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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
BACKGENESIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2449903
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2704 REW CIRCLE, SUITE 105
OCOEE, FLORIDA 34761
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(407) 905-9699
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(407) 905-9695
(REGISTRANT'S FACSIMILE NUMBER, INCLUDING AREA CODE)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH EACH
TO BE SO REGISTERED CLASS IS TO BE REGISTERED
------------------- -------------------------
NONE NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
---------------------------------------
(TITLE OF CLASS)
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TABLE OF CONTENTS
<TABLE>
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Part I 1
Item 1 Description of Business.............................................................................................. 1
Historical Background................................................................................................ 3
Business of the Issuer............................................................................................... 4
Industry Overview.................................................................................................... 5
Company Business Model - The "Four Pillars" Of Expanded Ancillary Services........................................... 7
Markets, Distribution Methods and Development Strategy............................................................... 10
Competition.......................................................................................................... 10
Major Suppliers...................................................................................................... 11
Dependence on Key Customers.......................................................................................... 11
Patents, Trademarks, Licenses........................................................................................ 11
Government Regulations............................................................................................... 16
Estimate of the Amount Spent on Research and Development............................................................. 16
Costs and Effects of Compliance with Environmental Laws.............................................................. 16
Employees............................................................................................................ 17
Item 2 Management's Discussion and Analysis of Results of Operations and
Financial condition of the Company................................................................................. 17
Overview............................................................................................................. 18
Comparison of the Results of Operations for the twelve months ended
June 30, 1999 and June 30, 1998.................................................................................... 18
Liquidity and Capital Resources...................................................................................... 19
Tax Loss Carry-Forwards.............................................................................................. 19
Comparison of the Results of Operations for the three month periods ended
September 30, 1999 and 1998........................................................................................ 19
Year 2000 Disclosure................................................................................................. 19
Item 3 Description of Property.............................................................................................. 20
Item 4 Security Ownership of Certain Beneficial Owners and Management....................................................... 21
Item 5 Directors and Executive Officers and Control Persons................................................................. 21
Executive Officers and Directors..................................................................................... 21
Officers and Employee Directors...................................................................................... 22
Non-Employee Directors............................................................................................... 23
Control Persons...................................................................................................... 23
Item 6 Executive Compensation............................................................................................... 24
Stock Options and Warrants........................................................................................... 25
Compensation of Directors............................................................................................ 25
Item 7 Certain Relationships and Related Transactions....................................................................... 26
Item 8 Description of Securities............................................................................................ 26
Common Stock......................................................................................................... 27
Preferred Stock...................................................................................................... 27
Transfer Agent....................................................................................................... 27
Part II
Item 1 Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters............................................................................. 27
Item 2 Legal Proceedings.................................................................................................... 29
Item 3 Changes in and Disagreements with Accountants........................................................................ 29
Item 4 Recent Sales of Unregistered Securities.............................................................................. 29
Item 5 Indemnification of Directors and officers............................................................................ 30
Part F/S Financial Statements................................................................................................. 31
Part III
Item 1 Items 1 and 2 Index and Description to Exhibits...................................................................... 31
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORICAL BACKGROUND
BackGenesis, Inc. (the "Company") was incorporated in the
State of Utah on July 2, 1982, under the name of Mark Oil, Inc. to explore for
natural resources and to invest in other assets or businesses. In January 1984,
the Company acquired an operating subsidiary and changed the Company's name to
Clef Communications, Inc. The business of the subsidiary was unsuccessful. In
January 1997, the Company changed its state of incorporation to the state of
Delaware and its name to Galaxy Ventures, Inc. In December 1999, the
shareholders of the Company by majority consent approved a resolution of the
Company's Board of Directors to change the Company's name to BackGenesis, Inc.
The Company was reorganized on June 23, 1998, with the acquisition of
Chiu Minimally Invasive Spine Surgery, Inc. ("CMIS"), a California corporation
formed on March 6, 1998. The acquisition was structured as a stock-for-stock
exchange in which the shareholders of CMIS initially received 5,000,000 shares
of the Company's common stock (or approximately 61%) in exchange for all of the
outstanding shares of capital stock of CMIS in a business combination described
as a "reverse acquisition." The CMIS shareholders subsequently agreed to return
a significant portion of these shares in connection with the acquisition of
Valley Pain Centers, Inc., which is discussed below. For accounting purposes,
the acquisition has been treated as the acquisition of the Registrant by CMIS.
CMIS continued as a wholly-owned subsidiary of the Company. As part of the CMIS
transaction, John C. Chiu, M.D. ("Dr. Chiu") was retained by the Company as its
Chairman and CEO, and the name of the Company was changed to Minimally Invasive
Surgery Corporation. Prior to the acquisition, management of the Company had no
relationship with CMIS or its shareholders.
Contemporaneous with the acquisition of CMIS, the Company sold pursuant
to a private placement 1,333,333 shares of its common stock, $.001 par value, at
$1.50 per share (or approximately $2,000,000) for the purpose of providing the
Company with capital to expand its business through acquisitions and to provide
it with working capital. In addition, the Company granted warrants to its
shareholders of record to purchase at any time prior to June 30, 2000 one
million eight hundred thousand (1,800,000) shares of its common stock at an
exercise price of $3.00 per share.
On November 13, 1998, the Company, through its wholly-owned subsidiary
CMIS, entered into an agreement with Dr. Haq Babur, M.D. for the purchase of the
assets of his neuro spine surgery medical practice located in Clovis, New
Mexico. As consideration for the assets purchased, the Company issued to Dr.
Babur 40,000 shares of its common stock and paid him $75,000 in cash. In
addition, Dr. Babur received options to purchase 30,000 shares of the Company's
common stock at an exercise price of $3.50 per share. The options were to vest
at a rate of 5,000 shares per year over six years.
Concurrently with the Dr. Babur transaction, CMIS entered into a
Management Services Agreement with Eastern New Mexico Neuro Orthopedic Medical
Group (ENM Neuro), an affiliate of Dr. Chiu, for the management of the medical
practice being operated there by Dr. Babur. CMIS agreed to provide ENM Neuro
with offices, facilities and supplies, day-to-day management services of
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non-physician operations, non-physician support and personnel and financial
services. In consideration for its services, ENM Neuro agreed to pay CMIS a
monthly fee equal to 60% of the physician services revenues, 90% of the
ancillary revenues and 75% of the on-site physical therapy Revenues.
On November 15, 1998, the Company entered into a related party
transaction with Thousands Oaks Spine Medical Group ("TOSMG") of Thousands Oaks,
California, a medical practice, principally owned by the Company's chairman, Dr.
Chiu, which specialized in minimally invasive spine surgery procedures and pain
management services. Pursuant to the terms of an asset purchase agreement, CMIS
purchased substantially all of the assets of TOSMG and assumed certain leases
and other liabilities. In consideration for the assets purchased in the
transaction with TOSMG, the Company granted TOSMG options to purchase 60,000
shares of the Company's common stock at an exercise price of $3.50 per share.
The options were to vest pro rata over a seven year period.
Concurrently with the TOSMG asset acquisition, the Company entered
into a management services agreement with TOSMG. CMIS agreed to provide TOSMG
with offices, facilities and supplies, day-to-day management services of
non-physician operations, non-physician support and personnel and financial
services. In consideration for its services, TOSMG agreed to pay CMIS a monthly
fee equal to 60% of the physician services revenues and 90% of the ancillary
revenues.
On December 15, 1998, the Company, through its wholly-owned subsidiary
CMIS, purchased certain assets, assumed certain liabilities and entered into a
management agreement with Rockland Neurosurgical Practice P.C. ("RNP") of
Nanuet, New York. In consideration for the purchase of the assets, RNP received
40,000 shares of the Company's common stock, $85,000 in cash, and options to
purchase 50,000 shares of the Company's common stock at an exercise price of
$3.50 per share. The options were to vest at the rate of 5,000 shares per year
over ten years.
CMIS agreed to provide RNP with offices, facilities and supplies,
day-to-day management services of non-physician operations, non-physician
support and personnel and financial services. In consideration for its
management services, CMIS was to be paid 60% of all physician service revenues,
90% of all ancillary revenues and 10% of retained malpractice and liability
consultation revenues up to a maximum of $60,000 per year.
Subsequent to the closing of the ENM Neuro, TOSMG and RNP transactions,
management of the Company determined that actual operating results of these
acquired businesses differed materially from that which had been previously
reported to the Company and fell well below management's expectations.
Consequently, effective June 1, 1999, the Company rescinded and/or terminated
the ENM Neuro, TOSMG and RNP agreements. Set forth below are the specifics with
respect to these settlement agreements.
Effective June 1, 1999, the Company and Dr. Babur rescinded the asset
purchase agreement and terminated the management agreement. In settlement of the
disputes between the parties, the Company and Dr. Babur agreed that, the Company
in consideration for a return of substantially all of Dr. Babur's assets
(excluding $75,000 cash and certain accounts receivable), the stock options
issued to Dr. Babur would be cancelled and Dr. Babur would return to the Company
the 40,000 shares of the Company's common stock
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issued to him in connection with the acquisition. The Company and Dr. Babur also
exchanged joint and mutual releases.
Effective June 1, 1999, the Company in settlement of its disputes with
TOSMG entered into a rescission and termination agreement whereby the asset
purchase agreement was rescinded and the management agreement with TOSMG was
terminated. The parties agreed that the 40,000 options issued to TOSMG in
connection with the purchase of TOSMG's assets would be cancelled and the
Company would retain all accounts receivable. The parties also exchanged joint
and mutual releases.
With respect to transactions with RNP, the Company and RNP entered into
a termination agreement and release effective June 1, 1999. Pursuant to the
terms of the termination agreement, RNP retained the cash paid with respect to
the acquisition and the Company retained the assets, closed the office and
canceled all stock options. The Company also received 20,000 of the 40,000
shares of the Company's stock previously issued to RNP. The Management agreement
was also terminated. The parties executed joint and mutual releases.
Effective May 1, 1999, the Company expanded its business to include
pain practices as a foundation upon which to further develop its business model
by acquiring Valley Pain Centers, Inc., a Florida corporation ("VPC"). The
acquisition was accomplished by VPC merging into the Company's wholly-owned
subsidiary, MIS Acquisition Company I, Inc. VPC was the surviving corporation.
Immediately prior to the acquisition, the Company had 6,863,333 shares of common
stock outstanding. As part of the VPC acquisition, the Company issued 1,500,000
shares of its common stock to the Class A common stockholders of VPC in exchange
for their interest in VPC. In addition, the Class B stockholders of VPC received
in exchange for their ownership interest in VPC contingent payments of
$3,750,000 to be paid in the form of convertible debentures provided the Company
meets certain earnings targets over the three (3) years immediately following
the closing. The convertible debentures, if earned, will bear interest at the
Applicable Federal Rate (determined at the date of issuance) and shall be due
and payable on the first anniversary date of their issuance. The debentures are
convertible, at the option of the holder, into common stock of the Company at
the rate of $3.00 per share.
An entity controlled by Dr. Chiu, which was the recipient of 5,000,000
shares of the Company's common stock in the CMIS transaction, agreed in
connection with the VPC acquisition to return to the treasury of the Company
3,601,506 shares of the Company's common stock (1,350,000 shares were agreed to
be returned to the Company in May 1999 and 2,251,506 shares in July 1999). As of
this date, no shares have been returned to the Company. In addition, Dr. Chiu,
as controlling member of this entity, entered into an agreement with the Company
to restrict the sale of the remaining Company stock it owned for three (3)
years. Specifically, Dr. Chiu agreed that no sales or transfers (other than
gifts) would be made with respect to the Company stock for a period of one year
beginning July 28, 1999. Thereafter, he would be entitled to sale and/or
transfer 465,000 shares during the period beginning July 28, 2000 through July
27, 2001, 465,000 shares during the following one year period and the remainder
at any time after July 27, 2002. In consideration for the foregoing, the Company
granted to Dr. Chiu warrants to purchase 300,000 shares of the Company's common
stock. The warrants vest (subject to certain performance requirements) pro rata
over a three (3) year period beginning June 1, 2000. The exercise price for the
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warrants is $3.00 per share. The warrants must be exercised by the fifth
anniversary of their vesting.
The VPC merger agreement also provides for stock price protection to
the former Class A stockholders of VPC. Specifically, if the average of the
daily closing prices of the Company's common stock for the period from May 7,
2000, through May 6, 2001 is less than $3.00 per share, then the Company has
agreed to issue additional shares to the former Class A stockholders of VPC in
an amount equal to the difference between 1,500,000 shares (the number of shares
issued to such stockholders at closing) and a number equal to $4,500,000 (the
agreed upon purchase price) divided by the average closing price of the
Company's common stock for the year ended May 6, 2001.
To facilitate the acquisition of VPC, the Company loaned $620,000 to
the shareholders of VPC which was used by such shareholders as part of the
consideration to purchase VPC from Cyber-Care, Inc. f/k/a Medical Industries of
America, Inc., in a transaction which closed effective April 30, 1999. The VPC
shareholders subsequently assigned the note payable to the Company to VPC. The
Company recorded this obligation as additional consideration for the acquisition
of VPC.
VPC has clinics in Staunton, Harrisonburg, Charlottesville and Roanoke,
Virginia. During 1998, VPC produced revenues of approximately $3.3 million and
an operating profit before management fees of approximately $932,000.
Immediately prior to the VPC acquisition, the Company had entered into
an oral management agreement with certain principals of VPC whereby the Company
paid such principals approximately $42,000 in management fees.
As part of the VPC transaction, Mr. Rogers W. Kirven, Jr. and Dr. David
S. Klein were elected to the Company's Board of Directors and Mr. Kirven was
retained by the Company as its chief executive officer. In November 1999, Mr.
Kirven resigned as a director and officer of the Company to pursue other
business interests. In November 1999, Mr. Jere Palazzolo who had been elected as
a director and retained by the Company to act as its president following the
CMIS acquisition agreed to resign his director and officer positions. The terms
of Messrs. Kirven and Palazzolo's termination agreements are set forth in Item 6
- - Executive Compensation. The remaining Board of Directors in accordance with
its bylaws elected Rick Capozza and Anthony T. Yeung, MD to serve as replacement
directors and entered into an agreement with Dr. David S. Klein to serve as the
Company's interim chief executive officer and president.
The Company entered into an agreement with Cloverleaf Capital Advisors,
LLC, a merchant banking and mergers and acquisitions firm, in September, 1999.
The agreement calls for Cloverleaf to provide merger, acquisition and financial
services to the Company. Cloverleaf is paid based upon performance with a
minimum payment of $50,000 per month. The initial term of the agreement with
Cloverleaf is six months, with the option to renew for additional six month
periods. Accordingly, the initial agreement expires on February 28, 2000 unless
renewed or extended.
Since July 1, 1999 the Company has spent an estimate of approximately
$232,000, on acquisition, finance, marketing and development expenses which
includes amounts paid to Cloverleaf. The Company is in default of its agreement
with CloverLeaf by failing to make its December payment.
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On or about November 22, 1999, VPC and Dr. David S. Klein received a
letter of inquiry from Trigon Blue Cross Blue Shield ("Trigon"), a third party
payor representing approximately 15 percent of the Company's billings. The
Trigon letter indicated that Trigon had identified at least six (6) significant
issues of concern which according to their analysis amounted to a quantified
estimate (extrapolated based on a limited sample of transactions) of overpayment
equaling approximately $618,000. The letter also stated that Trigon had
identified other issues of concern for which there was insufficient information
to determine an estimated overpayment, if any. While no assurance can be given
at this time, the Company does not believe, based upon its initial
investigation, it has any liability with respect to this matter. Both Trigon and
the Company recognize that their respective findings and analysis are
preliminary and that additional information is needed to conclude this matter.
Trigon and the Company have agreed to work together to resolve these issues in
an expedient manner.
BUSINESS OF THE ISSUER
The Company's present principal line of business is providing, through
its wholly-owned subsidiary, VPC, pain management products and services to its
patients at each of its clinics in Staunton, Harrisonburg, Charlottesville and
Roanoke, Virginia. These products and services principally involve:
o traditional medication and traditional medical approaches to pain and
pain related problems;
o radio-frequency neuroablation (or the destruction of nerve tissue
with heat generated at the tip of a special needle which is placed in the spine,
skull and extremities);
o cryoneuroablation (or the destruction of nerve tissue with a
freeze-probe in the spine, skull, and extremities);
o spinal-endoscopy (or the introduction of a camera guided catheter
into the spine to take down post-laminectomy scar tissue or decompress spinal
nerve roots without the need for open surgery or general anesthesia);
o transdermal medications (or the delivery of a variety of medications
directly through the skin to areas of pathology);
o peripheral and spinal nerve blocks;
o diagnostic radiology, including discography (or the introduction of
radio-opaque dye directly into a spinal disk suspected of being the source of
pain which provides information that CAT, MRI and Myelogram cannot);
o electro-diagnostic studies, such as Somato-Sensory Evoked Potentials,
which provide information on nerve function more sensitive than the commonly
available EMG;
o spinal cord stimulation (or highly sophisticated electrodes placed
immediately beside the spinal cord to deliver programmable electrical signals to
the central nervous system to block the integration of incoming pain stimuli;
and
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o spinal narcotic pump systems that deliver concentrated narcotics, on
a continuous basis, directly into the fluid surrounding the spinal cord.
The Company, in accordance with the management agreements it entered
into with Rehab Management Group, Inc., a nonrelated party, in May of 1999, also
provides to its patients at each of its clinics in Virginia physical
rehabilitation, nerve conduction studies, electromyography and evoke potentials.
The Company believes that its current business practices provide it
with a large and complementary base of patients with chronic back and neck pain,
which are excellent candidates for minimally invasive surgery ("MIS")
procedures. Accordingly, the Company expects to implement in its Virginia
clinics by the spring of 2000 the MIS procedures which have been principally
developed by its Chairman, Dr. John Chiu, and another Board member, Anthony T.
Yeung, MD. For a more exhaustive discussion of the Company's plan to implement
MIS procedures see "Company Business Model - The "Four Pillars" Of Expanded
Ancillary Services" below.
INDUSTRY OVERVIEW
Pain is one of the most common complaints that causes a patient to seek
medical care. Back pain is also a leading ailment cited in worker's compensation
claims. Those suffering from back and neck pain cause billions of dollars in
lost productivity due to absenteeism and billions more are spent on traditional
medicines for the treatment of back pain.
Pain management has been quite varied throughout the years, including
such treatment courses as medication, exercise, physiotherapy, chiropractic
manipulation, and surgery. Where surgery is indicated, traditional methods have
involved a major traumatic procedure, including a long and expensive stay in a
hospital plus a lengthy and painful recuperation. Surgical approaches have led
to inconsistent results and often have created a sense of anxiety and
apprehension among many patients regarding the direction to take for treatment.
Therefore, many patients resort to the least invasive and painful course, avoid
surgery, or manage their pain independently. Many continue to live with pain
rather than undergo major back surgery.
According to an October 1998, report by STIFEL, NICLAUS & COMPANY, INC.
("S & N"), the spinal surgery industry is experiencing a period of dynamic
change. As stated, managed care is driving the development of new cost effective
medical technologies within the "do more for less" business strategy. S&N has
stated that the incorporation of real-time fluoroscopy into laser image-guided
platforms, the emergence of minimally invasive surgical technologies, and the
use of new materials and techniques will provide the market with an upside
potential of up to a 400% increase over the next several years. In addition, the
Company believes 50% of all spinal surgeries are currently being performed
utilizing MIS technologies and the percentage of minimally invasive spine
surgery is expected to increase as more surgeons learn new technologies.
MIS is a specific surgical technique that the Company believes will
effectively answer the market's demand for spinal care that is more effective
and less traumatic treatment to typical spinal surgery. MIS or "band-aid"
surgery is a specialized surgical technique, based on currently available
endoscopic technologies, which allows physicians to provide the most technically
advanced treatment of back and neck pain,
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in an outpatient environment. MIS may be performed as an ambulatory procedure
at an outpatient surgery center or clinic, requiring only a local or light
general anesthetic. A small incision, usually requiring only local anesthetic,
is made and micro-spinal discectomy instruments, a high-tech endoscope, and a
laser probe are inserted into the opening through a sleeve, under x-ray
guidance. A portion of the disc is excised, or cut, and removed, relieving the
pressure on the nerve root that was causing the pain. Then the affected disc is
shrunk and tightened with the laser and the area is sutured. The actual
operating time is approximately 30-45 minutes per disk.
The benefits of this mode of treatment over traditional open disc
surgery are many. First, the patient experiences decreased anxiety from not
having to undergo major surgery and a lengthy, in-patient hospital stay. Also,
the risks associated with major surgery, such as use of general anesthesia over
long periods of time, are potentially reduced. Additionally, the surgery is
relatively quick and effective, often resulting in immediate relief of pain.
There is minimal surrounding tissue damage as compared to traditional open
surgery, and nerve pain is often reduced. The patient is often able to walk out
of the outpatient surgery center and to return to normal activities within a
short period of time, without significant pain. Finally, MIS is cost-effective,
with the entire procedure costing up to 40% less than that of traditional open
disc surgery.
The Company believes that the MIS techniques which seek to maximize
patient and payor satisfaction will result in a significant increase in its
revenues. Management believes that, because more patients will desire newer and
less invasive techniques, outpatient, office-based MIS and pain management
technologies will thrive. The Company believes that the large size and growth in
this marketplace and changing market perceptions of MIS and pain management will
be directly benefited by its business model to treating back and neck pain. The
Company's plan is to accurately diagnose and establish the least invasive course
of treatment possible. For example, a common cause of persistent back pain is
disc herniation. The Company believes that many herniated discs can be more
easily treated on an outpatient basis with MIS.
COMPANY BUSINESS MODEL - THE "FOUR PILLARS" OF EXPANDED ANCILLARY SERVICES
The Company has developed a "Four Pillar" business model to provide an
integrated suite of products and services to patients seeking pain relief.
Within this model, the Company has identified four outpatient services which are
typically referred to providers outside of the private physician's practice. The
Company's "Four Pillar" model includes: pain management, physical rehabilitative
therapy, minimally invasive surgery ("MIS") procedures and pain diagnostics all
built around the core-business of pain medicine.
The Company currently provides pain management and physical
rehabilitative therapy services in its Virginia clinics and anticipates
implementing MIS and pain diagnostics by the spring of 2000. In addition, the
Company expects, although no assurance can be given, to acquire additional pain
management and other complementary practices to serve as delivery platforms for
its products and services.
Management believes that the sense of urgency felt by patients who are
suffering from pain combined with a perceived lack of urgency from those
treating pain, provide it with a unique opportunity to establish market presence
and increase market penetration rapidly. Within this structure and subject to
Federal and state
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healthcare law restrictions, the Company anticipates that its clinics will be
able to bill for facility charges, in addition to the customary professional
services of a medical/surgical practice. Likewise, the deployment of other
medical practice specialties to its medical centers will be evaluated and
implemented as appropriate. These may include hiring additional spine surgeons,
internist/GP's, neurologists, pain specialists, physiotherapists, and others.
The Company expects revenue will increase as these additional specialists are
added.
FINANCE & ACCOUNTING. The Company provides financial and accounting
services for its clinics and practices, including financial reports, cash
management and management reports. This support is provided with the goal of
equipping on-site management with information and tools to perform their
functions effectively and efficiently.
MANAGEMENT INFORMATION SYSTEMS. The Company operates a centralized
network for billing, collections and management information and reporting
systems to manage and control each clinic and practice.
INSURANCE AND MANAGED CARE. The Company plans to develop a strategy for
contracting for services with insurance companies, managed care companies, and
third party administrators. This strategy will be implemented for each practice
and overseen by Company management. As the Company grows, it is the intent of
management to take advantage of its expanded geographic position through
negotiations of regional and national contracts, when deemed beneficial for the
Company.
ADMINISTRATION, MARKETING & DEVELOPMENT. As deemed appropriate by
management, an administrative/marketing director may be assigned to one or more
clinics and practices to oversee day-to-day operations. That person will have
the responsibility for supervising the business aspects of the clinics and
practices and the development and implementation of the Company's marketing and
expansion strategies. The Company manages its facilities in consultation with
the participating surgeons and physicians to insure the integrity of the medical
services being provided. The Company provides regulatory review to evaluate
compliance with the increasingly complex laws and regulations that apply to
medical and surgical practices nationwide.
PERSONNEL AND HUMAN RESOURCES. Management plans for staffing needs to
be met with either Company-employed or third party-leased employees. This
strategy may be modified according to specific circumstances. The Company will
evaluate its employees, make staffing decisions, provide and manage employee
wages and benefits, and implement policies and procedures for significant
aspects of human resources and personnel management.
MEDICAL EDUCATION & TRAINING. A training program in MIS and pain
management will be utilized, as appropriate, by the Company for affiliated
physicians. Likewise, a continuing education program will be recommended for
physicians and the medical and technical staff at the centers to help achieve a
consistently high level of surgical and medical technique and services
throughout the Company.
MARKETS, DISTRIBUTION METHODS AND DEVELOPMENT STRATEGY
GROWTH POTENTIAL. Due to market and demographic changes in the fields
of Anesthesiology, Neurology and Orthopedic Surgery, management believes that
physician
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salaries have remained stagnant or have decreased. Management theorizes that
this, in turn, has resulted in an increased interest in pain treatment as a
means of revenue enhancement in these specialties.
The majority of pain treatment centers or clinics are run by
Anesthesiologists. Traditionally, Anesthesiologists have limited their practice
to the hospital setting, and more recently, to the outpatient surgery setting
where third party billing companies most often provide billing services.
Management believes that only a small number of anesthesiologists have ventured
out of the hospital to the office-based setting.
Nationally, modest growth in the number of pain centers occurred until
the mid-1980's. Even today, the majority of pain centers are still located
within hospitals and outpatient centers. However, with the introduction of safer
anti-convulsant medications, safer anti-depressants, and improved interventional
procedures, the practice of pain medicine is maturing and diversifying beyond
the hospital campus.
GROWING CONSUMER DEMAND FOR SERVICES. Management believes that present
healthcare trends indicate that overall healthcare expenditures will continue to
increase in the coming years with the aging of the population and the extension
of healthcare coverage to previously uninsured groups. In recent years,
government programs, private insurance companies, managed care organizations and
self-insured employers have implemented various cost containment measures to
limit the growth of healthcare expenditures. These cost containment measures,
together with technological advances, have resulted in a significant shift in
the delivery of healthcare services away from traditional inpatient hospitals to
more cost effective alternatives, including outpatient surgery, pain management,
MIS procedures and treatment.
According to the American Hospital Association (the "AHA"), in 1998
over 680,000 spinal surgeries were performed in U.S. hospitals, including nearly
340,000 MIS procedures. The number of outpatient spinal surgeries is not
available but total outpatient surgery is increasing significantly. According to
the AHA, between 1985 and 1993, outpatient hospital-based surgical procedures
nearly doubled, and surpassed total inpatient surgeries. Outpatient surgeries
grew from 7.3 million to 13.1 million procedures while inpatient surgeries
decreased from 13.9 million to 10.7 million. According to the AHA, this
represents a 79.4% growth in outpatient surgeries, compared to a 23% decrease in
inpatient surgeries during the same period. Management believes that the number
of outpatient MIS procedures will continue to increase significantly in the
future
Managed care organizations, with significant numbers of covered lives,
are seeking to direct large numbers of patients to high quality, low cost
providers and provider groups. In order to compete for the growing number of
managed care patients, some hospitals, physicians, and other providers,
including alternate site outpatient providers, are forming integrated delivery
systems or provider joint ventures. The Company believes that its business model
fits well within this system, with its proposed multidisciplinary practice
approach, and its cost effective and efficient new surgical and treatment
techniques.
FACTORS CONTRIBUTING TO POTENTIAL GROWTH.
COST EFFECTIVE ALTERNATIVE. Management believes that outpatient MIS
procedures and pain management are considerably less expensive than traditional,
hospital-based, inpatient, major spinal surgery. Cost savings include lower
facility development costs,
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more efficient staffing and space utilization, and a specialized operating
environment focused on cost containment. Likewise, office practice-based
treatment for pain management provides similar savings over the more expensive
and less efficient traditional hospital-based approaches.
MANAGED CARE. Management believes that managed care enrollment will
continue to increase and that managed care organizations will continue to seek
high quality, cost effective healthcare alternatives for their enrollees. As a
result, interest in alternatives such as MIS and pain management techniques may
grow if reimbursement guidelines continue to shift the risks for healthcare
costs from traditional payors to providers such as hospitals and physician
groups.
PHYSICIAN AND PATIENT PREFERENCE. The Company believes that many
physicians choose to perform their surgeries at freestanding outpatient surgery
centers because of patient preference. Similarly, management believes that
patients often prefer the more friendly and simplified admissions and discharge
procedures, the less institutional atmosphere, and the cost effectiveness of
outpatient surgery. The combination of outpatient surgery with the added
benefits of MIS procedures over traditional surgical options often creates an
appealing alternative to patients. Additionally, management believes that many
physicians prefer free-standing surgery facilities, which often enhance
physicians' productivity by providing them with greater scheduling efficiency
and flexibility and more consistent nurse staffing, allowing physicians to
perform more surgeries in a defined period of time.
NEW TECHNOLOGY. New advances in technologies and anesthesia have opened
the doors to new techniques, such as MIS procedures and pain management,
allowing them to be performed in more accommodating and cost effective settings
such as outpatient, freestanding facilities. Lasers, fiberoptic endoscopes, real
time x-ray visualization, digital photography, micro-surgical instruments, and
advanced video monitoring have reduced the trauma and recovery time of once
major surgical procedures. Improved anesthesia has shortened recovery time by
maximizing the use of local anesthesia and minimizing post-operative side
effects such as nausea and drowsiness which generally limit the need for
overnight hospitalization of patients. With MIS, the surgical invasion is often
significantly reduced and the recovery period is minimized due to limited trauma
and the primary use of local anesthesia. Patients usually are able to walk out
of the facility within a few hours after the completion of surgery.
TARGETED CONSUMER PROFILE. The Company's target market consists of
three distinct, overlapping populations:
1. REFERRAL BY COMMUNITY-BASED PHYSICIANS. Community-based physicians
are the traditional markets for the referral of services to the typical pain
medicine practice. Physicians often choose to refer their patients to a
specialist or facility that extends to the referring physician the greatest
courtesy and speed to its patients. Physician-directed marketing is a
continuous, ongoing process of the Company business model.
2. PATIENT SELF-REFERRAL AND REFERRAL BY OTHER PATIENTS. Satisfied
patients will often refer friends and relatives to a particular pain center.
Based on the Company's historical data, in a mature practice, these type of
referrals can account for up to 1/3 of all patient referrals. Direct marketing
is effective in establishing a self-referral patient base. Marketing efforts are
broadcast media-intensive-radio
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advertising is the most effective direct marketing approach, newspaper is less
effective, and yellow pages generally is ineffective. The Company has and will
continue to deploy these marketing practices in its business.
3. PROVIDERS OF ALTERNATIVE MEDICINE (PAM). In surveys conducted by
management, it has been determined that the typical PAM feels disenfranchised
and frequently looks for validation of his role from the (traditional) medical
practitioner. Industry reports have indicated that the average chiropractor sees
more patients per day than the typical family physician. It also bears
recognition that 100% of these patients are at that office for the treatment of
pain-related problems. The Company recognizes the market potential of referrals
from PAM's and strives to establish mutually beneficial relationships with them.
TARGETED DEVELOPMENT AND ACQUISITION STRATEGY. The Company's objective
is to capitalize on its growth potential by developing a regional network of
pain management centers that will deliver the Company's "Four Pillars" of
service. The Company's goal is to create an integrated pain management niche by
establishing itself as a leader in this specialized, high-growth field. The
Company's business plan currently calls for a network of clinics built upon the
foundation of established pain management practices. It is anticipated that
experienced MIS physicians will bring in an existing revenue stream and a base
of patients upon which to build future business. The Company intends to acquire
pain management and MIS physician practices with at least 2,000 current patients
who may qualify for MIS, diagnostic and therapeutic modalities. The Company
expects to integrate these procedures into the newly acquired practices and
expects an increase in revenue related to the existing patient base. In
addition, the Company intends to expand this acquired patient base by
implementing focused marketing strategies through its target consumer profile
approaches.
The Company has established a profile of physician practices to be
considered for acquisition. The primary target will be experienced physicians
with a reputation for technical excellence. Company management believes that
each physician should have an entrepreneurial orientation, with an average to
above average practice volume and income. Each physician must have a strong
desire to expand his/her skills and practice to include the latest innovations
in pain management and surgical techniques. However, the profile of affiliated
physicians may vary based on the specific circumstances involved.
The Company's methodology for determining the value of practices to be
acquired is based primarily on a factor of each practices historical, pre-tax
profits, with consideration given to assets, outstanding receivables, debt and
proforma compensation. The purchase price for the practices is expected to be
funded through a combination of cash, the Company's common stock, and/or other
financial instruments and each acquisition will, in most cases, include an
earn-out provision. The Company plans to own each practice, its assets and its
complete operations. Notwithstanding, order to comply with the corporate
practice of medicine restrictions, the acquisition model may need to be modified
according to specific federal and state regulations and laws.
Following each practice acquisition, the Company expects to add new
services to each existing practice in order to maximize billable revenues. It is
anticipated that each Company clinic will include pain management techniques,
minimally invasive surgery capabilities, and physiotherapy and diagnostic
facilities. This will enable each clinic to provide and bill for services that
were previously referred to other health care providers.
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Each surgical physician whose practice is acquired will be provided the
opportunity for additional training in both pain management and MIS techniques.
This will enable the physician to further his experience in both specialties. As
circumstances require, the recruitment or affiliation with MIS surgeons and
other pain management specialists will be considered to enhance the practice
model. The Company will also evaluate the potential of expanding select offices
to small multi-specialty groups to include an additional spine surgeon, an
internist/general practitioner, a neurologist and a physiotherapist, among
others. When management deems it appropriate to expand, this new staff may serve
part-time initially, increasing coverage as volume grows. These additional
specialties will be considered in order to allow the practice to expand in
strategic areas that complement the main product lines and maximize the
retention of related billable services.
INTERNET MARKETING. The Company expects to develop an Internet Web
site, tailored to develop and enhance exposure among, and referrals from
physicians and patients.
COMPETITION
The healthcare industry in general, and the market in certain areas for
pain management and physical rehabilitation services and procedures of the type
the Company provides in particular, are highly competitive. Competition will
differ in each locality. In one of the Company's current markets, the Company is
the only provider of pain medicine, serving a population base in excess of
100,000 persons. In the other three (3) markets in which the Company is
presently located, the Company competes with the University of Virginia Pain
Center and two (2) physicians previously employed by VPC. As the Company
expands, it will compete with companies that are larger in size and have access
to considerably greater financial resources than it does. In the pain management
and physical rehabilitation business segments, there are numerous competitors
larger in size than the Company and which have access to considerably greater
financial resources.
While the pain management and physical rehabilitation business is
highly competitive, minimally invasive spinal surgery is a relatively recent and
evolving specialty that uses new techniques. There are few well-trained
physicians having the expertise to perform MIS procedures. In addition, there
are, to the Company's knowledge, no national networks dedicated primarily to the
combined disciplines of pain management and MIS. The Company's goal is to
position itself as a leading national network of MIS and pain management
centers. The Company plans to achieve market position through aggressive media
marketing and attention to customer service. Management believes that price
competition is not an important issue for the majority of patients, given the
present nature of third-party payors.
MAJOR SUPPLIERS
The Company obtains its products and supplies from many different
individuals and entities and therefore is not dependent on any major suppliers.
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DEPENDENCE ON KEY CUSTOMERS
The Company is not dependent on any one or group of key customers or
third-party payors but rather sells its products and services to the community
at large in its market areas. Presently, the Company's payor mix consists of:
approximately 33% of its revenues are derived from workers compensation cases;
33% from Medicare patients; 14% from commercial carriers; 15% from Blue Cross;
and, the balance from Medicaid and private payors.
PATENTS, TRADEMARKS, LICENSES
The Company does not depend upon any patents, trademarks, or licenses
to conduct its business; nor does the Company hold any such patents or
trademarks.
GOVERNMENTAL APPROVAL
Other than compliance with the Government Regulations discussed below,
the Company's products and services are not subject to governmental approval or
control.
GOVERNMENTAL REGULATION
The healthcare industry in general is subject to extensive federal and
state governmental regulation including, without limitation, referral and
reimbursement regulations, regulations certificates of need, licensure of
physicians and healthcare facilities, and restrictions on physician investments
in healthcare entities to which they refer patients. Although the Company
believes that its current operations comply with applicable regulations, there
can be no assurance that the subsequent adoption of laws or interpretation of
existing laws will not regulate, restrict or otherwise adversely effect the
Company's business. The Company's centers and its affiliated physicians are
subject to numerous regulatory, accreditation and certification requirements,
including requirements related to licensure, certificate of need, reimbursement
from insurance companies and other private third party payors, Medicare and
Medicaid participation and reimbursement, and utilization and quality review
organizations. An adverse determination by any authority could have a material
adverse effect on the Company.
HEALTHCARE REFORM AND LEGISLATIVE DEVELOPMENTS. The public has focused
significant attention on reforming the healthcare system in the United States. A
broad range of healthcare reform measures have been introduced in Congress. In
addition, proposed legislation regarding health care reform has been introduced
before many state legislatures. Any such reforms at the federal or state level
could significantly alter patient-provider relationships. State and federal
agency rule-making addressing these issues is also expected. Legislative
interest recently has also focused on the role of HMO's in the provision of
healthcare and the effect of managed care reimbursement mechanisms on healthcare
service utilization and quality of service. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect, if any, such
proposals would have on the Company's business. No predictions can be made as to
whether future healthcare reform legislation, similar legislation or rule-making
will be enacted or, if enacted, its effect on the Company. Any federal or state
legislation prohibiting investment interests in, or contracting with the Company
by, physicians or healthcare providers for which there is no statutory exemption
or safe harbor could have a material adverse effect on the Company business,
financial condition and results of operations. There can be no assurance that
any proposals adopted would be coordinated at the federal or state level;
therefore, the Company, as
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a national participant in the healthcare industry, is subject to varying state
regulatory environments. Certain proposals, such as cutbacks in the Medicare and
Medicaid programs, containment of healthcare costs that could include a negative
affect on prices charged by physicians, hospitals or other healthcare providers,
and greater state flexibility in the administration of Medicaid, could adversely
affect the Company. There can be no assurance that currently proposed or future
healthcare programs, laws, regulations or policies will not have a material
adverse effect on the Company's operating revenue.
"STARK LAWS." The Federal statute relating to self-referrals, 42 USC
ss. 1395 nn (the "Stark Law"), restricts the ability of a physician to refer
patients for the furnishing of certain designated health services ("Designated
Health Services") to health care entities when the physician (or immediate
family member) has a financial relationship, directly or indirectly, with the
entity receiving the referral. Moreover, the entity may not present or cause to
be presented a claim or bill for the Designated Health Services, either to the
Medicare or Medicaid programs or any other individual or third-party payor. The
financial relationship may be either an investment interest (either equity or
debt) or a compensation arrangement. Designated Health Services for purposes of
the Stark Law include: (1) clinical laboratory services, (2) physical therapy
services, (3) occupational therapy services, (4) radiology services, including
magnetic resonance imaging, computerized axial tomography scans, and ultrasound
services, (5) radiation therapy services and supplies, (6) durable medical
equipment and supplies, (7) parenteral and enteral nutrients, equipment, and
supplies, (8) prosthetics, orthotics, and prosthetic devices and supplies, (9)
home health services, (10) outpatient prescription drugs, and (11) inpatient
and outpatient hospital services.
There are exceptions to the Stark Law that apply (1) to both ownership
or investment interests and compensation arrangements, (2) only to ownership or
investment interests, or (3) only to compensation arrangements. The Company's
current structure will not meet any of the exceptions to permit a physician
investor's referral for Designated Health Services. Therefore, physician
investors cannot refer to the Company for Designated Health Services. Although
the Company will have mechanisms in place to monitor referrals from physician
investors, it is the responsibility of physician investors to comply with the
Stark Law and no assurance can be given that physician investors will comply
with such law.
Two of the exceptions that protect only compensation arrangements are
for employees and personal services and their requirements are similar to the
Safe Harbor requirements discussed above. However, unlike the Safe Harbors to
the Anti-Kickback Law, the exceptions to the Stark Law must be complied with
fully. The Company believes it currently meets the requirements of both of these
exceptions.
Notwithstanding management's belief that the Company currently is in
compliance with the Stark Laws, no assurance can be given that a federal agency
charged with enforcement and/or interpreting the Stark Law, or a private party,
might not successfully assert a contrary position, or that future federal
statutes, regulations, administrative interpretations and/or judicial decisions
would cause an investor's referral to be prohibited, or result in the imposition
of penalties on the Company or investors. Even the assertion of a violation
could have a material adverse effect upon our financial condition and results of
the operation.
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Violations of the various state and Federal self-referral laws may
result in substantial civil penalties and administrative sanctions for
individuals or entities, including exclusion from participation in the Medicare
and Medicaid programs, as well as the suspension or revocation of a physician's
license to practice medicine and surgery. Such sanctions, if applied to the
Company or any of its physician investors, would result in significant loss of
reimbursement and could have a material adverse effect on the Company.
An Advisory Opinion procedure similar to that discussed below and the
Declaratory Statement procedure also are available for parties seeking guidance
as to whether a specific transaction violates the Stark Law or the Self-Referral
Act, as the case may be. Potential investors should be aware that the Company
does not intend to seek the guidance available under either of these procedures.
REGULATORY LIMITATION ON FEE-SPLITTING AND THE CORPORATE PRACTICE OF
MEDICINE COULD EFFECT COMPANY OPERATIONS. The laws of many states prohibit
physicians from splitting fees with non-physicians (or other physicians) and
prohibit non-physician entities from practicing medicine. These laws vary from
state to state and are enforced by the courts and by regulatory authorities with
broad discretion. The Company's business operations have not been the subject of
judicial or regulatory interpretation; thus, there can be no assurance that
review of our business by courts or regulatory authorities will not result in
determinations that could adversely affect the Company's operations or that the
health care regulatory environment will not change so as to restrict the
Company's existing operations or their expansion. In addition, the regulatory
framework of certain jurisdictions may limit the Company's expansion into such
jurisdictions if the Company is unable to modify its operational structure to
conform with such regulatory framework.
A determination in any state that the Company is engaged in the
corporate practice of medicine or any unlawful fee-splitting arrangement could
render any management agreement between the Company and a practice located in
such state unenforceable or subject to modification, which could have a material
adverse effect on the Company. Regulatory authorities or other parties may
assert that the Company or a practice is engaged in the corporate practice of
medicine in such states or that the management fees paid to the Company by the
managed practices constitute unlawful fee-splitting or the corporate practice of
medicine. If such a claim were asserted successfully, the Company could be
subject to civil and criminal penalties, managed physicians could have
restrictions imposed upon their licenses to practice medicine, and the Company
or the managed practices could be required to restructure their contractual
arrangements. Such results or the inability of the Company or the managed
practices to restructure the relationship to comply with such prohibitions could
have a material adverse effect on the Company's financial condition and results
of operations.
CHANGES IN PAYMENT FOR MEDICAL SERVICES. The Company believes that
trends in cost containment in the healthcare industry will continue to result in
reductions from historical levels in per-patient revenue. The federal government
has implemented, through the Medicare program, the resource-based relative value
scale ("RBRVS") payment methodology for physicians services. The RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year and is subject to increases or decreases at the discretion
of Congress. To date,
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the implementation of RBRVS has reduced payment rates for certain of the
procedures historically performed by the Company's affiliated physicians. There
can be no assurance that any reduced operating margins could be recouped by cost
reductions, increased volume, introduction of additional procedures, or
otherwise.
Rates paid by non-governmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician, ambulatory
surgery center and hospital charges and are generally higher than Medicare
payment rates. A change in the makeup of the patient mix of the Company's
ancillary services that results in a decrease in patients covered by private
insurance or a shift by private payors to RBRVS or similar payment structures
could adversely affect the Company's business, financial condition, and results
of operations.
MEDICARE AND MEDICARE FRAUD AND ABUSE. Federal law prohibits the offer,
payment, solicitation or receipt of any form of remuneration in return or, or in
order to induce: (i) the referral of a person in connection with the provisions
if medical services; (ii) the furnishing or arranging for the furnishing of
items or services reimbursable under Medicare and Medicaid programs; and (iii)
the purchase, lease, order, arranging or recommending of any items or service
reimbursable under Medicare or Medicaid (the "Anti-Kickback Law"). Pursuant to
the Anti-Kickback Law, the federal government has announced a policy of
increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
costs. The applicability of this provisions to many business transactions in the
health care industry will be subject to continuing judicial and regulatory
interpretation.
The United States Department of Health and Human Services Office of the
Inspector General ("OIG"), the federal agency with primary responsibility for
enforcing the Anti-Kickback Law, has issued regulations that define
relationships that are immune from prosecution under the Anti-Kickback Law (the
"Safe Harbor" regulations). Each Safe Harbor includes a series of standards, all
of which must be satisfied for a business or compensation arrangement to benefit
from the protection offered by a specific Safe Harbor.
Two of the Safe Harbors address investment interests held by parties
who are in a position to refer patients or other business (1) in entities whose
securities are publicly traded that have more than $50,000,000 in undepreciated
net tangible assets, and (2) in those entities in which (a) no more than 40% of
the value of the investment interests of each class of investors may be held by
investors in a position to make referrals; (b) the terms of an investment
interest offered to a passive investor in a position to make referrals must be
no different than those offered to other passive investors; (c) the terms of an
investment interest offer to an investor in a position to make referrals or
generate business must not be based on the volume or value generated from the
investor to the entity; (d) there is no requirement that a passive investor make
referrals or generate business for the entity as a condition to remaining as an
investor; (e) the entity's services or items must not be marketed to passive
investors differently than non-investors; (f) no more than 40% of the entity's
gross revenue may come from referrals or business generated by investors; (g)
the entity must not loan or guarantee funds to an investor in a position to make
referrals if used to obtain the investment interest; and (h) the amount of
return to the investor must be directly proportional to amount of capital
investment.
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Other Safe Harbors address the structuring of employment and personal
services agreements. The employment safe harbor protects amounts paid by an
employer to an employee who has a bona-fide employment relationship with such
employer, for the employment in the provision of items or services covered by a
federal health care program. In order to be protected under the personal
services safe harbor, independent contractor relationships must satisfy certain
standards. These standards include the requirement that the aggregate
compensation over the term of the arrangement must be consistent with the fair
market value of the services being rendered and not determined in a manner that
takes into account the volume or value of patient referrals or other business
between the parties that is paid for, in whole or in part, by a federal health
care program. The United States Department of Health and Human Services Office
of the Inspector General ("OIG"), the federal agency with primary responsibility
for enforcing the Anti-Kickback Law, has issued regulations that define
relationships that are immune from prosecution under the Anti-Kickback Law (the
"Safe Harbor" regulations). Each Safe Harbor includes a series of standards, all
of which must be satisfied for a business or compensation arrangement to benefit
from the protection offered by a specific Safe Harbor.
Notwithstanding that management believes that the Company currently
satisfies the investment interest, employee and personal services Safe Harbors
to the Anti-Kickback Law, no assurance can be given that a federal agency
charged with enforcement and/or interpreting the Anti-Kickback Law, or a private
party, will not successfully assert a contrary position, or that future federal
statutes, regulations, administrative interpretations and/or judicial decisions
would cause an investor's referral to be prohibited, or result in the imposition
of penalties on us or investors. Even the assertion of a violation could have a
material adverse effect upon the financial condition and results of the
Company's operations. Further, in addition to complying with the Anti-Kickback
Law, physician investors must also comply with the federal and state laws
governing physician self-referrals discussed below.
The OIG has adopted a procedure whereby it will provide guidance (an
"Advisory Opinion") as to whether a party's participation in a particular
business or compensation arrangement would be viewed as violating the
Anti-Kickback Law. An Advisory Opinion is available to the participants in a
business or compensation arrangement who are willing to disclose certain
information to the OIG. An Advisory Opinion may be relied on only by the
requesting party and is binding on the OIG only with respect to that
transaction; provided, if the OIG later determines the requestor failed to
disclose material information, the OIG will no longer be bound. A prospective
investor should be aware that the Company does not intend to seek an Advisory
Opinion regarding its compliance with the Anti-Kickback Law from the OIG.
FAILURE TO PROPERLY SUBMIT CLAIMS FOR REIMBURSEMENT COULD ADVERSELY
AFFECT THE COMPANY'S FINANCIAL CONDITION. The Company is subject to numerous
state and federal laws that govern the submission of claims for reimbursement to
third party payors, including state and federal health care programs (e.g.,
Medicare and Medicaid). These laws generally prohibit an individual or entity
from presenting a claim (or causing a claim to be presented) for payment by
Medicare, Medicaid or any other third party payor that is false or fraudulent.
The penalties available for violations of these statutes include substantial
civil and criminal fines, imprisonment, exclusion from the federal health care
programs and licensure revocation.
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One of the most prominent of these laws is the Federal False Claims
Act, which may be enforced by the federal government directly, or by a private
plaintiff on the government's behalf. Under the False Claims Act, both the
government and the private plaintiff, if successful, are permitted to recover
substantial monetary penalties, as well as an amount equal to three times actual
damages. In recent cases, some qui tam plaintiffs have taken the position that
violations of the Anti-Kickback Law and the Stark Law should also be prosecuted
as violations of the Federal False Claims Act. The Company believes that it has
procedures in place to ensure the accurate completion of claim forms and
requests for payment.
ESTIMATE OF THE AMOUNT SPENT ON RESEARCH AND DEVELOPMENT
To date, the Company has had no research and development expenditures.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company, to the best of its knowledge, is in compliance with all
applicable federal, state, and local environmental laws and regulations, none of
which the Company believes have a material effect on its operations and
business. The Company has incurred minimal costs associated with environmental
compliance.
EMPLOYEES
As of December 31, 1999 the Company has a total of 25 full-time
employees and 5 part-time employees. The Company provides standard employee
benefits such as medical and dental insurance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF THE COMPANY
FORWARD LOOKING STATEMENTS. THE DISCUSSION CONTAINED HEREIN REGARDING
THE COMPANY AND ITS BUSINESS AND OPERATIONS MAY INCLUDE "FORWARD LOOKING
STATEMENTS." SUCH STATEMENTS CONSIST OF ANY STATEMENT OTHER THAN A RECITATION OF
HISTORICAL FACT AND CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE
THEREOF, OTHER VARIATIONS THEREOF, OR COMPARABLE TERMINOLOGY. ALL
FORWARD-LOOKING STATEMENTS ARE NECESSARILY SPECULATIVE, AND THERE ARE CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER
MATERIALLY FROM THOSE REFERRED TO IN SUCH FORWARD-LOOKING STATEMENTS. EXCEPT FOR
HISTORICAL INFORMATION, MATTERS DISCUSSED IN THIS REPORT REGARDING FINANCIAL
RESULTS AND DEMAND FOR PRODUCTS AND SERVICES ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE RELATED TO THE FURTHER
DEVELOPMENT OF THE COMPANY'S PRODUCTS AND SERVICES AND MARKET ACCEPTANCE OF SUCH
PRODUCTS AND SERVICES.
