<PAGE>
(Schedule 14A Information)
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ________)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Medical Control, Inc.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
_________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transactions:
--------------------------------------------------------------------
(5) Total fee paid:__________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:_______________________
(2) Form, Schedule or Registration Statement No.:_______________________
(3) Filing Party:_______________________________________________________
(4) Date Filed: _______________________________________________________
<PAGE>
MEDICALCONTROL, INC.
8625 King George, Dr., Suite 300
Dallas, Texas 75235
Telephone: (214) 630-6368
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held Wednesday, May 14, 1997
To the Shareholders:
PLEASE TAKE NOTICE that the Annual Meeting of Shareholders (the "Meeting")
of MedicalControl, Inc. (the "Company") will be held at the Company's offices at
8625 King George Dr., Suite 300, Dallas, Texas 75235, on Wednesday, May 14,
1997, at 9:30 a.m., local time, for the following purposes:
1. To elect four directors to hold office for the term specified in the Proxy
Statement or until their successors are elected and qualified;
2. To approve an amendment to the 1993 Stock Compensation Plan to allow the
Board of Directors to amend an option agreement to specify a lower exercise
price or accept the surrender of outstanding options and authorize the granting
of new options in substitution therefor specifying a lower exercise price;
3. To approve an amendment to the Outside Directors Stock Option Plan to allow
non-interested directors to amend an option agreement to specify a lower
exercise price or accept the surrender of outstanding options and authorize the
granting of new options in substitution therefor specifying a lower exercise
price;
4. To approve an amendment to the Qualified Employee Stock Purchase Plan to
increase the authorized number of shares of common stock of the Company
available under the plan from 100,000 to 200,000; and
5. To transact such other business as may properly come before the Meeting or
any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on April 14, 1997,
as the record date for the determination of shareholders entitled to notice of
and to vote at the Meeting and at any adjournment or adjournments thereof.
A Proxy Statement that describes the foregoing proposals and a form of
Proxy accompany this notice.
By Order of the Board of Directors
Stephanie L. McVay
Secretary
Dated: April 22, 1997
IMPORTANT
Whether or not you expect to attend the meeting, you are urged to execute
the accompanying proxy and return it promptly in the enclosed reply envelope,
which requires no postage. Any shareholder granting a proxy may revoke the same
at any time prior to its exercise. Also, whether or not you grant a proxy, you
may vote in person if you attend the Meeting.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
General Information........................................................ 1
Voting at Meeting.......................................................... 2
Principal Shareholder and Ownership of Management.......................... 3
Proposal 1 Election of Directors.......................................... 5
Board of Directors......................................................... 6
Management................................................................. 8
Executive Compensation..................................................... 9
Certain Relationships and Related Transactions.............................13
Proposal 2 Amendment to 1993 Employee Stock Compensation Plan.............14
Proposal 3 Amendment to Outside Directors Stock Option Plan...............16
Proposal 4 Amendment to Qualified Employee Stock Purchase Plan............18
Selection of Auditors......................................................19
Proposals of Shareholders for Presentation at Next Annual
Meeting of Shareholders............................................20
Annual Report..............................................................20
Other Business.............................................................20
Availability of Annual Report on Form 10-KSB...............................20
Amendment to 1993 Stock Compensation Plan..................................A-1
Amendment to Outside Directors Stock Option Plan...........................A-2
Amendment to Qualified Employee Stock Purchase Plan........................A-3
</TABLE>
<PAGE>
MEDICALCONTROL, INC.
8625 King George, Dr. Suite 300
Dallas, Texas 75235
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held Wednesday, May 14, 1997
GENERAL INFORMATION
This proxy statement is furnished to shareholders by the Board of Directors
of MedicalControl, Inc. (the "Company") for solicitation of proxies for use at
the Annual Meeting of Shareholders of the Company (the "Meeting") on Wednesday,
May 14, 1997, to be held at the Company's offices at 8625 King George Dr.,
Dallas, Texas 75235, at 9:30 a.m., and at all adjournments thereof for the
purposes set forth in the attached Notice of Annual Meeting of Shareholders.
The Board of Directors is not currently aware of any other matters that will
come before the meeting.
In addition to the use of the mails, proxies may be solicited by personal
interview, telephone or telegraph by officers, directors and other employees of
the Company, who will not receive additional compensation for such services.
The Company may also request brokerage houses, nominees, custodians and
fiduciaries to forward the soliciting material to the beneficial owners of stock
held of record and will reimburse such persons for forwarding such material at
the rates suggested by the New York Stock Exchange. The Company will bear the
cost of this solicitation of proxies. Such costs are expected to be nominal.
Proxy solicitation will commence with the mailing of this Proxy Statement on or
about April 22, 1997.
Execution and return of the enclosed proxy will not affect a shareholder's
right to attend the Meeting and to vote in person. Any shareholder executing a
proxy retains the right to revoke it at any time prior to exercise at the
Meeting. A proxy may be revoked by delivery of written notice of revocation to
the Secretary of the Company, by execution and delivery of a later proxy or by
voting the shares in person at the Meeting. A proxy, when executed and not
revoked, will be voted in accordance with the instructions thereon. In the
absence of specific instructions, proxies will be voted by the person named in
the proxy "FOR" the election as directors of those nominees named in the Proxy
Statement, "FOR" the proposed amendment to the 1993 Stock Compensation Plan,
"FOR" the proposed amendment to the Outside Directors Stock Option Plan and
"FOR" the proposed amendment to the Qualified Employee Stock Purchase Plan.
The enclosed form of proxy provides a method for shareholders to withhold
authority to vote for any one or more of the nominees for director while
granting authority to vote for the remaining nominees. The names of all
nominees are listed on the proxy. If you wish to grant authority to vote for
all nominees, check the box marked "FOR." If you wish to withhold authority to
vote for some nominees and not for one or more of the others, check the box
marked "FOR" and indicate the name(s) of the nominee(s) for whom you are
withholding the authority to vote by writing the name(s) of such nominee(s) on
the proxy in the space provided.
<PAGE>
VOTING AT MEETING
The voting securities of the Company consist solely of common stock, $.01
par value per share (the "Common Stock"). The Board of Directors has fixed
April 14, 1997 as the record date for the determination of shareholders entitled
to vote at the Annual Meeting. As of close of business on the record date,
there were 3,875,023 shares of Common Stock outstanding. Shareholders are
entitled to one vote, in person or by proxy, for each share of Common Stock held
in their name on the record date. As provided in the Company's Certificate of
Incorporation, there is no right of cumulative voting. All matters being voted
upon by the shareholders require a majority vote of the shares represented at
the Annual Meeting either in person or by proxy, except for the election of
directors, which require a plurality vote in the event of more nominees than
positions (i.e., the four nominees receiving the highest number of votes would
be elected).
The presence at the Annual Meeting in person or by proxy of the holders of
a majority of the outstanding shares of Common Stock entitled to vote
constitutes a quorum for the transaction of business. Shares voted as abstention
and broker non-votes on any matter (or a "withheld authority" vote as to
directors) will be counted as present and entitled to vote for purposes of
determining a quorum and for the purposes of calculating the vote with respect
to such matter, but will not be deemed to have been voted in favor of such
matter. "Broker non-votes" are shares held by brokers or nominees which are
present in person or represented by proxy, but which are not voted on a
particular matter because instructions have not been received from the
beneficial owner. The effect of broker non-votes on a particular matter depends
on whether the matter is one as to which the broker or nominee has discretionary
voting authority. If a broker submits a proxy that indicates the broker does not
have discretionary authority to vote certain shares on a particular matter,
those shares will be counted as present for purposes of determining a quorum,
but will not be considered present and entitle to vote for purpose of
calculating the vote with respect to such matter.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH NOMINEE
FOR DIRECTOR NAMED HEREIN, FOR THE PROPOSED AMENDMENT TO THE 1993 STOCK
COMPENSATION PLAN, FOR THE PROPOSED AMENDMENT TO THE OUTSIDE DIRECTORS STOCK
OPTION PLAN AND FOR THE PROPOSED AMENDMENT TO THE QUALIFIED EMPLOYEE STOCK
PURCHASE PLAN. IT IS INTENDED THAT PROXIES SOLICITED BY THE BOARD OF DIRECTORS
WILL BE VOTED FOR EACH NOMINEE AND FOR SUCH OTHER PROPOSALS UNLESS OTHERWISE
DIRECTED BY THE SHAREHOLDER SUBMITTING THE PROXY.
