817,357
Property and equipment, net ......................................... 5,473,485 5,107,694
Other assets:
Intangible assets, net of amortization of
$159,346 and $214,756, respectively ............................ 869,080 829,411
------------ ------------
Total assets .............................................. $ 26,504,537 $ 24,754,462
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 976,150 $ 619,947
Accrued expenses ................................................ 1,197,785 750,465
Current maturities of:
Capital lease obligations ....................................... 248,650 212,784
Deferred revenue ................................................ 163,976 200,434
------------ ------------
Total current liabilities ................................. 2,586,561 1,783,630
Capital lease obligations, net of current maturities ................ 239,929 132,062
------------ ------------
Total liabilities ......................................... 2,826,490 1,915,692
------------ ------------
Stockholders' equity:
Common stock, $0.002 par value, 30,000,000 shares
authorized; 6,157,300 and 6,281,592 shares issued and
outstanding, respectively, ..................................... 12,331 12,743
Capital in excess of par value ...................................... 26,236,053 26,651,257
Accumulated deficit ................................................. (2,504,393) (3,427,938)
Treasury stock at cost, 25,703 and 107,203 shares, respectively ... (65,944) (397,292)
------------ ------------
Total stockholders' equity ............................... 23,678,047 22,838,770
------------ ------------
Total liabilities and stockholders' equity ............... $ 26,504,537 $ 24,754,462
============ ============
</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, 1997 AND 1998
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) (UNAUDITED)
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue ................................................ $ 5,282,701 $ 4,159,415 $ 10,151,162 $ 8,313,837
------------ ------------ ------------ ------------
Costs and expenses:
Salaries and benefits .................................... 2,640,076 1,838,847 4,431,188 3,926,459
Selling, general and
administrative ........................................ 2,453,906 1,748,834 4,316,302 3,520,181
Depreciation and
amortization .......................................... 937,289 561,650 1,574,264 1,146,671
Provision for uncollectible
accounts .............................................. 1,963,933 488,109 2,663,907 1,024,429
------------ ------------ ------------ ------------
Total costs and
expenses ............................................ 7,995,204 4,637,440 12,985,661 9,617,740
------------ ------------ ------------ ------------
Operating income(loss) ................................ (2,712,503) (478,025) (2,834,499) (1,303,903)
------------ ------------ ------------ ------------
Other (income) expense:
Interest income and other,
net ................................................... (158,507) (216,325) (376,538) (412,337)
Interest expense ......................................... 34,041 13,171 63,384 31,979
------------ ------------ ------------ ------------
Total other (income) expense .......................... (124,466) (203,154) (313,154) (380,358)
------------ ------------ ------------ ------------
Income (loss) before income taxes .......................... (2,588,037) (274,871) (2,521,345) (923,545)
Provision (benefit) for income taxes ....................... (754,940) -- (726,920) --
------------ ------------ ------------ ------------
Net income (loss) .......................................... $ (1,833,097) $ (274,871) $ (1,794,425) $ (923,545)
============ ============ ============ ============
Net income (loss) per share (basic) ........................ $ (.30) (.04) (.30) (.15)
============ ============ ============ ============
Net income (loss) per share (diluted) ...................... $ (.30) (.04) (.30) (.15)
============ ============ ============ ============
Weighted average number of common shares and common share
equivalents (in thousands) (basic) ......................... 6,014 6,281 6,007 6,266
============ ============ ============ ============
Weighted average number of common shares and common share
equivalents (in thousands) (diluted) ...................... 6,229 6,392 6,222 6,377
============ ============ ============ ============
</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)
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................................ $ (1,794,425) $ (923,545)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Loss on joint venture ........................................................ 56,540 0
Gain from disposal of equipment .............................................. 0 (25,390)
Provision for uncollectible accounts ......................................... 2,663,907 1,024,429
Depreciation and amortization ................................................ 1,574,264 1,146,671
Deferred income taxes ........................................................ (726,920) 0
Changes in assets and liabilities net of effects from
Acquisitions:
Accounts receivable .......................................................... (1,285,547) (213,294)
Prepaid expenses and other current assets .................................... (255,475) 527,368
Accounts payable and accrued expenses ........................................ (1,473,310) (803,523)
Deferred revenue ............................................................. 44,488 36,458
