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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 0-22115
----------------
COMPLETE WELLNESS CENTERS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 52-1910135
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
725 INDEPENDENCE AVENUE, S.E., WASHINGTON, D.C. 20003
(Address of principal executive offices)
(202) 543-6800
(Issuer's telephone number)
-----------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
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, at June 30, 1997: 1,860,767.
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INDEX COMPLETE WELLNESS CENTERS, INC.
FORM 10 - QSB
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Part I. FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 1
Condensed Consolidated Statement of Operations
Three months ended June 30, 1997 and June 30, 1996
Six months ended June 30, 1997 and June 30, 1996 2
Condensed Consolidated Statement of Cash Flows
Three months ended June 30, 1997 and June 30, 1996 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Part II. OTHER INFORMATION 9
Signatures
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------------- ---------------
ASSETS (UNAUDITED) (NOTE)
<S> <C> <C>
Cash and equivalents $ 2,227,406 $ 298,509
Patient receivables, net of allowance for doubtful
accounts of $1,030,169 and $143,422 1,056,262 540,444
Other Assets 121,788 43,232
Deferred tax assets 47,010 15,487
----------- -----------
Total current assets 3,452,466 897,672
Furniture and equipment, net 348,287 215,615
----------- -----------
Total assets $ 3,800,753 $ 1,113,287
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 784,989 $ 412,725
Accrued wages 4,523 91,000
Accrued management fee 437,572 442,646
Accrued interest 3,751 52,010
Income tax payable 59,455 23,728
Notes payable - 1,098,000
----------- -----------
Total current liabilities 1,290,290 2,120,109
Convertible note payable 25,000 25,000
Minority Interest 47,891 -
Stockholders' equity
Preferred Stock, $.01 par value per share, 2,000,000 authorized of which
1,500 are designated Series A, 12% Cumulative Convertible Preferred,
1,350 shares issued and outstanding at December 31, 1996 - 14
Common Stock, $.0001665 par value per share, 10,000,000
shares authorized, 1,860,762 shares and 714,967 shares issued and
outstanding at June 30, 1997 and December 31, 1996 respectively 310 119
Additional capital 4,842,439 156,027
Accumulated deficit (2,405,177) (1,187,982)
----------- -----------
Total stockholders' equity (deficit) 2,437,572 (1,031,822)
Total liabilities and stockholders' equity (deficit) $ 3,800,753 $ 1,113,287
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 has been extracted from
the audited financial statements at that date.
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
--------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue
Patient revenue $ 1,002,068 $ 281,973 $ 1,813,947 $ 316,022
Management services income 840,392 - 990,755 -
--------- --------- --------- ---------
1,842,460 281,973 2,804,702 316,022
Direct expenses:
Salary and consulting costs 685,074 97,235 1,101,932 121,287
Management fees 884,691 117,672 1,241,765 133,048
Rent 74,084 61,201 110,735 68,131
Advertising and marketing 28,672 4,577 52,885 10,522
Bad debt expense 254,483 31,993 473,144 35,000
--------- --------- --------- ---------
Total direct expenses 1,927,004 312,678 2,980,461 367,988
General and administrative 654,502 168,949 1,029,281 211,045
Depreciation and amortization 21,122 12,007 36,303 14,007
Operating deficit (760,168) (211,661) (1,241,343) (277,018)
Interest expense 1,757 1,655 24,869 1,917
Interest income 44,084 - 47,370 604
Minority interest 5,851 129,919 5,851 152,216
--------- --------- --------- ---------
Net loss before income taxes (711,990) (83,397) (1,212,991) (126,115)
Income taxes 204 - 4,204 -
--------- --------- --------- ---------
Net loss after income taxes $ (712,194) $ (83,397) $(1,217,195) $ (126,115)
========= ========= ========= =========
Net loss per share data (Note C)
Net loss per share and common equivalent shares $ (0.38) $ - $ (0.71) $ -
========= ========= ========= =========
Weighted average number of common and common
Equivalent shares outstanding 1,860,767 - 1,706,350 -
========= ========= ========= =========
Pro forma net loss per share data (Note C)
Net loss per share and common equivalent shares $ (0.38) $ (.07) $ (0.70) $ (0.11)
========= ========= ========= =========
Weighted average number of common and common
Equivalent shares outstanding 1,860,767 1,168,055 1,745,016 1,168,055
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $(1,217,195) $ (126,115)
Adjustments to reconcile net loss to net cash
Used in operating activities
Minority interest (5,851) (152,216)
Depreciation and amortization 36,303 14,007
Amortization of debt discount 2,000 -
Recognition of granting of non qualified stock options 4,271 1,597
Provision for bad debts 473,144 35,000
Provision for deferred taxes (31,523) -
Changes in operating assets and liabilities
Patient receivables (988,962) (241,026)
Advances to officers and other current assets (78,556) (15,575)
Current tax liability 35,727 -
Accounts payable and other current liabilities 214,973 170,898
----------- ----------
Net cash used in operating activities (1,555,669) (313,430)
Investing activities
Purchase of equipment (168,975) (142,321)
----------- ----------
Net cash used in investing activities (168,975) (142,321)
Financing activities
Payment of bridge notes (1,100,000) -
Proceeds (payments) from notes payable 17,481 -
Proceeds from sale of common stock 4,686,060 -
Proceeds from exercising of stock options - 1,430
Proceeds from sale of equity in Complete Wellness Centers, LLC - 425,000
Investment of minority shareholders in CWIPA 50,000 -
----------- ----------
Net cash provided by financing activities 3,653,541 426,430
Net increase in cash and cash equivalents 1,928,897 (29,321)
Cash and cash equivalents at beginning of year 298,509 63,834
----------- ----------
Cash and cash equivalents at end of year $ 2,227,406 $ 34,513
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-QSB and
Article 10 of Regulation S-X. The financial statement information was derived
from unaudited financial statements unless indicated otherwise. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's 10-KSB dated December 31, 1996. The Company was
incorporated under the laws of the State of Delaware in November 1994. The
Company develops multi-disciplinary medical centers and furnishes certain
support services to such facilities.
Note B - Initial Public Offering
On February 24, 1997, the Company successfully completed an initial
public offering of 1,000,000 shares of common stock and 1,000,000 redeemable
common stock purchase warrants from which it received net proceeds, after
giving effect to the underwriting discount and non-accountable expenses, of
approximately $5,281,000. The offering proceeds were received by the Company in
February 1997. In addition, the Company incurred approximately $595,000 in
transaction costs in connection with the offering.
On March 20, 1997, the underwriter exercised 36,776 redeemable common
stock purchase warrants from a possible 150,000 included in the over-allotment
option. After giving effect to the underwriting discount, the Company received
approximately $3,200 in March 1997.
Note C - Net Loss Per Share
The Company's net loss per share calculations are based upon the
weighted average number of shares of Common Stock outstanding. During the
second and third quarters 1996 the Company issued 110,000 and 37,667 shares of
common stock. An additional 1,145,800 shares of common stock were issued on
February 19, 1997 in connection with the Company's initial public offering and
conversion of preferred stock to common stock. Pursuant to the requirements of
the Securities and Exchange Commission (SEC) staff accounting bulletin No. 83,
options to purchase Common Stock issued at prices below the initial public
offering price during the twelve months immediately preceding the initial
filing of the registration statement related to the initial public offering
have been included in the computation of net loss per share as if they were
outstanding for all periods presented prior to the initial public offering
(using the treasury method assuming repurchase of common stock at the estimated
initial public offering price). Other shares issuable upon the exercise of
stock options or conversion of redeemable convertible preferred stock have been
excluded from the computation because the effect of their inclusion would be
anti-dilutive. Subsequent to the Company's initial public offering, options
under the treasury stock method are included to the extent they are dilutive.
Weighted average
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shares used to calculate the pro forma net loss per share differs from the
weighted average on a historical basis due primarily to the inclusion of the
shares of Common Stock resulting from the assumed conversion at the beginning
of the applicable period of the Series A Convertible Preferred Stock.
Note D - New Subsidiaries
During May 1997, the Company incorporated three new wholly owned
subsidiaries, Complete Wellness Research Institute, Inc. (CWRI) and Complete
Wellness Education, Inc. (CWEI), both Delaware corporations; and Complete
Billing, Inc. (CBI), a Florida corporation. The results of operations of these
companies are included in the Company's June 30, 1997 consolidated financial
statements. During the three months and six months ended June 30, 1997, CWRI
had a net loss of $22,564, CWEI had no operating activity and CBI had a net
loss of $10,129. The net losses recorded are primarily related to start up
expenses not capitalized.
During May 1997, the Company entered into an agreement to become the
majority shareholder of a new Delaware corporation, Complete Wellness
Independent Physicians Association, Inc. (CWIPA). In accordance with the
agreement, the Company acquired 86.67% of the common stock of CWIPA in return
for $50,000 of initial capital and a commitment to provide up to $850,000 in
additional working capital or guarantees. Approximately $31,000 of additional
capital was provided in June 1997. The remaining 13.33% ownership is held by
the management of CWIPA. Management of CWIPA is subject to employment
agreements that provide them salary, annual bonuses equal to 10% of CWIPA
annual pretax income and a stock option plan with 3,500 CWIPA shares. During
the three months and six months ended June 30, 1997, CWIPA had net losses of
$43,984, of which the Company's share is $38,134. The financial statements of
CWIPA are consolidated with those of the Company.
Subsequent to June 30, 1997 the Company acquired all of the operating
assets and business of the Oxford Health Plan's Smokenders program, for $50,000
in cash and a royalty equal to 5% of the Smokenders revenues for a period of
ten years. Smokenders 1997 operating results prior to the acquisition are not
significant in comparison to those of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Statements included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" Section, and in other sections
of this Report and in prior and future filings by the Company with the
Securities and Exchange Commission, in the Company's prior and future press
releases and in oral statements made with the approval of an authorized
executive which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
presently anticipated or projected. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak
only as of the date made. There are important risk factors that in some cases
have affected and in the future could affect the Company's actual results and
could cause the Company's actual financial and operating performance to differ
materially from that expressed in any forward-looking statement. The following
discussion and analysis should be read in conjunction with the Financial
Statements and notes appearing elsewhere in this report.
The Company was established in November 1994. From its inception until
March 1995, the Company raised funds privately and developed the corporate
infrastructure, protocols, policies and procedures required to commence its
plan to develop multi-disciplinary medical clinics. In March 1995, the Company
formed Complete Wellness Centers, LLC ("CWC, LLC") as a vehicle for raising
capital needed to open medical clinics. The Company is the managing member of
CWC, LLC, has a 1% equity interest and has obtained irrevocable and permanent
voting proxies from the holders of a majority of ownership interests in CWC,
LLC. The Company consolidates the financial statements of CWC, LLC in its
financial statements due to its unilateral, perpetual and non-temporary
control. In July 1995, CWC, LLC purchased selected assets of a chiropractic
practice for the purpose of establishing the Company's first medical
5
<PAGE> 8
clinic. This clinic is a wholly owned subsidiary of CWC, LLC.
Throughout 1996, CWC, LLC established affiliations with an additional
six chiropractic practices using a strategy whereby CWC, LLC forms a medical
entity and enters into a long term management agreement with the entity to
provide certain administrative and management services. CWC, LLC employs the
affiliated chiropractor and one or more medical doctors and subcontracts the
daily operations of the medical clinic to the chiropractors' management
company. At December 31, 1996, CWC, LLC had one owned and six affiliated
medical clinics in operation. During the first quarter of 1997, CWC, LLC
revoked the contract of one affiliated clinic. During the second quarter of
1997 CWC, LLC agreed to close one of its clinics as the result of the
retirement of the affiliated chiropractor.
In July 1996, the Company affiliated with a chiropractic practice and
formed a medical clinic organized as a professional corporation. The Company
entered into a long-term agreement with the professional corporation to provide
administrative and management services. Operations at this clinic started in
August 1996. Additionally, the Company entered into new affiliation contracts
for 33 clinics during 1996. None of the new affiliations were in operation at
December 31, 1996.
During the six months ended June 30, 1997 the Company entered into
affiliated contracts for 62 additional clinics, bringing the total under
contract to 110. During June 1997, CWC, LLC agreed to close one of its clinics
as the result of retirement of the affiliated chiropractor. The Company also
started operations in 36 medical clinics, bringing the total in operation to
42.
During May 1997, the Company incorporated three new wholly owned
subsidiaries. Complete Wellness Research Institute, Inc. (CWRI) and Complete
Wellness Education, Inc. (CWEI), are Delaware corporations; and Complete
Billing, Inc. (CBI), is a Florida corporation. All three companies started
operations in May 1997. CWRI plans to provide clinic research and studies to
pharmaceutical, vitamin, natural product and medical device manufactures'
within the Company's network of clinics. CWEI plans, through its consortium of
nationally recognized doctors and authors, to provide education and wellness
articles and periodicals to national publications and publishers. CBI is a
healthcare billing company, which provides services to medical and chiropractic
clinics, both inside the Company's clinic network and to unaffiliated doctors.
Included in the Company's June 30, 1997 consolidated financial statements are
the results of operations of these companies.
