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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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MEDICAL ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
TEXAS 73-1347577
(STATE OF 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)
---------------------
Registrant's telephone number, including area code: 972-580-8999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
Common Stock, $.002 par value WHICH REGISTERED
Nasdaq National Market
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 23, 1998 the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $17,088,420 based
upon the closing price of $4.00 per share on the Nasdaq National Market. As of
March 23, 1998, 6,250,104 shares of the registrant's Common Stock, $0.002 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, scheduled to be mailed on or about
April 6, 1998 for the annual meeting of Shareholders of the registrant to be
held on May 8, 1998 are incorporated by reference in Part III of this report.
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MEDICAL ALLIANCE, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
Form 10-K Item Page
----
PART I
Item 1 Business ............................................ 3
Item 2 Properties .......................................... 11
Item 3 Legal Proceedings ................................... 11
Item 4 Submission of Matters To A Vote of
Security Holders................................... 12
PART II
Item 5 Market For Registrant's Common Stock and
Related Stockholder Matters....................... 12
Item 6 Selected Financial Data ............................ 12
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8 Financial Statements and Supplementary Data ........ 17
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............ 31
PART III
Item 10. Directors and Executives of Company................. 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................. 31
Item 13. Certain Relationships and Related
Transactions...................................... 31
PART IV
Item 14. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K........................... 31
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Medical Alliance provides a complete range of services used to create
temporary surgical environments in physician offices in 40 states and believes
it is the leading provider of such services in the United States. The Company's
services allow physicians to transfer an increasing number of established
surgical procedures from a hospital or outpatient setting to the physician's
office. These services include:
-- Providing on-site technical personnel and medical equipment on a
scheduled basis;
-- Monitoring and documenting preoperative, intraoperative and
postoperative procedures;
-- Returning the physician's office to its pre-procedure condition;
-- Establishing procedural safety and quality assurance protocols for
office-based procedures;
-- Facilitating physician training and qualification; and
-- Physician credentialing pursuant to contracts with managed care
organizations.
The Company's services benefit payors, physicians and patients by
lowering costs for surgical procedures, increasing physician productivity,
broadening access to advanced medical technologies and improving patient
satisfaction.
The Company is a leader in facilitating the migration of established
surgical procedures and the latest advanced medical technologies from hospitals
and outpatient surgery centers to a lower-cost setting, the physician's office.
An increasing number of minimally invasive procedures are being performed with
local anesthesia in physicians' offices using technologically advanced medical
equipment. The Company currently maintains a network of approximately 3,000
physicians who have utilized the Company's services and has 141 managed care
contracts that in aggregate cover approximately 65 million lives. Currently,
physicians in the Company's network perform approximately 7,000 procedures
monthly using the Company's services.
The Company provides its services along two primary business lines:
medical surgical and aesthetic elective services. The Company's medical surgical
services allow physicians to perform approximately 25 different office-based
surgical procedures across numerous specialties, including gynecology, podiatry,
urology and otolaryngology. The Company's aesthetic elective services are
utilized primarily by plastic surgeons and dermatologists for laser procedures
such as skin resurfacing, vascular and pigmented lesion treatment, and tattoo
removal. The Company is generally reimbursed for providing its medical surgical
services by third-party payors, including through its contracts with managed
care organizations, and is paid directly by patients for any required copayments
and deductibles. For providing its aesthetic elective services, the Company is
generally paid directly by patients or physicians. None of the Company's net
revenues is derived from Medicare or Medicaid reimbursement.
On October 17, 1996, the Company consummated its initial public
offering (the "IPO") of 2,000,000 shares (and an additional 300,000 shares in
connection with the exercise of the underwriter over-allotment option on
November 11, 1996) of the common stock, par value $.002 per share (the "Common
Stock") of the Company.
MARKET OVERVIEW
Medical Surgical. The continued increase in health care costs at a rate
significantly higher than that of overall inflation has caused managed care
companies, indemnity insurers, government agencies and other payors to employ a
variety of strategies designed to reduce the cost and control the utilization of
health care services. In particular, payors have created incentives for health
care providers to deliver high-quality health care services in lower cost
settings. Initially, numerous surgical, diagnostic and other medical procedures
that were traditionally performed in a hospital were transferred to an
outpatient setting, predominantly the outpatient section of a hospital or an
ambulatory surgery center. In continuation of this trend, many established
procedures that are performed in an outpatient setting can now be transferred to
the physician's office because such procedures can be performed at a lower cost
and without the risk of general anesthesia while maintaining the quality of
care. The transfer of such procedures to the physician's office has continued to
accelerate as a result of: (i) the introduction of advanced medical technology
that reduces anesthesia requirements and allows physicians to perform a broader
array of office-based procedures, (ii) the development of training programs and
clinical protocols for office-based procedures, and (iii) the patient's desire
to undergo procedures in a more comfortable setting, with reduced risk, pain and
recovery time. The migration
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of such procedures to the physician's office benefits payors, providers and
patients through lower procedure costs (as compared to similar procedures
performed in a hospital or outpatient surgery center), increased provider
productivity, broader access by physicians and patients to advanced technologies
and treatments, and an increased level of patient satisfaction.
Aesthetic Elective. The Company believes that the number of aesthetic
elective procedures performed annually in the United States will continue to
grow, primarily due to the development of new technologies for cosmetic
procedures, increased public awareness, shorter recovery times and the aging of
the "baby boom" generation. According to the American Academy of Cosmetic
Surgery Survey, approximately 2.7 million cosmetic procedures were performed in
the United States in 1994. The Company believes that a majority of such
procedures are or can be performed in a physician's office. According to the
American Society of Plastic and Reconstructive Surgeons Survey , patients
between the ages of 35 and 50 represented 41% of the cosmetic procedures
performed in the United States in 1994, and the number of people who say they
approve of cosmetic surgery, either for themselves or others, has increased 50%
in the last decade. According to the ASPRS Survey, approximately 36% of the
cosmetic procedures performed in 1994 were performed in a physician's office.
The Company believes that the vast majority of the aesthetic procedures are
performed in an outpatient setting and that such procedures will increasingly be
transferred to physician's offices. The benefits derived from performing
aesthetic procedures in an office-based setting are similar to those associated
with medical surgical procedures, and include lower procedure costs, increased
provider productivity, broader access by physicians and patients to advanced
technologies and treatments, and an increased level of patient satisfaction.
BUSINESS STRATEGY
The Company's goal is to enhance its position as a provider of services
to the emerging market for physician office-based procedures. The Company
intends to achieve its goal by employing four primary strategies:
Increasing Utilization of the Company's Services in Existing Markets.
The Company plans to expand by facilitating the transfer of an increasing
percentage of outpatient procedures to a physician's office where the Company's
services may be utilized. The Company intends to achieve such expansion through:
(i) marketing efforts designed to cause existing network physicians to transfer
more outpatient procedures performed by them to their offices, (ii) the
expansion of the Company's physician network, either through ongoing marketing
efforts or the acquisition of mobile medical equipment providers that maintain
relationships with physicians, (iii) the provision of a full range of applicable
services to all physicians in its network and (iv) the introduction of new
services and technologies which will enable additional procedures to be
performed in a physician's office. In addition, the Company plans to increase
the services which are eligible for reimbursement under its existing managed
care contracts and to assist in the establishment of incentives and/or mandates
by payors for their network physicians to perform office-based procedures using
the Company's services.
Expanding the Company's Operations into New Markets. The Company
employs a two-phase strategy to enter new markets. In the initial phase, the
Company offers aesthetic elective services (which are paid for directly by
patients or physicians) while establishing a network of physicians who utilize
such aesthetic elective services and seeks to develop relationships with local
managed care organizations for the provision of medical surgical services. This
initial phase may include acquisitions. In the second phase, the Company
negotiates managed care contracts and introduces its medical surgical services
to such managed care payors' network physicians and seeks to expand the network
of physicians using its medical surgical services. In some cases, the Company
will also seek to capitalize on its managed care relationships in existing
markets by gaining access to such payors' covered lives in markets not currently
served by the Company. This two-phase expansion strategy allows the Company to
utilize a single infrastructure to support both business lines and use cash flow
generated from aesthetic elective services to offset the relatively higher costs
associated with establishing reimbursement of medical surgical services under
third-party payor contracts.
Continuing the Development of Managed Care Contracts. The Company is
designated as a preferred provider for medical surgical services in 141 payor
contracts, including contracts with health plans owned by United HealthCare
Corporation, Prudential Healthcare, CIGNA Healthcare and Blue Cross Blue Shield
entities in six states, which contracts cover in aggregate approximately 65
million lives. The Company plans to establish additional contractual
relationships with managed care organizations and other third-party payors as a
preferred or mandated provider to physicians of office-based surgical services.
As a preferred provider, the Company negotiates a pre-determined fee schedule
for its services and obtains enhanced access to the payor's physician network in
order to market its services directly to such physicians. The Company believes
that payors contract with the Company because the Company's services provide a
turn-key solution that assists payors in transferring established surgical
procedures to a lower cost setting while maintaining the quality of care.
Establishing Strategic Alliances with Medical Equipment Manufacturers.
The Company has strategic alliances with manufacturers and distributors of
medical equipment that enable it to provide advanced medical technology to
physicians while reducing the risk of ownership to the Company. The Company
believes manufacturers often encounter significant challenges in selling
sophisticated medical equipment to physicians. Physicians are generally
reluctant to purchase such medical equipment because: (i) physicians generally
are not able to ensure sufficient procedure volume to recover the cost of
acquiring, using and maintaining the equipment, (ii) physicians
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generally do not want to assume the risk of technological obsolescence, and
(iii) such equipment is generally available to them through hospitals,
outpatient surgery centers and mobile medical equipment providers. The
manufacturers benefit from the Company's ability to introduce new technology to
a large number of physicians in a short period of time thereby increasing the
rate of acceptance for the technology.
SERVICES PROVIDED BY THE COMPANY
The Company offers a complete range of services used to create
temporary surgical environments in physicians' offices. The Company facilitates
the migration of established outpatient procedures and advanced medical
technologies to physicians' offices by providing a broad array of services which
enables physicians to provide high quality, cost-effective medical care in their
offices. The Company's services include the following:
On-Site Technical Personnel. The Company provides on-site technical
personnel who create the temporary surgical environment in a physician's office,
assist the physician in the set-up and operation of medical equipment, and are
present during, and document relevant aspects of, the office-based procedure.
The Company provides training to its field technicians, including intensive
classroom instruction and hands-on training covering various technical and
clinical aspects of office-based procedures as well as the Company's surgical
services.
Provision of On-Site Medical Technology. The Company provides medical
technology and services that include all of the necessary medical equipment and
related instruments, accessories, disposable supplies and technical support for
the Company's network physicians to perform certain office-based procedures. The
Company has organized its field units into the three configurations listed
below, the first two of which are used to provide medical surgical services and
the third of which is used to provide aesthetic elective services.
Office Based Surgical Unit. The Office Based Surgical Unit may be
configured utilizing the following technologies: CO2 laser, flashlamp pulsed dye
laser, electrosurgical generator, hospital grade smoke evacuator and related
instruments and accessories. This equipment is used to perform procedures in
gynecology, podiatry, urology and otolaryngology. As of December 31, 1997, the
Company had 50 Office Based Surgical Units in service.
Office Based Endoscopy Unit. The Office Based Endoscopy Unit may be
configured utilizing the following technologies: medical digital camera system,
video monitor, printer and recorder, CO2 and fluid insufflation, related
instruments and accessories, and one of the following endoscopes: hysteroscope,
laparascope or arthroscope. This equipment is used to perform procedures in
gynecology and podiatry. As of December 31, 1997, the Company had 21 Office
Based Endoscopy Units in service.
Office Based Aesthetic Unit. The Office Based Aesthetic Unit may be
configured utilizing the following technologies: KTP/532 laser, Q-Switched
Nd:YAG laser, flashlamp pulsed dye laser, UltraPulse CO2 laser, and Erbium Yag
laser and related instrumentation and accessories. This equipment is used to
perform procedures in plastic surgery and dermatology. As of December 31, 1997,
the Company had 118 Office Based Aesthetic Units in service.
The physician's office simply contacts the Company to schedule the
procedure for a specific date and time. Then, the Company preregisters the
patient and, if necessary, begins verifying insurance coverage and obtaining any
necessary pre-certifications.
On the day of surgery, the Company sends either an Office Based
Surgical Unit (for gynecological, podiatric, urological, and otolaryngological
procedures), an Office Based Endoscopy Unit (for minimally invasive
gynecological and podiatric procedures), or an Office Based Aesthetic Unit (for
cosmetic surgeries and dermatological and podiatric procedures). Each Unit is
staffed by an experienced technician who converts a room in the physician's
office into a temporary surgical setting according to recognized clinical
protocols. The physician is required to inspect the set-up and to test and
accept all equipment before using it. During the procedure, the Company's
technician remains with the physician to ensure that the technology functions
correctly and that all equipment protocols are followed. Then, after the
procedure, the technician again follows clinical protocols to return the room to
its previous condition or to prepare it for the next procedure.
Procedure Monitoring and Documentation. The Company's on-site
technical personnel are present during, and document relevant aspects of, the
office-based procedures, including information regarding disposables consumed,
sterilization procedures performed and adherence to the Company's established
guidelines and standards, including preoperative, intraoperative and
postoperative instructions.
Establishment of Procedural Safety and Quality Assurance Protocols. The
Company has established procedural safety and quality assurance protocols and
standards for the use of its surgical services in physicians' offices that are
set forth in its Alternate Site Quality Protocol, Standards and Guidelines. The
Company utilizes this manual to assist managed care organizations in documenting
the Company's operations to satisfy accrediting organizations' requirements. The
Company's standard field operating procedures include
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Occupational Safety and Health Administration safety procedures incorporating
the use of personal protective equipment and sterilization of equipment and
provide step-by-step preoperative, intraoperative and postoperative
instructions. The Company recognizes that there is an absence of documented
office-based procedures and clinical protocols in the physician marketplace, as
well as methods for measuring and documenting compliance therewith. Accordingly,
the Company has created its Optimal In-Office Surgical Suite Guidelines manual
for its network physicians, which includes guidelines, standards and regulations
and a comprehensive self-assessment checklist for surgeries performed in the
physician's office without general anesthesia. The standards established by the
Company serve as guidelines to assist physicians in satisfying quality
requirements set by managed care organizations and accrediting authorities, as
well as in complying with applicable government regulations and manufacturers'
specifications.
