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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, 1999
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)
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: $15,340,060.
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: As of March 24, 2000: $33,235,040*
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,664,567 shares of Common Stock,
$.01 par value as of March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for 2000 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 $7.125, the last sales price of
the Registrant's common stock as of March 24, 2000, 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,
future products and plans, 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-K filed with the Securities and Exchange Commission.
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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PART I
<S> <C> <C>
Item 1 Description of Business ............................................................. 3
Item 2 Description of Properties ........................................................... 22
Item 3 Legal Proceedings ................................................................... 22
Item 4 Submission of Matters to a Vote of Security Holders ................................. 22
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters ........... 23
Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 7 Financial Statements ................................................................ 25
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25
PART III
Item 9 Directors and Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.................................................... 26
Item 10 Executive Compensation .............................................................. 26
Item 11 Security Ownership of Certain Beneficial Owners and Management ...................... 26
Item 12 Certain Relationships and Related Transactions ...................................... 26
PART IV
Item 13 Exhibits and Reports on Form 8-K .................................................... 26
</TABLE>
IMPULSE(TM) and ppoONE.com(TM) are trademarks of ppoONE.com, inc. All other
trademarks or trade names referred to in this Annual Report are the property of
their respective owners.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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 subsidiaries are
ppoONE.com, inc. ("ppoONE.com"), providing Internet e-health solutions for
preferred provider organizations ("PPO"), MedicalControl Network Solutions, Inc.
("MedicalControl"), providing managed care services primarily through its
preferred provider networks, ValueCheck, Inc. ("ValueCheck"), providing
utilization review and case management, and Diversified Group Administrators,
Inc. ("Diversified"), providing third party administration ("TPA") services.
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
GENERAL
ppoONE.com, using its proprietary application software, database
structures and reports, is an Internet based Application Service Provider (ASP)
delivering enterprise software solutions for PPOs and other healthcare provider
network organizations. ppoONE.com enables such entities and their clients to
manage provider data, contract data and client data, reprice healthcare claims
to reflect negotiated rates and to produce data analyses. During the first
quarter of 1998, ppoONE.com began formally marketing its ASP software and
Internet-based data center services.
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 provides
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. As of January 1, 2000,
ValueCheck was providing service to over 200 employer clients representing
62,000 member lives.
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 250 self-funded benefit plans with
clients ranging from 50 to 4,000 employees. Current total covered lives exceed
90,000 members located in 49 states. In 1998, Diversified entered the
Taft-Hartley and student accident markets.
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 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
It has been estimated that there are over 700,000,000 healthcare claims
repricing transactions per year. Historically, many PPOs and other networks have
developed specialized in-house software applications to reprice claims and
maintain provider data. Such systems are typically expensive, costly to support
and maintain and do not offer flexible and enterprise-wide access to data. Most
of these systems are not designed to meet the need for real-time information or
actions. The widespread adoption of distributed client-server computing has
provided
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organizations with a much greater ability to access and manipulate stored
information but also has created the need for third-party vendors of packaged
software solutions that provide better functionality and reliability than
traditional in-house applications.
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. 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.
Utilization review and case management services are provided by various
companies including companies that specialize in such services as well as PPOs,
TPAs and insurance companies that perform the services as a complement to their
other products. In November 1999, United Health Care, the nation's second
largest health insurer, announced that they would reduce the number of providers
requiring precertification (utilization review). Other HMOs and insurers have
follow suit, which could adversely impact ValueCheck's market opportunity.
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. The stop-loss market has
experienced significant losses recently leading to diminishing capacity and
significantly higher premiums for existing and potential clients. In addition,
some self-insured plans have been unable to obtain affordable stop-loss
coverage, which required the employer to use a fully insured product.
APPLICATION SERVICE PROVIDER AND PPO ENTERPRISE SOFTWARE SERVICES - PPOONE.COM
ppoONE.com is dedicated to providing PPOs with enterprise PPO
administration software and Internet data center services. Currently, ppoONE.com
offers two types of products: (i) its proprietary PPO management software
referred to as IMPULSE(TM) and (ii) ppoONE.com's ASP solution for Internet
claims repricing and PPO data management solutions. Target markets for
ppoONE.com products are PPOs, medical provider groups, insurance carriers, third
party administrators and other managed care companies offering or utilizing
healthcare provider networks. During the spring of 1997, ppoONE.com began
servicing its first client, MedicalControl, and its second client in the fall of
1997, Business Health Companies, Inc., which the Company subsequently purchased
in September 1998. During 1999, ppoONE.com signed several new clients including
a large insurance conglomerate and independent and provider owned PPOs.
ppoONE.com's PPO claims repricing and data management software is a
comprehensive PPO enterprise solution based on a client/server technology
architecture. A new product, expected to be available in the second quarter of
2000, is Internet based and utilizes an n-tiered, scaleable, redundant and
distributed architecture that can support virtually unlimited capacity and
growth. Both platforms employ an Oracle(TM) relational database and
state-of-the-art user interfaces. ppoONE.com's technology allows clients to
reprice claims, perform customer service and manage enterprise PPO data via
Internet access to ppoONE.com's data center. ppoONE.com's products provide
faster response times and require 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.
Among many other state-of-the-art features, ppoONE.com allows the
electronic transmission and receipt of healthcare provider claims. ppoONE.com is
well positioned to assist clients in complying with governmental, HIPAA and HCFA
regulations. ppoONE.com can receive and transmit electronic claims from
facilities and
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physicians which reduces 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 SOLUTION
ppoONE.com intends to continue to redefine and streamline the claims
repricing process and dramatically reduce expenses and improve service for its
clients by providing a high value proposition, an e-health B2B (business to
business) PPO claims repricing solution accessible by both PPOs and payor
organizations. Payors will be able to access ppoONE.com's e-health B2B solution
for (i) web-browser, XML and EDI claims repricing, (ii) network provider
information, (iii) marketing information and (iv) extensive reporting.
ppoONE.com's e-health solution may alter the fundamental industry equation
between payors and PPOs by eliminating significant expense, redundancy, errors
and claims payment delays.
ppoONE.com is leading a revolution in the distribution and information
exchange between healthcare payors and PPOs as the first Application Service
Provider (ASP) solution available via the Internet. ppoONE.com member PPOs are
charged a small up-front installation fee and an ongoing transaction fee based
on claims repricing volumes and optional service usage. For PPOs, ppoONE.com's
ASP product represents a complete enterprise solution as well as a link to
ppoONE.com's e-health B2B claims repricing solution.
Market Size and Revenue Sources
The basic business model calls for ppoONE.com to derive its primary
revenue source from claims repricing transaction fees in addition to other
optional services including reports, implementation fees, custom programming,
directory production, web site hosting and more. The current annual market size
for ppoONE.com's product solution approaches $175,000,000 based upon 700,000,000
claims repricing transactions.
ppoONE.com is projected to process in excess of 10,000,000 claims per
year in 2000, and additional sales may increase volumes. While the primary
revenue source is from claims repricing transaction fees, other revenue
generators include reports, product implementation, custom programming,
professional services and PPO directory production.
PRODUCTS AND SERVICES FOR PAYOR ORGANIZATIONS
The central role and value proposition provided by ppoONE.com is in
service of two primary as well as several secondary constituencies. The most
important services relate to healthcare benefit payor organizations and their
access to and exchange of PPO services, claims repricing information and related
services.
1. ppoONE.com intends to make available to all payor organizations one source,
24x7 Internet access to claims repricing, healthcare provider data
administration, reference information and administrative support.
2. ppoONE.com intends to consolidate and streamline payors interface with all
participating PPOs providing a state-of-the-art, Internet-accessible claims
repricing and administration solution.
Benefits
o Administrative Simplicity and Reduced Costs: Payors will not need to
load, maintain or update PPO data on their adjudication system. All PPO
claims repricing will be achieved through ppoONE.com's e-health B2B
solution.
o Maximize Client/Plan Savings: Payor reduces the frequency of "missed"
discount opportunities due to non-current information or delayed
processing.
o Achieve Superior Client Service and Claim Turnaround: Claims may be
received by payor directly from healthcare provider. PPO repricing lag,
lost/misrouted claims and claim repricing errors are reduced and
immediate claims data capture and payor system claim recognition allows
superior customer service response/assistance. Claims may be repriced
on-line, real time versus a common 5 to 30 day turnaround by the PPO.
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PRODUCTS AND SERVICES FOR PPOS
1. ppoONE.com provides an ASP enterprise software solution for each member PPO
and their client/payors accessible via the Internet.
2. ppoONE.com provides PPOs the capability to support payor-clients with
Internet access, marketing, distribution and repricing services 24 hours a
day, 365 days per year.
Benefits:
o Superior Payor Services and Options: PPO sells payor convenience, simple
administration, reduced payor costs, superior repricing services and
excellent potential claims turnaround.
o Simplify Administration and Payor Service: PPO will be able to load, update
and maintain all network provider demographic and fee schedule data on
ppoONE.com's Internet Data Center - once. This will eliminate the
requirement to distribute/support "n" payors with "n" instances of initial
provider and fee schedule data loads, monthly/quarterly updates, payor
system installations, remote terminals/users, payor training and more.
o State-of-the-Art Technology/System Support: Member PPOs utilize the latest
technology, state-of-the-art administration and repricing system from
ppoONE.com permitting focus on core competencies, i.e., marketing, network
development, provider relations, client and customer services.
o Reduce Technology and Systems Overhead: Reduce or eliminate member PPO
requirement to purchase and maintain PPO administration and repricing
software, hardware and telecommunications network. Through ppoONE.com,
member PPOs gain state-of-the-art information systems, claims outsourcing
options and ability to deliver exceptional client services.
o Reduce Claims Department Costs: Member PPOs reduce operating costs
utilizing ppoONE.com's state-of-the-art repricing and data management
systems achieving highest rates of accuracy and productivity. Additionally,
where affiliate networks are ppoONE.com members, the work associated with
the maintenance of affiliate network provider data and fee schedules can be
eliminated.
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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") preferred provider
organization. The HHPO network currently includes 70 hospitals, over 7,200
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, 1999, MedicalControl had over 428 clients comprising
more than 280,000 employees or plan members and representing over 640,000
covered lives. Through the Company's directly-contracted and affiliate provider
networks, the Company's clients have access to more than 2,300 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, 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 cards, dental PPOs or vision programs.
MedicalControl offers the following types of PPO networks:
MedicalControl Hospital Network -- a network of more than 2,354 acute
care hospitals and 4,516 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 in addition to chiropractors, physical therapists and other
healthcare professionals through both direct agreements and affiliate
network agreements.
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 the American Accreditation HealthCare Commission/URAC accredits
its credentialing process.
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
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31, 1999, the Company processed over 498,000 claims in an average of 1.8
calendar days with an accuracy rate of over 97% for all errors and 97% 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 Internet access to the system, provides faster 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 180 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 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, Montana, New Jersey, North Carolina, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia,
Washington and Wisconsin.
As of December 31, 1999, the approximate number of MedicalControl's
contracted providers was:
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Primary Care Specialists Total
Hospitals Ancillaries Physicians(1) Physicians Physicians
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Directly Contracted 554 1,176 6,301 7,703 15,734
Contracted through Affiliates 1,800 3,340 65,900 99,200 170,240
------------- ------------- ------------- ------------- -------------
Total 2,354 4,516 72,201 106,903 185,974
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</TABLE>
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(1) Primary care physicians include general practitioners, family practitioners,
pediatricians and internal medicine physicians.
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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 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 has
placed 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 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, 1999, 1998 and 1997,
MedicalControl derived 44%, 67% 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.
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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 efficient, basic and cost-effective
utilization review and case management services. In addition, utilization review
and case management is a complementary product for PPO and TPA services.
ValueCheck products can be sold to the same customer and ValueCheck adds value
to the PPO and TPA offering. 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 an 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. 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 treating 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 treating 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.
MEDADVICE 2001 CLINICAL GUIDELINES: These guidelines provide on-line
diagnosis specific review guidelines that are used by clinical staff
to support medical review decisions. They were developed by the
vendor's research and development team and are thoroughly reviewed and
approved by the vendor's medical director and physician panel prior to
implementation.
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
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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.
ValueCheck's 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. Diversified provides complete
benefit plan review, design and administration services to administer
comprehensive employee benefit programs and risk management activities.
Diversified currently administers over 250 self-funded benefit plans fully
insured with clients ranging from 50 to 4,000 employees. Current total covered
lives exceed 90,000 members located in 49 states. Diversified administers
fully-insured student accident policies covering 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.
The stop-loss market has experienced significant losses recently
leading to diminishing capacity and significantly higher premiums for existing
and potential clients. In addition, some self-insured plans have been unable to
obtain affordable stop-loss coverage, which required the employer to use a
fully-insured product.
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 owned 50% of the joint venture and shared equally in revenues and expenses.
ETAS introduced a fully-insured product, the Initial Advantage, in July 1997.
This product was designed for small and medium-sized employer groups in eastern
Tennessee. The insurance company underwriting these products terminated the
program in 1999. All groups will replace the program by July 31, 2000. Revenue
from this product in 1999 was approximately $275,000. Due to the termination of
this program, the ETAS partnership was dissolved in 1999.
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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 were 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 18 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 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, 7 utilization review firms, 36 managed care or
PPO networks, 2 employee assistance programs, 2 subrogation firms, 9
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 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
Diversified 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
was completed in 1999. 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 and assured year 2000 compliance. The
full array of standard as well as ad hoc reporting capabilities is available to
Diversified's clients making it 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.
GOVERNMENT REGULATION AND LEGISLATION
To date, PPOs that are not part of an insured product are not highly
regulated. 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 at
requiring all businesses to offer health insurance coverage to their employees.
It is uncertain what additional healthcare reform legislation will
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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 affect 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
that 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, permits employers 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 Diversified.
.Employers viewed the ability to underwrite their own health claims as a result
of ERISA as an opportunity to better control health costs. Regulation of such
self-insured benefit plans falls under the auspices of the United States
Department of Labor, which has strict, enforceable guidelines relative to the
operation of TPAs in the administration of such plans. In addition, TPAs are
subject to licensing and regulation on the state level. Typically, the only
state requirements 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 California, Illinois, Kentucky, Pennsylvania,
Tennessee, Texas and West Virginia and has filed for ERISA exemptions where
required. Diversified is in the process of filing for a New Mexico license.
Each state's government regulates the utilization review and case
management industry and regulations vary from state to state. ValueCheck is
licensed in the State of Texas and has either received or applied for licensure
in all states that require utilization review licensure or certification. In
October 1999, ValueCheck was awarded a full 2-year accreditation for Health
Utilization Management Standards by URAC.
The Company anticipates that federal and state legislatures will
continue to review and consider alternative healthcare solutions and payment
methods. The Company is 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, the Company is unable to determine the favorable or
unfavorable impact, if any, such initiatives would have on its operations.