------------ ------------
Net cash (used in) provided by operating activities ......................... (1,196,478) 769,174
------------ ------------
Cash flows from investing activities:
Capital expenditures ............................................................ (2,355,500) (739,080)
Proceeds from disposal of equipment ............................................. 0 39,000
Payment for acquisitions ........................................................ (605,978) 0
Change in restricted cash ....................................................... 21,000 0
Other ........................................................................... 0 (15,741)
------------ ------------
Net cash used in investing activities ........................................... (2,940,478) (715,821)
------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligations .......................................... (241,394) (143,733)
Purchase of treasury shares ..................................................... 0 (331,348)
Proceeds from issuance of common stock .......................................... 87,885 415,616
------------ ------------
Net cash used in financing activities ........................................ (153,509) (59,465)
------------ ------------
Net increase (decrease) in cash and cash equivalents .............................. (4,290,465) (6,112)
Cash and cash equivalents at beginning of period .................................. 20,505,787 14,902,578
------------ ------------
Cash and cash equivalents at end of period ........................................ $ 16,215,322 $ 14,896,466
============ ============
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations incurred .............................................. $ 577,627 $ 0
The company has acquired businesses, as follows:
Fair value of assets acquired ................................................... 828,249 0
Goodwill recorded ............................................................... 815,195 0
Less:
Cash paid .................................................................... (605,978) 0
Fair value of common stock ................................................... (255,000) 0
------------ ------------
Liabilities assumed .......................................................... $ 782,466 $ 0
============ ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- CAPITAL IN EXCESS ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE DEFICIT STOCK EQUITY
------ ------ ------------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ............ 6,157,300 $ 12,331 $ 26,236,053 $ (2,504,393) $ (65,944) $ 23,678,047
Options exercised (unaudited) ........ 205,792 412 415,204 415,616
Treasury stock purchases
(unaudited) .......................... (81,500) (331,348) (331,348)
Net loss (unaudited) ................. (923,545) (923,545)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998
(unaudited) .......................... 6,281,592 $ 12,743 $ 26,651,257 $ (3,427,938) $ (397,292) $ 22,838,770
============ ============ ============ ============ ============ ============
</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, 1997 AND 1998 IS
UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of June 30, 1998, and the consolidated
statements of operations for the three and six months ended June 30, 1997 and
1998, and the consolidated statements of cash flows for the six months ended
June 30, 1997 and 1998, and the consolidated statement of stockholders' equity
for the six months ended June 30, 1998, have been prepared by the Company
without audit. The December 31, 1997 consolidated, condensed balance sheet is
derived from the audited consolidated balance sheet as of that date. In the
opinion of management, all adjustments (which include only normal, recurring
adjustments) necessary to present fairly the financial position at June 30,
1998, 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, 1997 included in the
Company's Form 10-K.
2. RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and presentation of comprehensive income
and its components, however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity as presented.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
defines derivatives, requires that derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company is currently evaluating SFAS 133; however, the Company does not
believe adoption of SFAS 133 will have a material impact on the financial
statements of the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
Medical equipment .................................................... $ 8,231,052 $ 8,826,026
Furniture and fixtures ............................................... 1,763,602 1,827,903
Transportation ....................................................... 117,778 117,778
Leasehold improvements ............................................... 52,961 53,361
Equipment under capital leases ....................................... 1,493,533 1,493,533
------------ ------------
11,658,926 12,318,601
Less accumulated depreciation and amortization ....................... (6,185,441) (7,210,907)
------------ ------------
Net property and equipment ........................................... $ 5,473,485 $ 5,107,694
============ ============
</TABLE>
7
<PAGE> 8
Depreciation expense related to property and equipment was approximately
$912,000 and $534,000 for the three months ended June 30, 1997 and 1998,
respectively and $1,542,000 and $1,091,000 for the six months ended June 30,
1997 and 1998, respectively.