The following should be read in conjunction with the financial
statements and corresponding notes contained in this document.
OVERVIEW. Prior to the acquisition of CMIS by the Company in June of
1998, the Company had no revenues or expenses for the fiscal years ended June
30, 1997 and June 30, 1998. Following the acquisition of CMIS, management of the
Company resigned and was replaced by CMIS's officers and directors. The
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Company then adopted CMIS's business plan. The following discussion reflects the
combined operations of the two entities as of June 30, 1998.
Beginning with the acquisition of CMIS in June,1998, the Company
entered a reorganizational stage with the intent of developing, owning,
operating and managing a chain of neuro/orthopedic spinal surgery clinics and
physician practices. Commencing with the CMIS acquisition, the Company began to
shift its resources with the goal of developing the Company into a public
company as well as developing its new business plan. As a result, large
supplementary capital expenditures were required to implement the new
infrastructure. Expansion of management and other personnel, as well as
considerable expenses were incurred as a result of this effort. Senior
management was enhanced with the addition of a President.
The Company's first attempt to implement its business plan occurred in
November and December of 1998, when the Company acquired certain assets and
entered into management agreements with three neuro-spine practices in New
Mexico, California and New York. These transactions failed and the Company
terminated all relations and entered into settlement agreements with these
parties. SEE "BUSINESS - HISTORICAL BACKGROUND."
With the acquisition of Valley Pain Centers, Inc. and the integration
of a new member to the Company's management team in May of 1999, the Company
adjusted its conceptual philosophy to focus on the acquisition, development and
operation of pain management practices throughout the country, particularly east
of the Mississippi River. From these platform practices, the Company anticipates
implementing its four-pillar business model of ancillary services. The Company
is presently operating in a cash negative position and will require substantial
additional funding to continue operations, make acquisitions, implement its
business plan and achieve its business objectives. There can be no assurance
given that the Company will be successful in entering into such funding
arrangements.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED
JUNE 30, 1999 AND JUNE 30, 1998. Total revenues were $456,998 for the year ended
June 30, 1999, as compared with $0 for the year ended June 30, 1998. This
increase is due to the revenues generated from Valley Pain Centers, Inc. ("VPC")
for the months of May and June in 1999, subsequent to the acquisition of VPC in
May of 1999.
Operating expenses increased to $2,429,175 in 1999, from $63,287 in
1998. This increase was due primarily to a full year of operations in 1999,
versus one month of actual operation in 1998. The expenses for 1999 included
$1,078,507 for general and administrative expenses, $873,962 for compensation
and benefits, $262,380 for rescinded practices net of operations (See Item 1,
Description of Business), $142,000 for management and directors' fees and
$72,326 for depreciation and amortization.
Net loss increased to $1,498,577 in 1999, from a net loss of
$63,287 in 1998. The increase in net loss is due to one year of operation and
the development of the Company's business plan and the inclusion of only two
months of operations for VPC.
LIQUIDITY AND CAPITAL RESOURCES. In 1999 and 1998, the Company financed
operating activities from the net proceeds of a private placement of common
stock of $1,919,142 in June, 1998 and from deposits received on stock
subscriptions of
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$277,500 and proceeds with respect to a note payable to a stockholder of
$300,000 received in May, 1999. Cash used in operating activities was $954,299
in 1999 as compared with cash used by operating activities of $46,875 in 1998.
Cash used in investing activities was $939,042 ($616,908 with respect to the
purchase of VPC; purchase of property and equipment accounted for $162,134; and
acquisition costs totaled $160,000) in 1999 as compared with cash used in
investing activities of $7,343 (purchase of property and equipment) in 1998.
Cash provided by financing activities was $261,184 (net borrowing from
shareholder) in 1999 as compared with cash provided by financing activities of
$1,983,290 (proceeds from common stock issuance less offering costs, and
proceeds from note payable to shareholder) in 1998.
At June 30, 1999, the Company had working capital of $604,532 as
compared to working capital of $1,876,684 at June 30, 1998. Current portion of
long-term maturities aggregating $14,667 on June 30, 1999 represents payments
due on capital lease obligations.
In June 1998, the Company sold 1,333,333 shares of the Company's common
stock for $2,000,000 (or $1.50 per share). Net proceeds from this offering
totaled $1,919,142, after deducting offering costs of $80,858.
In May 1999, the Company commenced a private offering to accredited
investors of its common stock at $1.50 per share. As of June 30, 1999, the
Company had received a total of $277,500 from subscribers to the private
placement and recorded these proceeds as restricted cash and deposits on stock
subscriptions in the accompanying consolidated balance sheet. During August
1999, the Company completed the private placement and sold 500,800 shares of
the Company's common stock for approximately $750,000, which included the
conversion of a $300,000 note payable to a stockholder at a discount below the
market value of the Company's stock. This beneficial conversion feature
resulted in $180,000 of additional interest expense during August 1999.
The Company intends to continue to use its best efforts to raise
working capital from equity based private placements and debt financings. The
Company will not have sufficient working capital to fund operations, unless the
Company is able to secure addition debt and/or equity financing on acceptable
terms. No assurances can be given that any future financing will be available
or, if available, may be obtained on terms satisfactory to the Company.
TAX LOSS CARRY-FORWARDS. At June 30, 1999, the Company had operating
loss carry-forwards for US income tax purposes of approximately $1,563,000
available to reduce future taxable income, which expires in 2018 and 2019.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1999 AND 1998.
Total revenues were $406,080 for the three months ended September 30,
1999 as compared with $0 for the three months ended September 30, 1998. This
increase is due to the revenues generated from Valley Pain Centers, which was
acquired during May, 1999, in the three months ended September 30, 1999.
Operating expenses increased from $107,511 in the first quarter of 1998
to $1,100,784 in the first quarter of 1999. The increase was due primarily to
VPC
20
<PAGE> 23
operations being included in 1999. Salaries and related benefits increased
$439,154 due to additional personnel. Professional and consulting fees related
to legal matters, accounting, and business development activities increased
$211,743 and operating expenses related to VPC increased by $691,400 primarily
because VPC was not part of the Company until May, 1999.
Net loss increased from $107,511 in 1998 to $695,093 in 1999. The
increased loss was due to the increased salaries and professional fees incurred
in 1999.
Liquidity and Capital Resources. During the three months ended
September 30, 1999, the Company financed operating activities from the net
proceeds of a private placement of common stock of $681,430 in August 1999. Cash
provided by financing activities was $641,227 in 1999.
At September 30, 1999, the Company had working capital of $573,982
compared with $1,750,992 at September 30, 1998. The current portion of long-term
capital lease obligations was $14,537 at September 30, 1999.
YEAR 2000 DISCLOSURE. The Company has completed a review of its
computer systems and non-information technology ("non-IT") systems to identify
all systems that could be affected by the inability of many existing computer
and microcontroller systems to process time-sensitive data accurately beyond the
year 1999, referred to as the Year 2000 or Y2K issue. The Company is dependent
on third-party applications, particularly with respect to such critical tasks as
accounting, billing, and reimbursement control. The Company also relies on its
own computer and non-IT systems (which consists of personal computers, internal
telephone systems, internal network server, and operating systems). In
conducting the Company's review of its internal systems, the Company performed
operational tests of its systems which revealed no Y2K problems. As a result of
its review, the Company has discovered no problems with its systems relating to
the Y2K issue and believes that such systems are Y2K compliant. Costs associated
with the Company's review were not material to its results of operations.
While the Company believes that its procedures have been designed to be
successful, because of the complexity of the Year 2000 issue and the
interdependence of organizations using computer systems, there can be no
assurances that the Company's efforts, or those of third parties with whom the
Company interacts, have fully resolved all possible Year 2000 issues. Failure to
satisfactorily address the Year 2000 issue could have a material adverse effect
on the Company.
The most likely worst case Y2K scenario which management has identified
to date is that, due to unanticipated Y2K compliance problems, the Company may
be unable to bill its patients or collect from its payors, in full or in part,
for services and products sold. Should this occur, it would result in a material
loss of some or all gross revenue to the Company for an indeterminable amount of
time, which could cause the Company to cease operations. The Company has not yet
developed a contingency plan to address this worst case Y2K scenario, and does
not intend to develop such a plan in the future.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No.
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<PAGE> 24
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designed as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133, as amended by SFAS 137,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000.
Historically, the Company has not entered into derivative contracts to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on July 1, 2000 to affect its financial
statements.
In June 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires costs of start-up activities and
organizational costs, as defined, to be expensed as incurred. The Company
adopted this SOP on July 1, 1998, and, as a result, expensed the carrying value
of its organization costs whose net book value was approximately $1,830 as of
June 30, 1998.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 800 square feet of office space at
2707 Rew Circle, Ocoee, Florida, at a monthly rental of approximately $800. The
lease is on a month to month basis with a 30 day cancellation notice.
The Company also leases from two partnerships controlled by its CEO and
President, Dr. David Klein, office space for billing and administrative offices
at 13 W. Beverly, Staunton, VA. The rental for the billing space is $5,200 per
month. The rental for the administrative space is $500 per month. Both leases
will expire on June 30, 2003.
The Company leases approximately 2,900 square feet of medical office
space in Roanoke, Virginia, at a monthly rental of $3,020. The lease will expire
on August 31, 2001.
The Company leases approximately 1,750 square feet of medical office
space in Charlottesville, VA at monthly rental of $1,375. This lease will expire
on August 31, 2001.
The Company leased approximately 900 square feet of medical office
space located at 109 MacTanly Place, Staunton, VA at a monthly rental of $588.
In June, 1999, the Company signed a lease renewal to increase the space to 2,400
square feet. The new rent is $1708 per month.
The Company leases approximately 3,651 square feet of medical office
space located at 861 Cantrell Avenue, Harrisonburg, Virginia at a monthly rental
of $3,377. The lease will expire August 14, 2004.
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<PAGE> 25
In October 1999, the Company entered into an agreement to lease an
executive office suite at 120 International Parkway, Heathrow, FL. The monthly
fee of $1,192 includes telephone and reception services. The lease will expire
on September 30, 2000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The authorized capital stock of the Company consists of 20,000,000
shares of common stock, $.001 par value per share, of which there are
approximately 6,627,627 shares of common stock issued and outstanding as of
December 1, 1999, and 100,000 shares of "blank check" preferred stock, par value
$.001 per share, none of which are outstanding.
In June 1998, the Company established the Minimally Invasive Surgery
Corporation Stock Option Plan (the "Plan") and authorized 500,000 shares of
common stock available for grants at the Board of Directors' discretion to
officers, directors, employees and consultants. The exercise price per share
shall be at least equal to the fair market value of the underlying common stock
on the grant date and no option may be exercised beyond ten years from the date
of the grant.
During the year ended June 30, 1998, the Company granted options to
purchase 205,000 shares of the Company's common stock to certain employees. The
options vest over a period of time and are exercisable through June 2008 at an
exercise price of $1.50 per share.
In connection with the acquisition of CMIS, the Company granted
warrants to its shareholders of record to purchase at any time prior to June 30,
2000 one million eight hundred thousand (1,800,000) shares of its common stock
at an exercise price of $3.00 per share.
The following table sets forth, as of December 31, 1999, the beneficial
ownership of the Company's Common Stock (i) by the only persons who are known by
the Company to own beneficially more than 5% of the Company's Common Stock; (ii)
by each director of the Company; and (iii) by all directors and officers as a
group. Percentage ownership assumes all vested options are fully exercised.
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<PAGE> 26
<TABLE>
<CAPTION>
Options for
Name and Address of Shares of Common Common Percentage
Beneficial Owner Stock Owned Stock Owned Total Shares Owned
---------------- ---------------- ------------ ------------- -----------
<S> <C> <C> <C>
John C. Chiu (1) 1,398,494 -- 1,398,494 14.19%
808 Camino Flores
Thousand Oaks, CA
Stanley Chiu (2) -- 5,000 5,000 *
4905 Vincent Avenue South
Minneapolis, MN 55410
David S. Klein (3)(4) 1,100,000 541,559 1,641,559 22.9%
1011 Tufton Cove
Heathrow, FL 32746
George E. Sheldon III 10,000 -- 10,000 *
2707 Rew Circle
Ocoee, FL 34761
Rick Capozza 16,667 -- 16,667 *
FBO Capozza 1990 Family Trust
551 Merrywing Circle
Austin, TX 78730
Anthony T. Yeung, MD 100,000 -- 100,000 1.01%
Yeung Family Trust
4050 East Desert Crest
Paradise Valley, AZ 85253
* Indicates less than 1%
ownership.
All Officers and Directors
a Group five persons 2,625,161 546,559 3,171,720 44.21%
</TABLE>
(1) These shares are owned by an entity with which Dr. Chiu is affiliated
and were received in connection with the CMIS acquisition.
(2) Reflects options granted under Stock Option Plan which may be exercised
within the next 60 days at exercise price of $1.50 per share. Options
are fully vested.
(3) Nine Hundred Thousand (900,000) of these shares were obtained as a
result of the May 1, 1999 acquisition of Valley Pain Centers, Inc.
("VPC") in which Dr. Klein was a majority shareholder, but it does not
include the impact of a possible conversion of $1,875,000 of
convertible debentures at $3.00 per share which he will receive
pursuant to the VPC transaction provided certain earnings targets are
met. Two Hundred Thousand (200,000) shares were received as a result of
Dr. Klein's investment in the Company's May 1999 private placement.
(4) Reflects non-plan options that may be exercised within the next 60
days. Three hundred eighty four thousand seven hundred and sixty
(384,760) of the options were granted by the Company in June and
November, 1999 at exercise prices of $2.50 and $1.25, respectively for
providing his personal guarantee to certain Company obligations. The
remainder of the options (156,799) represent the number of shares that
Dr. Klein would receive if he were to convert two notes in the
respective amounts of $50,000 and $185,199 into the Company's common
stock at a conversion price of $1.50. These convertible notes evidence
loans made to the Company by Dr. Klein in November 1999.
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<PAGE> 27
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the directors and executive officers of
the Company. Directors are elected for a period of one year and thereafter serve
until the next annual meeting at which their successors are duly elected by the
stockholders. Officers and other employees serve at the will of the Board of
Directors.
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------ ----------------------------------------------------------
NAME AGE POSITION
- ---------------------------------------- ------------------ ----------------------------------------------------------
<S> <C> <C>
John C. Chiu, M.D. 60 Chairman and Director
- ---------------------------------------- ------------------ ----------------------------------------------------------
David S. Klein, M.D. 45 Director, Chief Executive Officer and President
- ---------------------------------------- ------------------ ----------------------------------------------------------
Richard C. Capozza 57 Director
- ---------------------------------------- ------------------ ----------------------------------------------------------
Anthony T. Yeung, M.D. 59 Director
- ---------------------------------------- ------------------ ----------------------------------------------------------
Stanley L. Chiu 32 Director
- ---------------------------------------- ------------------ ----------------------------------------------------------
</TABLE>
OFFICERS AND EMPLOYEE DIRECTORS
JOHN C. CHIU, M.D., CHAIRMAN OF THE BOARD AND A DIRECTOR. Dr. Chiu has
served as Chairman of the Board and a Director of the Company since June 1998.
Dr. Chiu is a Diplomat of the American Board of Neurological Surgery, and is a
neuro spine surgeon specializing in Minimally Invasive Microdecompressive
Endoscopic (Arthroscopic) Surgery of the cervical, thoracic and lumbar discs and
laser endoscopic spinal discetomy. Since 1988, Dr. Chiu has served as the Chief
Neuro Spine Surgeon at the California Back Specialists Medical Group, which has
one of the largest private MIS practices in the world, with patients from all
over the United States and overseas. Dr. Chiu's principal occupation has been
neurospine surgery, specializing in MIS, since 1988. He is owner and president
of California Back Specialists Medical Group and Conejo Multi-Specialty Medical
Group. He is president of the American Academy of Minimally Invasive Spine
Medicine and Surgery, a professional society dedicated to the advancement of the
technique of MIS.
Dr. Chiu received his M.D. from Baylor University College of Medicine,
completed an internship at The Brooklyn Hospital, and completed further training
in neurosurgery at the Mayo Clinic, State University of New York/Long Island
College Hospital, Baylor University College of Medicine, Kings County Hospital
and University of Zurich.
DAVID S. KLEIN, M.D., CHIEF EXECUTIVE OFFICER, PRESIDENT AND A
DIRECTOR. Dr. Klein has served as Vice Chairman and a Director of the Company
since May 1999. Dr. Klein was elected in November of 1999 with the resignation
of Rogers W. Kirven, Jr. and Jere Palazzola and currently serves as the
Company's Chief Executive Officer and President. From September 1998 until May
of 1999, Dr. Klein served as President of Valley Pain Centers, Inc. ("VPC") and
a Senior Vice-President of Cyber-Care, Inc., a publicly traded NASDAQ company
located in Boynton Beach, Florida. In September, 1998, Dr. Klein sold VPC to
Cyber-Care, Inc. f/k/a Medical Industries of America, Inc. From 1983 until
September 1998, Dr. Klein owned and operated and served as President of VPC with
its principal offices located in Staunton, Virginia.
Dr. Klein has also served on the teaching faculties at Ohio State
University, National Naval Medical Center, Portsmouth Naval Hospital, University
of Virginia and
25
<PAGE> 28
Bowman Gray School of Medicine. Dr. Klein received his BS degree from the
University of Maryland, where he graduated Cum Laude. He received his Doctorate
of Medicine from the University of Maryland School of Medicine and performed his
internship in surgery at the University of North Carolina School of Medicine,
and residency in Anesthesiology was performed at Duke University School of
Medicine. Dr. Klein has also participated in numerous clinical studies for some
of the largest pharmaceutical companies in the country and abroad. In addition,
he has authored numerous articles in medical journals and periodicals, as well
as serving as a contributing chapter writer for several medical books and
manuals.
NON-EMPLOYEE DIRECTORS
STANLEY L. CHIU, DIRECTOR. Mr. Chiu has served as a Director of the
Company since June 1998. Mr. Chiu received a Master of Architecture degree from
Harvard Graduate School of Design, and a Bachelor of Arts degree from Wesleyan
University. He is an experienced architect with a strong design background in
medical facilities. Since 1995, Mr. Chiu has been employed as an architect with
Ellerbe Becket, Inc., Minneapolis, Minnesota. Mr. Chiu has been designer on
numerous award-winning buildings, most recently Yonsei University Medical Center
in Seoul, Korea, and his work has been published and exhibited internationally.
Among his extensive project experience are included Mayo Clinic, Medical College
of Ohio, Stanford University Palo Alto Medical Foundation, University of
Minnesota, Golden Harbor Plaza (Inchon, Korea), Bengals Stadium (Cincinnati,
Ohio), Yamanashi Prefecture Horticulture Museum (Tokyo), and many other major
projects internationally.
RICHARD C. CAPOZZA, DIRECTOR. Mr. Capozza has served as a Director of
the Company since November, 1999. Since September 1999 Mr. Capozza has served as
Chairman of the Board of Directors of Boston Innovative Optics, Austin, Texas, a
company engaged in the business of developing new technologies for vision
correction. From 1995 to 1998, he served as President, Chief Operating Officer
and Director of Autonomous Technologies Corp.("ATC") of Orlando, Florida. ATC
develops new technologies for laser vision correction. From 1985 to 1995, Mr.
Capozza served as Executive Vice President and Director of Pilkington Barnes
Hind of Sunnyvale, California, a worldwide manufacturer of contact lenses and
contact lens care products. Mr. Capozza is a graduate of the Executive Program
of Stanford University Business School, received a PhD. in Chemistry from
University of Maryland and a Bachelor of Science in Chemistry from Providence
College.
ANTHONY T. YEUNG, M.D., DIRECTOR. Dr. Yeung has been a Director of the
Company since November, 1999. Since 1989, Dr. Yeung has served as Medical
Director and owner of the Arizona Orthopedic Surgeons which he formed in 1989
and Squaw Peak Surgical Facility in Phoenix, Arizona. Dr. Yeung is a member of
the American Academy of Orthopedic Surgeons, and is a orthopedic surgeon. He is
the
26
<PAGE> 29
Vice Chairman of the American Academy of Minimally Invasive Spinal Medicine and
Surgery. Dr. Yeung is also a consultant and Clinical Director for the Phoenix
Orthopedic Residency Program in Phoenix, Arizona. Dr. Yeung has presented
numerous scientific papers, reports and lectures on the topic of minimally
invasive spinal medicine and surgery. Dr. Yeung received his M.D. from
University of New Mexico, completed his internship at Good Samaritan Hospital in
Phoenix, Arizona, and his residency in general and orthopedic surgery at
Maricopa County (Arizona) General Hospital. Dr. Yeung is also the past president
of the Arizona Orthopedic Society, Arizona Chapter of the Western Orthopedic
Association and Maricopa County Medical Society
ITEM 6. EXECUTIVE COMPENSATION
On June 1, 1998 the Company through its wholly-owned subsidiary, CMIS,
entered into an employment agreement with Jere D. Palazzolo to act as President
and Chief Operating Officer for an initial term of four years. The principal
terms of Mr. Palazzolo's employment agreement are as follows: (i) an annual
salary of $150,000, which may be increased from time to time at the discretion
of the Board of Directors; (ii) stock options to purchase up to 100,000 shares
of the Company's common stock at an exercise price of $1.50 per share, which
options vest ratably over a four year period; (iii) health and disability
insurance coverage; (iv) term life insurance; (v) discretionary bonuses; and
(vi) payment for certain relocation costs not to exceed $10,000,in the event the
Company requires Mr. Palazzolo to relocate. Mr. Palazzolo may not be terminated
without his consent or without due cause unless the Company pays Mr. Palazzolo
an amount equal to his salary for the period beginning on the date of
termination and ending on the date the term of the Agreement would otherwise
expire.
Effective November 5, 1999 the Company and Mr. Palazzolo entered into a
Termination Agreement with respect to Mr. Palazzolo's employment. Pursuant to
the terms of the Termination Agreement, the Company agreed to continue to
compensate Mr. Palazzolo in accordance with the terms of his employment
agreement until such time as the Company is able to buy out Mr. Palazzolo's
agreement. To that end, the Company agreed that in the event of an equity raise
in excess of $800,000, it would pay Mr. Palazzolo a lump sum amount equal to his
salary for the remaining term of his employment agreement.
Effective with the acquisition of VPC, Rogers W. Kirven, Jr. agreed,
pursuant to an oral agreement with the Company, to serve as the Chief Executive
Officer of the Company at an annual salary of $150,000 plus customary benefits.
Effective November 5, 1999 Mr. Kirven resigned as a Director and President of
the Company to pursue other business interests. The Company agreed to pay Mr.
Kirven two (2) months salary as severance
Effective August 1, 1998, David S. Klein entered into an employment
Agreement with Valley Pain Centers, Inc. ("VPC") to act as VPC's President and
Medical Director for an initial term of four (4) years. The principal terms of
Dr. Klein's employment agreement are: (i) an annual salary of $200,000 provided
VPC profits and cash flow are sufficient to pay same; (ii) annual incentive
compensation ranging from 10 percent to 25 percent of VPC's annual pre-tax net
income exceeding $1,000,000; and (iii) health, dental, disability and life
insurance. Dr. Klein may not be terminated without his consent or without due
cause unless VPC pays Dr. Klein a lump sum severance payment in an amount equal
to $120,000 and his incentive compensation through the original term of his
Agreement.
27
<PAGE> 30
Effective November 5, 1999, Dr. Klein agreed to assume, on an interim
basis and for no additional compensation the positions of Chief Executive
Officer and President of the Company left vacant by Messrs. Kirven and
Palazzolo, respectively.
The following table includes information with respect to each person
who served in the capacity of chief executive officer during 1998, and the
Company's other officers whose total annual salary and bonus for the fiscal year
ended June 30, 1999 exceeded $100,000. These named executive officers receive
other personal benefits in amounts less than 10% of their total annual salary
and bonus.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Other Annual LTIP
Name & Principal Position Salary($) Bonus($) Compensation Options/Warrants(3) Payout($)
- --------------------------- -------- ---------- ------------ ------------------- ---------
<S> <C> <C> <C> <C> <C>
Rogers W. Kirven, Jr., CEO (1) $23,077 $-0- $-0- -0- $-0-
John C. Chiu, CEO(2) $0 $-0- $100,000 -0- $-0-
Jere D. Palazzolo, President $130,000 $-0- $-0- -0- $-0-
</TABLE>
(1) Rogers W. Kirven, Jr. served as a Director and the CEO of the Company
from May 6, 1999 until November 5, 1999.
(2) John Chiu served as a Director and the CEO of the Company prior to Mr.
Kirven's employment but did not receive a salary in 1998. However, he
was paid a consulting fee of $100,000 during the year. There is no
ongoing arrangement for his services.
(3) No options were granted or exercised during fiscal 1999.
COMPENSATION OF DIRECTORS
Currently, Directors of the Company receive no compensation. All
directors are entitled to reimbursement for reasonable expenses incurred in the
performance of their duties as members of the Board of Directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OFFICER, DIRECTOR AND AFFILIATE TRANSACTIONS.
The Company in connection with the CMIS acquisition granted warrants to
its shareholders of record to purchase at any time prior to June 30, 2000 one
million eight hundred thousand ($1,800,000) shares of its common stock at an
exercise price of $3.00 per share.
In connection with the VPC acquisition, the Company loaned to David S.
Klein, Rogers W. Kirven, Jr. and certain other individuals $620,000 which was
used by such individuals as part of the consideration to purchase VPC from
Cyber-Care, Inc. These individuals subsequently assigned the note payable with
respect to this loan to VPC. VPC assumed all obligations with respect to the
repayment of the note, and the Company recorded this obligation as additional
consideration for the acquisition of VPC.
On May 11, 1999, David S. Klein, M.D., a prior owner of VPC, loaned the
Company $300,000 for use as working capital. On August 4, 1999, this loan was
28
<PAGE> 31
converted into common stock of the Company at a conversion rate equal to $1.50
per share of common stock (or, 200,000 shares).
The Company leases administrative offices located in Staunton, Virginia
at 13 West Beverly, 2nd Floor from a partnership controlled by Dr. Klein at a
monthly rental of $500 per month. This lease will expire on June 30, 2003.
The Company also leases certain equipment from an entity controlled by
Dr. Klein at a monthly rental of $4,122 per month. The lease will expire on
August 31, 2003.
Dr. Klein is a controlling partner in a partnership that leases a
billing office located in Staunton, Virginia at a monthly rental under the lease
of $5,200 per month. The lease commenced on July 1, 1998 and will expire on June
30, 2003.
In July, 1999, Dr. Chiu entered into an Addendum to the VPC Merger
Agreement whereby the Company redeemed from him 2,251,506 shares of Common Stock
in the Company in exchange for consideration of $10 and warrants to purchase
300,000 shares of the Company's Common Stock at a purchase price of $3.00 per
share. The warrants will vest ratably over the next three years and will expire
on the fifth anniversary from the date of vesting. In addition, vesting is
contingent upon the stockholder recruiting three physicians for the Company. In
connection with the agreement, Dr. Chiu also agreed to certain restrictions on
the transfer of his remaining shares in the Company during the next three years.
Except as described above, there were no transactions, or series of
transactions, during the fiscal 1997 or 1998 nor are there any currently
proposed transactions between the Company, its officers, directors,
shareholders, and affiliates in which amount exceeds $60,000. Conflicts of
interest could arise in the negotiation of the terms of any transaction between
the Company and its shareholders, officers, directors or affiliates. The Company
has no plans or arrangements, including the hiring of an independent third
party, for the resolution of disputes between the Company and such persons, if
they arise. The Company and its shareholders could be adversely affected should
such individuals choose to place their own interests before those of the
Company. No assurance can be given that conflicts of interest will not cause the
Company to lose potential opportunities, profits, or management attention. The
Board of Directors of the Company has adopted a policy regarding transactions
between the Company and any officer, director, or affiliate, including loan
transactions, requiring that all such transactions be approved by a majority of
the independent and disinterested members of the Board of Directors and that all
such transactions be for a bona fide business purpose and be entered into on
terms at least as favorable to the Company as could be obtained from
unaffiliated independent third parties.
TRANSACTIONS WITH PROMOTERS.
On December 7, 1998 the Company entered into a Financial Consulting
Agreement with Worldwide Corporate Finance, a California corporation ("WCF").
Pursuant to the terms of the Consulting Agreement, WCF agreed to provide the
Company with the following services: expansion and growth plans; broker-dealer
liaison; consultation with market makers; advisory and consultation to the
Company; assistance to Company professionals and underwriters; supervising
shareholder and
29
<PAGE> 32
investor relations; and financing services. In consideration for the foregoing
services, the Company agreed to initially pay WCF the sum of $75,000, $5,000 per
month, three hundred thousand (300,000) shares of common stock and within 180
days of the date of the Agreement, an additional one hundred fifty thousand
(150,000) shares of the Company's common stock. Additional fees were to be paid
upon performance. The shares paid to WCF are subject to piggyback registration
rights.
In May of 1999, the Consulting Agreement with WCF was terminated. The
parties agreed to settle all issues between them by delivering the original
75,000 shares valued at $196,875 to WCF which the Company was previously
obligated to pay.
ITEM 8. DESCRIPTION OF SECURITIES
The following statements do not purport to be complete and are
qualified in their entirety by reference to the detailed provisions of the
Company's Certificate of Incorporation, as amended, Bylaws, and Stock Option
Plan, copies of which are filed as exhibits to this documents.
COMMON STOCK. The Company currently is authorized to issue 20,000,000
shares of $.001 par value common stock ("Common Stock"), of which, as of
December 31, 1999, approximately 6,627,627 shares were issued and outstanding.
The holders of Common Stock of the Company are entitled to equal
dividends and distributions per share with respect to the Common Stock when, as
and if declared by the Board of Directors from funds legally available
therefore. No holder of any shares of Common Stock has a pre-emptive right to
subscribe for any securities of the Company, nor are any common shares subject
to redemption or convertible into other securities of the Company. Upon
liquidation, dissolution or winding up of the Company, and after payment of
creditors and preferred stockholders, if any, the assets will be divided
pro-rata on a share-for-share basis among the holders of the shares of Common
Stock. All shares of Common Stock now outstanding are fully paid, validly issued
and non-assessable. Each share of Common Stock is entitled to one vote with
respect to the election of any director or any other matter upon which
stockholders are required or permitted to vote. Holders of the Company's Common
Stock do not have cumulative voting rights, so the holders of more than 50% of
the combined shares voting for the election of directors may elect all of the
directors if they choose to do so, and, in that event, the holders of the
remaining shares will not be able to elect any members to the Board of
Directors.
PREFERRED STOCK. The Company's Certificate of Incorporation authorizes
the issuance of up to 100,000 shares of $.001 par value "blank check" Preferred
Stock, none of which are outstanding. The Board of Directors has the power,
without further action by the holders of the common stock, to designate the
relative rights and preferences of the preferred stock, and to issue the
preferred stock in one or more series as designated by the Board of Directors.
The designation of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive of the interest of the holders of the
common stock or the preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control of the Company without further shareholder action and may adversely
affect the rights and powers, including voting rights, of the holders of common
stock. In certain circumstances, the issuance of preferred stock could depress
the market price of the common stock. The Board of
30
<PAGE> 33
Directors effects a designation of each series of preferred stock by filing with
the Delaware Secretary of State a Certificate of Designation defining the rights
and preferences of each such series. Documents so filed are matters of public
record and may be examined in accordance with procedures of the Delaware
Secretary of State, or copies thereof may be obtained from the Company.
CONVERTIBLE DEBENTURES. In accordance with the merger agreement with
respect to the acquisition of VPC, the Company has agreed to issue, provided
certain earning targets are met, to the VPC Class B Shareholders $3,750,000 in
convertible debentures over a three (3) year period beginning in May 2000. These
convertible notes, if earned, will bear interest at the Applicable Federal Rate
(determined at the date of issuance) and shall be due and payable on the first
anniversary date of their issuance. The debentures are convertible, at the
option of the holder, into common stock of the Company at the rate of $3.00 per
share (or 1,250,000 shares if fully earned). The debentures are secured by a
pledge of the VPC stock owned by the Company. The Company does not believe it
will experience any adverse tax effects as a result of the issuance of these
debentures.
TRANSFER AGENT. The transfer agent for the common stock of the Company
is American Registrar and Transfer Co, Salt Lake City, Utah.
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS.
The Common Stock ("Common Stock") of the Company, par value $.001 per
share, was eligible in June 1998 for trading on the NASDAQ Over-the-Counter
Bulletin Board Service under the symbol "BACK". The Securities and Exchange
Commission (the "SEC") approved new rules requiring companies that utilized the
Over-The-Counter Bulletin Board Service prior to January 4, 1999 to comply with
new reporting requirements. In order to maintain it's listing, the Company was
required to meet these reporting requirements by September 3, 1999. As the
Company has not yet complied with the NASD's Eligibility Rule 6530 (as further
discussed below), the Company's trading symbol was changed to BACKE.
Pursuant to NASD Eligibility Rule 6530 (the "Rule") issued on January
4, 1999, issuers who do not make current filings pursuant to Sections 13 and
15(d) of the Securities Act of 1934 are ineligible for listing on the NASDAQ
Over-the-Counter Bulletin Board. Pursuant to the Rule, issuers who are not
current with such filings are subject to de-listing pursuant to a phase-in
schedule depending on each issuer's trading symbol as reported on January 4,
1999. The Company's trading symbol in June, 1998 was BACK. Therefore, pursuant
to the phase-in schedule, the Company was subject to de-listing on September 3,
1999. One month prior to an issuer's de-listing date, non-complying issuers have
their trading symbol appended with an "E". As a result, the Company's trading
symbol was changed to BACKE on August 3, 1999.
The Company is not currently in compliance with the Rule, and in the
past, has not made filings pursuant to Sections 13 and 15(d) of the Securities
Act of 1934. The Company has filed this Registration Statement on Form 10-SB in
order to
31
<PAGE> 34
become a "reporting" company and therefore comply with the Rule. As a result, on
September 3, 1999, the Company's Common Stock was de-listed and will remain
de-listed until such time as the Securities and Exchange Commission has reviewed
the Company's Form 10-SB and has stated that it has no further comments. Once
the Company has complied with the Rule, it will once again become eligible for
listing on the NASDAQ Over-the-Counter Bulletin Board and will seek to be
reinstated on the NASDAQ Over-the-Counter Bulletin Board.
Set forth below for each quarter within the Company's last two fiscal
years and for the two month period ending November 30, 1999 are the high and low
bid information with respect to the Company's common stock. Because the Company
engages in over-the-counter market quotations, these quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions
PER SHARE OF
COMMON STOCK
----------------------
PERIOD: HIGH LOW
- ------- ------ -----
March 1998 to Sept. 1998 n/a n/a
Oct. 1998 - Dec. 1998 $2.80 $2.40
Jan. 1999 - March 1999 $3.60 $2.00
April 1999 - June 1999 $4.00 $2.40
July 1999 - Sept. 1999 $3.50 $1.60
Oct. 1999 - Dec. 1999 $2.60 $0.74
The Company presently has options, warrants and other convertible
instruments outstanding which may be converted into 3,226,559 shares of its
common stock. In addition, there are approximately 3,153,333 shares that could
be sold pursuant to Rule 144 of the Securities Act and approximately 2,100,000
shares that are subject to "piggy-back" registration rights.
The Company has not paid any cash dividends since its inception and
does not anticipate paying cash dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS.
On or about November 22, 1999, VPC and Dr. David S. Klein received a
letter of inquiry from Trigon Blue Cross Blue Shield ("Trigon"), a third party
payor representing approximately 15 percent of the Company's billings. The
Trigon letter indicated that Trigon had identified at least six (6) significant
issues of concern which according to their analysis amounted to a quantified
estimate of overpayment equaling approximately $618,000. The letter also stated
that Trigon had identified other issues of concern for which there was
insufficient information to determine an estimate overpayment. While no
assurance can be given at this time, the Company does not believe, based upon
its initial investigation, it has any liability with respect to this matter.
Both Trigon and the Company recognize that their respective findings and
analysis are preliminary and that additional information is needed to conclude
this matter. Trigon and the Company have agreed to work together to resolve
these issues in an expedient manner.
32
<PAGE> 35
If it is ultimately determined that the Company has been overpaid with
respect to its Trigon billings, this would result in a material adverse impact
on the Company and its business.
On December 22, 1999 the Company's subsidiary, Valley Pain Centers,
Inc. ("VPC") was served with a summons in a civil action brought by Neural
Function Analysis, P.C. ("NFA"). The action was brought for an alleged breach of
a consulting Agreement entered into between NFA and a predecessor company of
VPC, for failure to make payments in accordance with the Consulting Agreement.
The Company disputes the allegations of NFA and does not believe it
will incur any significant cost or expense with respect to this matter.
Except as indicated above, as of December 31, 1999 the Company is not a
party to any legal action nor is it aware of any threatened litigation.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The financial statements for BackGenesis for the development period
March 6, 1998 through June 30, 1998 were audited by Prichett, Siler & Hardy,
P.C. The financial statements for Valley Pain Centers, Inc. ("VPC") for the year
ended December 31, 1997 were audited by Arthur Andersen. The Company engaged BDO
Seidman, LLP in May 1999 to audit the consolidated financial statements for
BackGenesis, Inc. and it's subsidiaries for the year ended June 30, 1999 and VPC
for the year ended December 31, 1998.
The reports of BDO Seidman, LLP on the financial statements of the
Company as of June 30,1999 and the report of Pritchett, Siler & Hardy, P.C. on
the financial statements of the Company as of June 30,1998 did not contain an
adverse opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
of the Company's financial statements for each of the two years ended June 30,
1999 and in the subsequent interim period, there were no disagreements with BDO
Seidman, LLP or Pritchett, Siler & Hardy, P.C. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures, which disagreements, if not resolved to the satisfaction of BDO
Seidman, LLP or Pritchett, Siler & Hardy, P.C. would have caused it to make
reference to the subject matter of the disagreement in their reports.
Similiarly, The reports of BDO Seidman, LLP on the financial statements
of VPC as of December 31, 1998 and the report of Arthur Andersen, LLP on the
financial statements of the Company as of December 31, 1997 did not contain an
adverse opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
of the Company's financial statements for each of the two years ended December
31, 1998 and in the subsequent interim period, there were no disagreements with
BDO Seidman, LLP or Arthur Andersen, LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope and procedures,
which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP or
Arthur Andersen, LLP would have caused it to make reference to the subject
matter of the disagreement in their reports.
Arthur Andersen was consulted and engaged in July 1999 to restate the
VPC 1997 financial statements. The restatement was to correct the understatement
of
33
<PAGE> 36
accounts receivable at December 31, 1997. BDO Seidman was consulted as to the
effects of the change on the 1998 VPC financial statements. The 1997 VPC
restated financial statements were issued on August 20, 1998.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On June 23, 1998, the Company (which at the time was known as Galaxy
Ventures, Inc.) acquired all of the outstanding common stock of Chiu Minimally
Invasive Spine Surgery, Inc. a California corporation (CMIS) in a business
combination described as a "reverse acquisition." As part of the reorganization,
the Company issued 5,000,000 shares of its "restricted" (as that term is defined
under Rule 144 of the Securities Act of 1933) common stock to the shareholders
of CMIS in exchange for all of the outstanding shares of CMIS. Such shares
include the shares owned by officers and directors of the Company as set forth
in the Section "Security Ownership of Certain Beneficial Owners and Management"
hereunder. This issuance was an isolated transaction not involving a public
offering conducted pursuant to Section 4(2) of the Securities Act of 1933.
In June, 1998, the Company issued 1,333,333 shares of its Common Stock
in a private placement exempt from registration pursuant to Section 4(2) of the
Act. Net proceeds of this offering totaled $1,919,142, after deducting offering
expenses of $80,858.
In May 1999, the Company terminated a consulting agreement with a third
party and agreed, as part of the termination, to issue the consultant 75,000
shares of Company Common Stock that were due in December of 1998. These shares
were issued in August 1999. The issuance was an isolated transaction not
involving a public offering conducted pursuant to Section 4(2) of the Securities
Act of 1933.
In August, 1999, the Company sold to accredited investors 500,800
shares of Common Stock (including 200,000 shares issued to David S. Klein) at a
purchase price of $1.50 per share in a private offering exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The Company received
proceeds of approximately $681,000 net of offering expenses of approximately
$60,000.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits
indemnification of directors, officers, employees and agents of a corporation
against expenses (including attorneys' fees) judgments, fines and amount paid in
settlement actually and reasonably incurred by the person with an action, suit
or proceeding, under certain conditions and subject to certain limitations.
Reference is made to Article XI of the Company's Bylaws which provide for
indemnification by the Company in the manner and to the full extent permitted by
Delaware General Corporation Law.
The Company currently maintains Directors and Officers Liability
Insurance policies with limits aggregating $3,000,000.
34
<PAGE> 37
PART F/S
FINANCIAL STATEMENTS. The following Financial Statements required by this Item
are included at the end of this report beginning on Page F-1 as follows:
Index to Financial Statements F-1
Report of Independent Certified Public Accountants
BDO Seidman, LLP
Pritchett, Siler & Hardy, P.C.
BackGenesis, Inc. and Subsidiaries as of June 30, 1998 and
1999 and for the period from inception (March 6, 1998) to
June 30, 1998 and the year ended June 30, 1999 F-2
Pro Forma combined Financial Information for the year ended
June 30, 1999 F-28
BackGenesis, Inc. and Subsidiaries as of September 30, 1999 and
for the three months then ended F-30
Valley Pain Centers, Inc. (a wholly owned subsidiary of Medical
Industries of America) ("Successor Company") as of December 31,
1998 and for the period from the commencement of operations
(September 1, 1998) through December 31, 1998, and David S.
Klein, M.D., P.C. ("Predecessor Company") for the period from
January 1, 1998 to August 31, 1998 F-37
PART III
ITEMS 1 AND 2. INDEX AND DESCRIPTION TO EXHIBITS.
<TABLE>
<S> <C>
Exhibit 1 1.1 Agreement and Plan of Reorganization between
Galaxy Ventures, Inc. and Chiu Minimally
Invasive Spine Surgery, Inc. dated June 4, 1998.
1.2 Agreement and Plan of Merger between Minimally
Invasive Surgery Corporation and MIS Acquisition
Company I, Inc. and Valley Pain Centers, Inc.
dated May 1999.
Exhibit 3 3.1 Articles of Incorporation, as amended to date
3.2 Bylaws
Exhibit 4 Instruments defining rights of security holders.
The rights of security holders are set forth in the
Articles of Incorporation, as amended, as set forth
in Exhibit 3.1 and in The Agreement and Plan of
Merger with VPC, as set forth in Exhibit 1.2
Exhibit 10 Material Contracts
</TABLE>
35
<PAGE> 38
10.1 Employment Agreement effective August 1, 1998
between David S. Klein, M.D. and BackGenesis, Inc.
10.2 Employment Agreement effective August 1, 1998
between David S. Klein, M.D. and Valley Pain
Centers, Inc.
Exhibit 27 Financial Data Schedule
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
BACKGENESIS, INC.
Date: December 31, 1999 By: /s/ David S. Klein, M.D.
-------------------- --------------------------------
Chief Executive Officer and President
Directors
/s/ John C. Chiu, M.D.
- ------------------------------------
/s/ David S. Klein
- ------------------------------------
/s/ Anthony T. Yeung, M.D.
- ------------------------------------
/s/ Stanley L. Chiu
- ------------------------------------
/s/ Richard C. Capozza
- ------------------------------------
36
<PAGE> 39
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
BDO Seidman, LLP F-2
Pritchett, Siler & Hardy, P.C. F-3
BackGenesis, Inc. and Subsidiaries as of June 30, 1998 and
1999 and for the period from inception (March 6, 1998) to
June 30, 1998 and the year ended June 30, 1999 F-4
Pro Forma combined Financial Information for the year ended
June 30, 1999 F-28
BackGenesis, Inc. and Subsidiaries as of September 30, 1999 and
for the three months then ended F-30
Valley Pain Centers, Inc. (a wholly owned subsidiary of Medical
Industries of America) ("Successor Company") as of December 31,
1998 and for the period from the commencement of operations
(September 1, 1998) through December 31, 1998, and David S.
Klein, M.D., P.C. ("Predecessor Company") for the period from
January 1, 1998 to August 31, 1998 F-37
F-1
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
BackGenesis, Inc.
Ocoee, Florida
We have audited the accompanying consolidated balance sheet of BackGenesis, Inc.
and Subsidiaries as of June 30, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Minimally Invasive
Surgery Corporation and Subsidiaries as of June 30, 1999, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Orlando, Florida
August 27, 1999, except for Note 1 which is dated December 1, 1999
F-2
<PAGE> 41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Minimally Invasive Surgery Corporation
Thousand Oaks, CA
We have audited the accompanying consolidated balance sheet of Minimally
Invasive Surgery Corporation and Subsidiary as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows from
inception on March 6, 1998 through June 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the consolidated financial position of Minimally Invasive
Surgery Corporation and Subsidiary as of June 30, 1998, and the consolidated
results of its operations and its cash flows for the period from inception
through June 30, 1998 in conformity with generally accepted accounting
principles.
/s/ Pritchett, Siler & Hardy, P.C.
August 17, 1998
Salt Lake City, Utah
F-3
<PAGE> 42
BACKGENESIS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
JUNE 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 296,915 $1,929,072
Restricted cash (Note 9) 277,500 --
Accounts receivable, net of allowance for doubtful accounts of
$291,542 and $-0- 1,103,498 --
Other current assets 3,748 --
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,681,661 1,929,072
PROPERTY AND EQUIPMENT, net (Note 5) 266,122 7,341
GOODWILL, net of accumulated amortization of $36,853 and $-0- (Note 3) 4,385,332 --
OTHER ASSETS 783 1,830
- --------------------------------------------------------------------------------------------------------------------
$ 6,333,898 $1,938,243
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to stockholder (Note 7) $ 300,000 $ 31,725
Accounts payable (Note 9) 297,690 16,867
Accrued expenses (Note 6) 464,772 3,796
Current portion of capital lease obligation (Note 8) 14,667 --
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,077,129 52,388
CAPITAL LEASE OBLIGATION, less current portion (Note 8) 54,311 --
DEPOSITS ON STOCK SUBSCRIPTIONS (Note 9) 277,500 --
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,408,940 52,388
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock, $.001 par value; 100,000 shares authorized; no
shares issued and outstanding -- --
Common stock, $.001 par value; 20,000,000 shares authorized; 8,363,333 and
8,133,333 shares issued and outstanding 8,363 8,133
Additional paid-in capital 6,647,179 1,941,009
Accumulated deficit (1,561,864) (63,287)
Common stock receivables (Note 3) (168,720) --
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 4,924,958 1,885,855
- --------------------------------------------------------------------------------------------------------------------
$ 6,333,898 $1,938,243
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 43
BACKGENESIS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET PATIENT SERVICE REVENUE $ 456,998 $ --
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
General and administrative expenses 1,078,507 63,165
Compensation and benefits 873,962 --
Rescinded practices net operations (Note 3) 262,380 --
Management and directors' fees (Note 12) 142,000 --
Depreciation and amortization 72,326 122
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,429,175 63,287
- --------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,972,177) (63,287)
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (4,443) --
Interest income 63,401 --
Loss on sale of securities (Note 4) (13,964) --
- --------------------------------------------------------------------------------------------------------------------
44,994 --
- --------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (1,927,183) (63,287)
INCOME TAX BENEFIT (Note 10) 428,606 --
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,498,577) $ (63,287)
====================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,215,785 5,463,399
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (.18) $ (.01)
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 44
BACKGENESIS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
------------------------ PAID-IN STOCK ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCEPTION, March 6, 1998 -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock 1,000 30,000 -- -- -- 30,000
Record capitalization of Company
and issuance of common stock
related to reverse merger between
Galaxy Ventures, Inc. and Chiu
Minimally Invasive Spine Surgery,
Inc. (Note 1) 6,799,000 (23,200) 23,200 -- -- --
Sale of common stock, net of
offering costs (Note 9) 1,333,333 1,333 1,917,809 -- -- 1,919,142
Net loss -- -- -- -- (63,287) (63,287)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 8,133,333 8,133 1,941,009 -- (63,287) 1,885,855
Issuance of common stock for
acquisition of assets of medical
practices (Note 3) 80,000 80 199,920 -- -- 200,000
Grant of options for acquisition of
assets of medical practices
(Note 3) -- -- 44,800 -- -- 44,800
Issuance of common stock for
acquisition of Valley Pain
Centers, Inc. (Notes 1 and 3) 1,500,000 1,500 4,498,500 -- -- 4,500,000
Shares to be returned to the
Company treasury (Note 3) (1,350,000) (1,350) 1,350 -- -- --
Common stock receivable for
return of shares from
rescission of acquisition of
assets of medical practices
(Note 3) -- -- -- (168,720) -- (168,720)
Cancellation of options related to
rescission of acquisition of
assets of medical practices
(Note 3) -- -- (38,400) -- -- (38,400)
Net loss -- -- -- (1,498,577) (1,498,577)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 8,363,333 $ 8,363 $6,647,179 $ (168,720) $(1,561,864) $ 4,924,958
============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 45
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,498,577) $ (63,287)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 72,326 122
Bad debts 204,542 --
Loss on sale of marketable debt securities 13,964 --
Gain on rescission of acquisition of assets of medical practices (53,941) --
Changes in assets and liabilities, net of acquisitions and rescissions:
Purchase of marketable debt securities (1,911,558) --
Proceeds from sale of marketable debt securities 1,897,594 --
Accounts receivable 213,777 --
Management fees receivable from medical practices (146,710) --
Other current assets (3,139) --
Other assets 2,027 --
Accounts payable 239,608 12,494
Accounts payable due to medical practices 41,215 --
Accrued expenses 413,573 3,796
Deferred taxes (439,000) --
- --------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (954,299) (46,875)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in Valley Pain Centers, Inc. acquisition (616,908) --
Purchase of property and equipment (162,134) (7,343)
Cash paid for acquisition of assets of medical practices (160,000) --
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (939,042) (7,343)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits on stock subscriptions 277,500 --
Increase in restricted cash (277,500) --
Payments on capital lease obligation (7,091) --
Proceeds from note payable to stockholders 300,000 31,725
Payments on note payable to stockholder (31,725) --
Payment of offering costs -- (78,435)
Proceeds from common stock issuance -- 2,030,000
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 261,184 1,983,290
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,632,157) 1,929,072
CASH AND CASH EQUIVALENTS, beginning of year 1,929,072 --
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 296,915 $1,929,072
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid for interest during the year $ 4,443 $ --
Acquisition of furniture and equipment through assumption of capital lease
obligation $ 76,069 $ --
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE> 46
1. NATURE OF BackGenesis, Inc., formerly named Minimally
ORGANIZATION Invasive Surgery Corporation, and Galaxy
Ventures, Inc. through its wholly-owned
subsidiaries, Chiu Minimally Invasive Spine
Surgery Medical Centers, Inc. (CMIS) and
Valley Pain Centers, Inc. (VPC) (collectively
"the Company"), is in the business of
acquiring and operating medical practices. At
June 30, 1999, the Company operated pain
management clinics located in Virginia. The
Company operates in one business segment.