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<PAGE>
PRINCIPAL SHAREHOLDER AND OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of April 11, 1997, by (i) all persons known by
the Company to be the owner of record or beneficially, of more than five percent
of the outstanding Common Stock, (ii) each executive officer and director of the
Company and (iii) all directors and executive officers as a group.
Name Share Beneficially Owned Percent of Shares
---- ------------------------ -----------------
John Ward Hunt (1)
and
The Answer Partnership, Ltd. (1) 3,185,000 (2) 69.0%
William L. Amos, Jr. 12,000 (3) .3%
David Samuel Coats 11,000 (4) .2%
Robert W. Philip 23,000 (5) .5%
Robert O. Brooks 50,000 (6) 1.1%
Roger A. Chapman 12,000 (7) .3%
David A. Hanson 10,000 (8) .2%
Stephanie L. McVay 10,000 (9) .2%
David C. Bramer 83,952 (10) 1.8%
Daniel Riston 22,470 (11) .5%
All Executive Officers and
Directors as a Group (10 persons) 3,419,422 74.1%
- ---------------------------
(1) The business address of Mr. Hunt and The Answer Partnership, Ltd. is 8625
King George Dr., Suite 300, Dallas, Texas 75235. Such shares are held of record
and beneficially by The Answer Partnership, Ltd. but may also be deemed to be
beneficially owned by Mr. Hunt (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) since, as managing partner of such
partnership, Mr. Hunt has the power to direct the voting and disposition of such
shares. See "Certain Relationships and Related Transactions" for further
information concerning The Answer Partnership, Ltd.
(2) Includes 240,000 shares with respect to which The Answer Partnership, Ltd.
has the right to acquire by virtue of outstanding vested options and 300,000
shares with respect to which J. Ward Hunt has the right to acquire by virtue of
outstanding vested options.
(3) Includes 10,000 shares with respect to which Dr. Amos has the right to
acquire by virtue of outstanding vested options.
(4) All of which are shares with respect to Mr. Coats has the right to acquire
by virtue of outstanding vested options.
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<PAGE>
(5) Includes 22,000 shares with respect to which Mr. Philip has the right to
acquire by virtue of outstanding vested options.
(6) Includes 20,000 shares and 30,000 shares with respect to which Mr. Brooks
has the right to acquire by virtue of outstanding options vesting 20% per year
on a cumulative basis commencing February 26, 1997 and July 27, 1996,
respectively.
(7) Includes 10,000 shares with respect to which Mr. Chapman has the right to
acquire by virtue of outstanding options vesting 50% per year on a cumulative
basis commencing July 15, 1997.
(8) Includes 5,000 and 5,000 shares with respect to which Mr. Hanson has the
right to acquire by virtue of outstanding options vesting 20% per year on a
cumulative basis commencing July 1, 1997 and March 18, 1998, respectively.
(9) Includes 5,000 and 5,000 shares with respect to which McVay has the right
to acquire by virtue of outstanding options vesting 20% per year on a cumulative
basis commencing July 1, 1997 and March 18, 1998, respectively.
(10) Includes 7,500 shares with respect to which Mr. Bramer has the right to
acquire by virtue of outstanding vested options, 50,000 shares with respect to
which Mr. Bramer has the right to acquire by virtue of outstanding options
vesting 20% per year on a cumulative basis commencing July 27, 1996, 25,000
shares with respect to which Mr. Bramer has the right to acquire by exercising a
right to convert $100,000 of the principal amount of a note owed to Mr. Bramer
by the Company and 1,252 shares with respect to which Mrs. Bramer has the right
to acquire by virtue of qualified options.
(11) Includes 1,000 shares with respect to which Mr. Riston has the right to
acquire by virtue of outstanding vested options, 14,000 shares and 5,000 shares
with respect to which Mr. Riston has the right to acquire by virtue of
outstanding options vesting 20% per year on a cumulative basis commencing July
27, 1996 and November 8, 1997, respectively, and 1,674 shares and 796 shares
with respect to which Mr. Riston and Mrs. Riston has the right to acquire by
virtue of outstanding options, respectively.
STOCK REPURCHASE PROGRAM
On December 17, 1996, the Board of Directors authorized the Company to buy
back up to 500,000 shares of Common Stock over a 24-month period. The stock
repurchases may be made from time to time in both open market and private
transactions and will be dependent on market conditions and availability.
Repurchased shares will be added to the Company's treasury shares and may be
used for employee stock plans and other corporate purposes. As of April 11,
1997, the Company had not repurchased any stock.
4
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall be as
fixed from time to time by resolution of the shareholders subject to increase by
the Board of Directors. The current number of members of the Board of
Directors is four (4). Each director will be elected for a one-year term
expiring upon the election of his successors at the next annual meeting. The
four persons designated by the Board of Directors as nominees for election as
directors at the Annual Meeting are J. Ward Hunt, Robert W. Philip, David Samuel
Coats and William L. Amos, Jr., M.D. Each nominee is currently a member of the
Board of Directors.
In the event any nominee should be unavailable to stand for election at the
time of the Annual Meeting, the proxies may be voted for a substitute nominee
selected by the Board of Directors. Management of the Company knows of no reason
why any nominee would be unable to serve.
See "Management" for biographical information concerning Mr. J. Ward Hunt,
who is an employee of the Company. The following biographical information is
furnished with respect to each of the other nominees.
William L. Amos, Jr., M.D. has served as a director of the Company since
May 1996. Dr. Amos has served as the Company's Medical Director since 1993.
After completing his training and serving two years in the Navy, Dr. Amos was
engaged in the private practice of obstetrics and gynecology. Dr. Amos also
served as Director, Senior Vice President and Medical Director of AFLAC. In
1988, Dr. Amos founded MedStrategies of Georgia, Inc., which collaborated with
MedStrategies of Virginia, Inc. to form MedStrategies, Inc. MedStrategies offers
a wide range of consulting services to managed care organizations, providers and
healthcare purchasers. Dr. Amos was a founding director and first President of
the American Association of Preferred Provider Organizations (now known as the
Association of Managed Healthcare Organizations) and continues to serve as a
director. Dr. Amos also serves as a director of the Utilization Review
Accreditation Commission. Dr. Amos received his Bachelors of Science degree from
the Georgia Institute of Technology in 1966 and his Medical Doctorate from the
Medical College of Georgia in 1970. Dr. Amos completed his internship and
residency in obstetrics and gynecology at Baylor University Medical Center in
1974. Dr. Amos is certified by the American Board of Obstetricians and
Gynecologists and a Fellow of the American College of Obstetricians and
Gynecologists. See "Certain Relationships and Related Transactions".
David Samuel Coats has served as a director of the Company since April
1996. He is President and Chief Executive Officer of PROS Strategic Solutions,
Inc. PROS is the world's leading provider of airline revenue management systems,
with more than forty airline customers around the world. From January 1996 until
November 1996, Mr. Coats was a self-employed business consultant and private
investor. From 1993 to 1995, Mr. Coats served as a Senior Vice President at
Continental Airlines, Inc, where he was a member of the management team that
brought Continental out of bankruptcy and assisted in establishment of its
business after bankruptcy. At various periods during his tenure at Continental,
Mr. Coats was over in-flight services, reservations, customer relations and the
short haul system of Continental and Continental Express. He also served as a
member of the airline's senior management committee. Before joining Continental,
Mr. Coats served as Chief Executive Officer of Southern Cross Airline Holdings
Ltd., d.b.a. Compass Airlines, an Australian airline placed in receivership and
liquidated in April 1993. Mr. Coats received his Bachelor of Arts degree in 1964
and Law Degree in 1965 from the University of Texas in Austin.
Robert W. Philip has served as a director of the Company since October
1992. He was Executive In Residence and Lecturer at the University of North
Texas, Denton, Texas from September 1989 until May 1994. Effective July 31,
1989, Mr. Philip retired from Arthur Andersen LLP, an
5
<PAGE>
international audit and business advisory firm, of which he was a partner since
1971. His experience with the Andersen Worldwide Organization included
assignments in the United States and Europe, working with both very large,
publicly owned clients and smaller entrepreneurial enterprises. Mr. Philip
resigned from the Board of Directors of Sport Supply Group, Inc. in December
1996.
None of the nominees has any family relationship with each other or any
officer or director of the Company. None of the nominees is being proposed for
election pursuant to any arrangement of understanding between such nominees and
any other person except only the directors and executive officers of the Company
acting solely as such.
THE BOARD OF DIRECTORS RECOMMENDS TO THE SHAREHOLDERS THAT THEY VOTE "FOR"
THE ELECTION OF EACH NOMINEE.
