<PAGE>
UNITES 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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number 1-11922
MEDICALCONTROL, INC.
-------------------------------
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 75-2297429
- ------------------------------------------------------------- --------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
8625 King George Drive, Suite 300
Dallas, Texas 75235
- --------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (214) 630-6368
</TABLE>
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
----------------------------
(Title of Class)
Common Stock Purchase Warrants
------------------------------
(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
-- --
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: $14,313,101.
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: As of March 27, 1998: $20,821,553*
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,966,010 shares of Common Stock,
$.01 par value as of March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for 1998 Annual Meeting of Shareholders of
MedicalControl, Inc. are incorporated by reference into Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format: Yes No X
-- --
*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 $5.25, the last sales price of
the Registrant's common stock as of March 27, 1998, such date being within 60
days prior to the date of filing.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
MedicalControl, Inc. (the "Company") is a holding company comprised of
related companies serving the managed care industry and providing health care
benefit plan administration. The Company's three major subsidiaries are
MedicalControl Network Solutions, Inc. ("MedicalControl"), providing managed
care services primarily through its preferred provider networks, Diversified
Group Administrators, Inc. ("DGA"), providing third party administration ("TPA")
services and PPO Management Solutions, Inc. ("PMSI"), providing network
management and repricing software and services for preferred provider
organizations ("PPO") and certain healthcare network organizations.
As a PPO, MedicalControl 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.
MedicalControl reprices resulting network provider claims to reflect negotiated
terms as well as providing healthcare data analyses, reporting and related
healthcare cost containment programs. Over the past three years, MedicalControl
has undergone significant changes. MedicalControl has retained new management
focused on expanding its products and service offerings as well as improving
efficiencies and operations. MedicalControl believes one of the keys to meeting
its goals for growth is delivering the highest levels of quality client and
customer service. MedicalControl is attempting to meet and to exceed the needs
of its customers, while also achieving the Company's internal goals and
objectives.
MedicalControl plans to achieve its revenue growth through internally
generated sales of its PPO, through acquisitions and by entering new markets.
MedicalControl plans to increase its penetration of its target markets by
offering clients a more complete range of managed healthcare services designed
to improve services and to minimize the cost of providing employee healthcare
and other health benefit programs. MedicalControl is also seeking to expand
through acquisition 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.
PMSI, using its recently completed proprietary application software system,
provides repricing services for PPOs that enable PPOs and their clients to
reprice provider claims to reflect negotiated rates and to produce data
analyses, reporting and other cost containment information. PMSI began
servicing its first client in the fall of 1997. During the first quarter of
1998, PMSI began formally marketing its repricing and administrative services
software and services.
DGA provides a comprehensive range of administration services to self-
funded benefit plans, insurance companies, provider-based organizations and
other benefit management organizations. DGA provides complete benefit plan
review, design and administration services to administer comprehensive employee
benefit programs and risk management activities. DGA currently administers over
300 self-funded benefit 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 90,000 members located in 49 states. In 1997, DGA in a
joint venture with a regional healthcare provider, introduced a new fully
insured product underwritten by an insurance company.
The Company was incorporated in October 1989 as a Delaware corporation.
Unless the context otherwise requires, the term the "Company" refers to
MedicalControl, Inc. and its direct and indirect wholly-owned subsidiaries.
Effective January 1, 1998, the Company established MedicalControl and PMSI as
subsidiaries and transferred its managed care operations to MedicalControl and
its repricing and administrative
2
<PAGE>
services operations to PMSI. All references to the operations of MedicalControl
or PMSI prior to January 1, 1998, are to operations of the Company. 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 fifteen years. Primary among the available managed care solutions
offering access to healthcare services at reduced rates 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-thirds of all Americans are enrolled in a PPO, HMO or other form of managed
care. A growing number of health insurance carriers, HMOs, TPAs and provider
groups have also established their own PPO networks.
Employers and other healthcare purchasers have encouraged the development
or expansion 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, frequently acquiring
reinsurance to provide protection against claims exceeding specific or aggregate
amounts. By adopting self-funding programs and using the plan administration
services of TPAs and other managed care services, employers may experience lower
costs and obtain other advantages over traditional insurance.
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 aimed at reforming the healthcare system. Certain healthcare related
laws were enacted in 1996 and 1997 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. It is uncertain whether any of the proposals will be
enacted by Congress or the state legislatures or what form such legislation may
take. The Company cannot predict what effect federal or state health care
legislation or private sector initiatives will have on the PPO or TPA. There
can be no assurance that further health care reforms will not be adopted which
would have a material adverse effect on the Company.
Another trend in the managed care industry is the development or expansion
of provider-owned networks. In some areas, these provider-owned or operated
organizations require a plan or PPO to access their network exclusively in a
service area. These provider-owned or operated organizations may also own or
contract the providers in a given service area, requiring the PPO to contract
with that organization in order to offer a network in that area. Such
situations limit the ability of the PPO to provide the broadest network offering
or limits access altogether.
MANAGED CARE BUSINESS
MedicalControl provides access to preferred provider networks for its
clients and their enrolled plan members. It also provides clients with
healthcare data analyses, reporting and related 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 enhance networks of healthcare providers providing
medical services to clients'
3
<PAGE>
plan members at negotiated, discounted rates. After the provider renders
service, MedicalControl, its client or its client's third party administrator
reviews and reprices the provider's bill to apply the PPO's negotiated rates
prior to adjudication and payment. 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 services and network
utilization, claims processing activity, accounting data and cost savings.
As of December 31, 1997, MedicalControl had over 75 clients comprising more
than 270,000 employees or plan members and representing over 621,000 covered
lives. Through the Company's provider networks, the Company's clients have
access to more than 2,100 hospitals and 127,000 physicians and other healthcare
providers nationwide. Significant concentrations of covered employees or plan
members reside in Dallas, Fort Worth, San Antonio and Houston, Texas in addition
to the States of California, Florida, Illinois, Ohio, Oklahoma and Pennsylvania.
Products and Services. MedicalControl plans to achieve revenue growth by
offering its clients a more complete range of network and managed healthcare
services designed to improve quality and 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, provider
claims repricing, healthcare data analyses and reports and healthcare cost
containment programs.
MedicalControl offers the following types of PPO networks:
. MedicalControl Hospital Network -- a network of more than 2,100 acute
care hospitals and 4,000 ancillary facilities available through both
direct agreements and affiliate network agreements.
. MedicalControl Physician Network -- a network of more than 127,000
physicians, chiropractors, physical therapists and other healthcare
professionals through both direct agreements and affiliate network
agreements.
. MedicalControl Behavioral Network -- a network of mental health, alcohol
and substance abuse treatment facilities.
Contracted network providers have agreed to accept, as full payment,
negotiated fee schedules in place of the current charges the providers bill to
non-network patients for the same procedures and services. As a result of the
Company's negotiated fee schedules for its Texas hospital network, the Company's
clients achieve average savings over 30% between billed charges and
MedicalControl's negotiated, discounted rates for Texas network hospital 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. MedicalControl evaluates and verifies the credentials of physicians
in MedicalControl's directly contracted Texas and New Mexico networks in
accordance with standards established by the American Accreditation HealthCare
Commission/URAC.
MedicalControl reprices network provider claims based on the negotiated fee
schedule and provides clients the ability to reprice their own claims. In
providing in-house claims repricing services for the year ended December 31,
1997, the Company processed over 560,000 claims in an average of 2.7 calendar
days with an accuracy rate of over 97%. MedicalControl uses PMSI's proprietary
software system to reprice network provider claims on behalf of its clients.
