U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to______________
COMMISSION FILE NO. 0-27236
MEDICAL ASSET MANAGEMENT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0359976
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25241 Paseo de Alicia, Suite 230
Laguna Hills, CA 92653
Telephone: (714) 829-8333
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 15,733,413 shares of Common
Stock were outstanding as of December 19, 1997 (15,662,625 shares of Common
Stock were outstanding as of September 30, 1997).
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
MEDICAL ASSET MANAGEMENT, INC.
INDEX
Page
No.
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations for the
three and nine months ended September 30, 1997
and 1996 4
Consolidated Statements of Cash Flows for the
three and nine months ended September 30, 1997
and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Recent Sales of Unregistered Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
1
<PAGE>
PART I
<TABLE>
<CAPTION>
Item 1. Financial Statements.
Medical Asset Management, Inc. and Subsidiary
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $52,000 $3,400,000
Restricted cash - 1,264,000
Accounts receivable, less $3,539,000 at
September 30, 1997 and $3,586,000 at
December 31, 1996 4,665,000 4,480,000
Physicians receivables, less $875,000 at
September 30, 1997 and $150,000 at
December 31, 1996 3,029,000 2,660,000
Other current assets 136,000 269,000
-------------- --------------
Total current assets 7,882,000 12,073,000
Property and equipment:
Land 195,000 -
Buildings 1,510,000 680,000
Furniture and equipment 1,906,000 1,668,000
-------------- --------------
3,611,000 2,348,000
Less accumulated depreciation 494,000 507,000
-------------- --------------
Total property and equipment, net 3,117,000 1,841,000
Intangible assets and other:
Acquired management contracts 14,640,000 12,202,000
Excess of cost of acquired assets
over fair value 5,270,000 5,431,000
Computer software license agreement 1,254,000 1,238,000
Other assets - 20,000
-------------- --------------
21,164,000 18,891,000
Less accumulated amortization 1,433,000 885,000
-------------- --------------
Total intangible assets and other, net 19,731,000 18,006,000
------------- --------------
Total assets $30,730,000 $31,920,000
============== ==============
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiary
Consolidated Balance Sheets
(continued)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C>
Current liabilities:
Line of credit and notes payable $34,000 $1,707,000
Current portion of long-term liabilities 2,593,000 1,393,000
Accrued litigation settlements 1,131,000 1,573,000
Accounts payable 981,000 705,000
Accrued payroll 223,000 268,000
Accrued professional fees 967,000 945,000
Accrued expenses 288,000 379,000
--------------- --------------
Total current liabilities 6,217,000 6,970,000
Notes payable and capital lease
obligations 4,725,000 2,301,000
Convertible subordinated debt 125,000 126,000
Deferred tax liability 3,274,000 3,274,000
--------------- --------------
Total liabilities 14,341,000 12,671,000
Stockholders' equity
Convertible preferred stock - $.001 par
value-10,000,000 shares authorized;
Class A - 2,250,000 shares issued and
outstanding at September 30, 1997 and
December 31, 1996 2,000 2,000
Common Stock - $.001 par value - 50,000,000
shares authorized, 15,663,000 shares
issued and outstanding at September 30,
1997 and 14,945,000 shares issued
and outstanding at December 31, 1996 16,000 15,000
Additional paid-in capital 20,196,000 18,382,000
Common Stock to be issued, 1,805,000
shares at September, 1997 and 1,988,000
shares at December 31, 1996 8,072,000 9,574,000
Unearned remuneration (1,007,000) (1,494,000)
Deficit (10,890,000) (7,231,000)
-------------- -------------
Total stockholders' equity 16,389,000 19,249,000
=============== ==============
Total liabilities and stockholders'
equity $30,730,000 $31,920,000
=============== ==============
SEE ACCOMPANYING NOTES.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1997 1996 1997 1996
(RESTATED) (RESTATED)
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenue $3,304,000 $2,699,000 $10,729,000 $6,435,000
Operating expenses:
Clinic salaries, wages,
and benefits 1,169,000 1,015,000 3,501,000 2,421,000
Clinic laboratory and
fees 552,000 448,000 1,583,000 1,069,000
Clinic rent 456,000 370,000 1,351,000 882,000
