<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934
For the transition period from to
-------------- -------------
Commission File Number: 1-11922
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MEDICALCONTROL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 75-2297429
- ------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
8625 King George Drive, Suite 300; Dallas, Texas 75235
------------------------------------------------------
(Address of principal executive offices)
(214) 630-6368
---------------------------
(Issuer's telephone number)
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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock - 4,519,155 as
of August 10, 1999.
Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X]
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MEDICALCONTROL, INC.
Form 10-QSB for the Quarter ended June 30, 1999
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 13
PART II - OTHER INFORMATION 17
</TABLE>
2
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MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 880,302 $ 1,112,653
Restricted cash 738,474 308,002
Accounts receivable - trade, net of allowance
for doubtful accounts of $177,000 and $119,000
at June 30,1999 and December 31, 1998, respectively 1,424,337 1,312,043
Accounts receivable - premium 347,356 466,980
Accounts receivable - other 63,249 90,671
Income tax receivable 706,366 472,691
Prepaid expenses and other current assets 468,140 227,391
Deferred income taxes 169,028 169,028
----------- -----------
Total current assets 4,797,252 4,159,459
NOTE RECEIVABLE - OFFICER, including accrued interest 434,229 421,175
PROPERTY AND EQUIPMENT, NET 1,646,341 1,697,698
GOODWILL, NET 6,414,276 7,772,833
INTANGIBLE AND OTHER ASSETS, NET 57,516 97,991
DEFERRED TAXES 526,270 85,270
----------- -----------
TOTAL ASSETS $13,875,884 $14,234,426
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 1,315,935 $ 916,826
Accounts payable - premium 1,085,830 774,982
Accrued liabilities 672,128 773,749
Borrowings under bank line of credit 400,000 325,000
Current portion of long-term debt 947,087 1,115,515
----------- -----------
Total current liabilities 4,420,980 3,906,072
NON-CURRENT LIABILITIES
Long-term debt, net of current portion 1,302,493 1,554,484
Deferred gain on sale of option on real estate 743,917 789,417
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, 4,355,579 and 4,115,409 issued
in 1999 and 1998, respectively 43,556 41,154
Additional paid-in capital 6,717,510 6,210,002
Retained earnings 647,428 1,733,297
----------- -----------
Total stockholders' equity 7,408,494 7,984,453
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,875,884 $14,234,426
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For The Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,862,679 $ 3,604,058 $ 7,774,913 $ 7,084,015
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries and wages 2,468,875 2,177,664 5,066,805 4,290,970
Other operating expenses 1,331,717 1,216,053 2,750,127 2,543,687
Depreciation and amortization 188,427 234,992 373,055 467,698
Loss from impairment 1,225,000 -- 1,225,000 --
----------- ----------- ----------- -----------
Total operating expenses 5,214,019 3,628,709 9,414,986 7,302,355
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,351,340) (24,651) (1,640,073) (218,340)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (55,223) (2,442) (122,047) (4,648)
Investment income 20,600 38,016 43,734 78,854
Other income 2,542 (211) 2,542 932
----------- ----------- ----------- -----------
Total other (expense) income (32,080) 35,363 (75,771) 75,138
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,383,421) 10,712 (1,715,844) (143,202)
Income taxes (benefit) (501,992) 4,191 (629,975) (55,133)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (881,429) $ 6,521 $(1,085,869) $ (88,069)
=========== =========== =========== ===========
Basic loss per share $ (0.21) $ 0.00 $ (0.26) $ (0.02)
=========== =========== =========== ===========
Diluted loss per share $ (0.21) $ 0.00 $ (0.26) $ (0.02)
=========== =========== =========== ===========
Weighted average common shares outstanding 4,231,659 3,857,205 4,193,640 3,837,010
=========== =========== =========== ===========
Weighted average common and diluted shares outstanding 4,231,659 3,892,236 4,193,640 3,837,010
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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MEDICALCONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
Net loss $(1,085,869) $ (88,069)
Adjustments to reconcile net loss
to net cash provided by operations:
Depreciation and amortization 373,055 467,698
Amortization of deferred gain on real estate transaction (45,500) (37,917)
Loss on impairment 1,225,000 --
Net changes in certain assets and liabilities
Accounts receivable - trade (112,294) 326,139
Income tax receivable (233,675) (103,257)
Prepaid expenses and other current assets (200,914) (101,932)
Accounts payable - trade 399,109 78,592
Accrued expenses (101,621) (318,445)
Deferred income taxes (441,000) --
----------- -----------
Net cash provided by (used in) operating activities (223,709) 222,809
----------- -----------
CASH FLOWS RELATED TO INVESTING ACTIVITIES
Acquisition and goodwill costs (21,000) --
Purchases of property and equipment (139,079) (109,241)
----------- -----------
Net cash used in investing activities (160,079) (109,241)
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CASH FLOWS RELATED TO FINANCING ACTIVITIES
Loan to officer, including accrued interest (13,054) (11,954)
Draw on bank line of credit 75,000 175,000
Payments on long-term debt (420,419) (40,258)
Proceeds from issuance of common stock 509,910 281,852
Acquisition of treasury stock -- (451,000)
----------- -----------
Net cash provided by (used in) financing activities 151,437 (46,360)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (232,351) 67,208
Cash and cash equivalents at beginning of period 1,112,653 2,031,550
----------- -----------
Cash and cash equivalents at end of period $ 880,302 $ 2,098,758
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 99,306 $ 7,427
=========== ===========
Income taxes paid $ -- $ 412,700
=========== ===========
Restricted cash at period end date $ 738,474 $ 877,550
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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MEDICALCONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
NOTE 1 - BACKGROUND AND ORGANIZATION
MedicalControl, Inc. (the "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. ("ppoONE.com"), providing repricing and administrative
services for PPO's and certain network healthcare providers, and ValueCheck,
Inc. ("ValueCheck"), the newly-formed subsidiary providing utilization review
and case management services. All significant intercompany transactions have
been eliminated. The Company's contracts with its customers are renewable
annually and permit cancellation upon 30 to 60 days' notice.
During September 1998, MedicalControl Network Solutions, Inc. acquired Business
Health Companies, Inc. ("BHC"). See Note 5 for further discussion.
NOTE 2 - BASIS OF PRESENTATION
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
have not been audited or reviewed by independent public accountants. In the
opinion of management, all adjustments (which consisted only of normal
recurring accruals) necessary to present fairly the financial position and
results of operations have been made. Pursuant to SEC rules and regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from these statements unless significant changes
have taken place since the end of the most recent fiscal year. The Company
believes that the disclosures contained herein, when read in conjunction with
the financial statements and notes included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998, are adequate to make
the information presented not misleading. It is suggested, therefore, that
these statements be read in conjunction with the statements and notes included
in the aforementioned Form 10-KSB.
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding during the period. Diluted earnings per share
are computed by dividing net income by the weighted average dilutive shares
outstanding during the period. There was no impact from dilutive common
equivalent shares since losses were reported for the three-month and six-month
periods ended June 30, 1999 and the six-month period ended June 30, 1998.
In the six months ended June 30, 1999 and 1998 and the three months ended June
30, 1999, 507,775, 182,276 and 516,630 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.
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NOTE 4 - REGISTRATION STATEMENT
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. The
stock registered serves as collateral for certain loans of the majority
shareholder.
During July 1999, the Company filed a registration statement with the Securities
and Exchange Commission to register certain additional existing 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.
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 $4,500,000 plus liabilities assumed of $264,138
and accrued acquisition costs of $150,000. BHC provides managed care services,
primarily through its PPO networks within the 15-county Houston, Texas market.
The purchase consideration consisted of $2,150,000 in cash, an aggregate of
$1,000,000 in subordinated convertible notes to the previous shareholders of
BHC and 270,900 shares of Company stock valued at approximately $1,422,000. 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.
NOTE 6 - 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% at June
30, 1999) and is payable in monthly installments of principal and interest
through October 2003. The subordinated convertible seller notes bear interest
at 8.5% and are payable in quarterly installments of principal and interest
through October 2003. The notes are convertible into common stock of the
Company 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. See Note 9-Subsequent Events for further discussion.
In conjunction with the bank financing above, the Company's existing $1,000,000
line of credit was terminated and a new revolving credit facility was obtained.
This credit facility, secured by accounts receivable, 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% at June 30, 1999). As of June 30,
1999, the Company had no availability under its line of credit.
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 made principal reductions
of $200,000 on March 31, 1999 and $50,000 on June 15, 1999. Further, the
Company is required to make an additional principal reduction of $550,000 to be
paid with a portion of the proceeds from an income tax refund expected in the
third quarter of 1999 and the sale of common stock subsequent to June 30, 1999
- -see Note 9-Subsequent Events. The
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revised new term note includes certain revised financial covenants, including
minimum cash flow, stockholders' equity and working capital requirements, and is
secured by a pledge of certain shares of the Company's wholly-owned
subsidiaries. The Company is required to make monthly payments of principal and
interest, as described above. No other modifications were made to this credit
facility.
Although there can be no assurance, the Company believes that it will be in
compliance with its debt covenants through 1999.
Management believes that cash flows from operations and cash on hand will be
sufficient to fund liquidity needs and capital requirements in 1999.
NOTE 7 - SALE OF DIVISION
In August 1999, the Company's TPA subsidiary completed the sale of its
unprofitable division located in Dallas, Texas. The sale has resulted in an
impairment of the goodwill attributable to this division in the amount of
$1,225,000, which is reflected as a charge against earnings for the three-month
and six-month periods ended June 30, 1999, reduced by a deferred tax benefit of
$441,000.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
Comprehensive Income
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted SFAS No. 130 effective January 1,
1998. Management believes the impact of SFAS No. 130 was immaterial as there
were no items of other comprehensive income for the periods ended June 30, 1999
and 1998.
