<PAGE>
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 March 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
-------------- EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ---------------------
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)
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 3,875,023 as of May 7,
1997
Transitional Small Business Disclosure Format (Check one): YES NO X
--- ---
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MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended March 31, 1997
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 10
2
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MEDICALCONTROL, INC. AND SUBSIDIARY
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,779,214 $ 2,013,302
Accounts receivable - trade, net of allowance
for doubtful accounts of $256,000 and
$242,000 1,712,565 1,608,842
Accounts receivable - premium 357,209 390,907
Accounts receivable - other 14,694 20,429
Prepaid expenses and other current assets 249,949 273,337
Deferred income taxes 137,359 137,359
------------ -----------
Total current assets 4,250,990 4,444,176
NOTE RECEIVABLE - OFFICER, including accrued interest 372,158 365,221
PROPERTY AND EQUIPMENT, NET 1,748,612 1,698,681
GOODWILL, NET 3,546,339 3,578,003
INTANGIBLE AND OTHER ASSETS, NET 878,523 950,854
------------ -----------
TOTAL ASSETS $10,796,622 $11,036,935
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 822,903 $ 577,650
Accounts payable - premium 689,860 861,320
Accrued liabilities 660,420 716,931
Income taxes payable 64,092 77,164
Current portion of long-term debt 455,379 791,405
------------ -----------
Total current liabilities 2,692,654 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 2,718,056 2,632,853
------------ -----------
7,988,407 7,896,904
Less: Treasury stock (33,612 shares), at cost (268,896) (268,896)
------------ -----------
Total stockholders' equity 7,719,511 7,628,008
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,796,622 $11,036,935
=========== ===========
</TABLE>
The accompanying notes are an integral part these financial statements.
3
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MEDICALCONTROL, INC. AND SUBSIDIARY
-----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
NET REVENUES $3,568,756 $4,009,397
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OPERATING EXPENSES
Salaries and wages 1,898,093 2,002,357
Other operating expenses 1,359,164 1,475,828
Depreciation and amortization 204,689 208,110
---------- ----------
Total operating expenses 3,461,946 3,686,295
---------- ----------
INCOME FROM OPERATIONS 106,810 323,102
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OTHER INCOME (EXPENSE)
Interest expense (2,595) (48,925)
Investment income 24,526 6,982
Other 11,364 24,310
---------- ----------
Total other income (expense) 33,295 (17,633)
---------- ----------
INCOME BEFORE INCOME TAXES 140,105 305,469
Provision for income taxes 54,902 122,461
---------- ----------
NET INCOME $ 85,203 $ 183,008
========== ==========
Earnings per share - primary $ 0.02 $ 0.05
========== ==========
Weighted average number of shares outstanding 3,935,108 3,998,132
========== ==========
</TABLE>
The accompanying notes are an integral part these financial statements.
4
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARY
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income $ 85,203 $ 183,008
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 204,689 208,110
Deferred tax provision - -
Net changes in certain assets and liabilities
Accounts receivable - trade (103,723) (21,764)
Accounts receivable - premium 33,698 114,212
Prepaid income taxes - 91,695
Prepaid expenses and other current assets 29,123 19,063
Accounts payable - trade 245,253 (228,621)
Accounts payable - premium (171,460) 362
Accrued liabilities (69,583) (68,744)
---------- ----------
Net cash provided by (used in) operating activities 253,200 297,321
---------- ----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (150,625) (18,948)
Proceeds from sale of subsidiary - 258,809
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Net cash provided by (used in) investing activities (150,625) 239,861
---------- ----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Increase in note receivable - officer (6,937) (7,023)
Net drawdowns/(repayments) on revolving bank
lines of credit - (425,000)
Proceeds (payments) of long-term debt (336,026) 20,783
Proceeds from issuance of common stock 6,300 7,853
Stock and warrant registration costs - -
---------- ----------
Net cash used in financing activities (336,663) (403,387)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (234,088) 133,795
Cash and cash equivalents at beginning of period 2,013,302 1,651,475
---------- ----------
Cash and cash equivalents at end of period $1,779,214 $1,785,270
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 15,443 $ 21,284
========== ==========
Income taxes paid $ 65,322 $ 81,000
========== ==========
</TABLE>
The accompanying notes are an integral part these financial statements.
