<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-QSB
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the period from__________ to__________
Commission file number 0-25344
_______________
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 25-1741216
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1315 Greg Street, Suite 103
Sparks, Nevada
(Address of principal 89431
executive offices) (Zip Code)
(702) 356-2315
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No .
---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: Common Stock, par value $.01 per
share, 15,399,316 shares outstanding as of October 31, 1997.
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 818.1 $ 2,882.0
Accounts receivable............................................................... 5,734.9 2,339.1
Notes and interest receivable--related party...................................... 2,776.2 3,428.2
Other assets and prepaid expenses................................................. 139.7 301.8
------------- ------------
Total current assets............................................................ 9,468.9 8,951.1
Property and equipment, net......................................................... -- 19.1
Intangible assets, net.............................................................. 8,180.4 5,780.4
Deferred costs and other assets..................................................... 335.8 800.5
------------- ------------
Total assets.................................................................... $ 17,985.1 $ 15,551.1
------------- ------------
------------- ------------
LIABILITIES
Current liabilities:
Accrued subcontract fees.......................................................... $ 1,120.3 $ 1,074.1
Accounts payable and accrued expenses............................................. 46.3 137.9
Short term debt................................................................... 380.3 77.0
Federal income taxes payable...................................................... 119.0 --
------------- ------------
Total current liabilities....................................................... 1,665.9 1,289.0
Long-term debt...................................................................... 128.9 --
Commitments and contingent liabilities.............................................. -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding...... -- --
Common stock, $.01 par value, 40,000,000 shares authorized, 15,399,316 and
14,956,428 shares issued and outstanding.......................................... 154.0 149.6
Paid-in capital..................................................................... 12,372.7 11,512.1
Retained earnings................................................................... 3,663.6 2,600.4
------------- ------------
Total stockholders' equity...................................................... 16,190.3 14,262.1
------------- ------------
Total liabilities and stockholders' equity...................................... $ 17,985.1 $ 15,551.1
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
INCOME STATEMENTS
(In Thousands)
For the Three Month Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.............................................................................. $ 2,161.3 $ 2,358.4
Subcontract expense................................................................... 1,461.4 1,614.8
------------ ------------
Operating income.................................................................. 699.9 743.6
Selling, general and administrative expense........................................... 97.5 248.6
Depreciation and amortization expense................................................. 119.7 86.5
Interest expense (income)............................................................. (75.5) (105.1)
------------ ------------
Income before income taxes............................................................ 558.2 513.6
------------ ------------
Provision for income taxes:
Current............................................................................. 182.2 158.5
Deferred............................................................................ -- --
------------ ------------
182.2 158.5
------------ ------------
Net income........................................................................ $ 376.0 $ 355.1
------------ ------------
------------ ------------
Primary net income per share.......................................................... $ 0.02 $ 0.02
------------ ------------
------------ ------------
Weighted average number of shares outstanding used in primary calculation............. 15,269,925 15,618,588
------------ ------------
------------ ------------
Fully diluted net income per share.................................................... $ 0.02 $ 0.02
------------ ------------
------------ ------------
Weighted average number of shares outstanding used in fully diluted calculation....... 15,269,925 15,618,588
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
INCOME STATEMENTS
(In Thousands)
For the Nine Month Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.............................................................................. $ 6,914.9 $ 6,767.0
Subcontract expense................................................................... 4,745.5 4,544.3
------------ ------------
Operating income.................................................................. 2,169.4 2,222.7
