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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
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(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
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EXCHANGE ACT OF 1934
For the transition period from __________ to _________
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Commission File Number: 1-11922
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MEDICALCONTROL, INC.
(Exact name of small business issuer as
specified in its charter)
Delaware 75-2297429
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(State of incorporation) (IRS Employer ID Number)
9649 Webb Chapel Road; Dallas, Texas 75220
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(Address of principal executive offices)
(214) 352-2666
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(Issuer's telephone number)
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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
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock - 3,873,578 as of
October 30, 1996
Transitional Small Business Disclosure Format (Check one): YES NO X
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MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended September 30, 1996
Table of Contents
Page
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PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 8
PART II - OTHER INFORMATION
2
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MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,535,243 $ 1,651,475
Accounts receivable - trade, net of allowance
for doubtful accounts of $200,000 and
$352,000 1,709,529 1,908,415
Accounts receivable - premium 430,390 438,978
Accounts receivable - other 88,500 343,629
Prepaid income taxes 103,863 121,360
Prepaid expenses and other current assets 95,857 131,499
Deferred income taxes 199,497 199,497
------------ ------------
Total current assets 4,162,879 4,794,853
NOTE RECEIVABLE - OFFICER, including accrued interest 358,206 337,239
PROPERTY AND EQUIPMENT, NET 1,667,118 1,790,333
GOODWILL, NET 3,587,849 3,707,306
INTANGIBLE AND OTHER ASSETS, NET 1,038,332 1,270,400
------------ ------------
TOTAL ASSETS $ 10,814,384 $ 11,900,131
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 586,245 $ 826,902
Accounts payable - premium 697,562 634,161
Accrued liabilities 536,484 649,124
Current portion of long-term debt 420,100 763,416
------------ ------------
Total current liabilities 2,240,391 2,873,603
NON-CURRENT LIABILITIES
Borrowings under revolving bank lines of credit 65,000 1,000,000
Long-term debt, net of current portion 486,371 474,360
Deferred income taxes 395,351 395,351
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.10 par; 4,000,000
shares authorized, no shares issued or outstanding -- --
Common stock - $.01 par: 8,000,000 shares
authorized, 3,907,190 and 3,904,823 issued 39,072 39,048
Additional paid-in capital 5,224,979 5,258,192
Retained earnings 2,632,116 2,128,473
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7,896,167 7,425,713
Less: Treasury stock (33,612 shares), at cost (268,896) (268,896)
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Total stockholders' equity 7,627,271 7,156,817
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,814,384 $ 11,900,131
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------------------------- ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,877,213 $ 4,574,437 $ 11,734,228 $ 13,305,968
------------ ------------ ------------ ------------
OPERATING EXPENSES
Salaries and wages 2,017,375 2,730,292 6,062,244 7,827,189
Other operating expenses 1,349,842 2,049,946 4,251,013 4,757,952
Depreciation and amortization 209,889 525,611 626,452 818,989
------------ ------------ ------------ ------------
Total operating expenses 3,577,106 5,305,849 10,939,709 13,404,130
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 300,107 (731,412) 794,519 (98,162)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (11,640) (84,155) (85,655) (240,668)
Investment income 23,124 59,652 69,677 184,260
Realized losses on securities (253,432) -(253,432)
Other 5,360 (6,214) 27,180 3,136
------------ ------------ ------------ ------------
Total other income (expense) 16,844 (284,149) 11,202 (306,704)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 316,951 (1,015,561) 805,721 (404,866)
Provision (benefit) for income taxes 122,041 (364,030) 302,078 (142,866)
------------ ------------ ------------ ------------
NET INCOME $ 194,910 $ (651,531) $ 503,643 $ (262,000)
============ ============ ============ ============
Earnings per share $ 0.05 (0.1$) 0.$3 (0.07)
============ ============ ============ ============
Weighted average number of shares outstanding 3,955,353 3,866,124 3,955,507 3,849,031
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income $ 503,643 $ (262,000)
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 626,452 818,989
Allowance for doubtful accounts 107,000 253,432
Net changes in certain assets and liabilities
Accounts receivable - trade 91,886 (680,836)
Accounts receivable - premium 8,588 (149,464)
Prepaid expenses and other current assets 53,139 (123,265)
Accounts payable - trade (240,657) 700,489
Accounts payable - premium 63,401 (168,127)
Accrued liabilities (112,640) (17,324)
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Net cash provided by operating activities 1,100,812 371,894
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CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (151,712) (385,155)
Capitalized software development costs -- (511,845)
Proceeds from sale of subsidiary 255,129 --
Net sales of marketable securities -- (10,962)
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Net cash provided by (used in) investing activities 103,417 (907,962)
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CASH FLOWS RELATED TO FINANCING ACTIVITIES
Increase in note receivable - officer (20,967) (6,750)
Net drawdowns/(repayments) on revolving bank lines of credit (935,000) 1,230,418
Proceeds of long-term debt (331,305) (757,406)
Proceeds from issuance of common stock 7,853 130,071
Stock and warrant registration costs (41,042) (158,494)
----------- -----------
Net cash provided by (used in) financing activities (1,320,461) 437,839
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (116,232) (98,229)
Cash and cash equivalents at beginning of period 1,651,475 1,329,902
----------- -----------
Cash and cash equivalents at end of period $ 1,535,243 $ 1,231,673
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 83,104 $ 199,398
=========== ===========
Income taxes paid $ 245,005 $ 34,820
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</TABLE>
The accompanying notes are an integral part of these statements.