COMPETITION
ppoONE.com
The market for network software solutions is competitive and subject to
rapid change. Competitors, many of which have substantially greater financial
resources than ppoONE.com, vary in size and in the scope of the products and
services they offer. ppoONE.com encounters competition from a number of sources
including other application software companies, PPO and TPA software vendors and
management information systems departments of customers and potential customers.
ppoONE.com expects to experience additional competition from other established
and emerging companies. Increased competition, whether from other products or
new technologies, could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations.
ppoONE.com expects that it will face increasing pricing pressures from
its current competitors and new market entrants. Current major competitors
include, but not limited to, NetworX, Healtheon and Nichols TXEN. Price
competition could adversely affect ppoONE.com's ability to obtain new long-term
contracts and renewals of existing long-term contracts on terms favorable to
ppoONE.com. Any reduction in the price of ppoONE.com's products could materially
adversely affect the Company's business, financial condition and results of
operations. Some of ppoONE.com's current competitors and many of ppoONE.com's
potential competitors have significantly greater financial, technical, marketing
and other resources than ppoONE.com and broader integrated product lines. As a
result, they may have competitive advantages over ppoONE.com including the
ability to respond more quickly than ppoONE.com to new or emerging technologies
and changes in customer requirements and the ability to devote greater resources
to the development, promotion and sale of their products.
New competitors or alliances among competitors may emerge and rapidly
gain significant market share. ppoONE.com's customers, most of which have
significantly greater financial and marketing resources than ppoONE.com, may
compete with ppoONE.com in the future or otherwise discontinue their
relationships with or
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support of ppoONE.com. ppoONE.com may not be able to compete successfully
against current and future competitors and competitive pressures faced by
ppoONE.com may materially adversely affect its business, financial condition and
results of operations.
MANAGED CARE AND THIRD PARTY ADMINISTRATION SERVICES
Some of the Company's current competitors and many of the Company's
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company and broader integrated product lines. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company and may
possess marketing advantages due to their ability to market integrated suites of
related products that are vital to the customer's computing infrastructure. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. Also, the
Company relies upon its customers to provide data, expertise and other support
for the ongoing updating of the Company's models. The Company's customers, most
of which have significantly greater financial and marketing resources than the
Company, may compete with the Company in the future or otherwise discontinue
their relationships with or support of the Company. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
The Company competes 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. The Company competes with providers of all of these products, many of
which have substantially greater financial resources than the Company.
Management believes that a limited number of companies provide all of the
services offered by the Company within the geographic areas in which it
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 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.
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UTILIZATION REVIEW AND CASE MANAGEMENT
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 per employee per month. Smaller
vendors fall into several categories including software vendors, disease and
demand management specialty boutiques that have entered the utilization review
business, and turnkey 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, when integrated with the MedicalControl
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.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
There can be no assurance that patents will be issued with respect to potential
future patent applications or that the Company's potential future patents will
be upheld as valid or will prevent the development of competitive products. The
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. As
part of its confidentiality procedures, the Company generally enters into
ownership acknowledgements and non-disclosure agreements with its employees and
independent contractors and nondisclosure agreements with its distributors,
corporate partners and licensees, and limits access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. In addition, to ensure that customers
will not be adversely affected by an interruption in the Company's business, the
Company has placed source code for one of its products into escrow, which may
increase the likelihood of misappropriation or other misuse of the Company's
intellectual property.
As the number of software products increases and the functionality of
these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend and could
materially and adversely affect the Company's business, financial condition and
results of operations.
During 1999 and 1998, the Company incurred approximately $307,000 and
$243,000 of software development costs, respectively, all of which were expensed
as incurred.
CUSTOMERS
For the fiscal years ended December 31, 1999, 1998 and 1997, the
National Rural Electric Cooperative Association ("NRECA") accounted for
approximately 10.6%, 9.6% and 9.4%, respectively, of the consolidated net
revenues of the Company. The loss of NRECA or any principal customers could have
a material adverse effect on the Company and its business. PPO revenues derived
from the percentage of savings pricing methodology decreased by approximately
$1,000,000 due to loss of clients, decrease in utilization and clients changing
to a PEPM rate. The percentage of savings pricing methodology yields higher
returns for the Company. In addition, Diversified's revenues relating to its
fully-insured product will cease by July 31, 2000. Revenues from that product in
1999 were $275,000. Management believes that the Company will be able to replace
this revenue loss in 2000 by increased penetration of other current clients, new
PPO and TPA business development, marketing of its PPO repricing software
business and new utilization review and case management business as well as
through potential acquisitions.
EMPLOYEES
As of December 31, 1999, the Company and its wholly owned subsidiaries
had 202 full-time employees and 1 part-time employee. The Company believes that
it has a good relationship with its employees. None of the Company's employees
are covered by collective bargaining agreements.
The Company's success depends to a significant degree upon the
continued service of members of the Company's senior management and other key
research, development, sales and marketing personnel. Accordingly, the loss of
any of the Company's senior management or key research, development, sales or
marketing personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. Only a small number of
employees have employment agreements with the Company, and there can be no
assurance that such agreements will result in the retention of these employees
for any significant period of time. In addition, the untimely loss of a member
of the management team or a key employee of a business acquired by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations, particularly if such loss occurred before
the Company has had adequate time to familiarize itself with the operating
details of that business and provide a suitably experienced replacement for such
employee. In the past, the Company has experienced difficulty in recruiting a
sufficient number of qualified sales and technical employees. In addition,
competitors may attempt to recruit the Company's key employees. There can be no
assurance that the Company will be successful in attracting, assimilating and
retaining such personnel. The failure to attract, assimilate and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
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RISK FACTORS
This report contains forward-looking statements that 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, statements regarding new products 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.
DEPENDENCE ON KEY CLIENTS; LOSS OF REVENUES
The Company has contracts with several key clients that account for a
substantial portion of its total revenues. The Company's largest client
accounted for approximately 10.6%, 9.6% and 9.4%, respectively, of the Company's
net revenues for the fiscal years ended December 31, 1999, 1998 and 1997. The
loss of any principal customer could have a material adverse effect on the
operating results of the Company.
PPO revenues derived from the percentage of savings pricing methodology
decreased by approximately $1,000,000 due to loss of clients, decrease in
utilization and clients changing to a PEPM rate. The percentage of savings
pricing methodology yields higher returns for the Company. In addition,
Diversified's revenues relating to its fully-insured product will cease by July
31, 2000. Revenues from that product in 1999 were $275,000. Although we cannot
assure you, we believe we will be able to replace this revenue loss in 2000 by
increased penetration of other current clients, new PPO and TPA business
development, marketing of its PPO repricing software business and new
utilization review and case management business as well as through potential
acquisitions.
COMPETITION
ppoONE.com
The market for network software solutions is competitive and subject to
rapid change. Competitors, many of which have substantially greater financial
resources than ppoONE.com, vary in size and in the scope of the products and
services they offer. ppoONE.com encounters competition from a number of sources
including other application software companies, PPO and TPA software vendors and
management information systems departments of customers and potential customers.
ppoONE.com expects to experience additional competition from other established
and emerging companies. Increased competition, whether from other products or
new technologies, could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations.
ppoONE.com expects that it will face increasing pricing pressures from
its current competitors and new market entrants. Current major competitors
include, but not limited to, NetworX, Healtheon and Nichols TXEN. Price
competition could adversely affect ppoONE.com's ability to obtain new long-term
contracts and renewals of existing long-term contracts on terms favorable to
ppoONE.com. Any reduction in the price of ppoONE.com's products could materially
adversely affect the Company's business, financial condition and results of
operations. Some of ppoONE.com's current competitors and many of ppoONE.com's
potential competitors have significantly greater financial, technical, marketing
and other resources than ppoONE.com and broader integrated product lines. As a
result, they may have competitive advantages over ppoONE.com including:
o the ability to respond more quickly than ppoONE.com to new or emerging
technologies and changes in customer requirements; and
o the ability to devote greater resources to the development, promotion
and sale of their products.
New competitors or alliances among competitors may emerge and rapidly
gain significant market share. ppoONE.com's customers, most of which have
significantly greater financial and marketing resources than ppoONE.com, may
compete with ppoONE.com in the future or otherwise discontinue their
relationships with or support of ppoONE.com. ppoONE.com may not be able to
compete successfully against current and future competitors and competitive
pressures faced by ppoONE.com may materially adversely affect its business,
financial condition and results of operations. See "Description of Business -
Competition."
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MANAGED CARE AND THIRD PARTY ADMINISTRATION SERVICES
Some of the Company's current competitors and many of the Company's
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company and broader integrated product lines. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company and may
possess marketing advantages due to their ability to market integrated suites of
related products that are vital to the customer's computing infrastructure. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. Also, the
Company relies upon its customers to provide data, expertise and other support
for the ongoing updating of the Company's models. The Company's customers, most
of which have significantly greater financial and marketing resources than the
Company, may compete with the Company in the future or otherwise discontinue
their relationships with or support of the Company. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
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 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.
UTILIZATION REVIEW AND CASE MANAGEMENT
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
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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 per employee per month. Smaller
vendors fall into several categories including software vendors, disease and
demand management specialty boutiques that have entered the utilization review
business, and turnkey 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, when integrated with the MedicalControl
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 SALES CYCLE FOR PPOONE.COM PRODUCTS IS LENGTHY AND UNPREDICTABLE
Due in part to the business-critical nature of ppoONE.com's
applications, potential customers perceive high risk in connection with adoption
of ppoONE.com's products. As a result, customers have been cautious in making
decisions to acquire ppoONE.com's products. In addition, because the purchase of
ppoONE.com's products typically involves a significant commitment of capital and
may involve shifts by the customer to a new software platform, delays in
completing sales can arise while customers complete their internal procedures to
approve large capital expenditures and test and accept new technologies that
affect key operations. For these and other reasons, the sales cycle associated
with the purchase of ppoONE.com's products is typically lengthy, unpredictable
and subject to a number of significant risks over which ppoONE.com has little or
no control, including customers' budgetary constraints and internal acceptance
reviews. The sales cycle associated with the licensing of ppoONE.com's products
can typically range from 60 days to 18 months. As a result of the length of the
sales cycle and the typical size of customers' orders, ppoONE.com's ability to
forecast the timing and amount of specific sales is limited. A lost or delayed
sale could have a material adverse effect on our business, financial condition
and results of operations.
PPOONE.COM'S NEW PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE
The market for network software solutions is still emerging. The rate
at which businesses have adopted ppoONE.com's type products has varied
significantly and ppoONE.com expects to continue to experience such variations
with respect to its products in the future. ppoONE.com has introduced products
for the PPO markets. The Company has recently announced its new Internet-based
product currently under development and national clearinghouse concept. To date,
none of its products has achieved any significant degree of market acceptance,
and such products may never be widely accepted. Although businesses in
ppoONE.com's target markets have recognized the advantages of using network
software solutions to automate its processes, many have developed systems
internally rather than licensing them from outside vendors. The markets for
ppoONE.com's products may not continue to develop, and ppoONE.com's products may
not be accepted. If the markets for ppoONE.com's current or proposed products
fail to develop, or develop more slowly than anticipated, ppoONE.com's sales
would be negatively impacted, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
PPOONE.COM MUST KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES
In the markets served by ppoONE.com, technology changes rapidly and
computer hardware, network operating systems, programming tools, programming
languages, operating systems and database technology are constantly being
improved. ppoONE.com's success will depend upon its ability to continue to
develop and maintain competitive technologies, enhance its current products and
develop, in a timely and cost-effective manner, new products that meet changing
market conditions. In particular, ppoONE.com must respond to evolving customer
needs, new competitive product offerings, emerging industry standards and
changing technology. For example, the rapid growth of the Internet environment
creates new opportunities, risks and uncertainties for businesses, such as
ppoONE.com, which develop software solutions that now must be designed to
operate in Internet environments. ppoONE.com may not be able to develop and
market, on a timely basis, or at all, product enhancements or new products that
respond to changing technologies. (ppoONE.com has previously experienced
significant delays in the development and introduction of new products and
product enhancements, primarily due to capital resource
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constraints as well as difficulties with model development, which has in the
past required multiple iterations, difficulties with adapting to particular
operating environments. The length of these delays has varied depending upon the
size and scope of the project and the nature of the problems encountered.) Any
significant delay in the completion of new products, or the failure of such
products, if and when installed, to achieve any significant degree of market
acceptance, would have a material adverse effect on the Company's business,
financial condition and results of operations. Any failure by ppoONE.com to
anticipate or to respond adequately to changing technologies, or any significant
delays in product development or introduction, could cause customers to delay or
decide against purchases of ppoONE.com's products and would have a material
adverse effect on the Company's business, financial condition and results of
operations.
PPOONE.COM DERIVES SUBSTANTIAL REVENUES FROM ONE PRODUCT
ppoONE.com currently has two products that accounts for all of
ppoONE.com's total revenues. ppoONE.com expects that its current products will
continue to account for a substantial portion of ppoONE.com's total revenues for
the foreseeable future. The quality and timely introduction of future product
enhancements and competition will affect continued market acceptance of its
current products. Demand for, or use of, its current product could decline as a
result of competition, risks to self insured industry, technological change,
saturation of market demand, industry consolidation or other factors. Decline in
demand for its current products would result in decreased revenues, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PPOONE.COM MUST PROTECT ITS INTELLECTUAL PROPERTY
ppoONE.com relies on a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
ppoONE.com also seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. Despite ppoONE.com's measures to protect confidentiality of
intellectual property, it may be possible for a third party to copy or otherwise
to obtain and use ppoONE.com's products or technology without authorization, or
to develop similar technology independently. Patents may not be issued with
respect to ppoONE.com's future patent applications and ppoONE.com's future
patents may not be upheld as valid or prevent the development of competitive
products. In addition, to ensure that customers will not be adversely affected
by an interruption in ppoONE.com's business, ppoONE.com places source code for
certain of its products into escrow, which may increase the likelihood of
misappropriation or other misuse of ppoONE.com's intellectual property. See
"Description of Business - Intellectual Property and Other Proprietary Rights."
The Company's business, financial condition and results of operations
would be materially and adversely affected. As the number of software products
increases and the functionality of these products further overlaps, ppoONE.com
believes that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend and could materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- - Intellectual Property and Other Proprietary Rights."
PPOONE.COM'S PRODUCTS ARE COMPLEX AND ARE VULNERABLE TO PRODUCT DEFECTS AND
PRODUCT LIABILITY CLAIMS
Software products as complex as those offered by ppoONE.com often
contain undetected errors or failures when first introduced or as new versions
are released. As ppoONE.com develops new products that operate in new
environments, such as the Internet, the possibility for program errors and
failures may increase due to factors such as the use of new technologies or the
need for more rapid product development that is characteristic of the Internet
market. Despite pre-release testing by ppoONE.com and by current and potential
customers, there still may be errors in new products, even after post-testing
distribution. The occurrence of errors could result in delay in, or failure to
achieve, market acceptance of ppoONE.com's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although ppoONE.com's license agreements with its customers
typically contain provisions designed to limit ppoONE.com's exposure to
potential product liability claims, it is possible that such limitation of
liability provisions may not be effective as a result of existing or future laws
or judicial decisions. Because ppoONE.com's products are used in
business-critical applications, any errors or failures in such products may give
rise to substantial product liability claims, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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GOVERNMENT REGULATION AND HEALTHCARE REFORM
To date, PPOs that are not part of an insured product are 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 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. Such proposed legislation is primarily aimed at the practices of HMOs
but could affect the operations expense structure of PPOs as well. 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, permits employers 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 California, Illinois, Kentucky, Pennsylvania, Tennessee, Texas, and
West Virginia and has filed for ERISA exemptions where required. Diversified is
in the process of filing for a New Mexico license.