CORPORATE ORGANIZATION AND REVERSE
ACQUISITION
Galaxy Ventures, Inc. ("Galaxy"), was
organized in 1992, now a Delaware
corporation, had not commenced operations and
had 1,800,000 shares of common stock
outstanding prior to its merger with CMIS
described below.
CMIS was formed under the laws of the State
of California on March 6, 1998 and issued
1,000 shares of common stock with a par value
of $30 per share. In June 1998, CMIS merged
with and into Galaxy. The merger agreement
provided for the issuance of 5,000,000 shares
of Galaxy's common stock in exchange for all
the issued and all the outstanding shares of
common stock of CMIS.
Upon the consummation of the merger, the
former stockholder of CMIS obtained
approximately 67% voting rights of Galaxy.
Although CMIS merged into Galaxy, the
transaction was accounted for as a purchase
of Galaxy by CMIS (a reverse acquisition in
which CMIS is considered the acquirer for
accounting purposes) since the stockholder of
CMIS obtained a majority of the voting rights
of Galaxy as a result of this transaction.
Accordingly, the historical financial
statements of the Company for the periods
prior to the time of the merger are those of
CMIS. The historical operations and related
financial statements of Galaxy were
insignificant. Upon the merger with CMIS,
Galaxy changed its name to Minimally Invasive
Surgery Corporation and had 6,800,000 shares
of common stock outstanding. The Company was
a development stage company from inception
through May 1, 1999, the effective date of
its acquisition of Valley Pain Centers, Inc.
as described below.
THREE ACQUISITIONS AND RELATED RESCISSIONS
The Company acquired the assets of three
medical practices during 1998 through the
payment of $160,000 in cash, issuance of
80,000 shares of common stock and 140,000
options. These acquisitions were rescinded in
June 1999 as further described in Note 3.
F-8
<PAGE> 47
MERGER WITH VALLEY PAIN CENTERS, INC.
Effective May 1, 1999, the Company acquired
Valley Pain Centers, Inc. (VPC), a previously
unrelated entity. As described in greater
detail in Note 3, the Company acquired all of
the outstanding common stock in exchange for
1,500,000 shares of its own common stock and
$620,000 cash.
2. SUMMARY OF PRINCIPLES OF CONSOLIDATION
SIGNIFICANT
ACCOUNTING The consolidated financial statements include
POLICIES the accounts of Minimally Invasive Surgery
Corporation and its wholly-owned
subsidiaries, CMIS and VPC.
All significant intercompany accounts and
transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all short-term
investments with original maturities of three
months or less to be cash equivalents.
INVESTMENTS IN MARKETABLE DEBT SECURITIES
The Company records its investments under
Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115").
Under SFAS 115, all of the Company's
securities are classified as trading
securities and are carried at market value,
with the resulting unrealized gain or loss
reflected in the statement of operations.
Market values of the trading securities have
been determined using market quotations. The
cost of investments sold is determined on the
specific identification method.
ACCOUNTS RECEIVABLE
Accounts receivable consists of receivables
from patients and third-party payers for
medical services provided by the Company.
Such amounts are recorded net of estimated
contractual adjustments. Contractual
adjustments result from the differences
between the rates charged by the Company for
services performed and the rates allowed by
the third-party payers.
F-9
<PAGE> 48
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Depreciation expense is provided using the
straight-line method over the estimated
useful lives of the furniture and equipment.
Leasehold improvements are amortized over the
shorter of the estimated useful lives or over
the remaining lease term.
GOODWILL
The Company amortizes capitalized goodwill on
a straight-line method over an estimated
useful life of 20 years.
ADVERTISING COSTS
Advertising costs are charged to operations
when incurred. Advertising costs charged to
operations were $33,164 and $-0- during 1999
and 1998, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates impairment of
long-lived assets in accordance with
Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). SFAS 121
requires impairment losses to be recorded on
long-lived assets used in operations and
intangible assets when indications of
impairment are present and the undiscounted
cash flows estimated to be generated by those
assets are less than the assets' carrying
amount.
REVENUE RECOGNITION
Patient service revenues are recognized when
earned and are reported at the estimated
realizable amounts from patients, third-party
payers (which include managed care providers,
commercial insurance carriers, and health
maintenance organizations) and others for
services rendered. Additionally, the Company
participates in agreements with managed care
organizations to provide services at
negotiated rates or for capitated payments.
Provisions for third-party payer adjustments
are estimated and recorded in the period in
which the services are provided. Any
adjustments to the estimated amounts are
recorded in the period in which the revised
amount is determined.
F-10
<PAGE> 49
LOSS PER SHARE
Basic loss per share amounts are computed
based upon the weighted-average number of
common shares outstanding. Potential common
shares are not considered in the calculation
of diluted loss per share because their
inclusion would be antidilutive. Potential
common shares consist of 225,000 options (see
Note 9), 1,800,000 common stock warrants (see
Note 9) and the 1,250,000 shares underlying
convertible debentures related to the VPC
acquisition contingent consideration (see
Note 3).
CONCENTRATION OF CREDIT RISK
The Company extends credit to patients
covered by insurance programs, governmental
programs such as Medicare and Medicaid and
private insurers. The Company manages credit
risk with the various public and private
insurance providers as appropriate.
Allowances for uncollectible accounts have
been made for potential losses, where
appropriate.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities at
the date of the financial statements and the
reported amounts of revenues and expenses
during the reporting period. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The respective carrying value of certain
on-balance-sheet financial instruments
approximated their fair values. Fair value
estimates discussed herein are based upon
certain market assumptions and pertinent
information available to management. These
financial instruments include cash and cash
equivalents, accounts receivables, accounts
payable, accrued expenses and deposits on
stock subscriptions. Fair values were assumed
to approximate carrying values for these
financial instruments since they are short
term in nature and their carrying amounts
approximate fair values or they are
receivable or payable on demand. The fair
values of the Company's notes payable, which
approximate their carrying values, are
estimated based upon the quoted market prices
for the same or similar debt instruments or
on the current rates offered to the Company
for debt of the same remaining maturities.
F-11
<PAGE> 50
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 requires
companies to recognize all derivative
contracts as either assets or liabilities in
the balance sheet and to measure them at fair
value. If certain conditions are met, a
derivative may be specifically designated as
a hedge, the objective of which is to match
the timing of gain or loss recognition on the
hedging derivative with the recognition of
(i) the changes in the fair value of the
hedged asset or liability that are
attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted
transaction. For a derivative not designated
as a hedging instrument, the gain or loss is
recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters
or fiscal years beginning after June 15,
2000.
Historically, the Company has not entered
into derivatives contracts to hedge existing
risks or for speculative purposes.
Accordingly, the Company does not expect
adoption of the new standard on July 1, 2000
to affect its financial statements.
RISKS AND UNCERTAINTIES
The Company's primary risk and uncertainty is
its ability to retain competent physicians
capable of performing the required medical
procedures and whose skills demonstrate the
current trends of pain treatment. In
addition, the Company's business may be
affected by continuing changes in the health
insurance industry such as legislation and
changes in health maintenance organizations.
RECLASSIFICATIONS
Certain items have been reclassified in the
1998 financial statements to conform to the
1999 presentation.
F-12
<PAGE> 51
3. ACQUISITIONS ACQUISITION OF ASSETS OF MEDICAL PRACTICES
In November and December 1998, the Company
acquired certain assets and assumed certain
liabilities of three separate medical
practices and entered into management
agreements with the sellers to provide
practice management services. Under the terms
of the management agreements, the Company was
to receive a percentage of patient billings
as a management fee and was required to pay
all operating expenses of the practices
except for the practicing physicians'
salaries.
The acquisitions were recorded under the
purchase method of accounting, and the excess
of the fair value of net assets acquired over
the purchase price was recorded as a
reduction of certain long-term assets, which
was later reversed upon the rescission of
these acquisitions, as discussed below. The
aggregate purchase price, and the allocation
thereof, of the net assets of the three
practices is summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C>
Cash $ 160,000
80,000 shares of Company common stock 200,000
Options for 140,000 shares of Company common
stock 44,800
--------------------------------------------------------------------------------
Total consideration paid 404,800
--------------------------------------------------------------------------------
Fair value of assets acquired 483,185
Less liabilities assumed (76,069)
--------------------------------------------------------------------------------
Net assets acquired 407,116
--------------------------------------------------------------------------------
Excess of net assets acquired over cost $ 2,316
================================================================================
</TABLE>
The Company's common stock was valued at
$2.50 per share, the quoted market price on
the date the terms of the acquisitions were
agreed to. The value of the stock options
were computed at the same date of the grant
using the Black-Scholes option-pricing model
with the following assumptions: no dividend
yield; an expected life of eight years;
expected volatility of 71% and risk-free
interest rate of 5.75%.
RESCISSION OF THREE ACQUISITIONS
In June 1999, each of the three asset
purchase agreements and the related
management agreements were rescinded.
Pursuant to the rescission agreements, the
practice owners were to retain the cash
F-13
<PAGE> 52
paid to them upon the acquisition, were to
return to the Company's treasury 60,000
shares of the Company's common stock (20,000
shares from the original purchase price were
retained) and all but 20,000 of the stock
options previously issued to the practice
owners were canceled. As of June 30, 1999,
the 60,000 shares of common stock had not
been returned to the Company, and the fair
value of these shares, based on the quoted
market price on the effective date of the
rescission, has been recorded in a contra
equity account labeled common stock
receivable, in the accompanying consolidated
financial statements. In addition, the
Company surrendered management fees
receivable in the amount of $146,710,
returned property and equipment of $50,000,
was relieved of the obligation to repay
accounts payable to the practices in the
amount of $41,215 and reversed the effect of
the initial excess of the net assets acquired
over the related cost of $2,316. A net gain
on the three rescissions in the amount of
$53,941 was recognized by the Company.
The Company has combined its revenue,
operating expenses and the related gain on
the rescission of these acquisitions in its
consolidated statement of operations under
the description of rescinded practices net
operations, the components to which are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
<S> <C>
Management fee income $ 146,710
Operating expenses (463,031)
--------------------------------------------------------------------------------
Loss from operations (316,321)
Net gain on rescissions 53,941
--------------------------------------------------------------------------------
Rescinded practices net operations $ (262,380)
================================================================================
</TABLE>
ACQUISITION OF VALLEY PAIN CENTERS, INC.
Valley Pain Centers, Inc. (f/k/a David S.
Klein, M.D., P.C., a Virginia corporation) is
headquartered in Staunton, Virginia and
operates four pain management clinics located
throughout the state. In September 1998, VPC
was acquired by Cyber-Care, Inc. (f/k/a
Medical Industries of America, Inc.), an
unrelated publicly-owned company. Cyber-Care,
Inc. owned and operated VPC as a wholly-owned
subsidiary until April 30, 1999.
On April 30, 1999, Cyber-Care, Inc. sold all
the outstanding stock
F-14
<PAGE> 53
of VPC to its former owner, Dr. David S.
Klein, and an investor group (collectively
"the Interim Owners") for consideration which
included cash of $620,000 borrowed under a
note payable from the Company and stock of
Cyber-Care, Inc. previously held by the
Interim Owners.
Effective May 1, 1999, the Company acquired
all the outstanding common stock of VPC from
the Interim Owners for $4,500,000 consisting
of 1,500,000 shares of Company common stock
valued at $3.00 per share, the quoted market
price on the date the terms of the
acquisition were agreed to. The Interim
Owners are also entitled to receive up to a
maximum $3,750,000 in contingent
consideration based on the future earnings of
the Company payable in debentures convertible
into a minimum of 1,250,000 shares of common
stock. Contingent consideration to be issued,
if any, will be treated as additional
purchase price at the time of the issuance.
As of June 30, 1999, the Company had not
issued the 1,500,000 shares of common stock
to the Interim Owners; however, the
accompanying consolidated financial
statements have been adjusted to reflect the
issuance and related value of these shares.
Simultaneous to the VPC acquisition, the
Company, through VPC, assumed the $620,000
note payable from the Interim Owners payable
to the Company. The Company recorded the
assumption of this liability by VPC to itself
as additional purchase price related to the
VPC acquisition.
The acquisition was recorded using the
purchase method of accounting. The excess of
the purchase price over the fair value of net
assets acquired was recorded as goodwill on
the Company's balance sheet as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C>
Total consideration paid $ 5,120,000
Less fair value of assets acquired (1,225,432)
Liabilities assumed 527,617
--------------------------------------------------------------------------------
Excess of cost over net assets acquired $ 4,422,185
================================================================================
</TABLE>
The VPC acquisition agreement also provides
for a stock price guarantee to the Interim
Owners. If the average of the daily closing
prices of the Company's common stock for the
period from May 7, 2000 through May 6, 2001
is less than $3.00 per share, the Company has
agreed to issue additional shares to the
Interim Owners sufficient to equal the
difference between the 1,500,000 shares and
the original $4,500,000 purchase price
divided by the average closing price of
Company common stock for the period
F-15
<PAGE> 54
from May 7, 2000 through May 6, 2001.
The VPC acquisition agreement also provides
for the return of 1,350,000 shares of the
Company's common stock from the Company's
founding shareholder. These shares will be
canceled upon their return to the Company.
The accompanying consolidated financial
statements have been adjusted to reflect the
cancellation of these shares as of the date
of the VPC acquisition.
RETURN OF COMPANY SHARES AFTER YEAR END
Pursuant to an addendum dated July 28, 1999
to the VPC acquisition agreement, the
Company's founding shareholder agreed to
return an additional 2,251,506 shares of
common stock in exchange for total
consideration of $10 in cash and contingent
warrants to purchase 300,000 shares of
Company common stock, the issuance of which
is contingent upon the successful recruitment
of three physicians by the shareholder, as
defined. The Company intends to retire the
2,251,506 shares upon their return to the
Company. The warrants have an exercise price
of $3 per share and become exercisable
ratably over three years and shall expire on
the fifth anniversary of the date the
warrants become exercisable. In addition, the
shareholder entered into an agreement with
the Company to restrict the sale of his
Company stock for three (3) years.
Specifically, the shareholder agreed that no
sales or transfers (other than gifts) would
be made with respect to his Company stock for
a period of one year beginning July 28, 1999.
Thereafter, he would be entitled to sale
and/or transfer 465,000 shares during the
period beginning July 28, 2000 through July
27, 2001, 465,000 shares during the following
one year period and the remainder at any time
after July 27, 2002.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following summarized unaudited pro forma
consolidated results of operations for the
Company, and its subsidiaries, CMIS and VPC,
have been prepared as if the acquisition of
VPC had occurred at the beginning of the
respective periods presented and includes pro
forma adjustments for interest, depreciation,
amortization and income taxes:
F-16
<PAGE> 55
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 3,338,168 $ 3,539,624
Net income (loss) $ (1,194,324) $ 438,250
Net income (loss) per common share - basic and $
diluted $ (.14) .08
================================================================================
</TABLE>
The pro forma consolidated results do not
purport to be indicative of results that
would have occurred had the acquisitions been
in effect for the periods presented, nor do
they purport to be indicative of the results
that will be obtained in the future.
4. MARKETABLE The Company acquired and disposed of its
DEBT SECURITIES portfolio of U.S. Treasury securities
during the year ended June 30, 1999.
The cost, proceeds from the sale and the
realized loss is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
<S> <C>
Cost of marketable debt securities $ 1,911,558
Proceeds from sale of portfolio (1,897,594)
--------------------------------------------------------------------------------
Loss on sale of securities $ 13,964
================================================================================
</TABLE>
5. PROPERTY AND Property and equipment consist of the
EQUIPMENT following:
<TABLE>
<CAPTION>
JUNE 30, USEFUL LIVES 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment 5 years $ 291,987 $ 7,343
Leasehold improvements 5 years 9,610 -
--------------------------------------------------------------------------------
301,597 7,343
Less accumulated depreciation 35,475 2
--------------------------------------------------------------------------------
$ 266,122 $ 7,341
================================================================================
</TABLE>
Depreciation and amortization expense related
to property and equipment for the years ended
June 30, 1999 and 1998 was $35,473 and $122,
respectively.
6. ACCRUED As of June 30, 1999 and 1998, the Company had
EXPENSES accrued expenses of $464,772 and $3,796,
respectively, including $250,000 at June 30,
1999 related to a legal settlement with a
physician who was terminated by the Company
in June 1999. The settlement provides for 12
equal monthly payments and is secured by
shares of Company common stock.
7. NOTES PAYABLE TO The note payable to stockholder at June 30,
STOCKHOLDERS 1999 consists of a $300,000
F-17
<PAGE> 56
working capital loan from a stockholder and
the prior owner of VPC with principal and
interest at 10% payable on demand. This note
was converted to common stock upon the
closing of the Company's private placement in
August 1999 (see Note 9).
The note payable to stockholder balance of
$31,725 at June 30, 1998 was payable to the
founding stockholder on demand and accrued
interest at 10% per annum. The entire balance
of this note was repaid in 1998.
8. LEASES During 1999, the Company entered into a lease
for computer equipment under an agreement
classified as a capital lease with monthly
payments of principal and interest of
approximately $1,900 payable through August
2004. The equipment was recorded at a cost of
$76,069 and had accumulated depreciation and
depreciation expense as of and for the year
ended June 30, 1999 of $11,410. The lease is
collateralized by the underlying piece of
equipment. Interest expense on this
instrument during the year ended June 30,
1999 totaled $4,443. The interest rate
imputed on this lease is 19.33%.
The Company leases office space and equipment
with unrelated parties. These leases expire
between July 1999 and November 2003. Rent
expense for these operating leases for the
years ended June 30, 1999 and 1998 was
$52,414 and $-0-, respectively.
The Company also leases office space and
equipment with certain of its stockholders.
These leases expire between June 2003 and
November 2023. Included in operating lease
commitments below are commitments under these
related party leases of $210,816, $206,059,
$206,059, $206,059, $68,243, and $1,166,400
for the years ending June 30, 2000 through
2004 and thereafter, respectively. Rent
expense under these related party leases
totaled $56,178 and $-0- for the years ended
June 30, 1999 and 1998, respectively.
Future minimum lease payments under the
capital lease and the operating leases are as
follows:
F-18
<PAGE> 57
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 23,000 $ 353,000
2001 23,000 300,000
2002 23,000 250,000
2003 23,000 236,000
2004 4,100 93,000
Thereafter -- 1,166,000
--------------------------------------------------------------------------------
Total minimum lease payments 96,100 2,398,000
Amount representing interest (27,122) --
--------------------------------------------------------------------------------
Present value of net minimum lease payments $ 68,978 $ 2,398,000
--------------------------------------------------------------------------------
</TABLE>
9. STOCKHOLDERS' EQUITY PREFERRED STOCK
The Company's articles of incorporation
authorizes the issuance of up to 100,000
shares of $.001 par value preferred stock.
The Company's Board of Directors has the
power, without further action by the common
stockholders, to designate rights and
privileges to the preferred shares, such as
preferences to liquidation, redemption and
conversion rights, voting rights and
dividends. The Board has taken no action with
respect to the preferred shares during the
years ended June 30, 1999 or 1998.
SALE OF COMMON STOCK
In June 1998, the Company sold 1,333,333
shares of the Company's common stock for
$2,000,000 (or $1.50 per share). Net proceeds
from this offering totaled $1,919,142, after
deducting offering costs of $80,858.
In May 1999, the Company commenced a private
placement of 500,000 shares of the Company's
common stock offered at $1.50 per share. As
of June 30, 1999, the Company had received a
total of $277,500 from subscribers to the
private placement and recorded these proceeds
as restricted cash and deposits on stock
subscriptions in the accompanying
consolidated balance sheet. During August
1999, the Company completed the private
placement and sold 500,000 shares of the
Company's common stock for $750,000, which
included the conversion of the $300,000 note
payable to stockholder (see Note 7).
COMMON STOCK TO BE ISSUED FOR CONSULTING
SERVICES
The Company entered into a one-year
consulting agreement in December 1998 with an
unrelated third party and agreed to pay the
consultant in a combination of cash and
common stock. On
F-19
<PAGE> 58
May 27, 1999, the Company terminated the
consulting agreement and agreed to issue
75,000 shares of the Company's common stock
valued at $196,875 ($2.625 per share) in
complete settlement of its remaining
obligation under the agreement. As of August
27, 1999, these settlement shares have not
been issued, and a settlement liability of
$196,875 was recorded in accounts payable at
June 30, 1999.
COMMON STOCK OPTIONS
In June 1998, the Company established the
Minimally Invasive Surgery Corporation Stock
Option Plan (the "Plan") and authorized
500,000 shares of common stock available for
grants at the Board of Directors' discretion
to officers, directors, employees and
consultants. The exercise price per share
shall be at least equal to the fair market
value of the underlying common stock on the
grant date and no option may be exercisable
beyond ten years from the date of the grant.
During the year ended June 30, 1998, the
Company granted options to purchase 205,000
shares of the Company's common stock to
certain employees. The options vest over a
period of time and are exercisable through
June 2008 at an exercise price of $1.50 per
share.
The Company also granted options to purchase
140,000 shares of the Company's common stock
in November 1998 related to the acquisition
of the assets of three medical practices. All
but 20,000 of these options were canceled in
June 1999 upon the rescission of each of the
three acquisitions.
Changes in options outstanding under the Plan
are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE FAIR VALUE OF
NUMBER EXERCISE OPTIONS
OF SHARES PRICE GRANTED
--------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, March 6, 1998 -- $ -- $ --
Granted at market 205,000 1.50 0.62
--------------------------------------------------------------------------------
BALANCE, June 30, 1998 205,000 1.50 --
Granted at market -- -- --
--------------------------------------------------------------------------------
BALANCE, June 30, 1999 205,000 $ 1.50 $ --
================================================================================
</TABLE>
During the year ended June 30, 1999, 25,000
options that were
F-20
<PAGE> 59
granted in the prior year vested. As of June
30, 1999 and 1998, a total of 155,000 and
130,000 of the outstanding Plan options were
exercisable with a weighted-average exercise
price of $1.50 per share for both years,
respectively. As of June 30, 1999, the Plan
options outstanding have a weighted-average
remaining contractual life of 9.0 years.
The Company applies APB 25, "Accounting for
Stock Issued to Employees," and related
interpretations in accounting for options
issued. Under APB Opinion 25, compensation
expense is recorded for the difference
between the grant price and the fair market
value only if options are granted or extended
at exercise prices less than fair market
value.
Statement of Financial Accounting Standards
No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation," requires the
Company to provide pro forma information
regarding net income and earnings per share
as if compensation cost of the Company's
stock options had been determined in
accordance with the fair value based method
prescribed in SFAS 123. The Company estimated
the fair value of each stock option at the
grant date using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for grants
during the years ended June 30, 1999 and
1998, respectively:
o No dividend yield for both years
o Volatility of 71% and 0%
o Risk-free interest rates of 5.75%
and 5.316%
o Expected lives of ten years for
employee stock options and eight
years for options granted pursuant
to the practice asset acquisitions,
for both years
The Company's net loss and loss per share for
the years ended June 30, 1999 and 1998 would
be as follows under the accounting provisions
of SFAS 123:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Net loss $ (1,514,077) $ (116,483)
Net loss per share $ (0.18) $ (0.02)
================================================================================
</TABLE>
F-21
<PAGE> 60
Changes in nonplan options are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE FAIR VALUE OF
NUMBER EXERCISE OPTIONS
OF SHARES PRICE GRANTED
--------------------------------------------------------------------------------
<S> <C> <C> <C>
--------------------------------------------------------------------------------
BALANCE, July 1, 1998 -- $ -- $ --
Granted at market 140,000 3.50 0.32
Canceled (120,000) 3.50 --
--------------------------------------------------------------------------------
BALANCE, June 30, 1999 20,000 $ 3.50 $ --
================================================================================
</TABLE>
As of June 30, 1999, all of the options
granted outside of the Plan are exercisable
at $3.50 per share and have a remaining
contractual life of 7.3 years.
COMMON STOCK WARRANTS
The Company granted warrants to purchase
1,800,000 shares of its common stock at an
exercise price of $3.00 per share pursuant to
the June 1998 reverse merger with Galaxy. The
warrants expire on June 30, 2000.
10. INCOME TAXES The Company accounts for income taxes on the
liability method. Under this method, deferred
tax assets and liabilities are determined
based on differences between the financial
reporting and the tax bases of assets and
liabilities. Measurement of deferred income
tax is based on enacted tax rates and laws
that will be in effect when the differences
are expected to reverse, with the measurement
of deferred income tax assets being reduced
by available tax benefits not expected to be
realized. The Company uses the cash basis
method of accounting for income tax reporting
purposes.
F-22
<PAGE> 61
The components of income tax expense
(benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ -- $ --
State 10,394 --
--------------------------------------------------------------------------------
10,394 --
--------------------------------------------------------------------------------
Deferred:
Federal (375,000) --
State (64,000) --
--------------------------------------------------------------------------------
(439,000) --
--------------------------------------------------------------------------------
Income tax benefit $ (428,606) $ --
================================================================================
</TABLE>
The components of deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Property and equipment $ 7,000 $ -
Accrued expenses 96,000 -
Accounts payable 25,000 -
Net operating loss carryforward 630,000 21,500
--------------------------------------------------------------------------------
Gross deferred tax assets 758,000 21,500
Valuation allowance (318,000) (21,500)
--------------------------------------------------------------------------------
Total deferred tax assets 440,000 -
--------------------------------------------------------------------------------
Deferred tax liabilities:
Accounts receivable (440,000) -
--------------------------------------------------------------------------------
Total deferred tax liabilities (440,000) -
--------------------------------------------------------------------------------
Net deferred tax asset (liability) $ - $ -
================================================================================
</TABLE>
The Company's valuation allowance increased
by $296,500 and $21,500 during the years
ended June 30, 1999 and 1998, respectively.
The Company has recorded a valuation
allowance to state its deferred tax assets at
estimated net realizable value due to the
uncertainty related to realization of these
assets through future taxable income.
The amounts shown for income taxes in the
statements of operations differ from amounts
that would be derived from computing income
taxes at federal statutory rates. The
following is
F-23
<PAGE> 62
a reconciliation of those differences:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Income taxes at federal statutory rates (34%) (34%)
State income taxes, net of federal benefit (5%) (5%)
Net operating loss with no tax benefit 17% 39%
-------------------------------------------------------------------------------
Income taxes at effective rates (22%) --%
===============================================================================
</TABLE>
The unused portion of the Company's
approximate operating loss carryforwards will
expire as follows:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
--------------------------------------------------------------------------------
<S> <C> <C>
2018 $ 63,000
2019 1,500,000
--------------------------------------------------------------------------------
$ 1,563,000
================================================================================
</TABLE>
11. COMMITMENTS INSURANCE
AND
CONTINGENCIES The Company is insured with respect to
medical malpractice risks on a claims-made
basis. Accordingly, coverage relates only to
claims made during the policy term.
Historically, any claims paid have been
within the insurance policy limits.
Management is not aware of any claims against
it which might have a material impact on the
Company's financial position or results of
operations.
LITIGATION
The Company is subject to legal proceedings
and claims which arise in the ordinary course
of business. In the opinion of management,
the amount of potential liability with
respect to these actions will not materially
affect the Company's financial position or
results of operations.
F-24
<PAGE> 63
EMPLOYMENT AGREEMENTS
As of June 30, 1999, the Company has
employment agreements with one of its
officers and one physician. The officer's
agreement provides for the payment of salary
through May 2002. The physician's agreement
was set to expire in August 1999 and provided
for the payment of a percentage of cash
receipts on practice patient billings.
Subsequent to June 30, 1999, the physician's
employment agreement was terminated, and the
Company entered into an employment agreement
with a new physician which provides for a
salary to be paid through July 2004.
12. RELATED PARTY Significant related party transactions and
TRANSACTIONS balances not previously disclosed include
management fees totaling $42,000 paid during
the year ended June 30, 1999 to an entity
controlled by one of the Company's
stockholders under a month-to-month
agreement. In addition, the Company paid
director fees totaling $100,000 to the
founding shareholder during the year ended
June 30, 1999.
13. SUPPLEMENTAL CASH The following is a summary of the noncash
FLOW INFORMATION transactions related to the acquisition of
three medical practices described in Note 3:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
<S> <C>
Accounts receivable acquired $ 319,411
Property and equipment acquired 87,705
Excess of fair value of assets acquired over consideration paid (2,316)
--------------------------------------------------------------------------------
Assets acquired from acquisitions 404,800
--------------------------------------------------------------------------------
Common stock issued 200,000
Options for common stock granted 44,800
--------------------------------------------------------------------------------
Total noncash consideration paid on acquisitions 244,800
--------------------------------------------------------------------------------
Net cash paid for acquisitions of assets of medical practices $ 160,000
================================================================================
</TABLE>
F-25
<PAGE> 64
The following is a summary of the noncash
transactions related to the rescission of the
acquisition of the three medical practices
described in Note 3:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C>
Fair market value of common stock to be returned $ 168,720
Options for common stock canceled 38,400
--------------------------------------------------------------------------------
Total noncash consideration received upon rescissions 207,120
--------------------------------------------------------------------------------
Accrued management fees receivable surrendered 146,710
Property and equipment surrendered 50,000
Reversal of excess of fair value of assets acquired over
consideration paid (2,316)
Accounts payable to practices forgiven (41,215)
--------------------------------------------------------------------------------
Net noncash assets surrendered upon rescissions 153,179
--------------------------------------------------------------------------------
Gain on rescission recognized $ 53,941
================================================================================
</TABLE>
The following is a summary of noncash
transactions related to the VPC acquisition
disclosed in Note 3:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
<S> <C>
Common stock to be issued $(4,500,000)
Accounts receivable acquired 1,202,406
Other current assets acquired 609
Property, plant and equipment acquired 18,346
Goodwill acquired 4,422,185
Other assets acquired 979
--------------------------------------------------------------------------------
Total noncash acquisition of assets 1,144,525
--------------------------------------------------------------------------------
Accounts payable assumed (41,214)
Accrued liabilities assumed (47,403)
Deferred tax liability assumed (439,000)
--------------------------------------------------------------------------------
Total noncash assumption of liabilities (527,617)
--------------------------------------------------------------------------------
Net cash paid (net of cash acquired of $3,092) $ 616,908
================================================================================
</TABLE>
F-26
<PAGE> 65
14. SUBSEQUENT EVENTS LETTER OF INTENT TO ACQUIRE MEDICAL PRACTICE
During July 1999, the Company executed a good
faith letter of intent to acquire Advanced
Orthopedics of South Florida, Inc. ("AOSF").
The provisions of the letter of intent call
for the Company to purchase all of the
outstanding common stock of AOSF in exchange
for $1,500,000 consisting of cash of
$1,125,000 and Company common stock valued at
$375,000 based on a quoted market value of
$3.50 per share. In addition, the former
owners of AOSF may be entitled to receive up
to $1,500,000 in additional consideration
based on the future earnings of AOSF. The
contingent payments are to be comprised of
75% Company common stock and 25% cash. The
acquisition of AOSF will be accounted for by
the Company under the purchase method of
accounting. Any contingent payments to be
paid will be classified as additional
purchase price in the period of occurrence.
The letter of intent also contains provisions
for a five-year employment agreement with a
physician currently employed by AOSF. Terms
of the employment agreement provide for an
annual salary of $500,000 per year plus
incentives based on AOSF net income, as
defined.
Negotiations to finalize this acquisition
have continued into August 1999, and a
binding contract had not been executed as of
August 27, 1999.
WARRANTS ISSUED FOR CONSULTING SERVICES
In July 1999, the Company entered into two
management consulting agreements with an
unrelated third-party consultant.
The first agreement, which expires in June
2004, provides for the payment of fees to the
consultant based on the number of medical
procedures performed by VPC, as defined in
the agreement.
Under the second agreement, the consultant is
to provide certain management advisory
services to VPC during the three months ended
September 30, 1999. The consultant is to be
paid $45,000 in cash and be granted warrants
to purchase 45,000 shares of the Company's
common stock.
The warrants will have an exercise price of
$3 per share and are exercisable through the
third anniversary of the date of grant. The
fair market value of the warrants will be
charged to the Company's operations during
the year ended June 30, 2000.
F-27
<PAGE> 66
(b) Pro Forma financial information:
BackGenesis, Inc. Pro Forma Combined Financial Statements
The following unaudited pro forma combined financial statements of the
Registrant include the historical financial statements of BackGenesis, Inc.
(former named Minimally Invasive Surgery Corporation) for the fiscal year ended
June 30, 1999, the historical financial statements of Valley Pain Centers, Inc.
and its predecessor David S. Klein, M.D., P.C. for the year ended December 31,
1998 and the year then ended and the unaudited interim financial statements of
Valley Pain Centers, Inc. for the four months ended April 30, 1999 and the
application of pro forma adjustments to those financial statements to reflect
the transaction described in Item 1 which gives effect to this transaction as if
it had occurred as of July 1, 1998.
A purchase price of $5,120,000 was computed by adding the value of the 1,500,000
shares of BackGenesis, Inc.'s common stock of $4,500,000 issued to the
stockholders of Valley Pain Centers, Inc. and cash of $620,000 to the former
stockholders of Valley Pain Centers, Inc. The purchase price was then allocated
to the assets purchased and liabilities assumed based upon the fair values at
the date of transaction. The excess of the purchase price over the fair value of
the net assets acquired totaled $4,422,185 and has been recorded as goodwill
that will be amortized on a straight-line basis over 20 years.
The historical consolidated balance sheet of BackGenesis, Inc. and subsidiaries
as of June 30, 1999 included at F-4 gives effect to the Merger. Therefore, a pro
forma combined balance sheet is not presented herein.
The pro forma combined financial statements are derived from, and should be read
in conjunction with, the companies' historical financial statements set forth
herein. The pro forma combined financial statements do not purport to be
indicative of the results of operations or financial position which would have
F-28
<PAGE> 67
actually been reported had the transaction been consummated on the dates
indicated, or which may be reported in the future.
<TABLE>
<CAPTION>
Historical Pro Forma
6/30/99 6/30/99
BackGenesis (1) VPC Adjustments As Adjusted
<S> <C> <C> <C> <C> <C>
Net patient service
revenues 456,998 3,338,168 (456,998)(4) 3,338,168
Operating expenses:
General and administrative expenses 1,078,507 808,318 (181,974)(4) 1,704,851
Compensation and benefits 873,962 1,794,102 (470,256)(4) 2,197,808
Rescinded practices net
operations 262,380 -- -- 262,380
Management and directors' fees 142,000 554,098 -- 696,098
(2)
Depreciation and amortization 72,326 75,682 116,313 (4) 264,321
Total operating expenses 2,429,175 3,232,200 (535,917) 5,125,458
Income (loss) from
operations (1,972,177) 105,968 78,919 (1,787,290)
Other income (expense):
Interest expense (4,443) (12,243) -- (16,686)
Interest income 63,401 881 (666)(4) 63,616
Loss on sale of securities (13,964) -- -- (13,964)
44,994 (11,362) (666) 32,966
Income (loss) before
taxes on income (1,927,183) 94,606 78,253 (1,754,324)
Income tax benefit (3)
(expense) 428,606 (4,755) 136,149 (4) 560,000
Net income (loss)
available to common
stockholders (1,498,577) 89,851 214,402 (,194,324)
Loss per share, basic and
diluted (0.18) .01 (0.14)
Weighted average common
shares outstanding,
basic and diluted 8,215,785 8,215,785 124,932(5) 8,340,717
</TABLE>
(1) Amounts based on year end financial statements of BackGenesis, Inc.
(2) Adjustment to record amortization expense related to the goodwill recorded
on the VPC acquisition as if the acquisition occurred on July 1, 1998.
(3) To reverse the effect on deferred income tax expense relating to the
termination of the VPC S-election on August 31, 1998, as the pro forma
financial statements assume the termination occurred on June 30, 1998.
(4) Reverse the results of operations of VPC for the two months ended June 30,
1999 in which VPC was a wholly-owned subsidiary of BackGenesis. These
amounts are included in (1).
(5) Change in weighted average number of shares as if the VPC acquisition
occurred on July 1, 1998.
F-29
<PAGE> 68
BACKGENESIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
UNAUDITED
September 30, 1999
Assets
Current:
Cash and cash equivalents $ 273,834
Accounts receivable, net of allowance for doubtful
accounts of $291,542 958,268
Other current assets 5,600
Total current assets 1,237,702
Property and equipment, net 255,252
Goodwill, net of amortization of $92,129 4,330,055
Other assets --
$ 5,823,009
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable to stockholder $ 66,244
Accounts payable 253,458
Accrued expenses 329,481
Current portion of capital lease obligation 14,537
Total current liabilities 663,720
Capital lease obligation, less current portion 51,119
Total liabilities 714,839
Stockholders' equity:
Preferred stock, $.001 par value; 100,000 shares
authorized, no shares
issued and outstanding --
Common stock, $.001 par value; 20,000,000 shares
authorized; 6,687,627 shares issued and outstanding 6,687
Additional paid-in capital 7,707,160
Accumulated deficit (2,436,957)
Common stock receivables (168,720)
Stockholders' equity 5,108,170
$ 5,823,009
F-30
<PAGE> 69
BACKGENESIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
Quarter Ended September 30, 1999
Net patient revenue $ 406,080
Operating expenses:
General and administrative expenses 562,143
Compensation and benefits 469,336
Depreciation and amortization 69,305
Total operating expenses 1,100,784
Loss from operations (694,704)
Other income (expense):
Interest expense (4,483)
Interest on beneficial conversion feature of
shareholder loan (180,000)
Interest income 4,094
(180,389)
Loss before income taxes (875,093)
Income tax benefit --
Net loss $ (875,093)
Weighted average number of common shares outstanding 7,160,072
Net loss per common share, basic and diluted $ (0.12)
F-31
<PAGE> 70
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNAUDITED
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid In Accumulated Common Stock Total
Shares Amount Capital Deficit Receivable Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inception, March 6, 1998 1,000 $ 30,000 $ -- $ -- $ -- $ 30,000
Record capitalization of Company and issuance
of stock related to reverse merger between
Galaxy Ventures, Inc. and Chiu
Minimally Invasive Spine Surgery, Inc. 6,799,000 (23,200) 23,200 --
Sale of common stock, net of offering costs 1,333,333 1,333 1,917,809 1,919,142
Net loss (63,287) (63,287)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 8,133,333 8,133 1,941,009 (63,287) -- 1,885,855
Issuance of common stock for acquisition of
assets of medical practices 80,000 80 199,920 200,000
Grant of options for acquisition of assets
of medical practices -- -- 44,800 44,800
Issuance of common stock for acquisition of
Valley Pain Centers, Inc. 1,500,000 1,500 4,498,500 4,500,000
Shares to be returned to Company treasury (1,350,000) (1,350) 1,350 --
Common stock receivable for return of
shares from recission of acquisition of
assets of medical practices -- -- -- -- (168,720) (168,720)
Cancellation of options related to
recission of acquisition of assets of
medical practices -- -- (38,400)
Net income (loss)
-- -- -- (1,498,577) -- (1,498,577)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 8,363,333 8,363 6,647,179 (1,561,864) (168,720) 4,924,958
Shares to be returned to Company treasury (2,251,506) (2,252) 2,252
Issuance of 500,800 shares of common
stock in $750k private placement less
offering costs of $69,770, 8/4/99
plus the beneficial conversion of debt
security 500,800 501 860,929 861,430
Issuance of stock to Worldwide Finance
75,000 shares of common, 8/4/99 75,000 75 196,800 196,875
Net income (loss) (875,093) (875,093)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 6,687,627 $ 6,687 $ 7,707,160 $(2,436,957) $ (168,720) $ 5,108,170
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-32
<PAGE> 71
BACKGENESIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Quarter ended September 30, 1,999
<S> <C>
Cash flows from operating activities: $ (875,093)
Net loss
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 66,147
Changes in assets and liabilities, net of acquisitions and recissions:
Accounts receivable 145,230
Other current assets (1,852)
Other assets 783
Accounts payable (44,232)
Accrued expenses (135,291)
Net cash used for operating activities (844,308)
Cash flow from investing activities:
Purchase of property and equipment --
Net cash used for investing activities --
Cash flows from financing activities:
Deposits on stock subscriptions (277,500)
Decrease in restricted cash 277,500
Payment on capital lease obligation (3,322)
Proceeds from note payable to stockholder 66,244
Payments on note payable to stockholder (300,000)
Proceeds from common stock issuance 1,058,305
Net cash provided by financing activities 821,227
Net increase (decrease) in cash and cash equivalents (23,081)
Cash and cash equivalents, beginning of period 296,915
Cash and cash equivalents, end of period $ 273,834
Supplemental disclosure of cash flow information and noncash
investing and financing activities:
Cash paid for interest during period $ 4,483
</TABLE>
F-33
<PAGE> 72
BackGenesis, Inc. Combined Financial Statements
Footnotes to Quarter Ended September 30, 1999
Summary of Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements have been prepared in
conformity with instructions to Form 10-SB and therefore do not include all the
information and footnotes required by generally accepted accounting principals
for complete financial statements. Certain items included in these statements
are based upon management estimates. In the opinion of management, the
accompanying financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary for fair presentation. The results of
operations for the three months ended September 30, 1999 are not necessarily
indicative of the operating results expected for the fiscal year ending June 30,
2000. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-SB for the year ended June 30, 1999. See Note 1 to
those financial statements for a discussion of the merger with Valley Pain
Centers, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of
BackGenesis, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designed as a hedge, the objective of which is
to match the timing of gain or loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts to hedge
existing risks or for speculative purposes. Accordingly, the Company does not
expect adoption of the new standard on July 1, 2000 to affect its financial
statements.
In June 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires costs
F-34
<PAGE> 73
of start-up activities and organizational costs, as defined, to be expensed as
incurred. The Company will adopted this SOP on July 1, 1998, and, as a result,
will expensed the carrying value of its organization costs whose net book value
was approximately $1,830 as of June 30, 1998.
Net Income (Loss) Per Common Share
Basic EPS is calculated by dividing the income (loss) available to
common shareholders by the weighted average number of shares outstanding for the
period without consideration for potential common shares. Potential common
shares were not included for the three months ended September 30, 1999 since
their effects are antidilutive under the treasury stock method for options and
warrants and if-converted method for convertible preferred stock.
Name Change
On November 5, 1999 the shareholders of the Company approved a
resolution of the Company's Board of Directors to change the Company's name from
Minimally Invasive Surgery Corporation to BackGenesis, Inc.
Resignation of Officers
In conjunction with the merger with VPC, Messrs. Rogers W. Kirven, Jr.
and Dr. David S. Klein were elected to the Company's Board of Directors and Mr.
Kirven was retained by the Company as its chief executive officer. In November
1999, Messrs. Kirven resigned as a director and officer of the Company to pursue
other business interests. In November 1999, Mr. Jere Palazzolo who had been
elected as a director and retained by the Company to act as its president
following the CMIS acquisition agreed to resign his director and officer
positions. The remaining Board of Directors in accordance with its bylaws
elected Rick Capozza and Anthony T. Yeung, MD to serve as replacement directors
and entered into an agreement with Dr. Davis S. Klein to serve as the Company's
interim chief executive officer and president. In December 1999, George Sheldon,
CFO, Treasurer and Secretary resigned these positions. Effective November 5,
1999 the Company and Mr. Palazzolo entered into a Termination Agreement with
respect to Mr. Palazzolo's employment. Pursuant to the terms of the Termination
Agreement, the Company agreed to continue to compensate Mr. Palazzolo in
accordance with the terms of his employment agreement until such time as the
Company is able to buy out Mr. Palazzolo's agreement. To that end, the Company
agreed that in the event of an equity raise in excess of $800,000, it would pay
Mr. Palazzolo a lump sum amount equal to his salary for the remaining term of
his employment agreement.
Effective with the acquisition of VPC, Rogers W. Kirven, Jr. agreed,
pursuant to an oral agreement with the Company, to serve as the Chief Executive
Officer of the Company at an annual salary of $150,000 plus customary benefits.
Effective November 5, 1999 Mr. Kirven resigned as a Director and President of
the Company to pursue other business interests. The Company agreed to pay Mr.
Kirven two (2) months salary as severance.
F-35
<PAGE> 74
Consulting Agreements
The Company entered into an agreement with Cloverleaf Capital Advisors,
LLC, a merchant banking and mergers and acquisitions firm, in September, 1999.
The agreement calls for Cloverleaf to provide merger, acquisition and financial
services to the Company. Cloverleaf is paid based upon performance with a
minimum draw of $50,000 per month. The initial term of the agreement with
Cloverleaf is six months, with the option to renew for additional six month
periods. Accordingly, the initial agreement expires on February 28, 2000 unless
renewed or extended.
The Company entered into a 3 month agreement in June 1999 with RMG,
Inc. The agreement calls for RMG to provide a study of the practices of VPC. RMG
was paid $45,000 over three months ending September 1999. In addition, RMG was
granted 45,000 options on July 15, 1999 to purchase stock with an exercise price
of $3.00 expiring July 15, 2001.
Subsequent Events
On October 14, 1999 the Company settled a litigation with Dale A.
Stinespring for $17,500. The settlement releases the Company of any further
liability.
David S. Klein, CEO, entered into a lease agreement with American
Express Equipment Finance in the original principal amount of $250,000 and with
Rockford Industries, Inc. in the principal amount of $76,000. In December 1999,
the Company assumed the liabilities of these leases. In consideration for Dr.
Klein's continued personal guarantee of these leases, the Company granted him
options on July 30,1999 to purchase 19,760 shares at $2.50 per share with a 5
year expiration and on November 4, 1999 to purchase 65,000 shares at $1.25 per
share with a 5 year expiration. Further, Dr. Klein will receive the same options
for any additional leases and/or notes in which he is the guarantor.
On or about November 22, 1999, VPC and Dr. David S. Klein received a
letter of inquiry from Trigon Blue Cross Blue Shield ("Trigon"), a third party
payor representing approximately 15 percent of the Company's billings. The
Trigon letter indicated that Trigon had identified at least six (6) significant
issues of concern which according to their analysis amounted to a quantified
estimate (extrapolated based on a limited sample of transactions) of overpayment
equaling approximately $618,000. The letter also stated that Trigon had
identified other issues of concern for which there was insufficient information
to determine an estimate overpayment, if any. While no assurance can be given at
this time, the Company does not believe, based upon its initial investigation,
it has any liability with respect to this matter. Both Trigon and the Company
recognize that their respective findings and analysis are preliminary and that
additional information is needed to conclude this matter. Trigon and the Company
have agreed to work together to resolve these issues in an expedient manner.
F-36
<PAGE> 75
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Minimally Invasive Surgery Corporation
(The acquirer of Valley Pain Centers, Inc. in an acquisition dated May 1, 1999)
We have audited the accompanying balance sheet of Valley Pain Centers, Inc. (a
wholly-owned subsidiary of Medical Industries of America) ("Successor Company")
as of December 31, 1998, and the related statements of operations, stockholder's
equity and cash flows for the period from the commencement of operations
(September 1, 1998) through December 31, 1998, and the statements of operations,
stockholder's equity and cash flows of David S. Klein, M.D., P.C. ("Predecessor
Company" as described in Note 1 of the notes to financial statements) for the
period from January 1, 1998 to August 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Successor Company financial statements referred to above
present fairly, in all material respects, the financial position of Valley Pain
Centers, Inc. as of December 31, 1998, and the results of its operations and its
cash flows the period from the commencement of operations (September 1, 1998)
through December 31, 1998 in conformity with generally accepted accounting
principles. Furthermore, in our opinion, the Predecessor Company financial
statements referred to above present fairly, in all material respects, the
results of operations and cash flows of the Predecessor Company for the period
from January 1, 1998 to August 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 of the notes to financial statements, the Successor
Company purchased assets and assumed certain liabilities of the Predecessor
Company on August 31, 1998, in a business combination accounted for as a
purchase. As a result, the financial statements of the Successor Company are
presented on a new basis of accounting from the financial statements of the
Predecessor Company and, therefore, are not comparable.
BDO Seidman, LLP
Orlando, Florida
August 10, 1999
F-37
<PAGE> 76
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To David S. Klein, M.D., P.C.
We have audited the accompanying balance sheet of David S. Klein, M.D., P.C. (a
Virginia corporation) as of December 31, 1997, and the related statements of
operations, stockholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of David S. Klein, M.D., P.C. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
August 20, 1998
F-38
<PAGE> 77
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 6,111 $ 63,151
Marketable equity securities (Note 3) -- 68,614
Accounts receivable, net of allowance for doubtful
accounts of $87,000 and $167,000 (Note 5) 1,062,485 1,132,487
Due from related party -- 35,000
Other current assets -- 8,760
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,068,596 1,308,012
PROPERTY AND EQUIPMENT, net (Note 4) 19,885 30,736
DEFERRED INCOME TAXES (Note 7) 11,000 --
GOODWILL, net of accumulated amortization of $25,488 and $-0- (Note 1) 1,503,839 --
OTHER ASSETS -- 8,450
- --------------------------------------------------------------------------------------------------------------------
$2,603,320 $1,347,198
====================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Note payable (Note 5) $ 345,433 $ --
Note payable to related party (Note 6) - 84,933
Accounts payable 44,761 38,060
Accrued expenses 81,464 9,906
Income taxes payable to parent (Note 7) 74,755 --
Due to related party (Note 9) 188,496 --
Deferred income taxes (Note 7) 380,000 --
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,114,909 132,899
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDER'S EQUITY:
Common stock, $10 par value; 2,500 shares authorized; 10 shares issued and
outstanding 100 100
Additional paid-in capital 1,379,507 8,048
Retained earnings 108,804 1,206,151
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY 1,488,411 1,214,299
- --------------------------------------------------------------------------------------------------------------------
$2,603,320 $1,347,198
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-39
<PAGE> 78
VALLEY PAIN CENTERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDICAL INDUSTRIES OF AMERICA, INC.)
