MEMORANDUM OF UNDERSTANDING
AND
AGREEMENT TO PURCHASE
This Memorandum of Understanding ("MOU") is between Rockport Healthcare
Group, Inc. ("Rockport"), a Delaware corporation, Xxxx-Xxxxxxx Benefit
Administrators, Inc. ("B-C"), a Texas corporation, MedCorp Southwest, Inc.
("MSI"), a Texas corporation, and The Xxxxxxx Family Revocable Living Trust,
Xxxxx Xxxxxxx and Xxxxxx Xxxxxxx (collectively, "Owners"), all residents of the
State of Texas.
1. PURCHASE AND SALE OF STOCK. Rockport agrees to buy and Owners agree to
sell all of the issued and outstanding stock of all classes of MSI (the "MSI
Stock") for a total consideration of $550,000.00, payable by delivery at closing
of $100,000 cash and a note payable (the "Note") in the amount of $450,000.00.
The purchase and sale shall be consummated by the execution and delivery of a
stock purchase agreement (the "Stock Purchase Agreement") and other documents
incorporating the terms of this MOU.
2. TRANSITION AGREEMENT. Concurrently with the execution and delivery of
the Stock Purchase Agreement, the parties shall enter into a Transition Services
Agreement under which B-C will agree to perform certain administrative services
for MSI, including billing, collection of fees, repricing of claims, customer
service, provider service, reporting, provider data entry, and data base
maintenance, during July of 1998 and, at Rockport's option, August of 1998.
Services provided will not include recruiting and credentialling of providers,
recontracting of providers, management, accounting or paying for insurance
coverages. B-C shall receive a payment of 50% of the total MSI monthly revenue
for any month these transition services are provided.
3. PROMISSORY NOTE. Beginning on October 1, 1998, all remaining principal
and interest due on the Note will be paid in full in equal monthly payments over
a 60-month period.
- All amounts paid on the Note shall be applied first to accrued but unpaid
interest, which shall accrue at the rate of 8% per annum, then to
principal.
- At any time on or after of October 1, 1998 (the "Conversion Date"), the
Owners may elect, from time to time, to convert any or all of the
outstanding Note balance to Rockport Stock at a conversion rate equal to
$2.50 per share, up to a maximum number of 180,000 shares. The Rockport
Stock so acquired will be subject to SEC Rule 144 providing for a one-year
holding period from the date the Note is issued before the stock may be
sold.
- Subsequent to the Conversion Date, the Note may be prepaid by Rockport
without penalty; provided however, that the Owners shall have a period of
30 days following receipt by them of written notice of an anticipated
prepayment, within which to exercise the conversion privilege should they
so desire.
4. SECURITY. The Note at all times shall be secured by a pledge of all of
the MSI stock. Owners shall retain possession of the MSI stock certificates
issued to Rockport and a stock power, executed in blank, during the term of the
pledge. The Pledge Agreement will contain affirmative covenants relative to the
operation of MSI to be observed as long as the Note is outstanding, including
without limitation, the following:
(i) Rockport will not (a) change the name of the corporation, (b)
transfer, assign or encumber the assets of MSI, (c) permit MSI to incur any
debt other than in the ordinary course of business or permit MSI to incur
any debt (other than trade payables) which is not subordinate to the Note,
(d) permit MSI to issue additional debt or equity securities, or (e) permit
MSI to enter into a merger, acquisition or other transaction that would
result in the assumption of liabilities of any other entity, or (f) permit
MSI to guaranty the payment or performance of obligations by any other
entity;
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(ii) Rockport will not, directly or indirectly, use any MSI contracts or
covered lives to create or improve a competing network;
(iii) Rockport will increase the number of non-occupational Texas health
care providers by 200 and the number of Texas acute care hospitals by two
each calendar quarter, beginning with the quarter starting on October 1,
1998. By June 30, 2000, Rockport will have increased the number of non-
occupational Texas health care providers by 2,000 and number of Texas acute
care hospitals by 20. These increases will be through direct contracts with
providers or contracts with organizations authorized to contract on behalf
of providers and not through network access agreements. The contracts will
provide a significant discount off of billed charges. For any quarter in
which Rockport fails to achieve the required growth, it will pay a $10,000
prepayment of the Note within 15 days after the end of the quarter;
(iv) Rockport will institute and maintain a credentialling and
recredentialling process for new and existing providers that meets the
standards of the National Commission on Quality Assurance or the American
Health Care Accreditation Commission. Rockport will complete the process for
at least 5% of the network providers each quarter beginning with the quarter
ending September 30, 1998. By June 30, 2000, Rockport will have all
providers properly credentialled. For any quarter in which Rockport fails to
achieve the required percentage, it will pay a $10,000 prepayment of the
Note within 15 days after the end of the quarter;
(v) Beginning on or before August 1, 1998, Rockport shall begin
recontracting network providers and recruiting new providers that meet the
Rockport's standards and will complete this process by June 30, 2000. During
this process Rockport will make a diligent and commercially reasonable
effort to obtain maximum discounts from new and existing providers;
(vi) Rockport will promptly pay, as they come due, all local, state and
federal taxes, all trade payables, all lease obligations and all other
obligations as long as the Note is outstanding.
