SCHEDULE 14C
(Rule 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934 (Amendment No.1)
Check the appropriate box:
[ ]Preliminary information statement [ ]Confidential, for use of the Commission
only (as permitted by Rule 14c-5(d)(2))
[X] Definitive information statement
MEADOWBROOK REHABILITATION GROUP, INC.
(Name of Registrant as Specified in Its Charter)
Payment of filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A Common Stock of Meadowbrook Rehabilitation Group, Inc.
(2) Aggregate number of securities to which transaction applies:
1,268,014
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
$1.00; on July 31, 1998, the intraday high of the shares of Meadowbrook on
Nasdaq was $1.00 per share and the intraday low was $1.00 per share.
(4) Proposed maximum aggregate value of transaction:
$1,268,014
(5) Total fee paid:
$253.60
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
Meadowbrook Rehabilitation Group, Inc.
(4) Date Filed:
August 18, 1998
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MEADOWBROOK REHABILITATION GROUP, INC.
2000 Powell Street, Suite 1203
Emeryville, California 94608
Dear Stockholder:
As more fully described in the enclosed Joint Information/Consent
Solicitation Statement, Meadowbrook Rehabilitation Group, Inc. ("Meadowbrook")
has entered into an Agreement and Plan of Merger dated as of April 3, 1998 by
and among Meadowbrook, Interset, Inc., a Delaware corporation and wholly owned
subsidiary of Meadowbrook ("Interset"), Cambio Networks, Inc. ("Cambio") and
certain shareholders of Cambio (the "Principal Shareholders") as amended by that
certain Agreement of Amendment dated as of July 27, 1998 by and among
Meadowbrook, Interset, Cambio and the Principal Shareholders (the "Merger
Agreement"). Pursuant to the Merger Agreement, Interset will be merged with and
into Cambio and Cambio will be the surviving corporation and a subsidiary of
Meadowbrook (the "Merger").
The Merger Agreement and the transactions contemplated thereby have been
approved and adopted by your Board of Directors and the affirmative vote of the
holders of a majority of the outstanding voting shares of Meadowbrook's common
stock.
The enclosed Joint Information/Consent Solicitation Statement is being
furnished to you solely to advise you of the Merger and not to solicit any vote
or consent thereto. Meadowbrook is not asking you for a proxy and you are not to
send Meadowbrook a proxy or written consent.
August 14, 1998
Very truly yours,
Harvey, Wm. Glasser
President, Chairman and
Chief Executive Officer
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MEADOWBROOK REHABILITATION GROUP, INC.
CAMBIO NETWORKS, INC.
DEFINITIVE JOINT INFORMATION/CONSENT SOLICITATION STATEMENT
This Definitive Joint Information/Consent Solicitation Statement (the
"Joint Information/Consent Solicitation Statement") is being furnished to the
shareholders of Cambio Networks, Inc., a California corporation ("Cambio"), in
connection with the solicitation of the written consent (the "Written Consent")
of Cambio shareholders to approve and adopt the Agreement and Plan of Merger
dated as of April 3, 1998, among Meadowbrook Rehabilitation Group, Inc., a
Delaware corporation ("Meadowbrook"), Interset, Inc., a Delaware corporation and
wholly owned subsidiary of Meadowbrook ("Interset"), Cambio and certain
shareholders of Cambio (Frederick A. Adler, Euro-America II, L.P., 2001
Partners, L.P., Joseph K. Pagano and Philip R. Chapman who are referred to
herein collectively as the "Principal Shareholders"), as ammended by the
Agreement of Ammendment dated as of July 27, 1998 by and among Meadowbrook,
Interset, Cambio, and the Principal Shareholders (the "Merger Agreement") , and
the transactions contemplated thereby, including the merger of Interset with and
into Cambio (the "Merger"). WE ARE SEEKING THE WRITTEN CONSENT OF THE
SHAREHOLDERS OF CAMBIO. WE ARE NOT ASKING MEADOWBROOK STOCKHOLDERS FOR A PROXY
AND MEADOWBROOK STOCKHOLDERS ARE REQUESTED NOT TO SEND US A PROXY. As a result
of the Merger, Cambio will become a wholly owned subsidiary of Meadowbrook. Upon
consummation of the Merger, subject to provisions for payment of cash for
fractional shares, the shares of Cambio common stock ("Cambio Common Stock"),
and Cambio Series I Preferred Stock ("Cambio Preferred Stock"), issued and
outstanding immediately prior to the Effective Time of the Merger (as defined
herein), except for those shares as to which dissenters' rights have been
perfected, will be converted into shares of Meadowbrook Class A Common Stock,
$.01 par value ("Meadowbrook Class A Common Stock") representing approximately
32.5% of Meadowbrook's outstanding capital stock at the time of the Merger (the
"Effective Time"), assuming the exercise of all options and warrants of Cambio
and no exercise of any options of Meadowbrook. Upon consummation of the Merger,
each option to purchase Cambio Common Stock then outstanding under Cambio's 1994
Stock Option Plan will be converted into an option to acquire shares of
Meadowbrook Class A Common Stock based on the Exchange Ratio (as defined
herein).
This Joint Information/Consent Solicitation Statement is also being
furnished to the holders of Meadowbrook Class A Common Stock solely to advise
them of the Merger (not to solicit their written consent thereto) and
constitutes the Information Statement of Meadowbrook with respect to the private
offer and sale by Meadowbrook of the shares of Meadowbrook Class A Common Stock
into which shares of Cambio Common Stock will be converted upon consummation of
the Merger.
On April 3, 1998, the Meadowbrook Board of Directors (the "Meadowbrook
Board") approved the Merger Agreement and the Merger including the issuance of
Meadowbrook Class A Common Stock in connection with the Merger. On July 27,
1998, Harvey Wm. Glasser, M.D., Meadowbrook's President and Chief Executive
Officer and holder of approximately 89.3% of the total voting power of the
capital stock of Meadowbrook, executed and delivered to Meadowbrook a written
consent to the Merger Agreement, the Merger and the issuance of Meadowbrook
Class A Common Stock in connection with the Merger. In accordance with the
General Corporation Law of the State of Delaware and the Restated Certificate of
Incorporation and Bylaws of Meadowbrook, this Joint Information/Consent
Solicitation Statement is the notice of the action taken by Meadowbrook with
respect to the merger and no additional action by Meadowbrook or by Meadowbrook
stockholders is necessary to effect the Merger or the issuance of Meadowbrook
Class A Common Stock in connection with the Merger. Meadowbrook is not asking
its stockholders for a Proxy and Meadowbrook stockholders are not to send
Meadowbrook a Proxy or Written Consent.
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On August 12, 1998, the closing price of the Meadowbrook Class A Common
Stock on the Nasdaq National Market was $1.00.
This Joint Information/Consent Solicitation Statement and the accompanying
form of Written Consent are first being mailed to shareholders of Cambio and the
stockholders of Meadowbrook on or about August 14, 1998.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M. PACIFIC TIME ON
SEPTEMBER 4, 1998, UNLESS EXTENDED.
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SEE "RISK FACTORS" ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE EVALUATED IN CONNECTION WITH THE MERGER.
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THE SECURITIES TO BE ISSUED PURSUANT TO THE MERGER AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS AND,
UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS. THE SECURITIES TO BE ISSUED PURSUANT TO
THE MERGER AGREEMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT INFORMATION/CONSENT SOLICITATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The date of this Joint Information/Consent Solicitation Statement is August
14, 1998.
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In making a decision whether to consent to the Merger, Cambio shareholders
must rely on their own examination of the terms of the Merger, including,
without limitation, the merits and risks involved. The Meadowbrook Class A
Common Stock has not been recommended by any federal or state securities
commission or regulatory authority. Furthermore, the foregoing authorities have
not confirmed the accuracy or determined the adequacy of this document. Any
representation to the contrary is a criminal offense.
The Meadowbrook Class A Common Stock issuable in the Merger is subject to
restrictions on transferability and resale and may not be transferred or resold
except as permitted under the Securities Act of 1933, as amended (the
"Securities Act"), and applicable state securities laws, pursuant to
registration or exemption therefrom, and except as permitted pursuant to the
terms of the Merger Agreement, as described herein. Cambio shareholders should
be aware that they may be required to bear the financial risks of their
investment in Meadowbrook Class A Common Stock for an indefinite period of time.
This Joint Information/Consent Solicitation Statement does not purport to
be all-inclusive or to contain all the information that a Cambio shareholder may
desire in investigating the Merger. Each Cambio shareholder must conduct and
rely on his, her or its own evaluation of the terms of the Merger, including the
merits and risks involved, in making an investment decision with respect to the
Meadowbrook Class A Common Stock. See "Risk Factors" for a discussion of certain
factors which should be considered in connection with the Merger and an
investment in shares of Meadowbrook Class A Common Stock.
Each Cambio Shareholder receiving this Joint Information/Consent
Solicitation Statement acknowledges that such person has been afforded an
opportunity to request from Meadowbrook and Cambio and to review, and has
received, all additional information considered by such person to be necessary
to verify or supplement the information contained herein. No person is
authorized by Meadowbrook or Cambio to give any information or to make any
representation, other than those contained in this Joint Information/Consent
Solicitation Statement, in connection with the solicitation and the offering
made by this Joint Information/Consent Solicitation Statement and, if given or
made, such information or representations should not be relied upon as having
been authorized. This Joint Information/Consent Solicitation Statement does not
constitute the solicitation of a proxy or an offer to sell, or a solicitation of
an offer to purchase, any securities in any jurisdiction in which such
solicitation or offering may not lawfully be made.
Neither the delivery of this Joint Information/Consent Solicitation
Statement nor any distribution of securities made hereunder shall imply that
there has been no change in the information set forth herein or in the affairs
of Meadowbrook or Cambio since the date hereof.
--------------------
All information contained in this Joint Information/Consent Solicitation
Statement relating to Meadowbrook has been supplied by Meadowbrook, and all
information relating to Cambio has been supplied by Cambio.
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<PAGE>
AVAILABLE INFORMATION
Meadowbrook is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements, and other
information with the SEC. This filed material can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C., and at the SEC's Regional Offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois and 7 World Trade Center, Suite
1300, New York, New York. Copies of such material can be obtained by mail from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The SEC maintains a site on the World Wide Web
that contains reports, proxy and information statements, and other information
that are filed through the SEC's electronic filing system. The address for such
site is http://www.sec.gov.
The following documents previously filed by Meadowbrook with the SEC (the
"Meadowbrook SEC Documents") are incorporated by reference and are included with
this Joint Information/Consent Solicitation Statement for the information of
Cambio shareholders: (i) Meadowbrook's Annual Report on Form 10-K for the year
ended June 30, 1997; (ii) Meadowbrook's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998; (iii) Meadowbrook's Proxy Statement on Schedule
14A filed October 16, 1997 in connection with Meadowbrook's 1997 Annual Meeting
of Stockholders; and (iv) Meadowbrook's Current Reports on Form 8-K filed
October 14, 1997, April 22, 1998, and June 8, 1998.
All documents filed by Meadowbrook pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the Cambio
shareholder approval of the Merger shall be deemed to be incorporated by
reference into and to be part of this Joint Information/Consent Solicitation
Statement from the date of filing thereof.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Joint
Information/Consent Solicitation Statement to the extent that a statement
contained herein or in any other subsequently filed document which also is
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Joint Information/Consent Solicitation Statement.
Meadowbrook will provide without charge to each person to whom a copy of this
Joint Information/Consent Solicitation Statement has been delivered, and who
makes a written or oral request, a copy of any and all of the foregoing
documents incorporated by reference herein (other than exhibits unless such
exhibits are specifically incorporated by reference into such documents).
Requests should be submitted in writing or by telephone to Investor Relations,
Meadowbrook Rehabilitation Group, Inc., 2000 Powell Street, Suite 1203,
Emeryville, California 94608, telephone (510) 420-0900.
FORWARD-LOOKING STATEMENTS
This Joint Information/Consent Solicitation Statement (including the
information contained in the Meadowbrook SEC Documents) contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. When used in this Joint Information/Consent
Solicitation Statement, the words "expects," "anticipates," "estimates," and
similar expressions are intended to identify forward-looking statements. Such
statements, which include statements under the captions "Risk Factors" and
"Cambio-Business of Cambio" and elsewhere in this Joint Information/Consent
Solicitation Statement, are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed under such
captions and elsewhere in this Joint Information/Consent Solicitation Statement,
and the risks set forth below under "Risk Factors." The cautionary statements
made in this Joint Information/Consent Solicitation Statement should be read as
being applicable to all related forward-looking statements wherever they appear
in this Joint Information/Consent Solicitation Statement.