5
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three months ended March
31, 1997, primary earnings per share calculation are 27,815 common stock
equivalents.
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. As
required, the Company will restate previously reported earnings per share in
accordance with the provisions of this pronouncement. There is no impact on pro
forma basic and diluted earnings per share from previously reported earnings per
share for the three months ended March 31, 1997 and 1996.
6
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NOTE 4 - SUBSEQUENT EVENTS
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.
During April 1997, MCI has 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.
7
<PAGE>
PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER (OR THREE MONTHS) ENDED MARCH 31, 1997, COMPARED TO THE QUARTER (OR
THREE MONTHS) ENDED MARCH 31, 1996.
(1) RESULTS OF OPERATIONS
Net revenues for the three months ended March 31, 1997 decreased 11% to
$3,568,756 from $4,009,397 for the comparable 1996 period. PPO revenues declined
approximately $324,000 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
$116,000 due to the loss of a client.
Net income for the quarter ended March 31, 1997 was $85,203 compared to $188,008
for the same period in 1996. Primary earnings per share for the first quarter of
1997 and 1996 were $.02 and $.05, respectively. Included in this quarter's
operating results are approximately $137,000 of nonrecurring costs associated
with the Company 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, first quarter 1997
operating results would have been comparable to those achieved in the same
period in 1996.
Salaries and wages decreased 5% to $1,898,093 from $2,002,357 for the quarter
ended March 31, 1997, as compared to the prior year period. Personnel costs have
been reduced due to operating efficiencies realized in network services and
claims processing as a result of improvements made to the Company's information
systems.
Other operating expenses decreased by approximately $117,000 for the three
months ended March 31, 1997, or 8%, as compared to the three months ended March
31, 1996. This decrease was due primarily to reductions in consulting costs
(for information systems, marketing, and personnel needs) of approximately
$153,000, occupancy costs of approximately $20,000, and in travel, printing, and
other general operating expenses of $81,000. 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 $70,000 of systems conversion.
During 1996, the Company entered into a service agreement with a third party for
use of their claims adjudication software via on-line access to a 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 quarter of 1997, the Company incurred
approximately $70,000 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 $33,295 versus an expense of $17,633 for
the comparable 1997 and 1996 periods. This 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 quarter of 1997.
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of $1,558,336 at March 31, 1997, compared to
$1,419,706 at December 31, 1996. Cash and cash equivalents were $1,779,214 at
March 31, 1997, compared to $2,013,302 at December 31, 1996.
8
<PAGE>
Capital expenditures for the purchase of tangible property and equipment were
$150,625 for the three months ended March 31, 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 nine months of 1997 to be approximately $550,000,
of which $250,000 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 is required to make note payments to this subsidiary's
former shareholders of $333,333 on June 30, 1997. 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.
At March 31, 1997, the Company did not have any 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
None
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
10
<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.
May 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
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,779,214
<SECURITIES> 0
<RECEIVABLES> 2,086,468
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,250,990
<PP&E> 1,748,612
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,796,622
<CURRENT-LIABILITIES> 2,692,654
<BONDS> 0
0
0
<COMMON> 39,086
<OTHER-SE> 7,680,425
<TOTAL-LIABILITY-AND-EQUITY> 10,796,622
<SALES> 3,568,756
<TOTAL-REVENUES> 3,568,756
<CGS> 0
<TOTAL-COSTS> 3,461,946
<OTHER-EXPENSES> (35,890)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,595
<INCOME-PRETAX> 140,105
<INCOME-TAX> 54,902
<INCOME-CONTINUING> 85,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,203
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