Business Segment Reporting
Effective January 1, 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 preferred provider organization, third party
administration services, repricing and administrative products and services
offered through its wholly-owned subsidiary, ppoONE.com, and utilization review
and case management services through its newly-formed wholly-owned subsidiary,
ValueCheck.
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
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managed outside the segment. Costs excluded from the segment operating profit
consist of corporate expenses, including income taxes, amortization expense and
interest income and interest expense. Corporate expenses are comprised
primarily of executive compensation 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 three and six month periods
ended June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PPO Segment:
Revenues $ 2,068,370 $ 1,795,865 $ 4,126,847 $ 3,679,714
Operating expenses 1,708,142 1,376,012 3,498,085 2,890,457
----------- ----------- ----------- -----------
Operating profit 360,228 419,853 628,762 789,257
Depreciation 41,630 46,367 82,970 120,470
Segment assets 1,902,536 2,371,946 1,902,536 2,371,946
TPA Segment:
Revenues $ 1,599,713 $ 1,701,709 $ 3,339,130 $ 3,228,382
Operating expenses 1,540,920 1,354,227 3,220,745 2,742,232
----------- ----------- ----------- -----------
Operating profit 58,793 347,482 118,385 486,150
Depreciation 43,657 31,564 84,901 62,727
Segment assets 3,245,694 4,651,700 3,245,694 4,651,700
ppoONE.com Segment:
Revenues $ 661,041 $ 388,187 $ 1,271,196 $ 736,717
Operating expenses 750,950 834,956 1,524,091 1,510,602
----------- ----------- ----------- -----------
Operating loss (89,909) (446,771) (252,895) (773,885)
Depreciation 24,399 50,776 48,633 72,056
Segment assets 341,595 298,019 341,595 298,019
ValueCheck Segment:
Revenues $ 35,359 $ -- $ 67,021 $ --
Operating expenses 115,599 -- 218,359 --
----------- ----------- ----------- -----------
Operating loss (80,240) -- (151,338) --
Depreciation 1,101 -- 1,994 --
Segment assets 119,469 -- 119,469 --
</TABLE>
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A reconciliation of the Company's segment revenues, operating profit (loss) and
segment assets to the corresponding consolidated amounts as of and for the
three and six month periods ended June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Segment revenues $ 4,364,483 $ 3,885,761 $ 8,804,194 $ 7,644,813
Intercompany revenues 501,805 281,703 1,029,281 560,798
----------- ----------- ----------- -----------
Consolidated revenues $ 3,862,678 $ 3,604,058 $ 7,774,913 $ 7,084,015
=========== =========== =========== ===========
Segment operating profit $ 248,872 $ 320,564 $ 342,914 $ 501,522
Corporate expenses, net 375,212 345,215 757,987 719,862
----------- ----------- ----------- -----------
Consolidated operating loss $ (126,340) $ (24,651) $ (415,073) $ (218,340)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
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<S> <C> <C>
Segment assets $ 5,609,294 $ 4,309,347
Corporate assets 8,266,590 9,925,079
----------- -----------
Consolidated assets $13,875,884 $14,234,426
=========== ===========
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the holders of the remaining principal balance of
$850,000 of convertible seller notes converted into 161,903 shares of common
stock. In addition, the Company sold in a private transaction 38,000 shares of
common stock for $294,500 and employees holding stock options for 6,547 shares
of common stock exercised the options for an aggregate exercise price of
$28,380.
SUPPLEMENTAL FINANCIAL INFORMATION
On July 23, 1999, the Company issued a press release announcing its move to the
Nasdaq SmallCap Market.
On July 26, 1999, the Company's common stock moved from the Nasdaq National
Market to the Nasdaq SmallCap Market via an exception from the Net Tangible
Assets requirement of the maintenance criteria for continued listing on the
Nasdaq SmallCap Market. While the Company failed to meet the Net Tangible
Assets test as of July 26, 1999, the Nasdaq Listing Qualifications Panel (the
"Panel") granted the Company a temporary exception from this standard, subject
to the Company meeting certain conditions, including reaching a level of Net
Tangible Assets of at least $2.5 million by August 16, 1999.
The Panel also required the Company to file publicly with the Securities and
Exchange Commission a pro forma balance sheet evidencing the required level of
Net Tangible Assets. Accordingly, the Company is filing herewith its unaudited
pro forma condensed consolidated balance sheet as of June 30, 1999 and the
notes thereto, reflecting certain transactions between June 30, 1999 and August
16, 1999 which increased the Company's Net Tangible Assets to the required
level.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The historical consolidated balance sheet at June 30, 1999 is derived from the
Company's unaudited financial statements. In management's opinion, the
Company's unaudited financial statements at June 30, 1999, and for the six
months then ended, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position at June 30, 1999.
The unaudited pro forma condensed consolidated balance sheet is presented on
(i) a historical basis, and (ii) as if the Company had completed the sale of
38,000 shares of common stock in a private transaction, subordinated
convertible notes in the aggregate principal amount of $850,000 were converted
into 161,903 shares of common stock, stock options covering 6,547 shares of
common
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stock were exercised and the sale of the Dallas division of the Company's TPA
subsidiary had been completed on or before June 30, 1999.
The pro forma adjustments are based upon available information and actual
transactions which have occurred since June 30, 1999 and prior to the filing
date. In the opinion of management, all adjustments necessary to fairly present
the pro forma condensed consolidated balance sheet have been made. The
unaudited pro forma condensed consolidated balance sheet is provided for
informational purposes only and does not purport to be indicative of the
financial results that would have been reported had such events actually
occurred on the dates specified.
MEDICALCONTROL, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
JUNE 30, 1999 ADJUSTMENTS JUNE 30, 1999
------------- ------------ -------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 880,302 ) $ 294,500 (1) $ 1,203,182
) 28,380 (3)
Accounts receivable, trade and other current assets 3,853,701 3,853,701
Accounts receivable other 63,249 175,000 (4) 238,249
------------ ------------
Total current assets 4,797,252 5,295,132
0
LONGTERM RECEIVABLE FROM SALE OF DIVISION 300,000 (4) 300,000
GOODWILL, NET 6,414,276 (336,000) (4) 6,078,276
PROPERTY AND EQUIPMENT AND OTHER
NONCURRENT ASSETS 2,664,356 (27,000) (4) 2,637,356
------------ ------------ ------------
TOTAL ASSETS $ 13,875,884 $ 434,880 $ 14,310,764
============ ============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable trade and other current liabilities $ 2,801,765 $ 2,801,765
Accrued liabilities 672,128 112,000 (4) 784,128
Current portion of longterm debt 947,087 (200,000) (2) 747,087
------------ ------------
Total current liabilities 4,420,980 4,332,980
NONCURRENT LIABILITIES
Longterm debt, net of current portion 1,302,493 (650,000) (2) 652,493
Deferred gains 743,917 743,917
SHAREHOLDERS' EQUITY ) 294,500 (1)
Common stock and additional paidin capital 6,761,066 ) 850,000 (2) 7,933,946
) 28,380 (3)
Retained Earnings 647,428 647,428
------------ ------------
Total Shareholders' Equity 7,408,494 8,581,374
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,875,884 $ 434,880 $ 14,310,764
------------ ------------ ------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
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Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(1) Represents the sale of 38,000 shares of common stock for $294,500 in a
private transaction on August 12, 1999.
(2) Reflects the conversion of the remaining principal balance of $850,000
of subordinated convertible notes into 161,903 shares of common stock.
(3) Represents stock options exercised by employees between July 1, 1999
and August 11, 1999.
(4) Reflects the completion of the sale of the Dallas division of the
Company's TPA subsidiary and the recording of the sales proceeds and
certain selling costs.
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PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO THE QUARTER AND SIX
MONTHS ENDED JUNE 30, 1998.
(1) RESULTS OF OPERATIONS
Net revenues for the three and six months ended June 30, 1999 were up
$259,000 or 7% and $691,000 or 10% from the comparable 1998 periods. PPO
revenues increased approximately $273,000 for the quarter and $447,000 for
the six months primarily due to acquired BHC revenues, which were $677,000
for the quarter and $1,388,000 for the six months, reduced by lower Dallas
PPO revenues of $317,000 and $708,000 for the three and six month periods.
TPA revenues decreased approximately $102,000 for the quarter primarily
due to lost customers in the first six months of 1999 which were not
completely offset by revenues from new business signed.
The net loss for the three and six month periods ended June 30, 1999 was
$(881,429), or $(.21) per share and $(1,085,869), or $(.26) per share,
compared with net income of $6,521 (less than $.01 per share) and a net
loss of $(88,069) or $(.02), for the same periods in 1998. The loss in
both 1999 periods included the $1,225,000 loss from the impairment of
goodwill attributable to a division of the TPA subsidiary sold subsequent
to June 30, 1999, reduced by a deferred tax benefit of $441,000 resulting
in a net loss of $(784,000), or $(.19) per share. The additional decline
was due primarily to increases in personnel costs and operating expenses
more fully discussed below.
Salaries and wages increased $291,000 or 13% for the three months and
$776,000 or 18% for the six months ended June 30, 1999, as compared with
the respective prior year periods. Organizational restructuring during the
first quarter of 1999 resulted in PPO personnel cost savings in the second
quarter while expenses increased due to additional personnel in the PPO as
the result of the BHC acquisition, and in the TPA relating to the systems
conversion efforts and the Harrisburg acquisition.
Other operating expenses increased by approximately $116,000 for the three
months ended June 30, 1999, or 10%, and $206,000 or 8% for the six months
ended June 30, 1999, as compared to the same periods in 1998. The
increased expenses were primarily due to licensing fees associated with
the new utilization review business, higher telecommunications expense
primarily in the TPA, increased business insurance premiums and other
increases arising from the acquisitions, reduced by substantially lower
access fees paid to affiliate PPO networks because of the relative mix of
capitated versus percentage of savings client fees.
