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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
---- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,579,479 shares of Common
Stock, $.01 par value as of November 12, 1999.
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, 1999
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 11
PART II - OTHER INFORMATION 15
</TABLE>
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MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 752,375 $ 1,112,653
Restricted cash 395,221 308,002
Accounts receivable - trade, net of allowance
for doubtful accounts of $100,000 and $119,000
at September 30,1999 and December 31, 1998, respectively 1,262,058 1,312,043
Accounts receivable - premium 344,208 466,980
Accounts receivable - other 216,706 90,671
Income tax receivable 236,300 472,691
Prepaid expenses and other current assets 469,877 227,391
Deferred income taxes 169,028 169,028
-------------- --------------
Total current assets 3,845,773 4,159,459
NOTE RECEIVABLE - OFFICER, including accrued interest 441,221 421,175
RECEIVABLE FROM SALE OF DIVISION 300,000 --
PROPERTY AND EQUIPMENT, NET 1,554,717 1,697,698
GOODWILL, NET 6,008,512 7,772,833
INTANGIBLE AND OTHER ASSETS, NET 36,449 97,991
DEFERRED TAXES 605,513 85,270
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TOTAL ASSETS $ 12,792,185 $ 14,234,426
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 943,090 $ 916,826
Accounts payable - premium 739,429 774,982
Accrued liabilities 845,790 773,749
Borrowings under bank line of credit 200,000 325,000
Current portion of long-term debt 345,004 1,115,515
-------------- --------------
Total current liabilities 3,073,313 3,906,072
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 365,674 1,554,484
Deferred gain on sale of option on real estate 721,167 789,417
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, 4,563,949 and 4,115,409 issued
in 1999 and 1998, respectively 45,640 41,154
Additional paid-in capital 7,895,995 6,210,002
Retained earnings 690,396 1,733,297
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Total stockholders' equity 8,632,031 7,984,453
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,792,185 $ 14,234,426
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,823,794 $ 3,696,742 $ 11,598,708 $ 10,780,757
------------ ------------ ------------ ------------
OPERATING EXPENSES
Salaries and wages 2,254,265 2,366,209 7,321,070 6,657,179
Other operating expenses 1,316,664 1,511,999 4,066,790 4,055,686
Depreciation and amortization 174,892 182,462 547,948 650,160
Post acquisition charges -- 648,097 -- 648,097
Loss from impairment -- -- 1,225,000 --
------------ ------------ ------------ ------------
Total operating expenses 3,745,821 4,708,767 13,160,808 12,011,122
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 77,973 (1,012,025) (1,562,100) (1,230,365)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (30,847) (1,635) (152,894) (6,283)
Investment income 21,908 36,675 65,642 115,529
Other income 1,240 2,465 3,782 3,397
------------ ------------ ------------ ------------
Total other income (expense) (7,699) 37,505 (83,470) 112,643
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 70,274 (974,520) (1,645,570) (1,117,722)
Income taxes (benefit) 27,306 (379,290) (602,669) (434,423)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 42,968 $ (595,230) $ (1,042,901) $ (683,299)
============ ============ ============ ============
Basic earnings (loss) per share $ 0.01 $ (0.15) $ (0.24) $ (0.18)
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.01 $ (0.15) $ (0.24) $ (0.18)
============ ============ ============ ============
Weighted average common shares outstanding 4,521,335 3,856,712 4,304,072 3,815,853
============ ============ ============ ============
Weighted average common and diluted shares outstanding 4,718,126 3,856,712 4,304,072 3,815,853
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net loss $ (1,042,901) $ (683,299)
Adjustments to reconcile net loss
to net cash provided by operations:
Depreciation and amortization 547,948 650,160
Amortization of deferred gain on real estate transaction (68,250) (60,667)
Post acquisition charges -- 483,097
Loss from impairment 1,225,000 --
Net changes in certain assets and liabilities
Accounts receivable - trade 49,985 866,530
Accounts receivable - other (19,843) --
Income tax receivable 236,391 (818,205)
Prepaid expenses and other current assets (261,934) (8,331)
Accounts payable - trade 26,264 155,091
Accrued expenses 72,041 106,997
Deferred income taxes (520,243) --
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Net cash provided by operating activities 244,458 691,373
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CASH FLOWS RELATED TO INVESTING ACTIVITIES
Acquisition, net of cash required (21,000) (495,645)
Purchases of property and equipment (169,848) (341,298)
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Net cash used in investing activities (190,848) (836,943)
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CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (20,046) (19,238)
Net (repayments) drawdowns on revolving line of credit (125,000) 200,000
Payments on long-term debt (1,109,321) (118,511)
Proceeds from issuance of common stock 840,479 307,244
Acquisition of treasury stock -- (451,000)
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Net cash used in financing activities (413,888) (81,505)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (360,278) (227,075)
Cash and cash equivalents at beginning of period 1,112,653 2,031,550
------------ ------------
Cash and cash equivalents at end of period $ 752,375 $ 1,804,475
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 174,973 $ 11,041
============ ============
Income taxes paid $ -- $ 451,474
============ ============
Restricted cash at period end $ 395,221 $ 549,060
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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 four 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,
ppoONE.com, inc. ("ppoONE.com"), providing PPO management and repricing
software and outsourcing services for PPO's and certain network healthcare
organizations, and ValueCheck, Inc. ("ValueCheck"), the newly-formed subsidiary
providing utilization review and case management services. All significant
intercompany transactions have been eliminated. The Company's contracts with
its customers are renewable annually and generally permit cancellation upon 30
to 60 days' notice.
