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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number 1-11922
MEDICALCONTROL, INC.
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(Name of small business issuer in its charter)
Delaware 75-2297429
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8625 King George Drive, Suite 300
Dallas, Texas 75235
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (214) 630-6368
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
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(Title of Class)
Common Stock Purchase Warrants
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(Title of Class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $15,351,552.
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: As of March 25, 1997: $1,233,578*
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,873,578 shares of Common Stock,
$.01 par value as of March 25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for 1997 Annual Meeting of Shareholders
of MedicalControl, Inc. are incorporated by reference into Part III of this
Form 10-KSB.
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Transitional Small Business Disclosure Format: Yes No X
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*The aggregate market value was determined by multiplying the number of
outstanding shares (excluding those shares held of record by officers, directors
and greater than five percent shareholders) by $5.375, the last sales price of
the Registrant's common stock as of March 25, 1997, such date being within 60
days prior to the date of filing.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
MedicalControl, Inc. (the "Company") is a healthcare cost management and
administrative services company. The Company is comprised of two divisions, one
providing managed care services, primarily through its preferred provider
networks, and the other providing third party administration ("TPA") services.
In fulfilling its role as a preferred provider organization ("PPO"), the Company
contracts with hospitals, physicians and ancillary providers to provide access
to comprehensive healthcare services on behalf of its clients and their
employees or members at negotiated, discounted rates. The Company also reprices
resulting network provider claims to reflect negotiated terms as well as
providing healthcare data analyses, reporting and related healthcare cost
containment programs. In addition, the Company, through its wholly-owned TPA
subsidiary, provides employers that self-fund their employee benefit plans a
complete range of administrative and consulting services supporting such benefit
plans.
Prior to the Company's expansion into claims administration services, the
Company had derived its revenues primarily from PPO network access fees. In
1994, the Company expanded its products and service offerings to clients through
the acquisition of two third party administrators. By offering TPA services and
other managed care services, the Company positioned itself to more effectively
compete with larger insurance companies and other managed care companies by
integrating its products so that clients may choose to purchase most of their
healthcare services from one company. The TPA division also offers the managed
care division access to a cluster of self-insured clients who are candidates for
the Company's preferred provider networks.
Over the past two years, MedicalControl's managed care division has
experienced significant change. The Company has hired a new management team
focused on expanding its products and service offerings as well as improving
efficiencies and operations. The Company believes one of the keys to meeting
its goals for growth is delivering the highest levels of quality customer
service. The Company is attempting to meet and to exceed the needs of its
customers, while also achieving the Company's internal goals and objectives.
The Company intends to expand the managed care division through internal
growth of the PPO, through acquisitions and by entering new markets.
MedicalControl intends to increase the penetration of its target markets by
offering clients a more complete range of managed healthcare services designed
to minimize the cost of providing employee healthcare and other health benefit
programs. The Company is also seeking to expand its managed care division
through acquisitions of other PPOs or related managed care services companies.
There can be no assurance that the Company will be able to increase revenues or
earnings through acquisitions, operating efficiencies or otherwise.
The TPA division provides services to self-funded benefit plans, insurance
companies, provider-based organizations and other benefit management
organizations. The TPA division provides complete benefit review, design and
administration services to assist and direct comprehensive employee benefit
programs and risk management activities. The division currently administers
over 300 self-funded plans, one fully-insured plan, and over 50 risk management
plans, with clients ranging from 50 to 3,000 employees. Current total covered
lives exceed 80,000 located in 49 states. The TPA division intends to continue
to market its products to self-insured employees, while introducing a new fully-
insured product available through an insurance company in the first quarter of
1997.
MedicalControl is a Delaware corporation, incorporated in October 1989.
Unless the context otherwise requires, the term the "Company" refers to
MedicalControl, Inc. and its wholly-owned subsidiary
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and the term "MedicalControl" refers to the Company's managed care division. The
Company's executive offices are located at 8625 King George Drive, Suite 300,
Dallas, Texas 75235 and its telephone number is (214) 630-6368.
INDUSTRY OVERVIEW
The managed care industry has experienced tremendous growth and change over
the past decade and a half. Primary among the available managed care solutions
are Health Maintenance Organizations ("HMOs") and PPOs. Among other factors,
HMOs are distinguished from PPOs in that HMOs are responsible for the delivery
of medical services to their members and assume the financial risk for the costs
associated with that healthcare. PPOs, including MedicalControl, instead offer
employers and healthcare purchasers access to a network of contracted facilities
and providers who have agreed to provide services for discounted rates from
their standard fees. In such PPO arrangements, the self-insured employer or
benefit plan typically remains responsible for the cost of care. Currently,
approximately two in three Americans are enrolled in either a PPO, HMO or other
form of managed care. A growing number of health insurance carriers, HMOs, TPAs
and provider groups have established their own PPO networks.
In recent years, political, economic and regulatory influences have
subjected the healthcare industry to fundamental change and consolidation.
Since 1993, the Clinton administration and Congress have proposed various
programs to reform the healthcare system. Certain healthcare related laws were
enacted in 1996 and additional proposals are still under consideration at
federal and state levels. Many managed care companies are attempting to predict
the outcome of these proposals and are entering new markets or diversifying.
Employers and other healthcare purchasers have encouraged the development
of alternative forms of healthcare delivery and financing, including employer
self-funding for healthcare benefits. Currently, over 67% of employers have
opted for self-insurance. Under a self-funded benefit program, an employer
retains the obligation of funding claims up to a specific amount and typically
obtains reinsurance to provide protection against claims exceeding that amount.
By adopting self-funding and using the services of TPAs and other managed care
services, employers may incur lower costs and obtain other advantages over
traditional insurance.
MANAGED CARE DIVISION
MedicalControl's managed care division includes preferred provider
networks, healthcare data analyses and reporting and healthcare cost containment
programs. MedicalControl principally markets its managed healthcare services to
self-insured employers, insurance companies, third party administrators and
managed care organizations with large concentrations of employees or
participants within the southwestern United States. MedicalControl has
established and continues to establish and enhance networks of healthcare
providers providing medical services to MedicalControl's clients and their
employees or members at negotiated, discounted rates. After the provider
renders service, MedicalControl, the client or the client's TPA administrator
reviews and reprices the provider's bill to apply the PPO'S negotiated rates
prior to adjudication and payment of the repriced bill. MedicalControl also
offers a variety of management reports to clients designed to measure and
evaluate the cost-effectiveness and quality of the employers' healthcare benefit
programs. These reports provide summary and detailed information on benefit
utilization, claims processing activity, accounting data and cost savings.
As of December 31, 1996, MedicalControl serviced over 115 clients with more
than 300,000 employees or members, representing over 722,000 covered lives. The
Company's clients have access to more than 1,700 hospitals and 110,000
physicians and other healthcare providers nationwide. Significant
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concentrations of client employees or plan members are in Dallas, Fort Worth,
San Antonio and Houston, Texas in addition to the States of Arizona, California,
Florida, Illinois and Oklahoma.
Products and Services. MedicalControl intends to expand the managed care
division by offering clients a more complete range of network and managed
healthcare services designed to minimize the costs associated with their
employee benefit programs. MedicalControl provides a variety of managed care
products including access to quality, cost effective PPO networks, PPO network
claims repricing, healthcare data analyses and reports and healthcare cost
containment programs.
MedicalControl offers the following types of PPO networks:
. MedicalControl/NetOne Hospital Network -- a network of more than 1,700
acute care hospitals and 3,000 ancillary facilities available through
both direct agreements and affiliate network agreements.
. MedicalControl/NetOne Physician Network -- a network of more than
110,000 physicians, chiropractors, physical therapists and other
healthcare professionals through both direct agreements and affiliate
network agreements.
. MedicalControl/NetOne Behavioral Network -- a network of mental health,
alcohol and substance abuse treatment facilities.
. CompCare Occupational Medicine Network -- a network of providers meeting
the occupational health needs of client's employees in Texas and New
Mexico.
As a result of the Company's negotiated fee schedules, the Company and its
clients achieve average savings of approximately 28% between billed charges and
MedicalControl's negotiated, discounted rates for inpatient network hospitals
claims. MedicalControl's discounts continue to increase incrementally as actual
current charges increase and fee schedules are re-negotiated at lower levels.
In addition to hospitals and facilities, MedicalControl also contracts with
physicians whose credentials have been evaluated and verified in accordance with
accepted industry standards. These physicians have agreed to accept, as full
payment, negotiated fee schedules in place of the current charges physicians
bill to non-network patients for the same procedures and services.
The Company reprices network provider claims based on the PPO's negotiated
fee schedules in addition to providing clients the ability to reprice their own
claims. In providing in-house claims repricing services, for the year ended
December 31, 1996, the Company processed over 420,000 claims in an average of
3.2 calendar days with an accuracy rate of over 97%. MedicalControl has
developed, and plans to implement in the first quarter of 1997 a new claims
repricing and customer software system referred to as the Information Management
Processing & UtiLization SystEm ("IMPULSE"). MedicalControl developed this
comprehensive PPO claims repricing and customer service system based on
client/server technology. The system employs an Oracle relational database
engine and state-of-the-art Visual Basic user interface. MedicalControl will
utilize IMPULSE to reprice network provider claims on behalf of its clients.
IMPULSE's advanced technology also allows clients or claim payors to reprice
claims and perform customer service functions remotely via direct dial modem or
Internet access to the system. IMPULSE provides faster response times and
requires fewer keystrokes therefore reducing errors while increasing efficiency.
The system also has the ability to track claims status for improved customer
service.
MedicalControl provides extensive healthcare data analyses and reports to
its clients and has developed improved reporting software systems supporting
that objective. MedicalControl automatically
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produces these comprehensive utilization and savings reports for its clients on
a scheduled basis. MedicalControl has recently converted these monthly,
quarterly and annual reports to an improved, easy-to-understand standard report
format. MedicalControl can also create efficient ad hoc and custom reports with
this new report writing tool. MedicalControl has developed a catalog of over 120
standard reports for its clients identifying information related to claims
utilization, savings analyses, provider networks and claims production activity.
MedicalControl can produce these reports and other needed data electronically
providing it to clients via diskette, direct modem access or the Internet.
MedicalControl works with clients to design cost-effective benefit programs
or other healthcare management programs and to adopt appropriate cost
containment controls. Through benefit plan design, MedicalControl assists
clients in maximizing in-network utilization through the client's implementation
of employee co-pay differentials, use of exclusive provider organization
networks, waiver or reduction of deductibles for in-network hospitalization or
similar incentive programs for in-network use. Increased utilization of in-
network providers decreases the average cost per claim and reduces the cost of
the client's employee benefit plan.
In 1996, MedicalControl, through a third party, began offering a full range
of utilization management review products and larger claim management services
to MedicalControl's clients. The PPO managed care model directs and limits the
utilization of healthcare services through utilization review and controls the
total costs of services utilized through steerage to and use of contracted
network providers. Coupled with the use of PPO network providers, such services
better control utilization of healthcare services, direct patients and providers
to more cost effective alternatives and provide referral to network providers,
greatly improving the cost effective delivery of care.
Although MedicalControl is expanding its products to include many other
services for the benefit of its PPO clients, MedicalControl's expects its
primary product to continue to be its PPO networks.
Provider Arrangements and Services. MedicalControl provides clients with
savings on hospital, physician and related healthcare expenditures through
geographically tailored networks of quality, cost-effective providers.
MedicalControl's strategy is to create a network of healthcare providers that
meet the financial needs of clients and the healthcare needs of their covered
employees or plan members. MedicalControl uses the group purchasing leverage of
multiple clients to negotiate competitive discounts with such providers.
Healthcare providers join MedicalControl's network to increase patient volume as
members are directed to them through the client's health benefit plans,
utilization review oversight and other channeling mechanisms. In addition to
possible increased utilization of their services, healthcare providers also
maintain their current patients by joining MedicalControl's network.
The network development process begins with evaluation of MedicalControl's
current client needs, projected future needs and the supply and demand of
healthcare providers in a given geographic area in MedicalControl's southwestern
United States target market. Other demographic and environmental information
gathered in the development process, such as the economic condition of the area
and major businesses in the community, assists in identifying essential factors
that can impact network development and the negotiating process. MedicalControl
has developed its networks in response to the needs of its growing client base.
MedicalControl contracts with other PPO networks to develop and provide
access to provider networks, as needed, in regions of the country outside the
southwestern United States. MedicalControl also maintains affiliate
relationships in the southwestern United States to supplement its own network
during the development process. MedicalControl has network affiliate
relationships in the States of Alabama, Arizona, Arkansas, California, Florida,
Illinois, Indiana, Louisiana, Michigan, Mississippi, New Jersey, New York,
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North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Virginia and Washington.
As of December 31, 1996, the following lists the approximate number of
MedicalControl's contracted providers:
<TABLE>
<CAPTION>
Primary Care Specialty Total
Hospitals Ancillaries Physicians(1) Physicians Physicians
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<S> <C> <C> <C> <C> <C>
Directly Contracted 525 1,100 3,800 6,800 10,600
Contracted Through an
Affiliate 1,200 1,800 35,000 59,000 94,000
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Total 1,725 2,900 38,800 65,800 104,600
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</TABLE>
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(1) Primary care physicians include general practitioners, family practitioners,
pediatricians and internal medicine physicians.