Selling, general and administrative expense........................................... 482.9 477.4
Depreciation and amortization expense................................................. 352.2 221.7
Interest expense (income)............................................................. (246.9) (246.2)
------------ ------------
Income before income taxes............................................................ 1,581.2 1,769.8
------------ ------------
Provision for income taxes:
Current............................................................................. 518.0 604.6
Deferred............................................................................ -- 5.4
------------ ------------
518.0 610.0
------------ ------------
Net income........................................................................ $ 1,063.2 $ 1,159.8
------------ ------------
------------ ------------
Primary net income per share.......................................................... $ 0.07 $ 0.07
------------ ------------
------------ ------------
Weighted average number of shares outstanding used in primary calculation............. 15,229,481 15,623,155
------------ ------------
------------ ------------
Fully diluted net income per share.................................................... $ 0.07 $ 0.07
------------ ------------
------------ ------------
Weighted average number of shares outstanding used in fully diluted calculation....... 15,229,481 15,623,155
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
(In Thousands)
For the Nine Month Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net income...................................................................... $ 1,063.2 $ 1,159.8
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization expense......................................... 352.2 221.7
Insurance in lieu of cash..................................................... 196.1 13.4
Changes in assets and liabilities:
(Increase) decrease in receivables.......................................... (2,551.8) (209.0)
(Increase) decrease in other assets......................................... 377.4 (120.4)
Increase (decrease) in accounts payable and accrued expenses................ (45.4) (162.2)
Increase in income taxes payable............................................ 119.0 (130.2)
---------------- -----------
Net cash provided by (used in) operations..................................... (489.3) 773.1
---------------- -----------
Cash flow from investing activities:
Receivables acquired in acquisitions............................................ (844.1) (361.9)
Origination of notes receivable................................................. (452.3) (5,200.0)
Principal collections of notes receivable....................................... 1,104.4 2,000.0
Deferred costs-contract acquisitions............................................ 453.8 (95.0)
Purchase of property and equipment.............................................. 18.4 (8.9)
Client lists.................................................................... (1,636.4) (874.1)
Other assets.................................................................... 10.9 (10.9)
---------------- -----------
Net cash used in investing activities......................................... (1,345.3) (4,550.8)
---------------- -----------
Cash flow from financing activities:
Initial public offering costs................................................... -- (7.4)
Payments of short term debt..................................................... (229.3) (24.2)
---------------- -----------
Net cash used in financing activities......................................... (229.3) (31.6)
---------------- -----------
Net decrease in cash.......................................................... ($ 2,063.9) ($3,809.3)
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
(In Thousands)
For the Nine Month Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net decrease in cash................................................................ ($2,063.9) ($3,809.3)
Cash balance, beginning balance......................................................... 2,882.0 6,580.2
----------- -----------
Cash balance, ending balance............................................................ $ 818.1 $ 2,770.9
----------- -----------
----------- -----------
Supplemental data:
Cash paid for income taxes............................................................ $ 230.0 $ 823.1
----------- -----------
----------- -----------
Cash paid for interest................................................................ $ 8.0 $ 7.3
----------- -----------
----------- -----------
Non-cash items:
Stock issued for contract acquisitions.............................................. $ 865.0 $ 2,650.0
----------- -----------
----------- -----------
Note payable issued for contract acquisitions....................................... $ 250.0 $ --
----------- -----------
----------- -----------
Note payable issued for insurance................................................... $ 411.5 $ 161.4
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited statements of National Medical Financial
Services Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
information. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
the three month and nine month periods ended September 30, 1997 are not
necessarily indicative of the results of operations that may be expected for
the year ending December 31, 1997.
