<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 2000.
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
INTEGRATED ORTHOPAEDICS, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 8000 76-0203483
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1800 WEST LOOP SOUTH, SUITE 1030
HOUSTON, TEXAS 77027
(713) 361-2049
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
LAURIE H. GUTIERREZ
CHIEF FINANCIAL OFFICER
INTEGRATED ORTHOPAEDICS, INC.
1800 WEST LOOP SOUTH, SUITE 1030
HOUSTON, TEXAS 77027
(713) 361-2049
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
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MICHAEL A. SASLAW DAVID F. TAYLOR
WEIL, GOTSHAL & MANGES LLP LOCKE LIDDELL & SAPP LLP
100 CRESCENT COURT, SUITE 1300 600 TRAVIS, SUITE 3400
DALLAS, TEXAS 75201 HOUSTON, TEXAS 77002
(214) 746-7700 (713) 226-1200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and after
the satisfaction or waiver of all other conditions to the merger contemplated by
the Agreement and Plan of Merger described in the joint proxy
statement/prospectus included in the Registration Statement.
---------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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===========================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE(4) REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------
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Common Stock, $0.001 par value 24,814,612(2)
----------------------------------------------------------------
Series A Warrants 534,666 (3) $1,152,074 $305
----------------------------------------------------------------
Series B Warrants 1,498,482
===========================================================================================================================
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(1) This amount is based upon the maximum number of shares of common stock,
series A warrants and series B warrants anticipated to be issued pursuant to
an Agreement and Plan of Merger dated as of September 15, 2000 between
PowerBrief, Inc. and the Registrant.
(2) This amount includes the maximum number of shares of common stock that will
be put into escrow to satisfy the obligation to issue additional shares of
common stock pursuant to an adjustment to be made after the closing.
(3) Not applicable.
(4) Computed in accordance with Rule 457(f) under the Securities Act of 1933, as
amended, based on the book value as of September 30, 2000 of the securities
to be received by the Registrant in exchange for the securities registered
hereby.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE> 2
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE
AND MAY BE CHANGED. NEW POWERBRIEF MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[INTEGRATED ORTHOPAEDICS, INC. LOGO] [POWERBRIEF, INC. LOGO]
LETTER TO SHAREHOLDERS
MERGER PROPOSAL -- YOUR VOTE IS IMPORTANT
The boards of directors of Integrated Orthopaedics, Inc., or IOI, and
PowerBrief, Inc., or PowerBrief, have agreed to a merger where PowerBrief will
merge with and into IOI, and IOI will change its name to "PowerBrief, Inc." and
carry on the business of PowerBrief.
Sometimes in this document we refer to the combined company after the merger
as "New PowerBrief" and the common stock of the combined company after the
merger as "New PowerBrief common stock." Concurrently with the completion of the
merger, New PowerBrief will effect a five to one reverse stock split of its
common stock. Unless stated otherwise, the information in this joint proxy
statement/prospectus assumes that the five to one reverse stock split has
occurred.
IOI's common stock is publicly traded on the American Stock Exchange under
the symbol "IOI." IOI has applied to have continued listing of New PowerBrief's
common stock on the American Stock Exchange, including the shares of New
PowerBrief's common stock issued in connection with the merger. There is no
active public trading market for the stock of PowerBrief.
Based on the number of shares of PowerBrief's common stock, preferred stock,
options and warrants outstanding on November 20, 2000, common stock holders of
PowerBrief will receive initially (1) 0.6035 of a share of New PowerBrief's
common stock, (2) a series A warrant to purchase 0.0274 of a share of New
PowerBrief's common stock and (3) a series B warrant to purchase between 0.0659
and 0.0768 of a share of New PowerBrief's common stock, for each share of
PowerBrief's common stock they own at the time of the merger. PowerBrief's
series A preferred stock holders will receive initially (1) 1.8106 shares of New
PowerBrief's common stock, (2) a series A warrant to purchase 0.0822 of a share
of New PowerBrief's common stock and (3) a series B warrant to purchase between
0.1977 and 0.2304 of a share of New PowerBrief's common stock, for each share of
PowerBrief's series A preferred stock they own at the time of the merger. The
amount of New PowerBrief stock and warrants that each PowerBrief stockholder
receives in the merger and the exercise price of the New PowerBrief series B
warrants that each PowerBrief stockholder receives in the merger may be adjusted
as described in this joint proxy statement/prospectus.
Pursuant to voting agreements entered into in connection with the execution
of the merger agreement, the holders of at least two-thirds of IOI's capital
stock and a majority of PowerBrief's capital stock entitled to vote on the
merger have agreed to vote in favor of the merger. As result, the approval of
the merger by IOI's shareholders and PowerBrief's stockholders is assured.
The boards of directors of IOI and PowerBrief have determined that the
merger is fair to, and in the best interests of, their respective shareholders
and each board recommends voting in favor of the merger and the merger
agreement, as amended.
The boards of directors of IOI and PowerBrief are asking their shareholders
for proxies to be voted at the special meetings of their respective
shareholders. This document is also a prospectus for (1) up to 13,814,612 shares
of New PowerBrief's common stock, series A warrants to purchase up to 534,666
shares of New PowerBrief's common stock and series B warrants to purchase
between 1,285,445 and 1,498,482 shares of New PowerBrief's common stock to be
issued in the merger, and (2) up to 11,000,000 shares of New PowerBrief's common
stock to be put into escrow to satisfy New PowerBrief's obligation to issue
additional shares pursuant to an adjustment after the merger.
IOI's special meeting will be on , , 2001, at a.m.,
Central time, at , Houston, Texas . PowerBrief's special
meeting will be on , , 2001, at a.m., Central time, at
600 Travis, Suite 2500, Houston, Texas 77002.
BEFORE CASTING YOUR VOTE, PLEASE CONSIDER CAREFULLY THE RISK FACTORS
BEGINNING ON PAGE 15.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS EITHER APPROVED OR DISAPPROVED OF THE NEW POWERBRIEF SECURITIES
TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated , 2001, and was
first mailed to IOI's shareholders and PowerBrief's stockholders on ,
2001.
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Very truly yours, Very truly yours,
/s/ JOSE E. KAUACHI /s/ K. WADE BENNETT
Jose E. Kauachi K. Wade Bennett
President and Chairman of the Board Chairman of the Board
Integrated Orthopaedics, Inc. PowerBrief, Inc.
</TABLE>
<PAGE> 3
INTEGRATED ORTHOPAEDICS, INC.
1800 WEST LOOP SOUTH, SUITE 1030
HOUSTON, TEXAS 77027
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF INTEGRATED ORTHOPAEDICS, INC.
TO BE HELD ON , , 2001
Time:
a.m., Central time
Date:
, 2001
Place:
Houston, Texas
Purpose:
- vote on the proposed merger of PowerBrief and IOI and related matters;
and
- conduct other business if properly considered.
Only shareholders of record on , 2000 may vote at the special
meeting.
Pursuant to voting agreements entered into in connection with the execution
of the merger agreement, the holders of at least two-thirds of IOI's capital
stock and a majority of PowerBrief's capital stock entitled to vote on the
merger have agreed to vote in favor of the merger. As result, the approval of
the merger by IOI's shareholders and PowerBrief's stockholders is assured.
THE BOARD OF DIRECTORS OF IOI UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THE MERGER AND RELATED MATTERS. THE SPECIFIC DETAILS OF THE MERGER ARE FULLY
DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/ PROSPECTUS AND IN THE
MERGER AGREEMENT, AS AMENDED. A COPY OF THE MERGER AGREEMENT, AS AMENDED, IS
ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX A.
Your vote is important. Please complete, sign, date and return your proxy
card in the enclosed envelope promptly.
By order of the Board of Directors,
/s/ Laurie H. Gutierrez
Laurie H. Gutierrez
Secretary
Houston, Texas
, 2001
<PAGE> 4
POWERBRIEF, INC.
5858 WESTHEIMER, SUITE 500
HOUSTON, TEXAS 77057
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF POWERBRIEF, INC.
TO BE HELD ON , , 2001
Time:
a.m., Central time
Date:
, 2001
Place:
600 Travis
Suite 2500
Houston, Texas 77002
Purpose:
- vote on the proposed merger of PowerBrief and IOI and related matters;
and
- conduct other business if properly considered.
Only stockholders of record on , 2000 may vote at the special
meeting.
Pursuant to voting agreements entered into in connection with the execution
of the merger agreement, the holders of at least a majority of PowerBrief's
capital stock and two-thirds of IOI's capital stock entitled to vote on the
merger have agreed to vote in favor of the merger. As result, the approval of
the merger by PowerBrief's stockholders and IOI's shareholders is assured.
THE BOARD OF DIRECTORS OF POWERBRIEF UNANIMOUSLY (WITH ONE ABSTENTION)
RECOMMENDS THAT YOU VOTE "FOR" THE MERGER AND RELATED MATTERS. THE SPECIFIC
DETAILS OF THE MERGER ARE FULLY DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS AND IN THE MERGER AGREEMENT, AS AMENDED. A COPY OF THE
MERGER AGREEMENT, AS AMENDED, IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX A.
Your vote is important. Please complete, sign, date and return your proxy
card in the enclosed envelope promptly.
By order of the Board of Directors,
/s/ K. WADE BENNETT
K. Wade Bennett
Secretary
Houston, Texas
, 2001
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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WHERE YOU CAN FIND MORE INFORMATION....... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER.... 3
SUMMARY................................... 7
The Companies........................... 7
Reasons for the Merger.................. 7
The Special Meetings.................... 7
Record Date; Voting Power............... 7
Votes Required to Approve the Merger.... 8
Recommendations of the Boards of
Directors............................. 8
The Merger.............................. 8
MARKET PRICE AND DIVIDEND INFORMATION..... 13
Market Price............................ 13
Dividends............................... 13
RISK FACTORS.............................. 15
Risk Factors Related to the Merger...... 15
Risk Factors Related to IOI and its
Business.............................. 18
Risk Factors Related to PowerBrief and
its Business.......................... 19
THE IOI SPECIAL MEETING................... 27
General................................. 27
Matters to be Considered................ 27
Record Date; Shares Entitled to Vote;
Quorum................................ 27
Votes Required; Voting and Revocation of
Proxies; Effect of Abstentions and
Non-Votes............................. 27
Solicitation of Proxies................. 28
Other Matters........................... 28
THE POWERBRIEF SPECIAL MEETING............ 29
General................................. 29
Matters to be Considered................ 29
Record Date; Shares Entitled to Vote;
Quorum................................ 29
Vote Required; Voting and Revocation of
Proxies; Effect of Abstentions........ 29
Solicitation of Proxies................. 30
Other Matters........................... 30
THE MERGER................................ 31
General Description of the Merger....... 31
Background of the Merger................ 33
IOI's Reasons for the Merger and Factors
Considered by, and Recommendation of,
IOI's Board of Directors.............. 34
PowerBrief's Reasons for the Merger and
Factors Considered by, and
Recommendation of, PowerBrief's Board
of Directors.......................... 34
Opinion of PowerBrief's Financial
Advisor............................... 35
Voting Agreements....................... 38
Interests of Certain Persons in the
Merger................................ 39
Relationships Between IOI and
PowerBrief............................ 41
</TABLE>
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PAGE
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Accounting Treatment.................... 42
Material Federal Income Tax
Consequences.......................... 42
Appraisal Rights........................ 45
Restrictions on Resales by Affiliates... 47
THE MERGER AGREEMENT...................... 48
Structure of the Merger................. 48
Effective Time of the Merger............ 48
Manner and Basis for Converting
Shares................................ 48
Exchange Procedures..................... 49
Adjustments............................. 50
Treatment of PowerBrief Warrants........ 52
Treatment of PowerBrief Options......... 52
Board of Directors of New PowerBrief.... 53
Executive Officers of New PowerBrief.... 53
Significant Covenants................... 54
Representations and Warranties of IOI
and PowerBrief........................ 58
Termination or Amendment................ 58
Expenses................................ 59
COMPARISON OF SHAREHOLDER RIGHTS.......... 59
Authorized Capital...................... 60
Number of Directors; Removal;
Vacancies............................. 60
Charter Amendments...................... 61
Bylaw Amendments........................ 62
Special Meetings of Stockholders........ 62
Required Vote for Certain
Transactions.......................... 62
Standards of Conduct for Directors...... 63
Indemnification of Directors and
Officers.............................. 64
Limitation of Personal Liability of
Directors and Officers................ 66
Appraisal Rights........................ 67
Liquidation Rights...................... 68
Denial of Voting Rights................. 68
Payment of Dividends.................... 68
Inspection of Books and Records......... 69
DESCRIPTION OF CAPITAL STOCK.............. 69
Authorized Capital Stock................ 69
Common Stock............................ 69
Preferred Stock......................... 70
Warrants to be Issued in the Merger..... 70
Warrants Issued Before the Merger....... 73
Registration Rights..................... 74
Transfer Agent and Registrar............ 74
Stock Exchange Listing.................. 74
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.................... 76
INFORMATION ABOUT IOI..................... 80
Business................................ 80
Employees............................... 82
Competition, Major Customers and
Reimbursement......................... 82
Service Marks........................... 82
</TABLE>
i
<PAGE> 6
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PAGE
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Regulation.............................. 82
Description of Property................. 85
Legal Proceedings....................... 85
Market Price and Dividends.............. 85
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of IOI..................... 86
Security Ownership of IOI's Directors,
Officers and Principal Shareholders... 92
IOI's Directors......................... 94
New PowerBrief's Directors.............. 95
IOI's Executive Officers................ 95
Executive Employment Contracts.......... 95
Relationships and Related Party
Transactions.......................... 96
INFORMATION ABOUT POWERBRIEF.............. 97
Business................................ 97
The PowerBrief Concept.................. 97
PowerBrief's Opportunity................ 97
PowerBrief's Mission.................... 98
PowerBrief's Immediate Objectives....... 98
PowerBrief Product Development.......... 99
Competition............................. 100
Proprietary Rights...................... 101
Third Party Suppliers................... 101
Employees............................... 102
Description of Property................. 102
Legal Proceedings....................... 102
Market Price and Dividends.............. 102
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of PowerBrief.............. 103
Security Ownership of PowerBrief's
Directors, Officers and Principal
Stockholders.......................... 105
</TABLE>
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PAGE
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PowerBrief's Directors.................. 106
New PowerBrief's Directors.............. 107
PowerBrief's Executive Officers......... 108
New PowerBrief's Executive Officers..... 108
Remuneration of Directors and
Officers.............................. 109
Options, Warrants and Rights............ 109
Employment and Noncompetition
Arrangements.......................... 110
Director Compensation................... 112
PowerBrief, Inc. 2000 Equity Incentive
Plan.................................. 112
Stockholders' Agreement................. 112
Registration Rights Agreement........... 113
Relationships and Related Party
Transactions.......................... 113
RELATIONSHIPS WITH INDEPENDENT
ACCOUNTANTS............................. 114
EXPERTS................................... 114
LEGAL MATTERS............................. 114
INDEMNIFICATION........................... 115
OTHER MATTERS............................. 115
SHAREHOLDER PROPOSALS..................... 115
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.............................. F-1
APPENDIX A -- MERGER AGREEMENT............ A-1
APPENDIX B -- OPINION OF MCFARLAND,
GROSSMAN & COMPANY...................... B-1
APPENDIX C -- IOI VOTING AGREEMENT........ C-1
APPENDIX D -- POWERBRIEF VOTING
AGREEMENT............................... D-1
APPENDIX E -- SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW................. E-1
</TABLE>
ii
<PAGE> 7
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires IOI to file information with the Securities
and Exchange Commission, or the Commission, concerning its business and
operations. Accordingly, IOI files annual, quarterly and special reports, proxy
statements and other information with the Commission. You may read and copy any
document IOI files at the Commission's public reference rooms located at 450
Fifth Street, N.W., Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. These Commission filings are also available to the
public on the Commission's web site at: http://www.sec.gov.
IOI has filed with the Commission a registration statement on Form S-4.
This joint proxy statement/ prospectus is a part of the registration statement
and constitutes a prospectus of IOI for the New PowerBrief stock and warrants to
be issued in the merger and for the New PowerBrief stock to be held in escrow
and issued in an adjustment after the merger. IOI has supplied all information
contained in this joint proxy statement/prospectus relating to IOI, and
PowerBrief has supplied all information contained in this joint proxy
statement/prospectus relating to PowerBrief. As allowed by the Commission rules,
this joint proxy statement/prospectus does not contain all the information you
can find in the registration statement or the exhibits to the registration
statement. For further information with respect to IOI and the IOI stock, you
should consult the registration statement and its exhibits. Statements contained
in this joint proxy statement/prospectus concerning the provisions of any
documents are summaries of those documents, and IOI refers you to the document
filed with the Commission for additional information. The registration statement
and any of its amendments, including exhibits filed as a part of the
registration statement or an amendment to the registration statement, are
available for inspection and copying as described above.
The Commission rules and regulations permit IOI to "incorporate by
reference" the information IOI files with the Commission. This means that IOI
can disclose important information to you by referring you to the other
information IOI has filed with the Commission. The information that IOI
incorporates by reference is considered to be part of this joint proxy
statement/prospectus. Information that IOI files later with the Commission will
automatically update and supersede this information.
IOI incorporates by reference the documents listed below and any filings
IOI will make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 following the date of this joint proxy
statement/prospectus, but before the date of the IOI special meeting:
- Annual Report on Form 10-KSB of IOI for the fiscal year ended December
31, 1999;
- Quarterly Reports on Form 10-QSB for the periods ended March 31, 2000,
June 30, 2000 and September 30, 2000; and
- Current Reports on Form 8-K dated April 27, 2000, September 21, 2000 and
October 3, 2000.
You can request a free copy of the above filings or any filings subsequently
incorporated by reference into this joint proxy statement/prospectus by
writing or calling:
Integrated Orthopaedics, Inc.
1800 West Loop South, Suite 1030
Houston, Texas 77027
Attn: Secretary
Telephone requests may be directed to (713) 361-2049.
IN ORDER TO ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, YOU SHOULD MAKE YOUR
REQUEST BY , 2001.
Neither IOI nor PowerBrief has authorized anyone to give any information or
make any representation about the merger or about the respective companies that
differs from or adds to the
1
<PAGE> 8
information in this joint proxy statement/prospectus or in the documents that
IOI files publicly with the Commission. Therefore, you should not rely upon any
information that differs from or is in addition to the information contained in
this joint proxy statement/prospectus or in the documents that IOI files
publicly with the Commission.
If you live in a jurisdiction where it is unlawful to offer to exchange or
sell, to ask for offers to exchange or buy, or to ask for proxies regarding the
securities offered by this joint proxy statement/ prospectus, or if you are a
person to whom it is unlawful to direct such activities, the offer presented by
this joint proxy statement/prospectus is not extended to you.
The information contained in this joint proxy statement/prospectus speaks
only as of the date on the cover, unless the information specifically indicates
that another date applies.
2
<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE MERGER
Sometimes in this joint proxy statement/prospectus we refer to the combined
company after the merger as "New PowerBrief" and the common stock of the
combined company after the merger as "New PowerBrief common stock." Concurrently
with the completion of the merger, New PowerBrief will effect a five to one
reverse stock split of its common stock. Unless stated otherwise, the
information in this joint proxy statement/prospectus assumes that the five to
one reverse stock split has occurred.
Q: WHEN AND WHERE ARE THE SPECIAL MEETINGS?
A: Each company's special meeting will take
place on , 2001 in Houston, Texas. The address of each special
meeting is on page 7.
Q: WHY ARE THE TWO COMPANIES PROPOSING TO
MERGE?
A: The board of directors of IOI concluded that
there was little opportunity for IOI to obtain required financing for its
current operations and that a merger with PowerBrief could result in a
greater return on investment for IOI's shareholders than a liquidation of
IOI at this time.
In the merger, PowerBrief will receive existing cash to use as operating
capital in the business and will have access to the public markets.
Q: WHAT WILL NEW POWERBRIEF'S BUSINESS BE AFTER
THE MERGER?
A: If the merger is completed, IOI will change
its name to "PowerBrief, Inc." and will conduct PowerBrief's business as
described under "Information About PowerBrief" beginning on page 97.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the
enclosed return envelope as soon as possible, so that your shares may be
represented at your special meeting. In order to assure that your vote is
counted, please give your proxy as instructed on your proxy card even if
you currently plan to attend your special meeting in person. The board of
directors of each of IOI and PowerBrief recommends that its shareholders
vote in favor of the merger.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card
to your company's Secretary before your special meeting. Or, you can
attend your special meeting in person and vote. You may also revoke your
proxy by sending a notice of revocation to your company's Secretary. IOI's
shareholders should send any signed proxy cards or revocation notices to
1800 West Loop South, Suite 1030, Houston, Texas 77027, Attention:
Secretary. PowerBrief's stockholders should send any signed proxy cards or
any revocation notices to 5858 Westheimer, Suite 500, Houston, Texas
77057, Attention: Secretary.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A: If you do not provide your broker with
instructions on how to vote your "street name" shares, your broker will
not be permitted to vote them on the merger. You should therefore be sure
to provide your broker with instructions on how to vote your shares.
If you are an IOI shareholder and do not give voting instructions to your
broker, you will not be counted as voting for purposes of the merger vote
unless you appear in person and vote at the IOI special meeting. If your
shares are not voted, it will have the same effect as a vote against
approval of the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, New
PowerBrief will hire an exchange agent who will send PowerBrief's
stockholders written instructions for exchanging their share certificates.
IOI's shareholders will be given an opportunity to exchange their
certificates for certificates representing the shares held after the five
to one reverse stock split.
Additionally, if you are to receive additional shares of New PowerBrief's
common stock following an adjustment to increase your ownership in New
PowerBrief after the merger as discussed below, these shares will be sent
to you directly by New PowerBrief or an escrow agent without any action on
your part.
3
<PAGE> 10
Q: WHAT PERCENTAGE OF NEW POWERBRIEF WILL
IOI'S SHAREHOLDERS AND POWERBRIEF'S STOCKHOLDERS OWN AFTER THE MERGER?
A: Based on the number of outstanding shares of
stock of IOI and PowerBrief on November 20, 2000, the IOI shareholders and
PowerBrief stockholders will own 34.1% and 65.9%, respectively, of the
outstanding New PowerBrief common stock after the merger. Based on the
outstanding warrants and options on November 20, 2000 and the warrants to
be issued by IOI before the merger, the ownership percentages of the IOI
shareholders and PowerBrief stockholders of the fully diluted New
PowerBrief common stock after the merger will be:
- 39.8% and 60.2%, respectively, assuming the series B warrants of New
PowerBrief to be issued in the merger will purchase an aggregate of
1,285,445 shares of New PowerBrief's common stock, which is the
minimum number of shares that will be purchasable under these
warrants; and
- 40.0% and 60.0%, respectively, assuming the series B warrants of New
PowerBrief to be issued in the merger will purchase an aggregate of
1,498,482 shares of New PowerBrief's common stock, which is the
maximum number of shares that will be purchasable under these
warrants,
as described in this joint proxy statement/ prospectus. This information
is based on some assumptions described on pages 31 to 32 under "The
Merger -- General Description of the Merger."
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, based on the
stock, options and warrants outstanding on November 20, 2000, PowerBrief's
stockholders will have the right to receive the following in exchange for
each share of PowerBrief's common stock they own:
- 0.6035 of a share of New PowerBrief's common stock;
- a series A warrant to purchase 0.0274 of a share of New PowerBrief's
common stock; and
- a series B warrant to purchase between 0.0659 and 0.0768 of a share of
New PowerBrief's common stock.
In addition, each of the outstanding shares of PowerBrief's series A
preferred stock will be converted into the right to receive:
- 1.8106 shares of New PowerBrief's common stock;
- a series A warrant to purchase 0.0822 of a share of New PowerBrief's
common stock; and
- a series B warrant to purchase between 0.1977 and 0.2304 of a share of
New PowerBrief's common stock.
Any resulting fractional shares received by a former PowerBrief
stockholder will be paid in cash.
IOI's shareholders will continue to own their existing shares of IOI's
common stock after the merger, as adjusted for the five to one reverse
stock split concurrently with the merger.
The aggregate number of shares of common stock purchasable under the New
PowerBrief series B warrants to be issued in the merger will be between
1,285,445 and 1,498,482. The actual number of shares subject to these New
PowerBrief series B warrants will be equal to the aggregate number of
shares purchasable under IOI's warrants existing as of the date of the
merger agreement, after taking into account any anti-dilution adjustment
resulting from the issuance by IOI to its shareholders of warrants to
purchase 2,959,274 shares of common stock before the merger as permitted
by the merger agreement.
The number of shares of common stock purchasable under the warrants that
each PowerBrief stockholder receives in the merger may be adjusted before
the merger based on the number of shares of PowerBrief's common stock
purchased through the exercise of PowerBrief options before the merger.
The aggregate series A
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<PAGE> 11
warrants and series B warrants of New PowerBrief to be issued in the
merger will purchase a maximum of 534,666 and between 1,285,445 and
1,498,482 shares, respectively, of New PowerBrief's common stock. This
amount must be allocated among the holders of PowerBrief's stock and
warrants and anyone that acquires PowerBrief's common stock before the
merger through the exercise of options or warrants.
In addition, on or before the first anniversary of the completion of the
merger, New PowerBrief will adjust the relative ownership percentages of
IOI's shareholders and PowerBrief's stockholders of record as of the
merger based on a formula described in this joint proxy
statement/prospectus. New PowerBrief will carry out this adjustment by
issuing more shares of New PowerBrief's common stock to the shareholders
entitled to a percentage ownership increase.
For a more detailed description of these adjustments and their effects,
see "The Merger Agreement -- Adjustments" on pages 50 through 52 and "The
Merger -- General Description of the Merger" on pages 31 through 32.
Q: WHAT WILL HAPPEN TO THE OUTSTANDING WARRANTS
AND STOCK OPTIONS OF IOI?
A: All outstanding warrants and options to
acquire IOI's common stock that were not exercised before the merger will
remain outstanding after the merger in accordance with their terms, but
will be adjusted to reflect the five to one reverse stock split
concurrently with the merger.
Q: WHAT WILL HAPPEN TO THE OUTSTANDING WARRANTS
OF POWERBRIEF?
A: All outstanding warrants to acquire
PowerBrief's common stock that are not exercised before the merger
automatically will be converted into warrants to purchase the same number
of shares of New PowerBrief's common stock and series A warrants and
series B warrants that the warrant holders would have received in the
merger if they had exercised their warrants before the merger. The other
terms of the warrants, including the expiration date and exercise
provisions, will remain unchanged.
Q: WHAT WILL HAPPEN TO THE OUTSTANDING STOCK
OPTIONS OF POWERBRIEF?
A: All of the outstanding stock options of
PowerBrief that are not exercised before the merger automatically will be
converted into options to acquire New PowerBrief's common stock. The
number of shares of common stock that may be acquired upon exercise of
these options will be adjusted to acquire the same number of shares of New
PowerBrief's common stock, but not warrants, that the option holder would
have received in the merger if the options were exercised before the
merger. The other terms of the options, including the vesting schedule,
will remain unchanged.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT
OF THE MERGER?
A: IOI and PowerBrief expect that the exchange
of shares by PowerBrief's stockholders, as well as the five to one reverse
stock split, will be reorganizations pursuant to Section 368(a) of the
Internal Revenue Code. As a result, for federal income tax purposes the
merger and the reverse stock split generally will not result in income for
the PowerBrief stockholders or IOI shareholders, except to the extent of
cash received instead of fractional shares of New PowerBrief's stock. To
review the tax consequences to PowerBrief's stockholders in greater
detail, see "The Merger -- Material Federal Income Tax Consequences" on
pages 42 through 45.
Q: WILL I HAVE ANY RIGHT TO DISSENT OR OBTAIN THE
APPRAISED VALUE FOR MY SHARES?
A: Under Delaware law, each PowerBrief
stockholder will have the right to an appraisal of the value of his or her
shares of PowerBrief's stock in connection with the merger if the
PowerBrief stockholder complies with the requirements of Delaware law.
Under Texas law, IOI's shareholders will not have appraisal rights in
connection with the merger.
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<PAGE> 12
Q: WHEN DO YOU EXPECT THE MERGER TO BE
COMPLETED?
A: We are working toward completing the
merger as quickly as possible. We expect to complete the merger promptly
after the completion of each special meeting.
Q: WHAT IF I ALSO OWN SHARES OF IOI'S COMMON
STOCK?
A: IOI's common stock will not be affected by
the merger. If you currently own shares of IOI's common stock, you will
continue to own those shares after the merger as common stock of New
PowerBrief. However, those shares will be subject to a five to one reverse
stock split concurrently with the merger.
Q: WHO DO I CALL IF I HAVE QUESTIONS ABOUT THE
SPECIAL MEETINGS OR THE MERGER?
A: IOI's shareholders may call Laurie H.
Gutierrez at (713) 361-2049. PowerBrief's stockholders may call K. Wade
Bennett at (713) 526-4600.
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<PAGE> 13
SUMMARY
This summary highlights selected information about the merger from this
document. This summary does not describe all information relating to the merger
and is qualified by more detailed information and financial statements in other
sections of this document, including the Appendices and the documents referred
to or incorporated by reference in this joint proxy statement/prospectus.
References to the merger agreement in this joint proxy statement/prospectus are
to the merger agreement, as amended.
YOU CAN HAVE COPIES OF THE DOCUMENTS THAT ARE INCORPORATED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS FOR FREE BY WRITING OR CALLING LAURIE H. GUTIERREZ AT
1800 WEST LOOP SOUTH, SUITE 1030, HOUSTON, TEXAS 77027 (TELEPHONE NO. (713)
361-2049) OR K. WADE BENNETT AT 5858 WESTHEIMER, SUITE 500, HOUSTON, TEXAS 77057
(TELEPHONE NO. (713) 526-4600). IN ORDER TO MAKE SURE YOU GET THEM ON TIME,
PLEASE WRITE OR CALL BEFORE , 2001.
You should carefully read this entire document and the related documents.
THE COMPANIES
Integrated Orthopaedics, Inc.
1800 West Loop South, Suite 1030
Houston, Texas 77027
(713) 361-2049
IOI was formed on April 1, 1990 as a successor corporation in a
re-incorporation merger. IOI's principal business has been to provide healthcare
practice management services. In May 2000, IOI adopted a plan to discontinue its
current business due to difficult financing markets and limited investor support
for healthcare practice management services companies. IOI is in the process of
selling its remaining assets. If the merger is completed, IOI will change its
name to "PowerBrief, Inc." and will conduct PowerBrief's business.
PowerBrief, Inc.
5858 Westheimer, Suite 500
Houston, Texas 77057
(713) 526-4600
Incorporated on July 20, 1999, PowerBrief is a software development company
that plans to deliver its products and services as an application service
provider to the legal industry. PowerBrief is developing a business-to-business,
Internet-based application designed to allow clients, courts, attorneys and
everyone else involved in a legal matter to interact and manage their legal
matters in a more efficient manner by using the PowerBrief platform and the
Internet. PowerBrief released its application for testing in September 2000, and
new features are currently being developed and will be added to the application,
based on feedback PowerBrief has received from participants in its test program.
PowerBrief currently estimates that the commercial release of its application
will occur either in March or April 2001.
REASONS FOR THE MERGER (PAGES 34 TO 35)
The Board of Directors of IOI concluded that there was little opportunity
to obtain required financing for its current operations and that a merger with
PowerBrief could result in a greater return on investment for IOI's shareholders
than a liquidation of IOI at this time.
In the merger, PowerBrief will receive existing cash to use as operating
capital in the business and will have access to the public markets.
THE SPECIAL MEETINGS (PAGES 27 TO 30)
The IOI special meeting will be held at , Houston, Texas
at a.m., Central time, on , , 2001. At
the IOI special meeting, IOI's shareholders will be asked to approve the merger
and related matters.
The PowerBrief special meeting will be held at 600 Travis, Suite 2500,
Houston, Texas 77002 at a.m., Central time, on , ,
2001. At the PowerBrief special meeting, PowerBrief's stockholders will be asked
to approve the merger and related matters.
RECORD DATE; VOTING POWER (PAGES 27 TO 30)
You are entitled to vote at your special meeting if you owned shares as of
the close of business on , 2000, the Record Date.
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<PAGE> 14
On the Record Date, there were shares of IOI's common stock entitled
to vote at the IOI special meeting. IOI's shareholders will be entitled to one
vote at the special meeting for each share of IOI's common stock they owned on
the Record Date.
On the Record Date, there were shares of PowerBrief's common stock and
shares of PowerBrief's series A preferred stock entitled to vote at the
PowerBrief special meeting. PowerBrief's common stockholders will be entitled to
one vote for each share of common stock they owned on the Record Date and
PowerBrief's series A preferred stockholders will be entitled to three votes for
each share of series A preferred stock they owned on the Record Date.
PowerBrief's common stockholders and series A preferred stockholders will vote
together as one class at the PowerBrief special meeting.
VOTES REQUIRED TO APPROVE THE MERGER (PAGES 27 TO 30)
Approval of the merger requires the affirmative vote of the holders of
two-thirds of the outstanding shares of IOI's common stock.
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of PowerBrief's common stock and series A
preferred stock, voting as if converted into common stock and voting together as
one class. The holders of PowerBrief's series A preferred stock will be entitled
to one vote for each share of common stock into which a share of series A
preferred stock could be converted. Based on the conversion ratio for the series
A preferred stock on the Record Date, each share of series A preferred stock
will entitle its holder to three votes.
On the Record Date, directors and executive officers of IOI and PowerBrief
and their affiliates owned shares of IOI's common stock, or approximately
% of the voting power of the IOI voting stock outstanding on the Record Date.
On the Record Date, directors and executive officers of IOI and PowerBrief
and their affiliates owned shares of PowerBrief's common stock and
shares of PowerBrief's series A preferred stock, or approximately % of
the voting power of the PowerBrief voting stock outstanding on the Record Date.
Approval of the merger is assured because the holders of at least
two-thirds of IOI's capital stock and a majority of PowerBrief's capital stock
entitled to vote on the merger have entered into voting agreements requiring
them to vote in favor of the merger. In addition, these shareholders have
delivered irrevocable proxies to the officers of the other company allowing
those officers to vote the shares subject to the voting agreements in favor of
the merger. Because approval of the merger is assured, PowerBrief's stockholders
should carefully review the appraisal rights procedures described under "The
Merger -- Appraisal Rights."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
TO IOI'S SHAREHOLDERS
IOI's board of directors believes that the merger is fair to you and in
your best interests and recommends that you vote "for" the merger and the
related matters.
TO POWERBRIEF'S STOCKHOLDERS
PowerBrief's board of directors believes that the merger is fair to you and
in your best interests and recommends that you vote "for" the merger and the
related matters.
THE MERGER
The merger agreement is attached as Appendix A at the back of this joint
proxy statement/prospectus. We encourage you to read the merger agreement
because it is the legal document that governs the merger.
WHAT POWERBRIEF'S STOCKHOLDERS WILL RECEIVE IN THE MERGER (PAGES 48 TO 49)
If the merger is completed, based on the stock, options and warrants
outstanding on November 20, 2000, PowerBrief's stockholders will have the right
to receive the following in exchange for each share of PowerBrief's common stock
they own:
- 0.6035 of a share of New PowerBrief's common stock;
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<PAGE> 15
- a series A warrant to purchase 0.0274 of a share of New PowerBrief's
common stock; and
- a series B warrant to purchase between 0.0659 and 0.0768 of a share of
New PowerBrief's common stock.
In addition, each of the outstanding shares of PowerBrief's series A
preferred stock will be converted into the right to receive:
- 1.8106 shares of New PowerBrief's common stock;
- a series A warrant to purchase 0.0822 of a share of New PowerBrief's
common stock; and
- a series B warrant to purchase between 0.1977 and 0.2304 of a share of
New PowerBrief's common stock.
New PowerBrief will not issue any fractional shares in the merger.
PowerBrief's stockholders will receive cash for any fractional share of New
PowerBrief's common stock owed to them in an amount equal to the fractional
share multiplied by the average of the daily high and low sales prices of one
share of IOI's common stock on the American Stock Exchange during the 10
consecutive trading days ending two trading days before the completion of the
merger, as adjusted for the reverse stock split.
The aggregate number of shares of common stock purchasable under the New
PowerBrief series B warrants to be issued in the merger will be between
1,285,445 and 1,498,482. The actual number of shares subject to these New
PowerBrief series B warrants will be equal to the aggregate number of shares
purchasable under IOI's warrants existing as of the date of the merger
agreement, after taking into account any anti-dilution adjustment resulting from
the issuance by IOI to its shareholders of warrants to purchase 2,959,274 shares
of common stock before the merger as permitted by the merger agreement.
The number of shares of common stock purchasable under the warrants that
each PowerBrief stockholder receives in the merger may be adjusted before the
merger based on the number of shares of PowerBrief's common stock purchased
through the exercise of PowerBrief options before the merger. The aggregate
series A warrants and series B warrants of New PowerBrief to be issued in the
merger will purchase a maximum of 534,666 and between 1,285,445 and 1,498,482
shares, respectively, of New PowerBrief's common stock. This amount must be
allocated among the holders of PowerBrief's stock and warrants and anyone that
acquires PowerBrief's common stock before the merger through the exercise of
options or warrants.
In addition, on or before the first anniversary of the completion of the
merger, New PowerBrief will adjust the relative ownership percentages of IOI's
shareholders and PowerBrief's stockholders as of the merger based on a formula
described in this joint proxy statement/prospectus. New PowerBrief will carry
out this adjustment by issuing more shares of New PowerBrief's common stock to
the shareholders entitled to a percentage ownership increase.
For a more detailed description of these adjustments and their effects, see
"The Merger Agreement -- Adjustments" on pages 50 through 52 and "The
Merger -- General Description of the Merger" on pages 31 through 32.
OWNERSHIP OF NEW POWERBRIEF AFTER THE MERGER
Based on the number of outstanding shares of stock of IOI and PowerBrief on
November 20, 2000, the IOI shareholders and PowerBrief stockholders will own
34.1% and 65.9%, respectively, of the outstanding New PowerBrief common stock
after the merger. Based on the outstanding warrants and options on November 20,
2000 and the warrants to be issued by IOI before the merger, the ownership
percentages of the IOI shareholders and PowerBrief stockholders of the fully
diluted New PowerBrief common stock after the merger will be:
- 39.8% and 60.2%, respectively, assuming the series B warrants of New
PowerBrief to be issued in the merger will purchase an aggregate of
1,285,445 shares of New PowerBrief's common stock, which is the minimum
number of shares that will be purchasable under these warrants; and
- 40.0% and 60.0%, respectively, assuming the series B warrants of New
PowerBrief to be issued in the merger will purchase an
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<PAGE> 16
aggregate of 1,498,482 shares of New PowerBrief's common stock, which is
the maximum number of shares that will be purchasable under these
warrants.
This information is based on some assumptions described on pages 31 to 32 under
"The Merger -- General Description of the Merger."
LISTING OF NEW POWERBRIEF'S COMMON STOCK
IOI has applied to have continued listing of New PowerBrief's common stock
on the American Stock Exchange, including the shares of New PowerBrief's common
stock issued in the merger, under the ticker symbol "PWB."
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER (PAGES 39 TO 41)
When you consider the recommendations of IOI's and PowerBrief's boards of
directors that you vote in favor of the merger, you should be aware that a
number of IOI's and PowerBrief's officers and directors may have interests in
the merger that may be different from, or in addition to, yours. Please refer to
pages 39 through 41 for more information about these interests.
RELATIONSHIPS BETWEEN IOI AND POWERBRIEF (PAGES 41 TO 42)
IOI and PowerBrief have relationships other than the proposed merger. On
February 23, 2000, PowerBrief entered into a sublease with IOI for approximately
17,000 square feet of office space in Houston, Texas. IOI also assigned to
PowerBrief its lease covering the furniture and phone system associated with the
subleased office space. In addition, on September 15, 2000, PowerBrief and IOI
entered into a promissory note which allows PowerBrief to borrow up to $3.0
million from IOI at an annual interest rate of 12%. As of November 1, 2000,
PowerBrief has borrowed $500,000 under the promissory note.
APPRAISAL RIGHTS (PAGES 45 TO 46)
PowerBrief's stockholders will have appraisal rights in connection with the
merger if they comply with the applicable provisions of Delaware law. IOI's
shareholders will not have appraisal rights in connection with the merger.
DIRECTORS AND EXECUTIVE OFFICERS OF NEW POWERBRIEF AFTER THE MERGER (PAGES 53 TO
54)
After the merger, the board of directors of New PowerBrief will have seven
members. If the net current assets of IOI calculated 10 business days before the
scheduled closing date of the merger are less than $5.75 million, the board of
directors of IOI will be entitled to designate two members of New PowerBrief's
board. However, if the net current assets are at least $5.75 million, the board
of directors of IOI will be entitled to designate three members of New
PowerBrief's board. The remaining members of New PowerBrief's board will be
designated by PowerBrief's board of directors. We have provided a list of the
people that IOI and PowerBrief intend to designate as directors on page 53.
After the merger, Ernest D. Rapp will serve as the Chief Executive Officer
of New PowerBrief. Mr. Rapp currently serves as PowerBrief's Chief Executive
Officer. All of the other executive officers of New PowerBrief will be the
executive officers of PowerBrief before the merger. We have provided a list of
the executive officers of New PowerBrief on page 53.
ACCOUNTING TREATMENT (PAGE 42)
IOI and PowerBrief expect to account for the merger as a recapitalization
of PowerBrief because IOI has elected to sell its operating assets and will not
have any continuing operations. In addition, PowerBrief's stockholders will own
the majority of the outstanding New PowerBrief common stock after the merger. As
a result, New PowerBrief will record the merger as an issuance of common stock
for the net monetary assets of IOI, accompanied by a recapitalization of its
equity.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGES 42 TO 45)
The merger and the reverse stock split have been structured as
reorganizations within the meaning of Section 368(a) of the Internal Revenue
Code for federal income tax purposes. Consequently, PowerBrief's stockholders
and IOI's shareholders generally will not recognize any gain or loss for federal
income tax purposes as a result of the merger and the reverse stock split,
except for any gain or loss recognized in connection with the receipt of cash
instead of a fractional share of New PowerBrief's common stock. The companies
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<PAGE> 17
themselves will not recognize gain or loss as a result of the merger. It is a
condition to the obligations of IOI and PowerBrief to complete the merger that
each receive a legal opinion from its outside counsel to the effect that the
merger will be treated as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code for federal income tax purposes.
The federal income tax consequences described above may not apply to some
holders of PowerBrief's stock, including some types of holders referred to on
page 42. Your tax consequences will depend upon your personal situation. You
should consult your tax advisor for a full understanding of the tax consequences
of the merger to you.
CONDITIONS TO COMPLETION OF THE MERGER (PAGES 56 TO 57)
The completion of the merger depends upon meeting a number of conditions,
including the following:
- approval by the shareholders of IOI and PowerBrief;
- receipt of any required governmental approvals;
- absence of any law or court order prohibiting the merger;
- receipt of opinions from IOI's and PowerBrief's respective counsel that
the merger will be treated as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
- accuracy as of closing of the representations and warranties made by the
other party; and
- performance in all material respects by the other party of all agreements
and conditions required to be performed by it at or before the closing.
In addition, IOI's obligation to complete the merger is subject to:
- absence of a material adverse effect on PowerBrief;
- receipt of agreements from PowerBrief's affiliates regarding securities
laws restrictions on transfers of New PowerBrief's common stock;
- receipt of agreements from PowerBrief's directors and 5% stockholders not
to sell New PowerBrief's securities for 180 days after the completion of
the merger;
- continued employment of Messrs. Bennett, Foster, Ohnesorge and Rapp as of
the completion of the merger;
- termination of PowerBrief's stockholders' agreement and registration
rights agreement; and
- exercise of appraisal or dissenters' rights by PowerBrief's stockholders
representing no more than 5% of New PowerBrief's outstanding common
stock.
PowerBrief's obligation to complete the merger is subject to the following
additional conditions:
- approval for listing on the AMEX of the New PowerBrief stock to be issued
in the merger;
- receipt of agreements from IOI's directors and 5% shareholders, except
Jose Kauachi with respect to 25% of his equity interests in New
PowerBrief and Dr. William Donovan with respect to 100% of his equity
interests in New PowerBrief, not to sell New PowerBrief's securities for
180 days after the completion of the merger;
- the sum of: (1) IOI's cash, (2) notes receivable due to IOI from
PowerBrief, (3) reimbursable transaction expenses, (4) the expected cash
proceeds from the sale of IOI's interest in the Westbank Ambulatory Care
Center and (5) the cash proceeds from any investments made by anyone
introduced to PowerBrief by Oak Hill Capital, Chartwell Capital and their
affiliates must be greater than $2.5 million before completion of the
merger, unless PowerBrief borrowed more than $1.0 million from IOI before
completion of the merger; and
- amendment of IOI's warrants existing before the date of the merger
agreement to conform with the series B warrants issued in the merger, and
waiver by the holders of
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<PAGE> 18
IOI's existing warrants of the applicability of any anti-dilution
provisions in connection with the merger, except that the anti-dilution
provisions will apply to the issuance by IOI to its shareholders of
warrants to purchase 2,959,274 shares of IOI's common stock before the
merger.
TERMINATION OF THE MERGER AGREEMENT (PAGES 58 TO 59)
Either IOI or PowerBrief can terminate the merger agreement if any of the
following occurs:
- the merger is not complete by March 31, 2001;
- shareholders of IOI or PowerBrief do not give the required approvals; or
- a law or court order permanently prohibits the merger.
However, neither IOI nor PowerBrief can terminate the merger agreement for
the reasons described above if (1) it is in material breach of its obligations
under the merger agreement, (2) any of its shareholders that are a party to a
voting agreement in connection with the merger is in material breach of its
obligations under the voting agreement or (3) it has not received the opinion of
its counsel that the merger will be treated after commercially reasonable
efforts as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
In addition, IOI may terminate the merger agreement if:
- PowerBrief materially breaches a representation, warranty, covenant or
agreement in the merger agreement that cannot be cured within 60 days;
- PowerBrief's board withdraws its recommendation of the merger agreement
in a manner adverse to IOI, except as permitted in connection with an
acquisition proposal;
- PowerBrief does not submit the merger agreement to its stockholders
within 30 days after the effectiveness of the registration statement
filed by IOI of which this joint proxy statement/prospectus is a part; or
- PowerBrief's stockholders holding more than 5% of New PowerBrief's common
stock have exercised and not withdrawn their appraisal or dissenters'
rights in connection with the merger.
PowerBrief may also terminate the merger agreement if:
- IOI materially breaches a representation, warranty, covenant or agreement
in the merger agreement that cannot be cured within 60 days;
- IOI's board withdraws its recommendation of the merger agreement in a
manner adverse to PowerBrief, except as permitted in connection with an
acquisition proposal; or
- IOI does not submit the merger agreement to its shareholders within 30
days after the effectiveness of the registration statement filed by IOI
of which this joint proxy statement/prospectus is a part.
OPINION OF FINANCIAL ADVISOR (PAGES 35 TO 38)
McFarland, Grossman & Company has delivered its written opinion, dated
September 15, 2000 and the date of this joint proxy statement/ prospectus, to
PowerBrief's board of directors as to the fairness, from a financial point of
view, of the consideration to be paid by New PowerBrief in the merger.
A copy of the opinion of McFarland, Grossman & Company dated as of the date
of this joint proxy statement/prospectus is included as a part of this joint
proxy statement/prospectus as Appendix B.
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MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICE
IOI's common stock is traded on the American Stock Exchange, under the
symbol "IOI." Before March 12, 1997, IOI's trading symbol was "DRC." At November
1, 2000, IOI had 119 shareholders of record. A significant portion of IOI's
common stock not held by affiliates of IOI is held through securities
depositories. The following table sets forth the high and low sale prices per
share of IOI's common stock for the periods indicated, as reported by the
American Stock Exchange and without giving effect to the five to one reverse
stock split concurrently with the merger:
<TABLE>
<CAPTION>
LOW HIGH
------- -------
<S> <C> <C>
1998
1st Quarter................................................. $6.2500 $8.1250
2nd Quarter................................................. 5.2500 7.1250
3rd Quarter................................................. 4.4375 6.3750
4th Quarter................................................. 2.4375 4.6250
1999
1st Quarter................................................. 1.6875 3.1875
2nd Quarter................................................. 0.7500 1.9375
3rd Quarter................................................. 0.8750 1.7500
4th Quarter................................................. 0.5000 2.8750
2000
1st Quarter................................................. 1.0625 2.3750
2nd Quarter................................................. 0.5625 1.7500
3rd Quarter................................................. 0.7500 1.8750
4th Quarter (through November 16, 2000)..................... 0.5625 1.0000
</TABLE>
On September 18, 2000, the last full trading day before the public
announcement of the proposed merger, the last reported sale price was $1.4375
for IOI's common stock. On , 2001, the most recent practicable date
before the printing of this joint proxy statement/prospectus, the last reported
sale price was $ for IOI's common stock. IOI AND POWERBRIEF URGE YOU TO
OBTAIN CURRENT MARKET QUOTATIONS BEFORE MAKING ANY DECISION WITH RESPECT TO THE
MERGER.
There is no active public trading market for the PowerBrief stock. At
November 20, 2000, PowerBrief's 11,250,000 outstanding shares of common stock
were held by two holders of record and PowerBrief's 2,566,223 outstanding shares
of series A preferred stock were held by 136 holders of record. Each share of
PowerBrief's series A preferred stock is convertible at any time, at the
holder's option, into three shares of PowerBrief's common stock. At November 20,
2000, 560,116 shares of PowerBrief's common stock were subject to warrants to
purchase PowerBrief's common stock and 3,012,605 shares of PowerBrief's common
stock were subject to options to purchase PowerBrief's common stock.
IOI has applied to have continued listing of New PowerBrief's common stock
on the American Stock Exchange, including the shares of New PowerBrief's common
stock issued in the merger, under the ticker symbol "PWB."
DIVIDENDS
IOI has not declared or paid any dividends to common shareholders since
inception and does not anticipate paying any cash dividends in the foreseeable
future. Pursuant to the terms of IOI's articles of incorporation, no dividends
can be paid on the common stock until all dividends accrued on any outstanding
preferred stock have been paid. There are currently no shares of IOI's preferred
stock outstanding.
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PowerBrief has never paid dividends. Pursuant to the terms of PowerBrief's
certificate of incorporation, if PowerBrief declares a dividend on its common
stock, no dividend can be paid to common stockholders until the holders of
PowerBrief's series A preferred stock receive the dividend they would have been
entitled to receive if they had converted their series A preferred stock into
common stock.
New PowerBrief intends to retain future earnings, if any, to finance the
operation and development of its business and does not anticipate paying cash
dividends on its common stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of New
PowerBrief's board of directors.
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RISK FACTORS
In addition to the other information set forth in this joint proxy
statement/prospectus, the following factors should be considered by IOI's
shareholders and PowerBrief's stockholders before voting on the proposals in
this joint proxy statement/prospectus. This joint proxy statement/prospectus
contains forward-looking statements which involve risks and uncertainties.
Actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause these differences include,
but are not limited to, the risk factors set forth below.
RISK FACTORS RELATED TO THE MERGER
OUR FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE.
When used or incorporated by reference in this joint proxy
statement/prospectus, the words "anticipate," "estimate," "expect," "intend,"
"project" and similar expressions are intended to identify forward-looking
statements. These statements are subject to risks, uncertainties and
assumptions. If one or more of these risks or uncertainties materialize, or if
any underlying assumptions prove incorrect, then actual results may vary
materially from anticipated, estimated or projected results. These risks and
uncertainties are discussed below.
YOU SHOULD CAREFULLY REVIEW POWERBRIEF'S DISCLOSURES BECAUSE IOI'S CURRENT
OFFICERS AND DIRECTORS ARE NOT FAMILIAR WITH POWERBRIEF'S BUSINESS.
Before making any decision related to the matters presented in this joint
proxy statement/prospectus, carefully review PowerBrief's disclosures and other
information. IOI's current directors and officers have no experience managing a
software development company or an Internet-based application service provider.
They have no special experience, knowledge or training which enables them to
evaluate the viability of PowerBrief's proposed products and services or
determine if New PowerBrief will ever become profitable. Please consider IOI's
recommendations accordingly.
IOI'S FINANCIAL DISCLOSURES RELATE TO ITS PRIOR OPERATIONS AS A HEALTHCARE
PRACTICE MANAGEMENT SERVICES COMPANY AND DO NOT REPRESENT NEW POWERBRIEF'S
FINANCIAL RESULTS.
The IOI financial information will not help you analyze PowerBrief's
ongoing business and should be viewed accordingly. All of IOI's financial
disclosures set forth in this joint proxy statement/prospectus relate to its
operation as a healthcare practice management services company, which it intends
to discontinue. After the merger, New PowerBrief will conduct PowerBrief's
business. You will need to review carefully PowerBrief's financial disclosures
and other information before making any decision related to the matters
presented in this joint proxy statement/prospectus. As discussed below, New
PowerBrief cannot guarantee that it will be able to generate revenue from its
proposed operations, or if it does generate revenue, when or if it will be
profitable. See "Risk Factors Related to PowerBrief and its Business."
THE EXPECTED BENEFITS OF MERGER MAY NOT BE ACHIEVED.
We cannot be sure that the expected benefits of the merger as described
under "The Merger" will be achieved. Whether the anticipated benefits of the
merger are ultimately achieved will depend on a number of factors, including:
- New PowerBrief's success in managing the complexity of being a public
company during the development stage of New PowerBrief;
- New PowerBrief's ability to develop timely its products and protect its
intellectual property rights;
- New PowerBrief's ability to hire and retain qualified personnel;
- New PowerBrief's success in selling the assets associated with, and the
winding down of, IOI's former business;
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- unanticipated liabilities and other problems; and
- New PowerBrief's success in marketing its products and raising funds for
continuing product development.
Therefore, we cannot assure you that New PowerBrief can successfully integrate
and continue PowerBrief's business.
OWNERSHIP PERCENTAGES IN NEW POWERBRIEF AFTER THE MERGER ARE SUBJECT TO
ADJUSTMENT.
Based on the number of outstanding shares of stock of IOI and PowerBrief on
November 20, 2000, the IOI shareholders and PowerBrief stockholders will own
34.1% and 65.9%, respectively, of the outstanding New PowerBrief common stock
after the merger. Based on the outstanding warrants and options on November 20,
2000 and the warrants to be issued by IOI before the merger, the ownership
percentages of the IOI shareholders and PowerBrief stockholders of the fully
diluted New PowerBrief common stock after the merger will be:
- 39.8% and 60.2%, respectively, assuming the series B warrants of New
PowerBrief to be issued in the merger will purchase an aggregate of
1,285,445 shares of New PowerBrief's common stock, which is the minimum
number of shares that will be purchasable under these warrants; and
- 40.0% and 60.0%, respectively, assuming the series B warrants of New
PowerBrief to be issued in the merger will purchase an aggregate of
1,498,482 shares of New PowerBrief's common stock, which is the maximum
number of shares that will be purchasable under these warrants.
This information is based on some assumptions described on pages 31 to 32 of
this joint proxy statement/ prospectus. New PowerBrief's board of directors will
adjust these percentages within one year after the merger based on a formula
described in this joint proxy statement/prospectus. The formula is based in part
on the cash proceeds from the sale of IOI's interest in the Westbank Ambulatory
Care Center. If IOI's interest in the Westbank Ambulatory Care Center cannot be
sold within one year after the merger, no proceeds will be added to the formula
to determine the ownership percentages described above. We cannot guarantee that
IOI's interest in the Westbank Ambulatory Care Center will be sold within one
year after the merger and we cannot predict the price at which it may be sold.
THE NUMBER OF SHARES PURCHASABLE WITH THE SERIES A WARRANTS AND SERIES B
WARRANTS ISSUED IN THE MERGER IS SUBJECT TO ADJUSTMENT.
The number of shares of New PowerBrief's common stock purchasable with the
series A warrants issued in the merger is limited to 534,666. The number of
shares of New PowerBrief's common stock purchasable with the series B warrants
issued in the merger will be between 1,285,445 and 1,498,482. The actual number
of shares subject to these New PowerBrief series B warrants will be equal to the
aggregate number of shares purchasable under IOI's warrants existing as of the
date of the merger agreement, after taking into account any anti-dilution
adjustment resulting from the issuance by IOI to its shareholders of warrants to
purchase 2,959,274 shares of common stock before the merger as permitted by the
merger agreement.
If any holders of options to purchase PowerBrief's common stock exercise
their options before the merger, the maximum number of New PowerBrief's shares
purchasable with the series A warrants and the series B warrants issued in the
merger will be reallocated among the holders of all of PowerBrief's common
stock, preferred stock and warrants. If all of PowerBrief's options are
exercised before the merger, the number of shares of New PowerBrief's common
stock purchasable with the series A warrants and series B warrants that
PowerBrief's stockholders receive in the merger for each share of PowerBrief's
common stock that PowerBrief's stockholders owned could be reduced from 0.0274
and between 0.0659 and 0.0768, respectively, to 0.0234 and between 0.0562 and
0.0655, respectively. Also, the number of shares of New PowerBrief's common
stock purchasable with the series A warrants and series B warrants that
PowerBrief's stockholders receive in the merger for each share of PowerBrief's
series A preferred stock owned could be reduced from 0.0822 and between 0.1977
and 0.2304, respectively, to 0.0701 and between 0.1685 and 0.1964, respectively.
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IOI'S COMMON STOCK CURRENTLY IS THINLY TRADED AND IT MAY BE DIFFICULT TO SELL
THE NEW POWERBRIEF COMMON STOCK RECEIVED IN THE MERGER.
IOI's common stock currently is thinly traded. As a result, prices quoted
for IOI's stock may not reflect the actual fair market value of the stock. Also,
because of the low volume of trading in IOI's common stock, it may be difficult
for you to sell the New PowerBrief common stock you receive in the merger. If
you are able to sell New PowerBrief's common stock, the limited trading volume
could result in a significantly lower sales price than the sales price quoted by
the American Stock Exchange, or AMEX, at the time of your order to sell. You
should consult an experienced investment or financial advisor before attempting
any sale of New PowerBrief's common stock.
THE MARKET PRICE OF IOI'S COMMON STOCK FLUCTUATES. SALES OF IOI'S COMMON STOCK
COULD LOWER THE MARKET PRICE OF IOI'S COMMON STOCK BEFORE THE MERGER, AND SALES
OF SHARES OF NEW POWERBRIEF'S COMMON STOCK RECEIVED IN THE MERGER COULD LOWER
THE MARKET PRICE OF NEW POWERBRIEF'S COMMON STOCK AFTER THE MERGER.
The market price of IOI's common stock can fluctuate widely. Sales of
substantial amounts of IOI's common stock before the merger or New PowerBrief's
common stock after the merger will adversely affect the market price of its
common stock. We cannot determine what impact the merger will have on IOI's
stock price before the merger or New PowerBrief's stock price after the merger.
ALTHOUGH IOI'S STOCK PRICE MAY VARY IN RESPONSE TO CHANGES IN BUSINESS AND
ECONOMIC CONDITIONS, THE EXCHANGE RATIO SET FORTH IN THE MERGER AGREEMENT WILL
NOT BE ADJUSTED TO COMPENSATE FOR ANY CHANGES IN IOI'S STOCK PRICE.
IOI's stock price at the effective time of the merger may vary
significantly from the price as of the date of the execution of the merger
agreement or the date of this joint proxy statement/prospectus or the dates on
which IOI's shareholders and PowerBrief's stockholders vote on the merger due
to, among other factors, (1) changes in the business, operations or prospects of
IOI, PowerBrief or New PowerBrief, (2) market assessments of the likelihood that
the merger will be completed and the timing of the completion of the merger and
(3) general market and economic conditions. The exchange ratios set forth in the
merger agreement will not be adjusted to compensate for any changes in IOI's
stock price. See "The Merger Agreement -- Manner and Basis for Converting
Shares" and "The Merger Agreement -- Adjustments."
NEW POWERBRIEF MAY BE SUBJECT TO LITIGATION IF ITS COMMON STOCK PRICE DECLINES
OR INCREASES SIGNIFICANTLY.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against that company. Class action litigation against New PowerBrief
could result in substantial costs and a diversion of its management's attention
and resources, which would harm its business, financial condition and results of
operations. Any adverse determination in this litigation could also subject New
PowerBrief to significant liabilities.
THE SERIES A WARRANTS AND SERIES B WARRANTS ISSUED IN THE MERGER MAY EXPIRE
WITHOUT VALUE.
During the limited time in which the warrants issued in the merger can be
exercised, New PowerBrief's stock price could fall below the exercise price for
the warrants. The series A warrants issued in the merger will have an exercise
price based on a formula. The series B warrants issued in the merger will have
an exercise price of between $3.70 and $4.32 per share of common stock.
Furthermore, the series A warrants issued in the merger will not be exercisable
until one year after the merger. The series B warrants issued in the merger will
not be exercisable until the earlier of (1) one year after the merger and (2)
the date on which any warrants to purchase common stock of New PowerBrief are
exercised by FW Integrated Orthopaedics Investors, L.P., FW Integrated
Orthopaedics Investors II, L.P. or Chartwell Capital Investors, L.P. The series
A warrants issued in the merger will expire on the fifth anniversary of the
merger. The series B warrants issued in the merger will expire on June 30, 2005.
Also, the warrants issued in the merger will not be exercisable in each period
beginning one day before the end of a fiscal
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quarter of New PowerBrief and ending on the date New PowerBrief announces its
operating results for that quarter.
THERE MAY NOT BE A PUBLIC MARKET FOR THE WARRANTS ISSUED IN THE MERGER.
The warrants issued in the merger will not be listed on the AMEX or any
other exchange. We do not anticipate any market to develop for these warrants.
If the holders are able to sell these securities, we cannot guarantee the price
at which the holders may be able to sell these securities.
WE CANNOT GUARANTEE THAT THE COMMON STOCK OF NEW POWERBRIEF ISSUED IN THE MERGER
WILL BE LISTED ON THE AMEX.
Although the listing on the AMEX of New PowerBrief's common stock issued in
the merger is a condition to the merger, we cannot guarantee that those shares
of common stock will be listed on the AMEX.
WE CANNOT ASSURE YOU THAT IOI OR NEW POWERBRIEF WILL BE ABLE TO MAINTAIN ITS
LISTING ON THE AMEX.
IOI's common stock is listed on the AMEX, and IOI is subject to the AMEX's
maintenance requirements. IOI has applied to have continued listing of New
PowerBrief's common stock on the AMEX, including the common stock of New
PowerBrief issued in the merger. We cannot assure you that IOI's common stock or
New PowerBrief's common stock, if listed, will not be delisted by the AMEX. A
company's failure to meet the AMEX's maintenance requirements may result in a
delisting of the common stock. The determination by the AMEX to delist a company
is not based on a precise mathematical formula, but rather on a review of all
relevant facts and circumstances in light of the AMEX's policies. The AMEX will
normally consider delisting a company which has stockholders' equity of less
than $2.0 million if that company (1) has sustained losses from continuing
operations and/or net losses in two of its three most recent fiscal years or (2)
has sustained losses which are so substantial to its overall operations or its
existing financial resources, or its financial condition has become so impaired
that it appears questionable, in the opinion of the AMEX, as to whether that
company will be able to continue operations and/or meet its obligations as they
mature.
NEW POWERBRIEF DOES NOT INTEND TO PAY DIVIDENDS.
IOI has never declared or paid dividends to its common shareholders and
PowerBrief has never declared or paid dividends to any of its stockholders. New
PowerBrief intends to retain future earnings, if any, to finance the operation
and development of its business and does not anticipate paying cash dividends on
its common stock in the foreseeable future.
RISK FACTORS RELATED TO IOI AND ITS BUSINESS
THERE MAY NOT BE A MARKET FOR THE SALE OF IOI'S INTEREST IN THE WESTBANK
AMBULATORY CARE CENTER, AND THE CONTINUED OPERATION OF THE WESTBANK AMBULATORY
CARE CENTER WOULD LIKELY RESULT IN FUTURE LOSSES TO NEW POWERBRIEF.
IOI intends to discontinue its healthcare practice management services
business by selling IOI's sole remaining interest in a healthcare facility, the
Westbank Ambulatory Care Center. IOI is currently in discussions with a
prospective purchaser for IOI's interest in the Westbank Ambulatory Care Center.
If this prospective purchaser does not buy IOI's interest in the Westbank
Ambulatory Care Center, and if IOI is unable to find another purchaser of IOI's
interest in the Westbank Ambulatory Care Center, New PowerBrief will have to
continue operating it or discontinue its operations. Continued operations of the
Westbank Ambulatory Care Center would most likely result in further losses to
New PowerBrief after the merger.
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THE HEALTHCARE PRACTICE MANAGEMENT SERVICES BUSINESS IS SUBJECT TO EXTENSIVE
REGULATION, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE WESTBANK
AMBULATORY CARE CENTER.
The healthcare industry is subject to extensive governmental supervision,
regulation and control by state and federal authorities including, without
limitation, state and federal regulatory agencies, statutes and court rulings.
IOI cannot guarantee that state and federal authorities having jurisdiction over
IOI's healthcare practice management services business will not adopt
regulations or take other actions, such as the failure to renew or the
revocation of required licenses or certifications, that would have a material
adverse effect on the Westbank Ambulatory Care Center.
IOI OR NEW POWERBRIEF MAY BE SUBJECT TO LIABILITIES ARISING OUT OF IOI'S PRIOR
HEALTHCARE PRACTICE MANAGEMENT SERVICES OPERATIONS.
Currently, IOI is in the healthcare practice management services business.
IOI has been selling its operational assets to third parties. IOI plans to
permanently discontinue its healthcare practice management services business by
selling its sole remaining interest in a healthcare facility, the Westbank
Ambulatory Care Center. IOI or New PowerBrief may be subject to ongoing
liabilities, which cannot be quantified, from IOI's healthcare practice
management services business or the sale thereof, including, without limitation,
obligations for indemnification and medical malpractice.
TWO INDIVIDUALS HAVE ASSERTED CLAIMS AGAINST IOI, WHICH COULD HAVE ADVERSE
CONSEQUENCES TO IOI AND NEW POWERBRIEF.
A former employee of IOI has asserted various claims in writing against
IOI. When IOI employed this individual, it loaned him $25,000 in exchange for a
promissory note, which could be repaid with commissions he earned from IOI for
the acquisition of new businesses. After his resignation from IOI, he repaid the
unpaid portion of that note with cash. In his letter, this former employee
claimed that he earned $25,000 in commissions and that IOI owed that amount to
him. Furthermore, he claimed that he suffered losses of approximately $100,000
due to IOI's failure to deliver his stock option documents on a timely basis. He
also accused IOI's board of directors of intentionally suppressing IOI's stock
price by failing to fund potential acquisitions that he located. IOI believes
that these claims are without merit. However, if this former employee pursues
these claims in a court of law, and the court makes a finding adverse to IOI,
that determination could have adverse consequences to IOI and New PowerBrief.
Also, in May 2000, a physician formerly employed by IOI's Louisiana
practice filed suit against IOI and the Louisiana practice for an unspecified
amount of damages. The Louisiana practice hired this physician in July 1999. On
February 1, 2000, the Louisiana practice notified the physician that his
employment was being terminated effective 90 days from the date of that notice
pursuant to the terms of his employment contract. The physician alleged that IOI
and the Louisiana practice misrepresented the condition of its Louisiana
practice and that those misrepresentations induced him to leave his former
practice. He also claimed breach of contract, tortious interference by IOI with
his contract with the Louisiana practice and violations of the Louisiana
Whistleblower Protection Act and other laws. He has also made claims for payment
of medical malpractice coverage, vacation pay and continuing medical education
leave. IOI has denied all of his claims and believes that they are without
merit. However, if the court makes a finding adverse to IOI, his claims could
have an adverse effect on IOI.
RISK FACTORS RELATED TO POWERBRIEF AND ITS BUSINESS
POWERBRIEF IS AT AN EARLY STAGE OF DEVELOPMENT, AND POWERBRIEF ANTICIPATES THAT
NEW POWERBRIEF WILL HAVE FUTURE LOSSES.
PowerBrief cannot be sure that New PowerBrief will be able to achieve
profitability or that it can sustain profitability, if achieved. PowerBrief is a
development stage company. To date, PowerBrief has generated no revenues from
sales and has dedicated most of its financial resources to (1) organizational
expenses, (2) preliminary programming and research and development expenses, (3)
general and administrative expenses, (4) marketing expenses and (5) the
prosecution of copyright and domain name
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applications. PowerBrief expects New PowerBrief to incur significant operating
losses for at least the next several quarters, primarily due to programming,
research and development programs costs, marketing costs and costs associated
with the commercialization of products and services.
New PowerBrief's ability to achieve profitability will depend upon, among
other things:
- successfully completing the development of marketable products and
services in a timely manner;
- developing products and services that will compete favorably with other
systems that have been and/or may be developed by competitors with
superior resources;
- obtaining judicial, administrative and private-sector approvals and
acceptance for use of New PowerBrief's proprietary systems and/or
judicial, legislative, administrative or regulatory mandates that New
PowerBrief's products and services be used by third parties;
- obtaining and maintaining content agreements and alliances for use within
New PowerBrief's systems;
- establishing and maintaining advantageous sales and marketing
capabilities or collaborative arrangements; and
- raising sufficient funds to finance future activities.
NEW POWERBRIEF WILL NEED SUBSTANTIAL AMOUNTS OF ADDITIONAL CAPITAL IN THE
FUTURE, WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS.
PowerBrief has spent, and New PowerBrief will continue to require,
substantial funds to continue programming, research and development, and to
begin sales and marketing efforts. New PowerBrief cannot guarantee that
additional financing will be available on terms acceptable to it, or at all.
New PowerBrief expects, although it cannot guarantee, that New PowerBrief's
existing capital resources, including any resources that may be obtained through
the merger, will be sufficient to fund New PowerBrief's capital requirements
through the second quarter of 2001. Thereafter, New PowerBrief will likely need
to raise substantial additional capital to fund its operations. The issuance of
additional equity securities could result in dilution to shareholders. Debt
financing, if available, may be contingent upon New PowerBrief entering into
restrictive covenants. The failure of New PowerBrief to raise additional capital
could have a material adverse affect on its business, financial condition and
results of operations.
NEW POWERBRIEF'S PRODUCT DEVELOPMENT MAY BE DELAYED OR UNSUCCESSFUL, CAUSING
HARM TO NEW POWERBRIEF'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
New PowerBrief's inability to complete successfully the development of the
New PowerBrief system, or a determination by New PowerBrief not to complete the
development of any product or service, particularly in instances in which
PowerBrief or New PowerBrief has made significant research and development and
other expenditures, could have a material adverse effect on New PowerBrief's
business, financial condition and results of operations. Currently, PowerBrief
has not developed products or services that have generated any revenue, and all
of its proposed products and services are still being developed. New
PowerBrief's growth and profitability will depend, in large part, upon its
ability to complete development of new products and services on a timely basis.
The completion of the development of any of its proposed products and services
remains subject to all the risks associated with the commercialization of new
products and services based on innovative technologies, including (1)
unanticipated technical or other problems, (2) design and programming
difficulties and (3) the possible insufficiency of the funds allocated for the
completion of development, which could result in a change in the design, delay
in the development or the abandonment of products and services. As a result, New
PowerBrief cannot guarantee that any of its products and services under
development will be successfully developed or, if developed, that its products
and services will meet price or performance objectives, be developed on a timely
basis or prove to be as effective as competing products and services.
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THE FAILURE OF NEW POWERBRIEF'S NEW PRODUCTS AND SERVICES TO ACHIEVE MARKET
ACCEPTANCE AND GENERATE REVENUE COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
New PowerBrief's ability to create revenues and to achieve profitability
and positive cash flow will depend on the successful introduction of the New
PowerBrief system for researching, creating, filing, serving, retrieving and
managing legal documents. New PowerBrief cannot assure you that its products and
services under development will gain any significant degree of market acceptance
among courts or attorneys and their clients. New PowerBrief's technologies are
intended to provide new methods of managing legal paperwork. However, courts and
attorneys will not use New PowerBrief's products and services unless they
determine that the benefits are greater than those available from competing
products and services, including the current paper-based system. Even if the
advantage of New PowerBrief's systems is established as significant, attorneys
may not elect to use New PowerBrief's products and services for any number of
reasons, including the refusal of clients to authorize reimbursement for New
PowerBrief's products and services. Any new product or service New PowerBrief
introduces that is not favorably received could damage New PowerBrief's
reputation and the perception of New PowerBrief's brand name.
THE DEVELOPMENT OF THE NEW POWERBRIEF BRAND IS ESSENTIAL TO NEW POWERBRIEF'S
FUTURE SUCCESS.
Establishing and maintaining brand identity is critical to New PowerBrief's
efforts to attract users to its website and to build market acceptance of its
filing, service and research information products and services. In order to
build brand awareness, New PowerBrief must succeed in its brand marketing
efforts, provide high-quality services and create user awareness of its product,
if and when developed. These efforts will require significant expenses. If New
PowerBrief does not generate a corresponding increase in revenue as a result of
its branding efforts or otherwise fails to promote its brand successfully, its
business, results of operations and financial condition will be materially and
adversely affected.
NEW POWERBRIEF FACES INTENSE COMPETITION AND WILL FACE TECHNOLOGICAL CHANGE THAT
COULD RESULT IN REDUCED MARGINS ON NEW POWERBRIEF'S PRODUCTS AND SERVICES, LOSS
OF MARKET SHARE OR LESS USER-TRAFFIC TO ITS WEBSITE AND ON ITS SYSTEMS.
New PowerBrief's industry is characterized by intense competition,
innovation, extensive research and development efforts and rapid technological
progress. New developments occur and are expected to continue to occur at a
rapid pace, and New PowerBrief cannot guarantee that developments by its
competitors will not render some or all of New PowerBrief's products and
services obsolete or non-competitive, which would have a material adverse effect
on New PowerBrief's business, financial condition and results of operations.
New PowerBrief faces intense competition from well established competitors
such as Justice Link, Westlaw's affiliate WestWorks, Lexis' affiliate LexisONE,
Law.com, JDUSA, Inc., Niku Corporation, CaseCentral, Inc., Serengeti, Inc., IT
consulting firms, litigation consulting firms (including the large accounting
firms), branches or divisions of various federal, state and local governments,
academic institutions, in-house technology departments at major law firms and
in-house technology and legal departments at major corporations. New PowerBrief
will also compete for customers with the current paper form of handling and
managing legal documents, and with other companies offering online creation,
filing, storage and retrieval technology, publishers and distributors of
traditional print media that use or license their legal research content for use
on the Internet, commercial publishing companies, and corporate materials and
information market companies. New PowerBrief expects competition to increase
because these markets, particularly the markets for Internet-related products
and services, pose no substantial barriers to entry. Competition may also
increase as a result of industry consolidation.
There are many companies, both public and private, that have developed and
are developing systems, products and services for the legal technology and
document management markets that will compete with the systems that New
PowerBrief is seeking to develop. Some of these companies possess substantially
greater financial, research and development, programming, marketing and lobbying
experience and
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resources. These companies represent substantial long-term competition for New
PowerBrief. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large legal technology,
legal research, consulting or document management companies. Academic
institutions, governmental agencies and other public and private organizations
also develop, seek copyright and patent protection and establish collaborative
arrangements for the development of legal research, document management and
other systems. New PowerBrief cannot be certain that its competitors will not
(1) develop an easier to use, more reliable or more effective product that
achieves greater governmental or market acceptance than systems that it may
develop, (2) obtain patent, copyright or intellectual property rights that limit
New PowerBrief's ability to commercialize systems that it may develop or (3)
commercialize products and services earlier than New PowerBrief.
NEW POWERBRIEF MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY, PATENTS,
COPYRIGHTS AND PROPRIETARY TECHNOLOGY.
New PowerBrief's success will depend, in part, on its ability:
- to obtain patents and copyrights both in the United States and abroad or,
alternatively, to license patents and copyrights on acceptable terms, if
possible;
- to protect its trade secrets, know-how and other proprietary rights; and
- to operate without infringing on the proprietary rights of others.
New PowerBrief's failure to do so could have a material adverse effect on its
business, financial condition and results of operations. New PowerBrief cannot
guarantee that patents or copyrights issued to or licensed by it or New
PowerBrief's other proprietary rights will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to New PowerBrief. Furthermore, New PowerBrief cannot assure you that
others will not independently develop substantially equivalent or superseding
proprietary technology or that an equivalent product or system will not be
marketed in competition with New PowerBrief's systems, thereby substantially
reducing the value of New PowerBrief's proprietary rights. Therefore, New
PowerBrief cannot predict with any certainty the scope or enforceability of
claims allowed in the patents and copyrights on which New PowerBrief will rely.
New PowerBrief also cannot guarantee that it will be able to protect its
proprietary programming and code from duplication. The open-code programming
that the Internet relies on is subject to duplication. Many successful
Internet-based companies have had their systems and methods of operation
duplicated, almost entirely, by new competitors. New PowerBrief cannot assure
you that a competitor will not attempt to duplicate and improve upon the systems
that New PowerBrief may develop.
In addition, New PowerBrief may be subject to various intellectual property
infringement claims from time to time. Even if these claims are unsuccessful,
New PowerBrief could incur substantial attorneys' fees and other legal costs in
defending any patent infringement, copyright infringement or other infringement
claims. New PowerBrief could also incur substantial attorneys' fees and other
legal costs in its efforts to protect patent rights, copyrights or other
proprietary rights, including those granted to PowerBrief or New PowerBrief by
third parties.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM NEW POWERBRIEF'S BUSINESS.
Any new legislation or regulation, or the application or interpretation of
existing laws, may decrease the growth in the use of the Internet, which could
in turn decrease the demand for New PowerBrief's products and services, increase
its cost of doing business or otherwise have a material adverse effect on its
business, financial condition and results of operations. There are an increasing
number of laws and regulations pertaining to the Internet. In addition, a number
of legislative and regulatory proposals are under consideration by federal,
state, local and foreign governments and agencies. Laws or regulations may be
adopted with respect to the Internet relating to liability for information
retrieved from or transmitted over the Internet, domain name registration,
online content regulation, user privacy, taxation and quality of
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products and services. Moreover, the applicability to the Internet of existing
laws governing issues including intellectual property ownership and
infringement, copyright, patent, trademark, trade secret, obscenity, libel,
employment and personal privacy is uncertain and developing. Changes or
developments in the law or regulation of the Internet may have a material
adverse effect on New PowerBrief's business, financial condition and results of
operations.
NEW POWERBRIEF WILL ONLY BE ABLE TO EXECUTE ITS BUSINESS PLAN IF USE OF THE
INTERNET GROWS.
New PowerBrief's business would be adversely affected if Internet usage
does not continue to grow. Internet usage may be inhibited for any of the
following reasons:
- the inability of websites to respond to privacy concerns of potential
users, including concerns related to the placement by websites of
information on a user's hard drive without the user's knowledge or
consent;
- the inability of websites to provide security and authentication of
confidential information contained in transmissions over the Internet;
- the Internet infrastructure may not be able to support the demands placed
on it or its performance and reliability may decline as usage grows; or
- the Internet may be viewed as an unreliable media or forum on which to
conduct business as a result of highly-publicized outages and service
interruptions suffered by businesses unrelated to New PowerBrief.
NEW POWERBRIEF IS SUSCEPTIBLE TO BREACHES OF ITS PRODUCT, NETWORK AND
INFRASTRUCTURE SECURITY, WHICH COULD UNDERMINE ITS BUSINESS STRATEGY.
New PowerBrief's operations are dependent on its ability to protect its
products, computer systems and network infrastructure from damage that could
occur from break-ins, security breaches and other disruptive problems caused by
the Internet or other Internet users. Break-ins and security breaches could
jeopardize the security of information stored in and transmitted through New
PowerBrief's products, computer systems and network infrastructure and could
cause interruptions in New PowerBrief's operations, which may result in
significant liability to New PowerBrief. Other disruptions caused by problems on
the Internet or actions of Internet users could make it difficult for New
PowerBrief's customers to access and retrieve information, interact with courts,
attorneys and other persons involved in a particular legal matter, and otherwise
manage their legal affairs. In either case, problems of this nature could lead
existing customers to terminate their relationships with New PowerBrief and
could make it more difficult for New PowerBrief to attract new customers, which
could undermine New PowerBrief's business strategy. New PowerBrief may be
required to expend significant capital and other resources to protect against
these security breaches or to alleviate problems caused by breaches, which could
have a material adverse effect on New PowerBrief's business, financial condition
and results of operations. In addition, New PowerBrief cannot be certain that
its security measures will be successful.
THE PERFORMANCE OF THE NEW POWERBRIEF SYSTEM IS CRITICAL TO NEW POWERBRIEF'S
BUSINESS AND REPUTATION.
Any system failure, including network, software or hardware failure, that
causes an interruption in the delivery of New PowerBrief's products and services
or a decrease in responsiveness of its website service could result in reduced
revenue, and could impair New PowerBrief's reputation and brand. New
PowerBrief's systems will rely on the Internet infrastructure, which is does not
own or control. High-profile providers of Internet-based solutions and services
have experienced interruptions in service as a result of accidental and
intentional actions of Internet users, current and former employees and others.
Unauthorized access or coordinated over-loading of New PowerBrief's systems or
its partners' systems without unauthorized access could jeopardize the
reliability of New PowerBrief's systems, products and services and also might
deter potential customers.
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All of these results could have a material adverse affect on New
PowerBrief's business, financial condition and results of operation. Minimizing
these risks, including problems created by a New PowerBrief or vendor employee,
may require unforeseen expenditures and interruptions, delays or cessation of
service to New PowerBrief's customers. New PowerBrief cannot guarantee that its
efforts to minimize these risks will be successful.
NEW POWERBRIEF IS SUSCEPTIBLE TO BREACHES OF GENERAL ONLINE SECURITY.
The misappropriation of account numbers, identification information, credit
card numbers or other proprietary personal information or the purchase of
products through the fraudulent use of account numbers, identifying information
or credit cards could expose New PowerBrief to a risk of loss or litigation and
possible liability from the vendors of its products or from cardholders
themselves. Online communication and commerce on New PowerBrief's website will
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of identification information, billing information, credit card numbers and
other proprietary information. However, New PowerBrief cannot be sure that this
encryption and authentication technology will be sufficient to protect against
breaches of online security.
NEW POWERBRIEF WILL RELY ON THIRD PARTY SUPPLIERS FOR DATA STORAGE, PROCESSING
AND CONNECTIVITY, AND ANY FAILURE IN THE SERVICES PROVIDED BY THESE THIRD
PARTIES COULD HARM NEW POWERBRIEF'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
New PowerBrief cannot assure you that it will be able to obtain data
storage or data processing facilities from third party suppliers that are
adequately reliable and that have adequate capacity, on terms and conditions or
in quantities acceptable to New PowerBrief. New PowerBrief's failure to do so
would have a material adverse effect on its business, financial condition and
results of operations. PowerBrief does not operate and New PowerBrief does not
currently plan to operate data storage or data processing facilities. New
PowerBrief's systems, however, will exist on and rely on these facilities. New
PowerBrief intends to contract with third parties for the manufacture and
operation of the data storage and processing hardware that its systems will run
on. New PowerBrief will also rely on third party suppliers for connectivity. The
failure of any third party communications networks or systems could have a
material adverse effect on New PowerBrief's business, financial condition and
results of operations.
NEW POWERBRIEF FACES RISKS ASSOCIATED WITH ITS DEPENDENCE ON COOPERATIVE
ALLIANCES.
New PowerBrief's inability to enter into or maintain successful alliances
with third parties would have a material adverse effect on its business,
financial condition and results of operations. New PowerBrief's systems will
depend on third-party data such as the type provided by Law Office Information
Systems and other third party legal content suppliers. New PowerBrief has no
plans to create its own database of primary legal data, and the coverage and
accuracy of New PowerBrief's products and services is substantially dependent on
the coverage and accuracy of legal research data it licenses from third parties.
There are a limited number of providers of this data. Any failure by a third
party to deliver sufficient and accurate legal research data could have a
material adverse effect on New PowerBrief's business, financial condition and
results of operations.
Given the short term of New PowerBrief's data licenses and data sharing
arrangements, New PowerBrief will have to renegotiate its contracts in the
foreseeable future, which may result in contractual terms that are not as
favorable to New PowerBrief as existing licenses and arrangements. If New
PowerBrief cannot maintain these data licenses and data sharing arrangements or
any other third party license arrangement on commercially reasonable terms, the
utility and accuracy of its systems and products will suffer. As a result, the
marketability of New PowerBrief's systems would suffer.
Additionally, New PowerBrief's strategy for the programming, development,
maintenance, commercialization and marketing of its systems depends upon
entering into various alliances with corporate partners, subcontractors,
licensors, licensees and others, and is contingent upon the subsequent success
of
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<PAGE> 31
these third parties in performing their responsibilities under these alliances.
New PowerBrief cannot guarantee that third parties will perform their
obligations as expected or that New PowerBrief will derive any benefit from
these arrangements.
NEW POWERBRIEF LACKS TECHNICAL, SALES, MARKETING AND BUSINESS EXPERIENCE.
New PowerBrief's senior management has limited management or business
experience and New PowerBrief cannot be sure that its senior management can
successfully manage the business or any growth that New PowerBrief may
experience. New PowerBrief also has limited experience in sales, marketing or
distribution. To develop and market any of its products and services, New
PowerBrief must either develop a technical, sales and marketing force or enter
into maintenance and marketing arrangements with companies that have this
capability. In either case, New PowerBrief will be required to make significant
additional expenditures.
New PowerBrief's failure to establish technical and systems maintenance
capabilities would prevent the development or continued utility of New
PowerBrief's systems. New PowerBrief's failure to establish marketing
capabilities or to enter into marketing arrangements with third parties would
have a material adverse effect on its business, financial condition and results
of operations. In addition, New PowerBrief cannot guarantee that either New
PowerBrief or any third party will develop or market successfully any systems
that New PowerBrief may develop or that any third-party collaboration will be on
terms favorable to New PowerBrief.
NEW POWERBRIEF WILL DEPEND ON KEY PERSONNEL AND MAY BE UNABLE TO HIRE AND RETAIN
QUALIFIED EMPLOYEES.
New PowerBrief's success will depend on its ability to attract, train,
motivate and retain highly-skilled management, legal, technical and other
personnel. New PowerBrief cannot guarantee that it will be successful in
attracting, hiring, assimilating or retaining qualified personnel. The loss of
the services of the principal members of New PowerBrief's management, legal or
technical staff would impair its ability to develop and commercialize products.
New PowerBrief faces intense competition for personnel from other companies,
academic institutions, government entities and other organizations. In the
future, managing the integration of new personnel and growth in general could
pose significant risks to New PowerBrief's development and progress. New
PowerBrief expects to experience difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.
PowerBrief relies on, and New PowerBrief will rely on, consultants and
advisors, including its legal, technical and marketing advisors, to assist it in
formulating product development and marketing strategies. PowerBrief's
consultants and advisors are employed by employers other than PowerBrief and may
have commitments to, or consulting or advisory contracts with, other entities.
NEW POWERBRIEF MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER
DEMANDS CONTINUE TO EVOLVE.
To be successful, New PowerBrief must adapt to the rapidly changing market
by continually enhancing the technologies used in its systems and introducing
new technology to address the changing needs of courts, attorneys, businesses
and other consumers of its products and services. If New PowerBrief is unable,
for technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or legal, business and consumer customer
requirements, its business, financial condition and results of operations could
be materially and adversely affected.
NEW POWERBRIEF'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD
BE HARMED IF NEW POWERBRIEF CANNOT SUCCESSFULLY MANAGE ITS EXPANSION.
In order to execute its business plan, New PowerBrief must grow
significantly. New PowerBrief's inability to manage growth effectively could
have a material adverse effect on New PowerBrief's business, financial condition
and results of operations.
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As of April 17, 2000 PowerBrief had a total of 38 employees and as of
, 2001 New PowerBrief expects to have a total of
employees. New PowerBrief expects that the number of its employees will continue
to increase for the foreseeable future. New PowerBrief's growth will place a
significant strain on management systems and resources. New PowerBrief will need
to create financial and managerial controls and reporting systems and
procedures. New PowerBrief will also need to develop the ability to provide
effective support for its products and maintain close coordination among its
legal, technical, accounting, finance and sales and marketing organizations in
order to be successful.
