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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File Number 1-11922
MEDICALCONTROL, INC.
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(Name of small business issuer in its charter)
Delaware 75-2297429
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8625 King George Drive, Suite 300
Dallas, Texas 75235
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (214) 630-6368
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
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(Title of Class)
Common Stock Purchase Warrants
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
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: $14,571,673.
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: As of March 26, 1999: $11,634,240*
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,163,487 shares of Common Stock,
$.01 par value as of March 26, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for 1999 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 $9.13, the last sales price of
the Registrant's common stock as of March 26, 1999, such date being within 60
days prior to the date of filing.
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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 Form 10-KSB under "Risk Factors" 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, liquidity issues, 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 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
MedicalControl, Inc. (the "Company") is a holding company comprised of
related operating companies serving the managed care industry and providing
health benefit plan administration services. The Company's four major
subsidiaries are MedicalControl Network Solutions, Inc. ("MedicalControl"),
providing managed care services primarily through its preferred provider
networks, ValueCheck, Inc. ("ValueCheck"), providing utilization review and case
management, Diversified Group Administrators, Inc. ("Diversified"), providing
third party administration ("TPA") services, and ppoONE.com, inc. (formerly PPO
Management Solutions, Inc.) ("ppoONE.com"), providing network management and
repricing software and services for provider network organizations ("PPO"). Each
subsidiary is accounted for as a separate segment of the Company. For financial
information on each segment see Note 3 to the Consolidated Financial Statements.
DESCRIPTION OF OPERATING COMPANIES
MedicalControl, acting as a preferred provider organization ("PPO"),
contracts with hospitals, physicians and ancillary providers providing 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.
ValueCheck, a utilization review and case management company, began
doing business January 1, 1999. Utilization review and case management
represents a complementary product for both MedicalControl's PPO and
Diversified's TPA businesses and has potential value for many of the same target
clients and market segments. Diversified and MedicalControl began marketing
ValueCheck services in the Fall of 1998 to their clients.
Diversified provides a comprehensive range of administration services
to self-funded benefit plans, insurance companies, provider-based organizations
and other benefit management organizations. Diversified provides complete
benefit plan review, design and administrative services in the administration of
comprehensive employee benefit programs and risk management activities.
Diversified currently administers over 300 self-funded benefit plans, two
fully-insured plans and over 50 risk management plans with clients ranging from
50 to 4,000 employees. Current total covered lives exceed 100,000 members
located in 49 states. In 1998, Diversified entered the Taft-Hartley and student
accident markets.
ppoONE.com, using its proprietary application software, provides
software leasing, Internet-based data center and claims processing services for
PPOs and other network organizations that enable such entities and their clients
to reprice provider claims to reflect negotiated rates and to produce data
analyses, and other cost containment information. ppoONE.com began service to
its first client in the fall of 1997. During the first quarter of 1998,
ppoONE.com began formally marketing its software, Internet-based data center and
administrative services. ppoONE.com recently licensed its software to a large
insurance conglomerate.
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
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ppoONE.com as subsidiaries and transferred its managed care operations to
MedicalControl and its repricing and administrative services operations to
ppoONE.com. All references to the operations of MedicalControl or ppoONE.com
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 85%
of all Americans with private insurance are enrolled in an HMO, PPO 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. Currently, over 78% of employers have opted for some type of
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.
A 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. 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' 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 network utilization,
services provided, claims processing activity, accounting data and cost savings.
In September 1998, MedicalControl purchased Business Health Companies,
Inc. ("BHC"), a leading Houston, Texas-based managed care organization that
enhanced significantly MedicalControl's Texas network offering. BHC owns the
Houston Healthcare Purchasing Organization ("HHPO")
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preferred provider organization. The HHPO network currently includes 68
hospitals, over 6,000 contracted physicians in addition to ancillary providers.
In addition to managing its provider network, the HHPO issues an annual Quality
Data Study of Houston hospitals which evaluates the quality performance of 46
Houston area hospitals in 4 categories: mortality rates, medical complications,
length of stay and average charge per patient. Since the acquisition, BHC
operates as a subsidiary of MedicalControl providing its greater Houston PPO
network and as the Houston component of MedicalControl's Texas network.
As of December 31, 1998, 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 directly-contracted and affiliate provider
networks, the Company's clients have access to more than 2,400 hospitals and
185,000 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 Louisiana,
New Mexico, California, Florida, Illinois, Ohio, Oklahoma and Pennsylvania.
Products and Services. MedicalControl provides a variety of managed
care products including quality, cost effective PPO networks, provider claims
repricing, and healthcare data analyses and reports. MedicalControl is also
exploring ways to expand service offerings by selling third party services
complementing the PPO such as prescription drug card, dental PPO or vision
program.
MedicalControl offers the following types of PPO networks:
MedicalControl Hospital Network -- a network of more than 2,400 acute
care hospitals and 5,000 ancillary facilities available through both direct
agreements and affiliate network agreements in 43 states.
MedicalControl Physician Network -- a network of more than 185,000
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 payment in full,
negotiated fee schedules in place of the current charges providers bill to
non-network patients for the same procedures and services. As a result of the
Company's negotiated fee schedules available through its Texas hospital network,
the Company's clients achieve average savings of over 30% between billed charges
and MedicalControl's negotiated, discounted rates. 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 established
standards and its credentialing process is accredited by the American
Accreditation HealthCare Commission/URAC.
MedicalControl reprices network provider claims based on negotiated fee
schedules and provides clients the option to reprice their own claims. In
providing in-house claims repricing services for the year-ended December 31,
1998, the Company processed over 450,000 claims in an average of 1.8 calendar
days with an accuracy rate of over 97% for all errors and 99% for those errors
affecting repriced amounts. MedicalControl uses ppoONE.com's proprietary
software system, IMPULSE(TM), to reprice network provider claims. This system
allows claims payors to reprice claims and perform customer service functions
remotely via direct-dial modem or Internet access to the system, provides faster
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response times and requires fewer keystrokes, therefore reducing errors while
increasing efficiency. ppoONE.com's system also has the ability to track claims
status for improved customer service.
MedicalControl provides extensive client specific healthcare reports to
its clients. ppoONE.com's system automatically produces a variety of
comprehensive utilization and savings reports 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 in hard copy or
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 co-pay differentials, waiver or reduction of deductible amounts for
in-network hospitalization or similar incentive programs for in-network use.
Greater utilization of in-network providers decreases the average cost per claim
and the costs to the client's employee benefit plan.
Although MedicalControl is expanding its product portfolio to include
other services for the benefit of its clients, MedicalControl expects its core
business and primary revenue source 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 healthcare needs of their covered employees or plan members and the
financial needs of clients. 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 volumes as members are directed to them through the client's health
benefit plans, identification cards, 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.
In addition, MedicalControl contracts with other PPO networks to
provide PPO network access, as needed, in many regions outside of Texas and New
Mexico. MedicalControl also maintains affiliate relationships in the
southwestern United States to supplement its own network. MedicalControl has
such affiliate network relationships in the States of Alabama, Arizona,
Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Louisiana,
Nevada, Michigan, Mississippi, New Jersey, North Carolina, Ohio, Oklahoma,
Oregon, Pennsylvania, South Carolina, Tennessee, Virginia, Washington and
Wisconsin.
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As of December 31, 1998, the approximate number of MedicalControl's
contracted providers were:
<TABLE>
<CAPTION>
Primary Car Specialists Total
Hospitals Ancillaries Physicians(1) Physicians Physicians
--------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Directly Contracted 650 1,800 9,300 13,700 23,000
Contracted through Affiliates 1,750 3,200 64,700 97,300 162,000
Total 2,400 5,000 74,000 111,000 185,000
</TABLE>
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(1) Primary care physicians include general practitioners, family practitioners,
pediatricians and internal medicine physicians.
In the event that current contracts with providers are not continued,
MedicalControl believes that in most areas 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 a provider services program.
A dedicated staff performs a variety of activities including responding to
hospital and physician claims inquiries and conducting site visits.
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. Management believes that MedicalControl's credential standards are
more stringent than many other PPOs. In the credentialing process,
MedicalControl, using primary source verification, confirms that a physician
meets the established MedicalControl standards. In instances when contracting
with larger physician or provider groups, having confirmed that a provider group
credentials to MedicalControl's standards, MedicalControl may choose to delegate
the credentialing function to that provider group.
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
marketing services through its corporate office in Dallas, Texas and in its
Houston, Texas office.
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 location and size of the provider network,
provider choice, depth of negotiated discounts, quality of services,
administrative support services, access fees, market presence and reputation.
MedicalControl believes its clients' employees and members select
MedicalControl's
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PPO rather than an HMO due to the significantly greater freedom of choice of
providers offered by MedicalControl in addition to other factors.
MedicalControl believes the costs incurred by its clients for
healthcare services rendered, along with the fees paid to MedicalControl, result
in significant net savings to the client, and are competitive with like
PPOs/managed care companies. In addition, MedicalControl believes that its
proprietary PPO networks tend to be more extensive than its competitors in
certain geographic regions, providing greater access for a 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, 1998, 1997 and 1996,
MedicalControl derived 67%, 72% and 72%, 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 PPO provider services and the networks selected by the client.
The PEPM fee basis provides MedicalControl with an expected level of payment
that is not contingent or dependent upon utilization levels or savings. 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.
UTILIZATION REVIEW AND CASE MANAGEMENT
ValueCheck began providing utilization review and case management as of
January 1, 1999. The Company launched ValueCheck because of what management
believes is an unmet market need for effective, basic and cost-effective
utilization review and case management services. In addition, utilization review
and case management is a complementary product for PPO services. MedicalControl
and ValueCheck products can be sold to the same customer and ValueCheck adds
value to the PPO offering. ValueCheck products are also sold to Diversified's
customers. ValueCheck's management team brings over 50 years of sales, product,
operations and Medical Director experience in the utilization review and case
management industry to this business.
ValueCheck's basic utilization review program combines review of
medical necessity and the appropriateness of inpatient setting. High-risk
medical cases are identified for special tracking because such cases have the
greatest potential for financial impact. According to data derived from more
than 500,000 hospital admissions, more than 50% of all inpatient admissions
generally follow a consistent treatment course, therefore, outcomes are not
significantly influenced by aggressive utilization review. ValueCheck monitors
these medically uncomplicated cases from pre-certification through discharge to
ensure they do not become complicated or deviate from their expected treatment
course. However, in cases where treatments and outcomes are not consistent,
ValueCheck employs intensive management techniques to optimize patient outcomes
and maximize cost savings. ValueCheck incorporates three components to its
utilization review process: review of procedure and medical necessity,
length-of-stay determination and negotiation of the treatment plan and
alternative care.
Throughout the utilization review process, ValueCheck nurses review the
medical necessity of an inpatient stay using nationally accepted medical
guidelines. In instances where the treating physician requests days that are
unsupported by these guidelines, a ValueCheck physician advisor will review and
discuss the case with the treating physician.
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This process continues until the patient is discharged or until medical
guidelines are no longer met by the patient's condition or treatment plan.
ValueCheck's review specialists maintain on-going contact with the attending
physician to ensure the patient stay in an acute care setting lasts only as long
as medically necessary.
ValueCheck uses a range of medical guidelines to support the
utilization review process. They are designed to promote discussion and
negotiation with the patient's attending physician, ensure consistent case
reviews, enhance review nurses' cross-discipline clinical knowledge and
establish proactive information exchange and negotiation capabilities. These
guidelines are screening tools used by ValueCheck's review specialists that
allow consistent evaluation of the appropriate level of care and treatment
planning. The use of such guidelines does not, however, replace the expertise
and important contribution of ValueCheck's nurses or physicians. ValueCheck uses
the following guidelines for evaluation and decision making during the review
process:
MILLIMAN AND ROBERTSON OPTIMAL RECOVERY GUIDELINES (ORGS): ORGs provide
day-by-day treatment plans for patients under age 65 with no significant
co-morbidities or complications. They are based on the CPT (procedure) and ICD-9
(diagnosis) codes relevant to the patient's condition and planned treatment.
ORGs provide the equivalent of medical guidelines, length-of-stay guidelines,
and outpatient procedure/treatment alternatives for uncomplicated medical,
surgical, and pediatric admissions. They also include guidelines for extending
an admission.
HCIA LENGTH-OF-STAY (LOS) TABLES: HCIA LOS standards are based on all-payor data
gathered from nearly 11 million actual inpatient records, representing 1 of
every 3 discharges from hospitals in the United States annually. These standards
provide norms for both simple and more complex patients. Each patient is unique,
and HCIA's LOS tables are sensitive to those differences.
ValueCheck's case management program targets cases requiring more
attention which can result in better medical outcomes for patients and greater
cost savings for plan sponsors. ValueCheck's early identification of and
intervention in case management candidates gives ValueCheck the greatest
opportunity to impact outcomes. ValueCheck's criteria and systems are
specifically designed not only to identify catastrophic and chronic illness or
injury cases, but also to prompt our reviewer to ask questions about seemingly
routine, uncomplicated cases that may reveal additional factors indicating
increased risk. Once cases are identified, ValueCheck matches the level and
method of case management services to the intensity of the case to improve
outcomes in the most cost-efficient manner possible.
Case managers identify, coordinate, and negotiate alternative treatment
plans and related costs. Nurses help expedite discharge from costly inpatient
settings to a patient's home or outpatient care facility, placing the patient in
the most appropriate setting possible. Nurses interface with the patient,
family, treating providers, and facilities in addition to a variety of ancillary
vendors such as home health aid and local support groups to coordinate
patient-focused, caring treatment plans that incorporate effective use of
benefit dollars.
Our case managers will direct patients to network providers whenever
possible. If the patient does not participate in a PPO plan or there is not a
network provider available, the case manager will negotiate a discounted fee
with the service provider with the goal of securing high-quality, lower-cost
outpatient and home health care services.
THIRD PARTY ADMINISTRATION BUSINESS
Diversified provides a comprehensive range of administration services
to self-funded benefit plans, insurance companies, provider-based organizations
and other benefit management organizations.
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Diversified provides complete benefit plan review, design and administration
services to administer comprehensive employee benefit programs and risk
management activities. Diversified currently administers over 300 self-funded
benefit plans, two fully insured plans and over 50 risk management plans with
clients ranging from 50 to 4,000 employees. Current total covered lives exceed
100,000 members located in 49 states. Student Accident policies cover an
additional 200,000 participants.
Products and Services. Diversified'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. Diversified 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.
Diversified also maintains and manages the relationships and interfaces
with insurance carriers who provide risk taking products for Diversified's
clients. Diversified 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, Diversified 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 whom are clients of
Diversified, own The Initial Group. The Initial Group contracts with hospitals
and doctors in an eight-county area of Northeastern Tennessee. Diversified 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
program underwritten by an insurance company. Diversified 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. Diversified recently received notice from the insurance company
underwriting these products that it is terminating Diversified in September
1999. Revenue from this product in 1998 was approximately $114,000. Management
believes that other related customers of Diversified may also terminate their
agreement with Diversified.
In November 1998, Diversified acquired certain assets located in
Harrisburg, Pennsylvania, and opened a TPA office in Harrisburg. Harrisburg is
important to attracting potential new TPA clients on the East Coast. This new
office also administers Taft-Hartley plans and a fully-insured student accident
plan, which are new markets for Diversified.
Marketing. Diversified 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.
Diversified believes that clients select Diversified'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.
Diversified's TPA operations have been in existence for 17 years - significantly
longer than most TPAs.
Diversified believes that future 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. Diversified is constantly reviewing auxiliary
suppliers
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for quality products to supplement offerings to clients. As a TPA, Diversified
currently offers auxiliary service providers to its clients in the form of 18
insurance carriers, seven utilization review firms, 36 managed care or PPO
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.
Diversified maintains full client service offices in Canonsburg and
Harrisburg, 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, Diversified 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. Diversified'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, Diversified, 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 Diversified'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.
Diversified believes that its systems are equal or superior to those offered by
like size TPAs operating on a national basis.
PPO MANAGEMENT SOFTWARE, INTERNET DATA CENTER AND CLAIMS ADMINISTRATION BUSINESS
ppoONE.com is dedicated to providing other PPOs and provider network
organizations with PPO administration software, data center services and
complete administration and claims outsourcing. ppoONE.com offers three types of
products: (i) lease of its proprietary PPO management software referred to as
IMPULSETM (Information Management Processing & UtiLization SystEm) (ii) lease of
proprietary PPO management software and Internet-based data center and (iii)
outsourcing of PPO claims administrative services including claims repricing,
customer service and PPO data management. Target markets for ppoONE.com products
are PPOs, medical provider groups, insurance carriers, third party
administrators and other managed care companies offering provider networks.
During the fall of 1997, ppoONE.com began servicing its first client, Business
Health Companies, Inc., which the Company subsequently purchased in September
1998. In April 1998, Florida Health L.C., a state-wide Florida PPO, began
outsourcing its repricing needs to ppoONE.com. Those services have since been
expanded to cover complete information system outsourcing. In March 1999,
ppoONE.com signed a license agreement to license its software to a large
insurance conglomerate.
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At its core, ppoONE.com's PPO management and repricing software is a
comprehensive PPO claims processing and customer service system based on
client/server technology. The system employs an OracleTM relational database
engine and state-of-the-art Microsoft Visual BasicTM user interface. IMPULSE's
advanced technology allows clients 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.
ppoONE.com is continuing the development and improvement of its data
processing systems, proprietary software and administrative services serving
MedicalControl and its clients as well as software which is marketed to
prospective clients. Through continuing development of its advanced, proprietary
client/server software and relational database, ppoONE.com 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 such
products or services will be successfully developed, management believes that
these new administrative services and products provide superior administrative
services relating to healthcare management network and cost management.
Among many other state-of-the-art features, IMPULSETM allows the
electronic transmission and receipt of provider claims. ppoONE.com can receive
electronic claims from facilities and physicians which reduce the costs
associated with manual input of claims data. Once ppoONE.com receives the claims
data electronically, certain claims can be automatically repriced without human
intervention, again reducing manual input costs.
ppoONE.com has no patents and relies on a combination of trademarks,
trade secrets and copyright protection to establish and protect its proprietary
technology. ppoONE.com 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 ppoONE.com's technology. In addition, these protections and precautions do
not prevent independent third party development of competitive technology.
During 1998 and 1997, the Company incurred approximately $243,000 and
$286,000 of software development costs, respectively, all of which were expensed
as incurred.
OTHER SERVICES
The Company also provided 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 achieved the savings or complete removal of certain
charges based upon nurse reviews for medical necessity and appropriateness,
comparison and negotiation based on the Company's database of usual and
customary charges and other factors. G/VC may also negotiate a prompt pay
discount with the provider. Company-developed software provides G/VC with data
regarding reasonable and customary rates for use in negotiating discounts on
bills from out-of-network providers. The Company intends to outsource this
business beginning in the spring of 1999. This outsourced product will be sold
to clients of MedicalControl and Diversified.
CUSTOMERS
For the fiscal years ended December 31, 1998, 1997 and 1996, two
customers, American Airlines, Inc., and the National Rural Electric Cooperative
Association, in the aggregate, accounted for approximately 13%, 18%, and 17%,
respectively, of the consolidated net revenues of the Company.
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Individually, each of the foregoing major customers of the Company accounted for
the following respective approximate percentages of the consolidated net
revenues of the Company for the fiscal years ended December 31, 1998, 1997 and
1996: American Airlines, Inc., 4%, 9% and 9%, and the National Rural Electric
Cooperative Association, 9%, 9% and 8%. Based on current services provided to
American Airlines, the Company expects the revenues of American Airlines to
decrease further during 1999.
The loss of any 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 consolidated net revenues for the fiscal years ended December
31, 1998 and 1997.
Clients representing approximately $700,000 of 1998 revenues have
terminated or amended their contracts with the Company during 1998 and the first
two months of 1999. Certain PPO clients also changed from a percentage of
savings fee arrangement to a PEPM fee arrangement, representing a loss of
approximately $658,000 of 1998 revenues. In addition, Diversified's revenues
relating to its fully-insured product may cease. Revenues from that product in
1998 were $114,000. Management believes that the Company will be able to replace
this revenue loss in 1999 by increased penetration of other current clients, new
PPO and TPA business development, marketing of its PPO management and repricing
services business and new utilization review and case management business as
well as through potential acquisitions.
COMPETITION
The Company competes with national and local organizations that have
developed PPOs, TPAs, Utilization Review and Case Management companies as well
as with HMOs and 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 affect 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.
There are nearly 100 million lives enrolled in indemnity and PPO plans
in the United States today, and 95% of those covered lives are required to
comply with utilization review procedures as defined in their benefit plan. This
mature market is dominated by a handful of national firms that together control
about 40% of the market. The remaining market is fragmented among a variety of
smaller competitors. Most of the larger national firms have built products for
the high-end Fortune 500 company market, and product design tends to feature a
great deal of customization, product enhancements, ad hoc reporting
capabilities, and corresponding premium pricing at or above $1.50 PEPM. Smaller
vendors fall into several categories including software vendors, disease and
demand management specialty boutiques who have entered the utilization review
business, and turn-key consultants. Few vendors, large or small, offer both
Utilization Management and PPO provider discounts, the two managed care tools
necessary to effectively manage both the utilization of health care and the unit
cost of services rendered. ValueCheck,
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when integrated with the MedicalControl PPO network offering, addresses both
critical components of the cost of health care. The integration of both services
in one location, with one toll-free number for members and providers, offers
seamless delivery, a key advantage in a market that seeks administrative ease of
doing business and one-stop shopping. ValueCheck was not designed to be
all-things-to-all-buyers. Rather, ValueCheck's target markets are TPAs,
Taft-Hartley plans, associations, and select self-insured employers who value
customer service, and early identification of high dollar claims - all at a
price that is generally 40% or more below market pricing.
The Company's TPA subsidiary may encounter competition from larger TPAs
with greater resources and regional TPAs with greater market penetration. The
Company will be subject to significant competition in any new geographic areas
it 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 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 IMPULSETM system.