Each state's regulates the utilization review and case management
industry and regulations vary from state to state. ValueCheck is licensed in the
State of Texas and has either received or applied for licensure in all states
that require utilization review licensure or certification. In October 1999,
ValueCheck was awarded a full 2-year accreditation for Health Utilization
Management Standards by URAC.
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 PPO contracts, including the contracts with the
Company's major clients, permit cancellation upon 30 to 90 days' notice.
Additionally, the Company's PPO and TPA 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; Loss of Revenues." PPO
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revenues derived from the percentage of savings pricing methodology decreased by
approximately $1,000,000 due to loss of clients, decrease in utilization and
clients changing to a PEPM rate. The percentage of savings pricing methodology
yields higher returns for the Company. 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.
THE COMPANY MUST RECRUIT AND RETAIN QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the
continued service of members of the Company's senior management and other key
research, development, sales and marketing personnel. Accordingly, the loss of
any of the Company's senior management or key research, development, sales or
marketing personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. Only a small number of
employees have employment agreements with the Company, and these agreements may
not result in the retention of these employees for any significant period of
time. We have experienced difficulty in recruiting a sufficient number of
qualified sales and technical employees. In addition, competitors may attempt to
recruit key employees. We may not be successful in attracting, assimilating and
retaining such personnel. The failure to attract, assimilate and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Description of Business --
Employees."
MANAGEMENT INFORMATION SYSTEMS; PROPRIETARY TECHNOLOGY
Our management information systems are critical to our operations
because the information generated allows 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.
CONTROL OF THE COMPANY
Currently, The Answer Partnership, Ltd. owns 2,696,157 shares, or 58%,
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 effect 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.
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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 SmallCap 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, 1999 9 5/8 7 3/8
June 30, 1999 9 3/8 7 3/8
September 30, 1999 8 3/4 6 3/4
December 31, 1999 8 3/4 5 3/4
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
</TABLE>
The over-the-counter quotations set forth herein reflect inter-dealer
prices without retail mark-up, markdown or commission and may not represent
actual transactions.
(b) As of March 23, 2000, there were approximately 400 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FISCAL YEAR ENDED DECEMBER 31, 1999, COMPARED TO DECEMBER 31,1998
Net revenues for 1999 were up $768,000 or 5% to $15,340,000 from
$14,572,000 in 1998. PPO revenues increased approximately $691,000 for the year
primarily due to acquired BHC revenues, which were in the prior year for only
the last four months of 1998, reduced by lower Dallas PPO revenues of $920,000,
primarily because of lost percentage of savings business, and lower large claim
negotiation revenues beginning in 1999 when this activity was outsourced. TPA
revenues decreased approximately $270,000 for the year primarily due to the sale
of a division of the TPA subsidiary sold effective August 1, 1999 and lost
customers in the first nine months of 1999 which were not completely offset by
revenues from new business.
The Company reported a net loss of $1,556,000 or $.35 per share for
1999 compared with a net loss of $1,189,000 or $.30 per share in 1998. The loss
in 1999 included the $1,225,000 loss from the sale of a division of the TPA
subsidiary, reduced by a deferred tax benefit of $441,000 resulting in a net
loss of $784,000, or $.18 per share. 1998 was impacted by post acquisition
charges of $648,000 associated with the BHC acquisition. These charges consisted
of a $483,000 write-off of certain capitalized software development costs,
$125,000 of special bonuses related to the acquisition and $40,000 of severance
related costs.
Salaries and wages increased $454,000 for 1999, approximately a 5%
increase over 1998. Organizational restructuring during the first quarter of
1999 resulted in PPO personnel cost savings but there was an overall increase as
the result of the BHC acquisition, the systems conversion efforts and the
Harrisburg acquisition in the TPA.
Other operating expenses increased less than 1% for the year, as
compared with 1998 as the result of cost cutting measures adopted beginning in
the first quarter of 1999.
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Depreciation and amortization declined approximately $172,000 for 1999,
because of the Company's write-off of capitalized software development costs in
September 1998.
Other income (expense) declined for the year from income of
approximately $94,000, primarily interest income, to expense of approximately
$91,000, mainly as the result of interest expense on debt incurred to acquire
BHC.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $681,000 at
December 31, 1999, compared with $253,000 at December 31, 1998. Unrestricted
cash and cash equivalents were $641,000 at December 31, 1999, compared with
$1,113,000 at December 31, 1998. Cash provided by operations during 1999 was
approximately $107,000 compared with cash used in operations of approximately
$197,000 during 1998.
Capital expenditures for the purchase of tangible property and
equipment were approximately $235,000 for the twelve months ended December 31,
1999. These expenditures were primarily for data processing equipment for the
Company's TPA operations and for leasehold improvements in the ppoONE.com and
ValueCheck operations.
Effective September 1, 1998, a wholly-owned subsidiary of the Company
purchased BHC for approximately $4,600,000 plus liabilities assumed of $264,138
and accrued acquisition costs of $150,000. The purchase consideration consisted
of $2,150,000 cash, an aggregate of $1,000,000 in subordinated convertible notes
to the previous shareholders of BHC and common stock of the Company valued at
approximately $1,422,000. In connection with the acquisition, the Company
obtained bank financing in the form of a $1,600,000 term loan which bears
interest at the bank's prime rate plus 1% (9.5% at December 31, 1999) and is
payable in equal monthly principal installments of $26,667 plus interest. The
8.5% convertible seller notes were payable in quarterly principal installments
of $50,000 plus interest through October 2003 and were convertible into common
stock of the Company at a conversion rate of $5.25 per share. On July 6, 1999,
the remaining principal balance of $850,000 of convertible seller notes was
converted into 161,903 shares of the Company's common stock.
At December 31, 1999, the Company had no outstanding borrowings under
its revolving line of credit arrangement. This credit facility, secured by
accounts receivable, allows for maximum borrowings of $400,000 and bears
interest at the bank's prime rate plus 1.25% (9.75% at December 31, 1999).
In March, May and September 1999, the Company restructured certain
covenants and other terms of the bank agreement. Under the revised terms, the
Company made principal reductions of $200,000 on March 31, 1999, $50,000 on June
15, 1999, $147,000 from a portion of the proceeds from the sale of 38,000 shares
of the Company's common stock for $294,500 on August 16, 1999 and $407,000 on
August 18, 1999 paid with the proceeds from an income tax refund. The revised
term note includes covenants which impose minimum requirements for net income,
stockholders' equity and working capital, and is secured by a pledge of certain
shares of the Company's wholly-owned subsidiaries. Concurrently, maximum
borrowings under the Company's revolving credit facility were reduced from
$500,000 to $400,000. As of December 31, 1999, the Company was not in compliance
with certain debt covenants and, in March 2000, it received the necessary
waivers.
Management believes that cash flows from operations, cash on hand, and
the borrowing capacity under the Company's line of credit or otherwise will be
sufficient to fund liquidity needs and capital requirements for the fiscal year
1999. During the first quarter of 1999, the Company eliminated certain employee
positions and reduced certain other expenses that resulted in approximately
$70,000 in salary and other cost savings per month.
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 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. No major problems were encountered
with the exception of IT systems used in providing TPA services. Beginning in
1996, the TPA started converting its clients from an operating system that was
not Year 2000 compliant to a current Year 2000 compliant claims processing
system operated in the software vendor's data center. Such conversion took
longer than expected
24
<PAGE> 25
but now is completed. The cost to the Company was approximately $1,000,000 in
non-recurring expenses over the past four years.
The Company's primary PPO IT systems and applications have been
developed and placed into production within the past twenty-four months.
Accordingly, such systems and applications were developed employing contemporary
software tools to be Year 2000 compliant from their initial design phase.
Management used best efforts to inventory and evaluate all non-essential
software programs and hardware used in the Company's business. Non-compliant
systems were replaced, modified or outsourced.
With regard to non-IT systems, such as general office security systems
and phone systems, the Company evaluated such systems and has remediated and
upgraded the systems so that they now are compliant. The expenditures related to
these activities approximated $15,000.
Other than the system conversion in the TPA mentioned above, direct
expenditures associated with Year 2000 issues, excluding costs associated with
the development of the underlying core IT systems, have been immaterial to date
and have been funded through the Company's normal IT operations budget.
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 for the 1999 Financial Statements ................................... F-1
Report of Independent Public Accountants for the 1998 Financial Statements.................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 ......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999 and 1998 ............................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 .......................................................................... F-6
Notes to Consolidated Financial Statements ................................................................... F-7
</TABLE>
The Financial Statements are located after the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is no required disclosure for this Item.
25
<PAGE> 26
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, 1999, 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, 1999, 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, 1999, the end of
the year covered by this Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item is incorporated by reference
from the Company's definitive Proxy Statement, which involves, among other
things, the election of the Board of Directors, to be filed pursuant to
Regulation 14A and which the Company intends to file with the Securities and
Exchange Commission not later than 120 days after December 31, 1999, 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 Company - 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 Company - 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.
26
<PAGE> 27
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.
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 Form of Agreement by and between the Company and each of its directors and
officers - incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.
10.11 Commercial Lease, dated March 1, 1993, by and among Diversified and David
C. and Janice L. Bramer - incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
10.12 Letter Agreement, dated September 29, 1994, by and between the Company and
David C. Bramer - incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
10.13 Transfer Agreement, dated as of January 1, 1998, by and among the Company,
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 the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
10.14 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 the Company's Special Report on Form 8-K filed October 9, 1998.
10.15 Employment, Confidentiality and Non-Competition Agreement, dated September
25, 1998, by and among MedicalControl Network Solutions, Inc., the Company and
Donald Richard Huntington - incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
10.16 Employment, Confidentiality and Non-Competition Agreement, dated September
25, 1998, by and among MedicalControl Network Solutions, Inc., the Company and
Ralph T. Smith - incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998.
10.17 Loan Agreement, dated September 25, 1998, by and between the Company and
Bank One, Texas, N.A. - incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1998.
10.18 First Amendment to Loan Agreement, dated as of March 31, 1999, by and
between Bank One, Texas N.A. and the Company - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
27
<PAGE> 28
10.19 Second Amendment to Loan Agreement, dated as of May 15, 1999, by and
between Bank One, Texas N.A. and the Company.
10.20 Third Amendment to Loan Agreement, dated as of September 25, 1999, by and
between Bank One, Texas N.A. and the Company.
10.21 Asset Purchase Agreement, dated July 30, 1999, by and between Diversified
Group Administrators, Inc. and Group Resources, Inc. - incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999.
10.22 Employee Incentive Stock Option Plan.
10.23 Non-Employee Director Stock Compensation Plan.
10.24 Employment Agreement dated January 1, 1998, by and between PPO Management
Solutions, Inc. (now known as ppoONE.com) and Patrick W. Kennedy.
10.25 First Amendment to Employment Agreement dated June 24, 1999 by and between
ppoONE.com, inc. and Patrick W. Kennedy.
21 Subsidiaries of the Company, incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
23.1 Consent of Grant Thornton LLP, independent public accountants.
23.2 Consent of Arthur Andersen LLP, independent public accountants.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. The Company filed a Current Report Form 8-K on
October 20, 1999 regarding a change in accountants.
28
<PAGE> 29
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 29, 2000 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 29, 2000
- ------------------------------------ and Chairman of the Board of Directors
John Ward Hunt (principal executive officer)
/s/ Bob E. Buddendorf Senior Vice President and Chief Financial March 29, 2000
- ------------------------------------ Officer (principal accounting officer)
Bob E. Buddendorf
/s/ Frank M. Burke, Jr. Director March 29, 2000
- ------------------------------------
Frank M. Burke, Jr.
/s/ William L. Amos, Jr., M. D. Director March 29, 2000
- ------------------------------------
William L. Amos, Jr., M.D.
/s/ D. Samuel Coats Director March 29, 2000
- ------------------------------------
D. Samuel Coats
/s/Donald Richard Huntington Director March 29, 2000
- ------------------------------------
Donald Richard Huntington
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MedicalControl, Inc.
We have audited the accompanying consolidated balance sheet of MedicalControl,
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MedicalControl,
Inc. and subsidiaries as of December 31, 1999, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
GRANT THORNTON, LLP
Dallas, Texas
February 18, 2000 except for Note 8, as to which the date is March 29, 2000
F-1
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors of MedicalControl, Inc.:
We have audited the accompanying consolidated balance sheet of MedicalControl,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statement of operations, stockholders' equity, and cash
flows for the year 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
generally accepted in the United States. 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 the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 31, 1999
F-2
<PAGE> 32
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 640,803 $ 1,112,653
Restricted cash 313,665 308,002
Accounts receivable - trade, net of allowance
for doubtful accounts of $156,000 and $119,000
at December 31,1999 and December 31, 1998, respectively 1,395,536 1,312,043
Accounts receivable - premium 482,420 466,980
Accounts receivable - other 96,317 90,671
Income tax refundable 300,093 472,691
Prepaid expenses and other current assets 312,049 227,391
Deferred income taxes 235,169 169,028
----------- -----------
Total current assets 3,776,052 4,159,459
NOTE RECEIVABLE - OFFICER, including accrued interest 448,328 421,175
RECEIVABLE FROM SALE OF DIVISION 300,000 --
PROPERTY AND EQUIPMENT, NET 1,544,279 1,697,698
GOODWILL, NET 6,019,463 7,772,833
INTANGIBLE AND OTHER ASSETS, NET 4,402 97,991
DEFERRED INCOME TAXES 368,961 85,270
----------- -----------
TOTAL ASSETS $12,461,485 $14,234,426
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 842,266 $ 916,826
Accounts payable - premium 796,084 774,982
Accrued liabilities 1,044,803 773,749
Borrowings under bank line of credit -- 325,000
Current portion of long-term debt 411,970 1,115,515
----------- -----------
Total current liabilities 3,095,123 3,906,072
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 218,719 1,554,484
Deferred gain on sale of option on real estate 698,417 789,417
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.10 par; 4,000,000
shares authorized, no shares issued or outstanding -- --
Common stock - $.01 par: 8,000,000 shares
authorized, 4,625,579 and 4,115,409 issued
in 1999 and 1998, respectively 46,256 41,154
Additional paid-in capital 8,225,281 6,210,002
Retained earnings 177,689 1,733,297
----------- -----------
Total stockholders' equity 8,449,226 7,984,453
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,461,485 $14,234,426
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 33
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NET REVENUES $ 15,340,060 $ 14,571,673
------------ ------------
OPERATING EXPENSES
Salaries and wages 9,756,187 9,302,168
Other operating expenses 5,721,607 5,690,897
Depreciation and amortization 653,948 825,659
Post acquisition charges -- 648,098
------------ ------------
Total operating expenses 16,131,742 16,466,822
------------ ------------
LOSS FROM OPERATIONS (791,682) (1,895,149)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (181,878) (56,604)
Investment income 87,263 121,479
Loss on sale of division (1,225,000) --
Other income 3,832 29,391
------------ ------------
Total other income (expense) (1,315,783) 94,266
------------ ------------
LOSS BEFORE INCOME TAXES (2,107,465) (1,800,883)
Income tax benefit (551,857) (612,076)
------------ ------------
NET LOSS $ (1,555,608) $ (1,188,807)
============ ============
Basic and diluted loss per share $ (0.35) $ (0.30)
============ ============
Weighted average common shares outstanding 4,389,605 3,900,439
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 34
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock
--------------------------
Additional Total
Shares Paid-in Retained Treasury Stockholders'
Outstanding Amount Capital Earnings Stock Equity
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 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
Net Loss -- -- -- (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
Issuance of common stock upon
conversion of note payable 161,903 1,619 848,381 -- -- 850,000
Exercise of stock options 310,267 3,103 806,209 -- -- 809,312
Issuance of common stock in
private placement 38,000 380 294,120 -- -- 294,500
Tax benefit of stock option exercises -- -- 66,569 -- -- 66,569
Net Loss -- -- -- (1,555,608) -- (1,555,608)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 4,625,579 $ 46,256 $ 8,225,281 $ 177,689 $ -- $ 8,449,226
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 35
MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net loss $(1,555,608) $(1,188,807)
Adjustments to reconcile net loss
to net cash provided by operations:
Depreciation and amortization 653,948 825,659
Amortization of deferred gain on real estate transaction (91,000) (91,000)
Post acquisition charges -- 483,097
Loss on sale of division 1,225,000 --
Deferred income taxes (349,832) (251,755)
Net changes in certain assets and liabilities
Accounts receivable - trade (83,493) 963,372
Accounts receivable - other 153,914 --
Income tax refundable 172,598 (792,552)
Prepaid expenses and other current assets (193,550) 75,888
Other assets 93,589 47,851
Accounts payable - trade (74,560) 159,297
Accrued expenses 155,873 (427,780)
----------- -----------
Net cash provided by (used in) operating activities 106,879 (196,730)
----------- -----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Acquisition costs -- (495,645)
Purchases of property and equipment (234,799) (387,889)
----------- -----------
Net cash used in investing activities (234,799) (883,534)
----------- -----------
CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest -- (26,521)
Net (repayments) drawdowns on revolving line of credit (325,000) 325,000
Payments on long-term debt (1,189,310) (174,587)
Proceeds from issuance of common stock 1,170,380 488,475
Acquisition of treasury stock -- (451,000)
----------- -----------
Net cash provided by (used in) financing activities (343,930) 161,367
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (471,850) (918,897)
Cash and cash equivalents at beginning of period 1,112,653 2,031,550
----------- -----------
Cash and cash equivalents at end of period $ 640,803 $ 1,112,653
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 204,933 $ 56,638
=========== ===========
Income taxes paid $ -- $ 464,774
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTMENTS 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 end of period $ 313,665 $ 308,002
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 36
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
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 four 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, ppoONE.com, inc., providing
e-health solutions to the PPO and healthcare payor industry and ValueCheck, Inc.