This system also allows clients or claims payors to reprice claims and perform
customer service functions remotely via direct-dial modem or Internet access to
the
4
<PAGE>
system, provides faster response times and requires fewer keystrokes
therefore reducing errors while increasing efficiency. PMSI's system also has
the ability to track claims status for improved customer service.
MedicalControl provides extensive healthcare data analyses and reports to
its clients. PMSI's system automatically produces these comprehensive
utilization and savings reports in easy-to-understand format on a scheduled
basis. MedicalControl can also create efficient ad hoc and custom reports with
advanced report writing tools. Clients have access to a catalog of over 200
standard reports identifying information related to services and network
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 complete
range of utilization management review products and medical case management
services to its clients. The PPO managed care utilization management model
directs and minimizes utilization of healthcare services through utilization
review and attempts to control 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 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 PPO network to maintain or increase
patient volume as members are directed to them through the client's health
benefit plans, utilization review oversight and other channeling mechanisms.
The network development process begins with evaluation of MedicalControl's
current client needs, projected future needs and the supply of and demand for
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 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.
MedicalControl has affiliate network relationships in the States of Alabama,
Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Illinois,
Indiana, Louisiana, Nevada, Michigan, Minnesota, Mississippi,
5
<PAGE>
New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South
Carolina, Tennessee, Virginia, Washington and Wisconsin.
As of December 31, 1997, the following lists the approximate number of
MedicalControl's contracted providers:
<TABLE>
<CAPTION>
Primary Care Specialty Total
Hospitals Ancillaries Physicians(1) Physicians Physicians
------------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Directly Contracted 600 1,500 3,800 9,000 12,800
Contracted Through Affiliates
1,500 2,700 35,000 78,800 113,800
----- ----- ------ ------ -------
Total 2,100 4,200 38,800 87,800 126,600
===== ===== ====== ====== =======
</TABLE>
_________________
(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.
MedicalControl was the first PPO in the nation to have its physician
credentialing process accredited by the American Accreditation HealthCare
Commission/URAC as applied to its Texas and New Mexico directly contracted
networks. In the credentialing process, MedicalControl, using primary source
verification, confirms that a physician meets the established MedicalControl
standards. After confirming that a provider group credentials to its standards,
MedicalControl may choose to delegate the credentialing function to a provider
group that already credentials its physicians.
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 plans to place greater emphasis on marketing to TPAs, insurance
companies and other third parties that in turn market MedicalControl's PPO to
their clients. MedicalControl has developed marketing programs designed to
emphasize the unique aspects of its network products, other managed care
services and its reputation for quality service. MedicalControl provides
6
<PAGE>
marketing services through its corporate office in Dallas, Texas.
MedicalControl has recently closed its 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 indemnity insurance coverage or an HMO. MedicalControl believes
that the most significant factors in the selection of MedicalControl's PPO by
employers and 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 its clients'
employees and members select MedicalControl's PPO rather than an HMO due to the
significantly greater freedom of choice of providers offered by MedicalControl,
in addition to other factors. HMOs typically require enrollees access to a more
restricted panel of physicians than PPOs.
MedicalControl believes the charges paid by its clients for healthcare
services rendered, along with the fees paid to MedicalControl, result in
significant net savings to the client, which are competitive with other managed
care companies. MedicalControl has been the subject of independent client
analyses from time to time that validates its position. 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 its PPO network or
networks on either a percentage of savings or a per employee per month ("PEPM")
basis. For the fiscal years ending December 31, 1997, 1996 and 1995,
MedicalControl derived 72%, 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 three years. MedicalControl
believes that its pricing is competitive with the market.
PPO MANAGEMENT SOFTWARE AND ADMINISTRATIVE BUSINESS
PMSI began to actively market its PPO management software and claims
repricing services during the last quarter of 1997. PMSI offers three types of
products: i) sale/lease of proprietary PPO management software, ii) lease of
proprietary PPO management software and data center outsourcing and iii)
outsourcing of PPO administrative services including claims repricing, customer
service and PPO data management. PPOs, medical provider groups and other
managed care companies offering provider networks represent the target markets
for PMSI products and services. During the fall of 1997, PMSI began servicing
its first client, a regional PPO in Houston, Texas. PMSI performs claims
repricing, customer services and management reporting services on behalf of this
client.
PMSI's new PPO management and repricing software system, referred to as the
Information Management Processing & UtiLization SystEm (IMPULSE(TM)), is a
comprehensive PPO claims repricing and customer service system based on
client/server technology. The system employs an Oracle(TM) relational database
engine and state-of-the-art Visual Basic(TM) user interface. 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 than most systems therefore reducing errors while increasing
efficiency. The system also has the ability to track claims status for improved
customer service.
7
<PAGE>
PMSI is continuing its development and improvement of its data processing
systems, proprietary software and administrative services. PMSI plans to
continue to develop PPO management software serving MedicalControl and its
clients as well as software which is marketed to prospective clients. There can
be no assurance that PMSI will be able to develop additional software or that
the current or future developed software will be marketable.
Through continuing development of its advanced, proprietary client/server
software and relational database, PMSI plans 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 products or
services will be successfully developed, PMSI believes that these new
administrative services and products could provide superior administrative
services relating to healthcare services network and cost management.
PMSI has developed software that allows the electronic transmission and
receipt of provider claims. PMSI 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 PMSI
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 six months.
PMSI has no patents and relies on a combination of trademarks, trade
secrets and copyright protection to establish and protect its proprietary
technology. PMSI routinely enters into confidentiality agreements with its
employees and clients; however, there can be no assurance that the legal
protections and precautions taken will be adequate to prevent misappropriation
of PMSI's technology. In addition, these protections and precautions do not
prevent independent third party development of competitive technology.
During 1996 and 1997, the Company incurred approximately $465,000 and
$286,000 of software development costs, respectfully, all of which were expensed
as incurred. As this new application platform was implemented, certain
previously capitalized software projects were being discontinued. Accordingly,
management began to accelerate the amortization of these software projects to
reflect their revised estimated useful lives. During 1997, an additional $43,000
of non-cash amortization expense has been recognized in the accompanying
financial statements.
The Company has reviewed all of its significant systems and believes that
they are year 2000 compliant and any cost to bring non-significant systems into
compliance will be immaterial. There can be no assurance, however, that an
unknown issue will not arise or that any costs will not exceed current
expectations.
THIRD PARTY ADMINISTRATION BUSINESS
DGA provides a comprehensive range of administration services to self-
funded benefit plans, insurance companies, provider-based organizations and
other benefit management organizations. DGA provides complete benefit plan
review, design and administration services to administer comprehensive employee
benefit programs and risk management activities. DGA currently administers over
300 self-funded benefit 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 90,000 members 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.
8
<PAGE>
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 also 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.
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 ("ETAS"), to
develop and market in Knoxville, Tennessee and surrounding areas both self-
funded programs and a fully insured managed care programs underwritten by an
insurance company. DGA and The Initial Group each own 50% of the joint venture
and share equally in revenues and expenses. ETAS introduced a fully insured
product, the Initial Advantage, in July 1997. This product is designed for
small and medium sized employer groups in eastern Tennessee. As of December 31,
1997, this product serviced 38 groups with 491 employees and generated
$1,400,000 in annualized premiums. Management expects ETAS to have similar
levels of growth in 1998 during which time additional product lines will be
developed.
Marketing. DGA markets its products and services directly through in-house
personnel and through a national network of licensed/approved brokers. Over 95%
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 16 years - significantly longer than most TPAs.
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 provider
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 service 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.
9
<PAGE>
DGA maintains full client service offices in Canonsburg, Pennsylvania,
Dallas, Texas and Knoxville, Tennessee. In addition to sales and marketing,
client service personnel interact with clients on an ongoing basis related to
problem resolution, plan modifications and communications with other Company
personnel.