Also, during May 1997 the Company entered into an agreement to become
the majority shareholder of a new company, Complete Wellness Independent
Physicians Association, Inc. (CWIPA), a Delaware corporation. The Company holds
an 86.67% stake in CWIPA, with 13.33% ownership held by the management of
CWIPA. CWIPA plans to build a network of primary, specialty, hospital and
ancillary healthcare providers, including the Company's network of clinics, to
attract managed care contracts, Medicare, Medicaid and federal and state
government contracts and self funded corporation contracts. CWIPA started
operations in June 1997. Included in the Company's June 30, 1997 consolidated
financial statements are the results of operations of this company, with effect
given to the 13.33% minority interest.
Results from Operations
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1996
Revenue. During the three and six months ended June 30, 1997 the Company had
total revenue of $1,842,460 and $2,804,702 respectively, as compared to
$281,973 and $316,022 for the three and six months ended June 30, 1996. The
increase of $1,560,487 for the three month period was due primarily to the net
addition of thirty-nine Integrated Medical Centers after March 1996. The
increase of $2,488,680 for the six month period was due to the net addition of
thirty-six Integrated Medical Centers after June 1996.
Salary and Consulting Costs. During the three and six months ended June 30,
1997, the Company incurred salary and consulting costs of $685,074 and
$1,101,932, respectively as compared to $97,235 and $121,287 for the three and
six months ended June 30, 1996. The increase of $587,839 for the three month
period was due to an increase in the costs
6
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resulting from the hiring of additional employees in the administrative
capacity at the corporate headquarters and the medical capacity at the clinics.
The increase of $980,645 for the six month period was due to commencement of
normal salaries for certain executive officers who served without salary until
February of 1997 and the hiring of additional employees in the administrative
capacity at the corporate headquarters and the medical capacity at the clinics.
Management Fees. During the three and six months ended June 30, 1997, the
Company incurred management fees of $884,691 and $1,241,765, respectively, as
compared to $117,672 and $133,048 for the three and six months ended June 30,
1996. These are fees that are paid to the affiliated chiropractors' management
companies for managing the day-to-day operations of the Integrated Medical
Centers. The increase of $767,019 for the three month period was due primarily
to the net addition of thirty-nine Integrated Medical Centers after March 1996.
The increase of $1,108,717 for the six month period was due primarily to the
net addition of thirty-six Integrated Medical Centers after March 1996.
Rent. During the three and six months ended June 30, 1997, the Company incurred
rent expense of $74,084 and $110,735, respectively, as compared to $61,201 and
$68,131 for the three and six months ended June 30, 1996. Rent consists of
amounts incurred for office space and certain equipment by the Company at the
medical clinics. Rent for space and equipment for the medical clinics is paid
when the accounts receivable of the medical clinic are collected by the medical
clinic. The increase of $12,883 for the three month period was due primarily to
the net addition of thirty nine Integrated Medical Centers after March 1996.
The increase of $42,604 for the six month period was primarily due to the net
addition of thirty six Integrated Medical Centers after June 1996.
Advertising and Marketing. During the three and six months ended June 30, 1997,
the Company incurred advertising and marketing expenses of $28,672 and $52,885,
respectively, as compared to $4,577 and $10,522 for the three and six months
ended June 30, 1996. The increase of $24,095 for the three month and the
increase of $42,363 for the six month period was attributable to additional
national advertising for marketing and clinic recruitment purposes.
Bad Debt Expense. During the three and six months ended June 30, 1997, the
Company incurred bad debt expense of $254,483 and $473,144, respectively as
compared to $31,993 and $35,000 for the three and six months ended June 30,
1996. The Company has adopted a policy of fully reserving for any accounts
receivable that are not collected within 90 days. The increase of $222,490 for
the three month period was due to an increase related to reserves for doubtful
accounts of $222,490. The increase of $438,144 for the six month period was due
to an increase in reserves for doubtful accounts of $438,144.
General and Administrative. During the three and six months ended June 30,
1997, the Company incurred general and administrative expenses of $654,502 and
$1,029,281, respectively as compared to $168,949 and $211,045 for the three and
six months ended June 30, 1996. The increase of $485,553 for the three month
period was due primarily to the net addition of thirty nine Integrated Medical
Centers after March 1996 and consists of an increases of (i) $78,341 in
insurance costs, (ii) $187,645 in professional fees, (iii) $55,192 in travel
and entertainment costs and (iv) $122,135 in various costs such as automobile,
telephone, postage and printing and reproduction. The increase of $818,236 for
the six month period was due primarily to the net addition of thirty nine
Integrated Medical Centers after March 1996 and consists of an increases of (i)
$117,924 in insurance costs, (ii) $127,860 in professional fees, (iii) $76,275
in travel and entertainment costs and (iv) $142,998 in various costs such as
automobile, telephone, postage and printing and reproduction.
Depreciation and Amortization. During the three and six months ended June 30,
1997, the Company recognized depreciation and amortization expense of $21,122
and $36,303, respectively, as compared to $12,007 and $14,007 for the three and
six months ended June 30, 1996. The increase of $9,115 for the three month
period and $22,296 for the six month period resulted from the addition of fixed
assets, primarily computer equipment, with depreciable lives of five years or
less.
Interest Income. During the three and six months ended June 30, 1997, the
Company had interest income of $44,084 and $47,370, respectively, as compared to
$0 and $604 for the three and six months ended June 30, 1996. The increase of
$44,084 for the three month period and $46,766 for the six month period
resulted from the investment of funds as a result of the Company's Initial
Public Offering in a series of short term securities.
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Interest Expense. During the three and six months ended June 30, 1997, the
Company had interest expense of $1,757 and $24,869, respectively, as compared
to $1,655 and $1,917 for the three and six months ended June 30, 1996. The
increase of $102 for the three month period was due to an interest adjustment
and the increase of $22,952 for the six month period resulted from additional
interest expense associated with the bridge financing loan repaid in February
1997.
Liquidity and Capital Resources
The Company has experienced net losses, negative cash flow from
operations and an accumulated deficit each month since its inception. For the
three and six months ended June 30, 1997 the Company had incurred net losses of
$712,194 and $1,217,195 respectively, as compared to $83,397 and $126,115 for
the three and six months ended June 30, 1996. At June 30, 1997, the Company had
working capital of $2,162,176 and an accumulated deficit of $2,405,177. Net
cash used in operations for the three and six months ended June 30, 1997 was
$991,297 and $1,555,669, respectively, as compared to $145,285 and $313,430 for
the three and six months ended June 30, 1996. Negative cash flow for each
period was attributable to net losses in such periods and increases in accounts
receivable net of accounts payable and other current liabilities. For the three
and six months ended June 30, 1997, the Company used $114,197 and $168,975,
respectively, as compared to $132,696 and $142,321 for the three and six months
ended June 30, 1996 for purchases of equipment.
On February 24, 1997, the Company successfully completed an initial
public offering of its equity securities. Net proceeds to the Company after
expenses of the Offering were $4,965,000. Of the net proceeds, the Company
repaid approximately $1,100,000 of principal and $24,000 of interest to secured
lenders who participated in a bridge financings in July and August 1996.
Additionally, $121,000 of the proceeds was used to pay accrued salaries.
The Company intends to develop no fewer than 48 additional medical
clinics by December 31, 1997, including one in connection with a strategic
alliance. The average cost to the Company to develop a medical clinic is
approximately $10,000. The Company believes the average cost to the Company to
develop a medical center connected with a strategic alliance will be
approximately $75,000. The Company is financing its expansion strategy with a
portion of the net proceeds of the offering.
CWC, LLC experienced negative cash flow for the three and six months
ended June 30, 1997 of $8,762 and $250,915. The cash flow shortfall was offset
by advances from the Company of $10,000 and $32,150 for the three months and
six months then ended. Two of the seven clinics developed under CWC, LLC have
ceased operations. At June 30, 1997, CWC, LLC has negative equity of
approximately $269,000 and a deficit in working capital of approximately
$506,000. To the extent that the remaining medical clinics do not provide
sufficient cash flow to meet the short term needs of CWC, LLC, the Company, at
this time, intends to continue to provide cash advances.
Under the shareholders agreement for CWIPA, the Company provided
funding for start up costs of approximately $81,000 in the quarter ended June
30, 1997. A commitment remains for funding of an additional $820,000 through
March 31, 1998. This funding is intended to be provided through existing cash
resources and additional financing arrangements of the Company.
The acquisitions and the planned development of the Smokenders program
through the next twelve months is expected to require an additional cash needs
of approximately $170,000. This funding is intended to be provided from
existing cash resources and additional financing arrangements of the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the June 25, 1997 annual shareholders meeting, shareholders
approved the re-election of the Board of Directors in addition to the
appointment of two new Board of Directors members; Dr. Eric S. Kaplan
and Jason Elkin. Also at that meeting, the shareholders approved a
200,000 share increase in the 1996 Stock Option Plan and gave approval
to retain Ernst and Young, LLP as the Company's auditors for 1997.
ITEM 5. OTHER INFORMATION
1) New subsidiary Articles of Incorporation
2) Complete Wellness Independent Physician Association shareholders
agreement
3) Smokenders shareholders agreement
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 15, 1997 Complete Wellness Centers, Inc.
By /s/ E. Eugene Sharer
E. Eugene Sharer - President and
Chief Financial Officer
9
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STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
----------------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "COMPLETE WELLNESS EDUCATION, INC." FILED IN THIS OFFICE ON THE
SIXTH DAY OF JUNE A.D. 1997, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[Secretary's Office Logo]
/s/ EDWARD J. FREEL
--------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
DATE:
<PAGE> 2
CERTIFICATE OF INCORPORATION
OF
COMPLETE WELLNESS EDUCATION, INC.
------------------------------
FIRST: The name of the corporation (the "Corporation") is Complete
Wellness Education, Inc.
SECOND: Its registered office in the State of Delaware is to be located at
1013 Centre Road, Wilmington, Delaware 19805-1297. The registered agent at this
address is CORPORATION SERVICE COMPANY, in New Castle County.
THIRD: The purpose or purposes of the Corporation shall be to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Thousand (2,000) shares of Common Stock,
$.01 par value per share.
FIFTH: The name and mailing address of the incorporator are as follows:
Thomas W. Caplis
c/o Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
SIXTH: The Board of Directors shall have the power to adopt, amend or
repeal the By-Laws. Elections of directors need not be by written ballot unless
and to the extent that the By-Laws so provide.
SEVENTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, or by any successor thereto, indemnify any and all
persons whom it shall have power to indemnify under said Section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said Section. The Corporation shall advance expenses to the
fullest extent permitted by said Section. Such right to indemnification and
advancement of expenses shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. The indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which those seeking indemnification or
<PAGE> 3
advancement of expenses may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise.
EIGHTH: To the fullest extent that the General Corporation Law of the
State of Delaware, as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of directors, no
person serving as a director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. Neither the amendment or repeal of this Article Eighth nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
Article shall adversely affect any right or protection existing under this
Article at the time of such amendment or repeal.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore
named, has executed this Certificate of Incorporation on this 6th day of June,
1997.
/s/ THOMAS W. CAPLIS
--------------------------------------
Thomas W. Caplis
Incorporator
2
<PAGE> 4
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "COMPLETE WELLNESS RESEARCH INSTITUTE, INC." FILED IN THIS
OFFICE ON THE SIXTH OF JUNE, A.D. 1997, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THE CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[Secretary's Office Logo]
/s/ EDWARD J. FREEL
--------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
DATE:
<PAGE> 5
CERTIFICATE OF INCORPORATION
OF
COMPLETE WELLNESS RESEARCH INSTITUTE, INC.
---------------------------------------
FIRST: The name of the corporation (the "Corporation") is Complete
Wellness Research Institute, Inc.
SECOND: Its registered office in the State of Delaware is to be located at
1013 Centre Road, Wilmington, Delaware 19805-1297. The registered agent at this
address is CORPORATION SERVICE COMPANY, in New Castle County.
THIRD: The purpose or purposes of the Corporation shall be to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Thousand (2,000) shares of Common Stock,
$.01 par value per share.
FIFTH: The name and mailing address of the incorporator are as follows:
Thomas W. Caplis
c/o Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
SIXTH: The Board of Directors shall have the power to adopt, amend or
repeal the By-Laws. Elections of directors need not be by written ballot unless
and to the extent that the By-Laws so provide.
SEVENTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, or by any successor thereto, indemnify any and all
persons whom it shall have power to indemnify under said Section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said Section. The Corporation shall advance expenses to the
fullest extent permitted by said Section. Such right to indemnification and
advancement of expenses shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. The indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which those seeking indemnification or
<PAGE> 6
advancement of expenses may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise.
EIGHTH: To the fullest extent that the General Corporation Law of the
State of Delaware, as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of directors, no
person serving as a director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. Neither the amendment or repeal of this Article Eighth nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
Article shall adversely affect any right or protection existing under this
Article at the time of such amendment or repeal.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore
named, has executed this Certificate of Incorporation on this 6th day of June,
1997.
/s/ THOMAS W. CAPLIS
--------------------------------------
Thomas W. Caplis
Incorporator
2
<PAGE> 7
State of Florida
Articles of Incorporation
Of
COMPLETE BILLING, INC.
FIRST: The corporate name that satisfies the requirements of Section
607.0401 is: COMPLETE BILLING, INC.
SECOND: The street address of the principal office of the corporation and
its mailing address is:
12140 Suffolk Terrace, Gaithersburg, Maryland, 20878
THIRD: The number of shares the corporation is authorized to issue is Five
Hundred (500).