2. Accounts Receivable:
Accounts receivables consisted of the following at September 30, 1997 and
December 31, 1996, respectively:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
Accounts receivable--billed......... $ 4,296.0 $ 1,740.9
Accounts receivable--unbilled....... 1,436.9 592.9
Miscellaneous receivable............ 2.0 5.3
------------- ------------
Total............................... $ 5,734.9 $ 2,339.1
------------- ------------
------------- ------------
3. Notes Receivable:
On May 1, 1996, the Company entered into a transaction with First United
Equities Corporation ("First United"), a broker-dealer registered with the
Securities and Exchange Commission. First United was the principal market
maker in the Company's Common Stock. Pursuant to the transaction, the Company
loaned $5,200,000 through a series of advances evidenced by a promissory note
bearing interest at 10%. Such note was due and payable on demand with seven
days notice. The note was collateralized by the guarantees of the principals
of First United. On May 29, 1996, First United repaid $2,000,000 to the
Company. Effective October 1, 1996, the remaining balance on the note and
accrued interest was satisfied through the establishment of an unsecured note
due from Russell Data Services, Inc., a Nevada corporation ("Russell Data"),
which was then owned by the Company's Chairman and principal stockholder (the
"Chairman") in the amount of $3,344,200. The note bears interest at 10% and
establishes a payment schedule of $1,000,000 each at January 15, April 15 and
July 15, 1997 plus accrued interest thereon, with the remaining balance and
interest thereon due on September 15, 1997. On February 10, 1997, the Company
received $1,104,800 in principal and accrued interest from Russell Data in
accordance with the payment schedule. The April 15, July 15 and September 15
payments have not yet been paid. Effective April 1, 1997, Russell Data was
acquired by Equi-Med, Inc., a Delaware corporation ("EquiMed"), a
publicly-traded company of which the Chairman is the Chairman, President,
Chief Executive Officer and principal stockholder.
7
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
3. Notes Receivable, continued:
On May 23, 1997, the Company loaned $250,000, evidenced by a promissory
note, to EquiMed Pakistan (Private) Limited, a Pakistan company ("EquiMed
Pakistan"), which is a wholly-owned subsidiary of EquiMed. The promissory
note bears interest at 12% and was scheduled to be repaid on September 22,
1997. Such repayment has not yet occurred.
4. Contract Acquisitions:
On March 1, 1997, the Company acquired a contract to provide billing and
collection services to certain medical service providers in Rhode Island. The
total consideration paid was $165,000, consisting of $100,000 in cash and
14,444 shares of Common Stock valued at $4.50 per share. In accordance with
the purchase agreement, the Company placed these shares into escrow. Fewer
shares will ultimately be released if certain revenue levels are not
maintained.
On March 1, 1997, the Company acquired a contract to provide billing and
collection services to certain medical service providers in the Cleveland,
Ohio area. The total consideration paid was $500,000, consisting of $300,000
in cash and 44,444 shares of Common Stock valued at $4.50 per share. In
accordance with the purchase agreement, the Company placed these shares into
escrow. Fewer shares will ultimately be released if certain revenue levels
are not maintained.
On August 1, 1997, the Company acquired twelve contracts to provide
billing and collection services to certain medical service providers in
Arizona. The total consideration paid was $1,800,000, consisting of $600,000
in cash, 384,000 shares of Common Stock valued at $1.56 per share and
promissory notes in the aggregate amount of $600,000. In accordance with the
purchase agreement, the Company placed the shares into escrow. The Common
Stock and promissory notes will be subject to total or partial forfeiture if
certain revenue levels are not maintained.
5. Intangible Assets:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
Client lists.............................. $ 8,209.3 $ 5,457.9
Software license.......................... 700.0 700.0
------------- ------------
8,909.3 6,157.9
Less accumulated amortization............. (728.9) (377.5)
------------- ------------
Total..................................... $ 8,180.4 $ 5,780.4
------------- ------------
------------- ------------
8
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
6. Long-term Debt:
Long-term debt consisted of the following at September 30, 1997 and
December 31, 1996, respectively:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Term note payable; bearing interest at 7.86%; payable in monthly installments of
principal and interest of $9,600; due in July 2000................................ $ 292.5 $ --
Term note payable; bearing interest at 6.28%; payable in monthly installments of
principal and interest of $15,600; due in May 1997................................ -- 77.0
Term note payable; bearing interest at 10.0%; payable in monthly installments of
$16,700 plus interest; due in November 1998....................................... 216.7 --
------ -----
509.2 77.0
Less current portion................................................................ (380.3) (77.0)
------ -----
Long-term debt, less current portion................................................ $ 128.9 $ --
------ -----
------ -----
</TABLE>
Interest paid during the nine month periods ended September 30, 1997 and
1996 was $8,000 and $7,309, respectively.