In the event that current contracts with providers are not continued,
MedicalControl believes there are other physician groups, hospitals and other
providers sufficient to serve its clients' employees and members adequately.
MedicalControl believes that its relationships with its providers are generally
good. However, there is increasing competition for physicians and other
healthcare providers from other PPOs, HMOs, provider-owned networks and other
healthcare plans. There can be no assurance that MedicalControl will in all
cases be successful in maintaining existing relationships or attracting
necessary healthcare providers with adequate discounts.
In order to promote effective, long-term and positive business
relationships with network providers, the Company also considers its providers
to be clients of MedicalControl and has established an extensive provider
services program. A dedicated staff performs a variety of activities including
responding to hospital and physician claims inquiries, conducting site visits
and preparing and distributing provider utilization reports. Facilities receive
monthly or quarterly utilization reports, while physician utilization reports
are available upon request. Utilization reports provide detail and summary
claims activity information and managed care information such as average length
of stay, average percent discount from billed charges, average negotiated
amounts and average billed charges.
Marketing. MedicalControl principally markets its managed healthcare
services to self-insured employers, insurance companies, third party
administrators and managed care organizations with large concentrations of
employees or participants within the southwestern United States. MedicalControl
markets its products and services through an employed sales staff, independent
sales agents and third parties such as TPAs and insurance companies.
MedicalControl intends to emphasize marketing to TPAs, insurance companies and
other third parties that in turn market MedicalControl's PPO to their clients.
MedicalControl has developed marketing programs to emphasize the unique aspects
of its network products, other managed care services and its reputation for
quality service. Currently, MedicalControl provides marketing services through
its corporate office in Dallas, Texas as well as a regional office located in
Houston, Texas.
As is customary in the PPO industry, clients generally offer
MedicalControl's PPO to their employees or members as an alternative to either
traditional insurance coverage or a HMO. Consequently, marketing
MedicalControl's PPO is a dual process: the Company must first persuade the
client to offer a PPO and choose MedicalControl's PPO over other PPOs, and then
persuade the employees or members to choose MedicalControl's PPO over
traditional insurance and other options, including HMOs. MedicalControl believes
that the most significant factors in the selection of MedicalControl's PPO by
employers and
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employees include the scope, location and size of the provider network, provider
choice, depth of discounts, quality of services, PPO access fees, market
presence and reputation. MedicalControl believes that client's employees and
members select MedicalControl's PPO networks rather than an HMO due to the
significantly greater freedom of choice of providers offered by MedicalControl,
in addition to other factors. MedicalControl's PPO network affords employees and
members greater choice of healthcare providers compared to that of an HMO since
HMOs typically require its enrollees to use a more restricted access to
physicians. MedicalControl's broader geographic coverage, greater freedom of
choice and provider discounts attracts employers to MedicalControl's PPO
product.
MedicalControl believes that the charges paid by its clients to providers
for healthcare services rendered, along with the fees paid to MedicalControl,
result in significant net savings to the client that are competitive with other
managed care companies. MedicalControl has been the subject of independent
client analyses from time to time that validates its position that it is
competitive in the market with other managed care companies. In addition,
MedicalControl believes that its proprietary PPO networks tend to be more
extensive than its competitors in certain geographic regions, providing greater
access for a particular client's employees or members.
MedicalControl charges its clients for access to a network or networks on
either a percentage of savings method or per employee per month ("PEPM") basis.
For the fiscal years ending December 31, 1996 and 1995, MedicalControl derived
72% and 68%, respectively, of its PPO revenue from access fees based on the
percentage of savings method. For percentage of savings clients, the actual
savings upon which MedicalControl's fees are based is the difference between
what the client or payor would have paid without MedicalControl's intervention
and the final bill (reflecting the discounted adjustment) actually paid. The
percentage and aggregate revenue recognized by MedicalControl varies depending
on the number of enrollees, their levels of utilization of provider services and
the networks selected by the client. The PEPM basis provides MedicalControl
with an expected level of payment that is not contingent or dependent upon
utilization levels. The number of clients that use the PEPM basis has increased
during the past two years. MedicalControl believes that its pricing is
competitive with the market.
Management Information Systems and Software Development. MedicalControl is
constantly updating, developing and improving its data processing systems,
applications environment and proprietary software. MedicalControl intends to
continue to develop managed care software serving internal requirements as well
as software which may be marketed to its current and prospective clients and
other managed care companies. There can be no assurance that the Company will
be able to develop additional software or that the current or future developed
software will be marketable.
During the fiscal year ended December 31, 1996, MedicalControl continued to
upgrade its technology infrastructure. MedicalControl currently uses two (2)
state-of-the-art Hewlett Packard running Novell Microsoft NT server software
file servers. The new multi-processor servers will enable faster computer
response time and provide a redundant server environment. MedicalControl's
database (ORACLE) resides on two SUN UltraSparc UNIX computers. Currently,
MedicalControl uses a Novell 3.11 network for communications between personal
computers and the UNIX servers. MedicalControl has developed client/server
software applications to provide efficient and effective data processing
software.
Through continuing development of its advanced, proprietary client/server
software applications and corporate relational database, MedicalControl intends
to strengthen and expand its current client base as well as broaden its revenue
sources through entry into new markets. Although there can be no assurance that
any such product or service will be successfully developed, MedicalControl
believes that these new data-based services and products could provide
innovative analytical tools relating to medical utilization and cost management.
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MedicalControl has developed software that allows the electronic
transmission and receipt of hospital claims. MedicalControl can receive
electronic claims from facilities utilizing the National Electronic Interchange
Corporation (NEIC) clearinghouse which reduces the costs associated with manual
input of claims data. Once MedicalControl receives the claims from the
clearinghouse, certain facilities' claims can be automatically repriced without
human intervention, again reducing manual input costs. The Company expects to
complete modifications of its software to permit the electronic transmission of
physician claims within the next 18 months.
MedicalControl has no patents and relies on a combination of trade secrets
and copyright protection to establish and protect its proprietary technology.
MedicalControl enters into confidentiality agreements with its employees and
clients. However, there can be no assurance that the legal protections and
precautions taken by MedicalControl will be adequate to prevent misappropriation
of MedicalControl's technology. In addition, these protections and precautions
do not prevent independent third party development of competitive technology.
During 1996, the Company incurred approximately $465,000 of software
development costs, all of which were expensed as incurred. The Company
capitalized $473,000 of software development expenses in 1995 related to the
aforementioned programs. Capitalized software development costs are being
amortized over a three to five year period based on the Company's estimated
useful life of each specific program. During 1995, the Company also wrote off
approximately $288,000 in capitalized costs related to a discontinued managed
care product.
THIRD PARTY ADMINISTRATION DIVISION
Diversified Group Administrators, Inc., a third-party administrator and
wholly-owned subsidiary of the Company ("DGA"), provides services to self-funded
benefit plans, insurance companies, provider-based organizations and other
benefit management organizations. DGA provides complete benefit review, design
and administration services to assist and direct comprehensive employee benefit
programs and risk management activities. DGA currently administers over 300
self-funded plans, one fully-insured plan and over 50 risk management plans,
with clients ranging from 50 to 3,000 employees. Current total covered lives
exceed 80,000 located in 49 states.
Acquisitions of the TPAs. In August 1994, the Company purchased all of the
issued and outstanding shares of the capital stock of DGA. In October 1994, the
Company purchased substantially all of the assets of Group Administrators, Inc.,
a Texas corporation ("GAI"). In November 1994, the Company purchased Group
Administrators, Inc. - San Antonio ("GAS"), which it subsequently sold effective
December 31, 1995, to two former owners of GAS. In July 1996, GAI merged with
and into DGA.
Products and Services. DGA's services include placement of insurance
products, design of benefit programs, composition of plan documents and summary
plan descriptions, employee enrollment and orientation services, claim
processing and payment reporting, total plan or policy reporting, collection and
disbursement of premiums, fees and commissions. DGA also manages and interacts
with auxiliary service providers such as utilization review firms, prescription
drug firms, Employee Assistance Programs, subrogation recovery firms, PPOs and
other related entities on behalf of its clients. Other services provided include
COBRA continuation, portability certification, Internal Revenue Service and
Department of Labor reporting, Section 125/129 programs and medical savings
account plans.
DGA maintains and manages the relationships and interfaces with insurance
carriers who provide risk taking products for DGA's clients. DGA files claims
with carriers on behalf of clients in many lines of coverage including specific
and aggregate stop loss, life and accidental death, disability income and
insured medical, dental and vision products.
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In 1996, DGA entered into a joint venture arrangement with The Initial
Group, a Knoxville, Tennessee provider-owned PPO. St. Mary's Health System and
Baptist Health System of Knoxville, both of which are clients of DGA, own The
Initial Group. The Initial Group contracts with hospitals and doctors in an
eight-county area of Northeastern Tennessee. DGA and the Initial Group formed
the joint venture, known as East Tennessee Administrative Services, to develop
and market both self-funded programs and a fully-insured managed care program
insured by an insurance company in Knoxville and surrounding areas. DGA intends
to introduce and to market this fully-insured product in 1997. DGA and The
Initial Group each own 50% of the joint venture and share equally in revenues
and expenses.
Marketing. DGA markets its products and services directly through in-house
personnel and through a national network of licensed/approved brokers. Over 80%
of new revenues are generated through relationships with existing brokers and
clients.
DGA believes that clients select DGA's TPA services for a variety of
reasons, including flexibility, data processing and claims administration system
capabilities, personalized client services, competitive pricing, reputation,
market presence and longevity in the industry. DGA's TPA operations have been
in existence for 15 years - significantly longer than most TPA operations.
DGA believes that future marketing opportunities will be concentrated in
marketing risk assumption products of insurance companies and other risk-
assumers such as fully-insured managed care programs and provider-based risk
assumption organizations. DGA is constantly reviewing auxiliary suppliers for
quality products to supplement offerings to clients. As a TPA, DGA currently
offers auxiliary service providers to its clients in the form of 18 insurance
carriers, seven utilization review firms, 36 managed care or discount networks,
two Employee Assistance Programs, nine prescription drug plans and various other
services.
TPA revenues are derived from administrative fees, auxiliary service
provider fees, consulting fees, commission income from insurance contracts,
override and bonus arrangements with insurance carriers, override arrangements
with auxiliary services providers and fee-for-service arrangements with
brokerage firms. Administrative fees are based upon capitation, percentage or
periodic basis. Insurance policy administration and commissions are based upon
a percentage of total premiums. Overrides and bonuses are based upon
profitability, volume and persistency. Other fees are on a negotiated basis.
DGA maintains full client service offices in Canonsburg, Pennsylvania,
Dallas, Texas and Knoxville, Tennessee and an auxiliary client service office in
Houston, Texas. In addition to sales and marketing, client service personnel
interact with clients on an ongoing basis, including problem resolution, plan
modifications and communications with other Company personnel.
Management Information Systems and Software Systems. DGA, as a third-party
administrator, is currently using WLT of Florida ("WLT") as their claims
administration software system in its Dallas, Texas location; and Resource
Information Management Systems ("RIMS"), version 1.5, as the software system in
its Canonsburg, Pennsylvania location. The WLT system operates on a local
Novell network and the RIMS System is operating on a Qantel hardware system.
DGA's management has evaluated both current systems and found them insufficient
for the future growth and progress of DGA. Effective September 30, 1996, DGA
entered into an agreement with RIMS for the use of their most current version of
software via the RIMS Data Center located in Naperville, Illinois. Conversion
is underway for both systems to the RIMS Data Center and DGA expects the
conversion to be complete by the end of 1997.
Using frame relay telephone lines, each TPA location will access the RIMS
Data Center. DGA's agreement with RIMS provides continuous access to the most
current software versions as may be available and requires that RIMS ensure
satisfactory response time and system support, including a disaster recovery
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program. In addition, DGA, as a third-party administrator, will benefit from
improved functionality and productivity through the enhanced software programs.
The full array of standard as well as ad hoc reporting capabilities will be
available to DGA's clients and ease of data exchange with clients and vendors
will greatly improve. RIMS' software includes features that will allow
electronic claim submission, automatic batch adjudication, PPO repricing and
point-of-service plan administration and adjudication, among others, that are
considered essential in today's managed care marketplace.
DGA believes that, upon installation of the most current RIMS software and
data Center hardware arrangement, its systems will be equal or superior to
those offered by like-size TPAs operating on a national basis.
OTHER SERVICES
The Company also provides large healthcare claims negotiation services for
clients who incur out-of-network hospital claims through a division called
Genesis/ValueCheck ("G/VC"). Discounts achieved by G/VC vary depending on the
size of the claim, the specific facility and other factors. The Company
achieves the savings or complete removal of certain charges based upon nurse
reviews for medical necessity and appropriateness, comparison and negotiation
based on the Company's database of usual and customary charges and other
factors. G/VC may also negotiate a prompt pay discount with the provider.
