<PAGE> 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
- --------------------------------------------------------------------------------
(Mark one)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ------- ACT OF 1934
For the quarterly period ended March 31, 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 - 3,847,067 as of
May 14, 1998.
Transitional Small Business Disclosure Format (Check one): YES NO X
--- ---
- --------------------------------------------------------------------------------
MEDICALCONTROL, INC.
<PAGE> 2
Form 10-QSB for the Quarter ended March 31, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION
<S> <C>
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
<PAGE> 3
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,890,176 $ 3,235,307
Accounts receivable - trade, net of allowance
for doubtful accounts of $19,000 and
$135,000 in 1998 and 1997, respectively 1,723,362 1,979,875
Accounts receivable - premium 422,936 741,345
Accounts receivable - other 100,103 87,099
Prepaid income taxes, net 65,215 --
Prepaid expenses and other current assets 296,024 276,105
Deferred income taxes 168,838 168,838
------------ ------------
Total current assets 5,666,654 6,488,569
NOTE RECEIVABLE - OFFICER, including accrued interest 401,779 394,654
PROPERTY AND EQUIPMENT, NET 1,585,201 1,661,290
GOODWILL, NET 3,419,251 3,451,348
INTANGIBLE AND OTHER ASSETS, NET 602,532 691,563
------------ ------------
TOTAL ASSETS $ 11,675,417 $ 12,687,424
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 694,806 $ 643,249
Accounts payable - premium 1,264,095 1,945,102
Accrued liabilities 854,350 852,095
Income taxes payable -- 291,927
Current portion of long-term debt 152,943 173,072
------------ ------------
Total current liabilities 2,966,194 3,905,445
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 111,514 111,514
Deferred gain on sale of option on real estate 857,667 880,417
Deferred income taxes 116,489 116,489
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, 3,965,712 and 3,908,635 issued
in 1998 and 1997, respectively 39,657 39,086
Additional paid-in capital 5,480,278 5,231,265
Retained earnings 2,827,514 2,922,104
------------ ------------
8,347,449 8,192,455
Less: Treasury stock (123,612 and 83,612 shares at March
31, 1997 and December 31, 1997, respectively) (723,896) (518,896)
------------ ------------
Total stockholders' equity 7,623,553 7,673,559
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,675,417 $ 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
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
NET REVENUES $ 3,479,957 $ 3,568,756
------------ ------------
OPERATING EXPENSES
Salaries and wages 2,113,306 1,898,093
Other operating expenses 1,327,634 1,359,164
Depreciation and amortization 232,706 204,689
------------ ------------
Total operating expenses 3,673,646 3,461,946
------------ ------------
INCOME FROM OPERATIONS (193,689) 106,810
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (2,206) (2,595)
Investment income 40,838 24,526
Other income (expense) 1,143 11,364
Total other income (expense) 39,775 33,295
------------ ------------
INCOME BEFORE INCOME TAXES (153,914) 140,105
Provision for income taxes (59,324) 54,902
------------ ------------
NET INCOME $ (94,590) $ 85,203
============ ============
Basic earnings per share $ (0.02) $ 0.02
============ ============
Diluted earnings per share $ (0.02) $ 0.02
============ ============
Weighted average common shares outstanding 3,842,100 3,907,293
============ ============
Weighted average common and common equivalent shares outstanding 3,842,100 3,935,108
============ ============
</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 Three Months Ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income (loss) $ (94,590) $ 85,203
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 232,706 204,689
Amortization of deferred gain on real estate transaction (22,750) --
Net changes in certain assets and liabilities
Accounts receivable - trade 256,513 (103,723)
Accounts receivable - premium 318,409 33,698
Current income taxes, net (65,215) --
Prepaid expenses and other current assets (32,923) 29,123
Accounts payable - trade 51,557 245,253
Accounts payable - premium (681,007) (171,460)
Accrued expenses (289,672) (69,583)
------------ ------------
Net cash provided by (used in) operating activities (326,972) 253,200
------------ ------------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (35,489) (150,625)
------------ ------------
Net cash used in investing activities (35,489) (150,625)
------------ ------------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (7,125) (6,937)
Payments on long-term debt (20,129) (336,026)
Proceeds from issuance of common stock 249,584 6,300
Acquisition of treasury stock (205,000) --
------------ ------------
Net cash used in financing activities 17,330 (336,663)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (345,131) (234,088)
Cash and cash equivalents at beginning of period 3,235,307 2,013,302
------------ ------------
Cash and cash equivalents at end of period $ 2,890,176 $ 1,779,214
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 5,671 $ 15,443
============ ============
Income taxes paid $ 370,466 $ 65,322
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. ("MCI" or 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
PPO Management Solutions, Inc., providing repricing and administrative services
for PPO's and certain network healthcare providers. 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, 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 27,815 for the periods ended
March 31, 1998 and 1997, respectively.
In 1998 and 1997, 1,415,089 and 1,235,280 common equivalent shares were excluded
from the calculation of diluted earnings per share because the effect would have
been anti-dilutive for the periods presented.