POWERBRIEF OR NEW POWERBRIEF MAY BE SUBJECT TO A CLAIM BY POWERBRIEF'S FORMER
WEB DEVELOPER.
PowerBrief entered into a contract with a web development firm during 1999.
The contract obligated the developer to design and develop computer software in
accordance with PowerBrief's specifications by an agreed deadline and obligated
PowerBrief to pay development fees upon completion. The developer failed to
deliver a satisfactory product by the deadline in the first quarter of 2000.
PowerBrief delivered a formal notice of breach of contract to the developer and,
subsequently, the developer requested that PowerBrief pay a balance of fees
estimated at $350,000. PowerBrief informed the developer that it would not pay
these fees due to the developer's breach. PowerBrief's management strongly
believes that PowerBrief has and New PowerBrief will have valid defenses to any
claim the developer might bring against PowerBrief or New PowerBrief, and
believes that any damages the developer could prove would be offset in full by
PowerBrief's potential counterclaim against the developer for the developer's
breach of contract. Nonetheless, PowerBrief and New PowerBrief cannot assure you
that they would prevail on any claims, if asserted, and defending any claims
would be costly, could distract management and could have a material adverse
effect on New PowerBrief's business, financial condition or results of
operations. Although PowerBrief has not been informed by the developer of any
present intention to bring a claim against PowerBrief, there is a chance that
the developer may bring a claim against PowerBrief or New PowerBrief.
NEW POWERBRIEF MAY BE EXPOSED TO POTENTIAL LIABILITY FOR WHICH THE AVAILABILITY
OF INSURANCE IS UNCERTAIN.
New PowerBrief may be exposed to liability claims if its systems fail, are
shut down for substantial periods, lose data or are alleged to have had an
adverse effect on the legal cases of persons relying on them. New PowerBrief
cannot guarantee that liability claims, if made, would not result in damages, a
revocation of governmental approval, acceptance or mandate (if these are ever
achieved) or a change in the market acceptance of New PowerBrief's systems. New
PowerBrief intends to maintain liability insurance coverage for claims arising
from the use of its systems, but New PowerBrief cannot be sure that this
coverage will be adequate to cover potential claims. In addition, liability
insurance is becoming increasingly expensive, and New PowerBrief cannot be sure
that it will be able to maintain such insurance, obtain additional insurance, or
obtain insurance at a reasonable cost or in sufficient amounts to protect it
against losses that would have a material adverse effect on its business,
financial condition or results of operations.
CERTAIN PARTNERS AND EMPLOYEES OF POWERBRIEF'S OUTSIDE LEGAL COUNSEL HAVE
INVESTED IN POWERBRIEF'S EQUITY SECURITIES.
Individual partners and employees of PowerBrief's outside legal counsel,
Locke Liddell & Sapp LLP, or LLS, have purchased equity securities of PowerBrief
in previous offerings. These individual past purchases were not based upon any
services rendered by LLS to PowerBrief. PowerBrief also has issued to LLS
warrants to purchase PowerBrief's common stock as payment for part of the
services rendered by LLS to PowerBrief. Past purchases of equity securities of
PowerBrief by partners and employees of LLS reflect the individual decisions of
the purchasers only, and LLS' acceptance of PowerBrief's warrants as payment for
part of the services rendered to PowerBrief by LLS reflects LLS' decision only.
These past events should not be viewed as an endorsement of PowerBrief or the
merger, as securities or tax advice, or as an opinion by LLS or any of its
partners or employees as to any matter regarding PowerBrief or New PowerBrief.
IOI's shareholders and PowerBrief's stockholders are urged to consult their own
advisors and to make their own independent decisions regarding the merger on the
basis of all relevant information available to them.
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<PAGE> 33
THE IOI SPECIAL MEETING
GENERAL
IOI is using this joint proxy statement/prospectus to provide its
shareholders with information concerning the merger agreement and the merger of
PowerBrief with and into IOI and to solicit proxies from its shareholders to use
at the special meeting to be held on , 2001 at the time and place
set forth in the accompanying notice and at any adjournments of the special
meeting.
MATTERS TO BE CONSIDERED
At the IOI special meeting, the shareholders of IOI will consider and vote
upon:
(1) approval and adoption of the proposed merger pursuant to the
merger agreement; and
(2) any other business that may be properly brought before the special
meeting or any adjournment or postponement of the special meeting.
A copy of the merger agreement is attached as Appendix A to this joint
proxy statement/prospectus. IOI urges you to read carefully the merger
agreement.
THE IOI BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, AND RECOMMENDS THAT HOLDERS
OF IOI'S COMMON STOCK VOTE "FOR" THE PROPOSALS.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
IOI's board of directors has fixed the close of business on
, 2000 as the Record Date for determining holders entitled to notice
of and to vote at the special meeting. As of the Record Date, there were
shares of IOI's common stock issued and outstanding, each of which entitles its
holder to one vote on each matter submitted for shareholder approval. The
presence, either in person or by proxy, of the holders of a majority of the
issued and outstanding shares of IOI's common stock entitled to vote at the
special meeting is necessary to constitute a quorum for the transaction of
business at the special meeting.
VOTES REQUIRED; VOTING AND REVOCATION OF PROXIES; EFFECT OF ABSTENTIONS AND
NON-VOTES
Under Texas law, the affirmative vote of the holders of two-thirds of the
outstanding shares of IOI's common stock is required for approval of the merger
and the related transactions. On the Record Date, directors and executive
officers of IOI and PowerBrief and their affiliates own shares of IOI's
common stock, or approximately % of the voting power of the IOI voting stock
outstanding on the Record Date. Approval of the merger and the related
transactions by IOI's shareholders is assured because the holders of at least
two-thirds of IOI's capital stock entitled to vote on the merger entered into a
voting agreement in connection with the execution of the merger agreement.
Pursuant to the voting agreement, these shareholders agreed to vote their shares
in favor of the merger and the merger agreement, and granted irrevocable proxies
to officers of PowerBrief to vote their shares in favor of the merger. A copy of
this voting agreement is attached as Appendix C to this joint proxy
statement/prospectus. In addition, approval of the merger and the related
transactions by PowerBrief's stockholders is assured because the holders of at
least a majority of PowerBrief's capital stock entitled to vote on the merger
entered into a similar voting agreement. See "The Merger -- Voting Agreements."
Any shareholder giving a proxy has the right to revoke it at any time
before the special meeting by signing another proxy with a later date, giving
notice of the revocation to the Secretary before the special meeting or
attending the special meeting and voting in person. However, the proxies given
by IOI's shareholders who entered into the voting agreement in connection with
the execution of the merger agreement cannot be revoked. See "The
Merger -- Voting Agreements."
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<PAGE> 34
Votes cast by proxy or in person at the special meeting will be tabulated
by the election inspectors appointed for the meeting and will determine whether
or not a quorum is present. The election inspectors will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval of
any matter submitted to the shareholders for a vote. The failure to submit a
proxy or to vote at the special meeting will have the same effect as a vote
against the merger. In addition, under Texas law, any unvoted position in a
brokerage account with respect to any matter will be considered as not voted and
will not count toward a quorum as to that matter.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF IOI. ACCORDINGLY, HOLDERS OF IOI'S COMMON STOCK ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SOLICITATION OF PROXIES
Proxies will be solicited by mail, and may also be solicited personally, by
telephone, facsimile transmission or other means by the directors, officers and
employees of IOI, with no special or extra compensation, although those
directors, officers and employees may be reimbursed for out-of-pocket expenses
incurred in connection with the solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries to forward soliciting material to the
beneficial owners of IOI's common stock held of record by those persons, and IOI
may reimburse those custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses that they incur in that regard. Expenses incurred in
connection with the merger, including those attributable to the solicitation of
proxies, generally will be shared equally by IOI and PowerBrief. See "The Merger
Agreement -- Expenses" for a description of the circumstances when expenses will
not be shared equally by IOI and PowerBrief.
OTHER MATTERS
At the date of this joint proxy statement/prospectus, the board of
directors of IOI does not know of any business to be presented at the special
meeting, other than as set forth in the notice accompanying this joint proxy
statement/prospectus. If, however, other matters are properly brought before the
special meeting or any adjournments or postponements of the special meeting, the
persons appointed as proxies or their substitutes will have discretion to vote
or act on those matters according to their best judgment and applicable law
unless the proxy indicates otherwise.
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<PAGE> 35
THE POWERBRIEF SPECIAL MEETING
GENERAL
PowerBrief is using this joint proxy statement/prospectus to provide its
stockholders with information concerning the merger agreement and the merger of
PowerBrief with and into IOI and to solicit proxies from its stockholders to use
at the special meeting to be held on , 2001 at the time and place
set forth in the accompanying notice and at any adjournments of the special
meeting.
MATTERS TO BE CONSIDERED
At the PowerBrief special meeting, the stockholders of PowerBrief will
consider and vote upon:
(1) approval and adoption of the proposed merger pursuant to the
merger agreement; and
(2) any other business that may be properly brought before the special
meeting or any adjournment or postponement of the special meeting.
A copy of the merger agreement is attached as Appendix A to this joint
proxy statement/prospectus. PowerBrief urges you to read carefully the merger
agreement.
THE POWERBRIEF BOARD HAS UNANIMOUSLY (WITH ONE ABSTENTION) APPROVED THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, AND
RECOMMENDS THAT HOLDERS OF POWERBRIEF'S COMMON STOCK AND SERIES A PREFERRED
STOCK VOTE "FOR" THE PROPOSALS.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
PowerBrief's board of directors has fixed the close of business on
, 2000 as the Record Date for determining holders entitled to notice
of and to vote at the special meeting. As of the Record Date, there were
shares of PowerBrief's common stock and shares of PowerBrief's series A
preferred stock issued and outstanding. Each share of common stock is entitled
to one vote on each matter submitted for stockholder approval. Each share of
series A preferred stock is entitled to vote as if it were converted into common
stock, together as one class with the common stock. Based on the conversion
ratio as of the Record Date, each share of series A preferred stock is entitled
to three votes on each matter submitted for stockholder approval. The presence,
either in person or by proxy, of the holders of a majority of the issued and
outstanding shares of PowerBrief's stock entitled to vote at the special meeting
is necessary to constitute a quorum for the transaction of business at the
special meeting.
VOTES REQUIRED; VOTING AND REVOCATION OF PROXIES; EFFECT OF ABSTENTIONS
Under Delaware law and PowerBrief's certificate of incorporation, the
affirmative vote of the holders of a majority of the outstanding shares of
PowerBrief's common stock and PowerBrief's series A preferred stock, voting as
if converted into common stock and voting together as one class, is required for
approval of the merger and the related transactions. On the Record Date,
directors and executive officers of IOI and PowerBrief and their affiliates own
shares of PowerBrief's common stock and shares of PowerBrief's series
A preferred stock, or approximately % of the voting power of the PowerBrief
voting stock outstanding on the Record Date. Approval of the merger and the
related transactions by PowerBrief's stockholders is assured because the holders
of at least a majority of PowerBrief's capital stock entitled to vote on the
merger entered into a voting agreement in connection with the execution of the
merger agreement. Pursuant to this voting agreement, these stockholders agreed
to vote their shares in favor of the merger and the merger agreement, and
granted irrevocable proxies to officers of IOI to vote their shares in favor of
the merger. A copy of this voting agreement is attached as Appendix D to this
joint proxy statement/prospectus. In addition, approval of the merger and the
related transactions by IOI's shareholders is assured because the holders of at
least two-thirds of IOI's capital stock entitled to vote on the merger entered
into a similar voting agreement. See "The Merger -- Voting Agreements." As a
PowerBrief stockholder, if you do not approve of the terms of the proposed
merger and you want to
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<PAGE> 36
exercise your right to receive the appraised value of your shares of
PowerBrief's stock, you should carefully review the procedural requirements of
Delaware law described under "The Merger -- Appraisal Rights" to ensure that you
do not lose your appraisal rights.
Any stockholder giving a proxy has the right to revoke it at any time
before the special meeting by signing another proxy with a later date, giving
notice of the revocation to the Secretary at or before the special meeting or
attending the special meeting and voting in person. However, the proxies given
by PowerBrief's stockholders who entered into the voting agreement in connection
with the execution of the merger agreement cannot be revoked. See "The
Merger -- Voting Agreements."
Votes cast by proxy or in person at the special meeting will be tabulated
by the election inspectors appointed for the meeting and will determine whether
or not a quorum is present. The election inspectors will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval of
any matter submitted to the stockholders for a vote. The failure to submit a
proxy or to vote at the special meeting will have the same effect as a vote
against the merger.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF POWERBRIEF. ACCORDINGLY, HOLDERS OF POWERBRIEF'S STOCK
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SOLICITATION OF PROXIES
Proxies will be solicited by mail, and may also be solicited personally, by
telephone, facsimile transmission or other means by the directors, officers and
employees of PowerBrief, with no special or extra compensation, although those
directors, officers and employees may be reimbursed for out-of-pocket expenses
incurred in connection with the solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries to forward soliciting material to the
beneficial owners of PowerBrief's common stock and series A preferred stock held
of record by those persons, and PowerBrief may reimburse those custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses that they incur
in that regard. Expenses incurred in connection with the merger, including those
attributable to the solicitation of proxies, generally will be shared equally by
IOI and PowerBrief. See "The Merger Agreement -- Expenses" for a description of
the circumstances when expenses will not be shared equally by IOI and
PowerBrief.
OTHER MATTERS
At the date of this joint proxy statement/prospectus, the board of
directors of PowerBrief does not know of any business to be presented at the
special meeting, other than as set forth in the notice accompanying this joint
proxy statement/prospectus. If, however, other matters are properly brought
before the special meeting or any adjournments or postponements of the special
meeting, the persons appointed as proxies or their substitutes will have
discretion to vote or act on those matters according to their best judgment and
applicable law unless the proxy indicates otherwise.
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THE MERGER
The following information relating to the merger is not intended to be a
complete description of all information relating to the merger and is qualified
in its entirety by reference to more detailed information contained elsewhere in
this document, including the Appendices to this joint proxy statement/prospectus
and the documents referred to or incorporated in this joint proxy
statement/prospectus by reference. A copy of the merger agreement is included as
Appendix A, and is incorporated in this joint proxy statement/prospectus by
reference. References to the merger agreement in this joint proxy statement/
prospectus are to the merger agreement, as amended. All shareholders of IOI and
stockholders of PowerBrief are urged to read the merger agreement in its
entirety.
GENERAL DESCRIPTION OF THE MERGER
The merger agreement provides for the merger of PowerBrief with and into
IOI at the effective time of the merger. IOI will be the surviving entity in the
merger and the separate existence of PowerBrief will cease. At the effective
time of the merger, IOI's name will become "PowerBrief, Inc."
Sometimes in this joint proxy statement/prospectus we refer to the combined
company after the merger as "New PowerBrief" and the common stock of the
combined company after the merger as "New PowerBrief common stock." Concurrently
with the completion of the merger, New PowerBrief will effect a five to one
reverse stock split of its common stock. Unless stated otherwise, the
information in this joint proxy statement/prospectus assumes that the five to
one reverse stock split has occurred.
The parties have agreed that before the effective time of the merger IOI
will issue to its shareholders warrants to purchase an aggregate of 2,959,274
shares of IOI's common stock. Although this amount refers to warrants issued
before the merger, it has been adjusted for the five to one reverse stock split.
These warrants will be distributed pro rata among IOI's shareholders of record
at the time these warrants are issued. These warrants will have terms and
conditions, including exercise price and exercisability, no more favorable than
the series A warrants to be issued to PowerBrief's stockholders in the merger
and will not be exercisable before the merger. The issuance of these warrants
will cause an anti-dilution adjustment in the number of shares purchasable with
IOI's warrants existing as of the date of the merger agreement, as more fully
described in the footnotes to the table below. The series B warrants to be
issued in the merger will be exercisable for the same number of shares of common
stock purchasable with IOI's warrants existing as of the date of the merger
agreement, after taking into account the anti-dilution adjustment resulting from
the issuance by IOI to its shareholders of warrants to purchase 2,959,274 shares
of common stock before the merger.
The following tables set forth, immediately after the merger, the number of
shares of New PowerBrief's common stock that IOI's shareholders and PowerBrief's
stockholders will own or have the right to acquire under options or warrants in
different circumstances and their ownership percentages in different
circumstances. This table is based on the following assumptions, which are based
on each company's capitalization as of November 20, 2000:
- 29,602,741 shares of IOI's common stock are issued and outstanding;
- options to purchase 952,000 shares of IOI's common stock are unexercised;
- warrants to purchase 19,796,370 shares of IOI's common stock are
unexercised, with this number being subject to adjustment as described in
the footnotes to the table below;
- 11,250,000 shares of PowerBrief's common stock and 2,566,223 shares of
PowerBrief's series A preferred stock are issued and outstanding;
- options to purchase 3,380,862 shares of PowerBrief's common stock are
unexercised, including shares subject to options granted as of November
20, 2000 and shares available for grant under PowerBrief's 2000 Equity
Incentive Plan as of November 20, 2000; and
- warrants to purchase 560,116 shares of PowerBrief's common stock are
unexercised.
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<PAGE> 38
The numbers in this table give effect to the five to one reverse stock
split concurrently with the merger.
<TABLE>
<CAPTION>
IOI IOI POWERBRIEF POWERBRIEF
SHAREHOLDERS' SHAREHOLDERS' STOCKHOLDERS' STOCKHOLDERS'
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
CIRCUMSTANCE SHARES OWNERSHIP SHARES OWNERSHIP
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
no IOI or PowerBrief options
or warrants are exercised 5,920,548 34.1% 11,436,110 65.9%
--------------------------------------------------------------------------------------------------
all IOI options and warrants
are exercised(1) 10,355,667 47.5% 11,436,110 52.5%
--------------------------------------------------------------------------------------------------
all IOI options and warrants
are exercised(2) 10,568,704 48.0% 11,436,110 52.0%
--------------------------------------------------------------------------------------------------
all PowerBrief options and
warrants are exercised 5,920,548 27.8% 15,349,279 72.2%
--------------------------------------------------------------------------------------------------
all IOI options and warrants
and all PowerBrief options
and warrants are
exercised(3) 10,355,667 39.8% 15,634,724 60.2%
--------------------------------------------------------------------------------------------------
all IOI options and warrants
and all PowerBrief options
and warrants are
exercised(4) 10,568,704 40.0% 15,847,761 60.0%
--------------------------------------------------------------------------------------------------
</TABLE>
---------------
(1) These shares and ownership percentages reflect 285,445 additional shares of
IOI's common stock that will be purchasable under existing IOI warrants as
an anti-dilution adjustment resulting from the issuance by IOI to its
shareholders of warrants to purchase 2,959,274 shares of IOI's common stock
before the merger. This amount represents the minimum anti-dilution
adjustment that will result from the issuance of these warrants.
(2) These shares and ownership percentages reflect 498,482 additional shares of
IOI's common stock that will be purchasable under existing IOI warrants as
an anti-dilution adjustment resulting from the issuance by IOI to its
shareholders of warrants to purchase 2,959,274 shares of IOI's common stock
before the merger. This amount represents the maximum anti-dilution
adjustment that will result from the issuance of these warrants.
(3) These shares and ownership percentages reflect 285,445 additional shares of
IOI's common stock that will be purchasable under existing IOI warrants as
an anti-dilution adjustment resulting from the issuance by IOI to its
shareholders of warrants to purchase 2,959,274 shares of IOI's common stock
before the merger. This amount represents the minimum anti-dilution
adjustment that will result from the issuance of these warrants. These
shares and ownership percentages also reflect the series B warrants to be
issued to PowerBrief's stockholders in the merger entitling them to purchase
an aggregate of 1,285,445 shares of New PowerBrief common stock, which is
the minimum number of shares of New PowerBrief common stock purchasable
under the series B warrants to be issued in the merger.
(4) These shares and ownership percentages reflect 498,482 additional shares of
IOI's common stock that will be purchasable under existing IOI warrants as
an anti-dilution adjustment resulting from the issuance by IOI to its
shareholders of warrants to purchase 2,959,274 shares of IOI's common stock
before the merger. This amount represents the maximum anti-dilution
adjustment that will result from the issuance of these warrants. These
shares and ownership percentages also reflect the series B warrants to be
issued to PowerBrief's stockholders in the merger entitling them to purchase
an aggregate of 1,498,482 shares of New PowerBrief common stock, which is
the maximum number of shares of New PowerBrief common stock purchasable
under the series B warrants to be issued in the merger.
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<PAGE> 39
BACKGROUND OF THE MERGER
PowerBrief is a development stage company. From inception, PowerBrief has
raised equity through preferred stock placements, primarily to individuals,
comprised of practicing attorneys and business professionals. As PowerBrief
continued to grow in staff it required additional capital as well as larger
office space to operate. IOI's corporate office space became available for
sublease and, in March 2000, PowerBrief sublet this office space. Pursuant to
this sublease transaction, PowerBrief's Chief Executive Officer, Ernest D. Rapp,
had initial discussions with one of IOI's board members, Scott J. Hancock. Mr.
Hancock indicated that he was a director of IOI as well as a partner with the
firm Oak Hill Capital Management, Inc. Mr. Hancock requested that PowerBrief
submit a business plan to him as part of the process of accepting PowerBrief as
a sublease tenant to the IOI space. Initial information was exchanged at that
time, with PowerBrief submitting a more formal business plan to Mr. Hancock on
April 19, 2000.
On May 24, 2000, IOI's board met to discuss IOI's financial position and
prospects for its future operations. The board concluded that IOI needed
additional financing to continue its existing operations and that the chances of
obtaining additional financing were unlikely. The IOI board gave its unanimous
approval to a resolution granting Messrs. Kauachi and Hancock authority to sell
for cash the assets of IOI that they deemed prudent.
On May 25, 2000, Mr. Hancock visited with Mr. Rapp, K. Wade Bennett,
PowerBrief's Chairman and co-founder, as well as another individual investor of
PowerBrief at PowerBrief's offices. Mr. Hancock invited Mr. Rapp and Mr. Bennett
to meet other directors of IOI in Oak Hill Capital Management, Inc.'s Menlo
Park, California offices on June 15, 2000. At the June 5, 2000 board of
directors meeting of PowerBrief, Mr. Rapp informed PowerBrief's board of
directors about Mr. Hancock's interest in pursuing a possible transaction
between IOI and PowerBrief. The PowerBrief board advised Mr. Rapp to continue
discussions with IOI and Mr. Hancock.
On June 15, 2000, three of IOI's four directors, plus an additional
management team member of Oak Hill Capital Management, Inc., met with Mr. Rapp
and Mr. Bennett in Menlo Park, California. Mr. Hancock, as a director of IOI,
indicated at that time that IOI would begin due diligence with PowerBrief in
anticipation of merging with PowerBrief in an all stock transaction. At Mr.
Hancock's request, Mr. Rapp and Mr. Bennett were asked to make a presentation to
the general counsel of Oak Hill Capital Management, Inc. in New York City on
June 20, 2000 as part of the due diligence process.
The June 20, 2000 meeting consisted of Mr. Rapp and Mr. Bennett visiting
with John Monsky, Oak Hill's general counsel, as well as several outside law
firms that Mr. Monsky had invited to hear PowerBrief's presentation. Through
various conversations with board members of PowerBrief throughout this time, the
PowerBrief board members encouraged Mr. Rapp to continue active discussions
towards a possible transaction.
Subsequent to the June 20, 2000 meeting, Robert Stein, representing
Chartwell Capital Investors, L.P., a significant shareholder of IOI, visited
PowerBrief. Throughout this time, numerous telephone calls between Mr. Hancock
and Mr. Rapp took place. Initial negotiations began after Mr. Stein's visit, and
this visit led to IOI presenting a term sheet to the board of directors of
PowerBrief on July 7, 2000, which was negotiated over the course of the month.
PowerBrief also was actively pursuing other financing strategies with
various venture capital firms. On July 20, 2000, the board of PowerBrief met to
discuss IOI's draft letter of interest and a term sheet from another venture
capital group. Mr. Hancock was conferenced into the PowerBrief board meeting to
introduce further details and to demonstrate IOI's interest about the possible
transaction between IOI and PowerBrief. At that time, PowerBrief's board
determined and authorized management to pursue a transaction with IOI. The
PowerBrief board gave management authority to continue active negotiations with
IOI to further understand and clarify the proposed terms of the merger. From
July 20, 2000 through September 15, 2000, Mr. Rapp and Robert W. Ohnesorge,
PowerBrief's President, General Counsel and co-founder, with outside counsel,
actively negotiated the final terms of the merger agreement between PowerBrief
and IOI.
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<PAGE> 40
On August 9, 2000, PowerBrief's board met to discuss the terms of the
proposed merger. At this meeting, the PowerBrief board was unanimously, with
board member J. Abbott Sprague abstaining for reasons unrelated to the
transaction, in favor of proceeding with the merger on the terms presented at
the meeting. The PowerBrief board requested that management obtain an opinion
from an investment banking firm with respect to the fairness of the
consideration to be paid to PowerBrief's stockholders in the proposed merger
with IOI.
On September 15, 2000, prior to executing the final merger agreement, the
board of PowerBrief met to discuss the final terms and conditions of the
proposed transactions. At this meeting, the investment banking firm of McFarland
Grossman & Company presented to the board of PowerBrief its opinion as to the
fairness of the merger to the stockholders of PowerBrief. PowerBrief's board
approved the transaction at the September 15, 2000 meeting, with a vote of six
in favor, zero opposed and one abstention. Board member J. Abbott Sprague
abstained from the vote for reasons unrelated to the transaction. Mr. Sprague
has since resigned as a board member of PowerBrief.
Also, on September 15, 2000, the board of IOI met to discuss the merger
agreement. After considering the terms of the proposed transaction, the IOI
board unanimously determined that the merger agreement and the merger were
advisable and fair to, and in the best interests of, IOI and its shareholders.
The merger agreement was executed on September 15, 2000 and publicly
announced by IOI on September 18, 2000 after the close of the stock markets.
IOI'S REASONS FOR THE MERGER AND FACTORS CONSIDERED BY, AND RECOMMENDATION OF,
IOI'S BOARD OF DIRECTORS
IOI believes that a merger with PowerBrief is necessary to preserve
shareholder value. IOI had the following three options concerning its future
existence.
- IOI could continue its existing operations. This option was rejected
because IOI needed financing to continue its operations, which was
difficult to obtain in IOI's healthcare practice management services
industry.
- IOI could liquidate all of its assets and dissolve. This option was
rejected because management believed that IOI's shareholders could
receive a greater return by merging with another company.
- IOI could merge with a private company and change its operations to that
of the private company. This option was accepted because management
believed that a merger with PowerBrief could result in a greater return
on investment to the shareholders of IOI than a liquidation of IOI at
this time.
THEREFORE, THE BOARD OF IOI UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
DETERMINED THAT A MERGER WITH POWERBRIEF WAS ADVISABLE AND FAIR TO, AND IN THE
BEST INTEREST OF, IOI AND ITS SHAREHOLDERS.
POWERBRIEF'S REASONS FOR THE MERGER AND FACTORS CONSIDERED BY, AND
RECOMMENDATION OF, POWERBRIEF'S BOARD OF DIRECTORS
PowerBrief's business plan requires a significant capital infusion into
PowerBrief to execute and attempt to prove its business model. A primary element
of PowerBrief's growth strategy is through continued development and customer
acquisition, with a sales and revenue cycle that could last for several months
or, in some cases, a period of a year or longer. Before deciding to enter into
the merger agreement with IOI, PowerBrief's board actively pursued other
financing strategies with various venture capital firms. However, PowerBrief's
board concluded that the terms of the proposed merger with IOI would be more
favorable to PowerBrief and its stockholders than the other available financing
alternatives.
34
<PAGE> 41
PowerBrief's board of directors has determined that the terms of the merger
agreement are fair to, and in the best interests of, PowerBrief and its
stockholders. In reaching this decision, PowerBrief's board of directors
identified several potential benefits of the merger, including:
- access to an estimated $5.0 million of new capital in the form of cash,
liquid assets and a pre-closing line of credit;
- associations with Oak Hill Capital Management, Inc. and Chartwell Capital
Management, Inc. that may afford PowerBrief greater access to additional
capital and other resources and contacts important to growing the
company;
- failure to complete the merger could result in PowerBrief running out of
cash in the near future, requiring PowerBrief to raise additional capital
on less favorable terms, and possibly requiring PowerBrief to scale back
product development efforts; and
- being a publicly traded company could provide an alternative acquisition
currency.
The PowerBrief board also recognized that the potential benefits of the
merger might not be realized and that there are a number of risks and
uncertainties related to any merger. Some of the risks considered by the
PowerBrief board are:
- the added complexity of being a public company during this development
stage of the company;
- the potential disruption of PowerBrief's business that might result from
employee and customer uncertainty as a result of the merger;
- exposure to IOI's known and unknown liabilities;
- the potential negative effect on PowerBrief's operating results due to
winding down the final elements of IOI's business; and
- the possibility that the merger might not be completed and the public's
potentially negative response to that situation.
PowerBrief's board did not rank or otherwise assign relative weights to the
factors listed above. Rather, PowerBrief's board conducted an overall analysis
of the factors described above, including discussions with and presentations by
PowerBrief's management and financial, legal and accounting advisors.
In considering the factors described above, individual members of
PowerBrief's board may have given different weight to different factors.
However, after careful consideration, on September 15, 2000, PowerBrief's board
of directors unanimously (with one abstention) determined that the merger is
advisable, fair to and in the best interests of PowerBrief and its stockholders.
ACCORDINGLY, POWERBRIEF'S BOARD OF DIRECTORS UNANIMOUSLY (WITH ONE
ABSTENTION) RECOMMENDS THAT POWERBRIEF'S STOCKHOLDERS VOTE "FOR" APPROVAL AND
ADOPTION OF THE MERGER AND THE MERGER AGREEMENT.
OPINION OF POWERBRIEF'S FINANCIAL ADVISOR
PowerBrief retained McFarland, Grossman & Company, or MGCO, to provide an
opinion to the board of directors of PowerBrief as to the fairness, from a
financial point of view, of the consideration to be paid to PowerBrief's
stockholders in the merger. The amount and form of consideration was determined
through negotiations between management of IOI and PowerBrief and not MGCO. See
"-- Background of the Merger."
On September 15, 2000, MGCO delivered its opinion to PowerBrief's board of
directors that, as of such date, and subject to some assumptions, factors and
limitations set forth in its written opinion, the consideration to be received
by the equity holders of PowerBrief pursuant to the terms of the Agreement and
Plan of Merger dated September 15, 2000 was fair and reasonable to PowerBrief's
common and
35
<PAGE> 42
preferred stockholders from a financial point of view. MGCO confirmed, by
delivery of its written opinion as of the date of this joint proxy
statement/prospectus, its opinion as of September 15, 2000.
THE FULL TEXT OF THE WRITTEN OPINION OF MGCO, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
CONNECTION WITH THE OPINION, IS INCLUDED AS PART OF THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX B. STOCKHOLDERS OF POWERBRIEF SHOULD READ THIS
OPINION CAREFULLY IN ITS ENTIRETY.
MGCO's opinion was prepared for PowerBrief's board of directors and
addresses only the fairness of the consideration to be received by the equity
holders of PowerBrief from a financial point of view. The opinion does not
constitute a recommendation to any stockholder with respect to whether to vote
its shares in favor of the merger. The summary of the opinion of MGCO set forth
in this joint proxy statement/ prospectus is qualified in its entirety by
reference to the full text of the opinion, which is attached to this joint proxy
statement/prospectus as Appendix B.
In arriving at its opinion, MGCO has among other things:
- reviewed the Agreement and Plan of Merger dated September 15, 2000;
- reviewed certain publicly-available financial information concerning IOI;
- held discussions with members of the management of PowerBrief regarding
the business and prospects of PowerBrief;
- compared certain financial and stock market information with respect to
PowerBrief with similar information with respect to certain companies
whose securities are publicly traded and are believed to be similar to
PowerBrief;
- reviewed certain internal financial analyses and projections and other
internal information concerning the business and operations of
PowerBrief, prepared by PowerBrief's management;
- reviewed and analyzed financings completed by early stage companies
comparable to PowerBrief in terms of target market, products and
services;
- analyzed and reviewed recent acquisitions of companies whose securities
are publicly traded and are believed to be similar to PowerBrief;
- held discussions with attorneys, accountants and investment bankers
specializing in reverse mergers and public companies regarding valuation
and legal issues;
- considered the liquidation value of the common stock held by the public
shareholders of IOI; and
- performed such other studies and analyses and considered such other
factors as MGCO deemed appropriate.
In rendering its opinion, MGCO assumed and relied upon the accuracy and
completeness of the financial and other information reviewed by it, and it did
not assume any responsibility for independent verification of that information.
With respect to the projections and other information relating to PowerBrief,
MGCO assumed, with PowerBrief's consent, that the projections and other
information, including the underlying assumptions, have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
PowerBrief's management as to the future financial performance of PowerBrief.
MGCO assumed that the merger will be consummated in accordance with the terms of
the merger agreement. MGCO's opinion is necessarily based upon economic,
monetary, market and other conditions as in effect on, and the information made
available to MGCO, as of the date of its opinion.
The following is a summary of those material financial analyses MGCO
utilized in connection with providing its written opinion to the board of
directors of PowerBrief on September 15, 2000. This summary does not purport to
be a complete description of the analyses underlying MGCO's opinion.
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<PAGE> 43
POWERBRIEF ANALYSES
Comparable Public Company Analysis. MGCO compared projected financial
information for PowerBrief to the corresponding financial information of the
following vertical and enterprise application service provider companies, or
ASPs, which MGCO refers to as Comparable Companies: The Trizetto Group, Inc.,
Aspeon, Inc., Breakaway Solutions Inc., Corio, Inc., FutureLink Corp.,
Interliant, Inc., USInternetworking, Inc. and Interland, Inc. MGCO compared
market values as of September 12, 2000, among other things, to revenues at the
current run rate and publicly available estimates of anticipated sales for the
years ending December 31, 2000 and 2001. Analysis of adjusted market
capitalization as a multiple of run rate revenue yielded a multiple range of
0.37x to 3.65x with a mean of 2.01x for vertical ASPs and a multiple range of
2.18x to 9.64x with a mean of 6.11x for enterprise ASPs. Analysis of estimated
2000 revenue yielded a multiple range of 0.34x to 3.15x with a mean of 1.75x for
vertical ASPs and a multiple range of 2.65x to 8.10x with a mean of 5.04x for
enterprise ASPs. Analysis of estimated 2001 revenue yielded a multiple range of
0.29x to 1.46x with a mean of 0.87x for vertical ASPs and a multiple range of
1.53x to 3.78x with a mean of 2.58x for enterprise ASPs.
Comparable Private Placement Analysis. MGCO reviewed and analyzed recent
private institutional financings of six of the Comparable Companies before they
went public: The Trizetto Group, Inc., Breakaway Solutions Inc., Corio, Inc.,
Interliant, Inc., USInternetworking, Inc. and Interland, Inc. MGCO analyzed the
pre-money valuations of first round private financings for each of these
companies, which occurred between April 1998 and December 1999, and compared
them to current run rate revenue. This analysis of first round financing
pre-money valuation as a multiple of run rate revenue yielded a multiple range
of 0.09x to 3.10x with a mean of 1.53x.
Recent PowerBrief Private Placements. MGCO reviewed and analyzed the six
private placements of series A preferred stock that PowerBrief completed between
July 1999 and June 2000 and the implied pre-money and post-money valuation of
PowerBrief for each such financing. The primary pre-money valuation of
PowerBrief implied by these financings was, in chronological order of the
financings, $750,000, $1,230,000, $2,634,999, $8,853,330, $11,879,163 and
$18,894,563, respectively.
IOI ANALYSES
MGCO reviewed and analyzed the factors summarized below in evaluating the
implied valuation of IOI in the merger.
Net Cash Value Realized. MGCO reviewed the merger agreement and determined
the net cash value expected to be realized by PowerBrief from IOI.
Bridge Financing. MGCO reviewed the terms of the line of credit that IOI
provided to PowerBrief upon execution of the merger agreement and compared these
terms with those offered by lenders who specialize in this type of high risk
financing. The terms of PowerBrief's financing arrangement include a 12% annual
interest rate, while specialty bridge lenders require a return of between one
and three times the principal amount.
Analysis of Merger With Public Company. MGCO analyzed and calculated the
current cost of becoming a publicly traded company.
Relationship with Oak Hill Capital Management. Oak Hill Capital
Management, Inc. is a private entity. Entities related to Oak Hill Management,
Inc. are significant shareholders in IOI and will retain a significant ownership
interest in New PowerBrief. MGCO reviewed and summarized the benefits of a
relationship with Oak Hill Capital Management, Inc. that PowerBrief will
presumably enjoy through the merger. MGCO noted that these benefits cannot be
quantified. Oak Hill Capital Management, Inc. has not made any commitments with
regard to any benefits that PowerBrief may receive.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying
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<PAGE> 44
MGCO's opinion. In arriving at its determination of the fairness of the
consideration to be received by PowerBrief's equity holders from a financial
point of view, MGCO considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is identical to
PowerBrief or New PowerBrief. The analyses were prepared solely for purposes of
MGCO's opinion provided to the board of directors of PowerBrief as to the
fairness of the consideration to be received by PowerBrief's equity holders
pursuant to the merger agreement from a financial point of view and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon projections of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by these analyses. Because
these analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of PowerBrief, MGCO, IOI or any other person assumes
responsibility if future results are materially different from those projected.
The analyses described above were prepared solely as part of MGCO's analysis of
the fairness of the consideration from a financial point of view to PowerBrief's
stockholders. The analyses do not purport to be appraisals of PowerBrief, of the
value of New PowerBrief's common stock when it is issued to PowerBrief's
stockholders, or of the price at which New PowerBrief's common stock might
trade.
PowerBrief selected MGCO as its financial advisor because MGCO is a
recognized investment banking firm that has substantial experience in
transactions similar to the proposed merger. MGCO, as part of its investment
banking business, is regularly engaged in the valuation of businesses in
connection with mergers and acquisitions, as well as valuations for other
purposes.
Pursuant to a letter agreement dated August 11, 2000, referred to as the
Engagement Letter, PowerBrief engaged MGCO to act as its financial advisor in
connection with the merger. Pursuant to the terms of the Engagement Letter,
PowerBrief will pay MGCO $50,000 for rendering the fairness opinion. Further,
PowerBrief has agreed to reimburse MGCO for its reasonable out-of-pocket
expenses and to indemnify MGCO against various liabilities, including various
liabilities under the federal securities laws.
VOTING AGREEMENTS
In connection with the execution of the merger agreement, the holders of at
least two-thirds of the capital stock of IOI and a majority of the capital stock
of PowerBrief entitled to vote on the merger entered into voting agreements with
the other company. In the voting agreements, each of the shareholder parties
agreed that, until the effective time or the earlier termination of the merger
agreement in accordance with its terms, it would:
- vote its shares entitled to vote (1) in favor of the merger and the
merger agreement at every meeting and in any other circumstances where a
vote regarding the merger and the merger agreement is sought and (2)
against all other proposals that would reasonably be expected to delay
the completion of the merger; and
- not solicit, encourage or recommend to other shareholders of its company
that they (1) vote their shares against the merger agreement, (2) not
vote at all, (3) tender, exchange or otherwise dispose of their shares in
a competing transaction or (4) attempt to exercise any statutory
appraisal or similar rights they may have.
Each of these shareholder parties also agreed to vote against any competing
transactions, and to use its commercially reasonable efforts not to provide or
permit its agents to initiate, solicit, negotiate, encourage or provide
confidential information to facilitate any competing transaction. In addition,
the voting agreements provide that, until the effective time of the merger or
earlier termination of the merger agreement in accordance with its terms, these
shareholders cannot transfer or otherwise dispose of or impair their shares.
In connection with the voting agreement, the IOI shareholder parties to the
voting agreement granted proxies and powers of attorney to Ernest D. Rapp,
PowerBrief's Chief Executive Officer, Robert W. Ohnesorge, PowerBrief's
President, and/or their designees to vote the shares subject to the voting
38
<PAGE> 45
agreement as provided in the voting agreement. The PowerBrief stockholder
parties to the voting agreement granted proxies and powers of attorney to
Douglas P. Badertscher, IOI's Chief Operating Officer, Laurie H. Gutierrez,
IOI's Chief Financial Officer, and/or their designees to vote the shares subject
to the voting agreement as provided in the voting agreement. These proxies and
powers of attorney are irrevocable.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of IOI's board of directors and
PowerBrief's board of directors with respect to the merger agreement and the
transactions contemplated by the merger agreement, shareholders of IOI and
stockholders of PowerBrief should be aware that some members of IOI's and
PowerBrief's management and boards of directors have some substantial interests
in the merger in addition to their interests as shareholders of IOI and
stockholders of PowerBrief generally.
Ownership of PowerBrief's Common Stock. As of November 1, 2000, K. Wade
Bennett, PowerBrief's Chairman, and Robert W. Ohnesorge, PowerBrief's President,
each owned 5,625,000 shares of PowerBrief's common stock. Collectively, Messrs.
Bennett and Ohnesorge own all of the outstanding shares of PowerBrief's common
stock, and none of the series A preferred stock.
Indemnification; Directors' and Officers' Insurance. Pursuant to the
merger agreement, New PowerBrief will indemnify, defend and hold harmless the
present and former directors and officers of New PowerBrief and the former
directors and officers of IOI and PowerBrief in respect of threatened or actual
claims, actions, suits, proceedings or investigations arising from the fact that
the person is or was a director or officer of New PowerBrief or was a director
or officer of IOI or PowerBrief, to the fullest extent permitted under IOI's
bylaws and under Texas law. All rights to indemnification with respect to
matters occurring through the effective time of the merger will continue for at
least seven years after the effective time of the merger. In addition, the
merger agreement requires New PowerBrief to provide officers' and directors'
liability insurance for at least three years after the effective time of the
merger covering the officers and directors of New PowerBrief with respect to
acts or omissions and securities liabilities occurring after the effective time
of the merger, and covering IOI's and PowerBrief's officers and directors with
respect to acts or omissions and securities liabilities occurring before the
effective time of the merger. See "The Merger Agreement -- Significant
Covenants -- Indemnification and Insurance."
IOI Officer and Director Stock Options. The merger will constitute a
change-in-control event resulting in acceleration of vesting under the terms of
substantially all of the stock option awards granted to directors, officers and
employees of IOI under IOI's stock plans.
Employee Benefits. Following the merger, New PowerBrief will provide to
PowerBrief's employees employee benefits under New PowerBrief's benefit plans.
At New PowerBrief's sole discretion, the employees of PowerBrief will become the
employees of New PowerBrief upon completion of the merger. In addition, New
PowerBrief will honor the terms of all existing employment, severance,
consulting, salary continuation agreements and other employee arrangements of
PowerBrief. See "The Merger Agreement -- Significant Covenants -- Employee
Benefit Matters."
PowerBrief Stock Options and Warrants. New PowerBrief will assume all
options and warrants to purchase PowerBrief common stock outstanding at the
effective time of the merger, whether or not exercisable at the effective time
of the merger. Each of the PowerBrief options will become an option to acquire
New PowerBrief's common stock on the same terms and conditions as were
applicable before the effective time of the merger. The number of shares of New
PowerBrief's common stock issuable upon exercise of these options after the
merger will equal the number of shares of New PowerBrief's common stock, but not
warrants, the holder would have received in the merger if the holder had
exercised the option before the effective time of the merger, and the exercise
price will be appropriately adjusted. Each of the PowerBrief warrants will be
exercisable for the same number of shares of common stock and warrants of New
PowerBrief that the warrant holder would have received if its warrants had been
exercised immediately before the merger, and the exercise price will be
appropriately adjusted. See "The
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Merger Agreement -- Treatment of PowerBrief Warrants" and "The Merger
Agreement -- Treatment of PowerBrief Options."
Executive Agreements. IOI has entered into executive agreements with
Douglas P. Badertscher and Laurie H. Gutierrez. Under these agreements, each of
the executives is entitled to a bonus based on their continued employment with
IOI for specified periods of time.
- If Mr. Badertscher remains employed with IOI until the completion of
IOI's sale of its interest in the Westbank Ambulatory Care Center, he
will receive a bonus of $27,167. In addition, if his employment is
terminated before December 31, 2001, his balance related to unearned
advances by IOI will be forgiven. His unearned advances balance was
$66,750 at November 1, 2000.
- If Ms. Gutierrez remains employed with IOI for 60 days after the signing
of definitive documents relating to the sale of IOI's interest in, or the
closure of, the Westbank Ambulatory Care Center, she will receive a bonus
of $54,333 plus $3,125 for each month during the period from January 1,
2000 until the final day of her employment with IOI.
Additionally, upon satisfaction of the applicable employment condition by an
executive, 100% of that executive's IOI options will vest and remain exercisable
until the later of 120 days following termination of the executive's employment
or 90 days following the completion of any restructuring of IOI related to a
change of control of IOI.
If IOI terminates these executives' employment for any reason other than
for cause, death or disability, the terminated executive will receive all
accrued but unpaid compensation earned before termination, all earned and unused
vacation pay and family health and dental insurance coverage for a period of one
month following termination. Additionally, if not already received at the time
of termination, the terminated executive will receive the longevity bonus
described above and all of the executive's IOI options will vest and remain
exercisable until the later of 120 days following termination of the executive's
employment or 90 days following the completion of any restructuring of IOI
related to a change of control of IOI.
A termination by IOI of an executive's employment for cause means a
termination by IOI following:
- the executive's material acts of fraud, dishonesty or deceit;
- the executive's competition with IOI or its subsidiaries;
- the executive's unauthorized use of IOI's or its subsidiaries' trade
secrets or confidential information;
- conviction of the executive of a felony involving moral turpitude;
- any material violation by the executive of any other material duty to IOI
or its shareholders imposed by law or IOI's board of directors; or
- the executive's material breach of any representation, covenant, duty or
responsibility under the executive agreement.
Board of Directors. IOI and PowerBrief have agreed that the board of
directors of New PowerBrief will have seven members. Pursuant to the merger
agreement, if IOI's net current assets as calculated 10 days before the closing
date of the merger or on another mutually agreeable date are less than $5.75
million, then IOI's board will be entitled to designate two members of the New
PowerBrief board. Otherwise, IOI's board will be entitled to designate three
members of the New PowerBrief board. The remaining directors will be designated
by PowerBrief's board. At least one member of the New PowerBrief board
designated by IOI will serve on all committees of New PowerBrief's board. See
"The Merger Agreement -- Board of Directors of New PowerBrief," "Information
About IOI -- New PowerBrief's Directors" and "Information About
PowerBrief -- New PowerBrief's Directors."
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Executive Officers. After the effective time of the merger, Ernest D.
Rapp, PowerBrief's Chief Executive Officer, will serve as Chief Executive
Officer of New PowerBrief. In addition, all of the other executive officers of
New PowerBrief will be the executive officers of PowerBrief before the merger.
See "The Merger Agreement -- Executive Officers of New PowerBrief" and
"Information About PowerBrief -- PowerBrief's Executive Officers."
RELATIONSHIPS BETWEEN IOI AND POWERBRIEF
Sublease and Lease Agreement. On February 23, 2000, IOI and PowerBrief
entered into a sublease agreement with respect to approximately 17,000 square
feet of office space located at 5858 Westheimer in Houston, Texas. This office
space houses PowerBrief's executive offices. Under the sublease agreement, IOI,
the prime tenant under a lease with TCP Spectrum Partners, Ltd., subleased
office space to PowerBrief beginning on March 1, 2000 and expiring on November
30, 2002, unless earlier terminated pursuant to the sublease or the master lease
with TCP Spectrum Partners. PowerBrief pays approximately $21,000 per month in
rent to IOI under the sublease agreement. The sublease agreement may not be
assigned without the approval of IOI and TCP Spectrum Partners. In a consent to
the sublease by IOI to PowerBrief executed by TCP Spectrum Partners, the parties
also agreed that the sublease may not be assigned without TCP Spectrum Partners'
prior written consent.
In addition, IOI assigned to PowerBrief its lease covering the furniture
and phone system associated with the subleased office space. PowerBrief pays
approximately $7,700 per month to lease this furniture and phone system, and
this lease runs through November 30, 2002.
Line of Credit. On September 15, 2000, in connection with the execution of
the merger agreement, PowerBrief and IOI entered into a promissory note which
allows PowerBrief to borrow up to $3.0 million from IOI. As of November 1, 2000,
PowerBrief has borrowed $500,000 under the promissory note.
Under the promissory note, IOI agreed to make advances to PowerBrief from
time to time beginning on October 1, 2000 and until the earlier of:
- March 31, 2001;
- termination of the merger agreement; or
- a date on which PowerBrief's debt under the promissory note is
accelerated.
The principal amount borrowed by PowerBrief under the line of credit will be due
and payable to IOI on the earlier of those dates. PowerBrief is permitted to
prepay and reborrow amounts advanced under the line of credit. Each borrowing by
PowerBrief must be in an amount of at least $50,000, and PowerBrief may not
borrow more than $500,000 in any calendar month before January 1, 2001 and may
not borrow more than $750,000 in any calendar month after January 1, 2001.
Advances made by IOI under the line of credit are subject to interest at the
rate of 12% per year, and PowerBrief must pay accrued and unpaid interest
quarterly in arrears, beginning on December 31, 2000.
A default under the promissory note includes any of the following:
- PowerBrief's:
(1) failure to pay any of the debt or interest when due;
(2) voluntarily suspension of its business;
(3) insolvency or inability to pay its debts as they mature;
(4) commencement of a voluntary case in bankruptcy or a voluntary petition
seeking reorganization or to effect a plan or other arrangement with
creditors;
(5) making an assignment for the benefit of creditors;
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(6) application for or consent to the appointment of any receiver or
trustee for itself or for any substantial portion of its property; or
(7) making an assignment to an agent authorized to liquidate any
substantial part of its assets;
- any of the following occurs and is not vacated, released or bonded off
within 30 days after PowerBrief receives notice of its entry or levy:
(1) an involuntary case is commenced against PowerBrief seeking
liquidation, reorganization or a creditor's arrangement of PowerBrief;
(2) an order is entered against PowerBrief appointing any receiver or
trustee for PowerBrief or for any substantial portion of its property;
or
(3) a writ or warrant of attachment or any similar process is issued
against any substantial portion of PowerBrief's property; or
- PowerBrief's violation of any of its covenants, obligations or agreements
under the merger agreement or the inaccuracy of any of PowerBrief's
representations under the merger agreement.
ACCOUNTING TREATMENT
IOI and PowerBrief expect to account for the merger as a recapitalization
of PowerBrief because IOI has elected to sell its operating assets and will not
have any continuing operations. In addition, PowerBrief's stockholders will own
the majority of the outstanding New PowerBrief common stock after the merger. As
a result, New PowerBrief will record the merger as an issuance of common stock
for the net monetary assets of IOI, accompanied by a recapitalization of its
equity.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the merger to the holders of PowerBrief stock and IOI stock and
to PowerBrief and IOI.
This discussion is based upon existing provisions of the Internal Revenue
Code of 1986, as amended, or the Code, applicable U.S. Treasury regulations
promulgated or proposed under the Code, administrative rulings by the Internal
Revenue Service, or the IRS, and judicial authority as of the date of this joint
proxy statement/prospectus, all of which are subject to change, possibly with
retroactive effect. Any change could affect the continuing validity of this
discussion. This discussion assumes the holders of PowerBrief or IOI stock hold
their stock as capital assets within the meaning of Section 1221 of the Code.
This discussion does not address all aspects of income taxation that may be
relevant to any particular stockholder in light of the holder's specific
circumstances or to some types of holders subject to special treatment under the
U.S. federal income tax laws (for example, foreign persons, dealers in
securities, banks and other financial institutions, insurance companies,
tax-exempt organizations, holders who acquired their stock pursuant to the
exercise of options or otherwise as compensation or through a tax-qualified
retirement plan and persons holding PowerBrief stock or IOI stock as part of a
straddle or conversion transaction), and it does not discuss any aspect of
state, local, foreign or other tax law. No ruling has been, or will be, sought
from the IRS as to the anticipated tax consequences of the merger.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS FOR GENERAL INFORMATION ONLY. HOLDERS OF POWERBRIEF
STOCK OR IOI STOCK SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM AS A RESULT OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS IN THEIR
PARTICULAR CIRCUMSTANCES.
A condition to IOI's obligation to complete the merger is the receipt by
IOI from its counsel, Weil, Gotshal & Manges LLP, of an opinion to the effect
that the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. A condition to
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PowerBrief's obligation to complete the merger is the receipt by PowerBrief from
its counsel, Locke Liddell & Sapp LLP, of an opinion to the effect that the
merger will be treated for federal income tax purposes as a reorganization with
the meaning of Section 368(a) of the Code.
Assuming the merger is treated as a reorganization within the meaning of
Section 368(a) of the Code, IOI and PowerBrief will not recognize any gain or
loss for federal income tax purposes as a result of the merger. Assuming the
merger is treated as a reorganization, the following are the material federal
income tax consequences to the PowerBrief stockholders:
- No gain or loss will be recognized for federal income tax purposes by
holders of PowerBrief stock who exchange their PowerBrief stock solely
for New PowerBrief's common stock and warrants to purchase New
PowerBrief's common stock in the merger;
- Any cash received by a holder of PowerBrief stock in lieu of a
fractional share of New PowerBrief's common stock in the merger will
be treated as received in exchange for the fractional share and not as
a dividend. As a result, a holder of PowerBrief stock generally will
recognize a capital gain or loss for federal income tax purposes with
respect to the cash payment received in lieu of a fractional share
equal to the difference between the amount of cash received and the
portion of the PowerBrief stockholder's basis in PowerBrief stock
allocable to the fractional share. Any gain or loss will be long-term
capital gain or loss to the extent that the PowerBrief stock allocable
to the fractional share was held for more than one year as of the
effective time of the merger;
- Each holder's aggregate tax basis in New PowerBrief's common stock
received in the merger will equal his or her aggregate tax basis in
the PowerBrief stock exchanged therefor, decreased by the amount of
any tax basis allocable to the warrants received in the merger to
purchase New PowerBrief's common stock, any tax basis allocable to any
additional New PowerBrief common stock received after the merger
pursuant to the merger agreement and any fractional share interest for
which cash is received;
- While there is no complete certainty, each holder's allocable tax
basis in the warrants received in the merger should equal a portion of
his or her aggregate tax basis in the PowerBrief stock exchanged
therefor based on the relative fair market value of those warrants to
the total aggregate fair market value of the New PowerBrief common
stock (including for this purpose fractional shares for which cash
will be received in lieu thereof as well as possibly, as discussed
below, any additional shares of New PowerBrief common stock received
under the merger agreement) and warrants received at the time of the
merger;
- The holding period of New PowerBrief's common stock and warrants to
purchase New PowerBrief's common stock received in the merger will
include the holding period of the PowerBrief stock exchanged therefor;
- Cash received by a PowerBrief stockholder who dissents from the merger
will be treated as having been received as a distribution in
redemption of his or her stock, subject to the provisions and
limitations of Section 302 of the Code;
- Each holder's tax basis in any New PowerBrief common stock received as
a result of any exercise of the warrants to purchase New PowerBrief
common stock received in the merger will equal the amount paid to
exercise those warrants and the holder's allocated tax basis in those
warrants, if any. The holding period in that New PowerBrief common
stock will begin with the exercise of the warrants;
- Each holder that fails to exercise any warrants to purchase New
PowerBrief common stock received in the merger will recognize a
capital loss equal to his or her allocated tax basis, if any, in the
warrants. If the holding period in those warrants was more than one
year, that holder's capital loss will be treated as a long-term
capital loss;
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- Each holder that receives any additional New PowerBrief common stock
pursuant to any adjustment following the merger, under the merger
agreement should not recognize any gain or loss for federal income tax
purposes, except to the extent of that portion thereof which is
treated as interest according to the Code and applicable U.S. Treasury
regulations promulgated thereunder; and
- The determination of each holder's tax basis in any additional New
PowerBrief common stock received pursuant to any adjustment following
the merger is currently unclear. One method to determine the tax basis
is to assume at the time of the merger that each PowerBrief
stockholder's tax basis in the New PowerBrief common stock would be
allocated at the time of the merger among all New PowerBrief common
stock received in the merger (which would include the maximum number
of additional shares that could be received as well as fractional
share interests for which cash will be received in lieu thereof) and
the warrants, based on their relative fair market values. There may be
other methodologies to determine the tax basis and holders of
PowerBrief stock are urged to consult their own tax advisors. The
holding period of any additional New PowerBrief common stock (except
any of that stock treated as interest, as discussed above) will
include the holding period of the existing New PowerBrief common
stock.
Assuming the merger is approved, the five to one reverse stock split will
be effected. In addition, under the merger agreement the IOI shareholders may,
in some circumstances, receive additional New PowerBrief shares in the future.
The following would be the material federal income tax consequences to the IOI
shareholders:
- No gain or loss will be recognized for federal income tax purposes by
the holders of IOI common stock as a result of the five to one reverse
stock split of New PowerBrief to occur concurrently with the merger,
except to the extent, if any, of cash received in lieu of a fractional
share of New PowerBrief common stock. Any cash received by a holder of
IOI common stock in lieu of a fractional share of New PowerBrief
common stock will be treated as having been received by the
shareholder as a distribution in redemption of his or her fractional
interest, subject to the provisions and limitations of Section 302 of
the Code. Each holder's aggregate tax basis in the New PowerBrief
common stock received pursuant to the five to one reverse stock split
will equal his or her aggregate tax basis in the IOI common stock
exchanged therefor, decreased by the amount of any tax basis allocable
to any fractional share interest for which cash is received. The
holding period of the New PowerBrief common stock received pursuant to
the five to one reverse stock split will include the holding period of
the IOI common stock exchanged therefor.
- As noted above, in some circumstances the current shareholders of IOI
may be entitled to receive additional shares of New PowerBrief common
stock pursuant to the merger agreement. No gain or loss should be
recognized for federal income tax purposes by the current holders of
IOI common stock on the receipt of any of those additional shares of
New PowerBrief common stock. If a current IOI shareholder receives any
of those additional New PowerBrief shares, that holder's aggregate tax
basis in his or her New PowerBrief shares will be allocated among the
New PowerBrief shares held and the additional shares received pursuant
to any adjustment after the merger. The holding period of any of those
shares of additional New PowerBrief common stock received by that
holder will include the holding period of the IOI common stock
currently owned by that holder.
Under the Code, a holder of PowerBrief stock or IOI stock may be subject,
under certain circumstances, to backup withholding at a rate of 31% with respect
to the amount of cash, if any, received in lieu of fractional share interests,
unless the holder provides proof of an applicable exemption or a correct
taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not an additional tax and
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may be refunded or credited against the holder's federal income tax liability,
provided the required information is furnished to the IRS.
As noted above, it is a condition to the completion of the merger that
Weil, Gotshal & Manges LLP renders to IOI, and that Locke Liddell & Sapp LLP
renders to PowerBrief, an opinion to the effect that the merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. See "The Merger Agreement -- Significant
Covenants -- Mutual Closing Conditions." These opinions will not bind the IRS or
the courts, and no assurance can be given that the IRS will not assert or the
courts will not adopt a contrary position. The opinions of Weil, Gotshal &
Manges LLP and Locke Liddell & Sapp LLP, respectively, will be expressly based
and conditioned upon various customary limitations set forth in the opinions,
upon the accuracy of various assumptions and upon the receipt of and the truth
and accuracy of various customary representations made at the effective time of
the merger to these counsel by IOI, PowerBrief and some of PowerBrief's
stockholders and others as appropriate. If any of these representations cannot
be made or is inaccurate, the tax consequences of the merger could differ from
those described in this section.
APPRAISAL RIGHTS
Holders of IOI's common stock are not entitled to dissenters' rights of
appraisal under Texas law in connection with the merger. Under Delaware law,
dissenters' rights of appraisal are available to holders of PowerBrief's common
stock or PowerBrief's preferred stock if they comply with the procedural
requirements of the Delaware dissenters' rights statute. If PowerBrief's
stockholders representing more than 5% of New PowerBrief's outstanding common
stock exercise, and do not withdraw their exercise of, dissenters' rights of
appraisal under Delaware law in connection with the merger, IOI is not obligated
to complete the merger. See "Comparison of Shareholder Rights -- Appraisal
Rights" and "The Merger Agreement -- Significant Covenants -- Additional Closing
Conditions for IOI's Benefit."
The following summary of the provisions of Section 262 of the Delaware
General Corporation Law is not intended to be a complete statement of the
provisions and is qualified in its entirety by reference to the full text of
Section 262 of the Delaware General Corporation Law, a copy of which is attached
to this joint proxy statement/prospectus as Appendix E and is incorporated into
this summary by reference.
Under Delaware law, holders of PowerBrief's stock are entitled to appraisal
rights. If the merger is completed, each holder of PowerBrief's stock who:
(1) files written notice with PowerBrief of an intention to exercise
rights to appraisal of his or her shares prior to the PowerBrief
special meeting,
(2) does not vote in favor of the merger and
(3) follows the procedures set forth in Section 262
will be entitled to be paid the fair value in cash of the shares of PowerBrief's
stock by New PowerBrief after the merger. The fair value of shares of
PowerBrief's stock will be determined by the Delaware Court of Chancery and will
not include any element of value arising from the merger. The shares of
PowerBrief's stock with respect to which holders have perfected their appraisal
rights in accordance with Section 262 and have not effectively withdrawn or lost
their appraisal rights are referred to in this joint proxy statement/prospectus
as the "dissenting shares."
Within 10 days after the effective time of the merger, New PowerBrief must
mail a notice to all PowerBrief stockholders who have complied with (1) and (2)
above notifying those stockholders of the effective time of the merger. Within
120 days after the effective time of the merger, holders of PowerBrief's stock
may file a petition in the Delaware Court of Chancery for the appraisal of their
shares, although they may, within 60 days after the effective time of the
merger, withdraw their demand for appraisal. Within 120 days after the effective
time of the merger, the holders of dissenting shares may also,
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upon written request, receive from New PowerBrief a statement setting forth the
aggregate number of shares with respect to which demands for appraisals have
been received.
Appraisal rights are available only to the record holder of shares. If you
wish to exercise appraisal rights but have a beneficial interest in shares which
are held of record by or in the name of another person, such as a broker or
nominee, you should act promptly to cause the record holder to follow the
procedures set forth in Section 262 to perfect your appraisal rights.
A demand for appraisal should be signed by or on behalf of the PowerBrief
stockholder exactly as the stockholder's name appears on the stockholder's stock
certificates. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be executed in that
capacity. If the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a record holder;
however, in the demand the agent must identify the record owner or owners and
expressly disclose that the agent is executing the demand as an agent for the
record owner or owners. A record holder such as a broker who holds shares as
nominee for several beneficial owners may exercise appraisal rights for the
shares held for one or more beneficial owners and not exercise rights for the
shares held for other beneficial owners. In this case, the written demand should
state the number of shares for which appraisal rights are being demanded. When
no number of shares is stated, the demand will be presumed to cover all shares
held of record by the broker or nominee.
If any holder of PowerBrief's stock who demands appraisal of his or her
shares under Section 262 fails to perfect, or effectively withdraws or loses the
right to appraisal, his or her shares will be converted into a right to receive
shares of New PowerBrief's common stock and warrants to purchase shares of New
PowerBrief's common stock in accordance with the terms of the merger agreement.
Dissenting shares lose their status as dissenting shares if:
- the merger is abandoned;
- the dissenting stockholder fails to make a timely written demand for
appraisal;
- the dissenting shares are voted in favor of the merger;
- neither New PowerBrief nor the stockholder files a complaint or
intervenes in a pending action within 120 days after the effective time
of the merger; or
- the stockholder delivers to New PowerBrief within 60 days after the
effective time of the merger, or thereafter with New PowerBrief's
approval, a written withdrawal of the stockholder's demand for appraisal
of the dissenting shares, although no appraisal proceeding in the
Delaware Court of Chancery may be dismissed as to any stockholder without
the approval of the court.
In addition, if a PowerBrief stockholder delivers a signed proxy that has
been left blank, the proxy will be voted for approval of the merger and the
merger agreement, unless the proxy is revoked before or at the PowerBrief
special meeting. Therefore, any PowerBrief stockholder that intends to exercise
dissenter's rights and vote by proxy should not leave the proxy blank. The
stockholder should either vote against the merger and the merger agreement or
abstain from voting for or against the approval of the merger and the merger
agreement.
Failure to follow the steps required by Section 262 of the Delaware General
Corporation Law for perfecting appraisal rights may result in the loss of
appraisal rights, in which event a PowerBrief stockholder will be entitled to
receive the consideration with respect to the holder's dissenting shares in
accordance with the merger agreement. In view of the complexity of the
provisions of Section 262 of the Delaware General Corporation Law, PowerBrief
stockholders who are considering objecting to the merger should consult their
own legal advisors.
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RESTRICTIONS ON RESALES BY AFFILIATES
This joint proxy statement/prospectus does not cover any resales of New
PowerBrief's common stock or warrants to be received by the stockholders of
PowerBrief upon completion of the merger, and no person is authorized to make
any use of this joint proxy statement/prospectus in connection with any resale.
The shares of New PowerBrief's common stock and New PowerBrief's warrants
received by PowerBrief's stockholders in connection with the merger are being
registered under the Securities Act and, except as set forth below, may be
traded without restriction. The shares of New PowerBrief's common stock and
warrants issued in the merger and received by persons who are deemed to be
affiliates of PowerBrief under the Securities Act before the merger, such as
directors and some executive officers, may be resold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act or as otherwise permitted under the Securities Act.
The shares of New PowerBrief's common stock received by PowerBrief's
stockholders upon exercise of the warrants received in connection with the
merger are not being registered at this time. However, under the merger
agreement, New PowerBrief is required to register the shares of New PowerBrief's
common stock issuable upon exercise of all warrants outstanding after the
effective time of the merger at the earlier of:
- the time reasonably expected to permit the registration statement
covering those shares to be effective one year after the effective time
of the merger; and
- concurrently with the filing of a registration statement with respect to
any of New PowerBrief's equity securities, including options and
warrants, in accordance with the terms of IOI's registration rights
agreement with FW Integrated Orthopaedics Investors, L.P. and FW
Integrated Orthopaedics Investors II, L.P. described under "Description
of Capital Stock -- Registration Rights."
See "The Merger Agreement -- Significant Covenants -- Registration Rights."
The merger agreement provides that PowerBrief will cause each principal
executive officer, each director and each other person who is an affiliate of
PowerBrief to deliver to IOI on or before the effective time of the merger a
written agreement that the person will not offer to sell, sell or otherwise
dispose of any shares of New PowerBrief's common stock issued in the merger or
upon exercise of options or warrants in violation of the Securities Act or the
related Commission rules. Additionally, the directors and 5% stockholders of
PowerBrief and IOI, other than Jose E. Kauachi with respect to 25% of his equity
interests in New PowerBrief and Dr. William Donovan with respect to 100% of his
equity interests in New PowerBrief, have agreed to enter into agreements
prohibiting the resale of securities of New PowerBrief until the expiration of
180 days after the merger.
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THE MERGER AGREEMENT
The following summary of the terms of the merger and the merger agreement
is qualified by reference to the complete text of the merger agreement, which is
incorporated by reference and attached as Appendix A to this joint proxy
statement/prospectus. References to the merger agreement in this joint proxy
statement/prospectus are to the merger agreement, as amended.
STRUCTURE OF THE MERGER
Under the merger agreement, PowerBrief will merge with and into IOI, with
IOI surviving the merger. In connection with the merger, IOI will change its
name to "PowerBrief, Inc."
Sometimes in this joint proxy statement/prospectus we refer to the combined
company after the merger as "New PowerBrief" and the common stock of the
combined company after the merger as "New PowerBrief common stock." Concurrently
with the completion of the merger, New PowerBrief will effect a five to one
reverse stock split of its common stock. Unless stated otherwise, the
information in this joint proxy statement/prospectus assumes that the five to
one reverse stock split has occurred.
EFFECTIVE TIME OF THE MERGER
The closing will occur as soon as practicable following satisfaction or
waiver of all of the conditions to the merger set forth in the merger agreement.
The merger will become effective at the time that articles of merger are filed
with the Secretary of State of the State of Texas and a certificate of merger is
filed with the Secretary of State of the State of Delaware. These merger filings
will be made simultaneously with, or as soon as practicable after, the closing
under the merger agreement.
MANNER AND BASIS FOR CONVERTING SHARES
Based on the stock, options and warrants of PowerBrief outstanding on
November 20, 2000, at the effective time of the merger, each issued and
outstanding share of PowerBrief's common stock, other than shares held by
PowerBrief, IOI and dissenting stockholders, will be converted into the right to
receive:
- 0.6035 of a share of New PowerBrief's common stock;
- a series A warrant to purchase 0.0274 of a share of New PowerBrief's
common stock; and
- a series B warrant to purchase between 0.0659 and 0.0768 of a share of
New PowerBrief's common stock.
Each issued and outstanding share of PowerBrief's series A preferred stock,
other than shares held by PowerBrief, IOI and dissenting stockholders, will be
converted into the right to receive:
- 1.8106 shares of New PowerBrief's common stock;
- a series A warrant to purchase 0.0822 of a share of New PowerBrief's
common stock; and
- a series B warrant to purchase between 0.1977 and 0.2304 of a share of
New PowerBrief's common stock.
In the merger, New PowerBrief will issue to PowerBrief's stockholders a
maximum of:
- 13,814,612 shares of its common stock;
- series A warrants to purchase 534,666 shares of its common stock; and
- series B warrants to purchase between 1,285,445 and 1,498,482 shares of
its common stock.
However, the amount of New PowerBrief stock and warrants that each PowerBrief
stockholder receives in the merger and the exercise price of the New PowerBrief
series B warrants that each PowerBrief stockholder receives in the merger may be
adjusted as described under "-- Adjustments" below.
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The series A warrants received by PowerBrief's stockholders in the merger
will have a per share exercise price equal to 1.25 times the lesser of:
- $1.4815; and
- the lowest average closing price of New PowerBrief's common stock over
any consecutive 20 calendar days during the 90 calendar days immediately
after completion of the merger.
The series B warrants received by PowerBrief's stockholders in the merger
will have a per share exercise price of between $3.70 and $4.32, which is the
same exercise price as the exercise price for the series B warrants to purchase
IOI's common stock that are outstanding before the merger, adjusted for the five
to one reverse stock split concurrently with the merger.
The series A warrants received by PowerBrief's stockholders in the merger
are exercisable one year after the date of completion of the merger. The series
B warrants received by PowerBrief's stockholders in the merger are exercisable
at any time on and after the earlier of:
- one year after the date of completion of the merger; and
- the date that FW Integrated Orthopaedics Investors, L.P., FW Integrated
Orthopaedics Investors II, L.P. or Chartwell Capital Investors, L.P.
exercises any warrants to purchase New PowerBrief's common stock.
However, none of the warrants issued in the merger will be exercisable during
the period beginning one calendar day before the end of a fiscal quarter and
ending on the date New PowerBrief announces its operating results for that
quarter. In addition, the series A warrants issued in the merger will expire and
no longer be exercisable on the fifth anniversary of the date of the merger. The
series B warrants issued in the merger will expire on June 30, 2005. All of the
warrants issued in the merger will be subject to customary anti-dilution
provisions.
For a description of New PowerBrief's common stock and warrants that
PowerBrief's stockholders will receive in the merger, see "Description of
Capital Stock" and "Comparison of Shareholder Rights."
EXCHANGE PROCEDURES
Within three business days after the effective time of the merger, an
exchange agent will mail a letter of transmittal to each holder of record of
PowerBrief stock certificates. This letter of transmittal must be used in
surrendering PowerBrief stock certificates to the exchange agent for
cancellation. Upon surrender of a PowerBrief stock certificate for cancellation,
together with a duly executed letter of transmittal and any other documents that
the exchange agent may reasonably require, the holder of the PowerBrief stock
certificate will be entitled to receive:
- a New PowerBrief certificate representing the number of whole shares of
New PowerBrief's common stock that the holder has the right to receive;
- a New PowerBrief series A warrant representing the right to purchase the
number of shares of New PowerBrief's common stock that the holder has the
right to purchase;
- a New PowerBrief series B warrant representing the right to purchase the
number of shares of New PowerBrief's common stock that the holder has the
right to purchase; and
- a check representing the amount of (1) cash payable in lieu of fractional
shares of New PowerBrief's stock, if any, and (2) unpaid dividends and
distributions, if any, that the holder has the right to receive pursuant
to the merger agreement, after giving effect to any required withholding
tax.
POWERBRIEF STOCKHOLDERS SHOULD NOT SEND IN THEIR POWERBRIEF STOCK
CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL.
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After the effective time of the merger, each PowerBrief stock certificate,
until surrendered and exchanged, will represent only the right to receive a
certificate representing shares of New PowerBrief's common stock, a New
PowerBrief series A warrant, a New PowerBrief series B warrant, cash in lieu of
fractional shares, if any, and unpaid dividends and distributions, if any.
Holders of PowerBrief stock certificates will not be entitled to receive any
dividends or other distributions with respect to New PowerBrief's common stock
declared or made by New PowerBrief having a record date after the effective time
of the merger until the PowerBrief stock certificates are surrendered. Subject
to applicable law, following surrender of the PowerBrief stock certificates,
those dividends and distributions, if any, will be paid without interest.
ADJUSTMENTS
Adjustment Before the Merger. The aggregate number of shares of common
stock purchasable under the New PowerBrief series B warrants to be issued in the
merger will be between 1,285,445 and 1,498,482. The actual number of shares
subject to these New PowerBrief series B warrants will be equal to the aggregate
number of shares purchasable under IOI's warrants existing as of the date of the
merger agreement, after taking into account any anti-dilution adjustment
resulting from the issuance by IOI to its shareholders of warrants to purchase
2,959,274 shares of IOI's common stock before the merger as permitted by the
merger agreement.
The number of shares of common stock purchasable under the series A
warrants and series B warrants that each PowerBrief stockholder receives in the
merger may be adjusted before completion of the merger based on the number of
shares of PowerBrief's common stock purchased through the exercise of PowerBrief
options before the merger. The aggregate series A warrants and series B warrants
of New PowerBrief issued in the merger will be allocated among the holders of
PowerBrief's stock and warrants and anyone that acquires PowerBrief's common
stock before the merger through the exercise of options or warrants.
As of November 20, 2000, PowerBrief has options outstanding to purchase
3,012,605 shares of its common stock and can issue options to purchase up to an
additional 368,257 shares of its common stock. If (1) PowerBrief issues all of
the remaining options to purchase 368,257 shares of its common stock, (2) all of
PowerBrief's option holders exercise their options before the merger, and (3)
the aggregate number of shares of New PowerBrief's common stock purchasable
under the series B warrants issued in the merger is 1,285,445, then:
- the series A warrants and series B warrants that PowerBrief's
stockholders receive for their shares of PowerBrief's common stock will
be adjusted so that they are exercisable for only 0.0234 and 0.0562 of a
share, respectively, of New PowerBrief's common stock; and
- the series A warrants and series B warrants that PowerBrief's
stockholders receive for their shares of PowerBrief's series A preferred
stock will be adjusted so that they are exercisable for only 0.0701 and
0.1685 of a share, respectively, of New PowerBrief's common stock.
If (1) PowerBrief issues all of the remaining options to purchase 368,257
shares of its common stock, (2) all of PowerBrief's option holders exercise
their options before the merger, and (3) the aggregate number of shares of New
PowerBrief's common stock purchasable under the series B warrants issued in the
merger is 1,498,482, then:
- the series A warrants and series B warrants that PowerBrief's
stockholders receive for their shares of PowerBrief's common stock will
be adjusted so that they are exercisable for only 0.0234 and 0.0655 of a
share, respectively, of New PowerBrief's common stock, and
- the series A warrants and series B warrants that PowerBrief's
stockholders receive for their shares of PowerBrief's series A preferred
stock will be adjusted so that they are exercisable for only 0.0701 and
0.1964 of a share, respectively, of New PowerBrief's common stock.
Adjustment After the Merger. On the first anniversary of the completion of
the merger, or on an earlier date designated by unanimous consent of New
PowerBrief's board of directors as constituted
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immediately after the merger, New PowerBrief's board will adjust the relative
ownership percentages of IOI's shareholders and PowerBrief's stockholders of
record as of the merger.
New PowerBrief's board will adjust the percentage ownership of IOI's
shareholders of record as of the merger, on the one hand, and PowerBrief's
stockholders of record as of the merger, on the other hand, in New PowerBrief
after the merger based on how much more, or less, Realized Cash, as defined
below, is than $5.0 million. The New PowerBrief board of directors will increase
the common stock ownership percentage of New PowerBrief held by IOI's
shareholders of record as of the merger by 0.0000027% for every dollar that
Realized Cash is more than $5.0 million, or will increase the ownership
percentage of PowerBrief's stockholders of record as of the merger in the same
increment to the extent that Realized Cash is less than $5.0 million. However,
if Realized Cash is less than $3.75 million, the New PowerBrief board of
directors will increase the ownership percentage of the PowerBrief stockholders
of record as of the merger in New PowerBrief by 0.000006% for every dollar that
Realized Cash is less than $5.0 million. The New PowerBrief board of directors
will carry out this adjustment by issuing more shares of New PowerBrief's common
stock to the shareholders entitled to a percentage ownership increase.
At the closing of the merger, New PowerBrief will issue up to 11,000,000
shares of its common stock to an escrow agent agreed to by IOI and PowerBrief.
These shares of New PowerBrief common stock will be used to satisfy New
PowerBrief's obligation to issue additional shares of its common stock after the
merger pursuant to this adjustment. The right to receive shares of New
PowerBrief's common stock pursuant to this adjustment will not be assignable by
any party except by operation of law.
"Realized Cash" means the difference between:
- the sum of (1) IOI's total cash at the effective time of the merger, (2)
the total cash proceeds received before the adjustment date from the
sale, collection or liquidation of IOI's pre-merger assets other than
cash, net of Asset Sale Expenses, as defined below, and (3) all
liabilities not identified and quantified at the effective time of the
merger and Related Liability Expenses, as defined below, attributable to
the operations of PowerBrief before the effective time of the merger that
are quantified on or before six months after the effective time of the
merger pursuant to payments or settlements agreed to by all members of
the board of directors of New PowerBrief as constituted immediately after
the merger; and
- the sum of (1) all of IOI's liabilities identified and quantified at the
effective time of the merger (including accruals for any liabilities
attributable to periods before the effective time of the merger, but
payable after the effective time of the merger) paid in cash by New
PowerBrief before the adjustment date, and (2) all liabilities not
identified and quantified at the effective time of the merger and Related
Liability Expenses attributable to IOI's operations before the effective
time of the merger that are quantified on or before six months after the
effective time of the merger pursuant to payments or settlements agreed
to by all members of the board of directors of New PowerBrief as
constituted immediately after the merger.
However, Realized Cash will:
- not be reduced by (1) any payments made or required to be made by New
PowerBrief in respect of any insurance policies required by the merger
agreement, or (2) any Reimbursable Transaction Expenses, as defined
below, which are allocated to PowerBrief, and
- be increased by (1) Reimbursable Transaction Expenses paid in cash by IOI
before the effective time of the merger and (2) any unpaid past, present
or future obligations of PowerBrief to IOI, in existence at the effective
time of the merger, in respect of leased office space or furniture for
which there is an offsetting liability of IOI to the third party lessor
of an equal or greater amount that has reduced Realized Cash.
"Asset Sale Expenses" means all reasonable expenses incurred by New
PowerBrief directly in connection with the sale of IOI's pre-merger assets
before the adjustment date, including reasonable
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attorneys', brokers' and accountants' fees and expenses and other reasonable
transaction or closing fees and expenses.
"Reimbursable Transaction Expenses" means all reasonable attorneys' and
accountants' fees and expenses and other reasonable out-of-pocket expenses
related to the transactions contemplated by the merger agreement that are
incurred after September 15, 2000 and are spent but not reimbursed before the
effective time of the merger. Reimbursable Transaction Expenses do not include
any transaction fees paid or payable to any of IOI's affiliates.
"Related Liability Expenses" means all reasonable expenses incurred by New
PowerBrief directly in connection with its obligations to satisfy any of the
applicable liabilities, including reasonable attorneys', brokers' and
accountants' fees and expenses and other reasonable transaction fees and
expenses.
TREATMENT OF POWERBRIEF WARRANTS
As of the effective time of the merger, each outstanding warrant to
purchase shares of PowerBrief's common stock will be assumed by New PowerBrief
and converted into warrants to purchase the number of shares of New PowerBrief's
common stock and series A warrants and series B warrants that the holder of the
PowerBrief warrant would have been entitled to receive in the merger if the
holder had exercised its warrant for PowerBrief's common stock immediately
before the effective time of the merger. The exercise price payable for a share
of New PowerBrief's common stock, series A warrant and series B warrant under
the assumed PowerBrief warrant will be equal to (1) the exercise price per share
of PowerBrief's common stock under the assumed PowerBrief warrant immediately
before the effective time of the merger divided by (2) the number of shares of
New PowerBrief's common stock into which each share of PowerBrief's common stock
is convertible in the merger.
New PowerBrief will not issue fractional shares of New PowerBrief's common
stock upon the exercise of any assumed PowerBrief warrant. Instead of receiving
a fractional share, each holder will be entitled to receive a cash payment in an
amount equal to its fractional share, if any, multiplied by the average of the
daily high and low sales prices of one share of New PowerBrief's common stock on
the AMEX during the 10 consecutive trading days ending two trading days before
the exercise date.
Each assumed PowerBrief warrant will be subject to the same expiration date
and exercise provisions as were applicable to the PowerBrief warrant immediately
before the effective time of the merger. The number of shares of New
PowerBrief's common stock underlying each assumed PowerBrief warrant and the
exercise price will be subject to an appropriate adjustment to reflect the
adjustment described under "-- Adjustments -- Adjustment After the Merger"
above.
TREATMENT OF POWERBRIEF OPTIONS
At the effective time of the merger, each outstanding option to purchase
shares of PowerBrief's common stock will be assumed by New PowerBrief and
converted into an option to purchase the number of shares of New PowerBrief's
common stock, but not warrants, as the holder of the PowerBrief stock option
would have been entitled to receive in the merger if the holder had exercised
the option in full immediately before the effective time of the merger. The
exercise price payable per share of New PowerBrief's common stock under an
assumed PowerBrief stock option will be equal to (1) the exercise price per
share for PowerBrief's common stock under the PowerBrief stock option
immediately before the effective time of the merger, divided by (2) the number
of shares of New PowerBrief's common stock into which each share of PowerBrief's
common stock is convertible in the merger.
New PowerBrief will not issue fractional shares of New PowerBrief's common
stock upon the exercise of any assumed PowerBrief stock option. Instead of
receiving a fractional share, each holder will be entitled to receive a cash
payment in an amount equal to its fractional share, if any, multiplied by the
average of the daily high and low sales prices of one share of New PowerBrief's
common stock on the AMEX during the 10 consecutive trading days ending two
trading days before the exercise date.
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Each assumed PowerBrief stock option will be subject to the same expiration
date and vesting provisions as were applicable to the PowerBrief stock option
immediately before the effective time of the merger. The number of shares of New
PowerBrief's common stock underlying each assumed stock option and the exercise
price will be subject to an appropriate adjustment to reflect the adjustment
described under "-- Adjustments -- Adjustment After the Merger" above. In
addition, within five business days after the effective time of the merger, New
PowerBrief will use its reasonable best efforts to prepare and file with the
Commission a registration statement on Form S-8 covering the shares of New
PowerBrief's common stock subject to the assumed PowerBrief stock options, and
to keep the registration statement effective for as long as those options are
outstanding.
BOARD OF DIRECTORS OF NEW POWERBRIEF
After completion of the merger, New PowerBrief's board of directors will
have seven members. The number of board members designated by IOI and by
PowerBrief will be based on IOI's net current assets, as calculated 10 business
days before completion of the merger or on another date agreed to by the
parties.
For purposes of this calculation, net current assets include:
- any amounts due to IOI from PowerBrief;
- the expected cash proceeds from the sale of IOI's interest in the
Westbank Ambulatory Care Center;
- Reimbursable Transaction Expenses; and
- any amounts paid or required to be paid by New PowerBrief for directors'
and officers' liability insurance required under the merger agreement.
See "-- Significant Covenants -- Indemnification and Insurance."
The calculation of net current assets is reduced by all known liabilities
of IOI that are expected to require payment in cash.
If IOI's net current assets on the calculation date are less than $5.75
million, then IOI's board of directors will be entitled to designate two members
of the board of directors of New PowerBrief. Otherwise, IOI's board of directors
will be entitled to designate three members of the board of directors of New
PowerBrief. The remaining directors will be designated by PowerBrief's board of
directors. At least one member of the board of directors of New PowerBrief
designated by IOI will serve on all committees of the board of directors of New
PowerBrief.
IOI intends to designate Scott J. Hancock as a member of the board of New
PowerBrief, but has not determined who else it will designate to New
PowerBrief's board. PowerBrief intends to designate K. Wade Bennett, Robert W.
Ohnesorge, Ernest D. Rapp and Richard V. Bays as members of the board of
directors of New PowerBrief. If entitled to designate a fifth director,
PowerBrief expects to designate A. John Knapp. See "Information About IOI -- New
PowerBrief's Directors" and "Information About PowerBrief -- New PowerBrief's
Directors."
EXECUTIVE OFFICERS OF NEW POWERBRIEF
After the merger, the initial officers of New PowerBrief will be as set
forth in the following table:
<TABLE>
<CAPTION>
NAME OFFICE
---- ------
<S> <C>
Ernest D. Rapp................... Chief Executive Officer
Robert W. Ohnesorge.............. President and General Counsel
K. Wade Bennett.................. Vice President Business
Development, Secretary and
Treasurer
Mark Foster...................... Chief Technology Officer
Dr. Leslie Butterfield........... Vice President of Marketing
</TABLE>
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The officers of New PowerBrief were all officers of PowerBrief before the
merger. See "Information About PowerBrief -- New PowerBrief's Executive
Officers."
SIGNIFICANT COVENANTS
Each of IOI and PowerBrief has undertaken various covenants in the merger
agreement. The following summarizes the more significant of these covenants.
No Solicitation. Each of IOI and PowerBrief has agreed that it and its
officers, directors, employees, consultants, contractors and advisors will not
take any action to solicit, initiate, encourage or participate in any
discussions or negotiations regarding, or furnish to any person any information
in respect of, or take any other action to facilitate, an offer for an
acquisition proposal.
However, IOI and PowerBrief are permitted to take those actions in response
to an unsolicited acquisition proposal if required by the board of directors'
fiduciary duty to its shareholders. If a party receives an unsolicited
acquisition proposal, that party must:
- notify the other party of any acquisition proposal, including the
material terms of the offer and the identity of the party making it;
- provide the other party with a copy of any written acquisition proposal
and any amendments or supplements to it;
- inform the other party on a prompt basis of the status of any
negotiations or discussions with the third party and any material changes
in the terms of the offer; and
- give the other party a copy of any information delivered to the third
party which has not previously been reviewed by the other party.
Covenant Regarding Board Recommendations. The boards of directors of IOI
and PowerBrief have agreed to recommend the approval and adoption of the merger
agreement to their respective shareholders. However, each of the boards of
directors of IOI and PowerBrief is permitted to withdraw or modify its approval
and recommendation of the merger agreement in a manner adverse to the other
party if that board of directors determines in good faith that it is necessary
to do so to comply with its fiduciary duties to its shareholders under
applicable law, after receiving the advice of independent legal counsel. The
boards of directors of IOI and PowerBrief are required by the merger agreement
to submit the merger agreement to their respective shareholders, regardless of
whether or not either board withdraws or modifies its recommendation of the
merger agreement.