Company-developed software provides G/VC with data regarding reasonable and
customary rates for use in negotiating discounts on bills from out-of-network
providers. The software integrates usual, reasonable and customary data derived
from the Company's PPO database and cross-indexes each individual hospital
contract the Company has captured in its system. The software performs the data
base function and comparison to determine if large case claims billed by out-of-
network providers in a specific geographic location are in accordance with
usual, reasonable and customary charges of providers in that geographic area.
This software supports the Company's conclusions for negotiating specific
discounts from bills submitted by non-network providers.
CUSTOMERS
For the fiscal years ended December 31, 1996, 1995 and 1994, two
customers, American Airlines, Inc., and the National Rural Electric Cooperative
Association, in the aggregate, accounted for approximately 17%, 12% and 16%,
respectively, of the net revenues of the Company. Individually, each of the
foregoing major customers of the Company accounted for the following respective
approximate percentages of the net revenues of the Company for the fiscal years
ended December 31, 1996, 1995 and 1994: American Airlines, Inc., 9%, 6% and 9%;
and the National Rural Electric Cooperative Association, 8%, 6% and 7%.
The loss of any one or more of these principal customers could have a
material adverse effect on the Company and its business. No customer accounted
for as much as 10% of the Company's net revenues for the fiscal years ended
December 31, 1996 and 1995.
COMPETITION
The Company competes with national and local organizations who have
developed PPOs and TPAs as well as with major insurance carriers. The industry
is highly competitive and significant consolidation has occurred within the
industry, creating stronger competitors. The current competitive markets may
limit the Company's ability to price its products at levels the Company believes
are appropriate. The Company's managed care division also faces competition
from hospitals, healthcare facilities and other healthcare providers who have
combined and formed their own networks to contract directly with employer groups
and other prospective customers for the delivery of healthcare services. Large
employer groups have demanded a
11
<PAGE>
variety of healthcare options, such as traditional indemnity insurance, HMOs,
point-of-service plans and PPOs, offered either through self-funding or third
parties. The Company competes with providers of all of these products, many of
which have substantially greater financial resources than the Company. The
Company believes that a limited number of companies provide all of the services
offered by the Company within the geographic areas in which the Company
presently operates. The Company's managed care division may encounter
competition from companies with broader networks, narrower networks (which allow
for greater cost control and lower prices), greater market share or more
established marketplace name or reputation. These competitive factors could
adversely effect the Company's financial results. The Company's TPA division may
encounter competition from larger TPAs with greater resources and regional TPAs
with greater market penetration. Both divisions of the Company will be subject
to significant competition in any new geographic areas they may enter.
GOVERNMENT REGULATION AND LEGISLATION
Since 1993, many competing proposals have been introduced in Congress and
various state legislatures have called for general healthcare market reforms to
increase the access and availability of group health insurance and to require
that all businesses offer health insurance coverage to their employees. It is
uncertain what additional healthcare reform legislation, if any, will ultimately
be implemented or whether other changes in the administration or interpretation
of governmental healthcare programs will occur. It is impossible to predict if
proposals calling for broad insurance market reform will be reintroduced in
Congress or in any state legislature in the future, or if any such proposal may
be enacted. Additionally, the adoption of a publicly-financed, single payor,
national or state health plan may have a material adverse effect on the
Company's business. At both the federal and state level, there is also growing
interest in legislation to regulate how managed care companies interact with
providers and health plan members. The Company cannot predict what effect
federal or state healthcare legislation or private sector initiatives will have
on its PPO or TPA operations, although management of the Company believes the
Company may benefit from some proposals which favor the growth of managed care.
There can be no assurance that future healthcare reforms or PPO regulations will
not be adopted which would have a material adverse effect on the Company.
The Employee Retirement Income Security Act of 1974 ("ERISA"), governing
employee benefit plans, permitted employers, among other mandates, to self-
insure their health insurance by acting as a quasi-insurer. Employers viewed
the ability to underwrite their own health claims as a result of ERISA as an
opportunity to better control health costs. Regulation of TPAs falls under the
auspices of the United States Department of Labor, which has strict, enforceable
guidelines relative to the operation of TPAs. In addition, TPAs are subject to
licensing and regulation on the state level. Typically, the only state
requirements are a completed application and proof of a fidelity bond in the
amount of $500,000. DGA is licensed as a TPA in the states of Texas,
Pennsylvania, Tennessee, California, Illinois, Kentucky, West Virginia and New
Mexico and has filed for ERISA exemptions where required.
EMPLOYEES
As of December 31, 1996, the Company and its wholly-owned subsidiary had
approximately 210 full-time employees. The Company believes that it has a good
relationship with its employees. None of the Company's employees is covered by
collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY.
In August 1996, the Company signed a 10-year lease for 8,000 square feet
for its TPA operations in Dallas. In January 1997, the Company exercised an
option to lease an additional 20,200 square feet in the same building complex
for its executive offices and PPO operations. The total monthly rental is
approximately $20,800. The Company has an option to purchase the building
complex for $30 per square foot
12
<PAGE>
or $2,040,000 prior to December 31, 1997. The Company also has a month-to-month
lease for office space for a regional sales office in Houston, Texas.
The Company also leases approximately 5,000 square feet in Canonsburg,
Pennsylvania at a monthly rent of approximately $2,600 plus all maintenance and
repairs. See "Certain Relationships and Related Transactions." The Company
owns a 9,100 square foot building in Canonsburg, Pennsylvania with an
outstanding mortgage in the principal amount of approximately $120,000 and
monthly payments of approximately $5,500. The Company shares approximately
5,000 square feet in Knoxville, Tennessee with The Initial Group.
The Company does not invest in, and has not adopted any policy with respect
to investments in, real estate or interests in real estate, real estate
mortgages or securities of or interests in persons primarily engaged in real
estate activities. It is not the Company's policy to acquire assets primarily
for possible capital gain or primarily for income.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than routine
litigation incidental to the Company's business, to which the Company is a party
or of which any of its property is the subject, and no such proceedings are
known by the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Common Stock is traded in the over-the-counter market and is quoted
on The Nasdaq National Market under the symbol "MDCL." The following table sets
forth the high and low bid prices of the Common Stock for the last two fiscal
years as reported to the Company by the National Association of Securities
Dealers, Inc.:
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
- -------------------- -------- -------
<S> <C> <C>
March 31, 1995 10 1/2 7 3/4
June 30, 1995 9 3/8 7 7/8
September 30, 1995 8 1/2 6 1/2
December 31, 1995 6 1/2 4 3/4
March 31, 1996 6 7/8 5
June 30, 1996 6 7/16 5 1/4
September 30, 1996 5 1/4 3 3/4
December 31, 1996 5 1/2 4 1/2
</TABLE>
The over-the-counter quotations set forth herein reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
(b) As of March 25, 1997, there were approximately 750 record and
beneficial holders of the Company's Common Stock.
13
<PAGE>
(c) The Company has not declared or paid any dividends to date.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Total revenues for the year ended December 31, 1996 were $15.4 million, 14%
lower than the $17.8 million reported in 1995. Excluding revenues generated by
Group Administrators, Inc. - San Antonio ("GAS") which the Company sold
effective December 31, 1995, revenues decreased $1.3 million, (8%) between
years. This decline resulted primarily from lower PPO revenues resulting from
the loss of two clients in 1996.
For the year ended December 31, 1996, the Company earned net income of
approximately $504,000 ($.13 per share) versus a net loss of approximately
$321,000 ($.08 per share) in 1995. Exclusive of the net operating results of
GAS, net income increased approximately $750,000 compared to the prior year.
The 1995 losses were impacted by certain special charges totaling $741,000
before taxes, which are more fully discussed below. Reduced operating expenses
resulting from management's efforts in that regard favorably affected current
period results.
Salaries and wages decreased 22% between years, to $8.0 million in 1996
from $10.3 million in 1995. Exclusive of the salaries and wages attributable to
GAS, salaries and wages decreased $1.4 million (15%) between years. During the
first half of 1995, salaries and wages increased significantly due to the
Company's efforts to expand its PPO contracted provider hospital and physician
network, increased claims processing volumes, and the development of new
products and services for its clients. During the last half of 1995 and
continuing into 1996, salaries and wages have been reduced due to operating
efficiencies identified in the above areas and continued improvements made to
the Company's information systems.
Other operating expenses were approximately $5.6 million for 1996;
approximately $797,000 (12%) lower than 1995. Exclusive of the other operating
expenses attributable to GAS, other operating expenses decreased approximately
$575,000 (10%) for the period. The decreases noted above are primarily due to
costs related to the following activities in 1995: non-capitalized consulting
costs for information systems, legal costs for contract negotiations and
development matters, and access fees for leasing host networks for national
clients.
Operating expenses for 1995 also included the loss on the sale of GAS which
was $200,000.
Depreciation and amortization decreased to approximately $820,000 from $1.0
million, or 21% for the year. This decrease was primarily due to the write-off
of internally developed software costs related to a discontinued managed care
product in the third quarter of 1995. This write-off totaled approximately
$288,000. Exclusive of GAS, depreciation and amortization decreased $180,000
(18%), as compared to the same prior period.
Other income and expense decreased to an expense of approximately $56,000
from an expense of approximately $314,000 for the years ended December 31, 1996
and 1995, respectively. This change was primarily due to a $253,000 charge for
realized losses on the sale of marketable securities, which were recorded during
the third quarter of 1995.
LIQUIDITY
The Company had net working capital of $1,533,946 at December 31, 1996,
compared to $1,921,250 at December 31, 1995. Cash flows from operations were
approximately $2.0 million in 1996, of which $343,000 was used to retire current
portions of long-term debt and $1,000,000 was used to liquidate outstanding
14
<PAGE>
borrowings under the Company's revolving line of credit. Cash and cash
equivalents were $2,013,302 at December 31, 1996, compared to $1,651,475 at
December 31, 1995.
On May 31, 1996, the Company refinanced its revolving bank lines of credit
totaling $1,000,000 on terms substantially consistent with the prior
arrangements, except the lines were consolidated into a single note agreement
which matures on May 31, 1998. At December 31, 1996, there were no outstanding
borrowings under this line of credit.
CAPITAL REQUIREMENTS
Capital expenditures for the purchase of tangible property and equipment
were $279,139 for the twelve months ended December 31, 1996. Subsequent to
year-end, the Company acquired certain office furniture and fixtures totaling
approximately $290,000, which were financed under terms of an operating lease.
In connection with the acquisition of its TPA division, the Company was
required to make a principal payment to these subsidiaries' former shareholders
of $340,000 during January 1997, with a final note payment of $433,333 being due
on June 30, 1997. See "Certain Relationships and Related Transactions."
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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "safe harbor" provisions
contained in Section 27A of the Private Securities Litigation Reform Act and is
including this statement in its Annual Report on Form 10-KSB in order to do so.
From time to time the Company's management may wish to make forward-looking
statements based upon management expectations, to inform more fully existing and
potential shareholders regarding various matters, including without limitation,
projections regarding future income, completion of networks, future growth, as
well as predictions as to the timing and success of specific projects. Such
forward-looking statements are generally accompanied by words such as
"believes," "anticipates," "estimate", "predict" or "expect" and similar
expressions that convey the uncertainty of future events or outcomes.
The factors identified in this statement are believed to be important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company. Such statements are subject to
certain risks and uncertainties, over which the Company has no control, which
could cause actual results to differ materially from those projected. Such
forward-looking information could be affected by changes in laws and
regulations, interest rates, the rate of sales growth, price and product
competition, new product introduction and social and economic conditions, such
as increased competition in the managed care or healthcare industry and the
15
<PAGE>
amount, type and cost of financing available to the Company. Unpredictable or
unknown factors not discussed herein could also have material adverse effects on
forward-looking projections. Readers are cautioned not to place undue reliance
on these forward-looking statements that speak only as of the date hereof. The
Company undertakes no obligation to republish revised forward-looking statements
to reflect events or circumstances after the date thereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company, in this report, as
well as the Company's periodic reports on Forms 10-QSB and 8-KSB filed with the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS.
MEDICALCONTROL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
HISTORICAL FINANCIAL STATEMENTS
MedicalControl, Inc. and Subsidiaries Page
----
Report of Independent Public Accountants.............................. F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-2
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995.......................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996 and 1995.......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995.......................................... F-5
Notes to Consolidated Financial Statements............................ F-6
The Financial Statements are located after the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information called for by this Item is incorporated by reference from the
Company's definitive Proxy Statement, which involves, among other things, the
election of the Board of Directors, to be filed pursuant to Regulation 14A and
which the Company intends to file with the Securities and Exchange Commission
not later than 120 days after December 31, 1996, the end of the year covered by
this Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item is incorporated by reference from the
Company's definitive Proxy Statement, which involves, among other things, the
election of the Board of Directors, to be filed pursuant to Regulation 14A and
which the Company intends to file with the Securities and Exchange Commission
not later than 120 days after December 31, 1996, the end of the year covered by
this Form 10-KSB.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The information called for by this Item is incorporated by reference from the
Company's definitive Proxy Statement, which involves, among other things, the
election of the Board of Directors, to be filed pursuant to Regulation 14A and
which the Company intends to file with the Securities and Exchange Commission
not later than 120 days after December 31, 1996, the end of the year covered by
this Form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item is incorporated by reference from the
Company's definitive Proxy Statement, which involves, among other things, the
election of the Board of Directors, to be filed pursuant to Regulation 14A and
which the Company intends to file with the Securities and Exchange Commission
not later than 120 days after December 31, 1996, the end of the year covered by
this Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item is incorporated by reference from the
Company's definitive Proxy Statement, which involves, among other things, the
election of the Board of Directors, to be filed pursuant to Regulation 14A and
which the Company intends to file with the Securities and Exchange Commission
not later than 120 days after December 31, 1996, the end of the year covered by
this Form 10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
3.1 Restated Certificate of Incorporation of the Registrant - incorporated by
reference to the Exhibits to the Registration Statement on Form SB-2,
file number 33-58334-FW, declared effective May 13, 1993.
