<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21343
MEDICAL ALLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 73-1347577
(State or other jurisdiction of) (I.R.S. Employer
incorporation or organization) Identification No.)
2445 GATEWAY DRIVE, SUITE 150
IRVING, TEXAS 75063
(Address of principal executive offices)
(Zip Code)
(972) 580-8999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 5, 1998 there were 6,116,298 shares outstanding of the
registrant's common stock, $0.002 par value.
===============================================================================
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INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets (Unaudited)
December 31, 1997 and September 30, 1998.....................3
Consolidated Statements of Operations (Unaudited)
Three and Nine months ended September 30, 1997
and 1998.......................................................4
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1997 and 1998................5
Consolidated Statement of Stockholders' Equity (Unaudited).........6
Nine months ended September 30, 1998
Notes to Consolidated Financial Statements (Unaudited).............7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................13
Signatures........................................................15
</TABLE>
2
<PAGE> 3
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $14,902,578 $13,799,201
Accounts receivable, less allowance for doubtful accounts
of $2,554,705 and $1,524,804 respectively........................... 2,715,446 1,764,986
Prepaid expenses and other current assets.............................. 1,290,038 1,064,435
Refundable federal and state income taxes.............................. 1,253,910 419,236
----------- -----------
Total current assets................................................... 20,161,972 17,047,858
Property and equipment, net.................................................. 5,473,485 6,168,026
Other assets:
Intangible assets, net of amortization of approximately
$159,346 and $242,503, respectively..................................... 869,080 801,662
----------- -----------
Total assets....................................................... $26,504,537 $24,017,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 976,150 $ 414,705
Accrued expenses......................................................... 1,197,785 692,182
Current maturities of:
Capital lease obligations................................................ 248,650 210,320
Deferred revenue......................................................... 163,976 168,003
----------- -----------
Total current liabilities.......................................... 2,586,561 1,485,210
Capital lease obligations, net of current maturities..................... 239,929 80,165
----------- -----------
Total liabilities................................................. 2,826,490 1,565,375
=========== ===========
Stockholders' equity:
Common stock, $0.002 par value, 30,000,000 shares
authorized; 6,157,300 and 6,138,598 shares issued and
outstanding, respectively, 12,331 12,752
Capital in excess of par value........................................... 26,236,053 26,663,311
Accumulated deficit...................................................... (2,504,393) (3,426,509)
Treasury stock at cost, 25,703 and 254,903 shares, respectively.......... (65,944) (797,383)
----------- -----------
Total stockholders' equity........................................ 23,678,047 22,452,171
----------- -----------
Total liabilities and stockholders' equity........................ $26,504,537 $24,017,546
=========== ===========
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
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MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenue ............................................. $ 4,551,191 $ 3,854,658 $ 14,702,353 $ 12,168,495
Costs and expenses:
Salaries and benefits ................................. 1,948,730 1,682,231 6,379,918 5,608,690
Selling, general and
administrative ..................................... 1,752,813 1,414,947 6,069,115 4,935,128
Depreciation and
amortization ....................................... 793,509 591,290 2,367,773 1,737,961
Provision for uncollectible
accounts ........................................... 612,011 362,270 3,275,918 1,386,699
------------ ------------ ------------ ------------
Total costs and
expenses ......................................... 5,107,063 4,050,738 18,092,724 13,668,478
------------ ------------ ------------ ------------
Operating loss ..................................... (555,872) (196,080) (3,390,371) (1,499,983)
Other (income) expense:
Interest income and other,
net ................................................ (205,842) (212,122) (582,380) (624,459)
Interest expense ...................................... 25,161 14,613 88,545 46,592
------------ ------------ ------------ ------------
Total other income ................................. (180,681) (197,509) (493,835) (577,867)
------------ ------------ ------------ ------------
Income (loss) before income taxes ....................... (375,191) 1,429 (2,896,536) (922,116)
Provision (benefit) for income taxes .................... (100,000) 0 (826,920) 0
------------ ------------ ------------ ------------
Net income (loss) ....................................... $ (275,191) $ 1,429 $ (2,069,616) $ (922,116)
============ ============ ============ ============
Net income (loss) per share (basic) ..................... $ (.05) .00 $ (.34) $ (.15)
============ ============ ============ ============
Net income (loss) per share (diluted) ................... $ (.05) $ .00 $ (.34) $ (.15)
============ ============ ============ ============
Weighted average number of common shares and
common share equivalents (in thousands) (basic) ......... 6,101 6,204 6,038 6,245
============ ============ ============ ============
Weighted average number of common shares and
common share equivalents (in thousands) (diluted) ....... 6,101 6,243 6,038 6,245
============ ============ ============ ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
