<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
September 25, 1998
(Date of earliest event reported)
MEDICALCONTROL, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-11922 75-2297429
- ------------------------------- ------------------------ -------------------
(State or other jurisdiction of (Commission file number) (IRS employer
incorporation or organization) identification no.)
8625 King George Drive, Suite 300
Dallas, Texas 75235
(Address of principal executive offices, including zip code)
(214) 630-6368
------------------------
(Registrant's telephone number,
including area code)
Not Applicable
----------------------
(Former name or former address,
if changed from last report)
Page 1 of 22 sequentially
numbered pages.
================================================================================
-1-
<PAGE> 2
The current report on Form 8-k of the registrant previously filed October 9,
1998, is hereby amended to add thereto the following financial statements:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements related to the transaction completed by the
Stock Purchase Agreement dated September 10, 1998, pursuant to which the
registrant acquired all of the capital stock of Business Health Companies, Inc.:
(a) Financial Statements of Businesses Acquired.
Business Health Companies, Inc. financial statements filed as
part of this report are listed on the Index to Historical and
Pro Forma Financial Information on page 4 of this report,
which index is incorporated in this Item 7(a) by reference.
(b) Pro Forma Financial Information.
Pro forma financial statements filed as part of this report
are listed on the Index to Historical and Pro Forma Financial
Information on page 16 of this report, which index is
incorporated in this Item 7(b) by reference.
(c) Exhibits.
2.1 Asset Purchase Agreement, dated September 10, 1998,
by and among Business Health Companies, Inc.; Douglas
L. Elden; Donald Richard Huntington; Ralph T. Smith,
Jr.; MedicalControl, Inc.; and MedicalControl Network
Solutions, Inc. (filed October 10, 1998 with 8-K).
4.1 Form of convertible Subordinated Promissory Note
(filed October 0, 1998 with 8-K).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: November 12, 1998 MEDICALCONTROL, INC.
By: /s/ David Hanson
-------------------------------
David Hanson, Vice President,
Finance and Accounting
-2-
<PAGE> 3
MEDICALCONTROL, INC.
INDEX TO HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
HISTORICAL FINANCIAL INFORMATION
Consolidated Financial Statements of Business Health Companies, Inc. as of
June 30, 1998 and 1997, including report of Independent Public
Accountants...................................................................................4
PRO FORMA FINANCIAL INFORMATION
Summary Information Related to the Unaudited Condensed Pro Forma
Consolidated Financial Data..................................................................16
Unaudited Condensed Pro Forma Consolidated Balance Sheet of
MedicalControl, Inc. As of June 30, 1998.....................................................17
Notes to Unaudited Condensed Pro Forma Consolidated Balance Sheet
of MedicalControl, Inc. as of June 30, 1998..................................................18
Unaudited Condensed Pro Forma Consolidated Statement of Operations
of MedicalControl, Inc. for the six-month period ended June 30,1998..........................19
Notes to Unaudited Condensed Pro Forma Consolidated Statement of
Operations of MedicalControl, Inc. for the six-month period
ended June 30, 1998..........................................................................20
Unaudited Condensed Pro Forma Consolidated Statement of Operations
of MedicalControl, Inc. for the year ended December 31, 1997.................................21
Notes to Unaudited Condensed Pro Forma Consolidated Statement of
Income of MedicalControl, Inc. for the year ended December 31, 1997..........................22
</TABLE>
-3-
<PAGE> 4
Independent Auditors' Report
To the Stockholders and Board of Directors of
Business Health Companies, Inc.