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<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION..........................................................4
FORWARD-LOOKING STATEMENTS.....................................................4
GLOSSARY ......................................................................7
SUMMARY ...................................................................... 9
RISK FACTORS .................................................................17
CAMBIO SHAREHOLDER APPROVAL ..................................................24
THE MERGER ...................................................................25
Background of the Merger ............................................25
Recommendation of the Cambio Board of Directors;
Reasons for the Merger ..............................................25
Interests of Certain Persons in the Merger;
Management of Meadowbrook and Cambio ................................26
Regulatory Approvals ................................................27
Appraisal and Dissenters' Rights ....................................28
General; Merger Consideration .......................................29
Effective Time ......................................................29
Exchange of Certificates ............................................30
Fractional Shares ...................................................30
Registration of Meadowbrook Shares ..................................30
Expenses ............................................................30
Effect on Employee Benefit Plans ....................................30
Conduct of Business Prior to the Merger .............................31
No Solicitation of Transactions .....................................32
Indemnification .....................................................32
Additional Agreements ...............................................33
Conditions to Consummation of the Merger ............................33
Termination .........................................................33
Amendment and Waiver ................................................34
CAMBIO NETWORKS, INC .........................................................37
Cambio Selected Financial Data ......................................37
Cambio Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................38
Business of Cambio ..................................................41
Executive Officers and Directors of Cambio ..........................44
Ownership of Cambio Capital Stock ...................................45
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS OF
MEADOWBROOK AND CAMBIO .......................................................46
DESCRIPTION OF MEADOWBROOK CAPITAL STOCK .....................................50
COMPARISON OF RIGHTS OF STOCKHOLDERS OF MEADOWBROOK AND
SHAREHOLDERS OF CAMBIO .......................................................52
FINANCIAL STATEMENTS OF CAMBIO, INC.
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ANNEXES
Annex A - Agreement and Plan of Merger (including Exhibit D thereto,
Registration Rights Agreement).
Annex B - Chapter 13 of the California General Corporation Law.
Annex C - Meadowbrook's Annual Report on Form 10-K for the year ended June
30, 1997 and Meadowbrook's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1998.
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GLOSSARY
Unless otherwise specified in this Joint Information Statement/Consent
Solicitation Statement, the following terms shall have the meanings set forth
below:
"Anti-Takeover Law" means Section 203 of the DGCL.
"California Law" means the California General Corporation Law.
"Cambio" means Cambio Networks, Inc., a California corporation.
"Cambio Articles of Incorporation" means the Amended and Restated Articles
of Incorporation of Cambio.
"Cambio Board" means the Board of Directors of Cambio.
"Cambio Capital Stock" means the Cambio Common Stock and the Cambio
Preferred Stock.
"Cambio Common Stock" means the Common Stock of Cambio, no par value.
"Cambio Preferred Stock" means the Series I Preferred Stock of Cambio, no
par value.
"Cambio Option" means an outstanding option prior to the Effective Time to
purchase Cambio Common Stock.
"Cambio Record Date" means the close of business on July 24, 1998.
"Closing" means the third business day after all conditions to the closing
of the Merger specified in the Merger Agreement are satisfied or waived.
"Code" means the Internal Revenue Code of 1986, as amended.
"DGCL" means the Delaware General Corporation Law.
"Dissenting Shares" means "dissenting shares" within the meaning of Section
1300(b) of the California Law.
"Effective Time" means the date which is the later of (i) the filing of the
Certificate of Merger with the Secretary of State of the State of California,
and (ii) the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Ratio" means a fraction, the numerator of which is 1,268,014 and
the denominator of which is the total number of shares of Cambio Common Stock
and Preferred Stock outstanding plus the total number of shares of Cambio Common
Stock issuable upon exercise of Cambio Options outstanding as of the Effective
Time (as of August 12, 1998, the Exchange Ratio would have been approximately
0.24339).
"GAAP" means Generally Accepted Accounting Principles.
"Glasser Voting Agreement" means the Voting Agreement entered into by and
among Glasser and the Principal Shareholders.
"Indemnified Parties" means each present and former director or officer of
Cambio who, after the Effective Time and pursuant to the terms of the Merger
Agreement, are to be jointly and severally, to the fullest extent permitted
under applicable law, indemnified and held harmless by Meadowbrook.
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"IRS" means the Internal Revenue Service of the United States.
"Merger" means collectively, the merger of Interset with and into Cambio
pursuant to which Cambio, as the surviving corporation, becomes a wholly-owned
subsidiary of Meadowbrook, as contemplated by the Merger Agreement.
"Merger Agreement" means the Agreement and Plan of Merger .
"Nasdaq" means Nasdaq Stock Market.
"Meadowbrook" means Meadowbrook Rehabilitation Group, Inc., a Delaware
corporation.
"Meadowbrook Board" means the Board of Directors of Meadowbrook.
"Meadowbrook Class A Common Stock" means the Class A Common Stock of
Meadowbrook, par value $0.01 per share.
"Meadowbrook Class B Common Stock" means the Class B Common Stock of
Meadowbrook, par value $0.01 per share.
"Meadowbrook Certificate of Incorporation" means Meadowbrook's Restated
Certificate of Incorporation.
"OEMs" means original equipment manufacturers.
"Registration Rights Agreement" means the Registration Rights Agreement to
be entered into at the Closing between Meadowbrook and the Principal
Shareholders.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Stockholders Voting Agreement" means the Stockholders Voting Agreement
entered into by and between each of the Principal Shareholders, on the one hand,
and Meadowbrook, on the other.
"Superior Proposal" means a written unsolicited proposal relating to a
possible acquisition of Cambio, other than by Meadowbrook, which proposal is, in
the reasonable good faith judgment of the Cambio Board, after consultation with
its legal and financial advisors, on financial and other terms more favorable to
the shareholders of Cambio than the terms of the Merger and which is made by a
party that can reasonably be expected to consummate the transaction on the terms
proposed.
"Third Party Proposal" means a proposal from any person other than Cambio
or Meadowbrook relating to the possible acquisition of Cambio or Meadowbrook, as
applicable (whether by way of merger, purchase of its capital stock, purchase of
assets or otherwise), or any material portion of Cambio's or Meadowbrook's, as
applicable, capital stock or assets.
"VAR" means value added reseller.
"Voting Agreements" mean each of the Stockholders Voting Agreement and the
Glasser Voting Agreement, collectively.
"Windows NT" means the Microsoft Windows NT operating system.
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SUMMARY
The following is a summary of certain of the information contained
elsewhere in this Joint Information/Consent Solicitation Statement. This summary
is not intended to be complete and is qualified in all respects by reference to
the more detailed information contained elsewhere in this Joint
Information/Consent Solicitation Statement, the Annexes hereto, and the
Meadowbrook SEC Documents. Cambio shareholders are strongly urged to read and
consider carefully this Joint Information/Consent Solicitation Statement, the
Annexes hereto, and the Meadowbrook SEC Documents in their entirety,
particularly the matters referred to under "Risk Factors."
The Companies
Meadowbrook and Interset. Prior to June 30, 1998, Meadowbrook provided
outpatient, home health, and traditional acute, subacute and post-acute
comprehensive rehabilitation services. Since the beginning of the fiscal year
ended June 30, 1997 ("Fiscal 1997"), Meadowbrook has sold or closed all of its
operating assets. At the time of the Merger, Meadowbrook's operations will
consist solely of the operations of Cambio, which will be a subsidiary of
Meadowbrook. Meadowbrook was incorporated in 1986. Meadowbrook's executive
offices are located at 2000 Powell Street, Suite 1203, Emeryville, California
94608, and its telephone number is (510) 420-0900.
Interset is a Delaware corporation that is a wholly owned subsidiary of
Meadowbrook organized for the sole purpose of effecting the Merger.
Cambio. Cambio provides client/server network documentation software and
services. Cambio's products and services are designed to enhance network
operations support and reduce network-related costs associated with a variety of
business needs including network changes, relocations, network outsourcing,
backup and disaster recovery planning. Network documentation is an essential
corporate information system that allows network support professionals to
create, maintain and access a centralized model of the entire network, its
components and their relationships. Cambio also provides a broad range of
network integration, consulting, training, implementation services and Year 2000
solutions. Cambio was originally incorporated in 1987 as ISICAD, Inc. and
changed its name to Cambio in 1996. Cambio's executive offices are located at
15400 SE 30th Place, Suite 200, Bellevue, Washington 98007 and its telephone
number is (425) 643-1400.
Cambio Shareholder Approval
Only holders of record of Cambio Common Stock or Cambio Preferred Stock at
the close of business on July 24, 1998 (the "Cambio Record Date") will be
entitled to consent to the Merger. Cambio shareholders entitled to consent will
consider whether to approve and adopt the Merger Agreement, a copy of which is
attached to this Joint Information/Consent Solicitation Statement as Annex A and
is incorporated herein by reference, and the transactions contemplated thereby.
Under California law and the charter documents of Cambio, approval and adoption
of the Merger Agreement requires the affirmative vote of (i) holders of a
majority of the outstanding shares of Cambio Common Stock voting as a single
class, and (ii) holders of 66-2/3% of the outstanding shares of Cambio Preferred
Stock, voting as a single class. Holders of Cambio Common Stock and Cambio
Preferred Stock are each entitled to one vote per share.
As of the Cambio Record Date, there were outstanding 415,372 shares of
Cambio Common Stock held by 33 holders of record and 3,500,000 shares of Cambio
Preferred Stock held by five holders of record. The Cambio Common Stock and
Cambio Preferred Stock are collectively referred to herein as the "Cambio
Capital Stock."
The Principal Shareholders (who own an aggregate of 3,500,000 shares of
Cambio Preferred Stock representing approximately 89.4% of the votes entitled to
be cast by holders of shares of Cambio Common Stock and Cambio Preferred Stock
issued and outstanding as of the Cambio Record Date) have entered into a
Stockholders Voting Agreement (the "Stockholders Agreement") with Meadowbrook.
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Pursuant to the Stockholders Agreement, which is irrevocable, each of the
Principal Shareholders has agreed to vote in favor of approval and adoption of
the Merger Agreement and approval of the Merger. The vote in accordance with the
Stockholders Agreement of the shares of Cambio Preferred Stock subject to the
Stockholders Agreement will be adequate to approve the Merger Agreement and the
Merger by Cambio shareholders. See "The Merger AgreementCConditions to
Consummation of the Merger."
Recommendation of the Cambio Board of Directors; Reasons for the Merger
The Exchange Ratio (as defined below) was reached as a result of
negotiation between management of Meadowbrook and Cambio. The Board of Directors
of Cambio (the "Cambio Board") has unanimously approved the Merger Agreement and
believes that the transactions contemplated thereby are fair and in the best
interests of its shareholders. The Cambio Board unanimously recommends that its
shareholders consent to the approval and adoption of the Merger Agreement and
the Merger. For a discussion of the reasons for the Merger, see "The
MergerCRecommendation of the Cambio Board of Directors; Reasons for the Merger."
Effects of the Merger
General Effects of the Merger. Upon consummation of the Merger, Cambio will
become a wholly owned subsidiary of Meadowbrook, the separate corporate
existence of Interset will cease, and holders of Cambio Capital Stock at the
Effective Time (as defined below) (other than holders ("Dissenting
Shareholders") who perfect their statutory dissenters' rights of appraisal) will
receive shares of Meadowbrook Class A Common Stock and cash in lieu of
fractional shares. Each share of Cambio Capital Stock (other than shares as to
which dissenters' rights have been perfected) will be converted into the right
to receive (assuming that the Effective Time occurred on August 12, 1998)
0.24339 of a share of Meadowbrook Class A Common Stock (the "Exchange Ratio").
Based upon the Exchange Ratio of 0.24339 of a share of Meadowbrook Class A
Common Stock for each share of Cambio Capital Stock and assuming the exercise of
all Cambio stock options and warrants from the date hereof through the Effective
Time, the holders of Cambio Capital Stock (including holders of Cambio Common
Stock subject to restricted stock purchase agreements) would hold approximately
1,268,014 shares of Meadowbrook Class A Common Stock after the Merger, which
would represent approximately 32.5% of the Meadowbrook Class A Common Stock and
Class B Common Stock then outstanding (based upon the number of shares of
Meadowbrook Class A Common Stock and Class B Common Stock outstanding at August
12, 1998 before giving effect to the Merger). In the event that certain of the
Cambio shareholders convert outstanding indebtedness of Cambio owed to them into
shares of Cambio Capital Stock prior to the Merger, the Exchange Ratio will be
substantially reduced. After the Merger, Meadowbrook will hold 100% of the
Cambio Capital Stock then outstanding and the Cambio shareholders (other than
Dissenting Shareholders) will be stockholders of Meadowbrook. The holders of
Meadowbrook Class A Common Stock as of the Effective Time will continue to hold
their Meadowbrook Class A Common Stock following the Merger.
Certain Federal Income Tax Consequences. The Merger is intended to qualify
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
However, no ruling from the Internal Revenue Service (the "IRS") nor opinion of
counsel has been requested regarding the federal income tax consequences of the
Merger. The characterization of the Merger as a reorganization within the
meaning of Section 368(a) of the Code (a "Reorganization") will depend upon the
existence of certain factual circumstances and the satisfaction of certain
conditions at the time of the Merger. No assurance can be given that such
factual circumstances currently exist or will exist at such time or that such
conditions can or will be satisfied at such time. If, as intended, the Merger
qualifies as a Reorganization, in general and except with respect to Cambio
Capital Stock that was received in exchange for or upon the conversion of Cambio
debt, no gain or loss should be recognized by holders of Cambio Capital Stock
with respect thereto on the surrender of their Cambio Capital Stock in exchange
for Meadowbrook Class A Common Stock, except with respect to cash received in
lieu of fractional shares, and no gain or loss should be recognized by
Meadowbrook or Cambio. If, however, the Merger does not qualify as a
Reorganization, a shareholder of Cambio would recognize gain or loss with
respect to each share of Cambio Capital Stock surrendered in the Merger equal to
the difference between such shareholder's basis in such share and the fair
market value, as of the Effective Time, of the Merger consideration, including
the Meadowbrook Class A Common Stock, received in exchange therefor. EACH CAMBIO
SHAREHOLDER IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE TAX
CONSEQUENCES TO IT OF THE MERGER. See "The Merger-Certain Federal Income Tax
Consequences."