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MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $ (2,069,616) $ (922,116)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Loss on joint venture .................................. 56,540 0
Gain from disposal of equipment .......................... 0 (18,513)
Provision for uncollectible accounts ................... 3,275,918 1,386,699
Depreciation and amortization .......................... 2,367,773 1,737,961
Deferred income taxes .................................. (826,920) 0
Changes in assets and liabilities net of effects from
acquisitions:
Accounts receivable ..................................... (1,975,161) (436,239)
Prepaid expenses and other current assets .............. (703,814) 1,060,277
Accounts payable and accrued expenses ................... (1,600,426) (1,197,490)
Deferred revenue ....................................... 67,072 4,027
------------ ------------
Net cash (used in) provided by operating activities ... (1,408,634) 1,614,606
------------ ------------
Cash flows from investing activities:
Capital expenditures ..................................... (2,754,484) (2,252,173)
Proceeds from disposal of equipment ...................... 0 51,784
Payment for acquisitions, net of cash acquired of $6,000 . (605,978) 0
Change in restricted cash ................................ 31,000 0
Other .................................................... 0 (15,740)
------------ ------------
Net cash used in investing activities .................... (3,329,462) (2,216,129)
------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligations ................... (359,589) (198,094)
Purchase of treasury shares .............................. 0 (731,439)
Proceeds from issuance of common stock ................... 202,143 427,679
------------ ------------
Net cash used in financing activities ................ (157,446) (501,854)
------------ ------------
Net decrease in cash and cash equivalents ................ (4,895,542) (1,103,377)
Cash and cash equivalents at beginning of period ......... 20,505,787 14,902,578
------------ ------------
Cash and cash equivalents at end of period ............... $ 15,610,245 $ 13,799,201
============ ============
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations incurred ..................... $ 577,627 $ -0-
The Company has acquired businesses, as follows:
Fair value of assets acquired .......................... 828,249 -0-
Goodwill recorded ...................................... 815,195 -0-
Less:
Cash paid ............................................ (605,978) -0-
Fair value of common stock ......................... (255,000) -0-
------------ ------------
Liabilities assumed .................................. $ 782,466 $ -0-
============ ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK CAPITAL IN EXCESS ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT OF PAR VALUE DEFICIT STOCK EQUITY
------ ------ ------------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997......... 6,157,300 $12,331 $26,236,053 $(2,504,393) $ (65,944) $23,678,047
Options exercised ............... 210,498 421 427,258 427,679
Treasury stock purchases......... (229,200) (731,439) (731,439)
Net loss ........................ (922,116) (922,116)
--------- ------- ----------- ----------- --------- -----------
Balance at September 30, 1998.... 6,138,598 $12,752 $26,663,311 $(3,426,509) $(797,383) $22,452,171
========= ======= =========== =========== ========= ===========
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1998, and the
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1998, and the consolidated statements of cash flows for
the nine months ended September 30, 1997 and 1998, and the consolidated
statement of stockholders' equity for the nine months ended September 30, 1998,
have been prepared by the Company without audit. The December 31, 1997
consolidated balance sheet is derived from the audited consolidated balance
sheet as of that date. In the opinion of management, all adjustments (which
include only normal, recurring adjustments) necessary to present fairly the
financial position at September 30, 1998, and the results of operations and cash
flows for all periods presented have been made. The results of operations for
the interim periods are not necessarily indicative of the operating results for
the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, particularly accounts
receivable, and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results may, in some instances,
differ from previously estimated amounts.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements
should be read in conjunction with the audited financial statements and related
notes of the Company for the fiscal year ended December 31, 1997 included in the
Company's Form 10-K.
2. RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and presentation of comprehensive income
and its components, however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity as presented.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
defines derivatives, requires that derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company is currently evaluating SFAS 133; however, the Company does not
believe adoption of SFAS 133 will have a material impact on the financial
statements of the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1998
---- ----
<S> <C> <C>
Medical equipment ............................... $ 8,231,052 $ 8,899,603
Furniture and fixtures .......................... 1,763,602 2,138,269
Transportation .................................. 117,778 1,216,883
Leasehold improvements .......................... 52,961 53,361
Equipment under capital leases .................. 1,493,533 1,493,533
------------ ------------
11,658,926 13,801,649
Less accumulated depreciation and amortization... (6,185,441) (7,633,623)
------------ ------------
Net property and equipment ...................... $ 5,473,485 $ 6,168,026
============ ============
</TABLE>
Depreciation expense related to property and equipment was approximately
$766,000 and $564,000 for the three months ended September 30, 1997 and 1998,
respectively and $2,308,000 and $1,655,000 for the nine months ended September
30, 1997 and 1998, respectively.