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998
----------------------------------
FROM TO
SEPTEMBER 1, AUGUST 31, 1997
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET PATIENT SERVICE REVENUES $ 710,350 $ 2,606,300 $ 3,340,572
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Compensation and benefits 229,493 1,300,883 1,851,755
General and administrative expenses 228,196 519,304 809,106
Management fees (Note 9) - 754,098 -
Bad debt expense 23,862 51,143 201,600
Depreciation and amortization 26,833 5,071 11,680
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 508,384 2,630,499 2,874,141
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 201,966 (24,199) 466,431
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (3,535) (2,288) (14,349)
Other, net 1,128 7,115 10,267
- --------------------------------------------------------------------------------------------------------------------
(2,407) 4,827 (4,082)
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 199,559 (19,372) 462,349
INCOME TAX EXPENSE (Note 7) (90,755) (353,000) -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 108,804 $ (372,372) $ 462,349
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-40
<PAGE> 79
VALLEY PAIN CENTERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDICAL INDUSTRIES OF AMERICA, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
-------------------
BALANCE, January 1, 1997 10 $ 100 $ 8,048 $ 892,538 $ 900,686
Dividend payments -- -- -- (148,736) (148,736)
Net income -- -- -- 462,349 462,349
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 10 100 8,048 1,206,151 1,214,299
Dividend payments made in cash and through the
distribution of property -- -- -- (991,647) (991,647)
Net loss for period from January 1 to August 31,
1998 -- -- -- (372,372) (372,372)
Revocation of Subchapter S election (Note 7) -- -- (157,868) 157,868 --
SUCCESSOR COMPANY
Goodwill related to the acquisition of the
Successor Company by MIOA (Note 1) -- -- 1,529,327 -- 1,529,327
Net income for period from September 1 to
December 31, 1998 -- -- -- 108,804 108,804
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 10 $ 100 $ 1,379,507 $ 108,804 $ 1,488,411
==============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-41
<PAGE> 80
VALLEY PAIN CENTERS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF MEDICAL INDUSTRIES OF AMERICA, INC.)
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998
--------------------------
FROM TO
SEPTEMBER 1, AUGUST 31, 1997
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 108,804 $ (372,372) $ 462,349
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 26,833 5,071 11,680
Bad debts 23,862 51,143 201,600
Unrealized gain on marketable equity securities -- -- (10,267)
Loss on sale of marketable equity securities -- 12,887 --
Cash provided by (used for):
Proceeds from sale of marketable equity securities -- 55,727 --
Accounts receivable (582,491) 577,488 (416,190)
Due from related party -- 35,000 --
Other current assets 8,760 -- (7,730)
Deferred tax asset 3,000 (14,000) --
Accounts payable (194,661) 201,362 (76,601)
Accrued expenses 11,464 60,094 2,418
Income taxes payable to parent 74,755 -- --
Due to related party 188,496 -- --
Deferred tax liability 13,000 367,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (318,178) 979,400 167,259
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments by related parties -- -- 176,305
Purchases of property and equipment (401) -- (860)
Net increase (decrease) in other assets 14,339 (5,889) 4,835
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 13,938 (5,889) 180,280
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings in note payable 345,433 -- --
Principal payments on note payable to related party (51,892) (33,041) (135,652)
Dividends paid in cash -- (986,811) (148,736)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 293,541 (1,019,85) (284,388)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,699) (46,341) 63,151
CASH AND CASH EQUIVALENTS, beginning of period 16,810 63,151 --
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 6,111 $ 16,810 $ 63,151
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ 2,288 $ 18,377
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net book value of property and equipment distributed to prior owner -- 4,836 --
Reclassification of Subchapter S accumulated deficit to additional
paid-in capital -- 157,868 --
Goodwill related to acquisition of Predecessor Company by MIOA 1,529,327 -- --
==============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-42
<PAGE> 81
15. NATURE OF Valley Pain Centers, Inc. operated four back
ORGANIZATION pain clinics located in Virginia at December
31, 1998. Valley Pain Centers, Inc. operates
in one business segment.
MERGER WITH MIOA
Effective September 1, 1998, David S. Klein,
M.D., P.C. ("Predecessor Company"), a
Virginia corporation, was merged into MIOA
Acquisition Company V, Inc., a Florida
corporation, ("Successor Company")
(collectively "the Company"), a wholly-owned
subsidiary of Medical Industries of America,
Inc. ("MIOA"). Simultaneously with the
merger, MIOA Acquisition V was renamed as
Valley Pain Centers, Inc. As of December 31,
1998, the Successor Company was a
wholly-owned subsidiary of MIOA. The
Successor Company purchased assets and
assumed certain liabilities of the
Predecessor Company on September 1, 1998, in
a business combination accounted for as a
purchase. As a result, the financial
statements of the Successor Company are
presented on a new basis of accounting from
the financial statements of the Predecessor
Company and, therefore, are not comparable.
The purchase price for David S. Klein, M.D.,
P.C. was $3.3 million, paid to its former
sole stockholder as follows:
o An initial payment of $1.32 million
upon closing, paid in the form of
880,000 shares of MIOA common stock
valued at $1.50 per share, the quoted
market price on the date the terms of
the merger were agreed to.
o Contingent payments, as defined in
the purchase agreement, of up to
$1.98 million based on the earnings
of the Successor Company over each of
the first three years of its
operations. Contingent payments could
be paid entirely in MIOA common stock
or a combination of cash (after
applying a discount of 25% to the
cash portion) and MIOA common stock,
with payments commencing on the first
anniversary of the merger. No
contingent payments were made as MIOA
sold its interest in the Successor
Company as described below.
MIOA pushed down the excess of the purchase
price and related acquisition costs of the
Successor Company over the net assets
F-43
<PAGE> 82
acquired to the Successor Company's financial
statements in the amount of $1,529,327.
REPURCHASE OF THE SUCCESSOR COMPANY BY FORMER
STOCKHOLDER (UNAUDITED)
On April 30, 1999, MIOA sold all the
outstanding stock of the Successor Company to
Dr. David S. Klein (the former stockholder of
David S. Klein, M.D., P.C.) and an investor
group (collectively "the Interim Owners").
Under the terms of the sale agreement, MIOA
transferred all of the outstanding stock of
the Successor Company in exchange for
$620,000 cash and the return of 1,544,036
shares of MIOA common stock held by the
Interim Owners, valued at $1.854 per share,
the average closing price of MIOA's common
stock for the three-day period ending April
15, 1999, for a total sale price of
$3,482,643. The sale agreement provided for
the assumption by MIOA of certain liabilities
of the Successor Company, including the
Successor Company's obligation under the line
of credit agreement (see Note 5) in the
amount of $323,667, income taxes payable to
MIOA in the amount of $74,755 (see Note 7)
and a due to related party balance of
$218,195.
MERGER OF THE SUCCESSOR COMPANY INTO
MINIMALLY INVASIVE SURGERY CORPORATION
(UNAUDITED)
Effective May 1, 1999, the Interim Owners
sold their interest in the Successor Company
to Minimally Invasive Surgery Corporation
("MIS"), a previously unrelated publicly-held
company. The Interim Owners received
consideration in the amount of $4,500,000
consisting of 1,500,000 shares of MIS common
stock valued at $3.00 per share, the quoted
market price on the date the terms of the
merger were agreed to. In addition, the
Interim Owners are entitled to receive up to
$3,750,000 in additional consideration based
on the future earnings of the Successor
Company. Contingent consideration to be
issued, if any, will be treated as additional
purchase price at the time of the issuance.
The merger agreement provides for a stock
price guarantee to the Interim Owners by MIS.
If the average of the daily closing prices of
MIS common stock for the period from May 7,
2000 through
F-44
<PAGE> 83
May 6, 2001 is less than $3.00 per share, MIS
has agreed to issue additional shares to the
Interim Owners sufficient to equal the
difference between the 1,500,000 shares and
the original $4.5 million purchase price
divided by the average closing price of MIS
common stock for the period from May 7, 2000
through May 6, 2001.
The Interim Owners borrowed $620,000 from MIS
in order to fund the purchase of all the
Successor Company's stock from MIOA.
Simultaneously with the sale of the Successor
Company to MIS, the Successor Company assumed
the $620,000 note payable to MIS from the
Interim Owners.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following summarized unaudited pro forma
consolidated results of operations for the
Successor Company have been prepared as if
its acquisition by MIOA had occurred at the
beginning of the respective periods presented
and includes pro forma adjustments for
amortization and income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 3,316,650 $ 3,340,572
Net income 77,653 52,038
================================================================================
</TABLE>
16. SUMMARY OF CASH AND CASH EQUIVALENTS
SIGNIFICANT
ACCOUNTING The Company considers all short-term
POLICIES investments with original maturities of three
months or less to be cash equivalents.
INVESTMENTS IN MARKETABLE EQUITY SECURITIES
The Company records its investments under
Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115").
Under SFAS 115, all of the Company's
securities are classified as trading
securities and are carried at market value,
with the resulting unrealized gain or loss
reflected in the statement of operations.
Market values of the trading securities have
been determined using market quotations. The
cost of investments sold is determined on the
specific identification method.
F-45
<PAGE> 84
ACCOUNTS RECEIVABLE
Accounts receivable consist of receivables
from patients and third-party payers for
medical services provided by the Company.
Such amounts are recorded net of estimated
contractual adjustments. Contractual
adjustments result from the differences
between the rates charged by the Company for
services performed and the rates allowed by
the third-party payers.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Depreciation expense is provided using the
straight-line method over the estimated
useful lives of the furniture, fixtures and
equipment and vehicles (five to seven years)
and over the remaining lease term for
leasehold improvements.
GOODWILL
MIOA pushed down the excess of the purchase
price and related acquisition costs of the
Successor Company over the net assets
acquired to the Successor Company's financial
statements. The Successor Company amortizes
goodwill recorded as a result of the MIOA
acquisition over the goodwill's estimated
useful life of 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of
Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). SFAS 121 requires
impairment losses to be recorded on
long-lived assets used in operations when
indicators of impairment are present and the
undiscounted cash flows estimated to be
generated by those assets are less than the
assets' carrying amount. The adoption of SFAS
121 did not impact the financial statements
of the Company.
REVENUE RECOGNITION
Patient service revenues are recognized when
earned and are
F-46
<PAGE> 85
reported at the estimated realizable amounts
from patients, third-party payers (which
include managed care providers, commercial
insurance carriers, and health maintenance
organizations) and others for services
rendered. Additionally, the Company
participates in agreements with managed care
organizations to provide services at
negotiated rates or for capitated payments.
Provisions for third-party payer adjustments
are estimated and recorded in the period in
which the services are provided. Any
adjustments to the estimated amounts are
recorded in the period in which the revised
amount is determined.
CONCENTRATION OF CREDIT RISK
The Company extends credit to patients
covered by insurance programs, governmental
programs such as Medicare and Medicaid and
private insurers. The Company manages credit
risk with the various public and private
insurance providers as appropriate.
Allowances for uncollectible accounts have
been made for potential losses, where
appropriate.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities at
the date of the financial statements and the
reported amounts of revenues and expenses
during the reporting period. Actual results
could differ from those estimates.
F-47
<PAGE> 86
FAIR VALUE OF FINANCIAL INSTRUMENTS
The respective carrying value of certain
on-balance-sheet financial instruments
approximated their fair values. Fair value
estimates discussed herein are based upon
certain market assumptions and pertinent
information available to management. These
financial instruments include cash and cash
equivalents, marketable securities, accounts
receivables, accounts payable and accrued
expenses. Fair values were assumed to
approximate carrying values for these
financial instruments since they are short
term in nature and their carrying amounts
approximate fair values or they are
receivable or payable on demand. The fair
value of the Company's notes payable, which
approximates their carrying value, is
estimated based upon the quoted market prices
for the same or similar debt instruments or
on the current rates offered to the Company
for debt of the same remaining maturities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 requires
companies to recognize all derivative
contracts as either assets or liabilities in
the balance sheet and to measure them at fair
value. If certain conditions are met, a
derivative may be specifically designated as
a hedge, the objective of which is to match
the timing of gain or loss recognition on the
hedging derivative with the recognition of
(i) the changes in the fair value of the
hedged asset or liability that are
attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted
transaction. For a derivative not designated
as a hedging instrument, the gain or loss is
recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters
or fiscal years beginning after June 15,
2000.
Historically, the Company has not entered
into derivatives contracts to hedge existing
risks or for speculative purposes.
Accordingly, the Company does not expect
adoption of the new standard on January 1,
2001 to affect its financial statements.
F-48
<PAGE> 87
RISKS AND UNCERTAINTIES
The Company's primary risk and uncertainty is
its ability to retain competent physicians
capable of performing the required medical
procedures and whose skills demonstrate the
current trends of back pain treatment. In
addition, the Company's business may be
affected by continuing changes in the health
insurance industry such as legislation and
changes in health maintenance organizations.
RECLASSIFICATIONS
Certain items have been reclassified in the
1997 financial statements to conform to the
1998 presentation.
17. MARKETABLE The adjusted cost, gross unrealized gain and
EQUITY SECURITIES fair value of the Predecessor Company's
trading securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>
GROSS
UNREALIZED FAIR
COST GAIN VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity securities $ 30,268 $ 38,346 $ 68,614
--------------------------------------------------------------------------------
</TABLE>
The Predecessor Company sold all of its
marketable equity securities during 1998,
which resulted in a loss of $12,887.
18. PROPERTY AND Property and equipment consist of the
EQUIPMENT following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures, and equipment $ 105,869 $ 165,566
Leasehold improvements 39,260 39,260
Vehicles - 20,549
--------------------------------------------------------------------------------
145,129 225,375
Less accumulated depreciation and amortization 125,244 194,639
--------------------------------------------------------------------------------
$ 19,885 $ 30,736
================================================================================
</TABLE>
Depreciation and amortization expense related
to property and equipment for the years ended
December 31, 1998 and 1997 was
F-49
<PAGE> 88
$6,416 and $11,680, respectively.
19. NOTE PAYABLE As of December 31, 1998, the Successor
Company was a party to a $1.5 million line of
credit agreement arranged through its parent,
MIOA. Maximum borrowing under the line of
credit is based on a percentage of eligible
accounts receivable. Interest is payable
monthly at the prime rate plus 2.65% (9.90%
at December 31, 1998), and all of the
Successor Company's receivables are pledged
as collateral against the line of credit. All
payments on the note were to be made through
accounts receivable collections remitted
directly to the lender's lock box. In
February 1999, the Successor Company violated
the lock box provision of the loan agreement
by having all customer payments remitted
directly to the Successor Company. In April
1999, MIOA sold all the outstanding stock of
the Successor Company to the Interim Owners,
and MIOA agreed to assume the Successor
Company's obligation under the line of
credit.
Certain information regarding the line of
credit for the year ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
<S> <C>
Balance at December 31 $ 345,433
Weighted average interest rate 10.23%
Maximum outstanding at end of any month 345,433
Average amount outstanding during period 28,045
--------------------------------------------------------------------------------
</TABLE>
20. NOTE PAYABLE TO As of December 31, 1997, the Predecessor
RELATED PARTY Company had an 9% demand note payable to an
employee in the amount of $84,933. This note
was repaid during 1998.
21. INCOME TAXES The Successor Company is a member of a
consolidated group which files a consolidated
federal tax return; the provision for income
taxes included in these financial statements
is based on a "separate return" calculation.
Intercompany transactions are recorded
between the parent and subsidiary for any tax
benefits or taxes payable based on the
subsidiary's individual tax calculation. The
Successor Company uses the cash basis method
of accounting for income tax reporting
purposes.
The Predecessor Company formerly reported its
income under Subchapter S of the Internal
Revenue Code for income tax purposes.
Immediately prior to the merger, the
Predecessor
F-50
<PAGE> 89
Company terminated its S election and
recorded a net deferred tax liability and a
charge to operations in the amount of
$353,000 related to the difference between
the Predecessor Company's book and tax basis
in its assets and liabilities and
reclassified all of its accumulated deficit
to additional paid-in capital.
As of December 31, 1998, the Successor
Company recorded the current portion of its
federal and state income taxes payable to the
parent for the four months of operations then
ended. The components of income tax expense
(benefit) for the year ended December 31,
1998 are as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ 64,841 $ --
State 9,914 --
--------------------------------------------------------------------------------
Income taxes payable to parent 74,755 --
--------------------------------------------------------------------------------
Deferred:
Federal 14,000 305,000
State 2,000 48,000
--------------------------------------------------------------------------------
16,000 353,000
--------------------------------------------------------------------------------
Net income tax expense $ 90,755 $ 353,000
================================================================================
</TABLE>
F-51
<PAGE> 90
Deferred taxes are comprised of the following
at December 31:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
<S> <C>
DEFERRED TAX ASSETS:
Accounts payable $ 20,000
Allowance for doubtful accounts 34,000
Accrued expenses 32,000
Property and equipment 11,000
--------------------------------------------------------------------------------
Total deferred tax assets 97,000
DEFERRED TAX LIABILITY:
Accounts receivable (466,000)
--------------------------------------------------------------------------------
Net deferred tax liability (369,000)
Less long-term deferred tax asset (11,000)
--------------------------------------------------------------------------------
Current deferred tax liability $ (380,000)
================================================================================
</TABLE>
The following summary reconciles differences
from taxes at the federal statutory rate with
the effective rate:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
-------------------------------------------------------------------------------
<S> <C> <C>
Income taxes at federal statutory rates (34%) (34%)
State income taxes, net of federal benefit (5%) (5%)
Termination of Subchapter S election -% (1,783%)
Other permanent differences (6%) -%
-------------------------------------------------------------------------------
Income tax expense at effective rates (45%) (1,822%)
===============================================================================
</TABLE>
22. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES As of December 31, 1998, the Company had
operating leases with unrelated parties which
expire between August 1999 and June 2004.
Rent expense for these operating leases for
the years ended December 31, 1998 and 1997
was $73,259 and $169,783, respectively.
In addition, the Company had operating leases
with Dr. David S. Klein. These leases expire
between June and August 2003 and had rent
expense for the years ended December 31, 1998
and 1997 of $140,293 and $34,500,
respectively.
F-52
<PAGE> 91
Future minimum lease payments under all
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 247,000
2000 219,000
2001 202,000
2002 166,000
2003 167,000
Thereafter 91,000
--------------------------------------------------------------------------------
Total $ 1,092,000
================================================================================
</TABLE>
INSURANCE
The Company is insured with respect to
medical malpractice risks on a claims-made
basis. Accordingly, coverage relates only to
claims made during the policy term.
Historically, any claims paid have been
within the insurance policy limits.
Management is not aware of any claims against
it which might have a material impact on the
Company's financial position or results of
operations.
LITIGATION
The Company is subject to legal proceedings
and claims which arise in the ordinary course
of business. In the opinion of management,
the amount of potential liability with
respect to these actions will not materially
affect the Company's financial position or
results of operations.
PHYSICIAN AGREEMENTS
The Company has employment and contractor
agreements with its physicians that provide
for the payment of compensation based upon a
percentage of the Company's cash receipts. In
July 1999, these employment agreements were
terminated, and the Company entered into
employment agreements with two new physicians
which provide for a salary to be paid through
July 2004.
23. RELATED PARTY During 1998, the Predecessor Company entered
TRANSACTIONS into a management agreement with MIOA and
Ivanhoe Medical Systems, Inc. ("Ivanhoe"), a
wholly-owned subsidiary of MIOA. During the
year ended December 31, 1998, the Company
made payments of $565,602 under these
agreements. As of December 31, 1998, the
Successor Company had unpaid management fees
payable to Ivanhoe of $188,496 for services
rendered during 1998.
F-53
<PAGE> 1
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
GALAXY VENTURES, INC.
AND
CHIU MINIMALLY INVASIVE SPINE SURGERY INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Plan of Reorganization...............................................................................1
2. Exchange of Shares...................................................................................1
3. Pre-Closing Events...................................................................................2
4. Exchange of Securities...............................................................................2
5. Post Acquisition Events..............................................................................3
6. Other Matters........................................................................................3
7. Delivery of Shares...................................................................................4
8. Representations of CMIS Shareholders.................................................................4
9. Representations of CMIS..............................................................................4
10. Representations of Galaxy and Barlow.................................................................6
11. Closing..............................................................................................8
12. Conditions Precedent to the Obligations of CMIS......................................................8
13. Conditions Precedent to the Obligations of Galaxy ..................................................10
14. Indemnification.....................................................................................10
15. Nature and Survival of Representations..............................................................11
16. Documents at Closing................................................................................11
17. Finder's Fees.......................................................................................12
18. Miscellaneous.......................................................................................13
Signature Page...................................................................................................13
Exhibit A - CMIS Stockholder Schedule
Exhibit B - Amendment to Certificate of Incorporation
Exhibit C - Investment Letter
</TABLE>
(i)
<PAGE> 3
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (hereinafter the "Agreement")
is entered into effective as of this day of June, 1998, by and among Galaxy
Ventures, Inc., a Delaware corporation (hereinafter "Galaxy"); Clayton B.
Barlow, the sole officer and director of Galaxy (hereinafter "Barlow"); Chiu
Minimally Invasive Spine Surgery, Inc., a California corporation (hereinafter
"CMIS"), and the owners of all the outstanding shares of common stock of CMIS
(hereinafter the "CMIS Stockholders").
RECITALS:
WHEREAS, the CMIS Stockholders own all of the issued and outstanding
common stock of CMIS which comprises 1,000 shares (the "CMIS Common Stock").
Galaxy desires to acquire the CMIS Common Stock solely in exchange for voting
common stock of Galaxy, making CMIS a wholly-owned subsidiary of Galaxy; and
WHEREAS, the CMIS Stockholders (as set forth on the attached Exhibit
"A") desire to acquire voting common stock of Galaxy in exchange for the CMIS
Common Stock, as more fully set forth herein.
NOW THEREFORE, for the mutual consideration set out herein and other
good and valuable consideration, the legal sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. PLAN OF REORGANIZATION. It is hereby agreed that all of the CMIS
Common Stock shall be acquired by Galaxy in exchange solely for Galaxy common
voting stock (the "Galaxy Shares"). It is the intention of the parties hereto
that all of the issued and outstanding shares of capital stock of CMIS shall be
acquired by Galaxy in exchange solely for Galaxy common voting stock and that
this entire transaction qualify as a corporate reorganization under Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and related or
other applicable sections thereunder.
2. EXCHANGE OF SHARES. Galaxy and CMIS Stockholders agree that on the
Closing Date or at the Closing as hereinafter defined, the CMIS Common Stock
shall be delivered at Closing to Galaxy in exchange for the Galaxy Shares, after
giving effect to a 16 to 1 reverse stock split (the "Galaxy Reverse Stock
Split") as to all presently outstanding shares of Galaxy common stock, as
follows:
(a) At Closing, Galaxy shall, subject to the conditions set forth
herein, issue an aggregate of 5,000,000 shares of Galaxy common stock for
immediate delivery to the CMIS Stockholders on the basis of 5,000 Galaxy Shares
for each outstanding share of CMIS Common Stock.
(b) Each CMIS Stockholder shall execute this Agreement.
<PAGE> 4
(c) Unless otherwise agreed by Galaxy and CMIS this transaction shall
close only in the event Galaxy is able to acquire all of the outstanding CMIS
Common Stock.
3. PRE-CLOSING EVENTS. The Closing is subject to the completion of the
following:
(a) Galaxy shall have authorized 30,000,000 shares of $.001 par value
common stock and 100,000 shares of $.001 par value preferred stock. The
preferred stock shall be subject to issuance in such series and with such
rights, preferences and designations as determined in the sole discretion of the
board of directors.
(b) Galaxy shall have effectuated the Galaxy Reverse Stock Split at or
prior to Closing, and shall have 1,800,000 shares of its common stock issued and
outstanding and no other shares of capital stock issued or outstanding.
(c) Galaxy shall demonstrate to the reasonable satisfaction of CMIS
that it has no material assets and no liabilities contingent or fixed.
4. EXCHANGE OF SECURITIES. As of the Closing Date each of the following
shall occur:
(a) Each share of CMIS Common Stock issued and outstanding immediately
prior to the Closing Date shall be exchanged for 5,000 Galaxy Shares to be
delivered at Closing. All such outstanding shares of CMIS Common Stock shall be
deemed, after Closing, to be owned by Galaxy. The holders of such certificates
previously evidencing shares of CMIS Common Stock outstanding immediately prior
to the Closing Date shall cease to have any rights with respect to such shares
of CMIS Common Stock except as otherwise provided herein or by law;
(b) Any shares of CMIS Common Stock held in the treasury of CMIS
immediately prior to the Closing Date shall automatically be canceled and
extinguished without any conversion thereof and no payment shall be made with
respect thereto;
(c) The 1,800,000 shares of Galaxy common stock previously issued and
outstanding prior to the Closing, after giving effect to the Galaxy Reverse
Split will remain outstanding.
5. OTHER EVENTS OCCURRING AT CLOSING. At Closing, the following shall
be accomplished:
(a) Galaxy shall file an amendment to its Certificate of Incorporation
with the Secretary of State of the State of Delaware in substantially the form
attached hereto as Exhibit "B" effecting an amendment to its Certificate of
Incorporation to reflect a name change and to accomplish the Galaxy Reverse
Stock Split, all as set forth in the attached Exhibit "B".
(b) The resignation of the existing Galaxy officer and director and
appointment of new officers and directors as described in Section 12(f) hereof.
3
<PAGE> 5
(c) Galaxy shall have completed a private placement of 1,333,333 shares
of its common stock at $1.50 per share. The gross proceeds of this offering (the
"Galaxy Financing") shall be $2,000,000, which amount, less $75,000 costs, shall
be delivered to the control of new management of Galaxy at Closing in good
funds. The Galaxy Financing shall have been completed in compliance with all
applicable state and federal securities laws and the securities sold shall be
delivered at Closing to the investors in the Galaxy Financing.
6. OTHER MATTERS.
(a) Except as otherwise described herein, including the Galaxy Reverse
Stock Split, there shall be no stock dividend, stock split, recapitalization, or
exchange of shares with respect to or rights issued in respect of, Galaxy's
capital stock after the date hereof and there shall be no dividends paid on
Galaxy's capital stock after the date hereof, in each case through and including
the Closing Date.
(b) CMIS shall have received all requisite director and shareholder
approval of all matters set forth herein, and no shareholder of CMIS shall have
exercised any dissenters rights under applicable corporate law.
(c) Galaxy shall have received all requisite shareholder approval of
the matters set forth herein.
(d) At or prior to Closing, Galaxy shall announce the declaration of a
distribution of Series A Warrants to the shareholders of record as of a date to
be announced but which shall be as of a date prior to Closing. The Series A
Warrants shall be distributed on the basis of one warrant for each share of
post-split common stock held by each shareholder of record. There shall be
1,800,000 Series A Warrants distributed, each of which shall entitle the holder
thereof to purchase one share of the Company's common stock at $3.00 per share
prior to June 30, 2000, subject to the terms and conditions set forth in the
Memorandum (as such term is hereinafter defined).
(e) All parties hereto acknowledge and recognize that as an integral
part of the consideration given herein, Galaxy has agreed and committed to
immediately proceed, upon Closing, to obtain all necessary audited financial
statements and to commence preparation for filing, as soon as practicable, a
registration statement with the Securities and Exchange Commission ("S.E.C."),
registering the distribution of the Series A Warrants and the exercise of said
Warrants. Therefore Galaxy, with the complete cooperation of CMIS, hereby agrees
to commence preparation of said registration statement for filing with the
S.E.C. and to attempt to file such registration statement within three months of
Closing and to prosecute the same with all diligence to effectiveness.
7. DELIVERY OF SHARES. On or as soon as practicable after the Closing
Date, CMIS will use its best efforts to cause the CMIS Stockholders to surrender
for cancellation certificates representing their shares of CMIS Common Stock,
against delivery of certificates representing the
4
<PAGE> 6
Galaxy Shares for which the shares of CMIS Common Stock are to be exchanged at
Closing.
8. REPRESENTATIONS OF CMIS STOCKHOLDERS. CMIS Stockholders hereby
represent and warrant each only as to its own CMIS Common Stock, effective this
date and the Closing Date as follows:
(a) Except as may be set forth in Exhibit "A", the CMIS Common Stock is
free from claims, liens, or other encumbrances, and at the Closing Date CMIS
Stockholders will have good title and the unqualified right to transfer and
dispose of such CMIS Common Stock.
(b) Each CMIS Stockholder, respectively, is the sole owner of the
issued and outstanding CMIS Common Stock as set forth in Exhibit "A";
(c) No CMIS Stockholder has the present intent to sell or dispose of
the Galaxy Shares and no CMIS Stockholder is under a binding obligation, formal
commitment, or existing plan to sell or otherwise dispose of the Galaxy Shares.
9. REPRESENTATIONS OF CMIS. CMIS hereby represents and warrants as
follows, which warranties and representations shall also be true as of the
Closing Date:
(a) Except as noted on Exhibit "A", the CMIS Stockholders listed on the
attached Exhibit "A" are the sole owners of record and beneficially of the
issued and outstanding common stock of CMIS.
(b) CMIS has no outstanding or authorized capital stock, warrants,
options or convertible securities other than as described in the CMIS Financial
Statements or in Exhibit "A", attached hereto.
(c) The audited financial statements as of and for the period ended
March 20, 1998, which have been delivered to Galaxy (hereinafter referred to as
the "CMIS Financial Statements") are complete and accurate and fairly present
the financial condition of CMIS as of the date thereof and the results of its
operations for the period covered. There are no material liabilities or
obligations, either fixed or contingent, not disclosed in the CMIS Financial
Statements or in any exhibit thereto or notes thereto other than contracts or
obligations in the ordinary course of business; and no such contracts or
obligations in the ordinary course of business constitute liens or other
liabilities which materially alter the financial condition of CMIS as reflected
in the CMIS Financial Statements. CMIS has good title to all assets shown on the
CMIS Financial Statements subject only to dispositions and other transactions in
the ordinary course of business, the disclosures set forth therein and liens and
encumbrances of record. The CMIS Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied
(except as may be indicated therein or in the notes thereto).
(d) Since the date of the CMIS Financial Statements, there have not
been any material adverse changes in the financial position of CMIS except
changes arising in the ordinary course of
5
<PAGE> 7
business, which changes will in no event materially and adversely affect the
financial position of CMIS.
(e) CMIS is not a party to any material pending litigation or, to its
best knowledge, any governmental investigation or proceeding, not reflected in
the CMIS Financial Statements, and to its best knowledge, no material
litigation, claims, assessments or any governmental proceedings are threatened
against CMIS.
(f) CMIS is in good standing in its jurisdiction of incorporation, and
is in good standing and duly qualified to do business in each jurisdiction where
required to be so qualified except where the failure to so qualify would have no
material negative impact on CMIS.
(g) CMIS has (or, by the Closing Date, will have filed) all material
tax, governmental and/or related forms and reports (or extensions thereof) due
or required to be filed and has (or will have) paid or made adequate provisions
for all taxes or assessments which have become due as of the Closing Date.
(h) CMIS has not materially breached any material agreement to which it
is a party. CMIS has previously given Galaxy copies or access thereto of all
material contracts, commitments and/or agreements to which CMIS is a party
including all relationships or dealings with related parties or affiliates.
(i) CMIS has no subsidiary corporations except as described in writing
to Galaxy.
(j) CMIS has made all material corporate financial records, minute
books, and other corporate documents and records available for review to present
management of Galaxy prior to the Closing Date, during reasonable business hours
and on reasonable notice.
(k) The execution of this Agreement does not materially violate or
breach any material agreement or contract to which CMIS is a party and has been
duly authorized by all appropriate and necessary corporate action under
California law and CMIS, to the extent required, has obtained all necessary
approvals or consents required by any agreement to which CMIS is a party.
(l) All information regarding CMIS which is set forth in the Memorandum
or otherwise delivered to Galaxy by CMIS for use in connection with the
transaction (the "Acquisition") described herein is true, complete and accurate
in all material respects.
10. REPRESENTATIONS OF GALAXY AND BARLOW. Galaxy, and Barlow to the
best of his knowledge, hereby jointly and severally represent and warrant as
follows, each of which representations and warranties shall continue to be true
as of the Closing Date:
(a) As of the Closing Date, the Galaxy Shares, to be issued and
delivered to the CMIS Stockholders hereunder will, when so issued and delivered,
constitute, duly authorized, validly and
6
<PAGE> 8
legally issued shares of Galaxy common stock, fully-paid and nonassessable.
(b) Galaxy has the corporate power to enter into this Agreement and to
perform its respective obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the board of directors of Galaxy. The execution and
performance of this Agreement will not constitute a material breach of any
agreement, indenture, mortgage, license or other instrument or document to which
Galaxy is a party and will not violate any judgment, decree, order, writ, rule,
statute, or regulation applicable to Galaxy or its properties. The execution and
performance of this Agreement will not violate or conflict with any provision of
the Articles of Incorporation or by-laws of Galaxy. .........
(c) Galaxy has delivered to CMIS a true and complete copy of its
audited financial statements for the years ended December 31, 1996 and 1997,
(the "Galaxy Financial Statements"). The Galaxy Financial Statements are
complete, accurate and fairly present the financial condition of Galaxy as of
the dates thereof and the results of its operations for the periods then ended.
There are no material liabilities or obligations either fixed or contingent not
reflected therein. The Galaxy Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto) and fairly
present the financial position of Galaxy as of the dates thereof and the results
of its operations and changes in financial position for the periods then ended.
(d) Since December 31, 1997, there have not been any material adverse
changes in the financial condition of Galaxy except with regard to disbursements
to pay reasonable and ordinary expenses in connection with maintaining its
corporate status and pursuing the matters contemplated in this Agreement. Prior
to Closing, all accounts payable and other liabilities of Galaxy shall be paid
and satisfied in full.
(e) Galaxy is not a party to or the subject of any pending litigation,
claims, or governmental investigation or proceeding not reflected in the Galaxy
Financial Statements or otherwise disclosed herein, and there are no lawsuits,
claims, assessments, investigations, or similar matters, to the best knowledge
of Barlow, threatened or contemplated against or affecting Galaxy, its
management or its properties.
(f) Galaxy is duly organized, validly existing and in good standing
under the laws of the State of Delaware; has the corporate power to own its
property and to carry on its business as now being conducted and is duly
qualified to do business in any jurisdiction where so required except where the
failure to so qualify would have no material negative impact on it.
7
<PAGE> 9
(g) Galaxy has filed all federal, state, county and local income,
excise, property and other tax, governmental and/or related returns, forms, or
reports, which are due or required to be filed by it prior to the date hereof,
except where the failure to do so would have no material adverse impact on
Galaxy, and has paid or made adequate provision in the Galaxy Financial
Statements for the payment of all taxes, fees, or assessments which have or may
become due pursuant to such returns or pursuant to any assessments received.
Galaxy is not delinquent or obligated for any tax, penalty, interest,
delinquency or charge.
(h) There are no existing options, calls, warrants, preemptive rights
or commitments of any character relating to the issued or unissued capital stock
or other securities of Galaxy, except as contemplated in this Agreement.
(i) The corporate financial records, minute books, and other documents
and records of Galaxy have been made available to CMIS prior to the Closing.
(j) Galaxy has not breached, nor is there any pending, or to the
knowledge of management, any threatened claim that Galaxy has breached, any of
the terms or conditions of any agreements, contracts or commitments to which it
is a party or by which it or its assets are is bound. The execution and
performance hereof will not violate any provisions of applicable law or any
agreement to which Galaxy is subject. Galaxy hereby represents that it is not a
party to any material contract or commitment other than appointment documents
with its transfer agent, and that it has disclosed to CMIS all relationships or
dealings with related parties or affiliates.
(k) Galaxy common stock is currently approved for quotation on the OTC
Bulletin Board and there are no stop orders in effect with respect thereto.
(l) All information regarding Galaxy which has been provided to CMIS in
the Galaxy Private Placement Memorandum dated June 4, 1998 (the "Memorandum") or
otherwise disclosed to the public in connection with the transactions
contemplated herein, is true, complete and accurate in all material respects.
Galaxy and Barlow specifically disclaim any responsibility regarding disclosures
as to CMIS or its business.
11. CLOSING. The Closing of the transactions contemplated herein shall
take place on such date (the "Closing") as mutually determined by the parties
hereto when all conditions precedent have been met and all required documents
have been delivered, which Closing shall be no later than June 30, 1998, unless
extended by mutual consent of all parties hereto. The "Closing Date" of the
transactions described herein (the "Acquisition"), shall be that date on which
all conditions set forth herein have been met and the Galaxy Shares are issued
in exchange for the CMIS Common Stock.
12. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CMIS. All obligations of
CMIS under this Agreement are subject to the fulfillment, prior to or as of the
8
<PAGE> 10
Closing and/or the Closing Date, as indicated below, of each of the following
conditions:
(a) The representations and warranties by or on behalf of Barlow and
Galaxy contained in this Agreement or in any certificate or document delivered
pursuant to the provisions hereof shall be true in all material respects at and
as of the Closing and Closing Date as though such representations and warranties
were made at and as of such time.
(b) Galaxy shall have performed and complied with all covenants,
agreements, and conditions set forth in, and shall have executed and delivered
all documents required by this Agreement to be performed or complied with or
executed and delivered by it prior to or at the Closing.
(c) On or before the Closing, the board of directors, and shareholders
representing a majority interest the outstanding common stock of Galaxy, shall
have approved in accordance with applicable state corporation law the execution
and delivery of this Agreement and the consummation of the transactions
contemplated herein.
(d) On or before the Closing Date, Galaxy shall have delivered to CMIS
certified copies of resolutions of the board of directors and shareholders of
Galaxy approving and authorizing the execution, delivery and performance of this
Agreement and authorizing all of the necessary and proper action to enable
Galaxy to comply with the terms of this Agreement including the election of
CMIS's nominees to the Board of Directors of Galaxy and all matters outlined
herein.
(e) The Acquisition shall be permitted by applicable law and Galaxy
shall have sufficient shares of its capital stock authorized to complete the
Acquisition.
(f) At Closing, the existing officers and directors of Galaxy shall
have resigned in writing from all positions as directors and officers of Galaxy
effective upon the election and appointment of the CMIS nominees.
(g) At the Closing, all instruments and documents delivered to CMIS and
CMIS Stockholders pursuant to the provisions hereof shall be reasonably
satisfactory to legal counsel for CMIS.
(h) The shares of restricted Galaxy capital stock to be issued to CMIS
Stockholders and in the Galaxy Financing at Closing will be validly issued,
nonassessable and fully-paid under Delaware corporation law and will be issued
in compliance with all federal, state and applicable corporation and securities
laws.
(i) CMIS and CMIS Stockholders shall have received the advice of their
tax advisor, if deemed necessary by them, as to all tax aspects of the
Acquisition.
(j) CMIS shall have received all necessary and required approvals and
consents from required parties and its shareholders.
9
<PAGE> 11
(k) Galaxy shall have $1,925,000 in good funds, at Closing, from the
Galaxy Financing, for delivery at the direction of CMIS.
(l) At the Closing, Galaxy shall have delivered to CMIS an opinion of
its counsel dated as of the Closing to the effect that:
(i) Galaxy is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation;
(ii) This Agreement has been duly authorized, executed and
delivered by Galaxy and is a valid and binding obligation of Galaxy
enforceable in accordance with its terms;
(iii) Galaxy through its board of directors and stockholders
has taken all corporate action necessary for performance under this
Agreement;
(iv) The documents executed and delivered by Galaxy to CMIS
and CMIS Stockholders hereunder are valid and binding in accordance
with their terms and vest in CMIS Stockholders, as the case may be, all
right, title and interest in and to the Galaxy Shares to be issued
pursuant to the terms hereof, and the Galaxy Shares when issued will be
duly and validly issued, fully-paid and nonassessable;
(v) Galaxy has the corporate power to execute, deliver and
perform under this Agreement;
(vi) Legal counsel for Galaxy is not aware of any liabilities,
claims or lawsuits involving Galaxy;
13. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF GALAXY. All obligations
of Galaxy under this Agreement are subject to the fulfillment, prior to or at
the Closing, of each of the following conditions:
(a) The representations and warranties by CMIS and CMIS Stockholders
contained in this Agreement or in any certificate or document delivered pursuant
to the provisions hereof shall be true in all material respects at and as of the
Closing as though such representations and warranties were made at and as of
such time.
(b) CMIS shall have performed and complied with, in all material
respects, all covenants, agreements, and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing;
(c) CMIS shall deliver on behalf of the CMIS Stockholders a letter
commonly known as an "Investment Letter," signed by each of said shareholders,
in substantially the form attached
10
<PAGE> 12
hereto as Exhibit "C", acknowledging that the Galaxy Shares are being acquired
for investment purposes.
(d) CMIS shall deliver an opinion of its legal counsel to the effect
that:
(i) CMIS is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation
and is duly qualified to do business in any jurisdiction where so
required except where the failure to so qualify would have no material
adverse impact on CMIS;
(ii) This Agreement has been duly authorized, executed and
delivered by CMIS.
(iii) The documents executed and delivered by CMIS and CMIS
Stockholders to Galaxy hereunder are valid and binding in accordance
with their terms and vest in Galaxy all right, title and interest in
and to the CMIS Common Stock, which stock is duly and validly issued,
fully-paid and nonassessable.
14. INDEMNIFICATION. For a period of one year from the Closing, Galaxy
and Barlow agree to jointly and severally indemnify and hold harmless CMIS, and
CMIS agrees to indemnify and hold harmless Galaxy and Barlow, at all times after
the date of this Agreement against and in respect of any liability, damage or
deficiency, all actions, suits, proceedings, demands, assessments, judgments,
costs and expenses including attorney's fees incident to any of the foregoing,
resulting from any material misrepresentations made by an indemnifying party to
an indemnified party, an indemnifying party's breach of covenant or warranty or
an indemnifying party's nonfulfillment of any agreement hereunder, or from any
material misrepresentation in or omission from any certificate furnished or to
be furnished hereunder.
15. NATURE AND SURVIVAL OF REPRESENTATIONS. All representations,
warranties and covenants made by any party in this Agreement shall survive the
Closing and the consummation of the transactions contemplated hereby for one
year from the Closing. All of the parties hereto are executing and carrying out
the provisions of this Agreement in reliance solely on the representations,
warranties and covenants and agreements contained in this Agreement and not upon
any investigation upon which it might have made or any representation, warranty,
agreement, promise or information, written or oral, made by the other party or
any other person other than as specifically set forth herein.
16. DOCUMENTS AT CLOSING. At the Closing, the following documents shall
be delivered:
(a) CMIS will deliver, or will cause to be delivered, to Galaxy the
following:
(i) a certificate executed by the President and Secretary of
CMIS to the effect that all representations and warranties made by CMIS
under this Agreement are true and
11
<PAGE> 13
correct as of the Closing, the same as though originally given to
Galaxy on said date;
(ii) a certificate from the jurisdiction of incorporation of
CMIS dated at or about the Closing to the effect that CMIS is in good
standing under the laws of said jurisdiction;
(iii) Investment Letters in the form attached hereto as
Exhibit "C" executed by each CMIS Stockholder;
(iv) such other instruments, documents and certificates, if
any, as are required to be delivered pursuant to the provisions of this
Agreement;
(v) certified copies of resolutions adopted by the
shareholders and directors of CMIS authorizing this transaction; and
(vi) all other items, the delivery of which is a condition
precedent to the obligations of Galaxy as set forth herein.
(vii) the legal opinion required by Section 13(d) hereof.
(b) Galaxy will deliver or cause to be delivered to CMIS:
(i) stock certificates representing the Galaxy Shares to be
issued as a part of the stock exchange as described herein;
(ii) a certificate of the President of Galaxy, to the effect
that all representations and warranties of Galaxy made under this
Agreement are true and correct as of the Closing, the same as though
originally given to CMIS on said date;
(iii) certified copies of resolutions adopted by Galaxy's
board of directors and Galaxy's Stockholders authorizing the
Acquisition and all related matters described herein;
(iv) certificate from the jurisdiction of incorporation of
Galaxy dated at or about the Closing Date that Galaxy is in good
standing under the laws of said state;
(v) opinion of Galaxy's counsel as described in Section 12(l)
above;
(vi) such other instruments and documents as are required to
be delivered pursuant to the provisions of this Agreement;
(vii) resignation of the existing officer and director of
Galaxy;
(viii) all corporate and financial records of Galaxy; and
12
<PAGE> 14
(ix) all other items, the delivery of which is a condition
precedent to the obligations of CMIS, as set forth in Section 13
hereof.
17. FINDER'S FEES. Galaxy, represents and warrants to CMIS, and CMIS
represents and warrants to Galaxy that neither of them, or any party acting on
their behalf, has incurred any liabilities, either express or implied, to any
"broker" of "finder" or similar person in connection with this Agreement or any
of the transactions contemplated hereby. In this regard, Galaxy, on the one
hand, and CMIS on the other hand, will indemnify and hold the other harmless
from any claim, loss, cost or expense whatsoever (including reasonable fees and
disbursements of counsel) from or relating to any such express or implied
liability.
18. MISCELLANEOUS.
(a) FURTHER ASSURANCES. At any time, and from time to time, after the
Closing Date, each party will execute such additional instruments and take such
action as may be reasonably requested by the other party to confirm or perfect
title to any property transferred hereunder or otherwise to carry out the intent
and purposes of this Agreement.
(b) WAIVER. Any failure on the part of any party hereto to comply with
any of its obligations, agreements or conditions hereunder may be waived in
writing by the party to whom such compliance is owed.
(c) TERMINATION. All obligations hereunder may be terminated at the
discretion of either party's board of directors if (i) the closing conditions
specified in Sections 12 and 13 are not met by June 30, 1998, unless extended,
or (ii) any of the representations and warranties made herein have been
materially breached.
(d) AMENDMENT. This Agreement may be amended only in writing as agreed
to by all parties hereto.
(e) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given if delivered in person or sent by
prepaid first class registered or certified mail, return receipt requested.
(f) HEADINGS. The section and subsection headings in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(h) GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Utah.
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<PAGE> 15
(i) BINDING EFFECT. This Agreement shall be binding upon the parties
hereto and inure to the benefit of the parties, their respective heirs,
administrators, executors, successors and assigns.
(j) ENTIRE AGREEMENT. This Agreement and the attached Exhibits
constitute the entire agreement of the parties covering everything agreed upon
or understood in the transaction. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution hereof.
(k) TIME. Time is of the essence.
(l) SEVERABILITY. If any part of this Agreement is deemed to be
unenforceable the balance of the Agreement shall remain in full force and
effect.
(m) RESPONSIBILITY AND COSTS. All fees, expenses and out-of-pocket
costs and expenses, including, without limitation, fees and disbursements of
counsel, advisors and accountants, incurred by the parties hereto shall be borne
solely and entirely by the party that has incurred such costs and expenses.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
GALAXY VENTURES, INC.
By:
--------------------------------
Clayton B. Barlow, President and
Secretary
--------------------------------
Clayton B. Barlow, individually
CHIU MINIMALLY INVASIVE SPINE SURGERY, INC.
By: By:
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Secretary President
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SHAREHOLDERS OF CHIU MINIMALLY
INVASIVE SPINE SURGERY, INC.
John C. Chiu Family Limited Partnership N
By:
--------------------------------
John C. Chiu, General Partner
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DRAFT: MAY 2, 1999
CONFIDENTIAL
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AGREEMENT AND PLAN OF MERGER
Between
MINIMALLY INVASIVE SURGERY CORPORATION
And
MIS ACQUISITION COMPANY I, INC.
And
VALLEY PAIN CENTERS, INC.
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of the _____ day of May,
1999, is by and between Minimally Invasive Surgery Corporation, a Delaware
Corporation ("MIS"), MIS Acquisition Company I, Inc., a Florida corporation
("ACQUISITION COMPANY") and Valley Pain Centers, Inc., a Florida corporation
("VPC")
In consideration of the mutual covenants and agreements contained in
this Agreement, and intending to be legally bound hereby, MIS and VPC hereby
agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement:
"ACQUISITION COMPANY" shall mean MIS Acquisition Company I, Inc., a
Florida corporation and which is a wholly-owned subsidiary of MIS.
"ACQUISITION COMPANY BOARD APPROVAL" shall mean that the Board of
Directors of Acquisition Company, at a meeting duly called and held, has (i)
determined that the Merger is advisable and in the best interest of Acquisition
Company and its stockholders and approved it, (ii) duly approved, authorized and
ratified the execution and delivery of this Agreement and the consummation of
the Transactions, and (iii) recommended the approval of this Agreement, the
Merger, the Articles and each of the Closing Documents to which it is or will be
a party by the holders of Acquisition Company Capital Stock (and any other class
of stock of MIS entitled to vote on the Merger) and directed that this
Agreement, the Merger, the Articles of Merger and each of the Closing Documents
to which it is or will be a party be submitted for consideration by the holders
of Acquisition Company Capital Stock, at a meeting to be held for that purpose.
"ACQUISITION COMPANY CAPITAL STOCK" shall mean all the issued and
outstanding Acquisition Company Common Stock which is owned by MIS.
"ACQUISITION PROPOSAL" shall have the meaning ascribed to it in Section
7.2 hereof.
"ADDITIONAL MERGER CONSIDERATION" shall have the meaning ascribed to it
in Section 3.5 hereof.
"ADVERSE CONSEQUENCES" shall have the meaning ascribed to it in Section
5.13 hereof.
"AFFILIATE" shall have the meaning ascribed to it in Section 7.6
hereof.
"AFFILIATED GROUP" shall have the meaning ascribed to it in Section
5.13 hereof.
"AGREEMENT" means this Agreement and Plan of Merger, and all Schedules
and Exhibits hereto.
"ASSETS" means all of the assets of MIS and its Subsidiaries, or VPC,
as the case may be, of every kind and nature. Any representations and warranties
made by a party hereto with respect
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to the Assets shall pertain only to those Assets which are owned, leased or
otherwise controlled by such party.
"AUDITED FINANCIAL STATEMENT" shall have the meaning ascribed to it in
Section 6.8(a) hereof.
"AUTOMATIC TERMINATION DATE" shall have the meaning ascribed to it in
Section 10.1(e) hereof.
"BOARD APPROVAL" shall mean MIS Board Approval, Acquisition Company
Board Approval or VPC Board Approval, as applicable.
"BUSINESS DAY" shall mean any weekday, excluding any legal holiday
observed pursuant to the United States federal law or the laws of the State of
Florida.
"CERTIFICATE(S)" shall have the meaning ascribed to it in section 3.4
hereof.
"CLOSING" and "CLOSING DATE" shall have the meanings ascribed to such
terms in Section 3.6 hereof.
"CLOSING DOCUMENTS" means this Agreement and all other documents to be
executed and delivered either simultaneously herewith or at Closing in
connection with the Transactions.
"CODE" means the Internal Revenue Code of 1986, as amended.
"DEBENTURES" shall have the meaning ascribed to it in Section 3.1(j)
hereof.
"DELAWARE ACT" shall mean the Delaware General Corporation Law.
"DOL" shall mean the United States Department of Labor.
"EFFECTIVE TIME" shall have the meaning ascribed to it in Section 2.2
hereof.
"EMPLOYMENT AGREEMENTS" shall have the meaning ascribed to it in
Section 4.1 hereof.
"ENVIRONMENTAL LAWS" shall have the meaning ascribed to it in Section
5.6(b) hereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"EXCHANGE ACT" shall mean the Securities and Exchange Act of 1934, as
amended, and all regulations promulgated pursuant thereto.
"EXCHANGE AGENT" shall have the meaning set forth in Section 3.4(b)
hereof.
"EXCHANGE RATIO" shall have the meaning ascribed to it in Section
3.1(a) hereof.