BOARD OF DIRECTORS
The Board of Directors has the responsibility for establishing board
corporate policies and for the overall performance of the Company, although it
is not involved in day-to-day operations. The Board meets regularly throughout
the year, including the annual organization meeting following the Annual Meeting
of Shareholders, to review significant developments affecting the Company and to
act upon matters requiring Board approval. It also holds special meetings as
required from time to time when important matters arise requiring Board action
between scheduled meetings. During the last fiscal year, the Board met nine
times.
The Board of Directors has established Audit, Compensation and Stock Option
Committees to devote attention to specific subjects and to assist it in the
discharge of its responsibilities. The functions of these committees, their
current members and the number of meetings held during the last fiscal year are
described below.
The Compensation Committee consists of Messrs. Philip and Coats. Its
functions are to review and approve annual salaries and bonuses for all
executive officers and review, approve and recommend to the Board of Directors
the terms and conditions of all employee benefits or changes thereto. The
Compensation Committee also administers the Company's 1993 Stock Compensation
Plan for the benefit of certain officers, directors, employees and advisors of
the Company and the Company's Qualified Employee Stock Purchase Plan (the "Stock
Option Plans"). The Compensation Committee is authorized, among other powers,
to determine from time to time the individuals to whom options shall be granted,
the number of shares to be covered by each option and the time or times at which
the option shall be granted pursuant to the Stock Option Plans. The
Compensation Committee met twice during the last fiscal year.
The Audit Committee consists of Messrs. Philip and Coats. The functions of
the Audit Committee are to recommend annually to the Board of Directors the
appointment of the independent public accountants of the Company, discuss and
review the scope and the fees of the prospective annual audit and review the
results thereof with the independent public accountants, review and approve non-
audit services of the independent public accountants, review compliance with
existing accounting and financial policies of the Company, review the adequacy
of the financial organization of the Company and review management's procedures
and policies relative to the adequacy of the Company's internal accounting
controls and compliance with federal and state laws relating to financial
reporting. The Audit Committee met twice during the last fiscal year.
The Stock Option Committee consists of the Board of Directors. The
function of the Stock Option Committee is to manage and administer the Company's
Outside Directors Stock Option Plan. The Stock Option Committee did not meet
during the last fiscal year.
6
<PAGE>
The Company does not have a nominating committee. The functions
customarily, attributable to a nominating committee, are performed by the Board
of Directors as a whole.
During the last fiscal year, no director attended fewer than 75 percent of
the aggregate of the total number of meetings of the Board of Directors and the
total number of meetings held by all committees of the Board on which he served
except Mr. Coats did not attend the one Audit Committee meeting held in 1996
while he was a member of the Audit Committee.
Director Compensation
Each non-employee director of the Company receives $1,750 for each meeting
of the Board of Directors attended, as well as reimbursement of reasonable
expenses and $500 for each telephonic meeting of the Board of Directors in which
he participates. In November 1996, the Company paid Mr. Coats an additional
$1,000 for other board services rendered to the Company.
Outside Directors Stock Option Plan
In addition, pursuant to the Outside Directors Stock Option Plan, the
Company issues each director options to purchase 10,000 shares of Common Stock
at fair market value upon initial election to the Board. The Company also issues
each director 1,000 additional options upon their re-election to the Board for
subsequent terms. On September 1, 1994, the Company granted Mr. Philip
additional options to purchase 10,000 shares of Common Stock at $5.00 at any
time before September 1, 2004 for other services rendered to Company. The
Company has granted Dr. Amos, Mr. Coats and Mr. Philip options to purchase an
aggregate of 10,000, 11,000 and 22,000 shares of Common Stock pursuant to the
Directors Plan, respectively.
The Outside Directors Stock Option Plan (the "Directors Plan") was adopted
in order to enhance the Company's ability to secure and retain highly qualified
and experienced individuals who are not regularly salaried employees of the
Company to serve as directors of the Company. The Directors Plan provides
generally that (i) the purchase price of the Common Stock under each option
granted shall not be less than the fair market value of the Common Stock on the
date of grant; (ii) no director may be granted during any calendar year options
to purchase more than 10,000 shares of Common Stock; (iii) no option may be
granted for a period of greater than ten years from the date of grant; and (iv)
a maximum of 50,000 shares of Common Stock have been authorized and reserved for
issuance under the Directors Plan.
On August 20, 1996, the Executive Committee of the Board of Directors
elected, subject to shareholder approval, to amend the Directors Plan to remove
a prohibition to modify any outstanding options to decrease the exercise price
of an option. In order for the options to be an incentive for its outside
directors and to continue the purpose of the Directors Plan, the Executive
Committee, subject to shareholder approval of the amendment to the Directors
Plan, elected to decrease the exercise price of all outstanding options granted
under the Directors Plan to $4.50. Immediately prior to August 20, 1996, the
Company had 43,000 options outstanding under the Directors Plan with exercise
prices ranging from $5.00 to $8.71. See "PROPOSAL NO. 3 AMENDMENT TO THE OUTSIDE
DIRECTOR STOCK OPTION PLAN."
7
<PAGE>
MANAGEMENT
The following tables set forth certain information with respect to each of
the directors and executive officers of the Company. The executive officers and
directors of the Company are as follows:
Name Age Position
- ---- --- --------
John Ward Hunt 50 President, Chief Executive Officer and
Chairman of the Board of Directors of the
Company and Director of Diversified Group
Administrators, a wholly-owned subsidiary
of the Company ("DGA")
Robert O. Brooks 50 Executive Vice President and Chief Operating
Officer of the Company and Director of DGA
Roger A. Chapman 44 Senior Vice President, Network Services
David A. Hanson 34 Vice President, Finance and Accounting
Stephanie L. McVay 33 General Counsel and Secretary
David C. Bramer 50 President, Chief Executive Officer and
Director of DGA
Daniel Riston 49 Executive Vice President, Chief Financial
Officer and Director of DGA
William L. Amos, Jr., M.D. 52 Director and Medical Director
David Samuel Coats 56 Director
Robert W. Philip 61 Director
John Ward Hunt has served as President of the Company since January 1989
and as Chief Executive Officer and Chairman of the Board since December 1989.
From 1970 until joining the Company in 1989, Mr. Hunt was self-employed as an
investor in various operating businesses. Mr. Hunt is the managing general
partner of the principal shareholder of the Company. He received his Bachelor of
Arts degree in history from Washington and Lee University in 1969. See "Certain
Relationships and Related Transactions."
Robert O. Brooks has served as Executive Vice President and Chief Operating
Officer of the Company since February 1996. From March 1995 until January 1996,
Mr. Brooks was Vice President, Operations of the Company. From 1992 to 1994,
Mr. Brooks was Executive Vice President and General Manager of PayFlex Systems
USA, Inc., an Omaha, Nebraska third party administrator ("TPA"). From 1990 to
1992, he was Vice President - Insurance Operations for R.E. Harrington, Inc., a
national TPA based in Westerville, Ohio. Mr. Brooks is a director of the
Association of Managed Healthcare Organizations. Mr. Brooks received his
Bachelor of Science degree in social science/education from Wayne State
University in 1969 and his Masters of Business Administration degree from the
University of Dayton in 1981.
Roger A. Chapman has served as Senior Vice President, Network Services of
the Company since July 1996. From 1995 to 1996, Mr. Chapman formed a consulting
group to work with providers and businesses on electronic capabilities. From
1991 to 1995, Mr. Chapman was Vice President of Operations for ProAmerica
Managed Care, a Fort Worth, Texas preferred provider organization. From 1989 to
1991, he was Vice President of Marketing for Transport Life Insurance Company.
Mr. Chapman received his Bachelor of Science degree in actuarial science from
the University of Illinois in 1974 and his Masters of Business Administration
from the University of Illinois in 1976.
David A. Hanson has served as the Vice President, Finance and Accounting of
the Company since February 1997. From January 1996 until February 1997, he
served as Principal Accounting Officer and Controller of the Company. He has
over eight years of experience with Arthur Andersen LLP, an international audit
and business advisory firm, of which he was an audit manager since 1993. He also
has
8
<PAGE>
two years of internal audit experience with Centex Corporation, a national
general construction and home-building company. He received Bachelor of Arts
degrees in Accounting and Financial Management/Economics from the University of
Northern Iowa in 1985 and 1984, respectively.
