<PAGE> 1
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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 March 31, 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
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
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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: Common Stock 4,672,492 as of May 8,
2000.
Transitional Small Business Disclosure Format (Check one): YES NO X
--- ---
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MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended March 31, 2000
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C> <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
March 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 877,355 $ 640,803
Restricted Cash 331,946 313,665
Accounts receivable - trade, net of allowance
for doubtful accounts of $176,000 and $156,000
at March 31, 2000 and December 31, 1999, respectively 1,297,074 1,395,536
Accounts receivable - premium 366,079 482,420
Accounts receivable - other 83,033 96,317
Income tax receivable 299,693 300,093
Prepaid expenses and other current assets 433,653 312,049
Deferred income taxes 227,539 235,169
----------- -----------
Total current assets 3,916,372 3,776,052
NOTE RECEIVABLE - OFFICER, including accrued interest 455,545 448,328
RECEIVABLE FROM SALE OF DIVISION 261,268 300,000
PROPERTY AND EQUIPMENT, NET 1,510,625 1,544,279
GOODWILL, NET 5,953,783 6,019,463
INTANGIBLE AND OTHER ASSETS, NET 4,402 4,402
DEFERRED TAXES 368,961 368,961
----------- -----------
TOTAL ASSETS $12,470,956 $12,461,485
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 636,598 $ 842,266
Accounts payable - premium 698,025 796,084
Accrued liabilities 1,032,138 1,044,803
Borrowings under bank line of credit 250,000 --
Current portion of long-term debt 336,877 411,970
----------- -----------
Total current liabilities 2,953,638 3,095,123
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 209,405 218,719
Deferred gain on sale of option on real estate 675,667 698,417
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, 4,668,492 and 4,625,579 issued
in 2000 and 1999, respectively 46,685 46,256
Additional paid-in capital 8,394,791 8,225,281
Retained earnings 190,770 177,689
----------- -----------
Total stockholders' equity 8,632,246 8,449,226
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,470,956 $12,461,485
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
NET REVENUES $ 3,877,155 $ 3,912,235
----------- -----------
OPERATING EXPENSES
Salaries and wages 2,422,662 2,597,930
Other operating expenses 1,290,475 1,418,410
Depreciation and amortization 149,128 184,628
----------- -----------
Total operating expenses 3,862,265 4,200,968
----------- -----------
INCOME (LOSS) FROM OPERATIONS 14,890 (288,733)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (18,606) (66,824)
Investment income 24,427 23,134
----------- -----------
Total other income (expense) 5,821 (43,690)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 20,711 (332,423)
Income taxes (benefit) 7,630 (127,983)
----------- -----------
NET INCOME (LOSS) $ 13,081 $ (204,440)
=========== ===========
Income (loss) per share--basic and diluted $ 0.00 $ (0.05)
=========== ===========
Weighted average common shares outstanding 4,643,323 4,154,968
=========== ===========
Weighted average common and diluted shares outstanding 4,785,921 4,154,968
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
4
<PAGE> 5
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income (loss) $ 13,081 $ (204,440)
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization 149,128 184,628
Amortization of deferred gain on real estate transaction (22,750) (22,750)
Net changes in certain assets and liabilities
Accounts receivable - trade 98,462 64,367
Receivable from sale of division 38,731 --
Income tax receivable and deferred taxes (8,030) (127,983)
Prepaid expenses and other current assets (121,604) (283,825)
Accounts payable - trade (205,669) 6,829
Accrued expenses 16,679 191,438
----------- -----------
Net cash used in operating activities (41,972) (191,736)
----------- -----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (49,794) (106,095)
----------- -----------
Net cash used in investing activities (49,794) (106,095)
----------- -----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (7,216) (6,510)
Draw on bank line of credit 250,000 75,000
Payments on long-term debt (84,406) (220,418)
Proceeds from issuance of common stock 169,939 297,745
----------- -----------
Net cash provided by financing activities 328,317 145,817
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 236,551 (152,014)
Cash and cash equivalents at beginning of period 640,803 1,112,653
----------- -----------
Cash and cash equivalents at end of period $ 877,354 $ 960,639
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 9,642 $ 70,189
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Restricted cash at period end date $ 331,946 $ 593,609
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
5
<PAGE> 6
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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"), Diversified Group Administrators, Inc., providing
third party administration ("TPA") services, ppoONE.com, inc. ("ppoONE.com"),
providing repricing and administrative services for PPOs and certain network
healthcare providers, and ValueCheck, Inc. ("ValueCheck"), the newly-formed
subsidiary 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. There was no impact from dilutive common
equivalent shares since net income was less than one cent per share and a loss
was reported for the periods ended March 31, 2000 and 1999, respectively.