We have audited the accompanying consolidated balance sheets of Business
Health Companies, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Business Health
Companies, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
R.J. MANN & COMPANY
Houston, Texas
September 25, 1998
-4-
<PAGE> 5
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 55,066 $ 84,500
Trade accounts receivable, net allowance for
doubtful accounts of $50,000 in 1998
and $32,000 in 1997 192,766 165,697
Accounts receivable-other 12,797 3,729
Prepaid expenses 12,158 13,368
Income taxes receivable 13,392 --
------------------ ------------------
Total Current Assets 286,179 267,294
------------------ ------------------
Property and Equipment:
Office equipment 109,511 93,502
Furniture and fixtures 27,522 25,814
Leasehold improvements 28,409 9,475
------------------ ------------------
165,442 128,791
Less accumulated depreciation and amortization (63,993) (34,958)
------------------ ------------------
101,449 93,833
------------------ ------------------
Other Long-Term Assets 792 1,046
------------------ ------------------
Total Assets $ 388,420 $ 362,173
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Current Liabilities:
Trade accounts payable $ 64,879 $ 69,125
Accrued liabilities 79,355 52,459
Income taxes payable -- 15,001
Deferred tax liabilities 35,935 34,138
------------------ ------------------
Total Current Liabilities 180,169 170,723
Deferred tax liabilities 11,904 8,297
------------------ ------------------
Total Liabilities 192,073 179,020
------------------ ------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $1 par value, 500 Class A,
500 Class C and 500 Class D shares
authorized, issued and outstanding 1,500 1,500
Additional paid-in capital 5,500 5,500
Retained earnings 189,347 176,153
------------------ ------------------
Total Stockholders' Equity 196,347 183,153
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 388,420 $ 362,173
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE> 7
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Net Revenues $ 2,165,298 $ 1,853,123
------------------ ------------------
Operating Expenses:
Salaries and wages 1,056,743 771,556
Other operating expenses 1,055,894 967,569
Depreciation and amortization 29,606 21,329
------------------ ------------------
Total operating expenses 2,142,243 1,760,454
------------------ ------------------
Income from operations 23,055 92,669
------------------ ------------------
Other Income (Expense)
Interest expense (622) (759)
Investment income 1,373 3,154
Other income (expense) (29) (17,000)
------------------ ------------------
Total other income (expense) 722 (14,605)
------------------ ------------------
Income before income taxes 23,777 78,064
Provision for income taxes 10,583 16,851
------------------ ------------------
Net income $ 13,194 $ 61,213
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
-7-
<PAGE> 8
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,194 $ 61,213
------------------ ------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in allowance for doubtful accounts 18,000 --
Depreciation and amortization 29,606 21,329
Deferred tax provision 5,404 (1,720)
Loss on disposition of property and equipment 29 --
Change in assets and liabilities:
Decrease (increase) in trade accounts receivable (45,069) 36,389
Increase in accounts receivable-other (9,068) (2,667)
Decrease (increase) in prepaid expenses 1,210 (6,681)
Increase in income taxes receivable (13,392) --
Decrease in other assets 254 254
Decrease in trade accounts payable (4,246) (25,919)
Increase in accrued liabilities 26,896 15,491
Increase (decrease) in income taxes payable (15,001) 12,230
------------------ ------------------
Total adjustments (5,377) 48,706
------------------ ------------------
Net cash provided by operating activities 7,817 109,919
------------------ ------------------
Cash flows provided (used) by investing activities:
Payments received on property and equipment sale 2,400 --
Purchase of property and equipment (39,651) (35,218)
------------------ ------------------
Net cash used by investing activities (37,251) (35,218)
------------------ ------------------
Cash flows used by financing activities:
Payments on short-term borrowings -- (25,000)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (29,434) 49,701
Cash and cash equivalents at beginning of year 84,500 34,799
------------------ ------------------
Cash and cash equivalents at end of year $ 55,066 $ 84,500
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
-8-
<PAGE> 9
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 622 $ 965
================== ==================
Federal income taxes $ 33,573 $ 5,593
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
-9-
<PAGE> 10
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------ Additional
Shares Retained Paid-In
Outstanding Amount Earnings Capital Total
------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996 1,500 $ 1,500 $ 114,940 $ 5,500 $ 121,940
Net income -- -- 61,213 -- 61,213
------------- ------------- ------------- ------------- -----------------
Balance at June 30, 1997 1,500 1,500 176,153 5,500 183,153
Net income -- -- 13,194 -- 13,194
------------- ------------- ------------- ------------- -----------------
Balance at June 30, 1998 1,500 $ 1,500 $ 189,347 $ 5,500 $ 196,347
============= ============= ============= ============= =================
</TABLE>
The accompanying notes are an integral part of these statements.