Continuous investments and improvements will be required to retain this
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 aimed at
increasing 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 will ultimately be
implemented or whether other changes in the administration or interpretation of
governmental healthcare programs will occur. 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. Such proposed
legislation is primarily aimed at the practices of HMOs but could effect the
operations expense structure of PPOs as well. 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.
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 and utilization review and
case management businesses are subject to licensing and regulation on the state
level. Typically, the only state requirements for TPA are a completed
application, errors and omissions coverage and proof of a fidelity bond in the
amount of $500,000. Diversified 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. ValueCheck's license
in Texas is pending and expected to be completed soon. Many states merely
require accreditation. ValueCheck has applied for accreditation.
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EMPLOYEES
As of December 31, 1998, the Company and its wholly owned subsidiaries
had 233 full-time employees and 12 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.
RISK FACTORS
This report contains forward-looking statements which involve risks and
uncertainties. These forward-looking statements can be identified by the use of
predictive, future-tense or forward-looking terminology, such as "believes,"
"anticipates," "expects," "estimates," "may," "will" or similar terms.
Forward-looking statements also include projections of financial performance,
statements regarding management's plans and objectives and statements concerning
any assumptions relating to the foregoing. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the following risk
factors and elsewhere in this Form 10-KSB.
RECENT REVENUE DECLINE
Exclusive of revenues associated with BHC, the Company experienced a
16% decline in its PPO revenues for the year ended December 31, 1998, as
compared to the prior year. We cannot assure you that revenue will not further
decline or that profitable operations can be sustained on a quarterly or annual
basis in the future.
INTEGRATION OF ACQUIRED OPERATIONS
The Company, through MedicalControl, a wholly owned subsidiary,
completed the acquisition of BHC in September 1998. As a result of this
acquisition, BHC became an indirect, wholly owned subsidiary of the Company, and
the Company began the integration of the operations and management of BHC into
the Company's existing business. We expect to continue the integration of
marketing, client services and related support activities of BHC into our
operations throughout fiscal 1999. We may not be able to complete this
integration successfully. The operating history of BHC on a stand-alone basis
cannot necessarily be regarded as indicative of our prospects on a consolidated
basis. Accordingly, we cannot assure you that the Company and BHC will achieve
the growth in revenues or sustain revenues at a level consistent with the
historical results achieved by the Company and BHC on a stand-alone basis.
DEPENDENCE ON KEY CLIENTS
The Company has contracts with several key clients, which account for a
substantial portion of its total revenues. The Company's two largest clients, in
the aggregate, accounted for approximately 13%, 18% and 17%, respectively, of
the Company's net revenues for the fiscal years ended December 31, 1998, 1997
and 1996. The loss of any principal customer could have a material adverse
effect on the operating results of the Company. Subject to anticipated
fluctuations in the relative contribution of each of these clients, we expect
that the combined volume of these clients as a percentage of revenues through
1999 will be comparable with prior periods. Although we cannot assure you for
certain, we do not expect the net results of the change in volumes of these
clients to have a material effect on our results from operation.
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COMPETITION
We compete with national, regional and local organizations who have
developed PPOs and TPAs as well as with major insurance carriers. The industry
is highly competitive and significant consolidation has occurred within the
industry, creating stronger competitors. The current competitive environment may
limit our ability to price our products at levels we believe are appropriate.
The Company's managed care subsidiaries also face 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, health maintenance organizations ("HMOs"), point-of-service
plans and PPOs, offered either through self-funding or third parties. We compete
with providers of all of these products, many of which have substantially
greater financial resources than we do. We believe that a limited number of
companies provide all of the services offered by us within the geographic areas
in which we presently operate. The Company's managed care subsidiaries 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 affect the Company's financial results. The Company's TPA subsidiary
may encounter competition from larger TPAs with greater resources and regional
TPAs with greater market penetration. All subsidiaries of the Company will be
subject to significant competition in any new geographic areas they may enter.
"Indemnity insurance" is the "traditional" insurance plan that pays
specific benefits to an insured individual to reimburse them for a portion of
the cost of medical care. Reimbursement for medical care in this situation is
based on the providers' regular charges to the public and the insureds are not
limited with regard to choice of providers. HMOs are managed healthcare plans
that require their members, with the exception of certain medical emergency
situations, to use the services of specific designated physicians, hospitals or
other providers for their healthcare needs. Restriction of access to a limited
number of providers allows the HMO to control the utilization of services and
resources in the delivery of care. One method used by HMOs to reward providers
with cost-effective management of care is through "capitation." "Capitation" is
a provider payment method that reimburses each provider a fixed monthly fee per
member per month for the total cost of all care for enrolled patients regardless
of use. "Point of service" plans offer an individual the choice of seeking
services from a participating provider or any other provider of their choice
each time services are rendered. Patients who choose a participating provider to
provide healthcare services will receive a higher level of reimbursement than
patients choosing a non-participating provider. "Preferred provider
organizations", including our PPO subsidiary, offer employers and healthcare
purchasers access to a broad network of facilities and physicians who have
agreed, by contract, to provide services at a fixed rate or at discounted rates
from their standard fees. In such PPO arrangements, the cost of care is borne by
the self-insured employer or benefit plan and not the PPO.
The major competitors of the Company vary depending on the product or
services or the market served by the Company on behalf of its particular
clients. In general, the Company typically encounters competition from large
insurance companies, national and local TPAs, national, regional and local PPOs
and Blue Cross plans when the Company solicits new clients for business.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
PPOs are currently not highly regulated. Since 1993, many competing
proposals have been introduced in Congress and various state legislatures have
called for general healthcare market reforms to insure access to quality
healthcare services. These reforms relate to certain "patient rights," network
or healthcare quality and the measurement and reporting of certain quality
indicators. These reforms could
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have a negative impact on limiting certain practices, introducing new liability
exposures and increasing cost as a result of required quality measures or
reporting. We cannot predict 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.
We cannot 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 proposals may be enacted. At both the federal and state levels, interest is
growing in legislation to regulate how managed care companies interact with
providers and health plan members. We cannot predict what effect federal or
state healthcare legislation or private sector initiatives will have on our PPO
or TPA operations, although we believe we may benefit from some proposals that
favor the growth of managed care. We cannot assure you that future healthcare
reforms or PPO regulations will not be adopted which would have a material
adverse effect on us.
ERISA, governing employee benefit plans, permitted employers, among
other mandates, to self-insure their health insurance by acting as a
quasi-insurer. The courts are narrowing the application of ERISA, which limits
its protections for our TPA subsidiary. Employers viewed the ability to
underwrite their own health claims as a result of ERISA as an opportunity to
better control healthcare costs. The United States Department of Labor regulates
TPAs and has adopted strict, enforceable guidelines for the operation of TPAs.
In addition, TPAs are subject to licensing and regulation on the state level.
Typically, the only state requirements are a completed application and proof of
a fidelity bond in the amount of $500,000. The Company's wholly owned
subsidiary, Diversified 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.
We anticipate that federal and state legislatures will continue to
review and consider alternative healthcare solutions and payment methods. We are
unable to determine to what extent PPOs and TPAs will be subject to any managed
care initiatives of the federal and state governments or private sector
initiatives, as there is increasing emphasis on market-driven modifications.
Also, we are unable to determine the favorable or unfavorable impact, if any,
such initiatives would have on our operations.
DEPENDENCE ON HEALTHCARE PROVIDERS
The Company's PPO profitability and long-range business plans are
dependent upon attracting and retaining qualified physicians, hospitals and
other healthcare providers under contract and preferred pricing terms which
permit the Company to compete with other managed care companies and insurance
companies on favorable terms. We believe there is increasing competition from
HMOs, PPOs and other healthcare plans for physicians, hospitals and other
healthcare providers. We cannot assure you that we will be successful in
maintaining existing relationships or attracting necessary healthcare providers.
CANCELLATION RIGHTS ON CONTRACTS
Although the Company generally enters into written contracts with its
clients, the majority of such contracts, including the contracts with the
Company's major clients, permit cancellation upon 30 to 90 days' notice.
Additionally, the Company's contracts with its clients do not require minimum
payments or minimum levels of services. The exercise of these cancellation
rights or a significant reduction in the volume of services by the Company's
largest clients or by a number of the Company's other clients could have a
material adverse effect on the Company. See "Risk Factors - Dependence on Key
Clients." Clients representing approximately $3,000,000 of 1996 and 1997
revenues and $700,000 of 1998 revenues have terminated their contracts with the
Company during 1997 and 1998. In addition, certain clients in 1998 have
converted to a different fee arrangement resulting in a loss of approximately
$658,000 of 1998 revenues. We believe that we will be able to replace this
revenue through increased penetration of current
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clients, new PPO and TPA business development in 1998 and marketing of our
repricing and administrative services business and external growth. We cannot
assure you that we will maintain our current client relationships or that our
clients will not decrease their volume or change their fee structure.
POSSIBLE DELISTING OF COMMON STOCK ON THE NASDAQ NATIONAL MARKET
In November 1998, the Company received notification from The Nasdaq
National Market that the Company did not have the minimum net tangible assets
required for listed companies. As of December 31, 1998, the Company's net
tangible assets were approximately $114,000 and The Nasdaq National Market's
minimum requirement for listed companies is at least $4 million in net tangible
assets. The Company filed a proposal with The Nasdaq National Market that, if
successful, would cause the Company to comply with The Nasdaq National Market's
listing criteria. The Nasdaq National Market initially rejected the Company's
plan. The Company met with a panel from The Nasdaq National Market on March 25,
1999, to appeal this decision.
If the Company's Common Stock is no longer traded on The Nasdaq
National Market, the Company intends to apply for listing its Common Stock on
the American Stock Exchange or on a regional exchange, such as the Boston Stock
Exchange. If the Company's Common Stock is not approved for listing on The
American Stock Exchange or a regional exchange, trading, if any, on the
Company's Common Stock would be conducted in the over-the-counter market in the
"pink sheets" or the electronic bulletin board administered by the National
Association of Securities Dealers, Inc. In such an event, the market price of
the Company's Common Stock may be adversely impacted. As a result, an investor
may find it difficult to dispose of or obtain accurate quotations as to the
market value of the Company's Common Stock.
DEPENDENCE ON COMPANY'S SENIOR MANAGEMENT
The Company's success depends to a significant extent upon J. Ward
Hunt, President and Chief Executive Officer, and Robert O. Brooks, Executive
Vice President and Chief Operating Officer. Neither Mr. Hunt nor Mr. Brooks is
currently subject to an employment agreement and we cannot assure you that
either of them will remain our employees in the future. The loss of Mr. Hunt's
or Mr. Brooks' services could have a material adverse effect on us. We do not
carry key man life insurance on the life of Mr. Hunt or Mr. Brooks. We believe
that our future success will also depend on our ability to continue to attract
and retain key employees. Competition for qualified personnel in our industry is
intense.
MANAGEMENT INFORMATION SYSTEMS; PROPRIETARY TECHNOLOGY
Our management information systems are critical to our operations
because the information from our information systems allow us to negotiate price
discounts for provider services, monitor network utilization and perform other
client services. In addition, these systems are critical to the timely,
efficient processing and/or review of provider claims. We rely on a combination
of trade secrets and copyright protections to establish and protect our
proprietary rights to these information systems. We cannot assure you, however,
that the legal protections and the precautions taken by us will be adequate to
prevent misappropriation of our technology. In addition, these protections and
precautions will not prevent development by independent third parties of
competitive technology or products, and some companies have already developed
products which, to some extent, perform functions similar to those performed by
our information systems.
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RELIANCE ON DATA PROCESSING AND YEAR 2000 COMPLIANCE
Certain aspects of our business are dependent upon our ability to
store, retrieve, process and manage data and to maintain and upgrade our data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors or other
computer problems could have a material adverse effect on our business.
We recognize the need to ensure that our operations will not be
adversely impacted by Year 2000 software failures. Accordingly, we have been
evaluating the impact of the Year 2000 on our services offerings as well as our
internal systems and hardware. Relative to our services offerings, all current
versions of our products are designed to be "Year 2000" compliant. Accordingly,
we do not currently believe that the effects of any Year 2000 non-compliance in
our installed services offerings will result in any material adverse impact on
our business or financial condition. As to our own internal software systems and
hardware, we have identified and are currently reviewing all key applications
and systems. We believe there is no significant exposure to us related to the
Year 2000 issue.
We cannot assure you that the Company will not be exposed to potential
claims resulting from system problems associated with the century change. In
addition, we cannot know for certain that unknown issues will not arise or that
any costs will not exceed current. Any difficulties in reviewing claims in a
timely manner may adversely affect the Company's ability to attract and retain
clients and/or healthcare providers and may also adversely affect the Company's
ability to monitor its financial and operational performance. Further, we cannot
know for certain our providers, customers and vendors are Year 2000 compliant
and the effect of such non-compliance on the Company.
CONTROL OF THE COMPANY
Currently, The Answer Partnership, Ltd. owns 2,640,000 shares, or 64%,
of the Company's Common Stock. As a result, The Answer Partnership, Ltd. in
essence elects the entire Board of Directors of the Company and controls the
direction and operations of the Company. J. Ward Hunt, President of the Company,
controls The Answer Partnership, Ltd. due to his position as its managing
partner.
CONFLICTS OF INTEREST
The Company is a party to a loan arrangement with Mr. Hunt, the
Company's Chairman of the Board, principal shareholder, President and Chief
Executive Officer. From time to time during the term and course of such
arrangement, the officers and directors of the Company may be faced with
potential conflicts of interest between the Company and Mr. Hunt. The officers
and directors of the Company are limited only by their fiduciary duty under
Delaware law to conduct themselves in a manner that is fair to the shareholders
of the Company, the requirements under Delaware law of disclosure to the Board
of Directors of transactions that involve interested director(s) and approval by
a majority of the disinterested directors, and disclosure of interested
transactions to shareholders (for transactions that require shareholder
approval) and approval by a majority of the disinterested shareholders (for
transactions that require shareholder approval). Management undertakes to abide
by Delaware law and its fiduciary duty of fairness to shareholders if faced with
conflicts in this ongoing relationship with Mr. Hunt. We have established no
other guidelines or procedures for resolving potential conflicts. Failure by
management to resolve conflicts of interest in favor of the Company may have a
materially adverse affect on the Company.
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POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain
provisions that may discourage acquisition bids for the Company. The Company has
substantial authorized but unissued capital stock available for issuance. The
Company's Certificate of Incorporation contains provisions which authorize the
Board of Directors, without the consent of stockholders, to issue additional
shares of Common Stock and issue shares of Preferred Stock in series, including
establishment of the rights, powers and preferences, including voting rights, of
holders of the Preferred Stock, and grant authority to the Board to amend the
Company's Bylaws. Additionally, the Company's Bylaws empower the Board to
increase or decrease the number of directors, subject to certain limitations,
and specify that directors will generally hold office until the next annual
meeting of stockholders. These provisions may have the effect, either alone or
in combination with each other, of (i) limiting the price that certain investors
might be willing to pay in the future for the Common Stock, (ii) delaying,
deferring or otherwise discouraging an acquisition or change in control of the
Company deemed undesirable by the Board of Directors or (iii) adversely
affecting the voting power of stockholders who own Common Stock.
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 was
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 leases approximately 5,000 square feet in Canonsburg,
Pennsylvania at a monthly rent of approximately $2,750 plus all maintenance and
repairs. The Company owns a 9,100 square foot building in Canonsburg,
Pennsylvania with an outstanding mortgage in the principal amount of
approximately $250,000 and monthly principal payments of approximately $2,100.
The Company leases approximately 400 square feet in Knoxville, Tennessee and
5,000 square feet in Houston, Texas.
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.
18
<PAGE> 21
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, 1998 6 5 1/8
June 30, 1998 5 3/4 5 1/8
September 30, 1998 7 1/2 3 3/4
December 31, 1998 8 5/8 5 3/8
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
</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 21, 1999, there were approximately 800 record and
beneficial holders of the Company's Common Stock.
(c) The Company has not paid cash dividends on its Common Stock in the
last two years and in any subsequent interim period. The Company's bank
agreement with its senior lender prohibits the payment of dividends.
(d) In September 1998, the Company in a private transaction acquired
all of the outstanding stock of BHC. The Company paid to the three former
stockholders of BHC consideration consisting of cash, 270,900 shares of the
Company's Common Stock and convertible promissory notes in the aggregate
principal amount of $1,000,000 convertible into shares of the Company's Common
Stock at the conversion rate of $5.25 per share. The Company relied on the
exemption from the registration requirements provided by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FISCAL YEAR ENDED DECEMBER 31, 1998, COMPARED TO DECEMBER 31, 1997
Total revenues for the year ended December 31, 1998, were $14.6
million, $300,000 (2%) higher than the $14.3 million reported in 1997. Excluding
revenues generated by BHC which was purchased effective September 1998, revenues
declined by approximately $600,000. This net decrease resulted from reduced PPO
revenues of approximately $1.4 million (primarily due to client turnover,
reduced revenues from existing clients caused by conversion to capitated fee
arrangements and fluctuations in the relative mix of hospital versus physician
claims volumes), offset by increased TPA revenues of approximately $800,000
(primarily derived from claims administration fees on incremental covered lives
and twelve months of revenues from a new fully-insured product introduced during
1997). Diversified has received notice that it is being terminated from its
fully insured products as of September 1999. Revenue from this product in 1998
was approximately $114,000. Management believes that other related customers of
Diversified may also terminate their agreement with Diversified during 1999 as a
result.
The Company has experienced declining PPO revenues in recent periods.
This decline is largely attributable to industry-wide trends associated with PPO
access service fees migrating towards less profitable capitated rates and client
turnover driven by consolidations and mergers of large clients and client
benefit plans typically beyond the control of management. Medical Control
derived 67% of its PPO revenues from percentage of savings business in 1998
versus 72% in 1997. Management believes this trend can be reversed through
increased market penetration with current PPO clients, new PPO and TPA business
development, marketing of its PPO management and repricing business.
19
<PAGE> 22
For the year ended December 31, 1998, the Company generated a net loss
of $1.2 million ($.30 per share) versus net income of $289,000 ($.07 per share)
in 1997. Operating results for 1998 were in part adversely impacted by post
acquisition charges associated with the BHC acquisition more fully discussed
below. Included in the 1998 operating results is approximately $127,000 of net
income generated by BHC. Included in the prior year's operating results were
approximately $285,000 of non-recurring costs associated with the Company's
relocation of its principal operations and corporate offices, the implementation
of a new claims processing system for its subsidiary, certain separation costs
associated with a former employee, and accelerated software development cost
amortization. Exclusive of these prior year nonrecurring costs, and the impact
of BHC net income and the post acquisition charges included in 1998 operating
results, net income declined approximately $1.5 million between periods. This
decline was due primarily to reduced PPO revenues and increases in personnel
costs and operating expenses more fully discussed below.
Salaries and wages increased 22% between years, to $9.3 million in 1998
from $7.7 million in 1997. Exclusive of personnel costs associated with BHC
operations, salaries and wages increased approximately $1.3 million. Of this
amount, approximately $345,000 was attributable to merit increases and the
recruitment and retention of key management personnel effective between periods,
approximately $821,000 was attributable to incremental new staffing requirements
in both the PPO and TPA operations, and $120,000 related to temporary labor
costs associated with year-end backlog and systems conversion efforts in the TPA
operations.
Other operating expenses were $5.7 million for 1998, $262,000 (4%)
higher than in 1997. Exclusive of approximately $228,000 of operating expenses
associated with BHC operations and $253,000 of non-recurring charges included in
1997 operating results associated with the Company's relocation and systems
conversion costs, other operating expenses increased approximately $287,000
between periods. This increase was due primarily to incremental access fees paid
to affiliate PPO networks, increased telephone expenses associated with higher
customer service call volumes, and increased postage costs due to increased
claims volumes.
Depreciation and amortization expense decreased to approximately
$826,000 in 1998 from $885,000 in 1997, or 7% for the year. This decrease
resulted from the reduction in capitalized software development cost
amortization due to such remaining costs being written off during the third
quarter, offset by increased amortization expense associated with intangible
assets recorded in conjunction with the BHC acquisition. See discussion of post
acquisition charges below for further information.
In connection with the BHC acquisition discussed above, the Company
recognized certain post acquisition charges of approximately $648,000. These
charges consisted of a $483,000 write-off of certain historically capitalized
software development costs, $125,000 of special management bonuses related to
the acquisition, and $40,000 of severance related costs. Due to the Company's
requirement to consolidate database administration, network access, and like
product offerings of the separate entities, certain existing capitalized
information management applications of the Company no longer had an economic
value. The Company has and continues to develop new database and network
administration applications to accommodate combined product offerings of the
consolidated entity and such development costs are being expensed as incurred.
Other income and expense decreased to income of approximately $94,000
from $120,000 for the years ended December 31, 1998 and 1997, respectively. This
decrease resulted primarily from incremental interest expense on acquisition
notes payable to fund the BHC acquisition.
20
<PAGE> 23
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $253,000 at
December 31, 1998, compared to $2,583,000 at December 31, 1997. Unrestricted
cash and cash equivalents were approximately $1,113,000 at December 31, 1998,
compared to $2,032,000 at December 31, 1997. Cash provided by operations during
1998 was approximately $197,000 as compared to $923,000 during 1997. This
decrease is primarily due to cash used as purchase consideration for the BHC
acquisition, a reduction in PPO revenue, increased personnel costs, increased
current obligations from the purchase of BHC, and the timing of third party
insurance premium payments, offset by increased collections of accounts
receivable.
Capital expenditures for the purchase of tangible property and
equipment were approximately $388,000 for the twelve months ended December 31,
1998. These expenditures were primarily for data processing equipment for the
Company's PPO and TPA operations. During 1998, the Company also acquired certain
other data processing equipment totaling approximately $70,000, which were
financed under terms of an operating lease.
