<PAGE> 1
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
- - --------------------------------------------------------------------------------
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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
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
------------------------------------------------------
(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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock - 4,088,225 as of
November 1, 1998.
Transitional Small Business Disclosure Format (Check one): YES NO X
--- ---
- - --------------------------------------------------------------------------------
<PAGE> 2
MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended September 30, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 9
PART II - OTHER INFORMATION 12
</TABLE>
2
<PAGE> 3
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 2,353,535 $ 3,235,307
Accounts receivable - trade, net of allowance
for doubtful accounts of $81,000 and
$135,000 in 1998 and 1997, respectively 1,408,885 1,979,875
Accounts receivable - premium 539,023 741,345
Accounts receivable - other 107,389 87,099
Prepaid income taxes, net 520,582 -
Prepaid expenses and other current assets 292,034 276,105
Deferred income taxes 168,838 168,838
----------- -----------
Total current assets 5,390,286 6,488,569
NOTE RECEIVABLE - OFFICER, including accrued interest 413,892 394,654
PROPERTY AND EQUIPMENT, NET 1,651,107 1,661,290
GOODWILL, NET 7,746,675 3,451,348
INTANGIBLE AND OTHER ASSETS, NET 167,421 691,563
----------- -----------
TOTAL ASSETS $ 15,369,381 $ 12,687,424
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 912,620 $ 643,249
Accounts payable - premium 1,088,083 1,945,102
Accrued liabilities 1,128,447 852,095
Income taxes payable - 291,927
Borrowings under bank line of credit 200,000 -
Current portion of long-term debt 574,561 173,072
----------- -----------
Total current liabilities 3,903,711 3,905,445
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 2,191,514 111,514
Deferred gain on sale of option on real estate 819,750 880,417
Deferred income taxes 185,675 116,489
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, 4,088,225 and 3,908,635 issued
in 1998 and 1997, respectively 40,882 39,086
Additional paid-in capital 5,989,043 5,231,265
Retained earnings 2,238,806 2,922,104
----------- -----------
8,268,731 8,192,455
Less: Treasury stock (171,612 shares at December 31, 1997) - (518,896)
----------- -----------
Total stockholders' equity 8,268,731 7,673,559
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,369,381 $ 12,687,424
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,696,742 $ 3,577,547 $ 10,780,757 $ 10,717,501
----------- ----------- ------------ ------------
OPERATING EXPENSES
Salaries and wages 2,366,209 1,954,351 6,657,179 5,683,688
Other operating expenses 1,511,999 1,316,578 4,055,686 4,039,713
Depreciation and amortization 182,462 254,190 650,160 666,792
Post acquisition charges 648,097 - 648,097 -
----------- ----------- ------------ ------------
Total operating expenses 4,708,767 3,525,119 12,011,122 10,390,193
----------- ----------- ------------ ------------
INCOME FROM OPERATIONS (1,012,025) 52,428 (1,230,365) 327,308
----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (1,635) (5,266) (6,283) (14,925)
Investment income 36,675 25,618 115,529 75,225
Other income (expense) 2,465 4,430 3,397 17,397
----------- ----------- ------------ ------------
Total other income (expense) 37,505 24,782 112,643 77,697
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (974,520) 77,210 (1,117,722) 405,005
Provision for income taxes (379,289) 14,912 (434,422) 145,802
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ (595,230) $ 62,298 $ (683,299) $ 259,203
=========== =========== ============ ============
Basic earnings (loss) per share $ (0.15) $ 0.02 $ (0.18) $ 0.07
=========== =========== ============ ============
Diluted earnings (loss) per share $ (0.15) $ 0.02 $ (0.18) $ 0.07
=========== =========== ============ ============
Weighted average common shares outstanding 3,856,712 3,825,023 3,815,853 3,825,023
=========== =========== ============ ============
Weighted average common and dilutive
shares outstanding 3,856,712 3,827,571 3,815,853 3,845,461