FOURTH: The street address of the initial registered office of the
corporation is C/O C T CORPORATION SYSTEM, 1200 SOUTH PINE ISLAND ROAD, CITY OF
PLANTATION, FLORIDA 33324, and the name of its initial registered agent at such
address is C T CORPORATION SYSTEM.
FIFTH: The name and address of each incorporator is:
<TABLE>
<S> <C>
Cheryl Hawker 1633 Broadway, New York, New York 10019
Arlene Shaw 1633 Broadway, New York, New York 10019
Ida Torres 1633 Broadway, New York, New York 10019
</TABLE>
The undersigned have executed these articles of incorporation this 23rd day
of May, 1997.
/s/ CHERYL HAWKER
--------------------------------------
Cheryl Hawker, Incorporator
/s/ ARLENE SHAW
--------------------------------------
Arlene Shaw, Incorporator
/s/ IDA TORRES
--------------------------------------
Ida Torres, Incorporator
Page 1
<PAGE> 8
Acceptance by the Registered Agent of
COMPLETE BILLING, INC.
as required in Section 607.0501
C T Corporation System is familiar with and accepts the obligations
provided for in Section 607.0505.
C T CORPORATION SYSTEM
Dated 23rd day of May, 1997
By /s/ KIMBERLY D. GILBERTSON
------------------------------------
KIMBERLY D. GILBERTSON
------------------------------------
(Type Name of Officer)
ASST. VICE PRESIDENT
------------------------------------
(Title of Officer)
Page 2
<PAGE> 9
[SECRETARY'S OFFICE LOGO]
FLORIDA DEPARTMENT OF STATE
SANDRA B. MORTHAM
SECRETARY OF STATE
May 30, 1997
CT CORPORATION SYSTEM
660 E JEFFERSON STREET
TALLAHASSEE, FL 32301
The Articles of Incorporation for COMPLETE BILLING, INC. were filed on May 27,
1997 and assigned document number P97000047886. Please refer to this number
whenever corresponding with this office regarding the above corporation.
PLEASE NOTE: COMPLIANCE WITH THE FOLLOWING PROCEDURES IS ESSENTIAL TO
MAINTAINING YOUR CORPORATE STATUS. FAILURE TO DO SO MAY RESULT IN DISSOLUTION OF
YOUR CORPORATION.
A CORPORATION ANNUAL REPORT MUST BE FILED WITH THIS OFFICE BETWEEN JANUARY 1 AND
MAY 1 OF EACH YEAR BEGINNING WITH THE CALENDAR YEAR FOLLOWING THE YEAR OF THE
FILING DATE NOTED ABOVE AND EACH YEAR THEREAFTER. FAILURE TO FILE THE ANNUAL
REPORT ON TIME MAY RESULT IN ADMINISTRATIVE DISSOLUTION OF YOUR CORPORATION.
A FEDERAL EMPLOYER IDENTIFICATION (FEI) NUMBER MUST BE SHOWN ON THE ANNUAL
REPORT FORM PRIOR TO ITS FILING WITH THIS OFFICE. CONTACT THE INTERNAL REVENUE
SERVICE TO INSURE THAT YOU RECEIVE THE FEI NUMBER IN TIME TO FILE THE ANNUAL
REPORT. TO OBTAIN A FEI NUMBER, CONTACT THE IRS AT 1-800-829-3676 AND REQUEST
FORM SS-4.
SHOULD YOUR CORPORATE MAILING ADDRESS CHANGE, YOU MUST NOTIFY THIS OFFICE IN
WRITING, TO INSURE IMPORTANT MAILINGS SUCH AS THE ANNUAL REPORT NOTICES REACH
YOU.
Should you have any questions regarding corporations, please contact this office
at the address given below.
Kimberly Rolfe, Document Specialist
New Filing Section Letter Number: 497A00029402
Division of Corporations -- P.O. BOX 6327 -- Tallahassee, Florida 32314
<PAGE> 10
Acceptance by the Registered Agent of
COMPLETE BILLING, INC.
as required in Section 607.0501
C T Corporation System is familiar with and accepts the obligations provided for
in Section 607.0505.
C T CORPORATION SYSTEM
Dated 23rd day of May, 1997
By /s/ KIMBERLY D. GILBERTSON
------------------------------------
KIMBERLY D. GILBERTSON
------------------------------------
(Type Name of Officer)
ASST. VICE PRESIDENT
------------------------------------
(Title of Officer)
Page 2
<PAGE> 11
State of Florida
Articles of Incorporation
Of
COMPLETE BILLING, INC.
FIRST: The corporate name that satisfies the requirements of Section
607.0401 is: COMPLETE BILLING, INC.
SECOND: The street address of the principal office of the corporation and
its mailing address is:
12140 Suffolk Terrace, Gaithersburg, Maryland, 20878
THIRD: The number of shares the corporation is authorized to issue is Five
Hundred (500).
FOURTH: The street address of the initial registered office of the
corporation is C/O C T CORPORATION SYSTEM, 1200 SOUTH PINE ISLAND ROAD, CITY OF
PLANTATION, FLORIDA 33324, and the name of its initial registered agent at such
address is C T CORPORATION SYSTEM.
FIFTH: The name and address of each incorporator is:
Cheryl Hawker 1633 Broadway, New York, New York 10019
Arlene Shaw 1633 Broadway, New York, New York 10019
Ida Torres 1633 Broadway, New York, New York 10019
The undersigned have executed these articles of incorporation this 23rd day
of May, 1997.
/s/ CHERYL HAWKER
--------------------------------------
Cheryl Hawker, Incorporator
/s/ ARLENE SHAW
--------------------------------------
Arlene Shaw, Incorporator
/s/ IDA TORRES
--------------------------------------
Ida Torres, Incorporator
Page 1
<PAGE> 1
--------------------------------------
SUBSCRIPTION AND
SHAREHOLDERS' AGREEMENT
OF
COMPLETE WELLNESS INDEPENDENT
PHYSICIAN ASSOCIATION, INC.
--------------------------------------
MAY 13, 1997
<PAGE> 2
SUBSCRIPTION AND SHAREHOLDERS' AGREEMENT
SUBSCRIPTION AND SHAREHOLDERS' AGREEMENT made as of May
13, 1997, by and among Christopher M. Grady ("Grady"), Christian E. Miller
("Miller"), Jason M. Patchen ("Patchen"), David A. Sherwin ("Sherwin") and Sam
D. Toney, M.D. ("Toney"), individuals (collectively, the "Managers"), Complete
Wellness Centers, Inc., a Delaware corporation ("CWC"), and Complete Wellness
Independent Physician Association, Inc., a Delaware corporation (the
"Company"), having its principal place of business at 725 Independence Avenue,
SE, Washington DC 20003. The Managers and CWC are herein sometimes
collectively refered to as the "Shareholders."
WITNESSETH
WHEREAS, the Shareholders have caused the Company to be
organized under the laws of the State of Delaware and wish to set forth their
understanding concerning, among other things, the capitalization, organization,
operation and management of the Company and the rights and obligations of the
Shareholders among themselves.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth the parties hereto hereby agree
as follows:
ARTICLE I
CAPITALIZATION
1.1 Initial Capitalization. The Shareholders hereby
subscribe for, and on or before June 1, 1997 shall purchase, the number of
shares of common stock, par value $.01 per share, of the Company set forth
opposite their respective names, at the price of one dollar ($1.00) per share:
1
<PAGE> 3
<TABLE>
<CAPTION>
Shareholder Shares Percentage
----------- ------ ----------
<S> <C> <C>
Patchen 500 6.67%
Toney 150 2.00%
Sherwin 150 2.00%
Grady 150 2.00%
Miller 50 0.67%
CWC 6,500 86.66%
----- ------
TOTAL 7,500 100.00%
===== =======
</TABLE>
All amounts paid for shares in excess of the par value thereof, and all
additional capital contributions, shall be allocated to the surplus of the
Company.
1.2 Additional Capital Contributions by the Managers. On
or before June 1, 1997 the Managers shall contribute to the Company an
aggregate of $49,000, and on or before November 30, 1997 the Managers
additionally shall contribute an aggregate of $50,000 as an additional capital
contribution, in proportion to their respective shareholdings, as follows:
<TABLE>
<CAPTION>
June 1, 1997 November 30, 1997
Manager Contribution Contribution
------- ------------ ------------
<S> <C> <C>
Patchen $24,500 $25,000
Toney 7,350 7,500
Sherwin 7,350 7,500
Grady 7,350 7,500
Miller 2,450 2,500
----- -----
TOTAL $49,000 $50,000
====== ======
</TABLE>
1.3 Additional Capital Contributions by CWC. (a) On or
before June 1, 1997, CWC shall contribute $43,500 to the Company and CWC shall
provide to Company a $50,000 bond
2
<PAGE> 4
to be used by the Company for purpose of securing a Third Party Administrator
("TPA") license in the State of Florida.
(b) On or before November 30, 1997, CWC shall make a further
capital contribution to the Company valued at $850,000 substantially in
accordance with the Business Plan attached as Exhibit B hereto (the "November
Contribution") as follows:
(i) All or any part of the November Contribution may be in cash;
(ii) Up to $250,000 of the November Contribution may be satisfied by
issuance of guarantees of Company obligations, including but not
limited to guarantees of capital lease obligations;
(iii) Up to $600,000 of the November Contribution may be satisfied by
arranging for the issuance and placement by the Company of 12%
cumulative convertible preferred stock having the terms and conditions
substantially as set forth in Exhibit A hereto ("Preferred Stock"),
and such other terms and conditions as shall be determined by the
Board of Directors of the Company.
(c) On or before the earlier of (i) the date of execution of the
first contract(s) between the Company and health maintenance organizations or
other managed care providers (collectively, the "HMO Contracts"), and (ii)
March 1, 1998, CWC shall provide for the benefit of the Company one or more
letters of credit or other legally acceptable form of surety bond or guaranty
(the "LC") in the amount stipulated by the reserve requirements of such HMO
Contracts but not to exceed $2,000,000. It is agreed by both parties that the
LC shall be replaced, as soon as possible and no later than 12 months from the
execution of the first signed contract, with a reserve generated internally by
the Company's revenues. It is also agreed by the parties that the replacement
of the LC and funding of
3
<PAGE> 5
the Company's internal reserve will be senior in priority to the payment of
claims, to the extent commercially reasonable, and any employment bonus payment
obligations of the Company.
1.4 Anticipated Future Issuances. Upon the full payment
of all of the capital by the Managers and CWC as provided above, 1,000 shares
of the outstanding Common Stock of the Company shall be owned by the Managers
as a group, representing 13.33% of the outstanding shares, and 6,500 shares by
CWC, representing 86.66% of the outstanding shares. Under the terms of the
Employment Agreements, the Managers as a group will be granted up to an
additional 2,500 shares, subject to certain time and performance vesting, which
upon issuance will result in the Managers as a group having 35% of the
outstanding shares of Common Stock and CWC having 65% of the outstanding shares
of Common Stock. All shares of Common Stock of the Company to be issued
pursuant to this Agreement will be non-public "restricted securities" sold
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act") provided by Section 4(2) thereof
and SEC Regulation D promulgated thereunder, and by applicable exemptions under
any applicable state securities laws and regulations.
1.5 Capital Calls. By a vote of four (4) members of the
Board of Directors, the Company may seek additional equity financing
(hereinafter, a "Capital Call"). In the event of a Capital Call, the Company
shall notify the parties hereto, and CWC and the Managers shall preemptively
have the right to participate and provide such capital (proportionate to their
respective interests) within thirty (30) days of receiving notice of such
Capital Call. In the event that any Manager individually fails to provide his
proportionate share of such Capital Call, the remaining Managers shall have the
first right to make such contribution instead of the non-contributing Manager
proportionate to their respective interests. In the event any party fails to
provide his or its proportionate share of such Capital Call, the other parties
may provide such capital proportionate to their respective interests. For
purposes of this Section 1.5 only, a party's "interest" shall be the
4
<PAGE> 6
proportion of such party's issued and outstanding shares, including in the case
of CWC the Escrow Shares, plus all shares issuable under vested and exercisable
options to purchase Company shares to the number of all issued and outstanding
shares plus all shares issuable under vested and exercisable options to
purchase Company shares. Non-contributing parties shall suffer no penalty for
failure to contribute other than dilution of their respective interests in the
Corporation. In the event the parties hereto fail to provide such Capital Call
within forty five (45) days, then the Company may seek outside financing with
proportionate dilution to all of the parties which shall be subject to Board of
Directors' approval.
1.6 Delivery and Escrow of Shares. Upon the full
execution of this Agreement and the making of the capital contributions
described above, the Company will promptly deliver to each Shareholder a duly
executed share certificate registered in the name of such Shareholder
representing the number of Shares set forth opposite such Shareholder's name
above, provided, however, that Two Thousand (2,000) of the Six Thousand Five
Hundred (6,500) shares to be purchased by CWC (the "Escrow Shares") shall be
held in escrow, and the certificate representing such escrowed shares shall be
delivered to Crestar Bank ("Escrow Agent") to de disbursed in the following
manner. If the Preferred Stock is not issued by November 30, 1997, or if
issued but never converted by the holders of the Preferred Stock into Shares of
Common Stock, the Escrow Shares shall be released to CWC. If Shares of CWC are
to be repurchased by the Company under Section 2.2 (b), because of a CWC
Default, the Escrow agent shall deliver such shares to the Company.
1.7 Adequacy of Consideration for Shares. The
Shareholders and the Company acknowledge, agree and waive any claim to the
contrary that the consideration to be paid for the Shares by each of the
Shareholders as provided herein is legally adequate consideration for the
Shares under applicable Florida law.