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<PAGE>
Operations Following the Merger
Following the Merger, Cambio will continue its present operations as a
wholly owned subsidiary of Meadowbrook. There can be no assurance that
Meadowbrook will be successful in managing Cambio's business.
Following the Merger, it is currently contemplated that all of the Cambio
executive officers and senior management members will continue in their present
positions. See "The Merger-Interests of Certain Persons in the Merger."
Terms of the Merger Agreement
Effective Time. If the Merger Agreement and Merger are approved by the
requisite Cambio shareholder consent and if all other conditions set forth in
the Merger Agreement are satisfied or waived, the Merger will become effective
at the time a Certificate of Merger is filed with (and accepted for filing by)
the California Secretary of State and the Delaware Secretary of State or such
later time as specified in the Certificate of Merger (such time, the "Effective
Time"). Meadowbrook currently anticipates that the filing of the Certificate of
Merger will occur promptly after the satisfaction or waiver of the conditions to
the Merger. See "The Merger AgreementCEffective Time."
Exchange of Certificates. As soon as practicable after the Effective Time,
Meadowbrook will mail to each record holder (other than Meadowbrook or its
subsidiaries or Dissenting Shareholders) of an outstanding certificate or
certificates representing Cambio Capital Stock as of the Effective Time, a
letter of transmittal and instructions for use in effecting the surrender of
such certificates in exchange for the Meadowbrook Class A Common Stock issuable
pursuant to the Merger in respect of such shares. Shareholders of Cambio should
not submit certificates representing their Cambio Capital Stock unless and until
they receive such a letter of transmittal and instructions from Meadowbrook. At
the Effective Time, each then outstanding option to purchase Cambio Common
Stock, whether vested or unvested, will be converted into an option to acquire
shares of Meadowbrook Class A Common Stock based on the Exchange Ratio. Option
Agreements need not be surrendered. See "The Merger AgreementCExchange of
Certificates."
Stock Options. At the Effective Time, each outstanding option to purchase
Cambio Common Stock (each, a "Cambio Option") issued under Cambio's 1994 Stock
Option Plan (the "Cambio Option Plan") whether vested or unvested shall be
converted into an option to acquire shares of Meadowbrook Class A Common Stock
based on the Exchange Ratio. Each Cambio Option will continue to have, and be
subject to, substantially the same terms and conditions set forth in the Cambio
Option Plan and/or as provided in the respective option agreements governing
such Cambio Option immediately prior to the Effective Time, except that (i) such
Cambio Option will be exercisable for that number of whole shares of Meadowbrook
Class A Common Stock equal to the number of shares of Cambio Common Stock that
were issuable upon exercise of such Cambio Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of Meadowbrook Class A Common Stock and (ii) the per
share exercise price for the shares of Meadowbrook Class A Common Stock issuable
upon exercise of such converted Cambio Option will be equal to the quotient
determined by dividing the exercise price per share of Cambio Common Stock at
which such Cambio Option was exercisable immediately prior to the Effective Time
by the Exchange Ratio, rounded up to the nearest whole cent. Meadowbrook and
Cambio intend that the Cambio Options so converted will qualify following the
Effective Time as incentive stock options under the Code, to the extent the
Cambio Options qualified as incentive stock options immediately prior to the
Effective Time.
Conditions. The respective obligations of Meadowbrook and Cambio to effect
the Merger are subject to various conditions described under "The Merger
AgreementCConditions to Consummation of the Merger," including: (i) requisite
Cambio shareholder approval; (ii) the absence of any restraining order or
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<PAGE>
injunction that would prevent the consummation of the Merger; and (iii) the
issuance of Meadowbrook Class A Common Stock in connection with the Merger shall
be exempt from the registration requirements of the Securities Act. See "The
Merger Agreement-Conditions to Consummation of the Merger."
Termination. The Merger Agreement is subject to termination at the option
of either Meadowbrook or Cambio if the Merger is not consummated by September
15, 1998 and prior to that time upon the occurrence of certain events. See "The
Merger Agreement-Termination."
Restricted Securities
All shares of Meadowbrook Class A Common Stock to be issued in connection
with the Merger will be considered "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be resold except as permitted by the Securities
Act and the rules and regulations promulgated thereunder, and will bear a legend
to such effect. Meadowbrook has agreed to enter into a registration rights
agreement with the Principal Shareholders (the "Registration Rights Agreement")
providing that in certain circumstances and subject to certain exceptions,
Meadowbrook will use its reasonable efforts to file, and cause to become
effective, a registration statement with the SEC covering the resale of the
shares of Meadowbrook Class A Common Stock issued to the Principal Shareholders
in connection with the Merger. However, such shares cannot be resold to the
public until such registration statement has been declared effective by the SEC
or, in the absence of such registration, until the holder has satisfied certain
holding period and other requirements. In addition, any such registration
statement will only be kept effective for a limited period, not to exceed 90
days, and Meadowbrook will have certain rights to suspend the sale of any shares
under the registration statement. See "Risk FactorsCRestricted Securities" and
"The Merger AgreementCRegistration of Meadowbrook Shares" and the Registration
Rights Agreement included as Exhibit D to the Merger Agreement attached as Annex
A to this Joint Information/Consent Solicitation Statement.
Certain Related Agreements
Voting Agreements. The Principal Shareholders who beneficially own
approximately 89.4% of the outstanding shares of Cambio Capital Stock, in the
aggregate, have entered into the Stockholders Agreement with Meadowbrook
pursuant to which, such persons or entities have agreed to vote or consent with
respect to their shares of Cambio Capital Stock in favor of the Merger and
against certain transactions which are intended to, or could reasonably be
expected to, impede, interfere with, delay or adversely affect the Merger. See
"Certain Related Agreements-Voting Agreements."
Harvey Wm. Glasser, M.D., Meadowbrook's President and Chief Executive
Officer and holder of approximately 89.3% of the total voting power of the
capital stock of Meadowbrook has agreed to enter into a Voting Agreement with
Meadowbrook, Cambio and the Principal Shareholders (the "Glasser Voting
Agreement"), pursuant to which Dr. Glasser will agree to vote or act with
respect to all shares of Meadowbrook securities owned by him, in favor of the
election of three designees of the Principal Shareholders to the Meadowbrook
Board of Directors (the "Meadowbrook Board").
Registration Rights Agreement. At the Closing, Meadowbrook and the
Principal Shareholders will enter into the Registration Rights Agreement which
will grant the Principal Shareholders the right to request Meadowbrook, after 12
months following the closing, on up to two occasions in any 12-month period, to
register the shares of Meadowbrook Class A Common Stock to be received by the
Principal Shareholders in exchange for the Principal Shareholders's Cambio
Capital Stock pursuant to the Merger. The Principal Shareholders will also have
"piggyback" registration rights with respect to such shares of Meadowbrook Class
A Common Stock. See "The Merger-Interests of Certain Persons in the Merger" and
"Certain Related Agreements-Registration Rights Agreement."
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<PAGE>
Secured Bridge Financing. As of the date of this Joint Information/Consent
Solicitation Statement, Meadowbrook has loaned Cambio $1,300,000 to fund
Cambio's business activities prior to the Closing. Such loans are evidenced by
Secured Bridge Financing Notes and are payable upon the earlier to occur of (i)
the Closing; (ii) September 15, 1998; (iii) the date on which Cambio closes any
equity or debt financing in excess of $50,000; (iv) the date on which all or
substantially all of the assets of Cambio are sold; or (v) the date on which
there occurs any "change of control" of Cambio (defined as a sale or other
transfer, directly or indirectly, of 30% or more of the beneficial voting or
economic interest of Cambio).
Appraisal and Dissenters' Rights
Shareholders of Cambio who do not vote in favor of the Merger may, under
certain circumstances and by following procedures prescribed by Chapter 13 of
the California General Corporation Law (the "CGCL"), have a right to demand
payment for, and appraisal of the "fair value" of, their shares. See "The
Merger-Appraisal and Dissenters' Rights."
Risk Factors
Shareholders of Cambio before consenting to the Merger Agreement and the
Merger should consider the risks associated with the Merger and with holding
Meadowbrook Class A Common Stock.
Risks relating to the Merger. Risks relating to the Merger include: (i) the
uncertainty of the effects of the Merger; (ii) the potential dilutive effect to
stockholders; (iii) the additional shares of Meadowbrook Class A Common Stock to
be issued in the Merger as well as the number of shares of Meadowbrook Class A
Common Stock to be eligible for resale; (iv) certain differences in the rights
of holders of Meadowbrook Class A Common Stock and Cambio Capital Stock
resulting from the Merger; (v) the lack of effect on the Exchange Ratio of price
changes in the Meadowbrook Class A Common Stock; (vi) certain affiliates of
Meadowbrook and Cambio have certain interests that are different from or in
addition to stockholders of Meadowbrook and shareholders of Cambio; and (vii)
the limitations on sales of stock issued in conjunction with this Merger.
Risks relating to the Operations of Meadowbrook and Cambio. Risks relating
to the business of Meadowbrook and Cambio with Cambio operating as a wholly
owned subsidiary of Meadowbrook include: (i) the history of significant net
operating losses of Cambio and Meadowbrook, the uncertainty of profitability of
Meadowbrook following the Merger; (ii) the potential for fluctuations in the
operating results of Cambio; (iii) the need for additional capital on the part
of Cambio and Meadowbrook; (iv) the potential delisting of the Meadowbrook Class
A Common Stock from the Nasdaq National Market; (v) significant historical and
potential future volatility in the trading price of the Meadowbrook Class A
Common Stock; (vi) intense competition in Cambio's markets; (vii) risks
associated with integrating current and future products and technologies; (viii)
risks associated with international operations; (ix) reliance by Cambio on
certain significant customers; (x) risks associated with rapid technology change
and requirement for frequent product transitions; (xi) the potential that
Cambio's system software and products may not be Year 2000 compliant; (xii) the
dependence of Cambio on its proprietary technology; (xiii) risks relating to
software defects and product liability claims; and (xiv) Meadowbrook's ability
to manage growth and its dependence on key personnel; and (xv) risks relating to
past and future acquisitions.
For a more complete discussion of these and other risks affecting
Meadowbrook and Cambio and the Merger, see "Risk Factors."
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<PAGE>
Market Price and Dividend Data
Meadowbrook's Class A Common Stock is traded on the Nasdaq National Market
under the symbol MBRK. The following table sets forth for the periods indicated
the high and low sales prices for the Meadowbrook Class A Common Stock. All
prices have been adjusted to reflect a 3-for-2 stock split effected in the form
of a 100% stock dividend in April 22, 1998.
Fiscal 1996 High Low
---- ---
First Quarter................... 7.50 6.00
Second Quarter.................. 6.00 1.50
Third Quarter................... 4.50 2.25
Fourth Quarter.................. 4.25 1.50
Fiscal 1997
First Quarter................... 2.75 1.00
Second Quarter.................. 2.75 1.38
Third Quarter................... 1.81 1.63
Fourth Quarter.................. 2.50 1.88
Fiscal 1998
First Quarter................... 3.25 2.25
Second Quarter.................. 2.75 1.50
Third Quarter................... 4.25 2.50
Fourth Quarter.................. 2.50 0.22
The last reported sale price for Meadowbrook Class A Common Stock on the
Nasdaq National Market on April 2, 1998 (the last full day of trading prior to
the public announcement of the proposed Merger) was $2.25 per share. On August
12, 1998, the last reported sale price for the Meadowbrook Class A Common Stock
on the Nasdaq National Market was $1.00. As of July 21, 1998, there were
approximately 620 holders of record of the Meadowbrook Class A Common Stock.
No established trading market exists for the Cambio Common Stock or the
Cambio Preferred Stock. Options to purchase Cambio Common Stock were last
granted on June 6, 1998 at an exercise price of $0.05 per share ($0.21 per
equivalent share of Meadowbrook Class A Common Stock, based on the Exchange
Ratio of 0.24339), and shares of Cambio Preferred Stock were last purchased in a
third-party transaction on April 17, 1997 at a price of $0.30 per share ($1.26
per equivalent share of Meadowbrook Class A Common Stock, based on the Exchange
Ratio).
Cambio has never paid cash dividends on its Common Stock.
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<PAGE>
Historical Financial Data
See "Business and Financial Information Regarding Cambio-Cambio Selected
Financial Data," as well as the financial statements of Cambio attached hereto
and the financial information of Meadowbrook included in Meadowbrook's Annual
Report on Form 10-K for the year ended June 30, 1997 and Meadowbrook's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1998, which are incorporated
herein by reference and attached hereto as Annex C.