"FINANCIAL STATEMENTS" shall have the meaning ascribed to it in Section
5.8(a) and 6.8(a) hereof.
"FLORIDA ACT" shall mean the Florida Business Corporation Act.
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"FORMULA PERIODS" shall have the meaning ascribed to it in Section
3.1(g) hereof.
"FORMULA PROFITS" shall have the meaning ascribed to it in Section
3.1(f) hereof.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall include any and all governmental or
quasi-governmental bodies, agencies, bureaus, departments, boards, commissions,
instrumentalities or other entities having or asserting jurisdiction over VPC,
MIS, or any Subsidiary of either, as applicable.
"HAZARDOUS SUBSTANCE" shall have the meaning ascribed to it in Section
5.6(b) hereof.
"INITIAL PAYMENT" shall have the meaning ascribed to it in Section
3.1(a) hereof.
"INSTALLMENT PAYMENTS" shall have the meaning ascribed to it in Section
3.1(c) hereof.
"INTERIM FINANCIALS" shall have the meaning ascribed to it in Section
6.8(a) hereof.
"IRS" shall mean the Internal Revenue Service.
"LIABILITY" shall have the meaning ascribed to it in Section 5.13
hereof.
"MATERIAL ADVERSE EFFECT" means a material adverse effect upon, or in,
or circumstances likely to result in, a material adverse change in (i) the
business, assets, liabilities, prospects, operations, results of operations,
properties (including intangible properties), regulatory status or condition
(financial or otherwise) of MIS or VPC, as the case may be, or any of such
party's respective Subsidiaries taken as a whole, (ii) the legality, validity,
binding effect or enforceability of this Agreement, or (iii) the ability of MIS
or VPC, as the case may be, or any of such party's respective Subsidiaries to
perform their obligations under this Agreement.
"MERGER" shall mean the Merger of VPC into Acquisition Company upon the
terms and subject to the conditions set forth in this Agreement.
"MERGER SHARES" shall have the meaning ascribed to it in Section 3.1(b)
hereof.
"MIS" shall mean Minimally Invasive Surgery Corporation, a Delaware
corporation.
"MIS BOARD APPROVAL" shall mean that the Board of Directors of MIS, at
a meeting duly called and held, has (i) determined that the Merger is advisable
and in the best interest of MIS and its stockholders and approved it, (ii) duly
approved, authorized and ratified the execution and delivery of this Agreement
and the consummation of the Transactions, and (iii) adopted a resolution to
elect not to be subject, to the extent permitted by applicable law, to any state
takeover law that may purport to be applicable to this Agreement, the Merger,
and other Transactions.
"MIS BREACH SETTLEMENT" shall have the meaning ascribed to it in
Section 7.6(b) hereof.
"MIS CAPITAL STOCK" shall mean, collectively, the MIS Common Stock and
the MIS Preferred Stock, if any.
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"MIS COMMON STOCK" shall mean the common stock, $______ par value, of
MIS.
"MIS EMPLOYEES" shall have the meaning ascribed to it in Section
5.19(a) hereof.
"MIS EMPLOYEE BENEFIT PLAN" shall have the meaning ascribed to it in
Section 5.19(a) hereof.
"MIS EQUITY INTERESTS" shall mean all capital stock of MIS and
securities convertible into capital stock of MIS.
"MIS ERISA AFFILIATE" shall have the meaning ascribed to it in Section
5.19(a) hereof.
"MIS FINAL REVISED SCHEDULES" shall have the meaning ascribed to it in
Section 8.9 hereof.
"MIS GROUP" shall have the meaning ascribed to it in Section 5.13(b)
hereof.
"MIS INTELLECTUAL PROPERTY" shall have the meaning ascribed to it in
Section 5.10 hereof.
"MIS RECEIVABLES" shall have the meaning ascribed to it in Section 5.22
hereof.
"MIS SHAREHOLDER APPROVAL" means with respect to MIS the requisite
approval by the holders of MIS Capital Stock of this Agreement and the Merger.
"MONTHLY FINANCIALS" shall have the meaning ascribed to it in Section
4.9 hereof.
"MOST RECENT FISCAL QUARTER END" shall have the meaning ascribed to it
in Section 5.8 hereof.
"NONDISCLOSURES/NONCOMPETE AGREEMENTS" shall have the meaning ascribed
to it in Section 4.1 hereof.
"OPTION/WARRANT SHARES" shall have the meaning ascribed to it in the
Employment Agreements set forth in EXHIBIT 4.1 hereof.
"OUT-OF-POCKET COSTS" shall mean, with respect to MIS or VPC, as the
case may be, all fees, expenses, and other costs which are directly related to
the Transactions which such party has incurred through the date of termination
of this Agreement.
"PERMITTED EQUITY FINANCING" shall have the meaning ascribed to it in
Section 3.1(c) hereof.
"PERSON" means an individual, corporation, limited liability company,
limited liability partnership, limited partnership, trust, joint venture,
association or unincorporated organization or a Governmental Authority.
"PUBLIC REPORTS" shall have the meaning set forth in Section 5.6(c)
hereof.
"SEC" shall mean the U.S. Securities and Exchange Commission.
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"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
all regulations promulgated thereunder.
"SECURITIES FILINGS" shall mean the most recent Form 10-KSB filed by
MIS with the SEC, as well as any and all filing made by MIS thereafter pursuant
to the Exchange Act.
"SECURITY INTEREST" shall have the meaning ascribed to it in Section
5.13 hereof.
"SETTLEMENT CUT-OFF" shall have the meaning ascribed to it in Section
7.6 hereof.
"SPECIAL MEETING" shall have the meaning ascribed to it in Section 7.1
hereof.
"SUBSIDIARY" shall mean one of the business entitles identified as such
on SCHEDULE 5.1 hereto, as to MIS.
"SURVIVING CORPORATION" shall have the meaning ascribed to it in
Section 2.1 hereof.
"TAX" shall have the meaning ascribed to it in Section 5.13 hereof.
"TAX RETURN" shall have the meaning ascribed to it in Section 5.13
hereof.
"TRANSACTIONS" means the transactions contemplated by this Agreement,
including but not limited to the Merger.
"VPC" shall mean Valley Pain Centers, Inc., a Florida corporation.
"VPC BOARD APPROVAL" shall mean that the Board of Directors of VPC, at
a meeting duly called and held, has in the exercise of its sole discretion (i)
determined that the Merger is advisable and in the best interest of VPC and its
stockholders and approved it, (ii) duly approved, authorized and ratified the
execution and delivery of this Agreement and the consummation of the
Transactions, (iii) recommended the approval of this Agreement, the Merger, the
Certificate of Merger and each of the Closing Documents to which it is or will
be a party, by the holders of VPC Capital Stock (and any other class of stock of
VPC entitled to vote on the Merger) and directed that this Agreement, the Merger
and each of the Closing Documents to which it is or will be a party, be
submitted for consideration by the holders of VPC Capital Stock at a meeting to
be held for that purpose, and (iv) adopted a resolution to elect not to be
subject, to the extent permitted by applicable law, to any state takeover law
that may purport to be applicable to this Agreement, the Merger, and the other
Transactions.
"VPC BREACH SETTLEMENT" shall have the meaning ascribed to it in
Section 7.6(a) hereof.
"VPC CAPITAL STOCK" shall mean all VPC capital stock.
"VPC CLASS A COMMON STOCK" shall mean the Class A voting common stock,
$.001 par value, of VPC.
"VPC CLASS B COMMON STOCK" shall mean the Class B nonvoting common
stock, $.001 par value, of VPC.
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"VPC COMMON STOCK" shall mean the Class A voting common stock, $.001
par value, and the Class B nonvoting common stock, $.001 par value, of VPC.
"VPC CLASS A COMMON STOCKHOLDERS" shall mean the holders of the VPC
Class A Common Stock.
"VPC CLASS A COMMON STOCKHOLDERS" shall mean the holders of the VPC
Class A Common Stock.
"VPC EMPLOYEES" shall have the meaning ascribed to it in Section
6.19(a) hereof.
"VPC EMPLOYEE BENEFIT PLAN" shall have the meaning ascribed to it in
Section 6.19(a) hereof.
"VPC EQUITY INTERESTS" shall mean all capital stock of VPC and
securities convertible into capital stock of VPC.
"VPC ERISA AFFILIATE" shall have the meaning ascribed to it in Section
6.19(a) hereof.
"VPC FINAL REVISED SCHEDULES" shall have the meaning ascribed to it in
Section 9.9 hereof.
"VPC GROUP" shall have the meaning ascribed to it in Section 6.13(a)
hereof.
"VPC INTELLECTUAL PROPERTY" shall have the meaning ascribed to it in
Section 6.10 hereof.
"VPC STOCKHOLDERS" shall mean the VPC Class A Common Stockholders and
the VPC Class B Common Stockholders.
"VPC RECEIVABLES" shall have the meaning ascribed to it in Section 6.24
hereof.
"VPC STOCK OPTION PLANS" shall have the meaning ascribed to it in
Section 3.3 hereof.
"VPC STOCKHOLDER APPROVAL" means with respect to VPC, the requisite
approval by the holders of VPC Capital Stock of this Agreement and the Merger.
ARTICLE 2
THE MERGER
2.1 THE MERGER. At the Effective Time and subject to and upon the terms
and conditions of this Agreement, the Delaware Act and the Florida Act, VPC
shall be merged with and into Acquisition Company, the separate existence of VPC
shall cease and Acquisition Company, which shall change its name to Valley Pain
Centers, Inc., shall continue as the surviving corporation. Acquisition Company
after the Merger shall be governed by the Florida Act and is hereinafter
sometimes referred to as the "Surviving Corporation". The Surviving Corporation
shall remain a wholly-owned subsidiary of MIS.
2.2 EFFECTIVE TIME. As promptly as practicable after the satisfaction
or waiver of the conditions set forth in Articles 8 and 9, the parties hereto
shall cause the Merger to be
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consummated by filing Articles of Merger with the Secretary of State of Florida
in such form as required by, in executed in accordance with, the relevant
provisions of the Florida Act, copies of which are attached hereto as EXHIBIT
2.2 (the filing being the "Effective Time"). At the Effective Time, MIS will
irrevocably instruct its stock transfer agent to issue and deliver in the manner
provided in Articles 2 and 3 hereof the certificates evidencing the Merger
Shares to be issued in the Merger.
2.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the Florida Act.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all property, rights, privileges, powers and franchises of
Acquisition Company and VPC shall vest in the Surviving Corporation, and all
debts, liabilities and duties of Acquisition Company and VPC shall become the
debts, liabilities and duties of the Surviving Corporation.
2.4 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to (i) vest, perfect or conform of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or Assets of VPC or Acquisition Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or (ii) otherwise carry out this Agreement, then the officers and
directors of the Surviving Corporation shall be authorized to (x) execute and
deliver, in the name and on behalf of either VPC or Acquisition Company all such
deeds, bills of sale, assignments, assurances and (y) to take and do, in the
name of and on behalf of each such other corporation or otherwise, all such
actions and things as may be necessary or desirable, to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise carry out this Agreement.
2.5 ARTICLES OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS.
(a) At the Effective Time and as part of the Merger, the
Articles of Incorporation of the Surviving Corporation shall be in the form
attached hereto as EXHIBIT 2.5(a), until thereafter amended as provided by law,
its by-laws and such Articles of Incorporation.
(b) At the Effective Time and as part of the Merger, the
By-Laws of the Surviving Corporation shall be in the form attached hereto as
EXHIBIT 2.5(b), until thereafter amended as provided by law, the Articles of
Incorporation and such By-Laws.
(c) After the Effective Time, the Board of Directors of the
Surviving Corporation will consist of David S. Klein, M.D., Rogers W. Kirven,
Jr., and Jere Palazzolo.
(d) After the Effective Time, the Board of Directors of MIS
will consist of John Chiu, M.D., Jere Palazzolo, an appointee of Dr. Chiu and
Mr. Palazzolo, David S. Klein, M.D., Rogers W. Kirven, Jr., an appointee of Dr.
Klein and Mr. Kirven and an appointee mutually agreed to by Messrs. Chiu,
Palazzolo, Klein and Kirven.
2.6 BOARD AND STOCKHOLDER APPROVAL. This Agreement is subject to, and
it is a condition to the consummation of the Merger, that MIS Board Approval,
MIS Stockholder Approval, Acquisition Company Board Approval, VPC Board Approval
and VPC Stockholder Approval be obtained.
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2.7 TAX CONSEQUENCES. It is intended that this Transaction shall
constitute a reorganization within the meaning of Section 368 of the Code, and
that this Agreement shall constitute a "plan of reorganization" for purposes of
Section 368 of the Code.
ARTICLE 3
MERGER CONSIDERATION
In exchange for merging VPC into Acquisition Company and canceling and
extinguishing the VPC Capital Stock in accordance with this Merger Agreement,
the VPC Stockholders, as designated and in the amounts set forth in SCHEDULE 3,
shall receive the following Merger Consideration:
3.1 MERGER CONSIDERATION. MIS agrees, subject to the provisions of this
Merger Agreement, to pay to the VPC Stockholders an amount up to, but not
exceeding, Eight Million Two Hundred Fifty Thousand Dollars ($8,250,000.00) as
set forth below (hereinafter the "PURCHASE PRICE"). The Purchase Price has been
initially calculated and the Installment Payments (as defined below) are
conditioned upon MIS recognizing the Formula Profits (as defined below).
(a) INITIAL PAYMENT. MIS will pay, at Closing, the VPC Class A Common
Stockholders the sum of Four Million Five Hundred Thousand Dollars
($4,500,000.00) (the "INITIAL PAYMENT"). The Initial Payment shall be made in
non-registered MIS Common Stock (the "INITIAL MIS SHARES"). For purposes of
determining the number of Initial MIS Shares the VPC Class A Common Stockholders
will receive with respect to the Initial Payment, the following calculation
shall be made: the amount of the Initial Payment shall be divided by $3.00 with
the resulting quotient equaling the number of MIOA Shares that shall be
delivered to the VPC Class A Common Stockholders as set forth in SCHEDULE 3 in
respect of such payment (i.e., 1,500,000) (which shall not be subject to any
adjustments for subdivisions or other recapitalizations of MIS that would
otherwise have the effect of reducing the number of issued and outstanding
shares of MIS that occur prior to Closing).
Notwithstanding, in the event the MIS Common Stock or
its successor's common stock does not have a Fair Market Value of at least $3.00
per share (which shall for these purposes be increased by the ratio of any MIS
Common Stock combinations or decreased by the ratio of any MIS Common Stock
subdivisions that occur subsequent to Closing) during the period beginning on
the first anniversary date of the Closing and ending on the second anniversary
date of the Closing Date (the "TRADING PERIOD"), the VPC Class A Common
Stockholders will receive additional shares of MIS Common Stock equal to the
difference between $3.00 and the Fair Market Value per share for the Trading
Period. The Fair Market Value per share for these purposes shall equal the
average of the close prices of the MIS Common Stock as reported on NASDAQ or
other national exchange for each trading day during the Trading Period.
To illustrate, the VPC Class A Common Stockholders
will receive 1,500,000 Initial MIS Shares in respect of the Initial Payment
(i.e., $4,500,000.00/$3.00) and if the per share Fair Market Value of the MIS
Common Stock (as calculated above) for the Trading Period is less than $3.00
then, in such event, divide $4,500,000.00 by the Fair Market Value per share of
the MIS Common Stock for the Trading Period; then subtract 1,500,000 from the
resulting quotient to determine the additional number of MIS Common Shares the
VPC Class A Common Stockholders will receive. For example, if the per share Fair
Market Value is $2.50,
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then the VPC Class A Common Stockholders will receive 300,000 more MIS Common
Shares ($4,500,000.00/$2.50 = 1,800,000; 1,800,000 - 1,500,000 = 300,000).
(b) EXCHANGE OF SHARES. The manner and basis of exchanging shares of
VPC Capital Stock and MIS Capital Stock into stock of the Surviving Corporation
shall be as follows:
(i) Except as provided in Section 3.2, each share of VPC
Capital Stock which shall be outstanding immediately prior to the Effective Time
shall at the Effective Time, by virtue of the Merger, and without any action on
the part of the holder hereof, be exchanged into only the right to receive the
number of shares of MIS Common Stock as provided herein and the Convertible
Debentures (defined below) (the "EXCHANGE Ratio"). The common shares to be
issued by MIS with respect to the VPC Capital Stock are collectively hereinafter
referred to as "Merger Shares". The Exchange Ratio shall be subject to equitable
adjustment in the event of any stock split, stock dividend or other
recapitalization of MIS after the date hereof but prior to Closing, except for
capital stock combinations or other recapitalizations that have the effect of
reducing the number of Merger Shares the VPC Class A Common Stockholders would
otherwise receive pursuant to this transaction. After the Effective Time, no VPC
Capital Stock shall be recognized or deemed to be issued outstanding, and the
holders thereof shall not have any rights other than as set forth in Article 3.
(ii) Each share of VPC Capital Stock, if any, held in the
treasury of VPC shall automatically be cancelled, shall not be converted into
the right to receive Merger Shares, and shall be extinguished without exchange
thereof and no payment will be made with respect thereto.
(iii) Each share of Acquisition Company Capital Stock which
shall be outstanding immediately prior to the Effective Time shall at the
Effective Time, by virtue of the Merger, and without any action on the part of
the holder hereof, remain outstanding.
(iv) Except as otherwise specifically set forth herein, each
share of MIS Capital Stock which shall be outstanding immediately prior to the
Effective Time shall at the Effective Time remain outstanding. In no event shall
the MIS Capital Stock issued and outstanding on a fully diluted basis exceed on
a fully diluted basis 9,500,000 shares at the Closing or at the closing of the
Permitted Equity Financing described in subsection (v) immediately below.
(v) The parties acknowledge that the other party may, prior to
the Closing and with respect to MIS within 60 days subsequent to the Closing and
with the consent of the other party hereto, issue additional shares of its
capital stock (and/or securities convertible into shares of its capital stock)
in connection with (i) those offerings specifically identified on EXHIBIT 3.1(v)
so long as the conditions with respect to each such offering contained in such
Exhibit are satisfied, including but not limited to the condition that any such
offering is closed no later than: (1) in the case of VPC, the Closing Date; or
(2) in the case of MIS, the date which is 60 days subsequent to the Closing
Date, or (ii) any offering of such issuer's securities issued as consideration
for the Merger of assets or equity interests of another entity if the securities
issued in such offering have an aggregate fair market value of less than
$3,800,000 (each, a "Permitted Equity Financing"), provided, that in either
case, such offering must be made in compliance with all applicable securities
laws and structured so that is will not be integrated with the offering of
Merger Shares and/or Option Shares as contemplated herein, and in the case of
MIS with respect to its offering described in EXHIBIT 3.1(v) shall the MIS
Capital Stock issued and outstanding on a fully diluted basis exceed 9,500,000
shares at the closing of such Permitted Equity Financing. In
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the event that either MIS or VPC desires to issue additional shares of its
capital stock (and/or securities convertible into shares of its capital stock)
in an offering that does not constitute a Permitted Equity Financing, then MIS
and VPC shall attempt in good faith to agree upon the terms and conditions of
the proposed offering and how the resulting percentage ownership of MIS will be
allocated on a fully diluted basis (using the treasury stock method) among the
holders of VPC Equity Interest or the holders of MIS Equity Interest, as the
case may be, issued in connection with such offering.
(vi) MIS shall be required to effect a registration in
accordance with the Registration Rights Agreement attached hereto as EXHIBIT
3.1(vi) on Form S-1 (or other applicable form) to register the Merger Shares,
the common shares underlying the Debentures and the common shares underlying the
Option/Warrant shares to be issued to the VPC Stockholders in connection with
the Merger. MIS shall pay the fees and expenses incurred by it that are
associated with the Registration Statement and the registration of the Merger
Shares, the shares underlying the Debentures and the common shares underlying
the Option/Warrant Shares.
(c) INSTALLMENT PAYMENTS. On the Effective Time, the VPC Class B Common
Stockholders shall have the right to earn the remaining portion of the Purchase
Price (i.e., $3,750,000.00) (hereinafter the "INSTALLMENT PAYMENTS") during the
Formula Periods in accordance with the following formula:
(i) FORMULA PERIOD 1. In respect of Formula Period 1 as
defined below: (x) If Formula Profits of MIS equal One Million Five Hundred
Dollars ($1,500,000.00) (hereinafter the "FORMULA PERIOD 1 EARNINGS TARGET"),
MIS shall pay the VPC Class B Common Stockholders an amount equal to One Million
Two Hundred Fifty Thousand Dollars ($1,250,000.00) (hereinafter the "FORMULA
PERIOD 1 INSTALLMENT PAYMENT"); (y) If Formula Profits exceed the Formula Period
1 Earnings Target, MIS shall pay the VPC Class B Common Stockholders the Formula
Period 1 Installment Payment plus One Dollar ($1.00) for each dollar ($1.00) of
Formula Profits in excess of the Formula Period 1 Earnings Target; or, (z) If
Formula Profits are less than the Formula Period 1 Earnings Target, MIS shall
pay the VPC Class B Common Stockholders an amount equal to: the actual Formula
Profits of MIS divided by the Formula Period 1 Earnings Target; with the
resulting quotient (i.e., percentage) multiplied by the Formula Period 1
Installment Payment.
(ii) FORMULA PERIOD 2. In respect of Formula Period 2 as
defined below: (x) If Formula Profits of MIS equal One Million Eight Hundred
Thousand Dollars ($1,800,000.00) (hereinafter the "FORMULA PERIOD 2 EARNINGS
TARGET"), MIS shall pay the VPC Class B Common Stockholders an amount equal to
One Million Two Hundred Fifty Thousand Dollars ($1,250,000.00)(hereinafter the
"FORMULA PERIOD 2 INSTALLMENT PAYMENT"); (y) If Formula Profits exceed the
Formula Period 2 Earnings Target, MIS shall pay the VPC Class B Common
Stockholders the Formula Period 2 Installment Payment plus One Dollar ($1.00)
for each dollar ($1.00) of Formula Profits in excess of the Formula Period 2
Earnings Target; or, (z) If Formula Profits are less than the Formula Period 2
Earnings Target, MIS shall pay the VPC Class B Common Stockholders an amount
equal to: the actual Formula Profits of MIS divided by the Formula Period 2
Earnings Target; with the resulting quotient (i.e., percentage) multiplied by
the Formula Period 2 Installment Payment.
(iii) FORMULA PERIOD 3. In respect of Formula Period 3 as
defined below: (x) If Formula Profits of MIS equal Two Million One Hundred Sixty
Thousand Dollars ($2,160,000.00) (hereinafter the "FORMULA PERIOD 3 EARNINGS
Target"), MIS shall pay the VPC Class B Common Stockholders an amount equal to
One Million Two Hundred Fifty Thousand
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Dollars ($1,250,000.00)(hereinafter the "FORMULA PERIOD 3 INSTALLMENT PAYMENT");
(y) If Formula Profits exceed the Formula Period 3 Earnings Target, MIS shall
cause pay the VPC Class B Common Stockholders the Formula Period 3 Installment
Payment plus One Dollar ($1.00) for each dollar ($1.00) of Formula Profits in
excess of the Formula Period 3 Earnings Target; or, (z) If Formula Profits are
less than the Formula Period 3 Earnings Target, MIS shall pay the VPC Class B
Common Stockholders an amount equal to: the actual Formula Profits of MIS
divided by the Formula Period 3 Earnings Target; with the resulting quotient
(i.e., percentage) multiplied by the Formula Period 3 Installment Payment.
(d). MAXIMUM PAYMENTS. The foregoing notwithstanding, the
maximum amount of Installment Payments the VPC Class B Common Stockholders may
receive pursuant to these provisions shall not exceed Three Million Seven
Hundred Fifty Thousand Dollars ($3,750,000.00).
(e). ACCELERATION OF INSTALLMENT PAYMENTS. In the event MIS or
any successor company undertakes a public offering, merger, recapitalization,
consolidation or otherwise (hereinafter a "Dilutive Transaction") whereby more
than 50 percent of its issued and outstanding Capital Stock is issued to third
parties prior to the expiration of the Formula Periods, the VPC Class B Common
Stockholders shall, at their election, be paid the portion of the unpaid
Installment Payments immediately prior to the effectiveness of such Dilutive
Transaction by applying the above formula to the proforma Formula Profits for
the remainder of the Formula Period(s) calculated based on the immediately
preceding twelve (12) month period or such shorter period if less than 12
months.
(f). FORMULA PROFITS. For the purposes of this Agreement, the
term "FORMULA PROFITS" shall mean the pre-tax consolidated net profits of MIS,
as calculated utilizing generally accepted accounting principles by MIS's
independent certified public accountants for annual Formula Periods, where
possible, and as calculated by MIS otherwise. Notwithstanding the foregoing, for
purposes of determining Formula Profits: (i) there shall not be included any
non-recurring charges, losses, profits, gains, or non-cash adjustments not
related to the ongoing operations of the business, including, but not limited to
discount operations, extraordinary items, acquisition costs, goodwill charges,
or unusual or infrequent items as they are defined under generally accepted
accounting principles, and (ii) there shall not be included any charge related
to grants or exercises of the Options/Warrant Shares pursuant to the employment
agreements or other agreements with the individuals listed in EXHIBIT 4.1.
(g) FORMULA PERIODS. The period commencing on the Effective
Time and ending on the last day of the 12th month following the Effective Date
shall be deemed to be "FORMULA PERIOD 1". The period commencing on the first day
following FORMULA PERIOD 1 and ending on the last day of the 12th month
following FORMULA PERIOD 1 shall be deemed to be "FORMULA PERIOD 2". The period
commencing on the first day following FORMULA PERIOD 2 and ending on the last
day of the 12th month following FORMULA PERIOD 2 shall be deemed to be "FORMULA
PERIOD 3".
(h) CALCULATION TIMING. MIS shall cause the aforementioned
calculations to be made as soon as reasonably possible and the Installment
Payments paid to the VPC Class B Common Stockholders within fifteen (15) days of
such calculation but in no event later than the 90th day following each Formula
Period.
(i) EXAMPLE. Attached hereto as EXHIBIT 3.1(i) and
incorporated herein by this reference is an example of how the aforementioned
Formula is to be applied.
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(j) PAYMENT OF INSTALLMENT PAYMENTS. The Installment Payments
shall be made within fifteen (15) days of calculating the Installment Payment
for each Formula Period but in no event later than the 90th day following the
end of each Formula Period by delivering to the VPC Class B Common Stockholders,
in accordance with their percentage of ownership interest as described in
SCHEDULE 3.1, a series of convertible collaterialized promissory notes (the
"DEBENTURES"), one to each VPC Merger Shareholder for each Installment Payment,
in the form annexed hereto as EXHIBIT 3.1(j)(1). The Debentures will bear
interest at an annual rate of 9.0% and the payment of such Debentures will be
secured by the issued and outstanding capital stock of the Surviving
Corporation. To that end, MIS will enter into with the VPC Class B Common
Stockholders a pledge agreement in the form attached hereto as EXHIBIT 3.1(j)(2)
(hereinafter the "PLEDGE AGREEMENT"). Interest will be paid on the Formula
Earnings as calculated herein on a quarterly basis, in arrears, commencing at
the end of the first calendar quarter following the Effective Time and will be
subject to adjustment at the end of each Formula Period based upon the principal
face value of the applicable Debenture earned during such Formula Period. If
excess interest is paid pursuant to this Section in any Formula Period as the
result of the foregoing, such excess interest will be offset first against any
future interest to be paid pursuant to this Section and then, if necessary,
against the principal face value of the Debentures. The principal face value, if
any, of each Debenture together with all accrued but unpaid interest on said
Debenture shall be due and payable on the first anniversary date of its
issuance. The Debentures may be prepaid by MIS at any time without penalty or
additional interest. The VPC Class B Common Stockholders may convert the
principal face value of the Debentures at any time prior to redemption into MIS
Common Stock at the rate of $3.00 per share. Cash will be paid in lieu of any
fractional shares.
(k) CAPITAL ADJUSTMENTS. In case of any consolidation or
merger of MIS with or into another corporation or the conveyance of all or
substantially all of the assets of MIS to another corporation or a share
exchange transaction, the Debentures shall thereafter be convertible into the
number of shares of stock, options or other securities or property to which a
holder of the number of shares of common stock deliverable upon entitlement to
the MIS Common Stock would have been entitled upon such consolidation, merger,
conveyance, conversion or exchange; and, in any such case, appropriate
adjustment shall be made in the application of the provisions herein set forth
with respect to the rights and interest thereafter of the VPC Class B Common
Stockholders' rights to receive Debentures to the end that the provisions set
forth herein shall thereafter be applicable, as nearly as reasonably possible,
in relation to any shares of stock, options or other property thereafter
deliverable upon entitlement to the Debentures.
3.2 FRACTIONAL SHARES. No scrip or fractional shares of the capital
stock of MIS shall be issued in the Merger, nor will any outstanding fractional
share interest entitle the owner thereof to vote, to receive dividends or to
exercise any other right as a stockholder of MIS. All fractional shares of the
common stock to which a holder of multiple certificates of VPC Class A Common
Stock immediately prior to the Effective Time would otherwise be entitled at the
Effective Time shall be aggregated. If a fractional share results from such
aggregation, the number of shares of the Merger Shares to which such stockholder
shall be entitled, after the Effective Time shall be rounded to the nearest
whole number of Merger Shares.
3.3 STOCK OPTIONS AND WARRANTS. Except as described in SCHEDULE 3.3,VPC
does not presently have nor will it have at the time of Closing any options or
warrants issued or outstanding nor has it committed to issue any options and/or
warrants.
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3.4 DELIVERY OF MERGER SHARES.
(a) Except as set forth in this Agreement, from and after the
Effective Time, each holder of a certificate or certificates that immediately
prior to the Effective Time represented outstanding shares of VPC Capital Stock
("Certificate(s)") shall be entitled to receive in exchange therefor, upon
surrender thereof to the Exchange Agent, the appropriate number and type of
Merger Shares for each share of VPC Class A Common Stock so represented by the
Certificates(s) surrendered by such holder and the right to earn the appropriate
amount of the Debentures for each share of VPC Class B Common Stock so
represented by the Certificates(s) surrendered by such holder.
(b) At or simultaneous with the Closing, (1) MIS will furnish
to MIS's transfer agent (the "Exchange Agent") irrevocable instructions to issue
certificates to holders of VPC Class A Common Stock which represent that number
and type of Merger Shares to which each such holder of VPC Class A Common Stock
is entitled hereunder, and (2) MIS will cause the Exchange Agent to mail a
letter of transmittal (with instructions for its use) to each record holder of
outstanding VPC Class A Common Stock for the holder to use in surrendering the
Certificate(s) that represented such holder's VPC Class A Common Stock in
exchange for a stock certificate representing the number of type of Merger
Shares to which the holder is entitled. Such letter of transmittal shall specify
that delivery shall be effected, and risk of loss and title to the
Certificate(s) shall pass, only upon proper delivery of the Certificate(s) for
exchange therefor. Upon surrender to the Exchange Agent of Certificate(s),
together with such letter of transmittal duly executed and completed in
accordance with the instructions thereon, and such other documents as may be
reasonably requested by the Exchange Agent, the Exchange Agent shall, pursuant
to this Agreement, promptly deliver the appropriate number and type of Merger
Shares to the person entitled to such Merger Shares for each share of VPC Class
A Common Stock so represented by the Certificate(s) surrendered by such holder
thereof, and such Certificate(s) shall forthwith be cancelled.
(c) If delivery of all or part of the Merger Shares is to be
made to a person other than the person in whose name a surrendered Certificate
is registered, it shall be a condition of such delivery or exchange that the
Certificate so surrendered shall be properly endorsed or shall be otherwise in
proper form for transfer and that the person requesting such delivery or
exchange shall have paid any transfer and other taxes required by reason of such
delivery or exchange in a name other than that of the registered holder of the
Certificate surrendered or shall have established to the reasonable satisfaction
of VPC that such tax either has been paid or is not payable.
(d) Until surrendered and exchanged in accordance with this
Section 3.4 each such Certificate shall, after the Effective Time, represent
solely the right to receive the Merger Shares, in an amount and of the type
determined in accordance with Section 3.1 hereof, and shall have no ownership or
other rights. No interest shall accrue or be payable on any Merger Shares.
Neither MIS or VPC shall be liable to any holder of VPC Capital Stock for any
Merger Shares (or dividends or distributions with respect thereto) delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
(e) From and after the Effective Time, no holder of
Certificate(s) shall be entitled to receive any dividend or other distribution
from MIS until proper surrender by such holder of such Certificate(s) for stock
certificate(s) representing Merger Shares. Upon such surrender, the holder shall
be paid the amount of any dividends or other distributions (without interest)
that theretofore became payable by MIS after the Effective Time but prior to
such
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surrender, but were not paid by reason of the foregoing with respect to the
number and type of Merger Shares represented by the certificate(s) issued upon
such surrender. From and after the Effective Time, MIS shall, however, be
entitled to treat such Certificate(s) that have not yet been surrendered or
exchanged as evidencing the ownership of the type and aggregate number of Merger
Shares into which the shares of VPC Capital Stock represented by such
Certificate(s) would have been exchanged, notwithstanding any failure to
surrender such Certificate(s).
(f) MIS shall be responsible for the payment of all changes
and expenses of the Exchange Agent.
(g) If any Certificate shall have been lost, stolen or
destroyed, upon the receipt by MIS of an indemnity agreement and the making of
an affidavit by the person claiming such Certificate to be lost, stolen or
destroyed and, if required by MIS, the posting by such person of a bond in such
reasonable amount as MIS may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed Certificate the number and type
of Merger Shares and any cash in lieu of fractional shares, and unpaid dividends
and distributions on the number and type of Merger Shares deliverable in respect
thereof pursuant to this Agreement.
3.5 CLOSING. The closing of the Transactions (the "CLOSING") shall take
place on or before May ____, 1999, at the offices of VPC in Orlando, Florida, or
another mutually agreed upon location on the Business Day following compliance
or waiver of the terms, conditions and contingencies contained in this Agreement
or such other date as is mutually agreed upon by the parties hereto (such date
to be herein referred to as the "CLOSING DATE"). All computations, adjustments,
and transfers for the purposes hereof shall be effective as of the close of
business on the Closing Date. Each of the parties will take all such reasonable
and lawful action as may be necessary or appropriate in order to effectuate the
Merger as promptly as possible subject to the satisfaction of the closing
conditions set forth in Articles 8 and 9.
ARTICLE 4
ADDITIONAL COVENANTS
4.1 SUPPLEMENTAL AGREEMENTS. Concurrently with the Closing, each of the
individuals listed in EXHIBIT 4.1 shall enter into employment agreements with
MIS in the form of COMPOSITE EXHIBIT 4.1(a) hereof (the "EMPLOYMENT
AGREEMENTS"), which shall replace such individual's existing employment
agreement with MIS or VPC, as applicable. Each of such individuals shall also
enter into Nondisclosure/Noncompete Agreements in the form of COMPOSITE EXHIBIT
4.1(b) hereof ((the "Nondisclosure/Noncompete Agreements), which shall replace
each such individual's existing nondisclosure and Noncompete agreements with MIS
or VPC, as applicable, and a Stockholders' Agreement in the form of EXHIBIT 4.1
(c)(i). On or before the Closing Date, each of such individuals will have
entered into Standstill/Voting Agreements in the form of COMPOSITE EXHIBIT
4.1(c)(ii) hereof pursuant to which such individuals have agreed to (among other
things) vote their respective shares of capital stock in each of MIS and VPC, as
applicable, in favor of the Merger, and after the Closing, to vote their
respective shares of capital stock of MIS in favor of the election of the
individuals listed in EXHIBIT 4.1(d) to the Board of Directors of MIS so long as
such nominees remain employed by MIS.
4.2 CONDUCT OF BUSINESS BY MIS AND VPC PENDING MERGER. MIS and VPC
Covenant and agree that, unless the other party shall otherwise consent in
writing or except as otherwise set forth in this Agreement, between the date of
such party's Board Approval and the
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Closing, the business of MIS and VPC, respectively, and the Subsidiaries of MIS
shall be conducted only in, and none of said parties shall take any action
except in, the ordinary course of business and in a manner consistent with past
practice; and all of said parties will use their best efforts to preserve intact
their business organization, to keep available the services of their present
officers, employees and consultants and to preserve their present relationships
with customers, suppliers and other persons with which they have significant
business relations. Except as set forth on EXHIBIT 4.2, but without otherwise
limiting the foregoing, each of VPC and MIS covenants that neither of them or
the Subsidiaries of MIS shall, between the date of such party's Board Approval
and the Closing, directly or indirectly, do any of the following with the prior
written consent of the other;
(a) (i) issue, sell (other than upon exercise of outstanding
options or warrants, whose terms shall not be changed), pledge, dispose of,
encumber, authorize, or propose the issuance, sale, pledge, disposition,
encumbrance or authorization of any shares of capital stock of any class, or any
options, warrants, convertible securities or other rights of any kind to acquire
any shares of capital stock of, or any other ownership interest in, VPC, MIS or
any Subsidiary; PROVIDED, HOWEVER, that VPC and MIS shall have the right to
carry out any Permitted Equity Financing or other offering of its securities
that such parties have agreed to pursuant to Section 3.1(b) hereof; (ii) amend
or propose to amend the Articles of Incorporation as applicable, or By-Laws of
VPC or MIS, except as contemplated by this Agreement; (iii) split, combine or
reclassify any outstanding shares of VPC Capital Stock or MIS Capital Stock or
any Subsidiary's capital stock, or declare, set aside or pay any dividend or
distribution payable in cash, stock, property or otherwise with respect to such
capital stock; (iv) redeem, purchase or otherwise acquire or offer to redeem,
purchase or otherwise acquire any shares of capital stock or that of any
Subsidiary; or (v) authorize or propose or enter into any contract, agreement,
commitment or arrangement with respect to any of the matters set forth in this
Section 4.2(a):
(b) (i) acquire (by merger, consolidation, or Merger of stock
or assets) directly or indirectly, any Person or any business owned by such
Person; (ii) except in the ordinary course of business and in a manner
consistent with past practices, sell, pledge, dispose of, or encumber or
authorize or propose the sale, pledge, disposition or encumbrance of any assets
of VPC, MIS or any Subsidiary; (iii) enter into any material contract or
agreement, except in the ordinary course of business; (iv) authorize any single
capital expenditure or commitment in excess of $500,000, except as otherwise set
forth in EXHIBIT 4.2(b)(iv); (v) authorize any capital expenditure or commitment
outside the ordinary course of business, except as otherwise set forth in
EXHIBIT 4.2(b)(iv); or (vi) enter into or amend any contract, agreement,
commitment or arrangement with respect to any of the matters prohibited by
Section 4.2(b);
(c) take any action other than in the ordinary course of
business and in a manner consistent with the past practices (none of which
actions shall be unreasonable or unusual) with respect to increasing
compensation of any officer, director, stockholder or employee or with respect
to the grant of any severance or termination pay (otherwise than pursuant to
policies in effect on the date hereof and fully disclosed to the other party
prior to the date hereof) or with respect to any increase of benefits payable
under its severance or termination pay policies in effect on the date hereof;
(d) make any payments except in the ordinary course of
business and in amounts and in a manner consistent with past practice (none of
which payments shall be unreasonable or unusual), under any employee benefit
plan or otherwise to any employee, independent contractor or consultant, enter
into any employee benefit plan, any employment or consulting agreement,
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grant or establish any new awards under any such existing employee benefit plan
or agreement, or adopt or otherwise amend any of the foregoing;
(e) take any action in the ordinary course of business and in
a manner consistent with past practice or make any change in existing methods of
management, distribution, marketing, accounting or operating (or practices
relating to payment of trade accounts or to other payments);
(f) except in the order course of business or as set forth on
EXHIBIT 4.2(f), incur or increase prior to Closing any indebtedness for borrowed
money from banks, financial institutions or other Persons or cancel, without
payment in full, any notes, loans or receivables;
(g) directly or indirectly loan or advance monies to any
Person (other than any of its own Subsidiaries) under any circumstances
whatsoever except for credit transactions with customers on terms consistent
with past practices; or
(h) do any act or omit to do any act which might reasonably be
expected to cause a breach of any material contract, commitment or obligation.
4.3 EXPENSES. All of the expenses incurred by VPC in
connection with authorization, preparation, execution and performance of this
Agreement and other agreements referred to in this Agreement, including, without
limitation, all fees and expenses of agents, representatives, brokers, counsel
and accountants for VPC, shall be paid by VPC if the Transaction is not
consummated, and all of the expenses incurred by MIS in connection with the
authorization, preparation, execution and performance of this Agreement and
other agreements referred to in this Agreement, including without limitation,
all reasonable fees and expenses of advisors, agents, representatives, brokers,
counsel and accountants, shall be paid by MIS if the Transaction is not
consummated. After the Closing, such expenses of VPC and MIS will be paid by
MIS.
4.4 NOTIFICATION OF CERTAIN MATTERS.
(a) MIS shall give prompt written notice to VPC of the
following:
(i) the occurrence or nonoccurrence of any event
whose occurrence or nonoccurrence would be likely to cause either (A) any
representation or warranty of MIS contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the Execution of this
Agreement to the Closing (assuming that each representation and warranty was
re-affirmed as of each day between the Execution of this Agreement and the
Closing Date, inclusive), including but not limited those resulting from the
consummation of any Permitted Equity Financings, or (B) directly or indirectly,
any Material Adverse Effect; or
(ii) any material failure of MIS, any officer,
director, employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
(b) VPC shall give prompt written notice to MIS of the
following:
(i) the occurrence or nonoccurrence of any event
whose occurrence or nonoccurrence would be likely to cause either (A) any
representation or warranty of VPC contained in this Agreement to be untrue or
inaccurate in any material respect at any time from
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the execution of this Agreement to the Closing (assuming that each
representation and warranty was re-affirmed as of each day between the execution
of this Agreement and the Closing Date, inclusive), including but not limited
those resulting from the consummation of any Permitted Equity Financings; or (B)
directly or indirectly, any Material Adverse Effect;
(ii) any material failure of VPC, any officer,
director, employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder.
(c) In the event that either MIS or VPC is required to deliver
a written notice pursuant to subsection (a) or (b) above, respectively, such
party shall, within three (3) days after delivery of such notice, delivery to
the other party a revised schedule updating such representation or warranty. The
receiving party shall review the schedule and within five (5) days after its
receipt, elect to either (i) approve the schedule for attachment to this
Agreement and treat such schedule, as if it had been delivered and attached to
this Agreement as of the Closing Date, or (ii) treat such schedule and the
events giving rise to such Schedule as a breach of such related representation
or warranty in accordance with the terms of this Agreement, including but not
limited Section 7.6, 8.1 and 9.1, as applicable; PROVIDED, however, that any
events which are permitted to occur between the date hereof and the Closing
pursuant to the terms of this Agreement (such as a Permitted Equity Financing)
shall in no event be treated as a breach of a representation or warranty
hereunder.
(d) Notwithstanding the foregoing, the delivery of any notice
pursuant to this Section shall not waive or release MIS or VPC, as the case may
be, from its representations, warranties, covenants or agreements under this
Agreement, except as they may be modified and approved in accordance with
subsection (c)(i) above.
4.5 PUBLIC ANNOUNCEMENTS.
(a) Except for and to the extent of any public announcement or
disclosures relating to the Transactions previously made by MIS or VPC, as may
be required by law or as provided in this Section 4.5, MIS and VPC agree that
until the consummation of the Transactions or the termination of this Agreement,
as the case may be, each party will not, and will direct its directors,
officers, employees, representatives and agents who have knowledge of the
Transaction not to, disclose to any Person who is not a participant in
discussions concerning the Transactions (other than Persons whose consent is
required to be obtained hereunder), any of the terms, conditions or other facts
with respect to the Transactions.
(b) MIS shall obtain the prior written consent of VPC and VPC
shall obtain the prior written consent of MIS, before issuing any press release
or otherwise making any public statement prior to receiving such consent, except
in the case where such disclosure is required by law and the party whose consent
is required has unreasonably refused to give such consent or is unable to
consent prior to such disclosure because of exigent circumstances. The
disclosing party shall be responsible for the accuracy and completeness of any
such disclosure. Subject to the foregoing, the parties acknowledge and agree
that MIS and VPC expect to issue a press releases with respect to the
Transactions immediately after the execution of this Agreement, as well as after
the Closing.
(c) This Section 4.5 shall not restrict either MIS or VPC in
any actions by such parties which are necessary or appropriate to enforce their
respective rights under this Agreement.
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4.6 CONFIDENTIALITY. Until the Closing, VPC and MIS shall, and shall
cause their respective employees, agents, counsel, accountants, consultants and
other representatives to hold in strict confidence any and all information
obtained from the other party and to not disclose any such information (unless
such information is or becomes ascertainable from public sources or public
disclosure of such information which in the good faith judgment of MIS or VPC is
required by law; provided, however, that nothing contained in this Agreement
shall limit the right of any such persons to disclose any such information to
VPC or MIS or their respective employees, agents, representatives, counsel,
accountants, financial advisors and/or underwriters for the purpose of
facilitating the consummating of the Transactions. This obligation is in
furtherance, and not in limitation, of any other confidentiality agreements
between the parties.
4.7 ACCESS AND INSPECTION. On reasonable notice, each of MIS and VPC
and the Subsidiaries of MIS shall provide the other full access during normal
business hours from and after the date hereof until the Closing to all of their
respective offices, properties, books and records as they relate to the business
of each and the Assets, and shall furnish such information concerning the
business and affairs of each as may be requested, in each case for information
concerning the business and affairs of each as may be requested, in each case
for the purpose of making such continuing investigation of MIS and Subsidiaries
or VPC , as the case may be, and their respective predecessors and the Assets.
Each of VPC and MIS and the Subsidiaries of MIS shall cause appropriate
personnel to assist in such continuing investigation and shall cause personnel,
counsel, accountants and other non employee representatives to be reasonably
available in connection with such continuing investigation.
4. 8 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. Subject to compliance
with applicable law, VPC and MIS will (a) cooperate with one another (i) in
promptly determining whether any filings are required to be made or consents,
approvals, permits or authorizations are required to be obtained under any
federal, state or foreign law or regulation and (ii) in promptly making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such consents, approvals, permits or authorization and (b)
provide one another with copies of all filings made by such party with any
governmental authority in connection with this Agreement.
4.9 MONTHLY FINANCIAL STATEMENTS. From and after the date hereof until
the Closing, each of VPC and MIS shall provide to the other party its monthly
internal unaudited financial statements (the "Monthly Financials") as soon as
reasonably practicable after their preparation, but in no event later than the
20th day of each month for the immediately preceding month.
4.10 EFFORTS TO CLOSE TRANSACTIONS. After the date hereof but prior to
the Closing, MIS hereby agrees that it shall use its reasonable efforts to close
that certain Permitted Equity Financing in the amount of $750,000.00 as
disclosed in Section 3.1(b) on terms and conditions mutually agreeable to the
parties hereto.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MIS
In order to induce VPC to enter into this Agreement and consummate the
Transactions, MIS hereby represents and warrants the following to VPC as of the
Execution of this Agreement (and not the date hereof), each of which
representations and warranties shall be material to and relied upon by VPC and
shall be deemed remade on and as of the date of the Closing:
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5.1. ORGANIZATION AND AUTHORITY. MIS is a corporation duly organized
and validly existing under the laws of the State of Delaware and each of its
Subsidiaries is incorporated in the states identified on SCHEDULE 5.1. The
states in which MIS and each Subsidiary are qualified to do business are set
forth on SCHEDULE 5.1. Neither MIS nor any of its Subsidiaries is required to be
qualified as a foreign corporation in any other jurisdiction where its failure
to qualify would have a Material Adverse Effect. MIS and its Subsidiaries have
all necessary corporate power and authority to own, lease and operate their
properties and conduct their business as it is currently being conducted. Except
for MIS's ownership of its Subsidiaries, which is fully described on SCHEDULE
5.1, and as otherwise set forth on SCHEDULE 5.1, neither MIS nor any of its
Subsidiaries owns, directly or indirectly, any equity interest in any
corporation, partnership, joint venture, or other entity. The list of MIS's
Subsidiaries contained in SCHEDULE 5.1 is a true, correct and complete list of
all entities in which MIS has a direct or indirect equity interest. SCHEDULE 5.1
identifies each owner of an equity interest, or right to acquire any such
interest, in each Subsidiary of MIS.
5.2. CORPORATE POWER AND AUTHORITY; DUE AUTHORIZATION. Subject to MIS
Board Approval and MIS Stockholder Approval, MIS has full corporate power and
authority to execute and deliver this Agreement and each of the Closing
Documents to which MIS is or will be a party, to amend its Articles of
Incorporation in the manner set forth in this Agreement, and to consummate the
Transactions. No corporate proceeding is necessary to approve the Transactions
other than MIS Board Approval and MIS Stockholder Approval. Assuming MIS Board
Approval, MIS Stockholder Approval and that this Agreement and each of the
Closing Documents to which VPC is a party constitutes a valid and binding
agreement of VPC, this Agreement and each of the Closing Documents to which MIS
is a party constitutes, or will constitute when executed and delivered, a valid
and binding agreement of MIS in each case enforceable in accordance with its
terms, except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency or other similar laws relating to the enforcement of
creditors' rights generally and by the applicable of general principles of
equity. The duly elected officers and directors of MIS and its Subsidiaries are
set forth on SCHEDULE 5.2. Copies of the Articles of Incorporation, the Bylaws
and all minutes of MIS and its Subsidiaries are contained in the minute books of
MIS, or such Subsidiaries, respectively. True, correct and complete copies of
the minute books of MIS and its Subsidiaries have been made available to VPC.
5.3. SUFFICIENCY OF ASSETS. All material assets and rights relating to
MIS's business and that of its Subsidiaries are held solely by, and all
agreements, obligations, expenses and transactions relating to the business of
MIS and its Subsidiaries have been entered into, incurred and conducted solely
by, MIS and its Subsidiaries. Except as described in SCHEDULE 5.3, the Assets
are all of the items necessary to provide all services required in connection
with the business of MIS and its Subsidiaries, assuming competent personnel,
general office facilities, and adequate facilities are available.