5
<PAGE> 7
ARTICLE II
REMEDIES FOR FAILURE TO
PROVIDE ADDITIONAL CAPITAL
2.1 Default by Managers. In the event any of the
Managers fails to provide the additional capital required pursuant to Section
1.2 hereof, the Company shall have the right to repurchase all of such
Manager's shares at a purchase price of One Dollar ($1) per share. In the
event any of the Managers fails to provide a portion of such additional
capital, the Company shall have the right to repurchase, at a purchase price of
One Dollar ($1) per share, that number of such Manager's shares as equals (X)
the total number of shares issued to such Manager pursuant to Section 1.1
hereof, multiplied by (Y) the amount of capital contribution which such Manager
has failed to make, divided by (Z) the total amount of additional capital
contribution (i.e. the total of the contributions required to be made on June
1, 1997 and November 1, 1997) required to be made by such Manager pursuant to
Section 1.2.
2.2 Default by CWC. (a) In the event CWC fails to provide
the additional capital required pursuant to Section 1.3(b) hereof, the Company
shall have the right to repurchase 4,000 of CWC's shares at a purchase price of
One Dollar ($1.00) per share. In the event CWC fails to provide a portion of
such additional capital, the Company shall have the right to repurchase, at a
purchase price of One Dollar ($1) per share, that number of CWC's Shares as
equals (X) 4,000 multiplied by (Y) the amount of capital contribution which CWC
has failed to make, divided by (Z) $850,000.
6
<PAGE> 8
(b) In the event CWC fails to provide the letter of credit or
other security required pursuant to Section 1.3(c) hereof, the Company shall
have the right to repurchase 2,000 of CWC's shares at a purchase price of One
Dollar ($1) per share. In the event CWC fails to provide a portion of such
security, the Company shall have the right to repurchase, at a purchase price
of One Dollar ($1) per share, that number of CWC's Shares as equals (X) 2,000,
multiplied by (Y) the amount of security which CWC has failed to make, divided
by (Z) $2,000,000.
ARTICLE III
ORGANIZATION AND MANAGEMENT
3.1 Directors.
(a) The Company shall be governed by a Board of Directors
("Board") composed of five (5) persons, who need not be stockholders. CWC
shall be entitled to designate and elect two (2) members of the Board of
Directors of the Company and the Managers as a group shall be entitled to
designate and elect one (1) director, but in no event less than twenty percent
(20%) of the entire membership of the Board. Jason M. Patchen shall represent
the Managers as a member of the Board. The remaining two members of the five
member Board shall be selected by mutual consent of (i) CWC, and (ii) a
majority in interest of the Managers.
(b) In the event CWC fails to provide additional capital pursuant
to Sections 1.3 (a) and 1.3 (b) and the Company repurchases 6,000 of its Shares
from CWC at the price of $1.00 per Share, then the Managers shall be entitled
to designate and elect another director to represent the Managers, and one
additional director shall be designated and elected by mutual consent of the
Managers and CWC.
7
<PAGE> 9
3.2 Officers. The Shareholders agree in their capacity
as directors of the Company that the officers of the Company shall be as
follows:
<TABLE>
<S> <C>
Chairman and CEO C. Thomas McMillen
President and COO Jason M. Patchen
Vice President of
Operations Christian E. Miller
Treasurer David A. Sherwin
Vice President of
Medical Affairs Sam Toney, M.D.
Secretary Christopher M. Grady
</TABLE>
3.3 Amendment of Certificate of Incorporation and
By-Laws. The Certificate of Incorporation and By-Laws of the Company shall be
amended as and if necessary to conform to the requirements of, and to carry
into effect the provisions of, this Agreement.
3.4 Directors' Quorum and Required Vote. (a) The presence
or participation by conference telephone call of four Directors shall be
necessary to constitute a quorum for the transaction of business by the Board,
and except as otherwise provided herein, the affirmative action of three
Directors shall be necessary for the transaction of any business.
(b) For the Company to issue additional equity securities or
increase the number of shares reserved in the Company's Stock Option Plan, or
to recommend to the shareholders of the Company a sale of all or substantially
all of the assets of the Company or all or substantially all of the shares of
Common Stock, the affirmative vote of four (4) members of the Board shall be
required.
8
<PAGE> 10
3.5 Shareholders' Quorum. The presence in person or by
proxy of the holders of a majority of the Shares of voting stock of the Company
shall be necessary to constitute a quorum for the transaction of any business
and except as otherwise provided herein or by statute, the affirmative action
of the holders of 51 % of the shares of voting stock of the Company shall be
necessary for the transaction of any business.
3.6 Voting Agreement. Each Shareholder hereby
irrevocably agrees to cast his or its votes as a shareholder to elect the
Directors and to effect the agreements set forth in this Article.
ARTICLE IV
OPERATIONS
4.1 Fiscal Year. The fiscal year of the Company shall
commence on the 1st day of January in each year and end on the 31st day of
December in each year. Within 120 days after the end of each fiscal year the
Board of Directors shall present to the stockholders at a meeting which shall
be held within such 120 day period as shall be fixed annually by the Board a
report of the activities of the Company, a balance sheet and profit and loss
statement and summary of such activities which shall be submitted to the
stockholders not less than thirty (30) days in advance of such meeting.
4.2 Qualification to do Business. The officers of the
Company are hereby authorized to qualify the Company to do business in such
states as they deem appropriate after consultation with counsel.
9
<PAGE> 11
4.3 Business Plan. The Shareholders hereby agree to
pursue the business of the Company substantial as set forth in the business
plan dated April 23, 1997 (the "Business Plan") attached as Exhibit B hereto.
ARTICLE V
RESTRICTIONS ON TRANSFER
5.1 Certain Restrictions on Transfer. No transfer in
whole or in part of any Shares by a Shareholder shall be made whether by
sale, pledge, assignment, mortgage, gift, will, the laws of descent and
distribution or by operation of law, and no transfer of any Shares shall be
made on the books of the Company and no unregistered transfer of any equity
interest shall be made or be effective except as provided herein.
5.2 Securities Act Restrictions; Legend. (a) The Shares
to be issued by the Company to the Shareholders have not been registered under
the Securities Act of 1933, as amended (the "Act") and are being sold and
issued in reliance upon exemption from registration provided by Section 4(2) of
the Act and applicable exemptions provided under relevant state securities laws
and regulations. The Company is under no obligation to register such
securities under the Act. In view of the foregoing (and assuming that the
Shares are not subsequently registered under the Act), the Shareholders will
have to bear the economic risk of their investment for an indefinite period of
time, unless such Shares are sold or otherwise transferred in a transaction
permitted by this Agreement in connection with which an exemption from such
registration under the Act is available.
10
<PAGE> 12
(b) Each certificate evidencing the Shares shall bear the
following legend:
"The Shares represented by this Certificate have not
been registered under the Securities Act of 1933 or any
applicable state securities laws and may not be offered, sold,
pledged, transferred or otherwise disposed of except pursuant
to an effective registration statement under such Act and
compliance with any such applicable state securities laws,
unless an the issuer is provided with an opinion of counsel,
satisfactory to the issuer, that such disposition may be made
without such registration."
5.3 Additional Legend. Each Shareholder hereby agrees
with and for the benefit of the other Shareholders that all certificates
representing Shares of the Company will bear also on the face thereof the
following legend, which refers to the special arrangements concerning, among
other things, the election of Directors of the Company, the restriction on
transfer of shares of the company and special requirements concerning the
dissolution of the Company, all pursuant to this Agreement, as follows:
"The Shares evidenced by this certificate are subject to the
restrictions and options stated in, and are transferable only
upon compliance with the provisions of, the Shareholders
Agreement dated as of May 13, 1997, by and among Complete
Wellness Independent Physician Association, Inc. (the
"Company") and certain shareholders thereof, a copy of which
is on file at the office of the Company, the provisions of
which Agreement are incorporated herein by reference,
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<PAGE> 13
as the same may be at any time amended. The Agreement also
contains special provisions concerning, among other things,
the manner of electing directors of the Company, special
requirements concerning the sale of the Company, and the
quorum and voting requirements for action by the Shareholders
and Directors."
5.4 Transfers on Termination of Employment, Death or by
Operation of Law.
(a) In the Event of Employment Termination or Desire to Withdraw.
In the event of the resignation or removal for cause of a Shareholder as an
employee of the Company, or in the event a Shareholder desires to sell his
Shares (a "Selling Shareholder"), any Shares owned by such Shareholder shall be
deemed offered to the Company for sale to the Company at a price equal to the
Market Price, as defined below, determined at the time of said offer, as
hereinafter provided, provided however, that said price shall in no event be
less than Book Value per share unless otherwise provided herein.
In the event that a person who is designated above as an officer of
the Company leaves the employment of the Company (herein a "Withdrawing
Shareholder") prior to four years from the date hereof, the Company shall have
the option, but not the obligation, to purchase the Withdrawing Shareholder's
Shares for the following prices, which shall be conclusively deemed the legally
binding purchase price that may be paid by the Company: (i) if the Withdrawing
Shareholder leaves the employment of the Company on or within one year from the
date hereof, the Company shall pay Book Value, as hereafter defined, of the
Shares owned by him, (ii) if the Withdrawing Shareholder leaves the employment
of the Company on or within two years from the date hereof, the Company shall
pay 33% of the Market Price of the Shares owned by him, (iii) if
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<PAGE> 14
the Withdrawing Shareholder leaves the employment of the Company on or within
three years from the date hereof, the Company shall pay 66% of the Market Price
of the Shares owned by him, and (iv) if the Withdrawing Shareholder leaves the
employment of the Company after three years from the date hereof, the Company
shall pay 100% of the Market Price of the Shares owned by him.
The Selling Shareholder shall immediately give to all of the
Shareholders and to the Company written notice, by registered or certified
mail, of such attempted or impending disposition or transfer. Such notice
(hereinafter sometimes referred to as the "Selling Notice") shall set a date
for the holding of a special meeting of the Shareholders and Directors of the
Company, which date shall be not less than twenty (20) days nor more than
thirty (30) days from the mailing of the Selling Notice. The parties hereto
agree to waive any and all notices otherwise required for such special meeting
and do hereby consent to the holding of such special meeting. In the case of a
Withdrawing Shareholder, the notice of his termination of his employment with
the Company by the Withdrawing Shareholder or the notice of termination by the
Company of his employment for cause, shall be deemed a Selling Notice and an
offer to sell his Shares as provided herein
The Company may, within 20 days after receipt of such offer,
purchase all or any part of the shares by personally delivering or mailing by
registered mail, postage prepaid, its acceptance to that effect to the person
or party making the offer, provided, however, that in the event of the death of
a Shareholder, the Company shall, within 20 days after receipt of such offer,
accept such offer, specifying a closing date in accordance with the next
sentence of this Section 5.4, and confirm the Company's commitment to purchase
at such settlement date all of the Shares owned by him at a price equal to the
greater of (a) the Book Value thereof determined at the time
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<PAGE> 15
of said offer, as hereinafter provided, or (b) an amount equal to the Market
Price. If the Company shall accept such offer in whole or in part, it shall
specify a closing date not more than 30 days after the date of such acceptance
for delivery to it, against payment, of the certificate representing the Shares
so purchased. Such certificate or certificates shall be delivered duly
endorsed for transfer with signature guaranteed by a bank or securities
brokerage firm and with all required tax stamps affixed or with funds for
payment for such tax stamps. If the Company shall not purchase all of the
Shares so offered, the Company shall on behalf of the registered owner thereof
promptly notify its Shareholders (other than the Selling Shareholder), in
writing by registered mail, postage prepaid, or by personal delivery, that such
Shares or the balance of such Shares, not purchased by the Company, are
available for purchase by such Shareholders at the price specified above.
The Shareholders may elect to purchase all or any part of such
Shares by a written acceptance to that effect received by the Company within 20
days after the date of mailing or delivery of such notification. If there
shall be more than one other Shareholder, and the Shareholders elect to
purchase in the aggregate more of the Shares than are available, the available
Shares shall be divided among the accepting Shareholders in proportion to their
registered ownership of the Shares of the Company at the time the Shares are
offered to the Company. The President of the Company shall set the closing
date for the completion of the purchase of such Shares and shall notify all
interested persons of the Closing date by such means as he shall determine
sufficient. In no event shall the President of the Company designate a closing
date which is more than 90 days after the date on which the Company first
received the offer in respect of the Shares. Promptly after such closing, or
if no shareholder elects to purchase such Shares, the President of the Company
shall determine whether all of the foregoing provisions hereof have been
complied with, and if they have, shall notify the registered owner of the
shares of such determination.
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<PAGE> 16
For a period of three months beginning on the first full
business day following the date of the notification of such determination, such
Shares as have not been purchased by the Company or the Shareholders of the
Company (other than the Selling Shareholder) may be sold or otherwise
transferred by the owner thereof to any person, whether or not a Shareholder.
If the Shareholder of the Company owning such shares is unable to sell or
otherwise transfer such shares within such period of three months such
Shareholder shall have the right to notify the Company, within ten days of the
expiration of such three month period, of such Shareholder's election to
require the dissolution of the Company. In the event of any such election the
Company and all the Shareholders shall promptly take all necessary action to
effect the dissolution of the Company and the liquidation and distribution of
the Company's assets. In the event any Shares have not been transferred to
such person on the books of the Company within 90 days following the date of
the notification of such determination referred to above or in the event the
Shareholder of the Company holding such shares has not notified the Company of
its election to require the dissolution of the Company, such shares shall again
be subject to all the restrictions imposed by this Agreement.