(vii) Rockport will provide a quarterly report, within 15 days of the end
of each calendar quarter, to the Owners confirming its compliance with he
covenants outlined in paragraphs (iii)-(vi) above, or detailing any events
of non-compliance. An officer of Rockport shall certify the accuracy of each
report. The Note will provide that the Owners will have the right, from time
to time, to audit the books and records of Rockport by giving five days
notice;
(viii) Rockport will submit to Owners a monthly balance sheet, income
statement and statement of cash flows, all prepared in accordance with
generally accepted accounting principles within 30 days of the end of each
month, and annual audited financial statements within 90 days of each year
end;
(ix) Neither Rockport nor its employees, agents or representatives
shall, directly or indirectly, divulge any confidential information of MSI;
(x) Rockport will continue MSI's current professional liability policy
through the end of its term by making timely payments on the premium finance
note dated January 6, 1998 payable to Imperial Premium Finance, Inc. or
alternatively by paying such note in full at closing. Thereafter, during the
term of the Note, Rockport will maintain professional liability coverage for
MSI, through the same or a new policy, that contains a retroactive date of
January 5, 1989, has policy provisions at least as favorable to the MST as
the current provisions, and is written by an insurance company with a Best
rating of "A" or better. During the term of the Note, Rockport will maintain
comprehensive general liability coverage for MSI, with limits not less than
$1,000,000 per claim. If during the term of the Note, Rockport or an
affiliated company has worker's compensation insurance or commercial
automobile liability coverage, then Rockport will add MSI to such policy as
an additional named insured;
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(xi) One representative of the Owners shall be designated to receive all
information provided to the Board of Directors and to members of committees
of the Board of Directors of Rockport, and shall be allowed to attend all
meetings of the Board of Directors and of committees of the Board of
Directors of Rockport;
(xii) MSI will not enter into any employment or consulting arrangements
that cannot be terminated on 30 days notice, which provide for more than 30
days severance pay, or which contain provisions for payments to be made to
employees or consultants on a change of control of the Company; and
(xiii) Each calendar quarter beginning October 1, 1998, and continuing
until the Note is paid. Rockport will provide MSI with a complete provider
data base.
If Rockport defaults on the Note or the Pledge Agreement and such default is
not cured within 10 business days, Owners may exercise their rights under the
Pledge Agreement to have the MSI shares reissued in their names and Rockport
shall immediately transfer possession of all of the books, records and other
assets of MSI to the Owners and cooperate with the Owners in the transition of
ownership of MSI to the Owners. In that event, all agreements referred to in
this MOU shall terminate.
5. ADMINISTRATIVE SERVICES AGREEMENT. Concurrently with the execution and
delivery of the Stock Purchase Agreement, B-C and MSI shall enter into an
Administrative Services Agreement pursuant to which B-C will have the right for
10 years to reprice the claims on all current and future B-C clients that use
the MSI network. The Administrative Services Agreement will provide that
Rockport will pay B-C a repricing fee on such business equal to:
(i) on all future business directed to MSI by B-C, the fees or
commissions that MSI is paying brokers at the time the subscriber agreements
are executed or 10% of the total subscriber fee, whichever is greater, plus
(ii) on all current and future business directed to MSI by B-C, 30% of
the total subscriber fee or $1.00 per month per covered employee, whichever
is less.
6. CONTINUING RELATIONSHIP. It is the intention of Rockport and B-C to
seek to maintain an ongoing relationship to the mutual best interests of both
parties. Rockport agrees to meet the network needs of the B-C clients on a
reasonable, best efforts basis. Should B-C decide to enter the claims
adjudication for workers' compensation business, Rockport agrees to provide
technical assistance on a reasonable basis.