7. Common Stock:
On February 4, 1997, the Board of Directors of the Company authorized a
two for one stock split and a corresponding increase in the number of
authorized shares of the Company to 40,000,000 shares pursuant to Section
78.207 of the Nevada General Corporation Law (the "Stock Split"). The
stockholders of record as of February 17, 1997 (the "Record Date") received
one additional share of the Company's common stock for each share of common
stock held of record as of the Record Date. The Stock Split was distributed
on February 24, 1997 and all stock related data in the financial statements
reflects the Stock Split for all periods presented.
On June 30, 1997, in accordance with the Stock Option Plan for
Non-Employee Directors, each of the three eligible directors were
automatically granted stock options to purchase 50,000 shares of Common Stock
at an exercise price of $2.75 per share, the fair market value on that date.
9
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
7. Common Stock, continued:
On July 1, 1997, the Company granted non-qualified stock options to
acquire 500 shares of Common Stock to a consultant of the Company. In
addition, the Company granted incentive stock options to acquire 25,000
shares of Common Stock to the Company's Vice President, Chief Financial
Officer, Secretary and Treasurer. Both grants were awarded at an exercise
price of $2.72 per share, the fair market value at the time of the grant,
in accordance with the Stock Option Plan. The Company also cancelled
non-qualified stock options to acquire 20,000 shares of Common Stock which
were previously granted to a consultant.
In order to maintain a competitive compensation package to retain the
current officers and directors of the Company, the Company repriced the stock
options previously granted to those individuals at an exercise price of
$2.72 per share, the fair market value on July 1, 1997.
8. Prospective Accounting Changes:
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, and earlier application is
not permitted. This Statement requires restatement of all prior-period EPS
data presented. The Company is currently evaluating the impact, if any, that
the adoption of SFAS No. 128 will have on its financial statements.
9. Other Matters:
The contracts to provide billing, collection and accounts receivable
management services, as well as certain accounting services, to certain
medical service providers which are owned by, controlled by, or affiliated
with the Chairman expired on October 1, 1997, have not been renewed and no
further revenues and related subcontract expense (except some incidental
income) will be recognized. There can be no assurance that such contracts
will be renegotiated. Failure to successfully renegotiate these contracts
will have a material adverse effect on the Company's results of operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
financial statements and notes thereto, and with the Company's audited
financial statements and notes thereto for the fiscal year ended December 31,
1996.
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
Some of the information presented in this report constitutes forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 relating to the Company's future business and results of
operations. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results of operations or
the results of the Company's marketing and acquisition activities and will
not differ materially from its expectations. Factors which could cause actual
results to differ from expectations include, among others, uncertainty as to
whether the Company's marketing activities will result in an expansion of its
client base or lead to additional acquisitions of contracts and entities,
uncertainties related to state and federal governmental regulation of the
Company's business, uncertainties related to the demand for the services
provided by the Company, uncertainties related to the renewal of the client
contracts of medical service providers owned by, controlled by or affiliated
with the Chairman, and the uncertainty of whether the combination of
operating cash flows, the proceeds of the Company's initial public offering
and repayment of the note receivable will be sufficient to fund the Company's
growth and operations over the next twelve months. Specific reference is made
to risks and uncertainties described in the Company's Registration Statement
on Form S-3 (Registration No. 333-11381).
RESULTS OF OPERATIONS
Quarters Ended September 30, 1997 and September 30, 1996
Total revenues for the quarters ended September 30, 1997 and 1996 were
$2,161,300 and $2,358,400, respectively, a decrease of approximately 8.4%.
Approximately 52.7% of the 1997 revenues, as compared to 48.4% of the 1996
revenues, were derived from the Company's contracts with medical service
providers owned by, controlled by, or affiliated with the Chairman. The
primary reason for the decrease in revenues is due to cancellations of
acquired contracts from the Asterino, Doctors Medical Billing Services and
National Medical Services acquisitions. Revenues earned for the quarter ended
September 30, 1997 consisted of $1,960,100, or 90.7% of revenues, for billing
and collection services, $127,700, or 5.9% of revenues, for accounting
services, and $73,500, or 3.4% of revenues, for late charges and consulting
services. Revenues earned for the quarter ended September 30, 1996 consisted
of $2,172,100, or 92.1% of revenues, for billing and collection services, and
$134,700, or 5.7% of revenues, for accounting services, and $51,600, or 2.2%
of revenues, for late charges and consulting services. The percentage of
revenues attributable to billing and collection services as compared to
accounting services has decreased as the Company has lost contracts which
provide only for billing and collection services.