Stephanie L. McVay has served as General Counsel of the Company since July
1996. Prior to joining the Company, Ms. McVay practiced corporate and securities
law for eight years with the law firm of Gardere & Wynne, L.L.P. She received
her Bachelors of Business Administration degree in Accounting from Texas A&M
University in 1984 and a Juris Doctor degree from Southern Methodist University
School of Law in 1988.
David C. Bramer has served as President and Chief Executive Officer of DGA
since the corporation was organized in August 1989. From 1969 to 1982, Mr.
Bramer held various financial management positions in the Pittsburgh area. In
August 1982, he founded Simplified Employee Claims, Inc., the predecessor of
DGA. Mr. Bramer received his Bachelor of Arts in Economics from the University
of Pittsburgh in 1969 and his Master of Business Administration from the Katz
School of Business - University of Pittsburgh in 1976. See "Certain
Relationships and Related Transactions".
Daniel Riston has served as Executive Vice President and Chief Financial
Officer of DGA since the corporation was organized in August 1989. Prior to
joining DGA, Mr. Riston held various executive positions in the Pittsburgh area.
Mr. Riston received his Bachelor of Arts in Economics from the University of
Pittsburgh in 1976 and the Certified Management Accountant from the Institute of
Management Accounting in 1979.
EXECUTIVE COMPENSATION
The following table, and the accompanying explanatory footnotes, includes
annual and long-term compensation information on (i) the Company's Chief
Executive Officer and (ii) each executive officer who received total annual
salary and bonus in excess of $ 100,000, for services rendered in all capacities
during the fiscal years ended December 31, 1996, 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------------- ------------ All Other
Name and Fiscal Other Annual Options Compen-
Principal Position Year Salary Bonus Compensation Granted sation(1)
- ------------------ ------ ------ ------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
John Ward Hunt 1996 $250,000 $30,000 -0- -0- $32,610
President and Chief 1995 $249,577 -0- -0- -0- $32,610
Executive Officer 1994 $230,767 -0- -0- 500,000(2) $32,610
Robert O. Brooks 1996 $130,892 -0- -0- 20,000(3) -0-
Executive Vice 1995 $ 76,460 -0- -0- 30,000(4) -0-
President and Chief 1994 -0- -0- -0- -0- -0-
Operating Officer
David C. Bramer 1996 $150,110 -0- -0- -0- -0-
President and Chief 1995 $150,650 -0- -0- 57,500(5),(6) -0-
Executive Officer 1994 $129,124 -0- -0- -0- -0-
of DGA
</TABLE>
9
<PAGE>
- --------------------------------
(1) This amount reflects the amount paid by the Company for certain split
dollar insurance and/or deferred compensation/salary continuation for the
benefit of J. Ward Hunt.
(2) On December 10, 1994, the Company granted J. Ward Hunt 500,000 options to
purchase 500,000 shares at $8.75 per share expiring December 10, 2004. Subject
to certain terms and conditions, the options vest and may be exercised 20% per
year on a cumulative basis commencing May 13, 1994.
(3) On February 26, 1996, the Company granted Robert O. Brooks 20,000 options
to purchase 20,000 shares at $5.63 per share expiring February 26, 2004. Subject
to shareholder approval of an amendment to the 1993 Stock Compensation Plan (the
"1993 Plan"), the Board subsequently elected to decrease the exercise price to
$4.50. Subject to certain terms and conditions, the options vest and may be
exercised 20% per year on a cumulative basis commencing February 26, 1997.
(4) On July 25, 1995, the Company granted Robert O. Brooks 30,000 options to
purchase 30,000 shares at $6.75 per share expiring July 25, 2005. Subject to
shareholder approval of an amendment to the 1993 Plan, the Board has
subsequently elected to decrease the exercise price to $4.50. Subject to certain
terms and conditions, the options vest and may be exercised 20% per year on a
cumulative basis commencing July 25, 1996.
(5) On November 6, 1995, the Company granted David C. Bramer an option to
convert up to $100,000 of principal amount of debt owed to him by the Company,
in connection with the Company's purchase of Diversified Group Administrators,
Inc., to 20,000 shares of Common Stock at $5.00 per share. On August 20, 1996,
the Company amended the conversion option to allow for up to 25,000 shares at
$4.00 per share. See "Certain Relationships and Related Transactions" for
further information regarding this transaction.
(6) On July 25, 1995, the Company granted David C. Bramer 57,500 options to
purchase 7,500 shares and 50,000 shares at $6.75 per share expiring July 25,
2000 and July 25, 2005, respectively. Subject to shareholder approval of an
amendment to the 1993 Plan, the Board has subsequently elected to decrease the
exercise price to $4.50. Subject to certain terms and conditions, 7,500 options
vested immediately and 50,000 options vest 20% per year on a cumulative basis
commencing July 25, 1996.
401(k) Plan
Effective January 1, 1991, as amended April 1, 1992, the Company adopted a
401(k) Profit Sharing Plan (the "401(k) Plan") that is qualified under Section
401(k) of the Internal Revenue Code of 1986 (the "Code"). The 401(k) Plan is
available to each Company employee who meets certain eligibility requirements.
Employees may begin participation in the 401(k) Plan in January, April, July and
October of each year any time after one year of employment. Participating
employees may contribute a portion of their compensation not exceeding a limit
set annually by the Internal Revenue Service. The Company may make matching
contributions for eligible employees in an amount of 50% of the employee's
contribution, not to exceed a contribution by the employee of 5% of his or her
salary.
Qualified Employee Stock Purchase Plan
The Board of Directors and the shareholders have adopted and approved a
Qualified Employee Stock Purchase Plan (the "Plan") established under Section
423 of the Code. The Qualified Plan authorizes the issuance of 100,000 shares
of Common Stock to employees of the Company who (i) have been employed for at
least two years, (ii) have customary employment of a minimum of 20 hours per
week or customary employment of at least five months in any calendar year and
(iii) who are not
10
<PAGE>
considered a highly compensated employee as such employee has not during the
year in which the qualified option is granted, or the preceding year, received
compensation from the Company in excess of $75,000, as adjusted for cost of
living increases. The Qualified Plan basically provides that qualified options
will be granted to participating employees to purchase shares of Common Stock at
a purchase price equal to 85% of the fair market value of the shares as of the
date of grant of the qualified option. The term of the qualified option shall be
for a period of 27 months and will be exercisable at any time commencing after
one year from the date of grant and prior to the termination of the option.
On March 18, 1997, the Board of Directors elected, subject to shareholder
approval, to increase the number of shares available under the Qualified Plan
from 100,000 shares to 200,000 shares. As of April 11, 1997, the Company had
outstanding an aggregate of 93,914 qualified options to a total of approximately
90 employees, each qualified option being exercisable at an exercise price of
$4.36 per share. See "PROPOSAL NO. 4 AMENDMENT TO THE QUALIFIED EMPLOYEE STOCK
PURCHASE PLAN."
1993 Stock Compensation Plan
The Board of Directors and the shareholders have adopted and approved the
1993 Stock Compensation Plan, as amended. Options granted pursuant to the 1993
Plan constitute either incentive stock options within the meaning of Section 422
of the Code, or options that constitute non-qualified options at the time of
issuance of such options. The 1993 Plan provides that incentive stock options,
non-qualified stock options, and/or stock appreciation rights would be granted
to certain officers, directors (other than outside directors), employees and
advisors of the Company or its subsidiaries selected by the Compensation
Committee. A total of 1,000,000 shares of Common Stock are authorized and
reserved for issuance under the 1993 Plan, subject to adjustment to reflect
changes in the Company's capitalization in the case of a stock split, stock
dividend or similar event. The Compensation Committee administers the 1993 Plan
and has the sole authority to interpret the 1993 Plan and to make all
determinations necessary or advisable for administering the 1993 Plan. The
exercise price for any incentive option must be at least equal to the fair
market value of the shares covered thereby as of the date of grant of such
option. Except in the case of disability or death, no option shall be
exercisable after an optionee who is an employee of the Company ceases to be
employed by the Company; provided, however, the Compensation Committee has the
right to extend the exercise period for not more than three months following the
date of termination of such optionee's employment. If an optionee's employment
is terminated by reason of death or disability, the Compensation Committee may
extend the option term for a period not to exceed one year following the date of
termination of the optionee's employment. Upon the exercise of the option, the
exercise price thereof must be paid in full either in cash, shares of stock of
the Company or a combination thereof. During 1996, the Company granted 59,000
options to executive officers (86.8% of total options issued in 1996) and 9,000
options to other employee.
On August 20, 1996, the Board of Directors elected, subject to shareholder
approval, to amend the 1993 Plan to remove a prohibition to modify any
outstanding options to decrease the exercise price after issuance of an option.
