<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, 2000
[ ] 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)
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 -- 4,706,992 as of
November 9, 2000.
Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X]
<PAGE> 2
MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended September 30, 2000
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 10
PART II - OTHER INFORMATION 12
</TABLE>
2
<PAGE> 3
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
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(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,075,417 $ 640,803
Restricted cash 238,754 313,665
Accounts receivable - trade, net of allowance
for doubtful accounts of $226,000 and $156,000
at September 30, 2000 and December 31, 1999, respectively 1,588,800 1,395,536
Accounts receivable - premium 245,367 482,420
Accounts receivable - other 386,915 396,410
Prepaid expenses and other current assets 364,922 316,451
Deferred income taxes 222,028 235,169
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Total current assets 4,122,203 3,780,454
NOTE RECEIVABLE - OFFICER, including accrued interest 471,149 448,328
RECEIVABLE FROM SALE OF DIVISION 209,758 300,000
PROPERTY AND EQUIPMENT, NET 1,407,824 1,544,279
GOODWILL, NET 5,821,422 6,019,463
DEFERRED INCOME TAXES 368,961 368,961
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TOTAL ASSETS $12,401,317 $12,461,485
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 563,350 $ 842,266
Accounts payable - premium 484,121 796,084
Accrued liabilities 1,142,174 1,044,803
Borrowings under bank line of credit 400,000 --
Current portion of long-term debt 184,866 411,970
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Total current liabilities 2,774,511 3,095,123
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 192,333 218,719
Deferred gain on sale of option on real estate 630,167 698,417
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, 4,706,992 and 4,625,579 issued
in 2000 and 1999, respectively 47,070 46,256
Additional paid-in capital 8,556,406 8,225,281
Retained earnings 200,830 177,689
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Total stockholders' equity 8,804,306 8,449,226
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,401,317 $12,461,485
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</TABLE>
The accompanying notes are an integral part of these financial 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,
------------------------------ ------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
NET REVENUES $ 4,029,352 $ 3,823,794 $ 11,860,625 $ 11,598,708
------------ ------------ ------------ ------------
OPERATING EXPENSES
Salaries and wages 2,513,458 2,254,265 7,374,520 7,321,070
Other operating expenses 1,366,983 1,316,664 4,025,586 4,066,790
Depreciation and amortization 149,600 174,892 447,419 547,948
------------ ------------ ------------ ------------
Total operating expenses 4,030,041 3,745,821 11,847,525 11,935,808
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (689) 77,973 13,100 (337,100)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (16,023) (30,847) (55,617) (152,894)
Interest income 22,662 21,908 71,025 65,642
Loss on sale of division -- -- -- (1,225,000)
Other income 5,674 1,240 7,774 3,782
------------ ------------ ------------ ------------
Total other income (expense) 12,313 (7,699) 23,182 (1,308,470)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 11,624 70,274 36,282 (1,645,570)
Income taxes (benefit) 3,919 27,306 13,141 (602,669)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 7,705 $ 42,968 $ 23,141 $ (1,042,901)
============ ============ ============ ============
Basic income (loss) per share $ 0.00 $ 0.01 $ 0.00 $ (0.24)
============ ============ ============ ============
Diluted income (loss) per share $ 0.00 $ 0.01 $ 0.00 $ (0.24)
============ ============ ============ ============
Weighted average common shares outstanding 4,702,789 4,521,335 4,674,310 4,304,072
============ ============ ============ ============
Weighted average common and diluted shares outstanding 4,771,498 4,718,126 4,759,943 4,304,072
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income (loss) $ 23,141 $(1,042,901)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization 447,419 547,948
Amortization of deferred gain on real estate transaction (68,250) (68,250)
Loss on sale of division -- 1,225,000
Net changes in certain assets and liabilities
Accounts receivable - trade (193,264) 49,985
Receivable from sale of division 90,242 --
Accounts receivable - other 9,096 236,391
Prepaid expenses and other current assets (48,471) (281,777)
Accounts payable - trade (278,915) 26,264
Accrued expenses 97,369 72,041
Deferred income taxes 13,541 (520,243)
Other (22,820) (20,046)
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Net cash provided by operating activities 69,088 224,412
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CASH FLOWS RELATED TO INVESTING ACTIVITIES
Acquisition and goodwill costs -- (21,000)
Purchases of property and equipment (112,923) (169,848)
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Net cash used in investing activities (112,923) (190,848)
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CASH FLOWS RELATED TO FINANCING ACTIVITIES
Draw on bank line of credit 400,000 (125,000)
Payments on long-term debt (253,490) (1,109,321)
Proceeds from issuance of common stock 331,939 840,479
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Net cash provided by financing activities 478,449 (393,842)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 434,614 (360,278)
Cash and cash equivalents at beginning of period 640,803 1,112,653
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Cash and cash equivalents at end of period $ 1,075,417 $ 752,375
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SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 55,616 $ 174,973
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Income taxes paid $ -- $ --
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Restricted cash at period end date $ 238,754 $ 395,221
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</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 repricing and administrative services for PPO's and
certain network healthcare providers, and ValueCheck, Inc. ("ValueCheck"),
providing utilization review and case management services.