In September 1998, MedicalControl Network Solutions, Inc. acquired Business
Health Companies, Inc. ("BHC"). See Note 5 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 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, 1998, 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 dilutive shares
outstanding during the period. For the nine-month period ended September 30,
1999 and the three-and nine-month periods ended September 30, 1998, there was
no impact from dilutive common equivalent shares since losses were reported in
those periods.
In the nine months ended September 30, 1999 and 1998 and the three months ended
September 30, 1998, 206,393, 140,796 and 161,160 common equivalent shares were
excluded from the calculation of diluted earnings per share because the effect
would have been anti-dilutive for those periods.
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NOTE 4 - REGISTRATION STATEMENT
During March 1998, the Company 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 the Company. The
stock registered serves as collateral for certain loans of the majority
shareholder.
During July 1999, the Company filed a registration statement with the
Securities and Exchange Commission to register certain additional existing
outstanding shares of common stock owned by the majority shareholder of the
Company. The majority shareholder has indicated no present intention of selling
any stock but such stock may serve as collateral for certain loans of the
majority shareholder.
NOTE 5 - 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 liabilities assumed of $264,138
and 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, an aggregate of
$1,000,000 in subordinated convertible notes to the previous shareholders of
BHC and 270,900 shares of Company stock valued at approximately $1,422,000. 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
$4,500,000, which is being amortized over 25 years. Liabilities assumed
included $110,000 for severance related expenses for certain employees and
other identified contingencies.
NOTE 6 - DEBT
In connection with the acquisition of BHC, the Company obtained bank financing
in the form of a $1,600,000 five-year term loan. The Company also issued an
aggregate of $1,000,000 in subordinated convertible notes to the selling
shareholders of BHC. The bank note bears interest at the bank's prime rate plus
1% (9.25% at September 30, 1999) and is payable in equal monthly installments
of principal of $26,667 plus interest. The 8.5% subordinated convertible seller
notes were payable in quarterly installments of principal and interest through
October 2003 and were convertible into common stock of the Company upon 30
days' notice, in $25,000 increments, at a conversion rate of $5.25 per share.
On July 6, 1999, the remaining principal balance of $850,000 of convertible
seller notes was converted into 161,903 shares of the Company's common stock.
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, allowed for maximum
borrowings of $500,000, since reduced to $400,000 in March 1999, and bears
interest at the bank's prime rate plus 1% (9.25% at September 30, 1999). As of
September 30, 1999, the Company had availability of $200,000 under its line of
credit.
During March and May 1999, the Company restructured the terms and financial
covenants of its existing bank term note and revolving line of credit. Under
the revised terms of the note agreement, the Company made principal reductions
of $200,000 on March 31, 1999, $50,000 on June 15, 1999, $147,000 on August 16,
1999 paid with a portion of the proceeds from the sale of common stock and
$407,000 on August 18, 1999 paid with the proceeds from an income tax refund.
The revised new term note includes certain revised financial covenants,
including minimum net income, stockholders' equity and working capital
requirements, and is secured by a pledge of certain shares of the
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Company's wholly-owned subsidiaries. The Company is required to make monthly
payments of principal and interest, as described above, until the loan is
repaid in full in April, 2001. No other modifications were made to this credit
facility.