Other clinic costs 482,000 362,000 1,470,000 863,000
Consulting fees 2,000 19,000 175,000 44,000
Depreciation and
amortization 434,000 257,000 843,000 613,000
------------ ------------ ------------ ------------
Total operating expenses 3,095,000 2,471,000 8,923,000 5,892,000
------------ ------------ ------------ ------------
209,000 228,000 1,806,000 543,000
General and administrative
Expenses 1,656,000 1,009,000 3,961,000 2,406,000
------------ ------------ ------------ ------------
(1,447,000) (781,000) (2,155,000) (1,863,000)
Other income (expense):
Net loss on litigation
settlements -- -- -- (749,000)
Clinic terminations and
reserves (1,630,000) -- (1,630,000) --
Interest income 29,000 29,000 109,000 70,000
Interest expense (135,000) (65,000) (310,000) (155,000)
Forgiveness of debt 318,000 -- 318,000 --
Other (net) 2,000 (19,000) 9,000 (45,000)
------------ ------------ ------------ ------------
Total other income (expense) (1,416,000) (55,000) (1,504,000) (879,000)
------------ ------------ ------------ ------------
Loss before income taxes (2,863,000) (836,000) (3,659,000) (2,742,000)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (2,863,000) $ (836,000) $ (3,659,000) $ (2,742,000)
============ ============ ============ ============
Net loss per share $ (0.18) $ (0.06) $ (0.24) $ (0.21)
============ ============ ============ ============
Weighted average number of
common shares outstanding 15,662,000 14,409,000 15,371,000 12,806,000
SEE ACCOMPANYING NOTES.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Medical Asset Management, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
1997 1996 1997 1996
(RESTATED) (RESTATED)
------------ -------------- ----------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $(2,863,000) $ (836,000) $(3,659,000) $(2,742,000)
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 434,000 257,000 843,000 613,000
Clinic terminations 1,630,000 -- 1,630,000 --
Forgiveness of debt (318,000) -- (318,000) --
Bad debt and contractual 184,000 -- 409,000 --
allowances
Write-off of franchise fees -- -- 749,000
Common stock issued for services -- -- 375,000
Changes in operating assets and
liabilities, Net of effects
of acquisitions
Accounts and physician
receivables (609,000) (157,000) (2,039,000) (1,472,000)
Other current assets 98,000 (48,000) 106,000 480,000
Accounts payable (92,000) 100,000 (15,000) 293,000
Accrued payroll and expenses 468,000 -- (159,000) 8,000
----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities (1,068,000) (684,000) (3,202,000) (2,224,000)
CASH FLOWS FROM INVESTING
ACTIVITIES
Decrease in restricted cash 2,500,000 -- 1,264,000 --
Net cash used to fund
acquisitions (554,000) (1,011,000) (881,000) (2,100,000)
----------- ----------- ----------- -----------
Net cash provided (used) in
investing activities 1,946,000 (1,011,000) 383,000 (2,100,000)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from debt issuances 872,000 800,000 2,770,000 1,125,000
Repayment of debt
(2,758,000) (125,000) (3,299,000) (375,000)
Net proceeds from issuances of
common stock -- -- -- 8,260,000
----------- ----------- ----------- -----------
Net cash provided (used) by
financing activities (1,886,000) 675,000 (529,000) 9,010,000
Net increase (decrease) in cash (1,008,000) (1,020,000) (3,348,000) 4,686,000
Cash, beginning of period 1,060,000 5,838,000 3,400,000 132,000
=========== =========== =========== ===========
Cash, end of period $ 52,000 $ 4,818,000 $ 52,000 $ 4,818,000
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information:
Interest paid $ 80,000 $ 65,000 $ 121,000 $ 155,000
=========== =========== =========== ===========
Assets acquired with stock
issuance, Assumption of
debt and other liabilities $ 525,000 $ 1,811,000 $ 3,982,000 $ 8,102,000
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES.
</TABLE>
5
<PAGE>
Medical Asset Management, Inc. and Subsidiary
Notes to Consolidated Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited consolidated interim financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals which are necessary for a fair presentation of the
financial position and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
These unaudited consolidated financial statements, footnote disclosures and
other information should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996. The 1996 quarterly financial
statements were restated. See Note 3.