Interim Operations of IOI and PowerBrief. Each of IOI and PowerBrief has
undertaken a separate covenant that places restrictions on it until either the
effective time of the merger or the termination of the merger agreement. In
general, IOI and PowerBrief are required to conduct their operations in the
ordinary and usual course of business consistent with past practice and to use
commercially reasonable efforts to preserve intact their business organizations
and relationships with third parties, keep the services of their officers and
directors available and preserve their goodwill. IOI and PowerBrief have also
agreed to some specific restrictions, which are subject to exceptions described
in the merger agreement. The following table summarizes the more significant
items that each company has agreed not to do:
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<TABLE>
RESTRICTION IOI POWERBRIEF
---------------------------------------------------------------------------------------------
<S> <C> <C>
amend its organizational documents X X
---------------------------------------------------------------------------------------------
issue equity securities, options or other securities X X
convertible into or exercisable for equity securities,
except pursuant to outstanding options or warrants, to a
limited number of employees, in connection with other
specified investments or as discussed under "-- IOI
Warrants" below
---------------------------------------------------------------------------------------------
split, combine or reclassify its capital stock X X
---------------------------------------------------------------------------------------------
declare, set aside or pay dividends or other distributions X X
on its capital stock
---------------------------------------------------------------------------------------------
redeem or purchase any of its securities X X
---------------------------------------------------------------------------------------------
enter into any merger, liquidation or other reorganization X X
---------------------------------------------------------------------------------------------
other than the September 15, 2000 promissory note payable X X
by PowerBrief to IOI, incur, assume or guarantee any
debt or make any loans, other than customary loans
---------------------------------------------------------------------------------------------
enter into, adopt, amend or terminate any benefit plans or X X
benefits
---------------------------------------------------------------------------------------------
except as required under existing agreements, increase X X
employee, director, officer, contractor or consultant
compensation or benefits or grant completion bonuses or
change in control payments
---------------------------------------------------------------------------------------------
hire, promote or change the status of employees X X
---------------------------------------------------------------------------------------------
acquire or dispose of material assets outside of the X X
ordinary course of business consistent with past
practice, except pursuant to existing commitments
---------------------------------------------------------------------------------------------
make capital expenditures, subject to permitted levels of X X
expenditures
---------------------------------------------------------------------------------------------
enter into any material contract or agreement X X
---------------------------------------------------------------------------------------------
change its accounting policies X X
---------------------------------------------------------------------------------------------
make or revoke any tax election X X
---------------------------------------------------------------------------------------------
effect a mass layoff or plant closing X
---------------------------------------------------------------------------------------------
accelerate the collection of or transfer any accounts X
receivable
---------------------------------------------------------------------------------------------
dispose of or permit to lapse any rights to use any X
patent, trademark, copyright or other intangible asset,
or disclose any trade secret
---------------------------------------------------------------------------------------------
enter into any agreement with respect to intellectual X
property
---------------------------------------------------------------------------------------------
take any other action that would make any representation X X
or warranty by it inaccurate
---------------------------------------------------------------------------------------------
</TABLE>
Reasonable Best Efforts Covenant. IOI and PowerBrief have agreed to use
their commercially reasonable efforts to take all actions and do all things
necessary or advisable under applicable laws to complete the merger and the
other transactions contemplated by the merger agreement. However, this covenant
does not (1) limit a party's right to terminate the merger agreement or (2)
require IOI to dispose of any part of its or PowerBrief's business or operations
or comply with any other material restriction affecting its business or
operations.
Employee Benefit Matters. The merger agreement provides that New
PowerBrief will honor the provisions of PowerBrief's benefit plans and employee
arrangements, subject to New PowerBrief's right to amend or terminate those
plans or arrangements in accordance with their terms. After the effective time
of the merger, PowerBrief's employees will be eligible to participate in New
PowerBrief's benefit plans. At the sole discretion of New PowerBrief,
PowerBrief's employees will become employees of New PowerBrief after the
effective time of the merger. Prior to the completion of the merger, PowerBrief
will retain a
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compensation consultant to review PowerBrief's compensation programs and will
review the results with IOI.
Indemnification and Insurance. The merger agreement provides that New
PowerBrief will indemnify present and former directors and officers of New
PowerBrief and the former directors and officers of IOI and PowerBrief in
respect of threatened or actual claims, actions, suits, proceedings or
investigations arising from the fact that the person is or was a director or
officer of New PowerBrief or was a director or officer of IOI or PowerBrief,
whether the matter existed prior to, at or after the effective time of the
merger, to the fullest extent provided under IOI's bylaws in effect immediately
before the merger and Texas law. All rights to indemnification with respect to
matters occurring through the effective time of the merger will continue for at
least seven years after the effective time of the merger. In addition, the
merger agreement requires New PowerBrief to maintain, for at least three years
after the effective time of the merger, directors' and officers' liability
insurance covering:
- post-merger wrongful acts and securities liabilities;
- pre-merger wrongful acts or omissions by the directors and officers of
IOI and securities liabilities of IOI; and
- pre-merger wrongful acts or omissions by the directors and officers of
PowerBrief and securities liabilities of PowerBrief,
with each category of insurance having an aggregate limit of $10.0 million.
Tax-Free Reorganization Treatment. IOI and PowerBrief have agreed not to
take any action that would prevent or impede the merger from qualifying as a
reorganization under Section 368(a) of the Code.
IOI Warrants. The parties have agreed that before the effective time of
the merger IOI will distribute to its shareholders warrants to purchase an
aggregate of 2,959,274 shares of IOI's common stock, which reflects the five to
one reverse stock split concurrently with the merger. These warrants will have
terms and conditions, including exercise price and exercisability, no more
favorable than the series A warrants to be issued to PowerBrief's stockholders
in the merger. The shares of IOI's common stock subject to these warrants will
have registration rights under IOI's registration rights agreement with FW
Integrated Orthopaedics Investors, L.P. and FW Integrated Orthopaedics Investors
II, L.P. The distribution of these warrants to IOI's shareholders will cause an
adjustment in the number of shares purchasable with IOI's warrants existing as
of the date of the merger agreement and the series B warrants issued in the
merger. See "Description of Capital Stock."
Mutual Closing Conditions. The obligations of IOI and PowerBrief to
complete the merger are subject to the satisfaction or, to the extent legally
permissible, waiver by the party being benefited, of the following conditions:
- approval by the IOI shareholders and PowerBrief stockholders;
- receipt of any required governmental approvals or consents, including
under the Securities Act and blue sky laws;
- absence of legal prohibition on completion of the merger;
- IOI's registration statement on Form S-4, which includes this joint proxy
statement/prospectus, being effective and not subject to any stop order
by the Commission;
- receipt of opinions of IOI's and PowerBrief's outside counsel that the
merger will qualify as a reorganization within the meaning of Section
368(a) of the Code;
- accuracy as of closing of the representations and warranties made by the
other party to the extent specified in the merger agreement; and
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- performance in all material respects by the other party of all agreements
and conditions required to be performed by it at or before the closing.
Additional Closing Conditions for IOI's Benefit. IOI's obligation to
complete the merger is subject to the following additional significant
conditions:
- absence of a materially adverse change, circumstance or effect on
PowerBrief;
- receipt of agreements from PowerBrief's affiliates regarding securities
laws restrictions on their transfer of New PowerBrief's common stock
received in the merger;
- receipt of agreements from PowerBrief's directors and 5% stockholders not
to sell any of New PowerBrief's securities for 180 days after the
completion of the merger;
- continued employment of Messrs. Bennett, Foster, Ohnesorge and Rapp by
PowerBrief as of the completion of the merger;
- termination of PowerBrief's stockholders' agreement and registration
rights agreement; and
- exercise of appraisal or dissenters' rights under Delaware law in
connection with the merger by PowerBrief's stockholders representing no
more than 5% of New PowerBrief's outstanding common stock.
Additional Closing Conditions for PowerBrief's Benefit. PowerBrief's
obligation to complete the merger is subject to the following additional
significant conditions:
- approval for listing on the AMEX of the shares of New PowerBrief's common
stock to be issued in the merger;
- receipt of agreements from IOI's directors and 5% shareholders, except
for Jose Kauachi with respect to 25% of his equity interests in New
PowerBrief and Dr. William Donovan with respect to 100% of his equity
interests in New PowerBrief, not to sell any of New PowerBrief's
securities for 180 days after the closing;
- the sum of:
(1) IOI's cash;
(2) notes receivable due to IOI from PowerBrief;
(3) Reimbursable Transaction Expenses;
(4) the expected cash proceeds from the sale of IOI's interest in the
Westbank Ambulatory Care Center; and
(5) the proceeds of any investments made by anyone introduced to
PowerBrief by Oak Hill Capital, Chartwell Capital and their affiliates
(other than introductions made solely by Chartwell Capital)
must be greater than $2.5 million immediately before completion of the
merger, unless PowerBrief has borrowed more than $1.0 million from IOI
before completion of the merger; and
- amendment of IOI's warrants existing before the date of the merger
agreement to conform with the series B warrants issued in the merger, and
waiver by the holders of IOI's existing warrants of the applicability of
any anti-dilution provisions in connection with the merger, except that
the anti-dilution provisions will apply to the issuance by IOI to its
shareholders of warrants to purchase 2,959,274 shares of IOI's common
stock before the merger.
Registration Rights. Pursuant to the merger agreement, after completion of
the merger, New PowerBrief will file a shelf registration statement on the
appropriate form covering the shares of New PowerBrief's common stock issuable
upon the exercise of all warrants that remain outstanding after the
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effective time of the merger, including the series A warrants and the series B
warrants issued to PowerBrief's stockholders in the merger. New PowerBrief will
file the shelf registration statement at the earlier of:
- a time reasonably expected to permit the registration statement to be
effective on the first anniversary of the effective time of the merger;
and
- concurrently with the filing of a registration statement with respect to
any of New PowerBrief's equity securities, including options and
warrants, in accordance with the terms of IOI's registration rights
agreement with FW Integrated Orthopaedics Investors, L.P. and FW
Integrated Orthopaedics Investors II, L.P. described under "Description
of Capital Stock -- Registration Rights."
New PowerBrief also will file a registration statement on the appropriate form
with respect to the shares of New PowerBrief's common stock issuable in
connection with any adjustment as described under "-- Adjustments -- Adjustment
After the Merger" above which exceed the escrowed number of shares.
REPRESENTATIONS AND WARRANTIES OF IOI AND POWERBRIEF
In the merger agreement, IOI and PowerBrief have made various standard
representations and warranties relating to, among other things, their respective
assets and financial conditions, the accuracy of IOI's filings with the
Commission, the satisfaction of various legal requirements for the merger and
the absence of undisclosed liabilities. The representations and warranties of
each of the parties to the merger agreement will expire at the effective time of
the merger.
TERMINATION OR AMENDMENT
Right to Terminate. The merger agreement may be terminated at any time
before the completion of the merger in any of the following ways:
(1) The merger agreement may be terminated by mutual written consent
of IOI and PowerBrief.
(2) Either IOI or PowerBrief may terminate the merger agreement if:
- the merger has not been completed by March 31, 2001;
- IOI's shareholders or PowerBrief's stockholders fail to give the
necessary approval within 30 days after the merger agreement is
submitted to them for approval; or
- there is a permanent legal prohibition to completion of the merger.
(3) IOI may terminate the merger agreement if:
- PowerBrief materially breaches any representation, warranty, covenant
or agreement in the merger agreement that cannot be cured within 60
days;
- PowerBrief's board has withdrawn its recommendation of the merger
agreement in a manner adverse to IOI, or has resolved to do so, except
as permitted in connection with an acquisition proposal described
under "-- Significant Covenants -- No Solicitation" above;
- PowerBrief fails to submit the merger agreement to its stockholders
for approval within 30 days after the effectiveness of the
registration statement filed by IOI of which this joint proxy
statement/prospectus is a part; or
- the holders of more than 5% of New PowerBrief's outstanding common
stock have exercised and not withdrawn or forfeited appraisal or
dissenters' rights under Delaware law with respect to their PowerBrief
stock in connection with the merger.
(4) PowerBrief may terminate the merger agreement if:
- IOI materially breaches any representation, warranty, covenant or
agreement in the merger agreement that cannot be cured within 60 days;
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- IOI's board has withdrawn its recommendation of the merger agreement
in a manner adverse to PowerBrief, or has resolved to do so, except as
permitted in connection with an acquisition proposal described under
"-- Significant Covenants -- No Solicitation" above; or
- IOI fails to submit the merger agreement to its shareholders for
approval within 30 days after the effectiveness of the registration
statement filed by IOI of which this joint proxy statement/ prospectus
is a part.
However, neither IOI nor PowerBrief can terminate the merger agreement for
the reasons described in (2) above if its failure to fulfill in any material
respect its obligations under the merger agreement has contributed to the
failure to complete the merger. In addition, neither IOI nor PowerBrief may
terminate the merger agreement for the reasons described in (2) above if (a) any
of its shareholders that are party to a voting agreement entered into in
connection with the merger agreement has materially breached its obligations
under that voting agreement or (b) it has not received the opinion of its legal
counsel that the merger will be treated as a reorganization within the meaning
of Section 368(a) of the Code unless it has used its commercially reasonable
efforts to obtain the opinion.
Effect of Termination. In the event of termination of the merger agreement
pursuant to its terms by either IOI or PowerBrief, the merger agreement will
become void and there will be no further obligations with respect to the merger
on the part of IOI, PowerBrief or their officers or directors. However, some
obligations of the parties under the merger agreement regarding confidential
information, expenses and governing law applicable to the merger agreement will
survive the termination.
Amendment. The merger agreement may not be amended except by action taken
by an instrument in writing signed on behalf of each of IOI and PowerBrief. An
amendment may take place before or after approval of the merger by the
shareholders of IOI and the stockholders of PowerBrief, but after that approval,
no amendment may be made which changes the amount or form of share consideration
under the merger agreement.
EXPENSES
IOI and PowerBrief will each be responsible for their own legal, accounting
and other fees and expenses incurred in connection with the execution of the
merger agreement. All Reimbursable Transaction Expenses, as defined under
"-- Adjustments -- Adjustment After the Merger" above, are the joint
responsibility of IOI and PowerBrief and will be shared equally if the merger is
not completed, regardless of which party incurred those expenses. However, if
PowerBrief terminates the merger agreement solely because the sum of (1) IOI's
cash, (2) the notes receivable due to IOI from PowerBrief, (3) the Reimbursable
Transaction Expenses, (4) the expected cash proceeds from the sale of IOI's
interest in the Westbank Ambulatory Care Center and (5) the proceeds from any
investment made by persons or entities introduced to PowerBrief by Oak Hill
Capital, Chartwell Capital and their affiliates (excluding those made solely by
Chartwell Capital) is not more than $2.5 million immediately before completion
of the merger, then IOI will not be entitled to reimbursement for any of its
expenses. PowerBrief will pay all transfer taxes in connection with the merger.
COMPARISON OF SHAREHOLDER RIGHTS
IOI is a Texas corporation and the rights of IOI's shareholders currently
are governed by IOI's articles of incorporation, IOI's bylaws and the laws of
Texas. PowerBrief is a Delaware corporation, and the rights of PowerBrief's
stockholders currently are governed by PowerBrief's certificate of
incorporation, PowerBrief's bylaws and the laws of Delaware. New PowerBrief will
be a Texas corporation and, after completion of the merger, the rights of
PowerBrief's stockholders and IOI's shareholders will be governed by New
PowerBrief's articles of incorporation, New PowerBrief's bylaws and Texas law.
The rights of PowerBrief's stockholders under PowerBrief's certificate of
incorporation, PowerBrief's bylaws and Delaware law before the merger are
substantially the same as the rights New PowerBrief's shareholders will have
after the merger under New PowerBrief's articles of incorporation, New
PowerBrief's bylaws and
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Texas law, which are substantially similar to IOI's current articles of
incorporation and IOI's current bylaws with some principle exceptions summarized
below.
This summary is qualified in its entirety by reference to (1) IOI's
articles of incorporation and bylaws, which are available from IOI upon request
as provided under "Where You Can Find More Information," and which are on file
with the Commission, (2) PowerBrief's certificate of incorporation and bylaws,
which are available from PowerBrief upon request to the Secretary of PowerBrief
at 5858 Westheimer, Suite 500, Houston, Texas 77057, and (3) New PowerBrief's
articles of incorporation and bylaws, the forms of which are attached as
exhibits to the registration statement of which this joint proxy
statement/prospectus is a part. Furthermore, the description of the differences
between Texas law and Delaware law is a summary only, is not a complete
description of the differences between Texas law and Delaware law and is
qualified in its entirety by references to Texas law and Delaware law.
AUTHORIZED CAPITAL
Without giving effect to the five to one reverse stock split concurrently
with the merger, the total number of authorized shares of capital stock of IOI
is 60,000,000, consisting of 50,000,000 shares of IOI's common stock, par value
$0.001 per share, and 10,000,000 shares of IOI's preferred stock, par value
$0.01 per share, of which 26,000 shares are designated as series A preferred
stock and 400,000 shares are designated as series B preferred stock.
The total number of authorized shares of capital stock of PowerBrief is
60,000,000, consisting of 50,000,000 shares of PowerBrief's common stock, par
value $0.01 per share, and 10,000,000 shares of PowerBrief's preferred stock,
par value $0.01 per share, of which 5,000,000 shares are designated as series A
preferred stock.
If the merger is completed, the number of authorized shares of New
PowerBrief's common stock will be 100,000,000 shares and the number of
authorized shares of New PowerBrief's preferred stock will be 20,000,000 shares.
The New PowerBrief charter will eliminate IOI's series A preferred stock and
IOI's series B preferred stock, none of which is outstanding. In addition,
concurrently with the merger, New PowerBrief's will effect a five to one reverse
stock split of its common stock.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
Number of Directors. Delaware law permits the charter or the bylaws of a
corporation to govern the number of directors. However, if the charter fixes the
number of directors, such number may not be changed without amending the
certificate of incorporation. The PowerBrief charter does not fix the number of
directors. The PowerBrief bylaws state that the number of directors will be no
less than one, with the exact number to be fixed from time to time by the
PowerBrief board of directors. There are currently six directors serving on the
PowerBrief board of directors.
Texas law permits the charter or the bylaws of a corporation to govern the
number of directors. The IOI bylaws authorize no less than two and no more than
eight directors, with the exact number to be determined by IOI's board. There
are currently four directors serving on the IOI board of directors.
If the merger is completed, New PowerBrief's charter will provide that New
PowerBrief's board of directors will have seven members. IOI will designate two
or three of the seven members based on the total net current assets of IOI,
calculated 10 days before completion of the merger. PowerBrief director nominees
will fill the remaining seats. See "The Merger Agreement -- Board of Directors
of New PowerBrief."
Removal. Under Delaware law, the holders of a majority of the shares
entitled to vote at any election of directors may remove any director or the
entire board, with or without cause, except in the case of a corporation with a
classified board. However, when the holders of any class are entitled to elect
one or more directors by the charter, the vote of the holders of the outstanding
shares of that class is required to remove without cause a director or directors
elected by that class. The PowerBrief bylaws provide that any
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director may be removed either for or without cause at any special meeting of
the stockholders duly called and held for that purpose.
Under Texas law, the bylaws or charter of a Texas corporation may provide
that at any meeting of shareholders called expressly for that purpose, the
holders of a majority of the shares then entitled to vote at an election of
directors may vote to remove any director or the entire board, with or without
cause, subject to further restrictions on removal that the bylaws may contain.
The IOI bylaws provide that any director may be removed, with or without cause,
at any special or annual meeting of the shareholders by the affirmative vote of
a majority in number of shares of the shareholders if notice of intention to act
upon that matter is given in the notice calling the meeting.
Vacancies. Under Delaware law and the PowerBrief bylaws, a majority of the
directors then in office (even though less than a quorum) may fill vacancies and
newly-created directorships. However, Delaware law provides that if the
directors then in office constitute less than a majority of the whole board, the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least 10% of the total number of shares at the time outstanding and
entitled to vote for directors, order an election to be held to fill any such
vacancy or newly created directorship. The PowerBrief bylaws provide that if
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
Under Texas law, the shareholders or a majority of the remaining directors
may fill any vacancy occurring in the board of directors. A directorship to be
filled by reason of an increase in the number of directors may be filled by the
shareholders or by the board of directors for a term of office continuing only
until the next election of one or more directors by the shareholders. However,
the board of directors may not fill more than two such directorships during the
period between any two successive annual meetings of shareholders.
CHARTER AMENDMENTS
Under Delaware law, the board and stockholders may amend the corporation's
charter if:
- the board sets forth the proposed amendment in a resolution, declares the
advisability of the amendment, and directs that it be submitted to a vote
at a meeting of stockholders; and
- the holders of at least a majority of shares of stock entitled to vote
thereon approve the amendment, unless the charter requires the vote of a
greater number of shares.
The PowerBrief charter does not require the vote of a greater number of
shares. In addition, Delaware law provides that each class or series of stock
affected, even if the affected stock would not otherwise have these rights, must
approve by a majority vote amendments which make changes relating to the capital
stock by increasing or decreasing the par value or the aggregate number of
authorized shares of a class, or otherwise adversely affecting the rights of
such class.
Under Texas law, the board and shareholders may amend the corporation's
charter if:
- the board of directors sets forth the proposed amendment in a resolution
and directs that it be submitted to a vote at a meeting of shareholders;
and
- the holders of at least two-thirds of the outstanding shares entitled to
vote thereon approve it by affirmative vote, unless the charter otherwise
requires the vote of a different number of shares.
In addition, each class or series of stock affected, even if such stock
would not otherwise have such rights, must approve by at least a two-thirds
majority vote amendments which make changes relating to the capital stock by
increasing or decreasing the par value or the aggregate number of authorized
shares of such class, or otherwise adversely affecting the rights of such class.
The IOI charter does not require a number of shares different from Texas law to
approve an amendment to the IOI charter.
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BYLAW AMENDMENTS
Under Delaware law, the power to adopt, alter and repeal the bylaws is
vested in the stockholders, except to the extent that a corporation's charter or
bylaws vest it in the board of directors. However, if the power to adopt, alter
and repeal the bylaws is granted to the directors, the stockholders still hold
the power to adopt, amend or repeal the bylaws. The PowerBrief charter grants
the PowerBrief board of directors concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the PowerBrief bylaws. PowerBrief's
stockholders may alter, amend or repeal the PowerBrief bylaws or adopt new
bylaws:
- when a majority of the stock issued and outstanding and entitled to vote
at any meeting of stockholders is present at a meeting, in person or by
proxy, by the affirmative vote of the holders of at least a majority of
the stock present; or
- at any regular meeting of the stockholders, or at any special meeting of
the stockholders, if notice of the alteration, amendment, repeal or
adoption of new bylaws is contained in the notice of that special
meeting.
Under Texas law, a board of directors may amend or repeal a corporation's
bylaws, or adopt new bylaws, unless:
- the charter reserves that power exclusively to the shareholders; or
- the shareholders, in amending, repealing or adopting a particular bylaw
provision, expressly provide that the board may not amend or repeal that
bylaw.
In all cases, Texas law provides shareholders the power to amend or repeal
the bylaws unless the charter or a bylaw adopted by the shareholders provides
otherwise. The IOI charter and the IOI bylaws do not provide otherwise. The IOI
charter expressly authorizes the board of directors to alter, amend or repeal
the bylaws or to adopt new bylaws.
SPECIAL MEETINGS OF STOCKHOLDERS
Delaware law provides that the board of directors or another person or
persons authorized in the corporation's charter or bylaws may call a special
meeting of stockholders. The PowerBrief bylaws provide that, unless otherwise
prescribed by statute or by the PowerBrief charter, the president may call
special meetings and the president and secretary will call a special meeting at
the request of a majority of the board of directors or at the request in writing
of stockholders owning a majority of the capital stock outstanding and entitled
to vote. The PowerBrief charter does not confer on any other person the power to
call a special meeting.
Texas law provides that, in addition to the board of directors, the
president, other persons authorized in the corporation's charter or bylaws or
the holders of not less than 10% of all the shares entitled to vote have the
right to call a special shareholder meeting, unless the charter otherwise
specifies a higher percentage (but no greater than 50%) of the holders. The IOI
charter states that the president, the board of directors, or the holders of not
less than 50% of all the shares entitled to vote at the proposed special meeting
may call a special meeting.
If the merger is completed, New PowerBrief's articles of incorporation will
not adjust the percentage of holders required to call a special meeting from the
10% specified under Texas law.
REQUIRED VOTE FOR CERTAIN TRANSACTIONS
Extraordinary Transactions. Except as provided below, and in certain other
limited circumstances, Delaware law requires that a merger, sale, lease,
exchange or other disposition of all or substantially all of the property of a
corporation not in the usual and regular course of the corporation's business,
or a dissolution of a corporation, be approved by the holders of a majority of
the shares entitled to vote thereon, unless the corporation's charter provides
otherwise. The PowerBrief charter does not provide otherwise.
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Except as provided below, and in certain other limited circumstances, Texas
law requires that a merger, a disposition not in the regular course of business
or a dissolution of a corporation be approved by the holders of at least
two-thirds of the shares entitled to vote thereon, unless the corporation's
charter requires the vote of a different number of shares which may not be less
than a majority of the shares entitled to vote thereon. The IOI charter does not
require the vote of a different number of shares.
Absence of Required Vote for Certain Mergers. Delaware law does not
require a vote of the stockholders of a corporation surviving a merger to
approve a merger if:
- the agreement of merger does not amend the charter of the corporation;
- each share of stock of the corporation outstanding immediately before the
merger is to be an identical outstanding or treasury share of the
surviving corporation thereafter; and
- the number of shares of common stock of the corporation to be issued in
the merger, if any, does not exceed 20% of the number of shares
outstanding immediately before the merger.
Texas law does not require a vote of the shareholders of a corporation
surviving a merger to approve the merger if:
- the corporation is the sole surviving corporation in the merger;
- the charter of the corporation will not differ from its charter before
the merger;
- each shareholder of the corporation whose shares are outstanding
immediately before the effective date of the merger will hold the same
number of shares, with identical designations, preferences, limitations
and relative rights, immediately after the effective date of the merger;
- the voting power of the number of voting shares outstanding immediately
after the merger, plus the voting power of the number of voting shares
issuable by the corporation in the merger, will not exceed 20% of the
voting power of the total number of voting shares outstanding immediately
before the merger;
- the number of participating shares, that is, shares whose holders are
entitled to participate without limitation on dividends or other
distributions, outstanding immediately after the merger, plus the number
of participating shares that the corporation will issue in the merger,
does not exceed 20% of the number of such shares outstanding immediately
before the merger; and
- the board of directors of the corporation adopts a resolution approving
the plan of merger.
STANDARDS OF CONDUCT FOR DIRECTORS
Under Delaware law, the standards of conduct for directors have developed
through written opinions of the Delaware courts in cases decided by them.
Generally, directors of Delaware corporations are subject to a duty of loyalty
and a duty of care. The duty of loyalty has been said to require directors to
refrain from self-dealing. According to the Delaware Supreme Court, the duty of
care requires "directors . . . in managing the corporate affairs . . . to use
that amount of care which ordinarily careful and prudent men would use in
similar circumstances." Later case law has established "gross negligence" as the
test for breach of the standard for the duty of care in the decision-making
process of directors of Delaware corporations.
Similarly, under Texas law, the standards of conduct for directors have
developed through written opinions of the Texas courts in cases decided by them.
However, Texas case law concerning standards of conduct for directors is not as
well developed as Delaware case law. Generally, directors of Texas corporations
are subject to a duty of loyalty and a duty of care. The duty of loyalty
prohibits a director from profiting at the expense of the corporation in
connection with the director's dealings with the corporation, third parties and
shareholders. The duty of care requires directors to act in good faith and to
exercise the same degree of care and prudence that ordinary persons in a like
position under similar circumstances would exercise.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Scope. Delaware law provides that a corporation may indemnify any person
who is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of being:
- a director or officer of the corporation, or
- at the request of the corporation, a director, officer, employee or agent
of another enterprise,
against expenses (including attorneys' fees), judgments, fines and settlement
amounts actually and reasonably incurred in connection with such action, suit or
proceeding if:
- the person acted in good faith and reasonably believed that his or her
actions were in or not opposed to the best interests of the corporation;
and
- with respect to any criminal proceeding, the person had no reasonable
cause to believe that his or her conduct was unlawful.
However, no indemnification is permitted with respect to any matter as to which
the person is adjudged to be liable to the corporation, unless the court
determines that the person is entitled to indemnity.
Under Delaware law, indemnification rights are expressly not exclusive of
any other rights to which those seeking indemnification may be entitled under
any other bylaw, agreement, stockholder vote, disinterested director vote or
otherwise.
The PowerBrief charter and bylaws provide, in substance, that PowerBrief
will indemnify any person who was or is a party, or is threatened to be made a
party, to any type of proceeding by reason of the fact that he or she
- is or was a director, advisory director or officer of PowerBrief; or
- is or was serving at the request of PowerBrief as a director, officer,
employee or agent of another corporation or other entity,
to the full extent permitted by Delaware law, against any liability or expense
actually or reasonably incurred by the person in respect thereof.
Texas law permits a corporation to provide indemnification or advancement
of expenses, by a bylaw provision, agreement, security arrangement or otherwise,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by a person in connection with a proceeding if a court
determines:
- that the person conducted himself or herself in good faith;
- in the case of conduct in his or her official capacity, reasonably
believed that his or her conduct was in the corporation's best interest;
- in all other cases that his or her conduct was not opposed to the
corporation's best interests; and
- in the case of a criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
However, if the person is found liable to the corporation, or if the person
is found liable on the basis that he or she received an improper personal
benefit, indemnification under Texas law is limited to the reimbursement of
reasonable expenses. No indemnification is available if the person is found
liable for willful or intentional misconduct.
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The IOI charter provides, in substance, that IOI will indemnify officers
and directors against all costs and expenses reasonably incurred by or imposed
upon them in connection with or arising out of any action, suit or proceeding
which they may be involved by reason of being or having been:
- an officer or director of IOI; or
- at the request of IOI, an officer or director of another corporation of
which IOI was a shareholder or creditor and from which other corporation
they are not entitled to be indemnified,
except in relation to matters as to which they are found liable on the basis of
receiving an improper personal benefit or in which they are found liable to IOI.
The IOI bylaws are made expressly subject to the IOI charter, and provide for
indemnification of officers and directors for expenses incurred by reason of
being or having been an officer or director of IOI to the fullest extent
permitted under Texas law.
If the merger is completed, New PowerBrief's bylaws will require New
PowerBrief to indemnify and advance expenses to officers and directors of New
PowerBrief to the fullest extent permitted under Texas law.
Advancement of Expenses. Delaware law provides for the advancement of
expenses for proceedings upon receipt of an undertaking by or on behalf of the
person to repay the amount advanced if a court determines that the person is not
entitled to be indemnified. Delaware law does not require that the director give
an affirmation regarding his conduct in order to receive an advance of expenses.
Texas law provides that a corporation may pay or reimburse, in advance of
the final disposition of the proceedings, reasonable court costs and attorneys'
fees incurred by a director who was, is or is threatened to be made, a named
defendant or respondent in a proceeding because the person is or was a director
of the corporation. The corporation may pay or reimburse such expenses after the
corporation receives:
- a written affirmation by the director of his good faith belief that he
has met the standard of conduct necessary for indemnification under Texas
law; and
- a written undertaking by or on behalf of the director to repay the amount
paid or reimbursed if it is ultimately determined that he has not met
that standard or that indemnification for expenses is precluded under
Texas law.
Procedure for Indemnification. Delaware law provides that any of the
following can determine that indemnification is appropriate under Delaware law:
- a majority vote of directors who are not party to the proceeding, or a
committee of those directors designated by a majority vote of those
directors, even though, in both cases, less than a quorum;
- if there are no such directors, or if such directors so direct,
independent legal counsel; or
- a stockholder vote.
Texas law provides that any of the following can determine that
indemnification is appropriate under Texas law:
- a majority vote of a quorum consisting of directors who are not party to
the proceeding;
- if such a quorum cannot be obtained, a special committee of the board of
directors consisting of at least two directors not party to the
proceeding;
- special legal counsel; or
- a shareholder vote excluding shares held by directors party to the
proceeding.
Mandatory Indemnification. Delaware law requires indemnification with
respect to any claim, issue or matter on which the director is successful on the
merits or otherwise, in the defense of the proceeding.
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Under Texas law, indemnification by the corporation is mandatory only if the
director is wholly successful on the merits or otherwise, in the defense of the
proceeding.
Insurance. Delaware law and Texas law both allow a corporation to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation against any liability asserted
against that person and incurred by that person in such a capacity or arising
out of his status as such a person whether or not the corporation would have the
power to indemnify him against that liability. Under Texas law, a corporation
may also establish and maintain arrangements, other than insurance, to protect
these individuals, including a trust fund or surety arrangement. As noted above,
indemnification rights under Delaware law are expressly nonexclusive.
Persons Covered. Delaware law provides substantially the same
indemnification rights to officers, employees and agents as it provides for
directors. Texas law expressly and separately deals with the protection
available for officers, employees and agents. Those protections are similar to
those provided to directors.
Continuity of Indemnification. Delaware law contains a provision that
expressly provides that the statutory indemnification provisions:
- apply to a director, officer, employee or agent after he leaves the
corporation for acts he performed while a director, officer, employee or
agent; and
- apply to the estate and personal representatives of the director,
officer, employee or agent.
Texas law does not have a provision that expressly provides indemnification
after a directorship has terminated for acts or omissions which took place prior
to the termination.
Shareholder Report. Texas law requires a report to the shareholders upon
indemnification or advancement of expenses. Delaware law does not have a similar
reporting requirement.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Delaware law provides that a corporation's charter may include a provision
limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of a fiduciary duty as a director.
However, no provision can limit the liability of a director for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of the law;
- violation of certain provisions of the Delaware General Corporation Law;
- any transaction from which the director derived an improper personal
benefit; or
- any act or omission prior to the adoption of such a provision in the
charter.
The PowerBrief charter eliminates the monetary liability of directors to
the fullest extent permitted by Delaware law.
Under Texas law, a corporation's charter may eliminate all monetary
liability of each director to the corporation or its shareholders for conduct in
the performance of a director's duties other than some conduct specifically
excluded from protection. Texas law does not permit any limitation of liability
of a director for:
- breaching the duty of loyalty to the corporation or its shareholders;
- failing to act in good faith;
- engaging in intentional misconduct or a known violation of law;
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- obtaining an improper personal benefit from the corporation; or
- violating applicable statutes that expressly provide for the liability of
a director.
The IOI charter eliminates the monetary liability of IOI's directors to the
fullest extent permitted by Texas law.
APPRAISAL RIGHTS
Generally, under Delaware law, stockholders have the right to demand and
receive payment in cash of the fair value of their stock, as appraised pursuant
to judicial proceedings, instead of the consideration the stockholder would
otherwise receive in the transaction in the event of a merger or consolidation.
However, except as otherwise provided by Delaware law, a stockholder does not
have appraisal rights in connection with a merger or consolidation or in the
case of a disposition if:
- the shares of the corporation are listed on a national securities
exchange, designated as a national market system security by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 stockholders; or
- the corporation will be the surviving corporation of the merger and
Delaware law does not require a vote of the stockholders of the surviving
corporation to approve the merger.
PowerBrief's stock is not listed on a national securities exchange, designated
as a national market system security or held of record by more than 2,000
stockholders. See "Information About PowerBrief -- Market Price and Dividends."
However, a stockholder is entitled to appraisal rights in the case of a
merger or consolidation if the terms of an agreement of merger or consolidation
require the stockholder to accept in exchange for his shares anything other
than:
- shares of stock of the corporation surviving or resulting from the merger
or consolidation;
- shares of any other corporation that at the effective time of the merger
or consolidation will be listed on a national securities exchange,
designated as a national market system security by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 stockholders; or
- cash in lieu of fractional shares.
Generally, under Texas law, a shareholder has:
- the right to dissent from any plan of merger or consolidation or
disposition to which the corporation is a party if Texas law requires a
shareholder vote; and
- appraisal rights upon compliance with the statutory procedures.
Under Texas law, a shareholder of a corporation does not have the right to
dissent or to assert appraisal rights if:
- the shares held by the shareholder are part of a class or series of
shares that on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or consolidation or disposition
are listed on a national securities exchange, designated as a national
market system security by the National Association of Securities Dealers,
Inc. or held of record by not less than 2,000 holders;
- the shareholder is not required by the terms of the plan of merger or
plan of exchange to accept for his shares any consideration that is
different than the consideration to be provided to any other holder of
shares that are part of the same class or series, other than cash in lieu
of fractional shares; and
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- the shareholder is not required by the terms of the plan of merger or
plan of exchange to accept for his shares any consideration other than
cash in lieu of fractional shares and shares that, immediately after the
effective time of the merger or exchange, will be part of a class the
shares of which are (1) listed or authorized for listing upon official
notice of issuance, on a national securities exchange, (2) designated as
a national market system security by the National Association of
Securities Dealers, Inc., or (3) held of record by not less than 2,000
holders.
IOI's common stock is traded on the AMEX under the symbol "IOI." See
"Information About IOI -- Market Price and Dividends."
LIQUIDATION RIGHTS
PowerBrief's series A preferred stock designation provides that upon the
liquidation of PowerBrief, whether voluntary or involuntary, after payment for
all debts of PowerBrief but before any distribution or other payment is made to
the holders of PowerBrief's common stock, each holder of series A preferred
stock will be entitled to be paid first out of the assets of PowerBrief an
amount equal to the greater of:
- the actual purchase price received by PowerBrief for the original
issuance of each share of series A preferred stock, as appropriately
adjusted to give effect to any stock split, dividend, or other similar
transaction; or
- the amount to which that holder would have been entitled if that holder
had held the number of shares of common stock issuable upon the
conversion of that holder's series A preferred stock immediately before
the liquidation,
together with all declared but unpaid dividends, if any. If, upon liquidation of
PowerBrief, the assets of PowerBrief are insufficient to pay the holders of the
series A preferred stock the full amounts to which they are entitled, the
holders of the series A preferred stock will share ratably in any distribution
of available assets.
Upon the liquidation, dissolution or winding up of IOI, holders of IOI's
common stock are entitled to share ratably in the net assets of IOI after
payment of or provision for all liabilities of IOI and the preferential
liquidation rights of any preferred stock then outstanding.
DENIAL OF VOTING RIGHTS
Delaware law provides that holders of the outstanding shares of a class of
stock will be entitled to vote as a class upon a proposed amendment to the
charter, whether or not entitled to vote thereon by the charter, if the
amendment would change the aggregate number of authorized shares or the par
value of the class or would adversely affect the powers, preferences or special
rights of the class.
Texas law provides that holders of each class of shares are entitled to
vote as a class upon a proposed amendment to the charter, whether or not
entitled to vote thereon by the charter, if the amendment would change the
number of authorized shares or the par value of the class, reclassify, cancel,
or exchange shares of the class, create a new class of shares having equal or
superior preferences or rights of the class, increase the rights of an already
outstanding class or adversely affect the powers, preferences or special rights
of the class.
PAYMENT OF DIVIDENDS
Under Delaware law, a board of directors may authorize a corporation to
make distributions to its stockholders, subject to any restrictions in its
charter, either out of surplus or, if there is no surplus, out of net profits
for the fiscal year in which the board of directors declares the dividend and/or
the preceding fiscal year. Delaware law does not permit distributions out of net
profits, however, if, following the distribution, the corporation's capital is
less than the aggregate amount of capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets.
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PowerBrief's charter does not further restrict the ability of the
PowerBrief Board to declare dividends. However, PowerBrief's series A preferred
stock designation provides that if PowerBrief declares any dividend on shares of
common stock, PowerBrief must pay to each holder of series A preferred stock a
dividend equal to the dividend that would have been payable to that holder if
the shares of series A preferred stock held by that holder had been converted
into common stock on the record date for the determination of holders of common
stock entitled to receive the dividend.
Under Texas law, a board of directors may authorize a corporation to make
distributions to its shareholders out of its surplus, subject to any restriction
in its charter. Texas law does not permit distributions if the distribution
exceeds the surplus of the corporation or would render the corporation
insolvent. IOI's charter does not further restrict the ability of the IOI Board
to declare dividends.
INSPECTION OF BOOKS AND RECORDS
Under Delaware law, any stockholder of a Delaware corporation making a
written demand may examine the list of stockholders and may inspect any other
corporate books and records for any purpose reasonably related to the
stockholder's interest as a stockholder.
Under Texas law, any shareholder who holds at least 5% of all of the
outstanding shares of a corporation or that has held its shares for at least six
months will have the right to examine at any reasonable time, for any proper
purpose, the relevant books and records of account, minutes and share transfer
records of the corporation.
DESCRIPTION OF CAPITAL STOCK
The following summary of the current terms of the capital stock and
warrants of IOI and, where different, the terms of the capital stock and
warrants of New PowerBrief as in effect after completion of the merger is
qualified in its entirety by reference to the complete text of IOI's articles of
incorporation, the amendments to IOI's articles of incorporation and IOI's
warrants, and New PowerBrief's articles of incorporation and New PowerBrief's
warrants, copies of which are filed as exhibits to the registration statement
filed by IOI.
AUTHORIZED CAPITAL STOCK
As of November 1, 2000 and without giving effect to the five to one reverse
stock split concurrently with the merger, IOI's authorized capital stock
consists of 50,000,000 shares of common stock, $0.001 par value, of which
29,602,741 shares were issued and outstanding as of November 1, 2000, and
10,000,000 shares of preferred stock, $0.01 par value, of which 26,000 shares
are designated series A preferred stock and 400,000 shares are designated series
B preferred stock. As of November 1, 2000, there were no shares of IOI's
preferred stock outstanding.
If the merger is completed, the New PowerBrief articles of incorporation
will authorize 100,000,000 shares of common stock, $0.001 par value, and
20,000,000 shares of preferred stock, $0.001 par value. The New PowerBrief
articles of incorporation will eliminate IOI's series A preferred stock and
IOI's series B preferred stock, none of which is outstanding. In addition,
concurrently with the merger, New PowerBrief will effect a five to one reverse
stock split of its common stock.
COMMON STOCK
Holders of IOI's common stock are entitled to one vote for each share held
in the election of directors and on all other matters submitted to a vote at a
meeting of shareholders, subject to the rights of holders of any outstanding
preferred stock as discussed below, and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors are able to elect all of the directors
standing for election, subject to the rights of holders of any outstanding
preferred stock. Subject to the preferential dividend rights of any then
outstanding shares of preferred stock, holders of IOI's common stock are
entitled to receive ratably any dividends as may be
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declared in the discretion of the board of directors out of funds legally
available therefor. Upon the liquidation, dissolution or winding up of IOI,
holders of IOI's common stock are entitled to share ratably in the net assets of
IOI after payment or provision for all liabilities of IOI and the preferential
liquidation rights of any preferred stock then outstanding. The holders of IOI's
common stock have no preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
Under its articles of incorporation, IOI is authorized to issue from time
to time 10,000,000 shares of preferred stock in one or more classes or series
upon authorization by IOI's board of directors. Subject to the provisions of
IOI's articles of incorporation and limitations prescribed by law, IOI's board
of directors, without further approval of the shareholders, is expressly
authorized to fix the number of shares constituting any series, as well as the
dividend rights and terms, conversion rights and terms, voting rights and terms,
redemption rights and terms, liquidation preferences and any other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock.
If the merger is completed, the New PowerBrief articles of incorporation
will authorize New PowerBrief to issue from time to time 50,000,000 shares of
preferred stock in one or more classes or series upon authorization by New
PowerBrief's board of directors. Subject to the provisions of New PowerBrief's
articles of incorporation and limitations prescribed by law, New PowerBrief's
board of directors, without further approval of the shareholders, will be
expressly authorized to fix the number of shares constituting any series, as
well as the dividend rights and terms, conversion rights and terms, voting
rights and terms, redemption rights and terms, liquidation preferences and any
other rights, preferences, privileges and restrictions applicable to each series
of preferred stock. The New PowerBrief articles of incorporation will eliminate
IOI's series A preferred stock and IOI's series B preferred stock, none of which
is outstanding.
WARRANTS TO BE ISSUED IN THE MERGER
The New PowerBrief series A warrants and series B warrants to be issued in
the merger are to be issued in accordance with warrant agreements. The following
description is a summary of the material provisions of the warrant agreements
and is subject to and qualified in its entirety by reference to those
agreements.
General. Except as described below, the terms of the New PowerBrief series
A warrants and New PowerBrief series B warrants to be issued in the merger will
be identical. These warrants will be exercisable for a number of fully paid and
non-assessable shares of New PowerBrief's common stock. The exercise price of
New PowerBrief's series A warrants will be a price per share equal to 1.25 times
the lesser of:
- $1.4815; and
- the lowest average closing price for New PowerBrief's common stock over
any 20 consecutive calendar days during the 90 days after the date of
completion of the merger.
The exercise price of New PowerBrief's series B warrants will be between
$3.70 and $4.32 per share of New PowerBrief's common stock. The number of shares
of New PowerBrief's common stock issuable upon exercise of a New PowerBrief
warrant is subject to adjustment in some circumstances as described below.
Other than the period from one day before the end of any fiscal quarter
until New PowerBrief announces its operating results for that quarter, holders
may exercise (1) the New PowerBrief series A
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warrants issued in the merger on and after one year after the date of completion
of the merger and (2) the New PowerBrief series B warrants issued in the merger
on and after the earlier of:
- one year after the date of completion of the merger; and
- the date on which any warrants to purchase New PowerBrief's common stock
are exercised by FW Integrated Orthopaedics Investors, L.P., FW
Integrated Orthopaedics Investors II, L.P., or Chartwell Capital
Investors, L.P.
In all cases after the merger, upon a change of control of New PowerBrief,
defined as:
- an acquisition by another person or group of persons of 35% or more of
the outstanding common stock of New PowerBrief;
- a majority change in the board of directors of New PowerBrief over a
12-month period;
- a merger, consolidation or similar transaction in which New PowerBrief is
not the surviving entity or in which New PowerBrief's shareholders do not
own a majority of the shares of the surviving entity; or
- a sale of all or substantially all of New PowerBrief's assets,
the warrants will become fully exercisable, in whole or in part, at any time
before their expiration.
Unless earlier exercised, the New PowerBrief series A warrants issued in
the merger will expire five years after the completion of the merger. The New
PowerBrief series B warrants issued in the merger will expire on June 30, 2005.
New PowerBrief will give notice of expiration not less than 10 nor more than 30
days before the expiration date to the registered holders of the then
outstanding warrants. If New PowerBrief fails to give the notice when required,
the warrants will not expire until 10 days after the required notice is given.
In order to exercise all or any of the New PowerBrief warrants, holders are
required to deliver to New PowerBrief a written notice of the holder's election
to exercise the warrants that specifies the number of shares of New PowerBrief's
common stock to be purchased. In addition, holders must surrender to New
PowerBrief the certificate representing the warrants to be exercised and pay in
full the exercise price for each share of New PowerBrief's common stock issuable
upon exercise of the warrants. The exercise price may be paid:
(1) in cash or by certified or official bank check or by wire transfer
to an account that New PowerBrief designates for that purpose; or
(2) without the payment of cash, by reducing the number of shares of
New PowerBrief's common stock that would be obtainable upon the
exercise of a warrant and payment of the exercise price in cash so
as to yield a number of shares of common stock upon the exercise
of the warrant equal to the product of:
- the number of shares of New PowerBrief's common stock for which the
warrant is exercisable as of the date of exercise if the exercise
price were being paid in cash; and
- a fraction, the numerator of which is the excess of the fair market
value per share of common stock on the exercise date over the exercise
price per share as of the exercise date and the denominator of which
is the fair market value per share of the common stock on the exercise
date.
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When a holder surrenders a warrant certificate representing more than one
warrant in connection with his option to elect a cashless exercise described in
clause (2) above, the number of shares of New PowerBrief's common stock
deliverable upon a cashless exercise will be equal to:
- the number of shares of New PowerBrief's common stock issuable upon the
exercise of warrants that are specified to be exercised in accordance
with a cashless exercise
multiplied by
- the cashless exercise ratio described in clause (2) above.
All provisions of the warrant agreement apply with respect to a surrender
of a warrant certificate in accordance with a cashless exercise for less than
the full number of warrants represented by the warrant certificate.
When a holder surrenders the warrant certificate and pays the exercise
price, New PowerBrief will deliver or cause to be delivered to him or upon his
written order, a stock certificate representing the appropriate number of shares
of New PowerBrief's common stock for each warrant evidenced by the warrant
certificate, subject to adjustment as described below. If a holder exercises
less than all of the warrants evidenced by a warrant certificate, a new warrant
certificate will be issued to him for the remaining number of warrants. No
fractional shares of common stock will be issued upon exercise of the warrants.
At the time of exercise, New PowerBrief will pay the holder an amount in cash
equal to the fair value of any such fractional share of New PowerBrief's common
stock.
New PowerBrief will pay all costs incurred for delivery, transfer or
exchange of any warrant certificate, as well as any tax that may be imposed in
connection with the execution and delivery of the warrant agreements and the
issuance of the warrants or New PowerBrief's common stock issuable upon exercise
of the warrants.
In the event a bankruptcy or reorganization is commenced by or against New
PowerBrief, a bankruptcy court may hold that unexercised warrants are executory
contracts that may be subject to New PowerBrief's rejection with approval of the
bankruptcy court. As a result, a holder may not, even if sufficient funds are
available, be entitled to receive any consideration or may receive an amount
less than he would be entitled to receive if he had exercised his warrants
before the commencement of any such bankruptcy or reorganization.
Adjustments. The number of shares of New PowerBrief's common stock
issuable upon the exercise of the warrants and the exercise price will be
subject to adjustment in some circumstances including, without limitation:
(1) New PowerBrief's payment of cash dividends and other distribution
on its common stock payable in excess of 0.75% of the market price
of its common stock;
(2) subdivisions, combinations and some reclassifications of New
PowerBrief's common stock;
(3) the issuance to holders of New PowerBrief's common stock of
rights, options or other securities entitling them to subscribe
for additional shares of New PowerBrief's common stock, or of
securities convertible into or exercisable or exchangeable for
additional shares of New PowerBrief's common stock, for a
consideration per share that is less than the exercise price for
the warrants; and
(4) the issuance of shares of common stock for a consideration per
share that is less than the exercise price for the warrants.
The events described in clause (3) above do not give rise to an adjustment
if they involve the issuance of shares of New PowerBrief's common stock
underlying New PowerBrief options or warrants existing immediately after
completion of the merger.
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If New PowerBrief pays any dividend or other distribution on its common
stock or any evidence of indebtedness or other property (other than a cash
dividend, a subdivision, combination or reclassification of its common stock or
an issuance of rights or options to subscribe for or purchase its common stock),
New PowerBrief will pay or distribute to holders of exercisable series A
warrants and series B warrants, the evidence of indebtedness or other property
the holder would have been entitled to receive had he exercised the warrants
immediately before the dividend or distribution.
If New PowerBrief proposes at any time to purchase or redeem shares of its
common stock owned by any New PowerBrief affiliate for cash, evidence of
indebtedness or any other property, New PowerBrief will purchase or redeem the
then exercisable series A warrants and series B warrants and any shares of New
PowerBrief's common stock issued on exchange of any exercisable warrants, at the
option of each holder of those warrants, on the same terms and conditions and
for the same consideration as offered to the affiliates of New PowerBrief, less
the exercise price for the warrants. The electing holders' warrants will be
purchased or redeemed, as applicable, pro rata based on the number of shares of
New PowerBrief's common stock to be purchased or redeemed from New PowerBrief
affiliates.
Mergers, Consolidations or Other Sales. If New PowerBrief consolidates or
merges, or sells or otherwise dispose of all or substantially all of its assets
to another corporation, each series A warrant and series B warrant which is then
exercisable will thereafter, at the election of each holder of those warrants,
become the right to receive the kind and amount of shares of stock or other
securities or property which the holder would have been entitled to receive as a
result of the consolidation, merger or sale or other disposition if the holder
had exercised the warrant immediately before the consolidation, merger, sale or
other disposition, net of the exercise price of the warrant. If a holder does
not make the foregoing election, the successor or acquiring corporation will
assume the performance of the obligations and liabilities of the warrants held
by the holder.
Amendment. Any amendment or modification to the warrant agreements that
has an effect on the rights or benefits of warrant holders' interests will
require the written consent of the holders of two-thirds of the then outstanding
series A warrants or series B warrants, as applicable.
Restrictions on Performance. New PowerBrief will not enter into any
agreement or other instrument limiting in any manner its ability to perform it
obligations under the warrant agreements or the warrants, or making its
performance under the warrant agreements or the warrants, or the issuance of the
New PowerBrief common stock upon surrender of the warrants, a default under that
agreement or other instrument.
WARRANTS ISSUED BEFORE THE MERGER
Before the merger, IOI will issue warrants to purchase 2,959,274 shares of
its common stock on substantially the same terms as the series A warrants to be
issued in the merger to the PowerBrief stockholders. Also, IOI has outstanding
warrants that will purchase between 1,285,445 and 1,498,482 shares of its common
stock on substantially the same terms as the series B warrants to be issued to
the PowerBrief stockholders. Although these amounts make reference to warrants
issued prior to the merger, such amounts reflect the contemplated five to one
reverse stock split in the merger.
In this section of the joint proxy statement/prospectus, we sometimes refer
to the warrants IOI will issue to purchase 2,959,274 shares of its common stock
as the 2000 Warrants, and we sometimes refer to IOI's outstanding warrants to
purchase between 1,285,445 and 1,498,482 shares of its common stock as the 1997
Warrants.
The 1997 Warrants were originally issued to purchase 1,000,000 shares of
IOI's common stock. However, the issuance of the 2000 Warrants causes an
adjustment in the number of shares purchasable with the 1997 Warrants because
the exercise price of the 2000 Warrants will be less than the exercise price of
the 1997 Warrants. The final amount of this adjustment will be determined when
the exercise price of the 2000 Warrants is determined.
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The exercise price of the 2000 Warrants will be determined after the merger
in the same manner as the series A warrants to be issued in the merger. In
addition, if the merger does not occur, the exercise price for the 2000 Warrants
will be determined in the manner as if the merger had occurred on the date that
the merger agreement is terminated. See "-- Warrants to be Issued in the
Merger -- General."
If the 2000 Warrants are exercisable for their maximum exercise price, the
1997 Warrants will be exercisable for 1,285,445 shares of IOI's common stock.
Conversely, if the exercise price of the 2000 Warrants is determined to be only
$0.01 per share, which is their minimum exercise price, the 1997 Warrants will
be exercisable for 1,498,482 shares of IOI's common stock. See "-- Warrants to
be Issued in the Merger -- General" and "Merger
Agreement -- Adjustments -- Adjustment Before the Merger."
REGISTRATION RIGHTS
FW Integrated Orthopaedics Investors, L.P., FW Integrated Orthopaedics
Investors II, L.P. and Chartwell Capital Investors, L.P, which collectively hold
4,731,157 shares of IOI common stock and warrants to purchase 1,000,000 shares
of IOI common stock, after the five to one reverse stock split concurrently with
the merger, are entitled to registration rights with respect to these shares and
warrants. Under two separate registration rights agreements, the FW Integrated
Orthopaedics Investor parties and Chartwell, collectively, are entitled to
require IOI to register their shares of common stock and warrants up to three
times. In addition, if IOI proposes or is required to register any of its common
stock, either for its own account or for the account of other of its
shareholders, IOI will be required to notify the FW Integrated Orthopaedics
Investor parties and Chartwell, and subject to the limitations specified in the
registration rights agreements, to include in the registration all of the common
stock requested to be included by those holders. IOI will be obligated to pay
the expenses, other than underwriting commissions, of the registration required
by Chartwell or the FW Integrated Orthopaedics Investor parties, and of all
incidental registrations.
These registration rights agreements will remain in effect after completion
of the merger, with New PowerBrief honoring the obligations of IOI under the
registration rights agreements. Any exercise of these registration rights may
hinder New PowerBrief's efforts to arrange future financings and have an adverse
effect on the market price of New PowerBrief's common stock.
In addition, the merger agreement requires New PowerBrief to file a
registration statement to cover the shares of New PowerBrief's common stock
issuable upon exercise of all warrants remaining outstanding after the effective
time of the merger at the earlier of:
- a time reasonably expected to permit the registration statement to be
effective on the first anniversary of the effective time of the merger;
and
- concurrently with the filing of a registration statement with respect to
any of New PowerBrief's equity securities, including options and
warrants, in accordance with the terms of IOI's registration rights
agreement with the FW Integrated Orthopaedics Investor parties discussed
above.
The merger agreement also requires New PowerBrief to file a registration
statement covering the shares of New PowerBrief's common stock issuable in
connection with the adjustment described under "The Merger
Agreement -- Adjustments -- Adjustment After the Merger." See "The Merger
Agreement -- Significant Covenants -- Registration Rights."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for IOI's common stock is Continental
Stock Transfer & Trust Company.
STOCK EXCHANGE LISTING
IOI's common stock currently is listed on the AMEX. It is a condition to
PowerBrief's obligation to complete the merger that the shares of New
PowerBrief's common stock issued in the merger be approved
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for listing on the AMEX at or before the effective time of the merger. IOI has
applied to have continued listing of New PowerBrief's common stock on the AMEX,
including the shares of New PowerBrief's common stock to be issued in the
merger. However, we cannot assure you that the New PowerBrief common stock to be
issued in the merger will be listed on the AMEX. See "The Merger Agreement --
Significant Covenants -- Additional Closing Conditions for PowerBrief's Benefit"
and "Risk Factors -- Risk Factors Related to the Merger -- We cannot assure you
that IOI or New PowerBrief will be able to maintain its listing on the AMEX."
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements have been prepared based on the historical financial statements of
IOI and PowerBrief. The unaudited pro forma condensed consolidated financial
statements reflect the merger between PowerBrief and IOI as a recapitalization
of PowerBrief because IOI has elected to sell its operating assets and will not
have any continuing operations and because the stockholders of PowerBrief will
own the majority of the outstanding common stock of New PowerBrief after the
merger. As a result, New PowerBrief will record the merger as an issuance of
common stock for the net monetary assets of IOI, accompanied by a
recapitalization of its equity.
The unaudited pro forma condensed consolidated balance sheet as of
September 30, 2000 gives effect to the merger as if it occurred on September 30,
2000. The unaudited pro forma condensed consolidated statement of operations for
the nine months ended September 30, 2000 and the year ended December 31, 1999
gives effect to the merger as if it had occurred on January 1, 1999. Certain
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has been condensed or omitted
pursuant to the rules and regulations of the Commission.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical financial statements and related
notes of both IOI and PowerBrief and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" sections of both companies
included elsewhere in this joint proxy statement/prospectus.
The unaudited pro forma condensed consolidated statements of operations are
not necessarily indicative of the results that would have occurred had the
merger been consummated as of the beginning of the period presented or that
might be attained in the future.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PROFORMA
ADJUSTMENTS PRO FORMA
INCREASE/ REF. NEW
POWERBRIEF IOI (DECREASE) # POWERBRIEF
---------- -------- ----------- ---- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 942 $ 3,386 $ -- $ 4,328
Prepaid expenses and other assets........... 33 47 (2) 3 78
Note receivable............................. -- 111 (58) 1 53
Net assets of discontinued operations --
ambulatory surgery centers............... -- 2,735 -- 2,735
------- -------- -------- -------
Total current assets................ 975 6,279 (60) 7,194
Property and equipment, net................... 672 30 -- 702
Note receivable from stockholders............. 55 -- -- 55
Other assets.................................. 253 133 (75) 2 311
------- -------- -------- -------
Total assets........................ $ 1,955 $ 6,442 $ (135) $ 8,262
======= ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 621 $ 882 $ (2) 3 $ 1,501
Net liabilities of discontinued operations
-- other................................ -- 49 -- 49
Current maturities of capital lease
obligations.............................. 80 54 (58) 1 76
------- -------- -------- -------
Total current liabilities........... 701 985 (60) 1,626
Obligations under capital leases.............. 102 129 (75) 2 156
------- -------- -------- -------
Total liabilities................... 803 1,114 (135) 1,782
------- -------- -------- -------
Stockholders' equity:
Preferred stock............................. 26 -- (26) 4 --
Common stock................................ 112 30 (125) 4 17
Additional paid in capital.................. 5,427 52,238 (46,789) 4 10,876
Accumulated deficit......................... (4,413) (46,219) 46,219 4 (4,413)
Treasury shares............................. -- (721) 721 4 --
------- -------- -------- -------
Total stockholders' equity.......... 1,152 5,328 -- 6,480
------- -------- -------- -------
Total liabilities and stockholders'
equity............................ $ 1,955 $ 6,442 $ (135) $ 8,262
======= ======== ======== =======
</TABLE>
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<PAGE> 84
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROFORMA
ADJUSTMENTS PRO FORMA
INCREASE/ REF. NEW
POWERBRIEF IOI (DECREASE) # POWERBRIEF
---------- ------- ----------- ---- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Operating expenses:
Research and development costs............. $ 1,237 $ -- $ -- $ 1,237
General and administrative................. 2,598 2,307 -- 4,905
Special charges............................ -- 884 -- 884
------- ------- ------- -------
3,835 3,191 -- 7,026
------- ------- ------- -------
Loss from operations......................... (3,835) (3,191) -- (7,026)
Other income................................. 21 141 -- 162
------- ------- ------- -------
Loss from continuing operations before
provision for income taxes................. (3,814) (3,050) -- (6,864)
Income tax provision......................... -- (47) -- (47)
------- ------- ------- -------
Loss from operations......................... $(3,814) $(3,097) $ -- $(6,911)
======= ======= ======= =======
Loss from continuing operations applicable to
common shares.............................. $(3,814) $(4,827) $(8,641)
======= ======= =======
Loss from continuing operations per common
share: basic and diluted................... $ (0.34) $ (0.45) $ (0.64)
======= ======= =======
Weighted average common shares outstanding... 11,250 10,693 (8,367) 5 13,576
======= ======= ======= =======
</TABLE>
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<PAGE> 85
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROFORMA
ADJUSTMENTS PRO FORMA
INCREASE/ REF. NEW
POWERBRIEF(6) IOI (DECREASE) # POWERBRIEF
------------- ------- ----------- ---- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Operating expenses:
Research and development costs........... $ 307 $ -- $ -- $ 307
General and administrative............... 193 3,896 -- 4,089
Special charges.......................... -- 768 -- 768
------- ------- ------- -- -------
500 4,664 -- 5,164
------- ------- ------- -- -------
Loss from operations....................... (500) (4,664) -- (5,164)
Other income (expense)..................... 6 (82) -- (76)
------- ------- ------- -- -------
Loss from continuing operations before
provision for income taxes............... (494) (4,746) -- (5,240)
Income tax provision....................... -- (133) -- (133)
------- ------- ------- -- -------
Loss from continuing operations............ $ (494) $(4,879) $ -- $(5,373)
======= ======= ======= =======
Loss from continuing operations applicable
to common shares......................... $ (494) $(7,653) $(8,147)
======= ======= =======
Loss from continuing operations per common
share: basic and diluted................. $ (0.04) $ (1.18) $ (0.64)
======= ======= =======
Weighted average common shares
outstanding.............................. 11,250 6,496 (5,010) 5 12,736
======= ======= ======= =======
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed consolidated balance sheet to give effect to the merger as if it was
consummated as of September 30, 2000 and to the historical condensed
consolidated statement of operations as if the merger was consummated as of the
beginning of the periods presented:
<TABLE>
<CAPTION>
REFERENCE
NUMBER DESCRIPTION
--------- -----------
<C> <S>
1. Eliminate current portion of capital lease receivable and
payable between IOI and PowerBrief.
2. Eliminate long-term portion of capital lease receivable and
payable between IOI and PowerBrief.
3. Eliminate accounts payable and accounts receivable between
IOI and PowerBrief.
4. To reflect the exchange of New PowerBrief common stock for
PowerBrief's preferred stock and common stock, considering
the effect of the five to one reverse stock split and the
elimination of IOI's accumulated deficit to reflect the
merger as a recapitalization.
5. To adjust to the weighted average common shares outstanding
and the loss from continuing operations per common share of
New PowerBrief upon consummation of the merger considering
the effect of the five to one reverse stock split.
6. Period from inception (July 20, 1999) to December 31, 1999.
</TABLE>
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<PAGE> 86
INFORMATION ABOUT IOI
BUSINESS
IOI, a Texas corporation, was formed on April 1, 1990 as a successor
corporation in a re-incorporation merger. IOI's principal business has been to
provide healthcare practice management services.
During 1997, IOI implemented an orthopaedic physician practice affiliation
strategy. This strategy required IOI to acquire all of the non-medical
operations of an orthopaedic practice. The physicians associated with the
practice would then form a new medical group that assumed the medical operations
of their old practice, and the new medical group would execute a long-term
management agreement with IOI or a subsidiary of IOI. Various forms of
consideration were used in connection with the affiliation transactions,
including cash, convertible promissory notes and IOI common stock. In addition,
each physician who received consideration would enter into an employment
agreement with the new medical group, typically for an initial term of five
years. These agreements called for the payment of liquidated damages to the
medical group if the physician left before the expiration of the initial term of
the agreement and included limitations on the physician's ability to compete
with the medical group.
All of the management services agreements with the affiliated medical
groups had contracted terms of 40 years. The management services agreements
could be terminated without penalty by the affiliated medical groups upon IOI's
failure to cure a breach under the management services agreement or IOI's
bankruptcy or dissolution. At any time, an affiliated medical group could
terminate a management service agreement by tendering to IOI the unamortized
portion of the consideration paid by IOI for the group. If the affiliated
medical group breached its management services agreement, the group would be
responsible to pay liquidated damages to IOI equal to the unamortized portion of
the consideration paid by IOI for the group. The amount of the management fee
was based on a predetermined formula that was a function of the practice income
remaining after deducting practice operating expenses, excluding physician
compensation and management fees.
During 1997, IOI built its corporate infrastructure by adding key employees
and moving into larger office space. In the fourth quarter of 1997, it completed
three practice affiliation transactions with medical groups in Connecticut,
Louisiana, and Pennsylvania. In addition, in December of 1997, IOI completed the
sale of 250,000 shares of series B preferred stock and contingent warrants to
acquire up to 5.0 million shares of IOI's common stock to an investment group
affiliated with Robert M. Bass, yielding net cash proceeds to IOI of
approximately $24.5 million. IOI intended to use the capital primarily for
physician practice affiliation transactions.
In November 1997, IOI discontinued its management relationship with a
Houston-based musculoskeletal-related healthcare delivery system in a strategic
move to position its healthcare practice management services as a practice
affiliation model. As a result of this transaction, IOI took over the operations
of two work hardening centers in Houston, Texas. The centers operated under the
trade name "WorkWell." At December 31, 1997, IOI had affiliation agreements with
three orthopaedic practices and operated two work hardening facilities.
In the first quarter of 1998, IOI completed its fourth affiliation
transaction with a medical group in Colorado. During 1998, the healthcare
practice management services sector experienced significant deterioration in its
market position. Capital to fuel growth and acquisition in the physician
practice management industry became scarce. As a result, the
acquisition-centered healthcare practice management services strategy became
relatively difficult to execute. IOI's management responded by redefining its
growth strategy to include offering a portfolio of healthcare practice
management services alternatives, including consulting services and equity joint
ventures for ancillary services, as well as providing some management services
through both equity and non-equity models. At December 31, 1998, IOI had
affiliation agreements with four orthopaedic practices and operated two work
hardening facilities.
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<PAGE> 87
During 1999 similar market conditions continued as existed in 1998. In
January 1999, IOI terminated its management services agreement with its practice
in Connecticut effective December 31, 1998 due to the failure of the practice to
satisfy some of its obligations under the management services agreement. IOI
filed a lawsuit against the practice seeking to enforce repurchase obligations
under the management services agreement.
In April 1999, IOI acquired the rights to an ambulatory, or outpatient,
care center license in Marrero, Louisiana. The facility was located in the same
market served by its Louisiana practice. The center operates under the name
Westbank Ambulatory Care Center, LLC. The Westbank Ambulatory Care Center is an
eight-thousand square foot facility, including three operating rooms, a minor
procedure room, a recovery area with four recovery beds, and five step down beds
with associated support and business space. The Westbank Ambulatory Care Center
was under renovations from November 1999 through April 2000 and was operational
in May 2000. As part of its business plan for the Westbank Ambulatory Care
Center, IOI sold limited liability company units in the Westbank Ambulatory Care
Center, LLC to the area physicians. The sale of these limited liability units
was completed in March 2000. IOI funded all of the construction costs and start
up costs related to the Westbank Ambulatory Care Center because IOI was unable
to obtain financing for the project.
In the second and third quarters of 1999, IOI hired a new chief development
officer, a chief operating officer and a chief financial officer. IOI further
defined its business strategy to focus on the development and acquisition of
ambulatory surgery centers and specialty surgical hospitals in conjunction with
orthopaedic and other surgical specialty physicians.
In an effort to focus its financial and personnel resources on its
ambulatory surgery center acquisition and development business strategy, IOI
decided in the last quarter of 1999 to terminate its management services
agreements with its existing practices in Colorado, Pennsylvania and Louisiana.
IOI entered into a definitive agreement with its Colorado practice in January
2000 to terminate its management services agreement effective December 31, 1999.
IOI executed a definitive agreement with its Pennsylvania practice in April 2000
to terminate its management services agreement effective March 31, 2000. Upon
terminating the management services agreements, IOI received termination fees.
In addition, IOI sold the related net accounts receivable and net property and
equipment to the practices and the practices assumed various liabilities.
In March 2000, IOI and its Connecticut practice reached a settlement in the
lawsuit filed by IOI. In the settlement, the practice purchased all of the
assets of IOI Management Services of Connecticut, Inc. for $750,000 in cash and
promissory notes.
In May 2000, IOI adopted a plan to discontinue its current business due to
difficult financing markets and limited investor support for healthcare practice
management services companies. IOI restructured its corporate office personnel
in June 2000, leaving only key personnel to execute the merger strategy. IOI
began evaluating possible business opportunities in order to acquire new
operations through an acquisition or merger. On May 25, 2000, IOI began
discussions with PowerBrief regarding a possible merger. On July 7, 2000, IOI
presented a term sheet to the PowerBrief board of directors, which was
negotiated over the course of the month. On September 15, 2000, IOI and
PowerBrief executed the merger agreement, and IOI publicly announced the merger
on September 18, 2000 after the close of the markets.
On September 18, 2000, IOI entered into a definitive agreement to terminate
its management services agreement with its Louisiana practice effective August
31, 2000. IOI received termination fees, sold the related net accounts
receivable and net property and equipment to a newly formed entity owned by the
partner physicians of the practice and the newly formed entity assumed certain
liabilities and forgave certain debts. In addition, IOI sold the assets of its
work hardening clinics in Houston, Texas effective August 31, 2000. IOI is in
the process of selling its interest in its remaining operating asset, which is
the Westbank Ambulatory Care Center in Louisiana.
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<PAGE> 88
EMPLOYEES
At November 1, 2000, IOI employed 10 full time employees, of which three
are employees in continuing operations, and eight part time employees, of which
none are employees in continuing operations. None of IOI's or any of its
affiliate's employees are covered by collective bargaining agreements.
COMPETITION, MAJOR CUSTOMERS AND REIMBURSEMENT
Competition. In the event it continued its ambulatory surgery business,
IOI would compete with other ambulatory surgery companies and local hospitals. A
local hospital may have a competitive advantage in attracting physicians and
patients due to its established standing in the community, historical patient
loyalty and convenience for physicians making rounds and performing inpatient
surgery in the hospital. However, IOI believes that the physicians may prefer to
utilize the ambulatory surgery centers due to greater scheduling flexibility,
more consistent nurse staffing, and faster turnaround time between cases,
thereby allowing a physician to perform more surgeries in a defined period of
time.
Major Customers. As of September 30, 2000, all of IOI's revenue is derived
from the Westbank Ambulatory Care Center. IOI is in the process of pursuing the
sale of its interest in the Westbank Ambulatory Care Center as part of its plan
to discontinue its ambulatory surgery center operations.
Reimbursement. The various services rendered by the Westbank Ambulatory
Care Center are generally paid by employers, insurance companies and Medicare or
Medicaid. To some extent, professional medical services are covered by all
payors of medical care. Certain of the ancillary services are more likely to be
covered by employers' and workers' compensation insurance than by other payors
due to the nature of the services rendered. Patients pursuing personal injury
claims may require the services of any or all elements of the
musculoskeletal-related healthcare delivery system.
SERVICE MARKS
IOI owns federal registrations for the following service marks: "DRCA,"
"IOI," and "IOI & Design." These marks were registered in September 1995,
January 1999 and July 1999, respectively. As long as IOI continues to use these
marks, the registrations are valid for a term of ten years and may be renewed
for additional ten-year periods.
IOI also owns a Texas registration for the service mark "WORKWELL," and for
a design mark used in connection with its "WORKWELL" clinics. IOI registered
these marks with the Secretary of the State of Texas in January 1990. These
registrations are also valid for a term of ten years and were renewed for an
additional ten-year period in January 2000.
REGULATION
General. IOI is in the process of discontinuing its sole remaining
business of owning an interest in an ambulatory surgery center known as the
Westbank Ambulatory Care Center. The following description of regulations is
only applicable to the extent IOI continues operating the Westbank Ambulatory
Care Center.
The healthcare industry is highly regulated, and the regulatory environment
in which IOI operates could change significantly in the future. IOI believes
that healthcare regulations will continue to change, and it will monitor these
changes. To the extent it continues its ambulatory surgery center business, IOI
would expect to modify its agreements and operations from time to time as the
business and regulatory environments changed. Although IOI believes it would be
able to structure all its agreements and operations in accordance with
applicable law, it might not be able to successfully address changes in the
regulatory environment.
Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate health maintenance organizations, or
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<PAGE> 89
HMOs, and other managed care organizations with which the Westbank Ambulatory
Care Center or its affiliated physicians may have contracts. Many states require
regulatory approval, including certificates of need, before establishing or
expanding certain types of healthcare facilities, offering certain services or
making expenditures for healthcare equipment, facilities or programs in excess
of statutory thresholds. Some states also require licensing of collection
agencies and employee leasing companies. In connection with its operations, IOI
believes it is in material compliance with all of these laws and regulations and
current interpretations thereof, but these laws, regulations or interpretations
may change in future or additional laws and regulations may be enacted.
There also have been numerous federal and state initiatives for
comprehensive reforms affecting the payment for and availability of healthcare
services. IOI believes that these initiatives will continue. Aspects of some of
these reforms as previously proposed, such as further reductions in insurance
payments and additional restrictions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could adversely affect
IOI. Other aspects of these initiatives, such as universal health insurance
coverage and coverage of some previously uncovered services, could have a
positive impact on IOI's business.
The ability of IOI to operate its ambulatory surgery center business
profitably would depend, in part, upon the Westbank Ambulatory Care Center
obtaining and maintaining all necessary licenses, certificates of need and other
approvals, as well as operating in compliance with applicable healthcare laws
and regulations.
Fee Splitting; Corporate Practice of Medicine. The laws of many states
prohibit physicians from splitting fees with non-physicians and/or other
physicians. Also, other state laws may prohibit non-physician entities, such as
IOI, from practicing medicine. Under these corporate practice of medicine laws,
IOI is prohibited from exercising control over the provision of medical
services. These fee-splitting and corporate practice of medicine laws vary from
state to state and are enforced by regulatory authorities with broad discretion.
IOI believes its operations are in material compliance with existing applicable
laws. Specifically, IOI believes the compensation it receives for its management
services is consistent with fair market value and would not constitute fee
splitting. In addition, IOI believes that its long-term management agreement
with the Westbank Ambulatory Care Center does not result in IOI exercising
control over the provision of medical services in violation of corporate
practice of medicine laws. However, review of IOI's business by courts or
regulatory authorities could result in determinations that adversely affect the
operations of IOI. Also, changes in healthcare regulations could restrict IOI's
existing ambulatory surgical operations.
Fraud and Abuse. In general, federal law prohibits any kind of arrangement
to compensate someone for arranging a service paid for by the Medicare or
Medicaid programs. Pursuant to this anti-kickback law, joint ventures and other
transactions among healthcare providers have faced increased scrutiny from both
the Department of Justice and the Office of Inspector General of the Department
of Health and Human Services in an effort to reduce potential fraud and abuse
related to Medicare and Medicaid costs. Many states have similar anti-kickback
laws and in some states these laws apply to all types of patients, not just
Medicare and Medicaid beneficiaries. The applicability of these federal and
state laws to many business transactions remain uncertain because courts have
not interpreted them to any significant degree.
Violation of the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties. Similar
penalties are provided for violation of state anti-kickback laws. The federal
government has adopted "safe harbor" regulations that identify business and
payment practices that are deemed not to violate the federal anti-kickback
statute. Although IOI's business does not fall within some of the current or
proposed safe harbors, IOI believes that its ambulatory surgery center
operations materially comply with the anti-kickback laws. IOI is not aware of
any challenge or investigation of IOI with respect to these matters. However,
IOI cannot guarantee that a challenge or investigation will not occur in the
future, particularly with the implementation of new prohibitions and
regulations.
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Prohibitions on Referrals to Various Entities. A law known as the Stark
Law prohibits a physician from referring Medicare or Medicaid patients to an
entity to receive some healthcare services if that physician or any of his or
her immediate family members has a financial relationship with that entity,
unless an exception applies. Some of these exceptions include:
- referrals for designated health services in a physician's office and some
other locations;
- referrals for designated health services to some publicly traded
companies;
- referrals for designated health services to entities with which the
physician has space and equipment rental relationships;
- referrals for services provided in an ambulatory surgery center; and
- referrals to entities with which the physician has an employment or
independent contractor relationship.
The penalties for violating the Stark Law include civil penalties and a
denial of payment for services. Many states have similar restrictions on
referrals by physicians. The applicability of these federal and state laws to
many business transactions in the healthcare industry, including those of IOI,
have not been interpreted by courts. To the extent that IOI is deemed to be
subject to the Stark Law or similar state laws, IOI believes its intended
activities would materially comply with those statutes and regulations.
HMO and Insurance Laws. Federal and state laws regulate insurance
companies, HMOs and other managed care organizations. Generally, these laws
apply to entities that accept financial risk. There is a potential that some
risk arrangements that may be entered into by IOI could be characterized by some
states as the business of insurance or an HMO. However, IOI believes that it is
not engaged in the business of insurance or of an HMO. Many states also regulate
the establishment and operation of networks of healthcare providers. Generally,
these laws do not apply to the hiring and contracting of physicians by other
healthcare providers. The regulators of the states in which IOI operates could
apply these laws to require licensure of IOI's operations as an insurer or
provider network. IOI believes that its activities are and will be in material
compliance with these laws in the states in which it does business, but
interpretations of these laws by the regulatory authorities in these states
could require licensure or a restructuring of some or all of IOI's operations.
If IOI is required to become licensed under these laws, the licensure process
can be lengthy and time consuming and, unless the regulatory authority permits
IOI to continue to operate while the licensing process is pending, IOI could
experience a material adverse change in its business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which IOI may not immediately be able to meet.
Further, if licensed, IOI would be subject to continuing oversight by and
reporting to the respective regulatory agency.
Certificate of Need. Some states require that some providers of healthcare
services obtain a certificate of need before beginning construction and/or
operation. Louisiana currently does not require a certificate of need to
establish and operate an ambulatory surgery center. However, Louisiana could
institute such a program. To the extent Louisiana enacts such a program, it
could adversely affect the Westbank Ambulatory Care Center's ability to expand
the services it provides.
Regulatory Compliance. IOI believes that regulations and statutes will
continue to change and, as a result, it regularly monitors developments in
related law. Although IOI believes its operations are, and will continue to be,
in material compliance with existing applicable laws, IOI's business operations
have not been the subject of judicial or regulatory interpretation. A review of
IOI's business by courts or regulatory authorities or a change in the healthcare
regulatory environment could result in determinations that could adversely
affect the ambulatory surgery center operations of IOI. IOI expects to modify
its agreements and operations from time to time as the business, statutory and
regulatory environment changes. Although IOI believes it will be able to
structure all its agreements and operations in accordance with applicable laws,
IOI cannot guarantee that its arrangements will not be successfully challenged
in the future.
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<PAGE> 91
DESCRIPTION OF PROPERTY
IOI does not own any real property. The Westbank Ambulatory Care Center and
IOI's corporate offices are leased at commercial property rates for the size,
location, and tenant finish included in the lease. The Westbank Ambulatory Care
Center is located in Marrero, Louisiana and is of a size and configuration, and
houses various types of equipment appropriate to, the services rendered within
the facility. IOI leases approximately 6,000 square feet in Houston, Texas, for
office space. IOI also leases 17,000 square feet of office space in Houston,
Texas, which it subleases to PowerBrief. See "The Merger -- Relationships
Between IOI and PowerBrief -- Sublease and Lease Agreement." All facilities are
insured and are maintained in good operating condition.
LEGAL PROCEEDINGS
A former employee of IOI has asserted various claims in writing against
IOI. When IOI employed this individual, it loaned him $25,000 in exchange for a
promissory note, which could be repaid with commissions he earned from IOI for
the acquisition of new businesses. After his resignation from IOI, he repaid the
unpaid portion of that note with cash. In his letter, this former employee
claimed that he earned $25,000 in commissions and that IOI owed that amount to
him. Furthermore, he claimed that he suffered losses of approximately $100,000
due to IOI's failure to deliver his stock option documents on a timely basis. He
also accused IOI's board of directors of intentionally suppressing IOI's stock
price by failing to fund potential acquisitions that he located. IOI believes
that these claims are without merit. However, if this former employee pursues
these claims in a court of law, and the court makes a finding adverse to IOI,
that determination could have adverse consequences to IOI and PowerBrief.
Also, in May 2000, a physician formerly employed by IOI's Louisiana
practice filed suit in the District Court of Orleans Parish of Louisiana against
IOI and Louisiana practice for an unspecified amount of damages. The Louisiana
practice hired this physician in July 1999. On February 1, 2000, the Louisiana
practice notified the physician that his employment was being terminated
effective 90 days from the date of that notice pursuant to the terms of his
employment contract. The physician alleged that IOI and its Louisiana practice
misrepresented the condition of the Louisiana practice and that those
misrepresentations induced him to leave his former practice. He also claimed
breach of contract, tortious interference by IOI with his contract with the
Louisiana practice and violations of the Louisiana Whistleblower Protection Act
and other laws. He has also made claims for payment of medical malpractice
coverage, vacation pay and continuing medical education leave. IOI has denied
all of his claims and believes that they are without merit. However, if the
court makes a finding adverse to IOI, his claims could have an adverse effect on
IOI.
In the ordinary course of its business, IOI may be subject, from time to
time, to other claims and legal actions. Although IOI cannot predict the outcome
of litigation actions, IOI believes that all claims and actions are either
adequately covered by insurance or will not have a material adverse effect on
IOI's financial condition, results of operations or liquidity.
MARKET PRICE AND DIVIDENDS
IOI's common stock is traded on the AMEX, under the symbol "IOI." Before
March 12, 1997, IOI's trading symbol was "DRC." At November 1, 2000, IOI had 119
shareholders of record. A significant portion of IOI's common stock not held by
affiliates of IOI is held through securities depositories. The following table
sets forth the high and low sale prices per share of IOI's common stock for the
periods
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<PAGE> 92
indicated, as reported by the AMEX and without giving effect to the five to one
reverse stock split concurrently with the merger:
<TABLE>
<CAPTION>
LOW HIGH
------- -------
<S> <C> <C>
1998
1st Quarter....................................... $6.2500 $8.1250
2nd Quarter....................................... 5.2500 7.1250
3rd Quarter....................................... 4.4375 6.3750
4th Quarter....................................... 2.4375 4.6250
1999
1st Quarter....................................... 1.6875 3.1875
2nd Quarter....................................... 0.7500 1.9375
3rd Quarter....................................... 0.8750 1.7500
4th Quarter....................................... 0.5000 2.8750
2000
1st Quarter....................................... 1.0625 2.3750
2nd Quarter....................................... 0.5625 1.7500
3rd Quarter....................................... 0.7500 1.8750
4th Quarter (through November 16, 2000)........... 0.5625 1.0000
</TABLE>
IOI has not declared or paid any dividends to common shareholders since
inception and does not anticipate paying any cash dividends in the foreseeable
future. Pursuant to the terms of IOI's articles of incorporation, no dividends
can be paid on the common stock until all dividends accrued on any outstanding
preferred stock have been paid. There are currently no shares of IOI's preferred
stock outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF IOI
The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere in this joint
proxy statement/prospectus.
GENERAL
In 1998, the healthcare practice management services sector experienced
significant deterioration in its market position. Capital to fuel growth and
acquisitions in the healthcare practice management services industry became
scarce. Management responded by changing its business strategy to begin offering
a portfolio of healthcare practice management services alternatives, including
consulting services and equity joint ventures for ancillary services, as well as
providing some management services through both the equity and non-equity model.
As a result of the deterioration of the sector, IOI was only able to close one
affiliation transaction 1998, which was with a Colorado medical group.
In the second quarter of 1999, IOI hired a new chief operating officer and
new chief development officer to implement the new business model. In addition,
IOI restructured the corporate office to reduce corporate overhead. In August
1999, IOI further refined its business strategy to focus more fully on the
acquisition and development of ancillary services such as ambulatory surgery
centers and specialty surgical hospitals in conjunction with orthopaedic and
other surgical specialties. As a result, 1999 was a year of strategic and
management changes and IOI did not acquire additional physician practices.
However, IOI focused on the growth and implementation of ancillary services such
as magnetic resonance imaging, or MRI, physical therapy and bone densitometry at
its existing practices.
IOI terminated its management services agreement with the Connecticut
practice in January 1999, effective December 31, 1998, due to the failure of the
practice to satisfy some of its obligations under the management services
agreement. In March 2000, IOI and the practice reached a settlement with respect
to litigation initiated by IOI against the practice related to the failure of
the practice to satisfy some of its
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obligations under its management services agreement. As a result, IOI reduced
the management services agreement and the net property and equipment of the
practice to their net realizable value at December 31, 1999, based on the terms
of the agreement, and reflected these items in Net Assets of Discontinued
Operations -- Practice Management Services in the December 31, 1999 consolidated
balance sheet. IOI recorded impairment charges of $2.1 million and $2.5 million
for the years ended December 31, 1999 and 1998, respectively.
As a result of terminating the management services agreement with the
Connecticut practice, IOI's number of management services agreements decreased
from four in 1998 to three in 1999. In addition to the medical practice
affiliations, IOI continued to operate the work hardening facilities in Texas
during 1999.
In an effort to focus its financial and personnel resources on the new
business strategy, IOI decided to terminate its management services agreements
with its existing practices, contingent upon acceptable terms. In December 1999,
IOI entered into discussions with its practice in Colorado regarding terminating
its management services agreement. In January 2000, IOI and the Colorado
practice signed a definitive agreement to terminate the management services
agreement effective December 31, 1999. As a result, IOI reduced the management
services agreement, net accounts receivable and net property and equipment of
the practice to their net realizable value at December 31, 1999 based on the
terms of the agreement, and reflected these items in Net Assets of Discontinued
Operations -- Practice Management Services in the December 31, 1999 consolidated
balance sheet. IOI recorded an impairment charge of $2.6 million for the year
ended December 31, 1999.
In April 2000, IOI and its Pennsylvania practice signed a definitive
agreement to terminate the management services agreement effective March 31,
2000. IOI recorded an impairment charge of $7.6 million for the nine months
ended September 30, 2000 related to the termination of the management services
agreement.
In April 1999, IOI acquired the license for the Westbank Ambulatory Care
Center, an 8,000 square foot ambulatory surgery center, in Marrero, Louisiana,
which is the same market served by the Louisiana practice. The Westbank
Ambulatory Care Center was completely renovated, and it includes three operating
rooms, a minor procedure room, four recovery rooms and five step-down beds. As
of December 31, 1999, IOI had funded $517,000 of start-up costs and $412,000 of
construction in progress. As part of its business plan for the Westbank
Ambulatory Care Center, IOI sold limited liability company units in the Westbank
Ambulatory Care Center, LLC to the area physicians. The sale of these limited
liability company units was completed in March 2000 and the Westbank Ambulatory
Care Center was operational in May 2000. IOI was unable to obtain financing for
the construction and the equipment for the Westbank Ambulatory Care Center as a
result of a lack of capital available in the physician management sector and
IOI's continued operating losses and cash position. As of September 30, 2000,
IOI had funded $827,000 of start-up costs and $2.9 million of construction costs
since inception of the project.
In an effort to reduce corporate overhead costs, IOI restructured its
corporate office, resulting in a reduction in staff from 40 in January 1999 to
19 in December 1999. In addition, in March 2000, IOI subleased approximately
half of its 17,000 square feet of corporate office space in Houston, Texas to
PowerBrief, with the remaining half of the space being subleased to PowerBrief
effective June 1, 2000.