3.2 Amended and Restated Corporate Bylaws of the Registrant - incorporated by
reference to the Exhibits to the Registration Statement on Form SB-2,
file number 33-58334-FW, declared effective May 13, 1993.
4.1 Form of Warrant Agreement - incorporated by reference to the Exhibits to
the Registration Statement on Form SB-2, file number 33-58334-FW,
declared effective May 13, 1993.
10.1 Amended and Restated Non-Qualified Stock Option Agreement - incorporated
by reference to the Exhibits to the Registration Statement on Form SB-2,
file number 33-58334-FW, declared effective May 13, 1993.
10.2 Outside Directors Stock Option Plan of MedicalControl, Inc. -incorporated
by reference to the Exhibits to the Registration Statement on Form SB-2,
file number 33-58334-FW, declared effective May 13, 1993.
10.3 First Amendment to the Outside Directors Stock Option Plan of
MedicalControl, Inc. - incorporated by reference to the Exhibits to the
Registration Statement on Form SB-2, file number 33-58334-FW, declared
effective May 13, 1993.
17
<PAGE>
10.4 Amended and Restated Non-Qualified Stock Option Agreement (Issued Under
Outside Directors Stock Option Plan) . - incorporated by reference to the
Exhibits to the Registration Statement on Form SB-2, file number
33-58334-FW, declared effective May 13, 1993.
10.5 Qualified Employee Stock Purchase Plan of MedicalControl, Inc. -
incorporated by reference to the Exhibits to Post Effective Amendment
Number 1 to the Registration Statement on Form SB-2, file number
33-58334-FW, dated January 30, 1995.
10.6 1993 Stock Compensation Plan of MedicalControl, Inc. - incorporated by
reference to the Exhibits to Post Effective Amendment Number 1 to the
Registration Statement on Form SB-2, file number 33-58334-FW, dated
January 30, 1995.
10.7 Stock Purchase Agreement between Robert H. Soleau and David C. Bramer (as
Sellers) and MedicalControl, Inc., a Delaware corporation (as Purchaser),
dated as of June 30, 1994 - incorporated by reference to the Current
Report on Form 8-K dated August 15, 1994, file number 1-11922.
10.8 Asset Purchase Agreement between Group Administrators, Inc., a Texas
corporation (as Seller) and MedicalControl Administrators, Inc., a Texas
corporation (as Purchaser), dated as of October 3, 1994 - incorporated by
reference to the Current Report on Form 8-K dated October 31, 1994, file
number 1-11922.
10.9 Agreement and Plan of Reorganization between Group Administrators -San
Antonio, Inc., a Texas corporation, and MedicalControl Administrators San
Antonio, Inc., a Texas corporation and wholly-owned subsidiary of
MedicalControl, Inc., dated as of November 28, 1994 -incorporated by
reference to the Current Report on Form 8-K dated November 30, 1994, file
number 1-11922.
10.10 Form of Agreement by and between the Company and each of its directors.
10.11 Commercial Lease dated March 1, 1993 by and among DGA and David C. and
Janice L. Bramer
10.12 Letter Agreement dated September 29, 1994 by and between the Company and
David C. Bramer
10.13 Letter Agreement dated September 2, 1994 by and between the Company and
Dan Riston
21 Subsidiaries of the Registrant:
(i) Diversified Group Administrators, Inc., a Pennsylvania corporation
(ii) Diversified Group Insurance Agency of PA, Inc., a Pennsylvania
corporation and wholly owned subsidiary of Diversified Group
Administrators, Inc.
23 Consent of Arthur Andersen LLP, independent public accountants
27 Financial Data Schedule
(b) Reports on Form 8-K. The Company has not filed any Current Report on
-------------------
Form 8-K during the last quarter of the period covered by this Report on
Form 10-KSB.
18
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 1 5(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant:
Date: March 26, 1997 MedicalControl, Inc.
By: /s/ John Ward Hunt
-----------------------------------
John Ward Hunt, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title Date
- ---- ----- ----
/s/ John Ward Hunt President, Chief Executive March 26, 1997
- -------------------------- Officer Chief Financial Officer,
John Ward Hunt and Chairman of the Board of
Directors (principal executive
officer)
/s/ Robert O. Brooks Executive Vice President and March 26, 1997
- -------------------------- Chief Operating Officer
Robert O. Brooks
/s/ David A. Hanson Vice President, Finance and March 26, 1997
- -------------------------- Accounting (principal accounting
David A. Hanson officer)
/s/ Robert W. Philip Director March 26, 1997
- --------------------------
Robert W. Philip
/s/ William L. Amos Director March 26, 1997
- --------------------------
William L. Amos, Jr., M.D.
/s/ D. Samuel Coats Director March 26, 1997
- --------------------------
D. Samuel Coats
19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
MedicalControl, Inc.:
We have audited the accompanying consolidated balance sheets of MedicalControl,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedicalControl, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 18, 1997
F-1
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
<TABLE>
<CAPTION>
ASSETS
------
1996 1995
-------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,013,302 $1,651,475
Accounts receivable - trade, net of allowance
for doubtful accounts of $242,000 and
$352,000 in 1996 and 1995, respectively 1,608,842 1,908,415
Accounts receivable - premium 390,907 438,978
Accounts receivable - other 20,429 343,629
Prepaid income taxes - 121,360
Prepaid expenses and other current assets 273,337 131,499
Deferred income taxes 137,359 199,497
------------ ----------
Total current assets $ 4,444,176 4,794,853
NOTE RECEIVABLE - OFFICER, including accrued interest 365,221 337,239
PROPERTY AND EQUIPMENT, NET 1,698,681 1,790,333
GOODWILL, NET 3,578,003 3,707,306
INTANGIBLE AND OTHER ASSETS, NET 950,854 1,270,400
------------ ----------
TOTAL ASSETS $ 11,036,935 $11,900,131
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $577,650 $826,902
Accounts payable - premium 861,320 634,161
Accrued liabilities 716,931 649,124
Income taxes payable 77,164 -
Borrowings under revolving bank line of credit - 1,000,000
Current portion of long-term debt 791,405 763,416
------------ ------------
Total current liabilities 3,024,470 3,873,603
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 103,346 474,360
Deferred income taxes 281,111 395,351
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, 3,907,190 and 3,904,823 issued
in 1996 and 1995, respectively 39,072 39,048
Additional paid-in capital 5,224,979 5,258,192
Retained earnings 2,632,853 2,128,473
------------ -----------
7,896,904 7,425,713
Less: Treasury stock (33,612 shares at December 31, 1996 and 1995) (268,896) (268,896)
------------ -----------
Total stockholders' equity 7,628,008 7,156,817
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,036,935 $11,900,131
============ ===========
</TABLE>
F-2
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------------- ---------------------
<S> <C> <C>
NET REVENUES $15,351,552 $17,806,543
------------------- ---------------------
OPERATING EXPENSES
Salaries and wages 8,048,446 10,320,747
Other operating expenses 5,578,203 6,375,014
Depreciation and amortization 819,640 1,033,393
Loss on sale of subsidiary - 200,000
------------------- ---------------------
Total operating expenses 14,446,289 17,929,154
------------------- ---------------------
INCOME (LOSS) FROM OPERATIONS 905,263 (122,611)
------------------- ---------------------
OTHER INCOME (EXPENSE)
Interest expense (94,490) (280,691)
Investment income (loss) 94,218 (46,821)
Other (55,385) 13,254
------------------- ---------------------
Total other expense (55,657) (314,258)
------------------- ---------------------
INCOME (LOSS) BEFORE INCOME TAXES 849,606 (436,869)
Provision (benefit) for income taxes 345,226 (115,936)
------------------- ---------------------
NET INCOME (LOSS) $504,380 ($320,933)
================== ====================
Earnings (loss) per share - primary $0.13 ($0.08)
================== ====================
Weighted average number of shares outstanding 4,013,307 3,860,747
================== ====================
</TABLE>
F-3
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------
<TABLE>
<CAPTION>
Unrealized
Common Stock Holding Gains
-------------------- Additional (Losses) of Total
Shares Paid-in Marketable Retained Treasury Stockholders'
Outstanding Amount Capital Securities Earnings Stock Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,831,725 $ 38,317 $5,112,493 $ (280,560) $ 2,449,406 - $ 7,319,656
Exercise of stock options and warrants 60,450 605 239,981 - - - 240,586
Realized losses on sales
of marketable securities - - - 280,560 - - 280,560
Issuance of common stock 12,648 126 64,695 - - - 64,821
Stock and warrant registration costs - - (255,255) - - - (255,255)
Acquisition of treasury stock
in connection with sale of subsidiary (33,612) - - - - (268,896) (268,896)
Tax benefit on options exercised - - 96,278 - - - 96,278
Net loss - - - - (320,933) - (320,933)
----------------------------------------------------------------------------------------
Balance at December 31, 1995 3,871,211 39,048 5,258,192 - 2,128,473 (268,896) 7,156,817
Issuance of common stock 2,367 24 7,829 - - - 7,853
Stock and warrant registration costs - - (41,042) - - - (41,042)
Net income - - - - 504,380 - 504,380
----------------------------------------------------------------------------------------
Balance at December 31, 1996 3,873,578 $ 39,072 $5,224,979 $ - $ 2,632,853 $(268,896) $ 7,628,008
========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
YEARS ENDED DECEMBER 31, 1996 AND 1995
--------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------------- ---------------------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income (loss) $504,380 ($320,933)
Adjustments to reconcile net income (loss)
to net cash provided by operations
Depreciation and amortization 819,640 1,033,393
Loss on sale of subsidiary - 200,000
Loss on sale of marketable securities - 280,560
Deferred tax provision (52,102) (152,455)
Net changes in certain assets and liabilities
Accounts receivable - trade 299,573 (320,902)
Accounts receivable - premium 48,071 (67,082)
Current income taxes, net 198,524 (91,695)
Prepaid expenses and other current assets 181,362 122,047
Accounts payable - trade (249,252) 237,236
Accounts payable - premium 227,159 (361,265)
Accrued expenses 67,807 (243,409)
------------------- ---------------------
Net cash provided by operating activities 2,045,162 315,495
------------------- ---------------------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (279,139) (418,081)
Capitalized software development costs - (472,484)
Proceeds from sale of subsidiary - 4,635
Net sales of marketable securities - 2,433,119
------------------- ---------------------
Net cash provided by (used in) investing activities (279,139) 1,547,189
------------------- ---------------------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (27,982) (30,354)
Net repayments on revolving bank line of credit (1,000,000) (819,598)
Payments on long-term debt and amounts due to
selling shareholders of acquired companies (343,025) (741,311)
Proceeds from issuance of common stock 7,853 305,407
Stock and warrant registration costs (41,042) (255,255)
------------------- ---------------------
Net cash used in financing activities (1,404,196) (1,541,111)
------------------- ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 361,827 321,573
Cash and cash equivalents at beginning of year 1,651,475 1,329,902
------------------- ---------------------
Cash and cash equivalents at end of year $2,013,302 $1,651,475
================== ====================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $126,017 $198,575
================== ====================
Income taxes paid $354,967 $27,002
================== ====================
The accompanying notes are an integral part of these statements.
</TABLE>
F-5
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. ("MCI"), a Delaware corporation, is a healthcare cost
management company providing managed healthcare services primarily to employers
which self-fund their benefit programs, insurance companies, and other managed
care organizations. MCI and its subsidiaries (collectively the "Company"),
provide products and services which include healthcare cost containment
programs, a preferred provider organization ("PPO") network, large claim
negotiation, third-party administration ("TPA") services, claims administration
and data analysis and reporting to its customers. The Company's contracts with
its customers are renewable annually and permit cancellation upon 30 to 60 days'
notice.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles and include the accounts of MCI and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.
Cash and Cash Equivalents
- -------------------------
Cash equivalents consist of certificates of deposit and other highly liquid
investments with original maturities of three months or less.
Accounts Receivable - Trade
- ---------------------------
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers that are located throughout the United States.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts, which reflects its opinion of amounts that will eventually
become uncollectible.
Accounts Receivable Premium and Accounts Payable - Premium
- -----------------------------------------------------------
Accounts receivable - premium represent amounts owed by customers for insurance
premiums and related ancillary fees. The Company bears no substantial
collection risk, as nonpayment of premiums constitutes grounds for cancellation
of insurance coverage. As a result, the Company does not provide an allowance
for doubtful accounts on these accounts receivable. Premiums and fees owed to
insurance carriers and service providers are classified as accounts payable -
premium.