("ValueCheck"), providing utilization review and case management services. 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 5 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.
F-7
<PAGE> 37
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accounts Receivable - Premium and Accounts Payable - Premium
Accounts receivable - premium represent amounts owed by customers for insurance
premiums and related ancillary fees. The Company bears no substantial collection
risk, as nonpayment of premiums constitutes grounds for cancellation of
insurance coverage. As a result, the Company does not provide an allowance for
doubtful accounts on these accounts receivable. Premiums and fees owed to
insurance carriers and service providers are classified as accounts payable -
premium.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis, over their estimated useful lives (generally 3 to 40
years). Major additions and betterments are capitalized and depreciated over the
remaining estimated useful lives of the related assets. Maintenance, repairs and
minor improvements are expensed as incurred.
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 in 1998, as discussed in Note 5, 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 to 30 years.
F-8
<PAGE> 38
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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. Also, see
Note 4 relating to an impairment of goodwill in connection with the sale of a
division of the TPA in 1999.
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. One customer accounted for 10.6% and 9.6% of consolidated
revenues in 1999 and 1998, respectively. The loss of this customer could have a
material effect on the Company.
Earnings (Loss) Per Share
Basic earnings (loss) 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. There was no impact
from dilutive common equivalent shares since losses were reported in both 1999
and 1998.
In 1999 and 1998, 1,155,502 and 1,544,528 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.
F-9
<PAGE> 39
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 1998 financial statements to
conform them to the 1999 presentation.
NOTE 3 - 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, 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 PPO, TPA services, e-health solutions to the PPO and
healthcare payor industry offered through ppoONE.com and utilization review and
case management services performed by ValueCheck.
F-10
<PAGE> 40
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 3 - BUSINESS SEGMENT REPORTING - continued
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, 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, 1999
and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
PPO Segment:
Revenues $ 8,186,854 $ 7,496,303
Operating expenses 6,696,047 6,272,869
----------- -----------
Operating profit 1,490,807 1,223,434
Depreciation 145,228 163,515
Segment assets 1,903,317 2,027,275
TPA Segment:
Revenues $ 6,268,295 $ 6,538,289
Operating expenses 6,135,591 5,791,565
----------- -----------
Operating profit 132,704 746,724
Depreciation $ 158,293 $ 133,303
Segment assets 2,530,790 3,864,714
ppoONE.com Segment:
Revenues $ 2,792,976 $ 1,676,512
Operating expenses 3,042,580 3,183,765
----------- -----------
Operating loss (249,604) (1,507,253)
Depreciation 60,836 91,312
Segment assets 309,480 329,365
</TABLE>
F-11
<PAGE> 41
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 3 - BUSINESS SEGMENT REPORTING - continued
<TABLE>
<S> <C> <C>
ValueCheck Segment:
Revenues $ 192,272 $ --
Operating expenses 501,424 39,705
--------- ---------
Operating loss (309,152) (39,705)
Depreciation 4,607 307
Segment assets 117,310 24,197
</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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Segment revenues $ 17,440,397 $ 15,711,104
Intercompany revenues (2,100,337) (1,139,431)
------------ ------------
Consolidated revenues $ 15,340,060 $ 14,571,673
============ ============
Segment Operating profit $ 1,064,755 $ 423,200
Corporate expenses, net (1,856,438) (2,318,349)
------------ ------------
Consolidated operating loss $ (791,683) $ (1,895,149)
============ ============
Segment assets $ 4,860,897 $ 6,245,551
Corporate assets 7,600,588 7,988,875
------------ ------------
Consolidated assets $ 12,461,485 $ 14,234,426
============ ============
</TABLE>
NOTE 4 - SALE OF DIVISION
In August 1999, the Company's TPA subsidiary completed the sale of its
unprofitable division located in Dallas, Texas. The sale resulted in a loss in
the amount of $1,225,000, which was reflected as a charge against earnings as of
June 30, 1999, reduced by a deferred tax benefit of $441,000.
F-12
<PAGE> 42
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 5 - 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 $4,600,000 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 related to the acquisition, and
$40,000 of severance related costs. Due to the acquisition of BHC, 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.
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,
1998, 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
------------------
December 31, 1998
-----------------
<S> <C>
Net revenues $ 15,913,691
Operating loss $ (1,317,691)
Net loss $ (694,106)
Loss per share $ (0.17)
Weighted average shares outstanding 4,081,039
</TABLE>
F-13
<PAGE> 43
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1999 and 1998, consisted of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Life 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Land -- $ 60,000 $ 60,000
Buildings 40 years 240,000 240,000
Furniture and fixtures 5-10 years 773,937 714,731
Data processing equipment 3-6 years 1,454,902 1,368,345
Auto 5 years 4,941 --
Leasehold improvements 40 years 118,099 116,343
----------- -----------
2,651,879 2,243,690
Less - accumulated depreciation (1,107,600) (801,721)
----------- -----------
Property and equipment, net $ 1,544,279 $ 1,697,698
=========== ===========
</TABLE>
NOTE 7 - GOODWILL, NET
Goodwill at December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Goodwill $ 6,642,076 $ 8,392,856
Less - accumulated amortization (622,613) (620,023)
----------- -----------
Goodwill, net $ 6,019,463 $ 7,772,833
=========== ===========
</TABLE>
NOTE 8 - DEBT
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% (9.5% and 8.75% at
December 31, 1999 and 1998 respectively) and is payable in monthly installments
of principal of $26,667 plus interest. The 8.5% subordinated convertible seller
notes were payable in quarterly installments of principal and interest through
October 2003 and were convertible into common stock of the Company upon 30 days'
notice, in $25,000 increments, at a conversion rate of $5.25 per share. On July
6, 1999, the remaining principal balance of $850,000 of convertible seller notes
was converted into 161,903 shares of the Company's common stock.
F-14
<PAGE> 44
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 8 - DEBT - Continued
In conjunction with the bank financing above, the Company's previously existing
$1,000,000 line of credit was terminated and a new revolving credit facility was
obtained. This credit facility, secured by accounts receivable, allowed for
maximum borrowings of $500,000, since reduced to $400,000 in March 1999, and
bears interest at the bank's prime rate plus 1% (9.5% at December 31, 1999).
Availability under this credit facility was $400,000 at December 31, 1999. The
credit facility contains certain affirmative financial covenants, such as
minimum net worth and financial statement ratios.
During March and May 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 was required to make principal
reductions of $200,000 on March 31, 1999, $50,000 on June 15, 1999, $147,000 on
August 16, 1999 paid with a portion of the proceeds from the sale of common
stock and $407,000 on August 18, 1999 paid with the proceeds from an income tax
refund. The revised new term note includes certain revised financial covenants,
including minimum net income, 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, until the loan is paid in full in
April 2001. As of December 31, 1999, the Company was not in compliance with
certain debt covenants and, in March 2000, it received the necessary waivers.
Long-Term Debt
Long-term debt consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Mortgage note payable, monthly installments of $ 235,428 $ --
approximately $3,100, plus interest at 8.0% through
January 2009
Note payable to bank, secured by substantially all 395,261 1,558,428
assets of the Company, monthly installments of
approximately $26,700, plus interest at bank's
prime rate plus 1% (9.5% and 8.75% at December
31, 1999 and 1998 respectively) through 2003
</TABLE>
F-15
<PAGE> 45
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 8 - DEBT - Continued
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Mortgage note payable, monthly installments of $ -- $ 84,071
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 -- 27,500
$13,750 plus interest at 8% through June 1999
Subordinated convertible notes payable to -- 1,000,000
previous stockholders of subsidiary, principal
payable in quarterly installments of $50,000,
interest at 8.5% due monthly ----------- -----------
630,689 2,669,999
(411,970) (1,115,515)
----------- -----------
Less - current portion $ 218,719 $ 1,554,484
=========== ===========
Total long-term debt, net of current portion
</TABLE>
Scheduled future principal maturities of long-term debt at December 31, 1999,
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
- ------------ --------
<S> <C>
2000 $411,970
2001 19,697
2002 21,355
2003 23,152
2004 25,101
Thereafter 129,414
--------
$630,689
</TABLE>
F-16
<PAGE> 46
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 9 - BENEFIT PLANS
401(k) 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 $127,207 and $103,965 for plan contributions for the years
ended December 31, 1999 and 1998, respectively.
Deferred Compensation
The Company has a deferred compensation agreement with its chief executive
officer. The agreement provides benefits estimated at $540,000 upon the sooner
of termination of employment, death, change in control of the Company or January
2007. The Company has made an investment in a life insurance policy to fund
approximately two-thirds of this benefit.
Other than stated above, the Company does not provide any post-retirement or
post-employment benefits to any of its employees.
NOTE 10 - INCOME TAXES
The income tax benefit at December 31, 1999 and 1998, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current:
Federal $(237,200) $(320,805)
State (31,394) (39,516)
Deferred:
Federal (250,154) (222,329)
State (33,109) (29,426)
--------- ---------
Total $(551,857) $(612,076)
========= =========
</TABLE>
F-17
<PAGE> 47
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES - Continued
The differences between the statutory federal income tax rate and the Company's
effective income tax rate are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Statutory federal income tax rate (34.0%) (34.0%)
State income taxes, net of federal benefit (3.1) (2.6)
Meals and entertainment expenses .6 .8
Goodwill amortization 4.1 2.4
Adjustment of prior year's estimate 5.1 --
Other 1.1 (.5)
----- -----
Total (26.2%) (33.9%)
===== ====
</TABLE>
The components of and changes in net deferred tax assets (liabilities) as of
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current Deferred Taxes:
Assets:
Nondeductible reserves $ 133,545 $ 169,028
Deferred revenue 101,624 --
--------- ---------
235,169 169,028
Noncurrent Deferred Taxes:
Assets:
Deferred gain from sale of option on
real estate 268,891 303,926
Net operating loss carryforward 277,944 --
Other -- 50,800
Liabilities:
Excess tax over book depreciation and amortization (146,327) (269,456)
Other (31,547) --
--------- ---------
Noncurrent deferred taxes, net 368,961 85,270
--------- ---------
Total deferred taxes $ 604,130 $ 254,298
========= =========
</TABLE>
F-18
<PAGE> 48
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES - Continued
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. The company has net operating
loss carryovers at December 31, 1999 of approximately $744,000. The carryovers
expire if not utilized by 2019.
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 is being 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 each of the years ended December 31, 1999 and 1998 was
$91,000.
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.
F-19
<PAGE> 49
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 12 - COMMITMENTS AND CONTINGENCIES - Continued
At December 31, 1999, 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>
2000 $ 735,168
2001 564,011
2002 461,502
2003 349,941
2004 319,740
Thereafter 865,963
----------
$3,296,325
==========
</TABLE>
Rental expense for all operating leases for the years ended December 31, 1999
and 1998, was $848,239 and $530,803, 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 $175,504 and $170,065 in 1999 and 1998, respectively.
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,
results of operations, or cash flows.
F-20
<PAGE> 50
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 13 - STOCKHOLDERS' EQUITY
Stock Options
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:
<TABLE>
<CAPTION>
Weighted
Average
Shares Option Price Option Price
---------- -------------- ------------
<S> <C> <C> <C>
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
Granted 446,000 7.63 to 8.88 7.88
Exercised (452,110) 3.38 to 5.25 4.30
Forfeited (392,287) 4.36 to 7.54 7.28
---------- -------------- -----
Outstanding at December 31, 1999 1,146,131 $3.38 to $8.88 $7.35
========== ============== =====
Exercisable options:
December 31, 1998 946,551
==========
December 31, 1999 723,600
==========
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 expired
during 1999.
F-21
<PAGE> 51
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 13 - STOCKHOLDERS' EQUITY - Continued
Accounting for Stock-Based Compensation
The Company accounts for stock options 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>
1999 1998
---- ----
<S> <C> <C>
Pro forma net loss $ (1,862,090) $ (1,381,804)
Pro forma loss per share $ (.42) $ (.35)
</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>
1999 1998
---- ----
<S> <C> <C>
Risk free interest rate 5.1% 5.1%
Expected dividend yield 0.0% 0.0%
Expected volatility 35.2% 43.9%
Expected lives 5 5
</TABLE>
The weighted average fair value of options granted in 1999 and 1998 was $3.13
and $3.03, respectively.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
NOTE 14 - 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, 1999). The principal and any unpaid accrued interest are due in its
entirety by October 27, 2000. Accrued interest on this note was $148,328 and
$121,175 at December 31, 1999 and 1998, respectively.