In connection with the 1994 acquisition of Diversified, the Company
incurred certain acquisition note obligations. The final $100,000 of these
obligations, subject to an option to convert this note into 25,000 shares of
common stock, was due on June 30, 1998. At maturity, $40,000 of this obligation
was converted to Company stock with the remaining $60,000 being paid in cash.
In connection with the separation agreement with a former employee, the
Company is required to make eight quarterly installments of $13,750, plus
interest at 8%, which began on September 30, 1997. Three installments were made
during 1998, with a fourth payment being made immediately subsequent to
year-end. Two quarterly payments remain to be made in 1999.
Effective September 1, 1998, the Company purchased BHC for
approximately $4,500,000. The purchase consideration consisted of $500,000 cash,
a $1,600,000 term note with a bank, an aggregate of $1,000,000 in convertible
notes from the previous shareholders of BHC, and common stock of the Company
valued at approximately $1,400,000. The bank note bears interest at the bank's
prime rate plus 1% (8.75% at December 31, 1998) and is payable in sixty monthly
principal installments plus interest through October 2003. The convertible
seller notes bear interest at 8.5% and are payable in quarterly principal
installments of $50,000 plus interest through October 2003. The notes are
convertible into common stock of the Company at any time, in $25,000 increments,
at a conversion rate of $5.25 per share.
At December 31, 1998, the Company had $325,000 of outstanding
borrowings under its line of credit arrangement. In conjunction with the bank
financing above, the Company's existing $1,000,000 line of credit was terminated
and a new revolving credit facility was obtained. This credit facility, secured
by accounts receivable, allows for maximum borrowings of $500,000 and bears
interest at the bank's prime rate plus 1% (8.75% at December 31, 1998).
Availability under this credit facility was $175,000 at December 31, 1998. As of
December 31, 1998, the Company was not in compliance with certain debt covenants
and, in March 1999, it restructured these covenants and certain other terms of
the bank agreement and received the necessary waivers. Under the revised terms
of the bank agreement, the Company is required to make principal reductions in
the amount of $200,000 on March 31, 1999 and $350,000 on or before August 1,
1999. The revised term note includes certain revised financial covenants,
including minimum cash flow, stockholders' equity and working capital
requirements, and is secured by a pledge of certain shares of the Company's
wholly owned subsidiaries. Concurrently, maximum borrowings under the Company's
revolving credit facility were reduced from
21
<PAGE> 24
$500,000 to $400,000. As of March 1999, the Company has no availability under
its line of credit. Although there can be no assurance, the Company believes
that it will be in compliance with its debt covenants through 1999. In January
1999, the Company eliminated certain positions and reduced certain expenses that
resulted in approximately $70,000 in salary and other cost savings per month.
In October 1998, the Mr. Hunt gave notice of his intent to repay his
promissory note in the amount of approximately $414,000 by transferring to the
Company certain of his shares of common stock of the Company. This transfer
would require the consent of the Company's bank lender. Such consent was not
received and the transaction was not completed.
During the first half of 1998, the Company purchased a total of 88,000
shares of Company stock at $5.13 per share under terms of a stock repurchase
agreement announced during January 1997. The purchases were financed with
advances under this credit facility.
Management believes that cash flows from operations and cash on hand
will be sufficient to fund liquidity needs and capital requirements in 1999.
The Company has not paid dividends in the past and does not anticipate
the payment of such in the future.
RELIANCE ON DATA PROCESSING
The Company's management has recognized the need to ensure that its
operations and relationships with vendors and other third parties will not be
adversely impacted by software processing errors arising from calculations using
the year 2000 and beyond ("Year 2000"). Management recognizes that failure by
the Company to timely resolve internal Year 2000 issues could result, in the
worst case, in an inability of the Company to store, retrieve, process, and
manage data in support of its claims repricing and third party administration
services. However, Company management believes that scenario is unlikely based
on the progress made in its Year 2000 remediation plan. Failure of one or more
third party service providers on whom the Company relies to address Year 2000
issues could also result, in a worst case scenario, in some business
interruption. The lost revenues, if any, resulting from a worst case scenario
such as those examples described above would depend on the time period during
which the failure goes uncorrected and on how widespread the impact.
The Company began a formal program in 1998 to evaluate, assess and make
the needed changes to its core information technology ("IT") systems and
applications to comply with Year 2000 issues. Management has completed its
review of all essential IT systems and believes that they are Year 2000
compliant. The Company's primary IT systems and applications have been developed
and placed into production within the past eighteen to twenty-four months.
Accordingly, such systems and applications were developed employing contemporary
software tools to be Year 2000 compliant from their initial design phase.
Management is continuing to inventory and evaluate all non-essential software
programs and hardware used in the Company's business. Management expects this
process to be complete by September 30, 1999. Non-compliant systems are being
replaced, modified, or outsourced as they are reviewed. The Company has
communicated, and will continue to communicate, with its suppliers, financial
institutions and others with which it does business to monitor and evaluate Year
2000 conversion progress.
With regard to non-IT systems, such as general office security systems
and phone systems, the Company is currently evaluating the compliance of such
systems. Systems that are not compliant, if any, will be remediated, upgraded or
replaced by September 30, 1999. Management anticipates that expenditures related
to these activities will not exceed $20,000.
22
<PAGE> 25
Direct expenditures associated with Year 2000 issues, excluding costs
associated with the development of the underlying core IT systems, have been
immaterial to date and have been funded through the Company's normal IT
operations budget.
The Company has had each of its departments or divisions develop basic
contingency plans to restore the material functions of each of its material
systems or activities in the case of a Year 2000 related failure. The
contingency plans cover all material levels of activity within each business
location. The Company plans to continually refine these plans and to make them
more comprehensive, as more information becomes available from testing and third
party suppliers.
Although there can be no assurance that the Company will be able to
complete all of the modifications in the required time frame, nor that
unanticipated events will occur, or that the Company will be able to identify
all Year 2000 issues before problems manifest themselves, it is management's
belief that the Company is taking adequate action to address Year 2000 issues.
Management does not expect the Year 2000 compliance efforts or related
expenditures to be material to the Company's consolidated financial position,
results of operations or cash flows.
23
<PAGE> 26
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, 1998 and 1997 ................................................ F-2
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997.......................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998 and 1997........................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997.......................... 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, 1998, 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 Commission not later than 120 days after December 31, 1998, 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, 1998, the end of
the year covered by this Form 10-KSB.
24
<PAGE> 27
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, 1998, 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.
10.1 Amended and Restated Non-Qualified Stock Option Agreement -
incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, file number 33-58334-FW, declared effective May 13, 1993.
10.2 Outside Directors Stock Option Plan of MedicalControl, Inc., -
incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, file number 33-58334-FW, declared effective May 13, 1993.
10.3 First Amendment to the Outside Directors Stock Option Plan of
MedicalControl, Inc. - incorporated by reference to the Exhibits to the
Registration Statement on Form SB-2, file number 33-58334-FW, declared
effective May 13, 1993.
10.4 Amendment to the Outside Directors Stock Option Plan of MedicalControl,
Inc. dated August 20, 1996 - incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
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.
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 - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
25
<PAGE> 28
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 - incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
10.10 Stock Purchase Agreement, dated as of June 30, 1994, between Robert H.
Soleau and David C. Bramer (as Sellers) and MedicalControl, Inc., a
Delaware corporation (as Purchaser) - incorporated by reference to
the Current Report on Form 8-K dated August 15, 1994, file number
1-11922.
10.11 Asset Purchase Agreement, dated as of October 3, 1994, between Group
Administrators, Inc., a Texas corporation (as Seller) and
MedicalControl Administrators, Inc., a Texas corporation (as
Purchaser) - 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, dated as of November 28, 1994,
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. -
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
and officers - 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 Diversified 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., 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.) - incorporated by reference to Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
10.17 Stock Purchase Agreement, dated September 10, 1998, by and between
MedicalControl Network Solutions, Inc., Business Health Companies,
Inc., Ralph T. Smith, Donald Richard Huntington and Douglas Elden. -
incorporated by reference to Registrant's Special Report on Form 8-K
filed October 9, 1998.
10.18 Employment, Confidentiality and Non-Competition Agreement, dated
September 25, 1998, by and among MedicalControl Network Solutions,
Inc., registrant and Donald Richard Huntington
10.19 Employment, Confidentiality and Non-Competition Agreement, dated
September 25, 1998, by and among MedicalControl Network Solutions,
Inc., registrant and Ralph T. Smith
10.20 Loan Agreement, dated September 25, 1998, by and between the registrant
and Bank One, Texas, N.A.
10.21 First Amendment to Loan Agreement, dated as of March 31, 1999, by and
between Bank One, Texas N.A. and the registrant.
21 Subsidiaries of the Registrant.
26
<PAGE> 29
23.7 Consent of Arthur Andersen LLP, independent public accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K. The Company filed a Current Report on
Form 8-K and 8-K/A on October 9, 1998 and November 12, 1998,
respectfully, relating to the BHC acquisition.
27
<PAGE> 30
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 31, 1999 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 31, 1999
- --------------------------- and Chairman of the Board of Directors
John Ward Hunt (principal executive officer)
/s/ David A. Hanson Vice President, Finance and Accounting March 31, 1999
- --------------------------- (principal accounting officer)
David A. Hanson
Director
- ---------------------------
Robert W. Philip
/s/ William L. Amos, Jr. Director March 31, 1999
- ---------------------------
William L. Amos, Jr., M.D.
/s/ D. Samuel Coats
- ---------------------------
D. Samuel Coats Director March 31, 1999
</TABLE>
28
<PAGE> 31
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, 1998 and 1997,
and the related consolidated statements of operations, 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, 1998 and 1997, 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 31, 1999
F-1
<PAGE> 32
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,112,653 $ 2,031,550
Restricted cash 308,002 1,203,757
Accounts receivable - trade, net of allowance
for doubtful accounts of $119,000 and
$135,000 in 1998 and 1997, respectively 1,312,043 1,979,875
Accounts receivable - premium 466,980 741,345
Accounts receivable - other 90,671 87,099
Income tax receivable 472,691 --
Prepaid expenses and other current assets 227,391 276,105
Deferred income taxes 169,028 168,838
------------ ------------
Total current assets 4,159,459 6,488,569
NOTE RECEIVABLE - OFFICER, including accrued interest 421,175 394,654
PROPERTY AND EQUIPMENT, NET 1,697,698 1,661,290
GOODWILL, NET 7,772,833 3,451,348
INTANGIBLE AND OTHER ASSETS, NET 97,991 691,563
DEFERRED TAXES 85,270 --
------------ ------------
TOTAL ASSETS $ 14,234,426 $ 12,687,424
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 916,826 $ 643,249
Accounts payable - premium 774,982 1,945,102
Accrued liabilities 773,749 852,095
Income taxes payable -- 291,927
Borrowings under revolving bank line of credit 325,000 --
Current portion of long-term debt 1,115,515 173,072
------------ ------------
Total current liabilities 3,906,072 3,905,445
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 1,554,484 111,514
Deferred gain on sale of option on real estate 789,417 880,417
Deferred income taxes -- 116,489
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.10 par; 4,000,000
shares authorized, no shares issued or outstanding -- --
Common stock - $.01 par: 8,000,000 shares
authorized, 4,115,409 and 3,908,635 issued
in 1998 and 1997, respectively 41,154 39,086
Additional paid-in capital 6,210,002 5,231,265
Retained earnings 1,733,297 2,922,104
------------ ------------
7,984,453 8,192,455
Less: Treasury stock (83,612 shares at December 31,1997) -- (518,896)
------------ ------------
Total stockholders' equity 7,984,453 7,673,559
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,234,426 $ 12,687,424
============ ============
</TABLE>
F-2
The accompanying notes are an integral part of these statements.
<PAGE> 33
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET REVENUES $ 14,571,673 $ 14,313,101
------------ ------------
OPERATING EXPENSES
Salaries and wages 9,302,168 7,648,757
Other operating expenses 5,690,897 5,429,208
Depreciation and amortization 825,659 884,800
Post acquisition charges 648,098 --
------------ ------------
Total operating expenses 16,466,822 13,962,765
------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,895,149) 350,336
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (56,604) (10,704)
Investment income 121,479 108,356
Other income 29,391 21,923
------------ ------------
Total other income 94,266 119,575
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,800,883) 469,911
Provision (benefit) for income taxes (612,076) 180,660
------------ ------------
NET INCOME (LOSS) $ (1,188,807) $ 289,251
============ ============
Basic earnings (loss) per share $ (0.30) $ 0.08
============ ============
Diluted earnings (loss) per share $ (0.30) $ 0.07
============ ============
Weighted average common shares outstanding 3,900,439 3,840,478
============ ============
Weighted average common and dilutive shares outstanding 3,900,439 3,907,961
============ ============
</TABLE>
F-3
The accompanying notes are an integral part of these statements.
<PAGE> 34
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
Shares Paid-in Retained Treasury Stockholders' Comprehensive
Outstanding Amount Capital Earnings Stock Equity Income
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 --
Comprehensive income:
Net income -- -- -- 289,251 -- 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 --
Acquisition of treasury stock (88,000) -- -- -- (451,000) (451,000) --
Exercise of stock options 97,486 975 424,322 -- -- 425,297 --
Issuance of treasury stock upon
conversion of note payable 10,000 -- (12,500) -- 52,500 40,000 --
Issuance of common stock in
connection with BHC acquisition 270,900 1,093 503,737 -- 917,396 1,422,226 --
Tax benefit of stock option exercises -- -- 63,178 -- -- 63,178 --
Comprehensive income:
Net loss -- -- -- (1,188,807) -- (1,188,807) (1,188,807)
---------------------------------------------------------------------------- ============
Balance at December 31, 1998 4,115,409 $ 41,154 $ 6,210,002 $ 1,733,297 $ -- $ 7,984,453
===========================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 35
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net income $ (1,188,807) $ 289,251
Adjustments to reconcile net income
to net cash provided by operations (less balances acquired)
Depreciation and amortization 825,659 884,800
Amortization of deferred gain on real estate transaction (91,000) (29,583)
Post acquisition charges 483,097 --
Deferred tax provision (251,755) (196,101)
Net changes in certain assets and liabilities
Accounts receivable - trade 963,372 (371,033)
Current income taxes, net (792,552) 214,763
Prepaid expenses and other current assets 75,888 (69,438)
Other assets 47,851 --
Accounts payable - trade 159,297 65,599
Accrued expenses (427,780) 135,164
------------- -------------
Net cash provided by (used in) operating activities (196,730) 923,422
------------- -------------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Purchases of property and equipment (387,889) (495,736)
Proceeds from sale of property and equipment -- 34,273
Acquisition, net of cash acquired (495,645) --
Proceeds from sale of option on real estate -- 910,000
------------- -------------
Net cash provided by (used in) investing activities (883,534) 448,537
------------- -------------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (26,521) (29,433)
Net borrowings on revolving bank line of credit 325,000 --
Payments on long-term debt (174,587) (610,165)
Proceeds from issuance of common stock 488,475 6,300
Acquisition of treasury stock (451,000) (250,000)
------------- -------------
Net cash provided by (used in) financing activities 161,367 (883,298)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (918,897) 488,661
Cash and cash equivalents at beginning of year 2,031,550 1,542,889
------------- -------------
Cash and cash equivalents at end of year $ 1,112,653 $ 2,031,550
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 56,638 $ 49,253
============= =============
Income taxes paid $ 464,774 $ 162,008
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Fair value of assets acquired $ (5,087,246) $ --
Liabilities assumed 419,375 --
Acquisition debt 2,600,000 --
Common stock issued 1,422,226 --
Accrued acquisition costs 150,000 --
------------- -------------
Cash paid for acquisition of Business Health Companies, Inc. $ (495,645) $ --
============= =============
Restricted cash at period end date $ 308,002 $ 1,203,757
============= =============
</TABLE>
F-5
The accompanying notes are an integral part of these statements.
<PAGE> 36
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. ("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 ppoONE.com, 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.
In September 1998, the Company acquired all the outstanding shares of Business
Health Companies, Inc. ("BHC"). See Note 4 for further discussion.
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. Restricted cash
represents cash collected from customers for the payment of insurance premiums
and other ancillary fees to third parties.
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
F-6
<PAGE> 37
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
the remaining estimated useful lives of the related assets. Maintenance, repairs
and minor improvements are expensed as incurred.
Software Development Costs
Software development costs (included in intangible and other assets) consisted
of outside services and incremental salaries and wages incurred to develop
discrete proprietary software for internal use. These assets were being
amortized over their remaining estimated useful lives (12 to 36 months). As a
result of the acquisition discussed in Note 4, the Company had a requirement to
consolidate database administration, network access and like product offerings
of the separate entities. As a result of this requirement, the Company
determined that it would not be able to recover its investment in certain
capitalized software development costs over their remaining economic life, and
accordingly, recognized an impairment in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). As a
result of this impairment, approximately $483,000 of remaining capitalized
software costs were written off effective September 1, 1998, and are included in
the post acquisition charges in the accompanying consolidated statements of
operations. Maintenance and other minor updates to all of the Company's various
software programs are expensed as incurred.
Goodwill
Goodwill is being amortized under the straight-line method over periods ranging
from 25 - 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, two customers accounted for 13% and 18% of consolidated
revenues in 1998 and 1997, respectively. The loss of one of these customers
could have a material effect on the Company.
F-7
<PAGE> 38
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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
dilutive shares outstanding during the period. The impact of the dilutive common
equivalent shares was 0 and 67,483 for 1998 and 1997, respectively.
In 1998 and 1997, 1,544,528 and 1,355,425 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
The Company has adopted the footnoted disclosure approach of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123"). The Company's pro forma disclosure can be found
in Note 13 to the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements to
conform them to the 1998 presentation.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires companies to report all changes in equity during the period, except
those resulting from investments by and distributions to owners in a financial
statement. The Company has chosen to disclose comprehensive income, which
includes only net income in the consolidated statements of stockholders' equity.
Prior years have been restated to conform to SFAS No. 130 requirements.
Business Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of an Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS No. 131
also requires disclosures about products and services,
F-8
<PAGE> 39
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect results of operations or the financial position of the Company but did
affect the disclosure of segment information.
The Company manages its business segments primarily on a products and services
basis. The Company's reportable segments are comprised of managed care services,
primarily through its preferred provider organization ("PPO"), third party
administration services ("TPA"), and repricing and administrative products and
services offered through its wholly-owned subsidiary, ppoONE.com ("ppoONE.com").
Other segments include large claim negotiation services and utilization review
and case management services.
The accounting policies of the various business segments are the same as those
described in "Summary of Significant Accounting Policies" in Note 2. The Company
evaluates the performance of its business units based on segment operating
profit. Segment revenues include an intercompany allocation for services
performed by ppoONE.com for the PPO segment. Segment operating profit includes
personnel, sales and marketing expenses and other operating expenses directly
attributable to the segment and excludes certain expenses that are managed
outside the segment. Costs excluded from the segment operating profit consist of
corporate expenses, including income taxes, amortization expense and interest
income and interest expense. Corporate expenses are comprised primarily of
executive compensation, post acquisition charges and other general and
administrative expenses that are separately managed. Corporate assets are not
included in segment assets. Corporate assets consist primarily of cash and cash
equivalents, deferred taxes, and intangible assets.
Summary information by segment as of and for the years ended December 31, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
PPO Segment:
Revenues $ 5,863,553 $ 7,488,649
Operating expenses 5,571,360 3,990,543
-------------- --------------
Operating profit 292,193 3,498,106
Depreciation 27,423 21,539
Segment assets 1,825,806 2,343,721
TPA Segment:
Revenues $ 6,538,289 $ 5,738,674
Operating expenses 5,915,657 5,121,187
-------------- --------------
Operating profit 622,632 617,487
Depreciation $ 133,303 $ 80,083
Segment assets 2,112,915 3,112,848
ppoONE.com Segment:
Revenues $ 2,788,898 $ 1,036,186
Operating expenses 3,409,826 2,246,307
-------------- --------------
Operating loss (620,928) (1,210,121)
Depreciation 91,312 51,404
Segment assets 313,676 251,430
</TABLE>
F-9
<PAGE> 40
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Other Segments:
Revenues $ 493,319 $ 504,528
Operating expenses 193,129 315,573
-------------- --------------
Operating profit 300,190 188,955
Depreciation 4,093 9,834
Segment assets 56,950 192,116
</TABLE>
A reconciliation of the Company's segment revenues, operating profit (loss) and
segment assets to the corresponding consolidated amounts as of and for the years
ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Segment revenues $ 15,684,059 $ 14,768,037
Intercompany revenues (1,112,386) (454,936)
-------------- --------------
Consolidated revenues $ 14,571,673 $ 14,313,101
============== ==============
Segment operating profit $ 594,087 $ 3,094,427
Corporate expenses, net (2,489,236) (2,744,091)
-------------- --------------
Consolidated operating profit (loss) $ (1,895,149) $ 350,336
============== ==============
Operating profit
Segment assets $ 4,309,347 $ 5,900,115
Corporate assets 9,925,079 6,787,309
-------------- --------------
Consolidated assets $ 14,234,426 $ 12,687,424
============== ==============
</TABLE>
NOTE 4 - ACQUISITION
Effective September 1, 1998, a wholly owned subsidiary of the Company acquired
all of the issued and outstanding common stock of Business Health Companies,
Inc. ("BHC") for approximately $4,500,000 plus liabilities assumed of $264,138
and accrued acquisition costs of $150,000. BHC provides managed care services,
primarily through its PPO networks within the 15-county Houston, Texas market.
The purchase consideration consisted of $2,150,000 in cash, 270,900 shares of
Company stock, valued at approximately $1,422,000, and an aggregate of
$1,000,000 in subordinated convertible notes to the previous shareholders of
BHC. The acquisition was accounted for under the purchase method of accounting.
The purchase price exceeded the fair value of assets acquired and liabilities
assumed which resulted in the recording of goodwill of approximately $4,500,000,
which will be amortized over 25 years. Liabilities assumed included $110,000 for
severance related expenses for certain employees and other identified
contingencies.