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income (loss) $ (683,299) $ 259,203
Adjustments to reconcile net income (loss)
to net cash provided by operations
Depreciation and amortization 650,160 666,792
Amortization of deferred gain on real estate transaction (60,667) -
Post acquisition charges 483,097 -
Net changes in certain assets and liabilities, net of acquired balances:
Accounts receivable - trade 866,530 (316,518)
Accounts receivable - premium 202,322 (32,361)
Current income taxes, net (818,205) -
Prepaid expenses and other current assets (8,331) 60,980
Accounts payable - trade 155,091 (39,804)
Accounts payable - premium (857,019) 77,940
Accrued expenses 106,997 (31,424)
------------ -----------
Net cash provided by operating activities 36,676 644,808
------------ -----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (341,298) (347,130)
Acquisition, net of cash acquired (495,645)
Proceeds from sale of real estate option - 902,417
------------ -----------
Net cash provided by (used in) investing activities (836,943) 555,287
------------ -----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (19,238) (21,425)
Net drawdowns on revolving bank line of credit 200,000 -
Payments on long-term debt (118,511) (572,730)
Payments of severance agreements - (90,687)
Proceeds from issuance of common stock 307,244 6,300
Acquisition of treasury stock (451,000) (250,000)
------------ -----------
Net cash used in financing activities (81,505) (928,542)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (881,772) 271,553
Cash and cash equivalents at beginning of period 3,235,307 2,013,302
------------ -----------
Cash and cash equivalents at end of period $ 2,353,535 $ 2,284,855
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 11,041 $ 44,897
============ ===========
Income taxes paid $ 451,474 $ 139,943
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired $ (4,989,246) $ -
Liabilities assumed 321,375 -
Acquisition debt 2,600,000 -
Common stock issued 1,422,226 -
Accrued acquisition costs 150,000 -
------------ -----------
Acquisition of Business Health Companies, Inc., net of cash acquired $ (495,645) $ -
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. (the "Company"), a Delaware corporation, is a holding
company of healthcare cost management and administrative services companies. The
Company is comprised of three main subsidiaries: MedicalControl Network
Solutions, Inc., providing managed care services primarily through its preferred
provider organization ("PPO") networks, Diversified Group Administrators, Inc.,
providing third party administration ("TPA") services, and ppoONE.com, inc.,
providing repricing and administrative services for PPO's and certain network
healthcare providers. All significant intercompany transactions have been
eliminated. The Company's contracts with its customers are renewable annually
and permit cancellation upon 30 to 60 days' notice.
During September 1998, MedicalControl Network Solutions, Inc. acquired Business
Health Companies, Inc. See Note 6 for further discussion.
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, 1997, 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
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding during the period. Diluted earnings per share
are computed by dividing net income by the weighted average common shares and
common equivalent shares outstanding during the period. The impact of the
dilutive common equivalent shares was 0 and 2,548 for the three month periods
ended September 30, 1998 and 1997, respectively, and 0 and 26,270 for the nine
month periods ended September 30, 1998 and 1997, respectively.
Common equivalent shares excluded from the calculation of diluted earnings per
share because the effect would have been anti-dilutive were 1,413,910 and
1,392,101 for the three month periods ended September 30, 1998 and 1997,
respectively, and, 1,413,910 and 1,368,379 for the nine month periods ended
September 30, 1998 and 1997, respectively.
6
<PAGE> 7
NOTE 4 - REGISTRATION STATEMENT
During March 1998, the Company filed a registration statement with the
Securities and Exchange Commission to register 200,000 existing outstanding
shares of common stock owned by the majority shareholder of the Company. The
stock registered serves as collateral for certain loans of the majority
shareholder.