Accumulated amortization related to equipment under capital leases was
approximately $1,028,000 and $1,113,000 at December 31, 1997 and June 30, 1998,
respectively.
Property and equipment are recorded at cost. Depreciation is provided by
the straight-line method over existing useful lives from three to five years.
Effective January 1, 1998, the Company extended the estimated useful lives on
certain medical equipment and established residual values on such equipment
based on historical experience. The change in accounting estimate had the effect
of reducing depreciation expense and decreasing the net loss by approximately
$222,000 ($.04 per share) and $468,000 ($.07 per share) for the three and six
months ended June 30, 1998.
3. EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of common shares outstanding (basic) .... 6,014,089 6,280,991 6,006,834 6,265,977
Net income (loss) ............................................... $ (1,833,097) $ (274,871) $ (1,794,425) $ (923,545)
Net income (loss) per share (basic) ............................. $ (.30) $ (.04) $ (.30) $ (.15)
============ ============ ============ ============
Diluted:
Weighted average number of common shares outstanding (basic) .... 6,014,089 6,280,991 6,006,834 6,265,977
Incremental common shares outstanding applicable to
"In the Money" options and warrants based on the estimated
quarter end fair market value of the stock ..................... 214,950 110,926 214,950 110,926
Weighted average number of common shares outstanding (diluted) .. 6,229,039 6,391,917 6,221,784 6,376,903
Net income (loss) ............................................... $ (1,833,097) $ (274,871) $ (1,794,425) $ (923,545)
Net income (loss) per share (diluted) ........................... $ (.30) $ (.04) $ (.30) $ (.15)
============ ============ ============ ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
NET REVENUES. Net revenues decreased from $5.3 million for the three months
ended June 30, 1997, to $4.2 million for the three months ended June 30, 1998, a
decrease of $1.1 million or 21%. This decrease was attributable to the decline
in total procedure volume, which decreased from 23,717 for the three months
ended June 30, 1997, to 21,128 for the three months ended June 30, 1998, a
decrease of 2,589 or 11%. Medical surgical procedures increased from 6,789 for
the three months ended June 30, 1997, to 7,582 for the three months ended June
30, 1998, an increase of 793 or 12%. Aesthetic elective procedures decreased
from 16,928 for the three months ended June 30, 1997, to 13,546 for the three
months ended June 30, 1998, a decrease of 3,382 or 20%. The decline in total
procedure volume contributed to $562,000 of the $1.1 million decrease in net
revenues.
The net patient service revenue per case decreased from $217 for the three
months ended June 30, 1997, to $195 for the three months ended June 30, 1998, a
decrease of $22 per case or 10%. This decrease was attributable to a shift from
noncontracted to contracted payors related to the insurance billable business.
Contracted revenues as a percentage of insurance billable revenues increased
from 49% for the three months ended June 30, 1997, to 69% for the three months
ended June 30, 1998. The net patient service revenue per case decrease
contributed to $465,000 of the $1.1 million decrease in net revenues.
8
<PAGE> 9
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense decreased from
$2.6 million for the three months ended June 30, 1997, to $1.8 million for the
three months ended June 30, 1998, a decrease of $800,000 or 31%. The Company
incurred a $250,000 charge during the three months ended June 30, 1997 for a
restructuring of its field operations. The charge included expenses related to
severance packages, relocation allowances, and recruitment fees as a result of
the restructuring and realignment of personnel. Furthermore, average total
employees for the Company decreased from 173 for the three months ended June 30,
1997, to 157 for the three months ended June 30, 1998, a decrease of 16 or 9%.