In connection with the acquisition discussed above, the Company recognized
certain post acquisition charges of approximately $648,000. These charges
consisted of a $483,000 write-off of certain capitalized software development
costs, $125,000 of special bonuses payable to the CEO and COO of the Company,
related to the acquisition, and $40,000 of severance related costs. Due to the
acquisition of BHC, the Company has a requirement to consolidate database
administration, network access, and like product offerings of the separate
entities. As a result of this requirement, the Company has determined that it
will not be able to recover its investment in certain capitalized software
development costs over their remaining economic life, and accordingly, has
recognized an impairment in accordance with Statement of Financial Accounting
Standards No. 121.
F-10
<PAGE> 41
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma information is presented to illustrate the
estimated effects of the BHC acquisition as if it had occurred on January 1,
1997, and is not necessarily indicative of what operations would have been if
the acquisition had been consummated at the assumed date, nor is it indicative
of future results of operations. The pro forma information does not include the
post acquisition charges included in the accompanying consolidated statement of
operations for 1998.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------ -------------------
<S> <C> <C>
Net revenues $ 15,912,691 $ 15,877,794
Operating income $ (1,347,691) $ 180,490
Net income $ (659,192) $ (21,246)
Earnings per share $ (0.16) $ (0.01)
Weighted average shares outstanding 4,081,039 4,111,378
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Life 1998 1997
------------ -------------- --------------
<S> <C> <C> <C>
Land - $ 60,000 $ 60,000
Buildings 40 years 240,000 240,000
Furniture and fixtures 5-10 years 714,731 624,070
Data processing equipment 3-6 years 1,368,345 1,253,213
Leasehold improvements 40 years 116,343 66,407
-------------- --------------
2,499,419 2,243,690
Less - accumulated depreciation (801,721) (582,400)
-------------- --------------
Property and equipment, net $ 1,697,698 $ 1,661,290
============== ==============
</TABLE>
F-11
<PAGE> 42
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 6 - GOODWILL, NET
Goodwill at December 31, 1998 and 1997, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Goodwill $ 8,374,303 $ 3,871,953
Less - accumulated amortization (601,470) (420,605)
-------------- --------------
Goodwill, net $ 7,772,833 $ 3,451,348
============== ==============
</TABLE>
NOTE 7 - INTANGIBLE AND OTHER ASSETS, NET
Intangible and other assets at December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Software development costs $ - $ 1,354,771
Covenants not to compete 210,000 210,000
Organization costs 49,038 44,977
Other 31,731 20,808
-------------- --------------
290,769 1,630,556
Less - accumulated amortization (192,778) (938,993)
-------------- --------------
Intangible and other assets, net $ 97,991 $ 691,563
============== ==============
</TABLE>
NOTE 8 - DEBT
During 1997, the Company had 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 accrued interest at the bank's prime rate plus 1%.
There were no outstanding borrowings under this line of credit as of December
31, 1997.
In connection with the acquisition of BHC, the Company obtained bank financing
in the form of a $1,600,000 term loan. The Company also issued an aggregate of
$1,000,000 in subordinated convertible notes to the selling shareholders of BHC.
The bank note bears interest at the bank's prime rate plus 1% (8.75% at December
31, 1998) and is payable in monthly installments of principal and interest
through October 2003. The subordinated convertible seller notes bear interest at
8.5% and are payable in quarterly installments of principal and interest through
October 2003. The notes are convertible into common stock of the Company at any
time, in $25,000 increments, at a conversion rate of $5.25 per share.
In conjunction with the bank financing above, the Company's existing $1,000,000
line of credit was terminated and a new revolving credit facility was obtained.
This credit facility, secured by accounts receivable, allows for maximum
borrowings of $500,000 and bears interest at the bank's prime rate plus 1%
(8.75% at December 31, 1998). Availability under this credit facility was
$175,000 at December 31, 1998. The credit facility contains certain affirmative
financial covenants, such as minimum net worth and financial statement ratios.
The Company was not in compliance with such covenants as of December 31, 1998,
and received the necessary waivers.
During March 1999, the Company restructured the terms and financial covenants of
its existing bank term note and revolving line of credit. Under the revised
terms of the note agreement, the Company is required to make principal
reductions in the amount of $200,000 on March 31, 1999 and $350,000 on or before
August
F-12
<PAGE> 43
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1, 1999. The revised new term note includes certain revised financial
covenants, including minimum cash flow, stockholders' equity and working capital
requirements, and is secured by a pledge of certain shares of the Company's
wholly owned subsidiaries. The Company is required to make monthly payments of
principal and interest, as described above. Concurrently, maximum borrowings
under the Company's revolving credit facility were reduced from $500,000 to
$400,000. The Company had no availability under its line of credit as of March
1999. No other modifications were made to this credit facility.
Although there can be no assurance, the Company believes that it will be in
compliance with its debt covenants through 1999.
Management believes that cash flows from operations and cash on hand will be
sufficient to fund liquidity needs and capital requirements in 1999.
Long-Term Debt
Long-term debt consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Mortgage note payable, monthly installments of $ 84,071 $ 102,086
approximately $1,500, plus interest at a bank's prime rate
plus .25% (8.0% at December 31, 1998) through September 2003
Note payable, due in quarterly installments of $13,750 plus 27,500 82,500
interest at 8% through June 1999
Note payable to previous stockholders of subsidiary, - 100,000
$100,000 due on June 30, 1998, with balance due on June 30,
1998, plus interest at 9.5% due quarterly
Subordinated convertible notes payable to previous 1,000,000 -
stockholders of subsidiary, principal payable in quarterly
installments of $50,000, interest at 8.5% due monthly through
September 2003
Note payable to bank, secured by essentially all assets of 1,558,428 -
the Company, monthly installments of approximately $26,700,
plus interest at bank's prime rate plus 1% (8.75% at
December 31, 1998) through 2003
---------------- ---------------
2,669,999 284,586
Less - current portion (1,115,515) (173,072)
---------------- ---------------
Total long-term debt, net of current portion $ 1,554,484 $ 111,514
================ ===============
</TABLE>
F-13
<PAGE> 44
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
Scheduled future principal maturities of long-term debt at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ ----------
<S> <C>
1999 $1,115,515
2000 538,015
2001 538,015
2002 266,443
2003 212,011
Thereafter --
----------
$2,669,999
==========
</TABLE>
In connection with the notes payable to previous shareholders of subsidiary
discussed above, the Company agreed to permit one of the former shareholders the
option to convert up to $100,000 of debt owed to him by the Company into 25,000
shares of common stock at a price of $4.00 per share. During 1998, $40,000 of
the note was converted into common stock of the Company, with the remainder of
the note being paid in cash.
NOTE 9 - 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 $103,965 and $85,428 for plan contributions for the years
ended December 31, 1998 and 1997, respectively.
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, his
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. Premiums expended on this policy were $24,000 and $29,316 in
1998 and 1997, respectively.
Other than stated above, the Company does not provide any post-retirement or
post-employment benefits to any of its employees.
F-14
<PAGE> 45
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 10 - INCOME TAXES
The provision (benefit) for income taxes at December 31, 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Current:
Federal $ (320,805) $ 390,127
State (39,516) (13,366)
Deferred:
Federal (222,329) (173,178)
State (29,426) (22,923)
-------------- --------------
Total $ (612,076) $ 180,660
============== ==============
</TABLE>
The differences between the statutory federal income tax rate and the Company's
effective income tax rate are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Statutory federal income tax rate (34.0)% 34.0%
State income taxes, net of federal benefit (2.6) (5.1)
Meals and entertainment expenses 0.8 3.3
Goodwill amortization 2.4 5.5
Other (.5) 0.7
-------------- --------------
Total (33.9)% 38.4 %
============== ==============
</TABLE>
The components of and changes in net deferred tax assets (liabilities) as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Current Deferred Taxes:
Assets:
Nondeductible reserves $ 169,028 $ 168,838
-------------- --------------
Noncurrent Deferred Taxes:
Assets:
Other 50,800 26,757
Deferred gain from sale of option on
real estate 303,926 338,680
Liabilities:
Excess tax over book depreciation and
amortization (269,456) (267,074)
Software development costs -- (214,852)
-------------- --------------
Noncurrent deferred taxes, net 85,270 (116,489)
-------------- --------------
Total deferred taxes $ 254,298 $ 52,349
============== ==============
</TABLE>
F-15
<PAGE> 46
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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, the
Company will fully realize its deferred tax asset.
NOTE 11 - 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
for $910,000 cash to a third party, 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, 1998 and 1997 was $91,000 and
$29,583, respectively.
NOTE 12 - 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 principal 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.
At December 31, 1998, 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>
1999 $ 618,008
2000 566,980
2001 495,239
2002 367,954
2003 332,597
Thereafter 1,212,480
------------
$ 3,593,258
============
</TABLE>
Rental expense for all operating leases for the years ended December 31, 1998
and 1997, was $530,803 and $451,585, respectively.
During 1996, a subsidiary of 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 $170,065 and $178,236 in 1998 and 1997, respectively.
F-16
<PAGE> 47
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 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 13 - STOCKHOLDERS' EQUITY
Common Stock
In May 1993, the Company completed a stock offering consisting of 920,000 units
at a price per unit of $5.00. 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 enabled the holder to purchase one unit of the
Company's securities (one share of common stock and one warrant) for $6.00,
subject to adjustments and other conditions, as defined. The Underwriter's
Warrants were exercisable for a 48-month period commencing one year from their
date of issue and contained various registration rights. All of these warrants
expired during April 1997.
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 the Company 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 the Company
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. During 1998, the qualified plan was
terminated by the Company's Board of Directors. The following table sets forth
summarized information regarding the plans:
F-17
<PAGE> 48
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Weighted
Average
Shares Option Price Option Price
-------------- ------------------ -----------
<S> <C> <C> <C>
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 1,397,908 $ 3.30 to $ 9.00 $ 6.10
-------------- ================== ===========
Granted 286,995 4.46 to 7.81 $ 6.39
Exercised (96,835) 3.38 to 5.13 4.40
Forfeited (43,540) 3.38 to 4.50 3.81
-------------- ------------------ -----------
Outstanding at December 31, 1998 1,544,528 $ 3.38 to $ 9.00 $ 6.30
============== =================== ===========
Exercisable options 946,551
==============
Options available for future grants 400,050
==============
</TABLE>
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 the Company common stock at prices ranging from $6.00 to $9.00
per share. The option became fully vested as of November 12, 1994, and expires
over various dates through 1999.
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>
1998 1997
-------------- -------------
<S> <C> <C>
Pro-forma net income $ (1,400,254) $ 165,001
Pro-forma earnings per share $ (.36) $ .04
</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>
1998 1997
------------ ------------
<S> <C> <C>
Risk free interest rate 5.1% 6.0%
Expected dividend yield 0.0% 0.0%
Expected volatility 43.9% 45.1%
Expected lives 5 5
</TABLE>
The weighted average fair value of options granted in 1998 and 1997 was $3.03
and $1.83, respectively.
F-18
<PAGE> 49
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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 13 - 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, 1998). The principal and any unpaid accrued interest are due in its
entirety by October 27, 2000. Accrued interest on this note was $121,175 and
94,654 at December 31, 1998 and 1997, respectively.
During April 1998, the Company 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 the Company. The
stock registered serves as collateral for certain loans of the majority
shareholder. During December 1998, the Company filed a second registration
statement to register shares of common stock issued in connection with the BHC
acquisition. In connection with these registration statements, the Company paid
approximately $6,500 of legal and accounting expenses.
F-19
<PAGE> 50
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Registrant - incorporated
by reference to the Exhibits to the Registration Statement on Form
SB-2, file number 33-58334-FW, declared effective May 13, 1993.
3.2 Amended and Restated Corporate Bylaws of the Registrant - incorporated
by reference to the Exhibits to the Registration Statement on Form
SB-2, file number 33-58334-FW, declared effective May 13, 1993.
4.1 Form of Warrant Agreement - incorporated by reference to the Exhibits
to the Registration Statement on Form SB-2, file number 33-58334-FW,
declared effective May 13, 1993.
10.1 Amended and Restated Non-Qualified Stock Option Agreement -
incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, file number 33-58334-FW, declared effective May 13, 1993.
10.2 Outside Directors Stock Option Plan of MedicalControl, Inc., -
incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, file number 33-58334-FW, declared effective May 13, 1993.
10.3 First Amendment to the Outside Directors Stock Option Plan of
MedicalControl, Inc. - incorporated by reference to the Exhibits to the
Registration Statement on Form SB-2, file number 33-58334-FW, declared
effective May 13, 1993.
10.4 Amendment to the Outside Directors Stock Option Plan of MedicalControl,
Inc. dated August 20, 1996 - incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
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.
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 - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
<PAGE> 51
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 - incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
10.10 Stock Purchase Agreement, dated as of June 30, 1994, between Robert H.
Soleau and David C. Bramer (as Sellers) and MedicalControl, Inc., a
Delaware corporation (as Purchaser) - incorporated by reference to
the Current Report on Form 8-K dated August 15, 1994, file number
1-11922.
10.11 Asset Purchase Agreement, dated as of October 3, 1994, between Group
Administrators, Inc., a Texas corporation (as Seller) and
MedicalControl Administrators, Inc., a Texas corporation (as
Purchaser) - 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, dated as of November 28, 1994,
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. -
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
and officers - 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 Diversified 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., 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.) - incorporated by reference to Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
10.17 Stock Purchase Agreement, dated September 10, 1998, by and between
MedicalControl Network Solutions, Inc., Business Health Companies,
Inc., Ralph T. Smith, Donald Richard Huntington and Douglas Elden. -
incorporated by reference to Registrant's Special Report on Form 8-K
filed October 9, 1998.
10.18 Employment Confidentiality and Non-Competition Agreement, dated
September 25, 1998, by and among MedicalControl Network Solutions,
Inc., registrant and Donald Richard Huntington
10.19 Employment, Confidentiality and Non-Competition Agreement, dated
September 25, 1998, by and among MedicalControl Network Solutions,
Inc., registrant and Ralph T. Smith
10.20 Loan Agreement, dated September 25, 1998, by and between the registrant
and Bank One, Texas, N.A.
10.21 First Amendment to Loan Agreement, dated as of March 31, 1999, by and
between Bank One, Texas N.A. and the registrant.
21 Subsidiaries of the Registrant.
<PAGE> 52
23.7 Consent of Arthur Andersen LLP, independent public accountants.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT, dated
as of September 25, 1998 (this "Agreement"), is by and between MedicalControl
Network Solutions, Inc., a Delaware corporation ("Employer"), and Donald Richard
Huntington ("Employee").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Stock Purchase Agreement (the
"Acquisition Agreement") by and among MedicalControl, Inc. ("MedicalControl"),
the Employer, Employee, Business Health Companies, Inc. ("BHC") and the other
shareholders of BHC, Employer purchased (the "Acquisition") all of the
outstanding shares of capital stock of BHC (the "Shares"); and
WHEREAS, upon the consummation of the transactions contemplated by the
Acquisition Agreement, BHC will become a wholly owned subsidiary of the
Employer; and
WHEREAS, as a result of the consummation of the transactions
contemplated by the Acquisition Agreement, the Employer desires to obtain the
services of the Employee, and the Employee desires to provide such services to
the Employer, all upon the terms and conditions set forth herein; and
WHEREAS, immediately prior to the purchase of the Shares by the
Employer, the Employee was a shareholder, director and an executive officer of
the BHC; and
WHEREAS, in order to induce the Employer to purchase the Shares, the
Employee has agreed to enter into this Agreement and the Employee acknowledges
that he will economically benefit from the sale of the Shares to the Employer;
and
WHEREAS, the execution of this Agreement is a condition precedent to
the closing of the transactions contemplated by the Acquisition Agreement; and
WHEREAS, the Employer would not consummate the purchase of the Shares
pursuant to the Acquisition Agreement absent the execution by the Employee of
this Agreement; and
WHEREAS, the Employer and its Affiliates (the term "Affiliates" shall
include any person or entity that directly or indirectly controls, is controlled
by, or is under the control of such person or entity) are engaged in the
business of providing services in the healthcare industry, including operating a
contracted network of hospitals, physicians and ancillary healthcare providers;
providing healthcare benefit plan administration; providing management services
to preferred provider networks; and
<PAGE> 2
designing and selling repricing software and services for preferred provider
organizations and certain healthcare network organizations (the "Business"); and
WHEREAS, the Employer and its Affiliates would suffer damages,
including the loss of profits, if the Employee solicited any customers or
employees of the Employer or its Affiliates otherwise than for the benefit of
Employer pursuant to his duties described herein; and
WHEREAS, the Employee recognizes and agrees that the covenants
contained by him herein are essential to the ability of the Employer to retain
the goodwill related to the BHC's business that is being acquired by the
Employer;
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants set forth below, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Compensation and Employment. Employee agrees to be employed by
Employer, and Employer agrees to so employ Employee, on the terms and
conditions set forth below. Employer shall pay, and Employee agrees to accept,
an annual base salary (the "Base Salary") of $200,000 during the term hereof.
Additionally, Employee shall be eligible to participate in the Management
Incentive Program or other bonus programs established by Employer for
executives.
Employee's Base Salary may be increased consistent with
recommendations from the President of Employer. The Base Salary may not be
reduced to less than $200,000 without the consent of Employee. The Base Salary
will be payable according to the normal payroll procedures of the Employer and
subject to all appropriate withholdings. Employee shall be reimbursed his
reasonable and documented business expenses, in accordance with Employer's
policies for other executives. Employee shall be entitled to such fringe
benefits (including life, medical and long-term disability insurance and
participation in the Employer's 401(k) savings plan) that are consistent with
other senior executive employees of Employer. In all instances and for all
purposes, Employee's employment tenure will include his employment time with
BHC as well as Employer. In addition, Employer agrees to provide Employee four
weeks paid vacation and paid membership in The Houstonian on terms consistent
with past practices.
The Employer hereby employs the Employee to serve as a Senior Vice
President of Employer or higher position, and to retain the same position and
title held in BHC prior to employment with the Employer. Employee's duties will
include managing the business and operations of Employer acquired in the
Acquisition and performing such other corporate roles and responsibilities to
be reasonably determined by Employer.
2
<PAGE> 3
Employee shall report to the President of Employer. Employee's title and duties
will not be materially decreased in a manner inconsistent with his position and
experience or his performance hereunder. Employee agrees to devote his full
business time and his best efforts, skills and abilities to the performance of
his duties hereunder. The Employee shall be provided with his existing office
or comparable office, existing or similar office amenities and a secretary of
his choice who will be initially compensated in accordance with BHC's historic
practices. Employee may serve as a Director or Trustee of other organizations,
provided such service does not prevent Employee from effectively performing his
duties under this Agreement.
Employee's principal place of employment will be Employer's South
Texas Office which will be within a 50 mile radius of Houston, Texas. Employee
can perform his duties hereunder out of his residence if Employer and Employee
agree that such performance in no way diminishes the effectiveness of
Employee's performance hereunder.
Employee shall use his best efforts to preserve the business of
Employer and the good will of all employees, customers, suppliers and other
persons having business relations with Employer.
2. Term. The employment of Employee shall begin on the date of this
Agreement and shall continue until the earliest of (i) September 1, 2003; (ii)
the date Employer terminates it for just cause; (iii) the date Employee
terminates it for just cause; or (iv) the death of Employee.
For purposes of this Section 2, "just cause" for termination for the
purposes of the Employer's termination of Employee shall include: (a) the
failure or inability for any reason of Employee to devote the business time
(other than due to approved vacation time or other approved absences) required
by Section 1 to Employer's business; (b) the failure of Employee to diligently
perform his duties under this Agreement; (c) the conviction by Employee of a
felony or the commission by Employee of an act involving moral turpitude which
adversely affects Employer's business through the loss of clients, contracts,
vendors or suppliers; (d) Employee's material breach or default in the
performance of his obligations hereunder; or (e) Employee's failure or refusal
to follow the reasonable instructions of the President of Employer or the
reasonable policies, standards and regulations of Employer.
The termination of Employee's employment by Employer shall not be
deemed to be for just cause unless the President of Employer provides written
notice to Employee of the conduct on which the termination is based, and
Employee must be given the opportunity during the 30-day period following
written notice to correct the conduct described in such notice, unless such
conduct is a conviction of a felony or
3
<PAGE> 4
an act or acts involving moral turpitude which adversely affects the Employer
as described in Section 2(c) or which cannot be cured.
For purposes of this Agreement, "just cause," with respect to the
Employee's termination of employment with the Employer means (i) the Employer's
breach of its obligations to make any payments required hereunder or (ii) the
Employer's breach of any other material provision of this Agreement; provided,
however, the termination of Employee's employment by Employee shall not be
deemed to be for just cause unless Employee provides written notice to Employer
of the conduct on which the termination is based, and Employer must be given
the opportunity during the 30-day period following written notice to correct
the conduct described in such notice, unless such conduct cannot be cured.
If Employee becomes disabled (as defined under the Employer's
long-term disability insurance policy) during the term of this Agreement, then
Employee will be entitled to disability payments for the shorter of (a) three
years following his disability or (b) the remaining term of this Agreement (the
"Disability Period"), such disability payments to be equal to the difference
between (i) Employee's Base Salary during the Disability Period and (ii) the
amount of disability insurance payments collected by Employee during the
Disability Period.
If Employee resigns within 10 business days following a Change of
Control (as defined), he will receive his Base Salary for the one-year period
following the Change of Control. If Employee is terminated within 60 business
days after a Change of Control without just cause, then Employee will be
entitled to his Base Salary through the shorter of (a) three years following
his termination or (b) the remaining term of this Agreement. As used herein, a
Change of Control shall occur if the Employer or MedicalControl (i) sells
substantially all of its assets to a single purchaser (or to a group of
purchasers in a series of related transactions) other than to an affiliated
entity; (ii) sells, exchanges or otherwise disposes of more than 50% of its
outstanding shares other than to an affiliated entity; (iii) dissolves; or (iv)
merges or consolidates in a transaction in which the Employer's or
MedicalControl's shareholders receive less than 50% of the outstanding voting
shares of the new or continuing corporation.