7
<PAGE> 8
Accumulated amortization related to equipment under capital leases was
approximately $1,028,000 and $1,153,000 at December 31, 1997 and September 30,
1998, respectively.
Property and equipment are recorded at cost. Depreciation is provided by the
straight-line method over existing useful lives from three to five years.
Effective January 1, 1998, the Company extended the estimated useful lives on
certain medical equipment and established residual values on such equipment
based on historical experience. The change in accounting estimate had the effect
of reducing depreciation expense and increasing earnings by approximately
$188,000 ($.03 per share) and $656,000 ($.10 per share) for the three and nine
months ended September 30, 1998.
4. RELATED PARTIES
Effective September 11, 1998, the Company entered into an arrangement
whereby the Company would agree to repurchase 242,000 shares of common stock
pledged by an officer of the Company to a banking institution. The stock was
pledged to the bank to secure payment on a $170,000 loan between the officer of
the Company and the bank. The pledged stock would be repurchased by the Company
upon request from the bank if the loan is in default.
5. EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Weighted average number of common shares outstanding (basic) ... 6,101,059 6,204,460 6,038,243 6,245,472
Net income (loss) .............................................. $ (275,191) $ 1,429 $(2,069,616) $ (922,116)
Net income (loss) per share (basic) ............................ $ (.05) $ .00 $ (.34) $ (.15)
=========== =========== =========== ===========
Diluted:
Weighted average number of common shares outstanding (basic).... 6,101,059 6,204,460 6,038,243 6,245,472
Incremental common shares outstanding applicable to
"In the Money" options and warrants based on the estimated
quarter end fair market value of the stock .................... (a) 38,409 (a) (a)
Weighted average number of common shares outstanding (diluted).. 6,101,059 6,242,869 6,038,243 6,245,472
Net income (loss) .............................................. $ (275,191) $ 1,429 $(2,069,616) $ (922,116)
Net income (loss) per share (diluted) .......................... $ (.05) $ .00 $ (.34) $ (.15)
=========== =========== =========== ===========
</TABLE>
(a) Incremental common shares outstanding applicable to "in the money" options
and warrants were not included in the computation of diluted earnings per share
for the three months ended September 30, 1997 and the nine months ended
September 30, 1997 and 1998 as their inclusion would be antidilutive for the
respective periods. The shares not included totaled 165,511 for the three months
and nine months ended September 30, 1997 and 38,409 for the nine months ended
September 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
NET REVENUES. Net revenues decreased from $4,551,000 for the three months
ended September 30, 1997, to $3,855,000 for the three months ended September 30,
1998, a decrease of $696,000 or 15.3%. Total net patient service revenue per
case decreased from $214 for the three months ended September 30, 1997, to $207
for the three months ended September 30, 1998, a decrease of $7 per case or
3.3%.
Aesthetic elective net revenues decreased from $2,064,000 for the three
months ended September 30, 1997, to $1,900,000 for the three months ended
September 30, 1998, a decrease of $164,000 or 7.9%. This decrease was
attributable to the Company performing 1,250 hair removal procedures during the
three months ended September 30, 1997. The hair removal product line was
discontinued during the fourth quarter of 1997. The remainder of the procedure
volume decrease was offset by an increase in the aesthetic elective net revenue
per case which increased from $163 for the three months ended September 30,
1997, to $192 for the three months ended September 30, 1998, an increase of $29
or 17.8% which is due to a change in the product line mix within the aesthetic
elective line of business.