Although there can be no assurance, the Company believes that it will be in
compliance with its debt covenants through 1999.
Management believes that cash flows from operations and cash on hand will be
sufficient to fund liquidity needs and capital requirements in 1999.
NOTE 7 - SALE OF DIVISION
In August 1999, the Company's TPA subsidiary completed the sale of its
unprofitable division located in Dallas, Texas. The sale resulted in an
impairment of the goodwill attributable to this division in the amount of
$1,225,000, which was reflected as a charge against earnings as of June 30,
1999, reduced by a deferred tax benefit of $441,000.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
Comprehensive Income
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 was immaterial as there
were no items of other comprehensive income for the periods ended September 30,
1999 and 1998.
Business Segment Reporting
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of an Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or the financial position of the Company
but did affect the disclosure of segment information.
The Company manages its business segments primarily on a products and services
basis. The Company's reportable segments are comprised of managed care
services, primarily through its preferred provider organization, third party
administration services, repricing and administrative products and services
offered through its wholly-owned subsidiary, ppoONE.com, and utilization review
and case management services through its newly-formed wholly-owned subsidiary,
ValueCheck.
The Company evaluates the performance of its business units based on segment
operating profit. Segment revenues include an intercompany allocation for
services performed by ppoONE.com for the PPO segment. Segment operating profit
includes personnel, sales and marketing expenses and other operating expenses
directly attributable to the segment and excludes certain expenses that are
managed outside the segment. Costs excluded from the segment operating profit
consist of corporate
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expenses, including income taxes, amortization expense and interest income and
interest expense. Corporate expenses are comprised primarily of executive
compensation and other general and administrative expenses that are separately
managed. Corporate assets are not included in segment assets. Corporate assets
consist primarily of cash and cash equivalents, deferred taxes and intangible
assets.
Summary information by segment as of and for the three and six month periods
ended September 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended Sept. 30, For the Nine Months Ended Sept. 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PPO Segment:
Revenues $ 2,049,503 $ 1,809,607 $ 6,176,350 $ 5,489,321
Operating expenses 1,410,295 1,341,928 4,908,380 4,232,385
--------------- --------------- --------------- ---------------
Operating profit 639,208 467,679 1,267,970 1,256,936
Depreciation 41,915 2,492 124,885 122,962
Segment assets 1,733,312 2,122,324 1,733,312 2,122,324
TPA Segment:
Revenues $ 1,491,376 $ 1,671,168 $ 4,830,506 $ 4,899,550
Operating expenses 1,380,077 1,467,567 4,600,822 4,209,799
--------------- --------------- --------------- ---------------
Operating profit 111,299 203,601 229,684 689,751
Depreciation 42,533 34,091 127,434 96,818
Segment assets 2,975,261 3,501,666 2,975,261 3,501,666
PpoONE.com Segment:
Revenues $ 748,585 $ 492,640 $ 2,019,781 $ 1,229,357
Operating expenses 747,948 862,506 2,272,039 2,373,108
--------------- --------------- --------------- ---------------
Operating profit (loss) 637 (369,866) (252,258) (1,143,751)
Depreciation 24,460 37,268 73,093 109,324
Segment assets 353,925 356,114 353,925 356,114
ValueCheck Segment:
Revenues $ 54,942 $ -- $ 121,963 $ --
Operating expenses 136,180 -- 354,539 --
--------------- --------------- --------------- ---------------
Operating loss (81,238) -- (232,576) --
Depreciation 1,123 -- 3,117 --
Segment assets 87,955 -- 87,955 --
</TABLE>
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A reconciliation of the Company's segment revenues, operating profit (loss) and
segment assets to the corresponding consolidated amounts as of and for the
three and nine month periods ended September 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended Sept. 30, For the Nine Months Ended Sept. 30,
1999 1998 1999 1998
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Segment revenues $ 4,344,406 $ 3,973,415 $ 13,148,600 $ 11,618,228
Intercompany revenues 520,612 276,673 1,549,892 837,471
--------------- --------------- --------------- ---------------
Consolidated revenues $ 3,823,794 $ 3,696,742 $ 11,598,708 $ 10,780,757
=============== =============== =============== ===============
Segment operating profit $ 669,906 $ 301,414 $ 1,012,820 $ 802,936
Post acquisition charges -- 648,097 -- 648,097
Loss from impairment -- -- 1,225,000 --
Corporate expenses, net 591,933 665,342 1,349,920 1,385,204
--------------- --------------- --------------- ---------------
Consolidated operating
profit (loss) $ 77,973 $ (1,012,025) $ (1,562,100) $ (1,230,365)
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Sept. 30, 1999 December 31, 1998
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<S> <C> <C>
Segment assets $ 5,228,433 $ 4,309,347
Corporate assets 7,563,752 9,925,079
--------------- ---------------
Consolidated assets $ 12,792,185 $ 14,234,426
=============== ===============
</TABLE>
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PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1998.