Accounts Receivable - Other
- ---------------------------
At December 31, 1995, Accounts receivable - other primarily represented proceeds
to be received from the December 31, 1995 sale of Group Administrators, Inc. San
Antonio. All proceeds were received during 1996 (see Note 13).
F-6
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Property and Equipment
- ----------------------
Property and equipment are recorded at cost and are depreciated on a straight-
line basis, over their estimated useful lives (generally 3 to 40 years). Major
additions and betterments are capitalized and depreciated over the remaining
estimated useful lives of the related assets. Maintenance, repairs and minor
improvements are expensed as incurred.
Software Development Costs
- --------------------------
Software development costs (included in intangible and other assets) consist of
outside services and incremental salaries and wages incurred to develop discreet
proprietary software for internal use. These assets are being amortized over
their estimated useful lives (36 to 60 months). Maintenance and other minor
updates to these software programs are expensed as incurred. No software
development costs were capitalized during 1996.
Goodwill
- --------
Goodwill is being amortized under the straight-line method over a period of 30
years.
Long-Lived Assets
- -----------------
Subsequent to its initial recording, the Company periodically evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of long-lived assets (including property and equipment,
software development costs, and goodwill) may warrant revision or that the
remaining balance of the assets may not be recoverable. When factors indicate
these assets should be evaluated for possible impairment, the Company uses an
estimate of the related operating unit's or specific asset's undiscounted future
cash flows in determining whether an impairment has occurred, and the operating
unit's or specific asset's fair value in measuring the impairment. During 1995,
the Company wrote off $288,000 in capitalized software costs related to
discontinued managed care products.
The Company adopted Statement of Financial Accounting Standards No. 121:
"Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets To
Be Disposed Of" ("SFAS No. 121") in 1996. SFAS No. 121 requires companies to
periodically evaluate long-lived assets in a manner similar to the Company's
policies. No impairment was deemed to have occurred during 1996.
Income Taxes
- ------------
Deferred income taxes are provided for temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts. Deferred
taxes are recorded for temporary differences based upon enacted tax rates
anticipated to be in effect when the temporary differences are expected to
reverse.
F-7
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Revenue and Expense Recognition
- -------------------------------
Revenue is recognized (i) at the completion of the processing of a customer's
hospital or physician claim (regardless of the period in which the underlying
hospital charge was incurred) for cost management services, (ii) per month based
upon a fixed fee per employee in a customer's benefit plan for TPA services or
PPO services or (iii) at the time commissions are earned for the placement of
insurance coverage.
Earnings Per Share
- ------------------
Earnings per share is computed using the weighted-average number of shares of
common stock and common stock equivalents (calculated using the treasury stock
method) outstanding during the year. The 1995 earnings per share calculations
did not include any common stock equivalents, as their effect was anti-dilutive.
Included in the 1996 primary earnings per share calculation are 106,602 common
stock equivalents. Primary earnings per share is not materially different from
fully diluted earnings per share.
Use of Estimates
- ----------------
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from
these estimates.
Stock Based Compensation
- ------------------------
In 1996 the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires companies to either recognize compensation
expense related to employee stock options in the income statement or disclose
the pro-forma effect on earning of the stock options in the footnotes to the
financial statements. The Company adopted the footnoted disclosure approach of
SFAS No. 123 and the Company's pro forma disclosure can be found in Note 11 to
the consolidated financial statements.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1995 financial statements to
conform with the 1996 presentation.
NOTE 3 - MARKETABLE SECURITIES
During 1995, the Company sold its investments in marketable securities. Total
proceeds from the sales of these securities were $2,433,119, including realized
gains of $22,302 and realized losses of $258,258.
F-8
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
Estimated Useful
Life 1996 1995
---------------- ------------ ------------
<S> <C> <C> <C>
Land - $ 60,000 $ 60,000
Buildings 40 years 240,000 240,000
Furniture and fixtures 5-10 years 746,127 655,870
Data processing equipment 3-6 years 1,512,107 1,248,072
Leasehold improvements 40 years 6,380 268,874
---------- ----------
2,564,612 2,472,816
Less accumulated depreciation (865,931) (682,483)
---------- ----------
Property and equipment, net $1,698,681 $1,790,333
========== ==========
</TABLE>
NOTE 5 - GOODWILL, NET
Goodwill at December 31, 1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Goodwill 3,871,953 3,871,953
Less - accumulated amortization (293,950) (164,647)
---------- ----------
Goodwill, net $3,578,003 $3,707,306
========== ==========
</TABLE>
NOTE 6 - INTANGIBLE AND OTHER ASSETS, NET
Intangible and other assets at December 31, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Software development costs $1,354,771 $1,354,771
Covenants not to compete 100,000 100,000
Organization costs 44,977 45,152
Other 42,044 50,816
---------- ----------
1,541,792 1,550,739
Less - accumulated amortization (590,938) (280,339)
---------- ----------
Intangible and other assets, net $ 950,854 $1,270,400
========== ==========
</TABLE>
NOTE 7 - DEBT
Revolving Bank Line of Credit
- -----------------------------
During 1995, the Company had a revolving line of credit with a bank providing
for maximum borrowings of $2,200,000 secured by marketable securities.
Outstanding borrowings under the line of credit accrued interest at the bank's
prime rate. During October 1995, the Company liquidated its investments in
marketable securities and used the proceeds to repay this line of credit in
full.
F-9
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
During January 1995, the Company obtained a revolving line of credit with a bank
to provide for borrowings of up to $400,000. Borrowings under this line were
secured by accounts receivable and accrued interest at the bank's prime rate
plus 1% (9.5% at December 31, 1995). During April 1995, this agreement was
amended to increase the maximum borrowing limit to $750,000. At December 31,
1995, $750,000 was outstanding under this agreement.
During September 1995, the Company obtained an additional line of credit with a
bank, secured by essentially all the assets of the Company, to provide for
additional borrowings of up to $250,000. Borrowings under this line accrued
interest at the bank's prime rate plus 1% (9.5% at December 31, 1995). At
December 31, 1995, $250,000 was outstanding under this agreement.
On May 31, 1996, the Company refinanced its revolving bank lines of credit
totaling $1,000,000 on terms substantially consistent with the prior
arrangements, except the lines were consolidated into a single note agreement
which matures on May 31, 1998. The credit facility contains certain affirmative
financial covenants, such as minimum net worth and financial statement ratios.
The Company was in compliance with all such covenants as of the balance sheet
date. At December 31, 1996, there were no outstanding borrowings under this
line of credit.
Long-Term Debt
- --------------
Long-term debt consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
Mortgage note payable, monthly
installments of approximately
$1,500, plus interest at a bank's
prime rate plus .25% (8.5% at
December 31, 1996) through 2003 $ 121,418 $ 137,776
Note payable to previous stock-
holders of subsidiary, due in
three semiannual installments
commencing June 30, 1996, plus
interest at 9.5% due quarterly 773,333 1,100,000
----------- -----------
894,751 1,237,776
Less - current portion (791,405) (763,416)
----------- -----------
Total long-term debt, net of
current portion $ 103,346 $ 474,360
=========== ===========
Scheduled future principal maturities of long-term debt at December 31, 1996,
are as follows:
Year ended
December 31, Amount
------------ ----------
<S> <C>
1997 $ 791,405
1998 18,072
1999 18,072
2000 18,072
2001 18,072
Thereafter 31,058
----------
$ 894,751
==========
</TABLE>
F-10
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 8 - BENEFIT PLANS
Profit Sharing Plan
- -------------------
The Company has a 401(k) profit sharing plan that covers all employees of the
Company who have one year of service, as defined, and have reached age 21.
Company contributions are discretionary based upon determinations made by the
plan trustees. Employees become 100% vested in employer contributions after 5
years of service (accruing 20% per year of service, as defined). The Company
recorded expense of $43,872 and $31,008 for plan contributions for the years
ended December 31, 1996 and 1995, respectively.
Salary Continuation Benefits
- ----------------------------
The Company has a salary continuation plan, whereby two officers shall continue
to receive a stated monthly salary for 120 months following their normal
retirement date upon reaching age 65. In the event of premature death or
disability, their respective beneficiaries are entitled to certain benefits.
The Company reserves the right in its sole discretion to terminate this plan
and/or funding at any time. The Company has financed these potential
obligations with corporate-owned life insurance policies. Premiums expended on
these policies were $36,403 and $36,460 in 1996 and 1995, respectively.
Other than stated above, the Company does not provide any post-retirement or
post-employment benefits to any of its employees.
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes at December 31, 1996 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Current:
Federal $345,436 $ 27,750
State 51,892 8,769
Deferred:
Federal (45,972) (134,635)
State (6,130) (17,820)
-------- ---------
Total $345,226 $(115,936)
======== =========
</TABLE>
The differences between the statutory federal income tax rate and the Company's
effective income tax rate are as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Statutory federal income tax rate 34.0% (34.0)%
State income taxes, net of federal 4.5% (2.6)%
benefit
Meals and entertainment expenses 1.8% 5.2%
Goodwill amortization 4.5% 6.9%
Other (4.2)% (2.0)%
----- ------
Total 40.6% (26.5)%
===== ======
</TABLE>
F-11
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
The components of and changes in net deferred tax assets (liabilities) as of
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current Deferred Taxes:
Assets:
Nondeductible reserves $ 137,359 $ 199,497
--------- ---------
Noncurrent Deferred Taxes:
Assets:
Other 31,919 22,679
Capital loss carryforwards 196,246 196,246
Liabilities:
Excess tax over book depreciation and
amortization (196,730) (157,443)
Software development costs (312,546) (456,833)
--------- ---------
Noncurrent deferred taxes, net (281,111) (395,351)
--------- ---------
Total deferred taxes $(143,752) $(195,854)
========= =========
</TABLE>
A valuation allowance must be provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has not
established a valuation allowance because, in the opinion of management, taxes
paid in recent years, the timing of expected reversal of its tax temporary
differences, and tax planning strategies are such that the Company will fully
realize its deferred tax asset.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company leases certain office space, automobiles, furniture, and equipment
under noncancelable operating leases that expire at various dates through 2006.
During 1996, the Company relocated its principle operations to a new facility
under terms of a ten-year operating lease. In connection with this move, the
Company leased approximately $300,000 of certain furniture and fixtures under
terms of 5-year operating lease. These commitments are reflected in the table
of future minimum lease payments below.
At December 31, 1996, scheduled future minimum payments for operating leases
with initial terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
1997 $ 661,824
1998 380,110
1999 355,421
2000 341,292
2001 337,108
Thereafter 1,172,270
----------
Total $3,248,026
==========
</TABLE>
F-12
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Rental expense for all operating leases for the years ended December 31, 1996
and 1995, was $384,211 and $499,023, respectively.
During 1996, the Company entered into a service agreement with a third party for
use of their claims adjudication software via on-line access to a data center.
The term of this service agreement is ten years and fees paid to the third party
will be $1.00 per month for each individual plan member served by the Company's
subsidiary. Services under this agreement did not commence until 1997.
Litigation
- ----------
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that such litigation and
claims will be resolved without material effect on the Company's financial
position or results of operations.
NOTE 11 - STOCKHOLDERS' EQUITY
Common Stock
- ------------
In May 1993, the Company completed a stock offering consisting of 920,000 units
at a price per unit of $5. Each unit contained one share of common stock and
one warrant. The warrants expire, if unexercised, April 30, 1997. The warrants
are exercisable at a price of $7.50. The warrants are redeemable by the Company
at $.10 upon certain conditions, as defined. As of December 31, 1996 and 1995,
917,000 warrants were outstanding.
In connection with the offering discussed above, the Company sold 80,000
warrants (the "Underwriter's Warrants") to the underwriter and its designees for
$100. Each Underwriter's Warrant enables the holder to purchase one unit of the
Company's securities (one share of common stock and one warrant) for $6, subject
to adjustments and other conditions, as defined. The Underwriter's Warrants are
exercisable for a 48-month period commencing one year from their date of issue
and contain various registration rights. All of these warrants were outstanding
at December 31, 1996.
In connection with the notes payable to previous shareholders of subsidiary
discussed in Note 7, the Company has agreed to permit one of the former
shareholders the option to convert up to $100,000 of debt owed to him by the
Company into 25,000 shares of common stock at a price of $4.50 per share. This
option will expire on June 30, 1997. As of December 31, 1996, no amount of debt
had been converted under this option agreement.
Stock Options
- -------------
The Company has a nonqualified stock option agreement with the then sole
stockholder whereby the stockholder was granted options to purchase up to
300,000 additional shares of the Company's common stock at a price of $4.25.
The agreement expires on August 18, 1999 (subject to extension under certain
circumstances as defined). The options vest in 20% increments on each of the
first five anniversary dates of the agreement. Under certain specified events,
the vesting of the options may be accelerated.
F-13
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
The Company has stock option plans adopted in 1992 and 1993 which provide that
options for shares of MCI common stock may be granted to officers, directors,
and key employees of the Company at the fair market value on the date of grant.