Medical surgical net revenues decreased from $2,475,000 for the three months
ended September 30, 1997, to $1,936,000 for the three months ended September 30,
1998, a decrease of $539,000 or 21.8%. This decrease was attributable to the
medical surgical net revenue per case decreasing from $290 for the three months
ended September 30, 1997, to $224 for the three months ended September 30, 1998,
8
<PAGE> 9
a decrease of $66 or 22.8%. The lower net revenue per case is a result of a
shift from noncontracted to contracted payors related to the insurance billable
business. Revenues related to contracted payors typically yield a lower
reimbursement per case, but also provide a revenue dollar that is of a higher
quality and therefore is more collectable. Contracted revenues as a percentage
of insurance billable revenues increased from 49.9% for the three months ended
September 30, 1997, to 70.3% for the three months ended September 30, 1998, an
increase of 20.4%.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense decreased from
$1,949,000 for the three months ended September 30, 1997, to $1,682,000 for the
three months ended September 30, 1998, a decrease of $267,000 or 13.7%. Total
employees for the Company decreased from 181 at September 30, 1997, to 150 at
September 30, 1998, a decrease of 31 or 17.1%. Salaries and benefits expense as
a percentage of net revenues increased from 42.8% for the three months ended
September 30, 1997, to 43.6% for the three months ended September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased from $1,753,000 for the three months ended
September 30, 1997, to $1,415,000 for the three months ended September 30, 1998,
a decrease of $338,000 or 19.3%. Vehicle expense decreased from $454,000 for the
three months ended September 30, 1997, to $228,000 for the three months ended
September 30, 1998, a decrease of $226,000 or 49.8%. This decrease is due mainly
to the Company having a reduced fleet of vehicles of 95 at September 30, 1998
compared to 125 at September 30, 1997. In addition, a vehicle lease buyout of
the entire fleet occurred during the third quarter of 1998 which will result in
approximately $50,000 in net cost savings on a quarterly basis. The remainder of
the decrease is related to the Company's overall effort in reducing various
costs on the corporate and field operation levels. Selling, general and
administrative expense as a percentage of net revenues decreased from 38.5% for
the three months ended September 30, 1997, to 36.7% for the three months ended
September 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased from
$794,000 for the three months ended September 30, 1997, to $591,000 for the
three months ended September 30, 1998, a decrease of $203,000 or 25.6%. This
decrease was due mainly to a change in useful lives on certain medical equipment
from three to five years as well as the establishment of residual values on such
equipment which was effective January 1, 1998. The change in useful lives had
the effect of reducing depreciation expense and decreasing the net loss by
approximately $188,000 ($.03 per share) for the three months ended September 30,
1998.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
decreased from $612,000 for the three months ended September 30, 1997, to
$362,000 for the three months ended September 30, 1998, a decrease of $250,000
or 40.8%. Provisions for uncollectible accounts as a percentage of net patient
service revenues, decreased from 13.5% for the three months ended September 30,
1997 to 9.4% for the three months ended September 30, 1998. This 4.1%
improvement is due to the continued success from the Company's operational
processes including scheduling, preregistration, and preverification.
OPERATING LOSS. Operating loss decreased from $556,000 for the three months
ended September 30, 1997, to $196,000 for the three months ended September 30,
1998, a decrease of $360,000 or 64.7%.
INCOME (LOSS) BEFORE INCOME TAXES. Loss before income taxes was $375,000 for
the three months ended September 30, 1997 compared to income of $1,000 for the
three months ended September 30, 1998, a change of approximately $376,000.
PROVISION (BENEFIT) FOR INCOME TAXES. For the three months ended September
30, 1997, the Company recorded a tax benefit of $100,000. For the three months
ended September 30, 1998, the Company did not record a current or deferred tax
benefit due to the Company's continuing operating loss trend and the uncertainty
of utilization of net operating loss carryforwards in future periods.
NET INCOME (LOSS). As a result of the items discussed above, the Company had
a net loss of $275,000 for the three months ended September 30, 1997, compared
to income of $1,000, for the three months ended September 30, 1998, a change of
$276,000.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
NET REVENUES. Net revenues decreased from $14,702,000 for the nine months
ended September 30, 1997, to $12,168,000 for the nine months ended September 30,
1998, a decrease of $2,534,000 or 17.2%. Total net patient service revenue per
case decreased from $218 for the nine months ended September 30, 1997, to $204
for the nine months ended September 30, 1998, a decrease of $14 per case or
6.4%.
Aesthetic elective net revenues decreased from $6,506,000 for the nine
months ended September 30, 1997, to $6,272,000 for the nine months ended
September 30, 1998, a decrease of $234,000 or 3.6%. This decrease was
attributable to the Company performing 2,381 hair removal procedures during the
nine months ended September 30, 1997. The hair removal product line was
discontinued during the fourth quarter of 1997. The remainder of the procedure
volume decrease was offset by an increase in the aesthetic elective net revenue
per case which increased from $171 for the nine months ended September 30, 1997,
to $183 for the nine months ended September 30, 1998, an increase of $12 or 7.0%
which is due to a change in the product line mix within the aesthetic elective
line of business.