(1) RESULTS OF OPERATIONS
Net revenues for the three and nine months ended September 30, 1999
were up $127,000 or 3% and $818,000 or 8%, respectively, from the
comparable 1998 periods. PPO revenues increased approximately $240,000
for the quarter and $687,000 for the nine months primarily due to
acquired BHC revenues, which were in the 1998 periods for only the
month of September and thus resulted in increases of $468,000 for the
quarter and $1,856,000 for the nine months, reduced by lower Dallas PPO
revenues of $179,000 and $888,000 for the three-and nine-month periods
and lower large claim negotiation revenues beginning in 1999 when this
activity was outsourced. TPA revenues decreased approximately $180,000
for the quarter primarily due to lost customers in the first nine
months of 1999 which were not completely offset by revenues from new
business.
The Company reported net income of $42,968, $.01 per share, and a net
loss of $(1,042,901) or $(.24) per share for the three- and nine-month
periods ended September 30, 1999 compared with net losses of $(595,230)
or $(.15) per share and $(683,299) or $(.18) for the same periods in
1998. The profitable 1999 third quarter was achieved through a
combination of increased revenue and reduced operating expenses more
fully explained below. The loss in the nine months ended September 30,
1999 included the $1,225,000 loss from impairment as the result of the
sale of a division of the TPA subsidiary sold effective August 1, 1999,
reduced by a deferred tax benefit of $441,000 resulting in a net loss
of $(784,000), or $(.19) per share. Both of the 1998 periods were
impacted by post acquisition charges of $648,000 associated with the
BHC acquisition. 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.
Salaries and wages declined $112,000 for the three months and increased
$664,000 for the nine months ended September 30, 1999, as compared with
the respective prior year periods. Organizational restructuring during
the first quarter of 1999 resulted in PPO personnel cost savings in the
third quarter despite the additional personnel in the PPO as the result
of the BHC acquisition, and in the TPA relating to the systems
conversion efforts and the Harrisburg acquisition, which account for
the increase in the nine-month period.
Other operating expenses declined by approximately $195,000 for the
three months ended September 30, 1999, or 13%, and increased less than
1% for the nine months ended September 30, 1999, as compared to the
same periods in 1998. The trend toward lower operating expenses is the
result of cost cutting measures adopted beginning in the first quarter
of 1999.
Depreciation and amortization declined approximately $8,000 and
$102,000 for the three months and nine months ended September 30, 1999,
compared to the same periods in 1998, as a result of the Company's
write-off of capitalized software development costs in September 1998.
Other income (expense) declined for the three months and nine months
ended September 30, 1999, from income of approximately $38,000 and
$113,000, primarily interest income, to expense of approximately
$8,000 and $83,000, respectively, mainly as the result of interest
expense on debt incurred to acquire BHC.
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(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $772,000 at
September 30, 1999, compared with $253,000 at December 31, 1998.
Unrestricted cash and cash equivalents were $752,000 at September 30,
1999, compared with $1,113,000 at December 31, 1998. Cash provided by
operations during the first nine months of 1999 was approximately
$244,000 compared with approximately $691,000 during the same period
in 1998.
Capital expenditures for the purchase of tangible property and
equipment were approximately $170,000 for the nine months ended
September 30, 1999. These expenditures were primarily for data
processing equipment for the Company's TPA operations and for
leasehold improvements in the ppoONE.com and ValueCheck operations.
Effective September 1, 1998, a wholly-owned subsidiary of the Company
purchased BHC for approximately $4,500,000 plus liabilities assumed of
$264,138 and accrued acquisition costs of $150,000. The purchase
consideration consisted of $2,150,000 cash, an aggregate of $1,000,000
in subordinated convertible notes to the previous shareholders of BHC
and common stock of the Company valued at approximately $1,422,000. In
connection with the acquisition, the Company obtained bank financing
in the form of a $1,600,000 term loan which bears interest at the
bank's prime rate plus 1% (9.25% at September 30, 1999) and is payable
in equal monthly principal installments of $26,667 plus interest. The
8.5% convertible seller notes were payable in quarterly principal
installments of $50,000 plus interest through October 2003 and were
convertible into common stock of the Company in $25,000 increments, at
a conversion rate of $5.25 per share. On July 6, 1999, the remaining
principal balance of $850,000 of convertible seller notes was
converted into 161,903 shares of the Company's common stock.