Salaries and benefits expense as a percentage of net revenues decreased from 50%
for the three months ended June 30, 1997, to 44.2% for the three months ended
June 30, 1998. 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 decreased from $2.45 million for the three months ended
June 30, 1997, to $1.75 million for the three months ended June 30, 1998, a
decrease of $700,000 or 29%. The Company incurred a $250,000 charge during the
three months ended June 30, 1997 for a restructuring of its field operations.
The charge included expenses related to the divestiture of certain delivery vans
and certain medical equipment held under operating leases and legal/professional
fees related to accounts receivable and managed care initiatives. Legal and
professional fees decreased from $283,000 for the three months ended June 30,
1997, to $119,000 for the three months ended June 30, 1998, a decrease of
$164,000 or 58%. Repair and maintenance expense decreased from $322,000 for the
three months ended June 30, 1997, to $189,000 for the three months ended June
30, 1998, a decrease of $133,000 or 41%. This decrease is due to a restructuring
of the Company's annual maintenance contracts on medical equipment. The
remainder of the decrease is related mainly to the downsizing of the Company's
infrastructure. Selling, general and administrative expense as a percentage of
net revenues decreased from 46.5% for the three months ended June 30, 1997, to
42% for the three months ended June 30, 1998. 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 decreased from
$937,000 for the three months ended June 30, 1997, to $562,000 for the three
months ended June 30, 1998, a decrease of $375,000 or 40%. This decrease was due
mainly to a change in useful lives on certain medical equipment from three to
five years as well as the establishment of residual values on such equipment
which was effective January 1, 1998 and a nonrecurring charge of $150,000 for
the three months ended June 30, 1997, related to the redeployment and or
disposition of certain medical equipment in selected markets. The change in
useful lives had the effect of reducing depreciation expense and decreasing the
net loss by approximately $222,000 ($.04 per share) for the three months ended
June 30, 1998.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
decreased from $2.0 million for the three months ended June 30, 1997, to
$488,000 for the three months ended June 30, 1998, a decrease of $ 1.5 million
or 75%. There was a nonrecurring charge of $1.2 million to increase reserves for
uncollectible accounts for the three months ended June 30, 1997. Without the
nonrecurring charge of $1.2 million, provision for uncollectible accounts as a
percentage of net patient service revenues decreased from 14.8% for the three
months ended June 30, 1997 to 11.8% for the three months ended June, 30 1998.
This 3% improvement is due to the continued success from the Company's
operational processes including scheduling, preregistration, and
preverification.
OPERATING (LOSS). Operating loss decreased from $2.7 million for the three
months ended June 30, 1997, to $478,000 for the three months ended June 30,
1998, a decrease of $2.2 million or 81%. During the three months ended June 30,
1997, there were nonrecurring charges totaling $1.85 million. Without these
nonrecurring charges of $1.85 million, the operating loss for the three months
ended June 30, 1997 would have been $863,000.
INTEREST INCOME & OTHER, NET. Interest income and other, net increased from
$159,000 for the three months ended June 30, 1997, to $216,000 for the three
months ended June 30, 1998, an increase of $57,000 or 36%.
INCOME (LOSS) BEFORE INCOME TAXES. Loss before income taxes decreased from
$2.6 million for the three months ended June 30, 1997 to $275,000 for the three
months ended June 30, 1998, a decrease of approximately $2.3 million. Without
the $1.85 million in nonrecurring charges, the loss before income taxes would
have been $738,000 for the three months ended June 30, 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. For the three months ended June 30,
1997, the Company recorded a tax benefit of $755,000. For the three months ended
June 30, 1998, the Company did not record a current or deferred tax benefit due
to the Company's continuing operating loss trend and the uncertainty of
utilization of net operating loss carryforwards in future periods.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net loss decreased from $1.8 million for the three months ended June 30, 1997,
to a loss of $275,000 for the three months ended June 30, 1998, a decrease of
$1.5 million. Without the nonrecurring charges of approximately $1.4 million
(net of taxes), the net loss would have been $424,000.