NOTE 5 - ACQUISITION OF TREASURY STOCK
During the first half of 1998, the Company purchased a total of 88,000 shares of
outstanding Company stock at $5.13 per share under the terms of a stock
repurchase program announced in January 1997. Such shares were used in
connection with an acquisition and to satisfy the conversion of a convertible
note. See Note 6 for further discussion of the acquisition.
NOTE 6 - ACQUISITION
Effective September 1, 1998, a wholly owned subsidiary of the Company acquired
all of the issued and outstanding common stock of Business Health Companies,
Inc. ("BHC") for approximately $4,500,000 plus accrued acquisition costs of
$150,000. BHC provides managed care services, primarily through its PPO networks
within the 15-county Houston, Texas market. The purchase consideration consisted
of $2,150,000 in cash, 270,900 shares of Company stock, valued at approximately
$1,422,000, and an aggregate of $1,000,000 in convertible notes to the previous
shareholders of BHC. The acquisition was accounted for under the purchase method
of accounting. The purchase price exceeded the fair value of assets acquired and
liabilities assumed which resulted in the recording of goodwill of approximately
$4,400,000 which will be amortized over 25 years. Liabilities assumed included
$110,000 for severance related expenses for certain employees and other
identified contingencies.
NOTE 7 - DEBT
In connection with the acquisition of BHC, the Company obtained bank financing
in the form of a $1,600,000 term loan. The Company also obtained an aggregate of
$1,000,000 in convertible notes from the selling shareholders of BHC. The bank
note bears interest at the bank's prime rate plus 1% (9.5% at September 30,
1998) and is payable in monthly installments of principal and interest through
October 2003. The convertible seller notes bear interest at 8.5% and are payable
in quarterly installments of principal and interest through October 2003. The
notes are convertible into common stock of the Company at any time, in $100,000
increments, at a conversion rate of $5.25 per share.
In conjunction with the bank financing above, the Company's existing $1,000,000
line of credit was terminated and a new revolving credit facility was obtained.
This credit facility, secured by accounts receivable, allows for maximum
borrowings of $500,000 and bears interest at the bank's prime rate plus 1% (9.5%
at September 30, 1998). Availability under this credit facility was $300,000 at
September 30, 1998.
7
<PAGE> 8
NOTE 8 - POST ACQUISITION CHARGES
In connection with the acquisition discussed above, the Company recognized
certain post acquisition charges of approximately $648,000. These charges
consisted of a $483,000 write-off of certain capitalized software development
costs, $125,000 of special bonuses payable to the CEO and COO of the Company,
related to the acquisition, and $40,000 of severance related costs. Due to the
acquisition of BHC, the Company has a requirement to consolidate database
administration, network access, and like product offerings of the separate
entities. As a result of this requirement, the Company has determined that it
will not be able to recover its investment in certain capitalized software
development costs over their remaining economic life, and accordingly, has
recognized an impairment in accordance with Statement of Financial Accounting
Standards No. 121.
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted SFAS No. 130 effective January 1,
1998. Management believes the impact of SFAS No. 130 is immaterial as there were
no items of other comprehensive income for the periods ended September 30, 1998
and 1997.
NOTE 10 - SUBSEQUENT EVENT
Subsequent to period end, the Company's chief executive officer tendered shares
of MedicalControl stock to fully satisfy the note receivable - officer, and
accrued interest, recorded on the Company's balance sheet. The market value of
the Company's stock was $7.38 on the date the transaction occurred. The shares
received were recorded as treasury stock and will be used to satisfy the
exercise of stock options and other general corporate purposes in future
periods.
8
<PAGE> 9
PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THE QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1997.
(1) RESULTS OF OPERATIONS
Net revenues for the three and nine month periods ended September 30, 1998 were
$3,697,000 and $10,781,000, respectively, versus $3,578,000 and $10,718,000 for
the comparable 1997 periods. Net revenues for the 1998 period include
approximately $229,000 of revenues attributable to Business Health Companies,
Inc. ("BHC"), a wholly owned subsidiary which was purchased during September
1998. PPO revenues declined approximately $132,000 for the quarter and $580,000
for the nine month period primarily due to client turnover and fluctuations in
the relative mix of hospital versus physician claims volume. TPA revenues
increased approximately $252,000 for the quarter and $644,000 for the nine month
period primarily due to claims administration fees on incremental covered lives
and revenues from a new fully insured product introduced during 1997.