-10-
<PAGE> 11
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 1 - BACKGROUND AND ORGANIZATION
Business Health Companies, Inc. ("BHC" or the "Company"), a Delaware
corporation, is a holding company of healthcare cost management and consulting
companies. The Company is comprised of three subsidiaries: Business Health
Management, Inc. and Texas Health Partnership, Inc., providing managed care
services throughout the United States, primarily through preferred provider
organization ("PPO") networks (see Note 5), and Business Health Strategies,
Inc., providing consultation services to the healthcare industry. The Company's
contracts are generally renewable annually and permit cancellation with written
notice 90 to 120 days prior to the renewal date.
Effective September 1, 1998, the Company was purchased. See Note 9.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles and include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, generally with maturities
of three months or less.
Trade Accounts Receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers that are located throughout the United States.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts, which reflects its estimate of amounts that will eventually
become uncollectible.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the assets
or term of the lease, which are as follows:
Office equipment 5 - 7 years
Furniture and fixtures 7 years
Leasehold improvements 3 - 5 years
Expenditures for major renewals and betterments are capitalized, expenditures
for maintenance and repairs are charged to expense as incurred. When property or
equipment is retired or otherwise disposed of, the related costs and accumulated
depreciation or amortization are removed from the accounts and any gain or loss
is reflected in income.
-11-
<PAGE> 12
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
Subsequent to its initial recording, the Company periodically evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of long-lived assets (including property and equipment)
may warrant revision or that the remaining balance of the assets may not be
recoverable. When factors indicate these assets should be evaluated for possible
impairment, the Company uses an estimate of the related operating unit's or
specific asset's undiscounted future cash flows in determining whether an
impairment has occurred, and the operating unit's or specific asset's fair value
in measuring the impairment.
Income Taxes
Deferred income taxes are provided for temporary differences between recording
certain revenue and expense on a cash basis for tax reporting purposes and on an
accrual basis for financial reporting purposes, and the tax bases of assets and
liabilities and their financial reporting amounts. Deferred taxes are recorded
for temporary differences based upon enacted tax rates anticipated to be in
effect when the temporary differences are expected to reverse.
Revenue recognition
Managed health care service revenues are generally recognized per month based
upon either a fixed fee per employee in a customer's benefit plan or a
percentage of savings. Consulting fees are recognized as the services are
rendered.
Advertising
The Company expenses the cost of advertising and promotion. Advertising and
promotion expense was $18,613 in 1998 and $19,973 in 1997.
Use of Estimates
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from
these estimates.
-12-
<PAGE> 13
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 3 - PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "Plan") that covers all
employees of the Company who have one year of service, as defined in the Plan.
Company contributions are composed of an amount equal to the employees'
contribution plus a discretionary company amount. Employees become 100% vested
in employer contributions after 5 years of service (accruing 20% per year after
two years of service, as defined in the Plan). The Company recorded expense of
$45,000 and $45,560 for plan contributions for the years ended June 30, 1998 and
1997, respectively.
NOTE 4 - INCOME TAXES
The provision (benefit) for income taxes at June 30, 1998 and 1997, consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current $ 5,180 $ 18,570
Deferred 5,403 (1,719)
----------- -----------
Total $ 10,583 $ 16,851
=========== ===========
</TABLE>
The differences between the statutory federal income tax rate and the Company's
effective income tax are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Statutory federal income tax rate 29.7% 19.1%
Nondeductible expenses 14.8% 2.5%
----------- -----------
Total 44.5% 21.6%
=========== ===========
</TABLE>
The components of net deferred tax liabilities as of June 30, 1998 and 1997, are
as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current deferred taxes:
Cash basis adjustment for
tax reporting purposes $ 35,935 $ 34,138
Noncurrent deferred taxes:
Excess tax over book
depreciation and amortization 11,904 8,297
----------- -----------
Total deferred taxes $ 47,839 $ 42,435
=========== ===========
</TABLE>
-13-
<PAGE> 14
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
At June 30, 1998, the Company was obligated under various noncancellable
operating leases having initial or remaining terms in excess of one year through
2001. Some lease payments are subject to change as a result of changes in lessor
operating expenses. Estimated annual minimum payments under these agreements are
as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Operating Leases
Year Ending -----------------------------------------------------------
June 30 Facilities Equipment Total
----------- ------------ ----------
<S> <C> <C> <C>
1999 $ 57,834 $ 1,234 $ 59,068
2000 58,866 - 58,866
2001 14,781 - 14,781
----------- ------------ ----------
$ 131,481 $ 1,234 $ 132,715
=========== ============ ==========
</TABLE>
Total lease expense under both noncancellable and cancelable operating leases
was $60,654 and $58,261 for 1998 and 1997, respectively.