9
<PAGE> 10
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
NET REVENUES. Net revenues decreased from $10.2 million for the six months
ended June 30, 1997, to $8.3 million for the six months ended June 30, 1998, a
decrease of $1.9 million or 19%. This decrease was attributable to the decline
in total procedure volume, which decreased from 44,703 for the six months ended
June 30, 1997, to 40,579 for the six months ended June 30, 1998, a decrease of
4,124 or 9%. Medical surgical procedures increased from 13,296 for the six
months ended June 30,1997 to 13,913 for the six months ended June 30, 1998, an
increase of 617 or 5%. Aesthetic elective procedures decreased from 31,407 for
the six months ended June 30, 1997, to 26,666 for the six months ended June 30,
1998, a decrease of 4,741 or 15%. The decline in total procedure volume
contributed to $891,000 of the $1.9 million decrease in net revenues.
The net patient service revenue per case decreased from $216 for the six
months ended June 30, 1997, to $203 for the six months ended June 30, 1998, a
decrease of $13 per case or 6%. This decrease was attributable to a shift from
noncontracted to contracted payors related to the insurance billable business.
Contracted revenues as a percentage of insurance billable revenues increased
from 49% for the six months ended June 30, 1997, to 68% for the six months ended
June 30, 1998. The net revenue per case decrease contributed to $528,000 of the
$1.9 million decrease in net revenues.
The remainder of the net revenue decrease was attributable to a decrease in
revenues related to Company sponsored seminars, which decreased from $495,000
for the six months ended June 30, 1997 to $74,000 for the six months ended
June 30, 1998, a decrease of $421,000 or 85%. During the six months ended
June 30, 1997, the Company derived seminar revenues related to the hair removal
product line which was discontinued in the fourth quarter of 1997.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense decreased from
$4.4 million for the six months ended June 30, 1997, to $3.9 million for the six
months ended June 30, 1998, a decrease of $500,000 or 11%. The Company incurred
a $250,000 charge during the six months ended June 30, 1997 for a restructuring
of its field operations. This charge included expenses related to severance
packages, relocation allowances, and recruitment fees as a result of the
restructuring and realignment of personnel. The remainder of the decrease is due
to the downsizing of the Company's infrastructure. Salaries and benefits expense
as a percentage of net revenues increased from 43.7% for the six months ended
June 30, 1997, to 47.2% for the six months ended June 30, 1998. Without the
nonrecurring charge of $250,000, 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 decreased from $4.3 million for the six months ended
June 30, 1997, to $3.5 million for the six months ended June 30, 1998, a
decrease of $800,000 or 19%. The Company incurred a $250,000 charge during the
six months ended June 30, 1997 for a restructuring of its field operations.
This charge included 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. Legal and professional fees decreased from $438,000 for the six
months ended June 30, 1997, to $247,000 for the six months ended June 30, 1998,
a decrease of $191,000 or 44%. Repair and maintenance expense decreased from
$574,000 for the six months ended June 30, 1997, to $408,000 for the six months
ended June 30, 1998, a decrease of $166,000 or 29%. This decrease is due to a
restructuring of the Company's annual maintenance contracts on medical
equipment. The remainder of the decrease is related mainly to the downsizing of
the Company's infrastructure. Selling, general and administrative expense as a
percentage of net revenues decreased slightly from 42.5% for the six months
ended June 30, 1997, to 42.3% for the six months ended June 30, 1998. 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 decreased from
$1.6 million for the six months ended June 30, 1997, to $1.1 million for the six
months ended June 30, 1998, a decrease of $500,000 or 31%. This decrease was due
mainly to a change in useful lives on certain medical equipment from three to
five years as well as the establishment of residual values on such equipment
which was effective January 1, 1998 and a nonrecurring charge of $150,000 for
the six months ended June 30, 1997, related to the redeployment and or
disposition of certain medical equipment in selected markets. The change in
useful lives had the effect of reducing depreciation expense and decreasing the
net loss by approximately $468,000 ($.07 per share) for the six months ended
June 30, 1998.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
decreased from $2.7 million for the six months ended June 30, 1997, to $1
million for the six months ended June 30, 1998, a decrease of $1.7 million or
63%. There was a nonrecurring charge of $1.2 million to increase reserves for
uncollectible accounts for the six months ended June 30, 1997. Without the
nonrecurring charge of $1.2 million, provision for uncollectible accounts as a
percentage of net patient service revenues decreased from 15.2% for the six
months ended June 30, 1997 to 12.4% for the six months ended June 30, 1998. This
2.8% improvement is due to the continued success
10
<PAGE> 11
from the Company's operational processes including scheduling,
preregistration, and preverification.