9
<PAGE> 10
Medical surgical net revenues decreased from $7,690,000 for the nine months
ended September 30, 1997, to $5,804,000 for the nine months ended September 30,
1998, a decrease of $1,886,000 or 24.5%. This decrease was attributable to the
medical surgical net revenue per case decreasing from $283 for the nine months
ended September 30, 1997, to $234 for the nine months ended September 30, 1998,
a decrease of $49 or 17.3%. The lower net revenue per case is a result of a
shift from noncontracted to contracted payors related to the insurance billable
business. Revenues related to contracted payors typically yield a lower
reimbursement per case, but also provide a revenue dollar that is of a higher
quality and is more collectible. Contracted revenues as a percentage of
insurance billable revenues increased from 48.8% for the nine months ended
September 30, 1997, to 69.1% for the nine months ended September 30, 1998, an
increase of 20.3%.
The remainder of the net revenue decrease was attributable to a decrease in
revenues related to Company sponsored seminars, which decreased from $506,000
for the nine months ended September 30, 1997, to $93,000 for the nine months
ended September 30, 1998, a decrease of $413,000 or 81.6%. During the nine
months ended September 30, 1997, the Company derived seminar revenues related to
the hair removal product line which was discontinued in the fourth quarter of
1997.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense decreased from
$6,380,000 for the nine months ended September 30, 1997, to $5,609,000 for the
nine months ended September 30, 1998, a decrease of $771,000 or 12.1%. The
Company incurred a $250,000 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. Furthermore, total employees for
the Company decreased from 181 at September 30, 1997, to 150 at September 30,
1998, a decrease of 31 or 17.1%. Salaries and benefits expense as a percentage
of net revenues increased from 43.4% for the nine months ended September 30,
1997, to 46.1% for the nine months ended September 30, 1998. Without the
nonrecurring charge of $250,000, salaries and benefits expense as a percentage
of net revenues would have been 41.7% for the nine months ended September 30,
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased from $6,069,000 for the nine months ended
September 30, 1997, to $4,935,000 for the nine months ended September 30, 1998,
a decrease of $1,134,000 or 18.7%. The Company incurred a $250,000 charge during
the second quarter of 1997 for a restructuring of its field operations. This
charge included expenses related to the divestiture of certain delivery vans and
certain medical equipment currently under operating leases and
legal/professional fees related to accounts receivable and managed care
initiatives. In addition, vehicle expense decreased from $1,206,000 for the nine
months ended September 30, 1997, to $1,020,000 for the nine months ended
September 30, 1998, a decrease of $186,000 or 15.4%. This decrease is due mainly
to the Company having a reduced fleet of vehicles of 95 at September 30, 1998
compared to 125 at September 30, 1997 along with a vehicle lease buyout of the
entire fleet which occurred during the third quarter of 1998. Legal and
professional fees decreased from $593,000 for the nine months ended September
30, 1997, to $366,000 for the nine months ended September 30, 1998, a decrease
of $227,000 or 38.3%. Furthermore, leasing expense decreased from $579,000 for
the nine months ended September 30, 1997, to $408,000 for the nine months ended
September 30, 1998, a decrease of $171,000 or 29.5%. During 1997 there was
$133,000 in leasing of video conferencing equipment which was used for the
Company sponsored seminars related to the hair removal product line. The
remainder of the decrease is related to the downsizing of the Company's
infrastructure and the Company's overall effort in reducing various costs on the
corporate and field operation levels. Selling, general and administrative
expense as a percentage of net revenues decreased slightly from 41.3% for the
nine months ended September 30, 1997, to 40.6% for the nine months ended
September 30, 1998. Without the $250,000 nonrecurring charge, selling, general
and administrative expense as a percentage of net revenues would have been 39.6%
for the nine months ended September 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased from
$2,368,000 for the nine months ended September 30, 1997, to $1,738,000 for the
nine months ended September 30, 1998, a decrease of $630,000 or 26.6%. This
decrease was due mainly to a change in useful lives on certain medical equipment
from three to five years as well as the establishment of residual values on such
equipment which was effective January 1, 1998 and a nonrecurring charge of
$150,000 for the second quarter of 1997, related to the redeployment and or
disposition of certain medical equipment in selected markets. The change in
useful lives had the effect of reducing depreciation expense and decreasing the
net loss by approximately $656,000 ($.10 per share) for the nine months ended
September 30, 1998.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
decreased from $3,276,000 for the nine months ended September 30, 1997, to
$1,387,000 for the nine months ended September 30, 1998, a decrease of
$1,889,000 or 57.7%. There was a charge of $1,200,000 to increase reserves for
uncollectible accounts during the second quarter of 1997. Without the charge of
$1,200,000, provision for uncollectible accounts as a percentage of net patient
service revenues decreased from 14.6% for the nine months ended September 30,
1997, to 11.5% for the nine months ended September 30, 1998. This 3.1%
improvement is due to the continued success from the Company's operational
processes including scheduling, preregistration, and preverification.
