<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
-------------- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
-------------- 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
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
8625 King George Drive, Suite 300; Dallas, Texas 75235
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(Address of principal executive offices)
(214) 630-6368
--------------
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock - 3,908,635 as of July
31, 1997
Transitional Small Business Disclosure Format (Check one): YES NO X
--- ---
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<PAGE>
MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended June 30, 1997
Table of Contents
Page
----
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 10
2
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,522,496 $ 2,013,302
Accounts receivable - trade, net of allowance
for doubtful accounts of $239,000 and
$242,000 1,776,351 1,608,842
Accounts receivable - premium 313,952 390,907
Accounts receivable - other 12,009 20,429
Prepaid expenses and other current assets 258,117 273,337
Deferred income taxes 137,359 137,359
------------ ------------
Total current assets 4,020,284 4,444,176
NOTE RECEIVABLE - OFFICER, including accrued interest 379,362 365,221
PROPERTY AND EQUIPMENT, NET 1,767,964 1,698,681
GOODWILL, NET 3,514,675 3,578,003
INTANGIBLE AND OTHER ASSETS, NET 806,880 950,854
------------ ------------
TOTAL ASSETS $ 10,489,165 $ 11,036,935
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 611,473 $ 577,650
Accounts payable - premium 576,010 861,320
Accrued liabilities 691,140 716,931
Income taxes payable 68,259 77,164
Borrowings under revolving bank lines of credit 125,000 --
Current portion of long-term debt 451,613 791,405
------------ ------------
Total current liabilities 2,523,495 3,024,470
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 103,346 103,346
Deferred income taxes 281,111 281,111
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, 3,908,635 and 3,907,190 issued 39,086 39,072
Additional paid-in capital 5,231,265 5,224,979
Retained earnings 2,829,758 2,632,853
------------ ------------
8,100,109 7,896,904
Less: Treasury stock (83,612 shares - 50,000 and 33,612
shares acquired in 1997 and 1996, respectively) at cost (518,896) (268,896)
------------ ------------
Total stockholders' equity 7,581,213 7,628,008
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,489,165 $ 11,036,935
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,571,198 $ 3,847,618 $ 7,139,954 $ 7,857,015
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries and wages 1,831,244 2,042,512 3,729,337 4,044,869
Other operating expenses 1,363,971 1,425,343 2,723,135 2,901,171
Depreciation and amortization 207,913 208,453 412,602 416,563
----------- ----------- ----------- -----------
Total operating expenses 3,403,128 3,676,308 6,865,074 7,362,603
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 168,070 171,310 274,880 494,412
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (7,064) (32,072) (9,659) (74,015)
Investment income 25,081 46,553 49,607 46,553
Other 1,603 (2,490) 12,967 21,820
----------- ----------- ----------- -----------
Total other income (expense) 19,620 11,991 52,915 (5,642)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 187,690 183,301 327,795 488,770
Provision for income taxes 75,988 57,576 130,890 180,037
----------- ----------- ----------- -----------
NET INCOME $ 111,702 $ 125,725 $ 196,905 $ 308,733
=========== =========== =========== ===========
Earnings per share $ 0.03 $ 0.03 $ 0.05 $ 0.08
=========== =========== =========== ===========
Weighted average number of shares and
common stock equivalents outstanding 3,840,089 4,020,104 3,886,044 4,018,799
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income $ 196,905 $ 308,733
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 412,602 416,563
Net changes in certain assets and liabilities
Accounts receivable - trade (167,509) 129,478
Accounts receivable - premium 76,955 149,402
Prepaid expenses and other current assets 23,640 42,478
Accounts payable - trade 33,823 (211,384)
Accounts payable - premium (285,310) (93,625)
Accrued liabilities (34,696) 6,273
---------- ----------
Net cash provided by operating activities 256,410 747,918
---------- ----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (274,583) (44,132)
Proceeds from sale of subsidiary -- 250,174
---------- ----------
Net cash provided by (used in) investing activities (274,583) 206,042
---------- ----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Increase in note receivable - officer (14,141) (13,941)
Net drawdowns/(repayments) on revolving bank lines of credit 125,000 (450,000)
Proceeds (Payments) of long-term debt (339,792) 30,254
Proceeds from issuance of common stock 6,300 7,853
Acquisition of treasury stock (250,000) --
Stock and warrant registration costs -- (23,227)
---------- ----------
Net cash provided by used in financing activities (472,633) (449,061)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (490,806) 504,899
Cash and cash equivalents at beginning of period 2,013,302 1,651,475
---------- ----------
Cash and cash equivalents at end of period $1,522,496 $2,156,374
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 26,428 $ 57,031
========== ==========
Income taxes paid $ 118,422 $ 141,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(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 subsidiary (collectively the
"Company"), the Company provides products and services which include healthcare
cost containment programs, a 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 for
the fiscal year ended December 31, 1996, 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 primary earnings per share
calculations for the six month and three month periods ended June 30, 1997, are
30,615 and 2,288 common stock equivalents, respectively.