6
<PAGE>
2. Acquisitions
The Company entered into acquisitions and long-term management service
agreements with nine and twelve medical groups during the nine months ended
September 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash and transaction
costs $394,000 $847,000
Notes payable 2,334,000 1,512,000
Common stock issued and to be issued 1,765,000 5,717,000
Liabilities assumed 292,000 26,000
-------------- -------------
Total costs $4,785,000 $8,102,000
============== =============
</TABLE>
The following unaudited pro forma information presents the results of operations
of the Company for the nine months ended September 30, 1997 as if the 1997
transactions had been consummated on January 1, 1997, and for the nine months
ended September 30, 1996 as if the 1997 and 1996 transactions were consummated
on January 1, 1996.
The unaudited pro forma information presented below is for illustrative
information only and is not necessarily indicative of results which would have
been achieved or results which may be achieved in the future:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue $12,595,000 $9,815,000
Net loss (3,007,000) (2,496,000)
Net loss per
share $(0.20) $(0.19)
============== ==============
</TABLE>
3. Restatement
During 1996, management restated the 1995 consolidated financial statements for
certain corrections of accounting principles and misapplications of facts that
existed at the time the 1995 financial statements were prepared. The corrections
also required restatement of and adjustments to previously reported 1996
quarterly financial information as follows (unaudited):
<TABLE>
<CAPTION>
NET INCOME NET INCOME STOCKHOLDERS'
(LOSS) (LOSS) PER SHARE EQUITY
------ ---------------- ------
Three months ended
September 30, 1996
<S> <C> <C> <C>
As previously reported $ 717,000 $0.06 $26,226,000
Adjustment (1,553,000) (0.12) (5,007,000)
---------- ----- ----------
As restated $ (836,000) $(0.06) $21,219,000
========== ====== ===========
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW.
GENERAL. The Company is a physician practice management company that
develops contractual affiliations with physician practices that provide for
management by the Company and clinical autonomy for the physicians. The Company
also offers a full array of management services as a management service
organization under long term service contracts, to both affiliated physicians
and other independent healthcare entities, directly and through its subsidiary,
Healthcare Professional Management, Inc. ("HPM"). HPM also provides management
services on a consulting basis to over 200 physicians in Pennsylvania, West
Virginia and Ohio.
For the year ended December 31, 1996, the medical groups affiliated with
the Company derived approximately 35% of their medical service revenue from
service provided under Medicare and Medicaid programs and approximately 30% from
contractual fee-for-service arrangements with numerous payors and managed care
programs, respectively, none of which individually aggregated more than 10% of
medical service revenue. The remaining 35% of medical service revenue was
derived from various fee-for-service payors. Changes in the medical group's
payor mix can affect the Company's revenue. Management believes that the payor
mix during the first, second and third quarters of 1997 remained approximately
the same as for the year ended December 31, 1996.
RESTATEMENT. During 1996 management restated the prior periods' financial
statements for certain corrections of accounting principles and misapplication
of facts that existed at the time the financial statements were prepared. The
aggregate amount of the restatement resulted in a reduction in earnings from the
previously reported net income for the three months ended September 30, 1996 of
$717,000 to a net loss of $836,000.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues represented
by certain items reflected in the Company's Statement of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Expenses 80.6% 82.0% 75.3% 82.0%
Depreciation and
amortization 13.1% 9.6% 7.9% 9.6%
----- ---- ---- ----
Income from operations 6.3% 8.4% 16.8% 8.4%
General and administrative 50.1% 37.4% 36.9% 37.4%
Other income (expense) (42.9)% (2.0)% (14.0)% (13.6)%
------- ------ ------- -------
Net loss (86.7)% (31.0%) (34.1)% (42.6%)
</TABLE>
COMPARATIVE QUARTERLY RESULTS
At September 30, 1997, the Company managed 29 practices having a total of
98 physicians in nine states pursuant to its standard equity arrangements as
compared to 25 practices having a total of 32 physicians in eight states at
September 30, 1996. During the three and nine months ended September 30, 1997,
the Company entered into such arrangements with one and nine additional
practices, respectively, as compared to none and twelve for the three and nine
months ended September 30, 1996, respectively. Due to the drop in the Company's
stock value and cash reserves they have hindered the Company's ability to
acquire additional practices. During the three and nine months ended September
30, 1997, the Company terminated four and no such arrangements as compared to
none and five for the three and nine months ended September 30, 1996. Changes in
the results of operations for the three and nine months ended September 30,
1997, compared to the three and nine months ended September 30, 1996, were
caused primarily by affiliations with these additional practices, the continued
building of a corporate infrastructure, write-off of franchise fees and the
settlement of certain litigation, with their corresponding professional fees.