5.4. NO CONFLICT; REQUIRED CONSENTS. Exclusive of MIS Board Approval
and MIS Stockholder Approval, SCHEDULE 5.4 lists all material third-party
consents or approvals required with respect to MIS and its Subsidiaries for
consummation of the Transactions, which consents MIS agrees to use its best
reasonable efforts to obtain. Assuming all such consents and approvals have been
obtained and assuming the appropriate filings and mailings are made by VPC and
MIS to effectuate the Merger under the Florida Act, and under the Securities Act
and the Exchange Act, the execution and delivery by MIS of this Agreement and
the Closing Documents and the consummation by MIS of the Transactions do not and
will not, except as set forth on SCHEDULE 5.4, (a) require the consent, approval
or action of, or any filing or notice to, any corporation, firm,
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Person or other entity or any public, governmental or judicial authority (except
for such consents, approvals, actions, filing or notices the failure of which to
make or obtain will not in the aggregate have a Material Adverse Effect); (b)
violate in any material respect the terms of any material instrument, document
or agreement to which MIS or any of its Subsidiaries is a party, or by which MIS
or any of its Subsidiaries or the property of MIS or any of its Subsidiaries is
bound, or be in conflict in any material respect with, result in a material
breach of or constitute (upon the giving of notice or lapse of time or both) a
material default under any such instrument, document or agreement, or result in
the creation of any lien upon any of the property or assets of MIS or any of its
Subsidiaries; (c) violate in any respect the terms of any instrument, document
or agreement to which MIS or any of its Subsidiaries is a party, or by which MIS
or any of its Subsidiaries or the property of MIS or any of it Subsidiaries is
bound, or be in conflict in any respect with, result in a breach of or
constitute (upon the giving of notice or lapse of time or both) a default under
any such instrument, document or agreement, or result in the creation of any
lien upon any of the property or assets of MIS or any of its Subsidiaries if the
aggregate effect of all such violations listed in this subsection (d) results in
a Material Adverse Effect on MIS and its Subsidiaries taken as a whole; (e)
violate MIS's Certificate of Incorporation or Bylaws; or (f) violate any order,
write, injunction, decree, judgment, ruling, law, rule or regulation of any
federal, state, county, municipal, or foreign court of governmental authority
applicable to MIS or any of its Subsidiaries, or the business or assets of MIS
or any of its Subsidiaries. Neither MIS nor any of its Subsidiaries is subject
to, or a party to, any mortgage, lien, lease, agreement, contract, instrument,
order, judgment or decree or any other material restriction of any kind or
character which would prevent or hinder the continued operation of the business
of MIS and its Subsidiaries after the closing on substantially the same basis as
theretofore operated.
5.5. CAPITALIZATION. All of the authorized and outstanding MIS capital
stock is set forth on SCHEDULE 5.5, and no shares of MIS capital stock are held
in the treasury of MIS. No shares or any class of capital stock or other equity
interests of MIS, other than (i) MIS Common Stock, (ii) options or warrants for
MIS Common Stock, or (iii) those shares of MIS Capital Stock identified in
SCHEDULE 5.5, shall be issued and outstanding at the Closing. All outstanding
MIS capital stock has been duly authorized, and is validly issued, fully paid
and nonassessable. No preemptive (whether statutory or contractual) rights have
been violated. Current MIS stock option plans, all previous forms of those
plans, and amendments, and all outstanding options and warrants, are identified
on SCHEDULE 5.5. Except as set forth on SCHEDULE 5.5, all options were granted
in accordance with the provisions of MIS stock option plans. SCHEDULE 5.5 also
sets forth information as to options (if any) and warrants (if any) previously
granted which have terminated, expired or been exercised. Except for the
outstanding options, warrants and other commitments set forth in SCHEDULE 5.5,
MIS has no convertible securities, options, warrants, or other contracts,
commitments, agreements, understandings, arrangements or restrictions by which
it is bound to issue any additional shares of MIS Capital Stock or other
securities. Except as set forth on SCHEDULE 5.2, MIS owns, directly or
indirectly, all of the equity in its Subsidiaries and no third party has a right
to acquire any such interest. All securities of MIS and its Subsidiaries were
offered and sold in compliance with applicable federal and state securities
laws. SCHEDULE 5.5 identifies each stock option plan and outstanding option,
warrant, or other right, if any, to acquire the capital stock of any of its
Subsidiaries, full and complete copies of which have been provided to VPC. Each
and every dividend of MIS and each Subsidiary, if any, whether paid in cash or
other property, has been declared and paid in compliance with applicable law,
and neither MIS nor any of its Subsidiaries has any further obligation with
respect to such payment. SCHEDULE 5.5 also summarizes in detail all currently
effective registration rights which have been granted by MIS to any other person
or entity and all currently effective shareholder agreements between any
shareholders of MIS.
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5.6. COMPLIANCE WITH LAWS; FILINGS WITH THE SEC. Except as set forth in
SCHEDULE 5.6, (a) to the best of MIS's knowledge, MIS and its Subsidiaries are
in compliance with, and MIS and its Subsidiaries have operated any Persons or
businesses previously owned or operated by them in compliance with, all
applicable laws, orders, rules and regulations of all governmental bodies and
agencies, including applicable environmental laws and regulations, but excluding
applicable laws and regulations related to Medicare, Medicaid and other
federally funded programs, except where such noncompliance has and will have, in
the aggregate, no Material Adverse Effect. Neither MIS, nor any of its
Subsidiaries, has received notice of any noncompliance with the foregoing.
(b) Without limiting the foregoing, MIS and each of its
Subsidiaries and any other person or entity for whose conduct MIS is legally
held responsible are in material compliance with all applicable federal, state,
regional, local or provincial laws, statutes, ordinances, judgments, rulings and
regulations relating to any matters of pollution, protection of the environment,
health or safety, or environmental regulation or control (collectively,
"Environmental Laws"). Neither MIS nor any of its Subsidiaries, nor any other
person or entity for whose conduct MIS is legally responsible, has (i) received
any notice, demand, request for information, or administrative inquiry relating
to any violation of an Environmental Law or the institution of any suit, action,
claim or proceeding alleging such violation or investigation by any Governmental
Authority or any third party of any such violation, (ii) manufactured,
generated, treated, stored, handled, processed, released, transported or
disposed of any Hazardous Substance on, under, from or at any of MIS's or any of
its Subsidiaries' properties or any other properties, (iii) become aware or
received notice of the release or disposal of any Hazardous Substances in
violation of any applicable Environmental Law, on, under or at any of MIS's, or
any of its Subsidiaries' properties or any other properties, (iv) become aware
or received notice of any actual or potential material liability on the part of
MIS for the response to or remediation of any Hazardous Substance at or arising
from any of MIS's or any of its Subsidiaries' properties or any other properties
owned or operated by MIS, any of its Subsidiaries or any other Person for whose
conduct MIS is legally responsible, or (v) become aware of or received notice of
any actual or potential liability on the part of MIS for the costs of response
to or remediation of Hazardous Substances at or arising from any of MIS's or any
of its Subsidiaries' properties or any other properties owned or operated by
MIS, any of its Subsidiaries or any other Person for whose conduct MIS is or may
be held responsible. For purposes of this Agreement, the term "Hazardous
Substance" shall mean any toxic or hazardous materials or substances, including
asbestos, buried contaminants, chemicals, flammable explosives, radioactive
materials or petroleum and petroleum products and any substances defined as, or
included in the definition of, "hazardous substances," "hazardous wastes,"
"hazardous materials" or "toxic substances" under any Environmental Law. No
Environmental Law imposes any obligation upon MIS or its Subsidiaries arising
out of or as a condition to any transaction contemplated hereby, including,
without limitation, any requirement to modify or to transfer any permit or
license, any requirement to file any notice or other submission with any
Governmental Authority, the placement of any notice, acknowledgment, or covenant
in any land records, or the modification of or provision of notice under any
agreement, consent order, or consent decree. No lien has been placed upon any of
MIS's properties or its Subsidiaries' properties under any Environmental Law.
(c) MIS is not a Reporting Company as defined under the
Securities and Exchange Act of 1934. The parties recognize that MIS may not have
made all filings with the SEC that it is required to make under the Securities
Act and the Exchange Act (collectively, the "Public Reports") or that such
filings, if any, may not have been correct in all material respects.
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(d) MIS currently satisfies all applicable Nasdaq rules in
order to be traded on the bulletin board.
5.7. LICENSES AND PERMITS. Except as set forth in SCHEDULE 5.7, neither
MIS nor any of its Subsidiaries has received notice of any violations in respect
of any licenses, permits, concessions, grants, franchises, approvals or
authorizations necessary or required for the use or ownership of their assets
and the operation of their business. No proceeding is pending or, to the
knowledge of MIS, threatened, which seeks revocation or limitation of any such
licenses, permits, concessions, grants, franchises, approvals or authorizations.
5.8. FINANCIAL INFORMATION.
(a) MIS has provided to VPC its interim financial statements
for the period through March 31, 1999 ("Interim Financials") and an unaudited
financial statement for the most recent fiscal year-end December 31, 1998
("Unaudited Financial Statement"); together with Interim Financials are herewith
called (the "Financial Statements"), copies of which are attached hereto as
EXHIBIT 5.8. Except as disclosed in SCHEDULE 5.8 attached hereto, the Financial
Statements have been and MIS's Monthly Financials will be, prepared in
accordance with GAAP (except as to notes necessary for the Interim Financials
and MIS's Monthly Financials) applied on a consistent basis throughout the
periods covered thereby, present fairly the financial condition of MIS and its
Subsidiaries as of the indicated dates and the results of operations of MIS and
its Subsidiaries for the indicated periods, are consistent with the books and
records of MIS and its Subsidiaries and, except as discussed on SCHEDULE 5.8 do
not contain any material item of special or nonrecurring income not earned in
the ordinary course of business; provided, however, that the Interim Financials
and such Monthly Financials are subject to normal year-end adjustments that are
not expected to be material in amount.
(b) Except as and to the extent specifically disclosed in this
Agreement, there are no liabilities or obligations of MIS or any of its
Subsidiaries of any nature, whether liquidated, accrued, absolute, contingent or
otherwise except for those (i) that are specifically reflected or reserved
against as to amount in the latest balance sheet contained in the Financials,
(ii) that arose thereafter in the ordinary course of business, or (iii) that are
specifically set forth on SCHEDULE 5.8; and at all times after the execution of
this Agreement until the Closing, there will be no liabilities or obligations of
MIS or any of its Subsidiaries of any nature, whether liquidated, unliquidated,
accrued, absolute, contingent or otherwise, which are material, individually or
in the aggregate, except for those (A) that are specifically reflected or
reserved against as to amount in the latest balance sheet contained in the
Financials, or (B) that arose after the date of such balance sheet in the
ordinary course of business (and are, individually and in the aggregate,
immaterial), (C) that are specifically set forth on SCHEDULE 5.8, or (D) that
are permitted as set forth on EXHIBITS 4.2, 4.2(b)(iv), or 4.2(f).
(c) MIS and its Subsidiaries are not, nor have any of them
been during the twelve (12) months immediately preceding the execution of this
Agreement, insolvent within the meaning of 11 U.S.C. ss. 101(31). MIS and its
Subsidiaries have paid and are paying their debts as they become due.
5.9. NO UNDISCLOSED LIABILITIES. Except as and to the extent
specifically disclosed in this Agreement and those that are specifically
reflected or reserved against as to amount in the latest balance sheet contained
in the Financial Statements, neither MIS nor any of its Subsidiaries knows of
any reasonable basis for the assertion against MIS or any of its Subsidiaries of
any material liabilities or obligations of any nature, whether absolute,
accrued, contingent or
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otherwise and whether due or to become due, including, without limitation, any
liability for taxes and interest, penalties and other charges payable with
respect thereto. Except as set forth in this Agreement, neither the execution
and delivery of this Agreement nor the consummation of the Merger will (a)
result in any payment (whether severance pay, unemployment compensation or
otherwise) becoming due from MIS to any employee, director or officer or former
employee, director or officer of MIS, (b) increase any benefits otherwise
payable to any employee, director or officer or former employee, director or
officer of MIS, or (c) result in the acceleration of the time of payment or
vesting of any such benefits.
5.10. INTELLECTUAL PROPERTY. Except as described in SCHEDULE 5.10, to
the knowledge of MIS and its Subsidiaries, no patent, formula, process, trade
secret, trademark, trade name, assumed name or copyright relating to MIS's
business and that of its Subsidiaries, including all intellectual property used
in the operation of the business of MIS and its Subsidiaries (collectively, the
"MIS Intellectual Property"), infringes on any patent, copyright, trademark or
other intellectual property right of any Person, or violates the terms of any
agreements related thereto, nor to MIS's knowledge have there been any claims of
infringement. Except as set forth in SCHEDULE 5.10, there are no pending or, to
MIS's and its Subsidiaries' knowledge, threatened claims against MIS or any of
its Subsidiaries contesting the validity of, or their right to use any of, the
MIS Intellectual Property.
5.11. CONTRACTS AND COMMITMENTS. Except as disclosed on SCHEDULE 5.8:
(a) To MIS's and its Subsidiaries knowledge, no aspect of
MIS's and its Subsidiaries' business or operations or the Assets is of such
character as would restrict the Surviving Corporation from carrying on the
business of MIS and its Subsidiaries anywhere in the world.
(b) MIS and its Subsidiaries have no consultants or
independent contractors who are officers or directors of MIS or any of its
Subsidiaries, or who are affiliates of such officers or directors, to whom they
are paying compensation for services.
(c) Neither MIS nor any of its Subsidiaries has material
contracts, commitments, arrangements, or understandings relating to their
business, operations, financial condition, or prospects. For purposes of this
Section 5.11(c), "material" means payment or performance of a contract,
commitment, arrangement or understanding entered into in the ordinary course of
business which is expected to (i) involve payments in excess of $100,000 per
year, or (ii) have a duration exceeding five (5) years with expected payments
over its duration exceeding $100,000 (in each case other than leases not
required to be disclosed pursuant to Section 5.17), or any contract, commitment,
arrangement or understanding entered into not in the ordinary course of
business.
(d) To MIS's and its Subsidiaries' knowledge, there are no
outstanding contracts, commitments or bids, or services, development or sales
proposals, that will result in any substantial loss to MIS or any of its
Subsidiaries (and/or the Surviving Corporation) upon completion or performance
thereof, after allowance for normal direct employee expenses, licensing,
development, distribution expenses and other costs.
(e) There are no outstanding material lease or purchase
commitments of MIS or any of its Subsidiaries which are not consistent with
MIS's and its Subsidiaries' past lease and purchase commitment practices.
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5.12. ABSENCE OF CERTAIN CHANGES. Except as reflected on SCHEDULE 5.12,
or elsewhere in this Agreement or specifically identified on any Schedules
hereto, since December 31, 1998, MIS and its Subsidiaries have not, and at the
Closing Date will not, have:
(a) Suffered a Material Adverse Effect, or become aware of any
circumstances which might reasonably be expected to result in such a Material
Adverse Effect; or suffered any material casualty loss to the Assets (whether or
not insured);
(b) Incurred any obligations specifically related to the
Assets, except in the ordinary course of business, consistent with past
practices;
(c) Permitted or allowed any of the Assets to be mortgaged,
pledged, or subjected to any lien or encumbrance, except liens or encumbrances
specifically excepted by the provisions of Section 5.14;
(d) Written down the value of any inventory, contract or other
intangible asset, or written off as uncollectible any notes or accounts
receivable or any portion thereof, except for write-downs and write-offs in the
ordinary course of business, consistent with past practice and at a rate no
greater than during the latest complete fiscal year; cancelled any other debts
or claims, or waived any rights of substantial value, or sold or transferred any
of its material properties or assets, real, personal, or mixed, tangible or
intangible, except in the ordinary course of business and consistent with past
practice;
(e) Sold, licensed or transferred or agreed to sell, license
or transfer, any of the Assets, except in the ordinary course of business and
consistent with past practice;
(f) To MIS's and its Subsidiaries' knowledge, received notice
of any pending or threatened adverse claim or an alleged infringement of
proprietary material, whether such claim or infringement is based on trademark,
copyright, patent, license, trade secret, contract or other restrictions on the
use or disclosure of proprietary materials;
(g) Incurred obligations to refund money to customers, except
in the ordinary course of business, all of which will have no Material Adverse
Effect;
(h) Become aware of any event, condition or other circumstance
relating solely to the Assets (as opposed to any such event, condition, etc.,
which is, for example, national or industry-wide in nature) which might
reasonably be expected to have a Material Adverse Effect on the Assets;
(i) Made any capital expenditures or commitments, any one of
which is more than $500,000, for additions to property, plant, or equipment,
unless approved in writing by VPC or deemed approved by VPC pursuant to EXHIBIT
4.2(b)(iv) hereof;
(j) Made any material change in any method of accounting or
accounting practice;
(k) Paid, loaned, guaranteed, or advanced any material amount
to, or sold, transferred, or leased any material properties or assets (real,
personal, or mixed, tangible or intangible) to, or entered into any agreement,
arrangement, or transaction with any of MIS's or any Subsidiaries' officers or
directors, or any business or Person in which any officer or director
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of MIS or any of its Subsidiaries, or any affiliate or associate of any of such
Persons has any direct or indirect interest; or
(l) Agreed to take any action described in this Section 5.12.
5.13. TAXES.
(a) As used in this Agreement:
(i) "Adverse Consequences" means all actions, suits,
proceedings, hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues, penalties,
fines, costs, amounts paid in settlement, liabilities, obligations, taxes,
liens, losses, expenses, and fees, including court costs and attorneys' fees and
expenses;
(ii) "Affiliated Group" means any affiliated group
within the meaning of Code ss. 1504(a) (or any similar group defined under a
similar provision of state, local or foreign law);
(iii) "Liability" means any liability (whether known
or unknown, whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), including, without limitation, any liability for Taxes;
(iv) "Security Interest" means any mortgage, lien,
encumbrance or other security including any "tax lien" (other than for current
taxes not yet due);
(v) "Tax" means any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
ss. 59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property personal
property, sales, use, transfer, registration, value added, alternative, or
added-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not;
(vi) "Tax Return" means any return, declaration,
report, claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
(b) MIS and its Subsidiaries have not been a member of an
Affiliated Group filing a consolidated federal income Tax Return other than a
group the common parent of which is MIS. The Affiliated Group of which MIS is
the common parent (the "MIS Group") has filed all income Tax Returns that it was
required to file for each taxable period during which MIS and its Subsidiaries
were a member of the MIS Group. All such Tax Returns are correct and complete in
all material respects. All income Taxes owed by the MIS Group (whether or not
shown on any Tax Return) have been paid for each taxable period during which MIS
and its Subsidiaries filed a consolidated federal income Tax Return.
(c) The amounts booked as provisions for Taxes in the
Financial Statements are sufficient for payment of all unpaid Taxes of MIS, its
Subsidiaries, and the MIS Group through
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December 31, 1998. Copies of the MIS Group's federal and state income Tax
Returns for calendar years 1995, 1996, and 1997 have been provided to VPC.
(d) No claim has ever been made by a Governmental Authority in
a jurisdiction where MIS or a Subsidiary does not file Tax Returns that it is or
it may be subject to taxation by that jurisdiction. There are no Security
Interests on any of the assets of MIS or any of its Subsidiaries that arose in
connection with any failure (or alleged failure) to pay any Tax when due.
(e) MIS, each MIS Subsidiary, and the MIS Group have withheld
and paid over to the proper governmental authorities all Taxes required to have
been withheld and paid over, and complied with all information reporting and
back-up withholding requirements, including maintenance of required records with
respect thereto, in connection with amounts paid to any employee, independent
contractor, creditor, or other third party.
(f) There is no dispute or claim concerning any Tax Liability
of MIS, a Subsidiary or the MIS Group either (i) claimed or raised by any
Governmental Authority in writing, or (ii) as to which any of MIS or any of its
Subsidiaries (and employees responsible for Tax matters) has knowledge.
(g) MIS, its Subsidiaries, and the MIS Group have not waived
any statute of limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(h) MIS and its Subsidiaries do not have any liability for the
Taxes of any Person other than MIS or its Subsidiaries (i) as a transferee or
successor, (ii) by contract, or (iii) otherwise.
(i) MIS and each Subsidiary currently utilize the accrual
method of accounting for income Tax purposes. MIS has utilized the accrual
method of accounting for income Tax purposes since the date of its
incorporation. Each Subsidiary of MIS has utilized the accrual method of
accounting for income Tax purposes since the date of its incorporation or Merger
by MIS, as the case may be. MIS, its Subsidiaries, and the MIS Group have not
agreed to, and are not and will not be required to, make any adjustments under
Code Section 481(a) as a result of a change in accounting methods.
(j) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of MIS or its Subsidiaries that, individually or
collectively, could give rise to the payment of any amount (or portion thereof)
that would not be deductible pursuant to Sections 280G, 404 or 162 of the Code.
5.14. TITLE TO PROPERTIES; ENCUMBRANCES. Except as specifically
identified in the Schedules hereto and except for items leased or licensed by
MIS or any of its Subsidiaries, or on SCHEDULE 5.14, MIS or such Subsidiaries
have good, valid, and marketable title to all of the Assets. All of the Assets
are in the possession or under the control of MIS or a Subsidiary, and none of
the Assets are subject to any mortgage, pledge, lien, security interest,
conditional sale agreement, encumbrance, or charge of any kind except as set
forth on SCHEDULE 5.14 or as specifically disclosed on the other Schedules
hereto and, except minor imperfections or title and encumbrances, if any, that
are not substantial in amount, do not materially detract from the value
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or functional utility of the property subject thereto, and do not in any way
materially impair the value of the Assets.
5.15. EQUIPMENT. All of the equipment owned or leased by MIS and its
Subsidiaries which has (or had at the date of its Merger or execution of the
related lease by MIS or its Subsidiary) a fair market value of $400,000 or
greater is listed on SCHEDULE 5.15 attached hereto. All of the equipment owned
or leased by MIS and its Subsidiaries is in adequate operating condition and
repair subject to normal wear and tear, except as set forth on SCHEDULE 5.15.
5.16. REAL PROPERTY. SCHEDULE 5.16 contains a list of all real property
owned by MIS and its Subsidiaries, including, without limitation, the
improvements and structures located thereon. To MIS's and its Subsidiaries'
knowledge, such improvements and structures are structurally sound with no known
defects and in good operating condition and repair subject to normal wear and
tear, and neither MIS nor any of its Subsidiaries has received any written
notification that there is any violation of any building, zoning, or other law,
ordinance, or regulation in respect of such property, improvements, or
structures, and to the best of MIS's and its Subsidiaries' knowledge, no such
violation exists.
5.17. LEASES. SCHEDULE 5.17 contains a list of all leases (including
both operating and capital leases) pursuant to which MIS or any of its
Subsidiaries leases real or personal property and (i) which involve lease
payments in excess of $30,000 per year, (ii) which are between MIS or any of its
Subsidiaries, on the one hand, and any of their Affiliates, on the other hand,
or (iii) which were not entered into in the ordinary course of business. Copies
of all such leases have been delivered to VPC. All such leases are valid,
binding, and enforceable in accordance with their terms (except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency or
other similar laws relating to the enforcement of creditors' rights generally
and by the application of general principles of equity), are in full force and
effect and except as set forth on SCHEDULE 5.17, no event has occurred which is
a default or which with the passage of time will constitute a default by MIS or
any of its Subsidiaries thereunder, nor has any such event occurred to the
knowledge of MIS and its Subsidiaries which is a default, or with the passage of
time will constitute a default, by any other party to such lease. All property
leased by MIS or any of its Subsidiaries as lessee is in the possession of MIS
and its Subsidiaries. Except as indicated in SCHEDULE 5.17, no consent of any
lessor is required in connection with the Transactions.
5.18. LITIGATION. Except as set forth in SCHEDULE 5.18, (i) there are
no pending (served) actions, proceedings or regulatory agency investigations
against MIS or its Subsidiaries or, to MIS or such Subsidiaries' knowledge,
threatened against MIS or any of its Subsidiaries involving the Assets, and (ii)
no such action, proceeding, or regulatory agency investigation has been pending
(served) during the three-year period preceding the date of this Agreement. No
assertion has ever been made to MIS or any of its Subsidiaries to the effect
that MIS or any of its Subsidiaries has any liability as a successor to a third
party's business or product line, and neither MIS nor any of its Subsidiaries
has knowledge of any basis for such an assertion.
5.19. EMPLOYEE BENEFIT PLANS; EMPLOYEES. (a) SCHEDULE 5.19 sets forth a
list of each material "employee benefit plan" (as defined by Section 3(e) of
ERISA) and any other material compensation, deferred compensation, fringe
benefit, severance, disability, sick leave, vacation, or other agreement,
policy, or arrangement (each such plan, agreement, policy, or arrangement is
referred to herein as a "MIS Employee Benefit Plan," and, collectively, the "MIS
Employee Benefit Plans") for the benefit of employees (and their beneficiaries)
of MIS or any of its Subsidiaries (collectively, "MIS Employees") or with
respect to which MIS or any "MIS ERISA Affiliate" (hereby defined to include any
trade or business, whether or not incorporated,
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other than MIS, which has employees who are treated pursuant to Section
4001(a)(14) of ERISA and/or Section 414 of the Code as employees of a single
employer which includes MIS).
(b) MIS has, or will have prior to the Closing Date,
delivered to VPC, with respect to each MIS Employee Benefit Plan, copies of the
documents embodying the Plan, if any, and employee handbooks governing the
employment of MIS Employees.
(c) Neither MIS nor any Subsidiary has any obligation
to contribute to or provide benefits pursuant to, and has no other liability of
any kind with respect to, (i) a "multiple employer welfare arrangement" (within
the meaning of Section 3(40) of ERISA), (ii) a "plan maintained by more than one
employer" (within the meaning of Section 413(c) of the Code), (iii) a
"multi-employer plan" within the meaning of Section 3(37) of ERISA), or (iv) an
"employee pension benefit plan" (within the meaning of Section 3(2) of ERISA)
which is subject to Title IV of ERISA.
(d) To the knowledge of MIS, neither MIS nor any
Subsidiary is subject to any liens, or excise or other taxes under ERISA, the
Code or other applicable law relating to any MIS Employee Benefit Plan.
(e) The consummation of the Transactions will not
give rise to any liability for any employee benefits to any MIS Employee,
including, without limitation, liability for severance pay, unemployment
compensation, termination pay or withdrawal liability.
(f) No MIS Employee Benefit Plan in any way provides
for any benefits of any kind whatsoever (other than under Section 4980B of the
Code and Part 6 of Subtitle B of Title I of ERISA, the Federal Social Security
Act or any MIS Employee Benefit Plan qualified under Section 401(a) of the Code)
to any MIS Employee who, at the time the benefit is to be provided, is a former
director or employee of, other provider of services to MIS or an MIS ERISA
Affiliate (or a beneficiary of any such person).
(g) Any contribution, insurance premium, excise tax,
interest charge or other liability or charge imposed or required with respect to
any MIS Employee Benefit Plan which is attributable to any period or any portion
of any period prior to the Closing will be paid by MIS or a Subsidiary or bill
be reflected on the Financial Statements.
(h) Except as disclosed on SCHEDULE 5.19(h), to the
knowledge of MIS, no claim, lawsuit, arbitration or other action has been
asserted or instituted or threatened in writing against any MIS Employee Benefit
Plan, any trustee or fiduciaries thereof, MIS, any of its Subsidiaries or any
MIS ERISA Affiliate, any director, officer or employee thereof, or any of the
assets of an MIS Employee Benefit Plan or any related trust.
(i) Except as disclosed on SCHEDULE 5.19(i), to the
knowledge of MIS, no MIS Employee Benefit Plan is under audit or investigation
by the IRS or the DOL or any other governmental authority and no such completed
audit, if any, has resulted in the imposition of any tax, interest or penalty.
(j) Since December 31, 1998 and through the date
hereof, and except as set forth on SCHEDULE 5.19(j), neither MIS, any of its
Subsidiaries nor any MIS ERISA Affiliate has, nor will it, (i) institute or
agree to institute any new MIS Employee Benefit Plan or practice, (ii) make or
agree to make any change in any MIS Employee Benefit Plan, (iii) make or agree
to make any increase in the compensation payable or to become payable by MIS,
any of its
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Subsidiaries or any MIS ERISA Affiliate to any MIS Employee, except for normal
periodic salary increases consistent with past practices, or (iv) except
pursuant to this Agreement and except for contributions required to provide
benefits pursuant to the provisions of the MIS Employee Benefit Plans, pay or
accrue or agree to pay or accrue any bonus, percentage of compensation, or other
like benefit to, or for the credit of, any MIS Employee.
(k) There are no collective bargaining or other labor
union agreements to which MIS or any of its Subsidiaries is a party or by which
any of them is bound.
5.20. ADVISORS FEES. Other than as set forth on SCHEDULE 5.20, neither
MIS nor any of its Subsidiaries or any Affiliate thereof has retained or
utilized the services of any advisor, broker, finder or intermediary, or paid or
agreed to pay any fee or commission to any other Person or entity for or on
account of the Transactions, or had any communications with any Person or entity
which would obligate VPC to pay any such fees or commission.
5.21. NO EXISTING DISCUSSION FOR ACQUISITION PROPOSAL. Except as set
forth on SCHEDULE 5.21, as of the date hereof, MIS is not engaged in any
negotiations with any other party with respect to an Acquisition Proposal.
5.22. ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 5.22 and as
otherwise may be specifically identified on the Financial Statements, all
accounts receivable (the "MIS Receivables") of MIS which are reflected n the
Financial Statements, and all MIS Receivables acquired or generated since the
date of the Financial Statements, are in all material respects valid and BONA
FIDE MIS Receivables arising from the furnishing of goods or services to
customers in the ordinary course of business.
5.23. INVENTORIES. Any and all inventories of MIS which are reflected
on the Financial Statements, plus any replacements for such items acquired on or
before the Closing, and minus any such items sold by MIS in the ordinary course
of business on or before the Closing, are properly valued at the lower of cost
(first-in, first-out) or market in accordance with generally accepted accounting
principles consistently applied and, except for obsolete and slow moving items
which have been fully written off or reserved for and except for items sold in
the ordinary course of business, consist of items of a quality and quantity
currently useable and saleable in the ordinary course of business without
markdown or discount.
5.24. SOFTWARE. Except as set forth on SCHEDULE 5.24, MIS presently has
the right to use all computer software owned by it, and to the knowledge of MIS,
the right to use all other computer software which is leased or licensed to, or
otherwise used by MIS. To the knowledge of MIS, neither MIS nor any Subsidiary
is in violation of any license or other agreement related to its software.
5.25. Y2K COMPLIANCE. MIS's equipment, computers, software, hardware,
business and processes in which date sensitive software is utilized are year
2000 compliant such that such equipment, computers, software, hardware, business
and processes will not experience failures, interruptions or malfunctions in a
manner that will have a material adverse effect on such equipment, computers,
software, hardware, business and processes, MIS and/or it Assets.
5.26. SHARES TO BE DELIVERED. The Merger Shares and the shares of MIS
common stock underlying the Debentures and Option/Warrants to be issued with
respect to previously outstanding VPC Capital Stock and the Employment
Agreements set forth in Exhibit 4.1 when issued and delivered to such VPC
stockholders pursuant to this Agreement will be duly
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authorized, validly issued, fully paid and nonassessable shares of voting common
stock of MIS. Upon delivery of the Merger Shares after the Closing and assuming
that the former stockholders of VPC are receiving the Merger Shares in good
faith without notice of any adverse claims, such stockholders will receive good
and unencumbered title to the Merger Shares, free and clear of all liens,
restrictions, charges, encumbrances, and other security interests of any kind or
nature whatsoever, except for claims arising out of acts of or claims against
such stockholders, restrictions existing under applicable securities laws, and
the restrictions imposed hereby (as to Affiliates).
5.27. DISCLOSURE AND ALL DOCUMENTATION. No representation or warranty
by MIS contained in this Agreement and no statement contained in any certificate
or schedule furnished to VPC pursuant to the provisions hereof contains or shall
contain any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein not misleading. To the
knowledge of MIS and its Subsidiaries, there is no current event or condition of
any kind or character pertaining to MIS or its Subsidiaries that may reasonably
be expected to have a Material Adverse Effect, except as disclosed in this
Agreement and except for those events and conditions which are national or
industry-wide in nature. Except as specifically indicated elsewhere in this
Agreement, all documents delivered by MIS or its Subsidiaries to VPC in
connection herewith have been and will be complete originals, or exact copies
thereof.
5.28. TAX-FREE REORGANIZATION. To the knowledge of MIS, there is no
fact pertaining to it, any stockholder of MIS or any of its Subsidiaries that
would prevent the Merger from qualifying as a tax-free reorganization under the
Code.
5.29. SURVIVAL. The representations and warranties contained in this
Article 5 shall survive the Closing for one (1) year, but the running of such
period shall abate upon delivery of a notice of a breach until such time as the
alleged breach is resolved.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF VPC
In order to induce MIS to enter into this Agreement and consummate the
Transactions, VPC hereby represents and warrants the following to MIS as of the
Execution of this Agreement (and not the date hereof), each of which
representations and warranties shall be material to and relied upon by MIS and
shall be deemed remade on and as of the date of the Closing:
6.1. ORGANIZATION AND AUTHORITY. VPC is a corporation duly organized
and validly existing under the laws of the State of Florida and it has no
Subsidiaries. The states in which VPC is qualified to do business are set forth
on SCHEDULE 6.1. VPC is not required to be qualified as a foreign corporation in
any other jurisdiction where its failure to qualify would have a Material
Adverse Effect. VPC has all necessary corporate power and authority to own,
lease and operate its properties and conduct its business as it is currently
being conducted. VPC does not own, directly or indirectly, any equity interest
in any corporation, partnership, joint venture, or other entity.
6.2. CORPORATE POWER AND AUTHORITY; DUE AUTHORIZATION. Subject to VPC
Board Approval and VPC Stockholder approval, VPC has full corporate power and
authority to execute and deliver this Agreement and each of the Closing
Documents to which VPC is or will be a party, and to consummate the
Transactions. No corporate proceeding is necessary to approve the Transactions
other than VPC Board Approval and VPC Stockholder Approval. Assuming VPC
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Board Approval, VPC Stockholder Approval and that this Agreement and each of the
Closing Documents to which MIS is a party constitutes a valid and binding
agreement of MIS this Agreement and each of the Closing Documents to which VPC
is a party constitutes, or will constitute when executed and delivered, a valid
and binding agreement of VPC in each case enforceable in accordance with its
terms, except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency or other similar laws relating to the enforcement of
creditors' rights generally and by the applicable of general principles of
equity. The duly elected officers and directors of VPC is set forth on SCHEDULE
6.2. Copies of the Articles of Incorporation, the Bylaws and all minutes of VPC
are contained in the minute book of VPC. True, correct and complete copies of
the minute book of VPC have been made available to MIS.
6.3. SUFFICIENCY OF ASSETS. All material assets and rights relating to
VPC's business are held solely by, and all agreements, obligations, expenses and
transactions relating to the business of VPC have been entered into, incurred
and conducted solely by, VPC. Except as described in SCHEDULE 6.3, the Assets
are all of the items necessary to provide all services required in connection
with the business of VPC, assuming competent personnel, general office
facilities, and adequate facilities are available.
6.4. NO CONFLICT; REQUIRED CONSENTS. Exclusive of VPC Board Approval
and VPC Stockholder Approval, SCHEDULE 6.4 lists all material third-party
consents or approvals required with respect to VPC for consummation of the
Transactions, which consents VPC agrees to use its best reasonable efforts to
obtain. Assuming all such consents and approvals have been obtained and assuming
the appropriate filings and mailings are made by VPC and VPC to effectuate the
Merger under the Florida Act, and under the Securities Act and the Exchange Act,
the execution and delivery by VPC of this Agreement and the Closing Documents
and the consummation by VPC of the Transactions do not and will not, except as
set forth on SCHEDULE 6.4, (a) require the consent, approval or action of, or
any filing or notice to, any corporation, firm, Person or other entity or any
public, governmental or judicial authority (except for such consents, approvals,
actions, filing or notices the failure of which to make or obtain will not in
the aggregate have a Material Adverse Effect); (b) violate in any material
respect the terms of any material instrument, document or agreement to which VPC
is a party, or by which VPC or the property of VPC is bound, or be in conflict
in any material respect with, result in a material breach of or constitute (upon
the giving of notice or lapse of time or both) a material default under any such
instrument, document or agreement, or result in the creation of any lien upon
any of the property or assets of VPC; (c) violate in any respect the terms of
any instrument, document or agreement to which VPC is a party, or by which VPC
or the property of VPC is bound, or be in conflict in any respect with, result
in a breach of or constitute (upon the giving of notice or lapse of time or
both) a default under any such instrument, document or agreement, or result in
the creation of any lien upon any of the property or assets of VPC if the
aggregate effect of all such violations listed in this subsection (c) results in
a Material Adverse Effect on VPC taken as a whole; (d) violate VPC's Articles of
Incorporation or Bylaws; or (e) violate any order, write, injunction, decree,
judgment, ruling, law, rule or regulation of any federal, state, county,
municipal, or foreign court of governmental authority applicable to VPC, or the
business or assets of VPC. VPC is not subject to, or a party to, any mortgage,
lien, lease, agreement, contract, instrument, order, judgment or decree or any
other material restriction of any kind or character which would prevent or
hinder the continued operation of the business of VPC after the closing on
substantially the same basis as theretofore operated.
6.5. CAPITALIZATION. All of the authorized and outstanding VPC capital
stock is set forth on SCHEDULE 6.5, and no shares of VPC capital stock are held
in the treasury of VPC. No shares or any class of capital stock or other equity
interests of VPC, other than (i) VPC Common
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Stock, (ii) options or warrants for VPC Common Stock, or (iii) those shares of
VPC Capital Stock identified in SCHEDULE 6.5, shall be issued and outstanding at
the Closing. All outstanding VPC capital stock has been duly authorized, and is
validly issued, fully paid and nonassessable. No preemptive (whether statutory
or contractual) rights have been violated. Current VPC stock option plans, all
previous forms of those plans, and amendments, and all outstanding options and
warrants, are identified on SCHEDULE 6.5. Except as set forth on SCHEDULE 6.5,
all options were granted in accordance with the provisions of VPC stock option
plans. SCHEDULE 6.5 also sets forth information as to options (if any) and
warrants (if any) previously granted which have terminated, expired or been
exercised. Except for the outstanding options, warrants and other commitments
set forth in SCHEDULE 6.5, VPC has no convertible securities, options, warrants,
or other contracts, commitments, agreements, understandings, arrangements or
restrictions by which it is bound to issue any additional shares of VPC Capital
Stock or other securities. All securities of VPC were offered and sold in
compliance with applicable federal and state securities laws. Each and every
dividend of VPC, if any, whether paid in cash or other property, has been
declared and paid in compliance with applicable law, and VPC has no further
obligation with respect to such payment. SCHEDULE 6.5 also summarizes in detail
all currently effective registration rights which have been granted by VPC to
any other person or entity and all currently effective shareholder agreements
between any shareholders of VPC.
6.6. COMPLIANCE WITH LAWS. Except as set forth in SCHEDULE 6.6, (a) to
the best of VPC's knowledge, VPC is in compliance with, and VPC has operated and
any Persons or businesses previously owned or operated by them in compliance
with, all applicable laws, orders, rules and regulations of all governmental
bodies and agencies, including applicable environmental laws and regulations,
but excluding applicable laws and regulations related to Medicare, Medicaid and
other federally funded programs, except where such noncompliance has and will
have, in the aggregate, no Material Adverse Effect. VPC has not received notice
of any noncompliance with the foregoing.
(b) Without limiting the foregoing, VPC and any other person
or entity for whose conduct VPC is legally held responsible are in material
compliance with all applicable federal, state, regional, local or provincial
laws, statutes, ordinances, judgments, rulings and regulations relating to any
matters of pollution, protection of the environment, health or safety, or
environmental regulation or control (collectively, "Environmental Laws").
Neither VPC nor any other person or entity for whose conduct VPC is legally
responsible, has (i) received any notice, demand, request for information, or
administrative inquiry relating to any violation of an Environmental Law or the
institution of any suit, action, claim or proceeding alleging such violation or
investigation by any Governmental Authority or any third party of any such
violation, (ii) manufactured, generated, treated, stored, handled, processed,
released, transported or disposed of any Hazardous Substance on, under, from or
at any of VPC's properties or any other properties, (iii) become aware or
received notice of the release or disposal of any Hazardous Substances in
violation of any applicable Environmental Law, on, under or at any of VPC's,
properties or any other properties, (iv) become aware or received notice of any
actual or potential material liability on the part of VPC for the response to or
remediation of any Hazardous Substance at or arising from any of VPC's
properties or any other properties owned or operated by VPC or any other Person
for whose conduct VPC is legally responsible, or (v) become aware of or received
notice of any actual or potential liability on the part of VPC for the costs of
response to or remediation of Hazardous Substances at or arising from any of
VPC's properties or any other properties owned or operated by VPC or any other
Person for whose conduct VPC is or may be held responsible. For purposes of this
Agreement, the term "Hazardous Substance" shall mean any toxic or hazardous
materials or substances, including asbestos, buried contaminants, chemicals,
flammable explosives, radioactive materials or petroleum and petroleum products
and
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any substances defined as, or included in the definition of, "hazardous
substances," "hazardous wastes," "hazardous materials" or "toxic substances"
under any Environmental Law. No Environmental Law imposes any obligation upon
VPC or its Subsidiaries arising out of or as a condition to any transaction
contemplated hereby, including, without limitation, any requirement to modify or
to transfer any permit or license, any requirement to file any notice or other
submission with any Governmental Authority, the placement of any notice,
acknowledgment, or covenant in any land records, or the modification of or
provision of notice under any agreement, consent order, or consent decree. No
lien has been placed upon any of VPC's properties or its Subsidiaries'
properties under any Environmental Law.
6.7. LICENSES AND PERMITS. Except as set forth in SCHEDULE 6.7, VPC has
not received notice of any violations in respect of any licenses, permits,
concessions, grants, franchises, approvals or authorizations necessary or
required for the use or ownership of their assets and the operation of their
business. No proceeding is pending or, to the knowledge of VPC, threatened,
which seeks revocation or limitation of any such licenses, permits, concessions,
grants, franchises, approvals or authorizations.
6.8. FINANCIAL INFORMATION.
(a) VPC has provided to MIS its interim financial statements
for the period through March 31, 1999 ("Interim Financials") and an audited
financial statement for the most recent fiscal year-end December 31, 1998
("Audited Financial Statement"); together with Interim Financials are herewith
called (the "Financial Statements"), copies of which are attached hereto as
EXHIBIT 6.8. Except as disclosed in SCHEDULE 6.8 attached hereto, the Financial
Statements have been and VPC's Monthly Financials will be, prepared in
accordance with GAAP (except as to notes necessary for the Interim Financials
and VPC's Monthly Financials) applied on a consistent basis throughout the
periods covered thereby, present fairly the financial condition of VPC as of the
indicated dates and the results of operations of VPC for the indicated periods,
are consistent with the books and records of VPC and, except as discussed on
SCHEDULE 6.8 do not contain any material item of special or nonrecurring income
not earned in the ordinary course of business; provided, however, that the
Interim Financials and such Monthly Financials are subject to normal year-end
adjustments that are not expected to be material in amount.
(b) Except as and to the extent specifically disclosed in this
Agreement, there are no liabilities or obligations of VPC of any nature, whether
liquidated, accrued, absolute, contingent or otherwise except for those (i) that
are specifically reflected or reserved against as to amount in the latest
balance sheet contained in the Financial Statements, (ii) that arose thereafter
in the ordinary course of business, or (iii) that are specifically set forth on
SCHEDULE 6.8; and at all times after the execution of this Agreement until the
Closing, there will be no liabilities or obligations of VPC of any nature,
whether liquidated, unliquidated, accrued, absolute, contingent or otherwise,
which are material, individually or in the aggregate, except for those (A) that
are specifically reflected or reserved against as to amount in the latest
balance sheet contained in the Financial Statements, or (B) that arose after the
date of such balance sheet in the ordinary course of business (and are,
individually and in the aggregate, immaterial), (C) that are specifically set
forth on SCHEDULE 6.8, or (D) that are permitted as set forth on EXHIBITS 4.2,
4.2(b)(iv), or 4.2(f).
(c) VPC is not, nor has it been during the twelve (12) months
immediately preceding the execution of this Agreement, insolvent within the
meaning of 11 U.S.C. ss. 101(31). VPC has paid and is paying its debts as they
become due.
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6.9. NO UNDISCLOSED LIABILITIES. Except as and to the extent
specifically disclosed in this Agreement and those that are specifically
reflected or reserved against as to amount in the latest balance sheet contained
in the Financial Statements, VPC knows of any reasonable basis for the assertion
against VPC of any material liabilities or obligations of any nature, whether
absolute, accrued, contingent or otherwise and whether due or to become due,
including, without limitation, any liability for taxes and interest, penalties
and other charges payable with respect thereto. Except as set forth in this
Agreement, neither the execution and delivery of this Agreement nor the
consummation of the Merger will (a) result in any payment (whether severance
pay, unemployment compensation or otherwise) becoming due from VPC to any
employee, director or officer or former employee, director or officer of VPC,
(b) increase any benefits otherwise payable to any employee, director or officer
or former employee, director or officer of VPC, or (c) result in the
acceleration of the time of payment or vesting of any such benefits.
6.10. INTELLECTUAL PROPERTY. Except as described in SCHEDULE 6.10, to
the knowledge of VPC, no patent, formula, process, trade secret, trademark,
trade name, assumed name or copyright relating to VPC's business, including all
intellectual property used in the operation of the business of VPC
(collectively, the "VPC Intellectual Property"), infringes on any patent,
copyright, trademark or other intellectual property right of any Person, or
violates the terms of any agreements related thereto, nor to VPC's knowledge
have there been any claims of infringement. Except as set forth in SCHEDULE
6.10, there are no pending or, to VPC's knowledge, threatened claims against VPC
contesting the validity of, or their right to use any of, the VPC Intellectual
Property.
6.11. CONTRACTS AND COMMITMENTS. Except as disclosed on SCHEDULE 6.8:
(a) To VPC's knowledge, no aspect of VPC's business or
operations or the Assets is of such character as would restrict the MIS from
carrying on the business of VPC.
(b) VPC has no consultants or independent contractors who are
officers or directors of VPC, or who are affiliates of such officers or
directors, to whom they are paying compensation for services.
(c) VPC has no material contracts, commitments, arrangements,
or understandings relating to their business, operations, financial condition,
or prospects. For purposes of this Section 5.11(c), "material" means payment or
performance of a contract, commitment, arrangement or understanding entered into
in the ordinary course of business which is expected to (i) involve payments in
excess of $100,000 per year, or (ii) have a duration exceeding five (5) years
with expected payments over its duration exceeding $100,000 (in each case other
than leases not required to be disclosed pursuant to Section 5.17), or any
contract, commitment, arrangement or understanding entered into not in the
ordinary course of business.
(d) To VPC's knowledge, there are no outstanding contracts,
commitments or bids, or services, development or sales proposals, that will
result in any substantial loss to VPC (and/or the MIS) upon completion or
performance thereof, after allowance for normal direct employee expenses,
licensing, development, distribution expenses and other costs.
(e) There are no outstanding material lease or purchase
commitments of VPC which are not consistent with VPC's past lease and purchase
commitment practices.
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6.12. ABSENCE OF CERTAIN CHANGES. Except as reflected on SCHEDULE 6.12,
or elsewhere in this Agreement or specifically identified on any Schedules
hereto, since December 31, 1998, VPC has not, and at the Closing Date will not,
have:
(a) Suffered a material Adverse Effect, or become aware of any
circumstances which might reasonably be expected to result in such a Material
Adverse Effect; or suffered any material casualty loss to the Assets (whether or
not insured);
(b) Incurred any obligations specifically related to the
Assets, except in the ordinary course of business, consistent with past
practices;
(c) Permitted or allowed any of the Assets to be mortgaged,
pledged, or subjected to any lien or encumbrance, except liens or encumbrances
specifically excepted by the provisions of Section 6.14;
(d) Written down the value of any inventory, contract or other
intangible asset, or written off as uncollectible any notes or accounts
receivable or any portion thereof, except for write-downs and write-offs in the
ordinary course of business, consistent with past practice and at a rate no
greater than during the latest complete fiscal year; cancelled any other debts
or claims, or waived any rights of substantial value, or sold or transferred any
of its material properties or assets, real, personal, or mixed, tangible or
intangible, except in the ordinary course of business and consistent with past
practice;
(e) Sold, licensed or transferred or agreed to sell, license
or transfer, any of the Assets, except in the ordinary course of business and
consistent with past practice;
(f) To VPC's knowledge, received notice of any pending or
threatened adverse claim or an alleged infringement of proprietary material,
whether such claim or infringement is based on trademark, copyright, patent,
license, trade secret, contract or other restrictions on the use or disclosure
of proprietary materials;
(g) Incurred obligations to refund money to customers, except
in the ordinary course of business, all of which will have no Material Adverse
Effect;
(h) Become aware of any event, condition or other circumstance
relating solely to the Assets (as opposed to any such event, condition, etc.,
which is, for example, national or industry-wide in nature) which might
reasonably be expected to have a Material Adverse Effect on the Assets;
(i) Made any capital expenditures or commitments, any one of
which is more than $500,000, for additions to property, plant, or equipment,
unless approved in writing by MIS or deemed approved by MIS pursuant to EXHIBIT
4.2(b)(iv) hereof;
(j) Made any material change in any method of accounting or
accounting practice;
(k) Paid, loaned, guaranteed, or advanced any material amount
to, or sold, transferred, or leased any material properties or assets (real,
personal, or mixed, tangible or intangible) to, or entered into any agreement,
arrangement, or transaction with any of VPC's officers or directors, or any
business or Person in which any officer or director of VPC or any affiliate or
associate of any of such Persons has any direct or indirect interest; or
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(l) Agreed to take any action described in this Section 6.12.
6.13. TAXES.
(a) Except a set forth on SCHEDULE 6.13(a), VPC have not been
a member of an Affiliated Group filing a consolidated federal income Tax Return
other than a group the common parent of which is Medical Industries of America,
Inc. The Affiliated Group of which VPC is a member (the "VPC Group") has to the
best of its knowledge filed all income Tax Returns that it was required to file
for each taxable period during which VPC was a member of the VPC Group. All such
Tax Returns are correct and complete in all material respects. To VPC's
knowledge, all income Taxes owned by the VPC Group (whether or not shown on any
Tax Return) have been paid for each taxable period during which VPC filed a
consolidated federal income Tax Return.
(b) The amounts booked as provisions for Taxes on the
Financial Statements are sufficient for payment of all unpaid Taxes of VPC, and
the VPC Group through December 31, 1998. Copies of the VPC Group's federal and
state income Tax Returns for calendar years 1995, 1996 and 1997 have been
provided to MIS.
(c) No claim has ever been made by a Governmental Authority in
a jurisdiction where VPC does not file Tax Returns that it is or it may be
subject to taxation by that jurisdiction. There are no Security Interests on any
of the assets of VPC that arose in connection with any failure (or alleged
failure) to pay any Tax when due.
(d) VPC has withheld and paid over to the proper governmental
authorities all Taxes required to have been withheld and paid over, and complied
with all information reporting and back-up withholding requirements, including
maintenance of required records with respect thereto, in connection with amounts
paid to any employee, independent contractor, creditor, or other third party.
(e) There is no dispute or claim concerning any Tax Liability
of VPC either (i) claimed or raised by any Governmental Authority in writing, or
(ii) as to which any of VPC (and employees responsible for Tax matters) has
knowledge.
(f) VPC has not waived any statute of limitations in respect
of Taxes or agreed to any extension or time with respect to a Tax assessment or
deficiency.
