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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, 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
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(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
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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 - 3,825,023 as of
November 1, 1997
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, 1997
Table of Contents
<TABLE>
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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
</TABLE>
2
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MEDICALCONTROL, INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1997 1996
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,284,855 $ 2,013,302
Accounts receivable - trade, net of allowance
for doubtful accounts of $254,000 and
$242,000 1,925,360 1,608,842
Accounts receivable - premium 423,268 390,907
Accounts receivable - other 10,109 20,429
Prepaid expenses and other current assets 222,677 273,337
Deferred income taxes 137,359 137,359
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Total current assets 5,003,628 4,444,176
NOTE RECEIVABLE - OFFICER, including accrued interest 386,646 365,221
PROPERTY AND EQUIPMENT, NET 1,736,884 1,698,681
GOODWILL, NET 3,483,012 3,578,003
INTANGIBLE AND OTHER ASSETS, NET 778,667 950,854
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TOTAL ASSETS $11,388,837 $11,036,935
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 537,846 $ 577,650
Accounts payable - premium 939,260 861,320
Accrued liabilities 682,290 716,931
Income taxes payable 80,381 77,164
Current portion of long-term debt 147,317 791,405
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Total current liabilities 2,387,094 3,024,470
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 174,704 103,346
Deferred gain 902,417 -
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 2,892,056 2,632,853
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8,162,407 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)
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Total stockholders' equity 7,643,511 7,628,008
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,388,837 $11,036,935
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</TABLE>
The accompanying notes are an integral part of these statements.
3
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MEDICALCONTROL, INC. AND SUBSIDIARY
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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,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET REVENUES $ 3,577,547 $3,877,213 $ 10,717,501 $ 11,734,228
------------ ---------- ------------ ------------
OPERATING EXPENSES
Salaries and wages 1,954,351 2,017,375 5,683,688 6,062,244
Other operating expenses 1,316,578 1,349,842 4,039,713 4,251,013
Depreciation and amortization 254,190 209,889 666,792 626,452
------------ ---------- ------------ ------------
Total operating expenses 3,525,119 3,577,106 10,390,193 10,939,709
------------ ---------- ------------ ------------
INCOME FROM OPERATIONS 52,428 300,107 327,308 794,519
------------ ---------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (5,266) (11,640) (14,925) (85,655)
Investment income 25,618 23,124 75,225 69,677
Other 4,430 5,360 17,397 27,180
------------ ---------- ------------ ------------
Total other income (expense) 24,782 16,844 77,697 11,202
------------ ---------- ------------ ------------
INCOME BEFORE INCOME TAXES 77,210 316,951 405,005 805,721
Provision for income taxes 14,912 122,041 145,802 302,078
------------ ---------- ------------ ------------
NET INCOME $ 62,298 $ 194,910 $ 259,203 $ 503,643
============ ========== ============ ============
Earnings per share $ 0.02 $ 0.05 $ 0.07 $ 0.13
============ ========== ============ ============
Weighted average number of shares and
common stock equivalents outstanding 3,827,571 3,955,353 3,871,731 3,955,507
============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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MEDICALCONTROL, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
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1997 1996
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<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income $ 259,203 $ 503,643
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 666,792 626,452
Allowance for doubtful accounts 80,000 107,000
Net changes in certain assets and liabilities
Accounts receivable - trade (396,518) 91,886
Accounts receivable - premium (32,361) 8,588
Prepaid expenses and other current assets 60,980 53,139
Accounts payable - trade (39,804) (240,657)
Accounts payable - premium 77,940 63,401
Accrued liabilities (31,424) (112,640)
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Net cash provided by operating activities 644,808 1,100,812
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CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (347,130) (151,712)
Proceeds from sale of real estate option 902,417
Proceeds from sale of subsidiary - 255,129
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Net cash provided by (used in) investing activities 555,287 103,417
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CASH FLOWS RELATED TO FINANCING ACTIVITIES
Increase in note receivable - officer (21,425) (20,967)
Net drawdowns/(repayments) on revolving bank lines of credit - (935,000)
Proceeds (Payments) of long-term debt (572,730) (331,305)
Proceeds (Payments) of severance agreements (90,687) -
Proceeds from issuance of common stock 6,300 7,853
Acquisition of treasury stock (250,000) -
Stock and warrant registration costs - (41,042)
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Net cash provided by used in financing activities (928,542) (1,320,461)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 271,553 (116,232)
Cash and cash equivalents at beginning of period 2,013,302 1,651,475
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Cash and cash equivalents at end of period $ 2,284,855 $ 1,535,243
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 44,897 $ 83,104
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Income taxes paid $ 139,943 $ 245,005
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</TABLE>
The accompanying notes are an integral part of these statements.
5
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MEDICALCONTROL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month and three month periods ended September 30,
1997, are 26,270 and 2,548 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 nine
months ended September 30, 1997 and 1996.
6
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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 - SEVERANCE AGREEMENT
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.
NOTE 7 - DEFERRED GAIN
In connection with the Company's relocation of its corporate offices and
principal operations in January 1997, management secured a purchase option on
their new office facility. During September 1997, the Company sold this option
to a third party for $910,000 cash, who subsequently exercised the option.
Concurrent with the sale, the Company executed a ten year lease extension at a
fixed annual rental rate at or below current market rates. The proceeds from
this sale were used to retire all outstanding borrowings under the Company's
line of credit and other corporate purposes. The gain from this transaction
will be recognized on a straight-line basis over the life of the lease extension
and is reflected as a deferred gain on the accompanying balance sheet.
