<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 June 30, 1998
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
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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 89431
(Address of principal (Zip Code)
executive offices)
(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 No X .
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, par value
$.01 per share, 1,703,336 shares outstanding as of August 1, 1998.
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 103.1 $ 317.5
Accounts receivable 2,418.4 3,009.2
Notes and interest receivable--related party 1,840.1 2,848.0
Refundable income taxes 1,756.6 1,756.6
Other assets and prepaid expenses 455.6 309.0
--------- ----------
Total current assets 6,573.8 8,240.3
Property and equipment, net 256.5 19.8
Intangible assets, net 1,730.2 624.2
Deferred costs and other assets 129.7 185.3
--------- ----------
Total assets $ 8,690.2 $ 9,069.6
--------- ----------
--------- ----------
LIABILITIES
Current liabilities:
Accrued subcontract fees $ 1,465.1 $ 2,165.1
Accounts payable and accrued expenses 264.3 46.9
Accrued termination costs 255.7 305.7
Short-term capitalized leases 3.3 --
Short-term debt 101.9 97.7
--------- ----------
Total current liabilities 2,090.3 2,615.4
Long-term capitalized leases 22.5 --
Long-term debt 119.8 171.8
--------- ----------
Total liabilities 2,232.6 2,787.2
--------- ----------
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, 1,703,336 and 1,539,932 shares
issued and outstanding 17.0 15.4
Paid-in capital 12,909.7 12,511.3
Retained earnings (deficit) (5,469.1) (5,244.3)
Common stock in escrow to be returned (1,000.0) (1,000.0)
--------- ----------
Total stockholders' equity 6,457.6 6,282.4
--------- ----------
Total liabilities and stockholders' equity $ 8,690.2 $ 9,069.6
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
INCOME STATEMENTS
(In Thousands)
For the Three Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 574.4 $2,370.7
Cost of services 506.0 1,629.8
----------- -----------
Operating income 68.4 740.9
Selling, general and administrative expense 197.0 232.6
Depreciation and amortization expense 32.8 119.6
Interest expense (income) (43.7) (82.4)
----------- -----------
Income (loss) before income taxes (117.7) 471.1
----------- -----------
Provision for income taxes:
Current -- 154.8
Deferred -- --
----------- -----------
-- 154.8
----------- -----------
Net income (loss) $(117.7) $ 316.3
----------- -----------
----------- -----------
Basic net income (loss) per share $ (0.07) $ 0.21
----------- -----------
----------- -----------
Weighted average number of shares
outstanding used in basic calculation 1,703,336 1,501,532
----------- -----------
----------- -----------
Diluted net income (loss) per share $ (0.07) $ 0.21
----------- -----------
----------- -----------
Weighted average number of shares
outstanding used in diluted calculation 1,703,336 1,501,532
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
INCOME STATEMENTS
(In Thousands)
For the Six Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 1,084.4 $4,753.5
Cost of services 989.1 3,284.0
----------- -----------
Operating income 95.3 1,469.5
Selling, general and administrative expense 349.2 385.4
Depreciation and amortization expense 61.2 232.5
Interest expense (income) (90.3) (171.4)
----------- -----------
Income (loss) before income taxes (224.8) 1,023.0
----------- -----------
Provision for income taxes:
Current -- 335.8
Deferred -- --
----------- -----------
-- 335.8
----------- -----------
Net income (loss) $ (224.8) $ 687.2
----------- -----------
----------- -----------
Basic net income (loss) per share $ (0.13) $ 0.46
----------- -----------
----------- -----------
Weighted average number of shares
outstanding used in basic calculation 1,703,336 1,499,612
----------- -----------
----------- -----------
Diluted net income (loss) per share $ (0.13) $ 0.45
----------- -----------
----------- -----------
Weighted average number of shares
outstanding used in diluted calculation 1,708,965 1,530,866
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
(In Thousands)
For the Six Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (224.8) $ 687.2
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization expense 61.2 232.5
Insurance in lieu of cash 55.6 146.5
Changes in assets and liabilities:
(Increase) decrease in receivables 766.1 (1,356.2)
(Increase) decrease in other assets (146.6) 85.0
Increase (decrease) in accounts payable
and accrued expenses (532.6) (500.2)
--------- ---------
Net cash provided by (used in) operations (21.1) (705.2)
--------- ---------
Cash flow from investing activities:
Receivables acquired in acquisitions (175.3) (596.7)
Origination of notes receivable (97.1) (382.2)
Principal collections of notes receivable 1,105.0 1,104.4