OPERATING INCOME (LOSS). Operating loss decreased from $2.8 million for the
six months ended June 30, 1997, to $1.3 million for the six months ended
June 30, 1998, a decrease of $1.5 million or 54%. During the six months ended
June 30, 1997, there were nonrecurring charges totaling $1.85 million. Without
these nonrecurring charges of $1.85 million, the operating loss for the six
months ended June 30, 1997 would have been $984,000.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $377,000 for the six months ended June 30, 1997, to $412,000 for the six
months ended June 30, 1998, an increase of $35,000 or 9%.
INCOME (LOSS) BEFORE INCOME TAXES. Loss before income taxes decreased from
$2.5 million for the six months ended June 30, 1997, to $924,000 for the six
months ended June 30, 1998, a decrease of approximately $1.6 million. Without
the $1.85 million in nonrecurring charges, the loss before income taxes would
have been $671,000 for the six months ended June 30, 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. For the six months ended June 30,
1997, the Company recorded a tax benefit of $727,000. For the six months ended
June 30, 1998, the Company did not record a current or deferred tax benefit due
to the Company's continuing operating loss trend and the uncertainty of
utilization of net operating loss carryforwards in future periods.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net loss decreased from $1.8 million for the six months ended June 30, 1997, to
$924,000 for the six months ended June 30, 1998, a decrease of $876,000. Without
the nonrecurring charges of approximately $1.4 million (net of taxes), the net
loss would have been $385,000.
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
retained earnings of $431,290 as of March 31, 1997. As of June 30, 1998, the
Company has an accumulated retained deficit of $3.4 million, due to losses
incurred during the twelve months ended December 31, 1997 and the six months
ended June 30, 1998. 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 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 (used in) provided by the operating activities was $(1.2 million)
and $769,000 for the six months ended June 30, 1997 and 1998, respectively. For
its investing activities, the Company consumed $2.9 million and $716,000 for the
six months ended June 30, 1997 and 1998, respectively, primarily for the
purchase of medical equipment and payment for acquisitions. Capital expenditures
were $2.4 million and $739,000 for the six months ended June 30, 1997 and 1998,
respectively. Net cash consumed by financing activities was $154,000 and $59,000
for the six months ended June 30, 1997 and 1998, respectively.
YEAR 2000 COMPLIANCE
The Company is in the process of evaluating its Year 2000 ("Y2K") compliance
status. The Company is independently testing its information technology, such
as software regarding Y2K compliance and is seeking certification of Y2K
compliance from its third party vendors. Because its software and information
technology come from third party vendors, who would be called on to replace or
upgrade non-compliant software, the Company does not expect that its Y2K-related
expenditures with respect to information technology will be significant. Based
upon the Company's current evaluation of the Y2K compliance of its information
technology, its polling of third party vendors, and its intention to replace or
upgrade any non-compliant information technology, the Company does not
anticipate that there will be a material Y2K problem with respect thereto.
In addition, certain of the Company's medical equipment contains embedded
technology that could have Y2K-related problems. The Company has polled the
manufacturers and vendors of such equipment regarding Y2K compliance and, based
on such polling, all equipment known to the Company to be non-Y2K compliant has
been replaced or upgraded. The Company does not expect to conduct independent
tests of its medical equipment to assess Y2K compliance. Based upon the
Company's actions in preparation for Y2K, and responses
11
<PAGE> 12
received from its third party vendors, the Company does not anticipate that
there will be a material Y2K problem with respect to its equipment.