Physician Training Seminars. The Company conducts seminars to train
physicians and their staff in the use of medical equipment and related
technology provided by the Company through its services and receives a fee from
physicians for attending such seminars. Since 1993, approximately 3,700
physicians have participated in over 130 of the Company's seminars. The Company
developed and introduced its physician training seminars in response to the high
demand for physician training created by the introduction of new medical
technology. The Company retains highly qualified physician faculty to conduct
these seminars, which present such topics as medical laser physics and safety,
light and tissue interaction, clinical applications and treatment parameters,
and include procedure demonstrations, as well hands-on laboratory sessions.
Physician participants in the Company's seminars generally receive a peer
reference manual, video tapes, patient awareness and marketing information, and
a certificate that documents completion of the Company's training seminar.
Physician Credentialing. The Company performs physician credentialing
on behalf of managed-care payors, utilizing standards established by its Medical
Director which are based upon standards generally recognized by the medical
profession. The Company's services are offered only to those practitioners who
have provided documentation of certified training and/or competence relevant to
the procedures to be performed, including use of the technology provided in
conjunction with such services. For certain procedures, the Company requires
physicians to maintain hospital or surgery privileges relative to such
procedures, including the use of any technology for performance thereof.
Physician credentialing information is maintained by the Company and reviewed
periodically by the Medical Director and other key personnel.
REIMBURSEMENT AND PAYMENT
For its services, the Company charges fees that are payable by either
the patient, the physician, a managed care organization or an indemnity
insurance company. For medical surgical services rendered by the Company
pursuant to a contract with a managed care organization, the Company bills the
managed care payor based upon a pre-determined fee schedule. For medical
surgical services that are reimbursed under an indemnity plan, the Company
generally bills and collects 20% of the Company's charges from the patient at
the time services are rendered and bills the patient's insurance indemnity
carrier for the remaining balance. For aesthetic elective services, generally
the Company charges on a per-case basis and its fees are payable by the patient
or physician. None of the Company's net revenues is derived from Medicare or
Medicaid reimbursement.
SALES AND MARKETING
The Company currently operates in 40 states. The Company has divided
its service area into five regions ("Regions") encompassing an aggregate of 15
districts ("Districts"). The Company maintains an office in each District. Each
Region is managed by a Division Vice President or Regional Manager who is
responsible for meeting the Company's sales and operational objectives within
his or her Region(s).
Within each District, the Company employs a District Manager, a
District Operations Manager, a District Sales Representative and one or more
field technicians. The District Manager is responsible for the overall
development of the market. The District Operations Manager is responsible for
operations management and daily operations within the field operations. District
Sales Representatives are designated to oversee the marketing and development of
a particular product line or specialty focus within their respective designated
geographic area. Field technicians specialize in a particular clinical and/or
technical area within their respective designated geographic area and are
assigned office based field units for use in their assigned specialties.
SUPPLIERS OF MEDICAL TECHNOLOGY
In conjunction with its other services, the Company offers a wide range
of medical technology for use in performing office-based procedures. Such
medical technology is obtained directly from manufacturers and distributors of
medical equipment. Prior to obtaining any medical equipment, the Company
performs extensive research on existing and developing medical technology in
order to determine the optimal equipment to acquire. In order to enhance its
access to medical technology, the Company seeks to establish strategic alliances
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with manufacturers and distributors of medical equipment generally during the
development stage of a selected product. Such strategic alliances may include
agreements based upon per-procedure or other revenue sharing arrangements. In
certain circumstances, the Company may seek to become the exclusive mobile
provider for a certain technology.
INFORMATION SYSTEMS
In 1995 the Company began implementation of an information system that
includes a wide area network to link its Districts to its corporate office and
information databases. The system is decentralized and allows for data
acquisition by field personnel within each District and maintenance of all data
captured at a central corporate database that is accessible on a real-time
basis. The Company has completed the first four of six implementation phases
which included the installation of a network driven by multiple file servers, an
in-house voice mail system, software to link the Districts to the corporate
billing and collection system and the installation of portable computers to all
field personnel. The last two phases of implementation include the integration
of the Company's general ledger and financial reporting systems and the
installation of an electronic data storage system. The Company anticipates
completion of the general ledger and financial reporting systems by the second
quarter of 1998. The Company anticipates the installation of the electronic data
storage system to be complete by the fourth quarter of 1998.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation of physicians, other health care providers, managed care
organizations and other third-party payors. Health care regulation affects the
Company's operations both directly and indirectly. Many states require
regulatory approval, including certificates of need, before establishing or
expanding certain types of health care facilities or offering certain health
care services. Several states in which the Company operates prohibit the
corporate practice of medicine except by professional medical corporations or
associations. The Company provides only nonphysician services and does not
exercise influence or control over the practice of medicine by the physicians to
whom it provides its services. In addition, the laws of many states prohibit
physicians from splitting fees with non-physicians, and some states have
promulgated statutes that prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for referral of patients and
that prohibit referrals by physicians for designated health services to entities
with which they have a financial relationship. The Company believes that its
current and planned activities are in material compliance with applicable laws
and regulation as currently interpreted. There can be no assurance, however,
that a review of the Company's business by courts or regulatory authorities will
not result in a determination that could adversely affect the operations of the
Company. In addition, there can be no assurance that the regulatory environment
in which the Company operates will not change significantly in the future, which
change could adversely affect the Company's operations, financial condition,
business opportunities or future expansion.
The manufacturers of medical devices utilized by the Company are
subject to extensive regulation by the FDA. Failure of the manufacturer of such
devices to comply with FDA regulations could result in the loss of approval by
the FDA of such medical devices. In addition, physicians in the Company's
network are subject to significant federal and state regulation. The ability of
the Company to operate profitably will depend in part upon its network
physicians, the manufacturers of its medical devices and its third-party payors
obtaining and maintaining all necessary licenses, certificates of need and other
approvals, and operating in compliance with applicable health care regulations.
The Company's services involve the handling of chemical and biological
substances and regulated waste materials, some of which may be considered
contaminated, hazardous or toxic. The Company is subject to state and federal
laws that regulate labor and environmental matters such as the handling and
disposal of regulated medical wastes, the release of pollutants and contaminants
into the air and water, and the protection of employees who may be exposed to
blood or other potentially infectious materials including those which may
contain bloodborne pathogens such as hepatitis B virus. The Company is also
subject to federal and state laws relating to business conduct and general
employee matters. The Company believes that it is in material compliance with
applicable laws.
COMPETITION
The Company competes with companies that offer medical equipment to
physicians' offices on either a rental or a fee-for-service basis and with
hospitals and surgery centers that provide comparable surgical services. The
Company also competes with other providers in the health care industry for
access to technology, relationships with third-party payors and relationships
with physicians. The Company believes the trend toward managed care could
increase the competition to obtain contracts with third-party payors. The health
care industry is highly competitive and is subject to continuing changes in the
manner in which such services are provided and the manner in which providers are
selected and paid. Some of the Company's competitors have substantially greater
financial and other resources than the Company. In addition, competitors of the
Company could obtain exclusive rights to provide mobile surgical services for
products that the Company currently offers or expects to offer.
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The market for aesthetic elective services is highly competitive. The
Company believes that the heightened interest in aesthetic procedures among
physicians and patients, the development of advanced medical technologies to
perform aesthetic procedures and the industry practice of requiring immediate
cash payment for such services will create increased competition in this
segment. Competition in the provision of medical surgical services may also
increase because these services are becoming more accepted by physicians,
patients and third-party payors and the medical equipment used in providing such
services is readily available from various sources.
The Company believes that competition in the provision of services to
create temporary office-based surgical environments is based on the price,
quality, breadth and availability of services. The Company considers its
comprehensive high quality services, trained on-site technical personnel, "per
case" billing for certain services and strategic relationships with payors and
medical device manufacturers to be important factors in enabling it to compete
effectively. The Company believes that it is the only national provider of
medical surgical services for use in performing office-based procedures that has
developed contracts with managed care organizations.
INSURANCE
The Company maintains professional, general and product liability
insurance in amounts deemed appropriate by management. The Company carries an
aggregate of $10 million of general and public liability insurance coverage,
which covers premises, operations and product liability, and a $2 million
professional liability insurance policy.
EMPLOYEES
As of December 31, 1997, the Company had 171 employees, including 109
employees in field operations.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company.
NAME AGE POSITION
- ---- --- --------
Paul R. Herchman................. 41 Chairman of the Board and Chief
Executive Officer
Gary B. Hill .................... 48 President, Chief Operating Officer
and Director
David A. Kallenberger, M.D....... 48 Medical Director and Director
Michael G. Wallace............... 33 Senior Vice President, Chief
Financial Officer and Treasurer
PAUL R. HERCHMAN is a co-founder of the Company and has served as
Chairman of the Board, Chief Executive Officer since its inception in 1989. Mr.
Herchman served as President from 1989 until December 1997. In addition, Mr.
Herchman is a member of the Compensation Committee. From 1986 to 1989, Mr.
Herchman was a sales representative for Sun Medical, Inc., a distributor of
medical equipment. Prior thereto, Mr. Herchman served in sales positions with
Chesebrough-Ponds USA Co. in its Hospital Products Division, from 1984 to 1986,
and with Johnson & Johnson in its Ortho Pharmaceutical Division, from 1982 to
1984. Mr. Herchman received a Bachelor of Science degree from Texas Tech
University.
GARY B. HILL has served as President and Chief Operating Officer of
the Company since December 1997. From January 1994 to April 1996, Mr. Hill
served as President of the North Texas Division of Columbia/HCA. Prior thereto,
Mr. Hill was Senior Vice President of Region II for Galen Health Care Inc. and
Columbia from 1992 to 1994. From 1976 to 1992, Mr. Hill served in various
capacities with Humana Inc., most recently as Vice President for its hospital
and insurance operations in central Kentucky and Cincinnati. Mr. Hill received a
Bachelor of Science degree from the University of North Alabama. Mr. Hill was
elected to serve as a director of the Company in February of 1998.
DAVID A. KALLENBERGER, M.D. is a co-founder of the Company and has
served as a director and as the Medical Director since its inception in 1989.
Dr. Kallenberger is a practicing physician specializing in obstetrics and
gynecology, and has been practicing at Integris Baptist Medical Center in
Oklahoma City, Oklahoma since 1981. Dr. Kallenberger serves as a Clinical
Professor in the Department of Obstetrics/Gynecology at the University of the
Oklahoma Health Science Center and as a Program Director of the Henry G. Bennett
Fertility Institute at Integris Baptist Medical Center. Dr. Kallenberger
received his Medical Doctorate degree from The University of Oklahoma.
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MICHAEL G. WALLACE has served as the Treasurer of the Company since
April 1993, as Senior Vice President since November 1995 and as the Chief
Financial Officer since June 1996. From April 1993 to November 1995, Mr. Wallace
also served as Vice President of Finance. From June 1991 to April 1993, Mr.
Wallace served as Senior Accountant for Medical Care America, Inc., an
owner-operator of outpatient surgery centers, and as a Regional Accountant for
Medical Care America, Inc., from January 1990 to June 1991. From 1988 to 1990,
Mr. Wallace served as an accountant for Woodland Investment Company. Mr. Wallace
has served as a director of Global Healthnet, Inc., a software service company
in the health care industry, since March 1996. Mr. Wallace has also served as a
director of OHA Grantor Trust, Inc. since October 1997. Mr. Wallace is a
Certified Public Accountant and received a Bachelor of Business Administration
degree from Southwest Texas State University.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains forward-looking statements that involve risks and
uncertainties. Actual results, performance or achievements of the Company could
materially differ from those expressed or implied in such forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this report.
Uncertainty of Market Acceptance. There can be no assurance that any of
the Company's existing or future services will gain or maintain market
acceptance among physicians, patients and third-party payors. The Company
believes that market acceptance of office-based procedures, including those
performed using the Company's services, depends upon various factors including:
(i) the Company's ability to provide evidence to the medical community of the
efficacy of the office-based procedures and the corresponding benefits to
payors, physicians and patients, (ii) the willingness of physicians to perform
and patients to undergo procedures in the physician's office which have
traditionally been performed in a hospital or outpatient facility, (iii) the
willingness of physicians to perform and patients to undergo procedures under
local rather than under general anesthesia, (iv) the willingness of physicians
to utilize the Company's services rather than perform office-based procedures
utilizing their employees and medical equipment, and (v) the continued
availability of third-party reimbursement for certain procedures performed using
the Company's services.
Acquisition, Obsolescence and Regulation of Advanced Technology. The
Company's future success will depend in large part on the Company's ability to
provide advanced medical technology to physicians. The medical device industry
is characterized by rapid and significant technological change. The acquisition
of medical technology requires substantial expenditures, and there can be no
assurance that the Company will be successful in identifying, acquiring and
receiving timely delivery of technology for which sufficient demand will exist
and that such technology will not become obsolete during its anticipated product
life cycle. Currently, there are alternative technologies to those offered by
the Company. Such technologies may gain broader market acceptance, which could
have a material adverse effect on the Company's operating results or financial
condition. There can be no assurance that the company's strategy to obtain
medical technology through relationships with medical equipment manufacturers
and distributors will be successful or , if successful, that such relationships
can be maintained. In addition, the medical equipment utilized by the Company
requires approval by the Food and Drug Administration (the "FDA"), and there can
be no assurance that such medical equipment will receive or retain FDA approval
for desired current and future applications. The loss of any FDA approval for
such equipment could have a material adverse effect on the Company's operating
results or financial condition, as the Company would be unable to utilize such
equipment in the provision of its services. Furthermore, the medical equipment
industry has been characterized by extensive litigation regarding patents and
other intellectual property rights. There can be no assurance that manufacturers
or distributors of medical equipment utilized by the Company will obtain or
retain patents or other intellectual property rights related to the equipment
used by the Company. See "- Regulation of and Change in the Health Care
Industry" and "Business - Business Strategy - Establishing Strategic Alliances
with Medical Equipment Manufacturers."
Inability to Manage Growth. The Company has recently experienced, and
may continue to experience, growth in its geographic area of operations, the
breadth of services it provides and the number of its employees. During 1997,
the Company introduced three new services and increased its employee base by
approximately 45%. To accommodate this recent growth, compete effectively and
manage any future growth, the Company will be required to continue to implement
and improve operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, and manage its
work force, the failure of any of which could have a material adverse effect on
the Company's operating results or financial condition.
Uncertainty of Acquisitions. The Company's strategy has included and
will continue to include growth through acquisitions. There can be no assurance
that the Company will be able to successfully identify, complete or integrate
any acquisition. In addition, there can be no assurance that any future
acquisition will not have a material adverse effect upon the Company's operating
results or financial condition, particularly during the period in which the
operations of the acquired business are being integrated into the Company.