Deferred costs - acquisitions -- (135.4)
Purchase of property and equipment (224.7) 18.4
Client lists (753.4) (409.6)
Other assets -- 10.9
---------- ---------
Net cash provided by (used in) investing activities (145.5) (390.2)
---------- ---------
Cash flow from financing activities:
Payments of short term debt (47.8) (155.0)
---------- ---------
Net cash used in financing activities (47.8) (155.0)
---------- ---------
Net decrease in cash (214.4) (1,250.4)
Cash balance, beginning balance 317.5 2,882.0
---------- ---------
Cash balance, ending balance $ 103.1 $ 1,631.6
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
(In Thousands)
For the Six Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Supplemental data:
Cash paid for income taxes $ -- $ 230.0
----------- -----------
----------- -----------
Cash paid for interest $ 11.5 $ 2.0
----------- -----------
----------- -----------
Non-cash items:
Stock issued for contract acquisitions $ 400.0 $ 265.0
----------- -----------
----------- -----------
Note payable issued for insurance $ -- $ 78.0
----------- -----------
----------- -----------
Capital leases assumed from acquisitions $ 25.8 $ --
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
1. Description of Business:
General:
Effective December 31, 1997, National Medical Financial Services
Corporation (the "Company") restructured its operations and wrote-off all of the
contracts it had acquired during the period from June 1995 through August 1997.
Additionally, the contracts the Company had with medical service providers that
were owned by, controlled by or affiliated with the Company's Chairman and
principal stockholder (the "Chairman") expired on September 30, 1997 and were
not renewed. No further revenues or related subcontract expenses (except for
incidental income) were recognized after that date.
As part of the restructuring, the Company plans to strategically align
and affiliate itself, through acquisitions and partnerships, with established
companies that offer billing and collection and practice management services to
medical service providers and third-party billing companies. Following the
consummation of such acquisitions and partnerships, the Company expects to
provide access to offshore labor and high technology. The Company will also
attempt to acquire the service component of certain medical service providers
that perform their own billing functions.
2. Basis of Presentation:
The accompanying unaudited statements of 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 six month periods ended June 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1998.
3. Accounts Receivable:
Accounts receivables consisted of the following at June 30, 1998 and
December 31, 1997, respectively:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(In Thousands)
<S> <C> <C>
Accounts receivable $2,418.3 $3,008.5
Miscellaneous receivable .1 .7
-------- --------
Total $2,418.4 $3,009.2
-------- --------
-------- --------
</TABLE>
4. 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 is
owned by EquiMed, Inc., a publicly traded company which is controlled by the
Company's Chairman, in the amount of $3,344,200. The note bears interest at 10%
and established a payment schedule of $1,000,000 each at January 15, April 15
and July
7
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, continued
4. Notes Receivable, continued:
15, 1997 plus accrued interest thereon, with the remaining balance and interest
thereon due on September 30, 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 balance of the scheduled payments were due on
September 30, 1997. The Company did not receive any additional payments during
this time. December 31, 1997 through August 6, 1998, the Company received
principal and accrued interest payments of $1,580,000, leaving an outstanding
principal balance of $909,600. In the opinion of management, this amount is
collectible.
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. In the opinion of
management, this amount is collectible.
5. Business Acquisitions:
On January 6, 1998, the Company entered into an Accounting Business
Asset Purchase Agreement with Morris Maybruch D/B/A Maybruch & Co. ("Maybruch")
and a Medical Billing Business Asset Purchase Agreement with Morris Maybruch and
Shoreline Medical Billing Systems, Inc., a New York corporation "(Shoreline"),
pursuant to which Mr. Maybruch sold the assets and operations of his accounting
and medical business. The purchase price for the assets and business operations
was $913,700 in cash and 163,405 shares of the Company's Common Stock based on a
value of $2.45 per share. Under the terms of the Agreements, additional shares
of the Company's Common Stock may be issued if its closing price decreases over
a defined period. The transaction was accounted for as the purchase.