In order for the options to be incentives for its officers and other employees,
the Board of Directors, subject to shareholder approval of the amendment to the
1993 Plan, elected to decrease the exercise price of all outstanding options
granted under the 1993 Plan to $4.50. Prior to the Board meeting on August 20,
1996, the Company had 179,700 options outstanding with exercise prices ranging
from $4.50 to $7.54. See "PROPOSAL NO. 2 AMENDMENT TO THE 1993 STOCK
COMPENSATION PLAN."
If and to the extent that any option to purchase reserved shares shall not
be exercised by an optionee for any reason or if such option to purchase shall
terminate as provided by the 1993 Plan, such shares which have not been so
purchased thereunder shall again become available for the purposes of the 1993
Plan unless the 1993 Plan shall have been terminated.
11
<PAGE>
As of April 11, 1997, there were outstanding options to purchase an
aggregate of 226,700 shares under the 1993 Plan with exercise prices ranging
from $4.50 to $5.25, granted to a total of 17 employees, including the following
executive officers:
Exercise Price Current
Number of on Exercise Expiration
Name Options Date of Grant Price Date
---- ------- ------------- -------- ----------
Robert O. Brooks 30,000 6.75 4.50 July 27, 2005
20,000 5.63 4.50 February 21, 2006
Roger A. Chapman 10,000 5.25 4.50 July 15, 2001
David A. Hanson 5,000 5.25 4.50 July 1, 2006
5,000 5.125 5.125 March 18, 2007
Stephanie L. McVay 5,000 5.25 5.25 July 1, 2006
5,000 5.125 4.50 March 18, 2007
David C. Bramer 7,500 6.75 4.50 July 27, 2000
50,000 6.75 4.50 July 27, 2005
Daniel Riston 1,000 6.75 4.50 July 27, 2005
14,000 4.50 4.50 August 20, 2006
5,000 5.00 5.00 November 8, 2006
Employment Agreements
The Company and David C. Bramer have entered into an Employment Agreement
that provides for Mr. Bramer's salary of $150,000 per year, a stock bonus if
certain conditions are met, payment of disability benefits, a car allowance and
reimbursement of certain club dues. The Agreement provides for six months
severance in certain circumstances and has a covenant not to solicit clients for
one year if Mr. Bramer resigns.
The Company and Daniel Riston have entered into an Employment Agreement
that provides for a salary, cash and stock bonuses if certain conditions are
met. The Agreement provides for six months severance in certain circumstances
and has a covenant not to solicit clients for six months if Mr. Riston resigns.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Common Stock, to file initial reports of ownership (Form 3) and
reports of changes in ownership (Form 4) with the Securities and Exchange
Commission (the "SEC"). Executive officers, directors and greater than ten
percent beneficial owners are required by the SEC to furnish the Company with
copies of all Section 16(a) forms they file.
Based upon a review of the copies of such forms furnished to the Company,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, directors and greater than ten percent beneficial owners
were met during the year ended December 31, 1996, except each of Dr.
12
<PAGE>
Amos, Mr. Coats, Mr. Brooks and Mr. Hanson had one late Form 3 filing and Mr.
Bramer had one late Form 4 filing, during the fiscal year ended December 31,
1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Answer Partnership, Ltd. (the "Partnership") is a Texas limited
partnership that is owned 62.5% by J. Ward Hunt and 37.5% by The Essential
Endowment Trust (the "Trust"). Each of them owns a 1% general partnership
interest in the Partnership, with the balance of their respective interests
being held as limited partnership interests. The Partnership was organized
effective as of July 3, 1992, for purposes of acquiring all of the then-issued
and outstanding Common Stock. Mr. Hunt, President and Chief Executive Officer of
the Company, is the Managing Partner of the Partnership and controls the day-to-
day management of the Partnership. The Trust is a Texas irrevocable trust that
was formed effective as of July 2, 1992, for purposes of acquiring an interest
in the Partnership for the primary benefit of three children of Mr. Hunt. In the
event that Mr. Hunt should withdraw, or cease to serve, as Managing Partner, the
successor Managing Partner under the terms of the partnership agreement for the
Partnership would be Hilre Lucille Hunt and Thomas R. Corbett, as Co-Trustees of
the Trust. The Partnership is authorized to invest generally in any type of
property and to hold or develop and to sell, exchange or otherwise dispose of
all or any part of the Partnership property and carry on any other business or
businesses and exercise any and all powers as may be permitted by law.
On October 2, 1994, the Company approved a five-year loan to Mr. Hunt of up
to $300,000. The loan is secured by the pledge of 70,000 shares of the Company's
Common Stock by the Partnership and is guaranteed by the Partnership. The loan
accrues interest at the variable rate of prime plus one percent per annum. The
principal and any unpaid accrued interest are due in its entirety by November
1998. The outstanding principal and accrued interest on the loan as of April 11,
1997 was approximately $373,000.
On November 1, 1995, the Partnership entered into a $700,000 revolving line
of credit transaction with Compass Bank Dallas (the "Bank"). Under the terms of
the Partnership's agreement with the Bank, the Partnership executed a promissory
note dated November 1, 1995 (the "Note") in the amount of $700,000. The Note
bears interest at a variable rate equal to one percent over prime. The
Partnership is required to pay accrued interest on the principal of the Note on
a monthly basis with a final payment of unpaid principal and accrued interest
due and payable on May 15, 1997. All interest payments are current, and the
outstanding principal balance of the Note as of April 11, 1997 was approximately
$699,000. The Note is secured by a Pledge Agreement dated November 1, 1995,
wherein the Partnership pledged 2,000,000 shares of Common Stock as security for
the Bank. The Note is also secured by a Commercial Continuing Guaranty entered
into between Mr. Hunt, as guarantor, and the Bank. The Partnership retains the
right to vote the Common Stock for so long as no default has occurred under the
Note or the Pledge Agreement. The Partnership is currently in compliance with
the terms of the Note and the Pledge Agreement. Although the Partnership intends
to comply with the terms of the Note, any inability or failure by the
Partnership to comply with the terms of the Note and Pledge Agreement may result
in the Bank's owning the Common Stock, which it would probably be required by
banking laws to sell.
In August 1994, the Company purchased all of the issued and outstanding
shares of capital stock of DGA and Diversified Group Insurance Agency of
Pennsylvania, Inc. from David C. Bramer and Robert Soleau for $500,000 in cash,
a promissory note payable to Mr. Soleau in the principal amount of $1,558,000
and a promissory note payable to Mr. Bramer in the principal amount of $342,000.
On November 6, 1995, the Company agreed to permit David C. Bramer the option to
convert up to $100,000 of principal amount of debt owed to him by the Company,
in connection with the Company's purchase of DGA, to 20,000 shares of Common
Stock at $5.00 per share. On August 20, 1996, the Company amended the conversion
option to allow Mr. Bramer to convert $100,000 of the principal amount of the
debt for up to 25,000 shares of Common Stock at $4.00 per share.
13
<PAGE>
DGA leases approximately 5,000 square feet in a building owned by David C.
Bramer and his wife for approximately $2,600 per month. DGA is responsible for
all maintenance and repairs of the building.
Dr. Amos serves as the Company's Medical Director on a consultant basis.
For such services, the Company pays MedStrategies of Georgia, Inc., a
corporation in which Dr. Amos is the sole shareholder, $5,250 per month and $225
per hour for any hours worked in excess of 35 hours a month plus expenses. For
the year ended January 31, 1996, the Company paid MedStrategies of Georgia, Inc.
$87,305.
The Company does not currently intend to engage in future transactions with
Mr. Hunt or any affiliated persons in the future other than the lease of the
building from Mr. and Mrs. Bramer and the consulting arrangement with Dr. Amos.
All ongoing and any future transactions with affiliates are and will be on terms
no less favorable to the Company than could have been or could be obtained by
the Company from unaffiliated parties. The Company may seek competitive bids and
related market data prior to any such transaction. Further, any loans to
officers, affiliates or shareholders of the Company will be subject to review
and approval by a majority of the disinterested directors of the Company.