During the quarters ended September 30, 1997 and 1996, the Company incurred
subcontract expenses in the amount of $1,461,400 and $1,614,800, respectively,
for services
11
<PAGE>
rendered. Substantially all of these costs for both periods incurred were
payable to Russell Data. The Company reported operating income of $699,900,
income before taxes of $558,200, net income of $376,000 and primary earnings
per share of $0.02 for the quarter ended September 30, 1997. The Company
reported operating income of $743,600, income before taxes of $513,600, net
income of $355,100 and primary earnings per share of $0.02 for the quarter
ended September 30, 1996. The reasons for the increases in income before
taxes and net income for the quarter ended September 30, 1997 as compared to
the same period of 1996 were due to decreases in selling, general and
administrative expenses, particularly salaries and related employee benefits
and professional fees.
The Company incurred selling, general and administrative expenses of
$97,500 and $248,600 for the quarters ended September 30, 1997 and 1996,
respectively. The expenses for 1997 consisted primarily of insurance expense,
while the expenses for 1996 consisted primarily of salaries and related
employee benefits and professional fees.
The Company's effective tax rate was 32.8% and 38.2% for the quarters
ended September 30, 1997 and 1996, respectively.
Nine Month Periods Ended September 30, 1997 and September 30, 1996
Total revenues for the nine month periods ended September 30, 1997 and
1996 were $6,914,900 and $6,767,000, respectively, an increase of
approximately 2.2%. Approximately 48.8% of the 1997 revenues, as compared to
50.9% of the 1996 revenues, were derived from the Company's contracts with
medical service providers owned by, controlled by, or affiliated with the
Chairman. The increase in revenues was due to the fact that revenues from
acquisitions made by the Company during the third quarter of 1996 and first
and third quarters of 1997 exceeded the decrease in revenues from lost
contracts. Revenues earned for the nine month period ended September 30, 1997
consisted of $6,380,600, or 92.3% of revenues, for billing and collection
services, $398,700, or 5.8% of revenues, for accounting services, and
$135,600, or 1.9% of revenues, for late charges. Revenues earned for the nine
month period ended September 30, 1996 consisted of $6,076,500, or 89.8% of
revenues, for billing and collection services, and $416,700, or 6.2% of
revenues, for accounting services, and $273,800, or 4.0% of revenues, for
late charges and consulting services. The percentage of revenues attributable
to billing and collection services as compared to accounting services has
increased as the Company has acquired additional contracts which provide only
for billing and collection services.
During the nine month periods ended September 30, 1997 and 1996, the Company
incurred subcontract expenses in the amount of $4,745,500 and $4,544,300,
respectively, for services rendered. Substantially all of these costs for both
periods incurred were payable to Russell Data. The Company reported operating
income of $2,169,400, income before taxes of $1,581,200, net income of
$1,063,200 and primary earnings per share of $0.07 for the nine month period
ended September 30, 1997. The Company reported operating income of $2,222,700,
income before taxes of $1,769,800, net income of $1,159,800 and primary earnings
per share of $0.07 for the nine month period ended September 30, 1996. The
reasons for the decreases in operating income, income before taxes and net
income for the nine month period ended September 30, 1997, as compared to the
same period of 1996, were due to a reduction in late fees and consulting income,
and increases in selling, general and administrative expenses, primarily
insurance expense, and depreciation and amortization expense, particularly
amortization related to acquisition costs of client contracts.