6. Intangible Assets:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(In Thousands)
<S> <C> <C>
Goodwill $1,103.3 $ --
Non-competition agreement 50.0 --
Software license 700.0 700.0
-------- ------------
1,853.3 700.0
Less accumulated amortization (123.1) (75.8)
-------- ------------
Total $1,730.2 $624.2
-------- ------------
-------- ------------
</TABLE>
7. Long-term Debt:
Long-term debt consisted of the following at June 30, 1998 and
December 31, 1997, respectively:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(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 $ 221.7 $ 269.5
Less current portion (101.9) (97.7)
------- -------
Long-term debt, less current portion $ 119.8 $ 171.8
------- -------
------- -------
</TABLE>
8
<PAGE>
NATIONAL MEDICAL FINANCIAL SERVICES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, continued
7. Long-term Debt, continued:
Interest paid during the six months ended June 30, 1998 and 1997 was
$11,500 and $2,000, respectively.
8. Common Stock:
On December 24, 1997, the Board of Directors of the Company approved a
one for ten reverse stock split and no corresponding increase in the number of
authorized shares of the Company's Common Stock, which remained at 40,000,000
shares pursuant to Section 78.207 of the Nevada General Corporation Law (the
"Reverse Split"). Following the Reverse Split, rather than issue fractional
shares or pay cash to such persons otherwise entitled to receive fractional
shares, the Company would round up to the nearest whole share of Common Stock
held by each stockholder. Under Nevada law, the affirmative vote of the
stockholders holding a majority of voting power of Common Stock is required to
approve the amendment to the Company's Certificate of Incorporation that would
be filed in connection with the Reverse Split. The close of business on December
31, 1997, was fixed by the Board of Directors as the record date (the "Record
Date") for determination of stockholders entitled to execute written consents to
authorize the Reverse Split. An Information Statement was mailed on or before
January 13, 1998, with the Company planning on taking all necessary action to
consummate the Reverse Split on or before February 10, 1998. On February 10,
1998, approximately 61.0% of the eligible stockholders, which constituted a
majority vote, had voted in favor of the Reverse Split. The Reverse Split was
distributed on February 10, 1998 and all stock related data in the financial
statements reflect the Reverse Split for all periods presented.
On March 13, 1998, the Company repriced the stock options previously
granted to the current officers and directors in order to maintain a competitive
compensation package to retain the current officers and directors of the
Company. The stock options previously granted to those individuals were repriced
at an exercise price of $1.63 per share, the fair market value on that date.
9. Subsequent Events:
On July 20, 1998, in accordance with the Stock Option Plan for
Non-Employee Directors, each of the three eligible directors were automatically
granted stock options to purchase 5,000 shares of Common Stock at the exercise
price of $0.88 per share, the fair market value on that date.
On July 20, 1998, at the Company's annual meeting of stockholders, the
stockholders approved and authorized the issuance of additional shares of the
Company's Common Stock related to the acquisitions of Shoreline and Maybruch.
On August 7, 1998, the Company entered into an Asset Purchase Agreement
with the stockholders of Advanced Physician Billing, Inc., a Florida corporation
("APB"). The assets and business operations of APB were acquired effective July
1, 1998. The purchase price for the assets and business operations was
$1,724,000, consisting of $75,000 and $1,624,000 in the form of a promissory
note bearing interest at 7% per annum. The principal amount of this note is due
on or before July 1, 2003. Based on the financial results for the five years,
the final pay-off amount of this note may increase or decrease. In addition, the
Company loaned $400,000 to APB in the form of a promissory note bearing interest
at 7% per annum, which is due on the same date as the $1,649,000 note. The
transaction will be accounted for by the purchase method of accounting.
9
<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,
1997.
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 and affiliation with established
companies that offer billing and collection and practice management services to
medical service providers, 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 to provide access
to offshore labor and high technology, and the uncertainty of whether the
combination of operating cash flows, and repayment of accounts and notes
receivables and income tax refunds 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 June 30, 1998 and June 30, 1997
Total revenues for the quarters ended June 30, 1998 and 1997 were
$574,400 and $2,370,700, respectively, a decrease of approximately 75.8%. None
of the 1998 revenues were derived from the Company's contracts with medical
service providers owned by, controlled by, or affiliated with the Chairman, as
compared to 47.0% of the 1997 revenues. These contracts expired on September 30,
1997 and were not renewed. Accordingly, no further revenues were recognized
after that date. An additional reason for the decrease in revenues was the
write-off, as of December 31, 1997 of all of the acquired contracts to provide
billing and collection services the Company had acquired during the period from
June 30, 1995 through August 1, 1997. The acquired contracts were not providing
sufficient cash flows to support the Company's operations. The Company's
revenues in 1998 were derived solely from the operations it had acquired
effective January 1, 1998. Revenues earned for the quarter ended June 30, 1998
consisted of $508,800, or 88.6% of revenues, for billing and collection
services, and $65,600, or 11.4% of revenues, for accounting services. Revenues
earned for the quarter ended June 30, 1997 consisted of $2,196,200, or 92.6% of
revenues, for billing and collection services, $132,100, or 5.6% of revenues,
for accounting services, and $42,400, or 1.8% 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 due to the
change in contracts that have expired or were written-off.