In May 2000, IOI adopted a plan to discontinue its current business due to
difficult financing markets and limited investor support for healthcare practice
management services companies. IOI recorded special charges of $884,000 related
to the restructuring of its corporate office in the second quarter of 2000.
In September 2000, IOI executed a definitive agreement with its Louisiana
practice to terminate its management services agreement effective August 31,
2000. In conjunction with the transaction, IOI sold the net accounts receivable
and net property and equipment to a newly formed entity owned by the partner
physicians of the practice and the newly formed entity assumed certain
liabilities and forgave certain debt. The total consideration IOI received
related to the transaction was $1.3 million, which includes cash,
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<PAGE> 94
forgiveness of debt and the assumption of debt. IOI recorded an impairment
charge of $2.7 million for the nine months ended September 30, 2000.
In August 2000, IOI executed a definitive agreement to sell the fixed
assets of IOI's work hardening facilities effective August 31, 2000. The total
consideration IOI received related to the transaction was $120,000 in cash and
notes receivable. IOI recorded an impairment charge of $35,000 for the nine
months ended September 30, 2000.
IOI is pursuing the sale of its interest in the Westbank Ambulatory Care
Center.
RESULTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30,
------------------ ------------------
1999 1998 2000 1999
-------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................. $ -- $ -- $ -- $ --
======== ======= ======== =======
Loss from continuing operations...................... $ (4,879) $(3,797) $ (3,097) $(3,963)
======== ======= ======== =======
Income (loss) from discontinued operations........... $ (5,016) $(1,130) $(11,072) $ 1,361
======== ======= ======== =======
Extraordinary loss................................... $ (152) $ -- $ -- $ (152)
======== ======= ======== =======
Net loss............................................. $(10,047) $(4,927) $(14,169) $(2,754)
======== ======= ======== =======
Loss from continuing >operations applicable to common
share.............................................. $ (7,653) $(6,336) $ (4,827) $(6,016)
======== ======= ======== =======
Loss from continuing operations per common share:
basic and diluted.................................. $ (1.18) $ (0.98) $ (0.45) $ (0.93)
======== ======= ======== =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
DISCONTINUED OPERATIONS
The loss from discontinued operations for the nine months ended September
30, 2000 includes the loss on the termination of the management services
agreement, or MSA, with the Pennsylvania practice, as further described below,
and the loss from operations of the practice management services, work hardening
services and ambulatory surgery center business segments from January 1, 2000
through May 24, 2000. In addition, it includes the corporate office costs
associated with supporting the discontinued segments.
During the first quarter of 2000, definitive agreements were reached with
the Colorado and the Pennsylvania practices to terminate their MSAs effective
December 31, 1999 and March 31, 2000, respectively. As a result, the
consolidated statements of operations for the nine months ended September 30,
2000 do not include the operations of the Colorado practice and only include
three months of operations of the Pennsylvania practice. The loss from
discontinued operations for the nine months ended September 30, 2000 includes a
charge of $7.6 million related to the termination of the Pennsylvania practice
MSA and the sale of the related practice assets.
LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS
The loss from disposal of discontinued operations for the three and nine
months ended September 30, 2000 reflects the loss on the disposal of the
Louisiana orthopaedic practice and the two work hardening centers, the operating
losses for these three facilities as well as the Louisiana ambulatory surgery
center from May 25, 2000 until their disposal date, and the corporate office
costs associated with supporting these discontinued segments.
IOI executed a definitive agreement in September 2000 with its practice in
Louisiana regarding terminating its MSA effective August 31, 2000. In
conjunction with the transaction, IOI sold the net
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<PAGE> 95
accounts receivable and net property and equipment to a newly formed entity
owned by the partner physicians of the practice. The resulting write-down of
$2.7 million is included in the loss from disposal of discontinued operations in
the September 30, 2000 consolidated statement of operations.
In the third quarter, IOI executed definitive agreements with two parties
to sell the fixed assets of its work hardening facilities as of August 31, 2000.
The resulting write-down of $35,000 is included in the loss from disposal of
discontinued operations in the September 30, 2000 consolidated statement of
operations.
IOI completed renovations of an ambulatory surgery center in Louisiana in
April 2000 and completed the sale of a portion of its limited liability company
units to area physicians in March 2000. The ambulatory surgery center was
operational in May 2000. As a result of management's decision to discontinue its
operations in the ambulatory surgery center segment it is pursuing the sale of
its interest in its ambulatory surgery center in Louisiana.
SPECIAL CHARGES
IOI recorded special charges of $884,000 in June 2000 related to
restructuring the corporate office. The charges include severance costs for 10
corporate employees, an impairment charge related to the corporate fixed assets,
and lease termination costs.
IOI is discontinuing the operations of its three business segments, IOI is
omitting as not meaningful additional discussion herein of results of operations
for the year-to-date periods as compared to the equivalent prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
IOI currently expects to be able to satisfy its current requirements for
the next 12 months by using its current available cash of $3.4 million as well
as the proceeds from the sale of its assets. At September 30, 2000, IOI had
outstanding obligations of $116,000 related to the equipment and construction of
the ambulatory surgery center. However, upon completion of the merger, in order
to execute the New PowerBrief business strategy, New PowerBrief will need to
raise additional capital in the second or third quarter of 2001, or possibly
earlier depending upon the ability of IOI to sell its interest in the Louisiana
ambulatory surgery center for cash. New PowerBrief may raise this additional
capital from the sale of common stock or preferred stock, the exercise of
outstanding options or warrants or from borrowings, including using the
Louisiana ambulatory surgery center as collateral for those borrowings. IOI
cannot guarantee that additional financing or equity will be available on
acceptable terms, or at all.
In conjunction with the merger agreement with PowerBrief, IOI and
PowerBrief entered into a promissory note which allows PowerBrief to borrow up
to $3.0 million from IOI at an annual interest rate of 12%. As of November 1,
2000, PowerBrief had borrowed $500,000 under the promissory note.
In the event the merger is not completed and PowerBrief is unable to repay
the amount borrowed under the promissory note, IOI would have limited financial
resources to develop and implement an alternative business strategy. In
addition, if IOI is unable to sell its interest in its ambulatory surgery center
in Louisiana in an acceptable time frame or at an acceptable price, IOI would
have insufficient funds available to lend under the promissory note.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31, 1999
decreased $1.3 million, or 26%, from $5.0 million in 1998 to $3.7 million in
1999. These costs decreased as a result of an effort to decrease corporate costs
specifically related to corporate personnel, advertising, printing, professional
services, office supplies and telephone expenses. Of the decrease, $1.0 million
relates to a decrease in corporate personnel costs as a result of restructuring
the corporate office.
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<PAGE> 96
SPECIAL CHARGES
Special charges increased $322,000, or 72%, from $446,000 in 1998 to
$768,000 in 1999. The special charges relate to corporate restructuring charges.
The increase in special charges from 1998 to 1999 relates to additional
restructuring costs related to downsizing the corporate office.
INTEREST INCOME
Interest income decreased by $291,000 from 1998 to 1999. This decrease is a
result of a decrease in the cash and investment balance throughout the year.
INTEREST EXPENSE
Interest expense decreased $74,000 from 1998 to 1999. This decrease is
primarily attributable to the termination of the credit agreement and credit
facility in June 1999.
INCOME TAX EXPENSE
The $1.9 million increase in the income tax provision is due to a tax
benefit being recorded in 1998 as IOI expected to realize the tax asset related
to IOI's net operating loss. In 1999, IOI did not record a tax benefit as it was
determined that it may not be realized.
LOSS FROM DISCONTINUED OPERATIONS
The loss from discontinued operations net of taxes increased $3.9 million,
from a loss of $1.1 million in 1998 to a loss of $5.0 million in 1999. The
increase in the loss from discontinued operations primarily relates to a
$473,000 decrease in revenue, a $244,000 increase in other direct costs, a
$227,000 increase in depreciation and amortization, a $2.2 million increase in
impairment charges, a $1.0 million increase in the income tax provision, offset
by a $249,000 decrease in general and administrative expenses. The following are
explanations for the individual fluctuations within discontinued operations as
described above:
Revenues. Revenues for the year ended December 31, 1999 were $11.7
million, a decrease of $473,000, or 4%, over revenues of $12.2 million for the
same period of 1998. The decrease of $473,000 is a result of a $1.8 million
decrease in revenue resulting from the termination of the MSA with the
Connecticut practice, offset by an increase in revenues of $1.3 million from the
remaining three practices and the work hardening centers. The increase in
revenue at the remaining practices is a result of the addition of services
ancillary to physician visits, which accounted for $727,000 of the increase.
Same store growth contributed to the remaining increase.
Other Direct Costs. Other direct costs increased $244,000, or 6%, from
$4.0 million in 1998 to $4.3 million in 1999. Other direct costs decreased
$728,000 as a result of the termination of the MSA with the Connecticut
practice. However, this decrease was offset by a $972,000 increase in costs at
the remaining practices. Of this increase, $517,000 relates to start-up costs
for the Westbank Ambulatory Care Center in Marrero, Louisiana. The remaining
increase of $455,000 primarily relates to additional rent and professional
services at the practices for services ancillary to physician visits.
Depreciation and Amortization. Depreciation and amortization increased
$227,000, or 18%, from $1.3 million in 1998 to $1.5 million in 1999. Of this
increase $125,000 relates to an increase in amortization and $98,000 relates to
an increase in depreciation expense. The increase in amortization expense from
1998 to 1999 is a result of an increase of $249,000 in amortization expense
related to the three remaining practices offset by a decrease of $124,000 in
amortization expense related to the termination of the Connecticut practice MSA.
Amortization expense for the three remaining practices increased in 1999 due to
a full year of amortization using a 25-year amortization period. In 1998, a
40-year amortization period was used for the first six months with a reduction
in the amortization period as of July 1998 to 25 years. Depreciation expense
increased $98,000 as a result of an increase of $117,000 from 1998 to 1999 in
depreciation expense primarily due to the acquisition of MRI equipment for the
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Pennsylvania and Colorado practices offset by a decrease of $19,000 in
depreciation expense related to the termination of the Connecticut practice MSA.
Impairment Charges. Impairment charges increased $2.2 million, or 88%,
from $2.5 million in 1998 to $4.7 million in 1999. In 1998, IOI recorded an
impairment charge of $2.5 million related to the termination of the MSA with the
Connecticut practice. In 1999, IOI recorded an additional impairment charge of
$2.1 million related to the Connecticut practice as a result of reaching a
settlement with the practice. In addition, during 1999, IOI entered into
discussions with the Colorado practice to terminate its MSA. IOI and the
Colorado practice reached a definitive agreement in January 2000 to terminate
the MSA. As a result, IOI recorded an impairment charge of $2.6 million to
reduce the related assets to their net realizable value at December 31, 1999
based on the terms of the agreement.
Income Tax Provision. Income tax provision increased $1.0 million from
1998 to 1999 with the increase primarily attributable to a tax benefit being
recorded in 1998 as IOI expected to realize the tax asset related to IOI's net
operating loss. In 1999, IOI recorded a valuation allowance as it was determined
that a portion of the deferred tax asset may not be realized.
General and Administrative Expenses. General and administrative expenses
for discontinued operations decreased from $1.6 million in 1998 to $1.3 million
in 1999, or a decrease of $249,000. This decrease is primarily due to a decrease
in corporate office personnel to support the discontinued operating segments.
EXTRAORDINARY LOSS
Extraordinary loss increased to $152,000, net of tax as a result of
terminating a credit agreement and credit facility in June 1999.
NET LOSS/LOSS PER COMMON SHARE
Net loss, net loss from continuing operations applicable to common shares
and net loss from continuing operations per common share for the year ended
December 31, 1999 were $10.0 million, $7.7 million and $1.18, respectively,
compared to $4.9 million, $6.3 million and $0.98, respectively, for the same
period in 1998. The increase in the loss from continuing operations applicable
to common shares from 1998 to 1999 is a result of an increase in the loss from
continuing operations of $1.1 million during 1999 attributable to the reasons
noted above and an incremental increase in the annual stock dividend of $235,000
on the series B preferred stock during 1999. The net loss per share from
discontinued operations increased $0.59 from $0.18 in 1998 to net loss of $0.77
in 1999. The increase in net loss from discontinued operations per share from
1998 to 1999 is due to the $3.9 million of additional losses from discontinued
operations.
Weighted average shares outstanding at December 31, 1999 and December 31,
1998 are comparable.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended December 31, 1999
was $3.0 million, compared to $2.8 million for the same period of 1998. Net cash
used in investing activities decreased $4.1 million from $5.0 million in 1998 to
$858,000 in 1999, primarily due to cash used in 1998 of $4.7 million to enter
into the Colorado medical practice transaction. Net cash used in financing
activities was $226,000 in 1999, as compared to net cash used in financing
activities of $2.9 million in 1998. The $2.7 million decrease in the cash used
in financing activities is primarily due to the refund in 1999 of $414,000 of
deferred financing costs related to the termination of the Nations Bank credit
facility, the payment in 1998 of $1.0 million of deferred financing costs, and
$1.5 million of note payments related to the acquisition of a medical practice.
In 1998, IOI entered into a credit agreement, which provided for a $65.0
million three-year revolving credit facility. Due to changes in IOI's business
strategy and general market conditions, the credit agreement and credit facility
were terminated on June 4, 1999.
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IOI's new business strategy focused on the development of services
ancillary to physician visits such as ambulatory surgery centers, specialty
surgical hospitals and other ancillary services in conjunction with orthopaedic
and other surgical specialty physicians. In an effort to focus its financial and
personnel resources on the new business strategy, IOI decided to terminate its
MSAs with its existing practices, contingent upon obtaining acceptable terms.
Subsequent to December 31, 1999, IOI terminated all of its remaining MSAs.
Under the new business model, IOI began renovations of the Westbank
Ambulatory Care Center in Marrero, Louisiana. As of December 31, 1999, IOI had
funded $517,000 in start-up costs and $412,000 of construction in progress. At
December 31, 1999, IOI had outstanding commitments of $2.2 million related to
the equipment and construction of the Westbank Ambulatory Care Center. IOI was
unable to obtain financing for the equipment and leasehold improvements as a
result of the lack of capital available in the physician practice management
sector and due to IOI's continued operating losses and cash position.
SECURITY OWNERSHIP OF IOI'S DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of IOI's common stock as of November 1, 2000 by the following:
- each person who beneficially owns 5% of IOI's shares of common stock,
- each of IOI's directors,
- each of IOI's named executive officers; and
- all of IOI's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities, subject to community property laws, where applicable.
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<PAGE> 99
Unless otherwise noted, each of the persons listed below has sole voting
and investment power with respect to the shares beneficially owned by him as set
forth opposite his name.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- ----------
<S> <C> <C>
Chartwell Capital Investors, L.P............................ 2,510,266(1) 8.44%
1610 Independent Square
Jacksonville, Florida 32202
FW Integrated Orthopaedics Investors I, LP.................. 13,072,760(2) 40.81%
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
FW Integrated Orthopaedics Investors II, LP................. 13,072,761(3) 40.81%
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Steven B. Gruber............................................ 12,000(4) *
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Scott J. Hancock............................................ 12,000(4) *
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Jose E. Kauachi............................................. 1,160,287(5) 3.91%
P. O. Box 1846/1847
Edwards, Colorado 81632
Ronald E. Pierce............................................ 107,369(6) *
4918 Cambridge Street
Sugar Land, Texas 77479
Gerald R. Wicker............................................ 1,000(7) *
562 Castlebridge Lane
Birmingham, Alabama 35242
Mark A. Wolfson............................................. 12,000(4) *
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Directors and executive officers as a group (8 persons)..... 1,459,323 4.89%
</TABLE>
---------------
* Less than 1%
(1) Includes warrants to purchase 136,403 shares of common stock and 2,373,863
shares of common stock. These shares do not reflect the additional shares of
IOI's common stock (between 38,936 and 67,994) that will be purchasable
under the holder's warrants as an anti-dilution adjustment resulting from
the issuance by IOI to its shareholders of warrants to purchase 14,796,370
shares of common stock before the merger and the reverse stock split.
(2) Includes warrants to purchase 2,431,798 shares of common stock and
10,640,962 shares of common stock. These shares do not reflect the
additional shares of IOI's common stock (between 694,145 and 1,212,207) that
will be purchasable under the holder's warrants as an anti-dilution
adjustment resulting from the issuance by IOI to its shareholders of
warrants to purchase 14,796,370 shares of common stock before the merger and
the reverse stock split.
(3) Includes warrants to purchase 2,431,799 shares of common stock and
10,640,962 shares of common stock. These shares do not reflect the
additional shares of IOI's common stock (between 694,146 and 1,212,207) that
will be purchasable under the holder's warrants as an anti-dilution
adjustment resulting from the issuance by IOI to its shareholders of
warrants to purchase 14,796,370 shares of common stock before the merger and
the reverse stock split.
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(4) Includes an option to purchase 12,000 shares, which is currently
exercisable.
(5) Represents 1,097,537 shares directly owned by Mr. Kauachi, 750 shares owned
by Mr. Kauachi's wife and an option to purchase 62,000 shares, which is
currently exercisable. Mr. Kauachi disclaims any beneficial ownership with
respect to securities owned by his wife.
(6) Represents 107,179 shares directly owned and 190 shares owned by Mr.
Pierce's wife.
(7) Represents 1,000 shares owned by Mr. Wicker's wife.
IOI'S DIRECTORS
The following table sets forth, as of November 1, 2000, the name, age and
principal position of each of IOI's directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jose E. Kauachi....................... 61 Chairman of the Board and President
Steven B. Gruber...................... 42 Director
Scott J. Hancock...................... 41 Director
Mark A. Wolfson....................... 48 Director
</TABLE>
Jose E. Kauachi, a founder of IOI, serves as Chairman of the Board and has
served as a director since October 1986. From June 1999 to present, he has
served as President of IOI. From October 1986 to December 1997, Mr. Kauachi
served as President, Chairman of the Board and Chief Executive officers of IOI.
From 1984 to 1987, he was a consultant to various healthcare related companies,
including Mexican and Spanish companies interested in establishing and
developing business operations in the southwestern United States. Prior thereto,
he held various senior management positions with companies in the investment and
banking industries, including the Mexican Division of Financiera de Nuevo Leon,
SA de CV, Banamex, International Bank of America and Carte Blanche Corporation.
Mr. Kauachi received his degree in Mechanical Engineering Route to Business
Administration in 1965 from the University of Texas.
Steven B. Gruber has served as a director of IOI since February 1999. He
has served as a Vice President of Keystone, Inc. since 1992 and a managing
partner of Oak Hill Capital Management, Inc., investment advisor to Oak Hill
Capital Partners, L.P., since 1998. Mr. Gruber co-founded and serves as a
co-managing partner of Insurance Partners, L.P. He serves on the board of
Superior National Insurance Group, Inc. Prior to joining Keystone, Inc., Mr.
Gruber was a managing director and co-head of High Yield Securities at Lehman
Brothers and a managing director of its Merchant Banking Group. Mr. Gruber holds
an MBA from the University of Chicago Graduate School of Business where he was a
Merrill Fellow, and a BA degree from the University of Michigan. Mr. Gruber is a
member of the Board of the Children's Museum of Manhattan.
Scott J. Hancock has served as a director of IOI since December 1997. He
has served as a Vice President of Keystone, Inc. since 1996, a principal of
Arbor Investors, L.L.C. from 1996 to 1998 and a partner of Oak Hill Capital
Management, Inc. from 1998 to present. From 1993 until 1996, Mr. Hancock was
with Bain Capital, Inc. where he made private equity investments in the
healthcare, information technology and software industries. He holds a BS degree
from the University of California, Berkeley and an MBA from Stanford Graduate
School of Business.
Mark A. Wolfson has served as a director of IOI since December 1997. He has
served as a Vice President of Keystone, Inc. since 1985 and a managing partner
of Oak Hill Capital Management, Inc. since 1998. He serves on the Board of
Directors of Investment Technology Group and eGain Communications, Inc. Mr.
Wolfson has been a faculty member at the Stanford Graduate School of Business
since 1977, where he has held various titles, including Dean Witter Professor,
and served a three-year term as Associate Dean. He has also taught at the
Harvard Business School and the University of Chicago and has been a Visiting
Scholar at the Sloan School of Management as Massachusetts Institute
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of Technology and the Hoover Institution at Stanford University. Mr. Wolfson has
been a research Associate at the National Bureau of Economic Research since
1988.
NEW POWERBRIEF'S DIRECTORS
IOI intends to designate Mr. Hancock as a director of New PowerBrief, but
has not determined who else it will designate to New PowerBrief's board. See
"The Merger Agreement -- Board of Directors of New PowerBrief" for a discussion
regarding the designation of New PowerBrief's board members.
IOI'S EXECUTIVE OFFICERS
The following table sets forth, as of November 1, 2000, the names, ages and
positions of the persons who are not directors and who are executive officers of
IOI.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Douglas P. Badertscher................ 45 Senior Vice President and Chief
Operating Officer
Laurie H. Gutierrez................... 34 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
</TABLE>
Douglas P. Badertscher has served as Senior Vice President and Chief
Operating Officer since joining IOI on May 1, 1999. Prior to joining IOI, Mr.
Badertscher was President and Chief Operating Officer of Pendulum Practice
Management Company from March 1997 to April 1999. From January 1994 to April
1997, Mr. Badertscher was President and Chief Executive Officer of Medical
Transition Resources, which provided consulting services regarding merger and
acquisitions to physician practice management companies, independent practice
associations and management services organizations. Mr. Badertscher was educated
at Ouachita Baptist University and Williams College where he studied psychology
and sociology.
Laurie H. Gutierrez, CPA, has served as Senior Vice President, Chief
Financial Officer, Treasurer and Secretary since joining IOI on September 7,
1999. Ms. Gutierrez was Controller/Senior Director of Finance of Memorial
Sisters of Charity Health Plan, or MSCH, from January 1996 through April 1999.
MSCH provided managed care, indemnity, third-party administration, and rental
network products throughout southwest and southeast Texas. Prior thereto, Ms.
Gutierrez was a healthcare manager at Ernst & Young LLP. She began her
professional career at Ernst & Young LLP in 1988. Ms. Gutierrez holds a Bachelor
of Business Administration with a major in Accounting.
EXECUTIVE EMPLOYMENT CONTRACTS
IOI amended and restated its executive agreements with Douglas P.
Badertscher and Laurie H. Gutierrez on October 24, 2000. Under these agreements,
each of the executives is entitled to a bonus based on their continued
employment with IOI for specified periods of time.
- If Mr. Badertscher remains employed with IOI until the completion of
IOI's sale of its interest in the Westbank Ambulatory Care Center, he
will receive a bonus of $27,167. In addition, if his employment is
terminated before December 31, 2001, his balance related to unearned
advances by IOI will be forgiven. His unearned advances balance was
$66,750 at November 1, 2000.
- If Ms. Gutierrez remains employed with IOI for 60 days after the signing
of definitive documents relating to the sale of its interest in, or
closure of, the Westbank Ambulatory Care Center, she will receive a bonus
of $54,333 plus $3,125 for each month during the period from January 1,
2000 until the final day of her employment with IOI.
Additionally, upon satisfaction of the applicable employment condition by an
executive, 100% of that executive's IOI options will vest and remain exercisable
until the later of 120 days following termination of the executive's employment
or 90 days following the completion of any restructuring of IOI related to a
change of control of IOI.
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<PAGE> 102
If IOI terminates these executives' employment for any reason other than
for cause, death or disability, the terminated executive will receive all
accrued but unpaid compensation earned before termination, all earned and unused
vacation pay and family health and dental insurance coverage for a period of one
month following termination. Additionally, if not already received at the time
of termination, the terminated executive will receive the longevity bonus
described above and all of the executive's IOI options will vest and remain
exercisable until the later of 120 days following termination of the executive's
employment or 90 days following the completion of any restructuring of IOI
related to a change of control of IOI.
A termination by IOI of an executive's employment for cause means a
termination by IOI following:
- the executive's material acts of fraud, dishonesty or deceit;
- the executive's competition with IOI or its subsidiaries;
- the executive's unauthorized use of IOI's or its subsidiaries' trade
secrets or confidential information;
- conviction of the executive of a felony involving moral turpitude;
- any material violation by the executive of any other material duty to IOI
or its shareholders imposed by law or IOI's board of directors; or
- the executive's material breach of any representation, covenant, duty or
responsibility under the executive agreement.
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In May 1999, pursuant to an agreement entered into between IOI and Mr.
Pierce in conjunction with his resignation as President and Chief Executive
Officer, IOI paid Mr. Pierce $412,520. Additionally, IOI accelerated vesting of
options granted to Mr. Pierce to purchase 350,000 and 150,000 shares of common
stock at $5.125 and $3.25 per share, respectively. Mr. Pierce had until August
22, 1999 to exercise those options, at which time any portion that was not
exercised was forfeited and cancelled. All of the options were forfeited and
cancelled.
In July 1999, pursuant to an agreement entered into between IOI and Mr.
Wicker in conjunction with his resignation as Chief Financial Officer, IOI paid
Mr. Wicker $270,833. Additionally, IOI accelerated vesting of options granted to
Mr. Wicker to purchase 200,000 shares of common stock at $3.1875 per share. Mr.
Wicker had until September 28, 1999 to exercise those options, at which time any
portion that was not exercised was forfeited and cancelled. All of the options
were forfeited and cancelled.
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INFORMATION ABOUT POWERBRIEF
BUSINESS
PowerBrief is a software development company that plans to deliver its
products and services as an application service provider, or ASP. PowerBrief is
focused on merging the powers of electronic business, or eBusiness, with the
practice of law. As a 100% Internet-based application, the PowerBrief system,
which is PowerBrief's legal application, is being designed to provide attorneys
with enhanced mobility, information and technology resources to compete and
excel in this new electronic economy.
THE POWERBRIEF CONCEPT
PowerBrief's founders, Robert W. Ohnesorge and K. Wade Bennett, were trial
attorneys in a large law firm before founding PowerBrief. As practicing
attorneys, Mr. Ohnesorge and Mr. Bennett wanted to design, build and market an
Internet-based service for legal professionals, their clients and courts with
two primary features:
- a business-to-business Internet-based application with time-saving
functionalities currently unavailable to lawyers, corporate counsel and
judges, but available in terms of technology; and
- a seamless, Internet-based application where the entire legal enterprise,
including in-house counsel, outside counsel, clients, legal staff, back
office and court personnel, could interact and do business on a single
platform.
PowerBrief plans to actually merge the practice of law with the business of
law. Specifically, the PowerBrief system is being designed to allow corporate
law departments and law firms to move to a more paperless environment with
interactive matter management, enhanced collaboration tools, multi-media
briefing, electronic document libraries and desktop access to attorney work
product. PowerBrief intends to create a platform that will also enable lawyers
to quickly access third party content and services, including litigation support
services, imaging services, legal research materials, expert witnesses and court
reporters. PowerBrief intends for its platform to serve as (1) the core practice
and information management system for the "front office," linking outside
counsel with corporate counsel as well as other stakeholders in a legal matter,
and (2) the administrative "back office" solution for corporate law departments
and law firms. In short, PowerBrief is striving to become the end-to-end "Legal
Desktop" solution, providing users with timely, extensive, multi-media and
interactive information that enhances work quality and productivity.
PowerBrief is focused on developing a product that will allow the
professional to be more time efficient with everyday tasks such as file
management, brief preparation, legal research, and time reporting. In addition,
PowerBrief will enhance legal professionals' ability to communicate with other
professionals, such as in-house counsel, outside counsel and clients, through
the collaborative tools and functionality that the PowerBrief application will
provide. PowerBrief will also enable the attorney to spend more time on
value-added activities such as intellectual evaluation and less time on
administrative tasks.
PowerBrief believes that the PowerBrief system's productivity improvements
will generate substantial savings for the law department or law firm as a whole
when the sum of individual productivity gains is aggregated.
POWERBRIEF'S OPPORTUNITY
The legal industry is a large and growing market. Because the legal
industry relies on information, PowerBrief views it as an especially attractive
industry for integrating the dynamics of the Internet. In addition, PowerBrief
believes that there are five primary forces that make the legal marketplace
extremely attractive:
- the legal industry is large and continues to grow annually;
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- no single vendor provides a complete product that meets the needs of the
fragmented legal market by connecting corporate law departments to their
outside legal counsel and other services providers;
- eBusiness is changing all industries, including the legal marketplace;
- there are significant administrative inefficiencies in the legal
marketplace; and
- the ASP business model is being validated in the capital markets,
industry and the legal market.
PowerBrief believes that these five dynamics create a lucrative market
opportunity for companies able to execute strong online legal strategies.
POWERBRIEF'S MISSION
PowerBrief's mission is to provide corporate law departments, law firms,
third party service providers, legal content providers and others with an
easy-to-use and uniform portal on the Internet to facilitate:
- matter management;
- multi-media brief drafting and publishing;
- document management and archiving;
- discovery management;
- online collaboration;
- time and billing management;
- online marketplaces; and
- knowledge management for the millions of legal documents created by
attorneys every year.
PowerBrief believes these initial services, however, represent only a
portion of PowerBrief's potential revenue-generating capabilities. PowerBrief is
being designed to create a "legal community" on the Internet for legal
professionals and be the platform for new and additional revenues through
value-added activities, such as advertising and online marketplace services, as
PowerBrief's market share expands.
In addition to the core services outlined above, PowerBrief intends to
expand into the full array of "back office" and administrative applications for
corporate law departments and law firms. Examples of these "back office"
applications include billing and accounting applications, scheduling and
docketing applications, customer-tracking applications, human resource tools and
other data mining tools.
POWERBRIEF IMMEDIATE OBJECTIVES
- Speed to Market. PowerBrief is focused on increasing its speed to market
without unduly compromising quality, breadth or depth of functionality.
The PowerBrief team is building product offerings internally with a
talented development team while simultaneously evaluating whether to
acquire and/or partner with strategic targets.
- Marketing and Sales. First, PowerBrief intends to establish itself as
the "information headquarters" for briefing, file management and on-line
case management primarily with corporate law departments and large law
firms. Second, as product offerings evolve, PowerBrief plans to increase
its focus on establishing "community" through further offerings from
third party service providers and legal content providers. Lastly, from a
strategic marketing viewpoint, PowerBrief intends to then focus on
reaching the very large governmental legal sector, law students, pro bono
organizations, judges and clerks.
- Business Relationship and Customer Relationship Management. PowerBrief
estimates that its product will be commercially available either in March
or April 2001, and PowerBrief is currently testing its product with 12
corporations and approximately 80 attorneys serving as their outside
legal
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counsel on a few select cases. These corporations include Fortune 500
companies and the participating attorneys practice with some of the
largest law firms in the United States. PowerBrief is building business
relationships in the legal community through these test groups, with the
goal of converting these test groups into paying customers when
PowerBrief's product is commercially available.
- Build and Cultivate Supplier Relationships. PowerBrief has established
relationships with a variety of legal service providers, technology
companies, Internet content providers and other third party suppliers.
PowerBrief plans to provide additional value to its customers by building
upon its current third party relationships and developing new alliances
with companies whose services can enhance PowerBrief's product offering.
- Optimize Organization Structure. PowerBrief is striving to design, build
and engrain a culture that focuses on PowerBrief's core values, which are
customer-focus, innovation, teamwork and confidence.
POWERBRIEF PRODUCT DEVELOPMENT
PowerBrief began testing the PowerBrief system with potential customers in
September 2000. The PowerBrief system released for testing included a wide array
of tools that will enable litigation attorneys and other professionals to
efficiently manage cases ranging from complex commercial litigation to more
simple cases between individuals. These tools included the following:
- Online document management and organization;
- Team collaboration;
- Matter management and reporting;
- Multi-media brief development;
- World-wide web access to information; and
- Legal research tools.
These features combine to allow individuals, through a web-based application, to
upload, prepare, share and work on documents in electronic format and ultimately
manage the documents and team communications around the case. PowerBrief
believes that this capability will be extremely valuable to customers because it
allows attorneys and legal assistants to manage complex litigation dockets or
other workloads, such as tracking hundreds of active cases for a large corporate
law department.
PowerBrief's testing program is ongoing and the first release of the
PowerBrief system has been well received by the potential customers
participating in the testing program. PowerBrief has determined, however, based
on feedback from the testing program participants, that additional features
should be added to the PowerBrief system before PowerBrief attempts to
capitalize on its target market and generate revenue. These additional features
will be included in the next release of the PowerBrief system currently
scheduled to occur between January 15, 2001 and February 15, 2001. After the new
features have been added, PowerBrief will reintroduce the PowerBrief system to
the participants in its testing program for further testing. Assuming that the
next release satisfies customer demands for functionality, and is therefore
marketable, PowerBrief currently estimates that it will initially begin
generating revenue between March and April 2001. See "Risk Factors -- New
PowerBrief's product development may be delayed or unsuccessful, causing harm to
New PowerBrief's business, financial condition and results of operations" and
"Risk Factors -- The failure of New PowerBrief's new products and services to
achieve market acceptance and generate revenue could have a material adverse
effect on its business, financial condition and results of operations."
Assuming that PowerBrief successfully releases the PowerBrief system,
PowerBrief expects that continued development of the PowerBrief system will be
an ongoing process driven by customer requests
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for additional features and innovations developed by PowerBrief or its
competitors. PowerBrief currently anticipates new developments in the following
areas: document management, matter management, time and billing, knowledge and
risk management, legal market place and integration with applications for legal
research and corporate finance.
COMPETITION
PowerBrief's industry is characterized by intense competition, innovation,
extensive research and development efforts and rapid technological progress. New
developments occur and are expected to continue to occur at a rapid pace.
PowerBrief cannot guarantee that developments by PowerBrief's competitors will
not render some or all of PowerBrief's products and services obsolete or
non-competitive, which would have a material adverse effect on PowerBrief's
business, financial condition and results of operations.
PowerBrief faces intense competition from well established competitors such
as Justice Link, Westlaw's affiliate WestWorks, Lexis' affiliate LexisONE,
Law.com, JDUSA, Inc., Niku Corporation, CaseCentral, Inc., Serengeti, Inc., IT
consulting firms, litigation consulting firms (including the large accounting
firms), branches or divisions of various federal, state and local governments,
academic institutions, in-house technology departments at major law firms and
in-house technology and legal departments at major corporations. PowerBrief will
also compete for customers with the current paper form of handling and managing
legal documents, and with other companies offering online creation, filing,
storage and retrieval technology, publishers and distributors of traditional
print media that use or license their legal research content for use on the
Internet, commercial publishing companies, and corporate materials and
information market companies. PowerBrief expects competition to increase because
these markets, particularly the markets for Internet-related products and
services, pose no substantial barriers to entry. Competition may also increase
as a result of industry consolidation.
There are many companies, both public and private, that have developed and
are developing systems, products and services for the legal technology and
document management markets that will compete with the systems that PowerBrief
is seeking to develop. Many, if not all, of these companies possess
substantially greater financial, research and development, programming,
marketing and lobbying experience and resources. These companies represent
substantial long-term competition for PowerBrief. Smaller companies may also
prove to be significant competitors, particularly through collaborative
arrangements with large legal technology, legal research, consulting or document
management companies. Academic institutions, governmental agencies and other
public and private organizations also develop, seek copyright and patent
protection and establish collaborative arrangements for the development of legal
research, document management and other systems. PowerBrief cannot be certain
that its competitors will not (1) develop an easier to use, more reliable or
more effective product that achieves greater governmental or market acceptance
than systems that PowerBrief may develop, (2) obtain patent, copyright or
intellectual property rights that limit PowerBrief's ability to commercialize
systems that it may develop, or (3) commercialize products and services earlier
than PowerBrief.
There is an extremely high degree of fragmentation of participants and
tools in the online legal industry. The market for PowerBrief's services is
subject to rapid technological change and increased competition from existing
specialty participants and new entrants. PowerBrief believes the principal
competitive factors in its market include:
- degree of Internet expertise, talent and enablement;
- breadth of existing or expected product offerings; and
- vision and ability to execute.
PowerBrief believes it will compete favorably with respect to these factors.
PowerBrief also believes the market will continue to offer significant
opportunity for multiple players.
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PROPRIETARY RIGHTS
PowerBrief relies primarily on intellectual property and trade secret laws
and confidentiality agreements signed by its employees to protect its
intellectual property and proprietary rights. PowerBrief has trademark
applications pending in the United States for "PowerBrief," "Transforming the
Practice of Law" and "The Legal Desktop." Mr. Ohnesorge has a patent application
pending in the United States for the technology that is the basis for the
PowerBrief system. PowerBrief has an exclusive, royalty-free, worldwide license
to use this technology within the legal industry. See "-- Relationships and
Related Party Transactions" for a description of PowerBrief's license agreement
with Mr. Ohnesorge.
PowerBrief owns the Internet domain name "powerbrief.com" and various other
domain names. Domain names in the United States and in foreign countries are
regulated by the continually evolving laws and regulations regarding the
Internet. The relationship between laws governing domain names and laws
protecting intellectual property is uncertain. Therefore, PowerBrief cannot
guarantee that it will be able to prevent third parties from acquiring domain
names that infringe upon or otherwise decrease the value of PowerBrief's
intellectual property rights.
In addition, PowerBrief currently licenses portions of its technology from
third parties. PowerBrief cannot assure you that these licenses will continue to
be available to it on commercially reasonable terms, or at all.
PowerBrief cannot guarantee that patents or copyrights issued to or
licensed by PowerBrief or PowerBrief's other proprietary rights will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to PowerBrief.
PowerBrief also cannot guarantee that it will be able to protect its
proprietary programming and code from duplication. The open-code programming
that the Internet relies on is subject to duplication. Many successful
Internet-based companies have had their systems and methods of operation
duplicated, almost entirely, by new competitors. PowerBrief cannot assure you
that a competitor will not attempt to duplicate and improve upon the systems
that PowerBrief may develop.
In addition, PowerBrief may be subject to various intellectual property
infringement claims from time to time. Even if these claims are unsuccessful,
PowerBrief could incur substantial attorneys' fees and other legal costs in
defending any patent infringement, copyright infringement or other infringement
claims. PowerBrief could also incur substantial attorneys' fees and other legal
costs in its efforts to protect patent rights, copyrights or other proprietary
rights, including those granted to PowerBrief by third parties.
THIRD PARTY SUPPLIERS
PowerBrief does not operate and does not currently plan to operate data
storage or data processing facilities. PowerBrief's systems, however, will exist
on and rely on these facilities. PowerBrief intends to contract with third
parties for the manufacture and operation of the data storage and processing
hardware that its systems will run on. PowerBrief cannot assure you that it will
be able to obtain data storage or data processing facilities from third party
suppliers that are adequately reliable and that have adequate capacity, on terms
and conditions or in quantities acceptable to PowerBrief. PowerBrief's failure
to do so would have a material adverse effect on its business, financial
condition and results of operations. PowerBrief will also rely on third party
supplies for connectivity. The failure of any third party communications network
or systems could have a material adverse effect on PowerBrief's business,
financial condition and results of operation.
PowerBrief also has no plans to create its own database of primary legal
data. The coverage and accuracy of PowerBrief's products and services is
substantially dependent on the coverage and accuracy of legal research data it
licenses from third parties. There are a limited number of providers of this
data. Given the short term of PowerBrief's data licenses and data sharing
arrangements, it will have to renegotiate its contracts in the near future,
which may result in contractual terms that are not as favorable to PowerBrief as
existing licenses and arrangements. If PowerBrief cannot maintain these data
licenses and data sharing arrangements or any other third party license
arrangement on commercially reasonable terms,
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the utility and accuracy of its systems and products will suffer. As a result,
the marketability of PowerBrief's systems would suffer.
Additionally, PowerBrief's strategy for the programming, development,
maintenance, commercialization and marketing of its systems depends upon
entering into various alliances with corporate partners, subcontractors,
licensors, licensees and others, and is contingent upon the subsequent success
of these third parties in performing their responsibilities under these
alliances. PowerBrief cannot guarantee that third parties will perform their
obligations as expected or that PowerBrief will derive any benefit from these
arrangements.
EMPLOYEES
As of November 1, 2000, PowerBrief had 46 full-time employees and no
part-time employees. Of these employees, 27 were development personnel, nine
were sales and marketing personnel and 10 were general and administrative
personnel. None of PowerBrief's employees are represented by a labor union, and
PowerBrief considers its employee relations to be good.
DESCRIPTION OF PROPERTY
PowerBrief does not own any real property. PowerBrief subleases
approximately 17,000 square feet in Houston, Texas from IOI, which houses
PowerBrief's executive offices. See "The Merger -- Relationships Between IOI and
PowerBrief -- Sublease and Lease Assignment." PowerBrief's facilities are
insured and are maintained in good operating conditions.
LEGAL PROCEEDINGS
PowerBrief is not currently involved in any litigation, but in the ordinary
course of its business, PowerBrief may be subject, from time to time, to claims
and legal actions. PowerBrief cannot predict the outcome of any litigation
actions that could arise in the future, and PowerBrief cannot give you any
assurance that any claims and actions will be adequately covered by insurance or
that such claims and actions will not have a material adverse effect on
PowerBrief's financial condition, results of operations or liquidity.
PowerBrief may be subject to a claim by its former web developer, although
PowerBrief has not been informed of any present intention to bring a claim
against it. PowerBrief's contract with its former web developer obligated the
developer to develop software in accordance with PowerBrief's specifications by
an agreed deadline and obligated PowerBrief to pay development fees upon
completion. The developer failed to deliver a satisfactory product by the
deadline in the first quarter of 2000 and PowerBrief delivered a formal notice
of breach of contract to the developer. The developer subsequently requested
that PowerBrief pay a balance of fees estimated at $350,000, which PowerBrief
has declined to pay due to the developer's breach. PowerBrief's management
strongly believes that it has valid defenses to any claim the developer might
bring, and believes that any damages the developer could prove would be offset
by PowerBrief's potential counterclaim for the developer's breach of contract.
See "Risk Factors -- Risk Factors Related to PowerBrief and its
Business -- PowerBrief or New PowerBrief may be subject to a claim by
PowerBrief's former web developer."
MARKET PRICE AND DIVIDENDS
There is no active public trading market for the PowerBrief stock. At
November 1, 2000, PowerBrief's 11,250,000 outstanding shares of common stock
were held by two holders of record and PowerBrief's 2,566,223 outstanding shares
of series A preferred stock were held by 136 holders of record.
PowerBrief's series A preferred stock is convertible at any time, at the
holder's option, into three shares of PowerBrief's common stock. At November 1,
2000, 551,025 shares of PowerBrief's common stock were subject to warrants to
purchase PowerBrief's common stock and 3,012,605 shares of PowerBrief's common
stock were subject to options to purchase PowerBrief's common stock.
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PowerBrief has never paid dividends. Pursuant to the terms of PowerBrief's
certificate of incorporation, if PowerBrief declares a dividend on its common
stock, no dividend can be paid to the common stockholders until the holders of
PowerBrief's series A preferred stock receive the dividend they would have been
entitled to receive if they had converted the series A preferred stock into
common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF POWERBRIEF
The following section should be read in conjunction with PowerBrief's
financial statements and notes thereto beginning on page F-1 of this joint proxy
statement/prospectus. In addition to historical information, this discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions which could cause actual results to differ materially from
management's expectations. Factors that could cause these differences include
those discussed in "Risk Factors."
GENERAL
PowerBrief is a software development company that plans to deliver its
products and services as an ASP. PowerBrief is focused on merging the powers of
eBusiness with the practice of law. As a 100% Internet-based application, the
PowerBrief system is being designed to provide attorneys with enhanced mobility,
information and technology resources to compete and excel in this new electronic
economy.
The per share data set forth in this section does not give effect to the
proposed merger between PowerBrief and IOI or the five to one reverse stock
split concurrently with the completion of the merger.
RESULTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION NINE MONTHS PERIOD FROM INCEPTION
(JULY 20, 1999) TO ENDED (JULY 20, 1999) TO
DECEMBER 31, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------- ------------------ ---------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue................................ $ -- $ -- $ --
====== ======= ======
Research and development costs......... $ 308 $ 1,237 $ 13
====== ======= ======
General and administrative costs....... $ 193 $ 2,598 $ 75
====== ======= ======
Loss from operations................... $ (501) $(3,835) $ (88)
====== ======= ======
Net loss............................... $ (494) $(3,814) $ (88)
====== ======= ======
Loss from operations per common share:
basic and diluted.................... $(0.04) $ (0.34) $(0.01)
====== ======= ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE PERIOD FROM JULY 20, 1999
THROUGH SEPTEMBER 30, 1999
PowerBrief began operations on July 20, 1999. Research and development
expenses increased to approximately $1.2 million for the nine months ended
September 30, 2000 from approximately $13,000 for the period from July 20, 1999
through September 30, 1999. The increase is due to increased personnel, on-line
services, software support costs and consulting costs, as well as the comparison
to the short period from July 20, 1999 through September 30, 1999.
General and administrative expenses increased to approximately $2.6 million
for the nine months ended September 30, 2000 from approximately $75,000 for the
period from July 20, 1999 through September 30, 1999. The increase is due to
increased personnel, legal and professional costs, rent and other office
expenses, as well as the comparison to the short period from July 20, 1999
through September 30, 1999.
Interest expense increased to approximately $11,000 for the nine months
ended September 30, 2000 from $0 for the period from July 20, 1999 through
September 30, 1999. The increase is due to interest associated with PowerBrief's
capital lease obligations for furniture and equipment.
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Interest income increased to approximately $39,000 for the nine months
ended September 30, 2000 from $0 for the period from July 20, 1999 through
September 30, 1999. The increase is due to the investment of available cash in
interest bearing accounts during the nine months ended September 30, 2000.
Other expenses increased to approximately $7,300 for the nine months ended
September 30, 2000 from $0 for the period from July 20, 1999 through September
30, 1999. The increase is due to the write-off of miscellaneous furniture at
PowerBrief's previous office space.
Net loss increased to approximately $3.8 million, or $0.34 per share, for
the nine months ended September 30, 2000 from approximately $88,000 for the
period from July 20, 1999 through September 30, 1999, as a result of the
foregoing factors.
PERIOD FROM JULY 20, 1999 THROUGH DECEMBER 31, 1999
PowerBrief began operations on July 20, 1999. Research and development
expenses for the period from July 20, 1999 through December 31, 1999 were
approximately $308,000. Research and development expenses during this period
primarily were comprised of compensation to development staff, as well as third
party consulting expenses.
General and administrative expenses for the period from July 20, 1999
through December 31, 1999 were approximately $193,000. General and
administrative expenses during this period primarily were comprised of
compensation, legal and professional costs, rent and other office expenses.
Other income for the period from July 20, 1999 through December 31, 1999
was approximately $6,000. This other income was derived from one consulting
engagement, which related to services outside of PowerBrief's primary line of
business.
Net loss for the period from July 20, 1999 through December 31, 1999 was
approximately $494,000, or $0.04 per share, as a result of the foregoing
factors.
LIQUIDITY AND CAPITAL RESOURCES
Between July 20, 1999 and December 31, 1999, PowerBrief raised
approximately $800,000 through the issuance of preferred stock. Between January
1, 2000 and September 30, 2000, PowerBrief raised approximately $4.4 million in
additional funds through the sale of preferred stock. As of September 30, 2000,
PowerBrief had cash and cash equivalents of approximately $940,000.
On September 15, 2000, in conjunction with the merger agreement between
PowerBrief and IOI, PowerBrief and IOI entered into a promissory note which
allows PowerBrief to borrow up to $3.0 million from IOI at an annual interest
rate of 12%. Under the promissory note, IOI agreed to make advances to
PowerBrief from time to time beginning on October 1, 2000 and until the earlier
of (1) March 31, 2001, (2) termination of the merger agreement or (3) a date on
which PowerBrief's debt under the promissory note is accelerated. As of November
1, 2000, PowerBrief had borrowed $500,000 under the promissory note. See "The
Merger -- Relationships Between IOI and PowerBrief -- Line of Credit" for a more
detailed description of the promissory note.
PowerBrief cannot be sure that it will be able to achieve profitability or
that it can sustain profitability, if achieved. PowerBrief is a development
stage company. To date, PowerBrief has generated no revenues from sales and has
dedicated most of its financial resources to (1) organizational expenses, (2)
preliminary programming and research and development expenses, (3) general and
administrative expenses, (4) marketing expenses and (5) the prosecution of
copyright and domain name applications. PowerBrief expects to incur significant
operating losses for at least the next several quarters, primarily due to
programming, research and development programs costs, marketing costs and costs
associated with the commercialization of products and services.
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PowerBrief's ability to achieve profitability will depend upon, among other
things:
- successfully completing the development of marketable products and
services in a timely manner;
- developing products and services that will compete favorably with other
systems that have been and/or may be developed by competitors with
superior resources;
- obtaining judicial, administrative and private-sector approvals and
acceptance for use of PowerBrief's proprietary systems and/or judicial,
legislative, administrative or regulatory mandates that PowerBrief's
products and services be used by third parties;
- obtaining and maintaining content agreements and alliances for use within
PowerBrief's systems;
- establishing and maintaining advantageous sales and marketing
capabilities or collaborative arrangements; and
- raising sufficient funds to finance future activities.
To ensure that PowerBrief can continue its current plan of operations,
management believes that PowerBrief will need to raise additional capital in the
second or third quarter of 2001, or possibly earlier depending upon the ability
of IOI to sell for cash IOI's interest in the Westbank Ambulatory Care Center in
Louisiana. PowerBrief may raise this additional capital from the sale of common
or preferred stock, the exercise of outstanding options or warrants or from
borrowings, including using the Westbank Ambulatory Care Center as collateral
for those borrowings.
PowerBrief's activities to date have been financed primarily through the
sale of preferred stock. Currently, PowerBrief is exploring various methods to
raise additional capital to fund continued product development that would be in
addition to cash obtained from the merger. However, PowerBrief cannot guarantee
that the merger will be completed and that PowerBrief will be able to obtain
additional financing on acceptable terms.
PowerBrief's operating plan for the year 2001 includes continued
development of key functionality and features to the PowerBrief system.
Beginning in the first and second quarters of 2001, PowerBrief intends to
approach the corporations and outside legal counsel who have been testing
PowerBrief's product since September 2000 and potential new customers to convert
these testers and potential new customers into its initial revenue producing
customers. If PowerBrief is successful in converting testers into revenue
producing customer, PowerBrief believes that its revenues will grow, as more
legal matters and cases are started and maintained on the PowerBrief system.
PowerBrief also will seek to expand its sales and distribution channels through
various means, including a direct sales force and possible strategic resale and
distribution alliance agreements. PowerBrief cannot guarantee that it will be
able to execute its operating plan or otherwise expand its business because
PowerBrief is still in its early stages of development and customer acceptance.
At September 30, 2000, PowerBrief had net operating loss carry-forwards for
federal income tax purposes of approximately $1.8 million. The net operating
loss and credit carry-forwards expire in 2015. Additionally, PowerBrief's
ability to use its net operating loss carry-forwards may be subject to annual
limitations pursuant to Section 382 of the Code.
SECURITY OWNERSHIP OF POWERBRIEF'S DIRECTORS, OFFICERS AND PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding the record ownership
of PowerBrief's common stock and series A preferred stock as of November 1, 2000
by the following:
- each person who owns more than 10% of PowerBrief's shares of common stock
or series A preferred stock, including those shares subject to
outstanding options;
- each of PowerBrief's three highest paid officers or directors; and
- all of PowerBrief's directors and officers as a group.
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Unless otherwise noted (1) each of the persons listed below has sole voting
and investment power with respect to the shares owned by him as set forth
opposite his name and (2) the address for each of the persons listed below is
c/o PowerBrief, Inc., 5858 Westheimer, Suite 500, Houston, Texas 77057.
<TABLE>
<CAPTION>
COMMON STOCK(1) SERIES A PREFERRED STOCK(1)
------------------------------- -------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- -------- -------------------- --------
<S> <C> <C> <C> <C>
Ernest D. Rapp........................ -- * 20,000 *
Robert W. Ohnesorge................... 5,625,000 50.0% -- *
K. Wade Bennett....................... 5,625,000 50.0% -- *
Mark Foster........................... -- * 40,000 1.6%
Dr. Leslie Butterfield ............... -- * 10,000 *
A. John Knapp, Jr. ................... 15,000(2) * 307,576(3) 12.0%
Directors and officers as a group (8
persons)............................ 11,265,000 100.0% 589,576 23.0%
</TABLE>
---------------
* Less than 1%.
(1) The calculations in this table of the percentage of outstanding shares of a
class of PowerBrief's capital stock are based on 11,250,000 shares of
PowerBrief's common stock outstanding as of November 1, 2000 and 2,566,223
shares of PowerBrief's series A preferred stock outstanding as of November
1, 2000. With respect to the holders of 10% of a class of PowerBrief's
capital stock, shares of PowerBrief's common stock subject to outstanding
options as of November 1, 2000 are deemed to be outstanding and owned of
record by the person holding such options for the purpose of computing the
percentage of ownership of common stock of that person but are not treated
as outstanding for the purpose of computing the percentage of any other
person. Each share of PowerBrief's series A preferred stock is convertible
at any time, at the holder's option, into three shares of PowerBrief's
common stock.
(2) Includes 15,000 shares of common stock issuable upon exercise of outstanding
stock options, all of which are exercisable at this time.
(3) Includes 307,576 shares of series A preferred stock held in a trustee
capacity.
POWERBRIEF'S DIRECTORS
The following table sets forth, as of November 1, 2000, the name, age and
principal position of each of PowerBrief's directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ernest D. Rapp........................ 39 Director; Chief Executive Officer
Robert W. Ohnesorge................... 31 Director; President and General
Counsel
K. Wade Bennett....................... 30 Chairman of the Board; Secretary and
Treasurer
Richard V. Bays....................... 42 Director
David H. Burrow....................... 64 Director
A. John Knapp, Jr. ................... 49 Director
</TABLE>
Ernest D. Rapp has been Chief Executive Officer and a director of
PowerBrief since March 2000. Mr. Rapp joined PowerBrief from Internet America,
Inc., a Nasdaq-listed Internet service provider, where he served as Chief
Operating Officer of Internet America and President of its subsidiary, PDQ.net,
from December 1998 to February 2000. From April 1996 to September 1998, Mr. Rapp
was Chief Financial Officer and Acting Chief Operating Officer of The ForeFront
Group, Inc., an Internet software and computer-based training company. During
his tenure, ForeFront Group, Inc. was sold to CBT Systems, a Nasdaq-listed
company, for $160 million. From January 1994 to March 1995, Mr. Rapp served as
Chief Financial Officer and Chief Operating Officer of Multimedia Publishing
Corp. Mr. Rapp is a Certified
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Public Accountant and began his career at Arthur Andersen LLP, where he worked
with public and private companies in the service and wholesale/retail sectors.
Robert W. Ohnesorge, a founder of PowerBrief, has been President and a
director of PowerBrief since its inception in July 1999. Mr. Ohnesorge has also
served as PowerBrief's General Counsel since February 2000. Mr. Ohnesorge is a
licensed attorney in the State of Texas and also is admitted to practice in the
United States District Courts for the Southern, Northern, Eastern and Western
Districts of Texas. Prior to co-founding PowerBrief, Mr. Ohnesorge spent his
legal career at Locke Liddell & Sapp LLP, where he successfully represented
numerous Fortune 500 and other noteworthy clients in multiple complex commercial
litigation matters. He graduated cum laude with a BA in Philosophy from Texas
Tech University in 1991 and graduated magna cum laude from the University of
Houston Law Center in 1996. Among his educational honors and affiliations, Mr.
Ohnesorge was a member of the Order of the Coif and Order of the Barons and a
recipient of the Griggs & Harrison Award, the American Jurisprudence Award, the
Corpus Juris Secundum Award and the Claude V. Bridges Scholarship in Philosophy.
K. Wade Bennett, a founder of PowerBrief, has served as its Chairman of the
Board, Secretary and Treasurer since its inception. Mr. Bennett is an
experienced trial attorney. Prior to co-founding PowerBrief, he began his
professional career as an oil and petrochemical tanker chartering broker. In
1996, he earned a doctorate of jurisprudence from the University of Houston Law
Center and began practicing maritime, energy and commercial litigation with the
Houston-based law firm of Hutcheson & Grundy, L.L.P. in January 1997. In January
1998, he moved to the law firm of Locke Liddell & Sapp LLP. Mr. Bennett left
Locke Liddell & Sapp LLP in July 1999 to found PowerBrief with fellow trial
attorney, Mr. Ohnesorge.
Richard V. Bays has been a director of PowerBrief since November 1999. Mr.
Bays is a senior partner with the law firm of Locke Liddell & Sapp LLP in
Houston, Texas. Mr. Bays joined Locke Liddell & Sapp LLP in January 1985. He is
the co-founder and head of the firm's Technology and Commercial Transactions
section. His practice focuses on assisting clients with transactional matters
which create the infrastructure for the conduct of their business (including
software licenses, outsourcing, web site development and privacy policies) or
which are the conduct of their business (including alliance agreements,
distribution agreements and joint marketing agreements). Mr. Bays graduated from
the University of Texas School of Law in December 1984 with high honors where he
was a member of the Texas Law Review and a Chancellor.
David H. Burrow has been a director of PowerBrief since November 1999. Mr.
Burrow is an experienced and successful trial lawyer with the firm of Burrow &
Parrott, L.L.P. in Houston, Texas. His many accomplishments and memberships
include: listing in "The Best Lawyers in America" and certification to the rank
of Diplomat by the American Board of Trial Advocates (National President 1989-
1990, National Vice President 1988-1989 and President of the Houston Chapter
1978-1979). His memberships include: Fellow, American College of Trial Lawyers;
Fellow, International Academy of Trial Lawyers; and Fellow, International
Society of Barristers.
A. John Knapp, Jr. has been a director of PowerBrief since November 1999.
Mr. Knapp has been President of Andover Group, Inc., a private real estate
development and investment firm, since 1981. Mr. Knapp is also an active
shareholder of Chilton Capital Management and an investor in several technology
firms, including Networkoil and VSI Enterprises.
NEW POWERBRIEF'S DIRECTORS
PowerBrief intends to designate Messrs. Rapp, Ohnesorge, Bennett and Bays
as directors of New PowerBrief. In addition, if PowerBrief is entitled to
designate a fifth member of New PowerBrief's board, PowerBrief intends to
designate Mr. Knapp. See "The Merger Agreement -- Board of Directors of New
PowerBrief" for a discussion regarding the designation of New PowerBrief's board
members.
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POWERBRIEF'S EXECUTIVE OFFICERS
The following table sets forth, as of November 1, 2000, the names, ages and
positions of the persons who are not directors and who are executive officers of
PowerBrief.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Foster......................................... 34 Chief Technology Officer
Dr. Leslie Butterfield.............................. 45 Vice President of Marketing
</TABLE>
Mark Foster has been Chief Technology Officer of PowerBrief since January
2000. Mr. Foster joined PowerBrief from BMC Software, a Nasdaq-listed company.
At BMC Software, Mr. Foster served on the management team in research and
development from November 1997 to January 2000. Previously, from May 1990 to
January 1997, he was a co-founder and Chief Technology Officer of BindView
Development Corporation, a Nasdaq-listed software company that currently employs
over 600 people. Mr. Foster attended Rice University.
Dr. Leslie Butterfield has been Vice President of Marketing of PowerBrief
since April 2000. Dr. Butterfield joined PowerBrief from BMC Software, a
Nasdaq-listed software company. Dr. Butterfield served as Corporate Web
Strategist at BMC Software from April 1998 to April 2000. At BMC Software, she
was also responsible for growing the product marketing organization from three
to 150 people. Dr. Butterfield served as Senior Business Manager of Marketing
Operations at BMC Software from August 1996 to March 1998, and as Product
Marketing Manager at BMC Software from August 1994 to September 1996.
Previously, Dr. Butterfield was Worldwide Marketing Manager for Welcom Software
from 1992 to 1994, and Vice President of Marketing & Sales for Texim Inc. from
1990 to 1992, both project management software vendors. She was a co-founder of
Texim. Dr. Butterfield holds a Ph.D. in Communications and an MA in Design
Theory from the University of Minnesota, where she graduated magna cum laude.
NEW POWERBRIEF'S EXECUTIVE OFFICERS
Messrs. Rapp, Ohnesorge, Bennett and Foster and Dr. Butterfield will be
executive officers of New PowerBrief. See "The Merger Agreement -- Executive
Officers of New PowerBrief."
The following table sets forth, as of November 1, 2000, the names, ages and
future positions of each person who will be an executive officer of New
PowerBrief:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ernest D. Rapp........................ 39 Chief Executive Officer
Robert W. Ohnesorge................... 31 President and General Counsel
K. Wade Bennett....................... 30 Vice President Business Development,
Secretary and Treasurer
Mark Foster........................... 34 Chief Technology Officer
Dr. Leslie Butterfield................ 45 Vice President of Marketing
</TABLE>
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REMUNERATION OF DIRECTORS AND OFFICERS
The following table sets forth for each of the three highest paid officers
and directors at PowerBrief all remuneration paid, distributed or accrued for
services rendered in all capacities to PowerBrief during the fiscal year ended
December 31, 2000. None of PowerBrief's officers or directors received or
accrued remuneration from PowerBrief during the fiscal year ended December 31,
1999. Remuneration for the periods listed is calculated on an accrual basis:
<TABLE>
<CAPTION>
CAPACITIES IN WHICH
REMUNERATION WAS AGGREGATE
NAME YEAR RECEIVED REMUNERATION
---- ---- ------------------- ------------
<S> <C> <C> <C>
Ernest D. Rapp................................ 2000 Chief Executive Officer $99,808(1)
1999 and Director --
Mark Foster................................... 2000 Chief Technology Officer 87,692(2)
1999 --
Dr. Leslie Butterfield........................ 2000 Vice President of Marketing 63,250(3)
1999 --
</TABLE>
---------------
(1) Mr. Rapp joined PowerBrief in March 2000. Remuneration shown represents Mr.
Rapp's base salary and non-compete fee from March 1, 2000 through October
31, 2000.
(2) Mr. Foster joined PowerBrief in January 2000. Remuneration shown represents
Mr. Foster's base salary from January 13, 2000 through October 31, 2000.
(3) Dr. Butterfield joined PowerBrief in April 2000. Remuneration shown
represents Dr. Butterfield's base salary from April 12, 2000 through October
31, 2000.
OPTIONS, WARRANTS AND RIGHTS
The following table sets forth information regarding the options, warrants
or rights to purchase common stock from PowerBrief held as of November 1, 2000
by the following:
- each person who owns more than 10% of PowerBrief's shares of common stock
or series A preferred stock, including those shares subject to
outstanding options;
- each of PowerBrief's three highest paid officers or directors; and
- all of PowerBrief's directors and officers as a group.
<TABLE>
<CAPTION>
TITLE AND AMOUNT
OF SECURITIES CALLED
FOR BY OPTIONS, EXERCISE DATE OF
NAME WARRANTS OR RIGHTS PRICE EXERCISE(1)
---- -------------------- -------- -----------
<S> <C> <C> <C>
Ernest D. Rapp.......................................... 685,713 $0.83 2/29/00(2)
514,287 0.083 (3)
Robert W. Ohnesorge..................................... -- -- --
K. Wade Bennett......................................... -- -- --
Mark Foster............................................. 600,000 0.83 1/13/01(4)
Dr. Leslie Butterfield.................................. 256,500 0.83 4/12/01(5)
A. John Knapp, Jr. ..................................... 15,000 1.10 7/20/00(6)
Directors and officers as a group (8 persons)........... 2,101,500 (7) (7)
</TABLE>
---------------
(1) Date of exercise represents the first date options listed in the table are
exercisable. Except as otherwise noted in the table, options generally vest
in equal parts on the first, second and third anniversaries of the date the
options were granted.
(2) Options to purchase 257,142 shares of PowerBrief's common stock vested on
February 29, 2000. Options to purchase 142,857 shares of PowerBrief's common
stock vest on February 8, 2001, with options to purchase 285,714 shares
vesting pro rata over the following 24 months.
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(3) Options vest upon the achievement of specified corporate events and
performance criteria or on the sixth anniversary of the date the options
were granted, whichever occurs first.
(4) Options to purchase 225,000 shares of PowerBrief's common stock vest upon
the achievement of specified performance criteria or on the sixth
anniversary of the date the options were granted, whichever occurs first.
(5) Options to purchase 85,500 shares of PowerBrief's common stock upon the
achievement of specified corporate events and performance criteria or on the
sixth anniversary of the date the options were granted, whichever occurs
first.
(6) Options vested on July 20, 2000.
(7) Options for all officers and directors not specifically identified in the
table have a per share exercise price of $1.10 and vested 50% on November 9,
1999 and 50% on July 20, 2000.
EMPLOYMENT AND NONCOMPETITION ARRANGEMENTS
Ernest D. Rapp. On February 29, 2000, PowerBrief entered into an
employment agreement with Ernest D. Rapp. Mr. Rapp's employment agreement has a
three year term, expiring on February 28, 2003. Pursuant to his employment
agreement, Mr. Rapp. serves as Chief Executive Officer of PowerBrief.
As of November 1, 2000, Mr. Rapp's annual base salary was $125,000. Mr.
Rapp's annual base salary will increase to $135,000 on February 28, 2001 and to
$145,000 on February 28, 2002. Under his employment agreement, Mr. Rapp is
entitled to receive a $50,000 bonus if PowerBrief receives $10.0 million of
equity financing and another $50,000 bonus if PowerBrief reaches various 12
month objectives agreed upon by Mr. Rapp and PowerBrief's board of directors.
PowerBrief estimates that Mr. Rapp will receive a bonus for the year ended
December 31, 2000 in an amount between $60,000 and $80,000. The employment
agreement also obligates PowerBrief to grant Mr. Rapp options to purchase
1,200,000 shares of PowerBrief's common stock, as provided in his employment
agreement and subject to vesting schedules.
PowerBrief can terminate the employment agreement (1) for cause, (2) on 30
days prior written notice, which is referred to as an involuntary termination,
or (3) on Mr. Rapp's death or disability. Mr. Rapp's employment agreement
defines cause as Mr. Rapp's (1) gross misconduct, (2) conviction of a felony,
fraud or a crime of moral turpitude or (3) breach of any material provision of
his employment agreement. Mr. Rapp can terminate his employment agreement on 30
days prior written notice to PowerBrief, which is referred to as a voluntary
termination.
In the case of an involuntary termination, Mr. Rapp's vested options remain
exercisable until the earlier of (1) the expiration date of the options or (2)
30 months after the involuntary termination. If PowerBrief's stock is publicly
traded, the time period in (2) is 90 days after termination. In addition, in the
case of an involuntary termination, Mr. Rapp will receive his base salary and
annual non-compete fee, as described below, through the date of termination,
plus:
- three months of his base salary if PowerBrief has raised less than $10.0
million in equity financing as of his termination;
- six months of his base salary and one-half of his bonuses earned as of
his termination if PowerBrief has raised more than $10.0 million but less
than $20.0 million in equity financing as of his termination and has not
entered into an engagement letter with an investment bank to conduct an
initial public offering of PowerBrief's stock; or
- one year of his base salary and all bonuses payable, whether or not
earned, under the employment agreement if PowerBrief has entered into an
engagement letter with an investment bank in connection with an initial
public offering of PowerBrief's stock.
If Mr. Rapp's employment is terminated as a result of his death or
disability, his vested options remain exercisable until the earlier of (1) the
expiration date of the options or (2) 30 months after the
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termination. If PowerBrief's common stock is publicly traded, the time period in
(2) is 90 days after termination. In addition, Mr. Rapp or his estate will
receive his base salary and annual non-compete fee through the date of
termination, plus a lump sum payment equal to two months of his base salary and
two months of his annual non-compete fee.
If Mr. Rapp's employment is terminated for cause or if Mr. Rapp voluntarily
terminates his employment, his right to exercise any vested options terminates
on the date his employment is terminated. Mr. Rapp will be entitled to receive
his base salary and annual non-compete fee only through the date of his
termination.
Mr. Rapp's agreement contains standard provisions regarding
confidentiality, non-solicitation, non-competition and PowerBrief's ownership of
intellectual property rights. Under his employment agreement, Mr. Rapp is
entitled to a non-compete fee equal to $25,000 in his first year of employment
by PowerBrief, $15,000 in the second year and $5,000 in the third year.
Mark Foster and Dr. Leslie Butterfield. PowerBrief entered into employment
agreements with Mark Foster and Dr. Leslie Butterfield on January 13, 2000 and
April 12, 2000, respectively. Each of the employment agreements has a three year
term, with Mr. Foster's employment agreement expiring on January 12, 2000 and
Dr. Butterfield's employment agreement expiring on April 11, 2003. Mr. Foster
serves as Chief Technology Officer of PowerBrief and Dr. Butterfield serves as
Vice President of Marketing of PowerBrief.
As of November 1, 2000, Mr. Foster's annual base salary was $120,000 and
Dr. Butterfield's annual base salary was $115,000. Under his employment
agreement, Mr. Foster is eligible to receive, at the sole discretion of
PowerBrief's board, an annual bonus of up to $40,000 based on performance
criteria. Under her employment agreement, Dr. Butterfield is eligible to receive
an annual bonus of up to 40% of her base annualized salary, subject to
milestones agreed upon by Dr. Butterfield and PowerBrief's board of directors.
The employment agreements also obligate PowerBrief to grant Mr. Foster options
to purchase 600,000 shares of PowerBrief's common stock and Dr. Butterfield
options to purchase 256,500 shares of PowerBrief's common stock, as provided in
their respective employment agreements and subject to vesting schedules.
PowerBrief can terminate the employment agreements with or without cause at
any time. The employment agreements define cause as the employee's (1) inability
or refusal to perform his or her duties, (2) material breach of the employment
agreement, (3) misconduct, (4) failure to follow PowerBrief's policies,
directives or orders, (5) failure to provide adequate performance as determined
by PowerBrief's board, (6) insubordination or disruptive influence, (7)
unauthorized or excessive absence, (8) destruction of PowerBrief's property or
destruction of its documents, (9) conviction of a crime of moral turpitude or
felony or (10) acts of gross negligence, dishonesty or disloyalty.
In the case of a termination without cause, Mr. Foster will receive his
compensation and benefits for the remainder of the term of his agreement and the
non-competition provisions of his agreement will no longer be effective. If Dr.
Butterfield's employment is terminated without cause, she will continue to
receive her base salary for six months after the date of termination.
If Mr. Foster or Dr. Butterfield is terminated for any reason other than
cause, death or disability, their vested options will remain exercisable until
the earlier of (1) the expiration date of the options or (2) three months after
the termination. If Mr. Foster or Dr. Butterfield is terminated because of death
or disability, their vested options will remain exercisable until the earlier of
(1) the expiration date of the options or (2) 12 months after the termination.
In the case of a termination for cause, all options expire on the date of
termination and the employee only receives base salary earned through the date
of termination.
Mr. Foster's and Dr. Butterfield's agreements contain standard provisions
regarding confidentiality, non-solicitation, non-competition and PowerBrief's
ownership of intellectual property rights. Mr. Foster and Dr. Butterfield do not
receive additional non-compete fees.
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K. Wade Bennett and Robert W. Ohnesorge. Messrs. Bennett and Ohnesorge do
not have employment agreements. However, Messrs. Bennett and Ohnesorge entered
into a noncompetition agreement with PowerBrief on July 26, 1999 in connection
with the founding of PowerBrief. The noncompetition agreement contains standard
confidentiality, non-solicitation and non-competition provisions.
DIRECTOR COMPENSATION
Directors will be reimbursed for travel expenses and other out-of-pocket
costs incurred in connection with their attendance at meetings of PowerBrief's
board of directors or committees of the board. In July 2000, each of
PowerBrief's non-employee directors received an option to purchase 15,000 shares
of PowerBrief's common stock under the PowerBrief, Inc. 2000 Equity Incentive
Plan at an exercise price of $1.10 per share. All of these options are vested.
All PowerBrief directors are eligible to participate in the PowerBrief, Inc.
2000 Equity Incentive Plan. Directors receive no additional compensation for
their services as directors of PowerBrief.
POWERBRIEF, INC. 2000 EQUITY INCENTIVE PLAN
The Equity Incentive Plan, which is administered by the compensation
committee or the entire board acting as the committee, provides for the grant of
restricted stock, stock bonuses, and incentive stock options and non-qualified
stock options to purchase PowerBrief's common stock. All of the employees,
directors, officers, consultants or independent contractors or advisors of
PowerBrief are eligible to participate in the Equity Incentive Plan. The purpose
of the Equity Incentive Plan is to provide incentives to attract, retain and
motivate participants whose contributions are important to the success of
PowerBrief by offering them an opportunity to participate in PowerBrief's future
performance through awards of restricted stock, stock bonuses and options. The
maximum number of shares of PowerBrief's common stock for which restricted
stock, stock bonuses and options may be granted under the Equity Incentive Plan
is 2,866,575 shares.
The purchase price and other terms of restricted stock awards are at the
discretion of the committee. Restricted stock must be awarded pursuant to a
restricted stock purchase agreement. As of November 1, 2000, no shares of
restricted stock have been awarded under the Equity Incentive Plan.
A stock bonus award under the Equity Incentive Plan may consist of
restricted stock. The committee has discretion over the terms of any stock
bonuses, which may be paid in cash, shares of stock or a combination of cash and
stock and may be paid either in a lump sum or in installments. A stock bonus
must be awarded pursuant to a stock bonus agreement, and may be awarded upon
satisfaction of performance goals set in advance in a performance stock bonus
agreement. As of November 1, 2000, no stock bonuses have been awarded under the
Equity Incentive Plan.
The Equity Incentive Plan provides for purchases pursuant to an option at
no less than 85% of the fair market value of the stock. All previously granted
options under the Equity Incentive Plan have been at fair market value of the
stock, as determined by PowerBrief's board of directors at the time of the
grant. Options are generally exercisable for 10 years after the grant date,
except that incentive stock options granted to 10% stockholders are only
exercisable for five years after the grant date. Options granted under the
Equity Incentive Plan generally are not transferable by the optionee.
As of November 1, 2000, there were options outstanding under the Equity
Incentive Plan to purchase 2,498,318 shares of PowerBrief's common stock at a
weighted average price of $0.811 per share, of which 118,500 were exercisable as
of November 1, 2000.
STOCKHOLDERS' AGREEMENT
PowerBrief and all of PowerBrief's stockholders are parties to a
stockholders' agreement that contains voting agreements and restrictions on
transfer. It is a condition to IOI's obligation to complete the merger that this
stockholders' agreement be terminated at or before the completion of the merger.
The
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<PAGE> 119
stockholders' agreement will be terminated before the PowerBrief special
meeting, with the termination to be effective on the completion of the merger.
REGISTRATION RIGHTS AGREEMENT
Mr. Ohnesorge, Mr. Bennett and affiliates of Mr. Knapp are parties to a
registration rights agreement. It is a condition to IOI's obligation to complete
the merger that this registration rights agreement be terminated at or before
the completion of the merger. The registration rights agreement will be
terminated before the PowerBrief special meeting, with the termination to be
effective on the completion of the merger. If the merger is completed,
PowerBrief's stockholders will have registration rights as described under "The
Merger Agreement -- Significant Covenants -- Registration Rights."
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Robert W. Ohnesorge, PowerBrief's President, General Counsel and a
director, has a patent application pending in the United States for the
technology that is the basis for the PowerBrief system. Pursuant to a license
agreement effective as of July 20, 1999, Mr. Ohnesorge granted PowerBrief an
exclusive, royalty-free, worldwide license to use this technology within the
legal industry. Under the license agreement, PowerBrief is obligated to pay all
reasonable expenses associated with the filing and prosecution of any United
States patents associated with the technology. The license agreement continues
until the expiration of the last to expire patent covered by the license
agreement and is then perpetual with respect to the technology covered by the
license agreement.
PowerBrief has retained the law firm of Locke Liddell & Sapp LLP as its
outside legal counsel in connection with the merger and related transactions. K.
Wade Bennett, PowerBrief's Chairman of the Board, Secretary and Treasurer, and
Robert W. Ohnesorge, PowerBrief's President, General Counsel and a director,
were associates with Locke Liddell & Sapp LLP prior to founding PowerBrief.
Richard V. Bays, a director of PowerBrief, is a partner with Locke Liddell &
Sapp LLP.
Partners and employees of Locke Liddell & Sapp LLP, including Mr. Bays, own
shares of PowerBrief's series A preferred stock and Mr. Bays has options to
purchase shares of PowerBrief's common stock. In addition, PowerBrief granted
Locke Liddell & Sapp LLP warrants to purchase shares of PowerBrief's common
stock as payment for part of the services rendered by Locke Liddell & Sapp LLP
to PowerBrief.
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RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP served as IOI's independent auditors
continuously since 1990. By unanimous written consent on February 3, 1999, the
board of directors of IOI dismissed the firm of PricewaterhouseCoopers LLP as
IOI's principal accountant and engaged the accounting firm of Ernst & Young LLP
as principal accountant to audit IOI's financial statements for the year ended
December 31, 1998. During the two most recent fiscal years ended December 31,
1997 and the subsequent interim period preceding the dismissal, there were no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference to those
disagreements in their report on the financial statements for those years.
PricewaterhouseCoopers LLP's report on the financial statements of IOI for the
past two years contained no adverse opinion or disclaimer of opinion, or was not
qualified or modified as to uncertainty, audit scope or accounting principles.
IOI requested that PricewaterhouseCoopers LLP furnish it with a letter addressed
to the Commission stating whether it agrees with the above statements. A copy of
PricewaterhouseCoopers LLP's letter to the Commission, dated February 4, 1999,
was filed as Exhibit 16 to IOI's Current Report on Form 8-K dated February 10,
1999.
PowerBrief's board of directors appointed Ernst & Young LLP as independent
auditors for PowerBrief for the period from inception through December 31, 1999
and for the year ended December 31, 2000. Ernst & Young LLP was appointed as
PowerBrief's independent auditors in September 2000.
IOI has been advised by Ernst & Young LLP that Ernst & Young LLP has no
direct financial interest or any material indirect financial interest in IOI
other than arising from that firm's employment as auditor for IOI.
PowerBrief has been advised by Ernst & Young LLP that Ernst & Young LLP has
no direct financial interest or any material indirect financial interest in
PowerBrief other than arising from that firm's employment as auditor for
PowerBrief.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of IOI at December 31, 1999 and 1998, and for each of the
two years in the period ended December 31, 1999, as set forth in their report.
Ernst & Young LLP has also audited the financial statements of PowerBrief at
December 31, 1999, and for the period from inception (July 20, 1999) to December
31, 1999, as set forth in their report. We have included the financial
statements referenced above in the registration statement in reliance on Ernst &
Young LLP's reports, given on their authority as experts in accounting and
auditing.
LEGAL MATTERS
Weil, Gotshal & Manges LLP has rendered an opinion concerning the validity
of the securities being offered pursuant to this document and an opinion
concerning the treatment of the merger as a reorganization within the meaning of
Section 368(a) of the Code. The receipt by IOI of the opinion of Weil, Gotshal &
Manges LLP as to the treatment of the merger as a reorganization within the
meaning of Section 368(a) of the Code is a condition to closing the merger.
Locke Liddell & Sapp LLP has rendered an opinion concerning the treatment of the
merger as a reorganization within the meaning of Section 368(a) of the Code, and
the receipt by PowerBrief of that opinion of Locke Liddell & Sapp LLP is a
condition to closing the merger. See "Information About
PowerBrief -- Relationships and Related Party Transactions" for a description of
the relationships between PowerBrief and Locke Liddell & Sapp LLP.
114
<PAGE> 121
INDEMNIFICATION
IOI's charter and bylaws and PowerBrief's charter and bylaws contain
provisions authorizing IOI and PowerBrief to indemnify their officers,
directors, employees and agents to the full extent permitted by law. See
"Comparison of Shareholder Rights -- Indemnification of Directors and Officers."
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling IOI, IOI has been
informed that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, the board of
directors of each of IOI and PowerBrief does not know of any matters to be
presented at the special meetings other than those described in this joint proxy
statement/prospectus. If any other matters are properly brought before the
special meetings or any adjournments thereof, the enclosed proxies will be
deemed to confer discretionary authority on the individuals named as proxies
therein and will be voted in accordance with the recommendations of IOI's and
PowerBrief's respective boards of directors unless "Authority Withheld" is
indicated in the appropriate box on the proxies.
SHAREHOLDER PROPOSALS
Any proposal of holders of IOI's common stock intended to be presented at
the annual meeting of shareholders of IOI to be held in 2001 must be received by
IOI, addressed to the Secretary of IOI, no later than December 13, 2000, to be
included in the proxy statement related to that meeting.
Any shareholder of IOI desiring to bring business before the 2001 annual
meeting of shareholders in a form other than a shareholder proposal in
accordance with the preceding paragraph must give written notice that is
received by IOI, addressed to the Secretary of IOI, not later than March 14,
2001.
115
<PAGE> 122
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
POWERBRIEF, INC.
Report of Independent Auditors -- Ernst & Young LLP......... F-2
Balance Sheets as of December 31, 1999 and September 30,
2000 (unaudited).......................................... F-3
Statement of Operations for the period from inception (July
20, 1999) to December 31, 1999, for the period from
inception (July 20, 1999) to September 30, 1999
(unaudited), nine months ended September 30, 2000
(unaudited) and period from inception (July 20, 1999) to
September 30, 2000 (unaudited)............................ F-4
Statement of Stockholders' Equity for the period from
inception (July 20, 1999) to December 31, 1999 and nine
months ended September 30, 2000 (unaudited)............... F-5
Statements of Cash Flows for the period from inception (July
20, 1999) to December 31, 1999, for the period from
inception (July 20, 1999) to September 30, 1999
(unaudited), nine months ended September 30, 2000
(unaudited) and period from inception (July 20, 1999) to
September 30, 2000 (unaudited)............................ F-6
Notes to Financial Statements............................... F-7
INTEGRATED ORTHOPAEDICS, INC.
Report of Independent Auditors -- Ernst & Young LLP......... F-15
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-16
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998................................ F-17
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999 and 1998.................... F-18
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998................................ F-19
Notes to Consolidated Financial Statements.................. F-20
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999......................... F-34
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999
(unaudited)............................................... F-35
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2000 (unaudited)............... F-36
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited)...... F-37
Notes to Interim Condensed Consolidated Financial
Statements................................................ F-38
</TABLE>
F-1
<PAGE> 123
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PowerBrief, Inc.
We have audited the accompanying balance sheet of PowerBrief, Inc. (the
"Company") (a development stage enterprise) as of December 31, 1999, and the
related statements of operations, shareholders' equity, and cash flows for the
period from inception (July 20, 1999) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PowerBrief, Inc. at December
31, 1999, and the results of its operations and its cash flows for the period
from inception (July 20, 1999) to December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage, has not yet
completed development of its first product and has incurred losses since
inception. These conditions raise substantial doubt as to the Company's ability
to continue as a going concern. In order for the Company to emerge out of the
development stage and continue as a going concern, the Company must obtain
sufficient capital to complete development of a successful product and sustain a
level of operations sufficient to recover the development costs incurred.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that may result should
the Company be unable to continue as a going concern.
/s/ ERNST & YOUNG LLP
Houston, Texas
November 1, 2000
F-2
<PAGE> 124
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 211,316 $ 942,354
Accounts receivable....................................... 6,231 2,123
Other assets -- current................................... 26,375 31,187
Prepaid license........................................... 125,000 --
--------- -----------
Total current assets.............................. 368,922 975,664
Property and equipment, net................................. 60,780 671,829
Note receivable from stockholders........................... 55,000 55,000
Software and website development costs...................... -- 253,000
--------- -----------
Total assets...................................... $ 484,702 $ 1,955,493
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 136,548 $ 620,931
Current portion of capital lease obligation............... -- 80,319
--------- -----------
Total current liabilities......................... 136,548 701,250
Capital lease obligation, net of current portion............ -- 102,169
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Preferred Stock, $.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 1,009,325 at
December 31, 1999 and 2,566,223 at September 30,
2000.................................................. 10,093 25,662
Common Stock, $.01 par value:
Authorized shares -- 50,000,000
Issued and outstanding shares -- 11,250,000 at December
31, 1999 and at September 30, 2000.................... 112,500 112,500
Additional paid-in capital................................ 824,557 5,427,211
Deficit accumulated during the development stage.......... (598,996) (4,413,299)
--------- -----------
Total shareholders' equity........................ 348,154 1,152,074
--------- -----------
Total liabilities and shareholders' equity........ $ 484,702 $ 1,955,493
========= ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 125
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
INCEPTION INCEPTION NINE MONTHS INCEPTION
(JULY 20, 1999) TO (JULY 20, 1999) TO ENDED (JULY 20, 1999) TO
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 2000 2000
------------------ ------------------ ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.......................... $ -- $ -- $ -- $ --
Operating expenses:
Research and development
costs....................... (307,621) (12,827) (1,236,941) (1,544,562)
General and administrative..... (192,606) (75,294) (2,598,221) (2,790,827)
--------- -------- ----------- -----------
Total operating
expenses............. (500,227) (88,121) (3,835,162) (4,335,389)
--------- -------- ----------- -----------
Loss from operations... (500,227) (88,121) (3,835,162) (4,335,389)
Other income (expenses):
Interest expense............... -- -- (10,678) (10,678)
Interest income................ 38,820 38,820
Other income (expense)......... 6,231 -- (7,283) (1,052)
--------- -------- ----------- -----------
Loss before income
taxes................ (493,996) (88,121) (3,814,303) (4,308,299)
Income tax provision............. -- -- -- --
--------- -------- ----------- -----------
Net loss............... $(493,996) $(88,121) $(3,814,303) $(4,308,299)
--------- -------- ----------- -----------
Basic and diluted loss
per share............ $ (0.04) $ (0.01) $ (0.34) $ (0.38)
========= ======== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 126
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (JULY 20, 1999) TO DECEMBER 31, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
COMMON COMMON PREFERRED PREFERRED PAID-IN DEVELOPMENT STOCKHOLDERS'
STOCK SHARES STOCK STOCK SHARES STOCK CAPITAL STAGE EQUITY
------------ -------- ------------ --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception (July
20, 1999)................. -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders............. 11,250,000 112,500 -- -- -- (105,000) 7,500
Issuance of Series A
preferred stock, net of
costs of $125,000....... -- -- 996,665 9,967 768,033 -- 778,000
Warrants issued in
connection with private
placement............... -- -- -- -- 25,000 -- 25,000
Preferred stock issued in
lieu of cash for rent... -- -- 12,660 126 31,524 -- 31,650
Net loss.................. -- -- -- -- -- (493,996) (493,996)
---------- -------- --------- ------- ---------- ----------- -----------
Balance at December 31,
1999...................... 11,250,000 $112,500 1,009,325 $10,093 $ 824,557 $ (598,996) $ 348,154
Issuance of Series A
preferred stock, net of
costs of $75,000
(unaudited)............. -- -- 1,556,898 15,569 4,264,654 -- 4,280,223
Warrants issued in
connection with private
placement (unaudited)... -- -- -- -- 75,000 -- 75,000
Warrants issued for other
services (unaudited).... -- -- -- -- 253,000 -- 253,000
Compensation expense
related to stock options
(unaudited)............. -- -- -- -- 10,000 -- 10,000
Net Loss (unaudited)...... -- -- -- -- -- (3,814,303) (3,814,303)
---------- -------- --------- ------- ---------- ----------- -----------
Balance at September 30,
2000 (unaudited).......... 11,250,000 $112,500 2,566,223 $25,662 $5,427,211 $(4,413,299) $ 1,152,074
========== ======== ========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 127
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
INCEPTION INCEPTION INCEPTION
(JULY 20, 1999) (JULY 20, 1999) NINE MONTHS (JULY 20,1999)
TO TO ENDED TO
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 2000 2000
--------------- --------------- ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................... $(493,996) $(88,121) $(3,814,303) $(4,308,299)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation......................... 2,068 516 127,167 129,235
Issuance of stock to founders........ 7,500 -- -- 7,500
Stock compensation................... 31,650 -- 263,000 294,650
Loss from sale of assets............. 7,283 7,283
Change in operating assets and
liabilities:
Accounts receivable............... (6,231) -- 4,108 (2,123)
Prepaid expenses and other
assets.......................... (151,375) -- 120,188 (31,187)
Notes receivable from
shareholders.................... (55,000) (25,000) -- (55,000)
Accounts payable and accrued
expenses........................ 136,548 56,952 484,384 620,932
--------- -------- ----------- -----------
Net cash used in operating
activities................. (528,836) (55,653) (2,808,173) (3,337,009)
INVESTING ACTIVITIES
Purchases of property and equipment.... (62,848) (10,269) (529,846) (592,694)
Proceeds from sales of fixed assets.... -- -- 65 65
Capitalized software and website
development costs.................... -- -- (253,000) (253,000)
--------- -------- ----------- -----------
Net cash used in investing
activities................. (62,848) (10,269) (782,781) (845,629)
FINANCING ACTIVITIES
Proceeds from issuance of preferred
stock................................ 803,000 293,000 4,355,223 5,158,223
Payments made under capital lease
obligation........................... -- -- (33,231) (33,231)
--------- -------- ----------- -----------
Net cash provided by financing
activities........................... 803,000 293,000 4,321,992 5,124,992
--------- -------- ----------- -----------
Net increase in cash and cash
equivalents.......................... 211,316 227,078 731,038 942,354
Cash and cash equivalents at beginning
of period............................ -- -- 211,316 --
--------- -------- ----------- -----------
Cash and cash equivalents at
end of period.............. $ 211,316 $227,078 $ 942,354 $ 942,354
========= ======== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 128
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
PowerBrief, Inc. (the "Company") is a development stage company that is
developing software for use in the practice of law. The Company plans to provide
corporate law departments, law firms, third-party service providers, legal
content providers, and others with a uniform portal on the Internet to
facilitate management for the millions of legal documents created by attorneys
each year. PowerBrief, Inc. intends to create a "legal community" on the
Internet for legal professionals. The Company was incorporated on July 20, 1999
under the laws of the State of Delaware.