Management Information Systems and Software Systems. Effective September
30, 1996, DGA entered into an agreement with Resource Information Management
Systems ("RIMS") for the use of their most current version of software through
access to the RIMS Data Center located in Naperville, Illinois. RIMS offers
application software serving TPAs and claims administrators performing benefit
plan administration, claims adjudication and related functions. Conversion from
its former systems to the RIMS Data Center is substantially completed. Using
frame relay telephone lines, each TPA location accesses 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 program. In
addition, DGA, as a third-party administrator, benefits from improved
functionality and productivity through the enhanced software programs. The full
array of standard as well as ad hoc reporting capabilities is available to DGA's
clients and it is easier to exchange data with clients and vendors. RIMS'
software includes features allowing 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 its systems are 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 subsidiary called
Genesis/ValueCheck, Inc. ("G/VC"). Discounts achieved by G/VC vary depending on
the size of the claim, the nature of the services, 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.
CUSTOMERS
For the fiscal years ended December 31, 1997, 1996 and 1995, two customers,
American Airlines, Inc., and the National Rural Electric Cooperative
Association, in the aggregate, accounted for approximately 18%, 17%, and 12%,
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, 1997, 1996 and 1995: American Airlines, Inc., 9%, 9% and 6%,
and the National Rural Electric Cooperative Association, 9%, 8% and 6%. Subject
to anticipated fluctuations in the relative contribution of each of these
clients, the Company expects that the combined volume of these clients as a
percentage of revenues through 1998 will be comparable with prior periods.
Although there can be no assurance, the Company does not expect the net results
of the aggregate change in volumes of these clients to have a material effect on
the Company's results from operations.
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, 1997 and 1996.
Clients representing approximately $2,000,000 of 1997 revenues have
terminated or amended their contracts with the Company during 1997 and the first
two months of 1998. Management believes that approximately $1,000,000 of this
revenue loss will be recouped from a client that has increased its service area
10
<PAGE>
with the PPO. Further, management believes that the Company will be able to
replace the remaining amount of revenue loss by increased penetration of other
current clients, new PPO and TPA business development in 1998, marketing of its
new PPO management and repricing services business and growth through
acquisitions. During the last three years, the Company focused its attention on
redefining its PPO products and services, developing IMPULSE and its PPO
management and repricing business and investing in state-of-the-art adjudication
technology for its TPA. During the last half of 1997, the Company renewed its
focus on sales and marketing of its PPO and began marketing its PPO management
and repricing software and services business.
COMPETITION
The Company competes with national and local organizations that have
developed PPOs and TPAs as well as with HMOs and major insurance carriers. The
industry is highly competitive and significant consolidation has occurred within
the industry, creating stronger competitors. 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 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 subsidiary 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 current competitive markets may also limit the
Company's ability to price its products at levels the Company believes are
appropriate. The Company's TPA subsidiary may encounter competition from larger
TPAs with greater resources and regional TPAs with greater market penetration.
Both subsidiaries of the Company will be subject to significant competition in
any new geographic areas they may enter.
PPOs and other network managers obtain network management and claims
repricing software or services through a variety of means including internally
developed, proprietary systems, use of claims adjudication systems through
specific modules or modules designed for such purpose as well as through a few
vendors selling PPO claims outsourcing services or software. Management
believes there is no competitive software developed exclusively for PPOs with
all of the advanced features, functionality or productivity tools of the IMPULSE
PMSI system. Continuous investments and improvements will be required to keep
its competitive advantage. There can be no assurance that such competitive
advantage will be maintained.
GOVERNMENT REGULATION AND LEGISLATION
Since 1993, many competing proposals 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. 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. There can be no assurance that future health care reforms or
PPO regulations will not be adopted which would have a material adverse effect
on the Company.
11
<PAGE>
The Employee Retirement Income Security Act of 1974 ("ERISA"), governing
employee benefit plans, among other mandates, permitted employers 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 such self-insured
benefit plans falls under the auspices of the United States Department of Labor,
which has strict, enforceable guidelines relative to the operation of TPAs in
the administration of such plans. In addition, TPAs are subject to licensing
and regulation on the state level. Typically, the only state requirements are a
completed application, errors and omission coverage 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, 1997, the Company and its wholly owned subsidiaries had
approximately 186 full-time employees and 18 part-time employees. The Company
believes that it has a good relationship with its employees. None of the
Company's employees are covered by collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY.
In August 1996, the Company signed a ten-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. In connection with the Company's relocation of its
corporate offices and operations for its PPO in January 1997, management secured
a purchase option on their new office facility. During September 1997, the
Company sold this option to a third party for $910,000 cash, who subsequently
exercised the option. Concurrent with the sale, the Company executed a ten year
lease extension at a fixed monthly rental of approximately $26,500. The Company
also has a month-to-month lease for office space for a regional sales office in
Houston, Texas, which terminates March 31, 1998.
The Company also leases approximately 5,000 square feet in Canonsburg,
Pennsylvania at a monthly rent of approximately $2,750 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 $102,000 and
monthly principal payments of approximately $1,500. The Company leases
approximately 400 square feet in Knoxville, Tennessee.
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.
12
<PAGE>
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, 1997 5 5/8 5
June 30, 1997 5 1/4 3 1/2
September 30, 1997 5 7/8 3 1/4
December 31, 1997 5 5/8 5 1/4
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 26, 1998, there were approximately 790 record and
beneficial holders of the Company's Common Stock.
(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, 1997 COMPARED TO DECEMBER 31, 1996
Total revenues for the year ended December 31, 1997 were $14.3 million,
$1.1 million (7%) lower than the $15.4 million reported in 1996. This decline
resulted primarily from the loss of one client, which accounted for
approximately $600,000 of consolidated revenues. The remainder of the loss was
attributable to reductions in PPO revenues resulting from client turnover,
management's focus on eliminating marginal or unprofitable business, the
relative mix of hospital versus physician claims volume and the decision of PPO
management to focus on improving its products and services before investing in
its sales process. During the last half of 1997, upon accomplishing its goals
for products and services, the PPO renewed its focus on sales and marketing,
resulting in the addition of seven new clients generating over $25,000 per month
in revenues.
For the year ended December 31, 1997, the Company earned net income of
$289,000 ($.07 per share) versus $504,000 ($.13 per share) in 1996. In addition
to the decline in revenues discussed above, net income for 1997 was impacted by
non-recurring costs associated with the Company's relocation of its principal
operations and corporate offices ($67,000), expenses associated with a
separation agreement with a former employee ($86,000), implementation costs
related to a new claims processing system for its TPA subsidiary ($268,000), and
the acceleration of certain capitalized software costs ($43,000). Management's
efforts in reducing operating costs favorably impacted current year results and
offset the majority of these non-recurring items.
13
<PAGE>
Salaries and wages decreased 5% between years, to $7.6 million in 1997 from
$8.0 million in 1996. Exclusive of approximately $86,000 of separation costs
associated with a former employee, salaries and wages decreased approximately
$486,000. This decrease occurred ratably between the PPO and TPA operations,
resulting from operating efficiencies and continued improvements made to the
Company's information systems.
Other operating expenses were $5.4 million for 1997; $149,000 (3%) lower
than 1996. This decrease was due primarily to reductions in consulting costs
(for information systems, marketing, and personnel needs) of $295,000, legal and
accounting fees of $46,000, commission expenses of $85,000, and other general
operating expenses of $58,000. These operating expense reductions were offset by
approximately $268,000 of system conversion costs and approximately $67,000 of
nonrecurring costs associated with the Company's relocation of its principal
operations and corporate offices during 1997.