During the quarters ended June 30, 1998 and 1997, the Company incurred
direct cost of services of $506,000 and $1,629,800, respectively. Effective
January 1, 1998, the Company acquired the assets and operations of two
businesses that provided the accounting and medical billing services for the
Company's operations, whereas during the second quarter of 1997, the Company
incurred subcontract expenses in the amount specified above in connection with
cost of services rendered. Substantially all of the costs incurred in 1997 were
payable to Russell Data. The Company reported operating income of $68,400, loss
before taxes of $117,700, net loss of $117,700 and basic loss per share of $0.07
for the quarter ended June 30, 1998. The Company reported operating income of
$740,900, income before taxes of $471,100, net income of $316,300 and basic
earnings per share of $0.21 for the quarter ended June 30, 1997. The reasons for
the decreases in operating income, income before taxes and net income for the
quarter ended June 30, 1998 as compared to the same period of 1997 were
10
<PAGE>
due to the contracts which expired on September 30, 1997 and were not renewed
and the write-off of acquired contracts on December 31, 1997.
The Company incurred selling, general and administrative expenses of
$197,000 and $232,600 for the quarters ended June 30, 1998 and 1997,
respectively. The expenses for the three months ended June 30, 1998 consisted
primarily of salaries and related benefits, insurance expense, marketing expense
and professional fees. The expenses for the three months ended June 30, 1997
consisted primarily of insurance expense and professional fees.
The Company experienced an operating loss of $9,200,600 in 1997, which
resulted in net operating loss carryforwards totaling $4,750,000 that will be
available to offset future taxable income. These net operating loss
carryforwards will be available through the year 2012. The Company's effective
tax rate was 32.8% for the quarter ended June 30, 1997.
Six Months Ended June 30, 1998 and June 30, 1997
Total revenues for the six months ended March 31, 1998 and 1997 were
$1,084,400 and $4,753,500, respectively, a decrease of approximately 77.2%. None
of the 1998 revenues were derived from the Company's contracts with Medical
Service Providers owned by, controlled by, or affiliated with the Chairman, as
compared to 47.1% of the 1997 revenues. These contracts expired on September 30,
1997 and were not renewed. Accordingly, no further revenues were recognized
after that date. An additional reason for the decrease in revenues was the
write-off, as of December 31, 1997 of all of the acquired contracts to provide
billing and collection services it had acquired during the period from June 30,
1995 through August 1, 1997. The acquired contracts were not providing
sufficient cash flows to support the Company's operations. The Company's
revenues in 1998 were derived solely from the operations it had acquired
effective January 1, 1998. Revenues earned for the six months ended June 30,
1998 consisted of $928,900, or 85.7% of revenues, for billing and collection
services, and $155,500, or 14.3% of revenues, for accounting services. Revenues
earned for the six months ended June 30, 1997 consisted of $4,420,500, or 93.0%
of revenues, for billing and collection services, $271,000, or 5.7% of revenues,
for accounting services, and $62,000, or 1.3% 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 due to the
change in contracts that have expired or were written-off.
During the six months ended June 30, 1998 and 1997, the Company
incurred direct cost of services of $989,100 and $3,284,000, respectively.
Effective January 1, 1998, the Company acquired the assets and operations of two
businesses that provided the accounting and medical billing services for the
Company's operations, whereas during the first six months of 1997, the Company
incurred subcontract expenses in the amount for services rendered. Substantially
all of the costs incurred in 1997 were payable to Russell Data. The Company
reported operating income of $95,300, loss before taxes of $224,800, net loss of
$224,800 and basic loss per share of $0.13 for the six months ended June 30,
1998. The Company reported operating income of $1,469,500, income before taxes
of $1,023,000, net income of $687,200 and basic earnings per share of $0.46 for
the six months ended June 30, 1997. The reasons for the decreases in operating
income, income before taxes and net income for the six months ended June 30,
1998 as compared to the same period of 1997 were due to the contracts which
expired on September 30, 1997 and were not renewed and the write-off of acquired
contracts on December 31, 1997.