At September 30, 1999, the Company had $200,000 of outstanding
borrowings under its revolving line of credit arrangement. This credit
facility, secured by accounts receivable, allows for maximum
borrowings of $400,000 and bears interest at the bank's prime rate
plus 1% (9.25% at September 30, 1999).
In March and May 1999, the Company restructured certain covenants and
other terms of the bank agreement. Under the revised terms, the
Company made principal reductions of $200,000 on March 31, 1999,
$50,000 on June 15, 1999, $147,000 from a portion of the proceeds from
the sale of 38,000 shares of the Company's common stock for $294,500
on August 16, 1999 and $407,000 on August 18, 1999 paid with the
proceeds from an income tax refund. The revised term note includes
covenants which impose minimum requirements for net income,
stockholders' equity and working capital, and is secured by a pledge
of certain shares of the Company's wholly-owned subsidiaries.
Concurrently, maximum borrowings under the Company's revolving credit
facility were reduced from $500,000 to $400,000. Although there can be
no assurance, the Company believes that it will be in compliance with
its debt covenants throughout 1999.
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
fiscal year 1999. During the first quarter of 1999, the Company
eliminated certain employee positions and reduced certain other
expenses that resulted in approximately $70,000 in salary and other
cost savings per month.
The Company has not paid dividends in the past and does not anticipate
the payment of such in the future.
12
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(3) 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 with the exception of IT systems used in
providing TPA services. Beginning in 1996, the TPA started converting
its clients from an operating system that was not Year 2000 compliant
to a current Year 2000 compliant claims processing system operated in
the software vendor's data center. Such conversion has taken longer
than expected and has cost the Company approximately $950,000 to date
in non-recurring expenses and is estimated to cost an additional
$50,000 in non-recurring expenses during the remainder of 1999 before
such conversion is completed.
The Company's primary PPO IT systems and applications have been
developed and placed into production within the past twenty-four
months. Accordingly, such systems and applications were developed
employing contemporary software tools to be Year 2000 compliant from
their initial design phase. Management used best efforts to inventory
and evaluate all non-essential software programs and hardware used in
the Company's business. Non-compliant systems are being replaced,
modified or outsourced. 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 has evaluated such systems and has
remediated and upgraded the systems so that they now are compliant.
The expenditures related to these activities approximated $15,000.
Other than the system conversion in the TPA mentioned above, 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
failure. 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.
13
<PAGE> 14
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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
On August 12, 1999, the Company sold 38,000 shares of its Common Stock
to Mr. Stuart Hunt at $7.75 per share in a private placement. The
Company received $294,500 in cash. Mr. Hunt was granted piggy-back
registration rights in the transaction. This transaction was exempt
from registration under the Securities Act pursuant to Section 4(2)
and 4(6) of that Act. No underwriters were involved in the
transaction.
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
(a) Exhibits
Number Exhibit Description
27.1 Financial Data Schedule
15
<PAGE> 16
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 15, 1999 /s/ John Ward Hunt
-------------------------------------
John Ward Hunt
President and
Chief Executive Officer
/s/ Bob E. Buddendorf
-------------------------------------
Bob E. Buddendorf
Senior Vice President and
Chief Financial Officer
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 752,375<F1>
<SECURITIES> 0
<RECEIVABLES> 1,262,058
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,845,773
<PP&E> 1,554,717
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,792,185
<CURRENT-LIABILITIES> 3,073,312
<BONDS> 0
0
0
<COMMON> 45,640
<OTHER-SE> 8,586,391
<TOTAL-LIABILITY-AND-EQUITY> 12,792,185
<SALES> 11,598,708
<TOTAL-REVENUES> 11,598,708
<CGS> 0
<TOTAL-COSTS> 13,160,808
<OTHER-EXPENSES> (69,424)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,894
<INCOME-PRETAX> (1,645,570)
<INCOME-TAX> (602,669)
<INCOME-CONTINUING> (1,042,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,042,901)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
<FN>
<F1>Excludes Restricted Cash of $395,221.
</FN>
</TABLE>