Furthermore, the Company's ability to make acquisitions may depend upon its
ability to obtain financing, and there can be no assurance that financing will
be available to the Company on acceptable terms, or at all.
9
<PAGE> 10
Competition. The market for aesthetic elective services is highly
competitive due to: (i) low barriers to entry, (ii) low capital requirements,
and (iii) high profitability. Currently, the Company believes its competition is
primarily comprised of small, locally based equipment rental companies.
Competition in the provision of medical surgical services may also increase
because these services are becoming more accepted by physicians, patients and
third-party payors and because the medical equipment used in providing such
services is readily available from various sources. The Company competes with
companies that offer medical equipment to physicians' offices on either a rental
or a fee-for-services basis, and with hospitals and surgery centers that provide
comparable surgical services. The Company also competes with other providers in
the health care industry for access to technology, relationships with
third-party payors and relationships with physicians. Any of these competitors
may have greater financial and other resources than the Company. The health care
industry is highly competitive and is subject to continuing changes in the
manner in which health care services are provided and the manner in which
providers are selected and paid. There can be no assurance that competition will
not adversely affect the Company's operating results or its ability to maintain
or increase net revenues.
Reimbursement Risk. The Company generally receives payment directly
from the patient or physician for its aesthetic elective services. In those
instances where payment is not received at the time of the service, the Company
will invoice the responsible party. If the invoice is not paid, the account is
subject to write-off as an uncollectible account. The Company relies almost
exclusively on third party payors for payment for its medical surgical services.
If the claim is invoiced to a noncontracted payor, (i.e., a noncontracted
managed care plan or an indemnity plan), the claim is subject to denial by the
payor. Denial of reimbursement may occur, among other reasons, because of the
claim examiner's lack of understanding regarding the Company's services or the
lack of a contractual arrangement with a managed care company. To the extent any
third party payor ultimately fails to recognize or accept Company's services as
being reimbursable, the Company may not be able to collect fees for its
services. In addition, the health care industry is experiencing a trend toward
cost containment, and third-party payors are seeking to reduce the cost and
control the utilization of health care services and to negotiate reduced payment
schedules with service providers. Reduced payment schedules could result in
lower revenues for the Company. There can be no assurance that the Company will
be able to negotiate satisfactory arrangements with managed care organizations
or other third-party payors under such conditions, or at all. See "Business -
Business Strategy - Continuing the Development of Managed Care Contracts."
Dependence on Key Personnel. The Company's future performance is
substantially dependent upon the continued services of its senior management and
other key personnel. Because the Company has a relatively small number of
employees, its dependence on retaining its employees is particularly
significant. The Company's success will depend, in part, on its ability to
attract and retain qualified management and professional personnel. In addition,
there can be no assurance that the Company's current employees will continue to
work for the Company. The loss of the services of one or more of the Company's
key employees could adversely affect the Company's operating results or
financial condition. Further, the Company's growth in revenue has resulted, to a
significant degree, from the hiring and training of new field personnel. The
Company's continued growth will depend, in part, on its ability to attract and
retrain high quality field and other personnel. The Company may need to grant
additional stock options to key employees and to provide similar or other forms
of incentive compensation to attract and retain key personnel.
Fluctuations in Quarterly Results; Volatility of Stock Price. The
Company's quarterly revenues and operating results have varied significantly in
the past and may continue to do so in the future. As a result, the Company's
stock price may by subject to significant volatility, particularly on a
quarterly basis. Quarterly revenues and operating results will depend upon,
among other factors: (i) seasonal demand for the Company's services, (ii) the
timing of new service introductions by the Company, (iii) the timing of
regulatory and third-party reimbursement approvals, (iv) the timing of
acquisitions or entry into new markets, and (v) the timing of expenditures for
medical equipment. A shortfall in revenues from anticipated levels, changes in
general conditions in the economy or the health care industry, or other
developments affecting the Company or its competitors, could cause the market of
the Common Stock to fluctuate substantially.
Regulation of and Change in Health Care Industry. The health care
industry is subject to extensive federal and state regulation. The Company's
services generally are not directly subject to health care rules or regulations,
although such rules and regulations apply to the equipment provided to
physicians by the Company and to the medical personnel utilizing the Company's
services and products and therefore may indirectly affect the Company's
business. In addition, promulgation of new laws and regulations, or changes in
or reinterpretations of existing laws or regulations, may directly or indirectly
affect the Company's business, operating results or financial condition.
Further, the Company's services involve the handling of chemical and biological
substances, thereby subjecting the Company to certain labor and environmental
regulations. See - "Hazardous Materials." There can be no assurance that a
review of the Company's operations by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company.
The manufacturers of medical equipment utilized by the Company are
subject to extensive regulation by the FDA. Failure of such manufacturers to
obtain FDA approval for new technologies which the Company wishes to offer may
adversely affect the Company's plans for future expansion. In addition, failure
of medical equipment manufacturers to comply with FDA regulations could
10
<PAGE> 11
result in the loss of approval by the FDA of medical equipment utilized by the
Company, which could adversely affect the Company's operating results or
financial condition.
Subject to certain statutory exceptions, physicians who have a
financial relationship with an entity providing health services are prohibited
by federal law (the "Stark II Legislation") from referring or admitting patients
to that entity for the furnishing of certain designated services reimbursable
under Medicare or Medicaid, as well as certain other federally assisted state
health care programs. Possible sanctions for violations for the Stark II
Legislation include civil monetary penalties, exclusion from the Medicare and
Medicaid programs, and forfeiture of all amounts collected in violation of such
prohibition. Federal law generally prohibits certain activities under Medicare
and Medicaid programs (the "Fraud and Abuse Statutes"). Violations of
anti-kickback legislation are felonies punishable by monetary fines, civil and
criminal penalties and exclusion from participation in Medicare or Medicaid
programs. Several states in which the Company operates prohibit the corporate
practice of medicine except by professional medical corporations or
associations. Several states in which the Company operates also prohibit
physicians from splitting fees with non-physicians. Although the Company has
attempted to structure its business relations with physician groups to comply
with the Stark II Legislation, the Fraud and Abuse Statutes, and the state
corporate-practice-of-medicine and fee-splitting laws, there can be no assurance
that such laws will ultimately be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future which could have a material adverse effect on the Company's operating
results or financial condition.
While the Company does not currently derive any of its net revenues
from Medicare or Medicaid programs, and therefore it is not subject to such
federal legislation, there can be no assurance in the future that : (i) future
legislation may not be expanded to include health care services other than those
subject to Medicare or Medicaid reimbursement, (ii) the Company will not derive
net revenues from Medicare or Medicaid reimbursements, or (iii) managed care
providers with which the Company has contracts will not contract with Medicare
or Medicaid.
Certain of the states in which the Company currently operates or may
operate in the future have laws which prohibit physicians who have financial
relationships with an entity that provides health care services from referring
patients to that entity and that prohibit arrangements which provide
remuneration to physicians in order to induce the referral of business. Possible
sanctions for violation of these laws include civil monetary penalties,
forfeiture of amounts collected in violation of such laws and the requirement
that the Company discontinue the prohibited activity. Although the Company
believes it has structured its existing business relations with physician groups
to comply with these laws, there can be no assurance that such laws will be
interpreted in a manner consistent with the Company's practices. Such laws in
states where the Company may conduct operations in the future could prohibit the
Company from structuring its business relations with physician groups in the
same manner in which it conducts its current operations. Accordingly, such
prohibitions could adversely affect the future growth of the Company.
In addition, there can be no assurance that the regulatory environment
in which the Company operates will not change significantly in the future, which
change could adversely affect the Company's operations, financial condition,
business opportunities or future expansion. As consolidation among physician
provider groups continues and provider networks continue to be created,
purchasing decisions may shift to persons with whom the Company has not had
prior contact. There can be no assurance that the Company will be able to
maintain its physician, payor or manufacturer relationships under such
circumstances. See - "Risk of Acquiring Advanced Technology," - "Competition"
and "Business - Government Regulation."
ITEM 2. PROPERTIES
The Company leases 18 offices within its service area that range in
size from approximately 200 to 10,000 square feet under agreements with varying
terms and renewal options, and annual rents ranging from $2,700 to $134,487. The
Company currently leases approximately 10,000 square feet for its corporate
executive offices located in Irving, Texas. The lease agreement for its
corporate headquarters stipulates annual rental payments that increase from
$124,525 to $134,487 during the term of the lease, which expires in 2002.
ITEM 3. LEGAL PROCEEDINGS
As of 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.
11
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock began trading on the Nasdaq National Market on October
11, 1996 under the symbol "MAII". The initial public offering price was $11.00
per share. The high and low closing sales prices (excluding retail markup,
markdowns and commissions) for the period October 11, 1996 to December 31, 1997
are as follows:
High Low
---- ---
Fourth Quarter - October 11, 1996 to $12.50 $10.75
December 31, 1996
Fiscal year ended December 31, 1997
First Quarter $16.25 $11.00
Second Quarter 10.00 3.38
Third Quarter 4.00 3.38
Fourth Quarter 5.00 3.43
As of March 23, 1998, approximately 6,250,104 shares of Common Stock
were outstanding and held by approximately 106 holders of record.
The Company did not pay cash dividends on its Common Stock during 1996
and 1997. The current policy of the Company's Board of Directors is to retain
any future earnings to provide funds for the operation and expansion of the
Company's business. Consequently, the Company does not anticipate that cash
dividends will be paid on the Company's common stock in the foreseeable future.
On January 21, 1997, the Company issued 22,174 shares of Common Stock as
partial consideration for the purchase of substantially all the assets of Stone
Treatment Centers of New England, Inc. ("Stone Treatment"). These securities
were issued to the shareholders of Stone Treatment in a transaction exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
In March of 1997, the Company sold the following amounts of shares of
Common Stock, at $1.28 per share, to the following persons: 23,415 shares to
Columbia General Corporation ("CGC") pursuant to a warrant granted CGC on
August 18, 1993; 2,810 shares to Bob Mathews pursuant to a warrant granted Mr.
Mathews on October 18, 1993; 5,151 shares to Tom Montgomery pursuant to
warrants granted Mr. Montgomery in May and August of 1994; and 2,342 shares to
Shelly Burks pursuant to a warrant granted Ms. Burks on May 31, 1994. These
transactions were exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended.
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
December 31, 1997, the ending date of the reporting period, the approximate
amount of net offering proceeds used were $8.6 million, which were used as
follows: $3.5 million used to pay off in full the NationsBank debt, $4.5 million
used to purchase medical equipment and $600,000 to acquire other companies.
See "Management Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for the periods and at the dates indicated. The Company's statement
of operations data for each of the years in the five year period ended December
31, 1997 and its balance sheet data as of December 31, 1993, 1994,1995, 1996,
and 1997 are derived from the Company's financial statements which have been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes
included elsewhere herein.
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<PAGE> 13
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net Revenues $3,720 $5,262 $11,177 $17,350 $18,821
Costs and Expenses:
Salaries and benefits 1,643 2,005 3,721 5,137 8,353
Selling, general, and administrative 1,214 1,817 3,620 5,510 7,857
Depreciation and amortization 333 293 719 1,595 3,152
Provision for uncollectible accounts 551 781 1,885 3,408 3,871
------ ------ ------- ------- -------
Total costs and expenses 3,741 4,896 9,945 15,650 23,233
------ ------ ------- ------- -------
Operating income (loss) (21) 365 1,232 1,700 (4,412)
Other (income) expense:
Interest income and other, net (2) (6) 12 (172) (778)
Interest expense 158 179 247 270 111
------ ------ ------- ------- -------
Income (loss) before income taxes (177) 192 973 1,602 (3,745)
Income tax expense (benefit) (26) - 395 683 (848)
------ ------ ------- ------- -------
Net income (loss) $(150) $192 $578 $919 ($2,897)
====== ====== ======= ======= =======
Net income (loss) applicable to common stock $(225) $117 $311 $832 ($2,897)
====== ====== ======= ======= =======
Earnings (loss) per share (basic) $(.13) $.06 $.15 $.26 $(.48)
====== ====== ======= ======= =======
Earnings (loss) per share (diluted) $(.13) $.06 $.11 $.26 $(.48)
====== ====== ======= ======= =======
Weighted average number of common shares
outstanding (basic) 1,789 1,844 2,117 3,215 6,061
Weighted average number of common shares
outstanding (diluted) 2,523 3,290 3,690 3,559 6,293
Dividends declared on convertible preferred stock $75 $75 $87 $87 $0
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $101 $109 $1,409 $20,537 $14,903
Working capital........................... 121 126 1,913 22,094 17,575
Total assets ............................. 1,544 2,698 6,443 30,708 26,505
Total debt and capital lease
obligations............................. 1,101 1,566 2,354 355 489
Convertible preferred stock............... 1 1 2 - -
Retained earnings (deficit)............... (1,297) (1,105) (526) 393 (2,504)
Total shareholders' equity (deficit)...... (154) 123 2,431 26,085 23,678
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company commenced operations in Oklahoma in August 1989 by
providing medical surgical services to gynecologists in their offices. The
Company's initial focus was to develop contracts with managed care organizations
and other third-party payors and to expand into new markets. By the end of 1991,
the Company had operations in 14 states. The Company continued to expand its
range of services, and introduced during 1993 its second business line by
offering aesthetic elective services. Currently, the Company provides medical
surgical and/or aesthetic elective services in 40 states to a network of
approximately 3,000 physicians.
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<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues....................................... 100.0% 100.0% 100.0% 100.0%
Salaries and benefits expense...................... 38.1 33.3 29.6 44.4
Selling, general and administrative expense........ 34.5 32.4 31.8 41.7
Depreciation and amortization...................... 5.6 6.4 9.2 16.7
Provision for uncollectible accounts............... 14.8 16.9 19.6 20.6
Operating income (loss)............................ 6.9 11.0 9.8 (23.4)
Interest expense................................... 3.3 2.3 1.6 0.6
Income tax expense (benefit)....................... - 3.5 3.9 (4.5)
Net income (loss).................................. 3.7 5.2 5.3 (15.4)
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Revenues. Net revenues increased from $17.4 million for the year
ended December 31, 1996, to $18.8 million for the year ended December 31, 1997,
an increase of $1.4 million or 8%. This increase was primarily attributable to
growth in procedure volume, which increased from 68,585 for the year ended
December 31, 1996, to 85,819 for the year ended December 31, 1997, an increase
of 17,234 or 25%. Medical surgical procedures remained flat at 27,010 for the
year ended December 31, 1997 compared to 26,769 for the year ended December 31,
1996. Aesthetic elective procedures increased from 41,816 for the year ended
December 31, 1996, to 58,809 for the year ended December 31, 1997, an increase
of 16,993 or 41%.