The Company has generated no revenues from sales and has incurred cash
deficits from operations since inception (July 20, 1999) and does not project
operating profits or positive cash flows from operations through 2000. The
Company has dedicated most of its financial resources to organizational
expenses, preliminary programming and research and development expenses, general
and administrative expenses, marketing expenses and expenses related to the
prosecution of copyright and domain name applications. Management has developed
and is in the process of implementing a plan to grow the Company to
profitability. This plan includes increases in revenues from Internet
subscriptions and premium services. The plan does not project profitability or
positive operating cash flows through 2000 and the Company will be required to
seek additional capital and/or financing sources to fund operations. Without the
assurance of new capital to fund operations, these conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The Company's activities to date have been financed primarily through the
sale of preferred stock. At the report date the Company is exploring various
methods to raise additional capital to fund continued product development that
would be in addition to cash obtained from the merger discussed in note 7.
However, there can be no assurance that the merger will be completed and that
the Company will be able to obtain additional financing on acceptable terms.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents and accounts payable and accrued expenses. The Company believes all
of the financial instruments' recorded values approximate current values.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of ninety days or less.
Income Taxes
The Company uses the liability method of accounting for income taxes
whereby deferred tax liabilities and assets are determined based on the
difference between financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the period in which the differences are
expected to reverse.
F-7
<PAGE> 129
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets are recognized and measured based on the likelihood of
realization of the related tax benefit in the future.
Research and Development Expenditures
Research and development expenditures are expensed in the period incurred.
Software and Website Development Costs
The Company follows Statement of Position 98-1 ("SOP 98-1"), Accounting for
Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1
requires capitalization of certain costs incurred in connection with developing
or obtaining internal use software depending upon the stage of development. All
costs not meeting the criteria of SOP 98-1 are expensed as incurred as research
and development costs. All development costs incurred through December 31, 1999
have been expensed as research and development expenditures based upon the
nature of the costs incurred. The Company capitalized $253,000 during the nine
months ended September 30, 2000.
Emerging Issues Task Force Issue 00-2 ("EITF 00-2"), Accounting for Website
Development Costs, was issued in March 2000. EITF 00-2 clarifies the application
of the accounting model developed in SOP 98-1 as it pertains to website
development. EITF 00-2 is effective prospectively for all costs incurred for
quarters beginning after June 30, 2000, although early adoption is encouraged.
The Company's current accounting policy under SOP 98-1 is consistent with EITF
00-2.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes new standards for
recording derivatives in interim and annual financial statements. This statement
requires recording all derivative instruments as assets or liabilities, measured
at fair value. In June, 1999, the FASB issued Statement No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of Effective Date of
FASB Statement No. 133. As amended, Statement No. 133 is effective for fiscal
years beginning after June 15, 2000. Management does not anticipate that the
adoption of the new statement will have a significant impact on the results of
operations or financial position of the Company.
Interim Financial Statements (Unaudited)
The accompanying unaudited financial statements contain information that
was not audited and, accordingly, for which an opinion has not been expressed.
Interim information and footnote disclosures included in financial statements
have been prepared in accordance with generally accepted accounting principles.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company, and its
results of operations and cash flows.
F-8
<PAGE> 130
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided on a
straight-line basis over the assets' estimated useful lives ranging from three
to five years. Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Office furniture and equipment.............................. $ 8,218 $ 4,678
Computer software and equipment............................. 54,630 580,669
Capitalized lease........................................... -- 215,719
------- ---------
62,848 801,065
Less accumulated depreciation............................... (2,068) (129,237)
------- ---------
$60,780 $ 671,829
======= =========
</TABLE>
The Company entered into a lease agreement for lease of furniture and
telephone system equipment with Integrated Orthopaedics, Inc. ("IOI"), a company
with which the Company has entered into a definitive agreement to merge (see
Note 7). The term of the agreement is from March 1, 2000 to November 1, 2002. At
the end of the lease term, the ownership of the furniture and telephone system
equipment will be transferred to the Company; thus, the related costs have been
capitalized. Monthly obligations for lease of the furniture and telephone system
equipment are $7,667. As of September 30, 2000, $215,719 has been capitalized
under this lease obligation; the related liability as of September 30, 2000 was
$182,488.
The Company also entered into a lease agreement for lease of office space
with IOI. The term of the agreement is from March 1, 2000 to November 1, 2002.
Monthly rent obligation is $20,913.
3. SHAREHOLDERS' EQUITY
Stock Split
On December 16, 1999, the Company's Board of Directors authorized a 5-for-1
stock split of its Common Stock and Series A Convertible Preferred Stock.
Further, on March 16, 2000, the Company's Board of Directors authorized a
3-for-1 stock split of its Common Stock and changed the Series A Convertible
Preferred Stock conversion rate proportionately. All share amounts in the
accompanying financial statements have been retroactively restated to give
effect to the stock split.
Common Stock
As part of its formation, the Company sold 11,250,000 shares of Common
Stock, par value $0.01, to its founders. The Company recorded compensation
expense of $7,500 in connection with this issuance.
Preferred Stock
The Company has authorized 10,000,000 shares of $0.01 par value Preferred
Stock of which 5,000,000 are designated as Series A Convertible Preferred Stock
("Preferred A"). As of December 31, 1999 and September 30, 2000, the Company had
1,009,325 and 2,566,223 shares of Preferred A, issued and outstanding,
respectively.
Each outstanding share of Preferred A is convertible into three shares of
Common Stock and the holder of each share of Preferred A is entitled to three
votes. The holders of Preferred A are entitled to
F-9
<PAGE> 131
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
receive dividends or distributions at the discretion of the Company's Board of
Directors. If the Company declares dividends on shares of the Common Stock, the
Company is required to pay each holder of the Preferred A, a dividend equal to
the dividend which would have been payable to such holder if the shares of
Preferred A had been converted into Common Stock. Any dividends declared are
paid in full to holders of the Preferred A prior to any payment of dividends to
holders of Common Stock. Upon consummation of a qualifying public offering, all
outstanding shares of Preferred A will be converted into three shares of Common
Stock of the Company.
In July 1999 the Company commenced a private placement and during the
period from June 26, 1999 to October 19, 1999, the Company sold 350,000,
266,665, 5,000, and 325,000 shares of its Preferred A at an offering prices of
$0.20, $0.30, $0.60, and $2.00, respectively.
The Company commenced its second and third private placements of its
Preferred A on December 21, 1999 and May 19, 2000, respectively. The Company
sold 966,300 shares at an offering price of $2.50 per share, of which none were
sold by December 31, 1999, and 590,598 shares at an offering price of $3.30 per
share of its Preferred A in its second and third private placements,
respectively.
In August 1999, the Company issued 50,000 shares, of its Preferred A to
nonemployees for services provided in obtaining financing for the Company's
private placement. The fair value of the shares was $100,000 and has been
recorded as a cost of the private placement.
In December 1999, the Company issued 12,660 shares of Preferred A, at a
fair value totaling $31,650 of which $5,275 and $26,375 has been recorded as
rent expense and prepaid rent, respectively, as of December 31, 1999.
Warrants
During the period from Inception to December 31, 1999 and the nine months
ended September 30, 2000, the Company issued warrants to purchase Common Stock
of 23,619 at an exercise price of $0.01 and of 527,406 at exercise prices
ranging from $0.01 to $1.10, respectively. These warrants were issued for
payment of services that were rendered in connection with the private
placements, development of electronic databases and consulting services. These
warrants are exercisable at any time from the date of grant to the earlier date
of two years from the date of grant or twenty days from the date of a qualifying
public offering. None of these warrants were exercised as of September 30, 2000.
The fair value of the warrant grants was estimated based on the
Black-Scholes option pricing model using the following assumptions: risk-free
interest rates of 5.84%; expected life ranging from 2 to 3 years; dividend yield
of zero and volatility of 60 percent. For the period from Inception (July 20,
2000) to December 31, 1999, the total fair value of the warrant grants of
$25,000 was recorded as a cost of the private placement because the warrants
were issued for payment of services rendered in connection with the Company's
private placements.
Of the 527,406 warrants issued during the nine months ended September 30,
2000, 235,965 were for services directly related to the private placements; the
fair value of the warrants of $75,000 was recorded as a cost of the private
placement. The remaining 291,441 warrants were for development of electronic
databases and consulting services; the fair value of the warrants of $253,000
was expensed as incurred.
Stock Options
Subsequent to December 31, 1999, on January 15, 2000, the Company adopted
the 2000 Equity Incentive Plan (the "Plan"). The effective date of the Plan is
January 1, 2000 and 2,866,575 common shares are reserved and available for grant
and issuance under the Plan. The Board of Directors
F-10
<PAGE> 132
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
administers the Plan. Awards granted under the Plan may be nonqualified stock
options or incentive stock options. The plan also allows for restricted stock
and bonus stock awards. As of December 31, 1999 and September 30, 2000, options
to purchase 191,250 and 2,368,968 of Common Stock were issued and outstanding,
respectively. There were no restricted stock or bonus stock awards as of
December 31, 1999 and September 30, 2000.
On July 20, 2000, the Company issued options to directors of the Company to
purchase 60,000 shares of common stock. These grants were exercisable upon grant
and were awarded at fair market value; thus, no compensation expense has been
recorded.
The Company has elected to follow Accounting Principals Board Opinion No.
25, Accounting for stock Issued to Employees ("APB 25") and related
interpretations in accounting for its stock-based compensation arrangements.
Under APB 25, compensation has been for the difference between the exercise
price of the Company's employee stock options and the fair value of the
underlying stock on the date of grant.
Certain of the options granted during the nine months ended September 30,
2000 have the following features: exercisability upon a qualifying public
offering, exercisability upon release of new versions of product, exercisability
based on revenue targets and exercisability at the Board of Directors'
discretion based on performance. Because of these features, those specific stock
options are accounted for in accordance with variable plan accounting and
compensation expense related to these variable awards will be recognized either
on the date the triggering event occurs or at each reporting period based on
estimates. Deferred compensation will be recognized for the differences between
the fair value of the underlying common stock at each reporting date and the
exercise price for amounts not previously recognized as compensation expense.
Effective November 7, 2000, the Company amended all agreements with these
features to add a fixed vesting date of six years after the date of grant. The
amendment date is a new measurement date for the options and prospectively the
options will be accounted for in accordance with fixed plan accounting. The
total compensation charge to be recognized for these options is the difference
between the fair value of the common stock and the exercise price at the
amendment date of approximately $693,000. Compensation expense would be
recognized over the vesting period or upon the occurrence of the triggering
events.
In February 2000, the Company granted 514,287 options to purchase shares of
common stock at an exercise price of $0.083 per share. These grants were outside
of the Plan and had certain of the exercisability features discussed above. None
of these options were exercised as of September 30, 2000 and the resulting
deferred compensation charge is included below.
The Company has a total deferred compensation charge for these grants of
$25,500 and $693,000 at December 31, 1999 and September 30, 2000, respectively.
The deferred compensation charge will be expensed over the vesting period or
upon the occurrence of the triggering events. The Company recognized $-0- and
$10,000 as compensation expense for the period from Inception (July 20, 1999) to
December 31, 1999 and the nine months ended September 30, 2000, respectively.
F-11
<PAGE> 133
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of stock option activity for the period from
Inception (July 20, 1999) to September 30, 1999.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE FAIR VALUE
OPTIONS EXERCISE PRICE PER SHARE
--------- ---------------- ----------------
<S> <C> <C> <C>
Inception, July 20, 1999................... -- $ -- $ --
Granted.................................... 191,250 0.57 0.23
========= ====== =====
December 31, 1999.......................... 191,250 0.57 0.23
Granted.................................... 514,287 0.083 1.04
Granted.................................... 2,117,718 0.81 0.25
Granted.................................... 60,000 1.10 0.23
--------- ------ -----
September 30, 2000 (unaudited)............. 2,883,255 $ 0.67 $0.39
========= ====== =====
</TABLE>
The weighted average remaining contractual life of the options outstanding
at December 31, 1999 and September 30, 2000 is 9.8 years and 9.2 years,
respectively. Options are exercisable within the times determined by the stock
option agreement generally vesting over a 2 to 3 year period; however, no option
is exercisable after the expiration of 10 years from the date the option is
granted. As of December 31, 1999 and September 30, 2000, none and 347,152 of the
stock option grants were exercisable, respectively.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") requires
the Company to disclose the pro forma effect of the method of accounting
prescribed in SFAS 123, which would generally require the Company to record
compensation expense equal to the valuation of a stock option on the grant date.
The value of the Company's stock options granted to employees was estimated
using the minimum value method, which does not consider stock price volatility.
The fair value of the Company's stock-based awards granted to employees was
estimated assuming no expected dividends, a weighted-average expected life of
between 2 to 3 years and a weighted-average risk-free interest rate of 5.84%.
For pro forma purposes, the estimated minimum value of the Company's
stock-based awards to employees is amortized over the vesting period of the
underlying instruments. Had the Company determined stock based compensation in
accordance with SFAS 123 the Company's net loss would have been adjusted to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION INCEPTION NINE MONTHS INCEPTION
(JULY 20, 1999) (JULY 20, 1999) TO ENDED (JULY 20, 1999) TO
TO DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 2000 2000
--------------- ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
Net loss, as reported.... $(493,996) $(88,121) $(3,814,303) $(4,308,299)
Basic and diluted loss
per share, as
reported............... $ (0.04) $ (0.01) $ (0.34) $ (0.38)
Pro forma net loss....... $(494,954) $(88,121) $(3,978,031) $(4,472,958)
Pro forma basic and
diluted loss per
share.................. $ (0.04) $ (0.01) $ (0.35) $ (0.40)
</TABLE>
F-12
<PAGE> 134
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY
During 1999, the founders of the Company borrowed $55,000 from the Company.
The notes do not carry a specified interest rate, however, any interest imputed
on the notes during 1999 would not be material to the financial statements.
5. INCOME TAXES
No provisions for federal and state income taxes have been recorded for the
period from inception (July 20, 1999) to December 31, 1999 and the nine months
ended September 30, 2000 as the Company incurred a net operating loss. Due to
uncertainty regarding the realization of the resulting deferred tax assets, full
valuation allowances have been established.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $ 113,440 $ 616,123
Expenses not yet deductible for tax...................... 65,280 948,880
Stock based compensation................................. 10,761 100,181
--------- -----------
Total deferred tax assets.................................. 189,481 1,665,184
--------- -----------
Net deferred tax assets.................................... 189,481 1,665,184
Valuation allowance........................................ (189,481) (1,665,184)
--------- -----------
Net deferred taxes......................................... $ -- $ --
========= ===========
</TABLE>
The valuation allowance for the full amount of deferred tax assets has been
reserved due to the uncertainty concerning the Company's ability to utilize the
benefit of the net operating loss.
At December 31, 1999 and September 30, 2000, the Company has a net
operating loss carryforward of approximately $334,000 and $1,812,000,
respectively expiring in 2014 and 2015, respectively.
Due to the "change of ownership" provision of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryforwards may be subject to
an annual limitation against taxable income in future periods. As a result of
the annual limitation, a portion of these carryforwards may expire before
ultimately becoming available to reduce future income tax liabilities.
6. LOSS PER SHARE
Basic Loss Per Share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted Loss Per Share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. Dilutive
potential common shares consist of the incremental common shares issuable upon
the conversion of convertible preferred stock (using the "if converted" method)
and upon exercise of stock options and warrants.
F-13
<PAGE> 135
POWERBRIEF, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the numerator and denominator of basic and diluted Loss
Per Share is provided as follows:
<TABLE>
<CAPTION>
INCEPTION INCEPTION NINE MONTHS INCEPTION
(JULY 20, 1999) TO (JULY 20, 1999) TO ENDED (JULY 20, 1999) TO
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 2000 2000
------------------ ------------------ ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator -- net loss.... $ (493,996) $ (88,121) $(3,814,303) $(4,308,299)
Denominator -- basic and
diluted-weighted-average
number of common shares
outstanding............ 11,250,000 11,250,000 11,250,000 11,250,000
Basic and diluted loss
per share.............. $ (0.04) $ (0.01) $ (0.34) $ (0.38)
</TABLE>
The convertible preferred stock, stock options and warrants have been
excluded from the computation of diluted net loss per share because of their
antidilutive effect.
7. LINE OF CREDIT
The Company and IOI, a company with which the Company has entered into a
definitive agreement to merge, entered into a promissory note on September 15,
2000 which allows the Company to borrow up to $3.0 million from IOI. Subsequent
to September 30, 2000, on November 15, 2000, the Company borrowed $500,000 under
the promissory note.
8. MERGER
On September 15, 2000, the Company entered into a definitive agreement to
merge with Integrated Orthopaedics, Inc. ("IOI"), a publicly traded shell
company. Since IOI is a non-operating shell company, the merger will be treated
as a recapitalization of the Company for accounting purposes. As a result, the
Company will record the transaction as the issuance of common stock for the net
monetary asset of IOI (principally cash and investments), accompanied by a
recapitalization of equity. In the merger, IOI will issue approximately 57.2
million shares of its common stock (before a five to one reverse stock split by
IOI) in exchange for all of the outstanding common and preferred stock of the
Company. Holders of the common stock warrants and stock options will receive
like securities of IOI, adjusted to reflect the increased number of shares of
common stock such holders will be entitled to purchase. The officers and the
directors of the Company will retain their position with the surviving company.
The stockholders of the Company will own more than 60% of the outstanding stock
of IOI and accordingly the transaction will be accounting for by the Company as
a recapitalization. IOI will change its name to PowerBrief upon closing of the
merger.
In connection with the merger, IOI (New PowerBrief) will grant between
approximately 7.7 million and 8.2 million new warrants (before a five to one
reverse stock split by IOI) to existing common stock, preferred stock, and
warrant holders of the Company with exercise prices equal to or greater than the
deemed fair value per share of the merger.
F-14
<PAGE> 136
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Orthopaedics, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Orthopaedics, Inc., as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Orthopaedics, Inc., at December 31, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Houston, Texas
April 12, 2000,
except for notes 1, 2, and 8, as to which the date is
September 18, 2000
F-15
<PAGE> 137
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,889 $ 6,018
Prepaid expenses.......................................... 212 245
Other current assets...................................... 11 448
Net assets of discontinued operations:
Practice Management Services............................ 17,367 23,342
Ambulatory Surgery Centers.............................. 418 --
Work Hardening Services................................. 138 87
-------- --------
Total current assets............................... 20,035 30,140
Property and equipment:
Equipment (including capital leases)...................... 1,037 1,001
Leasehold improvements.................................... 69 69
Furniture and fixtures (including capital leases)......... 454 417
-------- --------
1,560 1,487
Less -- accumulated depreciation and amortization......... (860) (622)
-------- --------
700 865
Deferred income taxes....................................... 1,509 748
Other assets................................................ 101 622
-------- --------
Total assets....................................... $ 22,345 $ 32,375
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 87 $ 176
Accrued liabilities....................................... 986 1,320
Current obligations under capital leases.................. 89 95
Current portion of notes payable.......................... -- 194
-------- --------
Total current liabilities.......................... 1,162 1,785
Obligations under capital leases............................ 183 228
Dividend payable............................................ 735 531
Deferred income taxes....................................... 1,509 748
-------- --------
Total liabilities.................................. 3,589 3,292
COMMITMENT AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized:
Series A, cumulative convertible, 25,226 shares issued
and outstanding....................................... -- --
Series B, cumulative convertible, non-redeemable,
300,236 shares issued and outstanding in 1999 and
274,544 in 1998....................................... 3 3
Common stock, $.001 par value, 50,000,000 shares
authorized, 6,557,454 issued in 1999 and 1998........... 7 7
Additional paid-in capital................................ 49,316 46,744
Common stock to be issued................................. -- 78
Accumulated deficit....................................... (30,320) (17,499)
Treasury shares, 60,914 in 1999 and 1998.................. (250) (250)
-------- --------
Total stockholders' equity......................... 18,756 29,083
-------- --------
Total liabilities and stockholders' equity......... $ 22,345 $ 32,375
======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE> 138
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Revenues.................................................... $ -- $ --
Costs and expenses:
General and administrative................................ 3,658 5,016
Special charges........................................... 768 446
Depreciation and amortization............................. 238 242
-------- -------
4,664 5,704
-------- -------
Loss from operations........................................ (4,664) (5,704)
Interest income............................................. 202 493
Interest expense............................................ (284) (358)
-------- -------
Loss from continuing operations before provision for income
taxes..................................................... (4,746) (5,569)
Income tax (provision) benefit.............................. (133) 1,772
-------- -------
Loss from continuing operations............................. (4,879) (3,797)
Loss from discontinued operations, net of taxes (Note 2).... (5,016) (1,130)
-------- -------
Net loss before extraordinary items......................... (9,895) (4,927)
Extraordinary loss on termination of credit agreement,
net....................................................... (152) --
-------- -------
Net loss.................................................... $(10,047) $(4,927)
======== =======
Net loss from continuing operations applicable to common
shares.................................................... $ (7,653) $(6,336)
======== =======
Loss per share basic and diluted:
Net loss from continuing operations....................... $ (1.18) $ (0.98)
Net loss from discontinued operations..................... (0.77) (0.18)
Extraordinary loss........................................ (0.02) --
-------- -------
Net loss.......................................... $ (1.97) $ (1.16)
======== =======
Weighted average shares outstanding............... 6,496 6,459
======== =======
</TABLE>
See accompanying notes.
F-17
<PAGE> 139
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES AMOUNT ADDITIONAL STOCK EARNINGS/
------------------ ------------------ PAID-IN TO BE ACCUMULATED TREASURY
PREFERRED COMMON PREFERRED COMMON CAPITAL ISSUED DEFICIT STOCK TOTAL
--------- ------ --------- ------ ---------- ------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................. 276 5,886 $3 $6 $41,803 $1,643 $(10,033) $ -- $ 33,422
Treasury stock
repurchased at
cost................. -- -- -- -- -- -- -- (250) (250)
Medical practice
transactions:
Stock issued......... -- 157 -- -- 747 -- -- -- 747
Value of 30,001
shares to be
issued............. -- -- -- -- -- 78 -- -- 78
Delivery of common
stock to be issued... -- 424 -- 1 1,642 (1,643) -- -- --
Issuance cost of
Preferred Stock
Series B............. -- -- -- -- (85) -- -- -- (85)
Dividends on Preferred
Stock:
Series A............. 24 -- -- -- -- -- (202) -- (202)
Series B............. -- -- -- -- 2,337 -- (2,337) -- --
Options exercised...... -- 90 -- -- 300 -- -- -- 300
Net loss............... -- -- -- -- -- -- (4,927) -- (4,927)
--- ----- -- -- ------- ------- -------- ----- --------
Balance at December 31,
1998................. 300 6,557 3 7 46,744 78 (17,499) (250) 29,083
Dividends on Preferred
Stock:
Series A............. 26 -- -- -- -- -- (202) -- (202)
Series B............. -- -- -- -- 2,572 -- (2,572) -- --
Termination of common
stock to be issued... -- -- -- -- -- (78) -- -- (78)
Net loss............... -- -- -- -- -- -- (10,047) -- (10,047)
--- ----- -- -- ------- ------- -------- ----- --------
Balance at December 31,
1999................. 326 6,557 $3 $7 $49,316 $ -- $(30,320) $(250) $ 18,756
=== ===== == == ======= ======= ======== ===== ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 140
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(10,047) $ (4,927)
Noncash adjustments:
Impairment charges........................................ 4,678 2,500
Extraordinary loss on termination of credit agreement,
net..................................................... 152 --
Depreciation and amortization............................. 1,754 1,531
Deferred income taxes..................................... 343 (2,300)
Other..................................................... 139 164
Changes in assets and liabilities, excluding acquisitions
and dispositions:
Accounts receivable, net................................ 54 421
Other assets............................................ 363 (70)
Accounts payable and accrued liabilities................ (401) (490)
Due from/to affiliated medical groups................... (78) (306)
Income taxes receivable................................. (2) 712
-------- --------
Net cash used in operating activities.............. (3,045) (2,765)
INVESTING ACTIVITIES
Acquisition of property and equipment....................... (858) (573)
Proceeds from sale of marketable securities................. -- 111
Proceeds from sale of equipment............................. -- 199
Net payments in medical practice transitions................ -- (4,688)
-------- --------
Net cash used in investing activities....................... (858) (4,951)
FINANCING ACTIVITIES
Payments on other notes..................................... (411) (1,747)
Payments on capital lease obligations....................... (229) (126)
Refund (payment) of deferred financing costs................ 414 (1,000)
Payment to repurchase common shares......................... -- (250)
Direct costs of preferred stock issuance.................... -- (85)
Proceeds from exercise of stock options..................... -- 300
-------- --------
Net cash used in financing activities....................... (226) (2,908)
-------- --------
Decrease in cash and cash equivalents....................... (4,129) (10,624)
Cash and cash equivalents:
Beginning of year......................................... 6,018 16,642
-------- --------
End of year............................................... $ 1,889 $ 6,018
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................... $ 471 $ 136
Income taxes paid (refunded)................................ $ 155 $ (509)
NONCASH TRANSACTIONS:
Details of medical practice transactions:
Common stock and additional paid-in capital issued........ $ -- $ 747
Common stock and additional paid-in capital to be issued
(terminated)............................................ $ (78) $ 78
Deferred tax liability for book and tax basis
differences............................................. $ -- $ 2,204
Liabilities assumed....................................... $ -- $ 20
Others:
Series B Preferred Stock -- accumulated deficit related to
stock dividends......................................... $ 2,572 $ 2,337
Series A Preferred Stock -- increase in dividends
payable................................................. $ 202 $ 202
Furniture and equipment acquired under capital leases..... $ 760 $ 246
</TABLE>
See accompanying notes.
F-19
<PAGE> 141
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a Texas
corporation, was organized to provide management, consulting, and ancillary
development services to orthopedic medical practices and other organizations.
On May 24, 2000, the Company decided to discontinue operations in its
operating segments due to continuing operating losses, difficult financing
markets, and limited investor support for physician service companies. The
Company has restated the accompanying consolidated financial statements to
reflect its practice management services, ambulatory surgery center, and work
hardening services practices as discontinued operations (See Note 2).
On September 15, 2000, the Company signed a merger agreement with
PowerBrief, Inc. ("PowerBrief") a private company developing integrated online
solutions for legal professionals. Following the merger, existing shareholders
of the Company will own approximately 34% of the post merger outstanding common
stock of the surviving company and existing shareholders, warrants holders, and
option holders of the Company will own approximately 40% of the outstanding
common stock of the surviving company on a fully diluted basis. These
percentages are subject to further adjustment as set forth in greater detail in
the merger agreement, based on the amount of cash and liabilities the Company
has following the merger, which will depend, in part on the amount for which the
Company can sell its interest in the ambulatory surgery center in Louisiana.
Although there can be no assurances that the merger will close, the merger
is expected to be completed during the first quarter of 2001. The completion of
the merger depends on meeting a number of conditions, including without
limitation, the shares of the Company's common stock issuable in the merger be
listed on the American Stock Exchange. In the event that these conditions are
not met, the merger may not be completed. If the merger is not completed, the
Company will evaluate other possible opportunities to acquire operations through
an acquisition or merger. There can be no assurances that the Company will be
successful in identifying suitable merger candidates, raising equity capital, or
obtaining financing to implement new business strategies. Management believes
that available cash, including cash resulting from its divestitures, will be
sufficient to fund remaining loss during fiscal 2000.
The following is a summary of the Company's significant accounting
policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated. Certain reclassifications to the prior year's financial
statements have been made to conform to the 1999 presentation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. Actual future results could differ from those expected at the
reporting date.
CASH EQUIVALENTS
The Company considers its investments in highly liquid debt securities with
original maturities of three months or less to be cash equivalents.
F-20
<PAGE> 142
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and
equipment is recorded using the straight-line method over the estimated useful
lives of three to ten years for equipment, furniture and fixtures. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the terms of the respective leases, and the amortization is
included in depreciation and amortization expense.
MANAGEMENT SERVICE AGREEMENTS
Management service agreements ("MSAs") consist of intangible assets
attributable to the affiliated medical practices. As a result of certain
developments in the physician practice management ("PPM") industry, the Company
elected to change the amortization period of all its MSAs from 40 years to 25
years on a prospective basis beginning July 1, 1998. This 25 year amortization
period initiates at the execution date of the MSA. This change in accounting
estimate increased loss per share by $0.04 for the year ended December 31, 1998.
Under the agreements, the affiliated medical practices have agreed to
provide medical services on an exclusive basis only through the facilities
managed by the Company. The MSAs can be unilaterally terminated without penalty
by the affiliated medical practices only for cause. At any time, any affiliated
medical practice can terminate an MSA by tendering to IOI the MSA and the assets
of the practice. If the affiliated medical practice breaches the MSA, the
practice is responsible to pay liquidated damages to IOI in the same amount as
that which would be due if the practice terminated the MSA without cause. As
discussed further in Note 2, subsequent to December 31, 1999, the Company
executed agreements with all of its remaining affiliated medical practices to
terminate the respective MSAs.
The Company regularly evaluates the carrying value of the MSAs versus the
discounted cash benefit expected to be realized from the performance of the
underlying physician practices and adjusts for any impairment in value if there
are indicators that the value of the MSA may be impaired. Additionally, the
Company recognizes an impairment charge, if necessary, at the time a decision is
made to terminate a MSA (see Note 2) if the termination agreement results in the
Company receiving less than the recorded asset value.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized on a straight-line basis (which
approximates the interest method) over the term of the related debt, and are
included in interest expense.
REVENUE RECOGNITION AND RECEIVABLES
Medical service revenue for services to patients by the affiliated medical
practices affiliated with the Company is recorded when services are rendered
based on established or negotiated charges reduced by contractual adjustments
and allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when the final
settlements are determined. Medical service revenue of the affiliated medical
practices is reduced by the contractual amounts retained by the affiliated
medical practices to arrive at the Company's revenue. The affiliated medical
practices maintain exclusive control of all aspects of the practice of medicine
and the delivery of medical services. With respect to the medical practice
affiliations, substantially all of the amounts retained by affiliated medical
practices were contractually guaranteed as a minimum percentage of practice
gross profit.
The Company's revenues represent the contractual fees earned under the MSAs
with orthopaedic groups. Under the agreements, the Company is contractually
responsible and at risk for the operating costs of the affiliated medical
practices with the exception of the amounts retained by physicians. The
F-21
<PAGE> 143
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's revenues include the reimbursement of all medical practice operating
costs and the fixed and variable contractual management fees as defined and
stipulated in the agreements. Revenues related to MSAs are accrued when
collection is probable.
Under its MSAs, receivables generated by affiliated medical practices from
patient services are purchased by the Company at their net collectible value on
a full recourse basis. The Company, therefore, does not have an allowance for
doubtful accounts. As a result, the Company's accounts receivable are a function
of medical service revenue of the affiliated medical practices rather than the
Company's revenue. Such receivables are recorded by the affiliated medical
practices net of contractual adjustments and allowance for doubtful accounts and
are not collateralized.
INCOME TAXES
The Company records its income taxes under the liability method. Under this
method, deferred income tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
Company provides an allowance for tax assets not considered to be realizable
based upon expected future levels of taxable income and the turnaround effect of
deferred tax assets.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Due generally to their short-term nature and current interest rates and
terms, where applicable, the carrying value of the Company's financial
instruments is believed to approximate their fair values unless otherwise
indicated.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing loss applicable to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock on the first day of the fiscal year. However, if the
inclusion of such exercise or conversion reduces the loss per share, then such
conversion or exercise would be excluded from the calculation.
STOCK-BASED COMPENSATION
The Company measures stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. See Note 11 for the pro forma disclosures of the
effect on net loss and loss per common share as if the fair value-based method
had been applied in measuring compensation expense.
2. DISCONTINUED OPERATIONS
On May 24, 2000 the Board of Directors of the Company adopted a plan to
discontinue the operations and divest of its Practice Management Services,
Ambulatory Surgery Center, and Work Hardening Services operating segments. These
segments represented 100% of the Company's existing operating revenues. In
accordance with Accounting Principle Board Opinion No. 30, the following
financial
F-22
<PAGE> 144
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
data reflects the net assets at December 31, 1999 and 1998 and the summary of
operating results for the years then ended for these discontinued operations (in
thousands).
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
------- -------
<S> <C> <C>
NET ASSETS OF DISCONTINUED OPERATIONS
Assets:
Accounts receivable....................................... $ 2,101 $ 3,140
Prepaid expenses and other................................ 528 873
Property and equipment, net of accumulated depreciation... 1,637 973
Management Services Agreements, net of amortization....... 20,581 28,272
Assets to be disposed of.................................. 2,424 --
Other assets.............................................. 34 84
Deferred income taxes..................................... 416 1,693
------- -------
Total assets...................................... 27,721 35,035
Liabilities:
Accounts payable and accrued liabilities.................. 774 704
Obligations under capital leases.......................... 485 150
Notes payable............................................. 868 1,085
Deferred income taxes..................................... 7,671 9,667
------- -------
Total liabilities................................. 9,798 11,606
------- -------
Net assets of discontinued operations....................... $17,923 $23,429
======= =======
</TABLE>
The following is a summary of the loss from discontinued operations (in
thousands except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:................................................... $11,745 $12,218
Costs and expenses:
Practice compensation and benefits........................ 4,296 4,374
Other direct costs........................................ 4,291 4,047
General and administrative................................ 1,328 1,577
Depreciation and amortization............................. 1,516 1,289
Interest expense.......................................... 148 89
Impairment charge......................................... 4,678 2,500
------- -------
16,257 13,876
------- -------
Loss from discontinued operations before income taxes....... (4,512) (1,658)
Income tax (provision) benefit.............................. (504) 528
------- -------
Loss from operations, net of taxes.......................... (5,016) (1,130)
------- -------
Loss from discontinued operations per common share, basic
and diluted............................................... $ (0.77) $ (0.18)
======= =======
</TABLE>
F-23
<PAGE> 145
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the significant activity related to discontinued
segments:
DIVESTITURES -- ASSETS TO BE DISPOSED OF
In December 1999, the Company entered into discussions with its practice in
Colorado regarding terminating its MSA. In January 2000, a definitive agreement
was executed to terminate the MSA. In conjunction with this transaction the
Company sold the related net accounts receivable and net property and equipment
to the practice and an affiliated entity of the practice. Total consideration to
be received related to the transaction is $1,940,000 of which $700,000 was
received in cash, a note receivable of $974,000 which was subsequently paid off
in July 2000, and the assumption by the practice of certain liabilities. The
MSA, net accounts receivable and net property and equipment have been reduced to
their net realizable value at December 31, 1999 based upon the terms of the
agreement. The resulting write-down of $2,599,000 is reflected as an impairment
charge at December 31, 1999. The practice's income before taxes for 1999 and
1998 was $354,000 and $117,000, respectively.
In January 1999, the Company and a subsidiary of the Company filed a
lawsuit against the medical practice located in Connecticut seeking to enforce
certain repurchase obligations under the related MSA. The MSA was terminated by
the Company in January 1999 due to the failure of the practice to satisfy
certain of its obligations thereunder. Upon such termination for cause, the
Company and its subsidiary were entitled under the MSA to require the practice
to comply with certain repurchase obligations regarding certain assets,
including without limitation, accounts receivable, equipment, contract, and
intangibles. In March 2000 a settlement of $750,000 was reached between the
Company and the practice. The MSA and net property and equipment have been
reduced to their net realizable value at December 31, 1999 based on the terms of
the agreement. A loss of $2,079,000 and $2,500,000 on the disposal is included
in impairment charges for the years ended December 31, 1999 and 1998,
respectively. During 1999, there was no operations related to the practice. The
practice's income before taxes for 1998 was $308,000.
DIVESTITURES -- SUBSEQUENT ACTIVITY
In September 2000, a definitive agreement was executed to terminate the
Company's MSA with its Louisiana practice effective August 31, 2000. In
connection with the transaction, the Company sold the related net accounts
receivable and net property and equipment to a newly formed entity owned by the
partner physicians of the practice. In addition, the new entity assumed certain
liabilities and forgave certain debts of the Company. Total consideration
received related to the transaction was $1,266,000, which includes cash,
forgiveness of debt and the assumption of debt. A write-down of $2,732,000 was
recognized during fiscal 2000.
In August 2000, a definitive agreement was executed to sell the fixed
assets of the Company's work hardening practices effective August 31, 2000.
Total consideration received related to the transaction was $120,000 in cash and
notes receivable. A write-down of $35,000 was recognized in fiscal 2000.
In April 2000, a definitive agreement was executed to terminate the
Company's MSA with its Pennsylvania practice effective March 31, 2000. In
conjunction with the transaction, the Company sold the related net accounts
receivable and net property and equipment to the practice. Total consideration
received related to the transaction was $4,210,000, which is comprised of cash
and the assumption by the Pennsylvania practice of certain liabilities. A
write-down of $7.6 million was recognized in fiscal 2000.
DIVESTITURES -- PENDING TRANSACTIONS
The Company is in the process of selling its remaining operating asset,
which is an interest in an ambulatory surgery center in Louisiana.
F-24
<PAGE> 146
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOSS PER SHARE
The components of basic EPS are as follows (in thousands, except per share
data) for the years ended December 31:
<TABLE>
<CAPTION>
1999 EPS 1998 EPS
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net loss from continuing operations.............. $(4,879) $(0.75) $(3,797) $(0.59)
Series A Preferred Stock dividends............... (202) (0.03) (202) (0.03)
Series B Preferred Stock dividends............... (2,572) (0.40) (2,337) (0.36)
------- ------ ------- ------
Net loss available to common stockholders........ $(7,653) $(1.18) $(6,336) $(0.98)
------- ------ ------- ------
Weighted average common shares outstanding....... 6,496 6,459
======= =======
</TABLE>
For the years ended December 31, 1999 and 1998, the diluted weighted
average shares excluded the following as the issuance or conversion of these
instruments results in anti-dilution (shares in thousands). The number of shares
listed assumes the conversion occurred on January 1, 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Employee stock options to purchase
common stock......................... 942 $1.90 1,459 $3.71
Warrants to purchase common stock...... -- $ -- 200 $2.13
Non-employee stock options to purchase
common stock......................... 35 $5.00 58 $4.15
Series A Preferred Stock convertible
into common stock.................... 1,075 $ -- 872 $ --
Series B Preferred Stock convertible
into common stock.................... 9,667 $ -- 4,576 $ --
</TABLE>
The Series A Preferred Stock and Series B Preferred Stock have been subsequently
converted (see Note 8).
4. SPECIAL CHARGES
During 1999 and 1998, the Company recorded special charges of $768,000 and
$446,000 respectively, relating primarily to corporate restructuring charges.
F-25
<PAGE> 147
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The Company's income tax provision (benefit) consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------
1999 1998
---- -------
<S> <C> <C>
Continuing operations
Current:
Federal................................................... $ -- $ (918)
State..................................................... 133 (179)
Deferred:
Federal................................................... -- (564)
State..................................................... -- (111)
---- -------
Total income tax provision (benefit) from continuing
operations................................................ 133 (1,772)
Income tax provision (benefit) from discontinued
operations................................................ 504 (528)
Income tax benefit from extraordinary loss.................. (91) --
---- -------
Total income tax provision (benefit).............. $546 $(2,300)
==== =======
</TABLE>
The difference between the effective income tax rate and the amount which
would be determined by applying the statutory U.S. income tax rate to loss
before income tax (provision) benefit is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1999 1998
------- ------
<S> <C> <C>
Income tax benefits at U.S. statutory rates................. $ 1,614 $1,893
State income taxes, net of federal benefit.................. 176 207
Change in valuation allowance............................... (1,790) --
Nondeductible expenses and other............................ (133) (328)
------- ------
$ (133) $1,772
======= ======
</TABLE>
F-26
<PAGE> 148
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes including amounts related to discontinued operations at
December 31 are comprised of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses.......................................... $ 21 $ 281
Allowance for doubtful accounts........................... 395 296
Special charges not currently deductible for tax.......... -- 923
Net operating loss carryforward........................... 5,883 1,257
Other..................................................... -- 193
------- --------
6,299 2,950
Valuation allowance....................................... (4,374) (509)
------- --------
1,925 2,441
Deferred tax liabilities:
Other..................................................... (975) (215)
Intangible assets, net of amortization (MSAs)............. (8,003) (10,127)
Depreciation.............................................. (202) (73)
------- --------
(9,180) (10,415)
------- --------
Net deferred tax liability........................ $(7,255) $ (7,974)
======= ========
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $15,595,000 available for federal income tax purposes. Of the net
operating loss carryforward, $3,381,000 will expire in 2012 and $3,433,000 will
expire in 2018. The current year's portion, or $8,782,000, expires in 2019. The
Company increased its valuation allowance from $509,000 at December 31, 1998 to
$4,374,000 at December 31, 1999. The increase in the valuation allowance
resulted from subsequent events which led to management's determination that a
portion of the deferred tax asset related to the Company's net operating loss
may not be realized.
6. INDEBTEDNESS (INCLUDING OBLIGATIONS OF DISCONTINUED OPERATIONS)
Indebtedness at December 31, 1999 and 1998 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Nonnegotiable subordinated convertible note payable......... $ 868 $1,085
Capital lease obligations (see Note 7)...................... 757 473
Other....................................................... -- 194
------ ------
1,625 1,752
Less: current maturities.......................... (432) (533)
------ ------
$1,193 $1,219
====== ======
</TABLE>
REVOLVING CREDIT FACILITY
In 1998, the Company entered into a credit agreement (the "Credit
Agreement"), which provided for a $65.0 million three-year Revolving Credit
Facility (the "Credit Facility"). Due to changes in its business strategy and
general market conditions, the Credit Agreement and Credit Facility were
terminated on June 4, 1999 and the Company was refunded $414,000 of related
financing costs by the bank. The termination resulted in an extraordinary loss
related to the write-off of deferred financing costs which were not refunded of
$152,000 (net of income taxes $91,000). The Company incurred approximately
F-27
<PAGE> 149
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.0 million in financing costs in connection with the Credit Agreement and
recorded amortization expense related to the financing costs of $139,000 and
$164,000 in 1999 and 1998, respectively.
NONNEGOTIABLE SUBORDINATED CONVERTIBLE NOTES PAYABLE
Pursuant to a practice affiliation transaction in 1997, the Company issued
nonnegotiable subordinated convertible promissory notes to certain physicians.
These notes bear simple interest at seven percent per annum. Payments of
principal plus the amount of interest accrued to date on the outstanding
principal are due in five equal installments on the second through sixth
anniversaries of issuance date. At each principal due date, the holder of the
note may elect to receive payment in cash for both principal and interest or
take payment in the form of Company common stock. If the holder elects to take
payment in the form of Company common stock, the Company will issue
approximately one-fifth of one share for each dollar of principal payment
converted. If payment is taken in the form of Company stock, the accrued
interest is waived by the holder.
If the Company fails to make payment under any of the notes, the respective
physician group can terminate the related MSA for cause.
Future principal maturities (in thousands) are $217 in 2000, $217 in 2001,
$217 in 2002, $217 in 2003 and $-0- thereafter.
OTHER DEBT
Other debt at December 31, 1998 consisted primarily of unsecured notes.
These obligations matured in various installments through 1999 at interest rates
ranging from 7.5% to 8.25% in 1998.
7. LEASES (INCLUDING OBLIGATIONS OF DISCONTINUED OPERATIONS)
The Company leases property and equipment under cancelable and
non-cancelable leases. Future minimum operating and capital lease payments for
the next five years and thereafter are (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
Year ending December 31:
2000...................................................... $ 285 $ 867
2001...................................................... 261 767
2002...................................................... 220 729
2003...................................................... 119 359
2004...................................................... 18 308
Years after 2004............................................ -- 3,044
----- ------
Total minimum lease payments................................ 903 $6,074
======
Less: Amount representing interest.......................... (146)
-----
Present value of net minimum lease payments................. $ 757
=====
</TABLE>
Future minimum lease payments under operating leases have been reduced for
sublease rentals of $1,371,000. Rental expense was $1,260,000 and $1,065,000 for
1999 and 1998, respectively. Rental expense has been reduced for sublease rental
income of $166,000 and $200,000 in 1999 and 1998, respectively.
F-28
<PAGE> 150
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized amounts relate to assets leased by the Company
under capital leases (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1999 1998
----- -----
<S> <C> <C>
CLASSES OF PROPERTY
Equipment................................................... $ 806 $ 330
Furniture and fixtures...................................... 354 354
Less: accumulated amortization.............................. (362) (147)
----- -----
$ 798 $ 537
===== =====
</TABLE>
Amortization of assets recorded under capital leases is included with
depreciation expense in the statement of operations.
8. STOCKHOLDERS' EQUITY
Common and Preferred Stock
The Company has authorized capital stock consisting of (i) 50,000,000
shares of Common Stock, $.001 par value, and (ii) 10,000,000 shares of Preferred
Stock, $.01 par value. The Preferred Stock may be issued in such series and have
such rights, preferences, and other provisions as may be determined by the Board
of Directors without approval by the holders of Common Stock. As of December 31,
1999, the Company has designated 26,000 shares and 400,000 shares of its
authorized Preferred Stock as Series A Cumulative Convertible Preferred Stock
(the "Series A Preferred") and Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred") of which 25,226 and 300,236 were issued and
outstanding, respectively.
Holders of Common Stock are entitled to one vote per share in the election
of five of eight of the Company's directors and on all other matters submitted
to a vote at a meeting of shareholders. Holders of Series A Preferred and Series
B Preferred have weighted voting rights equal to that number of shares of Common
Stock into which it can be converted. Holders of Series B Preferred also have
certain exclusive rights regarding the election of three of the Company's eight
directors, and in an event of a breach by the Company of certain financial
covenants, can elect a majority of the directors of the Company. As of December
31, 1999, the Company was not in compliance with these financial covenants. As a
result, the holders of Series B Preferred have the permanent right to designate
a majority of the directors of the Company. The holders of Series B Preferred
currently have not designated any additional directors of the Company.
In addition, the consent of the holders of Series A Preferred and Series B
Preferred, voting as a class, are necessary for certain matters, including but
not limiting to merger, consolidation, change in the capital structure,
affiliation transactions, and capital expenditures.
The Series A Preferred provides for quarterly, cumulative dividends that
accrue at the following rate per share per annum: (i) $8.00 for the period
commencing on the date of issuance though June 30, 2001; (ii) $10.00 from July
1, 2001 through June 30, 2002; (iii) $12.00 from July 1, 2002 through June 30,
2003, and (iv) $16.00 after July 1, 2003. Such dividends shall be first payable
on June 30, 1999, subject to certain extensions, in preference and priority to
any dividends paid to holders of Common Stock and on parity with the holders of
the Series B Preferred. No dividends were paid in 1999 as there was not
available cash flow. At December 31, 1999 $733,000 or $29.06 per share of
dividends are in arrears related to the Series A Preferred Stock. In the event
of liquidation, the holder of each Series A Preferred will be entitled to
receive a liquidation payment of $100 per share plus any accrued but unpaid
dividends. The Series A Preferred is convertible into shares of Common Stock at
a rate equal to the liquidation payment
F-29
<PAGE> 151
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
divided by a factor of the lesser of (i) $3.50 or (ii) the average closing sales
price of Common Stock for the twenty trading days immediately preceding the
conversion. Holders of Series A Preferred may elect to convert at any time into
Common Stock at the then established conversion rate. If shares of the Series A
Preferred are outstanding after June 30, 2001, the Company's Board of Directors
shall be increased by one, and the holders of such shares, voting as a separate
series, shall be entitled to elect a director to fill such newly created
directorship.
The Series B Preferred provides for quarterly, cumulative dividends that
accrue at the rate of $9.00 per share per annum, subject to certain adjustments.
No cash dividends were paid in 1999 or 1998. Payment of such dividends shall be
in preference and priority to any dividends paid to holders of the Common Stock
and on parity with the holders of the Series A Preferred. At the option of the
Company, such dividends may be paid in shares of Series B Preferred. In the
event of liquidation, the holder of each Series B Preferred will be entitled to
receive a liquidation payment of $100 per share plus any accrued but unpaid
dividends. The Series B Preferred is convertible into shares of Common Stock at
a rate equal to the liquidation payment divided by a factor of the lesser of (i)
$6.00 or (ii) the average closing sales price of Common Stock for the twenty
trading days immediately preceding the conversion. Holders of the Series B
Preferred may elect to convert at any time into Common Stock at the then
established conversion rate.
The Company may elect to require the conversion of Series B Preferred into
Common Stock at the then-established conversion rate any time after the fifth
anniversary of the Series B Preferred issuance date.
Conversion of Convertible Preferred Stock
On August 2, 2000, the Company issued 2,373,863 shares of its Common Stock
in connection with the conversion and cancellation of all its Series A Preferred
Stock and the related accrued and unpaid dividends of $207,342. The Series A
Preferred Shareholder irrevocably waived, assigned, and transferred to the
Company $643,026 of its accrued and unpaid dividends. In addition, the Company
issued 21,092,174 shares of it's Common Stock in connection with the conversion
and cancellation of 242,560 shares of its Series B Preferred Stock. The Series B
Preferred Shareholders irrevocably waived, assigned and transferred to the
Company 73,796 of its Series B Preferred Stock and $2,786 of accrued and unpaid
dividends.
The following table shows the effects of the conversion of the convertible
preferred stock on the Company's basic and diluted loss per share assuming the
conversion took place on January 1, 1999 and 1998 (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Pro forma loss from continuing operations applicable to
common shares............................................. $(4,879) $(3,797)
------- -------
Pro forma loss from continuing operations per common share:
basic and diluted......................................... $ (0.16) $ (0.13)
------- -------
Pro forma weighted average common shares outstanding........ 29,963 29,925
------- -------
</TABLE>
Warrants
In conjunction with the issuance of the Series B Preferred, the Company
issued contingent warrants ("Warrants"), giving the holders of the Warrants the
right to acquire five million shares ("Warrant Shares") of the Company's Common
Stock at the lesser of (i) $8.00 per share, (ii) the average closing sales price
of the Common Stock for the twenty trading days immediately following March 29,
1999 or
F-30
<PAGE> 152
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(iii) the average closing sales price of the Common Stock for the twenty trading
days immediately following public disclosure of the Company's earnings for
calendar year 1999. The Warrants are not exercisable until June 30, 2000 and
shall expire in its entirety if the Company achieves all financial performance
objectives as set forth in the Warrant Agreement. The Company did not achieve
the financial performance objectives in 1998 or 1999 thus, none of the Warrants
expired. Vested Warrants may be exercised at any time until June 30, 2005 at
which time all vested but unexercised Warrants will expire. Other provisions of
the Warrant notwithstanding, the Warrant shall become exercisable immediately
upon a Change of Control, as defined in the Warrant Agreement.
In February 1989, the Company issued warrants to purchase 100,000 shares of
Common Stock each to Jose E. Kauachi, the Company's Chairman of the Board and
William F. Donovan, M.D., a then member of the Board. These warrants were issued
as compensation for services rendered and for each individual's personal
guarantee of corporate debt and other obligations. By amendments effective in
February 1994 and 1995, the expiration date of the warrants was extended to
February 22, 1999 and the exercise price was adjusted from $1.75 to the then
market value of $2.125 per share. Such warrants were not exercised on February
22, 1999 and as such have expired.
Stock Options
The Company has two stock option plans, the 1988 Stock Option Plan (the
"1988 Plan") and the 1997 Long Term Incentive Plan (the "1997 Plan"), that
provide for the granting of either incentive stock options ("ISO"), nonqualified
stock options ("NQO") and stock appreciation rights to key employees,
nonemployee members of the Company's Board of Directors and consultants.
Individual option vesting and related terms are set by the Board of Directors.
All individual option grants generally vest over time or based on pre-determined
performance targets. Both plans provide that ISOs may not be granted at less
than fair market value and NQOs cannot be granted at less than 85% of fair
market value as of the date of grant.
There are a total of 1,000,000 shares and 2,500,000 available for grant in
the 1988 Plan and the 1997 Plan, respectively. As of December 31, 1999, options
to purchase 50,000 shares of Common Stock were outstanding under the 1988 Plan
at exercise price of $2.50 per share, 50,000 were exercisable and no shares were
available for future grant. Options to purchase 892,000 shares of Common Stock
were outstanding under the 1997 Plan at exercise prices of $0.80 to $8.38 per
share, 246,000 were exercisable and 1,608,000 were available for future grant.
The following summarizes the activity for the 1999 and 1998 option plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance, December 31, 1997............................... 1,368,500 $4.99
Granted................................................ 682,500 $5.40
Exercised.............................................. (89,750) $3.44
Expired or forfeited................................... (502,750) $5.66
---------- -----
Balance, December 31, 1998............................... 1,458,500 $3.71
Granted................................................ 769,500 $0.90
Expired or forfeited................................... (1,286,000) $4.88
---------- -----
Balance, December 31, 1999............................... 942,000 $1.90
---------- -----
Exercisable at December 31, 1999......................... 296,000 $2.62
---------- -----
Available for future grant............................... 1,608,000
----------
</TABLE>
F-31
<PAGE> 153
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ----------------------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
------------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$2.50 and under 776,000 9.3 years $0.95 210,000 $1.27
$2.51-$5.00 22,500 8.7 years $4.06 -- --
$5.01-$7.50 67,000 6.7 years $5.22 62,000 $5.13
$7.51+ 76,500 7.9 years $8.00 24,000 $8.00
------- -------
942,000 296,000
------- -------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for fixed options granted to Company employees. The Company's
pro forma information for the years ended December 31, 1999 and 1998 under the
fair value method of SFAS No. 123 is as follows (in thousands, except for
earnings per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Net loss -- as reported..................................... $ (9,895) $(4,927)
Net loss -- pro forma....................................... (10,017) (4,949)
Earnings per share -- as reported:
Basic and diluted......................................... (1.97) (1.16)
Earnings per share -- pro forma:
Basic and diluted......................................... (1.99) (1.16)
</TABLE>
Options granted in 1999 and 1998 had weighted average fair values of $0.57
and $2.16, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Expected dividend yield..................................... 0% 0%
Expected stock price volatility............................. 81% 37%
Expected life............................................... 5 years 5 years
Risk-free interest rate..................................... 5.9% 4.7%
</TABLE>
As of December 31, 1999, nonemployee options to purchase 35,000 shares of
Common Stock, granted under certain other agreements, were outstanding at an
exercise prices of $5.00 per share all of which were vested.
9. COMMITMENTS AND CONTINGENCIES
Commitments
As of December 31, 1999, the Company had capital expenditure purchase
commitments outstanding of approximately $2,185,000 associated with the
construction of an ambulatory surgery center in Louisiana.
Professional and Liability Risks
In the ordinary course of its business, the Company may be subject, from
time to time, to claims and legal actions. While the Company cannot predict the
outcome of litigation actions, the Company believes that all such claims and
actions are either adequately covered by insurance or will not have a material
adverse effect on the Company's financial condition, results of operations, or
liquidity.
F-32
<PAGE> 154
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and its affiliated medical practices maintain professional
liability insurance with respect to medical malpractice risks on a claims-made
basis in amounts believed to be customary and adequate. In conjunction with the
termination of its management agreement with the Houston musculoskeletal related
healthcare delivery system, the Company purchased an unlimited extended
reporting period endorsement ("tail coverage") for itself and all Houston, Texas
based medical and ancillary services, which had been under its management
through November 30, 1997. Management is not aware of any outstanding claims or
unasserted claims likely to be asserted against it or its affiliated medical
practices, which would have a material impact on the Company's financial
position or results of operation.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes its billing
activities on behalf of its affiliated medical practices are materially in
compliance with applicable laws and regulations and is not aware of any pending
or threatened investigations involving allegations of potential wrongdoing.
Compliance with such laws and regulations can be subject to future government
review and interpretation, as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and Medicaid programs.
F-33
<PAGE> 155
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,386 $ 1,889
Prepaid expenses.......................................... 40 212
Note receivable........................................... 111 --
Other current assets...................................... 7 11
Net assets of discontinued operations -- practice
management services.................................... -- 17,367
Net assets of discontinued operations -- work hardening
services............................................... -- 138
Net assets of discontinued operations -- ambulatory
surgery center......................................... 2,735 418
-------- --------
Total current assets.............................. 6,279 20,035
Property and equipment (including capital leases)........... 251 1,560
Less: accumulated depreciation and amortization............. (221) (860)
-------- --------
Net property and equipment.................................. 30 700
Deferred income taxes....................................... -- 1,509
Other assets................................................ 133 101
-------- --------
Total assets...................................... $ 6,442 $ 22,345
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11 $ 87
Accrued liabilities....................................... 871 986
Net liabilities of discontinued operations -- practice
management services.................................... 16 --
Net liabilities of discontinued operations -- work
hardening services..................................... 33 --
Current maturities of notes payable and capital lease
obligations............................................ 54 89
-------- --------
Total current liabilities......................... 985 1,162
Obligations under capital leases............................ 129 183
Deferred income taxes....................................... -- 1,509
Dividends payable........................................... -- 735
-------- --------
Total current liabilities......................... 1,114 3,589
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................... -- 3
Common stock.............................................. 30 7
Additional paid-in-capital................................ 52,238 49,316
Accumulated deficit....................................... (46,219) (30,320)
Treasury shares........................................... (721) (250)
-------- --------
Total stockholders' equity........................ 5,328 18,756
-------- --------
Total liabilities and stockholders' equity........ $ 6,442 $ 22,345
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE> 156
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues.................................. $ -- $ -- $ -- $ --
------ ------- -------- -------
Costs and expenses:
General and administrative.............. 677 1,222 2,197 2,821
Special charges......................... -- 5 884 773
Depreciation and amortization........... 12 60 110 179
------ ------- -------- -------
689 1,287 3,191 3,773
Loss from operations...................... (689) (1,287) (3,191) (3,773)
Interest income........................... 54 45 166 172
Interest expense.......................... (3) (14) (25) (318)
------ ------- -------- -------
Loss from continuing operations before
provision for income taxes.............. (638) (1,256) (3,050) (3,919)
Income tax provision...................... (14) (14) (47) (44)
------ ------- -------- -------
Loss from continuing operations........... (652) (1,270) (3,097) (3,963)
Discontinued operations (Note 4)
Income (loss) from operations, net of
taxes................................ -- 361 (7,836) 1,361
Income (loss) from disposal of
operations, net of taxes............. 54 -- (3,236) --
------ ------- -------- -------
Income (loss) from discontinued
operations.............................. 54 361 (11,072) 1,361
Net loss before extraordinary items....... (598) (909) (14,169) (2,602)
Extraordinary loss related to retirement
of NationsBank debt, net................ -- -- -- (152)
------ ------- -------- -------
Net loss........................ $ (598) $ (909) $(14,169) $(2,754)
====== ======= ======== =======
Loss from continuing operations
applicable to common shares... $ (909) $(1,979) $ (4,827) $(6,016)
====== ======= ======== =======
Loss from continuing operations
per common share: basic and
diluted....................... $(0.05) $ (0.30) $ (0.45) $ (0.93)
====== ======= ======== =======
Weighted average common shares
outstanding................... 19,390 6,496 10,693 6,496
====== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE> 157
INTEGRATED ORTHOPAEDICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES AMOUNT
------------------ ------------------ ADDITIONAL PAID ACCUMULATED TREASURY
COMMON PREFERRED COMMON PREFERRED IN CAPITAL DEFICIT STOCK TOTAL
------ --------- ------ --------- --------------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999.................... 6,557 326 $ 7 $ 3 $49,316 $(30,320) $(250) $18,756
Dividends -- preferred
stock series A.......... -- -- -- -- -- (121) -- (121)
Dividends -- preferred
stock series B.......... -- 16 -- -- 1,609 (1,609) -- --
Treasury stock -- received
in connection with
settlement of litigation
(Note 3)................ -- -- -- -- 471 -- (471) --
Conversion of preferred
stock series A.......... 2,374 (25) 2 -- -- -- -- 2
Conversion of preferred
stock series B.......... 21,092 (317) 21 (3) 833 -- -- 851
Exercise of stock
options................. 7 -- -- -- 9 -- -- 9
Net loss.................. -- -- -- -- -- (14,169) -- (14,169)
------ ---- --- --- ------- -------- ----- -------
Balance at September 30,
2000.................... 30,030 -- $30 $-- $52,238 $(46,219) $(721) $ 5,328
====== ==== === === ======= ======== ===== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-36
<PAGE> 158
INTEGRATED ORTHOPAEDICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(14,169) $(2,754)
Non-cash adjustments:
Impairment charge...................................... 11,618
---
Minority interest in loss.............................. (175)
---
Depreciation and amortization.......................... 684 1,312
Changes in operating assets and liabilities............ (395) (405)
-------- -------
Net cash used by operating activities............. (2,437) (1,847)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2,509) (562)
Proceeds from sale of assets.............................. 4,707 --
Collection of note receivable............................. 1,701 110
-------- -------
Net cash provided (used) by investing
activities....................................... 3,899 (452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority interest......................................... 75 --
Proceeds from exercise of stock options................... 9 --
Net borrowings on notes and capital lease obligations..... (49) (420)
-------- -------
Net cash provided (used) by financing
activities....................................... 35 (420)
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 1,497 (2,719)
Cash and cash equivalents beginning of period............... 1,889 6,018
-------- -------
Cash and cash equivalents end of period..................... $ 3,386 $ 3,299
======== =======
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 34 $ 318
Income taxes paid......................................... $ 111 $ 51
Capital lease obligations for equipment................... $ -- $ 661
NON CASH TRANSACTIONS AND OTHERS:
Series B preferred stock -- accumulated deficit related to
stock dividends........................................ $ 1,609 $ 1,899
Series A preferred stock -- increase in accrued
liabilities related to unpaid dividends................ $ 121 $ 154
Receipt of company stock in connection with settlement of
litigation............................................. $ 471 $ --
Capital lease receivable for sublease of furniture........ $ 156 $ --
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE> 159
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Organization -- Integrated Orthopaedics, Inc. ("IOI" or the "Company"), a
Texas corporation, was organized to provide management, consulting and ancillary
development services to orthopedic medical practices and other surgical
specialty physicians. In May 2000, the Company decided to discontinue its
physician service operations due to difficult financing markets and limited
investor support for physician service companies. The Company had previously
terminated its management services agreement ("MSA") with its Colorado practice
in January 2000, effective December 31, 1999, and terminated its MSA with its
Pennsylvania practice in April 2000 effective March 31, 2000. The Company
terminated its MSA with its Louisiana practice in September 2000, effective
August 31, 2000. In addition, it sold the fixed assets related to its work
hardening centers, effective August 31, 2000. The Company is in the process of
pursuing the sale of its interest in the Westbank Ambulatory Care Center, which
is its remaining operating asset.
The Company provided comprehensive management services under agreements to
its Louisiana practice for eight months, and its Pennsylvania practice for three
months, during the nine months ended September 30, 2000. The Company completed
construction of an ambulatory surgery center ("ASC") in Louisiana in April 2000,
which was operational in May of 2000. The Company owns a majority interest in
the ASC and also provides management services to the ASC. In addition, the
Company operated two work hardening centers in Texas for eight months during the
nine months ended September 30, 2000.
On September 15, 2000, the Company signed a merger agreement with
PowerBrief, Inc. ("PowerBrief") a private company developing integrated online
solutions for legal professionals. Following the merger, existing shareholders
of the Company will own approximately 34.1% of the post merger outstanding
common stock of the surviving company, and existing shareholders, warrants
holders and option holders of the Company will own approximately 39.6% of the
outstanding common stock of the surviving company on a fully diluted basis.
These percentages are subject to further adjustment as set forth in greater
detail in the merger agreement, based on the amount of cash and liabilities the
Company has following the merger, which will depend, in part on the amount for
which the Company can sell its interest in its ambulatory surgery center in
Louisiana.
Although there can be no assurances that the merger will close, the merger
is expected to be completed during the first quarter of 2001. The completion of
the merger depends on meeting a number of conditions, including, without
limitation, that the shares of the Company's common stock issuable in the merger
be listed on the American Stock Exchange. In the event that these conditions are
not met the merger may not be completed. If the merger is not completed the
Company will evaluate other possible alternatives.
Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal recurring nature. Operating results for the nine months ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000 (See Note 4). These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 1999, as filed with the
Securities and Exchange Commission on the Company's Annual Report on Form
10-KSB.
F-38
<PAGE> 160
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as the disclosures of contingent assets and
liabilities. Because of the inherent uncertainties in this process, actual
future results could differ from those expected at the reporting date.
Comprehensive Income -- The Company had no other comprehensive income
(loss) for the nine months ended September 30, 2000 and 1999. Comprehensive
income (loss) equals net income (loss) for each of the periods presented on the
accompanying consolidated statement of operations.
NOTE 2 -- LOSS PER COMMON SHARE
Basic loss per share excludes dilution and is computed by dividing loss
available to common stockholders by the weighted average number of common shares
outstanding for the period.
The components of basic loss per share are as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 EPS 1999 EPS
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net loss from continuing operations.............. $ (652) $(0.04) $(1,270) $(0.19)
Series A preferred stock dividend................ (17) -- (53) (0.01)
Series B preferred stock dividend................ (240) (0.01) (656) (0.10)
------- ------ ------- ------
Loss applicable to common share.................. $ (909) $(0.05) $(1,979) $(0.30)
======= ====== ======= ======
Weighted average common shares outstanding....... 19,390 6,496
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 EPS 1999 EPS
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net loss from continuing operations.............. $(3,097) $(0.29) $(3,963) $(0.61)
Series A preferred stock dividend................ (121) (0.01) (154) (0.03)
Series B preferred stock dividend................ (1,609) (0.15) (1,899) (0.29)
------- ------ ------- ------
Loss applicable to common share.................. $(4,827) $(0.45) $(6,016) $(0.93)
======= ====== ======= ======
Weighted average common shares outstanding....... 10,693 6,496
======= =======
</TABLE>
Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock on the first day of the fiscal year. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
the computation of diluted EPS shall not assume conversion, exercise, or
contingent issuance of securities that would have an anti-dilutive effect on
earnings per share. For the nine months ended September 30, 2000 and 1999, basic
loss per share and diluted loss per share are the same as the conversion of
outstanding stock options, warrants and convertible stock would have an
anti-dilutive effect on earnings per share.
NOTE 3 -- LEGAL PROCEEDINGS
In January 1999, the Company and a subsidiary of the Company filed a
lawsuit against the medical practice located in Connecticut seeking to enforce
certain repurchase obligations under the related MSA. The Company terminated the
MSA in January 1999 due to the failure of the practice to satisfy certain of its
obligations thereunder. Upon such a termination for cause, the Company and its
subsidiary were entitled under the MSA to require the practice to comply with
certain repurchase obligations regarding certain assets, including, without
limitation, accounts receivable, equipment, contract and intangibles. In
F-39
<PAGE> 161
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
March 2000, a settlement was reached between the Company and the practice. The
settlement is composed of cash, notes receivable and the return of 376,836
shares of Company stock. The shares are held in treasury and are recorded at
market value as of the settlement date.
In May 2000 a physician, formerly employed by the Company's Louisiana
practice, filed suit against the Company and the Louisiana practice for an
unspecified amount of damages. The Louisiana practice hired this physician in
July 1999. On February 1, 2000, the Louisiana practice notified the physician
that his employment was being terminated effective 90 days from the date of such
notice pursuant to the terms of his employment contract. The physician alleged
that the Company and the Louisiana practice misrepresented the condition of the
Louisiana practice and that such misrepresentations induced him to leave his
former practice. He is also claiming breach of contract, tortious interference
by the Company with his contract with the Louisiana practice, and violations of
the Louisiana Whistleblower Protection Act and other laws. He has also made
claims for payment of medical malpractice coverage, vacation pay and continuing
medical education leave. The Company has denied such claims. This case is
pending in Louisiana.
NOTE 4 -- DISCONTINUED OPERATIONS
On May 24, 2000 the Board of Directors of the Company adopted a plan to
discontinue the operations of its Practice Management Services, Ambulatory
Surgery Center and Work Hardening Services operating segments due to difficult
financing markets and limited investor support for physician service companies.
Loss on Disposal of Discontinued Operations
The Company is pursuing the sale of its interest in its ambulatory surgery
center ("ASC") in Louisiana. The Company's net investment in the asset is
reflected as Net Assets of Discontinued Operations -- Ambulatory Surgery Center
in the accompanying consolidated balance sheet.
The following is a summary of the loss from discontinued operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
--------- -------
<S> <C> <C>
Revenues.................................................... $ 3,029 $ 8,359
Costs and expenses:
Practice compensation and benefits........................ 1,277 3,174
Other direct costs........................................ 1,172 3,135
General and administrative................................ 163 1,016
Depreciation and amortization............................. 390 1,133
Interest expense.......................................... 46 53
Loss on disposal of assets................................ 7,630 --
--------- -------
10,678 8,511
Loss from discontinued operations before income taxes....... (7,649) (152)
Income tax provision (benefit).............................. (187) 1,513
--------- -------
Income (loss) from operations, net of taxes................. (7,836) 1,361
Loss from disposal of operations, net of taxes.............. (3,236) --
--------- -------
Income (loss) from discontinued operations.................. $ (11,072) $ 1,361
========= =======
Loss from discontinued operations per common share: basic
and diluted............................................... $ (1.04) $ (0.21)
========= =======
</TABLE>
F-40
<PAGE> 162
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
For the three months ended September 30, 2000 and 1999, earnings per common
share from discontinued operations was $0.0 and $(0.06), respectively. The
Company had net assets of $2,686,000, which are associated with the discontinued
operations.
Medical Service Revenue
Medical service revenue for services to patients by the affiliated medical
practices with the Company is recorded when the services are rendered based on
established or negotiated charges reduced by contractual adjustments and
allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when the final
settlements are determined. Medical service revenue of the affiliated medical
practices is reduced by the contractual amounts retained by the medical
practices to arrive at the Company's revenue. The affiliated medical practices
maintain exclusive control of all aspects of the practice of medicine and the
delivery of medical services. All of the amounts retained by affiliated medical
practices under management in the first nine months of 2000 were contractually
guaranteed as a minimum percentage of practice gross profit. As of September 30,
2000, all affiliated medical practices had been sold.
Divestitures
In April 2000, a definitive agreement was executed to terminate the
Company's management services agreement ("MSA") with its Pennsylvania practice
effective March 31, 2000. In conjunction with the transaction, the Company sold
the related net accounts receivable and net property and equipment to the
practice. Total consideration received related to the transaction was
$4,210,000, which is comprised of cash and the assumption by the Pennsylvania
practice of certain liabilities. A write-down of $7.6 million is included in the
loss from discontinued operations in the consolidated statement of operations
for the nine months ended September 30, 2000.
In September 2000, a definitive agreement was executed to terminate the
company's MSA with its Louisiana practice effective August 31, 2000. In
connection with the transaction, the Company sold the related net accounts
receivable and net property and equipment to a newly formed entity owned by the
partner physicians of the practice. In addition, the new entity assumed certain
liabilities and forgave certain debts of the Company. Total consideration
received related to the transaction was $1,266,000, which includes cash,
forgiveness of debt and the assumption of debt. A write down of $2,732,000 is
included in the loss from disposal of discontinued operations in the
consolidated statement of operations for the nine months ended September 30,
2000.
In August 2000, a definitive agreement was executed to sell the fixed
assets of the Company's work hardening practices effective August 31, 2000.
Total consideration received related to the transaction was $120,000 in cash and
notes receivable. A write down of $35,000 is included in the loss from disposal
of discontinued operations for the nine months ended September 30, 2000.
NOTE 5 -- SPECIAL CHARGES
For the nine months ended September 30, 2000 and 1999, the Company recorded
special charges of $884,000 and $773,000 respectively relating to corporate
restructuring charges. The charges for the nine months ended September 30, 2000
include severance costs for ten corporate employees, an impairment charge
related to the corporate fixed assets, and lease termination costs. Management
expects all severance costs to be paid prior to March 31, 2001.
F-41
<PAGE> 163
INTEGRATED ORTHOPAEDICS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- CONVERSION OF CONVERTIBLE PREFERRED STOCK
On August 2, 2000, the Company issued 2,373,863 shares of its Common Stock
in connection with the conversion and cancellation of all its Series A Preferred
Stock and the related accrued and unpaid dividends of $207,342. The Series A
Preferred Shareholder irrevocably waived, assigned and transferred to the
Company $643,026 of its accrued and unpaid dividends. In addition, the Company
issued 21,092,174 shares of its Common Stock in connection with the conversion
and cancellation of 242,560 shares of its Series B Preferred Stock. The Series B
Preferred Shareholders irrevocably waived, assigned and transferred to the
Company 73,796 of its Series B Preferred Stock and $2,786 of accrued and unpaid
dividends.
NOTE 7 -- COMMITMENTS
As of September 30, 2000, the Company had capital expenditure purchase
commitments outstanding of approximately $116,000 associated with the
construction of the ambulatory surgery center in Louisiana.
NOTE 8 -- SUBSEQUENT EVENTS
In conjunction with the merger agreement with PowerBrief, Inc. dated
September 15, 2000, the companies entered into a promissory note, which allows
PowerBrief, Inc. to borrow up to $3.0 million from the Company at an annual
interest rate of 12%. The principal of the note is due and payable at the
earlier of March 31, 2001 or the date in which the merger agreement is
terminated. As of November 8, 2000 PowerBrief, Inc. had borrowed $500,000 under
the promissory note.
On November 20, 2000, the Company declared a dividend to the holders of its
common stock, of warrants to purchase an aggregate of 14.8 million additional
shares of the Company's common stock. Under the terms of the dividend, each
holder of the Company's common stock will receive a warrant to purchase 0.50 of
a share of the Company's common stock for each share of common stock that a
shareholder owns on the record date. The warrants will be exercisable for a
price to be determined upon the Company's planned merger with PowerBrief, Inc.
or upon the termination of the merger agreement with regard to such merger. The
record date for the dividend is December 1, 2000 and the payment date will be
December 19, 2000.
F-42
<PAGE> 164
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 15, 2000
BETWEEN
POWERBRIEF, INC.
AND
INTEGRATED ORTHOPAEDICS, INC.
================================================================================
<PAGE> 165
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article I THE MERGER.................................... A-1
SECTION 1.1 The Merger................................... A-1
SECTION 1.2 Effective Time............................... A-1
SECTION 1.3 Closing of the Merger........................ A-2
SECTION 1.4 Effects of the Merger........................ A-2
SECTION 1.5 Articles of Incorporation and Bylaws......... A-2
SECTION 1.6 Directors.................................... A-2
SECTION 1.7 Officers..................................... A-2
Article II CONVERSION OF SECURITIES...................... A-2
SECTION 2.1 Conversion of Shares......................... A-2
SECTION 2.2 Stock Options and Warrants................... A-5
SECTION 2.3 Exchange Fund................................ A-7
SECTION 2.4 Exchange Procedures.......................... A-7
SECTION 2.5 Distributions with Respect to Unsurrendered
Certificates........................................... A-7
SECTION 2.6 No Further Ownership Rights in Company Common
Stock.................................................. A-8
SECTION 2.7 No Fractional Shares of IOI Common Stock..... A-8
SECTION 2.8 Termination of Exchange Fund................. A-8
SECTION 2.9 No Liability................................. A-8
SECTION 2.10 Investment of the Exchange Fund.............. A-9
SECTION 2.11 Lost Certificates............................ A-9
SECTION 2.12 Withholding Rights........................... A-9
SECTION 2.13 Tax Consequences............................. A-9
SECTION 2.14 Stock Transfer Books......................... A-9
SECTION 2.15 Affiliates................................... A-9
SECTION 2.16 Appraisal Rights............................. A-9
SECTION 2.17 Escrow of Shares............................. A-10
Article III REPRESENTATIONS AND WARRANTIES OF THE
COMPANY................................................... A-10
SECTION 3.1 Organization and Qualification; No
Subsidiaries........................................... A-10
SECTION 3.2 Capitalization of the Company................ A-10
SECTION 3.3 Authority Relative to This Agreement;
Consents and Approvals................................. A-11
SECTION 3.4 Financial Statements; Accounts Receivable.... A-11
SECTION 3.5 No Undisclosed Liabilities................... A-12
SECTION 3.6 Absence of Changes........................... A-12
SECTION 3.7 Consents and Approvals....................... A-14
SECTION 3.8 No Default................................... A-14
SECTION 3.9 Real Property................................ A-14
SECTION 3.10 Litigation................................... A-15
SECTION 3.11 Permits...................................... A-15
SECTION 3.12 Employee Plans............................... A-15
SECTION 3.13 Labor Matters................................ A-16
SECTION 3.14 Environmental Matters........................ A-17
SECTION 3.15 Tax Matters.................................. A-18
SECTION 3.16 Absence of Questionable Payments............. A-20
SECTION 3.17 Material Contracts........................... A-20
SECTION 3.18 Insurance.................................... A-21
SECTION 3.19 Subsidies.................................... A-21
SECTION 3.20 Intellectual Property........................ A-21
SECTION 3.21 Software..................................... A-24
SECTION 3.22 HSR Matters.................................. A-25
</TABLE>
i
<PAGE> 166
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 3.23 Brokers...................................... A-25
SECTION 3.24 Product Liability; Recalls................... A-25
SECTION 3.25 Customers, Suppliers and Vendors............. A-25
SECTION 3.26 Compliance with Laws......................... A-25
SECTION 3.27 Takeover Statute............................. A-25
SECTION 3.28 Minute Books; Stock Record Books............. A-26
SECTION 3.29 Bank Accounts; Powers of Attorney............ A-26
SECTION 3.30 Books and Records; Computer Network.......... A-26
SECTION 3.31 Information Supplied......................... A-26
SECTION 3.32 Export Control Laws.......................... A-27
Article IV REPRESENTATIONS AND WARRANTIES OF IOI.......... A-27
SECTION 4.1 Organization and Qualification;
Subsidiaries........................................... A-27
SECTION 4.2 Capitalization of IOI........................ A-27
SECTION 4.3 Authority Relative to This Agreement; Consent
and Approvals.......................................... A-28
SECTION 4.4 Financial Statements; Accounts Receivable.... A-28
SECTION 4.5 No Undisclosed Liabilities................... A-29
SECTION 4.6 Absence of Changes........................... A-29
SECTION 4.7 Consents and Approvals....................... A-30
SECTION 4.8 No Default................................... A-31
SECTION 4.9 Real Property................................ A-31
SECTION 4.10 Litigation................................... A-32
SECTION 4.11 Permits...................................... A-32
SECTION 4.12 Employee Plans............................... A-32
SECTION 4.13 Labor Matters................................ A-33
SECTION 4.14 Environmental Matters........................ A-34
SECTION 4.15 Tax Matters.................................. A-34
SECTION 4.16 Absence of Questionable Payments............. A-36
SECTION 4.17 Material Contracts........................... A-36
SECTION 4.18 Insurance.................................... A-37
SECTION 4.19 Subsidies.................................... A-37
SECTION 4.20 Intellectual Property........................ A-37
SECTION 4.21 Software..................................... A-40
SECTION 4.22 HSR Matters.................................. A-41
SECTION 4.23 Brokers...................................... A-41
SECTION 4.24 Product Liability; Recalls................... A-41
SECTION 4.25 [Intentionally left blank]................... A-41
SECTION 4.26 Compliance with Laws......................... A-41
SECTION 4.27 Takeover Statute............................. A-41
SECTION 4.28 Minute Books; Stock Record Books............. A-42
SECTION 4.29 Bank Accounts; Powers of Attorney............ A-42
SECTION 4.30 Books and Records; Computer Network.......... A-42
SECTION 4.31 Information Supplied......................... A-42
SECTION 4.32 Export Control Laws.......................... A-42
SECTION 4.33 SEC Reports; Financial Statements............ A-43
Article V COVENANTS RELATED TO CONDUCT OF BUSINESS....... A-43
SECTION 5.1 Conduct of Business of the Company........... A-43
SECTION 5.2 Conduct of Business of the IOI Companies..... A-45
SECTION 5.3 Access to Information........................ A-48
SECTION 5.4 Continuation of Insurance Coverage........... A-48
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article VI ADDITIONAL AGREEMENTS.......................... A-48
SECTION 6.1 Registration Statement on Form S-4 and Joint
Proxy Statement/Prospectus............................. A-48
SECTION 6.2 Shareholder Meetings......................... A-49
SECTION 6.3 Reasonable Best Efforts...................... A-49
SECTION 6.4 Acquisition Proposals........................ A-50
SECTION 6.5 Public Announcements; Employee
Announcements.......................................... A-51
SECTION 6.6 Indemnification.............................. A-51
SECTION 6.7 Notification of Certain Matters.............. A-52
SECTION 6.8 Tax-Free Reorganization Treatment............ A-52
SECTION 6.9 Employee Matters............................. A-52
SECTION 6.10 Affiliate Letters............................ A-52
SECTION 6.11 Listing of Stock............................. A-52
SECTION 6.12 Anti-takeover Statutes....................... A-52
SECTION 6.13 Third Party Consents......................... A-53
SECTION 6.14 Commercially Reasonable Efforts and Certain
Filings................................................ A-53
SECTION 6.15 [Intentionally left blank]................... A-53
SECTION 6.16 IOI Warrants................................. A-53
SECTION 6.17 Registration Rights Agreement................ A-53
SECTION 6.18 Registration Rights.......................... A-53
SECTION 6.19 Post-Merger Board of Directors............... A-53
SECTION 6.20 Stock Options................................ A-54
SECTION 6.21 Company Audited Financial Statements......... A-54
SECTION 6.22 Additional Investments....................... A-54
Article VII CONDITIONS TO CONSUMMATION OF THE MERGER....... A-55
SECTION 7.1 Conditions to Each Party's Obligations to
Effect the Merger...................................... A-55
SECTION 7.2 Conditions to the Obligations of IOI......... A-55
SECTION 7.3 Conditions to the Obligations of the
Company................................................ A-56
Article VIII TERMINATION; AMENDMENT; WAIVER................. A-57
SECTION 8.1 Termination by Mutual Agreement.............. A-57
SECTION 8.2 Termination by Either IOI or the Company..... A-57
SECTION 8.3 Termination by the Company................... A-58
SECTION 8.4 Termination by IOI........................... A-58
SECTION 8.5 Effect of Termination and Abandonment........ A-58
SECTION 8.6 Amendment.................................... A-58
SECTION 8.7 Extension; Waiver............................ A-58
Article IX MISCELLANEOUS.................................. A-59
SECTION 9.1 Entire Agreement; Assignment................. A-59
SECTION 9.2 Notices...................................... A-59
SECTION 9.3 Governing Law................................ A-60
SECTION 9.4 Expenses..................................... A-60
SECTION 9.5 Descriptive Headings......................... A-60
SECTION 9.6 Parties in Interest.......................... A-60
SECTION 9.7 Severability................................. A-60
SECTION 9.8 Specific Performance......................... A-60
SECTION 9.9 Counterparts................................. A-60
SECTION 9.10 Further Assurances........................... A-60
SECTION 9.11 Interpretation............................... A-60
SECTION 9.12 Definitions.................................. A-61
SECTION 9.13 Nonsurvival of Representations, Warranties,
and Agreements......................................... A-62
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
Company Voting Agreement.................................... A
Company Affiliate Letter.................................... B
IOI Voting Agreement........................................ C
Articles of Merger.......................................... D
Certificate of Merger....................................... E
Restated Articles of Incorporation.......................... F
Company Bylaws.............................................. G
Series B Warrant Agreement.................................. H
Series A Warrant Agreement.................................. I
</TABLE>
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INDEX OF SCHEDULES
<TABLE>
<S> <C>
1.7..................... Officers of Surviving Corporation
3.2..................... Capitalization of the Company
3.6(b).................. Dividends, Distributions, Repurchases, Redemptions and
Acquisitions
3.6(m).................. Capital Expenditures
3.6(o).................. Revaluations of Company Assets
3.8..................... Defaults, Consents, Accelerations, Losses or Creation of
Rights
3.9..................... Leases
3.10.................... Litigation
3.12(b)................. Employee Agreements
3.12(K)................. Acceleration
3.15(L)................. Tax Returns
3.17.................... Material Contracts
3.18.................... Insurance Policies
3.20(A)................. Scheduled Inbound Intellectual Property
3.20(B)................. Scheduled Outbound Intellectual Property
3.20(C)................. Patents
3.20(L)................. Employees Without Assignment and Confidentiality Agreements
3.20(N)................. Encumbrances On Company Intellectual Property
3.20(O)................. Domain Names
3.20(T)................. Intellectual Property/Patent Infringements
3.21(B)................. Employment Agreement Defaults; Software Developed by
Contractors Without Assignment Obligations
3.21(C)................. Encumbrances/Defects in Ownership Software
3.21(D)................. Source Code Disclosures
3.25.................... Customers, Suppliers and Vendors
3.26.................... Noncompliance
3.29.................... Bank Accounts
4.1(a,b,c).............. Organization and Qualification and Subsidiaries
4.2..................... Capitalization of IOI
4.4(b).................. Accounts Receivable
4.5..................... Undisclosed Liabilities
4.6(b,g,i,m,n,p,r,x,y)... Absence of Changes
4.8..................... Default
4.9..................... Leases
4.10.................... Litigation
4.12(a,c,f,g)........... Employee Benefit Plans
4.13.................... Labor Matters
4.15.................... Taxes
4.17.................... Material Contracts
4.18.................... Insurance
4.20.................... Intellectual Property
4.21.................... Software
4.29.................... Bank Accounts
5.1..................... Conduct of Business of the Company
5.2(g,j,I,m)............ Conduct of Business of IOI
6.10.................... Affiliates
7.2(J).................. Key Employees
7.3(F).................. Non-Locked Affiliates
</TABLE>
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GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERMS DEFINED IN SECTION
------------- ------------------
<S> <C>
Acquisition Proposal........................................ 6.4(a)(iv)
Adjusted Primary Ownership.................................. 2.1(a)(iii)
Adjustment Date............................................. 2.1(a)(iii)
Affiliate Agreements........................................ Recitals
affiliate................................................... 9.12(a)
Agreement................................................... Preamble
AMEX........................................................ 2.2(a)(i)
Articles of Merger.......................................... 1.2
Asset Sale Expenses......................................... 2.1(a)(iii)
Assumed Company Warrants.................................... 2.2(b)
Assumed Stock Options....................................... 2.2(a)
Calculation Date............................................ 6.19(a)
CERCLA...................................................... 3.14(e)
Certificate of Merger....................................... 1.2
Certificates................................................ 2.4
Chartwell/Oak Hill Investor Event........................... 6.22(a)
Closing Date................................................ 1.3
Closing..................................................... 1.3
Code........................................................ Recitals
Common Share(s)............................................. 2.1(a)(i)
Company Audited Financial Statements........................ 6.21
Company Bank Account........................................ 3.29(i)
Company Benefit Plans....................................... 3.12(a)
Company Board............................................... 3.3(b)
Company Common Stock........................................ 2(a)(i)
Company Confidential Information............................ 3.20(p)
Company Consents............................................ 6.13
Company Employee Arrangements............................... 3.12(b)(ii)
Company Financial Statements................................ 3.4(a)
Company Intellectual Property............................... 3.20(h)
Company Interim Balance Sheet............................... 3.4(a)
Company Investor Event...................................... 6.22(b)
Company Leased Property..................................... 3.9(b)
Company Material Contracts.................................. 3.17(a)(xi)
Company Option Plans........................................ 2.2(a)
Company Permits............................................. 3.11
Company Real Property Leases................................ 3.9(b)
Company Requisite Vote...................................... 3.3(b)
Company Securities.......................................... 3.2
Company Shareholder Percentage.............................. 2.1(a)(iii)
Company Stock Option........................................ 2.2(a)
Company Voting Agreement.................................... Recitals
Company Warrants............................................ 2.2(a)
Company..................................................... Preamble
Copyrights.................................................. 3.20(f) and 4.20(f)
Defect...................................................... 3.25(b)(i)
Delaware Law................................................ 1.1
Dissenting Shareholders..................................... 2.16
Dissenting Shares........................................... 2.16
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERMS DEFINED IN SECTION
------------- ------------------
<S> <C>
Effective Time.............................................. 1.2
Environmental Costs and Liabilities......................... 3.14(a)(i)
Environmental Law........................................... 3.14(a)(ii)
ERISA....................................................... 3.12(a)
Escrow Agent................................................ 2.17
Escrow Shares............................................... 2.17
Exchange Act................................................ 4.7
Exchange Agent.............................................. 2.3
Exchange Fund............................................... 2.3
GAAP........................................................ 4.4(a)(ii)(A)
Governmental Entity......................................... 3.7
Hazardous Material.......................................... 3.14(a)(iii)
Indemnified Liabilities..................................... 6.6
Indemnified Parties......................................... 6.6
IOI Bank Accounts........................................... 4.29(i)
IOI Benefit Plans........................................... 4.12(a)(i)
IOI Board................................................... 4.3(b)
IOI Common Stock............................................ Recitals
IOI Companies............................................... Article IV
IOI Confidential Information................................ 4.20(p)
IOI Consolidated Group...................................... 4.15(a)(ii)
IOI Employee Arrangements................................... 4.12(a)(iii)
IOI Financial Statements.................................... 4.4(a)(ii)
IOI Intellectual Property................................... 4.20(h)
IOI Interim Balance Sheet................................... 4.4(a)(ii)
IOI Leased Property......................................... 4.9(b)
IOI Material Contracts...................................... 4.17(a)(xi)
IOI Permits................................................. 4.11
IOI Real Property Leases.................................... 4.9(b)
IOI Registration Rights Agreement........................... 6.17
IOI Requisite Vote.......................................... 4.3(b)(ii)
IOI SEC Reports............................................. 4.33
IOI Securities.............................................. 4.2(iv)
IOI Shareholder Percentage.................................. 2.1(a)(iii)
IOI Voting Agreement........................................ Recitals
IOI Warrants................................................ 6.16
IOI......................................................... Preamble
Joint Proxy Statement/Prospectus............................ 6.1(b)
know........................................................ 9.12(b)
Know-How.................................................... 3.20(g) and 4.20(g)
knowledge................................................... 9.12(b)
Law......................................................... 3.8
Lien........................................................ 9.12(c)
Line of Credit.............................................. 7.3(e)
Lock-Up Period.............................................. 7.2(k)
Material Adverse Effect..................................... 9.12(d)
Merger...................................................... 1.1
Net Current Assets.......................................... 6.19(a)
Notices..................................................... 3.25(a)(i)
Patent Rights............................................... 3.20(c) and 4.20(c)
Permitted Lien.............................................. 9.12(e)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERMS DEFINED IN SECTION
------------- ------------------
<S> <C>
person...................................................... 9.12(f)
Post-Merger Board........................................... 6.19(a)
Preferred Shares............................................ 2.1(a)(iv)
Product..................................................... 4.24(b)
Realized Cash............................................... 2.1(a)(iii)
Recalls..................................................... 3.25(a)(i)
Reimbursable Transaction Expenses........................... 6.19(a)
Related Liability Expenses.................................. 2.1(a)(iii)
Release..................................................... 3.14(a)(iv)
Remedial Action............................................. 3.14(a)(v)
S-4......................................................... 6.1(a)
Scheduled In-Bound Intellectual Property.................... 3.20(a) and 4.20(a)
Scheduled Out-Bound Intellectual Property................... 3.20(b) and 4.20(b)
SEC......................................................... 2.2(a)(ii)
Securities Act.............................................. 2.15
Series A Preferred Stock.................................... 2.1(a)(ii)
Series A Warrants........................................... 2.1(a)(i)
Series B Preferred Stock.................................... 2.1(a)(iv)
Series B Warrants........................................... 2.1(a)(i)
Share Consideration......................................... 2.1(a)(ii)
Software.................................................... 3.20(e) and 4.20(e)
subsidiary.................................................. 9.12(g)
Surviving Corporation....................................... 1.1
Takeover Statute............................................ 3.27
Tax Returns................................................. 3.15(a)
Tax(es)..................................................... 3.15(a)
Termination Date............................................ 8.2(a)
Texas Law................................................... 1.1
Third Party Intellectual Property........................... 3.20(i) and 4.20(i)
Third Party Patent Rights................................... 3.20(j) and 4.20(j)
Trademarks.................................................. 3.20(d) and 4.20(d)
Transfer Taxes.............................................. 9.12(h)
WARN........................................................ 3.13(d)
Warrants.................................................... 2.1(a)(i)
Westbank ASC Cash Proceeds.................................. 6.19(a)
</TABLE>
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<PAGE> 173
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of September
15, 2000, is between PowerBrief, Inc., a Delaware corporation (the "COMPANY"),
and Integrated Orthopaedics, Inc., a Texas corporation ("IOI"). Certain
capitalized and non-capitalized terms used herein are defined in Section 9.12.