Depreciation and amortization declined approximately $47,000 and $95,000
for the three months and six months ended June 30, 1999, compared to the
same periods in 1998, as a result of the Company's write-off of
capitalized software development costs in September 1998.
Other income (expense) declined for the three months and six months ended
June 30, 1999, from income of approximately $35,000 and $75,000, primarily
interest income, to expense of approximately $32,000 and $76,000,
respectively, mainly as the result of interest expense on debt incurred to
acquire BHC.
13
<PAGE> 14
(2) LIQUIDITY AND CAPITAL REQUIREMENTS
The Company had net working capital of approximately $376,000 at June 30,
1999, compared with $253,000 at December 31, 1998. Unrestricted cash and
cash equivalents were $880,000 at June 30, 1999, compared with $1,113,000
at December 31, 1998. Cash used in operations during the first six months
of 1999 was approximately $224,000 compared with cash provided by
operations of approximately $223,000 during the same period in 1998.
Capital expenditures for the purchase of tangible property and equipment
were approximately $139,000 for the six months ended June 30, 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 $4,500,000. 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% at June 30, 1999) and is payable in sixty monthly principal
installments of $26,667 plus interest through October 2003. The convertible
seller notes bear interest at 8.5% and are payable in quarterly principal
installments of $50,000 plus interest through October 2003. The notes are
convertible into common stock of the Company 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.
At June 30, 1999, the Company had $400,000 of 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% (9% at June 30, 1999).
In March and May 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 and $50,000 on
June 15, 1999. An additional principal reduction of approximately $550,000
is required to be paid with a portion of the proceeds from an income tax
refund, estimated at $400,000, expected in the third quarter of 1999 and
from the sale of 38,000 shares of the Company's common stock for $294,500
subsequent to June 30, 1999. The revised term note includes covenants
which impose minimum requirements for cash flow, 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. Although there can be no assurance, the Company believes that
it will be in compliance with its debt covenants throughout 1999.
Management believes that cash flows from operations, cash on hand, and the
borrowing capacity under the Company's line of credit will be sufficient
to fund liquidity needs and capital requirements for the 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.
14
<PAGE> 15
(3) RELIANCE ON DATA PROCESSING
The Company's management has recognized the need to ensure that its
operations and relationships with vendors and other third parties will not
be adversely impacted by software processing errors arising from
calculations using the year 2000 and beyond ("Year 2000"). Management
recognizes that failure by the Company to timely resolve internal Year
2000 issues could result, in the worst case, in an inability of the
Company to store, retrieve, process, and manage data in support of its
claims repricing and third party administration services. However, Company
management believes that scenario is unlikely based on the progress made
in its Year 2000 remediation plan. Failure of one or more third party
service providers on whom the Company relies to address Year 2000 issues
could also result, in a worst case scenario, in some business
interruption. The lost revenues, if any, resulting from a worst case
scenario such as those examples described above would depend on the time
period during which the failure goes uncorrected and on how widespread the
impact.
The Company began a formal program in 1998 to evaluate, assess and make
the needed changes to its core information technology ("IT") systems and
applications to comply with Year 2000 issues. Management has completed its
review of all essential IT systems and believes that they are Year 2000
compliant 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 has taken longer than expected and has cost the
Company approximately $850,000 to date in non-recurring expenses and is
estimated to cost an additional $150,000 in non-recurring expenses during
the remainder of 1999 before such conversion is completed.
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 is continuing to inventory and evaluate all
non-essential software programs and hardware used in the Company's
business. Management expects this process to be complete by September 30,
1999. Non-compliant systems are being replaced, modified or outsourced as
they are reviewed. The Company has communicated, and will continue to
communicate, with its suppliers, financial institutions and others with
which it does business to monitor and evaluate Year 2000 conversion
progress.
With regard to non-IT systems, such as general office security systems and
phone systems, the Company is currently evaluating the compliance of such
systems. Systems that are not compliant, if any, will be remediated,
upgraded or replaced by September 30, 1999. Management anticipates that
expenditures related to these activities will not exceed $20,000.
Direct expenditures associated with Year 2000 issues, excluding costs
associated with the development of the underlying core IT systems, have
been immaterial to date and have been funded through the Company's normal
IT operations budget.
The Company has had each of its departments or divisions develop basic
contingency plans to restore the material functions of each of its
material systems or activities in the case of a Year 2000 related failure.
The contingency plans cover all material levels of activity within each
business location. The Company plans to continually refine these plans and
to make them more comprehensive as more information becomes available from
testing and third party suppliers.
15
<PAGE> 16
Although there can be no assurance that the Company will be able to
complete all of the modifications in the required time frame, nor that
unanticipated events will occur, or that the Company will be able to
identify all Year 2000 issues before problems manifest themselves, it is
management's belief that the Company is taking adequate action to address
Year 2000 issues. Management does not expect the Year 2000 compliance
efforts or related expenditures to be material to the Company's
consolidated financial position, results of operations or cash flows.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
As of August 1, 1999, the Registrant's third party administration ("TPA")
services subsidiary, Diversified Group Administrators, Inc., headquartered
in Canonsburg, Pennsylvania completed the sale of its business serviced by
its Dallas, Texas division to Group Resources, Inc. of Atlanta, Georgia
("GRI"). The assets sold were primarily accounts serviced from its Dallas
office and related business records. The maximum purchase price is $591,287
subject to adjustment based on collections. Under the terms of the purchase
agreement, GRI has made one payment of $26,214, shall make two additional
payments of $26,214 on September 10, 1999 and October 10, 1999, a payment
of $14,240 on October 10, 1999 and 35 monthly payments thereafter based
upon a percentage of collections for the accounts sold. The maximum
purchase price was derived by a percentage of historical annual revenues.
The financial statements filed herewith in Part I reflect a loss from the
impairment of goodwill relating to this division and, under Supplemental
Financial Information on pages 10, 11 and 12, there is a pro forma balance
sheet which reflects, among other things, the effect of the sale. In
addition, the Registrant is filing herewith its unaudited pro forma
condensed consolidated statements of operations for the six months ended
June 30, 1999 and for the year ended December 31, 1998 and the notes
thereto, reflecting the results as if the sale had been completed at the
beginning of such periods.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The historical statements of operations are derived from the Company's
unaudited financial statements. In management's opinion, the Company's
unaudited financial statements at June 30, 1999 and December 31, 1998 and
for the six- and twelve-month periods then ended include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the Company's financial position at June 30, 1999 and
December 31, 1998 and the results of operations for the six- and
twelve-month periods then ended.
The unaudited pro forma condensed consolidated statement of operations for
the six- and twelve-month periods ended June 30, 1999 and December 31,
1998 is presented on a historical basis and, for the six months ended June
30, 1999, on a historical basis excluding the non-recurring loss from the
impairment of goodwill relating to this division, and as if the Company
had completed the sale of the business serviced by the Dallas division of
its TPA subsidiary.
17
<PAGE> 18
The pro forma adjustments are based on available information and upon
certain assumptions that the Company believes are reasonable. In the
opinion of management, all adjustments necessary to fairly present the pro
forma condensed consolidated statements of operations have been made. The
unaudited pro forma condensed consolidated statements of operations are
provided for informational purposes only and do not purport to be
indicative of the financial results that would have been reported had such
sale actually occurred on the dates specified.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 YEAR ENDED DECEMBER 31, 1998
------------------------------------------------ ------------------------------
Historical
Excluding
Historical Impairment Pro Forma Historical Pro Forma
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 7,774,913 $ 7,774,913 $ 7,287,130 $ 14,571,673 $ 13,186,762
Loss from operations (1,640,073) (415,073) (266,884) (1,895,149) (1,860,701)
Net loss (1,085,869) (301,869) (214,481) (1,188,807) (1,176,615)
Basic and diluted loss per share $ (0.26) $ (0.07) $ (0.05) $ (0.30) $ (0.30)
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Exhibit Description
------ -------------------
<S> <C>
10.1 Agreement for the Purchase and Sale of Assets dated July 30,
1999, by and between Diversified Group Administrators, Inc.
and Group Resources, Inc.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. The Company has not filed any current report on
Form 8-K during the second quarter of 1999 covered by this report on Form
10-QSB.
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICALCONTROL, INC.
August 16, 1999 /s/ John Ward Hunt
---------------------------------
John Ward Hunt
President and
Chief Executive Officer
/s/ Bob E. Buddendorf
---------------------------------
Bob E. Buddendorf
Senior Vice President and
Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10.1 Agreement for the Purchase and Sale of Assets dated July 30,
1999, by and between Diversified Group Administrators, Inc.
and Group Resources, Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS
THIS AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS (hereinafter
referred to as the "Agreement") is made and entered into this 30th day of July,
1999, by and between GROUP RESOURCES, INC. (hereinafter referred to as "GRI"), a
Georgia corporation and DIVERSIFIED GROUP ADMINISTRATORS, INC. (hereinafter
referred to as "DGA"), a Pennsylvania corporation.
W I T N E S S E T H:
WHEREAS, GRI desires to purchase and DGA desires to sell certain assets
of DGA currently serviced by DGA from its Dallas, Texas office, including
certain group health and life insurance contracts and Section 125 administration
contracts and the goodwill associated therewith;
WHEREAS, GRI and DGA desire to provide for the orderly transition of
such contracts and servicing to GRI;
NOW, THEREFORE, for and in consideration of the above contained
recitals, the mutual covenants, promises, and agreements set forth herein, the
sum of Ten and No/100 Dollars ($10.00), in hand paid each to the other, the
covenants against competition, and other good and valuable consideration, the
receipt and legal sufficiency of which is hereby acknowledged, the parties
hereto, intending to be legally bound, do hereby agree as follows:
1.