The Company has experienced declining PPO revenues in recent periods. This
decline is largely attributable to industry-wide trends associated with PPO
access service fees migrating towards less profitable capitated rates and client
turnover driven by consolidations and mergers of large clients that are beyond
the control of management. Management believes this trend can be reversed
through increased market penetration with current PPO clients, new PPO and TPA
business development, marketing of its PPO management and repricing business and
investing in state-of-the-art adjudication technology for its TPA.
Net income (loss) for the three and nine month periods ended September 30, 1998
was $(595,000) and $(683,000), respectively, compared to $62,000 and $259,000
for the same periods in 1997. Diluted earnings per share were $(.15) and $(.18)
for the three and nine month periods ended September 30, 1998, respectively,
compared to $.02 and $.07 for the same 1997 periods. Operating results for the
1998 periods were adversely impacted by post acquisition charges associated with
the BHC acquisition that are more fully discussed below. Included in the
operating results for the three and nine months ended September 30, 1998 is
approximately $37,000 of net income generated by BHC. Included in the prior
year's nine month operating results were approximately $353,000 of non-recurring
costs associated with the Company's relocation of its principal operations and
corporate offices, the implementation of a new claims processing system for its
subsidiary, certain separation costs associated with a former employee, and
accelerated software development cost amortization. Exclusive of these
nonrecurring costs and the post acquisition costs included in 1998 operating
results, net income declined approximately $761,000 between periods. This
decline was due primarily to reduced PPO revenues and increases in personnel
costs and operating expenses more fully discussed below.
Salaries and wages increased to $2,366,000 from $1,954,000 for the quarter ended
September 30, 1998, as compared to the prior year period. For the nine months
ended September 30, 1998 and 1997, respectively, salaries and wages increased
$973,000 (17%) to $6,657,000 from $5,684,000. Of this increase, approximately
$85,000 of this amount is attributable to BHC operations. Of the remaining
increase, approximately $287,000 was attributable to merit and other salary
adjustments effected between periods, $481,000 related to incremental positions
in both the PPO and TPA operations, and $120,000 related to temporary labor
costs associated with year end backlogs and systems conversion efforts in the
TPA operations.
Other operating expenses decreased by approximately $195,000 for the three
months ended September 30, 1998, or 15%, as compared to the three months ended
September 30, 1997. For the nine month periods ended September 30, 1998 and
1997, other operating expenses were $4,056,000 and $4,040,000,
9
<PAGE> 10
respectively. Exclusive of the $224,000 of nonrecurring relocation and systems
implementation costs incurred in 1997 and $80,000 attributable to BHC operations
in 1998, other operating expenses increased $162,000 between years primarily due
to access fees paid to affiliate networks and outside consulting costs for
personnel and network development activities.
Depreciation and amortization expense for the quarter ended September 30, 1998
was $182,000 compared to $254,000 for the same period in 1997. For the nine
month period, depreciation and amortization expense was $650,000 in 1998 versus
$667,000 for the comparable 1997 period. This decrease results from a reduction
in capitalized software development cost amortization due to such costs being
written off during the third quarter, offset by increased amortization expense
associated with intangible assets recorded in conjunction with the BHC
acquisition. See discussion of post acquisition charges below for further
information.