In 2000, 575,500 common equivalent shares were excluded from the calculation of
diluted earnings per share because the effect would have been anti-dilutive for
the period presented.
6
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NOTE 4 - DEBT
At March 31, 2000, the Company had $250,000 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 1.25% (10% at March 31, 2000).
Long-term debt consisted of the following at March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<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% (9.75% at March 31, 2000 and 9.5%
at December 31, 1999) to April 2001 $315,260 $395,261
Mortgage note payable, monthly installments
of $3,059, plus interest at 8% through
January 2009 231,022 235,428
-------- --------
Total 546,282 630,689
Less current portion 336,877 411,970
-------- --------
Total long-term debt, net of current portion $209,405 $218,719
======== ========
</TABLE>
NOTE 5 - BUSINESS SEGMENT REPORTING
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.
Certain reclassifications have been made in 1999 amounts in order to make them
consistent with amounts for the 2000 period. 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
periods ended March 31, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
PPO Segment:
Revenues $2,179,306 $2,058,477
Operating expenses 1,696,540 1,828,728
---------- ----------
Operating profit 482,766 230,299
Depreciation 26,994 48,938
Segment assets 1,818,386 2,025,155
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
TPA Segment:
Revenues $ 1,343,439 $ 1,739,417
Operating expenses 1,259,562 1,679,825
------------ ------------
Operating profit 83,877 59,592
Depreciation 42,829 41,244
Segment assets 2,537,866 3,253,528
ppoONE.com Segment:
Revenues $ 356,999 $ 199,975
Operating expenses 511,594 324,726
------------ ------------
Operating loss (154,595) (124,751)
Depreciation 12,172 16,635
Segment assets 365,379 340,881
ValueCheck Segment:
Revenues $ 118,118 $ 31,662
Operating expenses 182,301 102,760
------------ ------------
Operating loss (64,183) (71,098)
Depreciation 1,453 893
Segment assets 134,600 63,499
</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
periods ended March 31, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Segment revenues $ 3,997,862 $ 4,029,530
Intercompany revenues (120,707) (117,295)
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Consolidated revenues $ 3,877,155 $ 3,912,235
============ ============
Segment operating profit $ 347,865 $ 94,041
Corporate expenses, net 332,975 382,774
------------ ------------
Consolidated operating
profit (loss) $ 14,890 $ (288,733)
============ ============
Segment assets $ 4,856,231 $ 5,683,063
Corporate assets 7,614,725 $ 6,778,422
------------ ------------
Consolidated assets $ 12,470,956 $ 12,461,485
============ ============
</TABLE>
8
<PAGE> 9
PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER (OR THREE MONTHS) ENDED MARCH 31, 2000, COMPARED TO THE QUARTER (OR
THREE MONTHS) ENDED MARCH 31, 1999.
(1) RESULTS OF OPERATIONS
Net revenues for the three months ended March 31, 2000 were down slightly
from the comparable 1999 period largely due to the sale of the Dallas
division of the TPA. The Company had increased revenues from outside
customers in all operating segments except the TPA. TPA revenues were down
$396,000 largely because of the sale in August 1999 of its Dallas division
and also because of customers lost in 1999 which were not completely
offset by revenues from new business. PPO revenues increased approximately
$121,000 for the period reversing the downward trend experienced in recent
years.