OPERATING LOSS. Operating loss decreased from $3,390,000 for the nine months
ended September 30, 1997, to $1,500,000 for the nine months ended September 30,
1998, a decrease of $1,890,000 or 55.8%. During the second quarter of 1997,
there were nonrecurring charges totaling $1,850,000. Without these nonrecurring
charges of $1,850,000, the operating loss for the nine months ended September
30, 1997 would have been $1,540,000.
10
<PAGE> 11
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $582,000 for the nine months ended September 30, 1997, to $624,000 for the
nine months ended September 30, 1998, an increase of $42,000 or 7.2%.
INCOME (LOSS) BEFORE INCOME TAXES. Loss before income taxes decreased from
$2,897,000 for the nine months ended September 30, 1997, to $922,000 for the
nine months ended September 30, 1998, a decrease of approximately $1,975,000.
Without the $1,850,000 in nonrecurring charges, the loss before income taxes
would have been $1,047,000 for the nine months ended September 30, 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. For the nine months ended September
30, 1997, the Company recorded a tax benefit of $827,000. For the nine months
ended September 30, 1998, the Company did not record a current or deferred tax
benefit due to the Company's continuing operating loss trend and the uncertainty
of utilization of net operating loss carryforwards in future periods.
NET INCOME (LOSS). As a result of the items discussed above, the Company's
net loss decreased from $2,070,000 for the nine months ended September 30, 1997,
to $922,000 for the nine months ended September 30, 1998, a decrease of
$1,148,000. Without the nonrecurring charges of approximately $1,409,000 (net of
taxes), the net loss would have been approximately $661,000.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through 1993, the Company's operating expenses
significantly exceeded its net revenues, resulting in an accumulated retained
deficit of approximately $1.3 million as of December 31, 1993. From 1994 until
March 31, 1997, the Company recorded positive earnings, which resulted in
retained earnings of $431,290 as of March 31, 1997. As of September 30, 1998,
the Company has an accumulated retained deficit of $3,427,000, due to losses
incurred during the twelve months ended December 31, 1997 and the nine months
ended September 30, 1998. Until October 1996, the Company funded its operations
primarily through the private placement of equity securities, bank borrowings
and cash provided by operations. Prior to its initial public offering, which was
completed on October 11, 1996, the majority of the capital raised by the Company
had been raised from the private placement of $2.2 million of equity securities,
including $750,000 raised in July 1992, and approximately $1.5 million raised in
November 1995. The Company obtained a $2.0 million credit facility from
NationsBank of Texas, N.A. ("NationsBank") in June 1995. This facility was
composed of several tranches bearing interest rates ranging from prime plus 0.5%
to prime plus 1.5%. The net proceeds from such facility were used to retire
outstanding debt and to purchase medical equipment. The Company's facility with
NationsBank was increased to $4.3 million in March 1996. The NationsBank debt
was paid off in full during October 1996 with a portion of the net proceeds from
the initial public offering.
Net cash (used in) provided by the operating activities was $(1,409,000) and
$1,615,000 for the nine months ended September 30, 1997 and 1998, respectively.
For its investing activities, the Company consumed $3,329,000 and $2,216,000 for
the nine months ended September 30, 1997 and 1998, respectively, primarily for
the purchase of medical equipment, payment for acquisitions and buyout of
vehicle leases. Capital expenditures were $2,754,000 and $2,252,000 for the nine
months ended September 30, 1997 and 1998, respectively. Net cash consumed by
financing activities was $157,000 and $502,000 for the nine months ended
September 30, 1997 and 1998, respectively.
YEAR 2000 COMPLIANCE
The Company is in the process of evaluating its Year 2000 ("Y2K") compliance
status. The Company is testing its information technology, such as software
regarding Y2K compliance and is seeking certification of Y2K compliance from its
third party vendors. Because its software and information technology come from
third party vendors, who would be called on to replace or upgrade non- compliant
software, the Company does not expect that its Y2K-related expenditures with
respect to information technology will be significant. Based upon the Company's
current evaluation of the Y2K compliance of its information technology, its
polling of third party vendors, and its intention to replace or upgrade any
non-compliant information technology, the Company does not anticipate that there
will be a material Y2K problem with respect thereto.