F-22
<PAGE> 52
MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE 14 - RELATED PARTY TRANSACTIONS - Continued
During March 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. 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.
During August 1999, the Company filed a registration statement with the
Securities and Exchange Commission to register certain additional outstanding
shares of common stock owned by the majority shareholder of the Company. The
majority shareholder has indicated no present intention of selling any stock but
such stock may serve as collateral for certain loans of the majority
shareholder. In connection with this registration statement, the Company paid
approximately $6,600 of legal and accounting expenses.
F-23
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company - 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 Company - 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.
</TABLE>
<PAGE> 54
<TABLE>
<S> <C>
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.
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 Form of Agreement by and between the Company and each of its
directors and officers - incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996.
10.11 Commercial Lease, dated March 1, 1993, by and among Diversified and
David C. and Janice L. Bramer - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1996.
10.12 Letter Agreement, dated September 29, 1994, by and between the
Company and David C. Bramer - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1996.
10.13 Transfer Agreement, dated as of January 1, 1998, by and among the
Company, 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 the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997.
10.14 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 the Company's Special Report on Form
8-K filed October 9, 1998.
10.15 Employment, Confidentiality and Non-Competition Agreement, dated
September 25, 1998, by and among MedicalControl Network Solutions,
Inc., the Company and Donald Richard Huntington - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998.
10.16 Employment, Confidentiality and Non-Competition Agreement, dated
September 25, 1998, by and among MedicalControl Network Solutions,
Inc., the Company and Ralph T. Smith - incorporated by reference to
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
10.17 Loan Agreement, dated September 25, 1998, by and between the Company
and Bank One, Texas, N.A. - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1998.
10.18 First Amendment to Loan Agreement, dated as of March 31, 1999, by
and between Bank One, Texas N.A. and the Company - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998.
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
10.19 Second Amendment to Loan Agreement, dated as of May 15, 1999, by and
between Bank One, Texas N.A. and the Company.
10.20 Third Amendment to Loan Agreement, dated as of September 25, 1999,
by and between Bank One, Texas N.A. and the Company.
10.21 Asset Purchase Agreement, dated July 30, 1999, by and between
Diversified Group Administrators, Inc. and Group Resources, Inc. -
incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999.
10.22 Employee Incentive Stock Option Plan.
10.23 Non-Employee Director Stock Compensation Plan.
10.24 Employment Agreement dated January 1, 1998, by and between PPO
Management Solutions, Inc. (now known as ppoONE.com) and Patrick W.
Kennedy.
10.25 First Amendment to Employment Agreement dated June 24, 1999 by and
between ppoONE.com, inc. and Patrick W. Kennedy.
21 Subsidiaries of the Company - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1998.
23.1 Consent of Grant Thornton LLP, independent public accountants.
23.2 Consent of Arthur Andersen LLP, independent public accountants.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 10.19
SECOND AMENDMENT TO
LOAN AGREEMENT
This SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of May
__, 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, and amended on March 31, 1999 (as amended, 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 Paragraphs 8(l) and (m). From and after the date
hereof, paragraphs 8 (l) and (m) of the Loan Agreement are deleted in their
entirety and replaced with a new paragraph 8 (l) which shall read as follows:
"(l) Additional Equity. In the event that Borrower receives any
additional equity (whether such equity is raised by means of an additional
equity offering or otherwise, but excluding the equity required to be
contributed by J. Ward Hunt pursuant to paragraph 12 (j) and excluding the
proceeds of stock options exercised by individuals to the extent such
proceeds aggregate less than $50,000), all such additional equity shall be
applied to the Loans in such order as Bank may require."
Section 2.02. Amendment to Paragraphs 10 (c) and (d). From and after the
date hereof, paragraphs 10 (c) and (d) of the Loan Agreement are deleted in
their entirety and replaced with new paragraphs 10 (c) and (d) which shall read
as follows:
<PAGE> 2
"(c) Debt Service. Borrower will maintain, as of the last day of each
fiscal quarter commencing September 30, 1999, a ratio of (i) year to date
consolidated net income after taxes plus interest expense, depreciation and
amortization, less any capital expenditures, to (ii) paid year to date
total interest expense and current maturities of long term debt and long
term capital leases (excluding the deferred portion of the Subordinated
Debt and any prepayment of the Obligations required under this Agreement
that is not a part of the regularly scheduled monthly amortization required
herein of the Obligations), 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 (i) all outstanding Senior
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. For purposes of calculating such ratio, the amount
determined pursuant to item (ii) above shall be multiplied by two (2) for
the quarter ending June 30, 1999, and multiplied by one and one third
(1.33) for the quarter ending on September 30, 1999.
<TABLE>
<CAPTION>
Quarter End: Ratio:
----------- --------------
<S> <C>
June 30, 1999 3.00 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 Debt" means, as of any date,
the sum of the following: (i) the aggregate of all indebtedness for money
borrowed of Borrower as of such date minus (ii) the Subordinated Debt."
Section 2.02. Amendment to Paragraph 11 (d), Accounts Aging. From and after
the date hereof, paragraph 11 (d) of the Loan Agreement is deleted in its
entirety and in place thereof shall be a new paragraph 11(d) which shall read as
follows:
"(d) Accounts Aging. An accounts receivable aging report within
forty-five (45) days after the end of each fiscal quarter, in form and
detail satisfactory to Bank."
Section 2.03. Amendment to Paragraph 12(j), Events of Default. From and
after the date hereof, paragraph 12(j) of the Loan Agreement is deleted in its
entirety and replaced with a new paragraph 12 (j) which shall read as follows:
2
<PAGE> 3
"(j) The failure of Borrower, on or before 5:00 p.m. on June 1, 1999,
(i) to receive an additional equity contribution from J. Ward Hunt in the
amount of at least $70,000, and (ii) to deliver to, and pledge to, Bank
such $70,000 as collateral for the Loans."
Section 2.04. Amendment to Paragraph 12, Events of Default. From and after
the date hereof, paragraph 12 of the Loan Agreement is amended by adding thereto
a new paragraph 12 (m) which shall read as follows:
"(m) The failure of Borrower, on or before 5:00 p.m. on June 15, 1999,
to deliver to Bank a $50,000 prepayment on the Term Loan that will be
applied to the outstanding principal due thereunder in inverse order of
maturity."
ARTICLE III
Covenant Waivers
Section 3.01. Waiver of Certain Financial Covenants. Bank hereby waives
Borrower's failure to comply with (i) paragraph 10 (a) for the fiscal quarter of
Borrower ending March 31, 1999, and the fiscal quarter of Borrower ending June
30, 1999, (ii) paragraph 11 (d) for the month ending February 28, 1999, (iii)
paragraph 12 (j) on April 15, 1999. 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) Each Guarantor shall have executed and delivered this Amendment.
(c) 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.
(d) 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
3
<PAGE> 4
that with the giving of notice or lapse of time or both would be an Event
of Default.
(e) 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.
Borrower and each Guarantor jointly and severally renews and affirms the liens
and security interests created and granted in the Loan Documents and 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
4
<PAGE> 5
execution and delivery of this Amendment and the other Loan Documents, and no
investigation 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.
5
<PAGE> 6
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.
6
<PAGE> 7
EXECUTED as of the date first written above.
Bank One, Texas, National Association
By: /s/ C. DIANNE WOOLEY
---------------------------------------
C. Dianne Wooley , Vice President
MedicalControl, Inc.
By: /s/ J. WARD HUNT
---------------------------------------
J. Ward Hunt, President
CONFIRMATION BY GUARANTORS
Each of the undersigned, MedicalControl Network Solutions, Inc.,
Diversified Group Administrators, Inc., ppoONE.com,inc. (f/k/a PPO Management
Solutions, Inc.), Business Health Companies, Inc. and Medical Control Holdings,
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 or under the Security
Agreement executed by it, (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
---------------------------------------
Name: Robert O. Brooks
-------------------------------------
Title: President
------------------------------------
Diversified Group Administrators, Inc.
By: /s/ JO LESTER
---------------------------------------
Name: Jo Lester
-------------------------------------
Title: Vice President
------------------------------------
7
<PAGE> 8
ppoONE.com, inc. f/k/a PPO Management
Solutions, Inc.
By: /s/ ROBERT O. BROOKS
---------------------------------------
Name: Robert O. Brooks
-------------------------------------
Title: President
------------------------------------
Business Health Companies, Inc.
By: /s/ ROBERT O. BROOKS
---------------------------------------
Name: Robert O. Brooks
-------------------------------------
Title: EVP
------------------------------------
Medical Control Holdings, Inc.
By: /s/ ROBERT O. BROOKS
---------------------------------------
Name: Robert O. Brooks
-------------------------------------
Title: EVP
------------------------------------
8
<PAGE> 1
EXHIBIT 10.20
THIRD AMENDMENT TO
LOAN AGREEMENT
This THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment"), dated as of
September 25, 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, and amended on March 31, 1999 and May 14, 1999 (as amended,
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 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.
<PAGE> 2
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."
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., Business Health
Companies, Inc. and Business Health Management, 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 10 (b). From and after the date
hereof, paragraph 10 (b) of the Loan Agreement is deleted in its entirety and
replaced with a new paragraph 10 (b) which shall read as follows:
"(b) Net Worth. Borrower shall maintain, at all times, a "net worth" of
not less than $8,500,000. As used herein, the "net worth" of Borrower shall be
equal to Borrower's total assets minus Borrower's total liabilities."
Section 2.04. Amendment to Paragraph 10 (e). From and after August 1,
1999, paragraph 10 (e) of the Loan Agreement is deleted in its entirety and
replaced with a new paragraph 10 (e) which shall read as follows:
"(e) Capital Expenditures. Borrower shall not make capital expenditures
in excess of $250,000 in any fiscal year."
ARTICLE III
Covenant Waivers
Section 3.01. Waiver. Bank hereby waives Borrower's failure to comply
with paragraph 10 (b) for the period ending June 30, 1999. Such waiver is
expressly limited as aforesaid and shall not constitute a waiver of Borrower's
compliance with such covenant for any other past or future period or of any
other breach of the Loan Agreement or any other Loan Document.
2
<PAGE> 3
ARTICLE IV
Consent to Merger or Dissolution
Section 4.01. Consent to Merger. Borrower has requested that Bank
consent to the dissolution of Business Health Companies, Inc. or the merger of
Business Health Companies, Inc. into either (i) Medical Control Network
Solutions, Inc., or (ii) Business Health Management, Inc. Bank consents to such
dissolution or merger provided, however, that in the event of merger, such
consent is expressly conditioned upon the receipt by Bank of (i) a certificate
of merger evidencing such merger, (ii) a certificate of good standing and
certificate of existence for the merged entity, (iii) the execution and delivery
to Bank by Medical Control Network Solutions, Inc. and Business Health
Management, Inc. of guarantees of the Loans, in form and substance acceptable to
Bank in its sole discretion, (iv) the execution and delivery to Bank by Medical
Control Network Solutions, Inc. and Business Health Management, Inc. of security
agreements granting to Bank a first priority security interest in all of their
assets to secure payment of the Loans, in form and substance acceptable to Bank
in its sole discretion, (v) the execution and delivery to Bank of UCC-1
financing statements by Medical Control Network Solutions, Inc. and Business
Health Management, Inc., (vi) the execution and delivery to Bank of a pledge
agreement granting to Bank a first priority security interest in one hundred
percent (100%) of the issued and outstanding stock of Business Health
Management, Inc. together with stock certificates evidencing such stock and
stock powers executed in blank, all in form and substance acceptable to Bank in
its sole discretion, (vii) receipt by Bank of certified corporate resolutions
authorizing the foregoing, in form and substance acceptable to Bank in its sole
discretion, and (viii) such other documents and agreements as Bank may
reasonably require.
ARTICLE V
Conditions Precedent
Section 5.01. 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) Each Guarantor shall have executed and delivered this
Amendment.
(c) 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.
(d) 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
3
<PAGE> 4
that with the giving of notice or lapse of time or both would be an
Event of Default.
(e) 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 VI
Ratifications, Representations, and Warranties
Section 6.01. 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 6.02. Renewal and Extension of Security Interests and Liens.
Borrower and each Guarantor jointly and severally renews and affirms the liens
and security interests created and granted in the Loan Documents and 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 6.03. 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) except as waived by Bank, 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.
4
<PAGE> 5
ARTICLE VII
Miscellaneous
Section 7.01. 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 by Bank or any
closing shall affect such representations and warranties or the right of Bank to
rely thereon.
Section 7.02. 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 7.03. 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 7.04. 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 7.05. 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 7.06. 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.
5
<PAGE> 6
Section 7.07. 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 7.08. 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.
Section 7.09. Headings. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 7.10. 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 7.11. 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 7.12. ENTIRE AGREEMENT. THIS AMENDMENT, THE LOAN AGREEMENT AND
ALL OTHER LOAN DOCUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH AND PURSUANT
TO THIS AMENDMENT
6
<PAGE> 7
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.
EXECUTED as of the date first written above.
Bank One, Texas, National Association
By: /s/ C. DIANNE WOOLEY
----------------------------------
C. Dianne Wooley, Vice President
MedicalControl, Inc.
By: /s/ J. WARD HUNT
----------------------------------
J. Ward Hunt, President
CONFIRMATION BY GUARANTORS
Each of the undersigned, MedicalControl Network Solutions, Inc.,
Diversified Group Administrators, Inc., ppoONE.com,inc. (f/k/a PPO Management
Solutions, Inc.), Business Health Companies, Inc. and Medical Control Holdings,
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 or under the Security
Agreement executed by it, (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
7
<PAGE> 8
Diversified Group Administrators, Inc.
By: /s/ J. WARD HUNT
-----------------------------------
J. Ward Hunt,
Chairman of the Board
ppoONE.com, inc. f/k/a PPO Management
Solutions, Inc.
By: /s/ ROBERT O. BROOKS
-----------------------------------
Robert O. Brooks, President
and Chief Executive Officer
Business Health Companies, Inc.
By: /s/ ROBERT O. BROOKS
-----------------------------------
Robert O. Brooks, Executive
Vice President
Medical Control Holdings, Inc.
By: /s/ J. WARD HUNT
-----------------------------------
J. Ward Hunt, President and
Chief Executive Officer
8
<PAGE> 1
Exhibit 10.22
MEDICALCONTROL, INC.
STOCK OPTION AND INCENTIVE PLAN
SECTION 1 - GENERAL
1.1 Purpose. The MedicalControl, Inc. Stock Option and Incentive Plan (the
"Plan") has been established by MedicalControl, Inc. (the "Company") to (i)
attract and retain persons eligible to participate in the Plan; (ii) motivate
Participants, by means of appropriate incentives, to achieve long-range goals;
(iii) provide incentive compensation opportunities that are competitive with
those of other similar companies; and (iv) further align Participants' interests
with those of the Company's other shareholders through compensation that is
based on the Company's common stock; and thereby promote the long-term financial
interest of the Company and the Related Companies, including the growth in value
of the Company's equity and enhancement of long-term shareholder return.
1.2 Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Employees, those persons who will be granted one or more Awards under
the Plan, and thereby become "Participants" in the Plan. In the discretion of
the Committee, a Participant may be granted any Award permitted under the
provisions of the Plan, and more than one Award may be granted to a Participant.