Service Agreements
The Company has repricing agreements with various vendors that are generally
renewable annually and permit cancellation with written notice 90 days prior to
the renewal date.
To facilitate the providing of healthcare services, the Company has an agreement
with a managed care network to provide administrative and management services
through May 31, 2004. As compensation, the Company retains any and all fees
collected from the operation of the network.
Litigation
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that such litigation and claims
will be resolved without material effect on the Company's financial position or
results of operations.
NOTE 6 - RELATED PARTY TRANSACTIONS
Legal services purchased from a shareholder totaled $25,196 in 1998 and $32,821
in 1997. As of June 30, 1998 and 1997 shareholder advances totaled $2,397 and
$1,548, respectively.
Purchases from the parent company discussed in Note 9 were approximately
$285,000 in 1998 and $25,000 in 1997.
14
<PAGE> 15
BUSINESS HEALTH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 7 - STOCKHOLDERS' EQUITY
Common Stock
Each class of stock is entitled to equal rights and privileges. Upon termination
of employment, use of services or long-term disability, the stock becomes
non-voting stock.
Stock Purchase Agreement
The Company and all of its shareholders have entered into a stock purchase
agreement which governs the disposition of outstanding shares in the event of
the death, disability, termination of employment or voluntary disposition of any
of the shareholders. The Company has options to purchase shares under various
conditions; however, the Company may have an obligation to purchase shares from
a shareholder in the event of their death or disability at age 65.
The purchase price of the stock shall be the certificate of value, as defined in
the agreement, determined not more than one year prior to the event giving rise
to the option or obligation on the part of the Company. At June 30, 1998, the
certificate of value was $1,333 per share. In the absence of a certificate of
value, the purchase price shall be 110% of gross receipts, as defined in the
agreement.
With the sale discussed in Note 9, this agreement was terminated.
NOTE 8 - CONCENTRATION RISK
Substantially all revenues are generated by the providing of managed care
services. The Company serves a variety of industries with the insurance and oil
and gas industries each representing approximately 30% and 27% of its client
base for 1998 and 1997, respectively. The Company's two largest customers, an
insurance company and a computer company, comprise approximately 16% and 12% of
1998 revenues, and 12% and 13% of 1997 revenues, respectively. Receivables from
these customers totaled $114,870 at June 30, 1998 and $65,496 at June 30, 1997.
The loss of one of these two major customers could have a negative impact on the
Company's business.
Each of the remaining Company customers comprised less than 10% of the Company's
1998 and 1997 business.
NOTE 9 - SUBSEQUENT EVENT
Effective September 1, 1998 all issued and outstanding shares of the Company
were sold to a subsidiary of a company registered with the Securities and
Exchange Commission (the "Parent"). As consideration for the shares, the
shareholders received cash of $2,150,000; convertible subordinated notes in the
aggregate principal amount of $1.0 million; and 270,900 shares of stock of
Parent company.
-15-
<PAGE> 16
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED FINANCIAL DATA
During September, 1998 MedicalControl, Inc. (the "Company") acquired all the
issued and outstanding shares of Business Health Companies, Inc. ("BHC") for
approximately $4.5 million. The purchase consideration consisted of $2,150,000
in cash, 270,900 shares of the Company's common stock, valued at approximately
$1,422,000, and an aggregate of $1,000,000 in convertible notes from the
previous shareholders of BHC. The Company also incurred approximately $150,000
of transaction related costs.
The following unaudited condensed pro forma consolidated financial information
consists of the Company's Unaudited Condensed Pro Forma Consolidated Balance
Sheet as of June 30, 1998, the Unaudited Condensed Pro Forma Consolidated
Statements of Operations for the year ended December 31, 1997, and the six-month
period ended June 30, 1998, (collectively, the "Pro Forma Statements"). The Pro
Forma Statements give effect to the purchase of Business Health Companies Inc.