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, 1999, 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 three month periods ended September 30,
2000 and 1999 and for the nine month period ended September 30, 2000, the
dilutive effect of stock options was 68,709, 196,791 and 85,633 shares,
respectively. The number of options excluded from weighted average dilutive
shares outstanding because their effect was anti-dilutive was 997,000, 821,000
and 997,000, respectively. There was no impact from dilutive common equivalent
shares for the nine month period ended September 30, 1999.
6
<PAGE> 7
NOTE 4 - DEBT
At September 30, 2000, the Company had outstanding borrowings of $400,000 under
its 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 1.25% (10.75% at September 30, 2000).
Long-term debt consisted of the following at September 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Note payable to bank, secured by a pledge of substantially all
assets of the Company, monthly installments of $26,667,
plus interest at bank's prime rate plus 1% (10.5% and 9.5% at
September 30, 2000 and December 31, 1999) to April 2001 $155,258 $395,261
Mortgage note payable, monthly installments of $3,059, plus
interest at 8% through January 2009 221,941 395,261
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377,199 630,689
Less current portion 184,866 411,970
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Total long-term debt, net of current portion $192,333 $218,719
======== ========
</TABLE>
NOTE 5 - 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 6 - BUSINESS SEGMENT REPORTING
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 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 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.
7
<PAGE> 8
Certain reclassifications have been made in 1999 amounts in order to make them
consistent with amounts for the 2000 periods. The reclassifications reflect
moving the claims processing unit and customer service to the PPO segment from
the ppoONE.com segment. Summary information by segment as of and for the three
and nine month periods ended September 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
PPO Segment:
Revenues $ 2,116,332 $ 2,049,503 $ 6,526,058 $ 6,176,350
Operating expenses 1,612,703 1,599,040 4,906,062 5,003,123
----------- ----------- ----------- -----------
Operating profit 503,629 450,463 1,619,996 1,173,227
Depreciation 26,667 49,613 80,556 147,864
Segment assets 1,757,060 1,811,291 1,757,060 1,811,291
TPA Segment:
Revenues $ 1,285,311 $ 1,491,376 $ 3,890,366 $ 4,830,506
Operating expenses 1,193,415 1,380,074 3,637,012 4,600,819
----------- ----------- ----------- -----------
Operating profit 91,896 111,302 253,354 229,687
Depreciation 42,837 42,533 127,867 127,434
Segment assets 2,360,794 2,975,261 2,360,794 2,975,261
ppoONE.com Segment:
Revenues $ 479,052 $ 345,433 $ 1,285,333 $ 817,383
Operating expenses 714,700 306,383 1,882,066 932,810
----------- ----------- ----------- -----------
Operating profit (loss) (235,648) 39,050 (596,733) (115,427)
Depreciation 11,826 16,762 35,910 50,114
Segment assets 472,130 353,925 472,130 353,925
ValueCheck Segment:
Revenues $ 279,857 $ 54,942 $ 556,542 $ 121,963
Operating expenses 243,408 136,180 607,115 354,541
----------- ----------- ----------- -----------
Operating profit (loss) 36,449 (81,238) (50,573) (232,578)
Depreciation 2,090 1,123 5,045 3,117
Segment assets 313,468 87,955 313,468 87,955
</TABLE>
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, 2000 and 1999, are as follows:
8
<PAGE> 9
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Segment revenues $ 4,160,552 $ 3,941,254 $ 12,258,299 $ 11,946,202
Intercompany revenues 131,200 117,460 397,674 347,494
------------ ------------ ------------ ------------
Consolidated revenues $ 4,029,352 $ 3,823,794 $ 11,860,625 $ 11,598,708
============ ============ ============ ============
Segment operating profit $ 396,326 $ 519,577 $ 1,226,044 $ 1,054,909
Corporate expenses, net 397,015 441,604 1,212,944 1,392,009
------------ ------------ ------------ ------------
Consolidated operating
profit (loss) $ (689) $ 77,973 $ 13,100 $ (337,100)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Segment assets $ 4,903,452 $ 4,860,897
Corporate assets 7,497,865 7,600,588
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Consolidated assets $12,401,317 $12,461,485
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</TABLE>
NOTE 7 - SUBSEQUENT EVENTS
On October 26, 2000, the Company signed a definitive agreement to sell its PPO
subsidiary, MedicalControl Network Solutions, Inc., for $13.5 million to Beyond
Benefits, Inc., a leading national managed healthcare company. On November 14,
2000, the Company signed a definitive agreement to sell its TPA subsidiary,
Diversified Group Administrators, Inc., for $2.5 million cash plus other
consideration to HealthASPex, Inc., a provider of web portal-based enhancements
for TPAs. These sales are expected to close in the first quarter of 2001,
subject to regulatory review and other customary conditions. The Company expects
to recognize gains on the sales.