RECITALS
WHEREAS, the Boards of Directors of the Company and IOI each have, in light
of and subject to the terms and conditions set forth herein, approved this
Agreement and the transactions contemplated hereby, including the Merger (as
hereinafter defined), and declared the Merger advisable and fair to, and in the
best interests of, their respective shareholders;
WHEREAS, pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding shares
of capital stock of the Company shall be converted into the right to receive
shares of common stock, par value $0.001 per share, of IOI (the "IOI COMMON
STOCK") and warrants to purchase shares of IOI Common Stock;
WHEREAS, as an inducement to IOI to enter into this Agreement, certain
shareholders of the Company (i) have concurrently herewith entered into a voting
agreement in the form attached hereto as Exhibit A (the "COMPANY VOTING
AGREEMENT") pursuant to which, among other things, such shareholders have agreed
to vote all shares of capital stock of the Company owned by them in favor of the
Merger and (ii) will, within 15 days of the date of this Agreement, enter into
affiliate agreements in the form attached hereto as Exhibit B ("AFFILIATE
AGREEMENTS") pursuant to which, among other things, such shareholders will agree
to refrain from selling shares of IOI Common Stock during a specified period
following consummation of the Merger;
WHEREAS, as an inducement to the Company to enter into this Agreement,
certain shareholders of IOI have concurrently herewith entered into a voting
agreement in the form attached hereto as Exhibit C (the "IOI VOTING AGREEMENT")
pursuant to which, among other things, such shareholders have agreed to vote all
shares of capital stock of IOI owned by them in favor of the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"); and
WHEREAS, the Company and IOI desire to make certain representations,
warranties, covenants and agreements in connection with the Merger as set forth
in this Agreement.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, and intending to be
legally bound hereby, the Company and IOI hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. At the Effective Time (as hereinafter defined)
and upon the terms and subject to the conditions of this Agreement and in
accordance with the applicable provisions of the Texas Business Corporation Act
("TEXAS LAW") and the Delaware General Corporation Law ("DELAWARE LAW"), the
Company shall be merged with and into IOI (the "MERGER"). Following the Merger,
IOI shall continue as the surviving corporation (the "SURVIVING CORPORATION")
and the separate corporate existence of the Company shall cease.
SECTION 1.2 Effective Time. Subject to the provisions of this Agreement,
IOI and the Company shall cause the Merger to be consummated by filing (a)
articles of merger in the form attached hereto as
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<PAGE> 174
Exhibit D and other appropriate documents (the "ARTICLES OF MERGER") with the
Secretary of State of the State of Texas in such form as required by, and
executed in accordance with, the relevant provisions of Texas Law and (b) a
certificate of merger in the form attached hereto as Exhibit E and other
appropriate documents (the "CERTIFICATE OF MERGER") with the Secretary of State
of the State of Delaware in such form as required by, and executed in accordance
with, the relevant provisions of Delaware Law, as soon as practicable on the
Closing Date (as hereinafter defined). The Merger shall become effective upon
such filings or at such time thereafter as is provided in the Articles of Merger
and the Certificate of Merger (the "EFFECTIVE TIME").
SECTION 1.3 Closing of the Merger. The closing of the Merger (the
"CLOSING") will take place at a time and on a date to be specified by the
parties (the "CLOSING DATE"), which shall be no later than the third business
day after satisfaction or waiver of the conditions set forth in Article VII
(other than those conditions that by their nature are to be satisfied at the
Closing, but subject to the fulfillment or waiver of those conditions), at the
offices of Locke Liddell & Sapp LLP, 3400 Chase Tower, 600 Travis, Houston,
Texas 77002-3095, or at such other time, date or place as agreed to in writing
by the parties hereto.
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in this Agreement, the Articles of Merger and the Certificate of Merger
and the applicable provisions of Texas Law and Delaware Law. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time, all
of the properties, rights, privileges, powers and franchises of the Company and
IOI shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and IOI shall become the debts, liabilities and duties of
the Surviving Corporation.
SECTION 1.5 Articles of Incorporation and Bylaws. Effective immediately
following the Merger, the articles of incorporation of IOI, as in effect
immediately prior to the Effective Time, shall be amended in their entirety to
read as set forth in the form attached hereto as Exhibit F, including, without
limitation, an amendment to change the name of the Surviving Corporation to
"PowerBrief, Inc." Effective immediately following the Merger, the bylaws of
IOI, as in effect immediately prior to the Effective Time, shall be amended in
their entirety to read as set forth in the form attached hereto as Exhibit G.
SECTION 1.6 Directors. The initial Board of Directors of the Surviving
Corporation will consist of seven members chosen in accordance with the
provisions of Section 6.19. Such directors shall hold office in accordance with
the articles of incorporation and bylaws of the Surviving Corporation until
their successors are duly elected or appointed and qualified or until their
earlier death, resignation or removal.
SECTION 1.7 Officers. The initial officers of the Surviving Corporation
are listed on Schedule 1.7 and shall hold office in accordance with the articles
of incorporation and bylaws of the Surviving Corporation until their successors
are duly elected or appointed and qualified or until their earlier death,
resignation or removal.
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.1 Conversion of Shares.
(a)(i) At the Effective Time, each share of the Company's common stock, par
value $0.01 per share ("COMPANY COMMON STOCK"), issued and outstanding
immediately prior to the Effective Time (individually, a "COMMON SHARE" and
collectively, the "COMMON SHARES") (other than (A) Common Shares held by the
Company, (B) Common Shares held by IOI or (C) Dissenting Shares (as hereinafter
defined)) shall, by virtue of the Merger and without any action on the part of
IOI, the Company or any holder thereof, be converted into and be exchangeable
for the right to receive (i) 3.018 shares of IOI Common Stock, (ii) a Series A
warrant to purchase .0454 shares of IOI Common Stock (the "SERIES A WARRANTS"),
and (iii) a Series B warrant to purchase .0850 shares of IOI Common Stock (the
"SERIES B WARRANTS" and, together with the Series A Warrants, the "WARRANTS").
The Series B Warrants,
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<PAGE> 175
in the form attached hereto as Exhibit H, will have the same terms and
conditions as the Series B warrants to purchase common stock of IOI which are
outstanding as of the date hereof.
(ii) At the Effective Time, to the extent not converted into Company
Common Stock prior to the Effective Time, each share of the Company's
Series A Preferred Stock, par value $0.01 per share ("SERIES A PREFERRED
STOCK"), issued and outstanding immediately prior to the Effective Time, if
any, shall, by virtue of the Merger and without any action on the part of
IOI, the Company or any holder thereof, be converted into and be
exchangeable for the right to receive (i) 9.054 shares of IOI Common Stock,
(ii) a Series A Warrant to purchase .1363 shares of IOI Common Stock and
(iii) a Series B Warrant to purchase .2549 shares of IOI Common Stock. Such
Series A Warrants, in the form attached hereto as Exhibit I, will be
exercisable from and after the first anniversary of the Closing Date at all
times other than each period commencing one calendar day prior to the end
of a fiscal quarter and extending through the announcement of the Surviving
Corporation's operating results for such fiscal quarter. Such Series A
Warrants will have an exercise price equal to 1.25 times the lesser of (i)
$0.2963 and (ii) the lowest average closing price of the IOI Common Stock
over any consecutive 20 calendar days during the 90 calendar days after the
Closing. The Series A Warrants will expire and will no longer be
exercisable after the fifth anniversary of the Closing Date.
All such shares of IOI Common Stock issued pursuant to this Section
2.1(a), together with the Warrants and any cash paid in lieu of
fractional shares of IOI Common Stock to be paid pursuant to Section
2.7, are referred to herein as the "SHARE CONSIDERATION." The Share
Consideration is subject to a post-Merger adjustment as set forth in
Section 2.1(a)(iii) below.
Notwithstanding anything to the contrary herein, the maximum number of
(A) shares of IOI Common Stock issuable pursuant to Sections 2.1(a)(i)
and 2.1(a)(ii) and Section 2.2 shall be 69,049,729 shares, (B) Series A
Warrants issued and issuable pursuant to Sections 2.1(a)(i) and
2.1(a)(ii) and Section 2.2(b) shall be in respect of 2,673,490 shares of
IOI Common Stock and (C) Series B Warrants issued and issuable pursuant
to Sections 2.1(a)(i) and 2.1(a)(ii) and Section 2.2(b) shall be in
respect of 5,000,000 shares of IOI Common Stock. In the event that prior
to the Closing any of the options described in Section 2.2(a) are
exercised, the maximum number of Series A Warrants and Series B Warrants
will be reallocated, on a pro-rata basis, among all of the holders of
outstanding Company Common Stock and warrants. The foregoing amounts do
not limit the number of shares of IOI Common Stock issuable pursuant to
Section 2.1(a)(iii) below.
(iii) Upon the first anniversary of the Closing Date or earlier if
elected by unanimous consent of the Surviving Corporation's Board of
Directors as constituted immediately following the Effective Time (the
"ADJUSTMENT DATE"), the following adjustment will be made:
For every $1.00 by which Realized Cash (as hereinafter defined) is
greater or less than $5.0 million, the Adjusted Primary Ownership (as
hereinafter defined) between IOI's shareholders (the "IOI SHAREHOLDER
PERCENTAGE"), on the one hand, and the Company's shareholders (the
"COMPANY SHAREHOLDER PERCENTAGE"), on the other hand, will increase or
decrease, as applicable, by .0000027 of a percentage point; provided,
however, that if the Realized Cash is less than $3.75 million, then for
every $1.00 by which Realized Cash is less than $5.0 million, the IOI
Shareholder Percentage will decrease and the Company Shareholder
Percentage will increase by .000006 of a percentage point. Once the
adjustment has been determined and approved by the Board of Directors of
the Surviving Corporation, IOI's shareholders or the Company's
shareholders, of record as of the Closing Date, will, if necessary and
as applicable, be issued additional shares of IOI Common Stock to
reflect the adjustment. Such adjustment will be certified, in writing,
to the Surviving Corporation's Board of Directors and shareholders by
the Surviving Corporation's independent auditors. "ADJUSTED PRIMARY
OWNERSHIP" shall mean the percentage ownership by a party of the total
of outstanding shares of IOI Common Stock immediately following the
Merger, assuming full exercise of the options and warrants described in
Section 2.2 hereof and no exercise of any other option, warrant
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<PAGE> 176
or right to purchase IOI Common Stock outstanding as of the date hereof.
"REALIZED CASH" shall mean the difference between (A) the sum of (1) the
total cash of IOI at the Effective Time, (2) the total cash proceeds
that the Surviving Corporation receives from the sale, collection, or
liquidation of IOI's pre-Merger assets (other than cash) prior to the
Adjustment Date, net of Asset Sale Expenses (as defined herein), and (3)
all liabilities not identified and quantified at the Effective Time and
Related Liability Expenses attributable to the pre-Effective Time
operations of the Company which liabilities are quantified by no later
than six months after the Effective Time pursuant to payments or
settlements agreed to by all members of the Board of Directors of the
Surviving Corporation as constituted immediately following the Effective
Time and (B) the sum of (1) all of IOI's liabilities identified and
quantified at the Effective Time (including accruals for any liabilities
attributable to periods before the Effective Time, but payable after the
Effective Time) paid in cash by the Surviving Corporation prior to the
Adjustment Date, and (2) all liabilities not identified and quantified
at the Effective Time and Related Liability Expenses attributable to the
pre-Effective Time operations of IOI, which liabilities are quantified
by no later than six months after the Effective Time pursuant to
payments or settlements agreed to by all members of the Board of
Directors of the Surviving Corporation as constituted immediately
following the Effective Time; provided, however, that Realized Cash (1)
will not be reduced by (x) any payments made or required to be made by
IOI in respect of any insurance policies required by the last sentence
of Section 6.6, or (y) any Reimbursable Transaction Expenses (as
hereinafter defined) which are allocated to the Company pursuant to
Section 9.4 of this Agreement, and (2) will be increased by (x)
Reimbursable Transaction Expenses which have been paid in cash prior to
the Effective Time and (y) any unpaid past, present or future
obligations of the Company to IOI, in existence at the Effective Time,
in respect of leased office space or furniture for which there is an
offsetting liability of IOI to a third party lessor of an equal or
greater amount which has reduced Realized Cash. "ASSET SALE EXPENSES"
shall mean all reasonable expenses incurred by the Surviving Corporation
directly in connection with the sale of IOI's pre-Merger assets prior to
the Adjustment Date, including reasonable attorneys', brokers' and
accountants' fees and expenses and other reasonable transaction or
closing fees and expenses. "RELATED LIABILITY EXPENSES" shall mean all
reasonable expenses incurred by the Surviving Corporation directly in
connection with its obligations to satisfy any of the applicable
liabilities, including reasonable attorneys', brokers' and accountants'
fees and expenses and other reasonable transaction fees and expenses.
The maximum number of shares of IOI Common Stock issuable pursuant to
this Section 2.1(a)(iii) will not exceed 50% of the maximum number of
shares of IOI Common Stock issued to the shareholders of the Company in
the Merger. In addition, the right to receive shares of IOI Common Stock
pursuant to this Section 2.1(a)(iii) shall not be assignable by any
party except by operation of law.
(iv) Notwithstanding anything to the contrary herein, in the event
that the Company issues any shares of Series B Preferred Stock, par value
$0.01 per share ("SERIES B PREFERRED STOCK" and, together with the Series A
Preferred Stock, the "PREFERRED SHARES") in accordance with Section 6.22 of
this Agreement, the total number of shares of IOI Common Stock issued to
the Company's shareholders (including the Series B Preferred Stock holders)
under Sections 2.1(a)(i) and 2.1(a)(ii) and Section 2.2 will be adjusted by
written amendment to this Agreement in such a manner as is necessary for
the IOI shareholders and the other Company shareholders (and warrant and
option holders) to bear the dilution from such issuance in accordance with
the relative percentages allocated to them in this Agreement had the Series
B Preferred Stock never been issued, provided that the Company's remaining
shareholders will bear all dilution which arises or results from the
triggering of any anti-dilution protection applicable to any Company
Securities (as hereinafter defined) which is triggered from and after the
date hereof in connection with, the Series B Preferred Stock or the Merger.
In addition, the number of shares of IOI Common Stock issuable in respect
of each share of outstanding Series B Preferred Stock will be based on the
number of shares of Company Common Stock into which each share of Series B
Preferred Stock is convertible. Holders of Series B Preferred Stock will
receive, on an as-converted basis, the same number of shares of IOI
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Common Stock as holders of Company Common Stock receive in exchange for
each share of Company Common Stock (as adjusted pursuant to the preceding
sentence) and, in addition, will receive one Series A Warrant to purchase
.50 of a share of IOI Common Stock for each full share of IOI Common Stock
such holder receives in the Merger; provided that such holder will have no
other rights to receive Series A or Series B Warrants in respect of such
holder's Series B Preferred Stock. The 5,000,000 Series B Warrants issued
to the Company's shareholders and issuable to the Company's warrant holders
shall be allocated proportionately among all holders of Company Series A
Preferred Stock, Company Common Stock and the warrants described in Section
2.2 hereof, but not among the holders of Series B Preferred Stock. In
addition, notwithstanding anything to the contrary herein, in the event the
Company issues any shares of Series B Preferred Stock in accordance with
Section 6.22 of this Agreement, the adjustment described in subparagraph
(iii) above will take into account the Series B Preferred Stock in
determining and allocating such adjustment.
(b) At the Effective Time, each share of Company Common Stock owned by IOI
immediately prior to the Effective Time shall be cancelled and extinguished
without any conversion thereof.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of IOI Common Stock shall have been changed into a different
number of shares or a different class by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares, or any similar event, the calculation of the Share Consideration
shall be correspondingly adjusted to the extent necessary to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, or such similar event.
(d) Immediately following the Effective Time, the Surviving Corporation
will effect a 10 to one reverse stock split of the IOI Common Stock. In
connection with such reverse stock split, all outstanding options and warrants
exercisable for IOI Common Stock will be adjusted appropriately.
SECTION 2.2 Stock Options and Warrants.
(a) As soon as practicable following the date of this Agreement, IOI and
the Company (or, if appropriate, any committee of the Board of Directors of the
Company administering the Company's stock option plans, agreements or
arrangements (collectively, the "COMPANY OPTION PLANS") or warrants
(collectively, the "COMPANY WARRANTS")) shall take such action, and the Company
shall obtain all such agreements and consents, if any, as may be required to
effect the following provisions of this Section 2.2. As of the Effective Time
each outstanding option held by employees to purchase shares of Company Common
Stock pursuant to the Company Option Plans (a "COMPANY STOCK OPTION") shall be
assumed by IOI and unexercised options will be converted into options to
purchase shares of IOI Common Stock ("ASSUMED STOCK OPTIONS") as follows:
(i) In the case of any Assumed Stock Option, (x) the number of shares
of IOI Common Stock subject to the Assumed Stock Option shall be the number
of shares of IOI Common Stock which such holder of such Assumed Stock
Option would have been entitled to receive in the Merger if such Assumed
Stock Option had been exercised for Company Common Stock immediately prior
to the Effective Time (taking into account any adjustment provided for
under Section 2.1(a)(iv)) and (y) the exercise price payable for a share of
IOI Common Stock under the Assumed Stock Option shall be the quotient
(truncated to the nearest $.01) of the exercise price per share of Company
Common Stock under the Company Stock Option immediately prior to the
Effective Time divided by the number of shares of IOI Common Stock into
which each share of Company Common Stock is convertible under Section
2.1(a)(i). No fractional shares of IOI Common Stock will be issued upon the
exercise of Assumed Stock Options. Any holder of an Assumed Stock Option
who would otherwise have been entitled to receive a fraction of a share of
IOI Common Stock (after taking into account all Assumed Stock Options
exercised by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to the product of (i) such fractional part of
a share of IOI Common Stock multiplied by (ii) the average of the daily
high and low sales prices, regular way, of one share of IOI Common Stock
(rounded to the nearest ten thousandth) on the American Stock
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Exchange (the "AMEX") (as reported in the New York City edition of the Wall
Street Journal or, if not reported thereby, another nationally recognized
source) during the ten consecutive trading day period ending on the second
trading day prior to the exercise date.
(ii) Each Assumed Stock Option shall be subject to the same expiration
date and vesting provisions as were applicable to the relevant Company
Stock Option immediately prior to the Effective Time. As soon as
practicable after the Effective Time, IOI shall deliver to holders of
Assumed Stock Options appropriate notice of the terms of such options and
other appropriate documents. Promptly after the Effective Time (and in no
event later than five (5) business days thereafter), IOI shall use its
reasonable best efforts to prepare and file with the Securities and
Exchange Commission (the "SEC") a registration statement on Form S-8 or
other appropriate form with respect to shares of IOI Common Stock subject
to the Assumed Stock Options and to maintain the effectiveness of such
registration statement or registration statements covering such Assumed
Stock Options (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such Assumed Stock Options
remain outstanding. IOI shall take all corporate action necessary to
reserve for issuance under an appropriate stock option plan of IOI a
sufficient number of shares of IOI Common Stock for delivery upon exercise
of the options described above.
(b) As of the Effective Time each outstanding Company Warrant to purchase
shares of Company Common Stock shall be assumed by IOI and unexercised warrants
will be converted into warrants to purchase shares of IOI Common Stock, Series A
Warrants and Series B Warrants ("ASSUMED COMPANY WARRANTS") as follows:
(i) In the case of any Assumed Company Warrant, (x) the number of
shares of IOI Common Stock and Series A Warrants and Series B Warrants
subject to the Assumed Company Warrant shall be the number of shares of IOI
Common Stock and Series A Warrants and Series B Warrants which such holder
of such Assumed Company Warrant would have been entitled to receive in the
Merger if such Assumed Company Warrant had been exercised for Company
Common Stock immediately prior to the Effective Time (taking into account
any adjustment provided for under Section 2.1(a)(iv)) and (y) the exercise
price payable for a share of IOI Common Stock and related Series A Warrants
and Series B Warrant under the Assumed Company Warrant shall be the
quotient (truncated to the nearest $.01) of the exercise price per share of
Company Common Stock under the Assumed Company Warrant immediately prior to
the Effective Time divided by the number of shares of IOI Common Stock into
which each share of Company Common Stock is convertible under Section
2.1(a)(i). No fractional shares of IOI Common Stock will be issued upon the
exercise of Assumed Company Warrants. Any holder of an Assumed Company
Warrant who would otherwise have been entitled to receive a fraction of a
share of IOI Common Stock (after taking into account all Assumed Company
Warrants exercised by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to the product of (i) such fractional
part of a share of IOI Common Stock multiplied by (ii) the average of the
daily high and low sales prices, regular way, of one share of IOI Common
Stock (rounded to the nearest ten thousandth) on the AMEX (as reported in
the New York City edition of the Wall Street Journal or, if not reported
thereby, another nationally recognized source) during the ten consecutive
trading day period ending on the second trading day prior to the exercise
date.
(ii) Each Company Assumed Warrant shall be subject to the same
expiration date and exercise provisions as were applicable to the relevant
Company Warrant immediately prior to the Effective Time. As soon as
practicable after the Effective Time, IOI shall deliver to holders of
Company Assumed Warrants appropriate notice of the terms of such warrants
and other appropriate documents. IOI shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of IOI
Common Stock for delivery upon exercise of the warrants described above.
(c) The number of shares of IOI Common Stock underlying each Assumed Stock
Option and Assumed Company Warrant and the exercise price thereof will be
subject to an appropriate adjustment to
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reflect the adjustment to Adjusted Primary Ownership provided for in Section
2.1(a)(iii) (taking into account any adjustment under Section 2.1(a)(iv)).
SECTION 2.3 Exchange Fund. Prior to the Effective Time, IOI shall appoint
a commercial bank or trust company reasonably acceptable to the Company to act
as exchange agent hereunder for the purpose of exchanging Common Shares and
Preferred Shares for the Share Consideration (the "EXCHANGE AGENT"). At or prior
to the Effective Time, IOI shall deposit with the Exchange Agent, in trust for
the benefit of holders of Common Shares and Preferred Shares, certificates
representing the IOI Common Stock issuable pursuant to Section 2.1 in exchange
for outstanding Common Shares and Preferred Shares; Warrants issuable pursuant
to Section 2.1 in exchange for outstanding Common Shares and Preferred Shares;
and an estimated amount of cash sufficient to pay the cash payable in lieu of
fractional shares pursuant to Section 2.7. IOI agrees to make available to the
Exchange Agent from time to time as needed, cash sufficient to pay cash in lieu
of fractional shares pursuant to Section 2.7 and any dividends and other
distributions pursuant to Section 2.5. Any cash, certificates of IOI Common
Stock and Warrants deposited with the Exchange Agent shall hereinafter be
referred to as the "EXCHANGE FUND."
SECTION 2.4 Exchange Procedures. As soon as reasonably practicable after
the Effective Time (and in any event within three business days after the
Effective Time), IOI shall use commercially reasonable efforts to cause the
Exchange Agent to mail to each holder of a certificate or certificates which
immediately prior to the Effective Time represented outstanding Common Shares
and Preferred Shares (the "CERTIFICATES") (i) a letter of transmittal which
shall specify that delivery shall be effective, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent, and which letter shall be in customary form and have such other
provisions as IOI and the Company may reasonably specify; and (ii) instructions
for effecting the surrender of such Certificates in exchange for the Share
Consideration. Upon surrender of a Certificate to the Exchange Agent together
with such letter of transmittal, duly executed and completed in accordance with
the instructions thereto, and such other documents as may reasonably be required
by the Exchange Agent, the holder of such Certificate shall be entitled to
receive in exchange therefor (A) shares of IOI Common Stock representing, in the
aggregate, the whole number of shares that such holder has the right to receive
pursuant to Section 2.1 (after taking into account all Common Shares and
Preferred Shares then held by such holder), (B) Warrants representing, in the
aggregate, the whole number of Series A and Series B Warrants that such holder
has the right to receive pursuant to Section 2.1 (after taking into account all
Common Shares and Preferred Shares then held by such holder) and (C) a check in
an amount equal to the cash that such holder has the right to receive pursuant
to the provisions of this Article II, including cash in lieu of any dividends
and other distributions pursuant to Section 2.5 and cash in lieu of fractional
shares pursuant to Section 2.7. No interest will be paid or will accrue on any
cash payable pursuant to Section 2.5 or Section 2.7. In the event of a transfer
of ownership of Company Common Stock, Series A Preferred Stock or Series B
Preferred Stock which is not registered in the transfer records of the Company,
shares of IOI Common Stock evidencing, in the aggregate, the proper number of
shares of IOI Common Stock; Warrants evidencing, in the aggregate, the proper
number of Warrants; a check in the proper amount of cash in lieu of any
fractional shares of IOI Common Stock pursuant to Section 2.7 and any dividends
or other distributions to which such holder is entitled pursuant to Section 2.5,
may be issued with respect to such Common Shares or Preferred Shares to such a
transferee if the Certificate representing such Common Shares or Preferred
Shares is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and to evidence that any applicable stock
transfer Taxes (as hereinafter defined) have been paid.
SECTION 2.5 Distributions with Respect to Unsurrendered Certificates. No
dividends or other distributions declared or made with respect to shares of IOI
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of IOI Common
Stock that such holder would be entitled to receive upon surrender of such
Certificate and no cash payment in lieu of fractional shares of IOI Common Stock
shall be paid to any such holder pursuant to Section 2.7 until such holder shall
surrender such Certificate in accordance with Section 2.4. Subject to the effect
of applicable Laws, following surrender of any such Certificate, there shall be
paid to
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such holder of shares of IOI Common Stock issuable in exchange therefor, without
interest, (a) promptly after the time of such surrender, the amount of any cash
payable in lieu of fractional shares of IOI Common Stock to which such holder is
entitled pursuant to Section 2.7 and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of IOI Common Stock, and (b) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender and a payment date
subsequent to such surrender payable with respect to such shares of IOI Common
Stock.
SECTION 2.6 No Further Ownership Rights in Company Common Stock. All
shares of IOI Common Stock and Warrants issued and cash paid upon conversion of
the Common Shares and Preferred Shares in accordance with the terms of Article I
and this Article II (including any cash paid pursuant to Sections 2.5 and 2.7)
shall be deemed to have been issued or paid in full satisfaction of all rights
pertaining to the Common Shares and the Preferred Shares.
SECTION 2.7 No Fractional Shares of IOI Common Stock.
(a) No certificates or scrip of shares of IOI Common Stock representing
fractional shares of IOI Common Stock or book-entry credit of the same shall be
issued upon the surrender for exchange of Certificates and such fractional share
interests will not entitle the owner thereof to vote or to have any rights of a
stockholder of IOI or a holder of shares of IOI Common Stock.
(b) Notwithstanding any other provision of this Agreement, each holder of
Common Shares and Preferred Shares exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of IOI Common
Stock (after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
the product of (i) such fractional part of a share of IOI Common Stock
multiplied by (ii) the average of the daily high and low sales prices, regular
way, of one share of IOI Common Stock (rounded to the nearest ten thousandth) on
the AMEX (as reported in the New York City edition of the Wall Street Journal
or, if not reported thereby, another nationally recognized source) during the
ten consecutive trading day period ending on the second trading day prior to the
Closing Date. As promptly as practicable after the determination of the
aggregate amount of cash to be paid to holders of fractional interests, the
Exchange Agent shall notify IOI and IOI shall deposit such amount with the
Exchange Agent and shall cause the Exchange Agent to forward payments to such
holders of fractional interests subject to and in accordance with the terms
hereof.
SECTION 2.8 Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of Certificates for six months
after the Effective Time shall be delivered to the Surviving Corporation or
otherwise on the instruction of the Surviving Corporation, and any holders of
the Certificates who have not theretofore complied with this Article II shall
thereafter look only to the Surviving Corporation for the Share Consideration
with respect to the Common Shares and Preferred Shares formerly represented
thereby to which such holders are entitled pursuant to Section 2.1 and Section
2.4, any cash in lieu of fractional shares of IOI Common Stock to which such
holders are entitled pursuant to Section 2.7 and any dividends or distributions
with respect to shares of IOI Common Stock to which such holders are entitled
pursuant to Section 2.5. Any such portion of the Exchange Fund remaining
unclaimed by holders of Common Shares and Preferred Shares five years after the
Effective Time (or such earlier date immediately prior to such time as such
amounts would otherwise escheat to or become property of any Governmental Entity
(as hereinafter defined)) shall, to the extent permitted by Law, become the
property of the Surviving Corporation free and clear of any claims or interest
of any person previously entitled thereto.
SECTION 2.9 No Liability. None of the Surviving Corporation, the Company,
or the Exchange Agent shall be liable to any person in respect of any Share
Consideration from the Exchange Fund delivered to a public official pursuant to
any applicable abandoned property, escheat or similar Law.
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SECTION 2.10 Investment of the Exchange Fund. The Exchange Agent shall
invest any cash included in the Exchange Fund as directed by the Surviving
Corporation on a daily basis. Any interest and other income resulting from such
investments promptly shall be paid to the Surviving Corporation.
SECTION 2.11 Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity by such
person against any claim that may be made against the Surviving Corporation with
respect to such Certificate, the Exchange Agent will deliver in exchange for
such lost, stolen or destroyed Certificate the applicable Share Consideration
with respect to the Common Shares and Preferred Shares formerly represented
thereby, any cash in lieu of fractional shares of IOI Common Stock and unpaid
dividends and distributions on shares of IOI Common Stock deliverable in respect
thereof, pursuant to this Agreement.
SECTION 2.12 Withholding Rights. Each of IOI and the Exchange Agent shall
be entitled to deduct and withhold from the Share Consideration otherwise
payable pursuant to this Agreement to any holder of Common Shares and Preferred
Shares such amounts as it is required to deduct and withhold with respect to the
making of such payment under the Code and the rules and regulations promulgated
thereunder, or any provision of a Tax Law. To the extent that amounts are so
withheld by IOI or the Exchange Agent, as the case may be, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the Common Shares and Preferred Shares in respect to which such
deduction and withholding was made by IOI or the Exchange Agent, as the case may
be.
SECTION 2.13 Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code and the parties hereto hereby adopt this Agreement as a "plan
of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations. Each party hereto shall use its best
efforts to cause the Merger to be so qualified, shall report the transactions
contemplated by this Agreement in a manner consistent with such reorganization
treatment and will not take any position inconsistent therewith in any Tax
Return (as hereinafter defined), refund claim, litigation or otherwise unless
required to do so by Law.
SECTION 2.14 Stock Transfer Books. The stock transfer books of the
Company shall be closed immediately upon the Effective Time and there shall be
no further registration of transfers of Common Shares or Preferred Shares
thereafter on the records of the Company. On or after the Effective Time, any
Certificates presented to the Exchange Agent or IOI for any reason shall be
converted into the Share Consideration with respect to the Common Shares or
Preferred Shares formerly represented thereby, any cash in lieu of fractional
shares of IOI Common Stock to which the holders thereof are entitled pursuant to
Section 2.7 and any dividends or other distributions to which the holders
thereof are entitled pursuant to Section 2.5.
SECTION 2.15 Affiliates. Notwithstanding anything to the contrary herein,
no shares of IOI Common Stock or cash shall be delivered to a person who may be
deemed an "affiliate" of the Company for purposes of Rule 145 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), until such person has
executed and delivered to IOI the written agreement contemplated by Section
6.10.
SECTION 2.16 Appraisal Rights. Notwithstanding anything in this Agreement
to the contrary, Common Shares and Preferred Shares that are issued and
outstanding immediately prior to the Effective Time and which are held by
shareholders who did not vote in favor of the Merger (the "DISSENTING SHARES"),
which shareholders (the "DISSENTING SHAREHOLDERS") comply with all of the
relevant provisions of Delaware Law, shall not be converted into or be
exchangeable for the right to receive the Share Consideration, unless and until
such holders shall have failed to perfect or shall have effectively withdrawn or
lost their rights to appraisal under Delaware Law. If any Dissenting Shareholder
shall have failed to perfect or shall have effectively withdrawn or lost such
right, such holder's Common Shares and Preferred Shares shall thereupon be
converted into and become exchangeable for the right to receive, as of the
Effective Time, the Share Consideration without any interest thereon. The
Company shall give IOI (i) prompt notice of any written demands for appraisal of
any Common Shares or Preferred Shares,
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attempted withdrawals of such demands and any other instruments served pursuant
to Delaware Law and received by the Company relating to shareholders' rights of
appraisal, and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under Delaware Law. The Company shall not,
except with the prior written consent of IOI, voluntarily make any payment with
respect to, or settle or offer to settle, any such demand for payment. If any
Dissenting Shareholder shall fail to perfect or shall have effectively withdrawn
or lost the right to dissent, the Common Shares or Preferred Shares held by such
Dissenting Shareholder shall thereupon be treated as though such Common Shares
or Preferred Shares had been converted into the right to receive the Share
Consideration pursuant to Section 2.1(a).
SECTION 2.17 Escrow of Shares. At Closing, IOI shall issue up to
55,000,000 shares (the "ESCROW SHARES") of IOI Common Stock to an escrow agent
mutually agreed to by IOI and the Company (the "ESCROW AGENT"), which Escrow
Shares shall be held by the Escrow Agent for the purpose of delivering shares of
IOI Common Stock in satisfaction of the requirements under Section 2.1(a)(iii)
to issue additional shares of IOI Common Stock, if any, after the Adjustment
Date. The Escrow Shares shall be included in shares of IOI Common Stock
registered on the Form S-4 referenced in Section 6.1, and shall be issued in the
name of the Escrow Agent upon the Effective Time. Such Escrow Shares shall be
subject to a standard escrow agreement between the Surviving Corporation and the
Escrow Agent, which will provide, among other things, for the receipt and
investment of cash dividends, if any, on the Escrow Shares, the receipt and
retainage of stock dividends, if any, on the Escrow Shares, and the voting of
such Escrow Shares in connection with shareholder meetings of the Surviving
Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedules attached hereto, each of
which specifically references the Section below to which it states an exception,
the Company hereby represents and warrants to IOI as follows (with the
understanding that IOI is relying materially on each such representation and
warranty in entering into and performing this Agreement):
SECTION 3.1 Organization and Qualification; No Subsidiaries.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the Laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its businesses as now conducted and proposed by the
Company to be conducted, except where the failure to be duly organized, existing
and in good standing or to have such power and authority could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
(as hereinafter defined) on the Company.
(b) The Company does not own, directly or indirectly, beneficially or of
record, any shares of capital stock or other securities of any entity or any
investment in any entity.
(c) The Company is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing does not have and could not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect on the
Company.
(d) The Company has heretofore made available to IOI accurate and complete
copies of the certificate of incorporation and bylaws of the Company as
currently in effect.
SECTION 3.2 Capitalization of the Company. The authorized capital stock
of the Company consists of: (i) 60,000,000 shares of Company Common Stock and
(ii) 10,000,000 shares of Preferred Stock, par value $0.01 per share, of which
5,000,000 shares are designated Series A Preferred Stock. As of the date hereof,
there are issued and outstanding 11,250,000 shares of Company Common Stock,
2,566,223 shares of Series A Preferred Stock and no shares of Series B Preferred
Stock. Each share of Series A Preferred
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Stock is convertible into three shares of Company Common Stock, subject to
certain adjustments. A true and complete list of record holders of the issued
and outstanding Company Common Stock and Series A Preferred Stock as of the date
hereof is, and as updated at the Effective Time will be, set forth in Schedule
3.2, which schedule includes for each such record holder, the number of shares
of each class and series held by such holder. All of the issued and outstanding
Common Shares and shares of Series A Preferred Stock have been validly issued,
and are duly authorized, fully paid, non-assessable and free of preemptive,
maintenance or similar rights. As of the date hereof, 2,888,255 Common Shares
are reserved for issuance and issuable upon or otherwise deliverable in
connection with the exercise of outstanding Company Stock Options issued
pursuant to the Company Option Plans and 551,025 Common Shares are reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding warrants. Except as set forth on Schedule 3.2, since
July 1, 2000, no shares of the Company's capital stock have been issued other
than pursuant to Company Stock Options already in existence on such date. Except
as set forth above, as of the date hereof, there are no outstanding (i) shares
of capital stock or other voting securities of the Company; (ii) securities of
the Company convertible into or exchangeable for shares of capital stock or
voting securities of the Company; (iii) options or other rights to acquire from
the Company, and no obligations of the Company to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company; and (iv) equity equivalents,
interests in the ownership or earnings of the Company or other similar rights
(including stock appreciation rights) (collectively, "COMPANY SECURITIES").
Except as set forth on Schedule 3.2, there are no outstanding obligations of the
Company to repurchase, redeem or otherwise acquire any Company Securities.
Except as set forth on Schedule 3.2, there are no shareholder agreements, voting
trusts or other agreements to which the Company is a party or to which it is
bound relating to the voting of any shares of capital stock of the Company
(other than the Company Voting Agreement). Schedule 3.2 sets forth true and
complete information regarding the current exercise price, the date of grant and
the number of Company Stock Options granted for each holder of Company Stock
Options.
SECTION 3.3 Authority Relative to This Agreement; Consents and Approvals.
(a) The Company has all necessary corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. No other corporate proceedings on the part of the Company are necessary
to authorize this Agreement or to consummate the transactions contemplated
hereby (other than, in respect of the Merger and this Agreement, the Company
Requisite Vote (as hereinafter defined)). This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid, legal,
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by (i)
bankruptcy laws and other similar laws affecting creditors' rights generally and
(ii) general principles of equity.
(b) The Board of Directors of the Company (the "COMPANY BOARD") has duly
and validly authorized the execution and delivery of this Agreement and approved
the consummation of the transactions contemplated hereby, and taken all
corporate actions required to be taken by the Company Board for the consummation
of the transactions, including the Merger, contemplated hereby and has resolved
(i) this Agreement and the transactions contemplated hereby, including the
Merger, taken together, to be advisable and fair to, and in the best interests
of, the Company and its shareholders; and (ii) to recommend that the
shareholders of the Company approve and adopt this Agreement. The affirmative
approval of the holders of Common Shares and Preferred Shares representing a
majority of the votes that may be cast by the holders of all outstanding Common
Shares and Preferred Shares (voting as a single class), as of the record date
set by the Company Board for the vote of the Company's shareholders (the
"COMPANY REQUISITE VOTE"), are the only actions of the holders of any class or
series of capital stock of the Company necessary to adopt this Agreement and
approve the transactions contemplated hereby, including the Merger and the sale
of the Westbank Ambulatory Care Center.
SECTION 3.4 Financial Statements; Accounts Receivable.
(a) The Company has delivered to IOI (i) copies of the unaudited balance
sheets of the Company as of December 31, 1999, together with the related
unaudited statements of income, shareholders' equity
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and changes in cash flow for the fiscal year ended December 31, 1999, and the
notes thereto, and (ii) copies of the unaudited balance sheet of the Company, as
of June 30, 2000 (the "COMPANY INTERIM BALANCE SHEET"), together with the
related unaudited consolidated statements of income and changes in cash flow for
the six-month period ended on such date (such financial statements and unaudited
interim financial statements being hereinafter referred to as the "COMPANY
FINANCIAL STATEMENTS"). The Company Financial Statements, including the notes
thereto, present fairly in all material respects the financial position, results
of operations and changes in cash flow of the Company as of such dates and for
the periods then ended (subject, in the case of the unaudited interim Company
Financial Statements, to normal year-end audit adjustments, which are not in the
aggregate material, and the absence of notes).
(b) The accounts receivable of the Company as set forth on the Company
Interim Balance Sheet or arising since the date thereof are valid and genuine;
have arisen solely out of bona fide sales and deliveries of goods, performance
of services and other business transactions in the ordinary course of business
consistent with past practice; to the Company's knowledge, are not subject to
valid defenses, set-offs or counterclaims; and are collectible at the full
recorded amount thereof less, in the case of accounts receivable appearing on
the Company Interim Balance Sheet, the recorded allowance for collection of
doubtful accounts on the Company Interim Balance Sheet. The allowance for
collection of doubtful accounts on the Company Interim Balance Sheet has been
determined consistent with past practice.
SECTION 3.5 No Undisclosed Liabilities. There are no liabilities of the
Company of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, other than: (a) liabilities disclosed,
provided for or reserved against in the Company Financial Statements; (b)
liabilities arising in the ordinary course of business after the date of the
Company Interim Balance Sheet, which are not material to the financial position
of the Company; and (c) liabilities arising under this Agreement.
SECTION 3.6 Absence of Changes. Since June 30, 2000, the Company has
conducted its business in the ordinary and usual course consistent with past
practice and there has not been:
(a) any event, occurrence or development which has had or could
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company;
(b) except as set forth on Schedule 3.6(b), any declaration, setting
aside or payment of any dividend or other distribution in respect of any
shares of capital stock of the Company, or any repurchase, redemption or
other acquisition by the Company of any Company Securities;
(c) any amendment of any term of any outstanding security of the
Company that would materially increase the obligations of the Company under
such security;
(d) (i) any incurrence or assumption by the Company of any
indebtedness for borrowed money (or any renewals, replacements, or
extensions that increase the aggregate commitments thereunder) except (A)
in the ordinary and usual course of business consistent with past practice
or (B) in connection with any capital expenditure permitted by Section 5.1,
or (ii) any guarantee, endorsement, or other incurrence or assumption of
liability (whether directly, contingently or otherwise) by the Company for
the obligations of any other person;
(e) any creation or assumption by the Company of any material Lien (as
hereinafter defined) on any material asset of the Company other than
Permitted Liens (as hereinafter defined);
(f) any making of any loan, advance or capital contribution to or
investment in any person by the Company other than loans or advances to
employees, contractors or consultants of the Company made in the ordinary
and usual course of business consistent with past practice;
(g) (i) any contract or agreement entered into by the Company on or
prior to the date hereof relating to any material acquisition or
disposition of any assets or business or (ii) any modification, amendment,
assignment, termination or relinquishment by the Company of any contract,
license or other right (including any insurance policy naming it as a
beneficiary or a loss payable payee) that
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does or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company, other than those
contemplated by this Agreement;
(h) any material change in any method of accounting or accounting
principles or practice by the Company, except for any such change required
by reason of a change in GAAP;
(i) any (i) grant of any severance or termination pay to any director,
officer, employee, consultant or contractor of the Company; (ii) entering
into of any employment, deferred compensation or other similar agreement
(or any amendment to any such existing agreement) with any director,
officer, employee, consultant or contractor of the Company; (iii) increase
in benefits payable under any existing severance or termination pay
policies or employment agreements; or (iv) increase in compensation, bonus
or other benefits payable to directors, officers, employees, consultants or
contractors of the Company other than, in the case of clause (iv) only,
increases prior to the date hereof in compensation, bonus or other benefits
payable to employees, consultants or contractors of the Company in the
ordinary and usual course of business consistent with past practice or
merit increases in salaries of employees, consultants or contractors at
regularly scheduled times in customary amounts consistent with past
practices;
(j) any adoption, entering into, amendment, alteration or termination
of (partially or completely) any Company Benefit Plan or Company Employee
Arrangement (both as hereinafter defined) except as contemplated by this
Agreement or to the extent required by applicable Law;
(k) any entering into of any contract with an officer, director,
employee, consultant, contractor, agent or other similar representative of
the Company that (i) is not terminable, without penalty or other liability,
upon not more than 60 calendar days' notice or (ii) involves payments in
excess of $50,000;
(l) any (i) making or revoking of any material election relating to
Taxes, (ii) settlement or compromise of any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, or (iii) change to any material methods of reporting
income or deductions for federal income tax purposes;
(m) except as set forth on Schedule 3.6(m), any capital expenditures
in excess of $10,000 individually and in excess of $50,000 in the
aggregate;
(n) any lease, license or grant to any person of any rights in any of
the Company's assets or properties;
(o) except as set forth on Schedule 3.6(o), any revaluation of any of
the Company's assets;
(p) any discharge or satisfaction of any Lien or payment of any
obligation or liability, absolute or contingent, other than current
liabilities incurred and paid in the ordinary course of business;
(q) any failure to pay any accounts payable of the Company in
accordance with their terms;
(r) any acceleration of the collection of, or sale or other transfer
of, any accounts receivable of the Company;
(s) any cancellation, waiver, release or forgiveness of any debts or
obligations of, or rights or claims against, third parties;
(t) any amendment of the certificate of incorporation or bylaws of the
Company;
(u) any investment in any Person;
(v) any sufferance of any material damage, destruction or loss
(whether or not covered by insurance) to any material assets of the
Company;
(w) any strike, slowdown or demand for recognition by a labor
organization by or with respect to any of the employees of the Company;
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(x) any stock option grants or grants or sales of restricted stock
that have not been disclosed to IOI in writing;
(y) any hiring or termination of any employee, consultant or
contractor that has not been disclosed to IOI in writing; or
(z) any contracting with or terminating any consultant that has not
been disclosed to IOI in writing.
SECTION 3.7 Consents and Approvals. Except for filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Securities Act, state securities or blue sky
laws, and the filing and recordation of the Articles of Merger as required by
Texas Law and the Certificate of Merger as required by Delaware Law, no filing
with or notice to, and no permit, authorization, consent or approval of, any
court or tribunal or administrative, governmental or regulatory body, agency or
authority (a "GOVERNMENTAL ENTITY") is necessary for the execution and delivery
by the Company of this Agreement or the consummation by the Company of the
transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents, or approvals or to make such filings or give
such notice do not or would not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on the Company.
SECTION 3.8 No Default. The Company is not in violation of any term of
(i) its certificate of incorporation or bylaws (or other similar organizational
or governing documents), (ii) any Company Material Contract (as hereinafter
defined), or (iii) any domestic or foreign law, order, writ, injunction, decree,
ordinance, award, stipulation, statute, judicial or administrative doctrine,
rule or regulation entered by a Governmental Entity ("LAW") applicable to the
Company or any of its assets or properties, the consequence of which violation
(A) has had or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company or (B) has prevented or
would reasonably be expected to prevent or materially delay the performance of
this Agreement by the Company. Except as set forth on Schedule 3.8, the
execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby will not (X) result in any
violation of or conflict with, constitute a default under, require any consent,
waiver or notice under any term of, or result in the reduction or loss of any
benefit or the creation or acceleration of any right or obligation under, (i)
the certificate of incorporation or bylaws (or other similar organizational or
governing documents) of the Company, (ii) any Company Permit (as hereinafter
defined) or Company Material Contract, or (iii) any Law applicable to the
Company or any of its assets or properties, or (Y) result in the creation of (or
impose any obligation on the Company to create) any Lien (other than Permitted
Liens) upon any of the assets or properties of the Company pursuant to any such
term, excluding from clauses (X)(ii) and (iii) and (Y) such events as would not
have a Material Adverse Effect on the Company.
SECTION 3.9 Real Property.
(a) The Company does not presently own nor has it owned in the past any
real property.
(b) Schedule 3.9 sets forth all leases, subleases and other agreements (the
"COMPANY REAL PROPERTY LEASES") under which the Company is a party or pursuant
to which the Company uses or occupies or has the right to use or occupy, now or
in the future, any real property (the "COMPANY LEASED PROPERTY").
(i) The Company has heretofore delivered to IOI true, correct and
complete copies of all Company Real Property Leases (and all modifications,
amendments and supplements thereto and all side letters to which the
Company is a party affecting the obligations of any party thereunder).
(ii) Each Company Real Property Lease constitutes the valid and
legally binding obligation of the Company, enforceable in accordance with
its terms, and is in full force and effect.
(iii) All rent and other sums and charges payable by the Company as
tenants under each Company Real Property Lease are current and no
termination event or condition or uncured default
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of a material nature on the part of the Company or the landlord exists
under any Company Real Property Lease.
(iv) The Company has a good and valid leasehold interest in each
parcel of real property leased by it free and clear of all Liens, except
(i) Taxes and general and special assessments not in default and payable
without penalty and interest, and (ii) Permitted Liens.
(v) The Company has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered its leasehold interest in the Company Leased
Property.
(vi) No party to any such Company Real Property Lease has given notice
to the Company of or made a claim against the Company in respect of any
breach or default thereunder.
(vii) All facilities located in or benefiting the Company Leased
Property are in good operating condition and repair, and are structurally
sound and free of defects, with no material alterations or repairs required
thereto under applicable laws, permits or insurance company requirements.
All such facilities are supplied with utilities and other services
necessary for the operation of such facilities, including gas, electricity,
water, telephone, sanitary sewer and storm sewer, all of which services are
adequate to the conduct of the Company's business.
SECTION 3.10 Litigation. Except as set forth on Schedule 3.10 hereto,
there is no suit, claim, action, proceeding or investigation pending or, to the
Company's knowledge, threatened against the Company or any of its assets or
properties which (a) has had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company or
(b) questions the validity of this Agreement or any action to be taken by the
Company in connection with the consummation of the transactions contemplated
hereby or could otherwise prevent or materially delay the consummation of the
transactions contemplated by this Agreement. The Company is not subject to any
outstanding order, writ, injunction or decree which has had or could reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on the Company. There is no action, suit, proceeding or investigation pending
or, to the Company's knowledge, threatened against any current or former
officer, director, employee, consultant, contractor or agent of the Company (in
his or her capacity as such) which gives rise or could reasonably be expected to
give rise to a claim for contribution or indemnification against the Company.
SECTION 3.11 Permits. The Company holds, and has at all times held, all
permits, licenses, variances, exemptions, orders, and approvals of all
Governmental Entities necessary for the lawful conduct of its business (the
"COMPANY PERMITS"). The Company is in material compliance with the terms of the
Company Permits. No investigation or review by any Governmental Entity in
respect of the Company is pending or, to the Company's knowledge, threatened,
nor has the Company received notice from any Governmental Entity of its
intention to conduct the same.
SECTION 3.12 Employee Plans.
(a) The Company does not sponsor, maintain or contribute to any "employee
benefit plans," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") (the "COMPANY BENEFIT PLANS").
(b) Schedule 3.12(b) sets forth a true, correct and complete list of:
(i) all employees, consultants, independent contractors and leased
employees of the Company; and
(ii) all employment, consulting, termination, severance, change of
control, individual compensation or indemnification agreements, and all
bonus or other incentive compensation, deferred compensation, salary
continuation, disability, severance, stock award, stock option, stock
purchase, educational assistance, legal assistance, club membership,
discount, loan, credit union or vacation agreements, policies or
arrangements under which the Company has any obligation or liability
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(contingent or otherwise) in respect of any current or former officer,
director, employee, consultant, leased employee or contractor of the
Company (the "COMPANY EMPLOYEE ARRANGEMENTS").
(c) In respect of each Company Employee Arrangement, a complete and correct
copy of each of the following documents (if applicable) has been made available
to IOI: (i) each of the stock option grant agreements used to make grants under
the Company Option Plans and other arrangements, and all amendments thereto; and
(ii) each written employment, consulting or individual severance or other
compensation agreement, and all amendments thereto.
(d) All contributions or other payments required to have been made by the
Company to or under any Company Employee Arrangement by applicable Law or the
terms of such Company Employee Arrangement (or any agreement relating thereto)
have been timely and properly made.
(e) The Company Employee Arrangements have been maintained and administered
in all material respects in accordance with their terms and applicable Laws. In
particular, no individual who has performed services for the Company has been
improperly excluded from participation in any Company Employee Arrangement.
(f) There are no pending or, to the Company's knowledge, threatened
actions, claims, or proceedings against or relating to any Company Employee
Arrangement (other than routine benefit claims by persons entitled to benefits
thereunder), and, to the knowledge of the Company, there are no facts or
circumstances which could form the basis for any of the foregoing.
(g) The Company does not have any obligation or liability (contingent or
otherwise) to provide post-retirement life insurance or health benefits coverage
for current or former officers, directors, employees, consultants, contractors
or leased employees of the Company except (i) as may be required under Part 6 of
Title I of ERISA at the sole expense of the participant or the participant's
beneficiary or (ii) through the last day of the calendar month in which the
participant terminates employment with the Company.
(h) Except as set forth in Schedule 3.12(h), neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment becoming due to any employee, consultant,
contractor or leased employee (current, former, or retired) of the Company, (ii)
increase any benefits under any Company Employee Arrangement or (iii) result in
the acceleration of the time of payment of, vesting of, or other rights in
respect of any such benefits.
(i) The Company has delivered to IOI a true and correct list of the
following for each employee, consultant, contractor and leased employee of the
Company: base salary, any bonus obligations, immigration status, hire date,
time-off balance, pay rate and termination provisions.
SECTION 3.13 Labor Matters.
(a) The Company is not a party to any labor or collective bargaining
agreement, and no employees of the Company are represented by any labor
organization. Since the Company's incorporation, there have been no
representation or certification proceedings, or petitions seeking a
representation proceeding, pending or, to the Company's knowledge, threatened in
writing to be brought or filed with the National Labor Relations Board or any
other labor relations tribunal or authority. Since the Company's incorporation,
to the Company's knowledge, there have been no organizing activities involving
the Company in respect of any group of employees of the Company.
(b) There are no strikes, work stoppages, slowdowns, lockouts, material
arbitrations or material grievances or other material labor disputes pending or,
to the knowledge of the Company, threatened against or involving the Company.
There are no unfair labor practice charges, grievances or complaints pending or,
to the Company's knowledge, threatened by or on behalf of any employee or group
of employees of the Company which, if individually or collectively resolved
against the Company, would have a Material Adverse Effect on the Company, and,
to the knowledge of the Company, there are no facts or circumstances which could
form the basis for any of the foregoing.
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(c) There are no complaints, charges or claims against the Company pending
or, to the Company's knowledge, threatened to be brought or filed with any
Governmental Entity or arbitrator based on, arising out of, in connection with,
or otherwise relating to the employment or termination of employment of any
individual by the Company, and, to the knowledge of the Company, there are no
facts or circumstances which could form the basis for any of the foregoing.
(d) The Company is in material compliance with all Laws relating to the
employment of labor, including all such Laws relating to wages, hours, the
Worker Adjustment and Retraining Notification Act, as amended ("WARN"),
collective bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding and/or Social
Security Taxes and any similar Tax.
(e) There has been no "mass layoff" or "plant closing" as defined by WARN
in respect of the Company within the six months prior to the date hereof.
SECTION 3.14 Environmental Matters.
(a) For purposes of this Agreement:
(i) "ENVIRONMENTAL COSTS AND LIABILITIES" means any and all losses,
liabilities, obligations, damages (including, compensatory, punitive and
consequential damages), fines, penalties, judgments, actions, claims,
costs, and expenses (including, fees, disbursements and expenses of legal
counsel, experts, engineers and consultants and the costs of investigation
and feasibility studies and clean up, remedial, removal or treatment
activities, or in any other way addressing any Hazardous Materials) arising
from, under or pursuant to any Environmental Law;
(ii) "ENVIRONMENTAL LAW" means any applicable federal, state, local or
foreign Law (including common Law), statute, rule, regulation, ordinance,
decree or other legal requirement relating to the protection of natural
resources, the environment or to pollution or the release or exposure to
Hazardous Materials as such Laws have been and may be amended or
supplemented through the Closing Date;
(iii) "HAZARDOUS MATERIAL" means any substance, material or waste
which is regulated, classified or otherwise characterized as hazardous,
toxic, a pollutant, a contaminant or words of similar meaning or regulatory
effect by any Governmental Entity or the United States, and includes,
without limitation, petroleum, petroleum by-products and wastes, asbestos
and polychlorinated biphenyls;
(iv) "RELEASE" means any release, spill, effluent, emission, leaking,
pouring, emptying, escaping, dumping, pumping, injection, deposit,
disposal, discharge, dispersal, leaching, or migration into the indoor or
outdoor environment, or into or out of or from any property; and
(v) "REMEDIAL ACTION" means all actions, including any capital
expenditures, required by any Governmental Entity or required under or
taken pursuant to any Environmental Law to (A) clean up, remove, treat or,
in any other way, ameliorate or address any Hazardous Materials or other
substance in the indoor or outdoor environment; (B) prevent the Release or
threat of Release, or minimize the further Release of any Hazardous
Material so it does not endanger or threaten to endanger the public or
employee health or welfare of the indoor or outdoor environment; (C)
perform pre-remedial studies and investigations or post-remedial monitoring
and care pertaining or relating to a Release; or (D) bring the applicable
party into compliance with any Environmental Law.
(b) The operations of the Company have been and are in compliance in all
material respects with all Environmental Laws, and the Company is not aware of
any facts, circumstances or conditions, which without significant capital
expenditures would prevent material compliance in the future;
(c) The Company has obtained and maintains all material permits,
authorizations, licenses or similar approvals required under applicable
Environmental Laws for its property (whether real or personal or owned or
leased) and for the continued operations of its business;
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(d) The Company is not subject to any outstanding written orders, contracts
or agreements with any Governmental Entity respecting Environmental Laws, or
with any Governmental Entity or other person respecting (A) any Remedial Action,
(B) any Release or threatened Release of a Hazardous Material or (C) an
assumption of responsibility for environmental claims of another entity;
(e) The Company has not received any written communication alleging, in
respect of any such party, the violation of or liability (real or potential)
under any Environmental Law or requesting with respect to any such party
information with respect to an investigation pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), or
any foreign or state counterpart thereto, or any other Environmental Law;
(f) The operations of the Company do not now involve, nor to the Company's
knowledge, have ever involved in the past, transportation, treatment, storage or
disposal of hazardous waste, as defined and regulated under 40 C.F.R. Parts
260-270 (in effect as of the date of this Agreement) or any state equivalent or
the generation of hazardous waste in quantities that prevent the Company from
qualifying as a conditionally exempt small-quantity generator under 40 C.F.R.
sec. 261.5;
(g) To the Company's knowledge, there is not now, nor has there been in the
past, on or in any property owned, leased or operated by the Company any of the
following for which the Company could reasonably expect to incur material
Environmental Costs and Liabilities: (A) any underground storage tanks or
landfills, dumps or surface impoundments, (B) any friable asbestos-containing
materials that are known by the Company not to be managed under an operations
and maintenance program by the owner of such property, (C) any polychlorinated
biphenyls other than PCBs in light ballasts and in electrical equipment owned by
the utility company, (D) a material Release of Hazardous Materials or (E) any
site on or nominated for the National Priority List promulgated pursuant to
CERCLA or any foreign or state remedial priority list promulgated or published
pursuant to any comparable foreign or state Law;
(h) No judicial or administrative proceedings are pending or, to the
Company's knowledge, threatened against the Company alleging the violation of or
seeking to impose liability pursuant to any Environmental Law and there are, to
the Company's knowledge, no investigations pending or threatened against the
Company under Environmental Laws;
(i) The Company has provided IOI with copies of all environmentally related
assessments, audits, investigations, sampling or similar reports in its
possession relating to the Company or any real property currently or formerly
owned, operated or leased by or for the Company; and
(j) The Company has made all filings, reports and notices required under
Environmental Laws for the current operations of its business.
SECTION 3.15 Tax Matters.
(a) The Company and each affiliated group (within the meaning of Section
1504 of the Code) of which the Company is or has been a member, has timely filed
all material Tax Returns required to be filed by it with the appropriate taxing
authorities in all jurisdictions in which such Tax Returns are required to be
filed. All such Tax Returns are true, complete and correct in all material
respects. The Company has paid all Taxes due for all periods of its existence.
The most recent Financial Statements for the periods ended December 31, 1999 and
June 30, 2000 reflect an adequate reserve for all Taxes payable by the Company
for all taxable periods and portions thereof through the date of such Financial
Statements. The Company has previously delivered to IOI true and complete copies
of (i) all federal, state, local and foreign Tax Returns filed by the Company
relating to the taxable periods of the Company since its inception; and (ii) any
audit report issued (or otherwise in respect of any audit, investigation or
proceeding in progress) relating to Taxes due from or in respect of the Company.
For purposes of this Agreement, "TAX" or "TAXES" means all federal, state, local
or foreign taxes, charges, fees, imposts, duties, levies, gaming or other
assessments, including, without limitation, all gross or net income, gross
receipts, alternative income or add-on taxes, capital, sales, use, ad valorem,
value added, transfer, transfer gains, environmental, franchise, profits,
inventory, capital stock, license, withholding, payroll, employment, social
security, unemployment, excise, severance, stamp, occupation, property, and
estimated taxes, water,
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rent and sewer service charges, customs duties, fees, assessments and charges of
any kind whatsoever, together with any interest and any penalties, fines,
additions to tax or additional amounts thereon imposed by any taxing authority
(domestic or foreign) and shall include any transferee or several liability in
respect of taxes, any liability in respect of taxes imposed by contract, tax
sharing agreement, tax indemnity agreement, tax reimbursement agreement or any
similar agreement (whether written or oral). "TAX RETURN" or "TAX RETURNS" means
any report, return, document, declaration, or any other information or filing
required to be supplied to any taxing authority or jurisdiction (domestic or
foreign) in respect of Taxes, including, information returns, any document in
respect of or accompanying payments or estimated Taxes, or in respect of or
accompanying requests for the extension of time in which to file any such
report, return document, declaration, or other information, including any
schedule or attachment thereto and including any amendment thereof.
(b) No deficiencies for any Taxes have been proposed, asserted, or assessed
against the Company that have not been fully paid or adequately provided for in
the Company Financial Statements. No requests for waivers of the time to assess
any Taxes have been executed, filed or are pending (including, but not limited
to, any applicable statute of limitation). No power of attorney in respect of
any Taxes has been executed or filed with any taxing authority. No issues
relating to Taxes have been raised by the relevant federal, state, local or
foreign taxing authority during any presently pending or prior audit or
examination.
(c) No Liens for Taxes exist in respect of any assets or properties of the
Company.
(d) The Company is not a party to, bound by, or has any obligation under
any Tax sharing agreement, Tax indemnity obligation, or similar agreement,
arrangement, or practice in respect of Taxes (whether or not written) (including
any advance pricing agreement, closing agreement, or other agreement relating to
Taxes with any taxing authority).
(e) The Company has not taken, agreed to take or will take any action that
would prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code.
(f) There are no employment, severance or termination agreements, other
compensation arrangements, Company Benefit Plans or other contracts or
agreements currently in effect which provide for the payment of any amount
(whether in cash or property or the vesting of property) individually or
collectively (either alone or upon the occurrence of any additional or
subsequent event), that could give rise to a payment which is not deductible by
reason of Section 280G of the Code.
(g) The Company has complied in all respects with all Laws applicable to
the payment and withholding of Taxes and has duly and timely withheld from
employee salaries, wages and other compensation and has paid over to the
appropriate taxing authority all amounts required to be so withheld and paid
over for all periods under all applicable Laws.
(h) The Company has not received any written or oral notice of any pending
audit or proceeding and no federal, state, local, or foreign audits or other
administrative proceedings or court proceedings are presently pending in respect
of any Taxes or Tax Returns of the Company. No issue has been raised by a
federal, state, local or foreign taxing authority in any current or prior
examination which, by application of the same or similar principles, could
reasonably be expected to result in a proposed deficiency for any subsequent
taxable period.
(i) The Company has not (i) in respect of any assets or property held or
acquired by it, filed a consent to the application of Section 341(f) of the Code
or agreed to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by the Company; (ii) executed or entered into a closing agreement pursuant
to Section 7121 of the Code or any predecessor provision thereof or any similar
provision of state, local, or foreign Tax Law in respect of the Company; (iii)
received or filed any requests for rulings or determinations in respect of any
Taxes within the last five years; or (iv) extended the time within which to file
any Tax Return, which Tax Return has since not been filed, or the assessment or
collection of Taxes, which Taxes have not since been paid.
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(j) The Company is not currently, and has not been within the last five
years, a "United States real property holding company" within the meaning of
Section 897(c) of the Code.
(k) No written claim has been made by a taxing authority in a jurisdiction
where the Company does not file Tax Returns to the effect that the Company is or
may be subject to taxation by that jurisdiction.
(l) Except as disclosed on Schedule 3.15(l), all Tax Returns of the Company
have been examined by and settled with the IRS or the applicable state, local or
foreign Tax authorities. All assessments for Taxes due with respect to such
completed and settled examinations or any concluded litigation have been fully
paid by the Company.
(m) The Company has not received any private letter rulings from the IRS or
comparable rulings from other taxing authorities.
(n) The Company has not constituted either a "distributing corporation" or
a "controlled corporation" (within the meaning of Section 355(a)(1)(A) of the
Code) in a distribution of stock qualifying for tax-free treatment under Section
355 of the Code (i) in the two years prior to the date of this Agreement or (ii)
in a distribution which could otherwise constitute part of a "plan" or "series
of related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
(o) There is no taxable income of the Company that will be reportable in a
taxable period beginning after the Closing Date that is attributable to a
transaction (such as an installment sale) that occurred prior to the Closing.
SECTION 3.16 Absence of Questionable Payments. Neither the Company nor,
to the Company's knowledge, any director, officer, agent, employee, consultant,
contractor or other person acting on behalf of the Company, has used any
corporate or other funds for unlawful contributions, payments, gifts, or
entertainment, or made any unlawful expenditures relating to political activity
to government officials or others or established or maintained any unlawful or
unrecorded funds in violation of the Foreign Corrupt Practices Act of 1977, as
amended, or any other domestic or foreign Law. Neither the Company nor, to the
Company's knowledge, any director, officer, agent, employee, consultant,
contractor or other person acting on behalf of the Company, has accepted or
received any unlawful contributions, payments, gifts or expenditures.
SECTION 3.17 Material Contracts.
(a) Schedule 3.17 sets forth a list of all Company Material Contracts. The
Company has heretofore made available to IOI true, correct and complete copies
(or if oral, written summaries) of all written or oral contracts and agreements
(and all amendments, modifications and supplements thereto, and all side letters
to which the Company is a party affecting the obligations of any party
thereunder) to which the Company is a party or by which any of its assets or
properties are bound that are material to the business, assets or properties of
the Company taken as a whole, including all: (i) employment, severance, product
design or development, personal services, consulting, non-competition or
indemnification contracts (including, any contract to which the Company is a
party involving employees, consultants or contractors of the Company); (ii)
licensing, merchandising or distribution agreements; (iii) contracts granting a
right of first refusal or first negotiation; (iv) partnership or joint venture
agreements; (v) agreements for the acquisition, sale or lease of material assets
or properties of the Company (by merger, purchase or sale of assets or stock or
otherwise); (vi) contracts or agreements with any Governmental Entity; (vii)
loan or credit agreements, mortgages, indentures or other agreements or
instruments evidencing indebtedness for borrowed money by the Company or any
such agreement pursuant to which indebtedness for borrowed money may be
incurred; (viii) agreements that purport to limit, curtail or restrict the
ability of the Company to compete in any geographic area or line of business;
(ix) agreements that require performance of services by specified (by name or
job function) employees, consultants or contractors of the Company; (x) any
other material contract, arrangement or understanding not made in the ordinary
course of business and consistent with past practice; and (xi) commitments and
agreements to enter into any of the foregoing (collectively, together with any
such contracts entered into in accordance with Section 5.1, the "COMPANY
MATERIAL CONTRACTS"). The Company is not a party to nor bound by any severance
or other agreement
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with any employee, consultant or contractor pursuant to which such person would
be entitled to receive any additional compensation or an accelerated payment of
compensation as a result of the consummation of the transactions contemplated
hereby.
(b) Each of the Company Material Contracts constitutes the valid and
legally binding obligation of the Company, enforceable in accordance with its
terms, and is in full force and effect, except as may be limited by (i)
bankruptcy laws and other similar laws affecting creditors' rights generally and
(ii) general principles of equity. The Company is not in breach or default in
any material respects of any provisions of any Company Material Contract and, to
the Company's knowledge, no event has occurred which with notice or lapse of
time or both would constitute a material breach or default by the Company or
permit termination, modification or acceleration thereunder, and which with
respect to each of the foregoing, could not be timely cured by the Company.
(c) No party to any such Company Material Contract has given notice to the
Company of or made a claim against the Company in respect of any breach or
default thereunder.
(d) No terms and conditions of any Company Material Contract or other
arrangement or understanding between the Company and any other Person in effect
on the date of this Agreement prevent, delay or materially restrict the
Company's ability to utilize any material portion of its assets or resources as
it deems appropriate and as it presently contemplates.
SECTION 3.18 Insurance. Schedule 3.18 sets forth a true and complete list
and brief summary description (including information on the premiums payable in
connection therewith and the scope and amount of the coverage provided
thereunder) of directors and officers liability and general liability insurance
policies maintained by the Company. Such policies have been issued by insurers
which, to the Company's knowledge, are reputable and financially sound and
provide coverage for the operations conducted by the Company of a scope and
coverage consistent with customary industry practice. Complete and correct
copies of each such policy have been delivered to IOI. All such policies are in
full force and effect and no notice of cancellation has been given with respect
to any such policy. All premiums due thereon have been paid in a timely manner.
Except as set forth on Schedule 3.18, there are no pending claims or, to the
knowledge of the Company, threatened claims, under any of the Company's
insurance policies.
SECTION 3.19 Subsidies. No grants, subsidies or similar arrangements
exist directly or indirectly between or among the Company, on the one hand, and
any domestic or foreign Governmental Entity or any other person, on the other
hand. The Company has not requested, sought, applied for or entered into any
grant, subsidy or similar arrangement directly or indirectly from or with any
domestic or foreign Governmental Entity or any other person.
SECTION 3.20 Intellectual Property.
(a) As used in this Section 3.20, the term "SCHEDULED IN-BOUND INTELLECTUAL
PROPERTY" means, as it pertains to the Company, patent licenses from third
parties, software licenses from third parties (other than routine,
non-negotiated, shrink wrap or similar everyday licenses of the type commonly
available at reasonable cost to the industry in general), and know-how licenses
from third parties in effect as of the date hereof, set forth on Schedule
3.20(a).
(b) As used in this Section 3.20, the term "SCHEDULED OUT-BOUND
INTELLECTUAL PROPERTY" means, as it pertains to the Company, patent licenses
from the Company to third parties, software licenses from the Company to third
parties (other than routine, non-negotiated, shrink wrap or similar everyday
licenses of the type commonly available at reasonable cost to the industry in
general) and know-how licenses from the Company to third parties in effect as of
the date hereof, set forth on Schedule 3.20(b).
(c) As used in this Section 3.20, the term "PATENT RIGHTS" means, as it
pertains to the Company, issued domestic and foreign patents (including design
registrations and other government grants of rights to inventions), patent
applications (including provisional patents filed with the U.S. Patent and
Trademark Office) as of the date hereof, and Company-approved invention
disclosures, set forth on Schedule 3.20(c).
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(d) As used in this Section 3.20, the term "TRADEMARKS" means, as it
pertains to the Company, trade names, trademarks, trademark registrations and
applications, service marks, service mark registrations and applications, and
copyright registrations and applications and the goodwill of the Company's
business associated with the foregoing.
(e) As used in this Section 3.20 and in Section 3.21, the term "SOFTWARE"
means, as it pertains to the Company, all software developed by the Company,
either alone or jointly.
(f) As used in this Section 3.20, the term "COPYRIGHTS" means, as it
pertains to the Company, copyright registrations and applications, and
unregistered copyrights (including copyrights in software) owned by or licensed
to the Company.
(g) As used in this Section 3.20, the term "KNOW-HOW" means, as it pertains
to the Company, all trade secrets, know-how and confidential information, other
non-public proprietary technical and business information, proprietary processes
and formulae used in the business of the Company.
(h) As used in this Section 3.20 and in Section 3.21, the term "COMPANY
INTELLECTUAL PROPERTY" means the Scheduled In-Bound Intellectual Property,
Patent Rights, Trademarks, Software, Copyrights and Know-How.
(i) As used in this Section 3.20, the term "THIRD PARTY INTELLECTUAL
PROPERTY" means, with respect to a Person (other than the Company), all trade
names, trademarks, trademark registrations and applications, service marks,
service mark registrations and applications, copyright registrations and
applications, unregistered copyrights (including copyrights in software),
software, trade secrets, confidential know-how and information, other non-public
proprietary technical and business information, proprietary processes and
formulae used in the business of such person.
(j) As used in this Section 3.20, the term "THIRD PARTY PATENT RIGHTS"
means with respect to a Person (other than the Company), issued domestic and
foreign patents (including design registrations and other government grants of
rights to inventions) and patent applications.
(k) Except as otherwise indicated on Schedule 3.20(c), the Company is the
sole owner of all right, title and interest in and to the Patent Rights and the
Company knows of no contingencies that will impede the Company's sole and
exclusive ownership of the Patent Rights. There are no past due, unpaid required
maintenance fees, annuities or other governmental fees on the Patent Rights, and
all patents and issued registrations included therein are valid and subsisting.
(l) Except for license rights granted under the Scheduled In-Bound
Intellectual Property and except as otherwise set forth in Schedule 3.20(l), to
its knowledge the Company has secured valid written assignments from all
officers, employees, consultants, independent contractors and other parties,
needed to secure the Company's sole (or as indicated on Schedules 3.20(l) and
3.21(c), joint) ownership in the Patent Rights, the Software and the Know-How.
Each officer and employee of the Company, and each consultant and independent
contractor of the Company who has had access to Company Confidential Information
(as defined in Section 3.20(p) below) or who has been engaged in a technical
capacity, has executed an undertaking to protect such Confidential Information
and which includes an obligation to assign patents and copyrights originated or
invented by such officer, employee, consultant or independent contractor during
the course of such person's relationship with the Company.
(m) Except as set forth on Schedule 3.20(b) (the Scheduled Out-Bound
Intellectual Property) or as may be inherent in the sale of products in the
ordinary course of business, the Company has not granted any licenses of or
other rights to use any of the Company Intellectual Property to any third party.
(n) Except as set forth in Schedule 3.20(n), the Company owns or has the
right to use pursuant to license, sublicense, agreement or permission, free and
clear of all Liens, past due charges, security interests or other encumbrances
of others, all Company Intellectual Property necessary for the operation of the
business of the Company as presently conducted, as contemplated in the
performance of existing contracts.
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(o) The Company is the current registrant for the domain names in the
Company's existing websites listed in Schedule 3.20(o), and, to the Company's
knowledge, the Company has the right to use pursuant to license, sublicense,
agreement or permission, free and clear of all claims or rights of others, the
text and images comprising those existing websites.
(p) The Company has taken commercially reasonable actions to protect and
preserve the confidentiality of all Company Intellectual Property covering trade
secrets, confidential know-how and information, other non-public proprietary
technical and business information, proprietary processes and formulae not
otherwise protected by patents, patent applications or copyright other than
information disclosed as part of the Company's marketing, public relations and
financing activities ("COMPANY CONFIDENTIAL INFORMATION").
(q) Each employee, consultant and independent contractor of the Company has
either executed a non-disclosure agreement or is by law or otherwise under an
enforceable and binding obligation to protect and preserve the confidentiality
of the Company Confidential Information.
(r) To the Company's knowledge, no Company Confidential Information
material to the business of the Company as currently operated has been disclosed
or authorized to be disclosed to any third party, other than pursuant to a
non-disclosure agreement that protects the Company's proprietary interests in
and to such Company Confidential Information or under circumstances in which the
third party is under a legal duty not to disclose such trade secrets and
confidential know-how.
(s) Except as set forth in Schedule 3.20(b), or as may be inherent in the
sale of products in the ordinary course of business, the Company has not granted
any licenses of or other rights to use any of the Company Intellectual Property
other than the Scheduled Out-Bound Intellectual Property of the Company to any
third party.
(t) Except as set forth in Schedule 3.20(t), the Company has not interfered
with, infringed upon, or misappropriated any Third Party Intellectual Property
or Third Party Patent Rights, and the Company has not received any charge,
complaint, claim or notice alleging any such interference, infringement, or
misappropriation. The Company has no knowledge that the manufacturing,
marketing, licensing, use or sale of the products designed or developed by the
Company for itself or third parties, including former products and products
under development or as contemplated in the performance of existing contracts,
infringes any Third Party Intellectual Property.
(i) Except as set forth in Schedule 3.20(t), no third party has, to
the knowledge of the Company, interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Company
Intellectual Property.
(ii) Except as set forth in Schedule 3.20(t), the Company has not
entered into any agreement to indemnify any other person against any charge
of infringement of any Third Party Intellectual Property or Third Party
Patent Rights, other than in connection with those items set forth in the
Scheduled In-Bound Intellectual Property, the Company Material Contracts
and the Scheduled Out-Bound Intellectual Property.
(iii) The Company is not, as a result of the execution and delivery of
this Agreement or the performance of its obligations under this Agreement
or as a result of the transactions contemplated hereby, nor will it be, as
a result of the execution and delivery of this Agreement or the performance
of its obligations under this Agreement or as a result of the transactions
contemplated hereby, in a material breach of any license, sublicense or
other agreement relating to the Scheduled In-Bound Intellectual Property.
(u) With respect to the Scheduled In-Bound Intellectual Property:
(i) to the Company's knowledge, each item of Scheduled In-Bound
Intellectual Property is legal, valid, binding, enforceable and in full
force and effect;
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(ii) to the Company's knowledge, each item of Scheduled In-Bound
Intellectual Property will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following the
Closing Date, except as otherwise might be stated in the terms of the
agreements set forth on Schedule 3.20(a); and
(iii) to the Company's knowledge, the Company is not in breach or
default in any material respects of any provisions of the Scheduled
In-Bound Intellectual Property and no event has occurred which with notice
or lapse of time or both would constitute a material breach or default by
the Company or permit termination, modification or acceleration thereunder,
and which with respect to each of the foregoing, could not be timely cured
by the Company.
SECTION 3.21 Software.
(a) To the extent developed, the Software is in machine readable form,
contains all current revisions of such Software and includes all computer
programs, systems, materials, storage media, know-how, object and source codes,
other written materials, know-how and processes related to the Software.
(b) Except as set forth in Schedule 3.21(b), to the Company's knowledge, no
employee, consultant, officer, director or other contractor of the Company is,
or is now expected to be, in material default under any term of any employment
contract, agreement or arrangement relating to the Software or noncompetition
arrangement, or any other Company Material Contract or any restrictive covenant
relating to the Software or its development or exploitation. Except as set forth
on Schedule 3.21(b) and except for consultants and independent contractors under
written obligation to assign ownership of the results of their efforts to the
Company, the Software was developed entirely by the employees of the Company
during the time they were employees of the Company, and the Company has made
reasonable efforts to ensure that such Software does not include any (i)
inventions, works of authorship, derivatives or contributions of such employees
made prior to the time such employees became employees of the Company or (ii)
intellectual property of any previous employer of such employee.
(c) Except as set forth on Schedule 3.21(c) or as otherwise set forth on
Schedule 3.20(n), all right, title and interest in and to the Software is owned
by the Company, free and clear of all Liens, is fully transferable to the
Surviving Corporation, and no person other than the Company has any interest in
the Software, including, any security interest, license, contingent interest or
otherwise. Development, use, sale or exploitation of any of the Software
material to the conduct of the business by the Surviving Corporation will not be
restricted by, interfere with, infringe upon, or misappropriate any Third Party
Intellectual Property right by virtue of any change of control or prohibition of
assignment provisions in agreements between the Company and any third party,
except as otherwise might be stated in the terms of the agreements set forth on
Schedule 3.20(a). The Company has not received any communication alleging such a
violation. Except as set forth on Schedules 3.20(a) and 3.20(b) and with regard
to those contractors listed on Schedule 3.12(a) (as applicable), the Company
does not have any obligation to compensate any other person for the development,
use, sale or exploitation of the Software nor has the Company granted to any
other person any license, option or other rights to develop, use, sell or
exploit in any manner the Software whether requiring the payment of royalties or
not.
(d) Except as set forth on Schedule 3.21(d), the Company has kept secret
and has not disclosed the source code for the Software to any person other than
certain employees of the Company who are subject to the terms of a binding
confidentiality agreement in respect thereof. The Company has taken all
appropriate measures to protect the confidential and proprietary nature of the
Software, including the use of confidentiality agreements with all of its
employees having access to the Software source and object code. To the Company's
knowledge, except as set forth on Schedule 3.20(c), there have been no patents
applied for and to the Company's knowledge, no copyrights registered for any
part of the Software, except for those owned by the Company. There are no
trademark rights of any person in the Software, except for those owned by the
Company.
(e) A complete, up to date copy of the Software, to the extent developed,
in both source code and object code form, is available and will be available
following the Closing.
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SECTION 3.22 HSR Matters. No person owns (or at the Effective Time will
own) 50% or more of the voting securities of the Company or has (or at the
Effective Time will have) the right to designate 50% or more of the members of
the board of directors of the Company. The Company does not have as of June 30,
2000 (the date of the Company's most recent regularly prepared balance sheet),
and will not have as of the date of any regularly prepared balance sheet
prepared prior to the Effective Time, annual net sales or total assets of $10.0
million or more.
SECTION 3.23 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission or expense reimbursement
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company or any of its affiliates.
SECTION 3.24 Product Liability; Recalls.
(a) (i) The Company has not received any written notice, demand, claim, or
inquiry (collectively, "NOTICES") and there is no action, suit, hearing,
proceeding or investigation, of a civil, criminal or administrative nature
pending, or to the Company's knowledge, threatened before any Governmental
Entity in which a Product is alleged to have a Defect or relating to or
resulting from any alleged failure to warn or from any alleged breach of express
or implied warranties or representations, nor, to the Company's knowledge, is
there any valid basis for any such demand, claim, action, suit, inquiry,
hearing, proceeding, notice of violation or investigation; (ii) no Notice would,
if adversely determined, have, individually or in the aggregate, a Material
Adverse Effect on the Company; (iii) there has not been any recall, rework,
retrofit or post-sale general consumer warning (collectively, "RECALLS") of any
Product, or, to the knowledge of the Company, any investigation or consideration
of or decision made by any person concerning whether to undertake or not to
undertake any Recalls and the Company has received no Notices from any
Governmental Entity or any other person in respect of the foregoing; and (iv)
there are currently no material Defects in design, manufacturing, materials or
workmanship, including, any failure to warn, or any breach of express or implied
warranties or representations, which involve any Product that accounts for a
material portion of the Company's sales.
(b) As used herein, (i) "DEFECT" means a defect or impurity of any kind,
whether in design, manufacture, processing, or otherwise, including, any
dangerous propensity associated with any reasonably foreseeable use of a
Product, or the failure to warn of the existence of any defect, impurity or
dangerous propensity; and (ii) "PRODUCT" means any product designed,
manufactured, shipped, sold, marketed, distributed and/or otherwise introduced
into the stream of commerce by or on behalf of the Company.