(g) VPC does not have any liability of the Taxes of any Person
other than VPC (i) as a transferee or successor, (ii) by contract, or (iii)
otherwise.
(h) VPC currently utilize the accrual method of accounting for
income Tax purposes. VPC has not agreed to, and are not and will not be required
to, make any adjustments under Code Section 481(a) as a result of a change in
accounting methods.
(i) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of VPC that, individually or collectively, could
give rise to the payment of any amount (or portion thereof) that would not be
deductible purchase to Sections 280G, 404 or 162 of the Code.
6.14. TITLE TO PROPERTIES; ENCUMBRANCES. Except as specifically
identified in the Schedules hereto and except for items leased or licensed by
VPC, or on SCHEDULE 6.14, VPC has
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good, valid, and marketable title to all of the Assets. All of the Assets are in
the possession or under the control of VPC, and none of the Assets are subject
to any mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance, or charge of any kind except as set forth on SCHEDULE 6.14 or as
specifically disclosed on the other Schedules hereto and, except minor
imperfections or title and encumbrances, if any, that are not substantial in
amount, do not materially detract from the value or functional utility of the
property subject thereto, and do not in any way materially impair the value of
the Assets.
6.15. EQUIPMENT. All of the equipment owned or leased by VPC which has
(or had at the date of its Merger or execution of the related lease by VPC) a
fair market value of $400,000 or greater is listed on SCHEDULE 6.15 attached
hereto. All of the equipment owned or leased by VPC is in adequate operating
condition and repair subject to normal wear and tear, except as set forth on
SCHEDULE 6.15.
6.16. REAL PROPERTY. SCHEDULE 6.16 contains a list of all real property
owned by VPC, including, without limitation, the improvements and structures
located thereon. To VPC's knowledge, such improvements and structures are
structurally sound with no known defects and in good operating condition and
repair subject to normal wear and tear, and VPC has not received any written
notification that there is any violation of any building, zoning, or other law,
ordinance, or regulation in respect of such property, improvements, or
structures, and to the best of VPC's knowledge, no such violation exists.
6.17. LEASES. SCHEDULE 6.17 contains a list of all leases (including
both operating and capital leases) pursuant to which VPC leases real or personal
property and (i) which involve lease payments in excess of $30,000 per year,
(ii) which are between VPC, on the one hand, and any of its Affiliates, on the
other hand, or (iii) which were not entered into in the ordinary course of
business. Copies of all such leases have been delivered to VPC. All such leases
are valid, binding, and enforceable in accordance with their terms (except as
the enforceability thereof may be limited by applicable bankruptcy, insolvency
or other similar laws relating to the enforcement of creditors' rights generally
and by the application of general principles of equity), are in full force and
effect and except as set forth on SCHEDULE 6.17, no event has occurred which is
a default or which with the passage of time will constitute a default by VPC
thereunder, nor has any such event occurred to the knowledge of VPC which is a
default, or with the passage of time will constitute a default, by any other
party to such lease. All property leased by VPC as lessee is in the possession
of VPC. Except as indicated in SCHEDULE 6.17, no consent of any lessor is
required in connection with the Transactions.
6.18. LITIGATION. Except as set forth in SCHEDULE 6.18, (i) there are
no pending (served) actions, proceedings or regulatory agency investigations
against VPC or, to VPC's knowledge, threatened against VPC involving the Assets,
and (ii) no such action, proceeding, or regulatory agency investigation has been
pending (served) during the three-year period preceding the date of this
Agreement. No assertion has ever been made to VPC to the effect that VPC has any
liability as a successor to a third party's business or product line, and VPC
has no knowledge of any basis for such an assertion.
6.19. EMPLOYEE BENEFIT PLANS; EMPLOYEES.
(a) SCHEDULE 6.19 sets forth a list of each material "employee
benefit plan" (as defined by Section 3(e) of ERISA) and any other material
compensation, deferred compensation, fringe benefit, severance, disability, sick
leave, vacation, or other agreement, policy, or arrangement (each such plan,
agreement, policy, or arrangement is referred to herein as a "VPC
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Employee Benefit Plan," and, collectively, the "VPC Employee Benefit Plans") for
the benefit of employees (and their beneficiaries) of VPC (collectively, "VPC
Employees") or with respect to which VPC or any "VPC ERISA Affiliate" (hereby
defined to include any trade or business, whether or not incorporated, other
than VPC, which has employees who are treated pursuant to Section 4001(a)(14) of
ERISA and/or Section 414 of the Code as employees of a single employer which
includes VPC).
(b) VPC has, or will have prior to the Closing Date, delivered
to VPC, with respect to each VPC Employee Benefit Plan, copies of the documents
embodying the Plan, if any, and employee handbooks governing the employment of
VPC Employees.
(c) VPC has no obligation to contribute to or provide benefits
pursuant to, and has no other liability of any kind with respect to, (i) a
"multiple employer welfare arrangement" (within the meaning of Section 3(40) of
ERISA), (ii) a "plan maintained by more than one employer" (within the meaning
of Section 413(c) of the Code), (iii) a "multi-employer plan" within the meaning
of Section 3(37) of ERISA), or (iv) an "employee pension benefit plan" (within
the meaning of Section 3(2) of ERISA) which is subject to Title IV of ERISA.
(d) To the knowledge of VPC, VPC is not subject to any liens,
or excise or other taxes under ERISA, the Code or other applicable law relating
to any VPC Employee Benefit Plan.
(e) The consummation of the Transactions will not give rise to
any liability for any employee benefits to any VPC Employee, including, without
limitation, liability for severance pay, unemployment compensation, termination
pay or withdrawal liability.
(f) No VPC Employee Benefit Plan in any way provides for any
benefits of any kind whatsoever (other than under Section 4980B of the Code and
Part 6 of Subtitle B of Title I of ERISA, the Federal Social Security Act or any
MIAO Employee Benefit Plan qualified under Section 401(a) of the Code) to any
VPC Employee who, at the time the benefit is to be provided, is a former
director or employee of, other provider of services to MIAO or an VPC ERISA
Affiliate (or a beneficiary of any such person).
(g) Any contribution, insurance premium, excise tax, interest
charge or other liability or charge imposed or required with respect to any VPC
Employee Benefit Plan which is attributable to any period or any portion of any
period prior to the Closing will be paid by VPC or bill be reflected on the
Financial Statements.
(h) Except as disclosed on SCHEDULE 6.19(h), to the knowledge
of VPC, no claim, lawsuit, arbitration or other action has been asserted or
instituted or threatened in writing against any VPC Employee Benefit Plan, any
trustee or fiduciaries thereof, VPC, or any VPC ERISA Affiliate, any director,
officer or employee thereof, or any of the assets of a VPC Employee Benefit Plan
or any related trust.
(i) Except as disclosed on SCHEDULE 6.19(i), to the knowledge
of VPC, no VPC Employee Benefit Plan is under audit or investigation by the IRS
or the DOL or any other governmental authority and no such completed audit, if
any, has resulted in the imposition of any tax, interest or penalty.
(j) Since December 31, 1998 and through the date hereof, and
except as set forth on SCHEDULE 6.19(j), neither VPC nor any VPC ERISA Affiliate
has, nor will it, (i) institute or agree to institute any new VPC Employee
Benefit Plan or practice, (ii) make or agree to make any
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change in any VPC Employee Benefit Plan, (iii) make or agree to make any
increase in the compensation payable or to become payable by VPC or any VPC
ERISA Affiliate to any VPC Employee, except for normal periodic salary increases
consistent with past practices, or (iv) except pursuant to this Agreement and
except for contributions required to provide benefits pursuant to the provisions
of the VPC Employee Benefit Plans, pay or accrue or agree to pay or accrue any
bonus, percentage of compensation, or other like benefit to, or for the credit
of, any VPC Employee.
(k) There are no collective bargaining or other labor union
agreements to which VPC or any of its Subsidiaries is a party or by which any of
them is bound.
6.20. ADVISORS FEES. Other than as set forth on SCHEDULE 6.20, neither
VPC or any Affiliate thereof has retained or utilized the services of any
advisor, broker, finder or intermediary, or paid or agreed to pay any fee or
commission to any other Person or entity for or on account of the Transactions,
or had any communications with any Person or entity which would obligate MIS to
pay any such fees or commission.
6.21. NO EXISTING DISCUSSION FOR ACQUISITION PROPOSAL. Except as set
forth on SCHEDULE 6.23, as of the date hereof, MIS is not engaged in any
negotiations with any other party with respect to an Acquisition Proposal.
6.22. ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 6.22 and as
otherwise may be specifically identified on the Financial Statements, all
accounts receivable (the "VPC Receivables") of VPC which are reflected n the
Financial Statements, and all VPC Receivables acquired or generated since the
date of the Financial Statements, are in all material respects valid and BONA
FIDE VPC Receivables arising from the furnishing of goods or services to
customers in the ordinary course of business.
6.23. INVENTORIES. Any and all inventories of VPC which are reflected
on the Financial Statements, plus any replacements for such items acquired on or
before the Closing, and minus any such items sold by VPC in the ordinary course
of business on or before the Closing, are properly valued at the lower of cost
(first-in, first-out) or market in accordance with generally accepted accounting
principles consistently applied and, except for obsolete and slow moving items
which have been fully written off or reserved for and except for items sold in
the ordinary course of business, consist of items of a quality and quantity
currently useable and saleable in the ordinary course of business without
markdown or discount.
6.24. SOFTWARE. Except as set forth on SCHEDULE 6.24, VPC presently has
the right to use all computer software owned by it, and to the knowledge of VPC,
the right to use all other computer software which is leased or licensed to, or
otherwise used by VPC. To the knowledge of VPC, VPC is not in violation of any
license or other agreement related to its software.
6.25. Y2K COMPLIANCE. VPC's equipment, computers, software, hardware,
business and processes in which date sensitive software is utilized are year
2000 compliant such that such equipment, computers, software, hardware, business
and processes will not experience failures, interruptions or malfunctions in a
manner that will have a material adverse effect on such equipment, computers,
software, hardware, business and processes, VPC and/or it Assets
6.26. DISCLOSURE AND ALL DOCUMENTATION. No representation or warranty
by VPC contained in this Agreement and no statement contained in any certificate
or schedule furnished to MIS pursuant to the provisions hereof contains or shall
contain any untrue statement of a
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material fact or omits to state a material fact necessary in order to make the
statements therein not misleading. To the knowledge of VPC, there is no current
event or condition of any kind or character pertaining to VPC that may
reasonably be expected to have a Material Adverse Effect, except as disclosed in
this Agreement and except for those events and conditions which are national or
industry-wide in nature. Except as specifically indicated elsewhere in this
Agreement, all documents delivered by VPC to MIS in connection herewith have
been and will be complete originals, or exact copies thereof.
6.27. TAX-FREE REORGANIZATION. To the knowledge of VPC, there is no
fact pertaining to it, any stockholder of VPC that would prevent the Merger
from qualifying as a tax-free reorganization under the Code.
6.28. SURVIVAL. The representations and warranties contained in this
Article 6 shall survive the Closing for one (1) year, but the running of such
period shall abate upon delivery of a notice of a breach until such time as the
alleged breach is resolved.
ARTICLE 7
CERTAIN ADDITIONAL COVENANTS
7.1. SPECIAL MEETING. Subject to VPC Board Approval and MIS Board
Approval, VPC and MIS shall each take all action necessary, in accordance with
applicable law and its Articles of Incorporation and Bylaws, to convene a
special meeting of its stockholders (each, a "Special Meeting") or obtain
through written consents, as applicable, as promptly as practicable after the
signing of this Agreement for the purpose of considering and taking action upon
this Agreement and the Transactions. Subject to Board Approval, the Board of
Directors of VPC and MIS will recommend, subject to Section 7.4 hereof, that the
VPC and MIS stockholders, respectively, vote in favor of and approve the Merger
and this Agreement at the Special Meeting or by written consent, as applicable.
7.2. NO SOLICITATION. Subject to the provisions of Section 7.4, in
consideration of the expenses to be incurred by VPC and MIS in negotiating this
Agreement and in conducting their due diligence investigation, neither VPC nor
MIS shall, directly or indirectly, through any officer, director, employee,
financial advisor, representative or agent of such party: (i) solicit, initiate,
or encourage any inquiries or proposals that constitute, or could reasonably be
expected to lead to, a proposal or offer for a merger, consolidation, business
combination, sale or transfer of substantial assets, sale of any shares of
capital stock (including without limitation by way of tender offer) or similar
transaction involving such party or any of its Subsidiaries, other than the
Transactions (any of the foregoing inquiries or proposals being referred to this
Agreement as an "Acquisition Proposal"), or (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any Person
relating to, any Acquisition Proposal, or agree to or recommend any Acquisition
Proposal.
7.3. NOTIFICATION OF ACQUISITION PROPOSAL. MIS and VPC shall notify the
other within three (3) Business Days after receipt by such party (or its
advisors) of any Acquisition Proposal or any request for non-public information
in connection with an Acquisition Proposal or for access to its properties,
books or records by any person or entity that informs such party that it is
considering making, or has made, an Acquisition Proposal. Such notice shall be
made orally and in writing and shall indicate in reasonable detail the identity
of the offeror and the terms and conditions of such proposal, inquiry or
contact. Such party shall continue to keep the other party
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informed, on a prompt and current basis, of the status of any such discussions,
negotiations and the terms being discussed or negotiated.
7.4. FIDUCIARY OUT. (a) Notwithstanding the provisions of Section 7.2
above, nothing contained in this Agreement shall prevent MIS or its Board of
Directors, from (A) furnishing non-public information, or entering into
discussions or negotiations, with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal to its
stockholders, if and only to the extent that (1) the Board of Directors of MIS
believes in good faith (after consultation with its financial advisor) that such
Acquisition Proposal is reasonably capable of being completed on the terms
proposed and, after taking into account the strategic benefits anticipated to be
derived from the Merger and long-term prospects of MIS and VPC as a combined
company, such Acquisition Proposal would, if consummated, result in a
transaction significantly more favorable over the long term than the
Transactions, and MIS's Board of Directors determines in good faith after
receipt of an opinion from outside legal counsel to the effect that such action
is likely necessary for the Board of Directors to comply with its fiduciary
duties to stockholders under applicable law and (2) prior to furnishing such
non-public information to, or entering into discussions or negotiations with,
such person or entity, the MIS Board of Directors receives from such Person an
executed confidentiality agreement with terms no more favorable to such Person
than those contained in this Agreement; or (B) complying with 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal. Without limiting
Section 7.3 above, MIS shall give written notice to VPC as soon as possible of
any Acquisition Proposal that the MIS Board of Directors determines meets the
standards set forth in this Agreement and whether MIS will exercise its right to
use such Acquisition Proposal as a fiduciary out. Notice from MIS to VPC of its
election to use such Acquisition Proposal as a fiduciary out shall mean that
this Agreement is terminated and a termination fee is payable by MIS pursuant to
Section 7.5 hereof.
(b) Notwithstanding the provisions of Section 7.2 above,
nothing contained in this Agreement shall prevent VPC or its Board of Directors,
from (A) furnishing non-public information, or entering into discussions or
negotiations, with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal to its
stockholders, if and only to the extent that (1) the Board of Directors of VPC
believes in good faith (after consultation with financial advisor) that such
Acquisition Proposal is reasonably capable of being completed on the terms
proposed and, after taking into account the strategic benefits anticipated to be
derived from the Merger and the long-term prospects of MIS and VPC as a combined
company, such Acquisition Proposal would, if consummated, result in a
transaction significantly more favorable over the long term that the
Transactions, and VPC's Board of Directors determines in good faith after
receipt of an opinion from outside legal counsel to the effect that such action
is likely necessary for the Board of Directors to comply with its fiduciary
duties to stockholders under applicable law and (2) prior to furnishing such
non-public information to, or entering into discussions or negotiations with,
such person or entity, the VPC Board of Directors receives from such Person an
executed confidentiality agreement with terms no more favorable to such party
than those contained in this Agreement. Without limiting Section 7.3 above, VPC
shall give written notice to MIS as soon as possible of any such Acquisition
Proposal that the VPC Board of Directors determines meets standards set forth in
this Agreement and whether VPC will exercise its right to use Acquisition
Proposal as a fiduciary out shall mean that this Agreement is terminated and a
termination fee is payable by VPC to MIS pursuant to Section 7.5 hereof.
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7.5. BREAK-UP FEE/UPON OCCURRENCE OF FIDUCIARY OUT. MIS or VPC, as the
case may be, shall pay to the other party a termination fee upon the termination
of this Agreement pursuant to Section 7.4. The termination fee shall be the sum
of (i) the other party's Out-Of-Pocket Costs, and (ii) $250,000.00, but shall
not in any event exceed $500,000.00. The payment of a termination fee pursuant
to this subsection, which is agreed to be a fair estimate of the expenses and
lost opportunity which would be suffered by the non-terminating party in such
event, shall be the sole and exclusive remedy of the non-terminating against the
terminating party and any of its Subsidiaries and their respective directors,
officers, employees, attorneys, agents, advisors or other representatives, with
respect to the occurrences giving rise to such payment; provided that this
limitation shall not be applicable to the terminating party in the event of a
willful breach of Sections 4.5 or 4.6 of this Agreement by the terminating party
or its representatives.
7.6. BREACH. (a) If MIS becomes aware of breach(es) by VPC of any of
its representations or warranties contained in this Agreement after the
execution of this Agreement but prior to the date the expiration of the warranty
survival period (the "Settlement Cut-Off Date") as a result of its due diligence
investigation of VPC or otherwise, it shall give written notice to VPC of the
nature and the amount of damages suffered as a result of such breach(es). If in
the exercise of its good faith business judgment MIS alleges that such damages
exceed $250,000 in the aggregate, MIS and VPC shall in good faith negotiate a
mutually acceptable dollar value settlement ( the "VPC Breach Settlement") of
the damages caused by such breach(es). If MIS and VPC agree on the VPC Breach
Settlement, they shall jointly instruct the Exchange Agent to decrease the
number of Merger Shares issuable to all holders of VPC Class A Common Stock
immediately prior to the Closing or if subsequent to Closing, the VPC Class A
Common Stockholders shall return to MIS the number of Merger Shares issued by an
amount equal to the VPC Breach Settlement divided by the Fair Market Value. Such
decrease in the number of Merger Shares to be issued to or returned by the VPC
Class A Common Stockholders shall be allocated among the VPC Class A Common
Stockholders pro rata based upon the ownership of the VPC Class A Common Stock
immediately prior to the Merger. In the event that MIS and VPC, in the exercise
of good faith efforts, cannot reach agreement on the VPC Breach Settlement by
the earlier of (i) the date that is thirty (30) days after the notice of breach
called for above in this subsection (a) or (ii) the Settlement Cutoff Date, MIS
shall have the right to rescind this Agreement, whereupon each of MIS and VPC
shall be responsible for their own Out-Of-Pocket Costs (except to the extent
that such Out-of-Pocket Costs or expenses incurred by either party are agreed to
be paid otherwise by the terms of this Agreement) and neither MIS nor VPC shall
have any further obligation to the other under the terms of this Agreement. If
such damages do not exceed $250,000 in the aggregate, or if VPC and MIS do not
agree on a VPC Breach Settlement and MIS does not exercise its right to rescind
this Agreement, no decease in the number of Mergers Shares issuable or issued to
the VPC Class A Common Stockholders shall be made.
(b) If VPC becomes aware of breach(es) by MIS of any of its
representations or warranties contained in this Agreement after the execution of
this agreement but prior to the Settlement Cut-Off Date as a result of its due
diligence investigation of MIS and its Subsidiaries or otherwise, its shall give
written notice to MIS of the nature and the amount of damages suffered as a
result of such breach(es). If in the exercise of its good faith business
judgment VPC alleges that such damages exceed $250,000 in the aggregate, MIS and
VPC shall in good faith negotiate a mutually acceptable dollar value settlement
(the "MIS Breach Settlement") of the damages caused by such breach(es). If MIS
and VPC agree on the MIS Breach Settlement, they shall jointly instruct the
Exchange Agent to increase the number of Merger Shares issuable to the VPC Class
A Common Stockholders by an amount equal to the MIS Breach Settlement divided
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by the Fair Market Value. Such increase in the number of Merger Shares to be
issued to the VPC Class A Common Stockholders shall be allocated among the VPC
Class A Common Stockholders pro rata based upon the ownership of the VPC Class A
Common Stock immediately prior to the Merger. In the event that MIS and VPC, in
the exercise of good faith efforts, cannot reach agreement on the MIS Breach
Settlement by the earlier of (i) the date that is thirty (30) days after the
notice of breach called for above in this subsection (b) or (ii) the Settlement
Cut Off Date, VPC shall have the right to rescind this Agreement, whereupon each
of MIS and VPC shall be responsible for their own Out-Of-Pocket Costs (except
to the extent that such Out-of-Pocket or expenses incurred by either party are
agreed to be paid otherwise by the terms of this Agreement) and neither MIS nor
VPC shall have any further obligation to the other under the terms of the this
Agreement. If such damages do not exceed $250,000 in the aggregate, or if VPC
and MIS do not agree on a MIS Breach Settlement and VPC does not exercise its
right to rescind under this Section, no increase in the number of Mergers Shares
issuable to the VPC Class A Common Stockholders shall be made.
(c) If an adjustment has been agreed to under both subsection
(a) and (b) above, the adjustments made pursuant thereto shall be netted against
each other in order to determine the net adjustment to the number of Merger
Shares.
(d) Notwithstanding anything to the contrary in this Section
7.6, (i) no adjustment shall be made to the number of Merger Shares if the
absolute difference between the aggregate amount of VPC Breach Settlement(s) and
the aggregate amount of MIS Breach Settlement(s) does not exceed $250,000 and
(ii) in no event shall the net aggregate adjustment to the number of Merger
Shares exceed an amount equal to $3,000,000 million divided by $3.00.
7.7 RETURN OF MIS COMMON STOCK. As a material inducement for VPC to
enter into this transaction for which VPC has relied, Dr. John Chiu has agreed
to deliver to MIS, contemporaneous with the Closing, 1,350,000 shares of VPC
Common Stock owned by Dr. Chiu either directly or beneficially. Such shares
shall be retired by MIS to its treasury.
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF VPC TO CLOSE
Each and every obligation of VPC under this Agreement to be performed on or
prior to the Closing shall be subject to the fulfillment, on or prior to the
Closing, of each of the following conditions, which conditions MIS agrees to use
its best efforts to satisfy:
8.1 REPRESENTATIONS AND WARRANTIES AT CLOSING. The representations and
warranties made by MIS in or pursuant to this Agreement or given on its behalf
hereunder shall be true and correct on and as of the Closing Date, in each case
with the same effect as though such representations and warranties had been made
or given on and as of the Closing Date except for such representation and
warranties which if not true and correct on and as of the Closing Date, do not
result in damages suffered by VPC in excess of $250,000 in the aggregate.
8.2 OBLIGATIONS PERFORMED. MIS shall have performed and complied with
all material agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing.
8.3 CONSENTS AND STOCKHOLDER APPROVAL.
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(a) MIS shall have obtained and delivered to VPC the written
consents or approvals specified, or to be specified, in SCHEDULE 5.4 (except for
such consents or approvals as to which, in the aggregate, the failure to obtain
them shall not have a Material Adverse Effect) and all of such consents shall
remain in full force and effect at and as of the Closing.
(b) This Agreement and the Merger shall have received the
requisite MIS Board Approval, MIS Stockholder Approval, Acquisition Company
Board Approval, VPC Board Approval and VPC Stockholder Approval, as applicable.
(c) VPC shall have received all consents to the consummation
of the Transaction that VPC deems necessary or appropriate from its lenders.
8.4. CLOSING DELIVERIES. MIS shall have delivered to VPC each of the
following, together with any additional items which VPC may reasonably request
to effect the Transaction:
(a) a certificate of the President of MIS certifying as to the
matters set forth in Sections 8.1, 8.2 and 8.3 (except for 8.3(c)) hereof and as
to the satisfaction of all other conditions set forth in this Article 8:
(b) Employment Agreements duly executed by the individuals
described in SCHEDULE 4.1.
(c) Nondisclosure/Noncompete Agreements duly executed by the
individuals described in Schedule 4.1 in the form of EXHIBIT 4.1(b);
(d) Standstill/Voting Agreements duly executed by the
individuals described in Schedule 4.1 in the form of EXHIBIT 4.1 (c)(i);
(e) Stockholder's Agreement duly executed by the individuals
described in Schedule 4.1 in the form of EXHIBIT 4.1 (c)(ii);
(f) the Registration Rights Agreement in the form attached
hereto as EXHIBIT 3.1(vi); and
(g) a confirmation letter from the Exchange Agent that the
number and types of Merger Shares are available for delivery at the Effective
Time;
(h) any other documents or agreements contemplated hereby
and/or necessary or appropriate to consummate the Transactions.
8.5. NO INVESTIGATIONS OF MIS AND ITS SUBSIDIARIES OR THEIR
BUSINESS. As of the Closing Date, there shall be no, and neither MIS nor any of
its Subsidiaries shall have any knowledge of any material pending or threatened
investigation by any municipal, state or federal government agency or regulatory
body with respect to MIS or its Subsidiaries, the Assets or the business of MIS
and its Subsidiaries, other than such as have been disclosed to VPC prior to the
date hereof.
8.6. NO MATERIAL ADVERSE EFFECT. Since March 31, 1999, there
shall have been no Material Adverse effect with respect to MIS.
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8.7. MINUTES. VPC shall have received at Closing copies of
minutes of the Board of Directors of MIS, certified by the corporate secretary
of MIS, approving and authorizing the Merger and the Transactions.
8.9. REVISED SCHEDULES. MIS and its Subsidiaries shall have
provided VPC with revised Schedules dated as of the Closing Date (the "MIS Final
Revised Schedules"), with all material changes through such date duly noted
thereon, including any modifications to MIS's representations and warranties
resulting from the Permitted Equity Financings, and the MIS Final Revised
Schedules will not contain any disclosures which (i) should have been but were
not disclosed on the Schedules in accordance with Section 4.4, or (ii) set forth
changes which, individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect unless such disclosures are approved in writing
by VPC.
8.10. LEGALITY. No federal or state statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of making the Merger illegal or otherwise prohibiting
the consummation of the Merger.
8.11. REGULATORY MATTERS. All filings shall have been made and
all approvals shall have been obtained as may be legally required pursuant to
federal and state laws prior to the consummation of the Transactions and all
actions by or in respect of, or filings with, any governmental body, agency or
official or any other Person required to permit the consummation of the Merger
so that VPC shall be able to continue to carry on the business of MIS
substantially in the manner now conducted by MIS shall have been taken or made.
8.12. AGREEMENT AS TO EXHIBITS AND SCHEDULES. The parties
hereto shall have mutually agreed in the exercise of their respective sole
discretion to the terms contained in each Schedule and Exhibit to this
Agreement.
8.13. ADDITIONAL CLOSING CONDITIONS. Each and every one of the
additional closing conditions, if any, required of MIS or its stockholders set
forth in SCHEDULE 8.13 attached hereto shall have completed or fulfilled, as the
case may be.
8.14. RETURN OF SHARES. Dr. Chiu shall have delivered to MIS
for retirement in its treasury 1,350,000 shares of MIS Common Stock.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF MIS TO CLOSE
Each and every obligation of MIS under this Agreement to be performed on or
prior to the Closing shall be subject to the fulfillment, on or prior to the
Closing, of each of the following conditions, which conditions VPC agrees to use
its best efforts to satisfy:
9.1 REPRESENTATIONS AND WARRANTIES AT CLOSING. The representations and
warranties made by VPC in or pursuant to this Agreement or given on its behalf
hereunder shall be true and correct on and as of the Closing Date, in each case
with the same effect as though such representations and warranties had been made
or given on and as of the Closing Date except for such representation and
warranties which if not true and correct on and as of the Closing Date, do not
result in damages suffered by MIS in excess of $250,000.00 in the aggregate.
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<PAGE> 47
9.2. OBLIGATIONS PERFORMED. VPC shall have performed and complied with
all material agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing.
9.3. CONSENTS AND STOCKHOLDER APPROVAL.
(a) VPC shall have obtained and delivered to MIS the written
consents or approvals specified, or to be specified, in SCHEDULE 6.4 (except for
such consents or approvals as to which, in the aggregate, the failure to obtain
them shall not have a Material Adverse Effect) and all of such consents shall
remain in full force and effect at and as of the Closing.
(b) This Agreement and the Merger shall have received the
requisite VPC Board Approval, MIS Board Approval, Acquisition Company Board
Approval, MIS Stockholder Approval and VPC Stockholder Approval, as applicable.
(c) MIS shall have received all consents to the consummation
of the Transaction that MIS deems necessary or appropriate from its lenders, if
any.
9.4. CLOSING DELIVERIES. VPC shall have delivered to MIS each of the
following, together with any additional items which MIS may reasonably request
to effect the Transaction:
(a) a certificate of the President of VPC certifying as to the
matters set forth in Sections 9.1, 9.2 and 9.3 (except for 9.3(d)) hereof and as
to the satisfaction of all other conditions set forth in this Article 9:
(b) Employment Agreements duly executed by the individuals
described in SCHEDULE 4.1.
(c) Nondisclosure/Noncompete Agreements duly executed by the
individuals described in Schedule 4.1 in the form of EXHIBIT 4.1(b);
(d) Standstill/Voting Agreements duly executed by the
individuals described in Schedule 4.1 in the form of EXHIBIT 4.1 (c)(i);
(e) Stockholder's Agreement duly executed by the individuals
described in the form of EXHIBIT 4.1 (c)(ii);
(f) the Registration Rights Agreement in the form attached
hereto as EXHIBIT 3.1(vi); and
(g) any other documents or agreements contemplated hereby
and/or necessary or appropriate to consummate the Transactions.
9.5. NO INVESTIGATIONS OF VPC OR ITS BUSINESS. As of the Closing Date,
there shall be no, and neither VPC nor any of its Subsidiaries shall have any
knowledge of any material pending or threatened investigation by any municipal,
state or federal government agency or regulatory body with respect to VPC or its
Subsidiaries, the Assets or the business of VPC , other than such as have been
disclosed to MIS prior to the date hereof.
9.6. NO MATERIAL ADVERSE EFFECT. Since March 31, 1998, there shall have
been no Material Adverse effect with respect to VPC.
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<PAGE> 48
9.7. SECURITIES LAWS. The parties shall have complied with all federal
and state securities laws applicable to the Transactions. All SEC and "Blue Sky"
permits or approvals required to carry out the Transactions shall have been
received.
9.8. MINUTES. MIS shall have received at Closing copies of minutes of
the stockholders and the Board of Directors of VPC, certified by the corporate
secretary of VPC, approving and authorizing the Merger and the Transactions.
9.9. REVISED SCHEDULES. VPC shall have provided MIS with revised
Schedules dated as of the Closing Date (the "VPC Final Revised Schedules"), with
all material changes through such date duly noted thereon, including any
modifications to VPC's representations and warranties resulting from the
Permitted Equity Financings, and the VPC Final Revised Schedules will not
contain any disclosures which (i) should have been but were not disclosed on the
Schedules in accordance with Section 4.4, or (ii) set forth changes which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect unless such disclosures are approved in writing by MIS.
9.10. LEGALITY. No federal or state statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of making the Merger illegal or otherwise prohibiting
the consummation of the Merger.
9.11. REGULATORY MATTERS. All filings shall have been made and all
approvals shall have been obtained as may be legally required pursuant to
federal and state laws prior to the consummation of the Transactions and all
actions by or in respect of, or filings with, any governmental body, agency or
official or any other Person required to permit the consummation of the Merger
so that MIS shall be able to continue to carry on the business of VPC
substantially in the manner now conducted by VPC shall have been taken or made.
9.12. AGREEMENT AS TO EXHIBITS AND SCHEDULES. The parties hereto shall
have mutually agreed in the exercise of their respective sole discretion to the
terms contained in each Schedule and Exhibit to this Agreement.
9.13. ADDITIONAL CLOSING CONDITIONS. Each and every one of the
additional closing conditions, if any, required of VPC or its stockholders set
forth in SCHEDULE 9.13 attached hereto shall have completed or fulfilled, as the
case may be.
ARTICLE 10
TERMINATION
10.1. TERMINATION. This Agreement may be terminated:
(a) by mutual written consent of VPC and MIS at any time
before the Closing Date;
(b) by either VPC or MIS if there occurs prior to Closing a
substantial loss, damage or diminution of the other party's Assets or other
Material Adverse Effect on the business of the other party and MIS's
Subsidiaries (taken as a whole) arising from any cause, including but not
limited to theft, fire, flood or act of God;
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<PAGE> 49
(c) by either VPC or MIS if VPC Board Approval or MIS Board
Approval has not been obtained on or before May 3, 1999.
(d) by either VPC or MIS if the Closing is not consummated on
or before April 30, 1999 (the "Automatic Termination Date"), unless the failure
to close by such date is attributable to actions or omissions of the party
seeking to terminate this Agreement under this subsection (d);
(e) by either MIS or VPC pursuant to Section 7.4 (Fiduciary
Out);
(f) in accordance with Section 7.6 (a) or (b), as applicable;
10.2. EFFECT OF TERMINATION. In the event this Agreement is terminated
pursuant to Sections 10.1(a), 10.1(b), 10.1(c), or 10.1(d) above, no party shall
have any obligations to the other hereunder except for those obligations set
forth in Section 4.3 (Expenses) and those with respect to confidentiality and
the return of confidential information set forth below. If this Agreement is
terminated pursuant to Section 10.1(e), the remedies set forth in Section 7.4
shall apply. If this Agreement is terminated pursuant to Section 10.1(f), the
remedies set forth in Section 7.6 shall apply. If this Agreement is terminated,
each party shall promptly return to the other party all copies of the due
diligence materials previously provided by such party to the other or their
representatives including, without limitation, each party's Intellectual
Property, and the obligations in respect of confidentiality set forth in this
Agreement.
10.3. RECISION POST CLOSING DATE. The parties recognize and agree that
MIS is (a) undergoing an audit by its independent certified accountants, and (b)
required as a material inducement to VPC to enter into this transaction to
obtained, either through a debt or equity offering, on terms agreeable to VPC a
minimum of $3,000,000.00 for the purpose of providing MIS with at least
$1,000,000.00 of working capital and at least $2,000,000 for acquisitions, joint
ventures and strategic alliances (hereinafter the "Capital Raise"). If, for
whatever reason, MIS is deemed to be unauditable by such accountants or if
during the course of the audit a matter is revealed or discovered which could,
in the good faith opinion of VPC, have a material adverse affect on MIS or VPC
or if MIS is unable to obtain then on terms agreeable to VPC the Capital Raise
within 60 days of the Closing Date then, in such event, VPC shall have the
right, in its sole and absolute discretion to rescind this transaction by
providing written notice to MIS at any time subsequent to six (6) months from
the Closing Date but no later than nine (9) months from the Closing Date. If
notice is provided, the Transactions will be rescinded, unless otherwise agreed,
within thirty (30) days of the receipt of such notice. If the transaction is
rescinded in accordance with this provision, VPC shall transfer all the stock of
the Surviving Corporation to VPC Merger Shareholders in exchange for any and all
consideration paid to the Shareholders in connection with this Agreement.
Thereafter, all rights, duties and obligations of the parties shall terminate
and this Agreement shall be null and void with no further force or effect except
that MIS shall be required to pay VPC a recission fee of $500,000 and shall
forgive any debt or other obligations VPC and/or any VPC Stockholder may have to
MIS.
ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 SEVERABILITY. If any provision of this Agreement is prohibited by
the laws of any jurisdiction as those laws apply to this Agreement, that
provision shall be ineffective to the extent
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<PAGE> 50
of such prohibition and/or shall be modified to conform with such laws, without
invalidating the remaining provisions hereto.
11.2. MODIFICATION. This Agreement may not be changed or modified
except in writing specifically referring to this Agreement and signed by each of
the parties hereto.
11.3. ASSIGNMENT, SURVIVAL AND BINDING AGREEMENT. This Agreement and
the Closing Documents may not be assigned by VPC, without prior written consent
of MIS, and may not be assigned by MIS, without prior written consent of VPC.
The terms and conditions hereof shall survive the Closing as provided in this
Agreement and shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, personal representatives, successors and
assigns.
11.4. 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.
11.5. NOTICES. All notices, requests, demands, claims and other
communication hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly give if (and then two
Business Days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid and addressed to the intended recipient as set forth
below:
If to MIS Minimally Invasive Surgery Corporation
2100 Lynn Road, Suite 125 C
Thousand Oaks, California 91360
Attention: ____________________
Telefax: _____________________
If to VPC Valley Pain Centers, Inc.
2710 Rew Circle, Suite 100
Ocoee, Florida 34761
Facsimile No: (407) 656-7585
Attention: Rogers W. Kirven
or at such other address as any party hereto notifies the other parties hereof
in writing.
11.6. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement,
together with the Exhibits and Schedules attached hereto, constitutes the entire
agreement and supersedes any and all other prior agreements and undertakings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof and, except as otherwise expressly provided in this
Agreement, is not intended to confer upon any Person other than VPC and MIS, any
rights or remedies hereunder. No provision of this Agreement shall be construed
against any party on the ground that such party drafted the provision or caused
it to be drafted or the provision contains a covenant of such party.
11.7. GOVERNING LAW; JURISDICTION AND VENUE. This Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Florida, excluding those relating to conflicts of laws. The parties
hereto expressly agree that the exclusive jurisdiction and venue for legal
proceedings under this Agreement shall be the state or applicable
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<PAGE> 51
federal court having jurisdiction over the defendant's domicile (or in the case
of VPC and MIS, the location of its principal corporate office).
11.8. ATTORNEY'S FEES. In any action between the parties to enforce any
of the terms of this Agreement, the prevailing party shall be entitled to
recover reasonable expenses, including reasonable attorney's fees.
11.9. HEADINGS. The section headings contained in this Agreement and
the Schedules and Exhibits attached hereto are inserted for convenience only and
shall not affect in any way the meaning or interpretation of this Agreement.
11.10. INCORPORATION OF EXHIBIT AND SCHEDULES. The Exhibits and
Schedules identified in this Agreement are incorporated in this Agreement by
reference and made a part hereof.
11.11. CONSTRUCTION. Within this Agreement, the singular shall include
the plural and the plural shall include the singular and any gender shall
include all other genders, all as the meaning and context of this Agreement
shall require. The parties hereto have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties hereto an no presumption or burden of proof shall arise
favoring or disfavoring any party hereto by virtue of the authorship of any of
the provisions of this Agreement.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
MINIMALLY INVASIVE SURGERY CORPORATION
By:
-----------------------------------------
Its:
-----------------------------------------
VALLEY PAIN CENTER, INC.
By:
-----------------------------------------
Its:
-----------------------------------------
Page 51
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
GALAXY VENTURES, INC.
FIRST: The name of this Corporation shall be:
GALAXY VENTURES, INC.
SECOND: Its registered office in the State of Delaware is to be located
at 1013 Centre Road, in the City of Wilmington, County of New Castle 19805 and
its registered agent at such address is Corporation Service Company.
THIRD: The purpose 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 stock which the Corporation shall
have the authority to issue is:
Twenty Five Million One Hundred Thousand (25,100,000) shares divided
into Twenty Five Million (25,000,000) common shares with a par value of
One-Tenth of One Cent ($.001) per share and One Hundred Thousand
(100,000) Preferred shares with a par value of ($.001) per share.
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article, to provide for the issuance
of the shares of preferred stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish
from time to time the number of shares to be included in each such
series, and to fix the designations, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof.
FIFTH: The name and address of the incorporator is as follows:
Thomas G. Kimble
311 South State, Suite 440
Salt Lake City, UT 84111
SIXTH: The Board of Directors shall have the power to adopt, amend or
appeal the by-laws.
SEVENTH: No director shall be personally liable to the Corporation or its
Stockholder or monetary damages for any breach of fiduciary duty by such
director as a director.
<PAGE> 2
Notwithstanding the foregoing sentence, a director shall be liable to the extent
provided by applicable law, (i) for 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) pursuant to Section 174 of the Delaware General Corporation Law or (iv)
for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Seventh shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore named,
has executed, signed and acknowledged this certificate of incorporation this
12th day of December, 1996.
-----------------------------
Thomas G. Kimble, Incorporator
<PAGE> 3
GALAXY VENTURES, INC.
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
Galaxy Ventures, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
1st: That by unanimous written consent of the Board of Directors of
Galaxy Ventures, Inc., a resolution was duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and proposing approval by the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the FIRST article thereof so that as amended, said Article
shall read as set forth below:
FIRST: The name of this corporation shall be: Minimally Invasive
Surgery Corporation
2nd: The Corporation has effectuated a 16 to 1 reverse stock split
effective with the commencement of business on June 3, 1998, which reduced the
outstanding shares from 28,800,000 shares to 1,800,000 shares but does not
reduce the Corporation's authorized shares of common stock.
3rd: That thereafter, pursuant to resolution of its Board of Directors,
a written approval by majority consent of the stockholders of said Corporation
was duly received in accordance with the General Corporation law of the State of
Delaware, by which consent the necessary number of shares as required by statute
were voted in favor of the amendment.
4th: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware, and the necessary number of shares as required by statute were voted
in favor of the amendment.
IN WITNESS WHEREOF, said Galaxy Ventures, Inc., has caused this
certificate to be signed by Clayton B. Barlow, its President and its Secretary -
Treasurer, this 3rd day of June, 1998.
By: /s/ Clayton B. Barlow
Clayton B. Barlow, President and
Secretary - Treasurer
<PAGE> 4
STATE OF FLORIDA
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
Minimally Invasive Surgery Corporation
- --------------------------------------------------------------------------------
a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Florida.
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of BackGenesis, Inc.
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of Incorporation of this corporation be amended
by changing the Article thereof numbered Article I so that, as amended, said
Article shall be and read as follows: Change of company name from Minimally
Invasive Surgery Corporation to BackGenesis, Inc.
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a
special meeting of the stockholders of said corporation was duly called and held
upon notice in accordance with Section 222 of General Corporation Law of the
State of Florida at which meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Florida.
FOURTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, said Board of Directors has caused this certificate to be
signed by George E. Sheldon, III, an Authorized Officer, this 19th day of
November, 1999.
By: /s/ George E. Sheldon, III
-------------------------------
Authorized Officer
Title: Secretary
<PAGE> 5
CERTIFICATE AND ARTICLES OF MERGER
OF
CLEF COMMUNICATIONS, INC.
A UTAH CORPORATION
INTO
GALAXY VENTURES, INC.
A DELAWARE CORPORATION
THE UNDERSIGNED CORPORATION DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE OF INCORPORATION
---- ----------------------
Clef Communications, Inc. Utah
Galaxy Ventures, Inc. Delaware
SECOND: That an agreement and plan of merger between the parties to the
merger has been adopted, approved, certified, executed and acknowledged by each
of the constituent corporations in accordance with the requirements of
subsection (c) of Section 252 of the General Corporation Law of the State of
Delaware.
THIRD: The name of the surviving corporation of the merger is Galaxy
Ventures, Inc., a Delaware corporation.
FOURTH: That the Certificate of Incorporation of Galaxy Ventures, Inc.,
a Delaware corporation, shall be the certificate of incorporation of the
surviving corporation.
FIFTH: That the executed agreement and plan of merger is on file at the
principal place of business of the surviving corporation. The address of said
principal place of business is 782 East 8425 South, Sandy, Utah 84094.
SIXTH: That a copy of the agreement and plan of merger will be
furnished on request and without cost to any stockholder of any constituent
corporation.
SEVENTH: The authorized capital stock of the Utah corporation which is
a party to the merger is as follows:
<TABLE>
<CAPTION>
Corporation Class No. of Shares Par Value Per Share
- ----------- ----- ------------- -------------------
<S> <C> <C> <C>
Clef Communications, Inc. Common 50,000,000 $.001
</TABLE>
<PAGE> 6
EIGHT: The Plan of Merger shall be for the Utah corporation to be
merged into the Delaware corporation and the 50,000,000 outstanding shares of
common stock of the Utah corporation shall be automatically converted into
5,000,000 shares of common stock of the Delaware corporation on the basis of 1
new share of the Delaware corporation for each 10 outstanding shares of the Utah
Corporation. The 1,000 shares of common stock of the Delaware corporation
presently outstanding shall be canceled in the merger.
NINTH: The Utah corporation has 50,000,000 shares of common stock
outstanding, of which 31,412,000 (62.8%) shares voted in favor of the merger and
no shares voted against the merger. The Delaware Corporation has 1,000 shares of
common stock outstanding all of which were voted in favor of the merger.
GALAXY VENTURES, INC., a Delaware
Corporation
December 31, 1996 By:
------------------------------------------
Clayton B. Barlow, President and Secretary
<PAGE> 1
BY-LAWS
OF
BACKGENESIS, INC.
ARTICLE I - OFFICES
SECTION 1. AGENT: The registered office of the corporation in the State of
Delaware shall be at 1013 Centre Road, Wilmington, Delaware 19805-1297.
The registered agent in charge thereof shall be CSC Networks.
SECTION 2. OTHER OFFICES: The corporation may also have offices at such
other places as the Board of Directors may from time to time appoint or the
business of the corporation may require.
ARTICLE II - SEAL
Section 1. DESCRIPTION: A corporate seal, if adopted by the Board of
Directors, shall have inscribed thereon the name of the corporation, the year
of its organization and the words "Corporate Seal, Delaware".
ARTICLE III - STOCKHOLDERS' MEETINGS
SECTION 1. LOCATION: Meetings of stockholders shall be held at the
registered office of the corporation in this state or at such place, either
within or without this state, as may be selected from time to time by the Board
of Directors.
SECTION 2. ANNUAL MEETINGS: The annual meeting of the stockholders shall
be held on such date as is determined by the Board of Directors for the purpose
of electing directors and for the transaction of such other business as may
properly be brought before the meeting.
SECTION 3. ELECTION OF DIRECTORS: Elections of the directors of the
corporation shall be by written ballot.
SECTION 4. SPECIAL MEETINGS: Special meetings of the stockholders may be
called at any time by the President, or the Board of Directors, or stockholders
entitled to cast at least one-fifth of the votes which all stockholders are
entitled to cast at the particular meeting. At any time, upon written request
of any person or persons who have duly called a special meeting, it shall be
the duty of the Secretary to fix the date of the meeting, to be held not more
than sixty days after receipt of the request, and to give due notice thereof.
If the Secretary shall neglect or refuse to fix the date of the meeting and
give notice thereof, the person or persons calling the meeting may do so.
Business transacted at all special meetings shall be confined to the
objects stated in the call and matters germane thereto, unless all stockholders
entitled to vote are present and consent.
Written notice of a special meeting of stockholders stating the time and
place and object thereof, shall be given to each stockholder entitled to vote
thereat at least ten days before such meeting, unless a greater period of
notice is required by statute in a particular case.
SECTION 5. QUORUM: A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If a majority of the outstanding shares entitled
to vote is represented at a meeting, a majority of
1
<PAGE> 2
the shares so represented may adjourn the meeting from time to time without
further notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum.
SECTION 6. PROXIES: Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. All
proxies shall be filed with the Secretary of the meeting before being voted
upon.
SECTION 7. NOTICE OF MEETINGS: Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called.
Unless otherwise provided by law, written notice of any meeting shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
SECTION 8. CONSENT IN LIEU OF MEETINGS: Any action required to be taken at
any annual or special meeting of stockholders of a corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of
the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
SECTION 9. LIST OF STOCKHOLDERS: The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. No share of stock upon which any installment is due and unpaid
shall be voted at any meeting. The list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
ARTICLE IV - DIRECTORS
SECTION 1. NUMBER. The business and affairs of this corporation shall be
managed by its Board of Directors, no less than one in number or such other
minimum number as is required by law. The directors need not be residents of
this state or stockholders in the corporation. They shall be elected by the
stockholders of the corporation or in the case of a vacancy by remaining
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directors, and each director shall be elected for the term of one year, and
until his successor shall be elected and shall qualify or until his earlier
resignation or removal.
SECTION 2. REGULAR MEETINGS: Regular meetings of the Board shall be held
without notice other than this by-law immediately after, and at the same place
as, the annual meeting of stockholders. The directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution.
SECTION 3. SPECIAL MEETINGS: Special Meetings of the Board may be called
by the President or any director upon two day notice. The person or persons
authorized to call special meetings of the directors may fix the place for
holding any special meeting of the directors called by them.
SECTION 4. QUORUM: A majority of the total number of directors shall
constitute a quorum for the transaction of business.
SECTION 5. CONSENT IN LIEU OF MEETING: Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee. The Board of
Directors may hold its meetings, and have an office or offices, outside of this
state.
SECTION 6. CONFERENCE TELEPHONE: One or more directors may participate in
a meeting of the Board, of a committee of the Board or of the stockholders, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other;
participation in this manner shall constitute presence in person at such
meeting.
SECTION 7. COMPENSATION: Directors as such, shall not receive any stated
salary for their services, but by resolution of the Board, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular
or special meeting of the Board PROVIDED, that nothing herein contained shall
be construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
SECTION 8. REMOVAL: Any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, except that when cumulative
voting is permitted, if less than the entire Board is to be removed, no
director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire Board of Directors, or, if there be classes of directors, at an
election of the class of directors of which he is a part.
ARTICLE V - OFFICERS
SECTION 1. NUMBER: The executive officers of the corporation shall be
chosen by the directors and shall be a President, Secretary and Treasurer. The
Board of Directors may also choose a Chairman, one or more Vice Presidents and
such other officers as it shall deem necessary. Any number of offices may be
held by the same person.
SECTION 2. SALARIES: Salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
SECTION 3. TERM OF OFFICE: The officers of the corporation shall hold
office for one year and until their successors are chosen and have qualified.
Any officer or agent elected or
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appointed by the Board may be removed by the Board of Directors whenever in its
judgment the best interest of the corporation will be served thereby.
SECTION 4. PRESIDENT: The President shall be the chief executive officer
of the corporation; he shall preside at all meetings of the stockholders and
directors; he shall have general and active management of the business of the
corporation, shall see that all orders and resolutions of the Board are carried
into effect, subject, however, to the right of the directors to delegate any
specific powers, except such as may be by statute exclusively conferred on the
President, to any other officer or officers of the corporation. He shall
execute bonds, mortgages and other contracts requiring a seal, under the seal
of the corporation. He shall be EX-OFFICIO a member of all committees, and
shall have the general power and duties of supervision and management usually
vested in the office of President of a corporation.
SECTION 5. SECRETARY: The Secretary shall attend all sessions of the Board
and all meetings of the stockholders and act as clerk thereof, and record all
the votes of the corporation and the minutes of all its transactions in a book
to be kept for that purpose, and shall perform like duties for all committees
of the Board of Directors when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, and under whose supervision he shall be. He shall keep in safe
custody the corporate seal of the corporation, and when authorized by the
Board, affix the same to any instrument requiring it.