9
<PAGE>
NET REVENUE increased $605,000, or 22% to $3,304,000 for the three months
ended September 30, 1997 as compared to $2,699,000 for the three months ended
September 30, 1996. Net Revenue increased approximately $4,294,000 or 67%, to
$10,729,000 for the nine months ended September 30, 1997 as compared to
$6,435,000 for the nine months ended September 30, 1996. Medical service revenue
prior to any provision for doubtful accounts, contractual adjustments or
adjustments for amounts retained by medical groups increased $2,062,000, or 36%,
to $7,795,000 for the quarter ended September 30, 1997 as compared to $5,733,000
for the quarter ended September 30, 1996. For the same periods, revenue from HPM
increased $6,000, or 3%, from $238,000 to $244,000. Medical service revenue
prior to any provision for doubtful accounts, contractual adjustments or
adjustments for amounts retained by medical groups increased $10,893,000, or
82%, to $24,254,000 for the nine months ended September 30, 1997 as compared to
$13,361,000 for the nine months ended September 30, 1996. For the same periods,
revenue from HPM decreased $104,000, or 11%, from $931,000 to $829,000. The
Company's growth in revenue is primarily attributable to the addition of new
management services agreements.
OPERATING EXPENSES consist of (i) clinic salaries, wages and benefits,
clinic laboratory and fees, clinic rent, other clinic costs and consulting fees
and (ii) depreciation and amortization. Clinic expenses increased by $447,000,
or 20%, to $2,661,000 for the quarter ended September 30, 1997 from $2,214,000
for the comparable period in 1996. Clinic expenses increased by $2,801,000, or
53%, to $8,080,000 for the nine months ended September 30, 1997 from $5,279,000
for the comparable period in 1996. The increases in clinic expenses for each of
the respective periods reflects the addition of new physician affiliations.
Depreciation and amortization expenses for the quarter ended September 30,
1997 increased by $177,000, or 69%, to $434,000 as compared to $257,000 for the
quarter ended September 30, 1996. Depreciation and amortization expenses for the
nine months ended September 30, 1997 increased by $230,000, or 38%, to $843,000
as compared to $613,000 for the nine months ended September 30, 1996. This
increase was primarily the result of the amortization and depreciation of newly
acquired management services agreements and fixed assets.
INCOME FROM OPERATIONS decreased $19,000 or 8%, to $209,000 for the quarter
ended September 30, 1997 from $228,000 for the comparable period in 1996. Income
from Operations increased $1,263,000, or 233%, to $1,806,000 for the nine months
ended September 30, 1997 from $543,000 for the comparable period in 1996.
Substantially all of this increase was attributable to the addition of new
affiliated physician practices.
GENERAL AND ADMINISTRATIVE EXPENSES consist of salaries paid to corporate
staff, administrative, legal and accounting and development costs. General and
administrative costs increased by $647,000, or 64%, to $1,656,000 for the
quarter ended September 30, 1997 from $1,009,000 for the quarter ended September
30, 1996. General and administrative costs increased by $1,555,000, or 65%, to
$3,961,000 for the first nine months of 1997 from $2,406,000 for the nine months
ended September 30, 1996. These
10
<PAGE>
increases were primarily the result of a build-up in the Company's financial and
operational staff, additional professional and additional administrative costs
incurred in the first three and nine months of 1997 as compared to the
corresponding periods in 1996.