In the event of (i) the Employer's termination of the Employee's
employment without just cause (other than due to a disability of Employee or if
Employee is terminated within 60 business days following a Change in Control)
or (ii) the Employee's termination of employment for just cause (a "Termination
Event"), the Employee shall be paid, in addition to all compensation due up to
the date of termination, severance pay in the amount of his Base Salary through
the remaining term of this Agreement.
4
<PAGE> 5
Any severance pay or payments made due to Employee's disability or a
Change in Control will be paid periodically in accordance with Employer's
normal payroll procedures and subject to all appropriate withholdings.
Except as specifically provided for herein, the provisions of Sections
3, 4 and 5 shall survive any termination of Employee's employment under this
Agreement. In the event of the termination of Employee's employment prior to
the completion of the term of employment due to Employee's voluntary
resignation other than for just cause by Employee or Employer's termination of
Employee for just cause, Employee shall be entitled only to the compensation
earned by him as of the date of termination.
3. Nondisclosure Agreement. Employee has had and will have access to
and become familiar with various trade secrets and proprietary and confidential
information consisting of, but not limited to, processes, computer programs,
compilations of information, records, sales procedures, customer requirements,
pricing techniques, customer lists, methods of doing business and other
confidential information (collectively referred to as the "Trade Secrets"),
that are owned by Employer (including, but not limited to, Trade Secrets of the
BHC acquired in the Acquisition) and regularly used in the operation of the
Business, but in connection with which Employer take precautions to prevent
dissemination to persons other than certain directors, officers and employees.
Employee acknowledges and agrees that the Trade Secrets (1) are secret and not
known in the industry; (2) are entrusted to Employee after being informed of
their confidential and secret status by Employer and because of the fiduciary
position occupied by Employee with Employer; (3) have been developed by
Employer for and on behalf of Employer through substantial expenditures of
time, effort and money and are used in its business; (4) give Employer an
advantage over competitors who do not know or use the Trade Secrets; (5) are of
such value and nature as to make it reasonable and necessary to protect and
preserve the confidentiality and secrecy of the Trade Secrets; and (6) the
Trade Secrets are valuable, special and unique assets of Employer, the
disclosure of which could cause substantial injury and loss of profits and good
will to Employer. Employee shall not use in any way or disclose any of the
Trade Secrets, directly or indirectly, either during the term of this Agreement
or at any time thereafter, except as required in the course of his employment
under this Agreement. All files, records, documents, information, data and
similar items relating to the business of Employer, whether prepared by
Employee or otherwise coming into his possession, shall remain the exclusive
property of Employer and shall not be removed from the premises of Employer
under any circumstances without the prior written consent of the President of
Employer (except in the ordinary course of business during Employee's period of
active employment under this Agreement), and in any event shall be promptly
delivered to Employer upon termination of this Agreement. Employee agrees that
upon his receipt of any subpoena, process or other request to produce or
divulge, directly or indirectly, any
5
<PAGE> 6
Trade Secrets to any entity, agency, tribunal or person, Employee shall timely
notify and promptly hand deliver a copy of the subpoena, process or other
request to the President of Employer.
Notwithstanding the foregoing, Trade Secrets shall not include any
information which is generally available to the public (other than through a
breach of any confidentiality or other contract or a breach of fiduciary duty).
If Employee is requested in any legal proceeding to disclose any Trade Secrets,
Employee will give Employer prompt notice of such request so that Employer may
seek an appropriate protective order. If, in the absence of a protective order,
Employee is nonetheless compelled to disclose any Trade Secrets by a court or
governmental body having the apparent authority to order such disclosure,
Employee may disclose the Trade Secrets without liability hereunder; provided,
however, that Employee must give Employer written notice of the information to
be disclosed as far in advance of its disclosure as is practicable, and, upon
Employer's request, Employee uses his best reasonable efforts to obtain
assurances that confidential treatment will be accorded to the Trade Secrets.
4. Non-Competition Agreement. Employee acknowledges and agrees that he
will be able to injure Employer if he should compete with Employer in a
business that is competitive with the business conducted or to be conducted by
Employer or its Affiliates. In addition, Employer has acquired the Trade
Secrets and the good will of BHC as a result of the Acquisition, and Employer
would not have consummated the Acquisition without Employee executing a
non-competition agreement. For these reasons, Employee hereby agrees as
follows:
(a) Without the prior written consent of Employer, Employee
shall not, during the period of employment with Employer, directly or
indirectly, either as an individual, a partner or a joint venturer, or in any
other capacity, (i) invest (other than investments in publicly owned companies
which constitute not more than 1% of the voting securities of any such company)
or engage in any business that is competitive with the Business, (ii) accept
employment with or render services to a competitor of Employer as a director,
officer, agent, employee or consultant, (iii) contact, solicit or attempt to
solicit or accept business from any (A) customers of Employer or its affiliates
or (B) person or entity whose business Employer or its affiliates is
soliciting, (iv) contact, solicit or attempt to solicit or accept or direct
business that is competitive with the Business during Employee's employment
under this Agreement from any of the customers of Employer or any of its
affiliates, or (v) take any action inconsistent with the fiduciary relationship
of an employee to his employer.
(b) For a period of 36 months after the termination or
cessation of his employment with Employer for any reason whatsoever, Employee
shall not, directly or indirectly, either as an individual, a partner or a
joint venturer, or in any other
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<PAGE> 7
capacity, in the States of Texas, Louisiana, New Mexico, Arkansas, Oklahoma,
Mississippi, Alabama and Tennessee (the "Designated Territory") (i) invest
(other than investments in publicly owned companies which constitute not more
than 1% of the voting securities of any such company) or engage in any business
that is competitive with the Business, (ii) accept employment with or render
services to a competitor of Employer as a director, officer, agent, employee or
consultant, or (iii) contact, solicit or attempt to solicit or accept business
from any (A) customer of Employer or its affiliates or (B) person or entity
whose Employer or its affiliates are soliciting. For the purposes of this
Agreement, a "competitor" specifically includes persons, firms, sole
proprietorships, partnerships, companies, corporations or other entities that
market products and/or perform services in direct or indirect competition with
the Business within the Designated Territory.
5. Nonemployment Agreement. For a period of 36 months after the
termination or cessation of his employment with Employer for any reason
whatsoever, Employee shall not, on his own behalf or on behalf of any other
person, partnership, association, corporation or other entity, hire or solicit
or in any manner attempt to influence or induce any employee of Employer or its
affiliates to leave the employment of Employer or its affiliates, nor shall he
use or disclose to any person, partnership, association, corporation or other
entity any information obtained while an employee of Employer concerning the
names and addresses of Employer's employees.
The provisions contained in Section 4 and 5 hereof will terminate and
be of no effect if (a) an Event of Default occurs under the convertible
subordinated promissory note issued by Employer to Employee in the Acquisition
and remains uncured during the period provided for in such note, (b) Employer
fails to register the shares of common stock of MedicalControl in violation of
that certain Registration Rights Agreement between MedicalControl, Employee and
certain other individuals, (c) Employer in writing or orally in front of a
third party states to Employee that it is terminating him without just cause
and fails to pay the severance provided for herein or (d) Employer breaches the
terms of that certain Escrow Agreement executed in connection with the
Acquisition (it being acknowledged that the mere act of the escrow agent
depositing the escrow amount into a court in an interpleader action is not a
default by Employer of the Escrow Agreement).
6. Severability. The parties hereto intend all provisions of Sections
3, 4 and 5 hereof to be enforced to the fullest extent permitted by law.
Accordingly, should a court of competent jurisdiction determine that the scope
of any provision of Sections 3, 4 and 5 hereof is too broad to be enforced as
written, the parties intend that the court reform the provision to such
narrower scope as it determines to be reasonable and enforceable. In addition,
however, Employee agrees that the non-competition agreements, nondisclosure
agreements and nonemployment agreements set forth
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<PAGE> 8
above each constitute separate agreements independently supported by good and
adequate consideration and shall be severable from the other provisions of, and
shall survive, this Agreement. The existence of any claim or cause of action of
Employee against Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of the covenants
and agreements of Employee contained in the non-competition, nondisclosure or
nonemployment agreements. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part of this Agreement; and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of this
Agreement, a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
7. Affiliates. Employee will use his best efforts to ensure that no
corporation or other entity of which he is an officer, director, shareholder,
owner, partner or other affiliate, shall take any action that Employee could
not take without violating any provision of this Agreement. In addition, no
family members of Employee shall take any action that Employee could not take
without violating any provision of this Agreement if such family member is
under the direction or control of Employee.
8. Remedies. Employee recognizes and acknowledges that the
ascertainment of damages in the event of his breach of any provision of this
Agreement would be difficult, and Employee agrees that Employer, in addition to
all other remedies it may have, shall have the right to injunctive relief if
there is such a breach.
9. Acknowledgments. Employee acknowledges and recognizes that the
enforcement of any of the non-competition provisions in this Agreement by
Employer will not interfere with Employee's ability to pursue a proper
livelihood. Employee further represents that he is capable of pursuing a career
in other industries to earn a proper livelihood. Employee recognizes and agrees
that the enforcement of this Agreement is necessary to ensure the preservation
and continuity of the business and good will of Employer. Employee agrees that
due to the nature of Employer's business, the non-competition restrictions set
forth in this Agreement are reasonable as to time and geographic area. At any
time during the 36 months commencing on the date hereof, Employer may request
Employee to supply such information as Employer deems necessary to ascertain
whether or not Employee has complied with, or has violated, the restrictive
covenants of Sections 3, 4, and 5 hereof. Any such request for information will
be sent to Employee by certified mail, return receipt
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<PAGE> 9
requested, addressed to Employee's last known address. Employee shall furnish
the requested information to Employer within 10 days following the receipt of
such request.
10. Notices. Any notices, consents, demands, requests, approvals and
other communications to be given under this Agreement by either party to the
other shall be deemed to have been duly given if given in writing and
personally delivered or sent by mail, registered or certified, postage prepaid
with return receipt requested, as follows:
If to Employer: MedicalControl Network Solutions, Inc.
8625 King George Drive
Dallas, Texas 75235
Attention: President
If to Employee: 448 North Post Oak Lane
Houston, Texas 77024
With a copy (which shall Ken Kosut
not constitute notice) to: Evans, Kosut and Kasprzak
16945 North Chase Drive
Houston, Texas 77060
Douglas Elden
The Elden Law Firm
150 North Michigan Avenue
Suite 2500
Chicago, Illinois 60601
Notices delivered personally shall be deemed communicated as of actual receipt;
mailed notices shall be deemed communicated as of three days after mailing.
11. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or written, between the parties hereto with respect to
the subject matter hereof and contains all of the covenants and agreements
between the parties with respect thereto.
12. Modification. No change or modification of this Agreement shall be
valid or binding upon the parties hereto, nor shall any waiver of any term or
condition in the future be so binding, unless such change or modification or
waiver shall be in writing and signed by the parties hereto.
13. Governing Law and Venue. The parties acknowledge and agree that
this Agreement and the obligations and undertakings of the parties hereunder
will be performable in Houston, Harris County, Texas. This Agreement shall be
governed by,
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and construed in accordance with, the laws of the State of Texas. If any action
is brought to enforce or interpret this Agreement, venue for such action shall
be in Harris County, Texas.
14. Counterparts. This Agreement may be executed in counterparts, each
of which shall constitute an original, but all of which shall constitute one
document.
15. Costs. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which he or it may be entitled.
16. Estate. If Employee dies prior to the expiration of the term of
employment, any monies that may be due him from Employer under this Agreement
as of the date of his death shall be paid to his estate.
17. Assignment. Upon notice to Employee, Employer shall have the right
to assign this Agreement to its affiliates, successors or assigns. The terms
"successors" and "assigns" shall include any person, corporation, partnership
or other entity that buys all or substantially all of Employer's assets or all
of its stock, or with which Employer merges or consolidates. The rights, duties
and benefits to Employee hereunder are personal to him, and no such right or
benefit may be assigned by him.
18. Binding Effect. This Agreement shall be binding upon the parties
hereto, together with their respective executors, administrators, successors,
personal representatives, heirs and assigns.
19. Waiver of Breach. The waiver by Employer of a breach of any
provisions of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.
20. Mutual Contribution. The parties to this Agreement and their
counsel have mutually contributed to its drafting. Consequently, no provision
of this Agreement shall be construed against any party on the ground that such
party drafted the provision or caused it to be drafted or the provision
contains a covenant of such party.
21. Guaranty. By its execution hereof, MedicalControl irrevocably and
unconditionally guarantees to Employee the prompt payment when due of all of
the Employer's payment obligations under Sections 1 and 2 hereof, together with
and as adjusted by any and all amendments or modifications thereto in
accordance with the terms of this Agreement.
(Signature Page to Follow)
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
EMPLOYEE:
/s/ DONALD RICHARD HUNTINGTON
-----------------------------------------
Donald Richard Huntington
Employer:
MEDICALCONTROL NETWORK SOLUTIONS, INC.
By: /s/ ROBERT O. BROOKS
--------------------------------------
Robert O. Brooks
President and Chief Executive Officer
Guarantor:
MEDICALCONTROL, INC.
By: /s/ J. WARD HUNT
--------------------------------------
J. Ward Hunt
President and Chief Executive Officer
11
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT, dated
as of September 25, 1998 (this "Agreement"), is by and between MedicalControl
Network Solutions, Inc., a Delaware corporation ("Employer"), and Ralph T.
Smith, Jr. ("Employee").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Stock Purchase Agreement (the
"Acquisition Agreement") by and among MedicalControl, Inc. ("MedicalControl"),
the Employer, Employee, Business Health Companies, Inc. ("BHC") and the other
shareholders of BHC, Employer purchased (the "Acquisition") all of the
outstanding shares of capital stock of BHC (the "Shares"); and
WHEREAS, upon the consummation of the transactions contemplated by the
Acquisition Agreement, BHC will become a wholly owned subsidiary of the
Employer; and
WHEREAS, as a result of the consummation of the transactions
contemplated by the Acquisition Agreement, the Employer desires to obtain the
services of the Employee, and the Employee desires to provide such services to
the Employer, all upon the terms and conditions set forth herein; and
WHEREAS, immediately prior to the purchase of the Shares by the
Employer, the Employee was a shareholder, director and an executive officer of
the BHC; and
WHEREAS, in order to induce the Employer to purchase the Shares, the
Employee has agreed to enter into this Agreement and the Employee acknowledges
that he will economically benefit from the sale of the Shares to the Employer;
and
WHEREAS, the execution of this Agreement is a condition precedent to
the closing of the transactions contemplated by the Acquisition Agreement; and
WHEREAS, the Employer would not consummate the purchase of the Shares
pursuant to the Acquisition Agreement absent the execution by the Employee of
this Agreement; and
WHEREAS, the Employer and its Affiliates (the term "Affiliates" shall
include any person or entity that directly or indirectly controls, is
controlled by, or is under the control of such person or entity) are engaged in
the business of providing services in the healthcare industry, including
operating a contracted network of hospitals, physicians and ancillary
healthcare providers; providing healthcare benefit plan administration;
providing management services to preferred provider networks; and
<PAGE> 2
designing and selling repricing software and services for preferred provider
organizations and certain healthcare network organizations (the "Business");
and
WHEREAS, the Employer and its Affiliates would suffer damages,
including the loss of profits, if the Employee solicited any customers or
employees of the Employer or its Affiliates otherwise than for the benefit of
Employer pursuant to his duties described herein; and
WHEREAS, the Employee recognizes and agrees that the covenants
contained by him herein are essential to the ability of the Employer to retain
the goodwill related to the BHC's business that is being acquired by the
Employer;
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual covenants set forth below, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Compensation and Employment. Employee agrees to be employed by
Employer, and Employer agrees to so employ Employee, on the terms and
conditions set forth below. Employer shall pay, and Employee agrees to accept,
an annual base salary (the "Base Salary") of $200,000 during the term hereof.
Additionally, Employee shall be eligible to participate in the Management
Incentive Program or other bonus programs established by Employer for
executives.
Employee's Base Salary may be increased consistent with
recommendations from the President of Employer. The Base Salary may not be
reduced to less than $200,000 without the consent of Employee. The Base Salary
will be payable according to the normal payroll procedures of the Employer and
subject to all appropriate withholdings. Employee shall be reimbursed his
reasonable and documented business expenses, in accordance with Employer's
policies for other executives. Employee shall be entitled to such fringe
benefits (including life, medical and long-term disability insurance and
participation in the Employer's 401(k) savings plan) that are consistent with
other senior executive employees of Employer. In all instances and for all
purposes, Employee's employment tenure will include his employment time with
BHC as well as Employer. In addition, Employer agrees to provide Employee four
weeks paid vacation and paid membership in The Houstonian on terms consistent
with past practices.
The Employer hereby employs the Employee to serve as a Senior Vice
President of Employer or higher position, and to retain the same position and
title held in BHC prior to employment with the Employer. Employee's duties will
include managing the business and operations of Employer acquired in the
Acquisition and performing such other corporate roles and responsibilities to
be reasonably determined by Employer.
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<PAGE> 3
Employee shall report to the President of Employer. Employee's title and duties
will not be materially decreased in a manner inconsistent with his position and
experience or his performance hereunder. Employee agrees to devote his full
business time and his best efforts, skills and abilities to the performance of
his duties hereunder. The Employee shall be provided with his existing office
or comparable office, existing or similar office amenities and a secretary of
his choice who will be initially compensated in accordance with BHC's historic
practices. Employee may serve as a Director or Trustee of other organizations,
provided such service does not prevent Employee from effectively performing his
duties under this Agreement.
Employee's principal place of employment will be Employer's South
Texas Office which will be within a 50 mile radius of Houston, Texas. Employee
can perform his duties hereunder out of his residence if Employer and Employee
agree that such performance in no way diminishes the effectiveness of
Employee's performance hereunder.
Employee shall use his best efforts to preserve the business of
Employer and the good will of all employees, customers, suppliers and other
persons having business relations with Employer.
2. Term. The employment of Employee shall begin on the date of this
Agreement and shall continue until the earliest of (i) September 1, 2003; (ii)
the date Employer terminates it for just cause; (iii) the date Employee
terminates it for just cause; or (iv) the death of Employee.
For purposes of this Section 2, "just cause" for termination for the
purposes of the Employer's termination of Employee shall include: (a) the
failure or inability for any reason of Employee to devote the business time
(other than due to approved vacation time or other approved absences) required
by Section 1 to Employer's business; (b) the failure of Employee to diligently
perform his duties under this Agreement; (c) the conviction by Employee of a
felony or the commission by Employee of an act involving moral turpitude which
adversely affects Employer's business through the loss of clients, contracts,
vendors or suppliers; (d) Employee's material breach or default in the
performance of his obligations hereunder; or (e) Employee's failure or refusal
to follow the reasonable instructions of the President of Employer or the
reasonable policies, standards and regulations of Employer.
The termination of Employee's employment by Employer shall not be
deemed to be for just cause unless the President of Employer provides written
notice to Employee of the conduct on which the termination is based, and
Employee must be given the opportunity during the 30-day period following
written notice to correct the conduct described in such notice, unless such
conduct is a conviction of a felony or
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<PAGE> 4
an act or acts involving moral turpitude which adversely affects the Employer
as described in Section 2(c) or which cannot be cured.
For purposes of this Agreement, "just cause," with respect to the
Employee's termination of employment with the Employer means (i) the Employer's
breach of its obligations to make any payments required hereunder or (ii) the
Employer's breach of any other material provision of this Agreement; provided,
however, the termination of Employee's employment by Employee shall not be
deemed to be for just cause unless Employee provides written notice to Employer
of the conduct on which the termination is based, and Employer must be given
the opportunity during the 30-day period following written notice to correct
the conduct described in such notice, unless such conduct cannot be cured.
If Employee becomes disabled (as defined under the Employer's
long-term disability insurance policy) during the term of this Agreement, then
Employee will be entitled to disability payments for the shorter of (a) three
years following his disability or (b) the remaining term of this Agreement (the
"Disability Period"), such disability payments to be equal to the difference
between (i) Employee's Base Salary during the Disability Period and (ii) the
amount of disability insurance payments collected by Employee during the
Disability Period.
If Employee resigns within 10 business days following a Change of
Control (as defined), he will receive his Base Salary for the one-year period
following the Change of Control. If Employee is terminated within 60 business
days after a Change of Control without just cause, then Employee will be
entitled to his Base Salary through the shorter of (a) three years following
his termination or (b) the remaining term of this Agreement. As used herein, a
Change of Control shall occur if the Employer or MedicalControl (i) sells
substantially all of its assets to a single purchaser (or to a group of
purchasers in a series of related transactions) other than to an affiliated
entity; (ii) sells, exchanges or otherwise disposes of more than 50% of its
outstanding shares other than to an affiliated entity; (iii) dissolves; or (iv)
merges or consolidates in a transaction in which the Employer's or
MedicalControl's shareholders receive less than 50% of the outstanding voting
shares of the new or continuing corporation.
In the event of (i) the Employer's termination of the Employee's
employment without just cause (other than due to a disability of Employee or if
Employee is terminated within 60 business days following a Change in Control)
or (ii) the Employee's termination of employment for just cause (a "Termination
Event"), the Employee shall be paid, in addition to all compensation due up to
the date of termination, severance pay in the amount of his Base Salary through
the remaining term of this Agreement.
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<PAGE> 5
Any severance pay or payments made due to Employee's disability or a
Change in Control will be paid periodically in accordance with Employer's
normal payroll procedures and subject to all appropriate withholdings.
Except as specifically provided for herein, the provisions of Sections
3, 4 and 5 shall survive any termination of Employee's employment under this
Agreement. In the event of the termination of Employee's employment prior to
the completion of the term of employment due to Employee's voluntary
resignation other than for just cause by Employee or Employer's termination of
Employee for just cause, Employee shall be entitled only to the compensation
earned by him as of the date of termination.