Furthermore, because its equipment comes from third party vendors, which are
being requested to replace or upgrade all non-compliant equipment, the Company
does not expect that its Y2K-related expenditures with respect to embedded
technology will be significant.
Notwithstanding the foregoing, there can be no assurances (a) that the
representations provided by third party vendors with respect to Y2K compliance
will be accurate, or (b) that the Company will have any recourse against such
vendors if the representations prove to be inaccurate. A Y2K- related failure
of the Company's medical equipment and/or information technology could have a
material adverse effect on the Company and its results of operations.
Furthermore, there can be no assurances that Y2K-related failure caused by
third parties, such as utility providers, transportation companies or others,
will not have a material adverse effect on the Company.
PART II
ITEM 1. LEGAL PROCEEDINGS.
As of the date hereof, there are no legal proceedings pending against or
involving the Company that in the opinion of management, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company commenced its IPO on October 11, 1996 pursuant to a
Registration Statement on Form S-1 (file number 333-9815) which was declared
effective by the Securities and Exchange Commission on October 9, 1996. The
Company sold an aggregate of 2,300,000 shares of Common Stock in the IPO at an
initial price to the public of $11.00 per share. The IPO has terminated and all
shares have been sold. The managing underwriters of the IPO were Bear, Stearns &
Co., Inc. and Equitable Securities Corporation. Aggregate proceeds from the IPO
were $25,300,000, which includes $3,300,000 in aggregate proceeds due to the
exercise of the underwriters' option to purchase shares to cover
over-allotments. The Company paid underwriters' discounts and commissions of
$1,771,000 and other expenses of approximately $490,000 in connection with the
IPO. Net proceeds to the Company in the IPO were $23,039,000.
From October 9, 1996, the effective date of the Registration Statement, to
June 30, 1998, the ending date of the reporting period, the approximate amount
of net offering proceeds used were $9.1 million, which were used as follows:
$3.5 million used to pay off in full the NationsBank debt, $5 million used to
purchase medical equipment and $600,000 to acquire other companies.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. SHARE REPURCHASE PROGRAM.
On May 14, 1998, the Company commenced a share repurchase program of up
to one million shares of the Company's Common Stock. The purchases are to be
made from time to time over the next 12 months at prices then prevailing on the
Nasdaq National Market System or in privately negotiated transactions. From
May 14, 1998 thru June 30, 1998, the Company repurchased 81,500 shares of the
Company's stock at a total cost of $331,000.
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 March 18, 1996, between the Company and Maasai Inc.(1)(6)
2.2 Asset Purchase Agreement, dated June 10, 1996, between the Company and Mobile Laser Services, Inc. (1)(6)
2.3 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)(6)
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen of Company Common Stock Certificate. (1)
4.2 Warrant to Purchase 23,416 Shares of Common Stock of the Company dated August 15, 1993 between the Company and
Columbia General Corporation. (1)
4.3 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)
4.4 Warrant to Purchase 2,342 Shares of Common Stock of the Company dated May 31, 1994 between the Company and Shelly
Burks. (1)
4.5 Warrant to Purchase 1,873 Shares of Common Stock of the Company dated May 31, 1994 between the Company and Thomas
A. Montgomery. (1)
4.6 Warrant to Purchase 6,556 Shares of Common Stock of the Company dated September 1, 1994 between the Company and
Thomas A. Montgomery. (1)
4.7 Warrant to Purchase 15,651 Shares of Common Stock of the Company dated July 27, 1995 between the Company and Paul R.
Herchman. (1)
10.1 Agreement between the Company and Coherent Medical Group. (1)
10.2 Master Lease agreement dated July 20, 1995 between the Company and Cabot Medical Corporation. (1)
10.3 Master Service Agreement dated June 3, 1996 between the Company and Cosmetic Technologies International. (2)
10.4 Joint Venture Agreement dated March 25, 1996 between the Company and Coherent-AMT Inc. (2)
10.5 Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive Plan. (2)
10.6 Employment Agreement between the Company and Paul Herchman. (1)
10.7 Employment Agreement between the Company and Gary Hill. (4)
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)
12.1 Subsidiaries of the Company. (1)
27.1 Financial Data Schedule(5)
- -----
</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) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
13
<PAGE> 14
(5) Filed herewith.