OTHER INCOME (EXPENSE) increased by $1,361,000 to an expense of $1,416,000
for the quarter ended September 30, 1997 from an expense of $55,000 for the
comparable period in 1996. The increase is principally the result of a
$1,630,000 increase in clinic terminations and reserves for the quarter ended
September 30, 1997, from no expense for the quarter ended September 30, 1996.
Other Income (Expense) increased by $625,000 to an expense of $1,504,000 for the
nine months ended September 30, 1997 from $879,000 for the comparable period in
1996. The increase consists principally of a $1,630,000 net loss on clinic
terminations and reserves in the nine months ended September 30, 1997 as
compared to no such expense for the nine months ended September 30, 1996, offset
by a decrease in net loss on litigation settlements from $749,000 for the nine
months ended September 30, 1996 to no such expense for the nine months ended
September 30, 1997.
Interest expense increased by $155,000, to $310,000 for the nine months
ended September 30, 1997 from $155,000 for the first nine months of 1996,
primarily as a result of increased borrowings under the Company's credit
facility.
Interest income was $29,000 for the quarter ended September 30, 1997 and
for the quarter ended September 30, 1996. Interest income increased to $109,000
for the nine months ended September 30, 1997 from $70,000 for the nine months
ended September 30, 1996. This increase in interest income resulted from the
investment of a portion of funds received from a private placement that was
completed in May 1996.
INCOME TAXES were zero for the three and nine months ended September 30,
1997 and 1996. The Company had net operating losses for federal and state income
tax purposes at September 30, 1997 of approximately $11,000,000 which can be
carried forward and used to offset the Company's future taxable income through
the year 2009.
NET LOSS increased $2,027,000, or 242% to a loss of $2,863,000 for the
quarter ended September 30, 1997 from a net loss of $836,000 for the quarter
ended September 30, 1996. The increase in the net loss was primarily the result
of the increase in clinic terminations of $1,630,000 and a $647,000 increase in
general and administrative expenses, offset by an increase in income from
forgiveness of indebtedness of $318,000 for the quarter ended September 30, 1997
as compared to the same period in 1996. Net Loss increased $917,000 or 33% to
$3,659,000 for the nine months ended September 30, 1997 from a net loss of
$2,742,000 for the nine months ended September 30, 1996. The increase was the
result of the clinic terminations of $1,630,000 offset by $318,000 in
forgiveness off indebtedness income for the nine months ended September 30, 1997
as compared to no such expense and income items in the nine months ended
September 30, 1996. The increase was also attributable to an increase in
operating revenue of $1,263,000 and an increase in general and administrative
expenses of $1,555,000 offset by
11
<PAGE>
a decrease in net loss on litigation settlements of $749,000 for the nine months
ended September 30, 1997 as compared to the nine months ended September 30,
1996.
NET LOSS PER SHARE increased to ($.18) in the three months ended September
30, 1997 as compared to ($.06) per share for the corresponding period in 1996.
Net Loss per Share
increased to ($.24) in the nine months ended September 30, 1997 as compared to
($.21) per share for the corresponding period in 1996. These increases resulted
from the increase in net loss and a 29% and 33% increase in the weighted average
number of shares of Common Stock outstanding, for the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY. The Company has continued to experience losses from operations and
negative cash flows from operating activities for the nine months ended
September 30, 1997 and the year ended December 31, 1996. Significant
contributing factors to the loss for the nine months ended September 30, 1997,
were the rapid growth of the Company, the resulting increase in general and
administrative expenses and the losses incurred on terminations. The increase in
cash used in operations in the first nine months of 1997 was primarily the
result of the Company's decision to defer the timely collection of management
fees to support the growth of practices under management agreements. The
Company's decision to reinvest funds in medical practices that are already
owned, and fund acquisitions of additional medical practices along with cash
required to meet debt obligations and fund operations has significantly reduced
the amount of cash available to the Company. As a result, the Company will be
required to seek additional financing from banks, institutional investors and
other sources and to reduce or contain costs in order to fund operations and
meet obligations and future commitments.
WORKING CAPITAL. At September 30, 1997, the Company's net working capital
was $1,665,000, as compared to $5,103,000 at December 31, 1996. The principal
components of the Company's working capital are cash and accounts receivable.