In addition, certain of the Company's medical equipment contains embedded
technology that could have Y2K-related problems. The Company has polled the
manufacturers and vendors of such equipment regarding Y2K compliance and, based
on such polling, all equipment known to the Company to be non-Y2K compliant has
been replaced or upgraded. The Company does not expect to conduct independent
tests of its medical equipment to assess Y2K compliance. Based upon the
Company's actions in preparation for Y2K, and responses received from its
third-party vendors, the Company does not anticipate that there will be a
material Y2K problem with respect to its equipment. Furthermore, because its
equipment comes from third party vendors, which are being requested to replace
or upgrade all non-compliant equipment, the Company does not expect that its
Y2K-related expenditures with respect to embedded technology will be
significant.
Notwithstanding the foregoing, there can be no assurances (a) that the
representations provided by third party vendors with respect to Y2K compliance
will be accurate, or (b) that the Company will have any recourse against such
vendors if the representations prove to be inaccurate. A Y2K- related failure of
the Company's medical equipment and/or information technology could have a
material adverse effect on the Company and its results of operations.
Furthermore, there can be no assurances that Y2K-related failure caused by third
parties, such as utility providers, transportation companies or others, will not
have a material adverse effect on the Company.
11
<PAGE> 12
Based on the Company's process of evaluating its Y2K compliance status, the
Company has currently expended an estimated $10,000 related to addressing Y2K
issues. The Company expects the total costs in regard to addressing Y2K issues
to be an estimated $50,000. The Company also anticipates the project to be
substantially completed by the third quarter of 1999. Furthermore, there can be
no assurance that all Y2K issues will be addressed which could result in
additional costs for the Company.
PART II
ITEM 1. LEGAL PROCEEDINGS.
As of the date hereof, there are no legal proceedings pending against or
involving the Company that in the opinion of management, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. SHARE REPURCHASE PROGRAM.
On May 14, 1998, the Company commenced a share repurchase program of up to
one million shares of the Company's Common Stock. The purchases are to be made
from time to time over the next 12 months at prices then prevailing on the
Nasdaq National Market System or in privately negotiated transactions. From May
14, 1998 thru September 30, 1998, the Company repurchased 229,200 shares of the
Company's stock at a total cost of $731,000.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
2.1 Asset Purchase Agreement, dated March 18, 1996, between the Company and
Maasai Inc. (1)(6)
2.2 Asset Purchase Agreement, dated June 10, 1996, between the Company and
Mobile Laser Services, Inc. (1)(6)
2.3 Asset Purchase Agreement, dated as of January 21, 1997 among Stone
Treatment Center of New England, Inc., Gregory A. Mercurio, Vincent A.
Catallozzi, M.D., Alexander Calenda, M.D., Gerald Marsocci, M.D. Joseph
C. Cambio, M.D. and the Company. (3)(6)
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen of Company Common Stock Certificate. (1)
4.2 Warrant to Purchase 23,416 Shares of Common Stock of the Company
dated August 15, 1993 between the Company and Columbia General
Corporation. (1)
4.3 Warrant to Purchase 2,810 Shares of Common Stock of the Company dated
October 17, 1993 between the Company and Robert J. Mathews, M.D. (1)
4.4 Warrant to Purchase 2,342 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Shelly Burks. (1)
4.5 Warrant to Purchase 1,873 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (1)
4.6 Warrant to Purchase 6,556 Shares of Common Stock of the Company dated
September 1, 1994 between the Company and Thomas A. Montgomery. (1)
4.7 Warrant to Purchase 15,651 Shares of Common Stock of the Company dated
July 27, 1995 between the Company and Paul R. Herchman. (1)
10.1 Agreement between the Company and Coherent Medical Group. (1)
10.2 Master Lease agreement dated July 20, 1995 between the Company and
Cabot Medical Corporation. (1)
10.3 Master Service Agreement dated June 3, 1996 between the Company and
Cosmetic Technologies International. (2)
10.4 Joint Venture Agreement dated March 25, 1996 between the Company and
Coherent-AMT Inc. (2)
10.5 Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive
Plan. (2)
10.6 Employment Agreement between the Company and Paul Herchman. (1)
10.7 Employment Agreement between the Company and Gary Hill. (4)
10.8 Employment Agreement between the Company and Kevin O'Brien. (1)
10.9 Employment Agreement between the Company and Michael G. Wallace. (1)
10.10 Lease Agreement between the Company and Graymont Partners. Ltd. (1)
10.11 Strategic Alliance Agreement, dated as of December 19, 1996, by and
between Laserscope and the Company. (3)
10.12 Exclusive Provider Agreement, dated as of January 21, 1997, by and
between Thermolase Corporation and the Company. (3)
10.13 Strategic Alliance Agreement, dated as of January 1, 1997, by and
between Valleylab, Inc. and the Company. (3)
10.14 Exclusive Provider Agreement, dated as of February 9, 1997, by and
between Imagyn Medical, Inc. and the Company. (3)
12.1 Subsidiaries of the Company. (1)
27.1 Financial Data Schedule (5)
27.2 Financial Data Schedule (Restated) (5)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-09815) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-18545) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(5) Filed herewith.