SECTION 3.25 Customers, Suppliers and Vendors. Schedule 3.25 sets forth
(a) a list of the five largest customers of the Company based on sales during
the fiscal year ended December 31, 1999, and the six months ended June 30, 2000,
and (b) a list of the ten largest suppliers and vendors of the Company based on
purchases during the fiscal year ended December 31, 1999, and the six months
ended June 30, 2000. Since December 31, 1999, there has not been any material
adverse change in the business relationship of the Company with any customer,
supplier or vendor named in Schedule 3.25, and, except as set forth on Schedule
3.25, to the Company's knowledge, there will be no such material adverse change
in the future either as a result of the consummation of the transactions
contemplated by this Agreement or otherwise.
SECTION 3.26 Compliance with Laws. Except as set forth on Schedule 3.26
hereto, the Company is complying and has complied in all material respects with
all Laws, statutes, rules, regulations, codes and ordinances applicable to its
business, properties and operations, and has secured all necessary permits,
authorizations and licenses issued by federal, state, local and foreign agencies
and authorities, applicable to its business, properties and operations. Except
with respect to incidents of noncompliance that have been corrected, the Company
has not received any notice alleging a failure to so comply or to secure such a
permit, authorization or license nor, to the knowledge of the Company, is there
any inquiry, investigation or proceeding relating thereto.
SECTION 3.27 Takeover Statute. The Company has taken all action required
to be taken by it in order to exempt this Agreement and the transactions
contemplated hereby from, and this Agreement and
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the transactions contemplated hereby are exempt from, the requirements of any
"moratorium," "control share," "fair price," "affiliate transaction," "business
combination" or other anti-takeover Laws of Delaware (each, a "TAKEOVER
STATUTE").
SECTION 3.28 Minute Books; Stock Record Books. True and correct copies of
the Company's minute books and stock record books have been provided to IOI. The
minute books of the Company contain true and complete originals or copies of all
minutes of meetings of and actions by the shareholders, Board of Directors and
all committees of the Board of Directors of the Company, and accurately reflect
in all material respects all corporate actions of the Company which are required
by Law to be passed upon by the Board of Directors or shareholders of the
Company. The stock record books accurately reflect all transactions in shares of
the Company's capital stock.
SECTION 3.29 Bank Accounts; Powers of Attorney. Schedule 3.29 hereto sets
forth a complete and correct list showing: (i) all banks in which the Company
maintains a bank account or safe deposit box (collectively, "COMPANY BANK
ACCOUNTS"), together with, as to each such Company Bank Account, the account
number, the names of all signatories thereof and the authorized powers of each
such signatory and, with respect to each such safe deposit box, the number
thereof and the names of all persons having access thereto; and (ii) the names
of all persons holding powers of attorney from the Company, true and correct
copies thereof which have been delivered to IOI.
SECTION 3.30 Books and Records; Computer Network.
(a) Except as subcontracted pursuant to the Company Material Contracts, all
of the records, data, information, databases, systems and controls maintained,
operated or used by the Company in connection with the conduct or administration
of its business (including all means of access thereto and therefrom) are
located on the premises of the Company and are under the exclusive ownership or
direct control of the Company.
(b) Except as set forth in the Company Material Contracts, the Company has
not provided access to any third party (other than contractors or consultants
providing direct services to the Company) to the data contained on the file
servers or other storage devices of the Company's general computer network, and
there is no agreement, contract or understanding between the Company and a third
party that gives a third party (other than contractors or consultants providing
direct services to the Company) the right to access the data contained on the
file servers or other storage devices of the Company's general computer network
or, following the Closing, any computer network of the Surviving Corporation.
SECTION 3.31 Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion in (i) the S-4 (as hereinafter
defined), at the time the S-4 is filed with the SEC and upon effectiveness of
the S-4 will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the S-4 will, at the date mailed to
shareholders, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading or (iii) the Joint Proxy Statement/Prospectus (as hereinafter
defined), at the date it is first mailed to the Company's shareholders or at the
time of the Company's shareholder meeting contemplated by Section 6.2, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter thereof which has become misleading. If at any time prior to the
Effective Time any event in respect of the Company or its officers and directors
should occur which is required to be described in an amendment of, or a
supplement to, the S-4, the Company shall promptly so advise IOI and such event
shall be so described, and the Company shall cooperate in the prompt filing of
such amendment or supplement with the SEC, and, as required by Law, shall
promptly disseminate such amendment or supplement to the shareholders of the
Company.
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SECTION 3.32 Export Control Laws. The operations of the Company have been
and are in material compliance with all export control Laws and the Company has
obtained all material licenses, authorizations or similar approvals required
under applicable export control Laws.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IOI
Except as set forth in the disclosure schedules attached hereto, each of
which specifically references the Section below to which it states an exception,
IOI hereby represents and warrants to the Company as follows (with the
understanding that the Company is relying materially on each such representation
and warranty in entering into and performing this Agreement). For purposes of
this Agreement, references to the "IOI COMPANIES" shall mean, collectively, IOI
and the subsidiaries of IOI listed on Schedule 4.1(b) hereto.
SECTION 4.1 Organization and Qualification; Subsidiaries.
(a) Except as disclosed on Schedule 4.1(a) hereto, each of the IOI
Companies is a corporation duly organized, validly existing and in good standing
under the Laws of the jurisdiction of its incorporation and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its businesses as now conducted and proposed to be conducted, except
where the failure to be duly organized, existing and in good standing or to have
such power and authority could not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on IOI.
(b) Except as disclosed on Schedule 4.1(b) hereto, IOI does not own,
directly or indirectly, beneficially or of record, any shares of capital stock
or other securities of any entity or any investment in any entity.
(c) Except as disclosed on Schedule 4.1(c) hereto, each of the IOI
Companies is duly qualified or licensed and in good standing to do business in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing does not have and could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on IOI.
(d) IOI has heretofore made available to the Company accurate and complete
copies of the articles of incorporation and bylaws of each of the IOI Companies
as currently in effect.
SECTION 4.2 Capitalization of IOI. The authorized capital stock of IOI
consists of: (i) 50,000,000 shares of IOI Common Stock and (ii) 10,000,000
shares of Preferred Stock, par value $0.01 per share, of which 26,000 shares are
designated Series A Preferred Stock and 400,000 shares are designated Series B
Preferred Stock. As of the date hereof, there are issued and outstanding
30,030,491 shares of IOI Common Stock (including 437,750 treasury shares) and no
shares of Preferred Stock. All of the issued and outstanding shares of IOI
Common Stock have been validly issued, and are duly authorized, fully paid,
non-assessable and free of preemptive, maintenance or similar rights. As of the
date hereof, 1,073,000 shares of IOI Common Stock are reserved for issuance and
issuable upon or otherwise deliverable in connection with the exercise of
outstanding stock options issued pursuant to the IOI stock option plans and
5,000,000 shares of IOI Common Stock are reserved for issuance and issuable upon
or otherwise deliverable in connection with the exercise of outstanding
warrants. Except as set forth on Schedule 4.2, since August 29, 2000, no shares
of IOI's capital stock have been issued other than pursuant to IOI stock options
already in existence on such date. Except as set forth above or on Schedule 4.2,
as of the date hereof, there are no outstanding (i) shares of capital stock or
other voting securities of IOI; (ii) securities of IOI convertible into or
exchangeable for shares of capital stock or voting securities of IOI; (iii)
options or other rights to acquire from IOI, and no obligations of IOI to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of IOI; and (iv) equity
equivalents, interests in the ownership or earnings of IOI or other
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similar rights (including stock appreciation rights) (collectively, "IOI
SECURITIES"). Except as set forth on Schedule 4.2, there are no outstanding
obligations of IOI to repurchase, redeem or otherwise acquire any IOI
Securities. There are no shareholder agreements, voting trusts or other
agreements to which IOI is a party or to which it is bound relating to the
voting of any shares of capital stock of IOI (other than the IOI Voting
Agreement). Schedule 4.2 sets forth true and complete information regarding the
current exercise price, the date of grant and the number of IOI stock options
granted for each holder of IOI stock options.
SECTION 4.3 Authority Relative to This Agreement; Consent and Approvals.
(a) IOI has all necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
No other corporate proceedings on the part of IOI are necessary to authorize
this Agreement or to consummate the transactions contemplated hereby (other
than, in respect of the Merger and this Agreement, the IOI Requisite Vote (as
hereinafter defined)). This Agreement has been duly and validly executed and
delivered by IOI and constitutes a valid, legal and binding agreement of IOI,
enforceable against IOI in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors' rights generally and (ii) general principles of equity.
(b) The Board of Directors of IOI (the "IOI BOARD") has duly and validly
authorized the execution and delivery of this Agreement and approved the
consummation of the transactions contemplated hereby, and taken all corporate
actions required to be taken by the IOI Board for the consummation of the
transactions, including the Merger, contemplated hereby and has resolved (i)
this Agreement and the transactions contemplated hereby, including the Merger,
taken together, to be advisable and fair to, and in the best interests of, IOI
and its shareholders; and (ii) to recommend that the shareholders of IOI approve
and adopt this Agreement. The affirmative approval of the holders of shares of
IOI Common Stock representing a majority of the votes that may be cast by the
holders of all outstanding shares of IOI Common Stock (voting as a single
class), as of the record date set by the IOI Board for the vote of IOI's
shareholders (the "IOI REQUISITE VOTE"), are the only actions of the holders of
any class or series of capital stock of IOI necessary to adopt this Agreement
and approve the transactions contemplated hereby, including the Merger.
SECTION 4.4 Financial Statements; Accounts Receivable.
(a) IOI has delivered to the Company (i) copies of the audited balance
sheets of the IOI Companies as of December 31, 1999, together with the related
audited statements of income, shareholders' equity and changes in cash flow for
the fiscal year ended December 31, 1999, and the notes thereto, and (ii) copies
of the unaudited balance sheet of the IOI Companies, as of June 30, 2000 (the
"IOI INTERIM BALANCE SHEET"), together with the related unaudited consolidated
statements of income and changes in cash flow for the six-month period ended on
such date (such audited financial statements and unaudited interim financial
statements being hereinafter referred to as the "IOI FINANCIAL STATEMENTS"). The
IOI Financial Statements, including the notes thereto, (A) were prepared in
accordance with generally accepted accounting principals applied on a consistent
basis ("GAAP") throughout the periods covered thereby, and (B) present fairly in
all material respects the financial position, results of operations and changes
in cash flow of the IOI Companies as of such dates and for the periods then
ended (subject, in the case of the unaudited interim IOI Financial Statements,
to normal year-end audit adjustments, which are not in the aggregate material,
and the absence of notes).
(b) The accounts receivable of the IOI Companies as set forth on the IOI
Interim Balance Sheet or arising since the date thereof are valid and genuine;
have arisen solely out of bona fide sales and deliveries of goods, performance
of services and other business transactions in the ordinary course of business
consistent with past practice; to IOI's knowledge, are not subject to valid
defenses, set-offs or counterclaims; and are, except as disclosed on Schedule
4.4(b) hereto, collectible at the full recorded amount thereof less, in the case
of accounts receivable appearing on the IOI Interim Balance Sheet, the recorded
allowance for collection of doubtful accounts on the IOI Interim Balance Sheet.
The allowance
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for collection of doubtful accounts on the IOI Interim Balance Sheet has been
determined in accordance with GAAP consistent with past practice.
SECTION 4.5 No Undisclosed Liabilities. There are no liabilities of any
of the IOI Companies of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, other than: (a) liabilities
disclosed, provided for or reserved against in the IOI Financial Statements; (b)
liabilities arising in the ordinary course of business after the date of the IOI
Interim Balance Sheet, which are not material to the financial position of IOI;
(c) liabilities arising under this Agreement; and (d) those liabilities
described on Schedule 4.5 hereto.
SECTION 4.6 Absence of Changes. Since June 30, 2000, each of the IOI
Companies has conducted its business in the ordinary and usual course consistent
with past practice and there has not been:
(a) any event, occurrence or development which has had or could
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on IOI;
(b) except as disclosed on Schedule 4.6(b) hereto, any declaration,
setting aside or payment of any dividend or other distribution in respect
of any shares of capital stock of IOI, or any repurchase, redemption or
other acquisition by IOI of any IOI Common Stock;
(c) any amendment of any term of any outstanding security of IOI that
would materially increase the obligations of IOI under such security;
(d) (i) any incurrence or assumption by any of the IOI Companies of
any indebtedness for borrowed money (or any renewals, replacements, or
extensions that increase the aggregate commitments thereunder) except (A)
in the ordinary and usual course of business consistent with past practice
or (B) in connection with any capital expenditure permitted by Section 5.2,
or (ii) any guarantee, endorsement, or other incurrence or assumption of
liability (whether directly, contingently or otherwise) by any of the IOI
Companies for the obligations of any other person;
(e) any creation or assumption by any of the IOI Companies of any
material Lien on any material asset of any of the IOI Companies other than
Permitted Liens;
(f) any making of any loan, advance or capital contribution to or
investment in any person by any of the IOI Companies other than loans or
advances to employees, contractors or consultants of the IOI Companies made
in the ordinary and usual course of business consistent with past practice;
(g) (i) any contract or agreement entered into by any of the IOI
Companies on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (ii) any
modification, amendment, assignment, termination or relinquishment by any
of the IOI Companies of any contract, license or other right (including any
insurance policy naming it as a beneficiary or a loss payable payee) that
does or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on IOI, other than those contemplated
by this Agreement and those set forth on Schedule 4.6(g)hereto;
(h) any material change in any method of accounting or accounting
principles or practice by any of the IOI Companies, except for any such
change required by reason of a change in GAAP;
(i) any (i) grant of any severance or termination pay to any director,
officer, employee, consultant or contractor of any of the IOI Companies
(other than as disclosed on Schedule 4.6(i) hereto); (ii) entering into of
any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer,
employee, consultant or contractor of any of the IOI Companies; (iii)
increase in benefits payable under any existing severance or termination
pay policies or employment agreements; or (iv) increase in compensation,
bonus or other benefits payable to directors, officers, employees,
consultants or contractors of any of the IOI Companies other than, in the
case of clause (iv) only, increases prior to the date hereof in
compensation, bonus or other benefits payable to employees, consultants or
contractors of the IOI Companies in the ordinary and usual course of
business consistent with past practice or merit
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increases in salaries of employees, consultants or contractors at regularly
scheduled times in customary amounts consistent with past practices;
(j) any adoption, entering into, amendment, alteration or termination
of (partially or completely) any IOI Benefit Plan or IOI Employee
Arrangement (both as hereinafter defined) except as contemplated by this
Agreement or to the extent required by applicable Law;
(k) any entering into of any contract with an officer, director,
employee, consultant, contractor, agent or other similar representative of
any of the IOI Companies that (i) is not terminable, without penalty or
other liability, upon not more than 60 calendar days' notice or (ii)
involves payments in excess of $50,000;
(l) any (i) making or revoking of any material election relating to
Taxes, (ii) settlement or compromise of any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, or (iii) change to any material methods of reporting
income or deductions for federal income tax purposes;
(m) except as disclosed on Schedule 4.6(m) hereto, any capital
expenditures in excess of $10,000 individually and in excess of $50,000 in
the aggregate;
(n) except as disclosed on Schedule 4.6(n) hereto, any lease, license
or grant to any person of any rights in any of the IOI Companies' assets or
properties;
(o) any revaluation of any of the IOI Companies' assets;
(p) any discharge or satisfaction of any Lien or payment of any
obligation or liability, absolute or contingent, other than (i) current
liabilities incurred and paid in the ordinary course of business and (ii)
items disclosed on Schedule 4.6(p) hereto;
(q) any failure to pay any accounts payable of the IOI Companies in
accordance with their terms;
(r) except as disclosed on Schedule 4.6(r) hereto, any acceleration of
the collection of, or sale or other transfer of, any accounts receivable of
any of the IOI Companies;
(s) any cancellation, waiver, release or forgiveness of any debts or
obligations of, or rights or claims against, third parties;
(t) any amendment of the articles of incorporation or bylaws of any of
the IOI Companies;
(u) any investment in any Person;
(v) any sufferance of any material damage, destruction or loss
(whether or not covered by insurance) to any material assets of any of the
IOI Companies;
(w) any strike, slowdown or demand for recognition by a labor
organization by or with respect to any of the employees of any of the IOI
Companies;
(x) except as disclosed on Schedule 4.6(x) hereto, any stock option
grants or grants or sales of restricted stock that have not been disclosed
to the Company in writing;
(y) except as disclosed on Schedule 4.6(y) hereto, any hiring or
termination of any employee, consultant or contractor that has not been
disclosed to the Company in writing; or
(z) any contracting with or terminating any consultant that has not
been disclosed to the Company in writing.
SECTION 4.7 Consents and Approvals. Except for filings, permits,
authorizations, consents, and approvals as may be required under, and other
applicable requirements of, the Securities Act, the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), state securities or blue sky laws, and
the filing and recordation of the Articles of Merger as required by Texas Law
and the Certificate of
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Merger as required by Delaware Law, no filing with or notice to, and no permit,
authorization, consent, or approval of, any Governmental Entity is necessary for
the execution and delivery by IOI of this Agreement or the consummation by IOI
of the transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents, or approvals or to make such filings or give
such notice do not or would not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on IOI.
SECTION 4.8 No Default. None of the IOI Companies is in violation of any
term of (i) its articles of incorporation or bylaws (or other similar
organizational or governing documents), (ii) any IOI Material Contract (as
hereinafter defined), or (iii) any Law applicable to such IOI Company or any of
its assets or properties, the consequence of which violation (A) has had or
would reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on IOI or (B) has prevented or would reasonably be
expected to prevent or materially delay the performance of this Agreement by
IOI. Except as set forth on Schedule 4.8, the execution, delivery, and
performance of this Agreement by IOI and the consummation of the transactions
contemplated hereby will not (X) result in any violation of or conflict with,
constitute a default under, require any consent, waiver or notice under any term
of, or result in the reduction or loss of any benefit or the creation or
acceleration of any right or obligation under, (i) the articles of incorporation
or bylaws of any of the IOI Companies, (ii) any IOI Permit (as hereinafter
defined) or IOI Material Contract, or (iii) any Law applicable to any IOI
Company or any of its assets or properties, or (Y) result in the creation of (or
impose any obligation on any of the IOI Companies to create) any Lien (other
than Permitted Liens) upon any of the assets or properties of any of the IOI
Companies pursuant to any such term, excluding from clauses (X)(ii) and (iii)
and (Y) such events as would not have a Material Adverse Effect on IOI.
SECTION 4.9 Real Property.
(a) None of the IOI Companies presently owns nor has it owned in the past
any real property, except as set forth on Schedule 4.9(a) hereto.
(b) Schedule 4.9 sets forth all leases, subleases and other agreements (the
"IOI REAL PROPERTY LEASES") under which any of the IOI Companies is a party or
pursuant to which any IOI Company uses or occupies or has the right to use or
occupy, now or in the future, any real property (the "IOI LEASED PROPERTY").
(i) IOI has heretofore delivered to the Company true, correct and
complete copies of all IOI Real Property Leases (and all modifications,
amendments and supplements thereto and all side letters to which any of the
IOI Companies is a party affecting the obligations of any party
thereunder).
(ii) Each IOI Real Property Lease constitutes the valid and legally
binding obligation of the applicable IOI Company, enforceable in accordance
with its terms, and is in full force and effect.
(iii) All rent and other sums and charges payable by the IOI Companies
as tenants under each IOI Real Property Lease are current and no
termination event or condition or uncured default of a material nature on
the part of any of the IOI Companies or the landlord exists under any IOI
Real Property Lease.
(iv) Each of the IOI Companies has a good and valid leasehold interest
in each parcel of real property leased by it free and clear of all Liens,
except (i) Taxes and general and special assessments not in default and
payable without penalty and interest, and (ii) Permitted Liens.
(v) Except as disclosed on Schedule 4.9(b)(v) hereto, none of the IOI
Companies has assigned, transferred, conveyed, mortgaged, deeded in trust
or encumbered its leasehold interest in the IOI Leased Property.
(vi) No party to any such IOI Real Property Lease has given notice to
any of the IOI Companies of or made a claim against any of the IOI
Companies in respect of any breach or default thereunder.
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(vii) All facilities located in or benefiting the IOI Leased Property
are in good operating condition and repair, and are structurally sound and
free of defects, with no material alterations or repairs required thereto
under applicable laws, permits or insurance company requirements. All such
facilities are supplied with utilities and other services necessary for the
operation of such facilities, including gas, electricity, water, telephone,
sanitary sewer and storm sewer, all of which services are adequate to the
conduct of the IOI Companies' business.
SECTION 4.10 Litigation. Except as set forth on Schedule 4.10 hereto,
there is no suit, claim, action, proceeding or investigation pending or, to
IOI's knowledge, threatened against any of the IOI Companies or any of its
assets or properties which (a) has had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on IOI or (b)
questions the validity of this Agreement or any action to be taken by IOI in
connection with the consummation of the transactions contemplated hereby or
could otherwise prevent or materially delay the consummation of the transactions
contemplated by this Agreement. None of the IOI Companies is subject to any
outstanding order, writ, injunction or decree which has had or could reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on IOI. There is no action, suit, proceeding or investigation pending or, to
IOI's knowledge, threatened against any current or former officer, director,
employee, consultant, contractor or agent of any of the IOI Companies (in his or
her capacity as such) which gives rise or could reasonably be expected to give
rise to a claim for contribution or indemnification against any of the IOI
Companies.
SECTION 4.11 Permits. Each of the IOI Companies holds, and has at all
times held, all permits, licenses, variances, exemptions, orders, and approvals
of all Governmental Entities necessary for the lawful conduct of its business
(the "IOI PERMITS"). Each of the IOI Companies is in material compliance with
the terms of the IOI Permits, as applicable. No investigation or review by any
Governmental Entity in respect of any of the IOI Companies is pending or, to
IOI's knowledge, threatened, nor has any of the IOI Companies received notice
from any Governmental Entity of its intention to conduct the same.
SECTION 4.12 Employee Plans.
(a) Schedule 4.12(a) sets forth a true, correct and complete list of:
(i) all "employee benefit plans," as defined in Section 3(3) of ERISA
(the "IOI BENEFIT PLANS");
(ii) all employees, consultants, independent contractors and leased
employees of the IOI Companies; and
(iii) all employment, consulting, termination, severance, change of
control, individual compensation or indemnification agreements, and all
bonus or other incentive compensation, deferred compensation, salary
continuation, disability, severance, stock award, stock option, stock
purchase, educational assistance, legal assistance, club membership,
discount, loan, credit union or vacation agreements, policies or
arrangements under which any IOI Company has any obligation or liability
(contingent or otherwise) in respect of any current or former officer,
director, employee, consultant, leased employee or contractor of any IOI
Company (the "IOI EMPLOYEE ARRANGEMENTS").
(b) In respect of each IOI Benefit Plan and IOI Employee Arrangement, a
complete and correct copy of each of the following documents (if applicable) has
been made available to the Company: (i) each of the stock option grant
agreements used to make grants under the IOI stock option plans, and all
amendments thereto; and (ii) each written employment, consulting or individual
severance or other compensation agreement, and all amendments thereto.
(c) All contributions or other payments required to have been made by the
IOI Companies to or under any IOI Benefit Plan or IOI Employee Arrangement by
applicable Law or the terms of such IOI Benefit Plan or IOI Employee Arrangement
(or any agreement relating thereto) have been timely and properly made.
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(d) The IOI Benefit Plans and IOI Employee Arrangements have been
maintained and administered in all material respects in accordance with their
terms and applicable Laws. In particular, no individual who has performed
services for any of the IOI Companies has been improperly excluded from
participation in any IOI Benefit Plan or IOI Employee Arrangement.
(e) There are no pending or, to IOI's knowledge, threatened actions,
claims, or proceedings against or relating to any IOI Benefit Plan or IOI
Employee Arrangement (other than routine benefit claims by persons entitled to
benefits thereunder), and, to the knowledge of IOI, there are no facts or
circumstances which could form the basis for any of the foregoing.
(f) Except as set forth on Schedule 4.12(f) hereto, none of the IOI
Companies has any obligation or liability (contingent or otherwise) to provide
post-retirement life insurance or health benefits coverage for current or former
officers, directors, employees, consultants, contractors or leased employees of
the IOI Companies except (i) as may be required under Part 6 of Title I of ERISA
at the sole expense of the participant or the participant's beneficiary or (ii)
through the last day of the calendar month in which the participant terminates
employment with the applicable IOI Company.
(g) Except as set forth in Schedule 4.12(g), neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment becoming due to any employee, consultant,
contractor or leased employee (current, former, or retired) of any of the IOI
Companies, (ii) increase any benefits under any IOI Benefit Plan or IOI Employee
Arrangement or (iii) result in the acceleration of the time of payment of,
vesting of, or other rights in respect of any such benefits.
(h) IOI has delivered to the Company a true and correct list of the
following for each employee, consultant, contractor and leased employee of the
IOI Companies: base salary, any bonus obligations, immigration status, hire
date, time-off balance, pay rate and termination provisions.
SECTION 4.13 Labor Matters.
(a) None of the IOI Companies is a party to any labor or collective
bargaining agreement, and no employees of any of the IOI Companies are
represented by any labor organization. Within the preceding three years, there
have been no representation or certification proceedings, or petitions seeking a
representation proceeding, pending or, to IOI's knowledge, threatened in writing
to be brought or filed with the National Labor Relations Board or any other
labor relations tribunal or authority. Within the preceding three years, to
IOI's knowledge, there have been no organizing activities involving any of the
IOI Companies in respect of any group of employees of any of the IOI Companies.
(b) There are no strikes, work stoppages, slowdowns, lockouts, material
arbitrations or material grievances or other material labor disputes pending or,
to the knowledge of IOI, threatened against or involving any of the IOI
Companies. There are no unfair labor practice charges, grievances or complaints
pending or, to IOI's knowledge, threatened by or on behalf of any employee or
group of employees of any of the IOI Companies which, if individually or
collectively resolved against any of the IOI Companies, would have a Material
Adverse Effect on IOI, and, to the knowledge of IOI, there are no facts or
circumstances which could form the basis for any of the foregoing.
(c) Except as set forth on Schedule 4.13(c) hereto, there are no
complaints, charges or claims against any of the IOI Companies pending or, to
IOI's knowledge, threatened to be brought or filed with any Governmental Entity
or arbitrator based on, arising out of, in connection with, or otherwise
relating to the employment or termination of employment of any individual by any
of the IOI Companies, and, to the knowledge of IOI, there are no facts or
circumstances which could form the basis for any of the foregoing.
(d) Each of the IOI Companies is in material compliance with all Laws
relating to the employment of labor, including all such Laws relating to wages,
hours, WARN, collective bargaining, discrimination, civil rights, safety and
health, workers' compensation and the collection and payment of withholding
and/or Social Security Taxes and any similar Tax.
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(e) There has been no "mass layoff" or "plant closing" as defined by WARN
in respect of any of the IOI Companies within the six months prior to the date
hereof.
SECTION 4.14 Environmental Matters.
(a) The operations of the IOI Companies have been and are in compliance in
all material respects with all Environmental Laws, and none of the IOI Companies
is aware of any facts, circumstances or conditions, which without significant
capital expenditures would prevent material compliance in the future;
(b) Each of the IOI Companies has obtained and maintains all permits,
authorizations, licenses or similar approvals required under applicable
Environmental Laws for its property (whether real or personal, owned or leased)
and for the continued operations of its business;
(c) None of the IOI Companies is subject to any outstanding written orders,
contracts or agreements with any Governmental Entity respecting Environmental
Laws, or with any Governmental Entity or other person respecting (A) any
Remedial Action, (B) any Release or threatened Release of a Hazardous Material
or (C) an assumption of responsibility for environmental claims of another
entity;
(d) None of the IOI Companies has received any written communication
alleging, in respect of any such party, the violation of or liability (real or
potential) under any Environmental Law or requesting with respect to any such
party information with respect to an investigation pursuant to CERCLA, or any
foreign or state counterpart thereto, or any other Environmental Law;
(e) The operations of the IOI Companies do not now involve, nor to IOI's
knowledge, have ever involved in the past, transportation, treatment, storage or
disposal of hazardous waste, as defined and regulated under 40 C.F.R. Parts
260-270 (in effect as of the date of this Agreement) or any state equivalent or
the generation of hazardous waste in quantities that prevent the IOI Companies
from qualifying as conditionally exempt small-quantity generators under 40
C.F.R. sec. 261.5;
(f) To IOI's knowledge, there is not now, nor has there been in the past,
on or in any property owned, leased or operated by any of the IOI Companies any
of the following for which any IOI Company could reasonably expect to incur
material Environmental Costs and Liabilities: (A) any Remedial Action or on-site
Release of solid waste (as defined pursuant to the Resource Conservation and
Recovery Act 42 USC sec. 6901 et. seq.) or Hazardous Materials, (B) any friable
asbestos-containing materials that are known by IOI not to be managed under an
operations and maintenance program by the owner of such property, (C) any
polychlorinated biphenyls other than PCBs in light ballasts and in electrical
equipment owned by the utility company, (D) a material Release of Hazardous
Materials or (E) any site on or nominated for the National Priority List
promulgated pursuant to CERCLA or any foreign or state remedial priority list
promulgated or published pursuant to any comparable foreign or state Law;
(g) No judicial or administrative proceedings are pending or, to IOI's
knowledge, threatened against any of the IOI Companies alleging the violation of
or seeking to impose liability pursuant to any Environmental Law and there are,
to IOI's knowledge, no investigations pending or threatened against any of the
IOI Companies under Environmental Laws;
(h) IOI has provided the Company with copies of all environmentally related
assessments, audits, investigations, sampling or similar reports in its
possession relating to the IOI Companies or any real property currently or
formerly owned, operated or leased by or for the IOI Companies; and
(i) Each of the IOI Companies has made all filings, reports and notices
required under Environmental Laws for the current operations of its business.
SECTION 4.15 Tax Matters.
(a) IOI and each affiliated group (within the meaning of Section 1504 of
the Code) of which IOI is or has been a member, has timely filed all material
Tax Returns required to be filed by it with the appropriate taxing authorities
in all jurisdictions in which such Tax Returns are required to be filed. All
such Tax Returns are true, complete and correct in all material respects. Each
of the members of the IOI Consolidated Group (as defined below) has paid all
Taxes due for all periods of its existence. The most
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recent IOI Financial Statements for the periods ended December 31, 1999 and June
30, 2000 reflect an adequate reserve for all Taxes payable by the members of the
IOI Consolidated Group for all taxable periods and portions thereof through the
date of such IOI Financial Statements. IOI has previously delivered to the
Company true and complete copies of (i) all federal, state, local and foreign
Tax Returns filed by the members of the IOI Consolidated Group relating to the
taxable periods of each member of the IOI Consolidated Group since December 31,
1996; and (ii) any audit report issued (or otherwise in respect of any audit,
investigation or proceeding in progress) relating to Taxes due from or in
respect of any of the members of the IOI Consolidated Group. For purposes of
this Agreement, references to the "IOI CONSOLIDATED GROUP" shall mean IOI and
each subsidiary included in the consolidated federal income tax return filed by
IOI as the common parent.
(b) No deficiencies for any Taxes have been proposed, asserted, or assessed
against IOI that have not been fully paid or adequately provided for in the IOI
Financial Statements. No requests for waivers of the time to assess any Taxes
have been executed, filed or are pending (including, but not limited to, any
applicable statute of limitation). No power of attorney in respect of any Taxes
has been executed or filed with any taxing authority. No issues relating to
Taxes have been raised by the relevant federal, state, local or foreign taxing
authority during any presently pending or prior audit or examination.
(c) No Liens for Taxes exist in respect of any assets or properties of any
of the members of the IOI Consolidated Group.
(d) None of the members of the IOI Consolidated Group is a party to, bound
by, or has any obligation under any Tax sharing agreement, Tax indemnity
obligation, or similar agreement, arrangement, or practice in respect of Taxes
(whether or not written) (including any advance pricing agreement, closing
agreement, or other agreement relating to Taxes with any taxing authority).
(e) None of the members of the IOI Consolidated Group has taken, agreed to
take or will take any action that would prevent the Merger from constituting a
reorganization qualifying under the provisions of Section 368(a) of the Code.
(f) There are no employment, severance or termination agreements, other
compensation arrangements, IOI Benefit Plans or other contracts or agreements
currently in effect which provide for the payment of any amount (whether in cash
or property or the vesting of property) individually or collectively (either
alone or upon the occurrence of any additional or subsequent event), that could
give rise to a payment which is not deductible by reason of Section 280G of the
Code.
(g) Each of the members of the IOI Consolidated Group has complied in all
respects with all Laws applicable to the payment and withholding of Taxes and
has duly and timely withheld from employee salaries, wages and other
compensation and has paid over to the appropriate taxing authority all amounts
required to be so withheld and paid over for all periods under all applicable
Laws.
(h) None of the members of the IOI Consolidated Group has received any
written or oral notice of any pending audit or proceeding and no federal, state,
local, or foreign audits or other administrative proceedings or court
proceedings are presently pending in respect of any Taxes or Tax Returns of any
of the members of the IOI Consolidated Group. No issue has been raised by a
federal, state, local or foreign taxing authority in any current or prior
examination which, by application of the same or similar principles, could
reasonably be expected to result in a proposed deficiency for any subsequent
taxable period.
(i) None of the members of the IOI Consolidated Group has (i) in respect of
any assets or property held or acquired by it, filed a consent to the
application of Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by such member of the IOI
Consolidated Group; (ii) executed or entered into a closing agreement pursuant
to Section 7121 of the Code or any predecessor provision thereof or any similar
provision of state, local, or foreign Tax Law in respect of such member of the
IOI Consolidated Group; (iii) received or filed any requests for rulings or
determinations in respect of any Taxes within the last five years; or (iv)
extended the time within which to file any Tax Return, which Tax
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Return has since not been filed, or the assessment or collection of Taxes, which
Taxes have not since been paid.
(j) None of the members of the IOI Consolidated Group is currently, nor
have any of them been within the last five years, a "United States real property
holding company" within the meaning of Section 897(c) of the Code.
(k) No written claim has been made by a taxing authority in a jurisdiction
where the members of the IOI Consolidated Group do not file Tax Returns to the
effect that the members of the IOI Consolidated Group are or may be subject to
taxation by that jurisdiction.
(l) Except as disclosed on Schedule 4.15(l), all Tax Returns of the members
of the IOI Consolidated Group have been examined by and settled with the IRS or
the applicable state, local or foreign Tax authorities. All assessments for
Taxes due with respect to such completed and settled examinations or any
concluded litigation have been fully paid by the members of the IOI Consolidated
Group.
(m) None of the members of the IOI Consolidated Group has received any
private letter rulings from the IRS or comparable rulings from other taxing
authorities.
(n) None of the members of the IOI Consolidated Group has constituted
either a "distributing corporation" or a "controlled corporation" (within the
meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock
qualifying for tax-free treatment under Section 355 of the Code (i) in the two
years prior to the date of this Agreement or (ii) in a distribution which could
otherwise constitute part of a "plan" or "series of related transactions"
(within the meaning of Section 355(e) of the Code) in conjunction with the
Merger.
(o) There is no taxable income of any of the members of the IOI
Consolidated Group that will be reportable in a taxable period beginning after
the Closing Date that is attributable to a transaction (such as an installment
sale) that occurred prior to the Closing.
SECTION 4.16 Absence of Questionable Payments. None of the IOI Companies
nor, to IOI's knowledge, any director, officer, agent, employee, consultant,
contractor or other person acting on behalf of any of the IOI Companies, has
used any corporate or other funds for unlawful contributions, payments, gifts,
or entertainment, or made any unlawful expenditures relating to political
activity to government officials or others or established or maintained any
unlawful or unrecorded funds in violation of the Foreign Corrupt Practices Act
of 1977, as amended, or any other domestic or foreign Law. None of the IOI
Companies nor, to IOI's knowledge, any director, officer, agent, employee,
consultant, contractor or other person acting on behalf of any of the IOI
Companies, has accepted or received any unlawful contributions, payments, gifts
or expenditures.
SECTION 4.17 Material Contracts.
(a) Schedule 4.17 sets forth a list of all IOI Material Contracts. IOI has
heretofore made available to the Company true, correct and complete copies (or
if oral, written summaries) of all written or oral contracts and agreements (and
all amendments, modifications and supplements thereto, and all side letters to
which any of the IOI Companies is a party affecting the obligations of any party
thereunder) to which any of the IOI Companies is a party or by which any of its
assets or properties are bound that are material to the business, assets or
properties of the IOI Companies taken as a whole, including all: (i) employment,
severance, product design or development, personal services, consulting,
non-competition or indemnification contracts (including, any contract to which
any of the IOI Companies is a party involving employees, consultants or
contractors of any of the IOI Companies); (ii) licensing, merchandising or
distribution agreements; (iii) contracts granting a right of first refusal or
first negotiation; (iv) partnership or joint venture agreements; (v) agreements
for the acquisition, sale or lease of material assets or properties of any of
the IOI Companies (by merger, purchase or sale of assets or stock or otherwise);
(vi) contracts or agreements with any Governmental Entity; (vii) loan or credit
agreements, mortgages, indentures or other agreements or instruments evidencing
indebtedness for borrowed money by any of the IOI Companies or any such
agreement pursuant to which indebtedness for borrowed money may be incurred;
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(viii) agreements that purport to limit, curtail or restrict the ability of any
of the IOI Companies to compete in any geographic area or line of business; (ix)
agreements that require performance of services by specified (by name or job
function) employees, consultants or contractors of any of the IOI Companies; (x)
any other material contract, arrangement or understanding not made in the
ordinary course of business and consistent with past practice; and (xi)
commitments and agreements to enter into any of the foregoing (collectively,
together with any such contracts entered into in accordance with Section 5.2,
the "IOI MATERIAL CONTRACTS"). None of the IOI Companies is a party to or bound
by any severance or other agreement with any employee, consultant or contractor
pursuant to which such person would be entitled to receive any additional
compensation or an accelerated payment of compensation as a result of the
consummation of the transactions contemplated hereby.
(b) Each of the IOI Material Contracts constitutes the valid and legally
binding obligation of the applicable IOI Company, enforceable in accordance with
its terms, and is in full force and effect, except as may be limited by (i)
bankruptcy laws and other similar laws affecting creditors' rights generally and
(ii) general principles of equity. None of the IOI Companies is in breach or
default in any material respects of any provisions of any IOI Material Contract
and, to IOI's knowledge, no event has occurred which with notice or lapse of
time or both would constitute a material breach or default by any of the IOI
Companies or permit termination, modification or acceleration thereunder, and
which with respect to each of the foregoing, could not be timely cured by such
IOI Company.
(c) No party to any such IOI Material Contract has given notice to any of
the IOI Companies of or made a claim against any of the IOI Companies in respect
of any breach or default thereunder.
(d) No terms and conditions of any IOI Material Contract or other
arrangement or understanding between any of the IOI Companies and any other
Person in effect on the date of this Agreement prevent, delay or materially
restrict any IOI Company's ability to utilize any material portion of its assets
or resources as it deems appropriate and as it presently contemplates.
SECTION 4.18 Insurance. Schedule 4.18 sets forth a true and complete list
and brief summary description (including information on the premiums payable in
connection therewith and the scope and amount of the coverage provided
thereunder) of directors and officers liability and general liability insurance
policies maintained by the IOI Companies. Such policies have been issued by
insurers which, to IOI's knowledge, are reputable and financially sound and
provide coverage for the operations conducted by the IOI Companies of a scope
and coverage consistent with customary industry practice. Complete and correct
copies of each such policy have been delivered to the Company. All such policies
are in full force and effect and no notice of cancellation has been given with
respect to any such policy. All premiums due thereon have been paid in a timely
manner. Except as set forth on Schedule 4.18, there are no pending claims or, to
the knowledge of IOI, threatened claims, under any of such insurance policies.
SECTION 4.19 Subsidies. No grants, subsidies or similar arrangements
exist directly or indirectly between or among any of the IOI Companies, on the
one hand, and any domestic or foreign Governmental Entity or any other person,
on the other hand. None of the IOI Companies has requested, sought, applied for
or entered into any grant, subsidy or similar arrangement directly or indirectly
from or with any domestic or foreign Governmental Entity or any other person.
SECTION 4.20 Intellectual Property.
(a) As used in this Section 4.20, the term "SCHEDULED IN-BOUND INTELLECTUAL
PROPERTY" means, as it pertains to the IOI Companies, patent licenses from third
parties, software licenses from third parties (other than routine,
non-negotiated, shrink wrap or similar everyday licenses of the type commonly
available at reasonable cost to the industry in general), and know-how licenses
from third parties in effect as of the date hereof, set forth on Schedule
4.20(a).
(b) As used in this Section 4.20, the term "SCHEDULED OUT-BOUND
INTELLECTUAL PROPERTY" means, as it pertains to the IOI Companies, patent
licenses from the IOI Companies to third parties, software licenses from the IOI
Companies to third parties (other than routine, non-negotiated, shrink wrap or
similar everyday licenses of the type commonly available at reasonable cost to
the industry in general) and know-
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how licenses from the IOI Companies to third parties in effect as of the date
hereof, set forth on Schedule 4.20(b).
(c) As used in this Section 4.20, the term "PATENT RIGHTS" means, as it
pertains to the IOI Companies, issued domestic and foreign patents (including
design registrations and other government grants of rights to inventions),
patent applications (including provisional patents filed with the U.S. Patent
and Trademark Office) as of the date hereof, and IOI-approved invention
disclosures, set forth on Schedule 4.20(c).
(d) As used in this Section 4.20, the term "TRADEMARKS" means, as it
pertains to the IOI Companies, trade names, trademarks, trademark registrations
and applications, service marks, service mark registrations and applications,
and copyright registrations and applications and the goodwill of IOI's business
associated with the foregoing.
(e) As used in this Section 4.20 and in Section 4.21, the term "SOFTWARE"
means, as it pertains to the IOI Companies, all software developed by the IOI
Companies, either alone or jointly.
(f) As used in this Section 4.20, the term "COPYRIGHTS" means, as it
pertains to the IOI Companies, copyright registrations and applications, and
unregistered copyrights (including copyrights in software) owned by or licensed
to the IOI Companies.
(g) As used in this Section 4.20, the term "KNOW-HOW" means, as it pertains
to the IOI Companies, all trade secrets, know-how and confidential information,
other non-public proprietary technical and business information, proprietary
processes and formulae used in the business of the IOI Companies.
(h) As used in this Section 4.20 and in Section 4.21, the term "IOI
INTELLECTUAL PROPERTY" means the Scheduled In-Bound Intellectual Property,
Patent Rights, Trademarks, Software, Copyrights and Know-How.
(i) As used in this Section 4.20, the term "THIRD PARTY INTELLECTUAL
PROPERTY" means, with respect to a Person (other than the IOI Companies), all
trade names, trademarks, trademark registrations and applications, service
marks, service mark registrations and applications, copyright registrations and
applications, unregistered copyrights (including copyrights in software),
software, trade secrets, confidential know-how and information, other non-public
proprietary technical and business information, proprietary processes and
formulae used in the business of such person.
(j) As used in this Section 4.20, the term "THIRD PARTY PATENT RIGHTS"
means with respect to a Person (other than the IOI Companies), issued domestic
and foreign patents (including design registrations and other government grants
of rights to inventions) and patent applications.
(k) Except as otherwise indicated on Schedule 4.20(c), the IOI Companies
are the sole owners of all right, title and interest in and to the Patent Rights
and IOI knows of no contingencies that will impede sole and exclusive ownership
of the Patent Rights by the IOI Companies. There are no past due, unpaid
required maintenance fees, annuities or other governmental fees on the Patent
Rights, and all patents and issued registrations included therein are valid and
subsisting.
(l) Except for license rights granted under the Scheduled In-Bound
Intellectual Property and except as otherwise set forth in Schedule 4.20(l), to
its knowledge IOI has secured valid written assignments from all officers,
employees, consultants, independent contractors and other parties, needed to
secure sole (or as indicated on Schedules 4.20(l) and 4.21(c), joint) ownership
of the IOI Companies in the Patent Rights, the Software and the Know-How. Each
officer and employee of the IOI Companies, and each consultant and independent
contractor of the IOI Companies who has had access to IOI Confidential
Information (as defined in Section 4.20(p) below) or who has been engaged in a
technical capacity, has executed an undertaking to protect such IOI Confidential
Information and which includes an obligation to assign patents and copyrights
originated or invented by such officer, employee, consultant or independent
contractor during the course of such person's relationship with the IOI
Companies.
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(m) Except as set forth on Schedule 4.20(b) (the Scheduled Out-Bound
Intellectual Property) or as may be inherent in the sale of products in the
ordinary course of business, none of the IOI Companies has granted any licenses
of or other rights to use any IOI Intellectual Property to any third party.
(n) Except as set forth in Schedule 4.20(n), the IOI Companies own or have
the right to use pursuant to license, sublicense, agreement or permission, free
and clear of all Liens, past due charges, security interests or other
encumbrances of others, all IOI Intellectual Property necessary for the
operation of the business of the IOI Companies as presently conducted, as
contemplated in the performance of existing contracts.
(o) IOI is the current registrant for the domain names in IOI's existing
websites listed in Schedule 4.20(o), and, to IOI's knowledge, the IOI Companies
have the right to use pursuant to license, sublicense, agreement or permission,
free and clear of all claims or rights of others, the text and images comprising
those existing websites.
(p) Each of the IOI Companies has taken commercially reasonable actions to
protect and preserve the confidentiality of all IOI Intellectual Property
covering trade secrets, confidential know-how and information, other non-public
proprietary technical and business information, proprietary processes and
formulae not otherwise protected by patents, patent applications or copyright
other than information disclosed as part of marketing, public relations and
financing activities ("IOI CONFIDENTIAL INFORMATION").
(q) Each employee, consultant and independent contractor of the IOI
Companies has either executed a non-disclosure agreement or is by law or
otherwise under an enforceable and binding obligation to protect and preserve
the confidentiality of the IOI Confidential Information.
(r) To IOI's knowledge, no IOI Confidential Information material to the
business of the IOI Companies as currently operated has been disclosed or
authorized to be disclosed to any third party, other than pursuant to a
non-disclosure agreement that protects the IOI Companies' proprietary interests
in and to such IOI Confidential Information or under circumstances in which the
third party is under a legal duty not to disclose such trade secrets and
confidential know-how.
(s) Except as set forth in Schedule 4.20(b), or as may be inherent in the
sale of products in the ordinary course of business, none of the IOI Companies
has granted any licenses of or other rights to use any of the IOI Intellectual
Property other than the Scheduled Out-Bound Intellectual Property of the IOI
Companies to any third party.
(t) Except as set forth in Schedule 4.20(t), none of the IOI Companies has
interfered with, infringed upon, or misappropriated any Third Party Intellectual
Property or Third Party Patent Rights, and none of the IOI Companies has
received any charge, complaint, claim or notice alleging any such interference,
infringement, or misappropriation. IOI has no knowledge that the manufacturing,
marketing, licensing, use or sale of the products designed or developed by each
of the IOI Companies for itself or third parties, including former products and
products under development or as contemplated in the performance of existing
contracts, infringes any Third Party Intellectual Property.
(i) Except as set forth in Schedule 4.20(t), no third party has, to
the knowledge of IOI, interfered with, infringed upon, misappropriated or
otherwise come into conflict with any IOI Intellectual Property.
(ii) Except as set forth in Schedule 4.20(t), none of the IOI
Companies has entered into any agreement to indemnify any other person
against any charge of infringement of any Third Party Intellectual Property
or Third Party Patent Rights, other than in connection with those items set
forth in the Scheduled In-Bound Intellectual Property, the IOI Material
Contracts and the Scheduled Out-Bound Intellectual Property.
(iii) IOI is not, as a result of the execution and delivery of this
Agreement or the performance of its obligations under this Agreement or as
a result of the transactions contemplated hereby, nor will it be, as a
result of the execution and delivery of this Agreement or the performance
of its obligations
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under this Agreement or as a result of the transactions contemplated
hereby, in a material breach of any license, sublicense or other agreement
relating to the Scheduled In-Bound Intellectual Property.
(u) With respect to the Scheduled In-Bound Intellectual Property:
(i) to IOI's knowledge, each item of Scheduled In-Bound Intellectual
Property is legal, valid, binding, enforceable and in full force and
effect;
(ii) to IOI's knowledge, each item of Scheduled In-Bound Intellectual
Property will continue to be legal, valid, binding, enforceable and in full
force and effect on identical terms following the Closing Date, except as
otherwise might be stated in the terms of the agreements set forth on
Schedule 4.20(a); and
(iii) to IOI's knowledge, none of the IOI Companies is in breach or
default in any material respects of any provisions of the Scheduled
In-Bound Intellectual Property and no event has occurred which with notice
or lapse of time or both would constitute a material breach or default by
any IOI Company or permit termination, modification or acceleration
thereunder, and which with respect to each of the foregoing, could not be
timely cured by such IOI Company.
SECTION 4.21 Software.
(a) To the extent developed, the Software is in machine readable form,
contains all current revisions of such Software and includes all computer
programs, systems, materials, storage media, know-how, object and source codes,
other written materials, know-how and processes related to the Software.
(b) Except as set forth in Schedule 4.21(b), to IOI's knowledge, no
employee, consultant, officer, director or other contractor of any of the IOI
Companies is, or is now expected to be, in material default under any term of
any employment contract, agreement or arrangement relating to the Software or
noncompetition arrangement, or any other IOI Material Contract or any
restrictive covenant relating to the Software or its development or
exploitation. Except as set forth on Schedule 4.21(b) and except for consultants
and independent contractors under written obligation to assign ownership of the
results of their efforts to the IOI Companies, the Software was developed
entirely by the employees of the IOI Companies during the time they were
employees of the IOI Companies, and the IOI Companies have made reasonable
efforts to ensure that such Software does not include any (i) inventions, works
of authorship, derivatives or contributions of such employees made prior to the
time such employees became employees of the IOI Companies or (ii) intellectual
property of any previous employer of such employee.
(c) Except as set forth on Schedule 4.21(c) or as otherwise set forth on
Schedule 4.20(n), all right, title and interest in and to the Software is owned
by the IOI Companies, free and clear of all Liens, is fully transferable to the
Surviving Corporation, and no person other than the IOI Companies has any
interest in the Software, including, any security interest, license, contingent
interest or otherwise. Development, use, sale or exploitation of any of the
Software material to the conduct of the business by the Surviving Corporation
will not be restricted by, interfere with, infringe upon, or misappropriate any
Third Party Intellectual Property right by virtue of any change of control or
prohibition of assignment provisions in agreements between any of the IOI
Companies and any third party, except as otherwise might be stated in the terms
of the agreements set forth on Schedule 4.20(a). None of the IOI Companies has
received any communication alleging such a violation. Except as set forth on
Schedules 4.20(a) and 4.20(b) and with regard to those contractors listed on
Schedule 4.12(a) (as applicable), none of the IOI Companies has any obligation
to compensate any other person for the development, use, sale or exploitation of
the Software nor has any of the IOI Companies granted to any other person any
license, option or other rights to develop, use, sell or exploit in any manner
the Software whether requiring the payment of royalties or not.
(d) Except as set forth on Schedule 4.21(d), the IOI Companies have kept
secret and have not disclosed the source code for the Software to any person
other than certain employees of the IOI Companies who are subject to the terms
of a binding confidentiality agreement in respect thereof.
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Each of the IOI Companies has taken all appropriate measures to protect the
confidential and proprietary nature of the Software, including the use of
confidentiality agreements with all of its employees having access to the
Software source and object code. To IOI's knowledge, except as set forth on
Schedule 4.20(c), there have been no patents applied for and to IOI's knowledge,
no copyrights registered for any part of the Software, except for those owned by
the IOI Companies. There are no trademark rights of any person in the Software,
except for those owned by the IOI Companies.
(e) A complete, up to date copy of the Software, to the extent developed,
in both source code and object code form, is available and will be available
following the Closing.
SECTION 4.22 HSR Matters. No person owns (or at the Effective Time will
own) 50% or more of the voting securities of IOI or has (or at the Effective
Time will have) the right to designate 50% or more of the members of the board
of directors of IOI. The IOI Companies do not have as of June 30, 2000 (the date
of IOI's most recent regularly prepared balance sheet), and will not have as of
the date of any regularly prepared balance sheet prepared prior to the Effective
Time, annual net sales or total assets of $10.0 million or more.
SECTION 4.23 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission or expense reimbursement
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of IOI or any of its affiliates.
SECTION 4.24 Product Liability; Recalls.
(a) (i) None of the IOI Companies has received any Notice and there is no
action, suit, hearing, proceeding or investigation of a civil, criminal or
administrative nature pending, or to IOI's knowledge, threatened before any
Governmental Entity in which a Product is alleged to have a Defect or relating
to or resulting from any alleged failure to warn or from any alleged breach of
express or implied warranties or representations, nor, to IOI's knowledge, is
there any valid basis for any such demand, claim, action, suit, inquiry,
hearing, proceeding, notice of violation or investigation; (ii) no Notice would,
if adversely determined, have, individually or in the aggregate, a Material
Adverse Effect on IOI; (iii) there has not been any Recall of any Product, or,
to the knowledge of IOI, any investigation or consideration of or decision made
by any person concerning whether to undertake or not to undertake any Recalls
and none of the IOI Companies has received any Notices from any Governmental
Entity or any other person in respect of the foregoing; and (iv) there are
currently no material Defects in design, manufacturing, materials or
workmanship, including, any failure to warn, or any breach of express or implied
warranties or representations, which involve any Product that accounts for a
material portion of the IOI Companies' sales.
(b) As used in this Section 4.24, "PRODUCT" means any product designed,
manufactured, shipped, sold, marketed, distributed and/or otherwise introduced
into the stream of commerce by or on behalf of the IOI Companies.
SECTION 4.25 [Intentionally left blank].
SECTION 4.26 Compliance with Laws. Except as set forth on Schedule 4.26
hereto, each of the IOI Companies is complying and has complied in all material
respects with all Laws, statutes, rules, regulations, codes and ordinances
applicable to its business, properties and operations, and has secured all
necessary permits, authorizations and licenses issued by federal, state, local
and foreign agencies and authorities, applicable to its business, properties and
operations. Except with respect to incidents of noncompliance that have been
corrected, none of the IOI Companies has received any notice alleging a failure
to so comply or to secure such a permit, authorization or license nor, to the
knowledge of IOI, is there any inquiry, investigation or proceeding relating
thereto.
SECTION 4.27 Takeover Statute. IOI has taken all action required to be
taken by it in order to exempt this Agreement and the transactions contemplated
hereby from, and this Agreement and the transactions contemplated hereby are
exempt from, the requirements of any Takeover Statute.
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SECTION 4.28 Minute Books; Stock Record Books. True and correct copies of
the IOI Companies' minute books and stock record books have been provided to the
Company. The minute books of each of the IOI Companies contain true and complete
originals or copies of all minutes of meetings of and actions by the
shareholders, Board of Directors and all committees of the Board of Directors of
such IOI Company, and accurately reflect in all material respects all corporate
actions of such IOI Company which are required by Law to be passed upon by the
Board of Directors or shareholders of such IOI Company. The stock record books
accurately reflect all transactions in shares of each of the IOI Companies'
capital stock.
SECTION 4.29 Bank Accounts; Powers of Attorney. Schedule 4.29 hereto sets
forth a complete and correct list showing: (i) all banks in which the IOI
Companies maintain a bank account or safe deposit box (collectively, "IOI BANK
ACCOUNTS"), together with, as to each such IOI Bank Account, the account number,
the names of all signatories thereof and the authorized powers of each such
signatory and, with respect to each such safe deposit box, the number thereof
and the names of all persons having access thereto; and (ii) the names of all
persons holding powers of attorney from the IOI Companies, true and correct
copies thereof which have been delivered to the Company.
SECTION 4.30 Books and Records; Computer Network.
(a) Except as subcontracted pursuant to the IOI Material Contracts, all of
the records, data, information, databases, systems and controls maintained,
operated or used by any of the IOI Companies in connection with the conduct or
administration of its business (including all means of access thereto and
therefrom) are located on the premises of such IOI Company and are under the
exclusive ownership or direct control of such IOI Company.
(b) Except as set forth in the IOI Material Contracts, none of the IOI
Companies has provided access to any third party (other than contractors or
consultants providing direct services to such IOI Company) to the data contained
on the file servers or other storage devices of such IOI Company's general
computer network, and there is no agreement, contract or understanding between
such IOI Company and a third party that gives a third party (other than
contractors or consultants providing direct services to such IOI Company) the
right to access the data contained on the file servers or other storage devices
of such IOI Company's general computer network or, following the Closing, any
computer network of the Surviving Corporation.
SECTION 4.31 Information Supplied. None of the information supplied or to
be supplied by the IOI Companies for inclusion in (i) the S-4, at the time the
S-4 is filed with the SEC and upon effectiveness of the S-4 will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
(ii) the S-4 will, at the date mailed to shareholders, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading or (iii) the Joint
Proxy Statement/Prospectus, at the date it is first mailed to IOI's
shareholders or at the time of IOI's shareholder meeting contemplated by Section
6.2, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter thereof which has become misleading. If at any time prior to the
Effective Time any event in respect of any of the IOI Companies or its officers
and directors should occur which is required to be described in an amendment of,
or a supplement to, the S-4, IOI shall promptly so advise the Company and such
event shall be so described, and IOI shall cooperate in the prompt filing of
such amendment or supplement with the SEC, and, as required by Law, shall
promptly disseminate such amendment or supplement to the shareholders of the
Company.
SECTION 4.32 Export Control Laws. The operations of the IOI Companies
have been and are in material compliance with all export control Laws and the
IOI Companies have obtained all material licenses, authorizations or similar
approvals required under applicable export control Laws.
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SECTION 4.33 SEC Reports; Financial Statements. IOI has filed all
required forms, reports and documents with the SEC since December 31, 1999, each
of which has complied in all material respects with all applicable requirements
of the Securities Act and the Exchange Act, and the rules and regulations
promulgated thereunder, each as in effect on the dates such forms, reports, and
documents were filed. IOI has heretofore made available to the Company, in the
form filed with the SEC (including, any amendments thereto), (i) its Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, (ii) all
definitive proxy statements relating to IOI's meetings of shareholders (whether
annual or special) held since December 31, 1999 and (iii) all other reports or
registration statements filed by IOI with the SEC since December 31, 1999 (the
"IOI SEC REPORTS"). None of such IOI SEC Reports, including any financial
statements or schedules included or incorporated by reference therein,
contained, when filed, any untrue statement of a material fact or omitted to
state a material fact required to be stated or incorporated by reference therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of IOI included in the IOI SEC Reports complied as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC in respect thereof and fairly
present, in conformity with GAAP on a consistent basis (except as may be
indicated in the notes thereto), the consolidated financial position of IOI and
its consolidated subsidiaries as of the dates thereof and their consolidated
results of operations and changes in financial position for the periods then
ended (subject, in the case of the unaudited interim financial statements, to
normal year-end adjustments).
ARTICLE V
COVENANTS RELATED TO CONDUCT OF BUSINESS
SECTION 5.1 Conduct of Business of the Company. Except as contemplated by
this Agreement, during the period from the date hereof to the Effective Time,
the Company will conduct its operations in the ordinary and usual course of
business consistent with past practice and, to the extent consistent therewith,
with no less diligence and effort than would be applied in the absence of this
Agreement, use commercially reasonable efforts to preserve intact its current
business organizations, keep available the services of its current officers and
employees, preserve its relationships with customers, suppliers and others
having business dealings with it and preserve the goodwill of the Company
through the Effective Time. Without limiting the generality of the foregoing,
and except as otherwise expressly provided in this Agreement or in Schedule 5.1,
prior to the Effective Time, the Company will not, without the prior written
consent of IOI:
(a) amend its certificate of incorporation or bylaws (or other similar
organizational or governing instruments), as each such document is in effect on
the date hereof;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other securities convertible into or exchangeable for any
stock or any equity equivalents (including any stock options or stock
appreciation rights), except for the issuance or sale of (i) Common Shares
pursuant to outstanding Company Stock Options or Company Warrants, (ii) employee
stock options granted to new employees, which when aggregated with other
outstanding Company Stock Options, do not represent options to purchase more
than 3,380,862 shares of Company Common Stock, or (iii) Preferred Shares
pursuant to a Chartwell/Oak Hill Investor Event (as hereinafter defined) or a
Company Investor Event (as hereinafter defined);
(c) (i) split, subdivide, recapitalize, exchange, combine or reclassify any
shares of its capital stock or change the number or class of shares of its
capital stock by a similar action; (ii) declare, set aside or pay any dividend
or other distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock; (iii) make any other actual,
constructive or deemed distribution in respect of any shares of its capital
stock or otherwise make any payments to shareholders in their capacity as such;
or (iv) redeem, repurchase or otherwise acquire, directly or indirectly, any of
its securities;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company (other than the Merger);
(e) (i) incur or assume any long-term or short-term debt or issue any debt
securities, other than under the Line of Credit (as hereinafter defined); (ii)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person;
(iii) make any loans, advances or capital contributions to, or investments in,
any other person (other than customary loans or advances to employees,
consultants or contractors in the ordinary and usual course of business
consistent with past practice and in amounts not material to the maker of such
loan or advance); (iv) pledge or otherwise encumber shares of capital stock of
the Company; or (v) mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any Lien thereupon, other than as
disclosed in the schedules hereto and Permitted Liens;
(f) (i) except as may be required by Law or as contemplated by this
Agreement, enter into, adopt or amend or terminate (partially or completely) any
Company Benefit Plan, Company Employee Arrangement (including, the repricing of
any stock options or the acceleration or vesting of any stock options), stock
appreciation right, restricted stock, performance unit, stock equivalent or
stock purchase agreement for the benefit or welfare of any director, officer,
employee, consultant or contractor in any manner; (ii) except as required under
existing agreements, increase in any manner the compensation or fringe benefits
of any director, officer, employee, consultant or contractor or pay any benefit
not required by any plan or arrangement as in effect as of the date hereof
(including, the granting of stock appreciation rights or performance units) or
grant any completion bonuses or change of control payments in respect of the
Merger or that will be affected thereby; or (iii) hire, promote or change the
classification or status in respect of any employee or individual; provided,
however, that IOI shall not unreasonably withhold or delay any consent sought to
hire, promote or change the classification or status of any employee or
individual;
(g) acquire, sell, lease or dispose of any assets outside the ordinary and
usual course of business consistent with past practice or any assets which in
the aggregate are material to the Company, enter into any commitment or
transaction outside the ordinary and usual course of business consistent with
past practice or grant any exclusive distribution rights;
(h) except as may be required as a result of a change in Law or in GAAP,
change any of the accounting principles or practices used by it;
(i) revalue in any material respect any of its assets, including, writing
down the value of inventory or writing-off notes or accounts receivable other
than in the ordinary and usual course of business consistent with past practice
or as required by GAAP;
(j) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof or any equity interest therein; (ii) enter into any material contract or
agreement, or amend in any material respect any of the Company Material
Contracts; (iii) authorize any new capital expenditure or expenditures which,
individually, is in excess of $10,000 or, in the aggregate, since June 30, 2000
are in excess of $50,000; or (iv) enter into or amend any contract, agreement,
commitment or arrangement providing for the taking of any action that would be
prohibited hereunder;
(k) make or revoke any Tax election, or settle or compromise any Tax
liability, or change (or make a request to any taxing authority to change) any
aspect of its method of accounting for Tax purposes;
(l) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or otherwise)
in excess of $10,000 individually or, since June 30, 2000, $50,000 in the
aggregate, or waive the benefits of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which the Company is a
party;
(m) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated hereby;
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(n) take any action (including, any action otherwise permitted by this
Section 5.1) that would prevent or impede the Merger from qualifying as a
"reorganization" under Section 368(a) of the Code;
(o) enter into any agreement that limits or otherwise restricts the Company
or any successor thereto (including the Surviving Corporation and its
affiliates) from engaging or competing in any line of business or in any
geographic area;
(p) fail to comply in any material respect with any Law applicable to the
Company or its assets which would reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect on the Company;
(q) enter into any direct or indirect arrangements for financial subsidies;
(r) effect a "mass layoff" or "plant closing" as defined in WARN;
(s) enter into any contract with an officer, director, employee, agent,
consultant, contractor or other similar representative of the Company that is
not terminable, without penalty or other liability, upon not more than 60
calendar days' notice, other than standard confidentiality and inventions
agreements;
(t) fail to pay any accounts payable of the Company in accordance with
their terms and inconsistent with past practice;
(u) accelerate the collection of, or sell or otherwise transfer, any
accounts receivable of the Company;
(v) dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name, copyright or other intangible asset, or dispose of or
disclose to any person any trade secret, formula, process or know-how not
theretofore a matter of public knowledge;
(w) enter into any agreement with respect to Company Intellectual Property;
(x) change any of the banking or safe deposit arrangements described in
Schedule 3.29 hereto, except in the ordinary course of business;
(y) grant or extend any power of attorney or act as guarantor, surety,
co-signer, endorser, co-maker, indemnitor or otherwise, in respect of the
obligation of any person;
(z) extend credit in the sale of products, collection of receivables or
otherwise, other than in the ordinary course of business consistent with past
practice;
(aa) fail to maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years; or
(bb) take, propose to take, or agree in writing or otherwise to take, any
of the actions described in Sections 5.1(a) through 5.1(aa) or any action which
would make any of the representations or warranties of the Company contained in
this Agreement untrue, incomplete or incorrect.
SECTION 5.2 Conduct of Business of the IOI Companies. Except as
contemplated by this Agreement, during the period from the date hereof to the
Effective Time, each of the IOI Companies will conduct its operations in the
ordinary and usual course of business consistent with past practice and, to the
extent consistent therewith, with no less diligence and effort than would be
applied in the absence of this Agreement, use commercially reasonable efforts to
preserve intact its current business organizations, keep available the services
of its current officers and employees, preserve its relationships with
customers, suppliers and others having business dealings with it and preserve
its goodwill through the Effective Time. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in this Agreement or in
Schedule 5.2, prior to the Effective Time, none of the IOI Companies will,
without the prior written consent of the Company:
(a) amend its articles of incorporation or bylaws (or other similar
organizational or governing instruments), as each such document is in
effect on the date hereof;
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(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities convertible into
or exchangeable for any stock or any equity equivalents (including any
stock options or stock appreciation rights), except for (i) the issuance or
sale of shares pursuant to outstanding IOI stock options and warrants, and
(ii) the issuance of the warrants contemplated under Section 6.16 hereof,
provided that if shares of IOI Common Stock are issued upon the exercise of
such options or warrants described in clause (i), there will be an
adjustment, evidenced by a written amendment to this Agreement, of the
exchange ratios set forth in Sections 2.1(a)(i) and (ii) and Section 2.2
such that the shares of IOI Common Stock held by shareholders of IOI
immediately prior to the Effective Time (prior to taking into account any
adjustment required under Section 2.1(a)(iv)) represents 30% of the
outstanding shares of IOI Common Stock, immediately following the Effective
Time, assuming the exchange of all outstanding Series A Preferred Stock and
Company Common Stock and the exercise of all options and warrants described
in Section 2.2, and no exercise of any option, warrant or other right to
purchase IOI Common Stock outstanding as of the Effective Time;
(c) (i) split, subdivide, recapitalize, exchange, combine or
reclassify any shares of its capital stock or change the number or class of
shares of its capital stock by a similar action; (ii) declare, set aside or
pay any dividend or other distribution (whether in cash, stock or property
or any combination thereof) in respect of its capital stock; (iii) make any
other actual, constructive or deemed distribution in respect of any shares
of its capital stock or otherwise make any payments to shareholders in
their capacity as such; or (iv) redeem, repurchase or otherwise acquire,
directly or indirectly, any of its securities;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization (other than the Merger);
(e) (i) incur or assume any long-term or short-term debt or issue any
debt securities; (ii) assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, contingently or otherwise) for the
obligations of any other person; (iii) other than the Line of Credit, make
any loans, advances or capital contributions to, or investments in, any
other person (other than customary loans or advances to employees,
consultants or contractors in the ordinary and usual course of business
consistent with past practice and in amounts not material to the maker of
such loan or advance); (iv) pledge or otherwise encumber shares of capital
stock of IOI; or (v) mortgage or pledge any of its material assets,
tangible or intangible, or create or suffer to exist any Lien thereupon,
other than as disclosed in the schedules hereto and Permitted Liens;
(f) (i) except as may be required by Law or as contemplated by this
Agreement, enter into, adopt or amend or terminate (partially or
completely) any IOI Benefit Plan, IOI Employee Arrangement (including, the
repricing of any stock options or the acceleration or vesting of any stock
options), stock appreciation right, restricted stock, performance unit,
stock equivalent or stock purchase agreement for the benefit or welfare of
any director, officer, employee, consultant or contractor in any manner;
(ii) except as required under existing agreements or customary pay raises
in the ordinary course of business consistent with past practice, increase
in any manner the compensation or fringe benefits of any director, officer,
employee, consultant or contractor or pay any benefit not required by any
plan or arrangement as in effect as of the date hereof (including, the
granting of stock appreciation rights or performance units) or grant any
completion bonuses or change of control payments in respect of the Merger
or that will be affected thereby; or (iii) hire, promote or change the
classification or status in respect of any employee or individual;
provided, however, that the Company shall not unreasonably withhold or
delay any consent sought to hire, promote or change the classification or
status of any employee or individual;
(g) other than the contemplated sale of the Westbank Ambulatory Care
Center and those items listed on Schedule 5.2(g) hereto, acquire, sell,
lease or dispose of any assets outside the ordinary and usual course of
business consistent with past practice or any assets which in the aggregate
are material
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to IOI, enter into any commitment or transaction outside the ordinary and
usual course of business consistent with past practice or grant any
exclusive distribution rights;
(h) except as may be required as a result of a change in Law or in
GAAP, change any of the accounting principles or practices used by it;
(i) revalue in any material respect any of its assets, including,
writing down the value of inventory or writing-off notes or accounts
receivable other than in the ordinary and usual course of business
consistent with past practice or as required by GAAP;
(j) other than the contemplated sale of the Westbank Ambulatory Care
Center and those items listed on Schedule 5.2(j) hereto, (i) acquire (by
merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division thereof or any
equity interest therein; (ii) enter into any material contract or
agreement, or amend in any material respect any of the IOI Material
Contracts; (iii) authorize any new capital expenditure or expenditures
which, individually, is in excess of $10,000 or, in the aggregate, since
June 30, 2000 are in excess of $50,000; or (iv) enter into or amend any
contract, agreement, commitment or arrangement providing for the taking of
any action that would be prohibited hereunder;
(k) make or revoke any Tax election, or settle or compromise any Tax
liability, or change (or make a request to any taxing authority to change)
any aspect of its method of accounting for Tax purposes;
(l) except as described on Schedule 5.2(l) hereto, pay, discharge or
satisfy any material claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise) in excess of $10,000
individually or, since June 30, 2000, $50,000 in the aggregate, or waive
the benefits of, or agree to modify in any manner, any confidentiality,
standstill or similar agreement to which such IOI Company is a party;
(m) except as listed on Schedule 5.2(m) hereto, settle or compromise
any pending or threatened suit, action or claim relating to the
transactions contemplated hereby;
(n) take any action (including, any action otherwise permitted by this
Section 5.2) that would prevent or impede the Merger from qualifying as a
"reorganization" under Section 368(a) of the Code;
(o) other than in connection with its sale of the Westbank Ambulatory
Care Center, enter into any agreement that limits or otherwise restricts
IOI or any successor thereto (including the Surviving Corporation and its
affiliates) from engaging or competing in any line of business or in any
geographic area;
(p) fail to comply in any material respect with any Law applicable to
it or its assets which would reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect on IOI;
(q) enter into any direct or indirect arrangements for financial
subsidies;
(r) enter into any contract with an officer, director, employee,
agent, consultant, contractor or other similar representative of any of the
IOI Companies that is not terminable, without penalty or other liability,
upon not more than 60 calendar days' notice, other than standard
confidentiality and inventions agreements;
(s) fail to pay any accounts payable in accordance with their terms
and inconsistent with past practice;
(t) change any of the banking or safe deposit arrangements described
in Schedule 4.29 hereto, except in the ordinary course of business;
(u) grant or extend any power of attorney or act as guarantor, surety,
co-signer, endorser, co-maker, indemnitor or otherwise, in respect of the
obligation of any person;
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(v) extend credit in the sale of products, collection of receivables
or otherwise, other than in the ordinary course of business consistent with
past practice;
(w) fail to maintain its books, accounts and records in the usual,
regular and ordinary manner on a basis consistent with prior years; or
(x) take, propose to take, or agree in writing or otherwise to take,
any of the actions described in Sections 5.2(a) through 5.2(w) or any
action which would make any of the representations or warranties of IOI
contained in this Agreement untrue, incomplete or incorrect.
SECTION 5.3 Access to Information.
(a) Between the date hereof and the Effective Time, each of the Company and
IOI will give to the other party and its authorized representatives (including,
counsel, financial advisors and auditors) reasonable access to all employees,
consultants, contractors, plants, offices, warehouses and other facilities and
to all books and records of such party, will permit the other party to make such
inspections and investigations as the other party may require, including,
without limitation, the sampling of surface water, groundwater, soil, indoor and
outdoor air quality and building materials. Each of the Company and IOI will
cause its officers to furnish the other party with such financial and operating
data and other information in respect of the business, properties and personnel
of such party as the other party may from time to time reasonably request,
provided that no investigation pursuant to this Section 5.3(a) shall affect or
be deemed to modify any of the representations or warranties made by either
party.
(b) Between the date hereof and the Effective Time, each of the Company and
IOI shall furnish to the other party (i) within five business days after the
delivery thereof to management, such monthly financial statements and data as
are regularly prepared for distribution to such party's management and (ii) at
the earliest time they are available, such quarterly and annual financial
statements as are regularly prepared for such party's Board of Directors.
(c) Each of the Company and IOI will hold and will cause its authorized
representatives to hold in confidence all documents and information concerning
the other party furnished to such party in connection with the transactions
contemplated by this Agreement.
SECTION 5.4 Continuation of Insurance Coverage. From the date hereof to
the Closing, each of the Company and IOI shall keep in full force and effect
insurance coverage for it and its assets and operations comparable in amount and
scope to the coverage now maintained covering such party and its assets and
operations.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 Registration Statement on Form S-4 and Joint Proxy
Statement/Prospectus.
(a) As soon as practicable following the execution of this Agreement, the
Company and IOI shall use all commercially reasonable efforts to prepare and
file with the SEC, and make effective under the Securities Act as promptly as
practicable following such filing, a registration statement on Form S-4 (the
"S-4") (including, without limitation, the preparation of all audited or
unaudited consolidated financial statements of the Company and the preparation
of all pro forma financial information required to be included in the S-4). The
S-4 shall register the issuance of all IOI Common Stock and Series A and Series
B Warrants issued to the Company's stockholders in the Merger. At the time the
S-4 is filed with the SEC and at all times subsequent thereto (through and
including the Effective Time), the Company and IOI shall take all actions
necessary so that the S-4 does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
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(b) As soon as practicable following the execution of this Agreement, the
Company and IOI shall use all commercially reasonable efforts to prepare and
file with the SEC a joint proxy statement relating to a meeting of the holders
of Company Securities and a meeting of the holders of IOI Securities to approve
the Merger (such joint proxy statement as amended or supplemented from time to
time being hereinafter referred to as the "JOINT PROXY STATEMENT/PROSPECTUS"),
such Joint Proxy Statement/Prospectus to be included in the S-4. Each of the
Company and IOI shall use its commercially reasonable efforts to cause the Joint
Proxy Statement to be mailed to shareholders of the Company and shareholders of
IOI at the earliest practicable date, in each case as promptly as practicable
after the S-4 is declared effective under the Securities Act.
(c) The Company shall furnish to IOI all information concerning the Company
and its shareholders and shall take such other action as IOI may reasonably
request in connection with the S-4 and the issuance of shares of IOI Common
Stock. If at any time prior to the Effective Time any event or circumstance
relating to IOI, the Company, any shareholder or their respective officers,
directors, employees, consultants or contractors should be discovered by such
party which should be set forth in an amendment or a supplement to the S-4, such
party shall promptly inform the other thereof and take appropriate action in
respect thereof.
SECTION 6.2 Shareholder Meetings. Each of the Company and IOI shall call
a meeting of its shareholders as soon as practicable after the date upon which
the S-4 becomes effective. Each party shall consult with the other in
determining a date for such party's meeting that is reasonably agreeable to the
other party. Each party's Board of Directors shall recommend approval and
adoption of this Agreement and the Merger by its shareholders and, except as
permitted by Section 6.4(b), each party's Board of Directors shall not withdraw,
amend, or modify in a manner adverse to the other party such recommendation (or
announce publicly its intention to do so). In addition, IOI shall seek
shareholder approval of the sale of the Westbank Ambulatory Care Center and the
reverse stock split described in Section 2.1(d). Notwithstanding the foregoing,
regardless of whether a party's Board of Directors has withdrawn, amended or
modified its recommendation that its shareholders approve and adopt this
Agreement, unless this Agreement has been terminated pursuant to the provisions
of Article VIII, such party shall be required to submit this Agreement to its
shareholders for approval as soon as practicable after the effectiveness of the
S-4.
SECTION 6.3 Reasonable Best Efforts.
(a) Subject to the terms and conditions of this Agreement, each party will
use commercially reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable Laws to consummate the Merger and the other transactions contemplated
by this Agreement.
(b) In furtherance and not in limitation of the covenants of the parties
contained in Section 6.3(a), each of IOI and the Company shall use its
reasonable best efforts to resolve such objections if any, as may be asserted by
a Governmental Entity or other person in respect of the transactions
contemplated hereby, including, without limitation, under any antitrust or other
Law or by any Dissenting Shareholder in respect of Dissenting Shares. In
connection with the foregoing, if any administrative or judicial action or
proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement, each of IOI and the Company shall cooperate in all respects with each
other and use its respective reasonable best efforts to contest and resist any
such action or proceeding and to have vacated, lifted, reversed or overturned
any decree, judgment, injunction, or other order, whether temporary, preliminary
or permanent, that is in effect and that prohibits, prevents or restricts
consummation of the transactions contemplated by this Agreement. Notwithstanding
the foregoing or any other provision of this Agreement, nothing in this Section
6.3 shall (i) limit a party's right to terminate this Agreement pursuant to
Section 8.2 so long as such party has up to then complied in all material
respects with its obligations under this Section 6.3, or (ii) require IOI to
dispose or hold separate any part of its or the Company's business or operations
(or a combination of
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IOI's and the Company's business or operations), or comply with any other
material restriction affecting its business or operations.
(c) Each party agrees that in connection with any litigation which may be
brought against it or its directors relating to the transactions contemplated
hereby, it will keep the other party, and any counsel which the other party may
retain at its own expense, informed of the course of such litigation, to the
extent the other party is not otherwise a party thereto. Each party agrees that
it will consult with the other party prior to entering into any settlement or
compromise of any such litigation, and that no such settlement or compromise
will be entered into without the other party's prior written consent, which
consent shall not be unreasonably withheld.
SECTION 6.4 Acquisition Proposals.
(a) Each party will not, nor will it authorize or permit any officer,
director, employee, consultant or contractor of or any investment banker,
attorney, accountant or other advisor or representative of, such party to,
directly or indirectly, (i) solicit, initiate or encourage the submission of any
Acquisition Proposal (as hereinafter defined) or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any information
in respect of, or take any other action to facilitate, any Acquisition Proposal
or any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Acquisition Proposal. Notwithstanding the
foregoing, in the event that a party receives an unsolicited Acquisition
Proposal, it shall be entitled to negotiate with the third party making such
proposal and to provide information to such third party if the Board of
Directors' fiduciary duty to such party's shareholders requires that such party
conduct such negotiations and provide such material in order to make its
recommendation to such party's shareholders regarding the approval or
disapproval of the Merger. Each party shall notify the other party of any
Acquisition Proposal (including the material terms and conditions thereof and
the identity of the person making it) as promptly as practicable after its
receipt thereof, and shall provide the other party with a copy of any written
Acquisition Proposal or amendments or supplements thereto, and shall thereafter
inform the other party on a prompt basis of the status of any discussions or
negotiations with such a third party, and any material changes to the terms and
conditions of such Acquisition Proposal, and shall promptly give the other party
a copy of any information delivered to such person which has not previously been
reviewed by the other party. Immediately after the execution and delivery of
this Agreement, each party will, and will use its reasonable best efforts to
cause its affiliates, and their respective officers, directors, employees,
consultants, contractors, investment bankers, attorneys, accountants and other
agents and representatives to, cease and terminate any existing activities,
discussions or negotiations with any parties conducted heretofore in respect of
any possible Acquisition Proposal. Each party shall take all necessary steps to
promptly inform the individuals or entities referred to in the first sentence of
this Section 6.4 of the obligations undertaken in this Section 6.4. "ACQUISITION
PROPOSAL" means an inquiry, offer or proposal regarding any of the following
(other than the transactions contemplated by this Agreement, including, without
limitation, any Chartwell/Oak Hill Investor Event or Company Investor Event)
involving either party: (v) any merger, consolidation, share exchange,
recapitalization, business combination or other similar transaction; (w) any
sale of shares of capital stock of a party; (x) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of all or substantially all the
assets of a party in a single transaction or series of related transactions; (y)
any tender offer or exchange offer for 20% or more of the outstanding Common
Shares or IOI Common Stock, as applicable, or the filing of a registration
statement under the Securities Act in connection therewith; or (z) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
(b) Each party's Board of Directors will not withdraw or modify, or propose
to withdraw or modify, in a manner adverse to the other party, its approval or
recommendation of this Agreement or the Merger unless such Board of Directors,
after consultation with independent legal counsel, determines in good faith that
such action is necessary to avoid a breach by such party's Board of Directors of
its fiduciary duties to its shareholders under applicable Law. Nothing contained
in this Section 6.4(b)shall prohibit either party from making any disclosure to
such party's shareholders which, in the good faith reasonable judgment of such
Board of Directors, after consultation with independent legal counsel, is
required under applicable
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Law; provided, that except as otherwise permitted in this Section 6.4(b),
neither party may withdraw or modify, or propose to withdraw or modify, its
position with respect to the Merger or approve or recommend, or propose to
approve or recommend, an Acquisition Proposal. Notwithstanding anything
contained in this Agreement to the contrary, any action by a party's Board of
Directors permitted by, and taken in accordance with, this Section 6.4(b) shall
not constitute a breach of this Agreement by such party. Nothing in this Section
6.4(b) shall (i) permit a party to terminate this Agreement (except as provided
in Article VIII hereof) or (ii) affect any other obligations of such party under
this Agreement.
SECTION 6.5 Public Announcements; Employee Announcements.
(a) Each of IOI and the Company will consult with one another before
issuing any press release or otherwise making any public statements in respect
of the transactions contemplated by this Agreement, including, the Merger, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by applicable Law or by
obligations pursuant to any listing agreement with the AMEX, as determined by
IOI or the Company, as the case may be.
(b) Prior to the Effective Time, each of IOI and the Company will consult
with one another regarding any written and spoken statements to be made to the
Company's employees, consultants or independent contractors in respect of the
transactions contemplated by this Agreement, including the Merger, employee
benefits, employee compensation and other transition and integration matters.
All written communications and formal oral presentations shall be mutually
agreed upon by IOI and the Company prior to any such communication or
presentation, and the Company shall not make any written or oral statements to
employees, consultants or independent contractors inconsistent with the
guidelines provided in conjunction with such consultation.
SECTION 6.6 Indemnification. From and after the Effective Time, IOI shall
indemnify, defend and hold harmless the present and former directors and
officers of the Company and IOI (the "INDEMNIFIED PARTIES") against all losses,
claims, damages, costs, expenses (including reasonable attorneys' fees and
expenses), liabilities or judgments or amounts that are paid in settlement with
the approval of IOI of or in connection with any threatened or actual claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of or pertaining to the fact that such person is
or was a director or officer of the Company or IOI whether pertaining to any
matter existing prior to, at or after the Effective Time and whether asserted or
claimed prior to, at or after the Effective Time ("INDEMNIFIED LIABILITIES"),
including all Indemnified Liabilities based in whole or in part on, or arising
in whole or in part out of, or pertaining to this Agreement or the transactions
contemplated hereby, in each case to the fullest extent a corporation is
permitted under IOI's bylaws in effect immediately prior to the Merger and under
Texas Law, as the same exist or may hereafter be amended (but, in the case of
any amendments, only to the extent that such amendments permit broader rights
than such Law permitted prior to such amendments and only to the extent such
amendments are not retroactively applicable) to indemnify its own directors or
officers, as the case may be. Without limiting the foregoing, in the event any
such claim, action, suit, proceeding or investigation is brought against any
Indemnified Parties (whether arising before or after the Effective Time), (i)
the Indemnified Parties may retain counsel satisfactory to them and IOI shall
pay all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received and otherwise advance to such
Indemnified Parties upon request reimbursement of reasonable documented expenses
incurred, in either case to the fullest extent and in the manner permitted by
Texas Law; and (ii) IOI will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that IOI shall not be liable for
any settlement effected without its prior written consent (which consent shall
not be unreasonably withheld). Any Indemnified Party wishing to claim
indemnification under this Section 6.6, upon learning of any such claim, action,
suit, proceeding or investigation, shall promptly notify IOI (but the failure so
to notify shall not relieve a party from any liability which it may have under
this Section 6.6 except to the extent such failure materially prejudices such
party), and shall to the extent required by IOI's bylaws in effect immediately
prior to the Merger and Texas Law deliver to IOI the undertaking contemplated by
IOI's bylaws in effect immediately prior to the Merger and Texas Law. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is, under applicable standards of
professional conduct,
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a conflict on any significant issue between the positions of any two or more
Indemnified Parties. IOI agrees that all rights to indemnification, including
provisions relating to advances of expenses incurred in defense of any action or
suit, existing in favor of the Indemnified Parties with respect to matters
occurring through the Effective Time, shall survive the Merger and shall
continue in full force and effect for a period of not less than seven years from
the Effective Time; provided, however, that all rights to indemnification in
respect of any Indemnified Liabilities asserted or made within such period shall
continue until the disposition of such Indemnified Liabilities. IOI will cause
to be maintained for a period of not less than three years from the Effective
Time (x) a directors' and officers' liability policy (including securities
entity coverage) on an annual basis covering post-Merger wrongful acts and
omissions with limits of not less than $10.0 million, (y) a runoff (tail)
endorsement on IOI's current directors' and officers' liability policy for
pre-Merger wrongful acts or omissions from IOI's operations covering pre-Merger
directors and officers and securities liabilities of the pre-Merger entity with
an aggregate limit of $10.0 million and (z) a runoff (tail) endorsement on the
Company's current directors' and officers' liability policy for pre-Merger
wrongful acts or omissions from the Company's operations covering pre-Merger
directors and officers and securities liabilities of the pre-Merger entity with
an aggregate limit of $10.0 million.
SECTION 6.7 Notification of Certain Matters. The Company shall give
prompt notice to IOI, and IOI shall give prompt notice to the Company, of (i)
the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at or prior to the
Effective Time, (ii) any material failure of the Company or IOI, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder, (iii) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement, or (iv) any facts or circumstances that could reasonably be expected
to result in a Material Adverse Effect; provided, however, that the delivery of
any notice pursuant to this Section 6.7 shall not cure such breach or
non-compliance or limit or otherwise affect the rights, obligations or remedies
available hereunder to the party receiving such notice.
SECTION 6.8 Tax-Free Reorganization Treatment. Neither the Company nor
IOI shall take any action that would prevent or impede the Merger from
qualifying as a reorganization under Section 368(a) of the Code.
SECTION 6.9 Employee Matters. Subject to the provisions of Section 6.20,
the Surviving Corporation will honor the obligations of the Company under the
provisions of all Company Benefit Plans and Company Employee Arrangements,
subject to the Surviving Corporation's right to amend or terminate any such
Company Benefit Plan or Company Employee Arrangement in accordance with its
terms. Subject to the provisions of Section 6.20, after the Effective Time, the
employees of the Company will be eligible to participate in the Company's
Benefit Plans or, if so determined by the Surviving Corporation, the Surviving
Corporation's applicable Benefit Plans, as such plans may be in effect from time
to time, and, at the Surviving Corporation's sole discretion, will become
employees of the Surviving Corporation.