The options expire 10 years from the date of grant (or earlier if specified in
the grant) and generally vest over a five year period. In 1993, the Company also
adopted a qualified stock option plan under Section 423 of the Internal Revenue
Code which provides that options for shares of MCI stock may be granted to
eligible employees of the Company at 85% of the fair market value on the date of
grant. The options vest one year from the date of grant and expire 27 months
thereafter. The following table sets forth summarized information regarding the
plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Option Price Option Price
------------ ---------------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 1,039,692 3.30 to 9.00 6.62
Granted 286,345 6.75 to 7.86 5.08
Exercised (57,450) 3.30 to 7.54 3.80
Forfeited (33,413) 3.88 to 7.86 4.43
--------- --------------- ------------
Outstanding at December 31, 1995 1,235,174 $3.30 to $9.00 6.58
--------- =============== ============
Granted 97,000 4.50 to 5.00 5.15
Exercised (0) 3.30 to 7.54 -
Forfeited (130,035) 3.30 to 7.86 6.08
--------- --------------- ------------
Outstanding at December 31, 1996 1,202,139 4.36 to $9.00 6.52
========= =============== ============
Exercisable options 630,038
=========
Options available for future grants 147,861
=========
</TABLE>
In August 1996, the Board elected, subject to shareholder approval in 1997, to
amend the 1993 Plan to remove a prohibition to decrease the exercise price after
issuance of an option. In order for the options to be incentives for its
officers, directors and other employees, the Board, subject to shareholder
approval of the Plan amendment discussed above, elected to decrease the exercise
price of all outstanding options granted under the 1993 Plan to $4.50. As of
August 1996, there were 179,700 options outstanding with exercise prices ranging
from $4.50 to $7.54.
In 1994, the Company granted a stock option to a third party for financial
advisory services whereby the third party has the option to purchase up to
100,000 shares of MCI common stock at prices ranging from $6 to $9 per share.
The option became fully vested as of November 12, 1994, and expires over various
dates through 1999.
Accounting for Stock-Based Compensation
- ---------------------------------------
In 1996 the Company adopted SFAS 123, "Accounting for Stock Based Compensation."
The Company has two stock option plans, a qualified and a non-qualified plan.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consisted with SFAS statement No. 123, the Company's pro forma
net income (loss) for 1996 and 1995 would have been $345,588 and ($567,505),
respectively, resulting in earnings (loss) per share of $.09 and ($.15),
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted-
average assumptions used for options granted in 1996, and 1995: risk-free
interest rate of 7.0%, expected dividend yield of zero, expected term of 5
years, expected volatility of 47.12%. The weighted average fair value of options
granted in 1996 and 1995 was $2.78 and $4.29, respectively.
F-14
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
NOTE 12 - RELATED PARTY TRANSACTIONS
In October 1994, the Company loaned $300,000 to its chief executive officer.
The loan is secured by the pledge of 70,000 shares of the Company's common stock
held by the majority stockholder and is also guaranteed by the majority
stockholder. The loan accrues interest at a bank's prime rate plus 1% (9.5% at
December 31, 1996). The principal and any unpaid accrued interest are due in its
entirety by October 27, 1998. Accrued interest on this note was $65,221 and
$37,239 at December 31, 1996 and 1995, respectively.
NOTE 13 - SALE OF SUBSIDIARY
Effective December 31, 1995, the Company sold its wholly owned subsidiary, Group
Administrators-San Antonio, Inc. ("GAS"), to certain of this subsidiary's former
owners for total consideration of approximately $600,000. As part of this
consideration, the Company received 33,612 shares of MCI common stock issued in
connection with the GAS Acquisition that was recorded as treasury shares. The
sale resulted in a net loss of approximately $200,000 (which is disclosed
separately as a component of operating expenses).
F-15
<PAGE>
EXHIBIT 10.10
AGREEMENT
This Agreement, dated as of December _____, 1996, but effective as of
______________, 19____, is by and between MedicalControl, Inc., a Delaware
corporation ("MedicalControl"), and ______________________ ("Director").
WHEREAS, MedicalControl desires to have qualified Directors serving on its
Board of Directors who are willing to make decisions that in their judgment are
in MedicalControl's best interest without any undue threat of personal
liability;
WHEREAS, the Amended and Restated Certificate of Incorporation of
MedicalControl ("Certificate of Incorporation") and MedicalControl's Amended and
Restated Bylaws ("Bylaws") require indemnification of each Director or officer
of MedicalControl in his capacity as a Director or officer against any and all
liability and reasonable expense that may be incurred by him in connection with
or resulting from any threatened, pending or completed action, claim, suit or
proceeding, whether civil, criminal, administrative or investigative
(collectively, a "Proceeding"), to the fullest extent permitted by the Delaware
General Corporation Law ("Act"), as the same exists or may be hereafter amended;
WHEREAS, MedicalControl desires to grant to Director the maximum
indemnification for any Loss (hereinafter defined) permitted by the Certificate
of Incorporation and Bylaws;
WHEREAS, developments with respect to the terms and availability of
Directors' and officers' liability insurance and with respect to the
application, amendment and enforcement of statutory, charter and bylaw
indemnification provisions generally have raised questions concerning the
adequacy and reliability of the protection afforded to persons intended to be
protected thereunder; and
WHEREAS, in order to resolve such questions and thereby induce Director to
consent to serve, to serve, and to continue serving as a Director of
MedicalControl, MedicalControl has agreed to enter into this Agreement with
Director;
NOW, THEREFORE, in consideration of the forgoing recitals and of the mutual
covenants set forth below, and certain other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Indemnity of Director. MedicalControl shall indemnify Director in his
---------------------
capacity as director of MedicalControl against any and all liability and
reasonable expense that may be incurred by Director in connection with or
resulting from (a) any Proceeding, (b) an appeal in such a Proceeding or (c)
any inquiry or investigation that could lead to such a Proceeding, all to the
fullest extent permitted by Section 145 of the Act.
2. Continuation of Indemnity. All agreements and obligations of
-------------------------
MedicalControl contained herein shall continue during the period Director is a
director of MedicalControl, shall be retroactive to the effective date of this
Agreement, covering all periods of service from time to time, and shall continue
thereafter so long as Director shall be subject to any possible claim or
threatened, pending or completed Proceeding any appeal in a Proceeding and any
inquiry or investigation that could lead to a Proceeding, by reason of the fact
that Director was serving or had consented to serve, in any capacity referred to
herein.
3. Notification and Defense of Claim. Promptly after receipt by
---------------------------------
Director of notice of any claim against Director or the commencement of any
Proceeding, Director will, if a claim in respect thereof is to be made against
MedicalControl under this Agreement, notify MedicalControl of the assertion of
any such claim or the commencement thereof; but the omission to so notify
MedicalControl will not relieve it from any liability under this Agreement
unless such delay in notification actually prejudiced MedicalControl (and then
only to the extent MedicalControl was actually prejudiced thereby). With
respect of any such Proceeding as to which Director notifies MedicalControl of
the commencement thereof the following shall apply:
(a) MedicalControl will be entitled to participate therein at its own
expense;
(b) Except as otherwise provided below, to the extent that it may wish,
MedicalControl jointly with any other indemnifying party similarly notified will
be entitled to assume the defense thereof, with counsel satisfactory to
<PAGE>
Director. After notice from MedicalControl to Director of its election to
assume the defense thereof, MedicalControl will not be liable to Director under
this Agreement for any legal or other expenses subsequently incurred by Director
in connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Director shall have the right to
employ his own counsel in such Proceeding, but the fees and expenses of such
counsel incurred after notice from MedicalControl of its assumption of the
defense thereof shall be at the expense of Director unless (i) the employment of
counsel by Director has been authorized by MedicalControl, (ii) Director shall
have reasonably concluded that there may be a conflict of interest between
MedicalControl and Director in the conduct of the defense of such action, or
(iii) MedicalControl shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of counsel
shall be at the expense of MedicalControl. MedicalControl shall not be entitled
to assume the defense of any Proceeding brought by or on behalf of
MedicalControl or as to which Director shall have made the conclusion provided
for in (ii) above.
(c) MedicalControl shall not be liable to indemnify Director under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. MedicalControl shall not settle any action or
claim in any manner which would impose any penalty or limitation on Director
without Director's written consent. Neither MedicalControl nor Director will
unreasonably withhold their consent to any proposed settlement.
4. Advances of Expenses. Reasonable expenses (other than judgments,
--------------------
penalties, fines and settlements) incurred by Director that are subject to
indemnification under this Agreement (and not paid, reimbursed or advanced by
others) shall be paid or reimbursed by MedicalControl in advance of the final
disposition of the Proceeding within 30 days after MedicalControl receives a
written request by Director accompanied by substantiating documentation of such
expenses, a written affirmation by Director of his good faith belief that he has
met the standard of conduct necessary for indemnification under this Agreement
and a written undertaking by or on behalf of Director to repay the amount paid
or reimbursed if it is ultimately determined that he has not met those standards
or that such reasonable expenses do not constitute a Loss. The written
undertaking described above must be an unlimited general obligation of Director
but need not be secured.
5. Right of Director to Indemnification Upon Application: Procedure Upon
----------------------------------------------------------------------
Application. Upon the written request of Director to be indemnified pursuant
- -----------
to this Agreement (other than pursuant to Section 4 hereto), MedicalControl
shall cause the Reviewing Party (hereinafter defined) to determine, within 45
days, whether or not the Director has met the relevant standards for
indemnification required by this Agreement. The termination of a Proceeding by
judgment, order, settlement or conviction, or on a plea of nolo contendere or
its equivalent, shall not of itself create a presumption that Director did not
meet the requirements for indemnification required by this Agreement. If a
determination of indemnification is to be made by Independent Legal Counsel
(hereinafter defined), such Independent Legal Counsel shall render its written
opinion to MedicalControl and Director as to what extent Director will be
permitted to be indemnified. MedicalControl shall pay the reasonable fees of
Independent Legal Counsel.
6. Definitions. The terms defined in this Section 6 shall, for purposes
-----------
of this Agreement, have the indicated meanings:
(a) "Loss" shall mean any and all judgments, penalties (including excise
and similar taxes), fines, settlements and reasonable expenses (including
attorneys' fees) actually incurred by Director, after realization of or giving
effect to all insurance, bonding, indemnification and other payments or
recoveries (i) actually received by or for the benefit of Director, directly or
indirectly, or (ii) to which Director is entitled, directly or indirectly.
(b) "Reviewing Party" means (i) a majority of a quorum of Directors, who at
the time of voting upon a determination of indemnification are neither officers
or employees of MedicalControl or members of the immediate family or an officer
or employee of MedicalControl ("Interested Parties") nor parties to that
particular Proceeding to which Director is seeking indemnification; or (ii)
Independent Legal Counsel selected by a majority of a quorum of Directors who at
the time of selecting such Independent Legal Counsel are neither interested
parties nor parties to that particular Proceeding to which Director is seeking
indemnification, or if such a quorum cannot be obtained, by a majority vote of a
committee of the Board of Directors of MedicalControl designated to select such
Independent Legal Counsel by a majority vote of all Directors of MedicalControl,
consisting solely of two or more Directors who at the time of such selection are
neither interested persons nor parties in that particular Proceeding to which
Director is seeking indemnification, or if such a quorum cannot be obtained and
such a committee cannot be established, by a majority vote of all Directors of
MedicalControl.
2
<PAGE>
(c) "Independent Legal Counsel" shall mean an attorney, selected in
accordance with the provisions of Section 6(b) hereof, who shall not have
otherwise performed services for Director, MedicalControl, any person that
controls MedicalControl or any of the Directors of MedicalControl, within five
years preceding the time of such selection (other than in connection with
seeking indemnification under this Agreement). Independent Legal Counsel shall
not be any person who, under the applicable standards of professional conduct
then prevailing, would have a conflict of interest in representing either
MedicalControl or Director in an action to determine Director's rights under
this Agreement, nor shall Independent Legal Counsel be any person who has been
sanctioned or censured for ethical violations of applicable standards of
professional conduct.
(d) "Voting Securities" shall mean any securities of MedicalControl which
are voted generally in the election of Directors.
7. Repayment of Expenses. Director shall reimburse MedicalControl for
---------------------
all reasonable expenses paid by MedicalControl in defending any Proceeding
against Director in the event and only to the extent that it shall be ultimately
determined that Director is not entitled to be indemnified by MedicalControl for
such expenses under the provisions of this Agreement.
8. Consideration. MedicalControl expressly confirms and agrees that it
-------------
has entered into this Agreement and assumed the obligations imposed on
MedicalControl hereby in order to induce Director to consent to serve, to serve
and to continue serving as a Director, and acknowledge that Director is relying
upon this Agreement in consenting to serve and serving in such capacity.
9. Insurance. MedicalControl hereby agrees to purchase and maintain for
---------
the benefit and on behalf of the Director insurance against any liability
asserted against the Director and incurred by the Director in his capacity as a
Director of MedicalControl or arising out of his status as a Director of
MedicalControl, without regard to the power of MedicalControl to indemnify the
Director against any such liability under the Act.