3. Nondisclosure Agreement. Employee has had and will have access to
and become familiar with various trade secrets and proprietary and confidential
information consisting of, but not limited to, processes, computer programs,
compilations of information, records, sales procedures, customer requirements,
pricing techniques, customer lists, methods of doing business and other
confidential information (collectively referred to as the "Trade Secrets"),
that are owned by Employer (including, but not limited to, Trade Secrets of the
BHC acquired in the Acquisition) and regularly used in the operation of the
Business, but in connection with which Employer take precautions to prevent
dissemination to persons other than certain directors, officers and employees.
Employee acknowledges and agrees that the Trade Secrets (1) are secret and not
known in the industry; (2) are entrusted to Employee after being informed of
their confidential and secret status by Employer and because of the fiduciary
position occupied by Employee with Employer; (3) have been developed by
Employer for and on behalf of Employer through substantial expenditures of
time, effort and money and are used in its business; (4) give Employer an
advantage over competitors who do not know or use the Trade Secrets; (5) are of
such value and nature as to make it reasonable and necessary to protect and
preserve the confidentiality and secrecy of the Trade Secrets; and (6) the
Trade Secrets are valuable, special and unique assets of Employer, the
disclosure of which could cause substantial injury and loss of profits and good
will to Employer. Employee shall not use in any way or disclose any of the
Trade Secrets, directly or indirectly, either during the term of this Agreement
or at any time thereafter, except as required in the course of his employment
under this Agreement. All files, records, documents, information, data and
similar items relating to the business of Employer, whether prepared by
Employee or otherwise coming into his possession, shall remain the exclusive
property of Employer and shall not be removed from the premises of Employer
under any circumstances without the prior written consent of the President of
Employer (except in the ordinary course of business during Employee's period of
active employment under this Agreement), and in any event shall be promptly
delivered to Employer upon termination of this Agreement. Employee agrees that
upon his receipt of any subpoena, process or other request to produce or
divulge, directly or indirectly, any
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<PAGE> 6
Trade Secrets to any entity, agency, tribunal or person, Employee shall timely
notify and promptly hand deliver a copy of the subpoena, process or other
request to the President of Employer.
Notwithstanding the foregoing, Trade Secrets shall not include any
information which is generally available to the public (other than through a
breach of any confidentiality or other contract or a breach of fiduciary duty).
If Employee is requested in any legal proceeding to disclose any Trade Secrets,
Employee will give Employer prompt notice of such request so that Employer may
seek an appropriate protective order. If, in the absence of a protective order,
Employee is nonetheless compelled to disclose any Trade Secrets by a court or
governmental body having the apparent authority to order such disclosure,
Employee may disclose the Trade Secrets without liability hereunder; provided,
however, that Employee must give Employer written notice of the information to
be disclosed as far in advance of its disclosure as is practicable, and, upon
Employer's request, Employee uses his best reasonable efforts to obtain
assurances that confidential treatment will be accorded to the Trade Secrets.
4. Non-Competition Agreement. Employee acknowledges and agrees that he
will be able to injure Employer if he should compete with Employer in a
business that is competitive with the business conducted or to be conducted by
Employer or its Affiliates. In addition, Employer has acquired the Trade
Secrets and the good will of BHC as a result of the Acquisition, and Employer
would not have consummated the Acquisition without Employee executing a
non-competition agreement. For these reasons, Employee hereby agrees as
follows:
(a) Without the prior written consent of Employer, Employee
shall not, during the period of employment with Employer, directly or
indirectly, either as an individual, a partner or a joint venturer, or in any
other capacity, (i) invest (other than investments in publicly owned companies
which constitute not more than 1% of the voting securities of any such company)
or engage in any business that is competitive with the Business, (ii) accept
employment with or render services to a competitor of Employer as a director,
officer, agent, employee or consultant, (iii) contact, solicit or attempt to
solicit or accept business from any (A) customers of Employer or its affiliates
or (B) person or entity whose business Employer or its affiliates is
soliciting, (iv) contact, solicit or attempt to solicit or accept or direct
business that is competitive with the Business during Employee's employment
under this Agreement from any of the customers of Employer or any of its
affiliates, or (v) take any action inconsistent with the fiduciary relationship
of an employee to his employer.
(b) For a period of 36 months after the termination or
cessation of his employment with Employer for any reason whatsoever, Employee
shall not, directly or indirectly, either as an individual, a partner or a
joint venturer, or in any other
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<PAGE> 7
capacity, in the States of Texas, Louisiana, New Mexico, Arkansas, Oklahoma,
Mississippi, Alabama and Tennessee (the "Designated Territory") (i) invest
(other than investments in publicly owned companies which constitute not more
than 1% of the voting securities of any such company) or engage in any business
that is competitive with the Business, (ii) accept employment with or render
services to a competitor of Employer as a director, officer, agent, employee or
consultant, or (iii) contact, solicit or attempt to solicit or accept business
from any (A) customer of Employer or its affiliates or (B) person or entity
whose Employer or its affiliates are soliciting. For the purposes of this
Agreement, a "competitor" specifically includes persons, firms, sole
proprietorships, partnerships, companies, corporations or other entities that
market products and/or perform services in direct or indirect competition with
the Business within the Designated Territory.
5. Nonemployment Agreement. For a period of 36 months after the
termination or cessation of his employment with Employer for any reason
whatsoever, Employee shall not, on his own behalf or on behalf of any other
person, partnership, association, corporation or other entity, hire or solicit
or in any manner attempt to influence or induce any employee of Employer or its
affiliates to leave the employment of Employer or its affiliates, nor shall he
use or disclose to any person, partnership, association, corporation or other
entity any information obtained while an employee of Employer concerning the
names and addresses of Employer's employees.
The provisions contained in Section 4 and 5 hereof will terminate and
be of no effect if (a) an Event of Default occurs under the convertible
subordinated promissory note issued by Employer to Employee in the Acquisition
and remains uncured during the period provided for in such note, (b) Employer
fails to register the shares of common stock of MedicalControl in violation of
that certain Registration Rights Agreement between MedicalControl, Employee and
certain other individuals, (c) Employer in writing or orally in front of a
third party states to Employee that it is terminating him without just cause
and fails to pay the severance provided for herein or (d) Employer breaches the
terms of that certain Escrow Agreement executed in connection with the
Acquisition (it being acknowledged that the mere act of the escrow agent
depositing the escrow amount into a court in an interpleader action is not a
default by Employer of the Escrow Agreement).
6. Severability. The parties hereto intend all provisions of Sections
3, 4 and 5 hereof to be enforced to the fullest extent permitted by law.
Accordingly, should a court of competent jurisdiction determine that the scope
of any provision of Sections 3, 4 and 5 hereof is too broad to be enforced as
written, the parties intend that the court reform the provision to such
narrower scope as it determines to be reasonable and enforceable. In addition,
however, Employee agrees that the non-competition agreements, nondisclosure
agreements and nonemployment agreements set forth
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<PAGE> 8
above each constitute separate agreements independently supported by good and
adequate consideration and shall be severable from the other provisions of, and
shall survive, this Agreement. The existence of any claim or cause of action of
Employee against Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of the covenants
and agreements of Employee contained in the non-competition, nondisclosure or
nonemployment agreements. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part of this Agreement; and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of this
Agreement, a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
7. Affiliates. Employee will use his best efforts to ensure that no
corporation or other entity of which he is an officer, director, shareholder,
owner, partner or other affiliate, shall take any action that Employee could
not take without violating any provision of this Agreement. In addition, no
family members of Employee shall take any action that Employee could not take
without violating any provision of this Agreement if such family member is
under the direction or control of Employee.
8. Remedies. Employee recognizes and acknowledges that the
ascertainment of damages in the event of his breach of any provision of this
Agreement would be difficult, and Employee agrees that Employer, in addition to
all other remedies it may have, shall have the right to injunctive relief if
there is such a breach.
9. Acknowledgments. Employee acknowledges and recognizes that the
enforcement of any of the non-competition provisions in this Agreement by
Employer will not interfere with Employee's ability to pursue a proper
livelihood. Employee further represents that he is capable of pursuing a career
in other industries to earn a proper livelihood. Employee recognizes and agrees
that the enforcement of this Agreement is necessary to ensure the preservation
and continuity of the business and good will of Employer. Employee agrees that
due to the nature of Employer's business, the non-competition restrictions set
forth in this Agreement are reasonable as to time and geographic area. At any
time during the 36 months commencing on the date hereof, Employer may request
Employee to supply such information as Employer deems necessary to ascertain
whether or not Employee has complied with, or has violated, the restrictive
covenants of Sections 3, 4, and 5 hereof. Any such request for information will
be sent to Employee by certified mail, return receipt
8
<PAGE> 9
requested, addressed to Employee's last known address. Employee shall furnish
the requested information to Employer within 10 days following the receipt of
such request.
10. Notices. Any notices, consents, demands, requests, approvals and
other communications to be given under this Agreement by either party to the
other shall be deemed to have been duly given if given in writing and
personally delivered or sent by mail, registered or certified, postage prepaid
with return receipt requested, as follows:
If to Employer: MedicalControl Network Solutions, Inc.
8625 King George Drive
Dallas, Texas 75235
Attention: President
If to Employee: 381 North Post Oak Lane
Houston, Texas 77024
With a copy (which shall Ken Kosut
not constitute notice) to: Evans, Kosut and Kasprzak
16945 North Chase Drive
Houston, Texas 77060
Douglas Elden
The Elden Law Firm
150 North Michigan Avenue
Suite 2500
Chicago, Illinois 60601
Notices delivered personally shall be deemed communicated as of actual receipt;
mailed notices shall be deemed communicated as of three days after mailing.
11. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or written, between the parties hereto with respect to
the subject matter hereof and contains all of the covenants and agreements
between the parties with respect thereto.
12. Modification. No change or modification of this Agreement shall be
valid or binding upon the parties hereto, nor shall any waiver of any term or
condition in the future be so binding, unless such change or modification or
waiver shall be in writing and signed by the parties hereto.
13. Governing Law and Venue. The parties acknowledge and agree that
this Agreement and the obligations and undertakings of the parties hereunder
will be performable in Houston, Harris County, Texas. This Agreement shall be
governed by,
9
<PAGE> 10
and construed in accordance with, the laws of the State of Texas. If any action
is brought to enforce or interpret this Agreement, venue for such action shall
be in Harris County, Texas.
14. Counterparts. This Agreement may be executed in counterparts, each
of which shall constitute an original, but all of which shall constitute one
document.
15. Costs. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which he or it may be entitled.
16. Estate. If Employee dies prior to the expiration of the term of
employment, any monies that may be due him from Employer under this Agreement
as of the date of his death shall be paid to his estate.
17. Assignment. Upon notice to Employee, Employer shall have the right
to assign this Agreement to its affiliates, successors or assigns. The terms
"successors" and "assigns" shall include any person, corporation, partnership
or other entity that buys all or substantially all of Employer's assets or all
of its stock, or with which Employer merges or consolidates. The rights, duties
and benefits to Employee hereunder are personal to him, and no such right or
benefit may be assigned by him.
18. Binding Effect. This Agreement shall be binding upon the parties
hereto, together with their respective executors, administrators, successors,
personal representatives, heirs and assigns.
19. Waiver of Breach. The waiver by Employer of a breach of any
provisions of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.
20. Mutual Contribution. The parties to this Agreement and their
counsel have mutually contributed to its drafting. Consequently, no provision
of this Agreement shall be construed against any party on the ground that such
party drafted the provision or caused it to be drafted or the provision
contains a covenant of such party.
21. Guaranty. By its execution hereof, MedicalControl irrevocably and
unconditionally guarantees to Employee the prompt payment when due of all of
the Employer's payment obligations under Sections 1 and 2 hereof, together with
and as adjusted by any and all amendments or modifications thereto in
accordance with the terms of this Agreement.
(Signature Page to Follow)
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
EMPLOYEE:
/s/ RALPH T. SMITH, JR.
------------------------------------------
Ralph T. Smith, Jr.
Employer:
MEDICALCONTROL NETWORK SOLUTIONS, INC.
By: /s/ ROBERT O. BROOKS
---------------------------------------
Robert O. Brooks
President and Chief Executive Officer
Guarantor:
MEDICALCONTROL, INC.
By: /s/ J. WARD HUNT
---------------------------------------
J. Ward Hunt
President and Chief Executive Officer
11
<PAGE> 1
EXHIBIT 10.20
LOAN AGREEMENT
September 25, 1998
MedicalControl, Inc.
8625 King George
Suite 300
Dallas, Texas 75235
Ladies and Gentlemen:
This Loan Agreement (the "LOAN AGREEMENT") will serve to set forth the
terms of the financing transactions by and between MEDICAL CONTROL, INC., a
Delaware corporation ("BORROWER"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION
("BANK"):
1. CREDIT FACILITIES. Subject to the terms and conditions set forth in
this Loan Agreement and the other agreements, instruments and documents
evidencing, securing, governing, guaranteeing and/or pertaining to the Loans, as
hereinafter defined (collectively, together with the Loan Agreement, referred to
hereinafter as the "LOAN DOCUMENTS"), Bank hereby agrees to lend to Borrower (a)
the amount of $1,600,000 (the "TERM LOAN") in a single advance on the date
hereof, and (b) (the "LINE OF CREDIT"), on a revolving basis from time to time
during the period commencing on the date hereof and continuing through the
maturity date of the promissory note evidencing this credit facility from time
to time, such amounts as Borrower may request hereunder; provided, however, the
total principal amount outstanding at any time under the Line of Credit shall
not exceed $500,000 (the Line of Credit and the Term Loan are collectively
referred to herein as the "CREDIT FACILITIES"). Subject to the terms and
conditions hereof, Borrower may borrow, repay and reborrow hereunder. The sums
advanced under the Loans shall be used for acquisition of a subsidiary and used
for general working capital purposes.
All advances under the Credit Facilities shall be collectively called the
"LOANS". Bank reserves the right to require Borrower to give Bank not less than
one (1) business day prior notice of each requested advance under the Line of
Credit, specifying (i) the aggregate amount of such requested advance, (ii) the
requested date of such advance, and (iii) the purpose for such advance, with
such advances to be requested in a form satisfactory to Bank. Borrower shall pay
to Bank upon the execution of this Agreement a facility fee in the amount of
$16,000. In addition, Borrower shall pay to Bank during the term of the Line of
Credit an unused fee equal to .25% per annum quarterly in arrears, of an amount
equal to $500,000 less the average outstanding balance under the Line of Credit.
LOAN AGREEMENT - Page 1
<PAGE> 2
2. PROMISSORY NOTES. The Line of Credit and the Term Loan shall be
evidenced by one or more promissory notes (such promissory notes, together with
any renewals, extensions and increases thereof, the "Note") duly executed by
Borrower and payable to the order of Bank, in form and substance acceptable to
Bank. Interest on the Note shall accrue at the rate set forth therein. The
principal of and interest on the Note shall be due and payable in accordance
with the terms and conditions set forth in the Note and in this Loan Agreement.
3. COLLATERAL. As collateral and security for the indebtedness
evidenced by the Note and any and all other indebtedness or obligations from
time to time owing by Borrower to Bank, Borrower shall grant, and hereby grants,
to Bank, its successors and assigns, a first and prior lien and security
interest in and to the property described hereinbelow, together with any and all
PRODUCTS AND PROCEEDS thereof (the "COLLATERAL"):
(a) All present and future accounts, chattel paper, documents,
instruments, deposit accounts and general intangibles (including any
right to payment for goods sold or services rendered arising out of the
sale or delivery of personal property or work done or labor performed
by Borrower), now or hereafter owned, held, or acquired by Borrower,
together with any and all books of account, customer lists and other
records relating in any way to the foregoing.
(b) All present and hereafter acquired inventory (including
without limitation, all raw materials, work in process and finished
goods) held, possessed, owned, held on consignment, or held for sale,
lease, return or to be furnished under contracts of service, in whole
or in part, by Borrower wherever located.
(c) All equipment and fixtures of whatsoever kind and
character now or hereafter possessed, held, acquired, leased or owned
by Borrower and used or usable in Borrower's business, together with
all replacements, accessories, additions, substitutions and accessions
to all of the foregoing.
(d) Any and all other assets, whether tangible or intangible,
of Borrower.
The term "COLLATERAL" shall also include all records and data relating to any of
the foregoing (including, without limitation, any computer software on which
such records and data may be located). Borrower agrees to execute such security
agreements, assignments, deeds of trust and other agreements and documents as
Bank shall deem appropriate and otherwise require from time to time to more
fully create and perfect Bank's lien and security interests in the Collateral.
LOAN AGREEMENT - Page 2
<PAGE> 3
5. GUARANTORS. As a condition precedent to the Bank's obligation to
make the Loans to Borrower, Borrower agrees to cause MedicalControl Network
Solutions, Inc., Diversified Group Administrators, Inc., and PPO Management
Solutions, Inc. (whether one or more, the "GUARANTORS") to each execute and
deliver to Bank contemporaneously herewith a guaranty agreement, in form and
substance satisfactory to Bank.
6. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants, and upon each request for an advance under the Credit Facilities,
further represents and warrants, to Bank as follows:
(a) Existence. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and all other states where it is doing business, and has all
requisite power and authority to execute and deliver the Loan
Documents.
(b) Binding Obligations. The execution, delivery, and
performance of this Loan Agreement and all of the other Loan Documents
by Borrower have been duly authorized by all necessary action by
Borrower, and constitute legal, valid and binding obligations of
Borrower, enforceable in accordance with their respective terms, except
as limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and except
to the extent specific remedies may generally be limited by equitable
principles.
(c) No Consent. The execution, delivery and performance of
this Loan Agreement and the other Loan Documents, and the consummation
of the transactions contemplated hereby and thereby, do not (i)
conflict with, result in a violation of, or constitute a default under
(A) any provision of its articles or certificate of incorporation or
bylaws, if Borrower is a corporation, or its partnership agreement, if
Borrower is a partnership, or any agreement or other instrument binding
upon Borrower, or (B) any law, governmental regulation, court decree or
order applicable to Borrower, or (ii) require the consent, approval or
authorization of any third party.
(d) Financial Condition. Each financial statement of Borrower
supplied to the Bank fully discloses and fairly presents Borrower's
financial condition as of the date of each such statement. There has
been no material adverse change in such financial condition or results
of operations of Borrower subsequent to the date of the most recent
financial statement supplied to the Bank.
(e) Litigation. There are no actions, suits or proceedings,
pending or, to the knowledge of Borrower, threatened against or
affecting Borrower or the properties of Borrower, before any court or
governmental department, commission or board, which, if determined
adversely to Borrower, would have a material adverse effect on the
financial condition, properties, or operations of Borrower.
LOAN AGREEMENT - Page 3
<PAGE> 4
(f) Taxes; Governmental Charges. Borrower has filed all
federal, state and local tax reports and returns required by any law or
regulation to be filed by it and has either duly paid all taxes, duties
and charges indicated due on the basis of such returns and reports, or
made adequate provision for the payment thereof, and the assessment of
any material amount of additional taxes in excess of those paid and
reported is not reasonably expected.
(g) Year 2000 Changes. All devices, systems, machinery,
information technology, computer software and hardware, and other date
sensitive technology (jointly and severally the "SYSTEMS") necessary
for Borrower and its subsidiaries to carry on its business as presently
conducted and as contemplated to be conducted in the future are Year
2000 Compliant or will be Year 2000 Compliant within a period of time
calculated to result in no material disruption of any of Borrower's
business operations. For purposes of these provisions, "Year 2000
Compliant" means that such Systems are designed to be used prior to,
during and after the Gregorian calendar year 2000 A.D. and will operate
during each such time period without error relating to date data,
specifically including any error relating to, or the product of, date
data which represents or references different centuries or more than
one century. Borrower will make written inquiry of each of its key
suppliers, vendors, and customers, and will obtain in writing
confirmations from all such persons, as to whether such persons have
initiated programs to become Year 2000 Compliant and Borrower
reasonably believes that all such persons will be or become so
compliant. For purposes hereof, "key suppliers, vendors, and customers"
refers to those suppliers, vendors, and customers of Borrower whose
business failure would, with reasonable probability, result in a
material adverse change in the business, properties, condition
(financial or otherwise), or prospects of Borrower. For purposes of
this paragraph, Bank, as a lender of funds under the terms of the
Credit Facility, confirms to Borrower that Bank has initiated its own
corporate-wide Year 2000 program with respect to its lending
activities.
7. CONDITIONS PRECEDENT TO ADVANCES. Bank's obligation to make any
advance under this Loan Agreement and the other Loan Documents shall be subject
to the conditions precedent that, as of the date of such advance and after
giving effect thereto (i) all representations and warranties made to Bank in
this Loan Agreement and the other Loan Documents shall be true and correct, as
of and as if made on such date, (ii) no material adverse change in the financial
condition of Borrower since the effective date of the most recent financial
statements furnished to Bank by Borrower shall have occurred and be continuing,
(iii) no event has occurred and is continuing, or would result from the
requested advance, which with notice or lapse of time, or both, would constitute
an Event of Default (as hereinafter defined), and (iv) Bank's receipt of all
Loan Documents appropriately executed by Borrower and all other proper parties.
8. AFFIRMATIVE COVENANTS. Until (i) the Note and all other obligations
and liabilities of Borrower under this Loan Agreement and the other Loan
Documents are fully paid and satisfied, and (ii) the Bank has no further
commitment to lend hereunder, Borrower agrees and covenants that it will, unless
Bank shall otherwise consent in writing:
LOAN AGREEMENT - Page 4
<PAGE> 5
(a) Accounts and Records. Maintain its books and records in
accordance with generally accepted accounting principles.
(b) Right of Inspection. Permit Bank to visit its properties
and installations and to examine, audit and make and take away copies
or reproductions of Borrower's books and records, at all reasonable
times.
(c) Right to Additional Information. Furnish Bank with such
additional information and statements, lists of assets and liabilities,
tax returns, and other reports with respect to Borrower's financial
condition and business operations as Bank may request from time to
time.