The transactions contemplated herein shall be closed on or before
August 1, 1999 (the "Transfer Date") and shall be effective as of August 1, 1999
and the parties hereto shall cooperate to orderly and timely effectuate the
transition during the periods immediately prior to and following the Transfer
Date.
Page 1 of 37
<PAGE> 2
2.
Effective on the Transfer Date, GRI will purchase from DGA and DGA will
sell to GRI all of DGAs right, title and interest in and to the following:
A. Customers. All right, title and interest in and to the customer
accounts listed on Exhibit "A" attached hereto and incorporated herein by this
reference as if stated in full (the "Customers") and all rights of DGA under the
contracts between DGA and the Customers (the "Customer Agreements"), relating to
DGA's business in Dallas, Texas, including the goodwill and business information
relating to the Customers (the "Customer Business Information"). The Customer
Business Information shall mean all of DGA's business information relating to
the Customers and the Customer Agreements, including vendor information, claims
information, broker information, life and stop loss brokerage information, files
and records relating to the Customers and the Customer Agreements and any other
information relating to the present servicing of the Customers, if in the
possession of DGA and not otherwise required to be produced pursuant to other
sections hereof. The Customers represent all accounts being administered, as of
the date of this Agreement and as of the Transfer Date, except as disclosed in
writing by DGA to GRI prior to the Transfer Date, at DGA's Dallas, Texas office,
for which DGA had not received a notice of cancellation as of the date of this
Agreement or as of the Transfer Date. Exhibit "A", in addition to the identity
of the Customers, contains a true and correct representation of all terms set
forth therein regarding each of the Customer Agreements. All assets purchased by
GRI pursuant to this Agreement other than the Customer Agreements are
hereinafter referred to as the "Assets." The parties hereto hereby acknowledge
and agree that the
Page 2 of 37
<PAGE> 3
Assets to be transferred hereunder specifically include, by way of example and
not by way of limitation, agreements with vendors, or otherwise related to the
servicing of the Customer Agreements, which are identified on Exhibit "A-1,"
attached hereto and incorporated herein by this reference as if stated in full,
and that such vendor agreements shall be assigned by DGA and assumed by GRI at
Closing, effective as of the Transfer Date.
B. Revenues. All revenues produced by the Customer Agreements from and
after the Transfer Date, including, but in no way limited to administration
fees, commissions and overrides.
C. Covenants Not to Compete. Covenants against competition regarding
the Customers in substantially the form attached hereto as Exhibit "N".
Items B and C of this Paragraph 2 are hereinafter collectively referred
to as the Assets, and individually referred to by the capitalized title
preceding their description.
3.
As full and complete consideration for the transfer of the Customers,
the Customer Agreements and the Assets by DGA, the parties agree as follows:
The maximum total purchase price is $591,286.76 (the "Maximum Purchase
Price" and as adjusted, "the Purchase Price"). The Purchase Price shall be paid
by GRI to DGA in certified or other immediately available funds, as follows:
A. Payments of Twenty Six Thousand Two Hundred Thirteen and
72/100 Dollars ($26,213.72) shall be paid at Closing (August
1, 1999), September 10, 1999 and October 10, 199 (the "Initial
Sum");
B. On or before October 10, 1999, the sum of Fourteen Thousand
Two Hundred
Page 3 of 37
<PAGE> 4
Forty and 16/100 Dollars ($14,240.16)(the "October Monthly
Payment"); and
C. Thirty-five (35) consecutive monthly payments commencing on
November 10, 1999 and continuing on the tenth (10th) day of
each month through and including September 10, 2002 (each of
said thirty-five (35) monthly payments is hereinafter referred
to as an "Adjusted Monthly Payment") equal to Collected
Revenues times .22578. In no event shall the aggregate of the
thirty five (35) monthly payments exceed Four Hundred Ninety
Eight Thousand Four Hundred Five and 64/100 Dollars
($498,405.64) and all payments shall cease when and if such
aggregate amount is paid.
"Collected Revenue" is defined as the revenues collected during the
prior month relating to the Customers, including, without limitation, the
administration fees, commissions and overrides. Collected Revenues shall be
adjusted to exclude all amounts that represent any increased administration
fees, commissions, or other items of income arising after the Transfer Data. GRI
shall use best efforts to collect all revenues on a timely basis.
The parties acknowledge and agree that the Maximum Purchase Price is
based on August 1999 billed revenues attributable to the Customers and the
Customer Agreement, multiplied by twelve (12), with the result thereof
multiplied by .78125.
Page 4 of 37
<PAGE> 5
Prior to any default in payment being declared hereunder by DGA, DGA
shall first (1st) give GRI written notice of the failure to make such payment
and GRI shall have ten (10) day following receipt of such notice within which to
remit payment.
4.
I. DGA hereby represents and warrants to GRI as follows, each of which
such representations and warranties shall be deemed material (and GRI, in
executing, delivering and consummating this Agreement, has relied and will rely
upon the correctness and completeness of each of such representations and
warranties as of the date of execution hereof and as of the Transfer Date);
that:
A. DGA is a corporation duly organized, validly existing and
in good standing under the laws of the State of Pennsylvania.
B. DGA is the full, legal and beneficial owner of the Assets
and has absolute and unconditional right, power and authority to sell and
transfer the Assets to GRI in accordance with the terms and conditions of this
Agreement. With the exception of the consent of the Customer, vendors and any
applicable reinsurer, which such consent is hereby waived by GRI, DGA has the
absolute and unconditional right, power and authority to sell, transfer and
assign the Customer Agreements to GRI in accordance with the terms and
conditions of this Agreement. By virtue of the Bill of Assignment, Bill of Sale,
and other transfer documents associated with the within contemplated transaction
to be delivered on the Transfer Date, GRI shall receive from DGA, subject to the
consent of the Customers and the applicable reinsurers which has been waived by
GRI, good, warrantable and merchantable and unencumbered title to the Assets and
the Customer Agreements, free and clear of all claims, liens, charges and
encumbrances of any nature whatsoever.
Page 5 of 37
<PAGE> 6
C. Other than the consent of the Customers, their reinsurers
and the vendors, which such consent is hereby waived by GRI, no consent,
license, approval or authorization of any governmental body or other third party
is required in connection with the valid execution, delivery and performance of
this Agreement and any of said transfer documents by DGA.
D. The Board of Directors of DGA has approved this Agreement
and the transactions to be consummated pursuant to this Agreement and has duly
authorized the execution, delivery and performance of this Agreement and all
related documents by DGA.
E. DGA has timely filed all corporate income and other
federal, state and local government tax returns and reports required of it and
has paid all required taxes, penalties, interests and fees due and payable.
F. Each of the employer group plans covered by the Customer
Agreements has been administered pursuant to the corresponding Administrative
Services Agreement by DGA. DGA holds adequate funds in trust from employers
sponsoring employee group plans to cover all claims with respect to which such
funds were received.
G. To the best of DGA's knowledge, after reasonable diligence
and investigation, DGA is in compliance with all federal, state and local
statutes, laws, regulations, orders and permits applicable to its administration
of the Customer Agreements. DGA acknowledges and agrees that as of the date of
execution hereof, its escrow account maintained for the Customer's is not able
to be reconciled, and, as such, DGA hereby specifically agrees to and hereby
does indemnify and hold harmless, GRI, from and against any and all claims,
obligations, liabilities, actions or other losses, including reasonable
attorney's fees actually
Page 6 of 37
<PAGE> 7
accrued in such matters, related to the escrow account maintained by DGA for the
Customers. Further DGA hereby expressly accepts all liability for matters
related to such escrow account, it being the intent of the parties that as of
the Transfer Date, GRI shall establish its own escrow accounts for each
Customer.
H. There are no suits, actions, claims, demands or other
proceedings made, pending or threatened against DGA which might adversely affect
the Assets, the Customer Agreements or the financial condition, business or
properties (including the Customer Agreements) of DGA or the conduct of DGA's
business. DGA neither knows nor has reason to know of any basis for any such
action, suit, proceeding or investigation that has not been affirmatively
disclosed to GRI in writing.
I. Exhibit "A" to this Agreement constitutes a true, correct,
and complete list of the Customer Agreements, including the subject
administration agreements which cover all of the employee group plans and
Section 125 plans serviced by DGA as of the Transfer Date. As of the date of
this Agreement, and as of the Transfer Date, DGA does not have any information,
nor is it aware of any facts indicating that any of these accounts intend to
cease doing business with DGA, or to materially alter the amount of business
they are presently doing with DGA, except as disclosed in this Agreement and the
Exhibits hereto or in writing to GRI.
J. There are no commissions due any person related to the
Assets or the Customer Agreements except as specifically set forth in Exhibit
"B" attached hereto and incorporated herein by this reference as if stated in
full herein.
Page 7 of 37
<PAGE> 8
K. Except as set forth on Exhibit "C" hereto, all reinsurance
premiums accruing and due up to and including the Transfer Date and related to
the Customers have been remitted to the applicable reinsurer by Diversified
Group Insurance Agency, Inc., a Pennsylvania corporation sufficient such that
all such premiums shall have been paid in full and a true, complete and detailed
listing of all such premiums, by reinsurer and group, are contained on Exhibit
"C" attached hereto and incorporated herein by this reference as if stated in
full.
L. Except as set forth on Exhibit "D" hereto, all of DGA's
vendors whose services or products directly or indirectly relate to the Assets,
the Customers and/or the Customer Agreements have been paid in full for all
items or services delivered up to and including the Transfer Date and a true,
complete and detailed listing of all such vendors, by vendor and group, are
contained on Exhibit "D" attached hereto and incorporated herein by this
reference as if stated in full.
M. All Customer Business Records are true, accurate, current
and in all material respects complete and correct and have been maintained in
accordance with good business practices and shall be in such condition as of the
Transfer Date.