10. Confidentiality. The Director shall have and observe a fiduciary
---------------
duty and duty of confidentiality with respect to the affairs of MedicalControl
to the extent required by the Act and Delaware law.
11. Indemnification Hereunder Not Exclusive. The indemnification and
---------------------------------------
advancement of expenses provided by this Agreement shall not be deemed exclusive
of any other rights to which Director may be entitled under any other agreement,
as a matter of law, or otherwise, but the indemnification provided for pursuant
to the Certificate of Incorporation or Bylaws of MedicalControl is limited to
any Loss.
12. Subrogation. If a payment is made under this Agreement,
-----------
MedicalControl shall be surrogated to the extent of such payment to all of the
rights of recovery of such Director, who shall execute all papers required and
shall do everything that may be necessary to secure such rights.
13. Severability. Each of the provisions of this Agreement is a separate
------------
and distinct agreement and independent of the others, so that if any provision
thereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforeceability shall not affect the validity or enforceability
of the other provisions hereto.
14. Notice. Any notice, consent, or other communication to be given
------
under this Agreement by any party to any other party shall be in writing and
shall be either (a) personally delivered, (b) mailed by registered or certified
mail, postage prepaid with return receipt requested, (c) delivered by overnight
express delivery service or same-day local courier service or (d) delivered by
telex or facsimile transmission to address set forth beneath the signature of
the parties below, or at such other address as may be designated by the parties
from time to time in accordance with this Section. Notices delivered
personally, by overnight express delivery service or by local courier service
shall be deemed given as of actual receipt. Mailed notices shall be deemed
given three business days after mailing. Notices delivered by telex or
facsimile transmission shall be deemed given upon receipt by the sender of the
answerback (in the case of the telex) or trasnsmission confirmation (in the case
of a facsimile transmission).
3
<PAGE>
15. Governing Law; Binding Effect; Amendment and Termination;
---------------------------------------------------------
Reimbursement.
- -------------
(a) This Agreement shall be interpreted and enforced in accordance with
the laws of the State of Delaware.
(b) This Agreement shall be binding upon Director and upon MedicalControl,
its successors, and assigns, and shall inure to the benefit of Director, his
heirs, executors, administrators, personal representatives, and assigns and to
the benefit of MedicalControl, its successors and assigns.
(c) No amendment, modification, termination, or cancellation of this
Agreement shall be effective unless in writing signed by both parties hereto.
(d) If Director is required to bring any action to enforce rights or to
collect moneys due under this Agreement and is successful in such action,
MedicalControl shall reimburse Director for all of Director's reasonable fees
and expenses in bringing and pursuing such action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written, but effective for all purposes as of
__________________, 1996.
MedicalControl, Inc.
By:
--------------------------------------------
J. Ward Hunt,
President and Chief Executive Officer
Address of MedicalControl, Inc.:
P.O. Box 540516
Dallas, TX 75354-0516
Director:
----------------------------------------------
Address of Director:
4
<PAGE>
EXHIBIT 10.11
COMMERCIAL LEASE
MADE this 1st day of March, 1993, by and between
David C. and Janice L. Bramer
hereinafter called "Lessor" and
Diversified Group Administrators, Inc. hereinafter called "TENANT."
1. DEMISE AND TERM: LESSOR, hereby leases to TENANT for the term of 3 years
commencing on the 1st day of March, 1993 and ending on the 28th day of February,
1996, (the "TERM") the following described premises in its present condition:
Office building located at 505 Boone Avenue, North Strabane Twp., Washington
County, Pennsylvania
(the "PREMISES"). TENANT also has a nonexclusive license for the benefit of
TENANT, its employees, agents and invitees for access to and from the leased
premises through the building and over property of LESSOR appurtenant thereto,
and to use those parts of the building designated by LESSOR for use by TENANTS
including but not limited to toilet rooms, elevators and unrestricted parking
areas, if any.
2. RENEWAL: TENANT, if not in default under this lease, may extend the Term of
this lease by written notice to the LESSOR received no later than three months
before the expiration of the previous Term, for an additional period of 2
year(s) at the renewal Rent stated below, under the terms of this same lease.
3. RENT: The TENANT covenants to pay as Rent the total sum of Ninety Three
Thousand Six Hundred Dollars ($93,600), payable in the installments of Two
Thousand Six Hundred Dollars ($2,600) per month, in advance without demand on or
before the first day of each month at the office of the LESSOR. In the event of
renewal of this lease, monthly rent for 2 year(s) will be Thirty Three Thousand
Dollars ($33,000) annually payable in installments of Two Thousand Seven Hundred
Fifty Dollars ($2,750) per month without demand in advance on or before the
first day of each month.
The TENANT shall pay all Rent when due and payable, without any setoff,
deduction or prior demand therefore whatsoever. Any payment by TENANT or
acceptance by LESSOR of a lesser amount than shall be due from TENANT to LESSOR
shall be treated as payment on account. The acceptance by LESSOR of a check
for a lesser amount with an endorsement or statement thereon, or upon any letter
accompanying such check, that such lesser amount is payment in full, shall be
given no effect, and LESSOR may accept such check without prejudice to any
other rights or remedies which LESSOR may have against TENANT.
The TENANT waives to the LESSOR the benefit of all laws now or hereafter in
force, in this State or elsewhere exempting property from liability for rent or
for debt including but not limited to Act No. 20 approved April 6, 1951,
entitled "The Landlord And Tenant Act of 1951."
4. LATE CHARGES: Any provision of this lease to the contrary notwithstanding,
TENANT shall pay a late charge in the amount of ten percent (10%) of the
outstanding delinquent balance for any payment of Rent or Additional Rent not
made within ten (10) days after the due date thereof to cover the extra expense
involved in handling late payments. This charge is in addition to any other
rights or remedies of the LESSOR.
5. ADDITIONAL RENT: TENANT shall pay as additional rental for the PREMISES, all
gas and electricity used thereon, all garbage collection charges, all sanitary
sewer charges or assessments, and all water rents assessed on the premises
whether by meter rate or flat rate as due. On failure of TENANT to pay same when
due, LESSOR shall enforce payment thereof in the same manner as rent in arrears.
6. CONDITION OF PREMISES: USE OF PREMISES: The TENANT hereby agrees to
maintain and keep the PREMISES during the term of this lease in good repair,
including but not limited to water pipes, their connections and all plumbing
fixtures. The TENANT also agrees to keep the PREMISES, including the common
area of the building, property of the LESSOR appurtenant thereto, and sidewalls
free of rubbish, and in such condition as the Board of Health may require.
TENANT further agrees to keep all sidewalks free from snow and ice.
<PAGE>
All repairs, except those specific repairs set forth below which are
the responsibility of the LESSOR, shall be made by the TENANT at its own
expense. If the LESSOR pays for the same or any part thereof, it will be
Additional Rent payable forthwith.
TENANT further agrees not to make any alterations or improvements to the
PREMISES without the consent of LESSOR, or to remove any additions or
improvements whether made by the LESSOR or TENANT, nor to post bills or erect
billboards or signs,without the written consent of the LESSOR, under penalty of
instant forfeiture of this Lease and the terms hereof.
The TENANT covenants to use the PREMISES only for business use and to
surrender the same in as good order as they now are, reasonable wear and tear
and accidents by fire alone excepted.
The LESSOR shall be responsible for making only the following repairs:
(1) repairs to any sprinkler system or heating, ventilating or
air-conditioning system serving the PREMISES, if and to the extent installed by
LESSOR, except computer room facilities and:
(2) structural repairs to exterior walls, structural columns and structural
floors which collectively enclose the PREMISES (excluding, however, storefronts)
and the roof over the PREMISES;
provided TENANT shall give LESSOR notice of the necessity for such repairs and
that such repairs did not arise from nor were they cause by the negligence or
willful acts of TENANT, its agents, concessionaires, officers, employees,
licensees, invitees, or contractors, or involve special needs of the business.
7. ASSIGNMENTS AND SUB-LETTING: The TENANT hereby agrees not to assign this
lease voluntarily or involuntarily, nor to sub-let the premises or any part
thereof, without the written consent of the LESSOR, under penalty of instant
forfeiture of this lease.
8. COMPLIANCE WITH PUBLIC LAWS: The TENANT further agrees to perform, fully
obey and comply with all ordinances, rules, regulations and laws of all public
authorities, boards and officers relating to said premises, or any part thereof,
for any purposes or use in violation of any law, statue or ordinance, whether
federal, state or municipal, during the term of said lease or any renewal
thereof.
9. TERMINATION; VACATING THE PREMISES: This lease shall terminate at the end
of the Term or any renewal thereof without the necessity of any notice from
either LESSOR or TENANT to terminate the same, and TENANT hereby expressly
waives all right to any notice which may be required under any laws now or
hereafter enacted and in force in Pennsylvania, including The Landlord And
Tenant Act of 1951, Act of April 6, 1951, as amended. TENANT covenants and
agrees to give up quiet and peaceful possession without further notice from said
Lessor or agent.
10. SECURITY DEPOSIT: The TENANT, contemporaneously with the first Rent
installment, agrees to deposit with the LESSOR xx Dollars ($ xx ) which
-------- ------
sum shall be held by Lessor, without liability for interest, as security for the
full faith and performance by Tenant of all of the terms, covenants and
conditions of this lease by said Tenant to be kept and performed during the Term
or any renewal thereof.
If Rent becomes overdue and is unpaid, or any other sum payable by the
TENANT to the LESSOR shall be overdue and unpaid, then the LESSOR may at its
discretion, appropriate and apply any portion of the deposit to the payment of
such sum. It is also within the LESSOR'S discretion to use such deposit to
compensate for loss or damage suffered or sustained by LESSOR due to a failure
of the TENANT to keep and perform any of the other terms, covenants and
conditions of this lease. Should the entire deposit, or any portion thereof, be
applied by LESSOR for the above stated purposes, then TENANT shall remit a
sufficient amount in cash to restore said security to the original sum
deposited. Failure to do so with xx days of the LESSOR'S written demand will
----
result in breach.
Should TENANT comply with all of the terms of this lease, the deposit will
be returned to TENANT in full within xx days of the expiration of the term.
------
11. DISTRAINT: As additional security, TENANT acknowledges the LESSOR'S right
to distrain, hold and sell with due legal notices all property on or to be
brought on the premises in order to satisfy unpaid Rent, expenses, and
Additional Rent, Any attempt by TENANT to remove said property while rents
remain overdue will be deemed fraudulent and will result in the acceleration of
rent, thereby causing all rent for the entire term to become due and payable.
All goods so removed may be followed for30 days and seized for the collection of
unpaid amounts.
12. DEFAULT; BREACH: It is further agreed that if the said TENANT shall
default in the payment of any installment of Rent or Additional Rent; or shall
remove or attempt to remove or express or declare an intention to remove any of
the goods and chattels from the premises, or should an execution be issued
against the TENANT, bankruptcy proceeding be begun by or against said TENANT, or
an assignment be made by TENANT for the benefit of creditors, or a receiver
appointed for TENANT, the and in such case the entire Rent for the balance of
the said Term shall become immediately due and payable. In case of such
assignment, bankruptcy proceedings, appointment of a receiver, or of a sale on
legal process of TENANT'S goods, LESSOR, shall have the right to demand and
receive the Rent for the balance of the Term, or renewal term which shall be
first paid out of the proceeds of such assignment, bankruptcy or receiver's
proceedings or sale on legal process, any law, usage or custom to the contrary
notwithstanding.
<PAGE>
18. CONFESSION OF JUDGMENT/EJECTMENT: For value received and on any default of
Rent or additional Rent by TENANT under this lease, or on any and every breach
of covenant or agreement by TENANT under the terms of this lease, the TENANT
does hereby empower any attorney of any court of record within the Unites States
or elsewhere, to appear for TENANT and with or without declaration filed,
confess judgment against the TENANT, and in favor of said LESSOR, his heirs,
devisees, executors, administrators or assigns, as of any term, for the sums due
by reason of said default in the payment of Rent, including unpaid Rent for the
balance of the term if the same shall have become due and payable under the
provisions herein, and/or for the sum due by reason of any breach of covenant or
agreement by TENANT herein, with costs of suit, and attorney's commission of
thirty percent (30%) for collection and forthwith issue writ or writs of
execution thereon, with release of all errors. and without stay of execution,
and inquisition and extension upon any levy on real estate is hereby expressly
waived, and condemnation agreed to, and exemption of any and all property from
levy and sale by virtue of any exemption law now in force or which may be
hereafter passed is also expressly waived by TENANT.
In case of violation of any of the covenants or agreements in this lease by
TENANT, the said TENANT further, at the option of said Lessor, authorizes and
empowers any such attorney, either in addition to or without such judgment for
the amount due according to the terms of this lease, to appear for said TENANT
and confess judgment forthwith against TENANT, and in favor of Lessor, in an
amicable action of ejectment for the PREMISES above described, with all the
conditions, fees, releases, waivers of stay of execution and waiver of exemption
to accompany said confession of judgment in ejectment as are set forth herein
for confession of judgment for said sum or sums due: and authorizes the entry of
such action, confession of judgment therein, and the immediate issuing of a Writ
of Possession and Writ of Execution for the amount of such judgment and costs.