The Company incurred selling, general and administrative expenses of
$349,200 and $385,400 for the six months ended June 30, 1998 and 1997,
respectively. Those expenses consisted primarily of salaries and related
benefits, insurance expense and professional fees.
The Company experienced an operating loss of $9,200,600 in 1997, which
resulted in net operating loss carryforwards totaling $4,750,000 that will be
available to offset future taxable income. These net operating loss
carryforwards will be available through the year 2012. The Company's effective
tax rate was 32.8% for the six months ended June 30, 1997.
11
<PAGE>
Liquidity and Capital Resources
At June 30, 1998 and 1997, the Company had cash and cash equivalents of
$103,100 and $1,631,600, respectively.
The Company realized net income (loss) from operations of ($117,700)
and $316,300 for the three months ended June 30, 1998 and 1997, respectively,
and ($224,800) and $687,200 for the six months ended June 30, 1998 and 1997,
respectively. During the six months ended June 30, 1998 and 1997, the Company
had net cash used in operations of $21,100 and $705,100, respectively. The
Company had net cash used in investing activities of $145,500 and $390,200 for
the six months ended June 30, 1998 and 1997, respectively. The Company had net
cash used in financing activities of $47,800 and $155,000 for the six months
ended June 30, 1998 and 1997, respectively.
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 established a payment schedule which would have
resulted in the balance being paid in full by September 15, 1997. On February
10, 1997, the Company received $1,104,800 of principal and accrued interest from
Russell Data representing the first in the series of scheduled payments. The
balance of the scheduled payments were due on September 30, 1997. The Company
did not receive any additional payments during that time period. Since December
31, 1997 through August 6, 1998 the Company received principal and accrued
interest payments of $1,580,000, leaving an outstanding principal balance of
$909,600. In the opinion of management, this amount is collectible.
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 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
1,445 shares of Common Stock valued at $45.00 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. The
1,445 shares of Common Stock held in escrow will be released by the Company in
1998.
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 4,445 shares of Common Stock valued at $45.00 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.
The 4,445 shares of Common Stock held in escrow will be released by the Company
in 1998.
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,
38,400 shares of Common Stock valued at $15.60 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. The 38,400 shares of Common Stock held in escrow will be returned to
the Company and the promissory notes were written-off.
Effective December 31, 1997, the Company terminated the contracts that
were purchased in 1995 through 1997, because they were not providing sufficient
cash flows to support the Company's operations. At December 31, 1997, these
purchased contracts had a book value of $8,000,400, net of amortization. At
December 31, 1997, 77,276 shares of the Company's Common Stock were being held
in escrow pending achievement of
12
<PAGE>
targeted revenue levels on these contracts. Since the revenue levels on certain
contracts were not sufficient to require full release of shares maintained in
escrow, 58,400 shares valued at $1,000,000 will not be released and will be
returned to the Company in 1998.
In addition, the contracts with entities owned by, controlled by or
affiliated with the Chairman expired on September 30, 1997 and were not renewed.
Accordingly, no further revenues and related subcontract expenses (except some
incidental income) were recognized after that date. The Company had a net
write-off of $129,800 from entities owned by, controlled by or affiliated with
the Chairman.
The effects of the net operating loss experienced in the 1997 of
$9,200,600 created a net loss of $2,597,600 to be carried back to obtain refunds
of income taxes paid in 1994 through 1996 of $1,355,900. In addition, refunds of
estimated tax payments made in 1997 and tax overpayments in prior years amount
to $400,700, which will be refunded. The Company has net operating loss
carryforwards totaling $4,750,000 that will be available to offset future
taxable income. These net operating loss carryforwards will be available through
the year 2012.
On January 1, 1998, as part of its new operating strategy, the Company
acquired the assets and operations of Shoreline Medical Billing Systems, Inc.
and Maybruch & Co., two privately-owned companies which perform physician
billing and collection and various practice management and accounting services.
The total consideration paid was $1,313,700, consisting of $913,700 in cash and
163,405 shares of Common Stock valued at $2.45 per share. In accordance with the
purchase agreements, additional shares of Common Stock may be issued if the
price of the Common Stock falls below certain levels.