The Company will adopt Statement of Accounting Standards (SFAS) No. 128 -
"Earnings per Share," in its December 31, 1997 consolidated financial
statements. SFAS No. 128 requires the calculation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. As required, the Company will restate previously
reported earnings per share in accordance with the provisions of this
pronouncement. There is no material impact on pro forma basic and diluted
earnings per share from previously reported earnings per share for the six
months ended June 30, 1997 and 1996.
6
<PAGE>
NOTE 4 - ACQUISITION OF TREASURY STOCK
During April 1997, the Company purchased 50,000 shares of outstanding MCI stock
at $5.00 per share under the terms of a stock repurchase program announced in
January 1997. Such shares will be used to satisfy the exercise of stock options
and for other corporate purposes. The acquired shares were recorded as
additional treasury stock in the Company's financial statements.
NOTE 5 - REGISTRATION STATEMENT
During April 1997, MCI filed a registration statement with the Securities and
Exchange Commission to register certain existing outstanding shares of common
stock owned by the majority shareholder of MCI. The stock registered serves as
collateral for certain loans of the majority shareholder.
NOTE 6 - SUBSEQUENT EVENT
During July 1997, MCI entered into a separation agreement with a former
employee. Under the terms of the agreement, the former employee will serve as a
consultant to MCI with respect to certain clients. The agreement includes
certain restrictive covenants, including a covenant not to solicit current MCI
clients. Total consideration to be paid under the terms of the agreement will be
approximately $175,000, plus commissions earned on certain client revenues. Of
this amount, $65,000 was paid and expensed upon execution of the agreement and
the remainder will be deferred over two years. Commission expense will be
recognized and paid as it is earned. Upon his separation, the former employee
also forfeited 80,000 options to acquire MCI stock from the majority shareholder
at an exercise price of $1.80.
7
<PAGE>
PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE SIX MONTHS AND QUARTER ENDED JUNE 30, 1997, COMPARED TO THE SIX MONTHS AND
QUARTER ENDED JUNE 30, 1996.
(1) RESULTS OF OPERATIONS
Net revenues for the three months ended June 30, 1997 decreased 7% to $3,571,198
from $3,847,618 for the comparable 1996 period, and decreased 9% to $7,139,954
from $7,857,015 for the six months ended June 30, 1997, compared to the same
period ended June 30, 1996. PPO revenues declined approximately $175,000 for
the quarter and approximately $500,000 for the six month period primarily due to
management's focus on eliminating marginal or unprofitable business and
fluctuations in the relative mix of hospital versus physician claims volume.
TPA revenues decreased approximately $100,000 for the quarter and approximately
$216,000 for the six month period due to the loss of a client.
Net income for the quarter ended June 30, 1997 was $111,702 compared to $125,725
for the same period in 1996, a decrease of 11%. Net income decreased to
$196,905 for the six months ended June 30, 1997, compared to $308,733 for the
same 1996 period. Primary earnings per share were $.03 for the quarters ended
June 30, 1997 and 1996. Primary earnings per share for the six months ended
June 30, 1997, was $.05, compared to $.08 for the comparable 1996 period.
Included in the six month's operating results were approximately $202,000 of
nonrecurring costs associated with the Company's relocation of its principal
operations and corporate offices to a new facility and the implementation of a
new claims processing system for its subsidiary. Exclusive of the impact of
these events, year to date 1997 operating results would have been comparable to
those achieved in the same period in 1996.
Salaries and wages decreased 10% to $1,831,244 from $2,042,512 for the quarter
ended June 30, 1997, as compared to the prior year period. For the six months
ended June 30, 1997 and 1996, respectively, salaries and wages decreased 8% to
$3,729,337 from $4,044,869. Personnel costs have been reduced due to operating
efficiencies realized in claims processing and network services as a result of
improvements made to the Company's information systems.
Other operating expenses decreased by approximately $62,000 for the three months
ended June 30, 1997, or 4%, as compared to the three months ended June 30, 1996.
Other operating expenses decreased approximately $178,000 (6%) for the six
months ended June 30, 1997, as compared to the same period in 1996. This
decrease was due primarily to reductions in consulting costs (for information
systems, marketing, and personnel needs) of $236,000, occupancy costs of
$42,000, and other general operating expenses of $102,000. These operating
expense reductions were offset by approximately $67,000 of nonrecurring costs
associated with the Company's relocation of its principal operations and
corporate offices during January 1997 and approximately $135,000 of systems
conversion costs.
During 1996, the Company's subsidiary entered into a service agreement with a
third party for use of their claims adjudication software via on-line access to
its data center. This arrangement will allow outsourcing of the claims
processing activity of the Company's TPA operations, which will improve customer
service and broaden product offerings. During the first half of 1997, the
Company incurred approximately $135,000 of costs related to this conversion
project, which are included in other operating expenses discussed in the
preceding paragraph.