7. B-C'S REPRESENTATIONS AND WARRANTIES. B-C acknowledges and represents
that:
- For the first four months of 1998, gross revenue of MSI has averaged
approximately $25,000.00 to $26,000.00 per month;
- The repricing fee to B-C, under section 6, based on MSI business for the
first four months of 1998 would approximate $3,000.00 per month, but the
actual repricing fee will vary depending upon the actual business in
force;
- The Owners have been provided with the Rockport Private Placement
Memorandum and are aware of the risks of such an investment;
- The Owners of MSI and B-C will make a capital contribution to the equity
of MSI of any inter-company payable which may exist on the books of MSI;
- All current assets of MSI, other than the contracts with providers, will
be distributed to the Owners prior to the closing of the purchase;
- MSI will have no known liabilities as of the date of closing. At the time
of closing B-C will assume all liabilities for unpaid broker fees and
network access fees that relate to periods prior to the closing date;
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- The preferred provider network owned by MSI has approximately 9,700
providers under contract located in Texas, Oklahoma and Arkansas.
8. ROCKPORT'S REPRESENTATIONS AND WARRANTIES. Rockport acknowledges,
represents and warrants that:
- Rockport has been made aware that the current MSI client, the Texas Oil
Marketers Association, is liquidating its business and that this MSI
business will decline from now and be eliminated by September 30, 1998,
and that the net revenue from this business for January, February, March
and April of 1998 was about $5,125, $4,290, $3,267, and $8,526
respectively;
- Rockport has been made aware that the current MSI client, Principal Mutual
Life Insurance Company, has notified MSI that it intends to begin moving
it business beginning on or about September 1, 1998, and that it may take
up to one year from that point to move all of its business. The monthly
revenue from the Principal business for the first four months of 1998 was
approximately $5,400.00 per month; and
- The disclosures in the Private Placement Memorandum are true and correct
in all material respects and do not omit any information necessary to make
the information therein complete.
9. SOUTHWEST HEALTH NETWORK. Owners shall have the option, through one
year from the closing of the Stock Purchase Agreement, to require Rockport to
assign all contracts executed in the name of Southwest Health Network to any
individual or entity named by Sellers for the sum of $1.00. If Sellers exercise
this option, Rockport shall cause MSI to assign its "Southwest Health Network"
assumed name, and all common law or other rights to that name, and all goodwill
associated therewith, to the entity receiving the assignment of the contracts.
Likewise, Rockport shall have the option, through one year from the closing of
the Stock Purchase Agreement, to require Owners to move the contracts and
assumed name out of MSI.
10. CLOSING. The closing of the purchase of MSI by Rockport shall occur no
later than July 1, 1998, unless such time is extended by the mutual agreement of
both parties. The transaction may close on an earlier date if possible.
11. NO PUBLICITY. Rockport may inform its potential investors about this
MOU. The parties shall not otherwise disclose to any person the existence of
this MOU, nor shall they issue, prior to the closing date, any press release,
public statement or other public notice with respect to the transactions
contemplated in this MOU without the consent of the other parties.
12. PROPRIETARY INFORMATION. Each party to this MOU shall keep all
Proprietary Information (as hereinafter defined) obtained by either party from
the other party hereto confidential and shall disclose such information only to
their respective employees and representatives who have a need to know of such
information in connection with the proposed transaction. If the Stock Purchase
Agreement is not signed, all Proprietary Information shall be promptly returned
to the other party and deleted from any computer storage to which the other
party has access. Proprietary Information shall mean information which is not in
the public domain.
13. BINDING LETTER OF INTENT. The parties intend that this Letter of
Intent be a binding agreement and the parties agree to negotiate in good faith
with respect to the completion of final documents.
Dated this day of May, 1998.
ROCKPORT HEALTHCARE GROUP, INC.
/s/ XXXXX X. XXXX
-------------------------------------------
Xxxxx Xxxx, President
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XXXX-XXXXXXX BENEFIT ADMINISTRATORS, INC.
/s/ X. X. XXXXXXX
-------------------------------------------
X. X. Xxxxxxx, President
MEDCORP SOUTHWEST, INC.
/s/ X.X. XXXXXXX
-------------------------------------------
X.X. Xxxxxxx, President
OWNERS:
The Xxxxxxx Family Revocable Living Trust
/s/ X. X. XXXXXXX
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X. X. Xxxxxxx, Co-Trustee
/s/ XXXXX XXXXXXX
-------------------------------------------
Xxxxx Xxxxxxx, Co-Trustee
/s/ XXXXX XXXXXXX
-------------------------------------------
Xxxxx Xxxxxxx
/s/ XXXXXX XXXXXXX
-------------------------------------------
Xxxxxx Xxxxxxx
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