PROPOSAL 2
AMENDMENT TO 1993 STOCK COMPENSATION PLAN
On October 29, 1993 and May 25, 1994, the Board of Directors and the
shareholders, respectively, adopted and approved the 1993 Stock Compensation
Plan (the "1993 Plan"). The 1993 Plan authorizes the grant of options for up to
300,000 shares of Common Stock. On December 10, 1994 and May 24, 1995, the
Board of Directors and the shareholders, respectively, adopted and approved an
amendment to the 1993 Plan to increase the number of authorized shares of Common
Stock subject to the 1993 Plan from 300,000 to 1,000,000. The Company has
outstanding options to purchase 221,700 shares under the 1993 Plan. For a
description of the options granted to executive officers of the Company pursuant
to the 1993 Plan, see "EXECUTIVE COMPENSATION 1993 Stock Compensation Plan."
The exercise price for any incentive option must be at least equal to the
fair market value of the shares covered thereby as of the date of grant of such
option. Except in the case of disability or death, no option shall be
exercisable after an optionee who is an employee of the Company ceases to be
employed by the Company; provided, however, the Compensation Committee has the
right to extend the exercise period for not more than three months following the
date of termination of such optionee's employment. If an optionee's employment
is terminated by reason of death or disability, the Compensation Committee may
extend the option term for a period not to exceed one year following the date of
termination of the optionee's employment. Upon the exercise of the option, the
exercise price thereof must be paid in full either in cash, shares of stock of
the Company or a combination thereof.
The purpose of the 1993 Plan is to encourage ownership of the Common Stock
of the Company by certain officers, directors, employees and advisors of the
Company or any subsidiary of the Company in order to provide additional
incentive for such persons to promote the success and the business of the
Company or its subsidiary and to encourage them to remain in the employ of the
Company or its subsidiary by providing such persons an opportunity to benefit
from any appreciation of the Common Stock through the issuance of stock options
to such person in accordance with the terms of the 1993 Plan.
On August 20, 1996, in order to accomplish the purpose of the 1993 Plan,
subject to shareholder approval of the 1993 Plan amendment, the Board of
Directors elected to amend the 1993 Plan as described below and decrease the
exercise price of all outstanding options granted under the 1993 Plan to $4.50.
Prior to the board meeting on August 20, 1996, the Company had 179,700 options
outstanding
14
<PAGE>
with exercise prices ranging from $4.50 to $7.54. On August 19, 1996, the
closing sales price of the Common Stock as reported on the Nasdaq National
Market was $4.25 per share.
In order to decrease the exercise price of outstanding options, on August
20, 1996, the Board of Directors elected, subject to shareholder approval, to
amended the 1993 Plan to replace the words "Neither the Committee nor the Board
of Directors shall, however, modify any outstanding Option so as to specify a
lower price or accept the surrender of outstanding Options and authorize the
granting of new Options in substitution therefor specifying a lower price" in
Section 17 of the 1993 Plan with the words "Only with the approval of the Board
of Directors, may the Company modify any outstanding Option so as to specify a
lower price or accept the surrender of outstanding Options and authorize the
granting of new Options in substitution therefor specifying a lower price."
Report of the Compensation Committee of the Board of Directors on Amendment to
1993 Plan.
The Compensation Committee consists of Messrs. Philip and Coats. One of
the Compensation Committee's functions is to review, approve and recommend to
the Board of Directors the terms and conditions of all employee benefits or
changes thereto. The Compensation Committee also administers the 1993 Plan and
the Company's Qualified Employee Stock Purchase Plan.
Set forth below is a report submitted by the Board of Director's
Compensation Committee. This report addresses the decrease in the exercise
price of outstanding stock options granted under the 1993 Plan.
The Board of Directors determined that the options outstanding under the
1993 Plan were not performing their purpose because the exercise price
significantly exceeded the fair market value for most of the options. Over the
past two years, the Company's managed care division has experienced significant
change. The Company hired a new management team and certain other employees
focused on expanding its products and service offerings as well as improving
efficiencies and operations. Options for new management and other certain
employees hired at the beginning of the two-year process to restructure of the
Company or hired prior to the restructuring had a significantly higher exercise
price then the new management and certain other employees hired in 1996 or
granted options in 1996. The Board of Directors of the Company determined that
to carry out the purpose of the 1993 Plan and to give additional incentive to
the new management team and certain other employees, the exercise price for all
outstanding options should be deceased. In determining the price, the Board of
Directors reviewed the then current fair market value and considered the initial
public offering price of the Common Stock. The Board of Directors, subject to
shareholder's approval of the amendment to the 1993 Plan, elected to amend the
exercise price of all outstanding options under the 1993 Plan to $4.50.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS.
David Samuel Coats
Robert W. Philip
Federal Income Tax Information with Respect to the 1996 Plan
The Company has been advised that the federal income tax consequences of
the 1993 Plan to the Company and the optionees, and possible exercise of options
granted under the 1993 Plan, will depend upon future circumstances and possible
changes in the tax laws. The following summary discussion addresses certain
federal income tax consequences of the 1993 Plan. This discussion does not
purport to address all of the tax consequences that may be applicable to any
particular employee or to the Company. In addition, this discussion does not
address foreign, state or local taxes, nor does it address federal taxes other
than federal income tax. This discussion is based upon applicable
15
<PAGE>
statutes, regulations, case law, administrative interpretations and judicial
decision in effect as of the date of this Proxy Statement.
The grantee of a non-qualified option pursuant to the 1993 Plan recognizes
no income for federal income tax purposes on the grant thereof. On the exercise
of an option pursuant to the 1993 Plan, the difference between the fair market
value of the underlying shares of Common Stock on the exercise date and the
option exercise price is treated as compensation to the holder of the option
taxable as ordinary income in the year of exercise, and such fair market value
becomes the basis for the underlying shares which will be used in computing any
capital gain or loss upon disposition of such shares. Subject to certain
limitations the Company may deduct for the year of exercise an amount equal to
the amount recognized by the option holder as ordinary income upon exercise of
an option granted pursuant to the 1993 Plan.
The grantee of an incentive option pursuant to the 1993 Plan recognizes no
income for federal income tax purposes on the grant thereof. Except as provided
below with respect to the alternative minimum tax, there is no tax upon exercise
of the incentive option. If no disposition of shares acquired upon exercise of
the incentive option is made by the option holder within two years after date of
the grant of the incentive option or within one year after exercise of the
incentive option, any gain realized by the option holder on the subsequent sale
of such shares is treated as a long-term capital gain for federal income tax
purposes. If the shares are sold prior to the expiration of such periods, the
difference between the lesser of the value of the shares at the date of exercise
or at the date of sale and the exercise price of the incentive option is treated
as compensation to the employee taxable as ordinary income and the excess gain,
if any, is treated as capital gain (which will be long-term capital gain if the
shares are held for more than one year).
The excess of the fair market value of the underlying shares over the
option price at the time of exercise of an incentive option will constitute an
item of tax preference for purposes of the alternative minimum tax. Taxpayers
who incur the alternative minimum tax are allowed a credit against the regular
tax liability in a later year; however, the minimum tax credit cannot reduce the
regular tax below the alternative minimum tax for that carryover year.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO AMEND
THE 1993 PLAN
The full text of the amendment to the 1993 Stock Compensation Plan is
printed as Appendix A, beginning on page A-1.
PROPOSAL 3
AMENDMENT TO OUTSIDE DIRECTORS STOCK OPTION PLAN
On December 3, 1992, the Board of Directors and the then sole shareholder
adopted and approved the Outside Directors Stock Option Plan (the "Directors
Plan"). The Directors Plan authorized the grant of options for up to 25,000
shares of Common Stock. On January 21, 1993, the Board of Directors and the
shareholders, respectively, adopted and approved an amendment to the Directors
Plan to increase the number of authorized shares of Common Stock subject to the
Directors Plan from 25,000 to 50,000. The Company has outstanding options to
purchase 43,000 shares under the Directors Plan. For a description of the
options granted to directors of the Company pursuant to the Directors Plan see
"BOARD OF DIRECTORS Outside Directors Stock Option Plan."
The purpose of the Directors Plan is to increase the Company's ability to
secure and retain highly qualified and experienced individuals to serve as
directors of the Company by affording them the opportunity to acquire an equity
interest in the Company.
16
<PAGE>
On August 20, 1996, in order to accomplish the purpose of the Directors
Plan, subject to shareholder approval of the amendment to the Directors Plan,
the Executive Committee of the Board of Directors elected to amend the Directors
Plan as described below and decrease the exercise price of all outstanding
options granted under the Directors Plan to $4.50. Immediately prior to the
decrease, the Company had 43,000 options outstanding with exercise prices
ranging from $5.00 to $8.75. On August 19, 1996, the closing sales price of the
Common Stock as reported on the Nasdaq National Market was $4.25 per share.