On August 7, 1998, the Company entered into an Asset Purchase
Agreement with the stockholders of Advanced Physician Billing, Inc., a
Florida corporation ("APB"), pursuant to which the stockholders sold the
assets and business operations of their medical billing business effective
July 1, 1998. The purchase price for the assets and business operations was
$1,724,000, consisting of $75,000 in cash and $1,624,000 in the form of a
promissory note bearing interest at 7% per annum. The principal amount of
this note is due on or before July 1, 2003 (the "Maturity Date"). Based on
the financial results for the five years, the final payoff amount of the note
may increase or decrease. In addition, the Company loaned $400,00 to APB in
the form of a promissory note bearing interest at 7% per annum, which is due
on the same date as the $1,649,000 note.
As of June 30, 1998, certain of the medical service providers which are
owned by, controlled by, or affiliated with the Chairman, owed $2,008,500 to the
Company. Since these contracts expired on September 30, 1997 and were not
renewed, there was no additional amounts billed to these entities since December
31, 1997. Since December 31, 1997, the Company has received $1,000,000 relating
to these receivables and has paid Russell Data $750,000 for services related to
these amounts. As of June 30, 1998 and 1997, the Company owed Russell Data
$1,465,100 and $253,500, respectively, for services provided. Included in the
1997 amount is prepayments of $1,042,000 the Company made to Russell Data for
the benefit of the acquired contracts which were indirectly subcontracted to the
former President and Chief Executive Officer. As of December 31, 1997, these
contracts were written-off since they were not providing sufficient cash flows
to support the Company's operations.
The Company's principal sources of liquidity are anticipated to be
cash flows from operations, repayment of accounts and notes receivables and
income tax refunds. 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, repayment of the accounts and
notes receivables, income tax refunds 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, repayment of the accounts and notes receivables and income tax
refunds will be adequate to fund its operations for the next twelve months,
although there can be no assurance to that effect.
13
<PAGE>
PART II--OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
(No response required)
Item 2: CHANGES IN SECURITIES
(No response required)
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
(No response required)
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
(Six Months).
27.1 Financial Data Schedule.
b. Forms 8-K
None
14
<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: August 14, 1998
15
<PAGE>
Exhibit 11.1
Computation of Per Share Earnings
(In Thousands)
For the Three Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Average shares outstanding 1,703,336 1,501,532
---------- -----------
---------- -----------
Net income (loss) ($117.7) $316.3
---------- -----------
---------- -----------
Basic net income (loss) per share ($0.07) $0.21
---------- -----------
---------- -----------
DILUTED NET INCOME (LOSS) PER SHARE
Average shares outstanding 1,703,336 1,501,532
Net effect of dilutive stock options and
warrants based on the treasury stock
method using average market price -- --
---------- -----------
Total 1,703,336 1,501,532
---------- -----------
---------- -----------
Net income (loss) ($117.7) $316.3
---------- -----------
---------- -----------
Diluted net income (loss) per share ($0.07) $0.21
---------- -----------
---------- -----------
</TABLE>
<PAGE>
Exhibit 11.2
Computation of Per Share Earnings
(In Thousands)
For the Six Month Periods Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Average shares outstanding 1,703,336 1,499,612
----------- -----------
----------- -----------
Net income (loss) ($224.8) $687.2
----------- -----------
----------- -----------
Basic net income (loss) per share ($0.13) $0.46
----------- -----------
----------- -----------
DILUTED NET INCOME (LOSS) PER SHARE
Average shares outstanding 1,703,336 1,499,612
Net effect of dilutive stock options and
warrants based on the treasury stock
method using average market price 5,629 31,254
----------- -----------
Total 1,708,965 1,530,866
----------- -----------
----------- -----------
Net income (loss) ($224.8) $687.2
----------- -----------
----------- -----------
Diluted net income (loss) per share ($0.13) $0.45
----------- -----------
----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 103,100
<SECURITIES> 0
<RECEIVABLES> 4,258,500
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,573,800
<PP&E> 271,000
<DEPRECIATION> 14,500
<TOTAL-ASSETS> 8,690,200
<CURRENT-LIABILITIES> 2,090,300
<BONDS> 142,300
0
0
<COMMON> 17,000
<OTHER-SE> 6,440,600
<TOTAL-LIABILITY-AND-EQUITY> 8,690,200
<SALES> 1,084,400
<TOTAL-REVENUES> 1,084,400
<CGS> 0
<TOTAL-COSTS> 989,100
<OTHER-EXPENSES> 410,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (90,300)
<INCOME-PRETAX> (224,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (224,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224,800)
<EPS-PRIMARY> ($0.13)
<EPS-DILUTED> ($0.13)
</TABLE>