N. DGA has not dealt with any broker or finder in connection
with any transactions contemplated by this Agreement, and no broker or other
person is entitled to any commission or finder's fee in connection with any of
these transactions other than Pacific Basin Marketing Company. GRI and DGA shall
each pay one-half (1/2) of the fee due Pacific Basin Marketing Company.
O. The representations and warranties made by DGA in this
Agreement and/or the Exhibits hereto do not contain any untrue statement of
material fact or omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading. The
Page 8 of 37
<PAGE> 9
parties hereto hereby acknowledge and agree that the Exhibits hereto will
contain information that will not be available at the time of execution of this
Agreement. As such, on or before twenty (20) business days following the
Transfer Date, with the exception of Exhibit "E" hereto, which shall be
completed by GRI no later than October 31(subject to the reasonable verification
of DGA), 1999, DGA shall compile all information necessary to complete the other
Exhibits and shall complete all of the Exhibits, subject to the reasonable
approval of GRI which such Exhibits shall be deemed to be a material part of
this Agreement as if same had been attached hereto and completed as of the date
of execution hereof and at such time as the parties hereto agree upon the
calculation of Base Revenue, complete Exhibit "E" hereto, which such Exhibit
shall be deemed to be a material part of this Agreement as if same had been
attached hereto and completed as of the date of execution hereof. Coupled with
DGA's duty to accurately complete the Exhibits in accordance with its
undertaking herein, DGA hereby covenants and agrees that it shall immediately
notify GRI in writing of any material change in any information to be utilized
to complete the subject Exhibits.
P. All representations and warranties of DGA in this Agreement
shall be true and correct in all material respects as of the Transfer Date
(unless written notice is given by DGA prior to the Transfer Date of material
changes), as if DGA expressly made such representations and warranties on the
Transfer Date.
Q. Base revenue, as detailed on Exhibit "E", attached hereto
and incorporated herein by this reference as if stated in full herein accurately
represents the month of August, 1999 as contemplated in Paragraph 3B hereof and
DGA knows of no adverse changes or anticipated changes in said base revenue,
unless otherwise indicated on Exhibit "E" hereto.
Page 9 of 37
<PAGE> 10
R. DGA has provided GRI with copies of all agreements in force
as of the Transfer Date affecting the Assets, the Customers and/or the Customer
Agreements, specifically including, but in no way limited to those with pharmacy
benefit managers, PPOs and pre-certification vendors. A true, correct and
complete list of all agreements contemplated by this Paragraph 3R is contained
within Exhibit "F" attached hereto and incorporated herein by this reference as
if stated in full.
S. To the best of DGA's knowledge, after reasonable diligence
and examination, DGA is in full compliance with all ERISA guidelines,
requirements and restrictions related to DGA's maintenance of its claim(s)
accounts, it being specifically acknowledged and agreed that GRI and DGA have
differing opinions as to DGA's compliance based upon DGA's operation of one (1)
centralized claims account. DGA hereby specifically agrees to indemnify and hold
harmless GRI from and against any and all liabilities, obligations, penalties,
fines or other matters relating to DGA's maintenance of a centralized claims
account.
T. DGA represents and warrants that all specific claims
related to the Customer Agreements are current as of the Transfer Date. For
purposes of this Section T, "current" shall mean that all required filings as to
reinsurers or otherwise have been made for all specific claims.
U. As of the Transfer Date DGA represents and warrants that
its claims turnaround time shall not exceed ten (10) business days for Clean
Claims (as defined below). DGA shall pay GRI Ten Dollars ($10.00) for each Clean
Claim (as defined below) that exceeds such ten (10) business day turnaround
time. "Clean Claim" shall mean any claim on a complete and proper claim form
with all information necessary to adjudicate the claim under the applicable
Page 10 of 37
<PAGE> 11
plan. GRI, at its option, and upon notice to DGA, shall be entitled to offset
all amounts due GRI under this Section U. against any monies owed DGA hereunder
according to the offset provisions contained herein
II. GRI makes the following representations and warranties to DGA:
A. GRI is a corporation duly organized, validly existing and
in good standing under the laws of the State of Georgia.
B. The Board of Directors of GRI has approved this Agreement
and the transactions to be consummated pursuant to this Agreement and have duly
authorized the execution, delivery and performance of this Agreement and all
related documents by GRI.
C. GRI has not dealt with any broker or finder in connection
with any transactions contemplated by this Agreement, and no broker or other
person is entitled to any commission or finder's fee in connection with any of
these transactions other than Pacific Basin Marketing Company.
D. GRI has timely filed all corporate income and other
federal, state and local government tax returns and reports required of it and
has paid all required taxes, penalties, interests and fees due and payable.
E. To the best of GRI's knowledge, after reasonable diligence
and investigation, GRI is in compliance with all federal, state and local
statutes, laws, regulations, orders and permits applicable to its contemplated
administration of the Customer Agreements.
F. To the best of GRI's knowledge, GRI is in full compliance
with all ERISA guidelines, requirements and restrictions related to its existing
business and hereby agrees to administer the Customer Agreements in accordance
with such guidelines, requirements and
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<PAGE> 12
restrictions for so long as there remains an outstanding balance under the
Purchase Price. GRI hereby specifically agrees to indemnify and hold harmless
DGA from and against any and all liabilities, obligations, penalties, fines or
other matters relating to GRI's administration of the Customer Agreements from
and after the Transfer Date.
G. GRI shall use its reasonable best efforts from and after
the Transfer Date to preserve the Customers and the Revenues associated
therewith.
5.
Except as provided on Exhibit "G" hereto, GRI is not assuming any
liabilities of DGA as a part of this transaction, including, without limitation;
judgments, accounts payable, lease obligations, taxes, charge backs, claims from
employees relating to back wages, vacation pay or any other employment benefit
including that of continued employment, OSHA violations, environmental claims,
as well as any liability for claims administered by DGA prior to the Transfer
Date or for which DGA had an obligation to the relevant Customer to pay under
the Customer Agreements, but for which it has inadequate funds held in trust on
behalf of such clients to pay. The parties hereto acknowledge and agree that as
of the Transfer Date, GRI shall establish bank accounts for each of the
Customers. The only obligations of DGA that GRI is assuming are the continuing
administration of the Customer Agreements from and after the Transfer Date and
the payment of claims arising under such agreements to the extent trust funds
DGA received from its clients and conveyed to GRI pursuant to the terms hereof
are available to cover such claims. DGA shall be and remain responsible for any
and all expenses, liabilities and actions, whether now known or later
discovered, arising from or in any way related to the Assets or the Customer
Agreements prior to the Transfer Date.
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<PAGE> 13
6.
DGA agrees to conduct DGA's business as follows during the period from
the date of this Agreement until the Transfer Date:
A. DGA will continue to operate DGA's business and service the Customer
Agreements in a professional manner in accordance with all applicable laws,
orders, policies and regulations of appropriate governmental agencies.
B. DGA shall not sell, transfer, lease, mortgage, pledge, encumber or
otherwise dispose of any of the Assets or the Customer Agreements or take any
action or permit any action to be taken that might reasonably impair the value
of the Customer Agreements and/or the Assets.
7.
All obligations of GRI to close the transactions contemplated by this
Agreement shall be subject to the fulfillment (or express waiver by GRI in GRI's
discretion), prior to or on the Transfer Date of each of the following
conditions:
A. All of the representations and warranties of DGA contained in this
Agreement shall be true and correct in all material respects as of the Transfer
Date, as if made and warranted on such date. The parties acknowledge and agree
that the Exhibits hereto may be completed following the Transfer Date and that
at such time as same are completed they will be true and correct in all material
respects, and that, to the extent a material change occurs in any matter which
affects or will become a part of an Exhibit to be attached hereto between the
Transfer Date and the date of completion of such Exhibit, DGA shall immediately,
in writing, notify GRI of such change.
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<PAGE> 14
B. DGA shall have fully performed and complied with all of its
agreements and covenants set forth in this Agreement and the conditions
contained and required to be conformed and complied with by DGA prior to or on
the Transfer Date.
C. During the period from the date of this Agreement to the Transfer
Date, there shall have not have been any materially adverse change in the
financial condition or the results of operations of DGA connected with the
Customer Agreements and/or the other Assets and DGA shall not have sustained any
material loss of business with respect to the Customer Agreements.
D. No action, suit, or proceeding shall have been instituted or shall
have been threatened before any court or other administrative or governmental
body, or by public authority which seeks to restrain, enjoin, prohibit or
invalidate the transactions contemplated by this Agreement or which pertains to
the transactions contemplated by this Agreement or to its consummation.
E. A due diligence review satisfactory to GRI, which shall include a
Client group telephone survey "service group" conducted by GRI in the name of
DGA on each Client to determine the Client's level of satisfaction with DGA. A
sample of the survey is attached hereto as Exhibit "H" and incorporated herein
by this reference as if stated in full.
F. Any proper and necessary approval of Federal and state authorities;
G. DGA shall use best efforts prior to, on and after the Transfer Date
to provide GRI with timely receipt of all required data relating to the Assets,
the Customers and/or the Customer Agreements in a form satisfactory to GRI (and
electronic data as detailed in Exhibit "I" attached hereto and incorporated
herein by this reference); and,
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<PAGE> 15
H. DGA's provision of documentation and evidence confirming to GRI that
all reinsurance premiums have been paid as of the date of execution of this
Agreement and as of the Transfer Date to the extent DGA has received funds
necessary for such payments from the appropriate Customers; provided, however,
that each Customer who has not tendered the required funds is identified to GRI
on or before the Transfer Date.
I. Unless otherwise set forth, DGA's provision of documentation and
evidence confirming to GRI that all vendors (e.g. PPOs, pharmaceutical
companies, ID companies, broker fees, commissions, and all other vendors either
in direct or indirect support of the Customer Agreements) have been paid as of
the date of execution of this Agreement and as of the Transfer Date to the
extent DGA has received funds necessary for such payments from the appropriate
Customers; provided, however, that each Customer who has not tendered the
required funds is identified to GRI on or before the Transfer Date.