Awards may be granted as alternatives to or replacement of awards outstanding
under the Plan, or any other plan or arrangement of the Company or a Related
Company (including a plan or arrangement of a business or entity, all or a
portion of which is acquired by the Company or a Related Company).
1.3 Operation, Administration and Definitions. The operation and administration
of the Plan, including the Awards made under the Plan, shall be subject to the
provisions of Section 4 (relating to operation and administration). Capitalized
terms in the Plan shall be defined as set forth in the Plan (including the
definition provisions of Section 8 of the Plan).
SECTION 2 - OPTIONS AND SARS
2.1 Definitions.
(a) The grant of an "Option" entitles the Participant to purchase shares of
Stock at an Exercise Price established by the Committee. Options granted
under this Section 2 may be either Incentive Stock Options or Non-Qualified
Stock Options, as determined in the discretion of the Committee. An
"Incentive Stock Option" is an Option that is intended to satisfy the
requirements applicable to an "incentive stock option" described in section
422(b) of the Code. A "Non-Qualified Option" is an Option that is not
intended to be an incentive stock option" as that term is described in
section 422(b) of the Code.
(b) A stock appreciation right (an "SAR") entitles the Participant to
receive, in cash or Stock (as determined in accordance with subsection 2.5),
value equal to all or a portion of the excess of: (a) the Fair Market Value
of a specified number of shares of Stock at the time of exercise; over (b)
an Exercise Price established by the Committee.
2.2 Exercise Price. The "Exercise Price" of each Option and SAR granted under
this Section 2 shall be established by the Committee or shall be determined by a
method established by the Committee at the time the Option or SAR is granted,
except that the Exercise Price shall not be less than 100% of the Fair Market
Value of a share of Stock as of the Pricing Date. For purposes of the preceding
sentence, the "Pricing Date" shall be the date on which the Option or SAR is
granted, except that the Committee may provide that: (i) the Pricing Date is the
date on which the recipient is hired or promoted (or similar event), if the
grant of the Option or SAR occurs not more than 90 days after the date of such
hiring, promotion or other event; and (ii) if an Option or SAR is granted in
tandem with, or in substitution for, an outstanding Award, the Pricing Date is
the date of grant of such outstanding Award.
2.3 Exercise. An Option and an SAR shall be exercisable in accordance with such
terms and conditions and during such periods as may be established by the
Committee.
2.4 Payment of Option Exercise Price. The payment of the Exercise Price of an
Option granted under this Section 2 shall be subject to the following:
<PAGE> 2
(a) Subject to the following provisions of this subsection 2.4, the full
Exercise Price for shares of Stock purchased upon the exercise of any Option
shall be paid at the time of such exercise (except that, in the case of an
exercise arrangement approved by the Committee and described in paragraph
2.4(c), payment may be made as soon as practicable after the exercise).
(b) The Exercise Price shall be payable in cash or by tendering shares of
Stock (by either actual delivery of shares or by attestation, with such
shares valued at Fair Market Value as of the day of exercise), or in any
combination thereof, as determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the Exercise
Price upon the exercise of an Option by authorizing a third party to sell
shares of Stock (or a sufficient portion of the shares) acquired upon
exercise of the Option and remit to the Company a sufficient portion of the
sale proceeds to pay the entire Exercise Price and any tax withholding
resulting from such exercise.
2.5 Settlement of Award. Distribution following exercise of an Option or SAR,
and shares of Stock distributed pursuant to such exercise, shall be subject to
such conditions, restrictions and contingencies as the Committee may establish.
Settlement of SARs may be made in shares of Stock (valued at their Fair Market
Value at the time of exercise), in cash, or in a combination thereof, as
determined in the discretion of the Committee. The Committee, in its discretion,
may impose such conditions, restrictions and contingencies with respect to
shares of Stock acquired pursuant to the exercise of an Option or an SAR as the
Committee determines to be desirable.
SECTION 3 - OTHER STOCK AWARDS
3.1 Definition. A Stock Award is a grant of shares of Stock or of a right to
receive shares of Stock (or their cash equivalent or a combination of both) in
the future.
3.2 Restrictions on Stock Awards. Each Stock Award shall be subject to such
conditions, restrictions and contingencies as the Committee shall determine.
These may include continuous service and/or the achievement of Performance
Measures. The Committee may designate a single goal criterion or multiple goal
criteria for performance measurement purposes, with the measurement based on
absolute Company or business unit performance and/or on performance as compared
with that of other publicly traded companies.
SECTION 4 - OPERATION AND ADMINISTRATION
4.1 Effective Date. Subject to the approval of the shareholders of the Company
at the Company's 2000 annual meeting of its shareholders, the Plan shall be
effective as of March 28, 2000 (the "Effective Date"). The Plan shall be
unlimited in duration and, in the event of Plan termination, shall remain in
effect as long as any Awards under it are outstanding.
4.2 Shares Subject to Plan.
(a) (i) Subject to the following provisions of this subsection 4.2, the
maximum number shares of Stock that may be delivered to Participants and
their beneficiaries under the Plan shall be equal to the sum of: (I) 2
million shares of Stock and (II) any shares of Stock that are
represented by awards granted under any prior plan of the Company in
which employees are eligible to participate (the "Prior Plans"), which
are forfeited, expire or are canceled without delivery of shares of
Stock or which result in the forfeiture of shares of Stock back to the
Company.
(ii) Any shares of Stock granted under the Plan that are forfeited
because of the failure to meet an Award contingency or condition shall
again be available for delivery pursuant to new Awards granted under the
Plan. To the extent any shares of Stock covered by an Award are not
delivered to a Participant or beneficiary because the Award is forfeited
or canceled, or the shares of Stock are not delivered because the Award
is settled in cash, such shares shall not be deemed to have been
delivered for purposes of determining the maximum number of shares of
Stock available for delivery under the Plan.
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<PAGE> 3
(iii) If the Exercise Price of any stock option granted under the Plan
or any Prior Plan is satisfied by tendering shares of Stock to the
Company (by either actual delivery or by attestation), only the number
of shares of Stock issued net of the shares of Stock tendered shall be
deemed delivered for purposes of determining the maximum number of
shares of Stock available for delivery under the Plan.
(iv) Shares of Stock delivered under the Plan in settlement, assumption
or substitution of outstanding awards (or obligations to grant future
awards) under the plans or arrangements of another entity shall not
reduce the maximum number of shares of Stock available for delivery
under the Plan, to the extent that such settlement, assumption or
substitution is a result of the Company or a Related Company acquiring
another entity (or an interest in another entity).
(b) Subject to paragraph 4.2(c), the following additional maximums are
imposed under the Plan.
(i) The maximum number of shares of Stock that may be issued by Options
intended to be Incentive Stock Options shall be 2 million shares.
(ii) The maximum number of shares of Stock that may be issued in
conjunction with Awards granted pursuant to Section 1 (relating to Stock
Awards) shall be 3 million shares.
(iii) The maximum number of shares that may be covered by Awards granted
to any one individual pursuant to Section 2 (relating to Options and
SARs) shall be 500,000 shares during any fiscal year.
(iv) The maximum payment that can be made for awards granted to any one
individual pursuant to Section 3 (relating to Stock Awards) shall be
$1,000,000 for any single or combined performance goals established for
any fiscal year. If an Award granted under Section 3 is, at the time of
grant, denominated in shares, the value of the shares of Stock for
determining this maximum individual payment amount will be the Fair
Market Value of a share of Stock on the first day of the applicable
performance period.
(c) Subject to the provisions of Section 6 hereof, in the event of a
corporate transaction involving the Company (including, without limitation,
any stock dividend, stock split, extraordinary cash dividend,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination or exchange of shares), the Committee may adjust Awards to
preserve the benefits or potential benefits of the Awards. Action by the
Committee may include adjustment of: (i) the number and kind of shares which
may be delivered under the Plan; (ii) the number and kind of shares subject
to outstanding Awards; and (iii) the Exercise Price of outstanding Options
and SARs as well as any other adjustments that the Committee determines to
be equitable.
4.3 Limit on Distribution. Distribution of shares of Stock or other amounts
under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or make
any other distribution of benefits under the Plan unless such delivery
or distribution would comply with all applicable laws (including,
without limitation, the requirements of the Securities Act of 1933),
and the applicable requirements of any securities exchange or similar
entity.
(b) To the extent that the Plan provides for issuance of stock
certificates to reflect the issuance of shares of Stock, the issuance
may be effected on a noncertificated basis, to the extent not
prohibited by applicable law or the applicable rules of any stock
exchange.
4.4 Tax Withholding. Whenever the Company proposes or is required to distribute
Stock under the Plan, the Company may require the recipient to remit to the
Company an amount sufficient to satisfy any Federal, state and
3
<PAGE> 4
local tax withholding requirements prior to the delivery of any certificate for
such shares or, in the discretion of the Committee, the Company may withhold
from the shares to be delivered shares sufficient to satisfy all or a portion of
such tax withholding requirements. Whenever under the Plan payments are to be
made in cash, such payments may be net of an amount sufficient to satisfy any
Federal, state and local tax withholding requirements.
4.5 Payment Shares. Subject to the overall limitation on the number of shares of
Stock that may be delivered under the Plan, the Committee may use available
shares of Stock as the form of payment for compensation, grants or rights earned
or due under any other compensation plans or arrangements of the Company or a
Related Company, including the plans and arrangements of the Company or a
Related Company acquiring another entity (or an interest in another entity).
4.6 Dividends and Dividend Equivalents. An Award may provide the Participant
with the right to receive dividends or dividend equivalent payments with respect
to Stock which may be either paid currently or credited to an account for the
Participant, and may be settled in cash or Stock as determined by the Committee.
Any such settlements, and any such crediting of dividends or dividend
equivalents or reinvestment in shares of Stock, may be subject to such
conditions, restrictions and contingencies as the Committee shall establish,
including the reinvestment of such credited amounts in Stock equivalents.
4.7 Payments. Awards may be settled through cash payments, the delivery of
shares of Stock, the granting of replacement Awards, or combination thereof as
the Committee shall determine. Any Award settlement, including payment
deferrals, may be subject to such conditions, restrictions and contingencies as
the Committee shall determine. The Committee may permit or require the deferral
of any Award payment, subject to such rules and procedures as it may establish,
which may include provisions for the payment or crediting of interest, or
dividend equivalents, including converting such credits into deferred Stock
equivalents.
4.8 Transferability. Except as otherwise provided by the Committee, Awards under
the Plan are not transferable except as designated by the Participant by will or
by the laws of descent and distribution.
4.9 Form and Time of Elections. Unless otherwise specified herein, each election
required or permitted to be made by any Participant or other person entitled to
benefits under the Plan, and any permitted modification, or revocation thereof,
shall be in writing filed with the Committee at such times, in such form, and
subject to such restrictions and limitations, not inconsistent with the terms of
the Plan, as the Committee shall require.
4.10 Agreement With Company. At the time of an Award to a Participant under the
Plan, the Committee may require a Participant to enter into an agreement with
the Company (the "Agreement") in a form specified by the Committee, agreeing to
the terms and conditions of the Plan and to such additional terms and
conditions, not inconsistent with the Plan, as the Committee may, in its sole
discretion, prescribe.
4.11 Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property of the
Company or any Related Company whatsoever, including, without limitation,
any specific funds, assets, or other property which the Company or any
Related Company, in their sole discretion, may set aside in anticipation of
a liability under the Plan. A Participant shall have only a contractual
right to the stock or amounts, if any, payable under the Plan, unsecured by
any assets of the Company or any Related Company. Nothing contained in the
Plan shall constitute a guarantee that the assets of such companies shall
be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection as
a Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan. Except as otherwise provided in the Plan, no
Award under the Plan shall confer upon the holder thereof any right as a
shareholder of the Company prior to the date on which the individual
fulfills all conditions for receipt of such rights.
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<PAGE> 5
4.12 Evidence. Evidence required of anyone under the Plan may be by certificate,
affidavit, document or other information which the person acting on it considers
pertinent and reliable, and signed, made or presented by the proper party or
parties.
4.13 Action by Company or Related Company. Any action required or permitted to
be taken by the Company or any Related Company shall be by resolution of its
board of directors, or by action of one or more members of the board (including
a committee of the board) who are duly authorized to act for the board, or
(except to the extent prohibited by applicable law or applicable rules of any
stock exchange) by a duly authorized officer of the company.
4.14 Gender and Number. Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and the
plural shall include the singular.
SECTION 5 - COMMITTEE
5.1 Administration. The authority to control and manage the operation and
administration of the Plan shall be vested in the Compensation Committee (the
"Committee") in accordance with this Section 5. The Committee shall be selected
by the Board and shall consist of two or more members of the Board.
5.2 Powers of Committee. The authority to manage and control the operation and
administration of the Plan shall be vested in the Committee, subject to the
following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Employees those
persons who shall receive Awards, to determine the time or times of
receipt, to determine the types of Awards and the number of shares covered
by the Awards, to establish the terms, conditions, performance criteria,
restrictions, and other provisions of such Awards, and (subject to the
restrictions imposed by Section 6) to cancel or suspend Awards. In making
such Award determinations, the Committee may take into account the nature
of services rendered by the individual, the individual's present and
potential contribution to the Company's success and such other factors as
the Committee deems relevant.
(b) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under the
Plan will be structured to conform to the requirements applicable to
performance-based compensation as described in Code section 162(m), and to
take such action, establish such procedures, and impose such restrictions
at the time such Awards are granted as the Committee determines to be
necessary or appropriate to conform to such requirements.
(c) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to establish terms and conditions of awards as the
Committee determines to be necessary or appropriate to conform to
applicable requirements or practices of jurisdictions outside of the United
States.
(d) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend, and rescind any rules and regulations relating
to the Plan, to determine the terms and provisions of any agreements made
pursuant to the Plan, and to make all other determinations that may be
necessary or advisable for the administration of the Plan.
(e) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding.
(f) Except as otherwise expressly provided in the Plan, where the Committee
is authorized to make a determination with respect to any Award, such
determination shall be made at the time the Award is made, except that the
Committee may reserve the authority to have such determination made by the
Committee in the future (but only if such reservation is made at the time
the Award is granted and is expressly stated in the Agreement reflecting
the Award).
(g) In controlling and managing the operation and administration of the
Plan, the Committee shall act by a majority of its then members, by meeting
or by writing filed without a meeting. The Committee shall
5
<PAGE> 6
maintain and keep adequate records concerning the Plan and concerning its
proceedings and acts in such form and detail as the Committee may decide.
5.3 Delegation by Committee. Except to the extent prohibited by applicable law
or the applicable rules of a stock exchange and subject to the prior approval of
the Board, the Committee may allocate all or any portion of its responsibilities
and powers to any one or more of its members and may delegate all or any part of
its responsibilities and powers to any person or persons selected by it. Any
such allocation or delegation may be revoked by the Committee at any time.
5.4 Information to be Furnished to Committee. The Company and Related Companies
shall furnish the Committee with such data and information as may be required
for it to discharge its duties. The records of the Company and Related Companies
as to an employee's or Participant's employment, termination of employment,
leave of absence, reemployment and compensation shall be conclusive on all
persons unless determined to be incorrect. Participants and other persons
entitled to benefits under the Plan must furnish the Committee such evidence,
data or information as the Committee considers desirable to carry out the terms
of the Plan.