(d) Compliance with Laws. Conduct its business in an orderly
and efficient manner consistent with good business practices, and
perform and comply with all statutes, rules, regulations and/or
ordinances imposed by any governmental unit upon Borrower its
businesses, operations and properties (including, without limitation,
all applicable environmental statutes, rules, regulations and
ordinances).
(e) Taxes. Pay and discharge when due all of its indebtedness
and obligations, including, without limitation, all assessments, taxes,
governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to
the date on which penalties would attach, and all lawful claims that,
if unpaid, might become a lien or charge upon any of Borrower's
properties, income, or profits; provided, however, Borrower will not be
required to pay and discharge any such assessment, tax, charge, levy,
lien or claim so long as (i) the legality of the same shall be
contested in good faith by appropriate judicial, administrative or
other legal proceedings, and (ii) Borrower shall have established on
its books adequate reserves with respect to such contested assessment,
tax, charge, levy, lien or claim in accordance with generally accepted
accounting principles, consistently applied.
(f) Insurance. Maintain insurance, including but not limited
to, fire insurance, comprehensive property damage, public liability and
worker's compensation, and, within ten (10) days after the date of this
Agreement will acquire business interruption and other insurance deemed
necessary or otherwise required by Bank.
(g) Notice of Indebtedness. Promptly inform Bank of the
creation, incurrence or assumption by Borrower of any actual or
contingent liabilities not permitted under this Loan Agreement.
(h) Notice of Litigation. Promptly after the commencement
thereof, notify Bank of all actions, suits and proceedings before any
court or any governmental department, commission or board affecting
Borrower or any of its properties.
(i) Notice of Material Adverse Change. Promptly inform Bank of
(i) any and all material adverse changes in Borrower's financial
condition, and (ii) all claims made against Borrower which could
reasonably be expected to materially affect the financial condition of
Borrower.
LOAN AGREEMENT - Page 5
<PAGE> 6
(j) Additional Documentation. Execute and deliver, or cause to
be executed and delivered, any and all other agreements, instruments or
documents which Bank may reasonably request in order to give effect to
the transactions contemplated under this Loan Agreement and the other
Loan Documents.
(k) Maintain Control. The Answer Partnership, Ltd., a Texas
limited partnership, J. Ward Hunt, or any entity owned or controlled by
J. Ward Hunt shall maintain ownership of not less than 50% of the
outstanding voting stock of Borrower.
9. NEGATIVE COVENANTS. Until (i) the Note and all other obligations and
liabilities of Borrower under this Loan Agreement and the other Loan Documents
are fully paid and satisfied, and (ii) the Bank has no further commitment to
lend hereunder, Borrower will not, without the prior written consent of Bank:
(a) Nature of Business. Make any material change in the nature
of its business as carried on as of the date hereof.
(b) Liquidations, Mergers, Consolidations. Liquidate, merge or
consolidate with or into any other entity.
(c) Sale of Assets. Sell, transfer or otherwise dispose of any
of its assets or properties, other than (i) in the ordinary course of
business and (ii) transfers among Borrower and the Obligated Parties.
(d) Liens. Create or incur any lien or encumbrance on any of
its assets, other than (i) liens and security interests securing
indebtedness owing to Bank, (ii) liens for taxes, assessments or
similar charges either (1) not yet due or (2) being contested in good
faith by appropriate proceedings and for which Borrower has established
adequate reserves, (iii) liens and security interest existing as of the
date hereof which have been disclosed to and approved by the Bank in
writing and (iv) liens and security interests on equipment securing the
purchase price for such equipment.
(e) Indebtedness. Create, incur or assume any indebtedness for
borrowed money or issue or assume any other note, debenture, bond or
other evidences of indebtedness, or guarantee any such indebtedness or
such evidences of indebtedness of others, other than (i) borrowings
from Bank, (ii) borrowings outstanding on the date hereof and disclosed
in writing to Bank, and (iii) the Subordinated Debt evidenced by the
Convertible Subordinated Promissory Notes attached hereto as EXHIBIT
"A" incurred in connection with the acquisition of subsidiary BHC, Inc.
(f) Change in Management. Allow Robert Brooks or J. Ward Hunt
to cease active participation in the senior management of Borrower.
(g) Loans. Make any loans to any person or entity except
advances of business expenses to employees in the ordinary course of
business.
LOAN AGREEMENT - Page 6
<PAGE> 7
(h) Transactions with Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any Affiliate (as
hereinafter defined) of Borrower, except in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon
fair and reasonable terms no less favorable to Borrower than would be
obtained in a comparable arm's-length transaction with a person or
entity not an Affiliate of Borrower. As used herein, the term
"AFFILIATE" means any individual or entity directly or indirectly
controlling, controlled by, or under common control with, another
individual or entity.
(i) Dividends. Borrower agrees not to declare or pay any cash
dividends on any shares of Borrower's capital stock, make any other
distributions with respect to any payment on account of the purchase,
redemption, or other acquisition or retirement of any shares of
Borrower's capital stock, or make any other distribution, sale,
transfer or lease of any of Borrower's assets other than in the
ordinary course of business, unless any such amounts are directly
utilized for the payment of principal or interest on indebtedness and
obligations owing from time to time by Borrower to Bank.
10. FINANCIAL COVENANTS. Until (i) the Note and all other obligations
and liabilities of Borrower under this Loan Agreement and the other Loan
Documents are fully paid and satisfied, and (ii) the Bank has no further
commitment to lend hereunder, Borrower and its subsidiaries, on a consolidated
basis, will maintain the following financial covenants:
(a) Minimum Income. Beginning January 1, 1999, Borrower will
maintain income of not less than $1.00 for each fiscal quarter.
(b) Net Worth. Borrower will maintain, at all times, its total
assets less its total liabilities at not less than $7,900,000.
(c) Debt Service. Borrower will maintain, as of the last day
of each fiscal quarter, a ratio of (i) consolidated net income after
taxes plus interest expense depreciation, amortization and other
non-cash expenses for the twelve (12) month period ending with such
fiscal quarter, less any capital expenditures during such twelve (12)
month period to (ii) total interest expense and current maturities of
long term debt and long term capital leases for such twelve (12) month
period, of not less than 1.25 to 1.0.
(d) Funded Debt to Cash Flow. Borrower will maintain, as of
the end of each fiscal quarter, a ratio of all outstanding debt of
Borrower at the end of such fiscal quarter, to (ii) earnings before
depreciation, amortization, and interest expense for the twelve (12)
month period ending with such fiscal quarter, of not more than 2.5 to
1.0.
(e) Capital Expenditures. Borrower will not make capital
expenditures in excess of $500,000 during any fiscal year.
(f) Current Ratio. At all times, a ratio of (a) current
assets, (excluding prepaid expenses) to (b) current liabilities of not
less than 1.5 to 1.0.
LOAN AGREEMENT - Page 7
<PAGE> 8
(g) Maintain Contracts. Borrower shall not allow the net loss,
in any year (after taking into account revenues from new clients), of
clients which contributed more than an aggregate amount of $1,500,000
in revenue to Borrower or its subsidiaries in the previous year.
As used herein, the term "SUBORDINATED DEBT" means any indebtedness owing by
Borrower which has been subordinated by written agreement to all indebtedness
now or hereafter owing by Borrower to Lender, such agreement to be in form and
substance acceptable to Lender. As used herein, "DISTRIBUTIONS" shall mean all
cash or cash equivalent dividends and other distributions made by Borrower to
its shareholders or partners, as the case may be, other than salary, bonuses and
other compensation for services. Unless otherwise specified, all accounting and
financial terms and covenants set forth above are to be determined according to
generally accepted accounting principles, consistently applied.
11. REPORTING REQUIREMENTS. Until (i) the Note and all other
obligations and liabilities of Borrower under this Loan Agreement and the other
Loan Documents are fully paid and satisfied, and (ii) the Bank has no further
commitment to lend hereunder, Borrower will, unless Bank shall otherwise consent
in writing, furnish to Bank:
(a) Interim Financial Statements. As soon as available, and in
any event within forty-five (45) days after the end of each quarter of
each fiscal year of Borrower, a consolidated and consolidating balance
sheet and income statement of Borrower as of the end of such fiscal
quarter, all in form and substance and in reasonable detail
satisfactory to Bank and duly certified (subject to year end review
adjustments) by the President and/or Chief Financial Officer of
Borrower (i) as being true and correct in all material aspects to the
best of his or her knowledge, (ii) as having been prepared in
accordance with generally accepted accounting principles, consistently
applied, and (iii) as being consistent in all material respects with
the information submitted by Borrower to the U.S. Securities and
Exchange Commission pursuant to its Quarterly Report on Form 10QSB.
(b) Annual Financial Statements. As soon as available and in
any event within one hundred twenty (120) days after the end of each
fiscal year of Borrower, a consolidated and consolidating balance sheet
and income statement of Borrower as of the end of such fiscal year, in
each case audited by independent public accountants of recognized
standing acceptable to Bank.
(c) Compliance Certificate. A certificate signed by Chairman,
President, or Vice President, Finance of Borrower, within forty-five
(45) days after the end of each quarter of each fiscal year, stating
that Borrower is in full compliance with all of its obligations under
this Loan Agreement and all other Loan Documents and is not in default
of any term or provisions hereof or thereof, and demonstrating
compliance with all financial ratios and covenants set forth in this
Loan Agreement.
LOAN AGREEMENT - Page 8
<PAGE> 9
(d) Accounts Aging. An accounts receivable aging report within
thirty (30) days after the end of each month of each fiscal year, in
form and detail satisfactory to Bank.
(e) Audit Reports. True and complete copies of all audit
reports submitted to Borrower.
(f) Adverse Events. Immediate notice of any Event of Default
or any event which, with the passing of time or the giving of notice,
or both, could constitute an Event of Default, and any other event
which could reasonably be expected to have a material adverse effect
upon Borrower or any Guarantor.
(g) Year 2000 Information. Furnish such additional
information, statements and other reports with respect to Borrower's
activities, course of action and progress towards becoming Year 2000
Compliant as Bank may request from time to time. In the event of any
change in circumstances that causes or will likely cause any of
Borrower's representations and warranties with respect to Borrower or
its subsidiaries being or becoming Year 2000 Complaint to no longer be
true (hereinafter, referred to as a "CHANGE IN CIRCUMSTANCES") then
Borrower shall promptly, and in any event within ten (10) days of
receipt of information regarding a Change in Circumstances, provide
Bank with written notice (the "Notice") that describes in reasonable
detail the Change in Circumstances and how such Change in Circumstances
caused or will likely cause Borrower's representations and warranties
with respect to being or becoming Year 2000 Compliant to no longer be
true. Borrower shall, within ten (10) days of a request, also provide
Bank with any additional information Bank requests of Borrower in
connection with the Notice and/or a Change in Circumstances.
12. EVENTS OF DEFAULT. Each of the following shall constitute an "EVENT
OF DEFAULT" under this Loan Agreement:
(a) The failure, refusal or neglect of Borrower to pay when
due any part of the principal of, or interest on, the Note or any other
indebtedness or obligations owing to Bank by Borrower from time to
time.
(b) The failure of Borrower or any Obligated Party (as defined
below) to timely and properly observe, keep or perform any covenant,
agreement, warranty or condition required herein or in any of the other
Loan Documents, if such failure shall continue for thirty (30) days
after notice to Borrower of such failure.
(c) The occurrence of an event of default under any of the
other Loan Documents or under any other agreement now existing or
hereafter arising between Bank and Borrower.
LOAN AGREEMENT - Page 9
<PAGE> 10
(d) Any representation contained herein or in any of the other
Loan Documents made by Borrower or any Obligated Party is false or
misleading in any material respect.
(e) The occurrence of any event which permits the acceleration
of the maturity of any indebtedness in excess of $50,000 owing by
Borrower to any third party under any agreement or understanding unless
such occurrence is rectified within five (5) days.
(f) If Borrower or any Obligated Party: (i) becomes insolvent,
or makes a transfer in fraud of creditors, or makes an assignment for
the benefit of creditors, or admits in writing its inability to pay its
debts as they become due; (ii) generally is not paying its debts as
such debts become due; (iii) has a receiver, trustee or custodian
appointed for, or take possession of, all or substantially all of the
assets of such party, either in a proceeding brought by such party or
in a proceeding brought against such party and such appointment is not
discharged or such possession is not terminated within sixty (60) days
after the effective date thereof or such party consents to or
acquiesces in such appointment or possession; (iv) files a petition for
relief under the United States Bankruptcy Code or any other present or
future federal or state insolvency, bankruptcy or similar laws (all of
the foregoing hereinafter collectively called "APPLICABLE BANKRUPTCY
LAW") or an involuntary petition for relief is filed against such party
under any Applicable Bankruptcy Law and such involuntary petition is
not dismissed within sixty (60) days after the filing thereof, or an
order for relief naming such party is entered under any Applicable
Bankruptcy Law, or any composition, rearrangement, extension,
reorganization or other relief of debtors now or hereafter existing is
requested or consented to by such party; (v) fails to have discharged
within a period of thirty (30) days any attachment, sequestration or
similar writ levied upon any property of such party; or (vi) fails to
pay within thirty (30) days any final money judgment against such
party.
(g) The liquidation, dissolution, or, without the prior
written consent of Bank, which consent shall not be unreasonably
withheld, the merger or consolidation of Borrower or any Obligated
Party.
(h) Either Robert Brooks or J. Ward Hunt ceases active
participation in the management of Borrower.
(i) The entry of any judgment against Borrower or the issuance
or entry of any attachment or other lien against any of the property of
Borrower for an amount in excess of $50,000, if undischarged, unbonded
or undismissed within thirty (30) days after such entry.
Nothing contained in this Loan Agreement shall be construed to limit the events
of default enumerated in any of the other Loan Documents and all such events of
default shall be cumulative. The term "OBLIGATED PARTY", as used herein, shall
mean any party other than Borrower who secures, guarantees and/or is otherwise
obligated to pay all or any portion of the indebtedness evidenced by the Note.
LOAN AGREEMENT - Page 10
<PAGE> 11
13. REMEDIES. Upon the occurrence of any one or more of the foregoing
Events of Default, (a) the entire unpaid balance of principal of the Note,
together with all accrued but unpaid interest thereon, and all other
indebtedness owing to Bank by Borrower at such time shall, at the option of
Bank, become immediately due and payable without further notice, demand,
presentation, notice of dishonor, notice of intent to accelerate, notice of
acceleration, protest or notice of protest of any kind, all of which are
expressly waived by Borrower, and (b) Bank may, at its option, cease further
advances under the Note provided, however, concurrently and automatically with
the occurrence of an Event of Default under SUBPARAGRAPH (F) in the immediately
preceding paragraph (i) further advances under the Note shall cease, and (ii)
the Note and all other indebtedness owing to Bank by Borrower at such time
shall, without any action by Bank, become due and payable, without further
notice, demand, presentation, notice of dishonor, notice of acceleration, notice
of intent to accelerate, protest or notice of protest of any kind, all of which
are expressly waived by Borrower. All rights and remedies of Bank set forth in
this Loan Agreement and in any of the other Loan Documents may also be exercised
by Bank, at its option to be exercised in its sole discretion, upon the
occurrence of an Event of Default.
14. RIGHTS CUMULATIVE. All rights of Bank under the terms of this Loan
Agreement shall be cumulative of, and in addition to, the rights of Bank under
any and all other agreements between Borrower and Bank (including, but not
limited to, the other Loan Documents), and not in substitution or diminution of
any rights now or hereafter held by Bank under the terms of any other agreement.
15. WAIVER AND AGREEMENT. Neither the failure nor any delay on the part
of Bank to exercise any right, power or privilege herein or under any of the
other Loan Documents shall operate as a waiver thereof, nor shall any single or
partial exercise of such right, power or privilege preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. No
waiver of any provision in this Loan Agreement or in any of the other Loan
Documents and no departure by Borrower therefrom shall be effective unless the
same shall be in writing and signed by Bank, and then shall be effective only in
the specific instance and for the purpose for which given and to the extent
specified in such writing. No modification or amendment to this Loan Agreement
or to any of the other Loan Documents shall be valid or effective unless the
same is signed by the party against whom it is sought to be enforced.
16. BENEFITS. This Loan Agreement shall be binding upon and inure to
the benefit of Bank and Borrower, and their respective successors and assigns,
provided, however, that Borrower may not, without the prior written consent of
Bank, assign any rights, powers, duties or obligations under this Loan Agreement
or any of the other Loan Documents.
17. NOTICES. All notices, requests, demands or other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and given by (i) personal delivery, (ii) expedited delivery service with proof
of delivery, or (iii) United States mail, postage prepaid, registered or
certified mail, return receipt requested, sent to the intended addressee at the
address set forth on the signature page hereof and shall be deemed to have been
received either, in the case of personal delivery, as of the time of personal
delivery, in the case of expedited delivery service, as of the date of first
attempted delivery at the address and in the
LOAN AGREEMENT - Page 11
<PAGE> 12
manner provided herein, or in the case of mail, upon deposit in a depository
receptacle under the care and custody of the United States Postal Service.
Either party shall have the right to change its address for notice hereunder to
any other location within the continental United States by notice to the other
party of such new address at least thirty (30) days prior to the effective date
of such new address.
18. CONSTRUCTION. THIS LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS HAVE
BEEN EXECUTED AND DELIVERED IN THE STATE OF TEXAS, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND SHALL BE
PERFORMABLE BY THE PARTIES HERETO IN THE COUNTY IN TEXAS WHERE THE BANK'S
ADDRESS SET FORTH ON THE SIGNATURE PAGE HEREOF IS LOCATED.
19. INVALID PROVISIONS. If any provision of this Loan Agreement or any
of the other Loan Documents is held to be illegal, invalid or unenforceable
under present or future laws, such provision shall be fully severable and the
remaining provisions of this Loan Agreement or any of the other Loan Documents
shall remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance.
20. EXPENSES. Borrower shall pay all costs and expenses (including,
without limitation, reasonable attorneys' fees) in connection with (i) any
action required in the course of administration of the indebtedness and
obligations evidenced by the Loan Documents, and (ii) any action in the
enforcement of Bank's rights upon the occurrence of Event of Default.
21. PARTICIPATION OF THE LOANS. Borrower agrees that Bank may, at its
option, sell interests in the Loans and its rights under this Loan Agreement to
a financial institution or institutions and, in connection with each such sale,
Bank may disclose any financial and other information available to Bank
concerning Borrower to each perspective purchaser.
22. ENTIRE AGREEMENT. This Loan Agreement (together with the other Loan
Documents) contains the entire agreement among the parties regarding the subject
matter hereof and supersedes all prior written and oral agreements and
understandings among the parties hereto regarding same.
23. CONFLICTS. In the event any term or provision hereof is
inconsistent with or conflicts with any provision of the other Loan Documents,
the terms and provisions contained in this Loan Agreement shall be controlling.
24. COUNTERPARTS. This Loan Agreement may be separately executed in any
number of counterparts, each of which shall be an original, but all of which,
taken together, shall be deemed to constitute one and the same instrument.
25. ARBITRATION. Bank and Borrower agree that upon the written demand
of either party, whether made before or after the institution of any legal
proceedings, but prior to the rendering of any judgment in that proceeding, all
disputes, claims and controversies between
LOAN AGREEMENT - Page 12
<PAGE> 13
them, whether individual, joint, or class in nature, arising from this Loan
Agreement, the Notes or any other Loan Document or otherwise, including, without
limitation, contract disputes and tort claims, shall be resolved by binding
arbitration pursuant to the Commercial Rules of the American Arbitration
Association. Any arbitration proceeding held pursuant to this arbitration
provision shall be conducted in the city nearest the Borrower's address having
an AAA regional office, or at any other place selected by mutual agreement of
the parties. No act to take or dispose of any Collateral shall constitute a
waiver of this arbitration agreement or be prohibited by this arbitration
agreement. The arbitration provision shall not limit the right of either party
during any dispute, claim or controversy to seek, use, and employ ancillary, or
preliminary rights and/or remedies, judicial or otherwise, for the purposes of
realizing upon, preserving, protecting, foreclosing upon or proceeding under
forcible entry and detainer for possession of, any real or personal property,
and any such action shall not be deemed an election of remedies. Such remedies
include, without limitation, obtaining injunctive relief or a temporary
restraining order, invoking a power of sale under any deed of trust or mortgage,
obtaining a writ of attachment or imposition of a receivership, or exercising
any rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code or when applicable, a judgment by confession of judgment. Any
disputes, claims or controversies concerning the lawfulness or reasonableness of
an act, or exercise of any right or remedy concerning any Collateral, including
any claim to rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated; provided, however, that no arbitrator
shall have the right or the power to enjoin or restrain any act of either party.
Judgment upon any award rendered by any arbitrator may be entered in any court
having jurisdiction. Nothing in this arbitration provision shall preclude either
party from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these purposes.
The Federal Arbitration Act (Title 9 of the United States Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
26. JURY WAIVER. TO THE EXTENT PERMITTED UNDER APPLICABLE LAW THE
UNDERSIGNED AND BANK (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY,
IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN
OR AMONG THE UNDERSIGNED AND BANK ARISING OUT OF OR IN ANY WAY RELATED TO THIS
DOCUMENT OR ANY OTHER RELATED DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT
TO BANK TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER LOAN
DOCUMENTS.
LOAN AGREEMENT - Page 13
<PAGE> 14
If the foregoing correctly sets forth our mutual agreement, please so
acknowledge by signing and returning this Loan Agreement to the undersigned.
Very truly yours,
BANK ONE, TEXAS, N.A.
By: /s/ BURTON FRENCH
--------------------------------------
Burton French, Vice President
BANK'S ADDRESS:
1717 Main Street, 3rd Floor
Dallas, Texas 75201
Attn: Burton French
ACCEPTED as of the date first written above.
BORROWER:
MEDICALCONTROL, INC.