(BHC). The Unaudited Condensed Pro Forma Consolidated Balance Sheet as of June
30, 1998 gives effect to the purchase of BHC as if such transaction had occurred
on June 30, 1998. The Unaudited Condensed Pro Forma Consolidated Statements of
Operations for the year ended December 31, 1997 and the six-month period ended
June 30, 1998 give effect to the purchase of BHC as if such transaction had
occurred on January 1, 1997.
The Company and BHC have different year-ends; December 31 and June 30,
respectively. Therefore, the Pro Forma Condensed Statement of Operations for the
year ended December 31, 1997, includes the results of BHC's operations from
January 1, 1997 to December 31, 1997. The Pro Forma Condensed Consolidated
Statement of Operations for the six-month period ended June 30, 1998, includes
the results of BHC's operations from January 1, 1998 to June 30, 1998. The Pro
Forma Statements present the Company's most recent fiscal year-end and interim
period results of operations.
The Pro Forma Statements do not purport to represent what the results of
operations of the Company would actually have been if the aforementioned
transaction in fact had occurred on January 1, 1997, or to project the results
of operations or financial position for any future periods or at any future
date.
-16-
<PAGE> 17
MEDICALCONTROL, INC
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
MCI BHC Adjustments Consolidated
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 2,976,308 $ 55,066 $ (550,000)(g) $ 2,481,374
Accounts receivable - trade, net of allowance -
for doubtful accounts of $177,000 1,653,736 192,766 1,846,502
Accounts receivable - premium 664,161 - 664,161
Accounts receivable - other 176,175 12,797 188,972
Prepaid income taxes 103,257 13,392 - 116,649
Prepaid expenses and other current assets 288,961 12,158 301,119
Deferred income taxes 168,838 (35,935) 132,903
------------ ---------- ----------- ------------
Total current assets 6,031,436 250,244 (550,000) 5,731,680
Note Receivable - Officer, including accrued interest 406,608 - 406,608
Property and Equipment, net 1,543,959 101,449 1,645,408
Goodwill, net 3,387,965 - 4,635,879 (a) 8,023,844
Intangible and other assets, net 513,820 792 514,612
------------ ---------- ----------- ------------
Total Assets $ 11,883,788 $ 352,485 $ 4,085,879 $ 16,322,152
============ ========== =========== ============
Current Liabilities
Accounts payable - trade $ 721,841 $ 64,879 $ 786,720
Accounts payable - premium 1,541,711 - 1,541,711
Accrued liabilities 825,577 79,355 110,000 (b) 1,014,932
150,000 (c) 150,000
Income taxes payable - - - -
Current portion of long-term debt 307,814 200,000 (e) 507,814
320,000 (d) 320,000
------------ ---------- ----------- ------------
Total current liabilities 3,396,943 144,234 780,000 4,321,177
Non-Current Liabilities
Long-term debt, net of current portion 111,514 - 800,000 (e) 911,514
1,280,000 (d) 1,280,000
Deferred gain on sale of option on real estate 842,500 - - 842,500
Deferred income taxes 116,489 11,904 - 128,393
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, 3,973,113 shares issued 39,731 1,500 1,193 (f) 42,424
(1,500)(h) (1,500)
Additional paid in capital 5,512,472 5,500 491,137 (f) 6,009,109
(5,500)(h) (5,500)
Retained earnings 2,834,035 189,347 - 3,023,382
(189,347)(h) (189,347)
------------ ---------- ----------- ------------
8,386,238 196,347 295,983 8,878,568
Less: Treasury stock (171,612 shares) (969,896) - 929,896 (f) (40,000)
------------ ---------- ----------- ------------
Total stockholders' equity 7,416,342 196,347 1,225,879 8,838,568
------------ ---------- ----------- ------------
Total Liabilities and Stockholders' Equity $ 11,883,788 $ 352,485 $ 4,085,879 $ 16,322,152
============ ========== =========== ============
</TABLE>
See accompanying Notes to Unaudited Condensed Pro Forma Balance Sheet
-17-
<PAGE> 18
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED BALANCE SHEET
As of June 30, 1998
The unaudited condensed pro forma consolidated balance sheet as of June 30, 1998
combines the following information:
1. The historical unaudited condensed consolidated balance sheet of the
Company as of June 30, 1998.
2. The historical condensed consolidated balance sheet of Business Health
Companies, Inc. as of June 30, 1998.