During late 1996, the Company's TPA subsidiary entered into a service
agreement with a third party for use of their claims adjudication software via
on-line access to its data center. This arrangement provides the Company's TPA
operations with access to industry leading claims processing systems, which will
improve customer service and broaden product offerings. During 1997, the
Company incurred approximately $268,000 of costs related to this conversion
project, which are included in other operating expenses discussed in the
preceding paragraph.
Depreciation and amortization increased to approximately $885,000 in 1997
from $820,000, or 8% for the year. During 1997 and 1996, the Company had been
developing its industry-leading IMPULSE PPO network administration and claims
repricing system. All costs associated with this development have been expensed
as incurred. As this new application platform was implemented, certain
previously capitalized software projects were being discontinued. Accordingly,
management began to accelerate the amortization of these software projects to
reflect their revised estimated useful lives. During 1997, an additional
$43,000 of non-cash amortization expense has been recognized in the accompanying
financial statements.
Other income and expense increased representing income of approximately
$120,000 from an expense of $56,000 for the years ended December 31, 1997 and
1996, respectively. This favorable increase was primarily attributable to lower
interest expense due to the retirement of a significant portion of the Company's
long-term debt and reduced average borrowings under the Company's revolving
credit facility during 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net working capital of $2,583,000 at December 31, 1997,
compared to $1,420,000 at December 31, 1996. Cash flows from operations were
approximately $1.7 million in 1997, of which $610,000 was used to retire long-
term debt, $496,000 was used to purchase fixed assets (principally data
processing equipment), and $250,000 was used to purchase treasury stock. Cash
and cash equivalents at December 31, 1997 and December 31, 1996, including
approximately $1,314,000 and $106,000 of restricted cash for insurance premium
payments, were $3,235,000 and $2,013,000, respectively.
In connection with the Company's relocation of its corporate offices and
principal operations in January 1997, management secured a purchase option on
the new office facility. During 1997, the Company sold this option to a third
party for $910,000 cash, who subsequently exercised the option. Approximately
$600,000 of these cash proceeds were used to retire all outstanding borrowings
under the Company's revolving line of credit, with the remainder being used for
general corporate purposes. At December 31, 1997, the Company had unrestricted
investments, included in cash and cash equivalents above, of approximately
$1,900,000.
14
<PAGE>
On May 31, 1997, the Company refinanced its two 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, 1997, there were no outstanding
borrowings under this line of credit.
Capital expenditures for the purchase of tangible property and equipment
were approximately $496,000 for the twelve months ended December 31, 1997.
These expenditures included leasehold improvements of approximately $60,000
associated with the Company's relocation discussed above.
In connection with the 1994 acquisition of DGA, the Company was required to
make note payments to this subsidiary's former shareholders of approximately
$333,000 on June 30, 1997. The final $100,000 of these obligations, subject to
an option to convert this note into 25,000 shares of Common Stock, will be due
on or before June 30, 1998.
In connection with the separation agreement with a former employee, the
Company will be required to make eight quarterly installments of $13,750, plus
interest at 8%, which began on September 30, 1997. The first two installments
were made prior to period end.
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
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
15
<PAGE>
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
<TABLE>
<CAPTION>
MedicalControl, Inc. and Subsidiaries Page
----
<S> <C>
Report of Independent Public Accountants......................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 .................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996............. F-3
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1997 and 1996..................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996............. F-5
Notes to Consolidated Financial Statements....................................................... F-6
</TABLE>
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, 1997, 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, 1997, the end of the year
covered by this Form 10-KSB.
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
16
<PAGE>
Commission not later than 120 days after December 31, 1997, 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, 1997, 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, 1997, 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., as -
incorporated by reference to the Exhibits to the Registration Statement on
Form SB-2, file number 33-58334-FW, delcared 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.
10.4 Amendment to the Outside Directors Stock Option Plan of MedicalControl,
Inc., dated August 20, 1996.
10.5 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.
17
<PAGE>
10.6 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.
10.7 Amendment to Qualified Employee Stock Purchase Plan of MedicalControl,
Inc. dated as of March 18, 1997.
10.8 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.
10.9 Amendment to 1993 Stock Compensation Plan of MedicalControl, Inc. dated
as of August 20, 1996.
10.10 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.
10.11 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.
10.12 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.
10.13 Form of Agreement by and between the Company and each of its directors
- incorporated by reference to Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
10.14 Commercial Lease dated March 1, 1993 by and among DGA and David C. and
Janice L. Bramer. - incorporated by reference to Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
10.15 Letter Agreement dated September 29, 1994 by and between Registrant and
David C. Bramer. - incorporated by reference to Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
10.16 Transfer Agreement dated as of January 1, 1998 by and among the
Registrant, MedicalControl Network Solutions, Inc., PPO Management
Solutions, Inc., Genesis/ValueCheck, Inc. and MedicalControl Holdings,
Inc. and its direct and indirect wholly-owned subsidiaries. (All exhibits
have been omitted and will be provided to the Commission upon request.
21 Subsidiaries of the Registrant.
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 15(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 27, 1998 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.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ John Ward Hunt President, Chief Executive Officer March 27, 1998
- ----------------------------------- and Chairmam of the Board of Directors
John Ward Hunt (principal executive officer)
/s/ Robert O. Brooks Executive Vice President and March 27, 1998
- ----------------------------------- Chief Operating Officer
Robert O. Brooks
/s/ David A. Hanson Vice President, Finance and Accounting March 27, 1998
- ----------------------------------- (principal accounting officer)
David A. Hanson
/s/ Robert W. Philip Director March 27, 1998
- -----------------------------------
Robert W. Philip
/s/ William L. Amos Director March 27, 1998
- ----------------------------------
William L. Amos, Jr., M.D.