Selected Financial Data of Meadowbrook
The statement of operations data for each of the three years in the period
ended June 30, 1997, and the balance sheet data at June 30, 1996 and 1997 are
derived from the audited consolidated financial statements of Meadowbrook
included in the Meadowbrook SEC Documents. The balance sheet data at June 30,
1995 has been derived from audited consolidated financial statements of
Meadowbrook that are not included in the Meadowbrook SEC Documents. The
statement of operations data for the nine months ended March 31, 1997 and 1998
and balance sheet data at March 31, 1998 are derived from unaudited consolidated
financial statements included in Meadowbrook SEC Documents. The unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, which Meadowbrook considers necessary for a fair
statement of the information set forth therein. Operating results for the nine
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for any future period. The data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes included in Meadowbrook's Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1998, which are incorporated herein by reference and attached
hereto as Annex C. All share and per share data has been adjusted to reflect a
3-for-2 stock split effected in the form of a 100% stock dividend in April 22,
1998.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, March 31,
---------------------------------- ----------------------
1997 1996 1995 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
Statements of Operations Data:
<S> <C> <C> <C> <C> <C>
Net operating revenues ....................................... $ 20,834 $ 23,623 $ 19,974 $ 6,286 $ 17,013
Non-capital operating expenses ............................... 22,503 21,759 20,258 7,559 16,819
Capital expenses:
Depreciation and amortization ............................ 572 586 543 190 448
Rent ..................................................... 1,635 1,953 2,351 474 1,328
Interest expense (income) ................................ (55) (114) 26 (111) (38)
Gain (loss) on sale of assets ............................ -- -- -- (1,472) (531)
-------- -------- -------- -------- --------
Total capital expenses ................................ 2,152 2,425 2,920 (919) 1,207
-------- -------- -------- -------- --------
Restructuring Charges ........................................ -- -- 310 -- --
-------- -------- -------- -------- --------
Total expenses ........................................ 24,655 24,184 23,488 6,640 18,026
-------- -------- -------- -------- --------
Net (loss) before income taxes and minority interest ......... (3,821) (561) (3,514) (354)
(1,012)
Income tax provisions (benefit) .............................. -- -- (93) -- --
-------- -------- -------- -------- --------
Net (loss) before minority interest .......................... $ (3,821) $ (561) $ (3,421) $ (354) $ (1,012)
Minority interest ............................................ 30 29 108 4 27
-------- -------- -------- -------- --------
Net (loss) ................................................... $ (3,851) $ (590) $ (3,529) $ (358) $ (1,039)
======== ======== ======== ======== ========
Net (loss) per common share .................................. $ (1.33) $ (0.21) $ (1.21) $ (0.12) $ (0.36)
======== ======== ======== ======== ========
Weighted average common shares used in per
Common share calculation ................................. 2,895 2,895 2,906 2,885 2,895
======== ======== ======== ======== ========
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</TABLE>
<PAGE>
At June 30, At March 31,
--------------------------- -----------
1997 1996 1995 1998
---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital .................... $ 4,815 $ 6,519 $ 4,815 $ 7,711
Total assets ....................... 7,358 14,840 9,548 16,304
Long-term liabilities and
capital lease obligations ......... 21 658 49 1,074
Stockholders' equity ............... $ 5,647 $10,086 $ 6,236 $10,677
Since the beginning of the fiscal year ended June 30, 1997, Meadowbrook has
disposed of all of its operating assets. As of June 30, 1998, Meadowbrook's
assets consisted mainly of cash and accounts receivable.
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RISK FACTORS
In addition to the other information regarding Meadowbrook, Cambio and the
Merger contained in this Joint Information/Consent Solicitation Statement or the
Meadowbrook SEC Documents, the following factors should be considered carefully
by the holders of Cambio Capital Stock before voting on the Merger Agreement and
the Merger. For periods following the Merger, references to the products,
services, business, results of operations, or financial condition of Meadowbrook
should be considered to refer to Meadowbrook and its subsidiaries, including
Cambio, unless the context otherwise requires.
Accumulated Deficits; Uncertain Profitability. Cambio has incurred
significant net losses since its inception, and Cambio had an accumulated
deficit of approximately $26 million at March 31, 1998. Cambio incurred net
losses of $7,465,664 and $3,175,055 for the years ended December 31, 1886 and
1997 respectively. There can be no assurance that Meadowbrook will be profitable
in any future period and any positive recent operating results should not be
considered indicative of future financial performance. Cambio's business is also
subject to the risks inherent in the operation of a new business enterprise, and
there can be no assurance that the Combined business will be able to
successfully address these risks. See "Management's Discussions and Analysis of
Financial Condition and Results of Operations of Cambio."
Fluctuating Operating Results. Cambio's operating results have fluctuated
in the past, and as a result Meadowbrook's results may fluctuate significantly
in the future depending on a number of factors. Factors that have resulted in
fluctuations in Cambio's operating results have included the size of orders
(which have typically ranged from a few thousand dollars to several hundred
thousand dollars) as well as the timing and seasonality of orders, with Cambio's
revenue in the first quarter of a fiscal year having been typically lower than
its revenue in the fourth quarter of the immediately preceding fiscal year, due
to seasonality in customer buying patterns and the structure of Cambio's sales
commission programs.
In addition to the factors that are specific to Meadowbrook and Cambio
described above, factors that may contribute to future fluctuations in
Meadowbrook's quarterly operating results include, but are not limited to: (i)
development and introduction of new operating systems that require additional
development efforts by Cambio; (ii) introduction or enhancement of products by
Cambio; (iii) changes in pricing policies of Cambio or its competitors; (iv)
increased competition; (v) technological changes in computer systems and
environments; (vi) the ability of Cambio to timely develop, introduce and market
new products; (vii) quality control of products sold; (viii) market readiness to
deploy systems management products for distributed computing environments; (ix)
market acceptance of new products and product enhancements; (x) customer order
deferrals in anticipation of new products and product enhancements; (xi)
Cambio's success in expanding its sales and marketing programs; (xii) personnel
changes; (xiii) foreign currency exchange rates; (xiv) mix of products sold;
(xv) acquisition costs; and (xvi) general economic conditions. See "Meadowbrook
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Meadowbrook's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997 and Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998, which are incorporated herein by reference and are
attached hereto as Annex C and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Cambio."
Need for Additional Capital. Cambio's current operations are cash flow
negative and as of March 31, 1998, Cambio had negative working capital of
$4,112,293. Meadowbrook has only a limited amount of working capital. Although
Cambio's management believes that its expected funds from operations and funds
from Meadowbrook will be sufficient to meet Cambio's forecasted short-term cash
commitments, in the future, Cambio will need additional capital to fund its
operations. There can be no assurance that capital will be available, or that,
if available, it can be obtained on terms favorable to Cambio or Meadowbrook. If
adaquate funds are not available, Cambio's liquidity could be impaired, which
could have a material adverse effect on the business of Cambio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Cambio."
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Potential Delisting from Nasdaq National Market. The Meadowbrook Class A
Common Stock is currently quoted on the Nasdaq National Market. On February 23,
1998, the Nasdaq National Market adopted new quantitative and qualitative
requirements, as set forth under NASD Marketplace Rule 4450, which issuers are
required to meet in order to maintain their listings. Meadowbrook has been
notified by Nasdaq that it does not comply with the public float and market
value of public float requirements. On June 1, 1998 Nasdaq issued a delisting
letter identifying the review procedures available to Meadowbrook. Meadowbrook
at this time is appealing the delisting decision and a hearing was held on July
30, 1998. At such hearing, Meadowbrook requested that the Meadowbrook Class A
Common Stock be quoted on the Nasdaq Small Cap Market. To be eligible for
continued listing on the Nasdaq Small Cap Market, Meadowbrook must meet the
following requirements: (i) net tangible assets of at least $2,000,000, or (ii)
a market capitalization of $35,000,000, or (iii) net income in at least two of
the last three years of $500,000 and a public float of at least 500,000 shares
with a market value of at least $1,000,000. As of the date of this Joint
Information/Consent Solicitation Statement, Meadowbrook met the continued
listing requirements for the Nasdaq SmallCap Market. In addition, Nasdaq has
indicated to Meadowbrook that in its considerationof Meadowbrook's request for
quotation of the Meadowbrook Class A Common Stock on the Nasdaq SmallCap Market,
because Meadowbrook has ceased its operations and the Merger would result in a
new company being listed, Meadowbrook may be required to meet the initial
listing requirements for the Nasdaq SmallCap Market which are more stringent
than the requirements for continued listing. Meadowbrook will not be able to
meet the requirements for initial listing on the Nasdaq SmallCap Market and
there can be no assurance that Meadowbrook will be able to meet the requirements
for continued listing on the Nasdaq SmallCap Market with respect to the
Meadowbrook Class A Common Stock. If Meadowbrook fails to maintain a Nasdaq
National Market listing or fails to obtain a listing on the Nasdaq Small Cap
Market, Meadowbrook's securities will likely be traded on the OTC Bulletin
Board. As a result, the market value of the Meadowbrook Class A Common Stock
would likely decline and stockholders likely would find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Meadowbrook Class A Common Stock.
Volatility in the Trading Price of Meadowbrook Class A Common Stock. On
April 2, 1998, the trading day immediately prior to the signing of the Merger
Agreement, the closing prices of the Meadowbrook Class A Common Stock was $2.25
per share. Since that date, the trading price of the Meadowbrook Class A Common
Stock has traded as high as $3.50 per share and has traded as low as $0.218 per
share, and was $1.00 per share on August 12, 1998. There can be no assurance
that the trading prices of the Meadowbrook Class A Common Stock will not decline
further between the date of this Joint Information/Consent Solicitation
Statement and the date of the Closing. Shareholders of Cambio are encouraged to
obtain current quotations as to the market prices of the Meadowbrook Class A
Common Stock.
Uncertain Effects of the Merger. Although the Cambio Board believes that
the Merger is fair and in the best interests of the Cambio shareholders, there
can be no assurance that Cambio will realize the anticipated benefits of the
Merger. Because Cambio shareholders will own a significantly smaller percentage
of Meadowbrook following the Merger than they owned of Cambio, their investment
will depend in large part upon the success of Meadowbrook's management of
Cambio. Meadowbrook's management has not had any experience in operating a
business such as Cambio's. The combination of Cambio and Meadowbrook involves
several potential operating and business risks, including, but not limited to,
the integration of Cambio's and Meadowbrook's management in a timely, efficient
and effective manner. There can be no assurance that Cambio will be able to
realize any revenue enhancements or cost savings or maintain Cambio's business
relationships with its customers after the Merger. Furthermore, there can be no
assurance that any cost savings which are realized due to the Merger will not be
offset by increases in other expenses or operating losses, including losses due
to problems in integrating the two companies. See "-Risks Associated With
Acquisitions."
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<PAGE>
Risks Associated with Acquisitions. As part of its business strategy,
Meadowbrook may from time to time acquire assets and businesses principally
relating to or complementary to its operations, including for the purpose of
acquiring specific technology. To the extent Meadowbrook acquires additional
businesses that are geographically distant from Meadowbrook's Emeryville,
California headquarters, the integration and management of the acquired
businesses' operations can be more difficult. These and any other acquisitions
by Meadowbrook will be accompanied by the risks commonly encountered in
acquisitions of companies. Such risks include, among other things, potential
exposure to unknown liabilities of acquired companies or to acquisition costs
and expenses exceeding amounts anticipated for such purposes, fluctuations in
Meadowbrook's quarterly and annual operating results due to the costs and
expense of acquiring and integrating new businesses or technologies, the
difficulty and expense of assimilating the operations and personnel of the
acquired businesses, the potential diversion of Meadowbrook's management's time
and attention, the inability to successfully integrate or to complete the
development and application of acquired technology and the potential failure to
achieve anticipated financial, operating and strategic benefits from such
acquisitions, difficulties in establishing and maintaining uniform standards,
controls, procedures and policies, the impairment of relationships with and
possible loss of key employees and customers of acquired businesses as a result
of changes in management and ownership, the incurrence of amortization expense
if an acquisition is accounted for as a purchase, and dilution to the
stockholders of Meadowbrook if the consideration for the acquisition consists of
equity securities. There can be no assurance that Meadowbrook will be successful
in overcoming these risks or any other problems encountered in connection with
such acquisitions. If Meadowbrook is unsuccessful in doing so, its business,
financial condition and results of operations could be materially and adversely
affected.
Potential Dilutive Effect to Stockholders. Although the companies believe
that benefits will result from the Merger, there can be no assurance that the
Merger, even if achieved in an efficient, effective and timely manner, will
result in an operation and financial condition superior to what would have been
achieved by Cambio independently, or as to the period of time required to
achieve such result. The issuance of Meadowbrook Class A Common Stock in
connection with the Merger, and Cambio's operating losses, will have the effect
of reducing Meadowbrook's net income per share and could reduce the market price
of Meadowbrook Class A Common Stock unless and until revenue growth or cost
savings and other business benefits sufficient to offset the effect of such
issuance can be achieved. There can be no assurance that such growth, savings or
benefits will be achieved. In addition, there can be no assurance that
shareholders of Cambio would not achieve greater returns on investment if Cambio
were to remain an independent company.