The average net revenue per case decreased from $253 for the year ended
December 31, 1996, to $219 per case for the year ended December 31, 1997, a
decrease of $34 or 13%. This decrease was attributable to a change in case mix
to include a larger percentage of aesthetic elective procedures. The average net
revenue per case for aesthetic elective procedures was $191 during 1997,
compared to average net revenue per case for medical surgical procedures of $261
during 1997.
Salaries and Benefits Expense. Salaries and benefits expense increased
from $5.1 million for the year ended December 31, 1996, to $8.4 million for the
year ended December 31, 1997, an increase of $3.3 million or 65%. This increase
was primarily attributable to an increase in the total number of employees from
118 as of December 31, 1996, to 171 as of December 31, 1997, an increase of
45%.The Company added scheduling coordinators and preverification personnel
during the first quarter of 1997 as a continuation of its efforts to reduce
provisions for uncollectible accounts. In addition, each medical surgical
district added a district operations manager to relieve the district manager of
operational responsibility. Furthermore, the Company incurred a $250,000
nonrecurring charge during the second quarter of 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. Finally, 25 technicians were added in the first
quarter to accommodate growth anticipated, but not realized, from the national
rollout of the Softlight laser for hair removal. Salaries and benefits expense
as a percentage of net revenues increased from 29.6% to 44.4% due to the reasons
discussed above.
Selling, General and Administration. Selling, general and
administrative expense increased from $5.5 million for the year ended December
31, 1996, to $7.9 million for the year ended December 31, 1997, an increase of
$2.4 million or 44%. The following items were attributable to the increase in
selling, general, and administrative expenses:
Vehicle expense increased from $1.1 million for the year ended December
31, 1996 to $1.7 million for the year ended December 31, 1997, an increase of
$600,000 or 55%. This increase was primarily due to an increase in field
personnel from 77 as of December 31, 1996 to 109 as of December 31, 1997, an
increase of 32 or 42%.
Repair and maintenance expense increased from $610,000 for the year
ended December 31, 1996 to $966,000 for the year ended December 31, 1997, an
increase of $356,000 or 58%. This increase was due primarily to the addition of
annual service contracts on medical equipment that was previously covered under
manufacturers warranty.
Communications expense increased from $584,000 for the year ended
December 31, 1996 to $944,000 for the year ended December 31, 1997, an increase
of $360,000 or 62%. This increase was primarily due to an increase in field
personnel and communication costs related to the Company's wide area network
linking its district's offices to its corporate office and information database.
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<PAGE> 15
Professional fees increased from $288,000 for the year ended December
31, 1996, to $956,000 for the year ended December 31, 1997, an increase of
$668,000 or 232%. This increase was primarily due to the additional costs
related to being a publicly held company. Furthermore, the Company incurred a
$250,000 nonrecurring charge during the second quarter of 1997 which included
professional fees related to accounts receivable and managed care initiatives.
Occupancy costs increased from $156,000 for the year ended December 31,
1996, to $327,000 for the year ended December 31, 1997, an increase of $171,000
or 110%. This increase was primarily attributable to field offices added in
January of 1997.
Depreciation and Amortization. Depreciation and amortization increased
from $1.6 million for the year ended December 31, 1996, to $3.2 million for the
year ended December 31, 1997, an increase of $1.6 million or 100%, resulting
from the addition of approximately $3.3 million in new medical equipment during
the year ended December 31, 1997.
Provision for Uncollectible Accounts. Provision for uncollectible
accounts increased from $3.4 million for the year ended December 31, 1996, to
$3.9 million for the year ended December 31, 1997, an increase of $500,000 or
15%. As a percentage of net revenue, provision for uncollectible accounts
increased from 19.6% for the year ended December 31,1996 to 20.6% for the year
ended December 31, 1997. During the second quarter of 1997, the Company recorded
a $1.2 million nonrecurring charge to increase reserves for uncollectible
accounts. These additional reserves were necessary to offset a significant shift
in the payment trends experienced from certain 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 14.2% for the twelve months ended December 31, 1997. This decrease is
primarily attributable to the Company's new processes including scheduling,
preregistration, and preverification.
Operating Income (Loss). As a result of the items discussed above,
including but not limited to the additional infrastructure added for
anticipated, but not realized, growth, operating income decreased from $1.7
million for the year ended December 31, 1996, to a loss of $4.4 million for the
year ended December 31, 1997, a decrease of $6.1 million.
Interest Income & Other, Net. Interest income and other, net increased
from $172,000 for the year ended December 31, 1996, to $778,000 for the year
ended December 31, 1997, an increase of $606,000 or 352%. This increase was due
mainly to interest being earned on the initial public offering proceeds for the
full calendar year of 1997.
Income Tax Provision. Income tax provision decreased from $683,000 for
the year ended December 31, 1996 to a benefit of $848,000 for the year ended
December 31, 1997, a decrease of $1.5 million. The Company's effective tax rate
decreased from 42.6% for the year ended December 31, 1996, to a benefit of 22.6%
for the year ended December 31, 1997 (See Note 8 to the Notes to Consolidated
Financial Statements)
Net Income(Loss). As a result of the items discussed above, the
Company's net income decreased from $919,000 for the year ended December 31,
1996, to a loss of $2.9 million for the year ended December 31, 1997, a decrease
of $3.8 million. As a percentage of net revenues, net income decreased from 5.3%
for the year ended December 31, 1996, to a loss of 15.4% for the year ended
December 31, 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Revenues. Net revenues increased from $11.2 million for the year
ended December 31, 1995, to $17.4 million for the year ended December 31, 1996,
an increase of $6.2 million or 55%. This increase was primarily attributable to
growth in procedure volume, which increased from 39,640 for the year ended
December 31, 1995, to 68,585 for the year ended December 31, 1996, an increase
of 28,945 or 73%. Medical surgical procedures increased from 19,509 for the year
ended December 31, 1995, to 26,769 for the year ended December 31, 1996, an
increase of 7,260 or 37%, which contributed to 25% of the total increase in
procedure volume. Aesthetic elective procedures increased from 20,131 for the
year ended December 31, 1995, to 41,816 for the year ended December 31, 1996, an
increase of 21,685 or 108%, which contributed to 75% of the total increase in
procedure volume.
The average net revenue per case decreased from $282 for the year ended
December 31, 1995, to $253 per case for the year ended December 31, 1996, a
decrease of $29 or 10%. This decrease was attributable to a change in case mix
to include a larger percentage of aesthetic elective procedures. The average net
revenue per case for aesthetic elective procedures was $192 during 1996,
compared to an average net revenue per case for medical surgical procedures of
$335 during 1996.
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<PAGE> 16
Salaries and Benefits Expense. Salaries and benefits expense increased
from $3.7 million for the year ended December 31, 1995, to $5.1 million for the
year ended December 31, 1996, an increase of $1.4 million or 38%. This increase
was caused by growth in the Company's procedure volume, the introduction of two
new procedures, and an increase in the total number of employees from 81 as of
December 31, 1995, to 118 at December 31, 1996, an increase of 46%. Salaries and
benefits expense as a percentage of net revenues decreased from 33.3% to 29.6%
due to increases in net revenues exceeding the increases in salaries and
benefits expense.
Selling, General, and Administration. Selling, general and
administrative expense increased from $3.6 million for the year ended December
31, 1995, to $5.5 million for the year ended December 31, 1996, an increase of
$1.9 million or 53%. A portion of the increase was due to an increase in
operating lease expense from $599,000 for the year ended December 31, 1995 to
$1,093,000 for the year ended December 31, 1996, an increase of $494,000 or 82%,
which was attributable to a laser manufacturer revenue sharing arrangement.
There were 13 such shared lasers during the majority of the 1996 calendar year
compared to 9 such shared lasers at the end of December 31, 1995.
Vehicle expense increased from $641,000 for the year ended December 31,
1995 to $1,127,000 for the year ended December 31, 1996, an increase of $486,000
or 76%. This increase was primarily due to a slight increase in field personnel
and an upgrade in the vans that are used to deliver the equipment to the
physician's offices.
Repair and maintenance expense increased from $161,000 for the year
ended December 31, 1995 to $610,000 for the year ended December 31, 1996, an
increase of $449,000 or 279%. This increase was due primarily to annual service
contracts on pulsed dye lasers. Selling, general and administrative expense as a
percentage of net revenues decreased slightly from 32.4% for the year ended
December 31, 1995, to 31.8% for the year ended December 31, 1996, due to
increases in net revenues exceeding the increases in selling, general, and
administrative expense.
Depreciation and Amortization. Depreciation and amortization increased
from $719,000 for the year ended December 31, 1995, to $1,595,000 for the year
ended December 31, 1996, an increase of $876,000 or 122%, resulting from the
addition of approximately $3.2 million in new medical equipment during the year
ended December 31, 1996.
Provision for Uncollectible Accounts. Provision for uncollectible
accounts increased from $1.9 million for the year ended December 31, 1995, to
$3.4 million for the year ended December 31, 1996, an increase of $1.5 million
or 79%. As a percentage of net revenue, provision for uncollectible accounts
increased from 16.9% for the year ended December 31,1995 to 19.6% for the year
ended December 31, 1996. This increase was primarily attributable to the Company
expanding its offering during 1996 to include more procedures with
non-contracted third party payors in an effort to establish relationships with
such payors.
Operating Income . Operating income increased from $1.2 million for the
year ended December 31, 1995, to $1.7 million for the year ended December 31,
1996, an increase of $500,000 or 42%. As a percentage of net revenues, operating
income decreased from 11.0% for the year ended December 31, 1995, to 9.8% for
the year ended December 31, 1996. This slight decrease was primarily the result
of the increase in the provision for uncollectible accounts as a percentage of
net revenues.
Interest Income & Other, Net. Interest income and other, net increased
from a $12,000 net expense for the year ended December 31, 1995, to a $172,000
income for the year ended December 31, 1996, an increase of $184,000. This
increase was due to interest being earned on the initial public offering
proceeds during the fourth quarter of 1996.
Income Tax Provision. Income tax provision increased from $395,000 for
the year ended December 31, 1995 to $683,000 for the year ended December 31,
1996, an increase of $288,000 or 73%. The Company's effective tax rate increased
from 40.6% for the year ended December 31, 1995, to 42.6% for the year ended
December 31, 1996 (See Note 8 to the Notes to Consolidated Financial
Statements).
Net Income. As a result of the items discussed above, the Company's net
income increased from $578,000 for the year ended December 31, 1995, to $919,000
for the year ended December 31, 1996, an increase of $341,000 or 59%. As a
percentage of net revenues, net income increased slightly from 5.2% for the year
ended December 31, 1995, to 5.3% for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through 1993, the Company's operating expenses
significantly exceeded its net revenues, resulting in an accumulated retained
deficit of approximately $1.3 million as of December 31, 1993. From 1994 until
March 31, 1997, the Company recorded positive earnings, which resulted in a
retained earnings of $431,290 as of March 31, 1997. As of December 31, 1997, the
Company has an accumulated retained deficit of $2.5 million, due to losses
incurred during 1997. Until October 1996, the Company funded its operations
primarily through the private placement of equity securities, bank borrowings
and cash provided by operations. Prior to its initial public offering, which was
completed on October 11, 1996, the majority of the capital raised by the Company
had been raised from
16
<PAGE> 17
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 Nations Bank 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 Company's initial public
offering.
Net cash provided by (used in) operating activities were $917,000, $2.5
million, and ($1.6 million) for the years ended December 31, 1995, 1996 and
1997, respectively. For its investing activities, the Company consumed $1.9
million, $3.8 million, and $3.8 million for the years ended December 31, 1995,
1996 and 1997, respectively, primarily for the purchase of medical equipment and
acquisitions of other companies. Capital expenditures were $1.9 million, $3.2
million, and $3.3 million for the years ended December 31, 1995, 1996 and 1997,
respectively. Net cash provided by (used in) financing activities were $2.3
million, $20.4 million, and ($197,000) for the years ended December 31, 1995,
1996 and 1997, respectively. The cash provided from financing activities in 1995
was primarily provided by the proceeds from bank borrowings and the sale of
362,500 shares of Series B Convertible Preferred Stock pursuant to the Series B
Stock Purchase Agreement, dated November 17, 1995, between the Company and
various investors. The cash provided from financing activities in 1996 is
primarily provided by the net proceeds from the Company's initial public
offering of 2.3 million shares of Common Stock in October of 1996.
The Company estimates that its total capital expenditures will be
approximately $1.6 million in 1998. The Company believes that the net proceeds
from the IPO and cash provided by operating activities will be sufficient to
fund its operations through 1999. However, there can be no assurance that the
Company will not require additional financing in the near future, and that if
needed, it will be available on terms satisfactory to the Company, or at all.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
information systems and applications to ensure the Company is year 2000
compliant. The financial impact to the Company has not been and is not
anticipated to be material to its financial position or results of operations in
any given year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Report of Independent Accountants ................................. 18
Consolidated Balance Sheets as of December 31, 1996 and 1997 ...... 19
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 ................................ 20
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997 .................... 21
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 ................................ 22
Consolidated Notes to Financial Statements ........................ 23
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1995, 1996 and 1997 .................... 36
</TABLE>
All other schedules are not submitted because they are not applicable
or not required or because the information is included in the consolidated
financial statements.