Director March 27, 1998
- ----------------------------------
D. Samuel Coats
</TABLE>
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, 1997 and 1996,
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, 1997 and 1996, 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 13, 1998
F-1
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1997 AND 1996
--------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ --------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,235,307 $ 2,013,302
Accounts receivable - trade, net of allowance
for doubtful accounts of $135,000 and
$242,000 in 1997 and 1996, respectively 1,979,875 1,608,842
Accounts receivable - premium 741,345 390,907
Accounts receivable - other 87,099 20,429
Prepaid expenses and other current assets 276,105 273,337
Deferred income taxes 168,838 137,359
------------ ------------
Total current assets 6,488,569 4,444,176
NOTE RECEIVABLE - OFFICER, including accrued interest 394,654 365,221
PROPERTY AND EQUIPMENT, NET 1,661,290 1,698,681
GOODWILL, NET 3,451,348 3,578,003
INTANGIBLE AND OTHER ASSETS, NET 691,563 950,854
------------ ------------
TOTAL ASSETS $ 12,687,424 $ 11,036,935
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 643,249 $ 577,650
Accounts payable - premium 1,945,102 861,320
Accrued liabilities 852,095 716,931
Income taxes payable 291,927 77,164
Current portion of long-term debt 173,072 791,405
------------ ------------
Total current liabilities 3,905,445 3,024,470
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 111,514 103,346
Deferred gain on sale of option on real estate 880,417 --
Deferred income taxes 116,489 281,111
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, 3,908,635 and 3,907,190 issued
in 1997 and 1996, respectively 39,086 39,072
Additional paid-in capital 5,231,265 5,224,979
Retained earnings 2,922,104 2,632,853
------------ ------------
8,192,455 7,896,904
Less: Treasury stock (83,612 and 33,612 shares at December
31, 1997 and 1996, respectively) (518,896) (268,896)
------------ ------------
Total stockholders' equity 7,673,559 7,628,008
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,687,424 $ 11,036,935
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
NET REVENUES $ 14,313,101 $ 15,351,552
------------ ------------
OPERATING EXPENSES
Salaries and wages 7,648,757 8,048,446
Other operating expenses 5,429,208 5,578,203
Depreciation and amortization 884,800 819,640
------------ ------------
Total operating expenses 13,962,765 14,446,289
------------ ------------
INCOME FROM OPERATIONS 350,336 905,263
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (10,704) (94,490)
Investment income 108,356 94,218
Other income (expense) 21,923 (55,385)
------------ ------------
Total other income (expense) 119,575 (55,657)
------------ ------------
INCOME BEFORE INCOME TAXES 469,911 849,606
Provision for income taxes 180,660 345,226
------------ ------------
NET INCOME $ 289,251 $ 504,380
============ ============
Basic earnings per share $ 0.08 $ 0.13
============ ============
Diluted earnings per share $ 0.07 $ 0.13
============ ============
Weighted average common shares outstanding 3,840,478 3,906,705
============ ============
Weighted average common and common equivalent shares outstanding 3,907,961 4,013,307
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------------
Additional Total
Shares Paid-in Retained Treasury Stockholders'
Outstanding Amount Capital Earnings Stock Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Acquisition of treasury stock (50,000) -- -- -- (250,000) (250,000)
Exercise of stock options 1,445 14 6,286 -- -- 6,300
Net income -- -- -- 289,251 -- 289,251
--------------------------------------------------------------------------------------
Balance at December 31, 1997 3,825,023 $ 39,086 $ 5,231,265 $ 2,922,104 $ (518,896) $ 7,673,559
======================================================================================
</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, 1997 AND 1996
--------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income $ 289,251 $ 504,380
Adjustments to reconcile net income
to net cash provided by operations
Depreciation and amortization 884,800 819,640
Amortization of deferred gain on real estate transaction (29,583) --
Deferred tax provision (196,101) (52,102)
Net changes in certain assets and liabilities
Accounts receivable - trade (371,033) 299,573
Accounts receivable - premium (350,438) 48,071
Current income taxes, net 214,763 198,524
Prepaid expenses and other current assets (69,438) 181,362
Accounts payable - trade 65,599 (249,252)
Accounts payable - premium 1,083,782 227,159
Accrued expenses 135,164 67,807
----------- -----------
Net cash provided by operating activities 1,656,766 2,045,162
----------- -----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (495,736) (279,139)
Proceeds from sale of property and equipment 34,273 --
Proceeds from sale of option on real estate 910,000 --
----------- -----------
Net cash provided by (used in) investing activities 448,537 (279,139)
----------- -----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (29,433) (27,982)
Net repayments on revolving bank line of credit -- (1,000,000)
Payments on long-term debt (610,165) (343,025)
Proceeds from issuance of common stock 6,300 7,853
Acquisition of treasury stock (250,000) --
Stock and warrant registration costs -- (41,042)
----------- -----------
Net cash used in financing activities (883,298) (1,404,196)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,222,005 361,827
Cash and cash equivalents at beginning of year 2,013,302 1,651,475
----------- -----------
Cash and cash equivalents at end of year $ 3,235,307 $ 2,013,302
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 49,253 $ 126,017
=========== ===========
Income taxes paid $ 162,008 $ 354,967
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. ("MCI" or the "Company"), a Delaware corporation, is a
holding company of healthcare cost management and administrative services
companies. The Company is comprised of three main subsidiaries: MedicalControl
Network Solutions, Inc., providing managed care services, primarily through its
preferred provider organization ("PPO") networks, Diversified Group
Administrators, Inc., providing third party administration ("TPA") services, and
PPO Management Solutions, Inc., providing repricing and administrative services
for PPO's and certain network healthcare providers. 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 the Company 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. Included in cash
and cash equivalents as of December 31, 1997 and 1996 was $1,314,000 and
$106,000, respectively, of cash restricted for insurance premium payments.
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 estimate 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.
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.
F-6
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 remaining estimated useful lives (12 to 36 months). Maintenance and other
minor updates to these software programs are expensed as incurred. No software
development costs were capitalized during 1997 or 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.
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.
Revenue 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. Although no one customer accounts for greater than 10% of
the Company's revenues, 2 customers accounted for 18% and 17% of consolidated
revenues in 1997 and 1996, respectively. The loss of one of these customers
could have a material effect on the Company.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128 requires the presentation of Basic and Diluted earnings
per share. Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income by the weighted average common
shares and common equivalent shares outstanding during the period. The impact
of the dilutive common equivalent shares was 67,483 and 106,602 for 1997 and
1996, respectively.
F-7
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
In 1997 and 1996, 1,355,425 and 1,115,537 common equivalent shares were excluded
from the calculation of diluted earnings per share because the effect would have
been anti-dilutive for the periods presented.
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.
New Accounting Pronouncements
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 requires the Company to report comprehensive income
in their financial statements. SFAS No. 131 requires the Company to disclose
revenues, profit and loss, and assets for business and geographic segments.
These statements are effective for fiscal years beginning after December 15,
1997. The Company anticipates no material impact on the financial statements or
footnotes to the financial statements and will adopt these statements during
1998.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
Estimated Useful
Life 1997 1996
---------------- ---------- ----------
<S> <C> <C> <C>
Land - $ 60,000 $ 60,000
Buildings 40 years 240,000 240,000
Furniture and fixtures 5-10 years 624,070 746,127
Data processing equipment 3-6 years 1,253,213 1,512,107
Leasehold improvements 40 years 66,407 6,380
---------- ----------
2,243,690 2,564,612
Less accumulated depreciation (582,400) (865,931)
---------- ----------
Property and equipment, net $1,661,290 $1,698,681
========== ==========
</TABLE>
F-8
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 4 - GOODWILL, NET
Goodwill at December 31, 1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Goodwill $3,871,953 $3,871,953
Less - accumulated amortization (420,605) (293,950)
---------- ----------
Goodwill, net $3,451,348 $3,578,003
========== ==========
</TABLE>
NOTE 5 - INTANGIBLE AND OTHER ASSETS, NET
Intangible and other assets at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Software development costs $1,354,771 $1,354,771
Covenants not to compete 210,000 100,000
Organization costs 44,977 44,977
Other 20,808 42,044
---------- ----------
1,630,556 1,541,792
Less - accumulated amortization (938,993) (590,938)
---------- ----------
Intangible and other assets, net $ 691,563 $ 950,854
========== ==========
</TABLE>
NOTE 6 - DEBT
Revolving Bank Line of Credit
The Company has a revolving line of credit with a bank providing for maximum
borrowings of $1,000,000, secured by accounts receivable. Advances under this
credit facility accrue interest at the bank's prime rate plus 1%. 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.
The Company's line of credit expires in May 1998. Management expects to be able
to extend this line prior to its maturity with similar or more favorable terms.
At December 31, 1997 and 1996, there were no outstanding borrowings under this
line of credit.
F-9
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Long-Term Debt
Long-term debt consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Mortgage note payable, monthly installments of
approximately $1,500, plus interest at a bank's prime rate
plus .25% (8.5% at December 31, 1997) through 2003 $ 102,086 $ 121,418
Note payable, due in quarterly installments of $13,750 plus
interest at 8%, through June 1999 82,500 -
Note payable to previous stockholders of subsidiary,
$100,000 due on June 30, 1998, with balance due on
June 30, 1997, plus interest at 9.5% due quarterly 100,000 773,333
--------- ---------
284,586 894,751
Less - current portion (173,072) (791,405)
--------- ---------
Total long-term debt, net of current portion $ 111,514 $ 103,346
========= =========
</TABLE>
Scheduled future principal maturities of long-term debt at December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ --------
<S> <C>
1998 $173,072
1999 45,572
2000 18,072
2001 18,072
2002 18,072
Thereafter 11,726
--------
$284,586
========
</TABLE>
NOTE 7 - 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 $85,428 and $43,872 for plan contributions for the years
ended December 31, 1997 and 1996, respectively.