J. All Customer Business Information shall be substantially and
materially complete as to each of the Customer Agreements and all physical
filing related to the Customer Agreements shall be current and complete as of
the Transfer Date.
K. As to all Section 125 cases, all Customer Business Information and
agreements shall be substantially and materially complete.
L. DGA shall provide GRI with the current status of all cases with
Customers and Customers in renewal, together with all related documents,
including executed or proposed renewal agreements.
M. DGA shall have provided GRI with copies of all agreements in force
to the extent in writing as of the Transfer Date affecting the Assets, the
Customers and/or the Customer Agreements (and details as to any agreements not
in writing), specifically including, but in no way limited to those with
pharmacy benefit managers, PPOs and pre-certification vendors.
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<PAGE> 16
In order to facilitate the fulfillment of the conditions set forth in
this Paragraph 7, GRI shall provide DGA, where appropriate, with written
confirmation of the satisfaction of such condition(s) as and when obtained.
8.
On the Transfer Date, the Bill of Assignment and other transfer
documents, together with the Covenants Not to Compete, as required herein shall
be duly executed and delivered to GRI, together with such other documents as
each party may reasonably request of the other in order to further evidence and
consummate the transactions contemplated by this Agreement. In addition, DGA
shall transfer to GRI, in trust, on the Transfer Date, control of all funds
received from or held on behalf of clients of DGA relating to the Customer
Agreements, and held by DGA, whether in trust, for the benefit of, or otherwise
as established by the particular Customer Agreement, for the payment of claims
arising under the Customer Agreements, specifically including any funds paid in
advance by any parties to the Customer Agreements, to the extent such funds are
intended to cover claims or services to be rendered or processed from and after
the Transfer Date. All funds to be transferred pursuant to this Agreement are
set forth in detail by client and account number on Exhibit "J" attached hereto
and incorporated herein by this reference as if stated in full. The parties
hereto hereby agree that on the Transfer Date, Exhibit "J" hereto shall be
updated to reflect the actual balances of funds transferred to GRI hereunder.
9.
I. DGA hereby agrees to and does indemnify and hold GRI harmless as
follows:
A. DGA hereby agrees to indemnify and hold GRI harmless at all
times from and after the Transfer Date against and in respect of:
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<PAGE> 17
i. All liabilities and obligations of DGA, absolute,
contingent or otherwise, other than those liabilities expressly assumed
by GRI;
ii. Any and all loss, liability and expense,
resulting from or arising out of taxes levied, imposed or assessed by
any governmental authority, federal, state or local with respect to the
income or operations of DGA accruing on or before the Transfer Date;
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<PAGE> 18
iii. Any and all damages, loss, deficiency, cost and
expense resulting from any misrepresentation, breach of warranty or
non-fulfillment of any obligation given under this Agreement on the
part of DGA or resulting from any action, event, act or occurrence, or
omission of DGA which has taken place prior to the Transfer Date; and,
iv. Any and all actions, suits, proceedings, demands,
assessments, judgments, costs, and legal and other expenses incident to
DGA's breach of this Agreement.
v. Any and all audits of "Terminated Accounts," each
of which are identified on Exhibit "K" attached hereto and incorporated
herein by this reference as if stated in full or audits related to
conduct and periods prior to the Transfer Date, including all costs
associated with complying or cooperating with the auditing authority.
B. In the event any indemnification claim of GRI is settled by
negotiation or arbitration pursuant to Section 19 of this Agreement or
otherwise agreed to in writing by the parties (the "Settled Claim"),
GRI shall immediately (unless otherwise agreed to by the parties) upon
demand be indemnified in full by DGA or GRI, at its option, may set off
such Settled Claim against and from any amounts owed or to be owed by
GRI to DGA pursuant to the terms of this Agreement and a notation to
this effect shall be placed on any Promissory Note or similar evidence
of indebtedness tendered by GRI to DGA in conjunction with the
transaction contemplated herein.
C. DGA shall, from and after the Transfer Date maintain,
errors and omissions "tail" coverage for the actions and/or inactions
of DGA related to the Customer Agreements with such coverage applicable
to all of the Customer Agreements and any Terminated
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<PAGE> 19
Accounts or such similar coverage as shall provide coverage for the
errors and/or omissions of DGA during its administration of the
Customer Agreements or other relationship with the Customers from the
Transfer Date forward until July 31, 2003, unless a longer period is
reasonably requested by GRI based on an extended statute of limitations
applicable to a possible cause of action arising under the Customer
Agreements. A copy of the applicable errors and omissions insurance
policy, together with any amendments, schedules or riders thereto shall
be provided to GRI upon execution of this Agreement or as soon
thereafter as is reasonably practical, but in no event later than the
Transfer Date. Additionally, upon each renewal of the relevant
insurance policy, to the extent premiums are required to maintain such
"tail" coverage, DGA shall provide GRI, upon request, with evidence of
the timely payment of same and the continued effectiveness of such
coverage. DGA's failure or inability to maintain the errors and
omissions insurance coverage specified herein shall be a material
default of DGA hereunder and shall give rise to the right, but not the
obligation, of GRI to terminate this Agreement prior to the Transfer
Date. DGA's failure or inability to maintain the errors and omissions
insurance coverage specified herein following the Transfer Date shall
be a material default of DGA hereunder and shall give rise to the right
of set off set forth for GRI hereunder. In the event GRI terminates
this Agreement for DGA's failure to maintain said insurance, all
covenants, warranties and indemnification provisions contained herein
shall survive and DGA hereby agrees to take any affirmative actions
necessary to confirm such survival.
II. GRI hereby agrees to and does indemnify and hold DGA harmless as
follows:
A. GRI hereby agrees to indemnify and hold DGA harmless at all
times from and after the Transfer Date against and in respect of:
i. All liabilities and obligations of GRI, absolute,
contingent or otherwise;
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<PAGE> 20
ii. Any and all loss, liability and expense,
resulting from or arising out of taxes levied, imposed or assessed by
any governmental authority, federal, state or local with respect to the
income or operations of GRI accruing after the Transfer Date;
iii. Any and all damages, loss, deficiency, cost and
expense resulting from any misrepresentation, breach of warranty or
non-fulfillment of any obligation given under this Agreement on the
part of GRI or resulting from any action, event, act or occurrence, or
omission of GRI which has taken place after the Transfer Date; and,
iv. Any and all actions, suits, proceedings, demands,
assessments, judgments, costs, and legal and other expenses incident to
GRI's breach of this Agreement.
B. In the event DGA is entitled to indemnification under the terms of this
Paragraph, DGA shall immediately upon demand be indemnified in full by GRI.
10.
Prior to the Transfer Date, this Agreement may be terminated, and the
Closing contemplated on the Transfer Date abandoned by GRI prior to the Transfer
Date, if DGA has breached or defaulted in the performance of any material
covenant, representation, warranty, duty or obligation contained in this
Agreement. In such event, GRI shall have no further liability or obligations to
DGA and shall be entitled to pursue all remedies provided in this Agreement, at
law, or in equity. This Agreement may be terminated, and the Closing
contemplated on the Transfer Date abandoned by DGA prior to the Transfer Date,
if GRI has breached or defaulted in the performance of any material covenant,
representation, warranty, duty or obligation contained in this Agreement. In
such event, DGA shall have no further liability or obligations to GRI and
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<PAGE> 21
shall be entitled to pursue all remedies provided in this Agreement, at law, or
in equity. In the event this Agreement is terminated pursuant to the terms
herein and the Closing contemplated on the Transfer Date abandoned by GRI or
DGA, neither party shall have any liability to the other party under this
Agreement and neither party will receive any asset or benefit to be transferred
pursuant to this Agreement. Anything contained herein to the contrary
notwithstanding, in the event this Agreement is terminated for any reason
whatsoever, any confidentiality letters or agreements executed by any of the
parties hereto, their principals, affiliates, or parent entities shall survive
and shall not be terminated, and each shall remain enforceable according to its
terms.
11.
Except as herein provided, DGA and GRI will each bear their own
expenses, including any associated attorney's fees, incurred in connection with
the within contemplated transaction. The parties hereto hereby recognize,
acknowledge and agree that each party has been represented by legal counsel of
its own choosing and that this Agreement constitutes an agreement negotiated
amongst equals and that in the event of a dispute as to the interpretation of
this Agreement, no provision of this Agreement shall be interpreted more harshly
against one party by virtue of the fact that such party's representative may
have drafted the initial version of said provision.
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<PAGE> 22
12.
INTENTIONALLY OMITTED
13.
DGA will pay all sales, transfer and other taxes associated with the
transfer of the Assets and the Customer Agreements.
14.
No accounts receivable of DGA will become the property of GRI upon the
Transfer Date, with the exception of any receivables set forth on Exhibit "L"
attached hereto and incorporated herein by this reference as if stated in full.
All accounts receivable shall be apportioned as of the Transfer Date as between
DGA and GRI. DGA shall be entitled to retain all funds received in the operation
of its business that have been earned up to the Transfer Date, with all prepaid
amounts tendered to GRI at Closing. All funds received, and receivables
generated from the Transfer Date forward shall be the sole and exclusive
property of GRI, except as noted on Exhibit "L" attached hereto and incorporated
herein by this reference as if stated in full. Similarly, all accounts payable
shall be apportioned as of the Transfer Date. DGA shall be responsible for all
payables accrued up to the Transfer Date. All payables incurred thereafter shall
be the responsibility of GRI, except as noted on Exhibit "M" attached hereto and
incorporated herein by this reference as if stated in full.
15.