Other income and expense was income of $19,620 and $52,915 for the quarter and
six month period ended June 30, 1997. For the quarter and six months ended June
30, 1996, other income and expense was income of $11,991 and expense of $5,642,
respectively. This favorable increase was primarily attributable to lower
interest expense associated with the Company's revolving line of credit, as
average borrowings under this credit facility have been significantly reduced
during the last half of 1996 and the first half of 1997.
8
<PAGE>
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of $1,621,789 at June 30, 1997, compared to
$1,419,706 at December 31, 1996. Cash and cash equivalents were $1,522,496 at
June 30, 1997, compared to $2,013,302 at December 31, 1996.
Capital expenditures for the purchase of tangible property and equipment were
$274,583 for the six months ended June 30, 1997. These expenditures included
leasehold improvements of approximately $60,000 associated with the Company's
relocation discussed above. Management currently expects total capital
expenditures for the remaining six months of 1997 to be approximately $300,000,
of which $150,000 relates to the implementation of the new claims processing
system for its subsidiary.
In connection with the 1994 acquisition of Diversified Group Administrators,
Inc. ("DGA"), the Company was required to make note payments to this
subsidiary's former shareholders of $333,333 on June 30, 1997. These payments
were made immediately subsequent to period end. The final $100,000 of these
obligations, subject to an option to convert this note into 25,000 shares of
common stock, will be due on or before June 30, 1998.
In connection with the separation agreement with a former employee discussed in
Note 6 to the accompanying financial statements, the Company will be required to
make eight quarterly installments of $13,750, plus interest at 8%, commencing in
September 1997.
At June 30, 1997, the Company had $125,000 of outstanding borrowings under its
$1,000,000 revolving line of credit. During April 1997, the Company purchased
50,000 shares of MCI stock at $5.00 per share under the terms of a stock
repurchase plan to purchase up to $500,000 of common stock announced during
December 1996. This purchase was financed with an advance under this credit
facility.
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.
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
Effective April 30, 1997, the MedicalControl, Inc. Common Stock Purchase
Warrants expired pursuant to their terms.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Submissions of matters through the solicitation of proxies were provided to
security holders during the three month period ended June 30, 1997. These
matters were voted on May 14, 1997, at the annual shareholders meeting. The
annual meeting involved the election of directors. The following individuals
were elected as directors of the Company:
<TABLE>
<CAPTION>
NAME POSITION FOR AGAINST ABSTAIN
---- -------- --- ------- -------
<S> <C> <C> <C> <C>
John Ward Hunt President, Chief 2,926,825 0 84,800
Executive Officer,
Chairman of the Board
of Directors
David Samuel Coats Director 2,926,825 0 84,800
Robert W. Philip Director 2,926,825 0 84,800
William L. Amos, M.D. Director 2,926,825 0 84,800
</TABLE>
The following additional items were voted on during the shareholders meeting.
The approval of an amendment to the 1993 Stock Compensation Plan to allow the
Board of Directors to amend an option agreement to specify a lower exercise
price or accept the surrender of outstanding options and authorize the granting
of new options in substitution therefore specifying a lower exercise price.
For: 2,856,205 Against: 148,020 Abstain: 7,400
The approval of an amendment to the Outside Directors Stock Option Plan to
allow non-interested directors to amend an option agreement to specify a lower
exercise price or accept the surrender of outstanding options and authorize the
granting of new options in substitution therefore specifying a lower exercise
price.
For: 2,863,105 Against: 140,520 Abstain: 8,000
10
<PAGE>
The approval of an amendment to the Qualified Employee Stock Purchase Plan to
increase the authorized number of shares of common stock of the Company
available under the Plan from 100,000 to 200,000.
For: 2,927,225 Against: 80,200 Abstain: 4,200
ITEM 5 - OTHER INFORMATION
During April 1997, the Company purchased 50,000 shares of outstanding MCI
stock at $5.00 per share under the terms of a stock repurchase program
announced in January 1997. Such shares will be used to satisfy the exercise
of stock options and for other corporate purposes. The acquired shares were
recorded as additional treasury stock in the Company's financial statements.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICALCONTROL, INC.
August 15, 1997 /s/ John Ward Hunt
-------------------------------------
John Ward Hunt
President
Chief Executive Officer
/s/ David A. Hanson
-----------------------------------
David A. Hanson
Vice President, Finance and Accounting
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,522,496
<SECURITIES> 0
<RECEIVABLES> 2,102,312
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,020,284
<PP&E> 1,767,964
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,489,165
<CURRENT-LIABILITIES> 2,523,495
<BONDS> 0
0
0
<COMMON> 39,086
<OTHER-SE> 7,542,127
<TOTAL-LIABILITY-AND-EQUITY> 10,489,165
<SALES> 7,139,954
<TOTAL-REVENUES> 7,139,954
<CGS> 0
<TOTAL-COSTS> (6,865,074)
<OTHER-EXPENSES> 62,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (9,659)
<INCOME-PRETAX> 327,795
<INCOME-TAX> 130,890
<INCOME-CONTINUING> 196,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196,905
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