Additional Shares to be Issued; Shares Eligible for Future Sale. As of July
24, 1998, there were approximately 1,735,866 shares of Meadowbrook Class A
Common Stock outstanding and 40,000 shares of Meadowbrook Class A Common Stock
subject to Meadowbrook Options. An additional up to 1,268,014 shares of
Meadowbrook Class A Common Stock or options to purchase Meadowbrook Class A
Common Stock will be issued as a result of the Merger. In addition, pursuant to
the Registration Rights Agreement, the Principal Shareholders, who will own
approximately 30% of the outstanding shares of Meadowbrook Class A Common Stock
upon 12 months following the Closing will have the right, on up to two occasions
in any 12-month period, to request that Meadowbrook register for public resale
such shares of Meadowbrook Class A Common Stock. The sale of a significant
number of the foregoing shares may cause substantial fluctuations in the market
price of Meadowbrook Class A Common Stock. Moreover, sales of substantial
amounts of Meadowbrook Class A Common Stock (including shares issuable upon
exercise of assumed options) in the public market could materially and adversely
affect the market price of the Meadowbrook Class A Common Stock. Such sales may
make it more difficult for Meadowbrook to sell equity securities or
equity-related securities in the future at a time and price that Meadowbrook
deems appropriate.
Rights of Holders of Meadowbrook Class A Common Stock and Cambio Capital
Stock Following the Merger. Following the Merger, holders of Cambio Capital
Stock will become holders of Meadowbrook Class A Common Stock. Certain material
differences exist between the rights of holders of Meadowbrook Class A Common
Stock and Cambio Capital Stock under Meadowbrook's Certificate of Incorporation
and Bylaws or Cambio's Articles of Incorporation and Bylaws, respectively. In
addition, certain material differences exist with respect to the rights of
shareholders under California law as compared with the rights of stockholders
under Delaware law. See "Comparison of Rights of Holders of Meadowbrook Class A
Common Stock and Cambio Common Stock."
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No Effect on Exchange Ratio of Change in Price of Meadowbrook Class A
Common Stock. Under the terms of the Merger Agreement, the shares of Cambio
Capital Stock issued and outstanding at the Effective Time will be converted
into shares of Meadowbrook Class A Common Stock. The Merger Agreement does not
contain any provisions for adjustment of the Exchange Ratio based on
fluctuations in the trading price of Meadowbrook Class A Common Stock, which has
declined from a closing price of $2.25 per share on April 2, 1998 to $1.00 per
share, on August 12, 1998. Accordingly, the value of the consideration to be
received by shareholders of Cambio upon the Merger will depend on the market
price of the Meadowbrook Class A Common Stock at the Effective Time.
Interests of Certain Persons in the Merger. Certain members of the
Meadowbrook Board, the Cambio Board, the management of Meadowbrook and the
management of Cambio, respectively, have certain interests in the Merger that
are different from, or in addition to, the interests of Meadowbrook stockholders
and Cambio shareholders in the Merger generally. These certain interests
include: (i) the current directors of Meadowbrook have become directors of
Cambio; (ii) certain current directors of Cambio will become directors of
Meadowbrook; (iii) Meadowbrook and the Principal Shareholders will enter into
the Registration Rights Agreement; (iv) Dr. Glasser will enter into the Glasser
Voting Agreement with Meadowbrook, Cambio and the Principal Shareholders; and
(v) prior to the Merger the Principal Shareholders may convert the outstanding
indebtedness of Cambio held by such Principal Shareholders into equity of
Cambio. See "The Merger-Interests of Certain Persons in the Merger."
Intense Competition. The markets in which Cambio competes are intensely
competitive, highly fragmented and rapidly changing. In order to compete
effectively, Cambio will have to enhance current products, enhance the
operability of its products with one another and develop new products in a
timely fashion.
Cambio anticipates continued growth in competition in the
telecommunications industry and consequently, the entrance of new competitors
into the software systems market in the future. To maintain and improve its
competitive position, Cambio must continue to develop and introduce, in a timely
and cost-effective manner, new product sets, new product features and services
and support that keep Cambio competitive with its competitors. The principle
competitive factors in Cambio's market are quality, performance, price, customer
support and training, Cambio's reputation, and product attributes such as
scalability, compatibility, functionality and acceptance. In addition, Cambio
competes with a number of companies that have substantially greater financial,
technical, sales, marketing and other resources as well as greater name
recognition than Cambio. As a result, Cambio's competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products and services than can Cambio. There can be no assurance that Cambio
will be able to compete successfully with its existing competitors or with new
competitors.
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Cambio competes primarily with: (i) hardware and software vendors that
offer a documentation platform or framework to support client/server network
documentation applications; (ii) vendors that provide network documentation
software for the mainframe environment and are migrating their products to the
client/server environment; (iii) vendors that provide "point" products that
address specific problems and offer specific functionality, such as job
scheduling or security audit tools; and (iv) vendors that provide integrated and
interoperable solutions. Cambio believes that its principal competitors that
offer products in all or some of its product areas are Architel Corporation and
Visionael, Inc. and several smaller private companies.
Cambio's success will also depend significantly on its ability to develop
more advanced products more quickly and less expensively than its existing
competitors and potential competitors and to educate potential customers as to
the benefits of licensing Cambio's products rather than developing their own
products. Cambio's current and future competitors could introduce products with
more features, greater scalability, greater functionality and lower prices than
Cambio's products. These competitors could also bundle existing or new products
with other, more established products in order to compete with Cambio. Cambio's
focus on client/server network documentation software may be a disadvantage in
competing with vendors that offer a broader range of products. Moreover, as the
network documentation software market develops, a number of companies with
significantly greater resources than those of Cambio could attempt to increase
their presence in this market by acquiring or forming strategic alliances with
competitors or business partners of Cambio. In addition, because there are
relatively low barriers to entry for the software market, Cambio expects
additional competition from other established and emerging companies. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could materially and adversely affect
Cambio's business, operating results and financial condition. Any material
reduction in the price of Cambio's products would negatively affect gross
margins and would require Cambio to increase software unit sales in order to
maintain gross profits. There can be no assurance that Cambio will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon Cambio's business, operating
results and financial condition. See "Business of Cambio-Competition."
Risk of Successfully Integrating Current and Future Products and
Technologies. Cambio's product strategy is to integrate selected products and
technologies to enhance network documentation functionality and to integrate
certain products throughout its entire product line through the availability of
a common set of services. Such product and technology integration activities
have not begun and no current schedule exists. The success of this strategy is
dependent in significant part on Cambio's ability to integrate its products as
planned and the resultant products achieving market acceptance by end users,
resellers and OEMs. No assurance can be given that Cambio will successfully
integrate its products as planned. If Cambio is unable to develop and introduce
new integrated products and technologies, or enhancements to existing products,
in a timely manner, its business, operating results and financial condition
would be materially and adversely affected.
Risks Associated With International Operations. International revenue (from
sales outside the United States and Canada) accounted for 25% and 14% of
Cambio's total revenues in the three months ended March 31, 1998 and the year
ended June 30, 1997, respectively. Cambio believes that its success depends upon
continued expansion of its international operations. Cambio currently has sales
and service offices in the United Kingdom. International expansion may require
Cambio to establish additional foreign offices, hire additional personnel and
recruit additional international resellers. This may require significant
management attention and financial resources and could adversely affect Cambio's
operating margins. To the extent Cambio is unable to effect these additions
efficiently and in a timely manner, its growth, if any, in international sales
will be limited, and its business, operating results and financial condition
could be materially and adversely affected. There can be no assurance that
Cambio will be able to maintain or increase international market demand for its
products.
These international operations subject Cambio to a number of risks inherent
in developing products outside of the United States, including the potential
loss of developed technology, imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations and lower levels of intellectual property protection.
See "Business of Cambio-Research and Development."
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Cambio's international business also involves a number of additional risks,
including lack of acceptance of localized products, cultural differences in the
conduct of business, longer accounts receivable payment cycles, greater
difficulty in accounts receivable collection, seasonality due to the slow-down
in European business activity during Cambio's third fiscal quarter, unexpected
changes in regulatory requirements and royalty and withholding taxes that
restrict the repatriation of earnings, tariffs and other trade barriers, and the
burden of complying with a wide variety of foreign laws. Cambio's international
sales are generated primarily through its international sales subsidiary and are
expected to be denominated in local currency, creating a risk of foreign
currency translation gains and losses. To the extent profit is generated or
losses are incurred in foreign countries, Cambio's effective income tax rate may
be materially and adversely affected. In some markets, localization of Cambio's
products is essential to achieve market penetration. Cambio may incur
substantial costs and experience delays in localizing its products, and there
can be no assurance that any localized product will ever generate significant
revenue. There can be no assurance that any of the factors described herein will
not have a material adverse effect on Cambio's future international sales and
operations and, consequently, its business, operating results and financial
condition.
Reliance of Significant Customers. Cambio's total revenues from its five
largest customers during the year ended December 31, 1997, and during the three
months ended March 31, 1998 represented approximately 41.3%, and 64.3%
respectively, of total revenues. This concentration of customers can cause
Cambio's revenues and earnings to fluctuate from quarter to quarter, based on
these customers' requirements and the timing of their orders. Although Cambio
believes it has good relationships with its largest customers and has in the
past received a substantial portion of its revenues from repeat business with
established customers, none of Cambio's major customers has any obligation to
purchase additional products or services, and these customers generally have
acquired fully-paid licenses to their installed systems. Therefore, there can be
no assurance that any of Cambio's major customers will continue to purchase new
systems, systems enhancements and services in amounts similar to previous years.
A reduction, delay or cancellation in orders from any of its major customers
would have a material adverse effect on Cambio's results of operations and
financial condition. In addition, the acquisition by a third party of one of
Cambio's major customers could result in the loss of that customer and have a
material adverse effect on Cambio's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Cambio."
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for Cambio's products is intensely competitive, highly
fragmented and characterized by rapid technological developments, evolving
industry standards and rapid changes in customer requirements. The introduction
of products embodying new technologies, the emergence of new industry standards
or changes in customer requirements could render Cambio's existing products
obsolete and unmarketable. As a result, Cambio's success depends upon its
ability to continue to enhance existing products, respond to changing customer
requirements and develop and introduce in a timely manner, new products that
keep pace with technological developments and emerging industry standards.
Customer requirements include, but are not limited to, product operability and
support across distributed and changing heterogeneous hardware platforms,
operating systems, relational databases and networks. For example, as certain of
Cambio's customers start to utilize Windows NT or other emerging operating
platforms, it will be necessary for Cambio to enhance and port its products or
develop new products to operate on such platforms in order to meet these
customers' requirements. There can be no assurance that Cambio's products will
achieve market acceptance or will adequately address the changing needs of the
marketplace or that Cambio will be successful in developing and marketing
enhancements to its existing products or new products incorporating new
technology on a timely basis. Cambio has in the past experienced delays in
product development, and there can be no assurance that Cambio will not
experience further delays in connection with its current product development or
future development activities. If Cambio is unable to develop and introduce new
products, or enhancements to existing products, in a timely manner in response
to changing market conditions or customer requirements, Cambio's business,
operating results and financial condition will be materially and adversely
affected. Because Cambio has limited resources, Cambio must restrict its product
development efforts and its porting efforts to a relatively small number of
products and operating systems. There can be no assurance that these efforts
will be successful or, even if successful, that any resulting products or
operating systems will achieve market acceptance.
Year 2000 Compliance. The computer systems and/or software used by many
companies, including Cambio and Cambio's customers, may need to be upgraded to
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comply with various "Year 2000" requirements. Significant uncertainty exists in
the software industry concerning the potential effects associated with such
compliance. Although most of the software currently offered by Cambio is either
designed to be Year 2000 complaint or has been upgraded to be Year 2000
complaint, Cambio still offers some software which is not Year 2000 complaint.
Cambio anticipates these software products to be Year 2000 complaint by the end
of 1998. Cambio is in the process of correcting this situation for a number of
its existing customers, although Cambio believes that is has no contractual
obligation to do so. In addition, there can be no assurance that Cambio's Year
2000 complaint software contains all necessary date code changes or that such
software will interface with its customers' other software programs. Further,
Cambio has warranted, and may in the future warrant, to certain customers that
its software will be Year 2000 complaint, and the failure of such software to be
Year 2000 complaint could have a material adverse effect on Cambio's business,
financial condition and results of operations. Based on preliminary information,
the costs of addressing any potential problems are not expected to have a
material adverse effect on Cambio's financial position, liquidity or results of
operations in future periods. Nevertheless, there can be no assurance that
Cambio will not encounter Year 2000 difficulties, and if it does Cambio will
likely incur additional expenditures.
Dependence on Proprietary Technology; Risks of Infringement. Cambio's
success depends upon its proprietary technology. Cambio has relied on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements to establish and protect its proprietary
rights. Cambio does not have any patents material to its business at the
Effective Time. As part of its confidentiality procedures, Cambio generally
enters into non-disclosure agreements with its employees, distributors and
corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use Cambio's
products or technology without authorization, or to develop similar technology
independently. Policing unauthorized use of Cambio's products is difficult and
although Cambio is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. Cambio will make source code available for certain of its products and
the provision of such source code may increase the likelihood of
misappropriation or other misuses of Cambio's intellectual property. In selling
its products, Cambio will also rely in part on "shrink wrap" licenses that are
not signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries. There
can be no assurance that Cambio's protection of its proprietary rights,
including any patent that may be issued, will be adequate or that Cambio's
competitors will not independently develop similar technology, duplicate
Cambio's products or design around any patents issued to Cambio or other
intellectual property rights.