SECTION 6. TREASURER: The Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation, and shall keep the moneys
of the corporation in a separate account to the credit of the corporation. He
shall disburse the funds of the corporation as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the
President and directors, at the regular meetings of the Board, or whenever they
may require it, an account of all his transactions as Treasurer and of the
financial condition of the corporation.
ARTICLE VI - VACANCIES
SECTION 1. NEW APPOINTMENTS. Any vacancy occurring in any office of the
corporation by death, resignation, removal or otherwise, shall be filled by the
Board of Directors. Vacancies and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in offfice, although less than a quorum, or by a sole
remaining director. If at any time, by reason of death or resignation or other
cause, the corporation should have no directors in offfice, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders
in accordance with the provisions of these By-Laws.
SECTION 2. RESIGNATIONS EFFECTIVE AT FUTURE DATE: When one or more
directors shall resign from the Board, effective at a future date, a majority
of the directors then in offfice, including those who have so resigned, shall
have power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective.
ARTICLE VII - CORPORATE RECORDS
SECTION 1. CERTIFICATES. Any stockholder of record, in person or by
attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who
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seeks the right to inspection, the demand under oath shall be accompanied by a
power of attorney or such other writing which authorizes the attorney or other
agent to so act on behalf of the stockholder. The demand under oath shall be
directed to the corporation at its registered offfice in this state or at its
principal place of business.
ARTICLE VIII - STOCK CERTIFICATES, DIVIDENDS. ETC.
SECTION 1. CERTIFICATES: The stock certificates of the corporation shall
be numbered and registered in the share ledger and transfer books of the
corporation as they are issued. They shall bear the corporate seal and shall be
signed by the
SECTION 2. TRANSFERS: Transfers of shares shall be made on the books of
the corporation upon surrender-of the certificates therefor, endorsed by the
person named in the certificate or by attorney, lawfully constituted in
writing. No transfer shall be made which is inconsistent with law.
SECTION 3. LOST CERTIFICATE: The corporation may issue a new certificate
of stock in the place of any certificate theretofore signed by it, alleged to
have been lost, stolen or destroyed, and the corporation may require the owner
of the lost, stolen or destroyed certificate, or his legal representative to
give the corporation a bond suffficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate.
SECTION 4. RECORD DATE: In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty nor less than ten days before the date
of such meeting, nor more than sixty days prior to any other action. If no
record date is fixed:
(a) The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived,
at the close of business on the day next preceding the day on which the meeting
is held.
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed.
(c) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
(d) A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 5. DIVIDENDS: The Board of Directors may declare and pay dividends
upon the outstanding shares of the corporation, from time to time and to such
extent as they deem advisable, in the manner and upon the terms and conditions
provided by statute and the Certificate of Incorporation.
SECTION 6. RESERVES: Before payment of any dividend there may be set aside
out of the net profits of the corporation such sum or sums as the directors,
from time to time, in their absolute discretion, think proper as a reserve fund
to meet contingencies, or for equalizing
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dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interests
of the corporation, and the directors may abolish any such reserve in the
manner in which it was created.
ARTICLE IX - MISCELLANEOUS PROVISIONS
SECTION 1. CHECKS: All checks or demands for money and notes of the
corporation shall be signed by such offficer or offficers as the Board of
Directors may from time to time designate.
SECTION 2. FISCAL YEAR: The fiscal year shall begin on the first day of
January or as otherwise determined by the Board of Directors.
SECTION 3. NOTICE: Whenever written notice is required to be given to any
person, it may be given to such person, either personally or by sending a copy
thereof through the mail, or by telegram, charges prepaid, to his address
appearing on the books of the corporation, or supplied by him to the
corporation for the purpose of notice. If the notice is sent by mail or by
telegraph, it shall be deemed to have been given to the person entitled thereto
when deposited in the United States mail or with a telegraph office for
transmission to such person. Such notice shall specify the place, day and hour
of the meeting and, in the case of a special meeting of stockholders, the
general nature of the business to be transacted.
SECTION 4. WAIVER OF NOTICE: Whenever any written notice is required by
statute, or by the Certificate or the By-Laws of this corporation a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Except in the case of a special meeting of
stockholders, neither the business to be transacted at nor the purpose of the
meeting need be specified in the waiver of notice of such meeting. Attendance
of a person either in person or by proxy, at any meeting shall constitute a
waiver of notice of such meeting, except where a person attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
SECTION 5. DISALLOWED COMPENSATION: Any payments made to an officer or
employee of the corporation such as a salary, commission, bonus, interest,
rent, travel or entertainment expense incurred by him, which shall be
disallowed in whole or in part as a deductible expense by the Internal Revenue
Service, shall be reimbursed by such offficer or employee to the corporation to
the full extent of such disallowance. It shall be the duty of the directors, as
a Board, to enforce payment of each such amount disallowed. In lieu of payment
by the offficer or employee, subject to the determination of the directors,
proportionate amounts may be withheld from his future compensation payments
until the amount owed to the corporation has been recovered.
SECTION 6. RESIGNATIONS: Any director or other offficer may resign at any
time, such resignation to be in writing and to take effect from the time of its
receipt by the corporation, unless some time be fixed in the resignation and
then from that date. The acceptance of a resignation shall not be required to
make it effective.
ARTICLE X - ANNUAL STATEMENT
SECTION 1. PRESENTATION: The President and the Board of Directors shall
present at each annual meeting a full and complete statement of the business
and affairs of the corporation for the preceding year. Such statement shall be
prepared and presented in whatever manner the Board of Directors shall deem
advisable and need not be verified by a Certified Public Accountant.
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ARTICLE XI - INDEMNIFICATION AND INSURANCE:
SECTION 1. (a) RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, offficer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and offficers.
(b) RIGHT OF CLAIMANT TO BRING SUIT:
If a claim under paragraph (a) of this Section is not paid in full by the
Corporation within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its: final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation law for the Corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant
has not met such applicable standard or conduct,
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shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard or conduct.
(c) Notwithstanding any limitation to the contrary contained in
sub-paragraphs (a) and 8 (b) of this section, 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,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, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified
may be entitled under any By-law, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his offficial
capacity and as to action in another capacity while holding such offfice, and
shall continue as to a person who has ceased to be director, offficer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(d) INSURANCE:
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under
the Del General Corporation Law.
ARTICLE XII - AMENDMENTS
SECTION 1. VOTE: These By-Laws may be amended or repealed by the vote of
directors.
/s/ George Sheldon
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Secretary, November 1999
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EMPLOYMENT AGREEMENT
BY AND BETWEEN
BACKGENESIS, INC.
AND
DAVID S. KLEIN, M.D.
THIS EMPLOYMENT AGREEMENT (the "Agreement") is to be effective
as of _____________, 1999 (the "Commencement Date") by and between BackGenesis,
Inc., a Delaware corporation (the "Company"), and David S. Klein, M.D.
("Employee").
WHEREAS, the Company is engaged in the medical surgery and
pain therapy business (such activities, present and future, being hereinafter
referred to as the "Business"); and
WHEREAS, the Company and Employee desire to enter into this
Agreement to memorialize their oral understanding, to assure the Company of the
services of Employee for the benefit of the Company and to set forth the
respective rights and duties of the parties hereto.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants, terms and conditions set forth herein, the Company and
Employee agree as follows:
ARTICLE I
EMPLOYMENT
1.1 EMPLOYMENT AND TITLE. As of the Commencement Date, the
Company employs Employee, and Employee accepts such employment, as interim Chief
Executive Officer and President of the Company all upon the terms and conditions
set forth herein. Employee shall also remain President of the Company's
wholly-owned subsidiary, Valley Pain Centers, Inc.("VPC"), all upon the terms
and conditions set forth in that certain Employment Agreement dated __________,
1999. This Employment Agreement and the Employment Agreement with VPC are
separate and distinct agreements and each shall be read, interpreted and acted
upon independent of each other unless specifically stated otherwise herein.
1.2 DUTIES. Subject to the power of the Board of Directors of
Employer to elect and remove officers, Employee will serve as Chief Executive
Officer of the and President of the Company. Employee will faithfully and
diligently perform the services and functions relating to such offices or
otherwise reasonable incident to such offices, provided that all such services
and functions will be reasonable and within Employee's area of expertise.
Employee will during the term of this Agreement (or any extension thereof),
devote his attention and skills and best efforts to the promotion of the
business of Employer and VPC. The foregoing will not be construed as preventing
Employee from acting as President of VPC or making investments in other business
or enterprises.
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<PAGE> 2
1.3 LOCATION. The principal place of employment and the
location of Employee's principal office shall be in the greater metropolitan
area of Orlando, Florida (which shall also be true with respect to the VPC
Employment Contract); provided, however, Employee shall, when requested by the
Board of Directors, or may, if he determines it to be reasonably necessary,
temporarily perform outside of such area, such services as are reasonably
required for the proper execution of his duties under this Agreement.
1.4 REPRESENTATIONS. Each party represents and warrants to the
other that he/it has full power and authority to enter into and perform this
Agreement and that his/its execution and performance of this Agreement shall not
constitute a default under or breach of any of the terms of any agreement to
which he/it is a party or under which he/it is bound. Each party represents that
no consent or approval of any third party is required for his/its execution,
delivery and performance of this Agreement or that all consents or approvals of
any third party required for his/its execution, delivery and performance of this
Agreement have been obtained.
ARTICLE II
TERM
2.1 TERM. The term of Employee's employment hereunder (the
"Term") shall commence as of the Commencement Date and shall continue until
relieved of his duties by the Board of Directors (the "Scheduled Termination
Date") unless a set term is otherwise established between the parties.
ARTICLE III
COMPENSATION
3.1 SALARY. As compensation for the services to be rendered by
Employee, the Company shall pay Employee no additional base compensation unless
otherwise agreed as Employee is presently entitled under the VPC Employment
Agreement to an annual base salary of not less than Two Hundred Thousand Dollars
($200,000.00) provided VPC profits and cash flow are sufficient to pay such
amount. The base salary will be reviewed annually, or, as appropriate, by the
Board of Directors. At any time the salary may be increased if so determined by
the Board of Directors of Employer after a review of Employee's performance of
his duties.
3.2 INCENTIVE COMPENSATION. The Company may also pay Employee
such incentive compensation as the Board of Directors deems appropriate. It is
acknowledged that Employee is entitled to annual incentive compensation under
the VPC Employment Agreement equal to a percentage of VPC's pre-tax net income
as determined as of December 31st of each year by the Company's independent
certified accountants based upon generally accepted accounting principles
("VPC's") as follows:
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<PAGE> 3
3.2.1 Ten (10) percent of VPC's Profits over
$1,000,000.00 through $1,500,000.00;
3.2.2 Fifteen (15) percent of VPC's Profits over
$1,500,000.00 through $2,000,000.00;
3.2.3 Twenty (20) percent of VPC's Profits over
$2,000,000.00 through $2,500,000.00; and
3.2.4 Twenty-five (25) percent of VPC's Profits over
$2,500,000.00.
Such VPC incentive compensation shall be paid on or before
April 1 of each year for VPC's immediately preceding fiscal year ending December
31st.
3.3 NONQUALIFIED STOCK OPTIONS. As approved by the stock
option committee, the Company may grant to Employee stock options to acquire its
restricted common stock.
3.4 BENEFITS. Employee shall be entitled, during the Term
hereof, to the same medical, hospital, pension, profit sharing, dental,
disability and life insurance coverage and benefits as are presently in effect
under the VPC Employment Agreement.
3.5 WITHHOLDING. Any and all amounts payable under this
Agreement, including, without limitation, amounts payable under this Article III
and Article VII, which are subject to withholding for such federal, state and
local taxes as the Company, in its reasonable judgment, determines to be
required pursuant to any applicable law, rule or regulation.
ARTICLE IV
WORKING FACILITIES, EXPENSES AND INSURANCE
4.1 WORKING FACILITIES AND EXPENSES. Employee shall be
furnished with an office at a location within the greater metropolitan area of
Orlando, Florida, or at such other location as agreed to by Employee and the
Company, and other working facilities and secretarial and other assistance
suitable to his position and reasonably required for the performance of his
duties hereunder. The Company shall reimburse Employee for all of Employee's
reasonable expenses incurred while employed and performing his duties under and
in accordance with the terms and conditions of this Agreement, subject to
Employee's full and appropriate documentation, including, without limitation,
receipts for all such expenses in the manner required pursuant to Company's
policies and procedures and the Internal Revenue Code of 1986, as amended (the
"Code") and applicable regulations as are in effect from time to time.
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<PAGE> 4
4.2 INSURANCE. The Company may secure in its own name or
otherwise, and at its own expense, life, disability and other insurance covering
Employee or Employee and others, and Employee shall not have any right, title or
interest in or to such insurance other than as expressly provided herein.
Employee agrees to assist the Company in procuring such insurance by submitting
to the usual and customary medical and other examinations to be conducted by
such physicians(s) as the Company or such insurance company may designate and by
signing such applications and other written instruments as may be required by
any insurance company to which application is made for such insurance.
ARTICLE V
ILLNESS OR INCAPACITY
5.1 RIGHT TO TERMINATE. If a term certain is hereafter agreed
to by the parties and during such term, Employee shall be unable to perform in
all material respects his duties hereunder for a period exceeding six (6)
consecutive months by reason of illness or incapacity, this Agreement may be
terminated by the Company in its reasonable discretion pursuant to Section 7.2
hereof.
5.2 RIGHT TO REPLACE. If Employee's illness or incapacity,
whether by physical or mental cause, renders him unable for a minimum period of
thirty (30) consecutive calendar days to carry out his duties and
responsibilities as set forth herein, the Company shall have the right to
designate a person to replace Employee temporarily in the capacity described in
Article I hereof; provided, however, that if Employee returns to work from such
illness or incapacity within the six (6) month period following his inability
due to such illness or incapacity, he shall be entitled to be reinstated in the
capacity described in Article I hereof with all rights, duties and privileges
attendant thereto.
5.3 RIGHTS PRIOR TO TERMINATION. Employee shall be entitled to
his full remuneration and benefits hereunder during such illness or incapacity
unless and until an election is made by the Company to terminate this Agreement
in accordance with the provisions of this Article.
5.4 DETERMINATION OF ILLNESS OR INCAPACITY. For purposes of
this Article V, the term "illness or incapacity" shall mean Employee's inability
to perform his duties hereunder substantially on a full-time basis due to
physical or mental illness as determined by a physician selected by the Company
and the Employee.
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ARTICLE VI
CONFIDENTIALITY
6.1 CONFIDENTIALITY. During the Term of this Agreement and
thereafter for a period of two (2) years, Employee shall not divulge,
communicate, use to the detriment of the Company, or for the benefit of any
other business, firm, person, partnership or corporation, or otherwise misuse,
any "Confidential Information", pertaining to the Company including, without
limitation, all (i) data or trade secrets, including secret processes, formulas
or other technical data; (ii) production methods; (iii) customer lists; (iv)
personnel lists; (v) proprietary information; (vi) financial or corporate
records; (vii) operational, sales, promotional and marketing methods and
techniques; (viii) development ideas, acquisition strategies and plans; (ix)
financial information and records; (x) "know-how" and methods of doing business;
and (xi) computer programs, including source codes and/or object codes and other
proprietary, competition-sensitive or technical information or secrets developed
with or without the help of Employee. Employee acknowledges that any such
information or data he may have acquired was received in confidence and by
reason of his relationship to the Company. Confidential Information, data or
trade secrets shall not include any information which: (a) at the time of
disclosure is within the public domain; (b) after disclosure becomes a part of
the public domain or generally known within the industry through no fault, act
or failure to act, error, effort or breach of this Agreement by Employee; (c) is
known to the recipient at the time of disclosure; (d) is subsequently discovered
by Employee independently of any disclosure by the Company; (e) is required by
order, statute or regulation, of any governmental authority to be disclosed to
any federal or state agency, court or other body; or (f) is obtained from a
third party who has acquired a legal right to possess and disclose such
information.
6.2 RECORDS. All documents, papers, materials, notes, books,
correspondence, drawings and other written and graphic records relating to the
Business of the Company which Employee shall prepare or use, or come into
contact with, shall be and remain the sole property of the Company and,
effective immediately upon the termination of the Employee's employment with the
Company for any reason, shall not be removed from the Company's premises without
the Company's prior written consent and any such documents, papers, materials,
notes, books, correspondence, drawings and other written and graphic records
upon request shall be returned to the Company.
ARTICLE VII
TERMINATION
7.1 TERMINATION FOR CAUSE. This Agreement and the employment
of Employee may be terminated by the Company "For Cause" under any one of the
following circumstances:
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(a) Employee has committed any material act of fraud,
misappropriation or theft against the Company.
(b) Employee's default breach of any material provision of
this Agreement; provided, that Employee shall not be in default
hereunder unless (i) he shall have failed to cure such default or
breach within thirty (30) days of written notice thereof by the Company
to Employee or (ii) Employee shall have duly received notice of at
least three (3) prior instances of such breach or default (whether or
not cured by Employee).
(c) Employee is engages in willful misconduct, gross
misconduct or is grossly negligent in the performance of his duties
hereunder.
(d) At the election of the Employee.
(e) Employee is convicted of or pleads guilty to a felony
offense which is directly related to his duties and responsibilities to
the Company or that might otherwise materially adversely affect the
Company or Employee's ability to carry out his duties and
responsibilities pursuant to this Agreement.
A termination For Cause under this Section 7.1 shall be
effective upon the date set forth in a written notice of termination.
7.2 TERMINATION WITHOUT CAUSE. This Agreement and the
employment of the Employee may be terminated "Without Cause" as follows:
(a) By mutual agreement of the parties hereto.
(b) At the election of the Company by its giving not less than
sixty (60) days prior written notice to Employee in the event of an
illness or incapacity described in Article 5.1.
(c) Upon the removal of Employee from the office of Chief
Executive Officer of the Company or in the event the Company fails to
afford Employee the power and authority generally commensurate with the
position of Chief Executive Officer.
(d) Upon Employee's death.
(e) At the election of the Employee if the Company requires
Employee to relocate his residence outside of Orlando, Florida.
A termination Without Cause under Section 7.2(b) or (e) hereof
shall be effective upon the date set forth in a written notice of termination
delivered in accordance with the notice provisions of such sections. A
termination Without Cause under Sections 7.2(a) or (d) shall be
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automatically effective upon the date of mutual agreement or the date of death
of the Employee, as the case may be. A termination Without Cause under Section
7.2(c) shall be automatically effective upon the date such event takes place.
7.3 EFFECT OF TERMINATION FOR CAUSE. If Employee's employment
is terminated "For Cause":
(a) Employee shall be entitled to his base salary under
Section 3.1 hereof, if any, through the date of termination.
(b) Employee shall be entitled to accrued incentive
compensation under Section 3.2 hereof, if any, through the date of
termination.
(c) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with the
provisions of Section 4.1 hereof.
(d) All unvested Option Shares under Section 3.3 hereof shall
be forfeited.
(f) Except as provided in Article XI, this Agreement shall
thereupon terminate and cease to be of any further force or effect.
7.4 EFFECT OF TERMINATION WITHOUT CAUSE. If Employee's
employment is terminated "Without Cause":
(a) Employee shall be entitled to accrued base salary under
Section 3.1, if any, hereof through the date of termination.
(b) Employee shall be entitled to reimbursement for expenses
accrued through the date of termination in accordance with the
provisions of Section 4.1 hereof.
(c) Employee shall be entitled to receive all amounts of
incentive compensation as would have been payable under Section 3.2
hereof through the expiration of the Term hereof, which amounts shall
be paid as and when the same would have been paid under the Agreement
had it not been terminated.
(e) Employee shall be entitled to receive all benefits as
would have been awarded under Section 4.1 hereof through the expiration
of the Term hereof, which benefits shall be awarded as and when the
same would have been awarded under the Agreement had it not been
terminated.
(f) All unvested Option Shares under Section 3.3 hereof shall
immediately vest in full.
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(g) All debts, obligations and/or guarantees for which
Employee is personally responsible and for which the Company has
received a benefit shall be satisfied or Employee shall be released to
his satisfaction from such debts and obligations.
(h) Except as provided in Article XI, this Agreement shall
thereupon terminate and cease to be of any further force or effect.
ARTICLE VIII
NON-COMPETITION AND NON-INTERFERENCE
8.1 NON-COMPETITION. Employee agrees that during the Term of
this Agreement and, in the case of a termination "For Cause", for a period of
two (2) years thereafter, Employee will not, directly, indirectly, or as an
agent on behalf of or in conjunction with any person, firm, partnership,
corporation or other entity, own, manage, control, join, or participate in the
ownership, management, operation, or control of, or be financially interested in
or advise, lend money to, or be employed by or provide consulting services to,
or be connected in any manner with any person engaged in business which competes
with the Company and/or its subsidiaries anywhere within the United States of
America.
8.2 NON-INTERFERENCE. Employee agrees that during the Term of
this Agreement and, in the case of a termination "For Cause", for a period of
two (2) years thereafter, Employee will not, directly, indirectly or as an agent
on behalf of or in conjunction with any person, firm, partnership, corporation
or other entity, induce or entice any employee of the Company to leave such
employment or cause anyone else to do so.
8.3 SEVERABILITY. If any covenant or provision contained in
Article VIII is determined to be void or unenforceable in whole or in part, it
shall not be deemed to affect or impair the validity of any other covenant or
provision. If, in any arbitral or judicial proceeding, a tribunal shall refuse
to enforce all of the separate covenants deemed included in this Article VIII,
then such unenforceable covenants shall be deemed eliminated from the provisions
hereof for the purpose of such proceedings to the extent necessary to permit the
remaining separate covenants to be enforced in such proceedings.
ARTICLE IX
INDEMNIFICATION
9.1. INDEMNIFICATION. The Employer shall to the full extent
permitted by law indemnify, defend and hold harmless Employee from and against
any and all claims, demands, liabilities, damages, losses and expenses
(including reasonable attorney's fees, court costs and disbursements) arising
out of the performance by him of his duties hereunder except in the case
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of his willful misconduct and will carry directors and officers' insurance of at
least $1,000,000 with $25,000 deductible.
ARTICLE X
MISCELLANEOUS
10.1 NO WAIVERS. The failure of either party to enforce any
provision of this Agreement shall not be construed as a waiver of any such
provision, nor prevent such party thereafter from enforcing such provision or
any other provision of this Agreement.
10.2 NOTICES. Any notice to be given to the Company and
Employee under the terms of this Agreement may be delivered personally, by
telecopy, telex or other form of written electronic transmission, or by
registered or certified mail, postage prepaid, and shall be addressed as
follows:
IF TO THE COMPANY: 2707 Rew Circle
Ocoee, FL 34761
IF TO EMPLOYEE:
---------------------
---------------------
---------------------
Either party may hereafter notify the other in writing of any change in
address. Any notice shall be deemed duly given (i) when personally delivered,
(ii) when telecopied, telexed or transmitted by other form of written electronic
transmission (upon confirmation of receipt) or (iii) on the third day after it
is mailed by registered or certified mail, postage prepaid, as provided herein.
10.3 SEVERABILITY. The provisions of this Agreement are
severable and if any provision of this Agreement shall be held to be invalid or
otherwise unenforceable, in whole or in part, the remainder of the provisions,
or enforceable parts thereof, shall not be affected thereby.
10.4 SUCCESSORS AND ASSIGNS. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company, including the survivor upon any
merger, consolidation, share exchange or combination of the Company with any
other entity. Employee shall not have the right to assign, delegate or otherwise
transfer any duty or obligation to be performed by him hereunder to any person
or entity.
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10.5 ENTIRE AGREEMENT. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties hereto, oral
or written, and may not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced. This Agreement was the subject of negotiation by the parties hereto
and their counsel. The parties agree that no prior drafts of this Agreement
shall be admissible as evidence (whether in any arbitration or court of law) in
any proceeding which involves the interpretation of any provisions of this
Agreement.
10.6 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Florida without
reference to the conflict of law principles thereof.
10.7 SECTION HEADINGS. The section headings contained herein
are for the purposes of convenience only and are not intended to define or limit
the contents of said sections.
10.8 FURTHER ASSURANCES. Each party hereto shall cooperate and
shall take such further action and shall execute and deliver such further
documents as may be reasonably requested by the other party in order to carry
out the provisions and purposes of this Agreement.
10.9 GENDER. Whenever the pronouns "he" or "his" are used
herein they shall also be deemed to mean "he" or "his" or "it" or "its" whenever
applicable. Words in the singular shall be read and construed as though in the
plural and words in the plural shall be read and construed as though in the
singular in all cases where they would so apply.
10.10 COUNTERPARTS. This Agreement may be executed in
counterparts, all of which taken together shall be deemed one original.
ARTICLE XI
SURVIVAL
11.1 SURVIVAL. The provisions of Articles VI, VII, VIII, and
X, of this Agreement shall survive the termination of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
BackGenesis, Inc.
a Delaware Corporation,
-----------------------------------
EMPLOYEE
-----------------------------------
David S. Klein, M.D.
<PAGE> 1
EMPLOYMENT AGREEMENT
BY AND BETWEEN
DAVID S. KLEIN, M.D., P.C.,
MIOA ACQUISITION COMPANY V, INC.
AND
DAVID S. KLEIN, M.D.
THIS EMPLOYMENT AGREEMENT (the "Agreement") is executed by and
between David S. Klein, M.D., P.C., a Virginia professional corporation (the
"Company"), MIOA Acquisition Company, V, Inc. ("Acquisition Corp"), a wholly
owned subsidiary of Medical Industries of America, Inc. ("MIOA"),and David S.
Klein, M.D. ("Physician") to be effective as of the Effective Date (hereinafter
the "Commencement Date") of that certain Merger Agreement by and between
Company, Physician, MIOA and Acquisition Corp (hereinafter the "Merger
Agreement").
WHEREAS, the Company is engaged in the practice of medicine
through physician employees (hereinafter referred to as the "Business"); and
WHEREAS, the Company anticipates merging with and into the
Acquisition Corp whereby Acquisition Corp shall be the surviving corporation in
accordance with the Merger Agreement; and
WHEREAS, the Company and upon effectiveness of the Merger, the
Acquisition Corp, desire to employ Physician and Physician desires to accept or
continue such employment during the term of this Agreement upon the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants, terms and conditions set forth herein, the Company,
Acquisition Corp and Physician agree as follows:
ARTICLE I
EMPLOYMENT
1.1 EMPLOYMENT AND TITLE. As of the Commencement Date, the
Company employs Physician, and Physician accepts such employment, as President,
Medical Director and a Medical Doctor of the Company, all upon the terms and
conditions set forth herein.
1.2 DEVOTION TO EMPLOYMENT. During the term of this
Agreement, Physician shall faithfully devote his full time, attention,
knowledge, energy and skills on behalf of the Company and as MIOA may otherwise
direct, and he shall not engage in any other gainful employment; provided,
however, that nothing contained herein shall prohibit Physician from performing
certain non-patient related personal services outside his employment by the
Company (e.g., speeches involving honoraria or expert witness services
involving expert witness fees) or from having a financial interest or business
arrangement with the facilities identified in Exhibit "A" attached hereto.
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1.3 SERVICES.
1.3.1 During the Term (as hereinafter defined) of
this Agreement, Physician shall at the direction of the
Company's CEO and Board of Directors make decisions about the
day-to-day medical and business operations of the Company.
1.3.2 Physician shall render professional medical
services on behalf of the Company in accordance with all
federal, state, AMA and state medical licensing board
regulations, guidelines, practices and policies, including
such duties as may be assigned to him by the policies
committee of the Company whose written communications to
Physician are adopted by the Company as guidelines and
incorporated herein by reference.
1.3.3. Physician shall insure that all medical
records, including, without limitation, doctors notes,
progress notes, discharge notes, patient files, encounter
tickets, documents and reports relative to the Company's
patients shall be properly prepared, filed and maintained in
such form as required by insurance companies, Medicare,
Medicaid and/or governmental agencies.
1.3.4. Physician shall also be responsible for
managing and supervising all medical personnel employed by the
Company in connection with the operation of the Company's
Business wherever located.
1.3.5. Physician agrees to assure a standard of
medical care that is consistent with the laws of State of
Virginia and the Federal government with the applicable
contractual obligations of the Company and the prevailing
standards of medical practice and care in the community.
1.3.6. Physician shall be responsible for all aspects
of the practice of medicine and the delivery of medical
services for the Company.
1.3.7. Physician shall assist the Company and MIOA in
expanding their businesses through internal growth as well as
through acquisitions.
1.4 OFFICE LOCATION. The principal place of employment and the
location of Physician's principal office shall be at 13 W. Beverley Street,
Staunton, VA 24401 (the "Office").
1.5 REPRESENTATIONS. Each party represents and warrants to the
other that he/it has full power and authority to enter into and perform this
Agreement and that his/its execution and performance of this Agreement shall not
constitute a default under or breach of any of the terms of any agreement to
which he/it is a party or under which he/it is bound. Other than as provided
herein, each party represents that no consent or approval of any third party is
required for his/its execution, delivery and performance of this Agreement or
that all consents or approvals of any third party required for her/its
execution, delivery and performance of this Agreement have been obtained.
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ARTICLE II
TERM
2.1 TERM. The term of Physician's employment hereunder (the
"Term") shall commence as of the Commencement Date and shall continue through
the fourth (4th) anniversary of the Commencement Date (the "Scheduled
Termination Date") unless renewed or earlier terminated pursuant to the
provisions of this Agreement. Unless sooner terminated as set forth herein, this
Agreement shall be automatically renewed after the original four (4) term for
successive one (1) year terms unless the party electing not to renew provides
the other party with written notice of such election at least one thirty (30)
days prior to the Scheduled Termination Date or the last day of the renewal
term, as applicable.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. As compensation for the services to be
rendered by Physician, the Company shall pay Physician, during the Term of this
Agreement, an annual base salary of Two Hundred Thousand Dollars ($200,000.00)
provided Company profits and cash flow are sufficient to pay such amount. Such
base salary shall accrue monthly (prorated for periods less than a month) and
shall be paid every two (2) weeks, in arrears.
3.2 INCENTIVE COMPENSATION. The Company shall also pay
Physician during the term of this Agreement annual incentive compensation. Such
annual incentive compensation shall be equal to a percentage of the Company's
annual pre-tax net income as determined as of December 31st of each year by the
Company's independent certified accountants based upon generally accepted
accounting principles ("Company Profits") as follows:
3.2.1 Ten (10) percent of Company Profits over
$1,000,000.00 through $1,500,000.00;
3.2.2 Fifteen (15) percent of Company Profits over
$1,500,000.00 through $2,000,000.00;
3.2.3 Twenty (20) percent of Company Profits over
$2,000,000.00 through $2,500,000.00;
3.2.4 Twenty-five (25) percent of Company Profits
over $2,500,000.00.
Such incentive compensation shall be paid on or before April 1
of each year for the Company's immediately preceding fiscal year ending December
31st.
3.3 NONQUALIFIED STOCK OPTIONS. As approved by the stock
option committee MIOA, the Company may grant to Physician stock options to
acquire MIOA's restricted common stock.
3.4 BENEFITS. Physician shall be entitled, during the Term
hereof, to the same medical, hospital, pension, profit sharing, dental,
disability and life insurance coverage and benefits as are available to the
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Company's most senior executive officers on the Effective Date. In addition,
Physician shall be entitled to such time off with pay for attendance at
seminars, courses, meetings and conventions as is authorized by the Company.
3.5 AUTOMOBILE. Physician, as a condition to his employment,
shall provide an automobile for use in the conduct of his duties on behalf of
the Company, and the Company shall pay to Physician a reasonable allowance
determined by the Company to defray the cost of insurance, gas, oil, repairs,
maintenance and other expenses incurred by Physician in connection with the
operation of such automobile. Any expenses in excess of such allowance shall be
the responsibility of the Physician. Physician shall be required to maintain
written records of the percentage of total miles for which Physician uses such
automobile for business purposes and for personal purposes, respectively.
3.6 WITHHOLDING. Any and all amounts payable under this
Agreement, including, without limitation, amounts payable under this Article
III, which are subject to withholding for such federal, state and local taxes as
the Company, in its reasonable judgment, determines to be required pursuant to
any applicable law, rule or regulation will be subject to the applicable
withholding provisions.
ARTICLE IV
WORKING FACILITIES, EXPENSES AND INSURANCE
4.1 WORKING FACILITIES AND EXPENSES. Physician shall be
furnished with an office at the Office of the Company, or at such other location
as agreed to by Physician and the Company, and other working facilities and
secretarial and other assistance suitable to his position and reasonably
required for the performance of his duties hereunder. The Company shall
reimburse Physician for all of Physician's reasonable expenses incurred while
employed and performing his duties under and in accordance with the terms and
conditions of this Agreement, subject to Physician's full and appropriate
documentation, including, without limitation, receipts for all such expenses in
the manner required pursuant to Company's policies and procedures and the
Internal Revenue Code of 1986, as amended (the "Code") and applicable
regulations as are in effect from time to time. Such reasonable expenses shall
include, without limitation, licensing costs, continuing medical education and
certification costs and the cost of such medical malpractice, health, life and
disability insurance polices as the parties shall mutually agree.
4.2 INSURANCE. The Company and MIOA may secure in their own
names or otherwise, and at their own expense, life, disability and other
insurance covering Physician or Physician and others, and Physician shall not
have any right, title or interest in or to such insurance other than as
expressly provided herein. Physician agrees to assist the Company and MIOA in
procuring such insurance by submitting to the usual and customary medical and
other examinations to be conducted by such physicians(s) as the Company, MIOA or
such insurance company may designate and by signing such applications and other
written instruments as may be required by any insurance company to which
application is made for such insurance.
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ARTICLE V
ILLNESS OR INCAPACITY
5.1 RIGHT TO TERMINATE. If, during the Term of this Agreement,
Physician shall be unable to perform in all material respects his duties
hereunder for a period exceeding six (6) consecutive months by reason of illness
or incapacity, this Agreement may be terminated by the Company in its reasonable
discretion pursuant to Section 7.2 hereof.
5.2 RIGHT TO REPLACE. If Physician's illness or incapacity,
whether by physical or mental cause, renders him unable for a minimum period of
thirty (30) consecutive calendar days to carry out his duties and
responsibilities as set forth herein, the Company shall have the right to
designate a person to replace Physician temporarily in the capacity described in
Article I hereof; provided, however, that if Physician returns to work from such
illness or incapacity within the six (6) month period following his inability
due to such illness or incapacity, he shall be entitled to be reinstated in the
capacity described in Article I hereof with all rights, duties and privileges
attendant thereto.
5.3 RIGHTS PRIOR TO TERMINATION. Physician shall be entitled
to his full remuneration and benefits hereunder during such illness or
incapacity unless and until an election is made by the Company to terminate this
Agreement in accordance with the provisions of this Article.
5.4 DETERMINATION OF ILLNESS OR INCAPACITY. For purposes of
this Article V, the term "illness or incapacity" shall mean Physician's
inability to perform his duties hereunder substantially on a full-time basis due
to physical or mental illness as determined by a qualified, independent
physician or psychiatrist, as the case may be, selected by the Company.
ARTICLE VI
CONFIDENTIALITY
6.1 CONFIDENTIALITY. Physician shall not divulge, communicate,
use to the detriment of the Company, MIOA or any of its subsidiaries, or for the
benefit of any other business, firm, person, partnership or corporation, or
otherwise misuse, any "Confidential Information", pertaining to the Company,
MIOA or any of its subsidiaries including, without limitation, all (i) data or
trade secrets, including secret processes, formulas or other technical data;
(ii) production methods; (iii) patient and customer lists; (iv) personnel lists;
(v) proprietary information; (vi) financial or corporate records; (vii)
operational, sales, promotional and marketing methods and techniques; (viii)
development ideas, acquisition strategies and plans; (ix) financial information
and records; (x) "know-how" and methods of doing business; and (xi) computer
programs, including source codes and/or object codes and other proprietary,
competition-sensitive or technical information or secrets developed with or
without the help of Physician. Physician acknowledges that any such information
or data he may have acquired was received in confidence and by reason of his
relationship to the Company. Confidential Information, data or trade secrets
shall not include any information which: (a) at the time of disclosure is within
the public domain; (b) after disclosure becomes a part of the public domain or
generally known within the industry through no fault, act or failure to act,
error, effort or breach of this Agreement by Physician; (c) is known to the
recipient at the time of disclosure; (d) is subsequently discovered by Physician
independently of any disclosure by the Company or MIOA; (e) is required by
order, statute or regulation, of any governmental authority to be disclosed to
any federal or state agency, court or other body; or (f) is obtained from a
third party who has acquired a legal right to possess and disclose such
information.
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6.2 NON-REMOVAL OF RECORDS. All documents, papers, materials,
notes, books, correspondence, drawings and other written and graphic records
relating to the Business of the Company which Physician shall prepare or use, or
come into contact with, shall be and remain the sole property of the Company
and, effective immediately upon the termination of the Physician's employment
with the Company for any reason, shall not be removed from the Company's
premises without the Company's prior written consent or if in Physician's
possession or under his control shall be immediately returned to the Company.
ARTICLE VII
TERMINATION
7.1 TERMINATION FOR CAUSE. This Agreement and the employment
of Physician may be terminated by the Company "For Cause" under any one of the
following circumstances:
(a) Physician commits any material act of fraud,
misappropriation or theft against the Company or
MIOA.
(b) Physician's default or breach of any material
provision of this Agreement including without
limitation Physician's failure to faithfully and
diligently perform his duties pursuant to this
Agreement; provided, that Physician shall not be in
default or breach hereunder unless he shall have
failed to cure such default or breach within thirty
(30) days of written notice thereof by the Company to
Physician. Notwithstanding, Physician may be
terminated pursuant to this provision if he shall
have duly received written notice on at least two
prior instances of the same or substantially similar
breach or default (whether or not cured by
Physician).
(c) Physician engages in gross misconduct or is grossly
negligent in the performance of his duties hereunder.
(d) Physician is convicted of or pleads guilty to a
felony offense which is directly related to his
duties and responsibilities to the Company or that
might otherwise materially adversely affect the
Company or Physician's ability to carry out his
duties and responsibilities pursuant to this
Agreement.
(e) The loss, or suspension for a period longer than six
(6) months of Physician's license to practice
medicine in the State of Virginia resulting from acts
or omissions of Physician.
(f) Physician not being insurable for professional
liability insurance as the result of acts or
omissions on the part of Physician.
(g) Physician's status as an approved medical provider
under the federal Medicare/Medicaid system being
revoked, or suspended for a period greater than three
(3) months.
(h) Physician becoming chemically dependent (as
hereinafter defined) on alcohol or any drugs.
Physician shall be considered to have a "chemical
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<PAGE> 7
dependency" or to be "chemically dependent" on
alcohol or any drugs if the Board of Directors of
MIOA, in its reasonable discretion, believes that
Physician may be chemically dependent and requests
that Physician submit to an independent medical or
psychological examination, the results of which
confirm a chemical dependency. Physician shall not be
terminated for chemical dependency if this is a first
occurrence of chemical dependency by Physician and
Physician enters an approved treatment program and
successfully continues such program through
completion. If Physician refuses to submit to an
independent examination to determine chemical
dependency, or does not successfully complete the
treatment program, or if this is a second or
subsequent occurrence of a chemical dependency, the
Company shall be entitled to terminate this
Agreement.
(i) At the election of Physician. and the Company refuses
to consent to such election.
(k) At the election of the Company if the Company
sustains net operating losses (as determined by its
accountants ) for any three (3) consecutive quarterly
periods.
A termination For Cause under this Section 7.1 shall be
effective upon the date set forth in a written notice of termination delivered
in accordance with the notice provisions of this Agreement.
7.2 TERMINATION WITHOUT CAUSE. This Agreement and the
employment of the Physician may be terminated "Without Cause" as follows:
(a) By mutual agreement of the parties hereto.
(b) At the election of the Company (which shall be done
by its giving not less than thirty (30) days written
notice to Physician) in the event of an illness or
incapacity described in Article V.
(c) Upon Physician's death.
(d) Upon the removal of Physician from the office of
Medical Director and President of the Company or in
the event the Company fails to afford Physician the
power and authority generally commensurate with the
position and the duties required hereunder.
(e) At the election of the Physician if the Company or
MIOA requires Physician to relocate his residence
outside of Staunton, Virginia.
A termination Without Cause under Section 7.2(b) hereof shall
be effective upon the date set forth in a written notice of termination
delivered in accordance with the notice provisions of such section. A
termination Without Cause under Section 7.2(a) hereof shall be automatically
effective upon the date of mutual agreement. A termination Without Cause under
Sections 7.2(c) or (d) hereof shall be effective upon the date such event takes
place. A termination Without Cause under Section 7.2(e) hereof shall be
automatically effective upon the date of Physician's election.
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7.3 EFFECT OF TERMINATION FOR CAUSE. If Physician's employment
is terminated "For Cause":
(a) Physician shall be entitled to accrued base salary
under Section 3.1 hereof through the date of
termination.
(b) Physician shall be entitled to receive all benefits
as would have been awarded under Section 3.4 hereof
through the date of termination, which benefits shall
be awarded as and when the same would have been
awarded under the Agreement had it not been
terminated.
(c) Physician shall be entitled to reimbursement for
expenses accrued through the date of termination in
accordance with the provisions of Sections 3.5 and
4.1 hereof.
(d) All unpaid incentive compensation and unvested stock
options under Sections 3.2 and 3.3 hereof,
respectively, shall be forfeited. This provision
shall also include any "Options" as that term is
defined in those certain Non-qualified Stock Option
Trust dated __________, 1998 of which by virtue of an
addendum to same effective as of the Effective Date
Physician will become a beneficiary.
(e) Except as provided in Article X, this Agreement shall
thereupon terminate and cease to be of any further
force or effect.
7.4 EFFECT OF TERMINATION WITHOUT CAUSE. If Physician's
employment is terminated "Without Cause":
(a) Physician shall be entitled to accrued base salary
under Section 3.1 hereof through the date of
termination.
(b) Physician shall be entitled to receive all benefits
as would have been awarded under Section 3.4 hereof
through the date of termination, which benefits shall
be awarded as and when the same would have been
awarded under the Agreement had it not been
terminated.
(c) Physician shall be entitled to reimbursement for
expenses accrued through the date of termination in
accordance with the provisions of Sections 3.5 and
4.1 hereof.
(d) Physician shall be entitled to receive all amounts of
incentive compensation as would have been payable
under Section 3.2 hereof through the original Term of
this Agreement, which amounts shall be paid as and
when the same would have been paid under the
Agreement had it not been terminated.
(e) All unvested stock options, if any, under Section 3.3
hereof shall immediately vest in full.
-8-
<PAGE> 9
(f) Physician shall be entitled to a lump sum severance
payment in an amount equal to one hundred twenty
thousand dollars ($120,000.00).
(g) Except as provided in Article X, this Agreement shall
thereupon terminate and cease to be of any further
force or effect.
ARTICLE VIII
NON-COMPETITION AND NON-INTERFERENCE
8.1 NONCOMPETITION; CONFIDENTIALITY. As an inducement to the
Company to execute this Agreement and in order to preserve the goodwill
associated with the business of the Company and in addition to and not in
limitation of any covenants contained in any agreement executed and delivered
herewith, Physician hereby covenants and agrees as follows:
a. COVENANT NOT TO COMPETE. During the term of this
Agreement and for a period of two (2) years after its termination "For Cause",
Physician will not directly or indirectly:
(1) be employed by, engage in, continue in
or carry on any business which competes with the Business of the Company or any
business of the Acquisition Corp, MIOA or any of its subsidiaries that is
substantially similar thereto, including owning or controlling any financial
interest in any corporation, partnership, firm or other form of business
organization which is so engaged;
(2) be employed by, consult with, advise or
assist in any way, whether or not for consideration, any corporation,
partnership, firm or other business organization which is now or becomes a
competitor of the Company or the Acquisition Corp in any aspect with respect to
the Business of the Company or the Acquisition Corp, including, but not limited
to, advertising or otherwise endorsing the products of any such competitor;
soliciting patients and customers or otherwise serving as an intermediary for
any such competitor; loaning money or rendering any other form of financial
assistance to or engaging in any form of business transaction on other than on
an arm's length basis with any such competitor;
(3) offer employment to an employee of the
Company, MIOA or any of its subsidiaries, without the prior written consent of
MIOA; or
(4) engage in any practice the purpose of
which is to evade the provisions of this covenant not to compete or to commit
any act which adversely affects the Company, the Acquisition Corp or their
business;
provided, however, that the foregoing shall not prohibit the
ownership of securities of corporations which are listed on a national
securities exchange or traded in the national over-the-counter market in an
amount which shall not exceed 5% of the outstanding shares of any such
corporation. The parties agree that the geographic scope of this covenant not to
compete shall extend in an outward radius of 15 miles from any clinic, lab,
medical facility or any other business of the Company, Acquisition Corp or any
similar business of any other subsidiary of MIOA. The parties agree that the
Company or the Acquisition Corp, as the case may be, may sell, assign or
otherwise transfer this covenant not to compete, in whole or in part, to any
-9-
<PAGE> 10
person, corporation, firm or entity that purchases all or part of the Company's,
or the Acquisition Corp's, business. In the event a court of competent
jurisdiction determines that the provisions of this covenant not to compete are
excessively broad as to duration, geographical scope or activity, it is
expressly agreed that this covenant not to compete shall be construed so that
the remaining provisions shall not be affected, but shall remain in full force
and effect, and any such over broad provisions shall be deemed, without further
action on the part of any person, to be modified, amended and/or limited, but
only to the extent necessary to render the same valid and enforceable in such
jurisdiction.
b. EQUITABLE RELIEF FOR VIOLATIONS. Physician agrees
that the provisions and restrictions contained in this Section are necessary to
protect the legitimate continuing interests of the Company and MIOA and that any
violation or breach of these provisions will result in irreparable injury to the
Company and MIOA for which a remedy at law would be inadequate and that, in
addition to any relief at law which may be available to the Company and/or MIOA
for such violation or breach and regardless of any other provision contained in
this Agreement, the Company and MIOA shall be entitled to injunctive and other
equitable relief as a court may grant after considering the intent of this
Section.
8.2 SEVERABILITY. If any covenant or provision contained in
Article VIII is determined to be void or unenforceable in whole or in part, it
shall not be deemed to affect or impair the validity of any other covenant or
provision. If, in any arbitration or judicial proceeding, a tribunal shall
refuse to enforce all of the separate covenants deemed included in this Article
VIII, then such unenforceable covenants shall be deemed eliminated from the
provisions hereof for the purpose of such proceedings to the extent necessary to
permit the remaining separate covenants to be enforced in such proceedings.
ARTICLE IX
MISCELLANEOUS
9.1 NO WAIVERS. The failure of either party to enforce any
provision of this Agreement shall not be construed as a waiver of any such
provision, nor prevent such party thereafter from enforcing such provision or
any other provision of this Agreement.
9.2 NOTICES. Any notice to be given to the Company and
Physician under the terms of this Agreement may be delivered personally, by
telecopy, telex or other form of written electronic transmission, or by
registered or certified mail, postage prepaid, and shall be addressed as
follows:
If to the Company: 13 W. Beverley Street
Masonic Lodge, 2nd floor
Staunton, VA 24401
With a Copy to: Medical Industries of America, Inc.
1903 S. Congress Ave., #400
Boynton Beach, FL 33463
Attn: Paul C. Pershes, President
If to Physician: David S. Klein, M.D.
13 W. Beverley Street
Masonic Lodge, 2nd floor
Staunton, VA 24401
-10-
<PAGE> 11
Either party may hereafter notify the other in writing of any change in
address. Any notice shall be deemed duly given (i) when personally delivered,
(ii) when telecopied, telexed or transmitted by other form of written electronic
transmission (upon confirmation of receipt) or (iii) on the third day after it
is mailed by registered or certified mail, postage prepaid, as provided herein.
9.3 SEVERABILITY. The provisions of this Agreement are
severable and if any provision of this Agreement shall be held to be invalid or
otherwise unenforceable, in whole or in part, the remainder of the provisions,
or enforceable parts thereof, shall not be affected thereby.
9.4 SUCCESSORS AND ASSIGNS. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and be binding upon
the successors, including the Acquisition Corp, and assigns of the Company,
including the survivor upon any merger, consolidation, share exchange or
combination of the Company with any other entity. Physician shall not have the
right to assign, delegate or otherwise transfer any duty or obligation to be
performed by him hereunder to any person or entity.
9.5 ENTIRE AGREEMENT. This Agreement supersedes all prior and
contemporaneous agreements and understandings between the parties hereto, oral
or written, and may not be modified or terminated orally. No modification,
termination or attempted waiver shall be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced. This Agreement was the subject of negotiation by the parties hereto
and their counsel. The parties agree that no prior drafts of this Agreement
shall be admissible as evidence (whether in any arbitration or court of law) in
any proceeding which involves the interpretation of any provisions of this
Agreement.
9.6 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Virginia without
reference to the conflict of law principles thereof.
9.7 SECTION HEADINGS. The section headings contained herein
are for the purposes of convenience only and are not intended to define or limit
the contents of said sections.
9.8 FURTHER ASSURANCES. Each party hereto shall cooperate and
shall take such further action and shall execute and deliver such further
documents as may be reasonably requested by the other party in order to carry
out the provisions and purposes of this Agreement.
9.9 GENDER. Whenever the pronouns "he" or "his" are used
herein they shall also be deemed to mean "she" or "her" or "it" or "its"
whenever applicable. Words in the singular shall be read and construed as though
in the plural and words in the plural shall be read and construed as though in
the singular in all cases where they would so apply.
9.10 COUNTERPARTS. This Agreement may be executed in
counterparts, all of which taken together shall be deemed one original.
-11-
<PAGE> 12
ARTICLE X
SURVIVAL
10.1 SURVIVAL. The provisions of Articles VI, VII, VIII, and
IX, of this Agreement shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
MIAO ACQUISTION COMPANY V, INC. DAVID S. KLEIN, M.D., P.C.
By: By:
---------------------------------- ---------------------------------
Title: Title:
------------------------------- -----------------------------
EMPLOYEE
------------------------------------
David S. Klein, M.D.
-12-
<PAGE> 13
EXHIBIT "A"
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 574,415
<SECURITIES> 0
<RECEIVABLES> 1,395,040
<ALLOWANCES> (291,542)
<INVENTORY> 0
<CURRENT-ASSETS> 1,681,661
<PP&E> 301,597
<DEPRECIATION> (35,475)
<TOTAL-ASSETS> 6,333,898
<CURRENT-LIABILITIES> 1,077,129
<BONDS> 331,811
0
0
<COMMON> 8,363
<OTHER-SE> 4,916,595
<TOTAL-LIABILITY-AND-EQUITY> 6,333,898
<SALES> 0
<TOTAL-REVENUES> 456,998
<CGS> 0
<TOTAL-COSTS> 2,429,175
<OTHER-EXPENSES> 13,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,443
<INCOME-PRETAX> (1,927,183)
<INCOME-TAX> (428,606)
<INCOME-CONTINUING> (1,498,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,498,577)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