DGA and GRI shall mutually agree upon a time table for the mechanics of
transferring the control of DGA's operations, including specifically, its
computer data, to GRI such that the transfer of control will be accomplished in
as efficient and effective manner as possible on or after
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<PAGE> 23
the Transfer Date. Additionally, GRI and DGA shall coordinate the method for
notifying the existing accounts, clients and/or customers of DGA of the sale of
the Assets and the transfer of the Customer Agreements.
16.
All transactions contemplated herein are conditional upon obtaining the
required third-party consents necessary for the consummation of the subject
transaction, specifically including an acknowledgment by each party to each of
the Customer Agreements and related reinsurers of the assignment of such
agreement to GRI and such agreement's continued validity.
17.
All representations, warranties, covenants and agreements in Sections
3, 4, 5, 9, 13, 15, 18 and 19 of the parties under this Agreement, shall survive
the execution and delivery of this Agreement and any such Sections shall not be
merged with any documents delivered by either party to the other under the terms
of this Agreement. A statement confirming the survival these Sections shall be
placed on the Closing Statement representing the within contemplated
transaction.
18.
GRI and DGA agree as follows with respect to the period following the
Transfer Date:
(a) General. In case at any time after the Transfer Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the parties will take such further action (including the execution and
delivery of such further instruments and documents) as the other party
reasonably may request, all at the sole cost and expense of the requesting party
(unless the requesting party is entitled to indemnification therefor hereunder).
DGA acknowledges and
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<PAGE> 24
agrees that from and after the Transfer Date, GRI will be entitled to possession
of the Assets, the Customer Agreements, the Customer Business Information and
any and all other information related to the Customers, the Customer Agreements
or the Assets reasonably requested by GRI and in the possession of DGA.
(b) Litigation Support. In the event and for so long as any party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
any fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Transfer Date involving any of the Assets and/or the Customer Agreements
the other party will cooperate with the contesting or defending party and its
counsel in the contest or defense, make available its personnel, and provide
such testimony and access to its books and records as shall be necessary in
connection with the contest or defense, all at the sole cost and expense of the
contesting or defending party (unless the contesting or defending party is
entitled to indemnification therefor hereunder).
(c) Transition. DGA will not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associate related in any way to any of the Assets,
the Customers and/or the Customer Agreements from maintaining the same business
relationships with GRI after the Transfer Date as it maintained with DGA prior
to the Transfer Date. DGA will refer all customer inquiries made to its Dallas,
Texas office relating to third party administration of the Customer Agreements
to GRI from and after the Transfer Date.
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<PAGE> 25
19.
A. Negotiation between Senior Executives
1. The parties shall attempt in good faith to resolve any controversy,
claim or dispute arising out of or relating to this Agreement or the
construction, interpretation, performance, breach, termination, enforceability
or validity thereof, or the commercial, economic or other relationship of the
parties hereto, whether such claim is based on rights, privileges, or interests
recognized by or based upon statute, contract, tort, common law, or otherwise
and whether such claim existed prior to or arises on or after the date of this
Agreement (a "Dispute"), promptly by negotiation between executives who have
authority to settle the Dispute (or have direct responsibility for the
administration of this Agreement ("Senior Party Representatives").
2. Either party may give the other party written notice (a "Dispute
Notice") of any Dispute which has not been resolved in the normal course of
business. Within five (5) business days after delivery of the Dispute Notice,
the receiving party shall submit to the other a written response (the
"Response"). The Dispute Notice and the Response shall include (i) a statement
setting forth the position of the party giving such notice and a summary of
arguments supporting such position and (ii) the name and title of such party's
Senior Party Representative and any other persons who will accompany the Senior
Party Representative at the meeting at which the parties will attempt to settle
the Dispute. Within ten (10) business days after delivery of the Dispute Notice,
the Senior Party Representatives of both parties shall meet at a mutually
acceptable time and place, and thereafter as often as they reasonably deem
necessary, to attempt to resolve the Dispute. All reasonable requests for
information made by one party to the other will be honored.
3. If the Dispute has not been resolved within thirty (30) days after
delivery of the Dispute Notice, or if the parties fail to meet within ten (10)
business days after delivery of the
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<PAGE> 26
Dispute Notice as hereinabove provided, either party may initiate mediation of
the Dispute as hereinafter provided.
4. All negotiations pursuant to this Section A. shall be treated as
compromise and settlement negotiations. Nothing said or disclosed, nor any
document produced, in the course of such negotiations which is not otherwise
independently discoverable shall be offered or received as evidence or used for
impeachment or for any other purpose in any current or future arbitration or
litigation.
B. Mediation
1. If the Dispute has not been resolved by negotiation as hereinabove
provided, the parties shall make a good faith attempt to settle the Dispute by
mediation pursuant to the provisions of this Section B. before resorting to
arbitration, litigation or any other dispute resolution procedure.
2. Unless the parties agree otherwise, the mediation shall be conducted
in accordance with the Commercial Mediation Rules of the American Arbitration
Association (the "AAA") then in effect by a mediator who (i) has the
qualifications and experience set forth in Paragraph 3. of this Section B. and
(ii) is selected as provided in Paragraph 4. of this Section B.
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<PAGE> 27
3. Unless the parties agree otherwise, the mediator shall be a neutral
and impartial lawyer with excellent academic and professional credentials (i)
who is or has been practicing law for at least ten (10) years, specializing in
either general commercial litigation or general corporate and commercial
matters, and (ii) who has had both training and experience as a mediator.
4. Either party (the "Initiating Party") may initiate mediation of the
Dispute by giving the other party (the "Recipient Party") written notice (a
"Mediation Notice") setting forth a list of the names and resumes of
qualifications and experience of three (3) impartial persons who the Initiating
Party believes would be qualified as a mediator pursuant to the provisions of
Paragraph 3. hereof. Within five (5) business days after the delivery of the
Mediation Notice, the Recipient Party shall give a counter-notice (the
"Counter-Notice") to the Initiating Party in which the Recipient Party may
designate a person to serve as the mediator from among the three (3) persons
listed by the Initiating Party in the Mediation Notice (in which event such
designated person shall be the mediator). If none of the persons listed in the
Mediation Notice is designated by the Recipient Party to serve as the mediator,
the Counter-Notice should set forth a list of the names and resumes of
qualifications and experience of three (3) impartial persons who the Recipient
Party believes would be qualified as a mediator pursuant to the provisions of
Paragraph 3. hereof. Within five (5) business days after the delivery of the
Counter-Notice, the Initiating Party may designate a person to serve as the
mediator from among the three (3) persons listed by the Recipient Party in the
Counter-Notice (in which event such designated person shall be the mediator). If
the parties cannot agree on a mediator from the three (3) impartial nominees
submitted by each party, each party shall strike two (2) names from the other
party's list and the two remaining persons on both lists will jointly select as
the mediator any person who has the
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<PAGE> 28
qualifications and experience set forth in Paragraph 3. hereof. If they are
unable to agree, then the President of the State Bar of Texas shall select as
the mediator any person who, in his or her opinion, has such qualifications and
experience.
5. Within thirty (30) days after the mediator has been selected as
provided above, both parties and their respective attorneys shall meet with the
mediator for one mediation session of at least four (4) hours, it being agreed
that each party representative attending such mediation session shall be a
Senior Party Representative with authority to settle the Dispute. If the Dispute
cannot be settled at such mediation session or at any mutually agreed
continuation thereof, either party may give the other and the mediator a written
notice declaring the mediation process at an end, in which event then the
Dispute shall be resolved by arbitration as hereinafter provided.
6. All conferences and discussions which occur in connection with the
mediation conducted pursuant to this Agreement shall be deemed settlement
discussions, and nothing said or disclosed, nor any document produced, which is
not otherwise independently discoverable shall be offered or received as
evidence or used for impeachment or for any other purpose in any current or
future arbitration or litigation.
7. The costs of the mediation shall be governed by Fees and Costs
provisions set out below.
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<PAGE> 29
C. Arbitration
1. If the Dispute has not been resolved by negotiation as provided in
Section A. or mediation as provided in Section B., then, except as otherwise
provided in this Section C., the Dispute shall be determined by arbitration in
Dallas, Texas in accordance with the Commercial Arbitration Rules of the AAA
then in effect by one arbitrator who (i) has the qualifications and experience
set forth in Paragraph 2. of this Section C. and (ii) is selected as provided in
Paragraph 3. of this Section C.. Any issue as to whether or the extent to which
the Dispute is subject to the arbitration and other dispute resolution
provisions contained in this Agreement, including but not limited to issues
relating to the validity or enforceability of these arbitration provisions, the
applicability of any statute of limitations or other defense relating to the
timeliness of the assertion of any claim or any other matter relating to the
arbitrability of such claim, shall be decided by the arbitrator(s); provided,
however, that any person or entity who or which has not agreed to be bound by
the provisions of this Agreement or these arbitration provisions shall not be
bound by any arbitration award rendered by the arbitrator(s) unless such person
or entity participates in the arbitration proceeding and fails to object to
being bound by such award at or prior to the commencement of the arbitration
hearing. The arbitrator(s) shall base their award on the terms of this
Agreement, and they shall endeavor to follow the law and judicial precedents
which a U.S. District Judge sitting in the appropriate District of Texas would
apply in the event the Dispute were litigated in such court. The parties
expressly agree that this Agreement shall confer no power or authority upon the
arbitrator(s) to render any judgment or award that is erroneous in its
application of substantive law and expressly agree that no such erroneous
judgment or award shall be eligible for confirmation. The arbitrator(s) shall
render their award in writing and, unless both
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<PAGE> 30
parties agree otherwise, shall include the findings of fact and conclusions of
law upon which their award is based. The arbitration shall be governed by the
substantive laws of the State of Texas applicable to contracts made and to be
performed therein, without regard to conflicts of law rules, and by the
arbitration law of the Federal Arbitration Act (Title 9, U.S. Code), and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
2. Every person named on all lists of potential arbitrators shall be a
neutral and impartial lawyer with excellent academic and professional
credentials (i) who is or has been practicing law for a minimum of ten (10)
years, specializing in either general commercial litigation or general corporate
and commercial matters; and (ii) who has had both training and experience as an
arbitrator and is generally available to serve as an arbitrator.