Cambio is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by Cambio with respect to current or future
products. Cambio expects that software product developers will increasingly be
subject to such claims as the number of products and competitors in Cambio's
industry segment grows and the functionality of products in the industry segment
overlaps. Any such claims, with or without merit, could result in costly
litigation that could absorb significant management time, which could have a
material adverse effect on Cambio's business, operating results and financial
condition. Such claims might require Cambio to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to Cambio or at all, which could have a material
adverse effect upon Cambio's business, operating results and financial
condition. See "Business of Cambio-Proprietary Rights."
Risk of Software Defects; Product Liability. Software products as complex
as those offered by Cambio frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Despite
product testing, Cambio has in the past released products with defects,
discovered software errors in certain of its new products after introduction and
experienced delayed or lost revenue during the period required to correct these
errors. Cambio has regularly introduced enhancements to its existing products
and has periodically introduced and intends to introduce new products. Despite
testing by Cambio and by current and potential customers, there is no assurance
that defects and errors will not be found in existing products or in new
products, versions or enhancements after commencement of commercial shipments.
Any such defects and errors could result in adverse customer reactions, negative
publicity regarding Cambio and its products, harm to Cambio's reputation, loss
of or delay in market acceptance or require expensive product changes, any of
which could have a material adverse effect upon Cambio's business, operating
results and financial condition. Further, Cambio could be subject to liability
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claims (for which it carries insurance, although such insurance may not be
sufficient to fully protect Cambio against losses relating to such claims) that
could have a material adverse effect on Cambio's business, operating results and
financial condition. See "Business of Cambio-Software Development."
Cambio's license agreements with customers typically contain provisions
designed to limit their exposure to potential product liability claims. To the
extent Cambio relies on "shrink wrap" licenses that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain jurisdictions,
the limitation of liability provisions contained in such "shrink wrap" license
agreements may not be effective. Cambio's products are generally used to manage
data critical to organizations, and, as a result, the sale and support of
products by Cambio may entail the risk of product liability claims. Although
Cambio maintains errors and omissions product liability insurance, such
insurance may not adequately compensate Cambio for losses relating to such
claims and a successful liability claim brought against Cambio could have a
material adverse effect upon Cambio's business, operating results and financial
condition.
Dependence on Key Employees. Meadowbrook is highly dependent on the
principal members of its management staff, including Dr. Glasser, its President
and Chief Executive Officer, and Wm. Samuel Veazey, its Vice President and Chief
Financial Officer, the loss of whose services would have a material adverse
effect on Meadowbrook's business. Meadowbrook has not entered into any
employment agreements with any of such persons and does not maintain any key
person life insurance policy on the life of any employee. Failure to attract and
retain key personnel could have a material adverse effect on Meadowbrook's
business, financial condition and results of operations. Cambio is highly
dependent on the principal members of its management staff, including Ali
Al-Dahwi, its President and Chief Operating Officer, the loss of whose services
would have a material adverse effect on Cambio's business. Cambio has not
entered into any employment agreements with any of such persons and does not
maintain any key person life insurance policy on the life of any employee.
Failure to attract and retain key personnel could have a material adverse effect
on Cambio's business, financial condition and results of operations. Gari Grimm,
Cambio's current Chairman of the Board and Chief Executive Officer will resign
her position effective September 30, 1998 and will be replaced by Dr. Glasser.
Ms. Grimm will remain as a director of Cambio.
Restricted Securities. All shares of Meadowbrook Class A Common Stock to be
issued in connection with the Merger will be considered "restricted securities"
within the meaning of Rule 144 promulgated by the SEC under the Securities Act
and may not be resold, except as permitted by the Securities Act and the rules
and regulations promulgated thereunder. Pursuant to the Registration Rights
Agreement, subject to certain exceptions, at any time after the first
anniversary of the Merger, upon the request of the Principal Shareholders of
Cambio, Meadowbrook will agree to file a registration statement covering shares
of Meadowbrook Class A Common Stock issued in the Merger to the Principal
Shareholders who have not delivered specified notices to Meadowbrook opting to
exclude their shares from such registration. However, such shares cannot be
resold to the public until such registration statement has been declared
effective by the SEC or, in the absence of such registration, until the holder
has satisfied certain holding period and other requirements. Meadowbrook's
obligation to file such registration statement and keep it effective will be
subject to certain conditions, the registration statement will only be kept
effective for a limited period, and Meadowbrook will have the right to suspend
sales pursuant to the registration statement under certain circumstances. For
all of the foregoing reasons, a Cambio shareholder who receives Meadowbrook
Class A Common Stock in the Merger may be unable to sell such stock at the time,
or at the price or upon such other terms and conditions, as the shareholder
desires, and the terms of such sale may be less favorable to the shareholder
than might be obtainable in the absence of such limitations and restrictions.
See "The Merger Agreement-Registration of Meadowbrook Shares."
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CAMBIO SHAREHOLDER APPROVAL
This Joint Information/Consent Solicitation Statement is being provided to
the shareholders of Cambio in connection with the solicitation by management of
Cambio of written consents to approve the Merger. The written consents will
approve the following resolution:
RESOLVED, that the shareholders of Cambio, Inc. ("Cambio") hereby approve
and adopt the Agreement and Plan of Merger by and among Meadowbrook
Rehabilitation Group, Inc. ("Meadowbrook"), Interset, Inc. ("Interset"),
and Cambio dated as of April 3, 1998, as ammended by the Agreement of
Ammendment dated as of July 27, 1998 by and among Meadowbrook, Interset,
Cambio, and the Principal Shareholders (the "Merger Agreement"), and all of
the transactions specified or contemplated by the Merger Agreement,
including the merger of Interset with and into Cambio and the conversion of
the outstanding shares of Cambio's common stock, and Series I Preferred
Stock into shares of the Class A Common Stock of Meadowbrook, $.01 par
value, in accordance with the Merger Agreement.
The Cambio Board has unanimously approved the Merger Agreement and the
Merger as being fair and in the best interests of Cambio and its shareholders
and unanimously recommends that the Cambio shareholders consent to the approval
and adoption of the Merger Agreement and the Merger.
Cambio Record Date, Voting Rights and Shareholder Vote Required. Only
holders of record of Cambio Capital Stock at the close of business on July 24,
1998, the Cambio Record Date, will be entitled to vote on the Merger. As of the
Cambio Record Date, there were outstanding 415,372 shares of Cambio Common Stock
held by 33 holders of record and 3,500,000 shares of Cambio Preferred Stock held
by five holders of record. For information about the ownership of Cambio Capital
Stock as of July 24, 1998, see "Cambio Networks, Inc.COwnership of Cambio
Capital Stock."
Under California law and the charter documents of Cambio, approval and
adoption of the Merger Agreement requires the affirmative vote of (i) holders of
a majority of the outstanding shares of Cambio Common Stock, voting as a single
class, and (ii) holders of 66-2/3% of the outstanding shares of Cambio Preferred
Stock, voting as a single class. Holders of Cambio Common Stock and Cambio
Preferred Stock are each entitled to one vote per share.
The holders of the outstanding shares of Cambio Preferred Stock have the
right to convert the Cambio Preferred Stock to Cambio Common Stock on a one to
one basis at any time prior to the consummation of the Merger. Upon the consent
of more than 66-2/3% of the holders of the Cambio Preferred Stock, all
outstanding shares of Cambio Preferred Stock will be automatically converted to
Cambio Common Stock.
THE MERGER
Background of the Merger
Prior to entering into the Merger Agreement, Meadowbrook's Board considered
a variety of acquisition alternatives in order to facilitate its investing in
non healthcare related businesses. The Meadowbrook Board believes that the terms
of the Merger are fair to, and in the best interest of, Meadowbrook and its
stockholders and has unanimously approved the Merger Agreement and the
transactions contemplated thereby. No fairness opinion was obtained by
Meadowbrook in connection with the Merger.
Recommendation of the Cambio Board of Directors; Reasons for the Merger
The Cambio Board unanimously approved the Merger Agreement and the Merger
as being fair and in the best interests of Cambio and the Cambio shareholders.
ACCORDINGLY, THE CAMBIO BOARD UNANIMOUSLY RECOMMENDS THAT EACH CAMBIO
SHAREHOLDER CONSENT TO THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER.
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Cambio believes that the Merger may result in a number of benefits to
Cambio and its shareholders, including the following:
Cambio's access to Meadowbrook's greater financial resources;
Subject to Meadowbrook's continued listing on Nasdaq, greater
liquidity for its shareholders, who would hold shares in a publicly
traded Nasdaq listed company rather than in a private company (see
"Risk Factors-Potential Delisting from the Nasdaq National Market" and
"-Restricted Securities" and "The Merger Agreement-Registration of
Meadowbrook Shares" for a description regarding the resale limitations
with respect to the Meadowbrook Class A Common Stock to be received by
Cambio shareholders); and
Subject to the price of Meadowbrook Class A Common Stock at the
Effective Time, a favorable purchase price (see "Risk Factors-No
Effect on Exchange Ratio of Change in Price of Meadowbrook Class A
Common Stock").
In the course of its deliberations, the Cambio Board also recognized that
the loss of control by current management may constitute a potential
disadvantage.
The Cambio Board considered a wide variety of factors in connection with
its evaluation of the Merger Agreement, and concluded that the Merger provides
an opportunity to serve the best interests of Cambio and its shareholders. In
view of the variety of factors considered by the Cambio Board in connection with
its evaluation of the Merger Agreement and proposed Merger, the Cambio Board did
not find it practicable to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination and
recommendations.
In evaluating the recommendation of the Cambio Board of Directors,
shareholders should carefully consider the matters described herein under "Risk
Factors."
Interests of Certain Persons in the Merger; Management of Meadowbrook and Cambio
Certain members of the Meadowbrook Board, the Cambio Board, the management
of Meadowbrook and the management of Cambio, respectively, have certain
interests in the Merger that are different from, or in addition to, the
interests in the Merger of Meadowbrook stockholders and Cambio shareholders
generally. These certain interests include:
The Merger Agreement provides that, for a period of six years after the
Effective Time, Meadowbrook will guarantee and cause Cambio to indemnify the
current officers and directors of Cambio in accordance with Cambio's Articles of
Incorporation and Bylaws in effect as of the date of the Merger Agreement for
any action or inaction by such person prior to the Merger.
In connection with the Merger and pursuant to the Glasser Agreement,
certain directors and shareholders of Cambio will become directors of
Meadowbrook. See "Certain Related AgreementsCVoting Agreements." Also in
connection with the Merger, the current directors of Meadowbrook, Dr. Glasser,
John McCracken and Robert Rush have become directors of Cambio.
The Principal Shareholders will enter into the Registration Rights
Agreement providing for the resale of the shares of Meadowbrook Class A Common
Stock that they receive pursuant to the Merger. The remaining Cambio
shareholders will not have any registration rights. See "Certain Related
Agreements-The Registration Rights Agreement." Prior to the Effective Time, the
Principal Shareholders will also convert the outstanding indebtedness of Cambio
held by such Principal Shareholders into equity of Cambio.
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Certain Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Cambio
Capital Stock. This discussion is based on the Code, Treasury Regulations,
published positions of the IRS and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to Meadowbrook or Cambio's shareholders as described herein.
This discussion addresses only those shareholders who hold their Cambio
Capital Stock as a capital asset within the meaning of Section 1221 of the Code,
and is included for general information only. It does not discuss all aspects of
United States federal income taxation that may be relevant to a particular
shareholder in light of such shareholder's personal tax circumstances and may
not apply to certain types of shareholders who may be subject to special
treatment under the federal income tax laws, such as insurance companies,
corporations subject to the alternative minimum tax, banks, dealers in
securities or tax-exempt organizations, persons that hold Cambio Capital Stock
as part of a straddle, hedging or conversion transaction, persons whose
functional currency is not the U.S. dollar, shareholders who for United States
federal income tax purposes are foreign corporations, foreign partnerships,
nonresident alien individuals, foreign estates or foreign trusts or to
shareholders who acquired their shares pursuant to the exercise of employee
stock options or otherwise as compensation. In addition, this discussion does
not address the tax consequences of the Merger under state, local or foreign
laws or any federal tax laws other than those pertaining to the income tax or
the tax consequences of transactions effectuated prior to or after the Merger
(whether or not such transactions are in connection with the Merger), including
without limitation transactions in which shares of Meadowbrook Class A Common
Stock are acquired or in which shares of Cambio Capital Stock are disposed.
Furthermore, this discussion does not address the tax consequences of the
receipt of Cambio Capital Stock in exchange for or upon conversion of Cambio
debt and does not address the tax consequences of the Merger as to Cambio
Capital Stock so received. DUE TO THE UNCERTAINTY OF THE FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND DUE TO THE SUMMARY NATURE OF THE FOLLOWING
DISCUSSION, EACH HOLDER OF CAMBIO CAPITAL STOCK IS STRONGLY URGED TO CONSULT ITS
OWN TAX ADVISOR AS TO THE FEDERAL INCOME TAX CONSEQUENCES TO IT OF THE MERGER
AND AS TO THE FOREIGN, STATE, LOCAL AND OTHER TAX CONSEQUENCES THEREOF.