In order to decrease the exercise price of outstanding options, on August
20, 1996, the Executive Committee of the Board of Directors elected, subject to
shareholder approval, to amended the Directors Plan to replace the words
"Neither the Committee nor the Board of Directors shall, however, modify any
outstanding Option so as to specify a lower price or accept the surrender of
outstanding Options and authorize the granting of new Options in substitution
therefor specifying a lower price" in Section 14 of the Directors Plan with the
words "Only with the approval of a majority of the non-interested directors, may
the Company modify any outstanding Option so as to specify a lower price or
accept the surrender of outstanding Options and authorize the granting of new
Options in substitution therefor specifying a lower price."
Federal Income Tax Information with Respect to the Directors Plan
The Company has been advised that the federal income tax consequences of
the Directors Plan to the Company and the optionees, and possible exercise of
options granted under the Directors Plan, will depend upon future circumstances
and possible changes in the tax laws. The following summary discussion
addresses certain federal income tax consequences of the Directors Plan. This
discussion does not purport to address all of the tax consequences that may be
applicable to any particular employee or to the Company. In addition, this
discussion does not address foreign, state or local taxes, nor does it address
federal taxes other than federal income tax. This discussion is based upon
applicable statutes, regulations, case law, administrative interpretations and
judicial decision in effect as of the date of this Proxy Statement.
The grantee of a non-qualified option pursuant to the Directors Plan
recognizes no income for federal income tax purposes on the grant thereof. On
the exercise of an option pursuant to the Directors Plan, the difference between
the fair market value of the underlying shares of Common Stock on the exercise
date and the option exercise price is treated as compensation to the holder of
the option taxable as ordinary income in the year of exercise, and such fair
market value becomes the basis for the underlying shares which will be used in
computing any capital gain or loss upon disposition of such shares. Subject to
certain limitations the Company may deduct for the year of exercise an amount
equal to the amount recognized by the option holder as ordinary income upon
exercise of an option granted pursuant to the Directors Plan.
The grantee of an incentive option pursuant to the Directors Plan
recognizes no income for federal income tax purposes on the grant thereof.
Except as provided below with respect to the alternative minimum tax, there is
no tax upon exercise of the incentive option. If no disposition of shares
acquired upon exercise of the incentive option is made by the option holder
within two years after date of the grant of the incentive option or within one
year after exercise of the incentive option, any gain realized by the option
holder on the subsequent sale of such shares is treated as a long-term capital
gain for federal income tax purposes. If the shares are sold prior to the
expiration of such periods, the difference between the lesser of the value of
the shares at the date of exercise or at the date of sale and the exercise price
of the incentive option is treated as compensation to the employee taxable as
ordinary income and the excess gain, if any, is treated as capital gain (which
will be long-term capital gain if the shares are held for more than one year).
17
<PAGE>
The excess of the fair market value of the underlying shares over the
option price at the time of exercise of an incentive option will constitute an
item of tax preference for purposes of the alternative minimum tax. Taxpayers
who incur the alternative minimum tax are allowed a credit against the regular
tax liability in a later year; however, the minimum tax credit cannot reduce the
regular tax below the alternative minimum tax for that carryover year.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL TO AMEND
THE OUTSIDE DIRECTORS STOCK OPTION PLAN.
The full text of the amendment to the Outside Directors Stock Option Plan
is printed as Appendix A, beginning on page A-2.
PROPOSAL NO. 4
AMENDMENT TO QUALIFIED PLAN
On December 13, 1993 and May 25, 1994, the Board of Directors and the
shareholders, respectively, adopted and approved the Qualified Employee Stock
Purchase Plan (the "Qualified Plan"). The Qualified Plan authorizes the grant
of options for up to 100,000 shares of Common Stock. The Company granted
options, which are currently outstanding, to purchase 93,914 shares under the
Qualified Plan and options for only 6,086 shares were available for grant under
the Qualified Plan.
The purpose of the Qualified Plan is to advance the growth and development
of the Company by providing an opportunity to all participating employees to
acquire an ownership interest in the Company. It is believed that employee
participation in the ownership of the business will help to achieve the unity of
purpose essential to the continued growth of the Company and the mutual benefit
of its employees and shareholders.
In 1994, the Company purchased two third party administration companies,
which were subsequently merged and are now a wholly-owned subsidiary of the
Company. As of April 11, 1996, the Company and its subsidiary had 185
employees, approximately 90 of which are qualified for stock options under the
Qualified Plan. The Board of Directors believes that an increase in the number
of shares available for grant under the Qualified Plan is necessary to continue
to accomplish its purpose. Accordingly, the Board of Directors by resolution
dated March 18, 1997, approved an amendment to increase the number of shares of
Common Stock subject to the Qualified Plan from 100,000 shares to 200,000
shares, subject to approval of the Company's shareholders.
The Qualified Plan authorizes the issuance of options to employees of the
Company (i) who have been employed at least two years, (ii) have customary
employment of a minimum of 20 hours per week or customary employment of at least
five months in any calendar year and (iii) who are not considered a highly
compensated employee as such employee has not, during the year in which the
qualified option is granted, or the preceding year, received compensation from
the Company in excess of $75,000, as adjusted for cost of living increases. The
Qualified Plan basically provides that qualified options will be granted to
participating employees to purchase shares of Common Stock at a purchase price
equal to 85% of the fair market value of the shares as of the date of grant of
the qualified option. The term of the qualified option shall be for a period of
27 months and will be exercisable at any time commencing after one year from the
date of grant and prior to the termination of the option.
The Company has an aggregate of 93,194 qualified options outstanding to a
total of approximately 90 employees, each qualified option being exercisable at
a price of $4.36 per share. As of April 11, 1997, the closing sale price of the
Common Stock was $5.1875. No current executive officer or director is eligible
to participate in the Qualified Plan although Mr. Riston has outstanding options
to
18
<PAGE>
purchase 1,674 shares under the Qualified Plan. The spouses of Messrs. Bramer
and Riston's, as qualifying employees of the Company's subsidiary, are eligible
to participate in the Qualified Plan. Mrs. Bramer holds options to purchase
1,252 shares at $4.36 per share. Mrs. Riston holds options to purchase 796
shares at $4.36 per share.
If and to the extent that any option to purchase reserved shares shall not
be exercised by an employee for any reasons or if such option to purchase shall
terminate as provided by the Qualified Plan, the shares that have not been
purchased under the Qualified Plan shall again become available for the purposes
of the Qualified Plan unless the Qualified Plan shall have been terminated.
Federal Income Tax Information with Respect to the Qualified Plan
The Company has been advised that the federal income tax consequences of
the Qualified Plan to the Company and the optionees, and possible exercise of
options granted under the Qualified Plan, will depend upon future circumstances
and possible changes in the tax laws. The following summary discussion
addresses certain federal income tax consequences of the Qualified Plan. This
discussion does not purport to address all of the tax consequences that may be
applicable to any particular employee or to the Company. In addition, this
discussion does not address foreign, state or local taxes, nor does it address
federal taxes other than federal income tax. This discussion is based upon
applicable statutes, regulations, case law, administrative interpretations and
judicial decision in effect as of the date of this Proxy Statement.
The tax consequences for the employee-optionee and the Company arising from
options granted under the Qualified Plan are generally that no taxable event
occurs by virtue of the grant or exercise of a stock option under the Qualified
Plan. In order for the employee to receive favorable capital gains treatment,
the employee must, at all time during the period beginning with the date of
grant and ending on the day three months before the option is exercised, be an
employee of the Company or a subsidiary of the Company. If the foregoing
employment condition is satisfied, no income tax liability results to the
employee on the grant or exercise of an option under the Qualified Plan, and the
Company is not allowed a deduction at any time for the stock involved. The
employee becomes liable for the tax on disposition of the stock. The tax
treatment of the subsequent disposition of stock issued under the Qualified Plan
depends on whether the stock was disposed of within or after the statutory
holding period and the exercise price of the option. The statutory holding
period for the Qualified Plan stock is the later of two years after the granting
of the option or one year from the date of transfer of the stock pursuant to the
option.
THE BOARD OF DIRECTORS RECOMMENDS TO THE SHAREHOLDERS THAT THEY VOTE "FOR"
THE ADOPTION OF THE AMENDMENT TO THE QUALIFIED EMPLOYEE STOCK PURCHASE PLAN.
The full text of the amendment to the Qualified Employee Stock Purchase
Plan is printed as Appendix A, beginning on page A-3.