SECTION 6 - ACCELERATION OF EXERCISABILITY
AND VESTING UNDER CERTAIN CIRCUMSTANCES
Notwithstanding any provision in this Plan to the contrary, with regard
to any Award of Options, SARs and Stock Awards to any Participant all Awards
will become immediately exercisable and vested in full upon the occurrence,
before the expiration or termination of such Option, SARs and Stock Awards or
forfeiture of such Awards, of a change of control as defined in the particular
grant agreement.
SECTION 7 - AMENDMENT AND TERMINATION
The Committee may, at any time, amend or terminate the Plan, provided
that, subject to subsection 4.2 (relating to certain adjustments to shares) and
Section 6 hereof (relating to immediate vesting upon certain events), no
amendment or termination may, in the absence of written consent to the change by
the affected Participant (or, if the Participant is not then living, the
affected beneficiary), adversely affect the rights of any Participant or
beneficiary under any Award granted under the Plan prior to the date such
amendment is adopted by the Committee.
SECTION 8 - DEFINED TERMS
For purposes of the Plan, the terms listed below shall be defined as
follows:
(a) Award. The term "Award" shall mean any award or benefit granted to
any Participant under the Plan, including, without limitation, the
grant of Options, SARs, and Stock Awards.
(b) Board. The term "Board" shall mean the Board of Directors of the
Company.
(c) Code. The term "Code" means the Internal Revenue Code of 1986, as
amended. A reference to any provision of the Code shall include
reference to any successor provision of the Code.
(d) Eligible Person. The term "Eligible Employee" shall mean any
employee of the Company or a Related Company.
(e) Fair Market Value. For purposes of determining the "Fair Market
Value" of a share of Stock, the following rules shall apply:
(i) If the Stock is at the time listed or admitted to trading on
any stock exchange, then the "Fair Market Value" shall be the mean
between the lowest and highest reported sale prices of the Stock on
the date in question on the principal exchange on which the Stock
is then listed or admitted to trading. If no reported sale of Stock
takes place on the date in question on the principal exchange, then
the reported closing asked price of the Stock on such date on the
principal exchange shall be determinative of "Fair Market Value."
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<PAGE> 7
(ii) If the Stock is not at the time listed or admitted to trading
on a stock exchange, the "Fair Market Value" shall be the mean
between the lowest reported bid price and highest reported asked
price of the Stock on the date in question in the over-the-counter
market, as such prices are reported in a publication of general
circulation selected by the Committee and regularly reporting the
market price of Stock in such market.
(iii) If the Stock is not listed or admitted to trading on any
stock exchange or traded in the over-the-counter market, the "Fair
Market Value" shall be as determined in good faith by the
Committee.
(f) Exchange Act. The term "Exchange Act" means the Securities Exchange
Act of 1934, as amended.
(g) Related Companies. The term "Related Company" means any company
during any period in which it is a "parent company" (as that term is
defined in Code section 424(e)) with respect to the Company, or a
"subsidiary corporation" (as that term is defined in Code section
424(f)) with respect to the Company.
(h) Stock. The term "Stock" shall mean shares of common stock of the
Company.
7
<PAGE> 1
EXHIBIT 10.23
MEDICALCONTROL, INC.
2000 NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
ARTICLE I GENERAL
1.1. PURPOSE. The purpose of the Plan is to promote the interests of the Company
and its stockholders by attracting, retaining and providing an incentive to
Non-Employee Directors through the acquisition of an equity interest in the
Company and an increased personal interest in its performance. This purpose will
be served by providing an opportunity for Non-Employee Directors to elect to
receive Common Stock in lieu of Director's Fees.
1.2. ADOPTION AND TERM. The Plan has been approved by the Board and shall become
effective as of March 28, 2000 (the "Effective Date") subject to shareholder
approval at the Annual Meeting of Shareholders held in 2000. The Plan shall
terminate without further action upon the earlier of (a) the tenth anniversary
of the effective date, and (b) the first date upon which no shares of Common
Stock remain available for issuance under the Plan.
1.3. DEFINITIONS. As used herein the following terms have the following
meanings:
(a) "Board" means the Board of Directors of the Company.
(b) "Common Stock" means the common stock, $0.01 per value, of the Company.
(c) "Company" means MedicalControl, Inc., a Delaware corporation, and any
successor thereto.
(d) "Compensation Year" means each calendar year or portion thereof during which
the Plan is in effect.
(e) "Director" means a member of the Board.
(f) "Director's Fees" means the dollar value of the fees that the Non-Employee
Director would be entitled to receive for attending meetings of the Board or any
committee of the Board.
(g) "Market Value" means, as of any given date, (i) if the Common Stock is
listed on The Nasdaq SmallCap Market or one or more national securities
exchanges, the last reported sales price on the date in question, or, if such
security shall not have been traded on such principal exchange on such date, the
last reported sales price on the first day prior thereto on which such security
was so traded; and (ii) if the Common Stock is not listed on The Nasdaq SmallCap
Market or a national securities exchange, the market value of the Common Stock
as reasonably determined by the Board.
(h) "Non-Employee Director" means a Director who is not an employee of the
Company or an affiliate.
(i) "Non-Employee Director Notice" means a written notice delivered in
accordance with Section 4.1.
(j) "Plan" means this MedicalControl, Inc. 2000 Non-Employee Director Stock
Compensation Plan, as it may hereafter be amended from time to time.
1.4. SHARES SUBJECT TO THE PLAN. The shares to be offered under the Plan shall
consist of the Company's authorized but unissued Common Stock or treasury shares
and, subject to adjustment as provided in Section 5.1 hereof, the aggregate
amount of such stock which may be issued or subject to Stock Options issued
hereunder shall not exceed 100,000.
ARTICLE II. ADMINISTRATION
The Board shall administer the Plan. Subject to the provisions of the Plan, the
Board shall interpret the Plan, promulgate, amend, and rescind rules and
regulations relating to the Plan and make all other determinations necessary or
advisable for its administration. Interpretation and construction of any
provision of the Plan by the Board shall be final and conclusive.
<PAGE> 2
ARTICLE III. PARTICIPATION
Each Non-Employee Director shall participate in the Plan on the terms and
conditions hereinafter set forth.
ARTICLE IV. NOTICE OF PARTICIPATION
4.1. NON-EMPLOYEE DIRECTOR NOTICE. A Non-Employee Director may file with the
Secretary of the Company or other designee of the Board, at any time prior to
December first of the calendar year prior to any Compensation Year, and at such
other times as the Board may approve, a Non-Employee Director Notice making an
election to receive his or her Director's Fee payment in the form of Common
Stock. If a Non-Employee Director does not timely file an election, he or she
shall receive the Director's Fee payment in cash. Notwithstanding the foregoing,
elections with respect to the 2000 Compensation Years and elections by newly
elected or appointed Non-Employee Directors may be made during the Compensation
Years to which such elections relate. Once filed, a Non-Employee Director Notice
is irrevocable with respect to the initial Compensation Year to which it relates
and will be effective and irrevocable for all subsequent Compensation Years
until another Non-Employee Director Notice is filed by such director in
accordance with the procedure described in the first sentence of this Section
4.1.
4.2 DIRECTOR'S MEETING FEE. Each Non-Employee Director who has duly filed a
Non-Employee Director Notice in accordance with Section 4.1 with respect to a
Compensation Year and elected to receive his or her Director's Fee payment in
the form of Common Stock shall receive as of the first business day in January
of the next following Compensation Year a number of shares of Common Stock equal
to the quotient obtained by dividing (i) the amount of the Director's Fee
payment for the Compensation Year by (ii) the Market Value of the Common Stock
per share on such day. Cash shall be paid in lieu of any fractional shares.
ARTICLE V. MISCELLANEOUS
5.1. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. The number and kind of shares
available for issuance under the Plan shall be appropriately adjusted to prevent
dilution or enlargement of rights by reason of any stock dividend, stock split,
combination or exchange of shares, recapitalization, merger, consolidation or
other change in capitalization with a similar substantive effect upon the Plan
or the shares issuable under the Plan.
5.2. AMENDMENT AND TERMINATION. The Board shall have complete power and
authority to amend the Plan at any time; provided, however, that the Board shall
not, without the affirmative approval of the shareholders of the Company,
increase the number of shares of Common Stock available for issuance hereunder
or make any other amendment which requires shareholder approval under any
applicable law. The Board shall have the right and the power to terminate the
Plan at any time. No amendment or termination of the Plan may, without the
consent of the Non-Employee Director, adversely affect the right of such
Non-Employee Director with respect to any Stock Options then outstanding.
5.3. REQUIREMENTS OF LAW. The issuance of Common Stock under the Plan shall be
subject to all applicable laws, rules and regulations and to such approval by
governmental agencies as may be required.
5.4. NO GUARANTEE OF MEMBERSHIP. Nothing in the Plan shall confer upon a
Non-Employee Director any right to continue to serve as a Director.
5.5 CONSTRUCTION. Words of any gender used in the Plan shall be construed to
include any other gender, unless the context requires otherwise.
2
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of
January 1, 1998 (the "Effective Date"), by and between PPO Management Solutions,
Inc. (the "Corporation") and Patrick W. Kennedy ("Employee").
WITNESSETH
WHEREAS, the Corporation operates a business that develops, operates,
markets and services PPO management and repricing systems and software relating
to managed care networks (the "Business"); and
WHEREAS, Employee has competence and experience as an information
services executive in managed care organizations; and
WHEREAS, Employee has been employed by MedicalControl, Inc., a sister
corporation of the Corporation ("MCI") since August 21, 1995; and
WHEREAS, effective January 1, 1998, the Business was transferred from
MCI to the Corporation; and
WHEREAS, the Corporation desires to employ Employee as a Senior Vice
President of the Corporation, and Employee is willing and desirous to be so
employed under mutually satisfactory terms and conditions; and
WHEREAS, the Corporation and the Employee will be developing marketing
materials and prospect lists for the sale and marketing of the Corporation's
products all of which will be the Corporation's trade secrets and confidential
and proprietary information; and
WHEREAS, Employee and its staff will be modifying, improving and
refining the Corporation's PPO management and repricing software products and in
so doing Employee will acquire information regarding the Corporation's trade
secrets and confidential and proprietary information; and
WHEREAS, the parties desire to provide a full statement of their
agreement in connection with Employee providing of services to the Corporation
during the term of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration hereinafter recited,
the Corporation and Employee agree as follows:
1. Employment as Senior Vice President. The Corporation hereby offers
and Employee hereby accepts employment as a Senior Vice President of the
Corporation and shall perform the duties described on Exhibit A and such other
similar services for the Corporation as may be directed from time to time by the
President of the Corporation. Employee shall also use his best efforts to
preserve the business of the Corporation and the goodwill of all employees,
customers, suppliers and other persons having business relations with the
Corporation and its affiliates.
2. Reporting Relationship. Employee, in performing his services as a
Senior Vice President, shall be subject to the control and direction of the
President of the Corporation, shall perform
<PAGE> 2
his duties in a diligent, trustworthy, loyal, businesslike and efficient manner,
and shall abide by all company policies and rules, all for the purpose of
advancing the business of the Corporation.
3. Exclusive Contract. Employee will engage in no other business
activities or affairs whatsoever, neither for another party nor in his own
behalf, and without regard as to whether such services are performed after
established work hours or on weekends without prior approval of the President of
the Corporation.
4. Base Salary. The Corporation shall pay to Employee, and Employee
agrees to accept as full consideration for his employment, $11,666.67 per month
during the term of this Agreement, payable in two equal installments each month,
subject to all withholdings (i) required by federal, state or local law and (ii)
pursuant to any agreement with Employee. If (a) the Corporation shall cease to
exist or operate prior to the expiration of this Agreement and (b) Employee is
not an employee of MedicalControl, Inc. or any of its subsidiaries or any
successor in interest to the Corporation after the merger into the other entity
or sale of the Corporation to the other entity, the Corporation shall be fully
liable for the lesser of (i) all payments and provisions due under this Section
4 for the remaining term of this Agreement or (ii) one year of Employee base
salary at the time of termination.
5. Term. This Agreement shall remain in full force and effect for a
term of three (3) years concluding on January 1, 2001.
6. Restrictive Covenants.
(a) Nonemployment Agreement. For a period of two years after the
termination or cessation of his employment with the Corporation 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 the Corporation
or its affiliates to leave the employment of the Corporation 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 the
Corporation concerning the names and addresses of the Corporation's employees.
Businesses that are competitive with the Corporation, for the purpose of this
Section 6, shall be only those that develop, implement or sell provider network
management or repricing software for preferred provider organizations or
provider service organizations or their industries.
(b) Noncompetition Agreement. Employee acknowledges and agrees that the
training he will receive, the experience he will gain while employed and the
information he will acquire regarding the Corporation's trade secrets and
confidential and proprietary information will enable him to injure the
Corporation if he should compete with the Corporation in a business that is
competitive with the business conducted or to be conducted by the Corporation.
For these reasons, Employee hereby agrees as follows:
(i) Without the prior written consent of the Corporation, Employee
shall not, during the period of employment with the Corporation, 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 that of the Corporation or
its affiliates, (ii) accept employment with or render services to a competitor
of the Corporation or any of its affiliates as a director, officer, agent,
employee or consultant, (iii) contact, solicit or attempt to solicit or accept
business from any (A) customers of the Corporation or its affiliates or (B)
person or entity whose business the Corporation or its affiliates is soliciting,
(iv) contact, solicit or attempt to solicit or accept or direct business that is
competitive with such business being conducted by the Corporation during
Employee's employment under this Agreement from any of the customers of the
Corporation or any of its affiliates, or (v) take any action inconsistent
2
<PAGE> 3
with the fiduciary relationship of an employee to his employer. As used in this
Section 6 of this Agreement, "affiliates" shall mean persons or entities that
directly, or indirectly through one or more intermediaries, control or are
controlled by, or are under common control with, the Corporation.
(ii) Upon any termination or cessation of his employment with the
Corporation for any reason whatsoever, and for a period of two years thereafter,
Employee shall not, directly or indirectly, either as an individual, a partner
or a joint venturer, or in any other capacity, within the United States of
America (the "Restricted Area"), (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 that of the Corporation or its affiliates, (ii) accept employment with or
render services to a competitor of the Corporation or its affiliates as a
director, officer, agent, employee or consultant, or (iii) contact, solicit or
attempt to solicit or accept business (A) from any of the customers of the
Corporation or its affiliates as of the date of this Agreement or at the time of
Employee's termination or cessation of employment, or (B) from any person or
entity whose business the Corporation or its affiliates were soliciting as of
such time. For 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 those marketed and/or performed by the Corporation or
its affiliates within Restricted Area.
(c) Severability. The parties hereto intend all provisions of this
Section 6 to be enforced to the fullest extent permitted by law. Employee
acknowledges and agrees that the restrictive covenants in this Section 6 are
reasonable and valid in geographic and temporal scope and in all other respects.
Employee also acknowledges that the enforcement of the restrictive covenants in
this Section 6 will not prevent Employee from finding other employment.