5
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MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(UNAUDITED)
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. ("MCI"), a Delaware corporation, is a healthcare cost
management company providing managed healthcare services primarily to employers
which self-fund their benefit programs, insurance companies, and other managed
care organizations. Through MCI and its subsidiaries (collectively the
"Company"), the Company provides products and services which include healthcare
cost containment programs, preferred provider organization ("PPO") network,
large claim negotiation, third-party administration ("TPA") services, claims
administration and data analysis and reporting to its customers. Typically, the
Company's contracts with its customers are renewable annually and permit
cancellation upon 30 to 60 days' notice.
NOTE 2 - BASIS OF PRESENTATION
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) and have
not been audited or reviewed by independent public accountants. In the opinion
of management, all adjustments (which consisted only of normal recurring
accruals) necessary to present fairly the financial position and results of
operations have been made. Pursuant to SEC rules and regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from these statements unless significant changes have taken
place since the end of the most recent fiscal year. The Company believes that
the disclosures contained herein, when read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-KSB as
amended for the fiscal year ended December 31, 1995, are adequate to make the
information presented not misleading. It is suggested, therefore, that these
statements be read in conjunction with the statements and notes included in the
aforementioned Form 10-KSB.
NOTE 3 - EARNINGS PER SHARE
Earnings per share is computed using the weighted-average number of shares of
common stock and common stock equivalents (calculated using the treasury stock
method) outstanding during the year. Included in the nine months ended September
30, 1996, primary earnings per share calculation are 48,964 common stock
equivalents and 48,163 for the quarter ended September 30, 1996.
NOTE 4 - DEBT
On May 31, 1996, the Company refinanced its revolving bank lines of credit
totaling $1,000,000 on terms substantially consistent with the prior
arrangements, except the lines were consolidated into a single note agreement
which matures on May 31, 1998. As of September 30, 1996, borrowings under this
line of credit were $65,000.
6
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NOTE 5 - REGISTRATION STATEMENTS
During 1996, MCI has filed two registration statements with the Securities and
Exchange Commission to register certain existing outstanding shares of common
stock and to extend the expiration date of warrants issued in connection with
MCI's 1993 initial public offering.
7
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PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE NINE MONTHS AND QUARTER ENDED SEPTEMBER 30, 1996, COMPARED TO THE NINE
MONTHS AND QUARTER ENDED SEPTEMBER 30, 1995
(1) RESULTS OF OPERATIONS
Net revenues for the three months ended September 30, 1996, decreased 15% to
$3,877,213 from $4,574,437 for the comparable period ended September 30, 1995,
and decreased 12% to $11,734,228 from $13,305,968 for the nine months ended
September 30, 1996, compared to the comparable period ended September 30, 1995.
Excluding revenues generated by Group Administrators - San Antonio, Inc. ("GAS")
which was sold effective December 31, 1995, revenues decreased 9% for the three
months ended September 30, 1996, compared to three months ended September 30,
1995, and 5% for the comparable nine month period ended September 30, 1996.
This decline resulted from PPO revenues declining primarily due to the loss of
two clients in 1996.
Net income for the quarter and nine months ended September 30, 1996, was
$194,910 and $503,643, respectively, versus net losses of $651,531 and $262,000
for the comparable 1995 periods, respectively. Primary earnings per share
increased to $.05 from ($.17) for the three months ended September 30, 1996, and
to $.13 from ($.07) for the nine month period as compared to the prior year.
Exclusive of the net operating results of GAS, net income increased
approximately $733,000 for the three months ended September 30, 1996, as
compared to the three months ended September 30, 1995, and increased
approximately $727,000 for the nine months ended September 30, 1996, compared to
the same period ended September 30, 1995. The 1995 losses were impacted by
certain special charges totaling $741,000 before taxes which are more fully
discussed below. Current period results were favorably affected by reduced
operating expenses which resulted from management's efforts in that regard.