In connection with the acquisition discussed above, the Company recognized
certain post acquisition charges of approximately $648,000. These charges
consisted of a $483,000 write-off of certain capitalized software development
costs, $125,000 of special bonuses payable to the CEO and COO of the Company,
related to the acquisition, and $40,000 of severance related costs. Due to the
acquisition of BHC, the Company has a requirement to consolidate database
administration, network access, and like product offerings of the separate
entities. As a result of this requirement, the Company has determined that it
will not be able to recover its investment in certain capitalized software
development costs over their remaining economic life, and accordingly, has
recognized an impairment in accordance with Statement of Financial Accounting
Standards No. 121.
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $1,487,000 at September 30,
1998, compared to $2,583,000 at December 31, 1997. Cash flows used in operations
were approximately $37,000 for the first nine months of 1998. Included in this
amount are income tax payments of approximately $451,000. Cash and cash
equivalents at September 30, 1998 and December 31, 1997, including approximately
$1,474,000 and $1,314,000 of cash for insurance premium payments, were
approximately $2,354,000 and $3,235,000, respectively.
Capital expenditures for the purchase of tangible property and equipment were
approximately $341,000 for the nine months ended September 30, 1998. These
expenditures were primarily for data processing equipment for the Company's PPO
operations. Management currently expects total capital expenditures for the
remaining three months of 1998 to be approximately $100,000, the majority of
which relates to additional data processing and information systems assets. The
Company used approximately $496,000 of cash to consummate the acquisition of
BHC.
In connection with the 1994 acquisition of Diversified Group Administrators,
Inc. ("DGA"), the Company incurred certain acquisition note obligations. The
final $100,000 of these obligations, subject to an option to convert this note
into 25,000 shares of common stock, was due on June 30, 1998. At maturity,
$40,000 of this obligation was converted to Company stock with the remaining
$60,000 being paid in cash.
In connection with the separation agreement with a former employee, the Company
is required to make eight quarterly installments of $13,750, plus interest at
8%, which began on September 30, 1997. The fifth installment was made prior to
period end.
In connection with the acquisition of BHC, the Company obtained bank financing
in the form of a $1,600,000 term note. Additionally, the Company obtained an
aggregate of $1,000,000 in convertible notes from the previous shareholders of
BHC. The bank note bears interest at the bank's prime rate plus
10
<PAGE> 11
1% (9.5% at September 30, 1998) and is payable in monthly principal installments
of $26,667 plus interest through October 2003. The convertible seller notes bear
interest at 8.5% and are payable in quarterly principal installments of $50,000
plus interest through October 2003. The notes are convertible into common stock
of the Company at any time, in $100,000 increments, at a conversion rate of
$5.25 per share.
At September 30, 1998, the Company had $200,000 of outstanding borrowings under
its line of credit arrangement. In conjunction with the bank financing
above, the Company's existing $1,000,000 line of credit was terminated and a new
revolving credit facility was obtained. This credit facility, secured by
accounts receivable, allows for maximum borrowings of $500,000 and bears
interest at the bank's prime rate plus 1% (9.5% at September 30, 1998).
Availability under this credit facility was $300,000 at September 30, 1998.
During the first half of 1998, the Company purchased a total of 88,000 shares of
Company stock at $5.13 per share under terms of a stock repurchase agreement
announced during January 1997. The purchases were financed with advances under
this credit facility.
Management believes that cash flows from operations, cash on hand, and the
Company's borrowing capacity 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.
RELIANCE ON DATA PROCESSING
The Company's management has recognized the need to ensure that its operations
and relationships with vendors and other third parties will not be adversely
impacted by software processing errors arising from calculations using the year
2000 and beyond ("Year 2000"). Management recognizes that failure by the
Company to timely resolve internal Year 2000 issues could result, in the worst
case, in an inability of the Company to store, retrieve, process, and manage
data in support of its claims repricing and third party administration
services. However, Company management believes that scenario is unlikely based
on the progress made in its Year 2000 remediation plan. Failure of one or more
third party service providers on whom the Company relies to address Year 2000
issues could also result, in a worst case scenario, in some business
interruption. The lost revenues, if any, resulting from a worst case scenario
such as those examples described above would depend on the time period during
which the failure goes uncorrected and on how widespread the impact.