Accordingly, should a court of competent jurisdiction determine that the scope
of any provision of this Section 6 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 noncompetition agreements and nonemployment agreements set forth
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 the Corporation, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Corporation
of the covenants and agreements of Employee contained in the noncompetition, 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. Termination. The Corporation may terminate Employee's employment and
this Agreement at any time for just cause. For purposes of this Section 7, "just
cause" for termination shall include (a) the failure or inability for any reason
of Employee to devote his full business time to the Corporation's business, (b)
the failure of Employee to diligently or effectively perform his duties under
this Agreement, (c) the conviction of Employee of any felony, (d) any breach by
Employee of any of the terms of, or the failure to perform any covenant
contained in, this Agreement, or (e) the violation by Employee of instructions
or policies established by the Corporation with respect to the operation of its
business and affairs or Employee's failure to carry out the reasonable
instructions of the President of the Corporation.
3
<PAGE> 4
8. Death. This Agreement shall terminate automatically upon the death
of Employee.
9. Disability. If at the end of any month Employee is, and has been for
substantially all the normal working days during six or more consecutive months,
unable to perform the duties specified pursuant to this Agreement, due to mental
or physical disability, then Employee's employment may be terminated by the
Corporation. Any determination of such an inability to perform shall be made
only by the President of the Corporation with such professional advice as he may
deem appropriate. Any determination of disability made by the Corporation's
President shall be final and conclusive. Nothing in this Section 9 shall affect
Employee's disability insurance contract rights.
10. Post-Termination Payments. Upon termination pursuant to Sections 7,
8 and 9 of this Agreement, the Corporation shall pay Employee or his estate any
base salary earned and unpaid to the date of termination, and any outstanding
funds advanced by the Corporation to or on behalf of Employee shall become
immediately due and payable. In the event that any funds are due from Employee
to the Corporation, the Corporation shall, upon termination of Employee's
employment, have a right to reduce any payment due to Employee by the sums owed
to the Corporation. In addition, if termination is pursuant to Sections 8 or 9
of this Agreement, then within ninety (90) days after the end of the
Corporation's fiscal year during which Employee's death or commencement of
disability occurred, the Corporation shall pay Employee or his estate a portion
of the annual incentive compensation, if any has been earned, as prorated by the
Corporation's President, which proration shall be final and conclusive.
11. Prior Agreements. This Agreement terminates, cancels and supersedes
all prior verbal and written understandings between the Corporation and Employee
regarding services covered under this Agreement other than the Employee
Confidentiality Agreement executed by Employee for the benefit of the
Corporation, which is in full force and effect.
12. Complete Agreement. This Agreement embodies the complete, full and
exclusive understanding of the Corporation and Employee with respect to
Employee's employment by the Corporation. Any amendments, additions, or
supplements to or cancellation of this Agreement shall be effective and binding
on the Corporation and Employee if in writing and signed by both parties.
Subject to the provision of Section 14 hereof, this Agreement shall be binding
upon the successors and assigns of the parties. No waiver of a breach hereof
shall be deemed to constitute a waiver of a future breach, whether of a similar
or a dissimilar nature.
13. No Assignment. Neither party hereto may transfer or assign its
rights or interests under this Agreement without the other party's written
consent.
14. Notice. Any written notice given under this Agreement by either
party shall be delivered via certified mail, return receipt requested, via
courier or in person directed to the addressee at the address of such addressee
as hereinafter set forth, unless prior written notice of a change of address has
been furnished, in which case such changed address shall be used:
PPO Management Solutions, Inc.
P. O. Box 549005
Dallas, Texas 75354-9005
Patrick W. Kennedy
5101 Captiva Dr.
Plano, Texas 75093
4
<PAGE> 5
Notice shall be deemed to be given upon the date when delivery is first
attempted at the address of the addressee.
15. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Texas.
16. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Agreement.
17. Attorney. Employee acknowledges that the General Counsel of the
Corporation represents the Corporation and not Employee. Employee further
acknowledges that the General Counsel of the Corporation advised the Employee
that he should seek legal counsel for the review of this Agreement.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officers, and Employee has executed this
Agreement by hereunto setting hand as of the day and year first above written.
/s/ PATRICK W. KENNEDY
-------------------------------------
Patrick W. Kennedy
PPO Management Solutions, Inc.
By: /s/ ROBERT O. BROOKS
----------------------------------
Robert O. Brooks, President and
Chief Executive Officer
5
<PAGE> 6
Exhibit A
Key responsibilities:
o Establish a comprehensive technology vision for MedicalControl Network
Solutions, Inc. ("MedicalControl") and PPO Management Solutions, Inc.
("PMS" and together with MedicalControl, the "Company") enabling
leading edge services and performance for the companies and their
clients. Define, develop and implement a strategy to place
MedicalControl and PMS as technical leader within PPO industry and
competitive superiority.
o Define and implement an overall IM strategy for the Company aligned
with corporate business objectives. Strategy must support
MedicalControl Network Solutions, Inc. and PPO Management Solutions,
Inc.
o Build a rapport with Business Unit Executives so that they fully
support the new IM management process - jointly developed, implemented
and enforced by Business Units and IM management, to include: Change
Management, Problem Management, Project Management, Service Level
Agreements, and Measurements.
o Validate current Business Unit IM projects by publishing a baseline of
the projects, their status and priority.
o Hire, train, supervise, assign and evaluate the IM management and
technical staff and oversees the management of the entire IM
organization. Responsible for the corporate IM budget development and
tracking of expenditures.
o Directs and develops staff in the successful performance of their
tasks and responsibilities.
o Develops and implements budget methods and practices to insure
efficient use of corporate IM resources.
o Proactive communication with end-users concerning overall and
divisional/departmental IM customer service.
o Recommends and approves the purchase of all major hardware and
software.
o Develop and implement initiatives to sell, market and support PPO
Management Solutions' products including claims repricing, data center
and software sales.
o Manage the Company's corporate data reporting activities.
o Interface with the Company's clients and prospect clients concerning
systems and operations.
<PAGE> 1
EXHIBIT 10.25
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made and entered into
as of June 24, 1999, by and between ppoONE.com, inc. (the "Corporation") and
Patrick W. Kennedy ("Employee").
WITNESSETH:
WHEREAS, the Corporation changed its name from PPO Management
Solutions, Inc. to ppoONE.com, inc.
WHEREAS, the Corporation and Employee have entered into that certain
Employment Agreement dated as of January 1, 1998 (the "Agreement");
WHEREAS, the Corporation desires to retain Employee and Employee
desires to remain with Corporation;
WHEREAS, the Employee shall be instrumental in the development of new
technology for the Corporation and the trade secrets relating thereto;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration hereinafter recited
the Corporation and Employee agree as follows:
1. SALARY AND BONUS. Section 4 of the Agreement shall be amended to
read in its entirely as follows:
"4. (a) Base Salary. Except as set forth in Section (4(c), the
Corporation shall pay to Employee, and Employee agrees to accept as full
consideration for his employment, $11,666.67 per month during the term of this
Agreement, payable in two equal installments each month, subject to all
withholdings (i) required by federal, state or local law and (ii) pursuant to
any agreement with Employee. If (a) the Corporation shall cease to exist or
operate prior to the expiration of this Agreement and (b) Employee is not an
employee of MedicalControl, Inc. or any of its subsidiaries or any successor in
interest to the Corporation after the merger into the other entity or sale of
the Corporation to the other entity, the Corporation shall be fully liable for
the lesser of (i) all payments and provisions due under this Section 4 for the
remaining term of this Agreement or (ii) one year of Employee base salary at the
time of termination.
(b) Retention Bonus. Employee shall be granted as of June 24, 1999 an
option to purchase 110,000 shares of MedicalControl, Inc. ("MedicalControl")
common stock (as adjusted from time to time and including all options that may
be granted by the Corporation or MedicalControl after June 24, 1999, the
"Incentive Options"). Upon a Change of Control (as hereinafter defined),
Employee, at his election no later than one (1) business day of the Change of
Control, shall either (i) keep the Incentive Options, (ii) exercise the
Incentive Options and sell the stock received in the exercise of the Incentive
Options (the "Option Shares") or (iii) if the aggregate exercise price of the
Incentive Options is greater than the aggregate market value of the Option
Shares, cancel the Incentive Options. If Employee elects to exercise the
Incentive Options and sell the Option Shares, or cancel the Incentive Options,
the Corporation shall pay Employee $400,000 within ten (10) business days of a
Change of Control in, at the option of the Corporation, cash or securities of a
publicly traded corporation (securities of a publicly traded corporation defined
as capital stock acquired by MedicalControl or its shareholders in a Change of
Control) less any and all amounts Employee received through the sale of the
Option Shares (if any) (the "Retention Bonus"). If Employee elects to keep the
Incentive Options, no Retention Bonus will be paid. If Employee sells the Option
Shares, Employee shall use best efforts to obtain the best price for the Option
Shares. If the Corporation or MedicalControl does not timely pay the Retention
Bonus due to Employee, interest will accrue on such unpaid portion at a rate of
the lesser of (i) 10% per annum or (ii) the maximum allowable rate. This
subsection (b) shall be null and void if, other than with the written consent of
the Corporation, Employee
<PAGE> 2
seeks other employment during the term of this Agreement, including without
limitation, forwarding his resume to any person or entity, interviewing with any
person or entity or discussions with any person or entity regarding employment.
The Corporation acknowledges that recruiters and other companies may contact
Employee from time to time with employment opportunities. In such cases,
Employee will inform such person or entity that he is not seeking other
employment at this time. For the purposes of this Agreement, a "Change of
Control" shall be deemed to have occurred if any one or more of the following
have occurred:
(i) Any "person", including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of 1934
and the Rules and Regulations promulgated thereunder, other than J.
Ward Hunt or his heirs, The Answer Partnership Ltd. or any corporation
or partnership owned or controlled by J. Ward Hunt or his heirs, is or
becomes, through one or a series of related transactions or through one
or more intermediaries, the beneficial owner, directly or indirectly,
of securities of MedicalControl representing 51% or more of the
combined voting power of MedicalControl's then outstanding securities;
or
(ii) As a direct result of, or in direct connection with, any
tender offer or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the
foregoing transaction (a "Transaction"), the persons who were Directors
of MedicalControl before the Transaction shall cease to constitute a
majority of the Board of Directors of MedicalControl or any successor
to MedicalControl; or
(iii) MedicalControl is merged or consolidated with another
corporation and as a result of such merger or consolidation less than
40% of the outstanding voting securities of the surviving or resulting
corporation shall then be owned in the aggregate by the former
shareholders of MedicalControl, other than (i) any party to such merger
or consolidation, or (ii) any affiliates of any such party; or
(iv) The Corporation is merged or consolidated with another
corporation and as a result of such merger or consolidation less than
40% of the outstanding voting securities of the surviving or resulting
corporation shall then be owned in the aggregate by MedicalControl or
the former shareholders of MedicalControl, other than (i) any party to
such merger or consolidation, or (ii) any affiliates of any such party;
or
(v) A tender offer or exchange offer is made and consummated
for the ownership of securities of MedicalControl representing 51% or
more of the combined voting power of MedicalControl's then outstanding
voting securities; or
(vi) MedicalControl transfers all or substantially all of the
assets of MedicalControl or the Corporation or all of the capital stock
of the Corporation, to another corporation that is not a wholly owned
corporation (directly or indirectly) of MedicalControl.
(c) Upon Employee's election, which shall be given to MedicalControl in
writing prior to December 15, 1999, all option agreements between
MedicalControl, Inc. and Employee granted prior to June 1, 1999 shall be amended
to accelerate vesting so that such options will be 100% vested as of January 1,
2000. In consideration for such early vesting, Employee's base salary shall
decrease from $11,666.67 per month to $8,333.34 per month from January 1, 2000
until June 30, 2000. On July 1, 2000, Employee's base salary shall return to
$11,666.67 per month.
(d) Section 4(b) and 4(c) of the Agreement are subject to the approval
of the compensation committee of MedicalControl before August 30, 1999 and the
Board of Directors of the Corporation. If such approval is not received and the
payment set forth in Section 4(b) is not made to Employee by MedicalControl or
the Corporation, J. Ward Hunt or his estate shall be wholly responsible to make
such payment to Employee. The Agreement is executed by Mr. Hunt only for the
purposes of this Section 1(d)."
2. TERM. Section 5 of the Agreement shall be amended to read in its
entirely as follows:
<PAGE> 3
"5. Term. This Agreement shall remain in full force and effect until
June 30, 2002."
3. BINDING EFFECT. The Agreement is hereby ratified and confirmed and
shall remain and continue in full force and effect in accordance
with its original terms and provisions, except as specifically amended hereby.
4. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one document.
5. CONFLICT OF LAWS. This Amendment shall be governed by the laws of
the State of Texas without giving effect to its conflict of law provisions.
IN WITNESS WHEREOF, the parties have executed this First Amendment to
Employment Agreement as of the date first written above.
ppoONE.com, inc.
By:/s/ ROBERT O. BROOKS
----------------------------
Robert O. Brooks, President
and Chief Executive Officer
/s/ PATRICK W. KENNEDY
-------------------------------
Patrick W. Kennedy
/s/ J. WARD HUNT
-------------------------------
J. Ward Hunt
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 18, 2000 (March 29, 2000 with respect
to Note 8), accompanying the consolidated financial statements included in the
Annual Report of MedicalControl, Inc. on Form 10-KSB for the year ended December
31, 1999. We hereby consent to the incorporation by reference of said report in
the Registration Statements of MedicalControl, Inc. on Forms S-3 (File No.
333-84367, 333-69363, 333-47781, 333-05025, 33-97646, 33-58334-FW, 33-325321 and
33-91278) and on Forms S-8 (File No. 33-97648, 33-97650, 33-89436, 33-89438,
33-370301 and 33-89440).
GRANT THORNTON, LLP
Dallas, Texas
March 30, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-KSB, into the Company's previously filed FORM
S-8 REGISTRATION STATEMENT NO. 333-70301, 333-89436, 33-89438, 33-89440,
33-97648 and 33-97650 and Form S-3 Registration Statement Nos. 333-84367,
33-25321, 33-58334-FW, 33-91278, 33-97646, 33-05025, 333-47781 and 333-69363.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 640,803<F1>
<SECURITIES> 0
<RECEIVABLES> 1,395,536
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,776,052
<PP&E> 1,544,279
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,461,485
<CURRENT-LIABILITIES> 3,095,123
<BONDS> 0
0
0
<COMMON> 46,256
<OTHER-SE> 8,402,970
<TOTAL-LIABILITY-AND-EQUITY> 12,461,485
<SALES> 15,340,060
<TOTAL-REVENUES> 15,340,060
<CGS> 0
<TOTAL-COSTS> 16,131,742
<OTHER-EXPENSES> (91,095)
<LOSS-PROVISION> 1,225,000
<INTEREST-EXPENSE> 181,878
<INCOME-PRETAX> (2,107,465)
<INCOME-TAX> (551,857)
<INCOME-CONTINUING> (1,555,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,555,608)
<EPS-BASIC> (0.35)
<EPS-DILUTED> (0.35)
<FN>
<F1>EXCLUDES RESTRICTED CASH OF 313,665
</FN>
</TABLE>