Salaries and wages decreased 26% to $2,017,375 from $2,730,292 for the three
months ended September 30, 1996, as compared to the prior year period. For the
nine months ended September 30, 1996, and 1995, respectively, salaries and wages
decreased 23% to $6,062,244 from $7,827,189. Exclusive of the salaries and
wages attributable to GAS, salaries and wages decreased approximately $492,000
(20%) for the three months ended September 30, 1996, as compared to the prior
year period, and decreased approximately $1,156,000 (16%) for the nine month
period ended September 30, 1996 as compared to the prior period. During the
first half of 1995, salaries and wages increased significantly due to the
Company's efforts to expand its contracted provider hospital and physician
network, increased claims processing volumes, and the development of new
products and services for its clients. During the last half of 1995 and
continuing into 1996, salaries and wages have been reduced due to operating
efficiencies identified in the above areas and continued improvements made to
the Company's information systems.
Other operating expenses decreased by approximately $500,000 (27%) for the
quarter ended September 30, 1996, compared to the same period in 1995. For the
nine month period ended September 30, 1996, other operating expenses decreased
approximately $307,000 (7%) as compared to the same 1995 period. Exclusive of
the other operating expenses attributable to GAS, other operating expenses
decreased approximately $450,000 (25%) and $143,000 (3%) for the quarter and
nine month period ended September 30, 1996 and 1995, respectively. The decreases
noted above are primarily due to costs related to the following activities in
1995: non-capitalized consulting costs for information systems, legal costs for
contract negotiations and development matters, and access fees for leasing host
networks for national clients.
8
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Depreciation and amortization decreased to $209,889 from $525,611, or 60% for
the three month comparable periods ending September 30, 1996 and 1995,
respectively. Depreciation and amortization decreased to $626,452 from
$818,989, or 24% for the nine month comparable periods ending September 30, 1996
and 1995, respectively. This decrease was primarily due to the write-off of
internally developed software costs related to a discontinued managed care
product in the third quarter of 1995. This write-off totaled approximately
$288,000. Exclusive of GAS, depreciation and amortization decreased
approximately 307,000 (59%) and $169,000 (21%) for the three and nine month
periods ended September 30, 1996, respectively, as compared to the same periods
during 1995.
Other income and expense increased to income of $16,844 from an expense of
$284,149 for the quarter ended September 30, 1996 and 1995, respectively. For
the nine month period ended September 30, 1996, other income and expense
increased to income of $11,202 from an expense of $306,704 for the same 1995
period. This increase was primarily due to a $253,000 charge for realized
losses on the sale of marketable securities which were recorded during the third
quarter of 1995.
(2) LIQUIDITY
The Company had net working capital of $1,922,488 at September 30, 1996,
compared to $1,921,250 at December 31, 1995. Cash flow from operations were
used to reduce accounts payable and outstanding borrowings under the Company's
revolving line of credit. Cash and cash equivalents were $1,535,243 at
September 30, 1996 compared to $1,651,475 at December 31, 1995.
On May 31, 1996, the Company refinanced its revolving bank lines of credit
totaling $1,000,000 on terms substantially consistent with the prior
arrangements, except the lines were consolidated into a single note agreement
which matures on May 31, 1998. As of September 30, 1996, borrowings under this
line of credit were $65,000.
(3) CAPITAL REQUIREMENTS
Capital expenditures for the purchase of tangible property and equipment were
$151,712 for the nine months ended September 30, 1996. Management currently
expects total capital expenditures for the remaining three months of 1996 to be
approximately $300,000.
In connection with the acquisition of DGA/DGIA, the Company is required to make
two semiannual note payments to these subsidiaries' former shareholders of
$366,667 commencing December 31, 1996.
Management believes that cash flows from operations, cash on hand, and the
borrowing capacity under the Company's line of credit will be sufficient to fund
liquidity needs and capital requirements for the foreseeable future.
Additionally, on March 29, 1996, the Company filed a post effective amendment to
its registration statement with the Securities and Exchange Commission to
maintain the registration of 1,080,000 shares of common stock underlying the
Warrants and Underwriters' Warrants included in the Company's May 1993 initial
public offering. The registration statement has been declared effective. The
exercise price for these warrants is $7.50. To the extent these Warrants and
Underwriters' Warrants are exercised, the Company's liquidity would be further
enhanced.
The Company has not paid dividends in the past and does not anticipate the
payment of such in the future.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
10
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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.
MEDICALCONTROL, INC.
November 13, 1996 /s/ John Ward Hunt
-------------------------------------
John Ward Hunt
President
Chief Executive Officer
/s/ David A. Hanson
-----------------------------------
David A. Hanson
Principal Accounting Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1996 FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,535,243
<SECURITIES> 0
<RECEIVABLES> 1,709,529
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,162,879
<PP&E> 1,667,118
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,814,384
<CURRENT-LIABILITIES> 2,240,391
<BONDS> 0
0
0
<COMMON> 39,072
<OTHER-SE> 7,588,199
<TOTAL-LIABILITY-AND-EQUITY> 7,623,271
<SALES> 3,877,213
<TOTAL-REVENUES> 3,877,213
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,577,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,640
<INCOME-PRETAX> 316,951
<INCOME-TAX> 122,041
<INCOME-CONTINUING> 194,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194,910
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0
</TABLE>