12
<PAGE>
The Company incurred selling, general and administrative expenses of
$482,900 and $477,400 for the nine month periods ended September 30, 1997 and
1996, respectively. The expenses for 1997 consisted primarily of professional
fees and insurance expense, while the expenses for 1996 consisted primarily
of salaries and related employee benefits and professional fees.
The Company's effective tax rate was 32.8% and 38.2% for the nine month
periods ended September 30, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 and 1996, the Company had cash and cash equivalents
of $818,100 and $2,770,900, respectively. The balance at September 30, 1996
primarily consisted of proceeds from the Company's initial public offering.
The Company realized net income from operations of $376,000 and $355,100
for the three months ended September 30, 1997 and 1996, respectively, and
$1,063,200 and $1,159,800 for the nine months ended September 30, 1997 and
1996, respectively. During the nine month periods ended September 30, 1997
and 1996, the Company had net cash provided by (used in) operations of
($489,300) and $773,100, respectively. The Company had net cash used in
investing activities of $1,345,300 and $4,550,800 for the nine months ended
September 30, 1997 and 1996, respectively. The Company used net cash in
financing activities of $229,300 and $31,600 for the nine months ended
September 30, 1997 and 1996, respectively.
On February 13, 1996, the Company acquired the accounts receivable and
client contracts from Doctors Medical Billing Services, A Limited Liability
Corporation. The client contracts related to this acquisition provide billing
and collection services to approximately 25 medical service providers in the
Las Vegas, Nevada area. The total consideration paid for this acquisition was
$1,800,000, consisting of $150,000 in cash and 388,236 shares of Common Stock
valued at $4.25 per share. In accordance with the purchase agreement, the
Company placed these shares into escrow. Fewer shares will ultimately be
released from escrow if certain revenue levels are not maintained.
On April 1, 1996, the Company acquired the accounts receivable and client
contracts from National Medical Services, Inc. The client contracts related
to this acquisition provide billing and collection services to approximately
19 medical service providers in the Las Vegas, Nevada area. The total
consideration paid for this acquisition was $550,000, consisting of $250,000
in cash and 60,000 shares of Common Stock valued at $5.00 per share. In
accordance with the purchase agreement, the Company placed these shares into
escrow. Fewer shares will ultimately be released if certain revenue levels
are not maintained.
On August 1, 1996, the Company acquired from Rapier Investments, Ltd.
seven additional contracts to provide billing, collection and accounts
receivable management services to certain medical service providers in
Massachusetts and New Hampshire. The total consideration paid was $945,000,
consisting of $750,000 in cash and 42,740 shares of Common Stock valued at
$4.56 per share. In accordance with the purchase agreement, the Company
placed these shares into escrow. Fewer shares will ultimately be released if
certain revenue levels are not maintained.
On March 1, 1997, the Company acquired a contract to provide billing and
collection services to certain medical service providers in Rhode Island. The
total consideration paid was $165,000, consisting of $100,000 in cash and
14,444 shares of Common Stock valued at $4.50
13
<PAGE>
per share. In accordance with the purchase agreement, the Company placed
these shares into escrow. Fewer shares will ultimately be released if certain
revenue levels are not maintained.
On March 1, 1997, the Company acquired a contract to provide billing and
collection services to certain medical service providers in the Cleveland,
Ohio area. The total consideration paid was $500,000, consisting of $300,000
in cash and 44,444 shares of Common Stock valued at $4.50 per share. In
accordance with the purchase agreement, the Company placed these shares into
escrow. Fewer shares will ultimately be released if certain revenue levels
are not maintained.
On August 1, 1997, the Company acquired twelve contracts to provide
billing and collection services to certain medical service providers in
Arizona. The total consideration paid was $1,800,000, consisting of $600,000
in cash, 384,000 shares of Common Stock valued at $1.56 per share and
promissory notes in the aggregate amount of $600,000. In accordance with the
purchase agreement, the Company placed the shares into escrow. The Common
Stock and promissory notes will be subject to total or partial forfeiture if
certain revenue levels are not maintained.