In case of violation of any of the covenants or agreements in this lease,
by TENANT, the TENANT expressly waives to the LESSOR the benefits of Act No.
20, approved April 6, 1951, entitled "The Landlord and Tenant Act of 1951,"
requiring notice to vacate the PREMISES.
14. NOTICE TO VACATE UPON SALE OF PREMISES: The TENANT expressly waives to the
LESSOR the benefits of ACt No. 20, approved April 6, 1951, entitled "The
Landlord And Tenant Act of 1951." requiring notice to vacate the PREMISES at
any time upon receiving 90 day's notice in writing, in case of sale of said
property.
15. LESSOR NOT LIABLE FOR INJURY OR DAMAGE TO PERSONS OR PROPERTY: The LESSOR
shall not be liable for any injury or damage to any person or to any property at
any time on said PREMISES or building from any cause whatever that may at any
time exist from the use or condition of the PREMISES or building from any cause,
during the Term or any renewal thereof.
16. INCREASED TAXES: In the event the taxes, including those imposed by any
municipality, County, or School District, levied and assessed against the real
estate or which the PREMISES are a part are increased beyond that imposed for
the year 1992, whether occasioned by an increase in mileage or an increase in
assessment or otherwise, the TENANT shall pay as Additional Rent its
proportionate share of the increased taxes during the Term of this lease or
any renewal thereof.
17. EXCLUSIVITY OF LESSOR'S REMEDIES: The receipt of rent after default, or
after judgment or after execution, shall not deprived the LESSOR of other
actions against the Tenant for possession or for rent or for damages, and all
such remedies are non-exclusive and can be exercised concurretly or separately
as LESSOR desires. The LESSOR may use the remedies herein given or those
prescribed by law, or both, and the LESSOR or Agent may enter at will to inspect
the premises, to take or send persons on said property, seeking to rent or
purchase, make repairs or improvements and post notices of "To Let" and "For
Sale."
18. SUCCESSORS AND ASSIGNS: All rights and liabilities herein given to or
imposed upon either of the parties hereto, shall extend to the heirs, executors,
administrators, successors and assigns of such party.
19. CONDEMNATION CLAUSE: In the event that all or part of the PREMISES is
taken by eminent domain or conveyed in lieu thereof, if the leased PREMISES
cannot reasonably be used by TENANT for their intended purpose, then the lease
will terminate effective as of the date that the condemning authority shall take
possession of the same.
20. TENANTS WAIVER OF DAMAGES AND EXCEPTIONS: TENANT hereby waives all claims
against LESSOR by reason of a taking of the PREMISES and assigns to LESSOR any
rights and damages to which TENANT might otherwise be entitled for condemnation
of the leasehold estate created by this lease; except that TENANT shall be
entitled to make any claim against the condemning authority for relocation
damages, damages for tenant improvements and any other payments lawfully due
tenants as such, without diminution of the sums due LESSOR.
21. FIRE CLAUSE: The TENANT hereby agrees to notify LESSOR of any damages to
the leased PREMISES by fire or other hazard and also of any dangerous or
hazardous condition within the leased PREMISES immediately upon the occurrence
of such fire or other hazard or discovery of such condition.
Upon occurrence of the fire, repairs shall be made by LESSOR as soon as
reasonably may be done unless the costs of repairing the PREMISES exceed 25% of
the replacement cost of the building in which case the LESSOR may, at its
option, terminate this lease by giving TENANT written notice of termination
within forty-five (45) days of the date of the occurrence.
thereof.
<PAGE>
If the LESSOR does not terminate this Lease pursuant to the paragraph
above, then the LESSOR has forty-five (45) days after the date of occurrence to
give written notice to TENANT setting forth its unqualified commitment to make
all necessary repairs or replacements, the projected date of commencement of
such repairs, and the LESSOR'S best good faith estimate of the date of
completion of the same.
If the LESSOR fails to give such notice, or if the date of completion is
more than 90 days after the date of occurrence, then the TENANT may, at its
option, terminate this lease and the LESSOR will be obliged to refund to the
TENANT any rent allocable to the period subsequent to the date of the fire.
22. WAIVER OF NONPERFORMANCE: Failure of the LESSOR to exercise any of its
rights under the lease upon nonperformance by the TENANT of any condition,
covenant or provision herein contained shall not be considered a waiver thereof,
no shall any waiver of nonperformance of any such condition, covenant or
provision by the LESSOR be construed as a waiver of the rights of the LESSOR as
to any subsequent defective performance or nonperformance hereunder.
23. PAROL EVIDENCE CLAUSE: This instrument constitutes the final, fully
integrated expression of the agreement between the LESSOR and TENANT. As such,
it cannot be modified or amended in any way except in writing signed by the
LESSOR and TENANT.
24. SUBORDINATION: this lease is subordinate to the lien of all present or
future mortgages which affect the leased PREMISES and to all renewals,
modifications, replacements and extensions thereof. This clause shall be
self-operative but in any event TENANT hereby agrees to execute promptly and
deliver any estoppel certificate or other assurances that LESSOR may request in
furtherance hereof; provided, however, that in the event of foreclosure of any
such mortgage or modification TENANT shall attorn to the purchase in foreclosure
or who shall be named in any deed in lieu of foreclosures and shall recognize
such purchaser as the LESSOR under this lease; and provided, further, that so
long as TENANT is not in default hereunder, this lease shall remain in full
force and effect.
25. SEVERABILITY CLAUSE: If any term, covenant, condition, or provision of
this lease is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the provisions shall remain in full force and
effect and shall in no way be affected, impaired, or invalidated.
26. PENNSYLVANIA LAW TO APPLY: This lease shall be construed under and in
accordance with the laws of the Commonwealth of Pennsylvania.
In Witness Whereof, the undersigned LESSOR and TENANT hereto execute this
lease as of the day and date first above written.
WITNESS/ATTEST
/s/ Janice L. Bramer
/s/ David C. Bramer
- ------------------------------ -----------------------(LESSOR)
- ------------------------------ By: ---------------------------
Title: ------------------------
- ------------------------------ Diversified Group (LESSEE)
-------------------------------
- ------------------------------ (LESSEE)
-------------------------------
- ------------------------------
By:
---------------------------
Title: CFO
-------------------------
LEASE
From
DAVID C. AND JANICE L. BRAMER
To
DIVERSIFIED GROUP ADMINISTRATORS, INC.
Lease $2,600 per month
Payable
Expires 2/26/96
assigns to
renewed to
renewed to
renewed to
================================================================================
<PAGE>
EXHIBIT 10.12
MEDICALCONTROLINC.
September 29, 1994
David C. Bramer
President & CEO
Diversified Group Administrators, Inc.
311 South Central Avenue
Canonsburg, Pennsylvania 15317
Dear Dave:
This letter of understanding will serve as a replacement for the employment
contract effective August 15, 1994. By using this letter of understanding, it is
our mutual intent to succinctly summarize the terms and conditions of your
employment with Diversified Group Administrators, Inc., (DGA) a wholly-owned
subsidiary of MedicalControl.
Base Salary - $150,000
- -----------
Incentive Bonus - DGA may pay an annual discretionary bonus in an amount
- ---------------
determined by the Board of Directors
Contingent Stock Bonus - The parent corporation, MedicalControl, Inc. agrees to
- ----------------------
grant a stock bonus in shares of common stock each calendar year in which the
gross fee income for DGA exceeds the greater of $4,000,000 or the gross fee
income for the prior year calculated as follows:
Stock Bonus = 5% (A-B)
--------
C
Where A equals gross fee income for DGA for the calendar year as determined by
MedicalControl's independent accountants in connection with their annual audit,
where B equals the greater of $4,000,000 or the gross fee income for the prior
year, and where C equals the fair market value of a share of MedicalControl
Common Stock as determined on the last business day of the calendar year. The
number of shares constituting the Stock Bonus will be rounded down to the
nearest whole number. The Stock Bonus shares will not be registered.
Employment Benefits - You will receive sick leave and disability benefits. DGA,
- -------------------
at its expense, shall provide you with a disability policy which shall pay you
$5000 per month until the earlier of you attaining the age of 65 years, your
death, your recovery to the extent you are no longer disabled.
<PAGE>
DGA will also provide you with a life insurance policy in the amount of
$200,000. DGA may, at its own expense, obtain a key man life insurance policy.
DGA will provide you with group health and dental insurance coverage.
Vacation - You will be entitled to paid vacation of 20 business days each year.
- --------
Automobile - DGA will provide you with an automobile not in excess of four years
- ----------
old which you may select whose cost may not exceed $30,000. DGA will also
reimburse you for normal operation and maintenance.
Club Membership - DGA will reimburse you for up to $1000 each calendar month to
- ---------------
defray the cost of your memberships, provided however DGA shall have no
obligation to reimburse you for more than $6000 in any calendar year.
Protective Covenants - You acknowledge that proprietary information and trade
- --------------------
secrets are the sole property of the company and MedicalControl.
Restriction on Soliciting Clients and Non-Compete - If we terminate you, with
- -------------------------------------------------
the exception of termination for cause due to fraud, embezzlement or conviction
of a felony, we will pay you six months severance to be paid monthly. If you
resign, you may not engage, participate, solicit or take away any clients of the
company for a period of 12 months.
If you have any questions, please contact me.
Sincerely, MedicalControl, Inc.
/s/ A.J. Rosmarin
- ------------------------------
By: A. J. Rosmarin
Executive Vice President
Chief Operating Officer
Agreed to:
/s/ David C. Bramer 10/3/94
- ------------------------------ ------------------------------
David C.Bramer Date:
cc: Ward Hunt
<PAGE>
MEDICALCONTROLINC.
September 2, 1994
Dan Riston
Diversified Group Administrators, Inc.
311 S. Central Avenue
Canonsburg, Pennsylvania 15317
Dear Dan:
Following is a summary of your terms of employment, taking into consideration
input from you, Dave Bramer and our meeting at DGA on Friday, August 12. Our
goal is to succinctly acknowledge the major points without exhaustive legal
language. We understand previous representations made to you were unfulfilled.
Our commitment is to set the foundation via this letter for a mutually rewarding
long term relationship.
We know the scope of your duties and are very comfortable the financial position
of DGA will be maintained suitable to MedicalControl's standards. We are also
cognizant that you have been preparing tax returns for many years for outsiders,
and understand that it will not interfere with your duties.
DGA shall pay you for services rendered as follows:
Base Salary - $65,000
- -----------
Incentive Bonus - If After Tax Income is between 1% but less than 8% of the
- ---------------
total revenue for the taxable year, a cash incentive bonus of $2500 will be
paid. If the After Tax Income is 8% or more of the total revenue for the
taxable-year, a $1000 bonus after the net taxable income of the company is
determined in connection with the annual outside audit of the financial
statements of MedicalControl.
A contingent stock bonus payable in shares of common stock of MedicalControl
will be paid when the After Tax Income exceeds 10% of the total revenue:
<PAGE>
<TABLE>
<CAPTION>
Cumulative Stock Bonus
After Tax Income of Company Shares
- --------------------------- ----------------------
<S> <C>
10% but less than 11% 200 shares
11% but less than 12% 400 shares
12% but less than 13% 600 shares
13% but less than 14% 800 shares
14% but less than 15% 1000 shares
15% but less than 16% 1300 shares
16% but less than 17% 1600 shares
17% but less than 18% 1900 shares
18% but less than 19% 2200 shares
More than 19% 2500 shares
</TABLE>
The shares will not be registered and must be held indefinitely unless they are
registered.
Automobile - You may retain your current arrangement.
- ----------
Country Club Membership - You may retain your current arrangement.
- -----------------------
Protective Covenants - You acknowledge that proprietary information and trade
- --------------------
secrets are the sole property of the company and MedicalControl.
Restriction on Soliciting Clients and Non-Compete - If we terminate you, with
- -------------------------------------------------
the exception of termination for cause due to fraud, embezzlement or sexual
harassment or abuse, we will pay you six months severance to be paid monthly. If
you resign, you may not engage, participate, solicit or take away any clients of
the company for a period of 6 months.
On behalf of Ward Hunt and the employees at MedicalControl, we look forward to a
successful working relationship with you.
If you have any questions, please contact me.
Sincerely,
/s/ A. J. Rosmarin /s/ Dan Riston
A. J. Rosmarin
Executive Vice President
Chief Operating Officer
cc: Ward Hunt
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,013,302
<SECURITIES> 0
<RECEIVABLES> 2,020,178
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,444,176
<PP&E> 1,698,681
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,036,935
<CURRENT-LIABILITIES> 3,024,470
<BONDS> 0
0
0
<COMMON> 39,072
<OTHER-SE> 7,588,936
<TOTAL-LIABILITY-AND-EQUITY> 11,036,935
<SALES> 15,351,552
<TOTAL-REVENUES> 15,351,552
<CGS> 0
<TOTAL-COSTS> (14,446,289)
<OTHER-EXPENSES> 38,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (94,490)
<INCOME-PRETAX> 849,606
<INCOME-TAX> (345,226)
<INCOME-CONTINUING> 504,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504,380
<EPS-PRIMARY> .13
<EPS-DILUTED> 0
</TABLE>