3. The arbitrator shall be selected as provided in this Section C. and
otherwise in accordance with the AAA's Commercial Arbitration Rules then in
effect, except that each party shall be entitled to strike on a peremptory
basis, for any reason or no reason, any or all of the names of potential
arbitrators on any list submitted to the parties by the AAA and any person
selected by the AAA to serve as an arbitrator by administrative appointment. In
the event the parties cannot agree on a mutually acceptable arbitrator from the
one or more lists submitted by the AAA within thirty days after the AAA
transmits to the parties its first list of potential arbitrators, the President
of the State Bar of Texas shall designate three (3) persons who, in his or her
opinion, meet the criteria set forth in Paragraph 2. hereof, which designees may
not include persons named on any list submitted by the AAA. Each party shall be
entitled to strike one (1) of such three (3) designees on a peremptory basis
within five (5) days after its receipt of such list of designees, indicating its
order of preference with respect to the remaining designees. If two (2) of
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such designees have been stricken by the parties, the unstricken designee shall
be the arbitrator. Otherwise, the selection of the arbitrator shall be made by
the AAA from the remaining designees in accordance with their mutual order of
preference, or by random selection in the absence of a mutual order of
preference.
D. Interim Relief and Provisional and Other Remedies
1. The arbitrator(s) shall have the authority to order or award any
provisional remedy or other remedy or relief which would be available from a
court of law pending arbitration of the Dispute, including but not limited to
interim orders or awards but the arbitrator(s) shall have no power or authority
to order or grant any remedy or relief which a court could not order or grant
under applicable law. The arbitrator(s) shall have the power and authority to
impose sanctions and to take other actions with regard to the parties to the
same extent that a judge could pursuant to the Federal Rules of Civil Procedure.
Either party may make an application to the arbitrator(s) seeking injunctive or
other interim relief, and the arbitrator(s) may take whatever injunctive or
other interim measures they deem necessary in respect of the subject matter of
the dispute, including measures to maintain the status quo or safeguard the
property that is the subject matter of the arbitration or to order the sale of
perishable goods, until such time as the arbitration award is rendered or the
controversy is otherwise resolved. Such interim measures may be taken in the
form of an interim award, and the arbitrator(s) may require security for the
costs of any such measures.
2. Notwithstanding the provisions of Paragraph 1. hereof, either party
may seek from any court having jurisdiction hereof any interim, provisional or
injunctive relief that may be necessary to protect the rights or property of any
party or maintain the status quo before, during
Page 31 of 37
<PAGE> 32
or after the pendency of the arbitration proceeding provided, however, that
after the arbitrator(s) have been selected and qualified, the arbitrator(s)
shall have the sole authority to hear and determine an application for such
relief, and the parties agree that any such relief ordered by the arbitrator(s)
may be immediately and specifically enforced by a court otherwise having
jurisdiction over the parties. The institution and maintenance of any judicial
action or proceeding for any such interim, provisional or injunctive relief
shall not constitute a waiver of the right or obligation of either party to
submit the Dispute to arbitration, including any claims or disputes arising from
the exercise of any such interim, provisional or injunctive relief.
E. Preliminary Legal Motions
The arbitrator(s) may, pursuant to such terms and procedures as the
arbitrator(s) deem appropriate, hear and determine any preliminary issue of law
asserted by a party to be dispositive, in whole or in part, of a claim or
defense to the same extent that a court could do so pursuant to a motion for
summary judgment.
F. Confidentiality
The arbitration proceedings conducted pursuant hereto shall be
confidential. Neither party shall disclose or permit the disclosure of any
information about the evidence adduced or the documents produced by the other
party in the arbitration proceedings or about the existence, contents or results
of the arbitration award without the prior written consent of such other party
except in the course of a judicial, regulatory or arbitration proceeding or as
may be requested by a governmental authority. Before making any disclosure
permitted by the preceding sentence, the party intending to make such disclosure
shall give the other party reasonable written notice of the intended disclosure
and afford the other party a reasonable opportunity to protect its interests.
Page 32 of 37
<PAGE> 33
G. Statute of Limitations
Any claim by either party shall be time-barred unless the asserting
party makes a demand for arbitration with respect to such claim within the
applicable statute of limitations except to the extent otherwise provided in
this Agreement; provided, however, that all applicable statutes of limitations
and defenses based upon the passage of time shall be tolled while the procedures
specified in this Paragraph 20 are pending, and the parties shall take such
action, if any, required to effectuate such tolling. Any dispute as to the
timeliness of such demand or other timeliness or statute of limitations issues
shall be decided by the arbitrator.
H. Fees and Costs
All expenses and fees of the mediator and/or the arbitrator and
expenses for hearing facilities and other expenses of the mediation and/or
arbitration shall be borne equally by the parties unless they agree otherwise or
unless the arbitrator in the award assesses such expenses against one of the
parties or allocates such expenses other than equally between the parties. Each
party shall bear its own counsel fees and the expenses of its witnesses except
to the extent otherwise provided in this Agreement or by applicable law;
provided, however, that if the arbitrator finds that the claim or defense of any
party was frivolous or lacked a reasonable basis in fact or law, the arbitrator
may assess against such party all or any part of the counsel and witness fees
and expenses of the other party. Any attorney who serves as an arbitrator shall
be compensated at a rate equal to his or her current regular hourly billing rate
unless the AAA is able to arrange with the parties and the arbitrator to agree
otherwise.
Page 33 of 37
<PAGE> 34
20.
No party hereto shall issue any press release or make any public
announcement relating to the subject matter of this Agreement prior to the
Transfer Date without the prior written approval of the other party; provided,
however, that any party may make any public disclosure it believes in good faith
is required by applicable law (in which case the disclosing Party will use its
reasonable best efforts to advise the other party prior to making the
disclosure).
21.
This Agreement shall not confer any rights or remedies upon any person
other than the parties and their respective successors and permitted assigns.
22.
Each of the parties acknowledges and agrees that the other party would
be damaged irreparably in the event any of the provisions of this Agreement are
not performed in accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties agrees that the other party shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the parties and the matter, in
addition to any other remedy to which it may be entitled, at law or in equity.
23.
Each of the parties submits to the jurisdiction of any state or federal
court sitting in Dallas, Texas, in any action or proceeding arising out of or
relating to this Agreement and agrees that all claims in respect of the action
or proceeding may be heard and determined in any such court. Each party also
agrees not to bring any action or proceeding arising out of or relating to this
Agreement in any other court. Each of the parties waives any defense of
inconvenient forum to
Page 34 of 37
<PAGE> 35
the maintenance of any action or proceeding so brought and waives any bond,
surety, or other security that might be required of any other party with respect
thereto. Any party may make service on the other party by sending or delivering
a copy of the process to the party to be served at the address and in the manner
provided for the giving of notices herein. Nothing in this Paragraph 23,
however, shall preclude the alternative dispute resolution provisions contained
herein, unless otherwise provided herein.
24.
All notices, requests, demands, claims, and other communications
hereunder will be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed duly given five (5) days after it is
sent by registered or certified mail, return receipt requested, postage prepaid,
and addressed to the intended recipient as set forth below:
<TABLE>
<S> <C>
If to DGA: Diversified Group Copy to: Stephanie L. McVey
Administrators, Inc. Medical Control, Inc.
311 S. Central Avenue 8625 King George Dr.
Canonsburg, Pennsylvania 15317 Suite 300
Dallas, Texas 75235
If to GRI: Group Resources, Inc. Copy to: Philip H. Weener, Esquire
3080 Premiere Parkway Weener & Mason LLP
Suite 100 4151 Ashford Dunwoody Rd.
Duluth, Georgia 30097 Suite 625
Attention: Thomas S. Byrd, Pres. Atlanta, Georgia 30319
</TABLE>
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been
Page 35 of 37
<PAGE> 36
duly given unless and until it actually is received by the intended recipient.
Any party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
25.
The following assets are not being purchased:
A. All tangible and intangible assets of DGA, either corporate or
relating to any location, including the Dallas, Texas office, which are not
related to the Customer Agreements and not specifically set forth above;
B. The corporate stock of DGA;
C. The name "Diversified Group Administrators, Inc."; and,
D. Any cash assets.
26.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original document.
Page 36 of 37
<PAGE> 37
IN WITNESS WHEREOF, each of the undersigned has set its hand and
affixed its seal as of the date first above written.
DIVERSIFIED GROUP
ADMINISTRATORS, INC., a
Pennsylvania corporation
By: /s/ DAVID C. BRAMER
-------------------------------
David C. Bramer, President
{CORPORATE SEAL}
GROUP RESOURCES, INC., a Georgia
corporation
By: /s/ THOMAS S. BYRD
-------------------------------
Thomas S. Byrd, President
{CORPORATE SEAL}
Page 37 of 37
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 880,302<F1>
<SECURITIES> 0
<RECEIVABLES> 1,424,337
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,797,252
<PP&E> 1,646,341
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,875,884
<CURRENT-LIABILITIES> 4,420,980
<BONDS> 0
0
0
<COMMON> 43,556
<OTHER-SE> 7,364,938
<TOTAL-LIABILITY-AND-EQUITY> 13,875,884
<SALES> 7,774,913
<TOTAL-REVENUES> 7,774,913
<CGS> 0
<TOTAL-COSTS> 9,414,986
<OTHER-EXPENSES> (46,276)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,047
<INCOME-PRETAX> (1,715,844)
<INCOME-TAX> (629,975)
<INCOME-CONTINUING> (1,085,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,085,869)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
<FN>
<F1>EXCLUDES RESTRICTED CASH OF $738,474.
</FN>
</TABLE>