(b) Purchase Upon Death.
(i) Upon the occurrence of the death of any Shareholder, all of
the stock of the Company owned by such deceased Shareholder (hereinafter
referred to as the "Selling Shareholder") shall be sold to the Company by the
Selling Shareholder's personal representative, and the Company shall purchase
the same at the price and upon the terms of the payment hereinafter set forth.
The closing of such sale shall take place at the main business office of the
Company within ninety (90) days after the occurrence of the date or event
giving rise to the purchase obligation hereunder, or if the Company and the
Selling Shareholder's personal representative cannot agree on a date within
said period, the closing shall take place ninety (90) days after the
occurrence of the date or event
15
<PAGE> 17
giving rise to the purchase obligation hereunder or ninety days (90) days after
the appointment of the personal representative of the estate of any such
deceased Shareholder, whichever date will be the later to occur. Upon the sale
of Shares pursuant to the terms of this subparagraph, the Selling Shareholder's
personal representative shall transfer and warrant good and sufficient title to
the Shares to the Company.
(ii) In the event the Company is prohibited by law from purchasing
all of the Shares of the Selling Shareholder or if the Company and the
remaining Shareholders determine to permit the Shareholders the first option to
purchase such shares, the other or surviving Shareholders shall purchase all of
the stock of the Selling Shareholder at the price and upon the terms
hereinafter set forth. Each of the other or surviving Shareholders shall
complete this purchase by sending written notice of such purchase to the
Selling Shareholder's personal representative within thirty (30) days after it
is determined that the Company is prevented by law (or has ceded its rights to
the surviving Shareholders) from purchasing all of the stock of the Selling
Shareholder. Unless they shall agree otherwise, the purchasing Shareholders
shall have the obligation to purchase such portion of the said Shares as the
number of shares of stock owned by said other Shareholders bears to the total
number of issued and outstanding Shares of stock of the Company (exclusive of
the Shares of stock to be sold). The closing of each such sale shall take
place at the main business office of the Company within sixty (60) days after
the sending of such notice of purchase, or if such purchasing Shareholder and
Selling Shareholder's personal representative cannot agree on a date within
that period, then the closing of each such sale shall take place sixty (60)
days after the sending such notice of purchase.
(iii) The retirement or purchase price of the stock purchased under
this Section 5.4 shall be at the Market Price of said Shares owned by him, as
defined herein, immediately preceding the
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<PAGE> 18
date of the event giving rise to the obligations to purchase expressed in this
Section 5.4 and shall be paid as follows: The Company or the Shareholder,
whosoever shall be the purchasing party in accordance with the terms hereof,
shall on the date of closing pay over to the Selling Shareholder's personal
representative a sum in cash equal to required purchase price.
5.5 Market Price. The term Market Price for the entire
Company shall mean an amount equal to the earnings of the Company, before
interest and taxes for the preceding fiscal year as determined in accordance
with generally accepted accounting principles, excluding any corporate overhead
expenses imposed on the Company by CWC in its capacity as parent and the
Company as subsidiary except those mutually agreed upon ("EBIT") as set forth
in the financial statement of the Company issued on behalf of the Company by
its independent certified public accountants, multiplied by the number five
(5). If the Market Price is being calculated more than six months after the
end of a fiscal year end, then the Company shall ask its independent
accountants to determine the EBIT based on the immediately preceding six
months, annualized as if it were for a twelve month prior period applying
normal assumptions and applying generally accepted accounting principles In
determining the Market Price payable to an individual Shareholder, the
Company's Market Price shall be multiplied by a fraction having as its
numerator the number of Shares owned by the Selling Shareholder and as its
denominator, the total number of Shares outstanding. By way of example only,
if the Company's EBIT were $1 million, the Company's Market Price would be $5
million, and if a Selling Shareholder owned 250 Shares out of 1,000 outstanding
shares, the Market Price payable to him would be 25% of $5 million, which is
$1,250,000.
Under no event shall the Market Price be less than Book Value as
defined below.
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<PAGE> 19
5.6 Book Value. The Book Value of the shares shall be
determined in accordance with the last financial statement of the Company
issued on behalf of the Company by its independent certified public
accountants, whether or not said financial statements have been certified by
such certified public accountants, provided however, that in the event said
financial statement shall have been issued more than three months prior to the
date on which such shares are first offered, or in the event such financial
statement has not been certified by such independent certified public
accountants, the Selling Shareholder or the Company shall have the right to
have such book value determined as of the date of such offer by the Company's
independent certified public accountants, the cost of such determination to be
paid by the party requesting the same.
5.7 Life Insurance. The Company shall exercise its best
efforts to purchase and maintain life insurance on the life of each Manager to
fund the buyout provided for herein in the event of the death of a Manager,
which shall be in the aggregate amount of $1 million, and be obtained on each
of their individual lives in the following amounts: $500,000 on Patchen,
$150,000 on Grady, $150,000 on Sherwin, $150,000 on Toney and $50,000 on
Miller. The policy proceeds, if any, received by the Company with respect to
the deceased Manager's death shall be payable by the Company in accordance with
Section 5.4 above by the Company on account of the purchase price of the Shares
purchased pursuant to such section. Each Manager shall exercise his best
efforts in cooperating with the Company in obtaining such life insurance.
ARTICLE VI
PUT AND CALL OPTIONS
6.1 Put Option. Commencing on May 31, 2000, and for a
period ending on July 31, 2000, each Manager shall have the option ("Put
Option") exercisable upon written notice to
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<PAGE> 20
CWC to sell to CWC any or all of his equity in the Company, including all of
his Shares and vested stock options.
6.2 Call Option. Commencing on May 31, 2000, and for a
period ending on July 31, 2000, CWC shall have a call option ("Call Option")
exercisable upon written notice to Managers to purchase from the Managers any
or all of the Managers' equity in the Company, including all of their Shares
and vested stock options.
6.3 Option Price. The price to be paid for a Manager's
equity pursuant to the foregoing Put and Call Options ("Option Price") shall be
an amount equal to (A) five (5) times the earnings before interest and taxes
("EBIT") of the Company, excluding any corporate overhead expenses imposed on
the Company by CWC in its capacity as parent and the Company as subsidiary
except those mutually agreed upon, as determined by generally accepted
accounting principles for the fiscal year which ends December 1999 multiplied
by (B) the number of shares of Common Stock held by such Manager plus the
number of shares issuable to such Manager under vested and exercisable options
to purchase Company shares divided by (C) the total number of shares of Common
Stock of the Company then issued and outstanding plus the total number of
shares issuable under all then vested and exercisable options to purchase
Company shares. Notwithstanding the foregoing, in the event that common stock
of the Company is registered in an initial public offering ("IPO") filed with
the Securities and Exchange Commission and becomes publicly traded, then the
Option Price to be paid shall be equal to the price of the Shares and vested
stock options owned by the Manager valued at 75% of the average closing "bid"
price of the Company's publicly traded common stock for the thirty (30)
calendar days immediately preceding the last trading day before the exercise of
the Option
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<PAGE> 21
6.4 Payment. Payment of any Option Price shall be made
by CWC within ninety (90) days of the exercise of any Option (whether a Put or
a Call Option) and shall consist of the issuance of an amount of CWC's common
stock equal in value to the amount of the Option Price valued at the average
closing "bid" price of CWC's publicly traded common stock for the thirty (30)
calendar days preceding the last trading day before the exercise of the Option
(the "Option Payment").
ARTICLE VII
EMPLOYMENT-COMPENSATION
7.1 Employment Agreements. (a) The Company shall enter
into employment agreements with each of the Managers. Each such agreement
shall be in substantially the forms of Exhibit C hereto. The respective
Employment Agreements shall provide for base compensation as follows:
<TABLE>
<CAPTION>
Manager Pre-operational Operational
------- --------------- -----------
<S> <C> <C>
Jason M. Patchen $90,000 $150,000
Sam Toney, M.D. $2,000/month $150,000
David A. Sherwin $68,000 $90,000
Christopher M. Grady $45,000 $80,000
Christian E. Miller $65,000 $90,000
</TABLE>
"Operational Status" shall begin at such time when the Company has entered into
HMO Contracts for at least 2,500 covered lives.
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<PAGE> 22
(b) In addition the Employment Agreements shall provide for the
Managers to receive an annual performance bonus ("Bonus") equal to ten percent
(10%) of the Company's annual pre-tax income determined in accordance with
generally accepted accounting principles ("GAAP"), excluding any corporate
overhead expenses imposed on the Company by CWC in its capacity as parent and
the Company as subsidiary except those mutually agreed upon. The maximum
aggregate annual Bonus payable to the Managers as a group shall be $5 million.
The Bonus shall be allocated 20% to each Manager.
7.2 Stock Options; Stock Option Plan. (a) There shall be
established for the Company an employee stock option plan with 3,500 shares
reserved for issuance thereunder, of which 2,500 shares shall be granted
pursuant to this Section 7.2.
(b) On June 1, 1997, the Managers shall be granted options ("Time
Options") to purchase 1,500 shares of the Company's Common Stock at an exercise
price of $1.00 per share. The Options shall vest as follows: 33-1/3% on June
1, 1998, 33-1/3% on June 1, 1999, and 33-1/3% on May 31, 2000 and shall be
exercisable for a period of five (5) years from June 1, 1997. However, in the
event the Employment Agreement(s) are terminated for cause or the employee
resigns from the employment of the Company, the vested options shall be
exercisable for a period of three (3) months from the date of termination or
resignation. The Time Options shall be allocated 46.67% to Patchen and 13.33 %
to each other Manager.
(c) In addition, on June 1, 1997, the Managers collectively shall
be granted performance options ("Performance Options") to purchase 1,000 shares
of the Company's common stock at an exercise price of $1.00 per share. The
Performance Options shall vest at the rate of 10% for every $1,000,000 of net
income, determined in accordance with GAAP, generated by the Company in
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<PAGE> 23
fiscal year 1999, which ends on December 31, 1999, excluding from net income
any corporate overhead expenses imposed on the Company by CWC in its capacity
as parent and the Company as subsidiary except those mutually agreed upon. The
Performance Options shall be exercisable for a period of five (5) years from
June 1, 1997. The Performance Options shall be allocated 20% to each Manager.
(d) In the event of an initial public offering ("IPO") of the
Company's Common Stock, the Managers shall be granted additional stock options
at the IPO price representing not less than five percent (5%) of all shares of
the Company issued and outstanding at immediately before the issuance of shares
in the IPO.
(e) The Time and Performance Options shall contain anti-dilution
protection, such that the Company may not issue additional Shares, other than
as contemplated herein, for less than fair market value consideration being
paid for such Shares and shall also be adjusted proportionately for stock
dividends, stock splits, corporate combinations, corporate subdivisions and
other similar recapitalizations.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
8.1 Representations and Warranties of the Company. The
Company hereby represents and warrants to the Shareholders as follows:
22
<PAGE> 24
(a) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
(b) The Company possesses full right, corporate power and legal
authority to execute and deliver this Agreement and to perform each of the
agreements on its part to be performed hereunder. The execution and delivery
of this Agreement and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of the Company.
(c) The execution and delivery by the Company of this Agreement
and the performance of all of the transactions contemplated hereby do not and
shall not (with or without the giving of notice or the passage of time or both)
(A) violate or conflict with any law, rule, ruling, determination, ordinance or
regulation of any government or governmental department, commission, board,
bureau, agency or instrumentality (an "Authority") or the Certificate of
Incorporation, bylaws or other governing document of the Company, or (B) (1)
violate or conflict with any condition or provision of, (2) result in the
creation or imposition of any lien, charge, security interest, encumbrance or
claim, whether legal or equitable ("Encumbrance") upon any of the property or
assets of the Company pursuant to, (3) accelerate or create, or permit the
acceleration or creation of, any liability or obligation of the Company under,
or (4) cause a termination under or give rise to a right of termination under,
the terms of any contract, mortgage, lien, lease, agreement, indenture, trust,
instrument, order, judgment or decree to which the Company is a party or which
is binding upon the Company.
(d) No action or consent which has not already been taken, whether
corporate or otherwise, including action or consent by any Authority, is
necessary in connection with the
23
<PAGE> 25
execution and delivery by the Company, the enforceability of this Agreement
against the Company or the consummation by the Company of the transactions
contemplated hereby.
8.2 Representations and Warranties of CWC. CWC hereby
represents and warrants to the other Shareholders and to the Company as
follows:
(a) This Agreement has been duly executed and delivered by CWC and
constitutes the legal, valid and binding obligation of CWC enforceable against
CWC in accordance with its terms.
(b) CWC possesses full right, corporate power and legal authority
to execute and deliver this Agreement and to perform each of the agreements on
its part to be performed hereunder. The execution and delivery of this
Agreement and the consummation by CWC of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action on the
part of CWC.