17
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Medical Alliance, Inc. and Subsidiaries:
We have audited the consolidated financial statements and the financial
statement schedule of Medical Alliance, Inc. and Subsidiaries (the "Company")
listed in the index on page 17 of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Medical Alliance, Inc. and Subsidiaries as of December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 10, 1998
18
<PAGE> 19
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 20,505,787 $ 14,902,578
Restricted cash ................................................. 31,000 0
Accounts receivable, less allowance for
doubtful accounts
of $1,859,621 and $2,554,705, respectively ...................... 4,414,860 2,715,446
Prepaid expenses and other current assets ....................... 461,743 1,290,038
Refundable federal and state income taxes ....................... 0 1,253,910
Deferred income taxes ........................................... 590,195 0
------------ ------------
Total current assets ....................................... 26,003,585 20,161,972
Property and equipment, net .......................................... 4,550,183 5,473,485
Other assets:
Intangible assets, net of amortization of
approximately
$59,080 and $159,346, respectively .............................. 154,151 869,080
------------ ------------
Total assets ............................................... $ 30,707,919 $ 26,504,537
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 2,447,108 $ 976,150
Accrued expenses ................................................ 983,905 1,197,785
Capital lease obligations ....................................... 296,717 248,650
Deferred revenue ................................................ 181,662 163,976
------------ ------------
Total current liabilities .................................. 3,909,392 2,586,561
Capital lease obligations, net of current maturities ................. 58,777 239,929
Deferred income taxes ................................................ 654,837 --
------------ ------------
Total liabilities .......................................... 4,623,006 2,826,490
------------ ------------
Commitments (Note 9)
Stockholders' Equity:
Common stock, $0.002 par value, 30,000,000 shares
authorized and 5,965,744 and 6,157,300 shares issued and
outstanding, respectively ....................................... 11,948 12,331
Capital in excess of par value ....................................... 25,746,292 26,236,053
Retained earnings (accumulated deficit) .............................. 392,617 (2,504,393)
Treasury stock at cost, 25,703 shares ................................ (65,944) (65,944)
------------ ------------
Total stockholders' equity ................................. 26,084,913 23,678,047
------------ ------------
Total liabilities and stockholders' equity ................. $ 30,707,919 $ 26,504,537
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
19
<PAGE> 20
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenue ................................... $ 11,177,138 $ 17,350,384 $ 18,821,125
------------ ------------ ------------
Costs and expenses:
Salaries and benefits .................. 3,721,169 5,136,732 8,352,623
Selling, general and administrative .... 3,620,394 5,510,614 7,857,136
Depreciation and amortization .......... 718,767 1,595,101 3,152,491
Provision for uncollectible accounts ... 1,884,709 3,408,360 3,870,925
------------ ------------ ------------
Total costs and expenses ............... 9,945,039 15,650,807 23,233,175
------------ ------------ ------------
Operating income (loss) ....................... 1,232,099 1,699,577 (4,412,050)
------------ ------------ ------------
Other (income) expense:
Interest income and other, net ......... 11,953 (172,195) (778,351)
Interest expense ....................... 246,655 269,532 111,578
------------ ------------ ------------
Total other expense ............. 258,608 97,337 (666,773)
------------ ------------ ------------
Income (loss) before income taxes ............. 973,491 1,602,240 (3,745,277)
Provision (benefit) for income taxes .......... 395,342 683,240 (848,267)
------------ ------------ ------------
Net income (loss) ............................. 578,149 919,000 ($ 2,897,010)
------------ ------------ ------------
Less preferred stock dividend ................. (87,000) (87,000) 0
Less charge for cancellation of put
feature described in Note 6 ............ (180,000) -- --
------------ ------------ ------------
Net income (loss) applicable to
common stock ........................... $ 311,149 $ 832,000 ($ 2,897,010)
============ ============ ============
Net income (loss) per share (basic) ........... $ 0.15 $ 0.26 $ (0.48)
============ ============ ============
Net income (loss) per share (diluted) ......... $ 0.11 $ 0.26 $ (0.48)
============ ============ ============
Weighted average number of common shares
outstanding (in thousands) (basic) ............ 2,117 3,215 6,061
Weighted average number of common shares
outstanding (in thousands) (diluted) .......... 3,690 3,559 6,293
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
20
<PAGE> 21
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred
Stock Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........................ 435,000 $870 1,894,024 $ 3,788
Issuance of Preferred stock...................... 362,500 $725
for debt payable to Satana
Corporation................................... 374,640 749
Charge for cancellation of put feature
described in Note 6...........................
Options exercised................................ 60,723 121
Issuance of common stock
related to acquisition........................ 10,034 20
Series A preferred stock dividend................
Net income.......................................
------- --------- --------- ----------- --------- --------
Balance at December 31, 1995........................ 435,000 $870 362,500 $725 2,339,421 $ 4,678
Issuance of common stock......................... 4,293 9
Options exercised................................ 85,605 171
Series A preferred stock dividend................
Treasury stock purchase.......................... (8,473)
Series A and Series B preferred stock
converted into common stock................... (435,000) (870) (362,500) (725) 1,244,898 2,490
Initial Public Offering of common
stock, net.................................... 2,300,000 4,600
-------- --------- --------- ----------- --------- --------
Net income.......................................
-------- --------- --------- ----------- --------- --------
Balance at December 31, 1996........................ 0 $ 0 0 $ 0 5,965,744 $ 11,948
======== ========= ========= =========== ========= ========
Issuance of common stock......................... 22,174 44
Options and warrants exercised................... 169,382 339
Net loss.........................................
-------- --------- --------- ----------- --------- ---------
Balance at December 31, 1997........................ 0 $ 0 0 $ 0 6,157,300 $ 12,331
======== ========= ========= =========== ========= =========
<CAPTION>
Capital In Retained Total
Excess of Earnings Treasury Stockholders'
Par Value (Deficit) Stock Equity
--------- --------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........................ $ 1,232,257 ($1,104,532) ($8,950) $ 123,433
Issuance of Preferred stock...................... 1,439,207 1,439,932
Exercise of warrant in exchange for debt
payable to Satana Corporation................. 479,251 480,000
Charge for cancellation of put feature
described in Note 6........................... (180,000) (180,000)
Options exercised................................ 50,179 50,300
Issuance of common stock
related to acquisition........................ 25,692 25,712
Series A preferred stock dividend................ (87,000) (87,000)
Net income....................................... 578,149 578,149
----------- ----------- ------- ------------
Balance at December 31, 1995........................ $ 2,959,586 ($526,383) ($8,950) $ 2,430,526
Issuance of common stock......................... 10,991 11,000
Options exercised................................ 90,370 90,541
Series A preferred stock dividend................ (87,000) (87,000)
Treasury stock purchase.......................... (56,994) (56,994)
Series A and Series B preferred stock
converted into common stock................... (895) 0
Initial Public Offering of common
stock, net.................................... 22,773,240 22,777,840
Net income....................................... 919,000 919,000
----------- ---------- -------- ------------
Balance at December 31, 1996........................ $25,746,292 $ 392,617 ($65,944) $ 26,084,913
=========== ========== ======== ============
Issuance of common stock......................... 252,183 252,227
Options and warrants exercised................... 237,578 237,917
Net loss......................................... (2,897,010) (2,897,010)
----------- ---------- -------- ------------
Balance at December 31, 1997........................ $26,236,053 ($2,504,393) ($65,944) $ 23,678,047
=========== ========== ======== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 22
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
----------- ------------ -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 578,149 $ 919,000 ($2,897,010)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Loss on joint venture.................................... -- 38,776 56,540
Provision for uncollectible accounts..................... 1,884,709 3,408,360 3,870,925
Depreciation and amortization............................ 718,767 1,595,101 3,152,491
Deferred income taxes.................................... 382,163 (317,521) (64,642)
Changes in assets and liabilities net of effects from
acquisitions:
Accounts receivable...................................... (3,066,681) (5,254,534) (2,171,511)
Prepaid expenses and other current assets................ (105,657) (231,421) (2,021,322)
Accounts payable and accrued expenses.................... 577,794 2,274,315 (1,518,457)
Deferred revenue.......................................... (6,570) 22,325 (17,686)
Other..................................................... (45,589) 6,102 (2,773)
---------- ----------- ----------
Net cash provided by (used in) operating activities 917,085 2,460,503 (1,613,445)
---------- ----------- ----------
Cash flows from investing activities:
Capital expenditures...................................... (1,850,112) (3,236,750) (3,301,515)
Net proceeds from sale of equipment -- -- 83,753
Payment for acquisitions................................. (35,000) (518,840) (605,978)
Change in restricted cash................................ (7,819) (8,146) 31,000
---------- ----------- ----------
Net cash used in investing activities.................. (1,892,931) (3,763,736) (3,792,740)
---------- ----------- ----------
Cash flows from financing activities:
Payment of dividends on preferred stock.................. (122,000) (87,000) --
Repayment of capital lease obligations................... (244,543) (317,989) (444,542)
Repayment of long-term debt............................... (1,161,190) (3,901,521) --
Proceeds from issuance of preferred stock................. 1,439,932 -- --
Proceeds from issuance of common stock................... 50,300 22,822,387 237,917
Proceeds from issuance of long-term debt................. 2,293,819 2,091,035 --
Other.................................................... 11,526 (183,546) 9,601
---------- -----------
Net cash provided by (used in) financing activities.... 2,267,844 20,423,366 (197,024)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........... 1,291,998 19,120,133 (5,603,209)
Cash and cash equivalents at beginning of year................. 93,656 1,385,654 20,505,787
---------- ----------- -----------
Cash and cash equivalents at end of year....................... $1,385,654 $20,505,787 $14,902,578
========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid............................................ $ 247,990 $ 276,090 $ 111,578
Income taxes paid........................................ 5,000 216,571 1,256,854
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations incurred....................... 186,366 130,554 --
Exercise of warrant in exchange for outstanding debt and
cancellation of put feature described in Note 6:
Common stock and capital in excess of par value........... 480,000 -- --
Debt..................................................... 300,000 -- --
The Company has acquired businesses, as follows:
Fair value of assets acquired............................ 242,765 351,198 831,082
Goodwill recorded........................................ 45,589 167,642 812,362
Less:
Fair value of common stock............................. (25,712) -- (255,000)
Cash paid.............................................. (35,000) (518,840) (605,978)
---------- ----------- -----------
Liabilities assumed...................................... $ 227,642 -- $ 782,466
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Medical Alliance, Inc. ("Medical Alliance") provides office based
surgical services which allow certain minimally invasive operative and
diagnostic procedures to be performed in the physician's office. Medical
Alliance was incorporated in Texas in 1989 and is headquartered in Irving,
Texas. Medical Alliance provides its services throughout the United States.
Medical Alliance entered into two new lines of business in 1993 through
wholly-owned subsidiaries. MAI Safety Compliance Services, Inc. provided
assistance to physician offices and other alternate site health-care facilities
to comply with O.S.H.A. standards. Physicians Marketing Services, Inc. provided
group advertising services to physicians who utilize Medical Alliance's office
based medical services.
The accompanying consolidated financial statements include the accounts
of Medical Alliance and its wholly-owned subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated.
Use of Estimates. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents -- The Company considers all investments with
initial maturities of 90 days or less at the time of purchase to be cash
equivalents. The Company maintains a significant portion of its cash balances
with one financial institution. These deposit accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to a limit of $100,000 per
account. At December 31, 1996 and December 31, 1997, the Company had
approximately $20,000,000 and $14,000,000 invested in high quality and high
investment grade instruments which mainly consist of commercial paper. As a
result of the foregoing, the Company believes that credit and market risk in
such instruments is minimal.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is provided by the straight-line method over existing useful lives
ranging from three to five years. Repairs and maintenance are charged directly
to expense as incurred. Maintenance contracts are amortized over their
respective contracted period. Upon sale or retirement of equipment the cost and
related accumulated depreciation are eliminated and the resulting gain or (loss)
is included in the consolidated statement of operations as other income
(expense).
Intangibles - Goodwill is the excess of the purchase price over the
fair value of net assets acquired and is being amortized on a straight-line
basis over three to thirty years. The carrying value of goodwill is continually
reviewed for recoverability. If the review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows, the carrying value
of the goodwill is reduced by the estimated short-fall of discounted cash flows.
Income Taxes - The Company recognizes deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in the Company's consolidated financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances, if any, are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not to be realized. Income tax expense is the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Revenue Recognition - The Company recognizes revenue in most instances
upon completion of the surgical procedures performed with the Company's
equipment. Revenue for procedures that require two or more treatments and is
collected as a global fee, is recognized in equal amounts over the course of the
treatments. Revenue is presented net of negotiated contractual discounts and
field discounts.
Deferred Revenue - The Company organizes certain training seminars for
physician utilizers. Revenues are recognized when the seminars are held.
Additionally, certain procedures require multiple treatments and revenues
received in advance are deferred until subsequent procedures are performed.
Long Lived Assets - Effective January 1, 1996 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. There was no material effect from the adoption of this
Statement.
23
<PAGE> 24
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Stock-Based Compensation - The Company has elected to account for
employee stock-based compensation as prescribed in Accounting Principles Board
(APB) No. 25 as opposed to the fair value method prescribed by (SFAS) No. 123
"Accounting for Stock-Based Compensation." However, pro forma disclosure as
prescribed by SFAS No. 123 for all such equity awards is included in these
annual financial statements.
Earnings Per Share -The Company has adopted SFAS No. 128, Earnings per
Share, which replaces the presentation of "Primary" earnings per share with
"Basic" earnings per share and the presentation of "Fully Diluted" earnings per
share with "Diluted" earnings per share. Prior periods have been restated to
reflect the change in presentation.
Basic earnings per share have been computed by dividing net income
applicable to common stock by the weighted average of shares of common stock
outstanding. Diluted earnings per share have been computed by dividing net
income by the weighted average number of common shares and equivalents
outstanding.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997
---- ----
<S> <C> <C>
Medical equipment .............................................. $ 5,679,297 $ 8,231,052
Furniture and fixtures ......................................... 1,002,466 1,763,602
Transportation 64,760 117,778
Leasehold improvements.......................................... 18,352 52,961
Equipment under capital leases.................................. 976,033 1,493,533
----------- -----------
7,740,908 11,658,926
Less accumulated depreciation and amortization.................. (3,190,725) (6,185,441)
----------- -----------
Net property and equipment...................................... $ 4,550,183 $ 5,473,485
========== ===========
</TABLE>
Depreciation expense related to property and equipment was $1,522,000 and
$3,065,000 at December 31, 1996 and December 31,1997, respectively. Accumulated
amortization related to equipment under capital leases was approximately
$646,000 and $1,028,000 at December 31, 1996 and December 31, 1997,
respectively.
4. SERIES A PREFERRED STOCK AND PREFERRED STOCK WARRANTS:
On July 10, 1992 the Company entered into a Preferred Stock Purchase
Agreement (the "Series A Agreement") with Mapleleaf Capital, Ltd. The Company
issued an aggregate of 375,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") in exchange for cash of $2.00 per share. In
connection with this transaction, the Company converted subordinated debt of
certain shareholders into shares of common stock at a conversion rate of one
share of common stock for every $2.00 of subordinated debt as described above.
The shares of Series A Preferred Stock were issued with warrants attached to
purchase up to 60,000 shares of Series A Preferred Stock. The warrants were
exercisable at $2.00 per share and expired in 1995. The warrants were exercised
on July 1, 1994 at $1.67 per share which approximated the fair value for other
trades in the Company's common stock. The Series A Preferred Stock was
convertible into common stock at a ratio of 1 to 1 initially. However, upon
issuance of common stock or common stock equivalents, the conversion ratio was
subject to an anti-dilution adjustment pursuant to the Series A Agreement for
all convertible preferred stock. Effective with the stock dividend discussed in
Note 6, the conversion ratio for the Series A Preferred Stock was 1.561 to 1 as
approved by the Board of Directors. The Series A Preferred Stock was convertible
at the election of the holder at any time, or automatically with the closing of
an underwritten qualified public offering (as defined in the Series A
Agreement). If the Company had not completed a qualified public offering on or
prior to December 31, 1997, the Company had the right, but not the obligation to
repurchase all remaining shares of Series A Preferred Stock.