F-10
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Salary Continuation Benefits
The Company has a salary continuation plan, whereby an officer shall continue to
receive a stated monthly salary for 120 months following his 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 this potential obligation with a corporate-owned
life insurance policy. Through June 1997, two officers were covered under the
plan. Premiums expended on this policy were $29,316 and $36,403 in 1997 and
1996, respectively.
Other than stated above, the Company does not provide any post-retirement or
post-employment benefits to any of its employees.
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes at December 31, 1997 and 1996,
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current:
Federal $ 390,127 $345,436
State (13,366) 51,892
Deferred:
Federal (173,178) (45,972)
State (22,923) (6,130)
--------- --------
Total $ 180,660 $345,226
========= ========
</TABLE>
The differences between the statutory federal income tax rate and the Company's
effective income tax rate are as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit (5.1%) 4.5%
Meals and entertainment expenses 3.3% 1.8%
Goodwill amortization 5.5% 4.5%
Other 0.7% (4.2)%
----- -----
Total 38.4% 40.6%
===== =====
</TABLE>
F-11
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The components of and changes in net deferred tax assets (liabilities) as of
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current Deferred Taxes:
Assets:
Nondeductible reserves $ 168,838 $ 137,359
--------- ---------
Noncurrent Deferred Taxes:
Assets:
Other 26,757 31,919
Capital loss carryforwards - 196,246
Deferred gain from sale of option on
real estate 338,680 -
Liabilities:
Excess tax over book depreciation and
amortization (267,074) (196,730)
Software development costs (214,852) (312,546)
--------- ---------
Noncurrent deferred taxes, net (116,489) (281,111)
--------- ---------
Total deferred taxes $ 52,349 $(143,752)
========= =========
</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 9 - DEFERRED GAIN ON SALE OF OPTION ON REAL ESTATE
In connection with the Company's relocation of its corporate offices and
principal operations in January 1997, management secured a purchase option on
their new office facility. During September 1997, the Company sold this option
to a third party for $910,000 cash, who subsequently exercised the option.
Concurrent with the sale, the Company executed a ten year lease extension. The
gain from this transaction will be recognized on a straight-line basis over the
life of the lease extension and is reflected as a deferred gain on the
accompanying balance sheet. The amount of gain amortization included in
operating results for the year ended December 31, 1997 was $29,583.
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 2007.
During 1997, the Company relocated its principle operations and corporate
offices and executed a ten-year extension of its operating lease. In connection
with this move, the Company leased approximately $300,000 of certain furniture
and fixtures under terms of a 5-year operating lease. These commitments are
reflected in the table of future minimum lease payments below.
F-12
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
At December 31, 1997, scheduled future minimum payments for operating leases
with initial terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ ----------
<S> <C>
1998 $ 493,534
1999 472,612
2000 429,049
2001 412,780
2002 324,615
Thereafter 1,518,765
---------
$3,651,355
==========
</TABLE>
Rental expense for all operating leases for the years ended December 31, 1997
and 1996, was $451,585 and $384,211, respectively.
During 1996, the Company entered into a service agreement, commencing January
1997, 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. Fees paid under this agreement
were $178,236 in 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 were exercisable at a price of $7.50. The warrants
were redeemable by the Company at $.10 upon certain conditions, as defined. The
917,000 warrants that were outstanding as of December 31, 1996, expired during
April 1997.
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, 1997 and 1996.
In connection with the notes payable to previous shareholders of subsidiary
discussed in Note 6, the Company has agreed to permit one of the former
shareholders the option to convert up to $100,000 of debt owed to him
F-13
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
by the Company into 25,000 shares of common stock at a price of $4.00 per share.
This option will expire on June 30, 1998. As of December 31, 1997, 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.
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, 1995 1,235,174 $3.30 to $9.00 $6.58
Granted 97,000 4.50 to 5.00 5.15
Exercised - - -
Forfeited (130,035) 3.30 to 7.86 6.08
--------- ---------------- -----
Outstanding at December 31, 1996 1,202,139 $3.30 to $9.00 $6.52
--------- ================ =====
Granted 230,994 3.38 to 5.13 $3.82
Exercised (1,445) 4.36 to 4.36 4.36
Forfeited (33,780) 4.36 to 7.86 5.78
--------- ---------------- -----
Outstanding at December 31, 1997 397,908 $3.30 to $9.00 $6.10
========= ================ =====
Exercisable options 207,408
=========
Options available for future grants 752,092
=========
</TABLE>
In August 1996, the Board elected 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 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.
F-14
<PAGE>
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Accounting for Stock-Based Compensation
The Company has three stock option plans, a qualified plan, a non-qualified
plan, and directors' 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 consistent with SFAS No. 123,
the Company's pro-forma net income and diluted earnings per share would have
been the amounts shown below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Pro-forma net income $165,001 $345,588
Pro-forma earnings per share $ .04 $ .09
</TABLE>
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Risk free interest rate 6.2% 7.0%
Expected dividend yield 0.0% 0.0%
Expected volatility 45.1% 47.1%
Expected lives 5 5
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 was $1.83
and $2.78, respectively.
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, 1997). The principal and any unpaid accrued interest are due in its
entirety by October 27, 2000. Accrued interest on this note was $94,654 and
$65,221 at December 31, 1997 and 1996, respectively.
During April 1997, MCI filed a registration statement with the Securities and
Exchange Commission to register certain existing outstanding shares of common
stock owned by the majority shareholder of MCI. The stock registered serves as
collateral for certain loans of the majority shareholder. In connection with
this registration statement, the Company paid approximately $5,000 of legal and
accounting expenses.
F-15
<PAGE>
EXHIBIT 10.4
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: /s/ J. Ward Hunt
---------------------------------
J. Ward Hunt, President and Chief
Executive Officer
<PAGE>
EXHIBIT 10.7
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: /s/ J. Ward Hunt
---------------------------------
J. Ward Hunt, President and Chief
Executive Officer
<PAGE>
EXHIBIT 10.9
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: /s/ J. Ward Hunt
---------------------------------
J. Ward Hunt, President and Chief
Executive Officer
<PAGE>
EXHIBIT 10.16
TRANSFER AGREEMENT
This Transfer Agreement, dated as of January 1, 1998, is by and among
MedicalControl, Inc., a Delaware corporation (the "Company"), MedicalControl
Network Solutions, Inc., a Delaware corporation ("MNS"), Genesis/ValueCheck,
Inc., a Delaware corporation ("GVC"), MedicalControl Holdings, Inc., a Delaware
corporation ("Holdings"), and PPO Management Solutions, Inc., a Delaware
corporation ("PMSI" and together with MNS and GVC, the "Operating Companies").
WHEREAS, the Operating Companies were incorporated to facilitate a
transaction (the "Transaction") that includes the transfer to of the Company's
(i) PPO business (the "PPO Business") to MNS (ii) large claim negotiation
business (the "GVC Business") to GVC, and (iii) PPO management services and
repricing software and services business (the "Administration Business") to
PMSI; and
WHEREAS, as part of the Transaction, each Operating Company will issue
1,000 shares of its common stock, being of all of its outstanding shares of
capital stock, to Holdings, a wholly owned subsidiary of the Company, and the
Company will transfer (i) the PPO Assets (as defined below) to MNS (ii) the GVC
Assets (as defined below) to GVC (iii) and the Administration Assets (as defined
below) to PMSI and MNS will pay or assume certain liabilities of the Company
relating to the PPO Business, GVC will pay or assume certain liabilities of the
Company relating to the GVC Business and PMSI will pay or assume certain
liabilities of the Company relating to the Administration Business; and
WHEREAS, as part of the Transaction, the Company will contribute all of the
capital stock of Diversified Group Administrators, Inc., a Pennsylvania
corporation, to Holdings.