(c) The execution and delivery by CWC of this Agreement and the
performance of all of the transactions contemplated hereby do not and shall not
(with or without the giving of notice or the passage of time or both) (A)
violate or conflict with any law, rule, ruling, determination, ordinance or
regulation of any government or governmental department, commission, board,
bureau, agency or instrumentality (an "Authority") or the Certificate of
Incorporation, bylaws or other governing document of CWC or (B) (1) violate or
conflict with any condition or provision of, (2) result in the creation or
imposition of any lien, charge, security interest, encumbrance or claim,
whether legal or equitable ("Encumbrance") upon any of the property or assets
of CWC pursuant to, (3) accelerate or create, or permit the acceleration or
creation of, any liability or obligation of CWC under, or (4) cause a
termination under or give rise to a right of termination under, the terms of
any
24
<PAGE> 26
contract, mortgage, lien, lease, agreement, indenture, trust, instrument,
order, judgment or decree to which the Company is a party or which is binding
upon CWC.
(d) No action or consent which has not already been taken, whether
corporate or otherwise, including action or consent by any Authority, is
necessary in connection with the execution or delivery of this Agreement by CWC
or enforceability against CWC or the consummation by CWC of the transactions
contemplated hereby.
(e) CWC is acquiring the Shares for its own account for investment
and not with a view to resale or distribution.
8.3 Several Representations and Warranties of the Managers. Each
Manager, severally, hereby represents and warrants to the other Shareholders
and to the Company as follows:
(a) This Agreement has been duly executed and delivered
by such Manager and constitutes the legal, valid and binding obligation of such
Manager enforceable against such Manager in accordance with its terms.
(b) The execution and delivery by such Manager of this
Agreement and the performance by such Manager of all of the transactions
contemplated hereby do not and shall not (with or without the giving of notice
or the passage of time or both) (A) violate or conflict with any law, rule,
ruling, determination, ordinance or regulation of any Authority applicable to
such Manager or (B) violate or conflict with any condition or provision of, or
result in the creation or imposition of any Encumbrance upon any of the
property or assets of such Manager pursuant to the terms of,
25
<PAGE> 27
any contract, mortgage, lien, lease, agreement, indenture, trust, instrument,
order, judgment or decree to which such Manager is a party or which is binding
upon such Manager.
(c) No other action or consent, including action or
consent by any Authority, is necessary in connection with the execution and
delivery of this Agreement by such Manager, or the validity or enforceability
of this Agreement against such Manager or the consummation by him of the
transactions contemplated hereby.
(d) Such Manager is acquiring the Shares for his own
account for investment and not with a view to resale or distribution.
8.4 Joint and Several Representation and Warranty of the
Managers. The Managers, jointly and severally, to the best of their knowledge
and belief, hereby represent and warrant to CWC to the Company that the
Business Plan attached hereto as Exhibit B is reasonable in its conclusion and
assumptions and is based on accurate and valid information and fact.
ARTICLE IX
MISCELLANEOUS
9.1 Term and Termination. This Agreement shall be
effective from the date hereof and shall terminate on May 31, 2037 or if
sooner, upon the first to occur of any of the following events:
(i) the cessation of the Company's businesses;
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<PAGE> 28
(ii) the dissolution of the Company;
(iii) the written agreement of all the parties who are then bound by
the terms hereof;
(iv) as to each Shareholder, when he or she has transferred all of
the Shares of the Company owned by him or her in accordance
with the terms of this Agreement; or
(v) the effective date of registration of any class of equity
security under the Securities Act through an initial public
offering of such equity securities (an "IPO"); provided
however that in the event of an IPO Articles VI and VII hereof
shall survive.
9.2 Complete Wellness Centers. The Company shall have
access for contracting purposes at comparable fair market rates to the complete
network of Complete Wellness Centers subject to criteria established by the
Managers.
9.3 Survival. Notwithstanding Section 9.1 above, all
obligations and undertakings of the parties hereto, which by their nature are
ongoing, shall survive any termination of this Agreement and shall continue
with full force and effect unless otherwise agreed to in writing by all of the
parties hereto.
9.4 Arbitration. Any dispute involving the
interpretation or performance of this Agreement, shall be resolved by
arbitration in the State of Florida in accordance with the rules then obtaining
of the American Arbitration Association, and judgment upon the award may be
entered in any court having jurisdiction thereof.
9.5 Governing Law. The provisions of this Agreement
shall be construed and governed under the laws of the State of Delaware.
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<PAGE> 29
9.6 Binding Effect. The provisions of this Agreement
shall inure to the benefit of and be binding upon the respective executors,
administrators, heirs, distributees, successors and assigns of the parties
hereto and shall apply to any Shares of the Common Stock which may hereafter be
acquired by the parties hereto.
9.7 Personal Contract. This Agreement is a personal
contract intended for the benefit of the Company and the Shareholders among
themselves and is not intended to benefit any other person or party whatsoever
including, without limitation, any creditors of the Company or any liquidator
or trustee in bankruptcy.
9.8 Counterparts. This Agreement may be executed in one
or more counterparts each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.9 Notices. All notices and other communications given
hereunder shall be in writing and shall be sent by registered or certified
mail, return receipt requested, addressed to the party for whom or for which
intended, and at the address of such party as the same shall appear on the
signature pages hereof or on the books of the Company, or at such other address
of which any party shall have given notice to the other parties hereto in the
manner provided for herein.
9.10 Severability. In the event that any provision of
this Agreement shall be declared invalid or unenforceable, such invalidity or
unenforceability shall not effect the validity or enforceability of the other
provisions of this Agreement, it being hereby agreed that such provisions are
severable.
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<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPLETE WELLNESS INDEPENDENT
PHYSICIAN ASSOCIATION, INC
By: /s/ C. THOMAS McMILLEN
----------------------
C. Thomas McMillen
Chief Executive Officer
ACCEPTED AND AGREED TO:
COMPLETE WELLNESS CENTERS, INC
By: /s/ C. THOMAS McMILLEN
----------------------
C. Thomas McMillen
Chief Executive Officer
The Managers:
/s/ CHRISTOPHER M. GRADY Date: 5/21/97
- ------------------------ -------
Christopher M. Grady
509 35 Avenue North
St. Petersburg, FL 33704
/s/ CHRISTIAN E. MILLER Date: 5/23/97
- ------------------------ -------
Christian E. Miller
4700 Pembrook Place
Orlando, FL 32811
/s/ JASON M. PATCHEN Date: 5/19/97
- ------------------------ -------
Jason M. Patchen
4932 Ridgemoor Circle
Palm Harbor, FL 34685
/s/ DAVID A. SHERWIN Date: 5/21/97
- ------------------------ -------
David A. Sherwin
3011 Gull Place
Clearwater, FL 34622
/s/ SAM D. TONEY, MD Date: 5/21/97
- ------------------------ -------
Sam D. Toney, MD
15906 Winding Drive
Tampa, FL 33624
29
<PAGE> 31
EXHIBIT A
SUMMARY TERMS OF CONVERTIBLE PREFERRED STOCK
Designation: Series A Convertible Preferred Stock
Issue: Up to 2,000 shares
Issue Price: $300 per share
Dividend: 12% per annum, cumulative, non-compounding
Conversion: Each share of preferred stock shall be convertible, at the
option of the holder, into the one share of Company Common
Stock. In the event of an IPO, each unconverted share shall
automatically convert into one share of Company Common Stock.
In the event of a conversion of Preferred Stock, the Escrow
agent shall transfer from the escrow to the Company one Escrow
Share for each share of Preferred Stock converted, and the
Company shall thereupon issue shares of common stock pursuant
to the conversion provisions of the Preferred Stock.
30
<PAGE> 1
-------------------------------------------------
SUBSCRIPTION AND
SHAREHOLDERS' AGREEMENT
OF
COMPLETE WELLNESS SMOKING CESSATION, INC.
-------------------------------------------------
June 29, 1997
<PAGE> 2
SUBSCRIPTION AND SHAREHOLDERS' AGREEMENT
SUBSCRIPTION AND SHAREHOLDERS' AGREEMENT made as of August 1,
1997, by and among Robert J. Mrazek the "Manager"), Complete Wellness
Centers, Inc., a Delaware corporation ("CWC"), and Complete Wellness Smoking
Cessation, Inc., a Delaware corporation (the "Company"), having its principal
place of business at 725 Independence Avenue, SE, Washington DC 20003. The
Manager and CWC are herein sometimes collectively referred to as the
"Shareholders."
WITNESSETH
WHEREAS, the Shareholders have caused the Company to be
organized under the laws of the State of Delaware and wish to set forth their
understanding concerning, among other things, the capitalization, organization,
operation and management of the Company and the rights and obligations of the
Shareholders among themselves.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth the parties hereto hereby agree
as follows:
ARTICLE I
CAPITALIZATION
1.1 Initial Capitalization. The Shareholders hereby
subscribe for, and on or before July 31, 1997 shall purchase, the number of
shares of common stock, par value $.01 per share, of the Company set forth
opposite their respective names, at the price of one cent ($0.01) per share:
1
<PAGE> 3
<TABLE>
<CAPTION>
Shareholder Shares Percentage
----------- ------ ----------
<S> <C> <C>
Robert J. Mrazek 1,000 11.77%
CWC 7,500 88.23%
----- ------
TOTAL 8,500 100.00%
===== =======
</TABLE>
All amounts paid for shares in excess of the par value thereof, and all
additional capital contributions, shall be allocated to the surplus of the
Company.
1.2 Additional Capital Contributions by the Managers. On
or before July 31, 1997 the Manager shall contribute to the Company $12,000 and
on or before September 30, 1997 the Manager additionally shall contribute to
the Company $5,000 as an additional capital contribution. Such contributions
shall be in the form of promissory notes bearing interest only at 8% per annum.
The principal shall be payable on July 31, 2000 and September 30, 1997
respectively.
1.3 Additional Capital Contributions by CWC.
(a) On or before July 31, 1997, CWC shall contribute to the Company in
cash $108,000.
(b) On or before September 30, 1997, CWC shall make a further capital
contribution in cash to the Company of $45,000.
1.4 Anticipated Future Issuances. Upon the full payment
of all of the capital by the Manager and CWC as provided above, 1,000 shares of
the outstanding Common Stock of the
2
<PAGE> 4
Company shall be owned by the Manager, representing 11.77% of the outstanding
shares, and 7,500 shares by CWC, representing 88.23% of the outstanding shares.
Under the terms of the Employment Agreement, the Manager will be granted up to
an additional 2,000 shares, subject to certain time vesting, which upon
issuance will result in the Manager as having 25% of the outstanding shares of
Common Stock and CWC having 75% of the outstanding shares of Common Stock. All
shares of Common Stock of the Company to be issued pursuant to this Agreement
will be non-public "restricted securities" sold pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") provided by Section 4(2) thereof and SEC Regulation D
promulgated thereunder, and by applicable exemptions under any applicable state
securities laws and regulations.
1.5 Capital Calls. By a vote of four (4) members of the
Board of Directors, the Company may seek additional equity financing
(hereinafter, a "Capital Call"). In the event of a Capital Call, the Company
shall notify the parties hereto, and CWC and the Manager shall preemptively
have the right to participate and provide such capital (proportionate to their
respective interests) within thirty (30) days of receiving notice of such
Capital Call. In the event any party fails to provide his or its proportionate
share of such Capital Call, the other parties may provide such capital
proportionate to their respective interests. For purposes of this Section 1.5
only, a party's "interest" shall be the proportion of such party's issued and
outstanding shares, plus all shares issuable under vested and exercisable
options to purchase Company shares to the number of all issued and outstanding
shares plus all shares issuable under vested and exercisable options to
purchase Company shares. Non-contributing parties shall suffer no penalty for
failure to contribute other than dilution of their respective interests in the
Corporation. In the event the parties hereto fail to provide such Capital Call
within forty five (45) days, then the Company may seek outside
3
<PAGE> 5
financing with proportionate dilution to all of the parties which shall be
subject to Board of Directors' approval..
1.6 Delivery of Shares. Upon the full execution of this
Agreement and the making of the capital contributions described above, the
Company will promptly deliver to each Shareholder a duly executed share
certificate registered in the name of such Shareholder representing the number
of Shares set forth opposite such Shareholder's name.
1.7 Adequacy of Consideration for Shares. The
Shareholders and the Company acknowledge, agree and waive any claim to the
contrary that the consideration to be paid for the Shares by each of the
Shareholders as provided herein is legally adequate consideration for the
Shares under applicable Delaware law.
ARTICLE II
ORGANIZATION AND MANAGEMENT
2.1 Directors.
(a) The Company shall be governed by a Board of Directors
("Board") composed of five (5) persons, who need not be stockholders. CWC
shall be entitled to designate and elect two (2) members of the Board of
Directors of the Company and the Manager shall be entitled to designate and
elect one (1) director, but in no event less than twenty percent (20%) of the
entire membership of the Board. Robert J. Mrazek as the Manager shall serve as
a member of the Board. The
4
<PAGE> 6
remaining two members of the five member Board shall be selected by mutual
consent of (i) CWC, and (ii) the Manager.
2.1 Officers. The Shareholders agree in their capacity
as directors of the Company that the officers of the Company shall be as
follows:
<TABLE>
<S> <C>
Chairman and CEO Robert J. Mrazek
Treasurer Michael Brigante
Secretary Ryan Knoll
</TABLE>
2.2 Amendment of Certificate of Incorporation and
By-Laws. The Certificate of Incorporation and By-Laws of the Company shall be
amended as and if necessary to conform to the requirements of, and to carry
into effect the provisions of, this Agreement.
2.4 Directors' Quorum and Required Vote. (a) The presence
or participation by conference telephone call of four Directors shall be
necessary to constitute a quorum for the transaction of business by the Board,
and except as otherwise provided herein, the affirmative action of three
Directors shall be necessary for the transaction of any business.