The Merger is intended to qualify for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. However,
characterization of the Merger as a Reorganization will depend upon the
existence of certain factual circumstances and the satisfaction of certain
conditions at the time of the Merger. No assurance can be given that such
factual circumstances currently exist or will exist at such time or that such
conditions can or will be satisfied at such time. Accordingly, no assurances can
be given that the Merger will be treated for federal income tax purposes as a
reorganization under section 368(a) of the Code. No ruling from the Internal
Revenue Service nor opinion of tax counsel has been requested regarding the
federal income tax consequences of the Merger.
Reorganization Treatment. If, as intended, the Merger qualifies as a
Reorganization, in general and except with respect to Cambio Capital Stock that
was received in exchange for or upon the conversion of Cambio debt, the
following federal income tax consequences would generally result:
(a) No gain or loss should be recognized by the holders of Cambio Capital
Stock who exchange their shares of Cambio Capital Stock solely for shares of
Meadowbrook Class A Common Stock pursuant to the Merger (except in respect of
cash received in lieu of fractional shares).
(b) The aggregate adjusted tax basis of the Meadowbrook Class A Common
Stock received in that exchange will be equal to the aggregate adjusted tax
basis of the Cambio Capital Stock surrendered therefor (adjusted with respect to
fractional shares).
(c) The holding period of the Meadowbrook Class A Common Stock received in
that exchange will include the period during which the Cambio Capital Stock
surrendered in exchange therefor was considered to be held.
(d) Cash payments received in lieu of a fractional share of Meadowbrook
Class A Common Stock will be treated as if such fractional share of Meadowbrook
Class A Common Stock had been issued in the Merger and then redeemed by
Meadowbrook. A Cambio shareholder receiving such cash will recognize gain or
loss, upon such payment, measured by the difference (if any) between the amount
of cash received and the portion of the basis of the share of Cambio Capital
Stock allocable to such fractional interest.
(e) Neither Meadowbrook nor Cambio should recognize gain or loss solely as
a result of the Merger.
A shareholder of Cambio who exercises dissenters' rights or appraisal
rights under California law with respect to a share of Cambio Capital Stock and
receives payments for such share in cash will generally recognize capital gain
or loss measured by the difference between the amount of cash received and the
shareholder's basis in such share. However, if such dissenting shareholder
directly or constructively owns shares of Cambio Capital Stock that are
exchanged for shares of Meadowbrook Class A Common Stock, or, possibly, owns
shares of Meadowbrook stock actually or constructively after the Merger, then in
certain circumstances such shareholder may be treated as having received a
dividend in the amount of the cash paid to such shareholder in exchange for the
shares as to which dissenters' rights are perfected. Any Cambio shareholder who
intends to dissent from the Merger should consult such shareholder's own tax
advisor with respect to the application of the stock redemption and constructive
ownership rules to the shareholder's particular circumstances.
Failure of Reorganization Treatment. If the Merger does not qualify as a
Reorganization whether because certain factual circumstances fail to exist,
certain conditions fail to be satisfied, or otherwise, then for federal income
tax purposes the Merger would be disregarded and the Reorganization would be
treated as a taxable acquisition by Meadowbrook of Cambio Capital Stock from the
Cambio shareholders in exchange for the merger consideration, including the
Meadowbrook Class A Common Stock, as if the Cambio shareholders had sold their
Cambio Capital Stock for an amount of cash equal to the fair market value of the
merger consideration, including the Meadowbrook Class A Common Stock, received.
In such case, the following federal income tax consequences would generally
result:
(a) Each Cambio shareholder, including Cambio shareholders continuing to
hold the Meadowbrook Class A Common Stock received, would generally recognize
capital gain or loss equal to the difference between such shareholder's basis
for the Cambio Capital Stock surrendered and the fair market value of the merger
consideration, including the Meadowbrook Class A Common Stock, received.
(b) Each Cambio shareholder would have a basis in the Meadowbrook Class A
Common Stock received in the Merger equal to the fair market value of such
Cambio Capital Stock as of the Effective Time.
(c) A Cambio shareholder's holding period for the Meadowbrook Class A
Common Stock received in the Merger would not include any period of time during
which the surrendered Cambio Capital Stock was held.
(d) No gain or loss would be recognized by Meadowbrook or Cambio solely as
a result of the Merger.
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The foregoing discussion may not apply to certain Cambio shareholders who
own shares of Meadowbrook stock, actually or constructively, prior to the
Merger. In certain unusual circumstances it may be possible that such a
shareholder may be treated as having received a dividend equal to the fair
market value of the Meadowbrook Class A Common Stock received. A Cambio
shareholder who perfects dissenters' rights and receives payment for such
shareholder's stock should be treated in the same manner discussed above in
connection with reorganization treatment under the Code.
The foregoing is not intended to be a comprehensive discussion of all
possible federal income tax consequences of the Merger. Furthermore, this
discussion does not provide information regarding the tax consequences of the
Merger under the tax laws of any state or of any local or foreign jurisdiction.
Each Cambio shareholder is strongly urged to consult its own tax advisors with
respect to all tax consequences of the Merger.
Regulatory Approvals
Other than compliance with the federal securities laws and applicable
securities laws of the various states, Meadowbrook and Cambio are aware of no
governmental or regulatory approvals required for consummation of the Merger.
Written Consent Of Cambio Shareholders
Tabulation of Written Consents. The written consents of the Cambio
shareholders with respect to the Merger will be tabulated on September 4, 1998,
unless such date is extended by the Cambio Board in its sole discretion.
Record Date and Outstanding Shares. The Merger is being submitted for
approval to those persons holding shares of Cambio Capital Stock as of the
Record Date. The Record Date is July 24, 1998.
Approval Date. This Joint Information/Consent Solicitation Statement and
the form of Consent Card constitute Cambio's notice of the Merger. Each Cambio
shareholder has until 5:00 p.m., Pacific Time, on September 4, 1998, unless
extended by Cambio in its sole discretion (the "Approval Date"), to inform
Cambio whether such Cambio shareholder wishes to approve or disapprove of the
Merger. Cambio asks that each Investor submit a written consent by completing
and returning the Consent Card accompanying this Joint Information/Consent
Solicitation Statement in the manner described below.
Consent Card. Cambio shareholders who wish to consent to the Merger should
check the appropriate box on the Consent Card which accompanies this Joint
Information/Consent Solicitation Statement and then complete, sign and return
the Consent Card to Cambio using the enclosed return envelope. Consent Cards
must be delivered by mail or other delivery service to Cambio at the following
address on, or prior to, the Approval Date:
Cambio Networks, Inc.
15400 SE 30th Place, Suite 200
Bellevue, Washington 98007
A Cambio shareholder who checks either: (i) the box on the Consent Card
indicating that he or she consents to the Merger or (ii) the box on the Consent
Card indicating that he or she abstains from giving such consent will be deemed
to have consented to the Merger and will receive shares of Meadowbrook Class A
Common Stock.
Cambio shareholders who wish to indicate that they do not consent to the
Merger should also complete a Consent Card by filling out all the requested
information and checking the appropriate box. The failure to return a Consent
Card will be treated the same as if such Consent Card had been returned with the
box marked "ABSTAINS" checked.
A Cambio shareholder who abstains from giving his or her consent by
checking the box marked "ABSTAINS" on the Consent Card or who fails to return a
Consent Card will also receive shares of Meadowbrook Class A Common Stock if the
Merger is approved. Such shareholder shall not have any appraisal rights. See
"The Merger-Appraisal and Dissenters' Rights."
All questions as to the form of all documents and the validity (including
time of receipt) of all approvals and elections will be determined by the Cambio
Board, and such determinations shall be final and binding. The Cambio Board
reserves the absolute right to waive any of the conditions of the Merger or any
defects or irregularities in any approval of the Merger or preparation of the
form of Consent Card. The Cambio Board's interpretation of the terms and
conditions of the Merger will be final and binding. The Cambio Board shall be
under no duty to give notification of any defects or irregularities in any
approval of the Merger or preparation of the form of Consent Card and shall not
incur any liability for failure for failure to give such notification.
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Revocability of Consent. Cambio Shareholders may withdraw or revoke their
consent at any time prior to the Approval Date. To be effective, a written,
telegraphic or telex notice of revocation or withdrawal of the Consent Card must
be received by Cambio no later than the Approval Date, addressed as follows:
Cambio Networks, Inc., 15400 SE 30th Place, Suite 200, Bellevue, Washington
98007. A notice of revocation or withdrawal must specify the Cambio
shareholders' name.
Appraisal and Dissenters' Rights
Shareholders of Cambio who do not consent to the Merger may, under certain
circumstances and by following the procedure prescribed by the CGCL, exercise
appraisal rights and receive cash for the "fair value" of their shares of Cambio
Capital Stock (excluding any element of value arising from the accomplishment or
expectation of the Merger). Choosing to abstain rather than consent is not the
same as affirmatively withholding consent and therefore does not trigger
appraisal rights.
If holders of Cambio Capital Stock exercise dissenters' rights in
connection with the Merger under Chapter 13, Sections 1300-1312 of the CGCL
("Chapter 13"), any shares of Cambio Capital Stock as to which such dissenters'
rights are exercised ("Dissenting Shares") will not be converted into the right
to receive shares of Meadowbrook Class A Common Stock by virtue of the Merger
but instead will be converted into the right to receive such consideration as
may be determined to be due with respect to such Dissenting Shares pursuant to
the laws of the State of California. The following summary of the provisions of
Chapter 13 is not intended to be a complete statement of such provisions and is
qualified in its entirety by reference to the full text of Chapter 13, a copy of
which is attached hereto as Annex B and is incorporated herein by reference.
If the Merger is consented to by the required number of Cambio's
shareholders, each holder of shares of Cambio Capital Stock who does not consent
to the Merger and who follows the procedures set forth in Chapter 13 will be
entitled to have shares of Cambio Capital Stock purchased by Cambio for cash at
their fair market value. The fair market value of shares of Cambio Capital Stock
will be determined as of the day before the first announcement of the terms of
the proposed Merger, excluding any appreciation or depreciation in consequence
of the proposed Merger and therefore valuing the shares of Cambio Capital Stock
as if the Merger had not occurred.
Within ten days after approval of the Merger by Cambio's shareholders,
Cambio must mail a notice of such approval (the "Approval Notice") to all
shareholders who have not consented to the Merger, together with a statement of
the price determined by Cambio to represent the fair market value of the
applicable Dissenting Shares, a brief description of the procedures to be
followed in order for the shareholder to pursue dissenters' rights, and a copy
of Sections 1300-1304 of the CGCL. The statement of price by Cambio constitutes
an offer by Cambio to purchase all Dissenting Shares at the stated amount.
A shareholder of Cambio electing to exercise dissenters' rights must,
within thirty days after the date in which the Approval Notice is mailed to such
shareholder, mail or deliver the written demand to Cambio stating that such
holder is demanding purchase of his or her shares of Cambio Capital Stock,
stating the number of shares which Cambio must purchase, what the shareholder
claims to be the fair market value of such shares and enclosing the share
certificates for endorsement by Cambio.
If Cambio and the shareholder agree that the shares are Dissenting Shares
and agree upon the price of the shares, Cambio must pay the shareholder the
agreed upon price plus interest thereon at the legal rate from the date of the
agreement on Dissenting Shares within 30 days from the later of (i) the date of
the agreement on Dissenting Shares, or (ii) the date all contractual conditions
to the Merger are satisfied.
If Cambio denies that the shares are Dissenting Shares, or if Cambio and
the shareholder fail to agree upon the fair market value of shares of capital
stock, then within six months after the date the Approval Notice was mailed to
shareholders, any shareholder who has made a valid written purchase demand and
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who has not consented to the approval and adoption of the Merger may file a
complaint in California superior court requesting a determination as to whether
the shares are Dissenting Shares or as to the fair market value of such holder's
shares of Cambio Capital Stock, or both.
THE MERGER AGREEMENT
The terms and conditions of the Merger are set forth in the Merger
Agreement attached to this Joint Information/Consent Solicitation Statement as
Annex A and incorporated herein by reference. The following summarizes the
material terms of the Merger Agreement and the Registration Rights Agreement.
Cambio shareholders are urged to review the text of the Merger Agreement and the
Registration Rights Agreement included as Exhibit D to the Merger Agreement in
their entirety.
General; Merger Consideration
Under the terms of the Merger Agreement, if approved by the shareholders of
Cambio and if all other conditions set forth in the Merger Agreement are
satisfied or waived, Interset, a wholly owned subsidiary of Meadowbrook, will be
merged with and into Cambio, the separate corporate existence of Interset will
cease, and Cambio as the surviving corporation will become a wholly owned
subsidiary of Meadowbrook. At the Effective Time, each holder of Cambio Common
Stock (other than Dissenting Holders) will receive a number of shares of
Meadowbrook Class A Common Stock equal to 0.24339 (assuming the Effective Time
were to occur on August 12, 1998), the Exchange Ratio, multiplied by the number
of shares of Cambio Capital Stock held by such Cambio shareholder as of the
Effective Time, and cash in lieu of fractional shares, subject to the escrow
described below.