NOW, THEREFORE, in consideration of the forgoing recitals, the mutual
agreements set forth below, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties to this
Agreement hereby agree as follows:
1. Effective Time. The transfer of assets to, and the assumption of
liabilities by, the Operating Companies shall be effective as of the first
second of January 1, 1998 (the "Effective Time").
2. Transfer of Stock. As of the Effective Time, each Operating Company
will issue to the Company 1,000 shares of its Common Stock. $0.01 par value
(the "Stock") to Holdings, which will constitute all of the outstanding shares
of stock of such Operating Company. As of the Effective Time, the Company will
contribute all of the capital stock of DGA to Holdings.
3. Assignment by the Company.
(a) As of the Effective Time, the Company will transfer to MNS all of its
direct or indirect right, title and interest in and to all of the assets of the
Company of every kind and character, whether owned or leased relating to the PPO
Business, including without limitation:
(i) all of the assets set forth on Exhibit A hereto;
---------
(ii) all of the Company's direct or indirect right, title and interest
in and to all assets and properties of every kind and character, tangible or
intangible relating to the PPO Business, including, without limitation, all of
the Company's direct or indirect right, title and interest in and to all
securities, contracts, leasehold and mineral interests, beneficial interests in
trusts, choices in action, equipment,
<PAGE>
furniture, fixtures, furnishings, vehicles, supplies, trade names, trademarks,
service marks, copyrights, trade secrets and patents; and
(iii) all current and active records, files and papers pertaining to
the foregoing.
The rights, titles and interests of the Company assigned to MNS hereby are
collectively referred to in this Agreement as the "PPO Assets". The PPO Assets
shall be transferred to MNS subject to all existing liens and encumbrances
thereon.
(b) As of the Effective Time, the Company will transfer to GVC all of its
direct or indirect right, title and interest in and to all of the assets of GVC
of every kind and character, whether owned or leased relating to the GVC
Business, including without limitation:
(i) all of the assets set forth on Exhibit B hereto;
---------
(ii) all of the Company's direct or indirect right, title and
interest in and to all assets and properties of every kind and character,
tangible or intangible relating to the GVC Business, including, without
limitation, all of the Company's direct or indirect right, title and interest in
and to all securities, contracts, leasehold and mineral interests, beneficial
interests in trusts, choices in action, equipment, furniture, fixtures,
furnishings, vehicles, supplies, trade names, trademarks, service marks,
copyrights, trade secrets and patents; and
(iii) all current and active records, files and papers pertaining to
the foregoing.
The rights, titles and interests of the Company assigned to GVC hereby are
collectively referred to in this Agreement as the "GVC Assets". The GVC Assets
shall be transferred to GVC subject to all existing liens and encumbrances
thereon.
(c) As of the Effective Time, the Company will transfer to PMSI all of its
direct or indirect right, title and interest in and to all of the assets of the
Company of every kind and character, whether owned or leased relating to the
Administration Business, including without limitation:
(i) all of the assets set forth on Exhibit C hereto;
---------
(ii) all of the Company's direct or indirect right, title and
interest in and to all assets and properties of every kind and character,
tangible or intangible relating to the Administration Business, including,
without limitation, all of the Company's direct or indirect right, title and
interest in and to all securities, contracts, leasehold and mineral interests,
beneficial interests in trusts, choices in action, equipment, furniture,
fixtures, furnishings, vehicles, supplies, trade names, trademarks, service
marks, copyrights, trade secrets and patents; and
(iii) all current and active records, files and papers pertaining to
the foregoing.
The rights, titles and interests of the Company assigned to PMSI hereby are
collectively referred to in this Agreement as the "Administration Assets". The
Administration Assets shall be transferred to PMSI subject to all existing liens
and encumbrances thereon.
4. Payment and Assumption by the Company.
(a) As consideration for the PPO Assets, as of the Effective Time, MNS
will pay or assume liability for, pay and hold the Company harmless from the
liabilities relating to the PPO Assets, including,
2
<PAGE>
without limitation those set forth on Exhibit D hereto and will issue 1,000
---------
shares of its Common Stock to Holdings, which will be all of the outstanding
Capital Stock of MNS.
(b) As consideration for the GVC Assets, as of the Effective Time, GVC
will pay or assume liability for, pay and hold the Company harmless from the
liabilities relating to the GVC Assets, including, without limitation those set
forth on Exhibit E hereto and will issue 1,000 shares of its Common Stock to
---------
Holdings, which will be all of the outstanding Capital Stock of GVC.
(c) As consideration for the Administration Assets, as of the Effective
Time, PMSI will pay or assume liability for, pay and hold the Company harmless
from the liabilities relating to the Administration Assets, including, without
limitation those set forth on Exhibit F hereto and will issue 1,000 shares of
---------
its Common Stock to Holdings, which will be all of the outstanding Capital Stock
of PMSI.
5. Personnel. At the Effective Time, the employees listed on Schedule G
of the Company will become employees of GVC, the employees listed on Schedule H
will become employees of PMSI and all other employees will become employees of
MNS.
6. Representations and Warranties of the Operating Companies. Each
Operating Company represents and warrants the following as to such Operating
Company:
(a) Organization and Good Standing. Operating Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with all requisite power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby.
Operating Company is duly qualified to do business and is in good standing in
the State of Texas.
(b) Authorization and Validity. The execution, delivery and performance
of this Agreement by Operating Company and the consummation of the transactions
contemplated hereby have been duly authorized by Operating Company. This
Agreement has been duly executed and delivered by Operating Company and
constitutes legal, valid and binding obligations of Operating Company,
enforceable against Operating Company in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency or similar laws affecting
creditor's rights generally or the availability of equitable remedies.
(c) No Violation. Neither the execution and performance of this Agreement
nor the consummation of the transaction contemplated hereby, will (a) conflict
with or result in a breach of the terms, conditions and provisions of, or
constitute a default under the Certificate of Incorporation or Bylaws of
Operating Company or any material agreement, indenture or other instrument under
which Operating Company is bound or (b) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over Operating
Company.
7. Representations and Warranties of the Company. The Company represents
and warrants the following:
(a) Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with all requisite power and authority to carry on the business in
which it is engaged and to own the properties it owns. The Company is duly
qualified to do business and is in good standing in the State of Texas.
(b) Authorization and Validity. The execution, delivery and performance
of this Agreement, and the consummation of the transactions contemplated hereby,
have been duly authorized by the
3
<PAGE>
Company. This Agreement has been executed and delivered by the Company and
constitutes legal, valid and binding obligations of the Company, enforceable
against it in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors' rights generally or
the availability of equitable remedies.
(c) No Violation. Neither the execution and performance of this Agreement
nor the consummation of the transactions contemplated hereby or thereby will (a)
result in a violation or breach of the Articles of Incorporation or Bylaws of
the Company or any material agreement or other instrument under which the
Company is bound or to which any of the assets of the Company is subject, or
result in the creation or imposition of any lien, charge or encumbrance upon any
of such assets except as set forth on Schedule E, or (b) violate any applicable
law or regulation or any judgment or order of any court or governmental agency,
except with respect to both clauses (a) and (b) above any violations or breaches
which would not have a material adverse effect on the Company or the Company's
business or the assets or businesses being transferred to MNS.