SELECTION OF AUDITORS
The Board of Directors has selected the firm of Arthur Andersen LLP,
independent certified public accountants, to serve as the Company's independent
auditors for the fiscal year ended December 31, 1997. Arthur Andersen LLP has
audited the Company's financial statements since its 1993 fiscal year. A
representative of Arthur Andersen LLP will attend the Meeting and will have the
opportunity to make a statement if he or she so desires. This representative
will be available to respond to appropriate shareholder questions at that time.
19
<PAGE>
PROPOSALS OF SHAREHOLDERS FOR PRESENTATION
AT NEXT ANNUAL MEETING OF SHAREHOLDERS
Any shareholder of record of the Company, who desires to submit a proper
proposal for inclusion in the proxy materials relating to the next Annual
Meeting of Shareholders, must do so in writing and it must be received at the
Company's principal executive offices by December 21, 1997. The proponent must
be a record or beneficial owner entitled to vote at the next Annual Meeting on
his or her proposal and must continue to own such security entitling him or her
to vote through the date on which the meeting is held.
ANNUAL REPORT
The Annual Report to Shareholders concerning the operations of the Company
during the fiscal year ended December 31, 1996, including audited financial
statements for the year then ended, has been distributed to all record holders
as of the record date. The Annual Report is not incorporated in the Proxy
Statement and is not to be considered a part of the soliciting material.
OTHER BUSINESS
Management of the Company is not aware of any other matters that are to be
presented at the Meeting, nor has it been advised that other persons will
present any such matters. However, if other matters properly come before the
Meeting, the individual named in the accompanying proxy shall vote on such
matters in accordance with his best judgment.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-KSB
UPON WRITTEN REQUEST, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY OF
ITS ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, TO
EACH SHAREHOLDER OF RECORD OR TO EACH SHAREHOLDER WHO OWNED COMMON STOCK OF THE
COMPANY LISTED IN THE NAME OF A BANK OR BROKER, AS NOMINEE, AT THE CLOSE OF
BUSINESS ON APRIL 14, 1997. ANY REQUEST BY A SHAREHOLDER FOR THE COMPANY'S
ANNUAL REPORT ON FORM 10-KSB SHOULD BE MAILED TO THE COMPANY'S SECRETARY,
MEDICALCONTROL, INC., P. O. BOX 549005, DALLAS, TEXAS 75354-9005.
The above notice and Proxy Statement are sent by order of the Board of
Directors.
Stephanie L. McVay
Secretary
April 22, 1997
20
<PAGE>
AMENDMENT TO
1993 STOCK COMPENSATION PLAN
of
MEDICALCONTROL, INC.
1. The 1993 Stock Compensation Plan of MedicalControl (the "1993 Plan") is
amended to replace the words "Neither the Committee nor the Board of Directors
shall, however, modify any outstanding Option so as to specify a lower price or
accept the surrender of outstanding Options and authorize the granting of new
Options in substitution therefor specifying a lower price" in Section 17 of the
1993 Plan with the words "Only with the approval of the Board of Directors, may
the Company modify any outstanding Option so as to specify a lower price or
accept the surrender of outstanding Options and authorize the granting of new
Options in substitution therefor specifying a lower price."
2. This Amendment to the 1993 Plan (this "Amendment") shall become
effective on the date of execution hereof, which date is the date the Board of
Directors approved and adopted the Amendment (the "Effective Date"); provided,
however, if the shareholders of the Company shall not have approved the
Amendment by the requisite vote of the shareholders within twelve (12) months
after the Effective Date, then this Amendment shall terminate and all amendments
to Options theretofore granted under the 1993 Plan pursuant to the terms of this
Amendment shall terminate and be null and void.
EXECUTED as of August 20, 1996.
MEDICALCONTROL, INC.
By:
------------------------------------
J. Ward Hunt, President and Chief
Executive Officer
A-1
<PAGE>
AMENDMENT TO
OUTSIDE DIRECTORS STOCK OPTION PLAN
of
MEDICALCONTROL, INC.
1. The Outside Directors Stock Option Plan of MedicalControl (the
"Directors Plan") is amended to replace the words "Neither the Committee nor the
Board of Directors shall, however, modify any outstanding Option so as to
specify a lower price or accept the surrender of outstanding Options and
authorize the granting of new Options in substitution therefor specifying a
lower price" in Section 17 of the Directors Plan with the words "Only with the
approval of the Board of Directors, may the Company modify any outstanding
Option so as to specify a lower price or accept the surrender of outstanding
Options and authorize the granting of new Options in substitution therefor
specifying a lower price."
2. This Amendment to the Directors Plan (this "Amendment") shall become
effective on the date of execution hereof, which date is the date the Board of
Directors approved and adopted the Amendment (the "Effective Date"); provided,
however, if the shareholders of the Company shall not have approved the
Amendment by the requisite vote of the shareholders within twelve (12) months
after the Effective Date, then this Amendment shall terminate and all amendments
to Options theretofore granted under the Directors Plan pursuant to the terms of
this Amendment shall terminate and be null and void.
EXECUTED as of August 20, 1996.
MEDICALCONTROL, INC.
By:
---------------------------------
J. Ward Hunt, President and Chief
Executive Officer
A-2
<PAGE>
AMENDMENT TO
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
of
MEDICALCONTROL, INC.
1. The Qualified Employee Stock Purchase Plan of MedicalControl (the
"Qualified Plan") is amended to replace the words "one hundred thousand
(100,000)" with the words "two hundred thousand (200,000) in the first sentence
of Section 2 of the Qualified Plan.
2. This Amendment to the Qualified Plan (this "Amendment") shall become
effective on the date of execution hereof, which date is the date the Board of
Directors approved and adopted the Amendment (the "Effective Date"); provided,
however, if the shareholders of the Company shall not have approved the
Amendment by the requisite vote of the shareholders within twelve (12) months
after the Effective Date, then this Amendment shall terminate and Options
theretofore granted under the Qualified Plan in granting options to purchase in
excess of 100,000 shares of Common Stock shall terminate and be null and void.
EXECUTED as of March 18, 1997.
MEDICALCONTROL, INC.
By:
---------------------------------
J. Ward Hunt, President and Chief
Executive Officer
A-3
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS OF MEDICALCONTROL, INC.
TO BE HELD MAY 14, 1996
The undersigned hereby appoints John Ward Hunt as the lawful agent and proxy
of the undersigned (with all powers the undersigned would possess if personally
present, including full power of substitution), and hereby authorizes him to
represent and to vote, as designated below, all the shares of Common Stock of
MedicalControl, Inc. held of record by the undersigned as of the close of
business on April 14, 1997, at the Annual Meeting of Shareholders to be held on
Wednesday, May 14, 1997, or any adjournment or postponement thereof.
1.ELECTION OF DIRECTORS
FOR all nominees listed below(except as marked to the contrary below)
WITHHOLD authorityto vote for all
nominees listed below
J. W. Hunt, R. Philip, D. S. Coats, W. Amos
(INSTRUCTION: To withhold authority to vote for any nominees, write the
nominees' names on the space provided below.)
------------------------------------------------------------------------------
2. To approve an amendment to the 1993 Stock Compansation Plan to allow the
Board of Directors to amend an option agreement to specify a lower exercise
price or accept the surrender of outstanding options and authorize the
granting of new options in substitution therefor specifying a lower exercise
price.
FOR AGAINST ABSTAIN
3. To approve an amendment to the Outside Directors Stock Option Plan to allow
non-interested directors to amend an option agreement to specify a lower
exercise price or accept the surrender of outstanding options and authorize
the granting of new options in substitution therefor specifying a lower
exercise price.
FOR AGAINST ABSTAIN
4. To approve an amendment to the Qualified Employee Stock Purchase Plan to
increase the authorized number of shares of common stock of the Company
available under the plan from 100,000 to 200,000.
FOR AGAINST ABSTAIN
5. In his discretion, the proxy is authorized to vote upon any matters which
may properly come before the Annual Meeting, or any adjournment or
postponement thereof.
<PAGE>
It is understood that when properly executed, this proxy will be voted in the
manner directed herein by the undersigned shareholder. WHERE NO CHOICE IS
SPECIFIED BY THE SHAREHOLDER, THE PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS PROPOSED IN ITEM (1) AND IN FAVOR OF ITEMs (2), (3) AND (4).
The undersigned hereby revokes all previous proxies related to the shares
covered hereby and confirms all that said proxy and his substitutes may do by
virtue hereof.
Please sign exactly as names
appear below. When shares are
held by joint tenants, both
should sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name by President or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Dated: ____________________, 1997
---------------------------------
Signature
---------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
[_PLEASE]CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE MEETING.