The Company began a formal program in 1998 to evaluate, assess and make the
needed changes to its core information technology ("IT") systems and
applications to comply with Year 2000 issues. Management has completed its
review of all essential IT systems and believes that they are Year 2000
compliant. The Company's primary IT systems and applications have been
developed and placed into production within the past eighteen to twenty-four
months. Accordingly, such systems and applications were developed employing
contemporary software tools to be Year 2000 compliant from their initial design.
Management is continuing to inventory and evaluate all non-essential software
programs and hardware used in the Company's business. Management expects this
process to be complete by September 30, 1999. Non-compliant systems are being
replaced, modified, or outsourced through as they are reviewed. The Company has
communicated, and will continue to communicate, with its suppliers, financial
institutions and others with which it does business to monitor and evaluate Year
2000 conversion progress.
With regard to non-IT systems, such as general office security systems and phone
systems, the Company is currently evaluating the compliance of such systems.
Systems that are not compliant, if any, will be remediated, upgraded or
replaced by September 30, 1999.
Direct expenditures associated with Year 2000 issues, excluding costs associated
with the development of the underlying core IT systems, have been immaterial to
date and have been funded through the Company's normal IT operations budget.
The Company has had each of its departments or divisions develop basic
contingency plans to restore the material functions of each of its material
systems or activities in the case of a Year 2000 related failures. The
contingency plans cover all material levels of activity within each business
location. The Company plans to continually refine these plans and to make them
more comprehensive, as more information becomes available from testing and
third party suppliers.
Although there can be no assurance that the Company will be able to complete
all of the modifications in the required time frame, nor that unanticipated
events will occur, or that the Company will be able to identify all Year 2000
issues before problems manifest themselves, it is management's belief that the
Company is taking adequate action to address Year 2000 issues. Management does
not expect the Year 2000 compliance efforts or related expenditures to be
material to the Company's consolidated financial position, results of
operations or cash flows.
11
<PAGE> 12
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
During the first half of 1998, the Company purchased a total of 88,000
shares of outstanding the Company stock at $5.13 per share under the terms
of a stock repurchase program announced in January 1997. Such shares were
used in connection with an acquisition and to satisfy the conversion of a
convertible note. See Note 6 for further discussion of the acquisition.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
On October 9, 1998, the Company filed a Form 8-K with the Securities and
Exchange Commission to report the acquisition of Business Health Companies,
Inc. ("BHC") by one of the Company's wholly owned subsidiaries. On November
12, 1998, the Company filed a Form 8-K/A that included all required
financial information regarding the BHC acquisition.
12
<PAGE> 13
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 16, 1998 /s/ John Ward Hunt
-----------------------------------
John Ward Hunt
President and
Chief Executive Officer
/s/ David A. Hanson
-----------------------------------
David A. Hanson
Vice President, Finance and Accounting
13
<PAGE> 14
INDEX TO EXHIBIT
Exhibit
Number Description
- - ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,353,535
<SECURITIES> 0
<RECEIVABLES> 1,408,885
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,390,286
<PP&E> 1,651,107
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,369,381
<CURRENT-LIABILITIES> 3,903,711
<BONDS> 0
0
0
<COMMON> 40,882
<OTHER-SE> 8,227,849
<TOTAL-LIABILITY-AND-EQUITY> 15,369,381
<SALES> 3,696,742
<TOTAL-REVENUES> 3,696,742
<CGS> 0
<TOTAL-COSTS> 4,708,767
<OTHER-EXPENSES> (39,140)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,635
<INCOME-PRETAX> (974,520)
<INCOME-TAX> (378,289)
<INCOME-CONTINUING> (595,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (595,230)
<EPS-PRIMARY> (.015)
<EPS-DILUTED> (.015)
</TABLE>