3. Pro forma adjustments
PRO FORMA ADJUSTMENTS:
(a) To record the excess of the purchase price over the fair value of
tangible net assets acquired which has been allocated to goodwill and
will be amortized, using the straight-line method over 25 years. A
summary of consideration and net assets acquired is as follows:
<TABLE>
<S> <C>
Cash paid at closing . . . . . . . . . . . . . . . . . . . . . . $ 550,000
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . 150,000
Cash balances acquired . . . . . . . . . . . . . . . . . . . . . (55,066)
----------
Net cash used for acquisition . . . . . . . . . . . . . . . 644,934
Common stock issued at closing . . . . . . . . . . . . . . . . . 1,422,226
Acquisition debt . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . 266,138
Assets acquired, net of cash balances . . . . . . . . . . . . . (297,419)
----------
Remaining amount allocated to goodwill . . . . . . . . . . $4,635,879
==========
</TABLE>
(b) To record the estimated costs for severance of certain BHC employees
and other identified contingent liabilities.
(c) To record estimated acquisition costs, which have been included in
total consideration.
(d) To record the note payable incurred by the Company, with a financing
institution, in September 1998 to fund the acquisition of BHC. The note
bears interest of prime plus 1% (currently 9.5%), and is payable in
monthly installments of $26,000 plus interest, beginning in October
1998 until October 2003.
(e) To record the convertible notes issued by the Company to the former
shareholders of BHC as consideration for the purchase of BHC. The
convertible notes bear interest of 8.5% annually, with quarterly
payments of $50,000 plus interest beginning December 31, 1998, until
December 2003.
(f) To record the issuance of 109,288 shares and 161,612 treasury shares
totaling $1,422,226, to the former shareholders of BHC as consideration
for the purchase of BHC.
(g) To record the cash paid by the Company to the former shareholders of
BHC as consideration for the purchase of BHC.
(h) To eliminate the equity of BHC, as required by purchase accounting.
-18-
<PAGE> 19
MEDICALCONTROL, INC
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six-Month Period Ended June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
MCI BHC Adjustments Consolidated
---------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 7,084,015 $ 1,199,096 $ (156,434)(a) $ 8,126,678
Operating Expenses:
Salaries and wages 4,290,970 492,429 4,783,399
Other operating expenses 2,543,687 678,506 (156,434)(a) 3,065,760
Depreciation and amortization 467,698 14,803 92,718 (b) 575,219
------------ ----------- ---------- -----------
Total operating expenses 7,302,355 1,185,738 (63,716) 8,424,378
------------ ----------- ---------- -----------
Operating income (loss) (218,340) 13,358 (92,718) (297,700)
Interest expense (income), net (74,206) (953) 80,925 (c) 5,766
Other expense (income), net (932) 28 (904)
------------ ----------- ---------- -----------
Income (loss) before taxes (143,202) 14,283 (173,643) (302,562)
Provision (benefit) for income taxes (55,133) 5,499 (31,156)(d) (80,790)
---------------- -------------- ---------------- -----------------
Net income (loss) $ (88,069) $ 8,784 $ (142,487) $ (221,772)
============ =========== ========== ===========
Basic loss per share $ (0.02) $ (0.05)
============ ===========
Diluted loss per share $ (0.02) $ (0.05)
============ ===========
Weighted average number of shares
outstanding 3,837,010 270,900 (e) 4,107,910
============ ========== ===========
Weighted average number of common
and dilutive shares outstanding 3,837,010 270,900 (e) 4,107,910
============ ========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Pro Forma Consolidated Statement
of Operations.
-19-
<PAGE> 20
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
For the Six-Month Period Ended June 30, 1998
The unaudited condensed pro forma consolidated statement of operations for the
six-month period ended June 30, 1998, combines the following information:
1. The historical unaudited condensed consolidated statement of operations
of the Company for the six-month period ended June 30, 1998.
2. The unaudited condensed consolidated statement of operations of
Business Health Companies, Inc. for the six-month period ended June 30,
1998.
3. Pro forma adjustments
PRO FORMA ADJUSTMENTS:
(a) To eliminate intercompany revenues and expenses associated with
repricing services performed by the Company for BHC.
(b) To record amortization expense of goodwill resulting from the
acquisition using the straight-line method over 25 years.