On May 1, 1996, the Company entered into a transaction with First United,
a broker-dealer registered with the Securities and Exchange Commission. First
United is the principal market maker in the Company's common stock. Pursuant
to the transaction, the Company loaned $5,200,000 in a series of advances
evidenced by a promissory note bearing interest at 10%. Such note was due and
payable on demand with seven days notice. The note was collateralized by the
guarantees of the principals of First United. On May 29, 1996, First United
repaid $2,000,000 to the Company. Effective October 1, 1996, the remaining
balance on the note and accrued interest was satisfied through the
establishment of an unsecured note due from Russell Data in the amount of
$3,344,200. The note bears interest at 10% and establishes a payment schedule
which will result in the balance being paid in full by September 15, 1997. On
February 10, 1996, the Company received $1,104,800 of principal and accrued
interest from Russell Data representing the first in the series of scheduled
payments. The April 15, July 15 and September 15 payments have not yet been
made.
On May 23, 1997, the Company loaned $250,000, evidenced by a promissory
note, to EquiMed Pakistan which bears interest at 12% and was scheduled to be
repaid on September 22, 1997. Such repayment has not yet occurred.
On December 31, 1996, entities owned by, controlled by, or affiliated
with the Chairman, owed $362,200 to the Company. Since December 31, 1996,
$3,376,700 has been billed to these entities and $485,600 relating to these
amounts has been received. The Company owed $253,500 on December 31, 1996 to
Russell Data for subcontract fees related to these contracts. Since December
31, 1996, the Company has recorded $2,268,800 in subcontract expense and paid
$1,222,400 to Russell Data related to these amounts. As of September 30,
1997, the Company has prepaid Russell Data $882,400 for services related to
these contracts.
The contracts underlying the acquisitions made by the Company are being
serviced by companies owned by, controlled by, or affiliated with the
Company's former President, Chief Executive Officer and Director on a direct
contract basis or on an indirect subcontract basis through Russell Data.
For those contracts being serviced on an indirect basis, the medical service
providers underlying these acquired contracts owed $1,378,700 in billed services
to the Company on December 31, 1996. Since December 31, 1996, $2,779,300 has
been billed to these entities and
14
<PAGE>
$3,167,500 relating to these amounts has been received. The Company owed
$820,600 on December 31, 1996 for subcontract fees related to these
contracts. The Company has recorded $2,246,300 in subcontract expense and
paid $3,604,600 to these indirect subcontractors. As of September 30, 1997,
the Company has prepaid Russell Data $1,181,500 for services related to these
contracts.
Contracts being serviced on a direct basis originated in 1997. Since
December 31, 1996, $162,200 has been billed to these entities and $110,000
relating to these amounts has been received. The Company has recorded
$230,400 in subcontract expense related to these contracts and has paid
$110,000 to these direct subcontractors. As of September 30, 1997, the
Company has prepaid these direct subcontractors $43,300 for services related
to these contracts.
The contracts to provide billing, collection and accounts receivable
management services, as well as certain accounting services, to certain
medical service providers which are owned by, controlled by, or affiliated
with the Chairman expired on October 1 1997, have not been renewed and no
further revenues and related subcontract expense (except some incidental
income) will be recognized. There can be no assurance that such contracts
will be renegotiated. Failure to successfully renegotiate these contracts
will have a material adverse effect on the Company's results of operations.
The Company's principal sources of liquidity are anticipated to be cash
flows from operations, repayment of notes and the remaining proceeds from its
initial public offering. The Company expects to fund future acquisitions of
contracts and future acquisitions of businesses by a combination of funds
available through the cash from operations, proceeds from the initial public
offering, repayment of the note receivable and issuance of Common Stock and
promissory notes. A similar funding strategy is anticipated to be used in its
future business growth. The Company anticipates that cash flow from
operations, the proceeds of the initial public offering and repayment of the
note receivable will be adequate to fund its operations for the next twelve
months, although there can be no assurance to that effect.
Prospective Accounting Changes:
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented. The Company is currently evaluating the impact, if any, that the
adoption of SFAS No. 128 will have on its financial statements.