(b) For the Company to issue additional equity securities or
increase the number of shares reserved in the Company's Stock Option Plan, or
to recommend to the shareholders of the Company a sale of all or substantially
all of the assets of the Company or all or substantially all of
5
<PAGE> 7
the shares of Common Stock, the affirmative vote of four (4) members of the
Board shall be required.
2.5 Shareholders' Quorum. The presence in person or by
proxy of the holders of a majority of the Shares of voting stock of the Company
shall be necessary to constitute a quorum for the transaction of any business
and except as otherwise provided herein or by statute, the affirmative action
of the holders of 51% of the shares of voting stock of the Company shall be
necessary for the transaction of any business.
2.6 Voting Agreement. Each Shareholder hereby
irrevocably agrees to cast his or its votes as a shareholder to elect the
Directors and to effect the agreements set forth in this Article.
ARTICLE III
OPERATIONS
3.1 Fiscal Year. The fiscal year of the Company shall
commence on the 1st day of January in each year and end on the 31st day of
December in each year. Within 120 days after the end of each fiscal year the
Board of Directors shall present to the stockholders at a meeting which shall
be held within such 120 day period as shall be fixed annually by the Board a
report of the activities of the Company, a balance sheet and profit and loss
statement and summary of such activities which shall be submitted to the
stockholders not less than thirty (30) days in advance of such meeting.
6
<PAGE> 8
3.2 Qualification to do Business. The officers of the
Company are hereby authorized to qualify the Company to do business in such
states as they deem appropriate after consultation with counsel.
3.3 Business Plan. The Shareholders hereby agree to
pursue the business of the Company substantially as set forth in the business
plan dated August 1, 1997 (the "Business Plan").
ARTICLE IV
RESTRICTIONS ON TRANSFER
4.1 Certain Restrictions on Transfer. No transfer in
whole or in part of any Shares by a Shareholder shall be made whether by sale,
pledge, assignment, mortgage, gift, will, the laws of descent and distribution
or by operation of law, and no transfer of any Shares shall be made on the
books of the Company and no unregistered transfer of any equity interest shall
be made or be effective except as provided herein.
4.2 Securities Act Restrictions; Legend. (a) The Shares
to be issued by the Company to the Shareholders have not been registered under
the Securities Act of 1933, as amended (the "Act") and are being sold and
issued in reliance upon exemption from registration provided by Section 4(2) of
the Act and applicable exemptions provided under relevant state securities laws
and regulations. The Company is under no obligation to register such
securities
7
<PAGE> 9
under the Act. In view of the foregoing (and assuming that the Shares are not
subsequently registered under the Act), the Shareholders will have to bear the
economic risk of their investment for an indefinite period of time, unless such
Shares are sold or otherwise transferred in a transaction permitted by this
Agreement in connection with which an exemption from such registration under
the Act is available.
(b) Each certificate evidencing the Shares shall bear the
following legend:
"The Shares represented by this Certificate have not
been registered under the Securities Act of 1933 or any
applicable state securities laws and may not be offered, sold,
pledged, transferred or otherwise disposed of except pursuant
to an effective registration statement under such Act and
compliance with any such applicable state securities laws,
unless an the issuer is provided with an opinion of counsel,
satisfactory to the issuer, that such disposition may be made
without such registration."
4.3 Additional Legend. Each Shareholder hereby agrees
with and for the benefit of the other Shareholders that all certificates
representing Shares of the Company will bear also on the face thereof the
following legend, which refers to the special arrangements concerning, among
other things, the election of Directors of the Company, the restriction on
transfer of shares of the company and special requirements concerning the
dissolution of the Company, all pursuant to this Agreement, as follows:
8
<PAGE> 10
"The Shares evidenced by this certificate are subject to the
restrictions and options stated in, and are transferable only
upon compliance with the provisions of, the Shareholders
Agreement dated as of August 1, 1997, by and among Complete
Wellness Smoking Cessation, Inc. (the "Company") and certain
shareholders thereof, a copy of which is on file at the office
of the Company, the provisions of which Agreement are
incorporated herein by reference, as the same may be at any
time amended. The Agreement also contains special provisions
concerning, among other things, the manner of electing
directors of the Company, special requirements concerning the
sale of the Company, and the quorum and voting requirements
for action by the Shareholders and Directors."
4.4 Transfers on Termination of Employment, Death or by
Operation of Law.
(a) In the Event of Employment Termination or Desire to Withdraw.
In the event of the resignation or removal for cause of a Shareholder as an
employee of the Company, or in the event a Shareholder desires to sell his
Shares (a "Selling Shareholder"), any Shares owned by such Shareholder shall be
deemed offered to the Company for sale to the Company at a price equal to the
Market Price, as defined below, determined at the time of said offer, as
hereinafter provided, provided however, that said price shall in no event be
less than Book Value per share unless otherwise provided herein.
9
<PAGE> 11
In the event that a person who is designated above as an officer of
the Company leaves the employment of the Company (herein a "Withdrawing
Shareholder") prior to four years from the date hereof, the Company shall have
the option, but not the obligation, to purchase the Withdrawing Shareholder's
Shares for the following prices, which shall be conclusively deemed the legally
binding purchase price that may be paid by the Company: (i) if the Withdrawing
Shareholder leaves the employment of the Company on or within one year from the
date hereof, the Company shall pay Book Value, as hereafter defined, of the
Shares owned by him, (ii) if the Withdrawing Shareholder leaves the employment
of the Company on or within two years from the date hereof, the Company shall
pay 33% of the Market Price of the Shares owned by him, (iii) if the
Withdrawing Shareholder leaves the employment of the Company on or within three
years from the date hereof, the Company shall pay 66% of the Market Price of
the Shares owned by him, and (iv) if the Withdrawing Shareholder leaves the
employment of the Company after three years from the date hereof, the Company
shall pay 100% of the Market Price of the Shares owned by him.
The Selling Shareholder shall immediately give to all of the
Shareholders and to the Company written notice, by registered or certified
mail, of such attempted or impending disposition or transfer. Such notice
(hereinafter sometimes referred to as the "Selling Notice") shall set a date
for the holding of a special meeting of the Shareholders and Directors of the
Company, which date shall be not less than twenty (20) days nor more than
thirty (30) days from the mailing of the Selling Notice. The parties hereto
agree to waive any and all notices otherwise required for such special meeting
and do hereby consent to the holding of such special meeting. In the case of a
Withdrawing Shareholder, the notice of his termination of his employment with
the Company by the Withdrawing Shareholder or the notice of termination by the
Company of his employment for cause, shall be deemed a Selling Notice and an
offer to sell his Shares as provided herein
10
<PAGE> 12
The Company may, within 20 days after receipt of such offer,
purchase all or any part of the shares by personally delivering or mailing by
registered mail, postage prepaid, its acceptance to that effect to the person
or party making the offer, provided, however, that in the event of the death of
a Shareholder, the Company shall, within 20 days after receipt of such offer,
accept such offer, specifying a closing date in accordance with the next
sentence of this Section 5.4, and confirm the Company's commitment to purchase
at such settlement date all of the Shares owned by him at a price equal to the
greater of (a) the Book Value thereof determined at the time of said offer, as
hereinafter provided, or (b) an amount equal to the Market Price. If the
Company shall accept such offer in whole or in part, it shall specify a closing
date not more than 30 days after the date of such acceptance for delivery to
it, against payment, of the certificate representing the Shares so purchased.
Such certificate or certificates shall be delivered duly endorsed for transfer
with signature guaranteed by a bank or securities brokerage firm and with all
required tax stamps affixed or with funds for payment for such tax stamps. If
the Company shall not purchase all of the Shares so offered, the Company shall
on behalf of the registered owner thereof promptly notify its Shareholders
(other than the Selling Shareholder), in writing by registered mail, postage
prepaid, or by personal delivery, that such Shares or the balance of such
Shares, not purchased by the Company, are available for purchase by such
Shareholders at the price specified above.
The Shareholders may elect to purchase all or any part of such
Shares by a written acceptance to that effect received by the Company within 20
days after the date of mailing or delivery of such notification. If there
shall be more than one other Shareholder, and the Shareholders elect to
purchase in the aggregate more of the Shares than are available, the available
Shares shall be divided among the accepting Shareholders in proportion to their
registered ownership of the Shares of the Company at the time the Shares are
offered to the Company. The President of the Company shall set the closing
date for the completion of the purchase of such
11
<PAGE> 13
Shares and shall notify all interested persons of the Closing date by such
means as he shall determine sufficient. In no event shall the President of the
Company designate a closing date which is more than 90 days after the date on
which the Company first received the offer in respect of the Shares. Promptly
after such closing, or if no shareholder elects to purchase such Shares, the
President of the Company shall determine whether all of the foregoing
provisions hereof have been complied with, and if they have, shall notify the
registered owner of the shares of such determination.
For a period of three months beginning on the first full
business day following the date of the notification of such determination, such
Shares as have not been purchased by the Company or the Shareholders of the
Company (other than the Selling Shareholder) may be sold or otherwise
transferred by the owner thereof to any person, whether or not a Shareholder.
If the Shareholder of the Company owning such shares is unable to sell or
otherwise transfer such shares within such period of three months such
Shareholder shall have the right to notify the Company, within ten days of the
expiration of such three month period, of such Shareholder's election to
require the dissolution of the Company. In the event of any such election the
Company and all the Shareholders shall promptly take all necessary action to
effect the dissolution of the Company and the liquidation and distribution of
the Company's assets. In the event any Shares have not been transferred to
such person on the books of the Company within 90 days following the date of
the notification of such determination referred to above or in the event the
Shareholder of the Company holding such shares has not notified the Company of
its election to require the dissolution of the Company, such shares shall again
be subject to all the restrictions imposed by this Agreement.
(b) Purchase Upon Death.
12
<PAGE> 14
(i) Upon the occurrence of the death of any Shareholder, all of
the stock of the Company owned by such deceased Shareholder (hereinafter
referred to as the "Selling Shareholder") shall be sold to the Company by the
Selling Shareholder's personal representative, and the Company shall purchase
the same at the price and upon the terms of the payment hereinafter set forth.
The closing of such sale shall take place at the main business office of the
Company within ninety (90) days after the occurrence of the date or event
giving rise to the purchase obligation hereunder, or if the Company and the
Selling Shareholder's personal representative cannot agree on a date within
said period, the closing shall take place ninety (90) days after the occurrence
of the date or event giving rise to the purchase obligation hereunder or ninety
days (90) days after the appointment of the personal representative of the
estate of any such deceased Shareholder, whichever date will be the later to
occur. Upon the sale of Shares pursuant to the terms of this subparagraph, the
Selling Shareholder's personal representative shall transfer and warrant good
and sufficient title to the Shares to the Company.
(ii) In the event the Company is prohibited by law from purchasing
all of the Shares of the Selling Shareholder or if the Company and the
remaining Shareholders determine to permit the Shareholders the first option
to purchase such shares, the other or surviving Shareholders shall purchase all
of the stock of the Selling Shareholder at the price and upon the terms
hereinafter set forth. Each of the other or surviving Shareholders shall
complete this purchase by sending written notice of such purchase to the
Selling Shareholder's personal representative within thirty (30) days after it
is determined that the Company is prevented by law (or has ceded its rights to
the surviving Shareholders) from purchasing all of the stock of the Selling
Shareholder. Unless they shall agree otherwise, the purchasing Shareholders
shall have the obligation to purchase such portion of the said Shares as the
number of shares of stock owned by said other Shareholders bears to the total
number of issued and outstanding Shares of stock of the Company (exclusive of
the Shares of stock
13
<PAGE> 15
to be sold). The closing of each such sale shall take place at the main
business office of the Company within sixty (60) days after the sending of such
notice of purchase, or if such purchasing Shareholder and Selling Shareholder's
personal representative cannot agree on a date within that period, then the
closing of each such sale shall take place sixty (60) days after the sending
such notice of purchase.
(iii) The retirement or purchase price of the stock purchased under
this Section 5.4 shall be at the Market Price of said Shares owned by him, as
defined herein, immediately preceding the date of the event giving rise to the
obligations to purchase expressed in this Section 5.4 and shall be paid as
follows: The Company or the Shareholder, whosoever shall be the purchasing
party in accordance with the terms hereof, shall on the date of closing pay
over to the Selling Shareholder's personal representative a sum in cash equal
to required purchase price.
4.5 Market Price. The term Market Price for the entire
Company shall mean an amount equal to the earnings of the Company, before
interest and taxes for the preceding fiscal year as determined in accordance
with generally accepted accounting principles, including any overhead expenses
imposed on the Company by CWC in its capacity as parent in an amount equal to
five percent (5%) of the Company's net revenues ("EBIT") as set forth in the
financial statement of the Company issued on behalf of the Company by its
independent certified public accountants, multiplied by the number five (5).
If the Market Price is being calculated more than six months after the end of a
fiscal year end, then the Company shall ask its independent accountants to
determine the EBIT based on the immediately preceding six months, annualized as
if it were for a twelve month prior period applying normal assumptions and
applying generally accepted accounting principles In determining the Market
Price payable to an individual Shareholder, the Company's Market Price shall be
multiplied by a fraction having as its numerator the number of
14
<PAGE> 16
Shares owned by the Selling Shareholder and as its denominator, the total
number of Shares outstanding. By way of example only, if the Company's EBIT
were $1 million, the Company's Market Price would be $5 million, and if a
Selling Shareholder owned 250 Shares out of 1,000 outstanding shares, the
Market Price payable to him would be 25% of $5 million, which is $1,250,000.