By: /s/ J. WARD HUNT
--------------------------------------
Name: J. Ward Hunt
------------------------------------
Title: President and CEO
-----------------------------------
BORROWER'S ADDRESS:
8625 King George
Suite 300
Dallas, Texas 75235
LOAN AGREEMENT - Page 14
<PAGE> 1
EXHIBIT 10.21
FIRST AMENDMENT TO
LOAN AGREEMENT
This FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of
March 31, 1999, is made and entered into between BANK ONE, TEXAS, NATIONAL
ASSOCIATION ("Bank"), and MEDICALCONTROL, INC., a Delaware corporation
("Borrower").
RECITALS
A. Bank and Borrower entered into that certain Loan Agreement, dated
September 25, 1998 (the "Loan Agreement").
B. Bank and Borrower desire to amend the Loan Agreement as herein set
forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Capitalized terms used in this Amendment,
to the extent not otherwise defined herein, shall have the same definitions
assigned to such terms in the Loan Agreement, as amended hereby.
ARTICLE II
Amendments to the Loan Agreement
Section 2.01. Amendment to Paragraph 1, Credit Facilities. From and
after the date hereof, paragraph 1 of the Loan Agreement is deleted in its
entirety and in place thereof shall be a new paragraph 1 which shall read as
follows:
"1. CREDIT FACILITIES. Subject to the terms and conditions
set forth in this Loan Agreement and the other agreements, instruments
and documents evidencing, securing, governing, guaranteeing and/or
pertaining to the Loans, as hereinafter defined (collectively,
together with the Loan Agreement, referred to hereinafter as the "LOAN
DOCUMENTS"), Bank hereby agrees to lend to Borrower (a) the amount of
$1,600,000 (the "TERM LOAN") in a single advance on the date hereof,
and (b) (the "LINE OF CREDIT"), on a revolving basis from time to time
during the period commencing on the date hereof and continuing through
the maturity date of the promissory note evidencing this credit
facility from time to time, such amounts as Borrower may request
hereunder; provided, however, the total principal amount outstanding
at any time under the Line of Credit shall not
<PAGE> 2
exceed $400,000 (the Line of Credit and the Term Loan are collectively
referred to herein as the "CREDIT FACILITIES"). Subject to the terms
and conditions hereof, Borrower may borrow, repay and reborrow
hereunder. The sums hereafter advanced under the Loans shall be used
for general working capital purposes.
All advances under the Credit Facilities shall be collectively called
the "Loans." Bank reserves the right to require Borrower to give Bank
not less than one (1) business day's prior notice of each requested
advance under the Line of Credit, specifying (i) the aggregate amount
of such requested advance, (ii) the requested date of such advance,
and (iii) the purpose for such advance, with such advances to be
requested in a form satisfactory to Bank. In addition, Borrower shall
pay to Bank during the term of the Line of Credit an unused fee equal
to .25% per annum quarterly in arrears, of an amount equal to $400,000
less the average outstanding balance under the Line of Credit."
Section 2.02. Amendment to Paragraph 5, Guarantors. From and after the
date hereof, paragraph 5 of the Loan Agreement is deleted in its entirety and
in place thereof shall be a new paragraph 5 which shall read as follows:
"5. GUARANTORS. As a condition precedent to the Bank's
obligation to make the Loans to Borrower, Borrower agrees to cause
MedicalControl Network Solutions, Inc., Diversified Group
Administrators, Inc., ppoONE.com, inc. f/k/a PPO Management Solutions,
Inc., Medical Control Holdings, Inc. and Business Health Companies,
Inc. (whether one or more, the "GUARANTORS") to each execute and
deliver to Bank contemporaneously herewith a guaranty agreement, in
form and substance satisfactory to Bank."
Section 2.03. Amendment to Paragraph 8, Affirmative Covenants. From
and after the date hereof, paragraph 8 of the Loan Agreement is amended by the
addition of new subparagraphs 8 (l) and (m) which shall read as follows:
"(l) Secondary Equity Offering. In the event that Borrower
makes any additional equity offering (excluding an offer of preferred
stock referred to in subparagraph (m) below), all proceeds from such
offering shall be applied to the Loans in such order as Bank may
require.
(m) Preferred Stock Offering. In the event that Borrower
makes any preferred stock offering, the first $500,000 in proceeds
from such offering shall be applied to the Loans in such order as Bank
may require."
Section 2.04. Amendment to Paragraph 9, Negative Covenants. From and
after the date hereof, paragraph 9 of the Loan Agreement is amended by the
addition of a new subparagraph 9 (j) which shall read as follows:
2
<PAGE> 3
"(j) Acquisitions. Acquire (i) all or substantially all of
the assets of any Person, (ii) the assets constituting the business or
a division or operating unit of any Person, or (iii) more than ten
percent (10%) of the capital stock of any Person. As used here,
'Person' means an individual, corporation, limited liability company,
partnership, joint venture, association, trust unincorporated
organization or a government or any agency or political subdivision
thereof."
Section 2.05. Amendment to Paragraph 10, Financial Covenants. From and
after the date hereof, subparagraphs 10 (b), (c), (d), (e) and (f) of the Loan
Agreement are deleted in their entirety and in place thereof shall be new
subparagraphs 10 (b), (c), (d), (e) and (f) which shall read as follows:
"(b) Net Worth. Borrower will maintain, at all times, its
total assets less its total liabilities at not less than $7,700,000
plus one hundred percent (100%) of additional equity contributions.
(c) Debt Service. Borrower will maintain, as of the last day
of each fiscal quarter commencing September 30, 1999, a ratio of (i)
consolidated net income after taxes plus interest expense,
depreciation and amortization, less any capital expenditures, to (ii)
total interest expense and current maturities of long term debt and
long term capital leases (excluding the deferred portion of the
Subordinated Debt), of not less than 1.25 to 1.0. The foregoing
covenant shall be measured from January 1, 1999 on a year to date
basis until December 31, 1999, and on a rolling twelve month basis
thereafter
(d) Funded Debt to Cash Flow. Borrower will maintain, as of
each fiscal quarter end set forth below, a ratio of all outstanding
Senior Funded Debt of Borrower at the such quarter end, to (ii)
consolidated net income after taxes plus interest expense,
depreciation and amortization for the period then ending, of not more
than the ratio set forth opposite such quarter end below.
<TABLE>
<CAPTION>
Quarter End: Ratio:
----------- -----
<S> <C>
June 30, 1999 2.25 to 1.0
September 30, 1999 and each
fiscal quarter end thereafter 2.00 to 1.0
</TABLE>
The foregoing covenant shall be measured from January 1, 1999 on a
year to date basis until December 31, 1999, and on a rolling twelve
month basis thereafter. As used herein, the term "Senior Funded Debt"
means, as of any date, the sum of the following (without duplication):
(i) the aggregate of all indebtedness for money borrowed of Borrower
as of such date, other than current liabilities, (ii) all indebtedness
which would be classified as "funded indebtedness" or "long-term
indebtedness" (or other similar classification) on a consolidated
balance sheet of Borrower prepared as of such date in accordance with
generally accepted accounting principles, (iii) the aggregate of all
indebtedness of
3
<PAGE> 4
Borrower outstanding under any revolving credit or similar agreement
providing for borrowing (and renewals and extensions thereof) over a
period of more than one year, notwithstanding the fact that any such
indebtedness is created within one year of the expiration of such
agreement, and (iv) the amount of all capitalized lease obligations of
Borrower booked in accordance with generally accepted accounting
principles, minus (v) the Subordinated Debt.
(e) Capital Expenditures. Borrower will not make capital
expenditures in excess of $150,000 during any fiscal year.
(f) Current Ratio. As of the end of each fiscal quarter of
Borrower, a ratio of (a) current assets, (including prepaid expenses)
to (b) current liabilities of not less than 1.0 to 1.0"
Section 2.06. Amendment to Paragraph 10, Financial Covenants. From and
after the date hereof, paragraph 10 of the Loan Agreement is amended by the
addition of a new subparagraph 10 (h) which shall read as follows:
"(h) Minimum Earnings. As of each date set forth below,
Borrower shall have earnings plus depreciation, amortization, and
interest expense of not less than the amount set forth opposite such
date below measured from January 1, 1999, on a year to date basis:
<TABLE>
<CAPTION>
Date: Required EBIDA:
----- ---------------
<S> <C>
March 31, 1999 $ 20,000
April 30, 1999 $ 60,000
May 31, 1999 $100,000
June 30, 1999 $160,000"
</TABLE>
Section 2.07. Amendment to Paragraph 11, Reporting Requirements. From
and after the date hereof, paragraph 11 (a) of the Loan Agreement is deleted in
its entirety and in place thereof shall be a new paragraph 11 (a) which shall
read as follows:
"(a) Interim Financial Statements. As soon as available, and
in any event within thirty (30) days after the end of each month, a
consolidated and consolidating balance sheet and income statement of
Borrower as of the end of such month, all in form and substance and in
reasonable detail satisfactory to Bank and duly certified (subject to
year end review adjustments) by the President and/or Chief Financial
Officer of Borrower (i) as being true and correct in all material
aspects to the best of his or her knowledge, (ii) as having been
prepared in accordance with generally accepted accounting principles,
consistently applied, and (iii) as being consistent in all material
respects with the
4
<PAGE> 5
information submitted by Borrower to the U.S. Securities and Exchange
Commission pursuant to its most recent Quarterly Report on Form 10QSB."
Section 2.08. Amendment to Paragraph 12, Events of Default. From and
after the date hereof, paragraph 12 of the Loan Agreement is amended by the
addition of new subparagraphs 12 (j) and (k) which shall read as follows:
"(j) The failure of Borrower, on or before 5:00 p.m. on April
15, 1999, (i) to receive an equity contribution from J. Ward Hunt in
the amount of at least $70,000, and (ii) to deliver to, and pledge to,
Bank the sum of $70,000 as additional as collateral for the Loans.
(k) The failure of Borrower, on or before 5:00 p.m. on April
2, 1999, to deliver to Bank (i) original, executed counterparts of
that certain First Amendment to Loan Agreement between the Bank and
Borrower dated as of March 31, 1999, and all other Loan Documents to
be executed in connection therewith, and (ii) original corporate
resolutions, with secretary's certificates attached, for Borrower and
for each Guarantor who executed any of such Loan Documents, all in
form and substance acceptable to Bank.
(l) The failure of Borrower, within three (3) days of its
receipt thereof, to deliver to Bank as a prepayment on the Term Loan
all of Borrower's federal income tax refund in the approximate amount
of $350,000 expected in June 1999."
ARTICLE III
Covenant Waivers
Section 3.01. Waiver of Certain Financial Covenants. Bank hereby
waives Borrower's compliance with subparagraphs 10 (c), (d), and (f) for the
fiscal quarters of Borrower ending September 30, 1998 and December 31, 1998.
Such waiver is expressly limited as aforesaid and shall not constitute a waiver
of Borrower's compliance with such covenants for any other past or future
period or of any other breach of the Loan Agreement or any other Loan Document.
ARTICLE IV
Conditions Precedent
Section 4.01. Conditions Precedent. The effectiveness of this
Amendment is subject to the satisfaction of the following conditions precedent,
unless specifically waived in writing by Bank:
(a) Borrower shall have executed and delivered to Bank this
Amendment, and such other Loan Documents as Bank may require.
(b) Medical Control Holdings, Inc. shall have executed and
delivered to Bank (i) a Pledge Agreement pledging to Bank all of the
issued and outstanding capital stock of Medical Control Network
Solutions, Inc., Diversified Group Administrators, Inc. and
5
<PAGE> 6
ppoONE.com, inc., and (ii) original stock certificates evidencing all
such stock either endorsed in blank or accompanied by stock powers
endorsed in blank.
(c) Medical Control Network Solutions, Inc. shall have
executed and delivered to Bank (i) a Pledge Agreement pledging to Bank
all of the issued and outstanding capital stock of Business Health
Companies, Inc., and (ii) original stock certificates evidencing all
such stock (save and except Certificate No. 4 that evidences 140
shares pledged to Ralph T. Smith, Douglas L. Elden and Donald R.
Huntington) either endorsed in blank or accompanied by stock powers
endorsed in blank.
(d) Borrower shall have delivered to Bank the sum of $200,000
as a prepayment of the Term Loan.
(e) Borrower shall have provided to Bank reasonable evidence
that J. Ward Hunt has contributed to Borrower not less than $70,000 in
equity within the last fifteen days, which amount shall have been used
to make payments on the promissory notes evidencing the Subordinated
Debt held by Ralph T. Smith, Douglas L. Elden and Donald R.
Huntington.
(f) Borrower shall have delivered to Bank copies of all
original documents and instruments executed in connection with the
Subordinated Debt held by Ralph T. Smith, Douglas L. Elden and Donald
R. Huntington including, without limitation, the promissory notes
evidencing such debt.
(g) Each Guarantor (other than Business Health Companies,
Inc. and Medical Control Holdings, Inc.) shall have executed and
delivered this Amendment.
(h) Each of Business Health Companies, Inc. and Medical
Control Holdings, Inc. shall have executed and delivered to Bank an
Unlimited Guaranty in form and substance acceptable to Bank and
Business Health Companies, Inc. and the other Guarantors (other than
Medical Control Holdings, Inc.) shall have executed and delivered to
Bank an Addendum to Security Agreement to add Business Health
Companies, Inc. as a party to the Security Agreement dated September
25, 1998 executed by the Guarantors (other than Medical Control
Holdings, Inc.).
(i) The representations and warranties contained herein and
in all other Loan Documents shall be true and correct as of the date
hereof as if made on the date hereof.
(j) Except as waived in writing by Bank, no Event of Default
shall have occurred and be continuing and no event or condition shall
have occurred that with the giving of notice or lapse of time or both
would be an Event of Default.
6
<PAGE> 7
(k) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments and other legal matters incident thereto shall be
satisfactory to Bank and its legal counsel in their sole discretion.
ARTICLE V
Ratifications, Representations, and Warranties
Section 5.01. Ratifications by Borrower . The terms and provisions set
forth in this Amendment shall modify and supersede all inconsistent terms and
provisions set forth in the Loan Agreement and, except as expressly modified
and superseded by this Amendment, the terms and provisions of the Loan
Agreement are ratified and confirmed and shall continue in full force and
effect. The Loan Agreement as amended by this Amendment shall continue to be
legal, valid, binding and enforceable in accordance with its terms.
Section 5.02. Renewal and Extension of Security Interests and Liens.
Each of Borrower and each Guarantor hereby renews and affirms the liens and
security interests created and granted in the Loan Documents. Each of Borrower
and each Guarantor agrees that this Amendment shall in no manner affect or
impair the liens and security interests securing the Indebtedness, and that
such liens and security interests shall not in any manner be waived, the
purposes of this Amendment being to modify the Loan Agreement as herein
provided, and to carry forward all liens and security interest securing same,
which are acknowledged by Borrower and each Guarantor to be valid and
subsisting.
Section 5.03. Representations and Warranties. Borrower represents and
warrants to Bank as follows: (i) the execution, delivery and performance of
this Amendment and any and all Loan Documents executed and/or delivered by
Borrower in connection herewith have been authorized by all requisite corporate
action on the part of Borrower and will not violate the articles or bylaws of
Borrower or any agreement to which Borrower is a party; (ii) the
representations and warranties contained in the Loan Agreement as amended
hereby and in each of the other Loan Documents are true and correct on and as
of the date hereof as though made on and as of the date hereof; (iii) no Event
of Default under the Loan Agreement has occurred and is continuing; and (iv)
Borrower is in full compliance with all covenants and agreements contained in
the Loan Agreement, as amended hereby.
ARTICLE VI
Miscellaneous
Section 6.01. Survival of Representations and Warranties. All
representations and warranties made in the Loan Agreement or any other Loan
Document including, without limitation, any Loan Documents furnished in
connection with this Amendment, shall survive the execution and delivery of
this Amendment and the other Loan Documents, and no investigation
7
<PAGE> 8
by Bank or any closing shall affect such representations and warranties or the
right of Bank to rely thereon.
Section 6.02. Reference to Loan Agreement. Each of the Loan Documents
and the Loan Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms
hereof or pursuant to the terms of the Loan Agreement as amended hereby, are
hereby amended so that any reference in such Loan Documents to the Loan
Agreement shall mean a reference to the Loan Agreement as amended hereby.
Section 6.03. Expenses of Bank. Borrower agrees to pay on demand all
reasonable costs and expenses incurred by Bank directly in connection with the
preparation, negotiation and execution of this Amendment and the other Loan
Documents executed pursuant hereto and any and all amendments, modifications,
and supplements thereto, including, without limitation, the costs and fees of
Bank's legal counsel, and all costs and expenses incurred by Bank in connection
with the enforcement or preservation of any rights under the Loan Agreement, as
amended hereby, or any other Loan Documents including, without limitation, the
reasonable costs and fees of Bank's legal counsel.
Section 6.04. Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
SECTION 6.05. APPLICABLE LAW. THIS AMENDMENT SHALL BE DEEMED TO HAVE
BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
Section 6.06. Successors and Assigns. This Amendment is binding upon
and shall inure to the benefit of the parties hereto and their respective
successors, assigns, heirs, executors, and legal representatives, except that
none of the parties hereto other than Bank may assign or transfer any of its
rights or obligations hereunder without the prior written consent of Bank.
Section 6.07. Counterparts. This Amendment may be executed in one or
more counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the
same instrument.
Section 6.08. Effect of Waiver. No consent or waiver, express or
implied, by Bank to or for any breach of or deviation from any covenant,
condition or duty by Borrower, shall be deemed a consent to or waiver of any
other breach of the same or any other covenant, condition or duty.
8
<PAGE> 9
Section 6.09. Headings. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 6.10. Conflicting Provisions. If any provision of the Loan
Agreement as amended hereby conflicts with any provision of any other Loan
Document, the provision in the Loan Agreement shall control.
SECTION 6.11. RELEASE. BORROWER AND EACH GUARANTOR HEREBY ACKNOWLEDGES
THAT NEITHER BORROWER NOR ANY GUARANTOR HAS ANY DEFENSE, COUNTERCLAIM, OFFSET,
CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE
ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF BORROWER'S OR ANY
GUARANTOR'S LIABILITY TO REPAY THE INDEBTEDNESS OR TO SEEK AFFIRMATIVE RELIEF
OR DAMAGES OF ANY KIND OR NATURE FROM BANK. BORROWER AND EACH GUARANTOR HEREBY
VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES BANK, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE
CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND
LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED,
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN
EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AGREEMENT IS
EXECUTED, WHICH BORROWER OR ANY GUARANTOR MAY NOW OR HEREAFTER HAVE AGAINST
BANK, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND
IRRESPECTIVE OR WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
OF LAW OR REGULATIONS, OR OTHERWISE OR ARISE FROM ANY LOAN, INCLUDING, WITHOUT
LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR
RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE, THE EXERCISE OF ANY
RIGHTS AND REMEDIES UNDER THE LOAN DOCUMENTS, AND/OR NEGOTIATION AND EXECUTION
OF THIS AMENDMENT.
SECTION 6.12. ENTIRE AGREEMENT. THIS AMENDMENT, THE LOAN AGREEMENT AND
ALL OTHER LOAN DOCUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH AND PURSUANT
TO THIS AMENDMENT AND THE LOAN AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
9
<PAGE> 10
EXECUTED as of the date first written above.
Bank One, Texas, National Association
By: /s/ BURTON FRENCH
------------------------------------
Burton French, Vice President
MedicalControl, Inc.
By: /s/ ROBERT O. BROOKS
-------------------------------------
Robert O. Brooks, Executive Vice
President and Chief Operating
Officer
CONFIRMATION BY GUARANTORS
Each of the undersigned, MedicalControl Network Solutions, Inc.,
Diversified Group Administrators, Inc. and ppoONE.com,inc. (f/k/a PPO
Management Solutions, Inc.), hereby (i) consents and agrees to the terms hereof
and agrees to be bound by this Amendment, (ii) consents, acknowledges, and
agrees to the execution, delivery, and performance by Borrower of this
Amendment, (iii) acknowledges and agrees that this Amendment does not affect,
diminish, waive, or release its obligations under the Unlimited Guaranty
executed by it on September 25, 1998, or under the Security Agreement executed
by it on September 25, 1998, (iv) ratifies and confirms its obligations
pursuant to such Unlimited Guaranty and such Security Agreement, and (v)
covenants, acknowledges, and agrees that it guaranties the repayment of the
Guaranteed Indebtedness, as provided in such Unlimited Guaranty.
GUARANTORS:
MedicalControl Network Solutions, Inc.
By: /s/ ROBERT O. BROOKS
------------------------------------
Robert O. Brooks, President and
Chief Executive Officer
Diversified Group Administrators, Inc.
By: /s/ DAVID C. BRAMER
------------------------------------
David C. Bramer, President and
Chief Executive Officer
10
<PAGE> 11
ppoONE.com, inc. f/k/a PPO Management
Solutions, Inc.
By: /s/ ROBERT O. BROOKS
------------------------------------
Robert O. Brooks, President and
Chief Executive Officer
11
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
MedicalControl Holdings, Inc., a Delaware corporation
<PAGE> 1
EXHIBIT 23.7
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, 333-47781 and 333-69363).
ARTHUR ANDERSEN LLP
Dallas, Texas
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,420,655
<SECURITIES> 0
<RECEIVABLES> 1,869,694
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,159,459
<PP&E> 1,697,698
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,234,426
<CURRENT-LIABILITIES> 3,906,072
<BONDS> 0
0
0
<COMMON> 41,154
<OTHER-SE> 7,943,299
<TOTAL-LIABILITY-AND-EQUITY> 14,234,426
<SALES> 14,571,673
<TOTAL-REVENUES> 14,571,673
<CGS> 0
<TOTAL-COSTS> 16,466,822
<OTHER-EXPENSES> (150,870)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,604
<INCOME-PRETAX> (1,800,833)
<INCOME-TAX> (612,076)
<INCOME-CONTINUING> (1,188,807)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,188,807)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
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