Unrestricted cash decreased to $52,000 from $3,400,000 at December 31, 1996
primarily as a result of cash used in operations. Accounts receivable
principally represent receivables from patients and third parties for medical
services provided by physician groups. Accounts receivable are a function of net
physician practice revenue rather than net revenue of the Company. Accounts
receivable increased $185,000, or 4%, to $4,665,000 at September 30, 1997 from
$4,480,000 at December 31, 1996, reflecting the increase in practice billings
that the Company manages. Physician receivables were $2,660,000 at December 31,
1996, as compared to $3,029,000 at September 30, 1997, reflecting the Company's
decision to continue to reinvest funds in medical practices managed. Total
current liabilities at September 30, 1997 decreased to $6,217,000 from
$6,970,000 on December 31, 1996 primarily as a result of lower borrowings under
the Company's credit line and notes payable. The ratio of current assets to
current liabilities was 1.27 to 1.00 at September 30, 1997 as compared to 1.73
to 1.00 at December 31, 1996.
12
<PAGE>
CASH FLOWS. Net cash provided in investing activities for the nine months
ended September 30, 1997 was $383,000, compared to net cash used of $2,100,000
in investing activities for the comparable period in 1996. The difference was
primarily the result of a decrease in restricted cash required by the Company's
credit facility from $1,264,000 to $0 and a decrease of $1,219,000 in amounts
used to fund acquisitions.
Net cash used by financing activities during the nine months ended
September 30, 1997 was $529,000, compared to $9,010,000 cash provided by
financing activities during the first nine months of 1996. The difference
reflects the private placement of Common Stock on May 31, 1996, which yielded
proceeds, net of offering expenses, of $7.2 million as well as an increase in
the repayment of debt of $2,924,000 offset by a decrease in the proceeds from
debt issuances of $1,645,000.
Net cash used in operations for the nine months ended September 30, 1997
was $3,202,000, a $978,000 increase over funds used in operations for the nine
months ended September 30, 1996. While the net loss for the nine months ended
September 30, 1997 increased to $3,659,000 from the net loss of $2,742,000 for
the nine months ended September 30, 1996, the increase in net cash used in
operations was primarily the result of a $1,630,000 in clinic terminations.
DEBT FACILITIES. The Company's outstanding debt obligations consist of a
line of credit, notes payable, long-term debt, and convertible subordinated
debt.
At September 30, 1997, the Company's long-term debt in aggregate principal
amount of $7,318,000 (including current portion of $2,593,000) consisted of:
(i) Mortgage payable of $1,115,000 to a banks, collateralized by a
building with a net book value of $1,665,000 with interest at 10%
(ii) Unsecured note payable to a finance company in the amount of
$375,000 with interest at 7.9%
(iii) Note payable to a computer vendor of $738,000 with interest at
10%
(iv) Capital lease obligations in the aggregate amount of $2,028,000
with varying interest rates not exceeding 26.5%
(v) Notes payable to various individuals in conjunction with asset
acquisitions, of $2,989,000 at 10% with varying maturity dates
(vi) Other debt in the amount of $73,000
SUBSEQUENT DEVELOPMENTS
On October 15, 1997, the Company entered into a $1,250,000 accounts
receivable factoring line of credit under which approximately $572,000 was
outstanding and fully
13
<PAGE>
repaid on November 24, 1997, at which time the line of credit was terminated.
The Company borrowings were limited to a formula equal to 40% of accounts
receivable outstanding for less than 90 days at the time of the borrowing. A
factoring commission of 1% for each 30 day period in addition to interest at the
published prime rate plus 2% could be charged on outstanding borrowings. A
reserve of 5% of the total outstanding invoices was also required. This facility
was guaranteed by certain officers of the Company.
The Company entered into a new accounts receivable credit facility
effective as of November 12, 1997, under which 80% of the net collectible value
of the Company's accounts receivable could be advanced up to $2,500,000. The
Company initially borrowed approximately $1,600,000 on November 24, 1997, the
proceeds of which were used to repay the outstanding borrowings under the
existing factoring accounts receivable line described above and to fund working
capital needs. Various additional borrowings and repayments have occurred
through December 30, 1997 at which time $2,198,000 was outstanding.