SECTION 6.10 Affiliate Letters. Schedule 6.10 sets forth a list of all
persons who are, and all persons who to the Company's knowledge will be at the
Closing Date, "affiliates" of the Company for purposes of Rule 145 under the
Securities Act. The Company will cause such list to be updated promptly through
the Closing Date. No later than 15 days after the date of this Agreement (but in
any event prior to the Effective Time), the Company shall cause its "affiliates"
to deliver to IOI a written agreement substantially in the form attached as
Exhibit B.
SECTION 6.11 Listing of Stock. IOI shall use its commercially reasonable
efforts to cause the shares of IOI Common Stock to be issued in connection with
the Merger to be approved for listing on the AMEX.
SECTION 6.12 Anti-takeover Statutes. If any Takeover Statute is or may
become applicable to the Merger, each of IOI and the Company shall take such
actions as are necessary so that the transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms
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contemplated hereby and otherwise act to eliminate or minimize the effects of
any Takeover Statute on the Merger.
SECTION 6.13 Third Party Consents. The Company shall use its commercially
reasonable efforts to obtain at the earliest practicable date all consents of
third parties (including, but not limited to, such as are listed on Schedule
3.8) necessary to the consummation of the transactions contemplated hereby (the
"COMPANY CONSENTS") and will provide to IOI copies of each such Company Consent
promptly after it is obtained. IOI agrees to cooperate fully with the Company in
connection with the obtaining of the Company Consents; provided, however, that
IOI shall not be required to pay any additional sums to secure such Company
Consents.
SECTION 6.14 Commercially Reasonable Efforts and Certain Filings. Subject
to the terms and conditions of this Agreement, the Company and IOI will use
their respective commercially reasonable efforts to maintain the accuracy of
their representations and warranties hereunder and to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary or
desirable to consummate the transactions contemplated by this Agreement. Neither
the Company nor IOI will take, agree to take or knowingly permit to be taken any
action or do or knowingly permit to be done anything in the conduct of the
business of the companies, or otherwise, which would be contrary to or in breach
of any of the terms or provisions of this Agreement.
SECTION 6.15 [Intentionally left blank].
SECTION 6.16 IOI Warrants. At any time after the date hereof and prior to
the Effective Time, IOI will be permitted to distribute to each of its
shareholders a warrant to purchase up to one-half of a share of IOI Common Stock
in respect of each share of IOI Common Stock held by each such shareholder on
the record date set for such dividend; provided that such warrants to purchase
IOI Common Stock shall not in the aggregate cover more than 14,796,370 shares of
IOI Common Stock (collectively, the "IOI WARRANTS"). If issued, the IOI Warrants
will have terms and conditions, including exercise price and exercisability, no
more favorable than those terms and conditions of the Series A Warrants to be
issued pursuant to Section 2.1, and will be designated "SERIES A WARRANTS."
SECTION 6.17 Registration Rights Agreement. The Registration Rights
Agreement (the "IOI REGISTRATION RIGHTS AGREEMENT"), dated as of December 12,
1997, among IOI and the shareholders of IOI signatory thereto, as amended prior
to the Closing to include the shares of IOI Common Stock subject to the IOI
Warrants, will remain in full force and effect following the Closing.
SECTION 6.18 Registration Rights. Following the Closing, IOI will file
(a) a shelf registration statement or statements on the appropriate form(s) with
respect to the shares of IOI Common Stock issuable upon the exercise of all
warrants that remain outstanding after the Effective Time at such time and in a
manner reasonably expected to permit the registration statement or statements to
be effective as of the first anniversary of the Effective Time, or, if earlier,
concurrently with the filing of a registration statement with respect to any IOI
equity securities, including options and warrants, in accordance with the terms
of the IOI Registration Rights Agreement, and to maintain the effectiveness of
such registration statement or statements covering such shares of IOI Common
Stock (and maintain the current status of the prospectus or prospectuses
contained therein) until the later of (1) such time as the shares of IOI Common
Stock subject to such registration statement or statements are disposed of
pursuant to such registration statement or statements or (2) such time as the
warrants outstanding immediately after the Effective Time expire and (b) a
registration statement or statements on the appropriate form(s) with respect to
the shares of IOI Common Stock issuable in connection with any adjustment made
under Section 2.1(a)(iii) (taking into account any adjustment provided for under
Section 2.1(a)(iv)), and to maintain the effectiveness of such registration
statement or statements covering such shares of IOI Common Stock (and maintain
the current status of the prospectus or prospectuses contained therein) until
such shares of IOI Common Stock have been distributed thereunder.
SECTION 6.19 Post-Merger Board of Directors. (a) The Board of Directors
of the Surviving Corporation (the "POST-MERGER BOARD") will consist of seven
members. If the Net Current Assets of IOI
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calculated ten business days prior to the scheduled Closing Date (or such other
date as is mutually agreed to by IOI and the Company) (in either case, the
"CALCULATION DATE") is less than $5.75 million, the Board of Directors of IOI as
of such date will be entitled to designate two (2) members of the Post-Merger
Board. If the Net Current Assets of IOI on the Calculation Date is greater than
$5.75 million, the Board of Directors of IOI as of such date will be entitled to
designate three (3) members of the Post-Merger Board. The remaining members of
the Post-Merger Board will be designated by the Company. IOI and the Company
will inform each other of their designated board members at least five business
days prior to the Closing. "NET CURRENT ASSETS" means current assets, including
any amounts due to IOI from the Company, plus Westbank ASC Cash Proceeds, less
all known liabilities which are anticipated to require payment in cash, plus
Reimbursable Transaction Expenses and any amounts paid or required to be paid by
IOI in respect of any insurance policies required by the last sentence of
Section 6.6. "WESTBANK ASC CASH PROCEEDS" means the expected cash proceeds from
the sale of the Westbank Ambulatory Care Center as stated in signed definitive
documents with a bona fide buyer and a closing date no later than 75 days after
the Closing Date. "REIMBURSABLE TRANSACTION EXPENSES" means all reasonable
attorneys' and accountants' fees and expenses and other reasonable out-of-pocket
expenses relating to the transactions contemplated by this Agreement incurred
after the date hereof which have been expended but not reimbursed as of the
Effective Time, excluding any transaction fees paid or payable to any affiliates
of IOI.
(b) At least one member of the Post-Merger Board designated by IOI will
serve on all committees of the Post-Merger Board.
(c) During the period between the Closing Date and the third anniversary
thereof, one representative designated by Chartwell Capital and one
representative designated by FW Integrated Orthopaedics Investors I and II will
have visitation rights to the regularly-scheduled meetings of the Post-Merger
Board, provided that the group represented by such person continues to hold at
least 25% of the shares of IOI Common Stock held by such group as of the
Effective Time.
SECTION 6.20 Stock Options. Prior to the Closing, the Company will retain
a qualified compensation consultant to review the Company's compensation
programs and will review the results of such review with IOI. During the period
commencing on the Closing Date and ending on the first anniversary thereof, any
stock options granted to any employees who were employed by the Company as of
July 31, 2000 will require unanimous approval of the Post-Merger Board.
SECTION 6.21 Company Audited Financial Statements. Prior to the filing of
the S-4, the Company will deliver to IOI copies of the Company's audited balance
sheets as of December 31, 1999, together with the related audited statements of
income, shareholders' equity and changes in cash flow for the fiscal year ended
December 31, 1999, and the notes thereto (the "COMPANY AUDITED FINANCIAL
STATEMENTS"). The Company Audited Financial Statements, including the notes
thereto, (A) will be prepared in accordance with GAAP and (B) will present
fairly in all material respects the financial position, results of operations
and changes in cash flow of the Company as of such dates and for the periods
then ended.
SECTION 6.22 Additional Investments.
(a) Prior to the filing of the S-4, any potential investors introduced to
the Company by Chartwell Capital and/or Oak Hill Capital may, if approved by the
Company in its sole discretion, make an aggregate investment in the Company up
to $2.0 million by purchasing new shares of Series B Preferred Stock of the
Company at a price per share of at least $0.863 per Common Share equivalent;
provided, however, that IOI must approve, prior to the issuance thereof, all
terms of the new Series B Preferred Stock in its sole discretion (the
"CHARTWELL/OAK HILL INVESTOR EVENT").
(b) Prior to the filing of the S-4, the Company may, in its sole
discretion, approve an investor group not introduced by Chartwell Capital and/or
Oak Hill Capital to make an aggregate investment in the Company up to $2.0
million on terms and conditions identical to those set forth in Section 6.22(a)
(the "COMPANY INVESTOR EVENT").
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ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 Conditions to Each Party's Obligations to Effect the
Merger. The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following conditions, any or all of which may be
waived in whole or in part by the party being benefited thereby, to the extent
permitted by applicable Law:
(a) This Agreement shall have been approved and adopted by the Company
Requisite Vote and the IOI Requisite Vote.
(b) The Company and IOI shall have timely obtained from each
Governmental Entity all approvals, waivers and consents, if any, necessary
for consummation of or in connection with the transactions contemplated
hereby, including such approvals, waivers and consents as may be required
under the Securities Act and under blue sky laws, if any.
(c) There shall not be in effect any Law of any Governmental Entity of
competent jurisdiction restraining, enjoining or otherwise preventing
consummation of the transactions contemplated by this Agreement and no
Governmental Entity shall have instituted any proceeding which continues to
be pending seeking any such Law.
(d) The S-4 shall have been declared effective by the SEC and shall be
effective at the Effective Time, and no stop order suspending effectiveness
shall have been issued; no action, suit, proceeding or investigation by the
SEC to suspend the effectiveness of the S-4 shall have been initiated and
be continuing; and all necessary approvals under state securities Laws or
the Securities Act or Exchange Act relating to the issuance or trading of
the IOI Common Stock shall have been received.
SECTION 7.2 Conditions to the Obligations of IOI. The obligation of IOI
to consummate the transactions contemplated by this Agreement is subject to the
fulfillment at or prior to the Effective Time of each of the following
additional conditions, any or all of which may be waived in whole or part by
IOI, to the extent permitted by applicable Law:
(a) The representations and warranties of the Company contained herein
shall have been true (for the purposes of this Section 7.2(a), without
regard to any materiality or Material Adverse Effect qualifier contained
therein), except where the failure to be true, individually or in the
aggregate, has not had or is not reasonably expected to have a Material
Adverse Effect on the Company, in each case when made and on and as of the
Closing Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which shall
speak only as of the specified date).
(b) The Company shall have performed or complied in all material
respects with all agreements and conditions contained herein required to be
performed or complied with by it prior to or at the time of the Closing.
(c) The Company shall have delivered to IOI a certificate, dated the
date of the Closing, signed by the President or any Vice President of the
Company (but without personal liability thereto), certifying as to the
fulfillment of the conditions specified in Sections 7.2(a) and 7.2(b).
(d) Prior to the Closing, there shall not have occurred any Material
Adverse Effect on the Company.
(e) IOI shall have received an opinion of Weil, Gotshal & Manges LLP,
dated the Effective Time, based on conventional representations of IOI and
the Company, to the effect that the Merger will be treated for federal
income Tax purposes as a reorganization within the meaning of Section
368(a) of the Code.
(f) All authorizations, consents or approvals of a Governmental Entity
(other than those specified in Section 7.1(b)) required in connection with
the execution and delivery of this Agreement
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and the performance of the obligations hereunder shall have been made or
obtained (without any limitation, restriction or condition), except for
such authorizations, consents or approvals, the failure of which to have
been made or obtained does not and could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on the
Company (or an effect on the IOI Companies that, were such effect applied
to the Company, has or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on the Company).
(g) The Company shall have obtained each consent or approval listed
(or required to be listed) in Schedule 3.8.
(h) IOI shall have received from the Company's "affiliates" a written
agreement substantially in the form attached as Exhibit B.
(i) The Company shall have delivered to IOI such good standing
certificates and officers' certificates and similar documents as counsel
for IOI shall have reasonably requested prior to the Closing Date.
(j) As of the Closing Date, all of the employees set forth on Schedule
7.2(j) shall continue to be employees of the Company.
(k) All directors of the Company and all holders of Company Securities
having 5% or greater of the Company's voting power on a pre-Merger basis
shall have executed an agreement not to sell any of IOI's securities for
the 180-day period commencing on the Closing Date (the "LOCK-UP PERIOD").
(l) Each of the (i) Stockholders' Agreement dated as of July 27, 1999,
by and between the Company and certain shareholders of the Company and (ii)
Registration Rights Agreement dated as of July 27, 1999, by and among the
Company and certain shareholders of the Company shall have been terminated
to IOI's satisfaction and any rights of first offer or refusal shall have
been waived by the appropriate parties.
(m) Holders of Common Shares and Preferred Shares representing no more
than 5% of the outstanding IOI Common Stock on a post-Merger basis, shall
have exercised and not withdrawn, forfeited or otherwise permitted to lapse
appraisal or dissenter's rights under Delaware Law with respect to their
Common Shares and Preferred Shares in connection with the Merger.
SECTION 7.3 Conditions to the Obligations of the Company. The obligation
of the Company to consummate the transactions contemplated by this Agreement is
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
the Company to the extent permitted by applicable Law:
(a) The representations and warranties of IOI contained herein shall
have been true (for the purposes of this Section 7.3(a), without regard to
any materiality or Material Adverse Effect qualifier contained therein),
except where the failure to be true, individually or in the aggregate, has
not had or is not reasonably expected to have a Material Adverse Effect on
IOI, in each case when made and on and as of the Closing Date as though
made on and as of the Closing Date (except for representations and
warranties made as of a specified date, which shall speak only as of the
specified date).
(b) IOI shall have performed or complied in all material respects with
all agreements and conditions contained herein required to be performed or
complied with by it prior to or at the time of the Closing.
(c) IOI shall have delivered to the Company a certificate, dated the
date of the Closing, signed by an officer of IOI (but without personal
liability thereto), certifying as to the fulfillment of the conditions
specified in Sections 7.3(a) and 7.3(b).
(d) The Company shall have received an opinion of Locke Liddell & Sapp
LLP, dated the Effective Time, based on conventional representations of IOI
and the Company, to the effect that the Merger will be treated for federal
income Tax purposes as a reorganization within the meaning of Section
368(a) of the Code.
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(e) The sum of IOI cash, plus notes receivable due to IOI from the
Company, plus Reimbursable Transaction Expenses, plus the Westbank ASC Cash
Proceeds, plus the proceeds of any investments made by individuals or
entities introduced to the Company by Oak Hill Capital, Chartwell Capital
and/or their affiliates (specifically excluding introductions made solely
by Chartwell Capital) must be greater than $2.5 million immediately prior
to the Closing; provided, however, that this Section 7.3(e) shall be
inapplicable if the Company has previously borrowed more than $1.0 million
under that certain Promissory Note, dated of even date herewith, between
IOI and the Company (the "LINE OF CREDIT").
(f) Except as set forth on Schedule 7.3(f), all directors of IOI and
all holders of IOI Securities having 5% or greater of IOI's voting power on
a pre-Merger basis shall have executed an agreement not to sell any of
IOI's securities for the Lock-Up Period.
(g) The IOI Common Stock to be issued in connection with the Merger
shall have been approved for listing on the AMEX.
(h) The Series B Warrants outstanding as of the date hereof will be
amended to conform in all material respects with the form of Series B
Warrant attached hereto as Exhibit H and to waive the applicability of any
anti-dilution protection provisions resulting from the transactions
contemplated by this Agreement.
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 Termination by Mutual Agreement. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after the approval of the Merger by the Company
Requisite Vote or the IOI Requisite Vote referred to in Section 7.1(a), by
mutual written consent of the Company and IOI by action of their respective
Boards of Directors.
SECTION 8.2 Termination by Either IOI or the Company. This Agreement may
be terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either IOI or the Company if:
(a) the Merger shall not have been consummated by March 31, 2001,
whether such date is before or after the date of approval of the Merger by
the Company Requisite Vote or the IOI Requisite Vote (the "TERMINATION
DATE");
(b) 30 days after submission of this Agreement to the Company's or
IOI's shareholders for approval, the Company Requisite Vote or the IOI
Requisite Vote, respectively, shall not have been obtained; or
(c) any Law permanently restraining, enjoining or otherwise
prohibiting consummation of the Merger shall become final and
non-appealable (whether before or after the approval of the Merger by the
Company Requisite Vote or the IOI Requisite Vote);
provided, however, that the right to terminate this Agreement pursuant to this
Section 8.2 shall not be available to any party that has breached in any
material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the occurrence of the failure of the Merger to
be consummated; provided, further, that the right to terminate this Agreement
pursuant to this Section 8.2 shall not be available to (i) the Company in the
event that (A) any shareholder party to the Company Voting Agreement has
materially breached its obligations thereunder or (B) the condition set forth in
Section 7.3(d) shall not have been satisfied, unless and until the parties shall
have used their commercially reasonable efforts to cause such condition to be
satisfied or (ii) IOI in the event that (A) any shareholder party to the IOI
Voting Agreement has materially breached its obligations thereunder or (B) the
condition set forth in Section 7.2(e) shall not have been satisfied, unless and
until the parties shall have used their commercially reasonable efforts to cause
such condition to be satisfied.
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SECTION 8.3 Termination by the Company. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval of the Merger by the Company Requisite Vote
referred to in Section 7.1(a), by action of the Company Board, if:
(a) there is a material breach by IOI of any representation, warranty,
covenant or agreement contained in this Agreement that cannot be cured
within 60 days and would cause a condition set forth in Sections 7.3(a) or
7.3(b) to be incapable of being satisfied as of the Termination Date;
(b) the IOI Board shall have withdrawn its recommendation of this
Agreement in a manner adverse to the Company or shall have resolved to do
the foregoing, except as otherwise permitted pursuant to Section 6.4; or
(c) IOI fails to submit this Agreement to its shareholders for
approval within thirty days of the effectiveness of the S-4.
SECTION 8.4 Termination by IOI. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval of the Merger by the Company Requisite Vote referred to in
Section 7.1(a), by action of the IOI Board, if:
(a) there is a material breach by the Company of any representation,
warranty, covenant or agreement contained in this Agreement that cannot be
cured within 60 days and would cause a condition set forth in Sections
7.2(a) or 7.2(b) to be incapable of being satisfied as of the Termination
Date;
(b) the Company Board shall have withdrawn its recommendation of this
Agreement in a manner adverse to IOI or shall have resolved to do the
foregoing, except as otherwise permitted pursuant to Section 6.4;
(c) the Company fails to submit this Agreement to its shareholders for
approval within thirty days of the effectiveness of the S-4; or
(d) the condition regarding appraisal rights set forth in Section
7.2(m) is not satisfied.
SECTION 8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, this Agreement (other than this Section 8.5, Section 5.3(c) and
Article IX) shall become void and of no effect with no liability on the part of
any party hereto (or of any of its directors, officers, employees, consultants,
contractors, agents, legal and financial advisors, or other representatives);
provided, however, that except as otherwise provided herein, no such termination
shall relieve any party hereto of any liability or damages resulting from any
willful material breach of this Agreement.
SECTION 8.6 Amendment. This Agreement may be amended by action taken by
the Company and IOI at any time before or after approval of the Merger by the
Company Requisite Vote but, after any such approval, no amendment shall be made
which changes the amount or form of the Share Consideration. This Agreement may
not be amended except by an instrument in writing signed on behalf of the
parties hereto.
SECTION 8.7 Extension; Waiver. At any time prior to the Effective Time,
each party hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto, or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of either party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Entire Agreement; Assignment.
(a) This Agreement constitutes the entire agreement between the parties
hereto in respect of the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, between the parties in
respect of the subject matter hereof.
(b) Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by operation of Law (including, by merger or
consolidation) or otherwise; provided, however, that IOI may assign, in its sole
discretion, any or all of its rights, interests and obligations under this
Agreement to any direct wholly owned subsidiary of IOI, but no such assignment
shall relieve IOI of its obligations hereunder if such assignee does not perform
such obligations. Any assignment in violation of the preceding sentence shall be
void. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by, the parties and their respective
successors and permitted assigns.
SECTION 9.2 Notices. All notices, requests, instructions or other
documents to be given under this Agreement shall be in writing and shall be
deemed given, (i) five business days following sending by registered or
certified mail, postage prepaid, (ii) when sent if sent by facsimile; provided,
however, that the facsimile is promptly confirmed by telephone confirmation
thereof, (iii) when delivered, if delivered personally to the intended
recipient, and (iv) one business day following sending by overnight delivery via
a national courier service, and in each case, addressed to a party at the
following address for such party:
<TABLE>
<S> <C>
if to IOI, to: Integrated Orthopaedics, Inc.
1800 W. Loop South
Suite 1030
Houston, Texas 77027
Attention: Scott J. Hancock
Facsimile: (650) 234-0525
with a copy to: Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
Attention: Michael A. Saslaw
Facsimile: (214) 746-7777
if to the Company, to: PowerBrief, Inc.
5858 Westheimer
Suite 500
Houston, Texas 77057
Attention: Robert W. Ohnesorge
Facsimile: (713) 586-4790
with a copy to: Locke Liddell & Sapp LLP
3400 Chase Tower, 600 Travis
Houston, Texas 77002-3095
Attention: David F. Taylor
Facsimile: (713) 223-3717
</TABLE>
or to such other address or facsimile number as the person to whom notice is
given may have previously furnished to the other in writing in the manner set
forth above.
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SECTION 9.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Texas, without giving
effect to the choice of Law principles thereof.
SECTION 9.4 Expenses. The Company shall be solely responsible for the
legal, accounting and other fees and expenses incurred by the Company in
connection with the execution of this Agreement. IOI shall be solely responsible
for the legal, accounting and other fees and expenses incurred by IOI in
connection with the execution of this Agreement. All Reimbursable Transaction
Expenses shall be the joint responsibility of IOI and the Company. In the event
the Merger is not consummated, Reimbursable Transaction Expenses shall be shared
equally by IOI and the Company, regardless of which party incurred such
expenses; provided, however, that if the Company properly exercises its right to
terminate this Agreement based solely on a failure of IOI to fulfill the
condition set forth in Section 7.3(e), IOI shall not be entitled to receive
reimbursement for any expenses incurred by it. Any and all Transfer Taxes shall
be timely paid by the Company.
SECTION 9.5 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 9.6 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns, and, except as provided in Section 6.6, nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 9.7 Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
SECTION 9.8 Specific Performance. The parties agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement, this being in addition
to any other remedy to which they are entitled at Law or in equity.
SECTION 9.9 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 9.10 Further Assurances. Each party to this Agreement agrees (i)
to furnish upon request to the other party such further information, (ii) to
execute and deliver to the other party such other documents and (iii) to do such
other acts and things as the other party reasonably requests for the purpose of
carrying out the intent of this Agreement and the documents and instruments
referred to herein.
SECTION 9.11 Interpretation.
(a) The words "hereof," "herein," "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, paragraph, exhibit, and schedule references are to the articles,
sections, paragraphs, exhibits, and schedules of this Agreement unless otherwise
specified. Whenever the words "include," "includes," or "including" are used in
this Agreement, they shall be deemed to be followed by
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the words "without limitation." All terms defined in this Agreement shall have
the defined meanings contained herein when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such terms. Any agreement, instrument, or statute
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement, instrument, or statute as from time to time,
amended, qualified or supplemented, including (in the case of agreements and
instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes and all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns.
(b) The phrases "the date of this Agreement," "the date hereof," and terms
of similar import, unless the context otherwise requires, shall be deemed to
refer to September 15, 2000.
(c) The parties 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 and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
SECTION 9.12 Definitions. As used herein,
(a) "AFFILIATE" has the meaning given to it in Rule 12b-2 of Regulation 12B
under the Exchange Act.
(b) "KNOW" or "KNOWLEDGE" means, (i) in respect of IOI, the knowledge of
Jose Kauachi, Scott Hancock, Laurie Hill Gutierrez and Douglas Badertscher and
(ii) in respect of the Company, the knowledge of Ernie Rapp, Robb Ohnesorge and
Wade Bennett, in each case after due inquiry, including without limitation, due
inquiry of IOI's or the Company's appropriate legal advisors, as applicable, and
IOI's or the Company's independent public accountants, as applicable.
(c) "LIEN" means, in respect of any asset (including, any security) any
mortgage, lien, pledge, charge, security interest, or encumbrance of any kind in
respect of such asset.
(d) "MATERIAL ADVERSE EFFECT" means in respect of any entity, any change,
circumstance or effect that, individually or in the aggregate with all other
changes, circumstances and effects, is or would be reasonably likely to be
materially adverse to (i) the assets, properties, condition (financial or
otherwise), results of operations or prospects of such entity and its
subsidiaries taken as a whole, other than any change, circumstance or effect
resulting directly and primarily from changes in general economic or industry
conditions, or (ii) the ability of such party to consummate the transactions
contemplated by this Agreement.
(e) "PERMITTED LIEN" means a statutory Lien not yet delinquent; a purchase
money Lien arising in the ordinary course of business consistent with past
practices; a Lien reflected in the financial statements of the applicable party;
or a Lien which does not materially detract from the value or impair the use of
the asset or property in question.
(f) "PERSON" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group (as defined in the Exchange Act).
(g) "SUBSIDIARY" means, in respect of any party, any corporation,
partnership or other entity or organization, whether incorporated or
unincorporated, of which (i) such other party or any other subsidiary of such
party is a general partner (excluding such partnerships where such party or any
subsidiary of such party does not have a majority of the voting interest in such
partnership) or (ii) at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions in respect of such corporation
or other organization is directly or indirectly owned or controlled by such
party or by any one or more of its subsidiaries, or by such party and one or
more of its subsidiaries.
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(h) "TRANSFER TAXES" means any and all state, local, foreign or provincial
sales, use, real property, stock transfer or similar taxes (including any
interest or penalties with respect thereto, but not including any shareholder
level taxes based upon net income) attributable to the transactions contemplated
herein.
SECTION 9.13 Nonsurvival of Representations, Warranties, and
Agreements. The representations, warranties, and agreements of IOI and the
Company contained in this Agreement shall not survive the Effective Time except
for the agreements contained in Sections 2.1, 2.2, 6.6, 6.9, 6.18, 6.19, 6.20,
8.5 and Article IX and the agreements delivered pursuant to Section 6.10.
[THE REMAINDER OF PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the date first above written.
POWERBRIEF, INC.
By: /s/ ERNEST D. RAPP
----------------------------------
Name: Ernest D. Rapp
Title: CEO
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ SCOTT J. HANCOCK
----------------------------------
Name: Scott J. Hancock
Title: Director
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AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to Agreement and Plan of Merger (this "Amendment") is
entered into as of November 20, 2000, by and among POWERBRIEF, INC., a Delaware
corporation (the "Company"), and INTEGRATED ORTHOPAEDICS, INC., a Texas
corporation ("IOI").
WHEREAS, the Company and IOI have entered into that certain Agreement and
Plan of Merger, dated as of September 15, 2000 (the "Merger Agreement");
WHEREAS, the parties hereto desire to amend the Merger Agreement as
hereinafter set forth;
WHEREAS, the Company desires to consent to the amendment of the employment
agreements with Douglas P. Baderscher, James Needham and Laurie Hill Gutierrez
on October 24, 2000 (the "Employment Agreement Amendments");
WHEREAS, IOI desires to consent to the grant of certain stock options by
the Company that would otherwise be prohibited by Section 5.1(b) of the Merger
Agreement; and
WHEREAS, the boards of directors of the Company and IOI have approved this
Amendment;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Definitions. The capitalized terms used, but not defined, in this
Amendment are defined in the Merger Agreement.
2. Amendments to Section 2.1 -- Conversion of Shares.
(a) The reference to ".0454" contained in Section 2.1(a)(i) of the Merger
Agreement, relating to the number of shares of IOI Common Stock purchasable with
Series A Warrants to be received in exchange for shares of Company Common Stock
by virtue of the Merger, is hereby amended to read "0.1370."
(b) Clause (iii) of Section 2.1(a)(i), which says "(iii) a Series B warrant
to purchase .0850 shares of IOI Common Stock (the "SERIES B WARRANTS"and
together with the Series A Warrants, the "WARRANTS")," shall be amended and
restated to read "(iii) a Series B warrant to purchase a number shares of IOI
Common Stock equal to the quotient of (x) the Maximum Series B Warrants Amount,
divided by (y) the sum of (I) the number of share of Company Common Stock
outstanding, (II) the number of shares of Series A Preferred Stock outstanding
multiplied bythree (3), and (III) the number of shares of Company Common Stock
purchasable under the Company Warrants, each as the Effective Time (the "SERIES
B WARRANTS"and together with the Series A Warrants, the "WARRANTS")."
(c) The reference to "9.054" contained in Section 2.1(a)(ii) of the Merger
Agreement, relating to the number of shares of IOI Common Stock to be received
in exchange for each share of the Company's Series A Preferred Stock by virtue
of the Merger, is hereby amended to read "9.053."
(d) The reference to ".1363" contained in Section 2.1(a)(ii) of the Merger
Agreement, relating to the number of shares of IOI Common Stock purchasable with
Series A Warrants to be received in exchange for shares of the Company's Series
A Preferred Stock by virtue of the Merger, is hereby amended to read "0.4111."
(e) Clause (iii) of Section 2.1(a)(ii), which says "(iii) a Series B
warrant to purchase .2549 shares of IOI Common Stock," shall be amended and
restated to read "(iii) a Series B warrant to purchase a number shares of IOI
Common Stock equal to the product of (x) the number of shares purchasable with a
Series B Warrant given in exchange for a share of Company Common Stock pursuant
to Section 2.1(a)(i) above, multiplied by (y) three (3)."
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(f) The first sentence of Section 2.1(d) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following two sentences:
"(d) Upon the Effective Time, the Surviving Corporation will effect a five
to one reverse stock split of IOI Common Stock. The shares of IOI Common
Stock, Series A Warrants and Series B Warrants issuable pursuant to this
Article II shall be subject to and effected by such reverse stock split."
(g) The last paragraph of Section 2.1(a)(ii) of the Merger Agreement is
hereby amended and restated in its entirety to read as follows:
"Notwithstanding anything to the contrary herein, the maximum number of (A)
shares of IOI Common Stock issuable pursuant to Sections 2.1(a)(i) and
2.1(a)(ii) and Section 2.2 shall be 69,073,062 shares, (B) Series A
Warrants issuable pursuant to Section 2.1(a)(i) and 2.1(a)(ii) and 2.1(b)
shall entitle the holders thereof to purchase an aggregate of 2,673,332
shares of IOI Common Stock and (C) Series B Warrants issuable pursuant to
Section 2.1(a)(i) and 2.1(a)(ii) and Section 2.2(b) shall entitle the
holders thereof to purchase an aggregate number of shares of IOI Common
Stock equal to the aggregate number of shares of IOI Common Stock that may
be purchased under the warrants of IOI issued and outstanding as of
September 15, 2000 (the "EXISTING IOI WARRANTS"), as adjusted pursuant to
the anti-dilution provisions of the Existing IOI Warrants as a result of
the issuance of the IOI Warrants as permitted and contemplated by Section
6.16 (the "MAXIMUM SERIES B WARRANTS AMOUNT"). For clarification, neither
the IOI Warrants nor the Series A Warrants will receive any anti-dilution
adjustment for issuance of the Series A Warrants, the Series B Warrants or
any IOI Common Stock in the Merger. In the event that prior to the Closing
any of the options described in Section 2.2(a) are exercised, the maximum
number of Series A Warrants and the Series B Warrants will be reallocated,
on a pro-rata basis, among all of the holders of outstanding Company Common
Stock, Series A Preferred Stock and warrants. The foregoing amounts do not
limit the number of shares of IOI Common Stock issuable pursuant to Section
2.1(a)(iii) below."
3. Amendment to Section 3.2 -- Capitalization of the Company. Section 3.2
of the Merger Agreement is hereby amended by deleting the reference to the
amount of "551,025," which describes the number of Common Shares reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of the Company's outstanding warrants, and replacing such amount with
"560,116."
4. Amendment to Section 7.3(h) -- Conditions to Obligations of the
Company. Section 7.3(h) of the Merger Agreement is hereby amended and restated
in its entirety to read as follows:
"(h) The Series B Warrants outstanding as of the date hereof will be
amended to conform in all material respects with the form of Series B
Warrant attached hereto as Exhibit H and to waive the applicability of any
anti-dilution protection resulting from the transactions contemplated by
this Agreement; provided that such amendment shall not waive the
applicability of the any anti-dilution protection with regard to the
issuance of the IOI Warrants as permitted and contemplated by Section
6.16."
5. Amendment to Exhibit H -- Warrant Agreement for Series B
Warrants. Exhibit H to the Merger Agreement is hereby deleted in its entirety
and replaced with a new Exhibit H attached to this Amendment as Annex I, which
(a) changes the expiration date of the Series B Warrants from a date that is
four years from the date that the Series B Warrants first became exercisable to
June 30, 2005, (b) changes the exercise price of the Series B Warrants to that
of the Existing IOI Warrants, as adjusted pursuant to their anti-dilution
provisions for the issuance of the IOI Warrants as permitted and contemplated in
Section 6.16 of the Merger Agreement, and (c) includes other amendments to the
Series B Warrants that have been mutually agreed to by the parties.
6. Amendment to Exhibit I -- Warrant Agreement for Series A
Warrants. Exhibit I to the Merger Agreement is hereby deleted in its entirety
and replaced with a new Exhibit I attached to this Amendment as Annex II, which
(a) changes the expiration date of the Series A Warrants from a date that is
four years from the date that the Series A Warrants first became exercisable to
a date that is five years from
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<PAGE> 238
the Closing Date, and (b) includes other amendments to the Series B Warrants
that have been mutually agreed to by the parties.
7. Consent to Employment Agreement Amendments. The Company hereby consents
to the Employment Agreement Amendments, copies of which are attached as Annex
III, and the actions taken by IOI in connection therewith. Furthermore, the
Company hereby waives IOI's compliance with the Merger Agreement, including,
without limitation, compliance with Section 5.2(f), solely with respect to the
entering into, and performance of, the Employment Agreement Amendments by IOI.
The foregoing consent and waiver applies only to the Employment Agreement
Amendments and the actions taken by IOI in connection therewith, and nothing
contained in this paragraph shall be a waiver of any other present or future
compliance with the Merger Agreement
8. Consent to Grant of Certain Stock Options. IOI hereby consents to the
grant of options exercisable for 98,350 shares of Company Common Stock under the
Company's 2000 Equity Incentive Plan and the actions taken by the Company in
connection therewith. Furthermore, IOI hereby waives the Company's compliance
with the Merger Agreement, including, without limitation, compliance with
Section 5.1(b), solely with respect to the grant of stock options contemplated
by this Section 8. The foregoing consent and waiver applies only to the grant of
stock options authorized by this Section 8 and the actions taken by the Company
in connection therewith, and nothing contained in this paragraph shall be a
waiver of any other present or future compliance with the Merger Agreement
9. Merger Agreement in Effect. Except as herein amended, the Merger
Agreement shall remain valid and subsisting in accordance with its terms. In the
event of any conflict or inconsistency between this Amendment and the Merger
Agreement, the provisions of this Amendment shall govern and control.
10. Governing Laws. This Amendment shall be governed by and construed in
accordance with the Laws of the State of Texas, without giving effect to the
choice of Law principals thereof.
11. Description Headings. The description headings herein are for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Amendment.
12. Severability. The provisions of this Amendment shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Amendment, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Amendment and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on its behalf as of the day and year first above written.
POWERBRIEF, INC.:
By: /s/ ERNEST D. RAPP
----------------------------------
Name: Ernest D. Rapp
Title: Chief Executive Officer
INTEGRATED ORTHOPAEDICS, INC.:
By: /s/ SCOTT J. HANCOCK
----------------------------------
Name: Scott J. Hancock
Title: Director
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APPENDIX B
[OPINION OF MCFARLAND, GROSSMAN & COMPANY]
September 15, 2000
Board of Directors
PowerBrief, Inc.
5858 Westheimer, Suite 500
Houston, TX 77057
Gentlemen:
You have requested our opinion as to the fairness and reasonableness, from
a financial point of view, to the holders of the outstanding shares of (i)
common stock, par value $.01 per share (the "Common Stock") and (ii) preferred
stock, par value $0.01 per share (the "Preferred Stock"), of PowerBrief, Inc.
(the "Company"), a Delaware corporation, of the proposed Agreement and Plan of
Merger hereafter referred to.
Pursuant to the Agreement and Plan of Merger dated September 15, 2000, as
amended (the "Merger Agreement") by and between PowerBrief, Inc., a Delaware
corporation (the "Company"), and Integrated Orthopaedics, Inc., a Texas
Corporation ("IOI"), the parties desire to merge the Company into IOI with the
holders of Company Common Stock and Preferred Stock to receive common stock, par
value $0.001 per share, of IOI ("IOI Common Stock"), warrants to purchase shares
of IOI Common Stock, and other consideration as set forth in the Merger
Agreement ("the Merger").
The Merger Agreement provides, among other things, that upon consummation
of the Merger each outstanding share of the Company's Common Stock will be
converted and exchanged for the right to receive (i) 3.018 shares of IOI Common
Stock, (ii) a Series A Warrant to purchase 0.1370 shares of IOI Common Stock and
(iii) a Series B warrant to purchase a range from 0.3295 to 0.3841 shares of IOI
Common Stock. The Merger Agreement further provides that, to the extent not
converted into Company Common Stock prior to consummation of the Merger, each
share of the Company's Series A Preferred Stock will be converted and exchanged
for the right to receive (i) 9.053 shares of IOI Common Stock, (ii) a Series A
warrant to purchase 0.4111 shares of IOI Common Stock, and (iii) a Series B
warrant to purchase a range from 0.9884 to 1.1522 shares of IOI Common Stock.
The terms and conditions of the Merger are more fully described in the Merger
Agreement.
McFarland, Grossman & Company, Inc., as a customary part of its investment
banking business, is routinely engaged in the issuance of fairness opinions and
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements and valuations
for estate, corporate and other purposes.
In arriving at our opinion, we have among other things:
- reviewed the Agreement and Plan of Merger dated September 15, 2000;
- reviewed certain publicly available financial information concerning IOI;
- held discussions with members of the management of the Company regarding
the business and prospects of the Company;
- compared certain financial and stock market information with respect to
the Company with similar information with respect to certain companies
whose securities are publicly traded and are believed to be similar to
the Company;
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Board of Directors
PowerBrief, Inc.
September 15, 2000
Page 2
- reviewed certain internal financial analyses and projections and other
internal information concerning the business and operations of the
Company, prepared by the Company's management;
- reviewed and analyzed financings completed by early stage companies
comparable to the Company in terms of target market, products and
services;
- analyzed and reviewed recent acquisitions of companies whose securities
are publicly traded and are believed to be similar to the Company;
- held discussions with attorneys, accountants and investment bankers
specializing in reverse mergers and public shell companies regarding
public shell valuation and legal issues;
- considered the liquidation value of the common stock held by the public
shareholders of IOI; and
- performed such other studies and analyses and considered such other
factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the financial projections or other information relating
to the prospects of the Company, we have assumed that such projections or
information reflect the most currently available estimates and judgements of the
management of the Company as to its likely future financial performance. We
express no view as to such projections or the assumptions on which they are
based. We were not asked by the Board of Directors to solicit any merger offers
for the Company from any other party, nor did we seek any such offers. In
addition, we have not made an independent evaluation or appraisal of the assets
or liabilities of the Company or IOI, nor have we been furnished with any such
current evaluation or appraisal of the assets or liabilities of the Company. Our
opinion is based on market, economic and other conditions as they exist and can
be evaluated as of the date of this letter. It should be understood that,
although subsequent events may affect this opinion, we do not have any
obligation to update, revise or reaffirm this opinion other than that delineated
in our engagement agreement with the Company dated August 11, 2000.
McFarland, Grossman & Company, Inc. has not acted as a financial advisor or
investment banker to the Company in connection with any previous or pending
transactions. Accordingly, you have not requested us to, and we have not,
participated in the structuring of the Merger.
Our engagement and the opinion expressed herein (including all matters set
forth in the attached report) are solely for the benefit of the Company's Board
of Directors in connection with the Merger and are not on behalf of, or intended
to confer rights or remedies upon, the Company or any stockholder of the Company
or any person other than the Company's Board of Directors. This letter and the
attached report may not be used for any other purpose, or published or referred
to (in full or in part) except with respect to references in the Company's
public filings (e.g., a registration statement on Form S-4), without our prior
written consent, which consent shall not be unreasonably withheld.
Based upon and subject to the foregoing and such other factors as we deemed
relevant, we are of the opinion that, as of the date of this letter, the Merger
is fair and reasonable, from a financial point of view, to the holders of the
Common and Preferred Stock.
Sincerely,
/s/ McFarland, Grossman & Company, Inc.
McFarland, Grossman & Company, Inc.
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APPENDIX C
VOTING AGREEMENT
This Voting Agreement dated as of September 15, 2000 (this "Agreement"), is
made by and among PowerBrief, Inc., a Delaware corporation (the "Company"), and
each of the undersigned holders of shares of capital stock (each, a
"Stockholder" and collectively, the "Stockholders") of Integrated Orthopaedics,
Inc., a Texas corporation ("IOI").
PRELIMINARY STATEMENTS
Concurrently with the execution of this Agreement, the Company and IOI have
entered into an Agreement and Plan of Merger (as the same may be amended from
time to time, the "Merger Agreement"), providing for the merger of the Company
with and into IOI, with IOI being the surviving corporation (the "Merger"),
which Merger is subject to the approval of the holders of shares of capital
stock of IOI as provided in the Merger Agreement, the Texas Business Corporation
Act, as amended, and IOI's Articles of Incorporation, as amended.
The Stockholders own the shares of IOI common stock, par value $0.001 per
share (the "Common Stock"), set forth opposite their respective names on Exhibit
A hereto. As used herein, the term "Shares" includes all shares of such Common
Stock as to which each Stockholder (at any time prior to the termination of this
Agreement) is the beneficial or record owner or is otherwise able to direct the
voting thereof and all securities issued or exchanged with respect to any such
Shares upon any reclassification, recapitalization, reorganization, merger,
consolidation, spin-off, stock split, combination, stock or other dividend or
any other change in IOI's capital structure.
To induce the Company to enter into the Merger Agreement, IOI has agreed,
upon the terms and subject to the conditions set forth herein, to cause holders
of not less than a majority of the voting power of the outstanding shares of
Common Stock to execute this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties to this
Agreement agree as follows:
1. Stockholders' Representations and Warranties. Each Stockholder, as to
itself only, represents and warrants to the Company that (i) such Stockholder is
the beneficial and record owner of the Shares set forth on Exhibit A hereto,
free and clear of any mortgage, pledge, lien, security interest, claim,
restriction on voting or otherwise or other encumbrance, (ii) such Stockholder
has the sole right to vote such Shares free of any mortgage, pledge, lien,
security interest, claim, restriction on voting or otherwise or other
encumbrance, (iii) such Stockholder has the full and unrestricted legal power,
authority and right to enter into, execute and deliver this Agreement without
the consent or approval of any other person, (iv) this Agreement is the valid
and binding agreement of such Stockholder and (v) no investment banker, broker
or finder is entitled to a commission or fee from such Stockholder or IOI in
respect of this Agreement based upon any arrangement or agreement made by or on
behalf of the Stockholder.
2. The Company's Representations and Warranties. The Company hereby
represents and warrants to the Stockholders as of the date hereof that the
Company has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by the Company, and the consummation of the
transactions contemplated hereby, have been duly authorized by all necessary
corporate action on the part of the Company. This Agreement has been duly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company enforceable in accordance with its terms. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the terms hereof will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time or both) under any provision of, the certificate of
incorporation or bylaws of the Company, any trust agreement, loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
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instrument, permit, concession, franchise, license, judgment, order, notice,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
to the Company's property or assets.
3. No Voting Trusts. Each Stockholder hereby revokes any and all proxies
and voting instructions with respect to the Shares previously given by such
Stockholder and such Stockholder agrees that it will not grant or give any other
proxies or voting instructions with respect to the voting of the Shares, enter
into any voting trust or other arrangement or agreement with respect to the
voting of the Shares (and if given or executed, such proxies, voting
instructions, voting trust or other arrangement or agreement shall not be
effective), or agree, in any manner, to vote the Shares for or against any
proposal submitted to the stockholders of IOI except in furtherance of the
proposals set forth in paragraph 4 hereof.
4. Agreements with Respect to the Shares.
(a) Each Stockholder agrees during the term of this Agreement:
(i) to vote the Shares, to the extent entitled to vote, (x) in
favor of the approval of the Merger Agreement and the Merger and the
sale of the Westbank Ambulatory Care Center and the reverse stock split
contemplated in the Merger Agreement, at every meeting of the
stockholders of IOI at which such matters are considered and at every
adjournment thereof or in any other circumstances upon which a vote,
consent or other approval (including by written consent) with respect to
the Merger and the Merger Agreement and the sale of the Westbank
Ambulatory Care Center and the reverse stock split contemplated in the
Merger Agreement is sought, and (y) against all other proposals
submitted to the stockholders of IOI which, directly or indirectly,
would reasonably be expected to prevent or materially delay the
consummation of the Merger or the transactions contemplated by the
Merger Agreement, in such manner as the Company may direct; and
(ii) not to solicit, encourage or recommend to other stockholders
of IOI that (w) they vote their shares of Common Stock or any such other
securities in any manner contrary to the terms of the Merger Agreement
and the transactions contemplated thereby, (x) they not vote their
shares of Common Stock at all, (y) they tender, exchange or otherwise
dispose of their shares of Common Stock pursuant to a Competing
Transaction (as hereinafter defined), or (z) they attempt to exercise
any statutory appraisal or other similar rights they may have.
(b) Unless otherwise instructed in writing by the Company, during the
term of this Agreement, each Stockholder will vote the Shares against any
Competing Transaction.
(c) Except with the prior written consent of the Company, during the
term of this Agreement, each Stockholder agrees that such Stockholder will
not, and shall use its commercially reasonable efforts not to permit any
employee, attorney, accountant, investment banker or other agent or
representative of such Stockholder to initiate, solicit, negotiate,
encourage, or provide confidential information in order to facilitate any
Competing Transaction.
(d) For purposes of this Agreement, a "Competing Transaction" shall
mean a transaction of any kind (including, without limitation, a merger,
consolidation, share exchange, reclassification, reorganization,
recapitalization, sale or encumbrance of substantially all the assets of
IOI outside the ordinary course of business, or sale or exchange by
stockholders of IOI of all or substantially all the shares of IOI's capital
stock) proposed by any person(s).
5. Proxies. In furtherance of the foregoing, each Stockholder is granting
to Ernest D. Rapp, the Chief Executive Officer of the Company, and/or Robert W.
Ohnesorge, the President of the Company, or to his designee(s), irrevocable
proxies and powers of attorney (which may be in the form annexed hereto or such
other form consistent with the terms hereof and thereof as the Company may
specify) to vote the
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Shares, to the extent such Shares are entitled to vote, and hereby specifically
agrees not to revoke such proxies granted under any circumstances:
(a) at any and all meetings of stockholders of IOI, notice of which
meetings are given prior to the due and proper termination of this
Agreement, with respect to matters presented to IOI's stockholders for a
vote which relates to or affects (i) the Merger or the Merger Agreement or
the sale of the Westbank Ambulatory Care Center or the reverse stock split
contemplated in the Merger Agreement or the approval of any of them; and
(ii) any Competing Transaction; or
(b) with respect to actions to be taken by written consent of the
stockholders of IOI which relates to or affects any of the foregoing, and
which consent is solicited prior to the due and proper termination of this
Agreement.
6. Limitation on Sales. During the term of this Agreement, except pursuant
to the Merger, each Stockholder agrees not to sell, assign, transfer, loan,
tender, pledge, hypothecate, exchange, encumber or otherwise dispose of, or
issue an option or call with respect to, any of the Shares, or impair such
Stockholder's Shares.
7. Specific Performance. Each Stockholder acknowledges that it will be
impossible to measure in money the damage to the Company if the Stockholder
fails to comply with the obligations imposed by this Agreement, and that, in the
event of any such failure, the Company will not have an adequate remedy at law
or in damages. Accordingly, each Stockholder agrees that injunctive relief or
any other equitable remedy, in addition to any remedies at law or damages, is
the appropriate remedy for any such failure and will not oppose the granting of
any such remedy on the basis that the Company has an adequate remedy at law.
Each Stockholder agrees not to seek, and agrees to waive any requirement for,
the securing or posting of a bond in connection with the Company seeking or
obtaining such equitable relief.
8. Reasonable Efforts. Each Stockholder will use all reasonable efforts to
cause to be satisfied the conditions to the obligations of IOI in such
Stockholder's control to effect the Closing under the Merger Agreement.
9. Publicity. Each Stockholder agrees that, from the date hereof through
the Closing Date, such Stockholder shall not issue any public release or
announcement concerning the transactions contemplated by this Agreement and the
Merger Agreement without the prior consent of the Company, except as required by
applicable law.
10. Term of Agreement; Termination.
(a) The term of this Agreement shall commence on the date hereof and
shall terminate upon the earliest to occur of (i) the Effective Time of the
Merger and (ii) the due and proper termination of the Merger Agreement in
accordance with its terms; provided that the term of this Agreement for
Chartwell Capital Investors, L.P., shall not continue past March 31, 2001.
Upon such termination, no party shall have any further obligations or
liabilities hereunder.
(b) The obligations of the Stockholders set forth in this Agreement
shall not be effective or binding upon any Stockholder until after such
time as the Merger Agreement is executed and delivered by IOI and the
Company.
11. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter of this Agreement and
supersedes all prior written and oral and all contemporaneous oral
agreements and understandings with respect to the subject matter of this
Agreement.
(b) Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and shall be
deemed to have been duly given on the next business day after the same is
sent, if delivered personally or sent by telecopy or overnight delivery, or
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five calendar days after the same is sent, if sent by registered or
certified mail, return receipt requested, postage prepaid, as set forth
below, or to such other persons or addresses as may be designated in
writing in accordance with the terms hereof by the party to receive such
notice.
If to the Company:
PowerBrief, Inc.
5858 Westheimer
Suite 500
Houston, Texas 77057
Attention: Robert W. Ohnesorge
Facsimile No: (713) 586-4790
with a copy to:
Locke Liddell & Sapp LLP
3400 Chase Tower, 600 Travis
Houston, Texas 77002-3095
Attention: David F. Taylor
Facsimile No: (713) 223-3717
If to a Stockholder, to the address set forth below such Stockholder's name
on Exhibit A hereto,
with a copy to:
Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
Attention: Michael A. Saslaw
Facsimile No: (214) 746-7777
(c) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas as applied to contracts
made and fully performed in such state without giving effect to the
principles of conflict of laws thereof.
(d) Rules of Construction. The descriptive headings in this Agreement
are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement. Words
used in this Agreement, regardless of the gender and number specifically
used, shall be deemed and construed to include any other gender, masculine
or feminine, or neuter, and any other number, singular or plural, as the
context requires. As used in this Agreement, the word "including" is not
limiting, and the word "or" is not exclusive. Capitalized terms used herein
but not otherwise defined herein shall have the meanings given to them in
the Merger Agreement.
(e) Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of the parties to this Agreement and their
legal successors-in-interest, and nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, and each of such counterparts shall for all purposes be
deemed to be an original, but all such counterparts together shall
constitute but one instrument.
(g) Assignment. No party hereto shall assign its rights and
obligations under this Agreement or any part thereof, nor shall any party
assign or delegate any of its rights or duties hereunder without the prior
written consent of the other party, and any assignment made without such
consent shall be void. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
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(h) Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
(i) Extension; Waiver. Any party to this Agreement may extend the
time for the performance of any of the obligations or other acts of any of
the other parties to this Agreement or waive compliance by any other party
with any of the agreements or conditions contained herein or any breach
thereof. Any agreement on the part of any party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed
on behalf of such party.
(j) Severability. The provisions of this Agreement are severable and,
if any thereof are invalid or unenforceable in any jurisdiction, the same
and the other provisions hereof shall not be rendered otherwise invalid or
unenforceable.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have duly executed this Voting Agreement as of the date first above
written.
POWERBRIEF, INC.
By: /s/ ERNEST D. RAPP
----------------------------------
Name: Ernest D. Rapp
Title: CEO
FW INTEGRATED ORTHOPAEDICS
INVESTORS, L.P.
By: GROUP 31, INC., its General
Partner
By: /s/ KEVIN G. LEVY
--------------------------------
Name: Kevin G. Levy
Title: Vice President
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FW INTEGRATED ORTHOPAEDICS INVESTORS
II, L.P.
By: FW GROUP GENPAR, INC., its General
Partner
By: /s/ KEVIN G. LEVY
----------------------------------
Name: Kevin G. Levy
Title: Vice President
CHARTWELL CAPITAL INVESTORS, L.P.
By: CHARTWELL CAPITAL PARTNERS, L.P.,
its General Partner
By: CHARTWELL PARTNERS, L.P., its
General Partner
By: CHARTWELL, Inc., its General
Partner
By:/s/ MINDY LANIGAN
-------------------------------
Name: Mindy Lanigan
Title: Vice President
/s/ JOSE E. KAUACHI
--------------------------------------
Jose E. Kauachi
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EXHIBIT A
HOLDINGS OF COMMON STOCK AS OF SEPTEMBER 15, 2000
<TABLE>
<S> <C>
Name of Stockholder: FW Integrated Orthopaedics Investors, L.P.
Address: 201 Main Street, Suite 3100
Fort Worth, Texas 76102
Telephone No.: (817) 390-8503
Facsimile No.: (817) 338-2067
Number of Shares of Common Stock: 10,640,962
Name of Stockholder: FW Integrated Orthopaedics Investors II, L.P.
Address: 201 Main Street, Suite 3100
Fort Worth, Texas 76102
Telephone No.: (817) 390-8503
Facsimile No.: (817) 338-2067
Number of Shares of Common Stock: 10,640,962
Name of Stockholder: Chartwell Capital Investors, L.P.
Address: One Independent Drive
Suite 3120
Jacksonville, FL 32202
Telephone No.: (904) 355-3519
Facsimile No.: (904) 353-5833
Number of Shares of Common Stock: 2,373,863
Name of Stockholder: Jose E. Kauachi
Address: 245 Castle Ridge
Edwards, Colorado 81632
Telephone No.: (970) 926-8595
Facsimile No.: (970) 926-8550
Number of Shares of Common Stock: 1,162,537
</TABLE>
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APPENDIX D
VOTING AGREEMENT
This Voting Agreement dated as of September 15, 2000 (this "Agreement"), is
made by and among Integrated Orthopaedics, Inc., a Texas corporation ("IOI"),
and each of the undersigned holders of shares of capital stock (each, a
"Stockholder" and collectively, the "Stockholders") of PowerBrief, Inc., a
Delaware corporation (the "Company").
PRELIMINARY STATEMENTS
Concurrently with the execution of this Agreement, the Company and IOI have
entered into an Agreement and Plan of Merger (as the same may be amended from
time to time, the "Merger Agreement"), providing for the merger of the Company
with and into IOI, with IOI being the surviving corporation (the "Merger"),
which Merger is subject to the approval of the holders of shares of capital
stock of the Company as provided in the Merger Agreement, the Delaware General
Corporation Law, as amended, and the Company's Certificate of Incorporation, as
amended.
The Stockholders own the shares of the Company common stock, par value
$0.01 per share (the "Common Stock"), set forth opposite their respective names
on Exhibit A hereto. As used herein, the term "Shares" includes all shares of
such Common Stock as to which each Stockholder (at any time prior to the
termination of this Agreement) is the beneficial or record owner or is otherwise
able to direct the voting thereof and all securities issued or exchanged with
respect to any such Shares upon any reclassification, recapitalization,
reorganization, merger, consolidation, spin-off, stock split, combination, stock
or other dividend or any other change in the Company's capital structure.
To induce IOI to enter into the Merger Agreement, the Company has agreed,
upon the terms and subject to the conditions set forth herein, to cause holders
of not less than a majority of the voting power of the outstanding shares of
Common Stock and Series A Preferred Stock, par value $0.01 per share (the
"Series A Preferred Stock"), of the Company, which will vote together on the
Merger as a single class, to execute this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties to this
Agreement agree as follows:
1. Stockholders' Representations and Warranties. Each Stockholder, as to
itself only, represents and warrants to IOI that (i) such Stockholder is the
beneficial and record owner of the Shares set forth on Exhibit A hereto, free
and clear of any mortgage, pledge, lien, security interest, claim, restriction
on voting or otherwise or other encumbrance, (ii) such Stockholder has the sole
right to vote such Shares free of any mortgage, pledge, lien, security interest,
claim, restriction on voting or otherwise or other encumbrance, (iii) such
Stockholder has the full and unrestricted legal power, authority and right to
enter into, execute and deliver this Agreement without the consent or approval
of any other person, (iv) this Agreement is the valid and binding agreement of
such Stockholder and (v) no investment banker, broker or finder is entitled to a
commission or fee from such Stockholder or the Company in respect of this
Agreement based upon any arrangement or agreement made by or on behalf of the
Stockholder.
2. IOI's Representations and Warranties. IOI hereby represents and
warrants to the Stockholders as of the date hereof that IOI has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by IOI, and the consummation of the transactions contemplated hereby, have been
duly authorized by all necessary corporate action on the part of IOI. This
Agreement has been duly executed and delivered by IOI and constitutes a valid
and binding obligation of IOI enforceable in accordance with its terms. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the terms hereof will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time or both) under any provision of, the articles of incorporation
or
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bylaws of IOI, any trust agreement, loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit, concession,
franchise, license, judgment, order, notice, decree, statute, law, ordinance,
rule or regulation applicable to IOI or to IOI's property or assets.
3. No Voting Trusts. Each Stockholder hereby revokes any and all proxies
and voting instructions with respect to the Shares previously given by such
Stockholder and such Stockholder agrees that it will not grant or give any other
proxies or voting instructions with respect to the voting of the Shares, enter
into any voting trust or other arrangement or agreement with respect to the
voting of the Shares (and if given or executed, such proxies, voting
instructions, voting trust or other arrangement or agreement shall not be
effective), or agree, in any manner, to vote the Shares for or against any
proposal submitted to the stockholders of the Company except in furtherance of
the proposals set forth in paragraph 4 hereof.
4. Agreements with Respect to the Shares.
(a) Each Stockholder agrees during the term of this Agreement:
(i) to vote the Shares, to the extent entitled to vote, (x) in
favor of the approval of the Merger Agreement and the Merger at every
meeting of the stockholders of the Company at which such matters are
considered and at every adjournment thereof or in any other
circumstances upon which a vote, consent or other approval (including by
written consent) with respect to the Merger and the Merger Agreement is
sought, and (y) against all other proposals submitted to the
stockholders of the Company which, directly or indirectly, would
reasonably be expected to prevent or materially delay the consummation
of the Merger or the transactions contemplated by the Merger Agreement,
in such manner as IOI may direct; and
(ii) not to solicit, encourage or recommend to other stockholders
of the Company that (w) they vote their shares of Common Stock or Series
Preferred Stock, par value $.01 per share ("Series A Preferred Stock"),
of the Company, or any such other securities in any manner contrary to
the terms of the Merger Agreement and the transactions contemplated
thereby, (x) they not vote their shares of Common Stock or Series A
Preferred Stock at all, (y) they tender, exchange or otherwise dispose
of their shares of Common Stock or Series A Preferred Stock pursuant to
a Competing Transaction (as hereinafter defined), or (z) they attempt to
exercise any statutory appraisal or other similar rights they may have.
(b) Unless otherwise instructed in writing by IOI, during the term of
this Agreement, each Stockholder will vote the Shares against any Competing
Transaction.
(c) Except with the prior written consent of IOI, during the term of
this Agreement, each Stockholder agrees that such Stockholder will not, and
shall use its commercially reasonable efforts not to permit any employee,
attorney, accountant, investment banker or other agent or representative of
such Stockholder to initiate, solicit, negotiate, encourage, or provide
confidential information in order to facilitate any Competing Transaction.
(d) For purposes of this Agreement, a "Competing Transaction" shall
mean a transaction of any kind (including, without limitation, a merger,
consolidation, share exchange, reclassification, reorganization,
recapitalization, sale or encumbrance of substantially all the assets of
the Company outside the ordinary course of business, or sale or exchange by
stockholders of the Company of all or substantially all the shares of the
Company's capital stock) proposed by any person(s).
5. Proxies. In furtherance of the foregoing, each Stockholder is granting
to Douglas P. Badertscher, the Chief Operating Officer of IOI, and/or Laurie
Hill Gutierrez, the Chief Financial Officer of IOI, or to his or her
designee(s), irrevocable proxies and powers of attorney (which may be in the
form annexed hereto or such other form consistent with the terms hereof and
thereof as IOI may specify) to vote the Shares, to the extent such Shares are
entitled to vote, and hereby specifically agrees not to revoke such proxies
granted under any circumstances:
(a) at any and all meetings of stockholders of the Company, notice of
which meetings are given prior to the due and proper termination of this
Agreement, with respect to matters presented to the
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Company's stockholders for a vote which relates to or affects (i) the
Merger or the Merger Agreement or the approval of either thereof; and (ii)
any Competing Transaction; or
(b) with respect to actions to be taken by written consent of the
stockholders of the Company which relates to or affects any of the
foregoing, and which consent is solicited prior to the due and proper
termination of this Agreement.
6. Limitation on Sales. During the term of this Agreement, except pursuant
to the Merger, each Stockholder agrees not to sell, assign, transfer, loan,
tender, pledge, hypothecate, exchange, encumber or otherwise dispose of, or
issue an option or call with respect to, any of the Shares, or impair such
Stockholder's Shares.
7. Specific Performance. Each Stockholder acknowledges that it will be
impossible to measure in money the damage to IOI if the Stockholder fails to
comply with the obligations imposed by this Agreement, and that, in the event of
any such failure, IOI will not have an adequate remedy at law or in damages.
Accordingly, each Stockholder agrees that injunctive relief or any other
equitable remedy, in addition to any remedies at law or damages, is the
appropriate remedy for any such failure and will not oppose the granting of any
such remedy on the basis that IOI has an adequate remedy at law. Each
Stockholder agrees not to seek, and agrees to waive any requirement for, the
securing or posting of a bond in connection with IOI seeking or obtaining such
equitable relief.
8. Reasonable Efforts. Each Stockholder will use all reasonable efforts to
cause to be satisfied the conditions to the obligations of the Company in such
Stockholder's control to effect the Closing under the Merger Agreement.
9. Publicity. Each Stockholder agrees that, from the date hereof through
the Closing Date, such Stockholder shall not issue any public release or
announcement concerning the transactions contemplated by this Agreement and the
Merger Agreement without the prior consent of IOI.
10. Term of Agreement; Termination.
(a) The term of this Agreement shall commence on the date hereof and
shall terminate upon the earliest to occur of (i) the Effective Time of the
Merger and (ii) the due and proper termination of the Merger Agreement in
accordance with its terms. Upon such termination, no party shall have any
further obligations or liabilities hereunder.
(b) The obligations of the Stockholders set forth in this Agreement
shall not be effective or binding upon any Stockholder until after such
time as the Merger Agreement is executed and delivered by IOI and the
Company.
11. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter of this Agreement and
supersedes all prior written and oral and all contemporaneous oral
agreements and understandings with respect to the subject matter of this
Agreement.
(b) Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and shall be
deemed to have been duly given on the next business day after the same is
sent, if delivered personally or sent by telecopy or overnight delivery, or
five calendar days after the same is sent, if sent by registered or
certified mail, return receipt requested, postage prepaid, as set forth
below, or to such other persons or addresses as may be designated in
writing in accordance with the terms hereof by the party to receive such
notice.
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If to IOI:
Integrated Orthopaedics, Inc.
1800 W. Loop South
Suite 1030
Houston, Texas 77027
Attention: Scott J. Hancock
Facsimile No: (713) 361-2000
with a copy to:
Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
Attention: Michael A. Saslaw
Facsimile No: (214) 746-7777
If to a Stockholder, to the address set forth below such Stockholder's name
on Exhibit A hereto,
with a copy to:
Locke Liddell & Sapp LLP
3400 Chase Tower, Travis
Houston, Texas 77002-3095
Attention: David F. Taylor
Facsimile No: (713) 223-3717
(c) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas as applied to contracts
made and fully performed in such state without giving effect to the
principles of conflict of laws thereof.
(d) Rules of Construction. The descriptive headings in this Agreement
are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement. Words
used in this Agreement, regardless of the gender and number specifically
used, shall be deemed and construed to include any other gender, masculine
or feminine, or neuter, and any other number, singular or plural, as the
context requires. As used in this Agreement, the word "including" is not
limiting, and the word "or" is not exclusive. Capitalized terms used herein
but not otherwise defined herein shall have the meanings given to them in
the Merger Agreement.
(e) Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of the parties to this Agreement and their
legal successors-in-interest, and nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, and each of such counterparts shall for all purposes be
deemed to be an original, but all such counterparts together shall
constitute but one instrument.
(g) Assignment. No party hereto shall assign its rights and
obligations under this Agreement or any part thereof, nor shall any party
assign or delegate any of its rights or duties hereunder without the prior
written consent of the other party, and any assignment made without such
consent shall be void. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
(h) Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
D-4
<PAGE> 253
(i) Extension; Waiver. Any party to this Agreement may extend the
time for the performance of any of the obligations or other acts of any of
the other parties to this Agreement or waive compliance by any other party
with any of the agreements or conditions contained herein or any breach
thereof. Any agreement on the part of any party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed
on behalf of such party.
(j) Severability. The provisions of this Agreement are severable and,
if any thereof are invalid or unenforceable in any jurisdiction, the same
and the other provisions hereof shall not be rendered otherwise invalid or
unenforceable.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have duly executed this Voting Agreement as of the date first above
written.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ SCOTT J. HANCOCK
----------------------------------
Name: Scott J. Hancock
Title: Director
/s/ ROBERT W. OHNESORGE
------------------------------------
Robert W. Ohnesorge
/s/ K. WADE BENNETT
------------------------------------
K. Wade Bennett
D-5
<PAGE> 254
EXHIBIT A
HOLDINGS OF COMMON STOCK AS OF SEPTEMBER 15, 2000
<TABLE>
<S> <C>
Name of Stockholder: Robert W. Ohnesorge
Address: c/o PowerBrief, Inc.
5858 Westheimer
Houston, Texas 77057
Telephone No.: (713) 526-4600
Facsimile No.: (713) 586-4790
Number of Shares of Common Stock: 5,625,000
Name of Stockholder: K. Wade Bennett
Address: c/o PowerBrief, Inc.
5858 Westheimer
Houston, Texas 77057
Telephone No.: (713) 526-4600
Facsimile No.: (713) 586-4790
Number of Shares of Common Stock: 5,625,000
</TABLE>
D-6
<PAGE> 255
APPENDIX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a non-stock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a non-stock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251 (other than a merger effected pursuant to
Section 251(g) of this title), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
E-1
<PAGE> 256
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date
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<PAGE> 257
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
E-3
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 259
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that any
director or officer of a Texas corporation may be indemnified against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by him
in connection with or in defending any action, suit or proceeding in which he
was, is, or is threatened to be made a named defendant by reason of his position
as director or officer, provided that he conducted himself in good faith and
reasonably believed that, in the case of conduct in his official capacity as a
director or officer of the corporation, such conduct was in the corporation's
best interests; and, in all other cases, that such conduct was at least not
opposed to the corporation's best interests. In the case of a criminal
proceeding, a director or officer may be indemnified only if he had no
reasonable cause to believe his conduct was unlawful. If a director or officer
is wholly successful, on the merits or otherwise, in connection with such a
proceeding, such indemnification is mandatory. IOI's bylaws provide for
indemnification of IOI officers and directors to the full extent provided for in
Article 2.02-1 of the Texas Business Corporation Act. Under IOI's bylaws,
subject to the provisions of the laws of the State of Texas and IOI's articles
of incorporation, IOI must indemnify each director or officer, whether or not
then in office, against all costs and expenses (including counsel fees)
reasonably incurred by or imposed upon him in connection with or arising out of
any action, suit or proceeding in which he may be involved as a result of his
being or having been a director or officer of IOI. IOI's indemnification
includes the costs of any settlement approved by IOI's board of directors (other
than amounts to be paid to IOI itself), made with a view to curtailment of costs
of litigation.
In addition, the Texas Miscellaneous Corporation law provides that a
corporation may amend is articles of incorporation to provide that no director
shall be liable to the corporation or its stockholders for monetary damages for
an act or omission in the director's capacity as a director, provided that the
liability of a director is not eliminated or limited (1) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (3) any transaction from which such director derived
an improper personal benefit or (4) an act or omission for which the liability
of a director is expressly provided by an applicable statute. IOI's restated
articles of incorporation, as amended, adopt such limitations on a director's
liability. The IOI restated articles of incorporation, as amended, also provide
for indemnification of directors or officers in connection with the defense or
settlement of suits brought against them in their capacities as directors or
officers of IOI or, if at the request of IOI, as directors or officers of
another corporation of which IOI is a shareholder or creditor and from which the
officer or director is not entitled to indemnification, except in respect of
liabilities arising from the receipt of a personal benefit or in which the
officer or director is found liable to the corporation.
An insurance policy obtained by IOI provides for indemnification of
officers and directors of IOI and various officers and directors of IOI's wholly
owned subsidiaries against liabilities and expenses incurred by any of them in
certain stated proceedings and under certain stated conditions.
For a statement of IOI's undertakings with respect to indemnification of
directors and officers, see Item 22 below.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger dated as of September 15,
2000 between PowerBrief and IOI.(1)
*2.2 -- Amendment to Agreement and Plan of Merger dated as of
November 20, 2000 between PowerBrief and IOI.
</TABLE>
II-1
<PAGE> 260
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Articles of Incorporation of IOI, as amended to date.(2)
3.2 -- Bylaws of IOI, as amended to date.(3)
**3.3 -- Form of Articles of Incorporation of New PowerBrief.
**3.4 -- Form of Bylaws of New PowerBrief.
4.1 -- Certificate of Designation and Determination of Rights
and Preferences of Cumulative Convertible Preferred
Stock, series A of IOI.(4)
4.2 -- Certificate of Designation, Rights and Preferences of
series B Convertible, Non-Redeemable Preferred Stock of
IOI.(5)
4.3 -- Warrant Agreement dated as of December 12, 1997, by and
among IOI, FW Integrated Orthopaedics Investors, L.P. and
FW Integrated Orthopaedics Investors II, L.P.(6)
4.4 -- Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors, L.P.(7)
4.5 -- Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics II, L.P.(8)
**4.6 -- Registration Rights Agreement between DRCA Medical
Corporation and Chartwell Capital Investors, L.P. dated
April 12, 1996.
4.7 -- Registration Rights Agreement dated as of December 12,
1997 by and among IOI, FW Integrated Orthopaedics
Investors, L.P. and FW Integrated Orthopaedics Investors
II, L.P.(9)
4.8 -- Specimen of Common Stock Certificate.(10)
**4.9 -- Form of series A warrant.
**4.10 -- Form of series B warrant.
**5.1 -- Opinion of Weil, Gotshal & Manges LLP regarding validity.
**8.1 -- Opinion of Weil, Gotshal & Manges LLP regarding tax
matters.
**8.2 -- Opinion of Locke Liddell & Sapp LLP regarding tax
matters.
10.1 -- 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America.(11)
10.2 -- Amendment of 1988 Stock Option Plan.(12)
10.3 -- Incentive Stock Option Agreement between IOI and William
F. Donovan, M.D. dated February 2, 1995.(13)
10.4 -- Investment Agreement by and between IOI and Chartwell
Capital Investors, L.P. dated April 12, 1996.(14)
10.5 -- Consulting Agreement between IOI and Jose E. Kauachi
dated December 12, 1997.(15)
10.6 -- Termination and Release Agreement between IOI and Jose E.
Kauachi dated December 31, 1997.(16)
10.7 -- IOI's 1997 Long Term Incentive Plan.(17)
10.8 -- Securities Purchase Agreement dated as of December 12,
1997 by and among IOI, FW Integrated Orthopaedics
Investors, L.P., FW Integrated Orthopaedics Investors II,
L.P. and certain other signatories.(18)
10.9 -- Agreement to Terminate the Management Agreement effective
as of December 31, 1999, by and between Front Range
Orthopedic Clinic, P.C. and IOI Management Services of
Colorado, Inc.(19)
</TABLE>
II-2
<PAGE> 261
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10 -- Asset Purchase Agreement dated January 27, 2000 by and
between IOI Management Services of Colorado, Inc. and
Front Range Orthopedic Clinic, P.C.(20)
10.11 -- Asset Purchase Agreement dated January 27, 2000 by and
between IOI Management Services of Colorado, Inc. and
Front Range Orthopedic Clinic, P.C.(21)
10.12 -- Asset Purchase Agreement dated April 12, 2000, by and
between IOI Management Services of Pennsylvania, Inc. and
Lancaster Orthopedic Group, P.C.(22)
10.13 -- Agreement to Terminate the Management Agreement dated
April 12, 2000, by and between IOI Management Services of
Pennsylvania, Inc. and Lancaster Orthopedic Group,
P.C.(23)
10.14 -- Amendment of IOI's 1997 Long Term Incentive Plan.(24)
10.15 -- Asset Purchase Agreement dated September 18, 2000 by and
between IOI Management Services of Louisiana, Inc. and
Doctors Katz and DiGrado, Inc.(25)
10.16 -- Agreement to Terminate the Management Agreement dated
September 18, 2000, by and between IOI Management
Services of Louisiana, Inc. and Westside Orthopedic
Clinic, PC.(26)
**10.17 -- Limited Liability Company Agreement of Westbank
Ambulatory Care Center, LLC dated November 3, 1999.
**10.18 -- Ambulatory Surgery Center Services Agreement dated March
20, 1999 between IOI Management Services of Louisiana,
Inc. and Westbank Ambulatory Care Center, LLC.
*10.19 -- Promissory Note dated September 15, 2000 between IOI and
PowerBrief.
*10.20 -- Employment Agreement between PowerBrief and Ernest D.
Rapp dated February 29, 2000.
*10.21 -- Employment Agreement between PowerBrief and Mark Foster
dated January 13, 2000.
*10.22 -- Employment Agreement between PowerBrief and Dr. Leslie
Butterfield dated April 12, 2000.
16.1 -- Letter on Change in Certifying Accountant.(27)
21.1 -- Subsidiaries of IOI.(28)
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of McFarland, Grossman & Company.
**23.3 -- Consent of Weil, Gotshal & Manges LLP (contained in
Exhibits 5.1 and 8.1).
**23.4 -- Consent of Locke Liddell & Sapp LLP (contained in Exhibit
8.2).
*24.1 -- Powers of Attorney (included on the signature page of
this registration statement).
*99.1 -- Form of IOI Proxy Card.
*99.2 -- Form of PowerBrief Proxy Card.
</TABLE>
---------------
* Filed herewith.
** To be filed by amendment.
(1) Incorporated by reference to Exhibit 99.2 to IOI's Form 8-K dated September
21, 2000.
II-3
<PAGE> 262
(2) Incorporated by reference to Exhibit 3.1 to IOI's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1997.
(3) Incorporated by reference to Exhibit 3.2 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(4) Incorporated by reference to Exhibit 4.01 to IOI's Current Report on Form
8-K dated December 29, 1997.
(5) Incorporated by reference to Exhibit 4.02 to IOI's Current Report on Form
8-K dated December 29, 1997.
(6) Incorporated by reference to Exhibit 4.03 to IOI's Current Report on Form
8-K dated December 29, 1997.
(7) Incorporated by reference to Exhibit 4.04 to IOI's Current Report on Form
8-K dated December 29, 1997.
(8) Incorporated by reference to Exhibit 4.05 to IOI's Current Report on Form
8-K dated December 29, 1997.
(9) Incorporated by reference to Exhibit 99.02 to IOI's Current Report on Form
8-K dated December 29, 1997.
(10) Incorporated by reference to Exhibit 4.1 to IOI's Annual Report on Form
10-K for the year ended December 31,1990.
(11) Incorporated by reference to Exhibit 10.1 to the Doctors Rehabilitation
Corporation of America's Registration Statement on Form 10, Registration
No. 0-17006.
(12) Incorporated by reference to Exhibit 10.2 to IOI's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1993.
(13) Incorporated by reference to Exhibit 10.85 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1994.
(14) Incorporated by reference to Exhibit 10.50 to IOI's Current Report on Form
8-K dated December 31, 1996.
(15) Incorporated by reference to Exhibit 10.14 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(16) Incorporated by reference to Exhibit 10.15 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(17) Incorporated by reference to Exhibit 10.16 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(18) Incorporated by reference to Exhibit 99.01 to IOI's Current Report on Form
8-K dated December 12, 1997.
(19) Incorporated by reference to Exhibit 10.3 to IOI's Current Report on Form
8-K dated February 11, 2000.
(20) Incorporated by reference to Exhibit 10.1 to IOI's Current Report on Form
8-K dated February 11, 2000.
(21) Incorporated by reference to Exhibit 10.2 to IOI's Current Report on Form
8-K dated February 11, 2000.
(22) Incorporated by reference to Exhibit 10.22 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(23) Incorporated by reference to Exhibit 10.23 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(24) Incorporated by reference to Exhibit 10.24 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
II-4
<PAGE> 263
(25) Incorporated by reference to Exhibit 2.1 to IOI's Current Report on Form
8-K dated October 3, 2000.
(26) Incorporated by reference to Exhibit 2.2 to IOI's Current Report on Form
8-K dated October 3, 2000.
(27) Incorporated by reference to Exhibit 16 to IOI's Current Report on Form 8-K
dated February 10, 2000.
(28) Incorporated by reference to Exhibit 21 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(b) Financial Statement Schedules:
All schedules have been omitted either as inapplicable or because the
required information is included in the financial statements or notes thereto.
(c) Report, Opinion or Appraisal:
The fairness opinion of McFarland, Grossman & Company is attached as
Appendix B to the joint proxy statement/prospectus. The legal opinions of Weil,
Gotshal & Manges LLP regarding validity and tax matters are included as Exhibits
5.1 and 8.1 to the registration statement, respectively. The opinion of Locke
Liddell & Sapp LLP regarding tax matters is included as Exhibit 8.2 to the
registration statement.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer
for expenses incurred or paid by a director, officer or controlling person of
the small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a
II-5
<PAGE> 264
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4 or
10(b) of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
The registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-6
<PAGE> 265
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on November 21, 2000.
INTEGRATED ORTHOPAEDICS, INC.
By: /s/ JOSE E. KAUACHI
----------------------------------
Jose E. Kauachi
Chairman of the Board and
President
Dated: November 21, 2000
POWER OF ATTORNEY
Know all those by these presents, that each person whose signature appears
below constitutes and appoints each of Laurie Hill Gutierrez, Scott J. Hancock
and Jose E. Kauachi, or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person and in his name, place and stead, in any and all capacities, in
connection with the Registration Statement on Form S-4 of Integrated
Orthopaedics, Inc. under the Securities Act of 1933, as amended, including,
without limitation of the generality of the foregoing, to sign the Registration
Statement in the name and on behalf of Integrated Orthopaedics, Inc., or on
behalf of the undersigned as a director or officer of Integrated Orthopaedics,
Inc., and any and all amendments or supplements to the Registration Statement,
including any and all stickers and post-effective amendments to the Registration
Statement, and to sign any and all additional Registration Statements relating
to the same offering of securities as the Registration Statement that are filed
pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any applicable
securities exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSE E. KAUACHI Chairman of the Board and November 22, 2000
----------------------------------------------------- President (Principal
Jose E. Kauachi Executive Officer and
Director)
/s/ LAURIE H. GUTIERREZ Senior Vice President, November 22, 2000
----------------------------------------------------- Chief Financial Officer,
Laurie H. Gutierrez Secretary and Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
II-7
<PAGE> 266
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN B. GRUBER Director November 22, 2000
-----------------------------------------------------
Steven B. Gruber
/s/ MARK A. WOLFSON Director November 22, 2000
-----------------------------------------------------
Mark A. Wolfson
/s/ SCOTT J. HANCOCK Director November 22, 2000
-----------------------------------------------------
Scott J. Hancock
</TABLE>
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<PAGE> 267
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger dated as of September 15,
2000 between PowerBrief and IOI.(1)
*2.2 -- Amendment to Agreement and Plan of Merger dated as of
November 20, 2000 between PowerBrief and IOI.
3.1 -- Articles of Incorporation of IOI, as amended to date.(2)
3.2 -- Bylaws of IOI, as amended to date.(3)
**3.3 -- Form of Articles of Incorporation of New PowerBrief.
**3.4 -- Form of Bylaws of New PowerBrief.
4.1 -- Certificate of Designation and Determination of Rights
and Preferences of Cumulative Convertible Preferred
Stock, series A of IOI.(4)
4.2 -- Certificate of Designation, Rights and Preferences of
series B Convertible, Non-Redeemable Preferred Stock of
IOI.(5)
4.3 -- Warrant Agreement dated as of December 12, 1997, by and
among IOI, FW Integrated Orthopaedics Investors, L.P. and
FW Integrated Orthopaedics Investors II, L.P.(6)
4.4 -- Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics Investors, L.P.(7)
4.5 -- Warrant Certificate dated December 12, 1997, issued to FW
Integrated Orthopaedics II, L.P.(8)
**4.6 -- Registration Rights Agreement between DRCA Medical
Corporation and Chartwell Capital Investors, L.P. dated
April 12, 1996.
4.7 -- Registration Rights Agreement dated as of December 12,
1997 by and among IOI, FW Integrated Orthopaedics
Investors, L.P. and FW Integrated Orthopaedics Investors
II, L.P.(9)
4.8 -- Specimen of Common Stock Certificate.(10)
**4.9 -- Form of series A warrant.
**4.10 -- Form of series B warrant.
**5.1 -- Opinion of Weil, Gotshal & Manges LLP regarding validity.
**8.1 -- Opinion of Weil, Gotshal & Manges LLP regarding tax
matters.
**8.2 -- Opinion of Locke Liddell & Sapp LLP regarding tax
matters.
10.1 -- 1988 Stock Option Plan of Doctors Rehabilitation
Corporation of America.(11)
10.2 -- Amendment of 1988 Stock Option Plan.(12)
10.3 -- Incentive Stock Option Agreement between IOI and William
F. Donovan, M.D. dated February 2, 1995.(13)
10.4 -- Investment Agreement by and between IOI and Chartwell
Capital Investors, L.P. dated April 12, 1996.(14)
10.5 -- Consulting Agreement between IOI and Jose E. Kauachi
dated December 12, 1997.(15)
10.6 -- Termination and Release Agreement between IOI and Jose E.
Kauachi dated December 31, 1997.(16)
10.7 -- IOI's 1997 Long Term Incentive Plan.(17)
</TABLE>
<PAGE> 268
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8 -- Securities Purchase Agreement dated as of December 12,
1997 by and among IOI, FW Integrated Orthopaedics
Investors, L.P., FW Integrated Orthopaedics Investors II,
L.P. and certain other signatories.(18)
10.9 -- Agreement to Terminate the Management Agreement effective
as of December 31, 1999, by and between Front Range
Orthopedic Clinic, P.C. and IOI Management Services of
Colorado, Inc.(19)
10.10 -- Asset Purchase Agreement dated January 27, 2000 by and
between IOI Management Services of Colorado, Inc. and
Front Range Orthopedic Clinic, P.C.(20)
10.11 -- Asset Purchase Agreement dated January 27, 2000 by and
between IOI Management Services of Colorado, Inc. and
Front Range Orthopedic Clinic, P.C.(21)
10.12 -- Asset Purchase Agreement dated April 12, 2000, by and
between IOI Management Services of Pennsylvania, Inc. and
Lancaster Orthopedic Group, P.C.(22)
10.13 -- Agreement to Terminate the Management Agreement dated
April 12, 2000, by and between IOI Management Services of
Pennsylvania, Inc. and Lancaster Orthopedic Group,
P.C.(23)
10.14 -- Amendment of IOI's 1997 Long Term Incentive Plan.(24)
10.15 -- Asset Purchase Agreement dated September 18, 2000 by and
between IOI Management Services of Louisiana, Inc. and
Doctors Katz and DiGrado, Inc.(25)
10.16 -- Agreement to Terminate the Management Agreement dated
September 18, 2000, by and between IOI Management
Services of Louisiana, Inc. and Westside Orthopedic
Clinic, PC.(26)
**10.17 -- Limited Liability Company Agreement of Westbank
Ambulatory Care Center, LLC dated November 3, 1999.
**10.18 -- Ambulatory Surgery Center Services Agreement dated March
20, 1999 between IOI Management Services of Louisiana,
Inc. and Westbank Ambulatory Care Center, LLC.
*10.19 -- Promissory Note dated September 15, 2000 between IOI and
PowerBrief.
*10.20 -- Employment Agreement between PowerBrief and Ernest D.
Rapp dated February 29, 2000.
*10.21 -- Employment Agreement between PowerBrief and Mark Foster
dated January 13, 2000.
*10.22 -- Employment Agreement between PowerBrief and Dr. Leslie
Butterfield dated April 12, 2000.
16.1 -- Letter on Change in Certifying Accountant.(27)
21.1 -- Subsidiaries of IOI.(28)
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of McFarland, Grossman & Company.
**23.3 -- Consent of Weil, Gotshal & Manges LLP (contained in
Exhibits 5.1 and 8.1).
**23.4 -- Consent of Locke Liddell & Sapp LLP (contained in Exhibit
8.2).
*24.1 -- Powers of Attorney (included on the signature page of
this registration statement).
</TABLE>
<PAGE> 269
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*99.1 -- Form of IOI Proxy Card.
*99.2 -- Form of PowerBrief Proxy Card.
</TABLE>
---------------
* Filed herewith.
** To be filed by amendment.
(1) Incorporated by reference to Exhibit 99.2 to IOI's Form 8-K dated September
21, 2000.
(2) Incorporated by reference to Exhibit 3.1 to IOI's Quarterly Report on Form
10-QSB for the quarter ended March 31, 1997.
(3) Incorporated by reference to Exhibit 3.2 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(4) Incorporated by reference to Exhibit 4.01 to IOI's Current Report on Form
8-K dated December 29, 1997.
(5) Incorporated by reference to Exhibit 4.02 to IOI's Current Report on Form
8-K dated December 29, 1997.
(6) Incorporated by reference to Exhibit 4.03 to IOI's Current Report on Form
8-K dated December 29, 1997.
(7) Incorporated by reference to Exhibit 4.04 to IOI's Current Report on Form
8-K dated December 29, 1997.
(8) Incorporated by reference to Exhibit 4.05 to IOI's Current Report on Form
8-K dated December 29, 1997.
(9) Incorporated by reference to Exhibit 99.02 to IOI's Current Report on Form
8-K dated December 29, 1997.
(10) Incorporated by reference to Exhibit 4.1 to IOI's Annual Report on Form
10-K for the year ended December 31,1990.
(11) Incorporated by reference to Exhibit 10.1 to the Doctors Rehabilitation
Corporation of America's Registration Statement on Form 10, Registration
No. 0-17006.
(12) Incorporated by reference to Exhibit 10.2 to IOI's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1993.
(13) Incorporated by reference to Exhibit 10.85 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1994.
(14) Incorporated by reference to Exhibit 10.50 to IOI's Current Report on Form
8-K dated December 31, 1996.
(15) Incorporated by reference to Exhibit 10.14 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(16) Incorporated by reference to Exhibit 10.15 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(17) Incorporated by reference to Exhibit 10.16 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(18) Incorporated by reference to Exhibit 99.01 to IOI's Current Report on Form
8-K dated December 12, 1997.
(19) Incorporated by reference to Exhibit 10.3 to IOI's Current Report on Form
8-K dated February 11, 2000.
(20) Incorporated by reference to Exhibit 10.1 to IOI's Current Report on Form
8-K dated February 11, 2000.
<PAGE> 270
(21) Incorporated by reference to Exhibit 10.2 to IOI's Current Report on Form
8-K dated February 11, 2000.
(22) Incorporated by reference to Exhibit 10.22 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(23) Incorporated by reference to Exhibit 10.23 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(24) Incorporated by reference to Exhibit 10.24 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(25) Incorporated by reference to Exhibit 2.1 to IOI's Current Report on Form
8-K dated October 3, 2000.
(26) Incorporated by reference to Exhibit 2.2 to IOI's Current Report on Form
8-K dated October 3, 2000.
(27) Incorporated by reference to Exhibit 16 to IOI's Current Report on Form 8-K
dated February 10, 2000.
(28) Incorporated by reference to Exhibit 21 to IOI's Annual Report on Form
10-KSB for the year ended December 31, 1999.