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, 1997, COMPARED TO THE NINE
MONTHS AND QUARTER ENDED SEPTEMBER 30, 1996.
(1) RESULTS OF OPERATIONS
Net revenues for the three months ended September 30, 1997 decreased 8% to
$3,577,547 from $3,877,213 for the comparable 1996 period, and decreased 9% to
$10,717,501 from $11,734,228 for the nine months ended September 30, 1997,
compared to the same period ended September 30, 1996. PPO revenues declined
approximately $214,000 for the quarter and approximately $715,000 for the nine
month period primarily due to client turnover, 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
$85,000 for the quarter and approximately $300,000 for the nine month period
primarily due to the loss of a client.
Net income for the quarter ended September 30, 1997 was $63,298 compared to
$194,910 for the same period in 1996. Net income decreased to $259,203 for the
nine months ended September 30, 1997, compared to $503,643 for the same 1996
period. Primary earnings per share were $.02 and $.05 for the quarters ended
September 30, 1997 and 1996. Primary earnings per share for the nine months
ended September 30, 1997, was $.07, compared to $.13 for the comparable 1996
period. Included in the nine month's operating results were the following non-
recurring costs: approximately $67,000 associated with the Company's relocation
of its principal operations and corporate offices to a new facility,
approximately $157,000 related to the implementation of a new claims processing
system for its subsidiary, approximately $86,000 related to a separation
agreement with a former employee, and approximately $43,000 related to the
acceleration of amortization of certain capitalized software costs. Each of
these items is more fully discussed below. 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 3% to $1,954,351 from $2,017,375 for the quarter
ended September 30, 1997, as compared to the prior year period. For the nine
months ended September 30, 1997 and 1996, respectively, salaries and wages
decreased 6% to $5,683,688 from $6,062,244. Exclusive of approximately $86,000
of separation costs associated with a former employee, salaries and wages
decreased approximately 465,000 (8%). 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, offset by
additional information management personnel.
Other operating expenses decreased by approximately $33,000 for the three months
ended September 30, 1997, or 2%, as compared to the three months ended September
30, 1996. Other operating expenses decreased approximately $211,000 (5%) for
the nine months ended September 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 $293,000, occupancy
costs of $31,000, and other general operating expenses of $111,000. 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 $157,000
of system conversion costs.
During late 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 provides the Company's TPA operations with
access to industry leading claims processing systems, which will improve
customer service and broaden product offerings. During the nine months ended
September 30, 1997, the Company incurred approximately $157,000 of costs related
to this conversion project, which are included in other operating expenses
discussed in the preceding paragraph.
8
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Depreciation and amortization for the quarter ended September 30, 1997 was
$254,190 compared to $209,889 for the same period in 1996. Depreciation and
amortization increased to $666,792 for the nine months ended September 30, 1997,
compared to $626,452 for the same 1996 period. During 1997 and 1996, the
company has been developing its industry-leading new IMPULSE PPO network
administration and claims repricing system. All costs associated with this
development have been expensed as incurred. As this new application platform is
implemented, certain previously capitalized software projects will be
discontinued. Accordingly, management has begun to accelerate the amortization
of these software projects to reflect their revised estimated useful lives.
During the current quarter, an additional $43,356 of non-cash amortization
expense has been recognized in the accompanying financial statements.
Other income and expense was income of $24,782 and $77,697 for the quarter and
nine month period ended September 30, 1997. For the quarter and nine months
ended September 30, 1996, other income and expense was income of $16,844 and
$11,202, 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.
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of $2,616,534 at September 30, 1997,
compared to $1,419,706 at December 31, 1996. Cash and cash equivalents were
$2,284,855 at September 30, 1997, compared to $2,013,302 at December 31, 1996.
Capital expenditures for the purchase of tangible property and equipment were
$347,130 for the nine months ended September 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 three months of 1997 to be approximately
$100,000, of which $50,000 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%, beginning on
September 30, 1997. The first installment was made prior to period end.
In connection with the sale of a purchase option on the Company's principal
facility discussed in Note 7 to the accompanying financial statements, the
Company received $910,000 in cash at closing. These cash proceeds were used to
retire all outstanding borrowings under the Company's revolving line of credit.
At September 30, 1997, the Company had net investments, included in cash and
cash equivalents above, of $400,000 with a bank.
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
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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 14, 1997 /s/ John Ward Hunt
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John Ward Hunt
President
Chief Executive Officer
/s/ David A. Hanson
-----------------------------------
David A. Hanson
Vice President, Finance and Accounting
11
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
CONTROL, INC. 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-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,284,855
<SECURITIES> 0
<RECEIVABLES> 1,925,360
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,003,628
<PP&E> 1,736,884
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,388,387
<CURRENT-LIABILITIES> 2,387,094
<BONDS> 0
0
0
<COMMON> 39,086
<OTHER-SE> 7,604,425
<TOTAL-LIABILITY-AND-EQUITY> 11,388,837
<SALES> 3,577,547
<TOTAL-REVENUES> 3,577,547
<CGS> 0
<TOTAL-COSTS> 3,525,119
<OTHER-EXPENSES> (19,516)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,266
<INCOME-PRETAX> 77,210
<INCOME-TAX> 14,912
<INCOME-CONTINUING> 62,298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,298
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