Management recognizes that the Company must generate additional financial
resources and reduce operating expenses. To address future cash requirements,
management developed a business plan in the fourth quarter of 1997 that
includes:
- Securing additional financing to cover anticipated cash
requirements.
- Reducing advances to physicians.
- Reducing compensation expense included in general and
administrative expense by headcount and salary reductions.
- Reducing executive compensation by 30% effective November 1, 1997
and deferral of 1998 senior management compensation, if
necessary.
- Completing refinancings of Company-owned medical buildings and
equipment.
- Curtailing acquisition activity until cash resources are
available and reducing associated travel and entertainment
expenditures.
There can be no assurance that the additional financing, other sources of funds,
or other cost reductions as described above will be achieved. If these
financings, other sources of funds or other reductions are not achieved within
acceptable ranges, the Company's liquidity would be materially adversely
affected.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share,"
which is required to be adopted by the Company for the year ended December 31,
1997. The provisions of SFAS No. 128 will be adopted in the 1997 consolidated
financial statements.
14
<PAGE>
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating earnings per share, the dilutive effect of
convertible preferred stock will be excluded for "basic earnings per share" and
only included in "diluted" earnings per share. Further, contingently issuable
shares will be included in basic earnings per share only if all
the necessary conditions have been satisfied by the end of the period and it is
only a matter of time before they are issued. The impact of SFAS No. 128 on the
calculation of earnings per share for the year ending December 31, 1997 has not
been determined.
* * *
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this report, may constitute
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.
15
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is presently engaged in various proceedings occurring in the
course of its business of entering its affiliations with physician practices and
medical related entities. However, except as described in the Company's Form
10-KSB, management believes that the ultimate outcome of these proceedings is
not expected to be material to operations or the Company's financial position.
In addition, Alastair Knott ("Plaintiff") filed a civil action on November
17, 1997, in the United States District Court for the District of Arizona
against MAM, John Regan, Sandy Regan, Dennis Calvert, Michael Zaic, David Lilly,
Esquire, Law Offices of Lance N. Kerr, and Holladay Stock Transfer, Inc.,
setting forth claims for damages in excess of $900,000 on theories of alter ego,
civil conspiracy, breach of oral contract, breach of written contract, breach of
covenants of good faith and fair dealings, fraud, breach of fiduciary duties,
conversion and bad faith denial of contract. These claims arise from the
allegedly wrongful cancellation of a stock certificate evidencing Plaintiff's
alleged ownership of 194,425 shares of the Common Stock of MAM. MAM has not yet
responded substantively to the complaint, but denies all liability and intends
to vigorously defend the suit.
Reference is made to the Company's Form 10-QSB for the quarterly period
ended June 30, 1997, which sets forth additional disclosures relating to legal
proceedings.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
There have been no changes in the rights, preferences or privileges of any
security of the Company during the quarter ended September 30, 1997. During the
quarter ended September 30, 1997, the Company issued an aggregate of 18,000
shares of Common Stock pursuant to asset purchase agreements with physicians, of
which 10,000 shares were issued pursuant to commitments entered into prior to
June 30, 1997. During the quarter ended September 30, 1997, the Company agreed
to issue, pursuant to new equity affiliation agreements with physicians, a total
of 34,000 additional shares of Common Stock during the period 1998 to 2001.
Further, during the quarter ended September 30, 1997, equity affiliation
agreements pursuant to which 177,000 shares of Common Stock were to be issued
were canceled. In addition, the Company issued 29,000 shares of Common Stock in
settlement of litigation. The Company issued these shares in transactions in
reliance upon the exemption provided under Section 4(2) of the Securities Act of
1933.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
SEQUENTIAL
EXHIBIT NO. DESCRIPTION LOCATION NO.
27 Financial Data Schedule Filed
herewith
(b) During the quarter ended September 30, 1997,
the Company filed no reports on Form-8-K.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL ASSET MANAGEMENT, INC.
By: /s/ John W. Regan
-------------------------------
John W. Regan
Chairman and President
By: /s/ Gary L. Steib
-------------------------------
Gary L. Steib
Treasurer and Interim Chief Financial
Officer
Date: January 5, 1998
18
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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