The Series A Preferred Stock required a $.20 per share annual dividend
commencing on June 30, 1993 which was cumulative if unpaid. Dividends paid for
the years ended December 31,1994, 1995, and 1996 were $115,000, $122,000, and
$87,000, respectively. During 1995, the Company was not in compliance with
certain covenants of the Series A Agreement, including the timely issuance of
its year-end audited consolidated financial statements, the timely issuance of a
budgeted operating forecast and a loan to an employee which exceeded the
designated limit. The Company obtained appropriate waivers from the Series A
Preferred Stock shareholder effective until January 1, 1997.
24
<PAGE> 25
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In connection with the Initial Public Offering on October 11, 1996, the
Series A Preferred Stock was converted into common stock on a 1.561 to one
basis, which was effected through a stock dividend declared on September 9,
1996.
5. SERIES B PREFERRED STOCK:
On November 17, 1995 the Company entered into a Preferred Stock Purchase
Agreement (the "Series B Agreement") with various investors. The Company issued
an aggregate of 362,500 shares of Series B Convertible Preferred Stock ("Series
B Preferred Stock") in exchange for cash of $4.00 per share.
The Series B Preferred Stock was convertible into common stock at a ratio of
1 to 1 initially. However, upon issuance of common stock or common stock
equivalents, the conversion ratio was subject to an anti-dilution adjustment
pursuant to the Series B Agreement for all convertible preferred stock.
Effective with the stock dividend discussed in Note 6, the conversion ratio for
the Series B Preferred Stock was 1.561 to 1 as approved by the Board of
Directors. The Series B Preferred Stock was convertible at the election of the
holders at any time, or automatically with the closing of an underwritten
qualified public offering (as defined in the Series B Agreement). There was no
annual dividend requirement in the Series B Agreement. During 1995, the Company
was not in compliance with certain covenants of the Series B Agreement
including, the timely issuance of its year-end audited consolidated financial
statements, the timely issuance of a budgeted operating forecast, and a loan to
an employee which exceeded the designated limit. The Company obtained
appropriate waivers from all Series B Preferred Stock shareholders effective
until January 1, 1997.
In connection with the Initial Public Offering on October 11, 1996, the
Series B Preferred Stock was converted into common stock on a 1.561 to one
basis, which was effected through a stock dividend declared on September 9,
1996.
6. COMMON STOCK AND COMMON STOCK WARRANTS:
On September 9, 1996, the Board of Directors approved and paid a 1.561 to 1
stock split, effected through a stock dividend, whereby each common stock
shareholder received an additional .561 shares for each share owned. In
connection with the split, effected through a stock dividend, common stock was
credited and capital in excess of par value was charged for the aggregate par
value of the shares that were issued. In accordance with SAB Topic 4-C, the
accompanying consolidated financial statements and related footnotes have been
retroactively adjusted to give effect for this stock split effected through a
stock dividend.
Furthermore, during the fourth quarter of 1996, the Company completed an
Initial Public Offering of its common stock in which 2,300,000 shares of common
stock were sold raising net proceeds of approximately $23 million.
A warrant to purchase up to 374,640 shares of common stock was granted to
Satana Corporation ("Satana") on January 17, 1991 as part of a subordinated note
to Satana. This warrant included a put feature, whereby the holder of the shares
acquired via the exercise of the warrant could have required the Company to
redeem the shares based on a formula price. The Satana subordinated note payable
was modified in July 1992, at which time Satana was granted a warrant to
purchase an additional 93,660 shares of the Company's common stock. During the
year ended December 31, 1994, the holder exercised the $.64 per share warrant to
purchase 93,660 shares of common stock at a price of $0.53 per share. The
Company recorded interest expense of approximately $10,000 as a result of this
transaction. During the year ended December 31, 1995, the holder exercised the
warrant to acquire 374,640 shares of common stock in exchange for the
outstanding debt owed to Satana and cancellation of the put feature. The
difference between the carrying value of the debt instrument, which approximated
fair value, and the exercise price of the warrants has been accounted for as a
reduction of capital in excess of par value and has been deducted from net
income for purposes of computing net income applicable to common stock in the
accompanying statement of operations.
A warrant to purchase up to 23,415 shares of common stock at $1.28 per share
was granted to Columbia General Corporation on August 15, 1993 as part of the
restructured note payable to MJ Capital Partners note. The warrant was exercised
in March of 1997.
A warrant to purchase 2,810 shares of common stock was granted in 1993 as
part of the restructured MJ Capital Partners note. The warrant was exercised in
March of 1997. Warrants to purchase up to 10,771 shares of common stock at $1.28
per share were granted in 1994 in connection with advances under the MJ Capital
Partners note. Warrants to purchase 3,278 shares of common stock at $1.28 per
share were canceled in 1995 as part of the early retirement of the MJ Capital
Partners note. These remaining warrants were exercised in March of 1997.A
warrant to purchase up to 15,610 shares of common stock at $2.56 per share was
granted in 1995 to a major stockholder in return for a personal guarantee of the
debt with NationsBank. This warrant vested immediately and expires in 1999.
25
<PAGE> 26
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company had reserved 49,328 shares of common stock for the conversion of
all outstanding common stock warrants as of December 31, 1996. As of December
31, 1997, 33,718 of the warrants have been exercised and 15,610 shares of common
stock are reserved for the conversion of all remaining outstanding common stock
warrants.
7. STOCK-BASED COMPENSATION PLANS
The Company sponsors the "Medical Alliance, Inc. Amended and Restated
1994 Long-Term Incentive Plan" (the "1994 Plan"), a stock-based incentive
compensation plan which is described below. The Company applies APB Opinion 25
and related Interpretations in accounting for the 1994 Plan. In 1995, the FASB
issued FASB Statement No. 123 "Accounting for Stock Based Compensation" ("SFAS
123") which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of the 1994 Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to elect these provisions of SFAS 123. However, pro forma disclosures as if the
Company adopted the cost recognition provisions of SFAS 123 in 1995 are required
by SFAS 123 and are presented below.
Under the Amended and Restated Long-Term Incentive Plan of 1994, the
Company is authorized to issue up to 1,324,290 shares of common stock pursuant
to awards granted in the form of incentive stock options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended),
non-qualified stock options, shares of restricted stock, stock appreciation
rights, performance shares, and/or stock units. Awards may be granted to
selected employees, directors, consultants or advisors of the Company or any
subsidiary. However, incentive stock options may be granted only to employees
and non-employee directors may be granted awards only in the manner and on the
terms and conditions set forth in Section 4.2 of the 1994 Plan.
EMPLOYEE STOCK OPTIONS
The 1994 Plan provides that the exercise price of any incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The stock options granted in 1995, 1996, and 1997 have varying
contractual terms, ranging from approximately two to five years, and varying
vesting dates, which range from the day immediately following the date of grant
to three years following the date of grant. In accordance with APB 25, the
Company has not recognized compensation cost for stock options granted in 1995,
1996 and 1997.
A summary of the Company's stock options as of December 31, 1995,
1996 and 1997 and the changes during the years then ended on those dates is
presented below:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
# Shares of Weighted # Shares of Weighted # Shares of Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Options Exercise Options Exercise
----------- Prices ----------- Prices ----------- Prices
------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of.............
the year ............................ 489,125 $1.19 798,983 $1.89 837,478 $2.41
Granted ................................ 679,035 2.56 219,321 3.79 508,760 7.54
Exercised............................... 60,723 .83 85,605 1.09 135,661 1.44
Forfeited............................... 308,454 2.47 95,221 2.48 239,491 8.62
Outstanding at the end of year.......... 798,983 1.89 837,478 2.41 971,086 3.35
Exercisable at end of year.............. 314,292 1.35 344,990 1.44 559,201 2.14
Weighted-average fair value of
options granted during the year........ $ .87 $1.00 $4.78
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the "minimum value" option-pricing model with the following
weighted-average assumptions for grants in 1995, 1996 and 1997, respectively:
dividend yield of 0.00% for all years; risk-free interest rates are different
for each grant and range from 5.22%, 7.80%, and 6.15%; and the expected lives of
options are different for each grant and range from 2.00 years, 4.71 years, and
3.94 years.
26
<PAGE> 27
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Wgtd. Avg. Number Wgtd. Avg.
Range of Outstanding Remaining Wgtd. Avg Exercisable Exercise
Exercise Prices at 12/31/97 Contr. Life Exercise Price at 12/31/97 Price
----------- ----------- -------------- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.28 to $4.00 828,495 2.64 $2.53 547,201 $1.58
$5.12 to $7.05 113,591 4.14 $6.21 - -
$11.50 to $13.50 29,000 6.05 $13.50 12,000 13.50
----- ------- ---- ----- ------- -----
TOTAL: 971,086 2.95 3.37 559,201 $2.14
</TABLE>
PRO FORMA NET INCOME
AND
NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996 and 1997 would approximate the pro forma
amounts below.
<TABLE>
<CAPTION>
REPORTED PRO FORMA REPORTED PRO FORMA AS REPORTED PRO FORMA
12/31/95 12/31/95 12/31/96 12/31/96 12/31/97 12/31/97
--------- --------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 Charge............................. $ 0.00 $ 43,325 $ 0.00 $ 49,773 $ 0.00 $204,567
APB25 Charge................................ 0.00 0.00 0.00 0.00 0.00 0.00
Net Income (loss)........................... 578,149 534,824 919,000 869,227 (2,897,010) (3,101,577)
Net Income Per Common Share ............... $ 0.11 $ 0.10 $ 0.26 $ 0.24 ($0.48) ($0.51)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards granted prior to 1995, and
the Company anticipates making awards in the future under its stock-based
compensation plans.
8. INCOME TAXES:
The income tax provisions consisted of the following:
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---- ---- ----
Current provisions:
<S> <C> <C> <C>
Federal ............................... $ -- $ 816,931 ($820,952)
State.................................. 13,179 183,830 37,327
--------- ---------- --------
Total current..................... 13,179 1,000,761 (783,625)
--------- ---------- --------
Deferred provisions:
Federal................................ 310,925 (261,859) (51,477)
State.................................. 71,238 (55,662) (13,165)
--------- ---------- --------
Total deferred.................... 382,163 (317,521) (64,642)
--------- ---------- --------
Total provisions
(benefit)..................... $ 395,342 $ 683,240 ($848,267)
========= ========== ========
</TABLE>
For the years ended December 31, 1995 and 1997 the Company generated
tax operating losses. The Company utilized the tax losses generated in the year
ended December 31, 1995 against taxable income in 1996. To the extent allowed,
the losses generated in 1997 will be carried back to the year ended December 31,
1996. The remaining net operating loss carryforward at December 31, 1997
approximates $1,215,000. If not utilized, the loss carryforward will expire in
the year 2012.
27
<PAGE> 28
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The components of the net deferred tax asset (liability) as of December 31, 1996
and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Deferred Revenue ........................... $ -- $ -- $ 61,163 $ --
Depreciation................................ 26,774 -- 236,198 --
Doubtful Accounts........................... 730,469 -- 128,685 --
Compensation................................ 77,676 -- 41,575 --
State and sales tax......................... -- -- 47,965 --
Section 481(a) adjustment................... -- 1,022,416 -- 647,312
Net operating loss carry forward............ -- -- 413,104
Other....................................... 122,855 -- 139,795 --
Valuation Allowance......................... -- -- (421,173) --
-------- ---------- -------- ---------
Total.................................. $957,774 $1,022,416 $647,312 $ 647,312
======== ========== ======== ==========
</TABLE>
Deferred income taxes totaling $590,195 and $0 at December 31, 1996 and
1997, are included in current assets and liabilities, respectively. Noncurrent
deferred income tax assets and liabilities totaled $654,837 and $0 at December
31, 1996 and 1997, respectively. Due to uncertainty regarding the realization of
the Company's net deferred tax asset, the Company has booked a valuation
allowance of $421,173 in the current year. The valuation allowance will be
reduced in future years as the Company realizes the deferred tax assets or it is
determined the deferred tax asset is more likely than not to be realized.
The effective income tax rate varies from the federal statutory rate for the
years ended December 31, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................... 34.0% 34.0% 34.0%
Disallowance of meals
and entertainment...................... 1.8 1.5 (0.8)
Addition to valuation allowance............. -- -- (11.3)
State taxes (net of federal benefit)........ 5.7 5.3 (.5)
Other....................................... (0.9) 1.8 1.2
----- ---- ----
Effective income tax rate................... 40.6% 42.6% 22.6%
==== ==== ====
</TABLE>
9. LEASE COMMITMENTS:
The Company leases office space and vans under operating leases and
certain medical equipment under both capital and operating leases. The Company
currently leases office space under noncancellable operating leases which expire
on various dates through July 2002. Future minimum rental payments under these
capital and operating leases subsequent to December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ---------
YEAR ENDING DECEMBER 31
<S> <C> <C>
1998 ................................. 312,556 1,302,337
1999 ................................. 229,400 796,343
2000 ................................. 38,630 634,006
2001................................... -- 254,093
2002................................... -- 67,244
--------- ----------
Total future minimum lease payments.... $ 580,586 $3,054,023
==========
Less amounts representing interest..... (92,007)
---------
Present value of future minimum
lease payments..................... 488,579
Less current maturities................ (248,650)
---------
Long-term capital lease obligations.... $ 239,929
=========
</TABLE>
28
<PAGE> 29
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Rent expense for the years ended December 31, 1995, 1996 and 1997 under
operating leases was approximately $946,000, $1,637,000, and $1,960,000,
respectively.
10. EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
---- ---- ----
BASIC:
<S> <C> <C> <C>
Weighted average of common shares outstanding (basic)......... 2,117,443 3,215,318 6,060,950
Net income (loss)............................................. $ 578,149 $ 919,000 $(2,897,010)
Less: Series A Preferred dividends ........................... 87,000 87,000
Less: Charge for cancellation of put feature.................. 180,000
--------- ---------- -----------
Net income (loss) applicable to common stock.................. 311,149 832,000 (2,897,010)
Net income (loss) per share (basic)........................... $ 0.15 $ 0.26 ($0.48)
========= ========== ===========
DILUTED:
Weighted average of common shares outstanding (basic)......... 2,117,443 3,215,318 6,060,950
SAB Topic 4-D computation:
Incremental common shares outstanding applicable to
options issued within one year of the offering ........... 174,380 -- --
Incremental common shares outstanding applicable to
the Series B Preferred Stock issued within one year
of the Offering ......................................... 565,863
--------- ---------- ------------
Common Stock outstanding including all SAB Topic 4-D
Shares ...................................................... 2,857,686 3,215,318 6,060,950
Incremental common shares outstanding applicable
to "In the Money" options and warrants based on
the estimated year end fair market value of the
stock ...................................................... 152,822 344,138 231,653
Incremental common shares outstanding applicable to
Series A Preferred Stock ................................... 679,035
--------- ---------- ------------
Weighted average of common shares outstanding (diluted)....... 3,689,543 3,559,456 6,292,603
========= ========== ============
Net income (loss) applicable to common stock................. $ 311,149 $ 832,000 $ (2,897,010)
Add: Series A Preferred dividends............................ $ 87,000 $87,000 --
--------- ---------- ------------
Net income (loss) assuming dilution.......................... $ 398,149 $ 919,000 $ (2,897,010)
Net income (loss) per share (diluted)........................ $ 0.11 $ 0.26 ($ 0.48)
========= ========== ============
</TABLE>
The Company has adopted SFAS No. 128, "Earnings per Share," effective after
December 15, 1997. As a result, the Company's reported earnings per share for
1995 and 1996 have been restated. The effect of this accounting change on
previously reported earnings per share (EPS) data is as follows:
<TABLE>
<CAPTION>
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
EPS as reported (primary)............ $0.10 $0.24 EPS as reported (fully diluted)... $0.10 $0.24
Effect of EPS SFAS No. 128 .......... 0.05 0.02 Effect of EPS SFAS No. 128........ 0.01 0.02
----- ----- ----- -----
EPS as restated (basic).............. $0.15 $0.26 EPS as restated (diluted)......... $0.11 $0.26
===== ===== ===== =====
</TABLE>
29
<PAGE> 30
11. CONCENTRATION OF SUPPLIERS:
The Company currently buys its laser equipment, the main component of its
services, from four suppliers. Although there are a limited number of
manufacturers of this equipment, management believes that other suppliers could
provide similar laser equipment on comparable terms.
12. RELATED PARTIES:
The Company paid Montgomery, Jessup and Co., L.L.P. ("MJ"), certified public
accountants, and affiliates of MJ Capital Partners, L.P. and MJ Capital
Corporation, approximately $20,000 in 1995, and $44,000 in 1996, and $58,000 in
1997 for professional fees. MJ and its affiliates own 222,126 shares of the
Company's common stock.
Approximately $27,000 and $347,000 in medical supplies and equipment were
purchased from a company owned by the relative of a former officer and
stockholder of the Company during 1995 and 1997, respectively. During 1996 no
medical supplies and equipment were purchased from this company.
13. EMPLOYEE BENEFITS:
Effective January 1, 1993, a tax deferred savings plan under Section 401(k)
of the Internal Revenue Code was established. The plan covers all full-time
employees who are twenty-one years of age with one year of service. Employees
may contribute to the plan up to a maximum of 20% of their salary with a maximum
contribution of $9,500 in 1997. Employees are immediately vested in their
contributions. The Company may contribute an amount as determined by the Board
of Directors. Effective January 1, 1996, the Company began matching 15% of
employee contributions totaling approximately $25,000 in 1996 and $28,000 in
1997.
14. ACQUISITIONS:
On October 30, 1995, the Company completed the acquisition of substantially
all of the assets of Mobile Surgical Services, Inc., a Florida laser rental
company, for a total purchase price of $288,000 which included $25,000 in common
stock. The asset purchase resulted in the recording of $243,000 in property and
equipment and $46,000 in goodwill.
The purchase agreement also contained a contingent consideration clause
whereby the Company paid on July 31,1996 an additional $25,000 when specific
gross revenues were generated in Florida. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the operating results
of Mobile Surgical Services, Inc. have been included in the consolidated
operating results since the date of acquisition. The pro forma effect of the
acquisition was not material to the results of operations or financial position
of the Company.
During 1996, the Company completed the acquisitions of Maasai, Inc. in
Salt Lake City, Utah and Mobile Laser Services, Inc. in Chicago, Illinois for a
total purchase price of approximately $494,000. These asset purchases were
accounted for under the purchase method of accounting resulting in the recording
of approximately $143,000 in goodwill and approximately $351,000 in property and
equipment. The pro forma effect of the acquisitions was not material to the
results of operations or financial position of the Company.
On January 21, 1997, the Company completed the acquisition of substantially
all of the assets of Stone Treatment Center of New England, Inc., a Rhode Island
corporation. For cash paid of $238,280 and 22,174 shares of common stock valued
at $11.50 per share, the Company recorded assets and assumed liabilities as
follows:
<TABLE>
<S> <C>
Property, equipment, and other assets............. $583,676
Goodwill.......................................... 619,571
Accounts Payable.................................. (709,966)
---------
$493,281
=========
</TABLE>
The purchase agreement contains a contingent consideration clause
whereby the Company would pay between $250,000 and $1,250,000 if specific EBITDA
(earnings before interest, taxes, depreciation, and amortization) levels ranging
from $445,835 and $778,000 are attained during calendar year 1997. During the
calendar year 1997, the minimum EBITDA level was not achieved, therefore, the
contingent earnout related to the purchase agreement was not paid. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the operating results of Stone Treatment Center of New England,
Inc. is included in the consolidated operating results from the date of
acquisition. The pro forma effect of the acquisition was not material to the
results of operations or financial position of the Company.
30
<PAGE> 31
Additionally, the Company completed the acquisitions of Continuum
Biomedical, Inc., Southeast Medical Distributors of Louisiana, Inc., and Mobile
Laser Services in California during the calendar year of 1997. The total
purchase price was $367,699. These asset purchases were accounted for under the
purchase method of accounting resulting in the recording of $192,791 in
goodwill, $247,408 in property and equipment, and a contingent payable of
$72,500 if certain income levels are achieved. The pro forma effect of the
acquisitions was not material to the results of operations or financial position
of the Company.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used in estimating fair
values:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Expenses
The carrying value in the balance sheet approximates fair value.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVES OF COMPANY
The information required by this Item is set forth under the heading
"Election of Directors" in the definitive proxy materials of the Company to be
filed in connection with its 1997 Annual Meeting of Shareholders, except for the
information regarding executive officers of the Company, which is contained in
Item 10 of Part III of this Annual Report on Form 10-K. The information required
by this Item contained in such definitive proxy materials is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the heading
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth under the heading
"Principal Shareholders" in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth under the heading
"Certain Transactions" in the Proxy Statement, which information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8 -K
(a) The following documents are filed as a part of this Annual Report
on Form 10-K:
(1) Financial Statements:
The financial statements filed as a part of this report are
listed in "Index to Consolidated Financial Statements and
Financial Statement Schedules" at Item 8.
(2) Financial Statement Schedules:
31
<PAGE> 32
The financial statement schedules filed as a part of this
report are listed in the "Index to Consolidated Financial
Statements and Financial Statements Schedules" at Item 8.
(3) Exhibits
The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item 14.
(b) Reports on Form 8-K:
No report of Form 8-K was filed on behalf of the Registrant
during the last quarter of the Company's 1997 fiscal year.
32
<PAGE> 33
(c) 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) (5)
2.2 - Asset Purchase Agreement, dated June 10, 1996 between the Company and
Mobile Laser Services, Inc.(1) (5)
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. (6)(5)
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 15,651 Shares of Common Stock of the Company dated
July 27, 1995 between the Company and Paul R. Herchman. (1)
4.3 - Warrant to Purchase 23,416 Shares of Common Stock of the Company dated
August 15, 1993 between the Company and Columbia General Corporation. (1)
4.4 - 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)
4.5 - Warrant to Purchase 2,342 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Shelly Burks. (1)
4.6 - Warrant to Purchase 1,873 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (1)
4.7 - Warrant to Purchase 6,556 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (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 services Agreement dated June 3, 1996 between the Company and
Cosmetic Technologies International. (1)
10.4 - Joint Venture Agreement dated March 25, 1996 between the Company and
Coherent-AMT Inc. (1)
10.5 - Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive
Plan. (2)(4)
10.6 - Employment Agreement between the Company and Paul Herchman. (1)(4)
10.7 - Employment Agreement between the Company and Gary Hill. (3)(4)
10.8 - Employment Agreement between the Company and Kevin O'Brien. (1)(4)
10.9 - Employment Agreement between the Company and Michael G. Wallace. (1)(4)
10.10 - Lease Agreement. (1)
10.11 - Strategic Alliance Agreement, dated as of December 19, 1996, by and
between Laserscope and the Company. (6)
10.12 - Exclusive Provider Agreement, dated as of January 21, 1997, by and
between Thermolase Corporation and the Company. (6)
10.13 - Strategic Alliance Agreement, dated as of January 1, 1997, by and
between Valleylab, Inc. and the Company. (6)
10.14 - Exclusive Provider Agreement, dated as of February 9, 1997, by and
between Imagyn Medical, Inc. and the Company. (6)
12.1 - Subsidiaries of the Company. (1)
27.1 - Financial Data Schedule. (3)
27.2 - Financial Data Schedule Restated.(3)
27.3 - Financial Data Schedule Restated.(3)
27.4 - Financial Data Schedule Restated.(3)
27.5 - Financial Data Schedule Restated.(3)
27.6 - Financial Data Schedule Restated.(3)
27.7 - Financial Data Schedule Restated.(3)
</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) Filed herewith.
(4) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(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.
(6) 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.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Mike Wallace
-----------------------------
MIKE WALLACE
Chief Financial Officer and
Sr. Vice President
Finance and Administration
Date: March 23, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSON ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Paul Herchman Chairman of the Board and March 23, 1998
- ------------------------------- Chief Executive Officer
PAUL HERCHMAN
/s/ Gary Hill President, Chief March 23, 1998
- ------------------------------- Operating Officer and Director
GARY HILL
/s/ David Kallenberger Director March 23, 1998
- -------------------------------
DAVID KALLENBERGER
/s/ Tony LeVecchio Director March 23, 1998
- -------------------------------
TONY LEVECCHIO
/s/ Tom Montgomery Director March 23, 1998
- -------------------------------
TOM MONTGOMERY
/s/ Leon Pritzker Director March 23, 1998
- -------------------------------
LEON PRITZKER
/s/ Jim Silcock Director March 23, 1998
- -------------------------------
JIM SILCOCK
</TABLE>
35
<PAGE> 35
SCHEDULE II
MEDICAL ALLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts............... 1,859,621 3,870,925 3,175,841(A) $2,554,705
Year Ended December 31, 1996
Allowance for doubtful accounts............... $1,113,314 $3,408,360 $2,662,053(A) 1,859,621
Year Ended December 31, 1995
Allowance for doubtful accounts............... 449,881 1,884,709 1,221,276(A) 1,113,314
</TABLE>
- -------------------
(1) Uncollectible accounts written off, net of recoveries.
36
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.1 - Asset Purchase Agreement, dated March 18, 1996 between the Company and
Maasai Inc. (1) (5)
2.2 - Asset Purchase Agreement, dated June 10, 1996 between the Company and
Mobile Laser Services, Inc.(1) (5)
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. (6)(5)
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 15,651 Shares of Common Stock of the Company dated
July 27, 1995 between the Company and Paul R. Herchman. (1)
4.3 - Warrant to Purchase 23,416 Shares of Common Stock of the Company dated
August 15, 1993 between the Company and Columbia General Corporation. (1)
4.4 - 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)
4.5 - Warrant to Purchase 2,342 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Shelly Burks. (1)
4.6 - Warrant to Purchase 1,873 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (1)
4.7 - Warrant to Purchase 6,556 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (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 services Agreement dated June 3, 1996 between the Company and
Cosmetic Technologies International. (1)
10.4 - Joint Venture Agreement dated March 25, 1996 between the Company and
Coherent-AMT Inc. (1)
10.5 - Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive
Plan. (2)(4)
10.6 - Employment Agreement between the Company and Paul Herchman. (1)(4)
10.7 - Employment Agreement between the Company and Gary Hill. (3)(4)
10.8 - Employment Agreement between the Company and Kevin O'Brien. (1)(4)
10.9 - Employment Agreement between the Company and Michael G. Wallace. (1)(4)
10.10 - Lease Agreement. (1)
10.11 - Strategic Alliance Agreement, dated as of December 19, 1996, by and
between Laserscope and the Company. (6)
10.12 - Exclusive Provider Agreement, dated as of January 21, 1997, by and
between Thermolase Corporation and the Company. (6)
10.13 - Strategic Alliance Agreement, dated as of January 1, 1997, by and
between Valleylab, Inc. and the Company. (6)
10.14 - Exclusive Provider Agreement, dated as of February 9, 1997, by and
between Imagyn Medical, Inc. and the Company. (6)
12.1 - Subsidiaries of the Company. (1)
27.1 - Financial Data Schedule. (3)
27.2 - Financial Data Schedule Restated. (3)
27.3 - Financial Data Schedule Restated. (3)
27.4 - Financial Data Schedule Restated. (3)
27.5 - Financial Data Schedule Restated. (3)
27.6 - Financial Data Schedule Restated. (3)
27.7 - Financial Data Schedule Restated. (3)
</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) Filed herewith.
(4) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(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.
(6) 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.
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
By this Agreement, Medical Alliance, Inc., ("Employer"), located at
2445 Gateway Drive, Suite 150, Irving, Texas 75063, agrees to employ GARY HILL,
of 4206 San Carlos Drive, Dallas, Texas 75205 ("Employee").
This Agreement is made and entered into this 2nd day of December, 1997.
RECITALS
WHEREAS, Employer desires to employ Employee, and Employee desires
to perform services for the Employer, which will allow Employee access to
various trade secrets and confidential information belonging to Employer and
which will require Employee to perform services of a unique and special nature;
WHEREAS, as a condition of Employee's employment, Employer desires
to receive from the Employee certain covenants and agreements; and
WHEREAS, Employer and Employee desire to set forth in writing the
terms and conditions of their agreements and understandings with respect to
these covenants, as this Agreement is a condition of Employee's continued
employment and ancillary thereto, and does not purport to set forth all the
terms of such employment.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing, of the mutual
promises herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged and confessed, Employer
and Employee do hereby agree as follows:
1. Terms. (a) Employer agrees to employ Employee and Employee
agrees to accept employment with the Employer, for a period of time beginning
December 2, 1997 and continuing until terminated by: (i) Employer upon twelve
months prior written notice; or (ii) Employee upon three months prior written
notice; in each case, unless terminated by either Employer or Employee pursuant
to paragraph (b) below. Employer may, at its option, require Employee to vacate
the premises at any time after any of such notices. In addition, if Employer
terminates this Agreement, then upon receipt of such notice, Employee shall have
the option of resigning at any time prior to the termination date set forth in
the notice or continuing to be employed until such specified termination date
(although Employee shall not be required to devote the time and effort required
in Section 4 during such period, and paragraph (b)(5) below shall not be
applicable). In any of the above circumstances, Employer shall be liable to
Employee for salary and benefits through the termination date specified in the
termination notice.