15
<PAGE>
PART II--OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
(No response required)
ITEM 2: CHANGES IN SECURITIES
In connection with an acquisition of twelve contracts on August 1, 1997,
the Company issued 384,000 shares of Common Stock valued at $1.56 per
share. Such issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
(No response required)
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(No response required)
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11.1 Statement Regarding Computation of Per Share Earnings
(Three Months).
11.2 Statement Regarding Computation of Per Share Earnings (Nine
Months).
27.1 Financial Data Schedule.
b. Forms 8-K
1. Form 8-K dated August 1, 1997.
2. Form 8-K/A dated August 27, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
(Registrant)
By: /s/ Robert W. Horner, Jr.
---------------------------
Robert W. Horner, Jr., Vice President,
Chief Financial Officer, Secretary
and Treasurer
(Signing on behalf of the Registrant
and as Principal Accounting Officer)
Date: November 13, 1997
17
<PAGE>
Exhibit 11.1
Computation of Per Share Earnings
(In Thousands)
For the Three Month Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
PRIMARY NET INCOME PER SHARE
Average shares outstanding............................................................ 15,269,925 14,942,026
Net effect of dilutive stock options and warrants based on the treasury stock method
using average market price.......................................................... -- 676,562
------------ ------------
Total................................................................................. 15,269,925 15,618,588
------------ ------------
------------ ------------
Net income............................................................................ $ 376.0 $ 355.1
------------ ------------
------------ ------------
Primary net income per share.......................................................... $ 0.02 $ 0.02
------------ ------------
------------ ------------
FULLY DILUTED NET INCOME PER SHARE
Average shares outstanding............................................................ 15,269,925 14,942,026
Net effect of dilutive stock options and warrants based on the treasury stock method
using ending market price........................................................... -- 676,562
------------ ------------
Total................................................................................. 15,269,925 15,618,588
------------ ------------
------------ ------------
Net income............................................................................ $ 376.0 $ 355.1
------------ ------------
------------ ------------
Fully diluted net income per share.................................................... $ 0.02 $ 0.02
------------ ------------
------------ ------------
</TABLE>
18
<PAGE>
Exhibit 11.2
Computation of Per Share Earnings
(In Thousands)
For the Nine Month Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
PRIMARY NET INCOME PER SHARE
Average shares outstanding............................................................ 15,088,391 14,842,348
Net effect of dilutive stock options and warrants based on the treasury stock method
using average market price.......................................................... 141,090 780,807
------------ ------------
Total................................................................................. 15,229,481 15,623,155
------------ ------------
------------ ------------
Net income............................................................................ $ 1,063.2 $ 1,159.8
------------ ------------
------------ ------------
Primary net income per share.......................................................... $ 0.07 $ 0.07
------------ ------------
------------ ------------
FULLY DILUTED NET INCOME PER SHARE
Average shares outstanding............................................................ 15,088,391 14,842,348
Net effect of dilutive stock options and warrants based on the treasury stock method
using ending market price........................................................... 141,090 780,807
------------ ------------
Total................................................................................. 15,229,481 15,623,155
------------ ------------
------------ ------------
Net income............................................................................ $ 1,063.2 $ 1,159.8
------------ ------------
------------ ------------
Fully diluted net income per share.................................................... $ 0.07 $ 0.07
------------ ------------
------------ ------------
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 818,100
<SECURITIES> 0
<RECEIVABLES> 8,511,100
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,468,900
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,985,100
<CURRENT-LIABILITIES> 1,665,900
<BONDS> 128,900
0
0
<COMMON> 154,000
<OTHER-SE> 16,036,300
<TOTAL-LIABILITY-AND-EQUITY> 17,985,100
<SALES> 6,914,900
<TOTAL-REVENUES> 6,914,900
<CGS> 0
<TOTAL-COSTS> 4,745,500
<OTHER-EXPENSES> 835,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (246,900)
<INCOME-PRETAX> 1,581,200
<INCOME-TAX> 518,000
<INCOME-CONTINUING> 1,063,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063,200
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