(c) To record interest expense on the note payable ($1,600,000, bearing
interest at 9.5%) and the convertible notes to previous shareholders of
BHC ($1,000,000 bearing interest at 8.5%).
(d) To adjust taxes for the effect of the interest expense pro forma
adjustment using an effective tax rate of approximately 38%. The pro
forma tax adjustment does not reflect the impact of amortization
related pro forma adjustments as such amortization is not deductible
for federal income tax purposes.
(e) To record shares issued as consideration for the acquisition of BHC.
The impact of the convertible notes was not considered in the
calculation of diluted earnings per share, as such impact would have
been anti-dilutive.
-20-
<PAGE> 21
MEDICALCONTROL, INC
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
MCI BHC Adjustments Consolidated
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net Revenues $ 14,313,101 $ 1,877,560 $ (312,867)(a) $ 15,877,794
Operating Expenses:
Salaries and wages 7,648,757 1,012,430 - 8,661,187
Other operating expenses 5,429,208 821,173 (312,867)(a) 5,937,514
Depreciation and amortization 884,800 28,368 185,435 (b) 1,098,603
------------ ----------- ---------- ------------
Total operating expenses 13,962,765 1,861,971 (127,432) 15,697,304
------------ ----------- ---------- ------------
Operating income (loss) 350,336 15,589 (185,475) 180,490
Interest expense (income), net (97,652) (2,437) 204,771 (c) 104,682
Other expense (income), net (21,923) 17,000 - (4,923)
------------ ----------- ---------- ------------
Income (loss) before taxes 469,911 1,026 (390,206) 80,731
Provision (benefit) for income taxes 180,660 154 (78,837)(d) 101,977
------------ ----------- ---------- ------------
Net income (loss) $ 289,251 $ 872 $ (311,369) $ (21,246)
============ =========== ========== ============
Basic earnings (loss) per share $ 0.08 $ (0.01)
============ ============
Diluted earnings (loss) per share $ 0.07 $ (0.01)
============ ============
Weighted average number of shares
outstanding 3,840,478 270,900 (e) 4,111,378
============ ========== ============
Weighted average number of common 270,900 (e)
==========
and dilutive shares outstanding 3,907,961 (67,483)(f) 4,111,378
============ ========== ============
</TABLE>
See accompanying Notes to Unaudited Condensed Pro Forma Consolidated Statement
of Operations.
-21-
<PAGE> 22
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1997
The unaudited condensed pro forma consolidated statement of operations for the
year ended December 31, 1997 combines the following information:
1. The historical condensed consolidated statement of operations of the
Company for the year ended December 31, 1997.
2. The unaudited condensed consolidated statement of operations of
Business Health Companies, Inc. for the twelve-month period ended
December 31, 1997.
3. Pro forma adjustments
PRO FORMA ADJUSTMENTS:
(a) To eliminate intercompany revenues and expenses associated with
repricing services performed by the Company for BHC.
(b) To record amortization expense of goodwill resulting from the
acquisition using the straight-line method over 25 years.
(c) To record interest expense on note payable ($1,600,000 bearing interest
at 9.5%) and convertible notes to previous shareholders of BHC
($1,000,000 bearing interest at 8.5%). The Company incurred this debt
in September 1998 to fund the acquisition of BHC.
(d) To adjust taxes for the effect of the interest expense pro forma
adjustment using an effective tax rate of approximately 38%. The pro
forma tax adjustment does not reflect the impact of amortization
related pro forma adjustments as such amortization is not deductible
for federal income tax purposes.
(e) To record shares issued as consideration in the acquisition of BHC. The
impact of the convertible note was not considered in the calculation of
diluted earnings per share, as such impact would have been
anti-dilutive.
(f) To adjust for the dilutive impact of common stock options and other
common stock equivalents as their impact is anti-dilutive, after
considering the pro-forma adjustments.
-22-
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Asset Purchase Agreement, dated September 10, 1998, by and among Business Health Companies, Inc.; Douglas L. Elden;
Donald Richard Huntington; Ralph T. Smith, Jr.; MedicalControl, Inc.; and MedicalControl Network Solutions, Inc.
(filed October 10, 1998 with 8-K).
4.1 Form of convertible Subordinated Promissory Note (filed October 0, 1998 with 8-K).
</TABLE>