(6) 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 11, 1998
Signature Title
--------- -----
/s/ PAUL R. HERCHMAN
----------------------------------
Paul R. Herchman Chief Executive Officer
/s/ MARK A. NOVY
----------------------------------
Mark A. Novy Vice President of Finance
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
2.1 Asset Purchase Agreement, dated March 18, 1996, between the Company and Maasai Inc. (1)(6)
2.2 Asset Purchase Agreement, dated June 10, 1996, between the Company and Mobile Laser Services, Inc. (1)(6)
2.3 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)(6)
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen of Company Common Stock Certificate. (1)
4.2 Warrant to Purchase 23,416 Shares of Common Stock of the Company dated August 15, 1993 between the Company and
Columbia General Corporation. (1)
4.3 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)
4.4 Warrant to Purchase 2,342 Shares of Common Stock of the Company dated May 31, 1994 between the Company and Shelly
Burks. (1)
4.5 Warrant to Purchase 1,873 Shares of Common Stock of the Company dated May 31, 1994 between the Company and Thomas
A. Montgomery. (1)
4.6 Warrant to Purchase 6,556 Shares of Common Stock of the Company dated September 1, 1994 between the Company and
Thomas A. Montgomery. (1)
4.7 Warrant to Purchase 15,651 Shares of Common Stock of the Company dated July 27, 1995 between the Company and Paul R.
Herchman. (1)
10.1 Agreement between the Company and Coherent Medical Group. (1)
10.2 Master Lease agreement dated July 20, 1995 between the Company and Cabot Medical Corporation. (1)
10.3 Master Service Agreement dated June 3, 1996 between the Company and Cosmetic Technologies International. (2)
10.4 Joint Venture Agreement dated March 25, 1996 between the Company and Coherent-AMT Inc. (2)
10.5 Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive Plan. (2)
10.6 Employment Agreement between the Company and Paul Herchman. (1)
10.7 Employment Agreement between the Company and Gary Hill. (4)
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)
12.1 Subsidiaries of the Company. (1)
27.1 Financial Data Schedule(5)
- -----
</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) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(5) Filed herewith.
(6) 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 JUN-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 14,902,578 14,896,466
<SECURITIES> 0 0
<RECEIVABLES> 5,270,151 3,532,252
<ALLOWANCES> 2,554,705 1,627,941
<INVENTORY> 0 0
<CURRENT-ASSETS> 20,161,972 18,817,357
<PP&E> 11,658,926 12,318,601
<DEPRECIATION> 6,185,441 7,210,907
<TOTAL-ASSETS> 26,504,537 24,754,462
<CURRENT-LIABILITIES> 2,586,561 1,783,630
<BONDS> 488,579 344,846
0 0
0 0
<COMMON> 12,331 12,743
<OTHER-SE> 23,665,716 22,826,027
<TOTAL-LIABILITY-AND-EQUITY> 26,504,537 24,754,462
<SALES> 0 0
<TOTAL-REVENUES> 18,821,125 8,313,837
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3,870,925 1,024,429
<INTEREST-EXPENSE> 111,578 31,979
<INCOME-PRETAX> (3,745,277) (923,545)
<INCOME-TAX> (848,267) 0
<INCOME-CONTINUING> (2,897,010) (923,545)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,897,010) (923,545)
<EPS-PRIMARY> (.48) (.15)
<EPS-DILUTED> (.48) (.15)
</TABLE>