Net income for the quarter ended March 31, 2000 was $13,081, less than one
cent per share, compared with a net loss of $(204,440), or $(.05) per
share, for the same period in 1999. This increase was due primarily to
decreases in personnel costs and operating expenses more fully discussed
below.
Salaries and wages decreased $175,000 or 6.7% for the quarter ended March
31, 2000, as compared to the prior year period because of lower TPA
personnel costs as the result of the sale of its Dallas division and a
reduction in headcount attributable to the completion of a systems
conversion project in late 1999.
Other operating expenses decreased by approximately $128,000 for the three
months ended March 31, 2000, or 9.0%, as compared to the three months ended
March 31, 1999. This decrease was primarily due to the sale of the Dallas
division of the TPA and an overall decrease in operating expenses resulting
from cost cutting measures adopted in early 1999, offset to some extent by
increases in ppoONE.com and ValueCheck as their revenues and customer
bases grow.
Depreciation and amortization for the quarter ended March 31, 2000 declined
approximately $35,000 from the same period in 1999, the majority of which
is goodwill amortization in 1999 on the TPA's Dallas division.
Other income (expense) improved from expense of approximately $44,000 for
the first quarter of 1999 to income of approximately $6,000 in the 2000
quarter as the result of lower interest expense attributable to substantial
reductions in debt during 1999 as explained in the following section.
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $963,000 at March 31,
2000, compared with $681,000 at December 31, 1999. Unrestricted cash and
cash equivalents were $332,000 at March 31, 2000, compared with $641,000 at
December 31, 1999. Cash used in operations during the first quarter of 2000
was approximately $42,000 compared with cash used in operations of
approximately $192,000 during the same period in 1999.
Capital expenditures for the purchase of tangible property and equipment
were approximately $50,000 for the three months ended March 31, 2000. These
expenditures were primarily for data processing equipment for ppoONE.com
and software for the Company's TPA operations.
9
<PAGE> 10
In connection with an acquisition in September 1998, 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% (9.75% at March 31, 2000) and is payable
in sixty monthly principal installments of $26,667 plus interest through
October 2003.
At March 31, 2000, the Company had $250,000 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 1.25% (10% at March 31, 2000).
In March and May 1999, the Company restructured certain covenants and other
terms of the bank agreement. Under the revised terms, the Company was
required to make 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 term
note includes covenants which impose minimum requirements for cash flow,
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.
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 will be sufficient to fund liquidity
needs and capital requirements for 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
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 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'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 were replaced, modified or outsourced.
With regard to non-IT systems, such as general office security systems and
phone systems, the Company evaluated such systems and has remediated and
upgraded the systems so that they now are compliant.
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
10
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IT systems, have been immaterial to date and have been funded through the
Company's normal IT operations budget.
11
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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
Number Exhibit Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
12
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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 12, 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
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 877,355<F1>
<SECURITIES> 0
<RECEIVABLES> 1,297,074
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,916,372
<PP&E> 1,510,625
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,470,956
<CURRENT-LIABILITIES> 2,953,638
<BONDS> 0
0
0
<COMMON> 46,685
<OTHER-SE> 8,585,561
<TOTAL-LIABILITY-AND-EQUITY> 12,470,956
<SALES> 3,877,155
<TOTAL-REVENUES> 3,877,155
<CGS> 0
<TOTAL-COSTS> 3,862,265
<OTHER-EXPENSES> (24,427)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,606
<INCOME-PRETAX> 20,711
<INCOME-TAX> 7,630
<INCOME-CONTINUING> 13,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,081
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>EXCLUDES RESTRICTED CASH OF $331,946.
</FN>
</TABLE>