<PAGE> 2
(b) This Agreement shall also terminate immediately on the
occurrence of any one of the following events:
(1) the death of Employee;
(2) the permanent disability of Employee (with permanent
disability being determined by Employer's disability insurance carrier);
(3) if the Board of Directors of Employer believes in
good faith that Employee has engaged in any activity in connection with the
business of Employer involving fraud, theft or a criminal act, or if Employee
has engaged in a criminal activity involving moral turpitude, it being
understood and agreed that if Employee is not convicted of such act at the trial
court level by a trial court of competent jurisdiction within (2) years after
the date of the termination notice, that Employer shall be liable for twelve
(12) months salary hereunder, although this Agreement shall be deemed terminated
as of the date of the notice to Employee of Employer's termination of this
Agreement;
(4) if Employee fails to devote the time and effort to
Employer and his duties hereunder that a chief operating officer and president
of a company of similar size industry would devote to his company; or
(5) if Employee fails without good reason to follow any
requirement, order or mandate of the Board of Directors of Employer.
(c) Employee, at this option, may terminate this Agreement for
"good reason" by giving written notice to Employer. For purposes hereof, "good
reason" shall mean the occurrence of any of the following events: (i) Employee's
title as President and Chief Operating Officer of Employer is changed without
Employee's written acceptance; (ii) a decrease in Employee's compensation as
provided in Section 2 (unless, however, Employer reduces the compensation of
each member of executive management of Employer by at least an equal
percentage); or (iii) Employer's principal executive offices are relocated more
than fifty miles from its current executive offices. In the event of any such
termination, Employee shall immediately cease to be employed by Employer,
however, Employer shall continue to pay to Employee, Employee's then current
monthly salary for a period of three (3) months following such termination.
(d) Employee agrees to return on the date of termination or
before, all of Employer's property in good condition, including all manuals,
notebooks or written documentation, and other information pertaining to Company
services, medical instruments, medical supplies, office supplies, etc.
(e) In the event of termination of this Agreement for any of
the reasons set forth above, the Employee shall be entitled to the compensation
earned prior to the date of termination, computed pro rata up to and including
the date of termination.
2
<PAGE> 3
(f) In the event the Employee cannot agree on the applicability
of subparagraphs (b)(3), (b)(4), and/or (b)(5) such matter (s) shall be
submitted to binding arbitration within 14 days of any effective date of
termination hereunder. The non-prevailing party will pay the cost and expenses
of both parties.
2. Compensation. Employee shall initially have a compensation
package as outlined on Appendix A; (b) stock options as provided in Appendix B
attached hereto; and (c) business expenses as described in Section 5. In the
event Employee is terminated by Employer pursuant to Section 1(a)(i) above, and
Employee has not accepted a consulting or employment position at the end of such
twelve-month period, the Employee's employment hereunder shall continue until
earlier of: (i) Six months after the end of such twelve-month period; or (ii)
the date that Employee accepts a consulting or employment position.
3. Duties Of Employee. Employee shall initially have the title,
and perform the duties, of President and Chief Operating Officer of Employer.
Employee shall devote the time, effort and skills to Employer and his duties
hereunder that a chief operating officer or president of a company of similar
size and similar industry would devote to his company. Employee's specific
duties shall be to devote all of his time to the management of the company or
other responsibilities delegated to Employee by the Board of Directors or Chief
Executive Officer of Employer. Additionally, Employee is required to perform
other duties typical of a president and chief operating officer of a company of
similar size in this industry. During the term of this Agreement, Employee shall
not directly or indirectly render any services of a business, commercial or
professional nature to any other person or organization, whether or not for
compensation, without the prior written consent of the Board of Directors of
Employer. Upon notice of termination pursuant to Section 1 above, Employee's
title and duties may be changed by the Board of Directors of Employer.
4. Employee Benefits. Employer agrees to include Employee and his
family in the hospital, surgical and medical benefit plans from time to time
covering employees of Employer, and to provide to Employee such other benefits
(or benefits comparable thereto) as are provided generally to employees by
Employer from time to time.
5. Business Expenses. Employee is authorized to incur reasonable
expenses for promoting the business of Employer, including airfare, lodging,
mileage, tolls, parking fees and long distance telephone calls made in the
pursuit of the business of the Employer. Employer will reimburse Employee for
all such reasonable expenses upon the Employee's presentation and itemized
account of such expenditures. Employee shall receive a monthly car allowance of
$350.
Employee agrees to procure and maintain in force at his cost an
automobile liability insurance policy covering any personal automobile used by
Employee in performing his duties for Employer with Employer as a named insured
for bodily injury in the minimum amount of $100,000 per person and $300,000 per
occurrence and for property damage in the minimum amount of $50,000 in one
accident. Employee agrees to provide Employer with a copy of Employee's
insurance certificate evidencing such coverage at the beginning of each renewal
period for the insurance.
3
<PAGE> 4
6. Covenant Not To Compete. Employee acknowledges that the services
rendered to Employer by Employee have been and will continue to be of a special
and unusual character which have a unique value to Employer and Employee has had
or will have access to trade secrets and confidential information belonging to
Employer, the loss of which cannot adequately be compensated by damages in an
action of law. Employee acknowledges that Employer's business and services are
highly specialized, that the identity and particular needs of Employer's
customers and suppliers are not generally known, and that the documents and
information regarding Employer's customers, provider contracts, suppliers,
services, methods of operation, sales, pricing and costs are highly confidential
and constitute trade secrets.
During the term of Employee's employment with Employer and for a
period of twelve (12) months following the effective date of termination of
Employee's employment with Employer for any reason whatsoever, Employee:
(a) will not, directly or indirectly, own, manage, operate,
control, be employed by, perform services for, connected with the ownership,
management, operation, or control of any business which performs services
similar to or competitive with those provided by Employer of which provides
medical equipment or similar services to any person or entity, in any territory
where Employer conducts business or in any territory identified in Employer's
business plan as a territory in which Employer intends to develop within the
next twelve (12) months;
(b) will not, either on his own account or for any person,
firm, partnership, corporation or other entity, solicit, interfere with, or
endeavor to cause any employee of Employer to leave his employment, or induce or
attempt to induce any such employee to breach his employment agreement with
Employer;
(c) shall not solicit, induce or attempt to induce any past or
current customer of the Employer to cease doing business in whole or in part
with or through Employer, or to do business with any other person, firm,
partnership, corporation or other entity. In this regard, Employer's customers
include all insurance companies, vendors, physicians, clinics, health
maintenance organizations, hospitals, surgical centers, and other health care
providers who have ever been charged for, bought, rented, leased, or have been
provided with any medical equipment being offered or provided for sale, rent or
lease by Employer; and
(d) Employee shall, from the date of this Agreement, refrain
from making disparaging, negative or other similar remarks concerning Employer
or any of its affiliates to any third party. Similarly, Employer and its
affiliates shall, from the date of this Agreement, refrain from making
disparaging, negative or other similar remarks concerning Employee to any third
party.
4
<PAGE> 5
Employee acknowledges that this covenant not to compete is
reasonable, both in time and scope considering the special training Employee has
received from Employer and the special knowledge about the business and
customers of Employer that Employee has received. Employee agrees that this
covenant not to compete is necessary in order to protect the legitimate business
interest of Employer and has been given by Employee in consideration of the
special training and knowledge provided to Employee by Employer.
7. Covenant Against Disclosure Of Confidential Information. During
the term of Employee's employment with Employer and thereafter, Employee shall
not use for any purpose or disclose to any person or entity any confidential
information acquired during the course of employment with Employer. The term
"confidential information" as used in this Agreement means any confidential
information of Employer and its affiliates, including, but not limited to,
documents, records, lists, and knowledge of Employer's customers, suppliers,
methods of operation, processes, trade secrets, method of determination of
prices, financial condition, profits, sales, net income and indebtedness as the
same may exist from time to time and which is not otherwise available to the
public domain.
Employee shall not directly or indirectly copy, tape or remove from
the Employer's premises any of the Employer's books, records, customer lists,
contracts or any other documents or materials that constitute confidential
information except in connection with performance of his duties hereunder.
Employee agrees to return immediately to Employer any records of Employer which
Employee has in his possession upon the termination of Employee's employment.
8. Representations of Employee. Employee represents and warrants to
Employer that by continuing Employment with Employer, Employee is not in
violation of any agreement between Employee and any other party, particularly
any covenant not to compete included in any agreement with a previous employer.
Employee agrees to hold Employer harmless from any and all claims, demands and
causes of action (including reasonable attorneys' fees, expenses, and court
costs incurred for the defense of Employer) asserted against Employer by any
third party because of the employment of Employee by Employer or because of the
alleged violation of any agreement between Employee and a third party.
9. Corporate Opportunities And Property Rights Of Parties. Employee
agrees to promptly and fully inform and disclose to Employer all business
opportunities to which Employee becomes aware related to the selling, renting,
leasing or providing of medical equipment or medical services, all inventions,
designs, improvements and discoveries that Employee may have relating to the
selling, renting, leasing or providing of medical equipment during the term of
this Agreement, whether conceived by Employee alone or with others and whether
or not conceived during regular working hours. All such opportunities,
inventions, designs, improvements and discovery shall be the property of
Employer and not the Employee.
5
<PAGE> 6
10. Notices. Any notice or communication hereunder must be in
writing and given by depositing the same in the United States mail, addressed to
the party to be notified, postage prepaid and registered or certified with
return receipt requested, or by delivering the same in person or by facsimile
transmission. Such notice shall be deemed received on the date of which it is
hand delivered or received by facsimile transmission or on the third business
day following the date on which it is so mailed. For purpose of notice, the
address of the parties shall be:
Employer: Medical Alliance, Inc.
2445 Gateway Dr., Suite 150
Irving, TX 75063
(972) 550-7330
Employee: Gary Hill
4206 San Carlos Drive
Dallas, TX 75205
Any party may change its address for notice by written notice given
to the other parties in accordance with Section 11.
11. Enforcement. A party to this Agreement may enforce the duties
and obligations prescribed by this Agreement in a court of competent
jurisdiction by specific performance, injunction, money judgment, or any other
remedy. It is the intent of each of the parties that the Covenants Not To
Compete contained in Section 6 above be enforced to the fullest extent permitted
by applicable law. Accordingly, should a court of competent jurisdiction
determine that the scope of any covenant is too broad to be enforced as written,
it is the intent of each of the parties that the court should reform such
covenant to such narrower scope as it determines enforceable. If a party fails
to perform any duty or obligation prescribed by this Agreement, and the other
party recovers a judgement against the defaulting party, the prevailing party in
the lawsuit is entitled to recover, in addition to his or its claims and costs,
a reasonable amount as attorneys fees from the defaulting party and other
reasonable expenses including premiums for bonds required for injunctive relief.
12. Parole Evidence Rule. This instrument constitutes the entire
Agreement of the parties concerning the subject matter of this Agreement and may
not be contradicted by evidence of any prior agreement or any contemporaneous
oral agreement. Neither party is relying on any representations except those
representations which are specifically incorporated in this Agreement.
13. Amendment. At the time this Agreement was executed, Employer
was a Texas corporation with its principal place of business located in Irving,
Texas. This Agreement, following its execution, was accepted by Employer in the
State of Texas. BOTH PARTIES TO THIS AGREEMENT AGREE THAT THIS AGREEMENT SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
6
<PAGE> 7
14. Severability. If any provision of this Agreement is invalid or
unenforceable, the provision shall be deleted, construed, modified, or reformed
to meet the minimum requirements to be valid and enforceable. Whether or not
deleted, construed, modified or reformed to be valid and enforceable, the
invalidity or unenforceability of any provision shall not affect the remainder
of this Agreement, which shall remain in full force and effect.
15. Binding Effect. This Agreement is binding on and shall inure to
the benefit of the parties and their respective heirs, successors,
administrators and assigns.
EXECUTED as of the date first set forth above.
EMPLOYER: Medical Alliance, Inc.
By: /S/ PAUL HERCHMAN
----------------------------------
Its: Chief Executive Officer
----------------------------------
EMPLOYEE:
/s/ GARY HILL
----------------------------------
Gary Hill
----------------------------------
Social Security Number
7
<PAGE> 8
APPENDIX A
Compensation: Employee shall initially be paid a salary of $16,667 per month
prorated for any partial month, along with quarterly and year end performance
bonuses as approved by the Compensation Committee of the Board of Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,902,578
<SECURITIES> 0
<RECEIVABLES> 5,270,151
<ALLOWANCES> 2,554,705
<INVENTORY> 0
<CURRENT-ASSETS> 20,161,972
<PP&E> 11,658,926
<DEPRECIATION> 6,185,441
<TOTAL-ASSETS> 26,504,537
<CURRENT-LIABILITIES> 2,586,561
<BONDS> 488,579
0
0
<COMMON> 12,331
<OTHER-SE> 23,665,716
<TOTAL-LIABILITY-AND-EQUITY> 26,504,537
<SALES> 0
<TOTAL-REVENUES> 18,821,125
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,870,925
<INTEREST-EXPENSE> 111,578
<INCOME-PRETAX> (3,745,277)
<INCOME-TAX> (848,267)
<INCOME-CONTINUING> (2,897,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,897,010)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 1,408,508 20,536,787
<SECURITIES> 0 0
<RECEIVABLES> 3,682,000 6,274,481
<ALLOWANCES> 1,113,314 1,859,621
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,207,516 26,003,585
<PP&E> 3,892,721 7,740,908
<DEPRECIATION> 1,699,903 3,190,725
<TOTAL-ASSETS> 6,443,363 30,707,919
<CURRENT-LIABILITIES> 2,294,175 3,909,392
<BONDS> 2,353,415 355,494
0 0
1,595 0
<COMMON> 4,678 11,948
<OTHER-SE> 2,424,253 26,072,965
<TOTAL-LIABILITY-AND-EQUITY> 6,443,363 30,707,919
<SALES> 0 0
<TOTAL-REVENUES> 11,177,138 17,350,384
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
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