(d) Consents. No authorization, consent, approval, permit or license of,
or filing with, any governmental or public body or authority, any lender or
lessor or any other person or entity is required to authorize, or is required in
connection with, the execution, delivery and performance of this Agreement on
the part of the Company except for those set forth in Schedule F hereto, all
which have been obtained prior to the Effective Date unless indicated otherwise
on Schedule F hereto.
8. Indemnification.
(a) The Company's Indemnity. The Company hereby agrees to indemnify,
defend and hold each Operating Company and its officers, directors, agents,
attorneys and affiliates harmless from and against all losses, claims,
obligations, demands, assessments, penalties, liabilities, costs, damages,
reasonable attorney's fees and expenses (collectively, "Damages"), as such
Damages are incurred, asserted against or incurred by such Operating Company by
reason of or resulting from a breach by the Company of any representation or
warranty contained herein or in any agreement executed pursuant hereto, or
incurred by the Company.
(b) Operating Companies' Indemnity. Each Operating Company hereby agrees
to indemnify, defend and hold the Company and its officers, directors, agents,
attorneys and affiliates harmless from and against all Damages, as such Damages
are incurred, asserted against or incurred by the Company by reason of or
resulting from (i) a breach by such Operating Company of any representation or
warranty contained herein, or (ii) the failure of such Operating Company to pay,
perform and discharge when due any Assumed Liabilities.
(c) Procedures. Any party seeking indemnification (the "Indemnified
Party") shall give notice to the other party (the "Indemnifying Party") within
15 business days after actual receipt of service or summons to appear in any
action begun in respect of which indemnify may be sought hereunder, or actual
notice of assertion of a claim with respect to which it or they seek
indemnification. The failure so to notify the Indemnifying Party shall not
cause the Indemnified Party to lose its right to indemnification under this
Agreement. The Indemnifying Party may participate at its own expense and with
its counsel in the defense of such action. If the Indemnifying Party so elects
within a reasonable time after receipt of such notice it may assume the defense
of such action with counsel chosen by the Indemnifying Party, unless the
Indemnified Party reasonably objects to such assumption on the ground that its
counsel has advised it that there may be legal defenses available to it that are
different from or in addition to those available to the Indemnified Party and
counsel for the Indemnifying Party concurs in such advice, in which case the
Indemnified Party shall have the right to employ counsel. If the Indemnifying
Party assumes the defense of such action, the Indemnifying Party shall not be
liable for fees and expenses of
4
<PAGE>
counsel for the Indemnified Party incurred thereafter in connection with such
action. In no event shall be Indemnifying Party be liable for the fees and
expenses of more than one counsel for all Indemnified Parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
9. Further Assurances. Each party hereto shall duly execute and deliver
or cause to be executed and delivered all instruments of sale, conveyance,
transfer, assignment or assumption, and all notices, releases, acquaintances and
other documents that may be necessary or advisable to consummate the
transactions contemplated by this Agreement to evidence the assumption of the
Assumed Liabilities by the Operating Companies and the sale and transfer of the
PPO Assets, GVC Assets and Administration Assets by the Company; provided that
none of the foregoing actions is in contravention of this Agreement. If for any
reason any asset or liability intended to be transferred from the Company to an
Operating Company pursuant hereto cannot be transferred or the transfer is
deemed void, the Operating Company and the Company and the Operating Company
will enter into arrangements wherein the Operating Companies, as the case may
be, will be entitled to the economic benefit of the asset and will compensate
the Company for any liability incurred relating to such asset after the date
hereof.
10. Notices. All notices and other communications required or permitted
hereunder shall be in writing and, unless otherwise provided in this Agreement,
shall be deemed to have been duly given when delivered in person or by mail or
when dispatched by telegram or electronic facsimile transfer (confirmed in
writing by mail simultaneously dispatched) to the addressee at the address
specified below:
If to MNS: P. O. Box 549005
Dallas, Texas 75354-9005
If to GVC: P.O. Box 543045
Dallas, Texas 75354-3045
If to PMSI: P. O. Box 549005
Dallas, Texas 75354-9005
If to the Company P. O. Box 549005
or Holdings: Dallas, Texas 75354-9005
or such other address as either party may from time to time designate by
like notice.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior written or oral agreements pertaining to such subject matter.
12. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas.
13. Binding Nature. This Agreement shall inure to the benefits of and be
binding upon the parties to this Agreement and their respective successors and
assigns.
14. Descriptive Headings. The descriptive headings herein are inserted
for the convenience or reference only and are not intended to be part of or
affect the meaning or interpretation of this Agreement.
5
<PAGE>
15. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights,
benefits or remedies or any nature whatsoever under or by reason of this
Agreement.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
17. Successors. All agreements of the parties in this Agreement shall
bind and inure to the benefits of their respective successors.
IN WITNESS WHEREOF, the parties have executed the Agreement as of the date
first above written.
MedicalControl, Inc.
By: /s/ J. Ward Hunt
--------------------------------
J. Ward Hunt, President and
Chief Executive Officer
MedicalControl Network Solutions, Inc.
By: /s/ Robert O. Brooks
--------------------------------
Robert O. Brooks, President and
Chief Executive Officer
Genesis/ValueCheck, Inc.
By: /s/ Robert O. Brooks
--------------------------------
Robert O. Brooks, President and
Chief Executive Officer
PPO Management Solutions, Inc.
By: /s/ Robert O. Brooks
--------------------------------
Robert O. Brooks, President and
Chief Executive Officer
MedicalControl Holdings, Inc.
By: /s/ J. Ward Hunt
--------------------------------
J. Ward Hunt, President and
Chief Executive Officer
6
<PAGE>
EXHIBITS
A PPO Business Assets
B GVC Business Assets
C PMSI Business Assets
D PPO Assumed Liabilities
E GVC Assumed Liabilities
F PMSI Assumed Liabilities
G GVC Personnel
H PMSI Personnel
I No Violations
J Consents
7
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant.
MedicalControl Holdings, Inc., a Delaware corporation
MedicalControl Network Solutions, Inc., a Delaware corporation and
wholly owned subsidiary of MedicalControl Holdings, Inc.
PPO Management Solutions, Inc., a Delaware corporation and wholly owned
subsidiary of MedicalControl Holdings, Inc.
Genesis/ValueCheck, Inc., a Delaware corporation and wholly owned
subsidiary of MedicalControl Holdings, Inc.
Diversified Group Administrators, Inc., a Pennsylvania corporation and
wholly owned subsidiary of MedicalControl Holdings, Inc.
Diversified Group Insurance Agency of PA, Inc., a Pennsylvania
corporation and wholly owned subsidiary of Diversified Group
Administrators, Inc.
<PAGE>
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports, included in this Form 10-KSB into the Company's previously filed
Registration Statements (File No.'s 33-89436, 33-89438, 33-89440, 33-97648,
33-97650, 33-58334-FW, 33-91278, 33-97646, 33-05025 and 333-47781).
ARTHUR ANDERSEN LLP
Dallas, Texas
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM DECEMBER 31,
1997 FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,235,307
<SECURITIES> 0
<RECEIVABLES> 1,979,875
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,488,569
<PP&E> 1,661,290
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,687,424
<CURRENT-LIABILITIES> 3,905,445
<BONDS> 0
0
0
<COMMON> 39,086
<OTHER-SE> 7,634,473
<TOTAL-LIABILITY-AND-EQUITY> 12,687,424
<SALES> 14,313,101
<TOTAL-REVENUES> 14,313,101
<CGS> 0
<TOTAL-COSTS> 13,962,765
<OTHER-EXPENSES> (130,279)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,704
<INCOME-PRETAX> 469,911
<INCOME-TAX> 180,660
<INCOME-CONTINUING> 289,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,251
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