Under no event shall the Market Price be less than Book Value as
defined below.
4.6 Book Value. The Book Value of the shares shall be
determined in accordance with the last financial statement of the Company
issued on behalf of the Company by its independent certified public
accountants, whether or not said financial statements have been certified by
such certified public accountants, provided however, that in the event said
financial statement shall have been issued more than three months prior to the
date on which such shares are first offered, or in the event such financial
statement has not been certified by such independent certified public
accountants, the Selling Shareholder or the Company shall have the right to
have such book value determined as of the date of such offer by the Company's
independent certified public accountants, the cost of such determination to be
paid by the party requesting the same.
4.7 Life Insurance. The Company shall exercise its best
efforts to purchase and maintain life insurance on the life of the Manager to
fund the buyout provided for herein in the event of the death of the Manager,
which shall be in the amount of $1 million. The policy proceeds, if any,
received by the Company with respect to the deceased Manager's death shall
be payable by the Company in accordance with Section 5.4 above by the Company
on account of the purchase price of the Shares purchased pursuant to such
section. The Manager shall exercise his best efforts in cooperating with the
Company in obtaining such life insurance.
15
<PAGE> 17
ARTICLE V
PUT AND CALL OPTIONS
5.1 Put Option. Commencing on July 31, 2000, and for a
period ending on September 30, 2000, the Manager shall have the option ("Put
Option") exercisable upon written notice to CWC to sell to CWC any or all of
his equity in the Company, including all of his Shares and vested stock
options.
5.2 Call Option. Commencing on July 31, 2000, and for a
period ending on September 30, 2000, CWC shall have a call option ("Call
Option") exercisable upon written notice to Manager to purchase from the
Manager any or all of the Manager's equity in the Company, including all of
their Shares and vested stock options.
5.3 Option Price. The price to be paid for a Manager's
equity pursuant to the foregoing Put and Call Options ("Option Price") shall be
an amount equal to (A) five (5) times the earnings before interest and taxes
("EBIT") of the Company, excluding any corporate overhead expenses imposed on
the Company by CWC in its capacity as parent and the Company as subsidiary
except those mutually agreed upon, as determined by generally accepted
accounting principles for the fiscal year which ends December 1999 multiplied
by (B) the number of shares of Common Stock held by such Manager plus the
number of shares issuable the Manager under vested and exercisable options to
purchase Company shares divided by (C) the total number of shares of Common
Stock of the Company then issued and outstanding plus the total number of
shares issuable under all then vested and exercisable options to purchase
Company shares. Not
16
<PAGE> 18
withstanding the foregoing, in the event that common stock of the Company is
registered in an initial public offering ("IPO") filed with the Securities and
Exchange Commission and becomes publicly traded, then the Option Price to be
paid shall be equal to the price of the Shares and vested stock options owned
by the Manager valued at 75% of the average closing "bid" price of the
Company's publicly traded common stock for the thirty (30) calendar days
immediately preceding the last trading day before the exercise of the Option
5.4 Payment. Payment of any Option Price shall be made
by CWC within ninety (90) days of the exercise of any Option (whether a Put or
a Call Option) and shall consist of the issuance of an amount of CWC's common
stock equal in value to the amount of the Option Price valued at the average
closing "bid" price of CWC's publicly traded common stock for the thirty (30)
calendar days preceding the last trading day before the exercise of the Option
(the "Option Payment").
ARTICLE VI
EMPLOYMENT-COMPENSATION
6.1 Employment Agreements. (a) The Company shall enter
into a three year employment agreement with the Manager. The Employment
Agreement shall provide for base compensation of $75,000 per annum which shall
be reviewed by the Board of Directors semi-annually.
(b) In addition the Employment Agreement shall provide for the
Manager and other key executives of the Company to receive an annual
performance bonus ("Bonus") equal to ten percent
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<PAGE> 19
(10%) of the Company's annual pre-tax income determined in accordance with
generally accepted accounting principles ("GAAP"), including corporate overhead
expenses imposed on the Company by CWC in its capacity as parent which shall be
an amount equal to five percent of the Company's net revenues. The maximum
aggregate annual Bonus payable to the Manager and key executives as a group
shall be $5 million. The Bonus shall be allocated 70% to the Manager.
6.2 Stock Options Plan. (a) There shall be established
for the Company an employee stock option plan with 3,500 shares reserved for
issuance thereunder, of which 2,500 shares shall be granted pursuant to this
Section 6.2.
(b) On July 31, 1997, the Manager shall be granted options
("Options") to purchase 2,500 shares of the Company's Common Stock at an
exercise price of $0.01 per share. The Options shall vest as follows: 50% on
July 31, 1998, 50% on July 31, 1999 and shall be exercisable for a period of
five (5) years from July 31, 1997. However, in the event the Employment
Agreement is terminated for cause or the employee resigns from the employment
of the Company, the vested options shall be exercisable for a period of three
(3) months from the date of termination or resignation.
(c) The Options shall contain anti-dilution protection, such that
the Company may not issue additional Shares, other than as contemplated herein,
for less than fair market value consideration being paid for such Shares and
shall also be adjusted proportionately for stock dividends, stock splits,
corporate combinations, corporate subdivisions and other similar
recapitalizations.
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<PAGE> 20
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
7.1 Representations and Warranties of the Company. The
Company hereby represents and warrants to the Shareholders as follows:
(a) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
(b) The Company possesses full right, corporate power and legal
authority to execute and deliver this Agreement and to perform each of the
agreements on its part to be performed hereunder. The execution and delivery
of this Agreement and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of the Company.
(c) The execution and delivery by the Company of this Agreement
and the performance of all of the transactions contemplated hereby do not and
shall not (with or without the giving of notice or the passage of time or both)
(A) violate or conflict with any law, rule, ruling, determination, ordinance or
regulation of any government or governmental department, commission, board,
bureau, agency or instrumentality (an "Authority") or the Certificate of
Incorporation, bylaws or other governing document of the Company, or (B)(1)
violate or conflict with any condition or provision of, (2) result in the
creation or imposition of any lien, charge, security interest, encumbrance or
claim, whether legal or equitable ("Encumbrance") upon any of the
19
<PAGE> 21
property or assets of the Company pursuant to, (3) accelerate or create, or
permit the acceleration or creation of, any liability or obligation of the
Company under, or (4) cause a termination under or give rise to a right of
termination under, the terms of any contract, mortgage, lien, lease, agreement,
indenture, trust, instrument, order, judgment or decree to which the Company
is a party or which is binding upon the Company.
(d) No action or consent which has not already been taken, whether
corporate or otherwise, including action or consent by any Authority, is
necessary in connection with the execution and delivery by the Company, the
enforceability of this Agreement against the Company or the consummation by the
Company of the transactions contemplated hereby.
7.2 Representations and Warranties of CWC. CWC hereby
represents and warrants to the other Shareholders and to the Company as
follows:
(a) This Agreement has been duly executed and delivered by CWC and
constitutes the legal, valid and binding obligation of CWC enforceable against
CWC in accordance with its terms.
(b) CWC possesses full right, corporate power and legal authority
to execute and deliver this Agreement and to perform each of the agreements on
its part to be performed hereunder. The execution and delivery of this
Agreement and the consummation by CWC of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action on the
part of CWC.
(c) The execution and delivery by CWC of this Agreement and the
performance of all of the transactions contemplated hereby do not and shall not
(with or without the giving of notice or the passage of time or both) (A)
violate or conflict with any law, rule, ruling, determination,
20
<PAGE> 22
ordinance or regulation of any government or governmental department,
commission, board, bureau, agency or instrumentality (an "Authority") or the
Certificate of Incorporation, bylaws or other governing document of CWC or (B)
(1) violate or conflict with any condition or provision of, (2) result in the
creation or imposition of any lien, charge, security interest, encumbrance or
claim, whether legal or equitable ("Encumbrance") upon any of the property or
assets of CWC pursuant to, (3) accelerate or create, or permit the
acceleration or creation of, any liability or obligation of CWC under, or (4)
cause a termination under or give rise to a right of termination under, the
terms of any contract, mortgage, lien, lease, agreement, indenture, trust,
instrument, order, judgment or decree to which the Company is a party or which
is binding upon CWC.
(d) No action or consent which has not already been taken, whether
corporate or otherwise, including action or consent by any Authority, is
necessary in connection with the execution or delivery of this Agreement by CWC
or enforceability against CWC or the consummation by CWC of the transactions
contemplated hereby.
(e) CWC is acquiring the Shares for its own account for investment
and not with a view to resale or distribution.
7.3 Several Representations and Warranties of the Manager. The
Manager, hereby represents and warrants to the other Shareholders and to the
Company as follows:
(a) This Agreement has been duly executed and delivered
by the Manager and constitutes the legal, valid and binding obligation of the
Manager enforceable against such Manager in accordance with its terms.
21
<PAGE> 23
(b) The execution and delivery by the Manager of this
Agreement and the performance by the Manager of all of the transactions
contemplated hereby do not and shall not (with or without the giving of notice
or the passage of time or both) (A) violate or conflict with any law, rule,
ruling, determination, ordinance or regulation of any Authority applicable to
the Manager or (B) violate or conflict with any condition or provision of, or
result in the creation or imposition of any Encumbrance upon any of the
property or assets of the Manager pursuant to the terms of, any contract,
mortgage, lien, lease, agreement, indenture, trust, instrument, order, judgment
or decree to which the Manager is a party or which is binding upon the Manager.
(c) No other action or consent, including action or
consent by any Authority, is necessary in connection with the execution and
delivery of this Agreement by the Manager, or the validity or enforceability of
this Agreement against the Manager or the consummation by him of the
transactions contemplated hereby.
(d) The Manager is acquiring the Shares for his own
account for investment and not with a view to resale or distribution.
7.4 Representation and Warranty of the Manager. The
Manager, to the best of their knowledge and belief, hereby represents and
warrant to CWC to the Company that the Business Plan attached hereto as Exhibit
B is reasonable in its conclusion and assumptions and is based on accurate and
valid information and fact.
ARTICLE VIII
22
<PAGE> 24
MISCELLANEOUS
8.1 Term and Termination . This Agreement shall be
effective from the date hereof and shall terminate on July 30, 2037 or if
sooner, upon the first to occur of any of the following events:
(i) the cessation of the Company's businesses;
(ii) the dissolution of the Company;
(iii) the written agreement of all the parties who are then bound by
the terms hereof;
(iv) as to each Shareholder, when he or she has transferred all of
the Shares of the Company owned by him or her in accordance
with the terms of this Agreement; or
(v) the effective date of registration of any class of equity
security under the Securities Act through an initial public
offering of such equity securities (an "IPO"); provided
however that in the event of an IPO Articles VI and VII hereof
shall survive.
8.2 Survival. Notwithstanding Section 9.1 above, all
obligations and undertakings of the parties hereto, which by their nature are
ongoing, shall survive any termination of this Agreement and shall continue
with full force and effect unless otherwise agreed to in writing by all of the
parties hereto.
8.3 Arbitration. Any dispute involving the
interpretation or performance of this Agreement, shall be resolved by
arbitration in the State of Maryland in accordance with the rules
23
<PAGE> 25
then obtaining of the American Arbitration Association, and judgment upon the
award may be entered in any court having jurisdiction thereof.
8.4 Governing Law. The provisions of this Agreement
shall be construed and governed under the laws of the State of Delaware.
8.5 Binding Effect. The provisions of this Agreement
shall inure to the benefit of and be binding upon the respective executors,
administrators, heirs, distributes, successors and assigns of the parties
hereto and shall apply to any Shares of the Common Stock which may hereafter be
acquired by the parties hereto.
8.6 Personal Contract. This Agreement is a personal
contract intended for the benefit of the Company and the Shareholders among
themselves and is not intended to benefit any other person or party whatsoever
including, without limitation, any creditors of the Company or any liquidator
or trustee in bankruptcy.
8.7 Counterparts. This Agreement may be executed in one
or more counterparts each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.8 Notices. All notices and other communications given
hereunder shall be in writing and shall be sent by registered or certified
mail, return receipt requested, addressed to the party for whom or for which
intended, and at the address of such party as the same shall appear on the
signature pages hereof or on the books of the Company, or at such other address
of which any party shall have given notice to the other parties hereto in the
manner provided for herein.
24
<PAGE> 26
8.9 Severability. In the event that any provision of
this Agreement shall be declared invalid or unenforceable, such invalidity or
unenforceability shall not effect the validity or enforceability of the other
provisions of this Agreement, it being hereby agreed that such provisions are
severable.
25
<PAGE> 27
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPLETE WELLNESS SMOKING CESSATION INC.
PHYSICIAN ASSOCIATION, INC
By: /s/ ROBERT J. MRAZEK
------------------------------
Robert J. Mrazek
Chief Executive Officer
ACCEPTED AND AGREED TO:
COMPLETE WELLNESS CENTERS, INC
By:/s/ C. THOMAS MCMILLEN
------------------------
C. Thomas McMillen
Chief Executive Officer
The Manager:
/s/ ROBERT J. MRAZEK Date: August 1, 1997
- --------------------------- ----------------------------
Robert J. Mrazek
301 Constitution Ave., NE
Washington, DC 20002
26
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<PERIOD-START> JAN-01-1997
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