(6) Schedules and similar attachments to this Exhibit have not been filed
herewith. The Company agrees to furnish a copy of any such
13
<PAGE> 14
omitted schedules and attachments to the Commission upon request.
(b) Reports on Form 8-K
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Alliance, Inc.
DATE: November 13, 1998
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ PAUL R. HERCHMAN
-----------------------------
Paul R. Herchman Chief Executive Officer
/s/ MARK A. NOVY
-----------------------------
Mark A. Novy Vice President of Finance
</TABLE>
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
2.1 Asset Purchase Agreement, dated March 18, 1996, between the Company and
Maasai Inc. (1)(6)
2.2 Asset Purchase Agreement, dated June 10, 1996, between the Company and
Mobile Laser Services, Inc. (1)(6)
2.3 Asset Purchase Agreement, dated as of January 21, 1997 among Stone
Treatment Center of New England, Inc., Gregory A. Mercurio, Vincent A.
Catallozzi, M.D., Alexander Calenda, M.D., Gerald Marsocci, M.D. Joseph
C. Cambio, M.D. and the Company. (3)(6)
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen of Company Common Stock Certificate. (1)
4.2 Warrant to Purchase 23,416 Shares of Common Stock of the Company
dated August 15, 1993 between the Company and Columbia General
Corporation. (1)
4.3 Warrant to Purchase 2,810 Shares of Common Stock of the Company dated
October 17, 1993 between the Company and Robert J. Mathews, M.D. (1)
4.4 Warrant to Purchase 2,342 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Shelly Burks. (1)
4.5 Warrant to Purchase 1,873 Shares of Common Stock of the Company dated
May 31, 1994 between the Company and Thomas A. Montgomery. (1)
4.6 Warrant to Purchase 6,556 Shares of Common Stock of the Company dated
September 1, 1994 between the Company and Thomas A. Montgomery. (1)
4.7 Warrant to Purchase 15,651 Shares of Common Stock of the Company dated
July 27, 1995 between the Company and Paul R. Herchman. (1)
10.1 Agreement between the Company and Coherent Medical Group. (1)
10.2 Master Lease agreement dated July 20, 1995 between the Company and
Cabot Medical Corporation. (1)
10.3 Master Service Agreement dated June 3, 1996 between the Company and
Cosmetic Technologies International. (2)
10.4 Joint Venture Agreement dated March 25, 1996 between the Company and
Coherent-AMT Inc. (2)
10.5 Medical Alliance, Inc. 1994 Amended and Restated Long-Term Incentive
Plan. (2)
10.6 Employment Agreement between the Company and Paul Herchman. (1)
10.7 Employment Agreement between the Company and Gary Hill. (4)
10.8 Employment Agreement between the Company and Kevin O'Brien. (1)
10.9 Employment Agreement between the Company and Michael G. Wallace. (1)
10.10 Lease Agreement between the Company and Graymont Partners. Ltd. (1)
10.11 Strategic Alliance Agreement, dated as of December 19, 1996, by and
between Laserscope and the Company. (3)
10.12 Exclusive Provider Agreement, dated as of January 21, 1997, by and
between Thermolase Corporation and the Company. (3)
10.13 Strategic Alliance Agreement, dated as of January 1, 1997, by and
between Valleylab, Inc. and the Company. (3)
10.14 Exclusive Provider Agreement, dated as of February 9, 1997, by and
between Imagyn Medical, Inc. and the Company. (3)
12.1 Subsidiaries of the Company. (1)
27.1 Financial Data Schedule (5)
27.2 Financial Data Schedule (Restated) (5)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-09815) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-18545) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(5) Filed herewith.
(6) Schedules and similar attachments to this Exhibit have not been filed
herewith. The Company agrees to furnish a copy of any such
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<DEPRECIATION> 7,633,623
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<CURRENT-LIABILITIES> 1,485,210
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<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> JAN-01-1997
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<CASH> 14,902,578
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