6
<PAGE> 7
NOTE 4 - REGISTRATION STATEMENT
During March 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 5 - ACQUISITION OF TREASURY STOCK
During March and April 1997, the Company purchased 40,000 and 8,000 shares,
respectively, of outstanding MCI stock at $5.13 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 6 - 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 March 31, 1998 and
1997.
7
<PAGE> 8
PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER (OR THREE MONTHS) ENDED MARCH 31, 1998, COMPARED TO THE QUARTER (OR
THREE MONTHS) ENDED MARCH 31, 1997.
(1) RESULTS OF OPERATIONS
Net revenues for the three months ended March 31, 1998 were $3,479,957 versus
$3,568,756 for the comparable 1997 period. PPO revenues declined approximately
$227,000 for the period primarily due to client turnover and fluctuations in the
relative mix of hospital versus physician claims volume. TPA revenues increased
approximately $139,000 for the quarter 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 revenues in recent periods. Management
believes this trend can be reversed through increased market penetration with
current clients, new PPO and TPA business development, marketing of its new PPO
management and repricing business and investing in state-of-the-art adjudication
technology for its TPA. During the last half of 1997 and continuing into 1998,
the Company renewed its focus on sales and marketing of its PPO and began
marketing its PPO management and repricing software and services business.
Net income (loss) for the quarter ended March 31, 1998 was $(94,590) compared to
$85,203 for the same period in 1997. Diluted earnings per share were $(.02) and
$.02 for the quarters ended March 31, 1998 and 1997, respectively. Included in
the prior year's operating results were approximately $137,000 of non-recurring
costs associated with the Company's relocation of its principal operations and
corporate offices and the implementation of a new claims processing system for
its subsidiary. Exclusive of these nonrecurring costs, net income declined
approximately $316,000 between periods. This decline was due primarily to
increases in personnel costs and operating expenses more fully discussed below.
Salaries and wages increased 11% to $2,113,306 from $1,898,093 for the quarter
ended March 31, 1998, as compared to the prior year period. Of this increase,
approximately $80,000 was attributable to merit and other salary adjustments
effected between periods, $70,000 related to incremental positions in both the
PPO and TPA operations, and $65,000 related to temporary labor costs associated
with yearend backlogs and systems conversion efforts in the TPA operations.
Other operating expenses decreased by approximately $32,000 for the three months
ended March 31, 1998, or 2%, as compared to the three months ended March 31,
1997. Exclusive of the $137,000 of nonrecurring relocation and systems
implementation costs incurred in 1997, other operating expenses increased
approximately $106,000 (8%). This increase was primarily due to increased
postage and office supplies expense associated with increased claims volume
($44,000) and incremental provisions for doubtful accounts ($30,000).
Depreciation and amortization for the quarter ended March 31, 1998 was $232,706
compared to $204,689 for the same period in 1997. This increase is a result of
the Company's continued investments in state-of-the-art information systems and
data processing equipment for its PPO and TPA operations.
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $2,700,000 at March 31,
1998, compared to $2,583,000 at December 31, 1997. Cash flows used in operations
were approximately $327,000 for the first quarter of 1998. Included in this
amount are income tax payments of approximately $370,000. Cash and cash
equivalents at March 31, 1998 and December 31, 1997, including approximately
$1,054,000 and
8
<PAGE> 9
$1,314,000 of cash for insurance premium payments, were approximately $2,890,000
and $3,235,000, respectively.
Capital expenditures for the purchase of tangible property and equipment were
approximately $35,000 for the three months ended March 31, 1998. These
expenditures were primarily for data processing equipment for the Company's PPO
operations. Management currently expects total capital expenditures for the
remaining nine months of 1998 to be approximately $200,000, the majority of
which relates to additional data processing and information systems assets.
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, will be due on or before June 30, 1998.
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 third installment was made prior to
period end.
The Company has a line of credit with a bank, which provides for maximum
borrowings of $1,000,000, secured by accounts receivable. This line expires May
30, 1998. Management expects to extend this line prior to its expiration date
with similar or more favorable terms. There were no outstanding borrowings under
this line of credit at March 31, 1998 or December 31, 1997.
Management believes that cash flows from operations, cash on hand, and the
borrowing capacity under the Company's line of credit will be sufficient to fund
liquidity needs and capital requirements for the foreseeable future.
The Company has not paid dividends in the past and does not anticipate the
payment of such in the future.
9
<PAGE> 10
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
<PAGE> 11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICALCONTROL, INC.
May 15, 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
11
<PAGE> 12
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,890,176
<SECURITIES> 0
<RECEIVABLES> 1,723,362
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,666,654
<PP&E> 1,585,201
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,675,417
<CURRENT-LIABILITIES> 2,966,194
<BONDS> 0
0
0
<COMMON> 39,657
<OTHER-SE> 7,583,896
<TOTAL-LIABILITY-AND-EQUITY> 11,675,417
<SALES> 3,479,957
<TOTAL-REVENUES> 3,479,957
<CGS> 0
<TOTAL-COSTS> 3,673,646
<OTHER-EXPENSES> (41,981)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,206
<INCOME-PRETAX> (153,914)
<INCOME-TAX> (59,324)
<INCOME-CONTINUING> (94,590)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94,590)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