9
<PAGE> 10
PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THE QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1999.
(1) RESULTS OF OPERATIONS
Net revenues for the three and nine months ended September 30, 2000 were up
slightly from the comparable 1999 periods. The Company had increased
revenues in all operating segments except the TPA for the three and nine
month periods. TPA revenues decreased approximately $206,000 for the
quarter and $940,000 for the nine months largely because of the sale in
August 1999 of its unprofitable Dallas division and also because of
customers lost in 1999 which were not completely offset by revenues from
new business. Significant revenue gains were reported in the ppoONE.com and
ValueCheck segments which both have been successful in adding new
customers. In addition, PPO revenues continued to increase, following the
trend reported in the first half of 2000.
Net income for the three and nine month periods ended September 30, 2000
was $7,705 and $23,141 (both less than $.01 per share) compared with net
income (loss) for the comparable 1999 periods of $42,968, or $.01 per share
and $(1,042,901), or ($.24) per share. The loss in the nine month period of
1999 included the $1,225,000 loss on the sale of a division of the TPA
subsidiary sold subsequent to June 30, 1999, reduced by a deferred tax
benefit of $441,000 resulting in a net loss of $784,000, or $.19 per share.
Increased profitability in the PPO segment for both periods and in the TPA
segment for the nine months and reduced losses in ValueCheck, which has
become profitable in the third quarter of 2000 because of new customers
added, were offset to some extent by increased losses at ppoONE.com. The
Company made the decision to increase spending on the development and
marketing of ppoONE.com's products and services during 2000, and these
costs have increased at a greater rate than revenues added as the result of
new customer signings.
Salaries and wages increased slightly for both the three months and nine
months ended September 30, 2000, as compared with the respective prior year
periods. Personnel cuts in the TPA as the result of no longer having its
Dallas division in 2000 and the completion of a system conversion effort in
1999 have been offset to a great extent by increasing personnel in
ppoONE.com and ValueCheck as these two rapidly growing segments increase
their customer bases.
Other operating expenses increased by approximately $50,000 for the three
months ended September 30, 2000, and decreased by $41,000 for the nine
months ended September 30, 2000, as compared to the same periods in 1999.
The elimination of expenses of the Dallas division of the TPA has been
offset by increased equipment rental and other expenses, primarily in
ppoONE.com.
Depreciation and amortization declined approximately $25,000 and $100,000
for the three months and nine months ended September 30, 2000, compared to
the same periods in 1999, primarily due to goodwill amortization in 1999 on
the TPA's Dallas division.
Other income (expense) improved for the three months and nine months ended
September 30, 2000, from expense of approximately $7,700 and $83,000,
respectively, to income of $12,000 and $23,000 as the result of lower
interest expense incurred due to substantial reductions in debt during 1999
as explained in the following section.
10
<PAGE> 11
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $1,348,000 at
September 30, 2000, compared with $685,000 at December 31, 1999.
Unrestricted cash and cash equivalents were $1,075,000 at September 30,
2000, compared with $641,000 at December 31, 1999. Cash provided by
operations during the first nine months of 2000 was approximately $69,000
compared with cash provided by operations of approximately $224,000 during
the same period in 1999.
Capital expenditures for the purchase of tangible property and equipment
were approximately $113,000 for the nine months ended September 30, 2000.
These expenditures were primarily for computer equipment and peripherals
for ppoONE.com.
The Company's management made the decision to accelerate spending on the
development and marketing of ppoOne.com's products and services.
Management believes that cash flows from operations, cash on hand, and the
borrowing capacity under the Company's line of credit, or alternatively,
refinancing existing debt or the sale of assets (see Note 7 - Subsequent
Events) will be sufficient to fund liquidity needs and capital requirements
for the remainder of the fiscal year 2000. The Company has not paid
dividends in the past and does not anticipate the payment of such in the
future.
(3) RELIANCE ON DATA PROCESSING
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 took longer than expected but now is completed. The cost to
the Company was approximately $1,000,000 in non-recurring expenses over the
past four years.
The Company began a formal program in 1998 to evaluate, assess and make the
needed changes to all other core information technology ("IT") systems and
applications to comply with Year 2000 issues. The Company's primary PPO IT
systems and applications have been developed and placed into production
within the past three years. 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 were replaced,
modified or outsourced.
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
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Exhibit Description
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<S> <C>
27.1 Financial Data Schedule
</TABLE>
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 14, 2000 /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
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
27.1 Financial Data Schedule
</TABLE>