Effective Time
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of California and the Secretary of State of the
State of Delaware (or such later time as is specified in such filing) in
accordance with the CGCL and DGCL. The filing of the Certificate of Merger will
be made only upon the satisfaction or, if permitted by applicable law and the
Merger Agreement, waiver of each of the terms and conditions to the Merger set
forth in the Merger Agreement, provided that prior thereto the Merger Agreement
has not been terminated in accordance with its terms. Among the conditions to
the Merger is the approval and adoption of the Merger Agreement by the requisite
vote of the holders of Cambio. See "-Conditions to Consummation of the Merger"
and "-Amendment and Waiver."
Exchange of Certificates
As soon as practicable after the Effective Time, Meadowbrook will mail to
each person who was, immediately prior to the Effective Time, a holder of record
of shares of Cambio Capital Stock (other than a Dissenting Shareholder) a letter
of transmittal to be used to surrender certificates representing shares of
Cambio Capital Stock in exchange for the Meadowbrook Class A Common Stock to
which such holder has become entitled as a result of the Merger, and cash in
lieu of fractional shares of Meadowbrook Class A Common Stock. After receipt of
such letter of transmittal, each such holder will be entitled to surrender such
certificates to Meadowbrook, and receive in exchange therefor cash and the
certificates representing the Meadowbrook Class A Common Stock to which such
holder has become entitled as a result of the Merger, together with cash in lieu
of any fractional shares of Meadowbrook Class A Common Stock. Such letter of
transmittal will be accompanied by instructions specifying other details of the
exchange. Shareholders of Cambio should not submit certificates representing
their Cambio Capital Stock unless and until they receive such a letter of
transmittal and instructions from Meadowbrook.
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Fractional Shares
Pursuant to the Merger Agreement, no certificates for fractional interests
in shares of Meadowbrook Class A Common Stock will be issued pursuant to the
Merger. In lieu of certificates representing such fractional interests, each
holder of Cambio Capital Stock whose shares are not convertible into a whole
number of shares of Meadowbrook Class A Common Stock shall be entitled to
receive, upon surrender of such holder's certificates formerly representing
Cambio Capital Stock for exchange as provided above and after aggregating all
fractional shares of Meadowbrook Class A Common Stock to be received by such
holder, an amount of cash (without interest) determined by multiplying such
fractional interest by the average of the closing prices per share of
Meadowbrook Class A Common Stock on the Nasdaq National Market for the ten
consecutive trading days ending on the date that is three trading days prior to
the Closing Date.
Registration of Meadowbrook Shares
Meadowbrook and the Principal Shareholders have agreed to execute the
Registration Rights Agreement, which provides that Meadowbrook will, under
certain circumstances and subject to certain conditions, file a registration
statement covering the shares of Meadowbrook Class A Common Stock issued in the
Merger to the Principal Shareholders who have not delivered specified notices to
Meadowbrook opting to exclude their shares from such registration. Meadowbrook
has agreed to use reasonable efforts to cause any such registration statement to
become effective and to keep it effective until the earlier of 90 days after any
such registration statement's effective date or the termination of the
Registration Rights Agreement. Meadowbrook's obligation to file such
registration statement and to keep it effective will be suspended if Meadowbrook
believes that public disclosure of pending material corporate developments or
similar material events would be prejudicial to Meadowbrook. Sales under such
registration statement may also be suspended under certain other circumstances,
including the inaccuracy of the prospectus then contained in the registration
statement, the issuance or initiation of stop orders or similar proceedings by
the SEC and other regulators, and such regulators' requests for amendments to or
information related to the registration statement.
Expenses
The Merger Agreement provides, in general, that each party will pay all of
its expenses in connection with the Merger and the transactions contemplated
thereby, including legal, accounting, financial advisory, and consulting; except
that Meadowbrook has agreed to pay up to $25,000 in fees and expenses incurred
by Cooley Godward LLP, counsel to Cambio, in connection with the Merger.
Effect on Employee Benefit Plans
At the Effective Time, each Cambio Option issued and outstanding
thereunder, whether vested or unvested will be converted into an option to
acquire shares of Meadowbrook Class A Common Stock based on the Exchange Ratio.
Each Cambio Option converted will continue to have, and be subject to,
substantially the same terms and conditions set forth in the Cambio Option Plan
and/or as provided in the respective option agreements governing such Cambio
Option immediately prior to the Effective Time, except that (i) such Cambio
Option will be exercisable for that number of whole shares of Meadowbrook Class
A Common Stock equal to the number of shares of Cambio Common Stock that were
issuable upon exercise of such Cambio Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded down to the nearest whole number
of shares of Meadowbrook Class A Common Stock and (ii) the per share exercise
price for the shares of Meadowbrook Class A Common Stock issuable upon exercise
of such assumed Cambio Option will be equal to the quotient determined by
dividing the exercise price per share of Cambio Common Stock at which such
Cambio Option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. Meadowbrook and Cambio
intend that the Cambio Options so converted by Meadowbrook will qualify
following the Effective Time as incentive stock options under the Code, to the
extent the Cambio Options qualified as incentive stock options immediately prior
to the Effective Time. Cambio Option Agreements need not be surrendered.
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Conduct of Business Prior to the Merger
Pursuant to the Merger Agreement, Cambio has agreed that, during the period
from the date of the Merger Agreement and continuing until the earlier of the
termination of the Merger Agreement and the Effective Time, except as
contemplated by the Merger Agreement or to the extent that Meadowbrook shall
otherwise consent in writing, Cambio will carry on its business in the usual,
regular and ordinary course in substantially the same manner as previously
conducted, to pay its debts and taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, to use
all commercially reasonable efforts consistent with past practice and policies
to preserve intact Cambio's present business organization, keep available the
services of its present officers and key employees, and preserve Cambio's
relationships with customers, suppliers, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired Cambio's
goodwill and ongoing businesses at the Effective Time.
In addition, Cambio has agreed that, subject to certain specific
exceptions, it will not, without the prior written consent of Meadowbrook: (i)
enter into any material commitment or transaction not in the ordinary course of
business; (ii) transfer to any person or entity any material proprietary rights,
other than pursuant to licenses in the ordinary course of business; (iii) enter
into any material agreements (or material amendments thereto) pursuant to which
any unrelated third party is granted marketing, distribution or similar rights
of any type or scope with respect to any products of Cambio or is subsidiary
other than in the ordinary course of business; (iv) amend or otherwise modify,
except in the ordinary course of business, or violate the material terms of,
certain specified agreements; (v) commence any material litigation; (vi)
declare, set aside or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or other equity interests, or repurchase, redeem
or otherwise acquire, directly or indirectly, any shares of its capital stock
(or options, warrants or other rights exercisable therefor), except in
connection with the restructuring of its indebtedness; (vii) except for the
issuance of shares of Cambio Capital Stock upon exercise of outstanding Cambio
Options or Cambio warrants or upon conversion of outstanding Cambio Preferred
Stock, issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any shares
of its capital stock or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, except in connection with the restructuring of its indebtedness;
(viii) cause or permit any amendments to its Amended and Restated Articles of
Incorporation or Bylaws (or other charter documents); (ix) acquire or agree to
acquire any assets in excess of $50,000 in the case of a single transaction, or
acquire, by merging or consolidating or by purchasing or by any other manner,
any equity securities; (x) sell, lease, license or otherwise dispose of any of
its properties or assets in excess of $50,000, except in the ordinary course of
business; (xi) except as permitted by the Merger Agreement incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue or
sell any of its debt securities or guarantee any debt securities of others;
(xii) grant any severance or termination pay to any director or officer or to
any other employee other than pursuant to the existing agreements; (xiii) adopt
or amend any employee benefit plan, or enter into any employment contract,
extend employment offers to any person whose aggregate annual base salary would
exceed $50,000, pay or agree to pay any special bonus or special remuneration to
any director or employee other than in connection with normal annual bonus and
salary adjustments for all non-officers and directors upon consultation with
Meadowbrook, or increase the salaries or wage rates of its other employees,
except as consistent with the ordinary course of business; (xiv) revalue any of
its assets, including without limitation writing down the value of inventory or
writing off notes or accounts receivable, other than in the ordinary course of
business; (xv) pay, discharge or satisfy, in an amount in excess of $25,000 (in
any one case) or $75,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of (A)
liabilities reflected or reserved against in Cambio's financial statements
referred to in the Merger Agreement and that are not in excess of $25,000, or
(B) liabilities that arose in the ordinary course of business subsequent to
September 30, 1997 and that are not in excess of $25,000, or (C) liabilities
under contracts entered into in the ordinary course of business, which payments
are due in accordance with the terms of such contracts and that are not in
excess of $25,000, or (xvi) expenses consistent with the provisions of the
Merger Agreement incurred in connection with the transactions contemplated
hereby and that are not in excess of $25,000; (xvii) make or change any material
election in respect of taxes, adopt or change any accounting method in respect
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of taxes, enter into any closing agreement, settle any claim or assessment in
respect of taxes, or consent to any extension or waiver of the limitation period
applicable to any claim or assessment in respect of taxes; or (xviii) take, or
agree in writing or otherwise to take, any of the actions described above, or
any other action that would prevent Cambio from performing or cause Cambio not
to perform its covenants under the Merger Agreement.
No Solicitation of Transactions
The Merger Agreement provides that Cambio shall not, directly or
indirectly, solicit, initiate, facilitate or encourage any inquiries or the
making of any proposal with respect to any merger, consolidation or other
business combination involving Cambio or acquisition of any kind of material
portion of the capital stock or assets of Cambio (an "Acquisition Transaction")
or negotiate, explore or otherwise communicate in any way with any third party
with respect to any Acquisition Transaction or enter into any agreement,
arrangement or understanding with respect to an Acquisition Transaction or
requiring it to abandon, terminate, or fail to consummate the Merger or any
other transactions contemplated by the Merger Agreement, or make or authorize
any statement, recommendation or solicitation in support of any Acquisition
Transaction with any third party other than Meadowbrook and Interset. Cambio has
agreed to promptly notify Meadowbrook if any such proposal or offer is made by
any third party.
Indemnification
In connection with the Merger, Meadowbrook will be able to recover from the
Principal Shareholders a limited amount of any losses or damages, Meadowbrook
incurs or reasonably anticipates incurring by reason of certain breaches by
Cambio of covenants, representations or warranties contained in the Merger
Agreement including, without limitation, those relating to Cambio's organization
and standing, capital structure, authority, absence of conflicts with other
instruments, governmental consents, financial statements, absence of changes,
properties, environmental matters, taxes, employees, compliance with laws,
litigation, contracts, absence of defaults, proprietary rights, insurance,
brokers or finders, related parties, certain advances, underlying documents,
absence of misleading statements, and this Joint Information/Consent
Solicitation Statement. The parties' representations and warranties are set
forth in full in the Merger Agreement attached hereto as Annex A. Resort to the
recovery from the Principal Shareholders will be the exclusive contractual
remedy of Meadowbrook for any such breaches and misrepresentations if the Merger
closes, provided that nothing will limit any remedy for fraud or willful
misconduct. Meadowbrook may not receive any shares from the Principal
Shareholders unless and until losses in excess of $70,000 have been suffered, in
which case Meadowbrook may recover from the Principal Shareholders an amount of
Meadowbrook Class A Common Stock with a value equal to the total of its
cumulative losses; provided that any such recovery shall not exceed 25% of any
Principal Stockholder's shares of Meadowbrook Class A Common Stock received in
the Merger. For the purpose of compensating Meadowbrook for its losses, the
shares recovered from the Principal Shareholders shall be valued at the average
of the closing prices of Meadowbrook Class A Common Stock for the 30 consecutive
trading days ending three days prior to the closing date of the Merger (the
"Closing Date").
Additional Agreements
The Merger Agreement contains additional covenants of each party (i) to
take all reasonable actions to comply with all legal requirements which may be
imposed with respect to the Merger and to obtain any consents and approvals (or
exemptions) of any governmental authority or other third party required to be
obtained by such party or its subsidiaries; (ii) in the case of Cambio, to
submit the Merger Agreement and related matters to its stockholders for
approval; (iii) abstain from any communications with the public or their
respective stockholders without the prior approval of the other party, subject
to compliance with law; (iv) notify the other parties in writing of any
occurrence that is likely to result in the failure of any condition to the
Merger (see "-Conditions to Consummation of the Merger"); and (v) use all
commercially reasonable efforts to cause the Merger to be treated as a
reorganization within the meaning of Section 368 of the Code and in connection
therewith to make certain representations and warranties. Cambio has also agreed
in the Merger Agreement to (i) afford Meadowbrook and its representatives
reasonable access to Cambio's books, contracts, records and properties; and (ii)
update its disclosures to Meadowbrook.
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Conditions to Consummation of the Merger
Each party's obligation to effect the Merger is subject to the following
conditions, unless waived by all parties: (i) the Merger Agreement shall have
been duly approved and adopted by the requisite vote of the holders of Cambio
Capital Stock;(ii) there shall not be in effect any temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger; and (iii) the issuance of Meadowbrook
Class A Common Stock in connection with the Merger shall be exempt from the
registration requirements of the Securities Act pursuant to an appropriate
exemption available under Regulation D under the Securities Act.
Termination
The Merger Agreement may be terminated at any time prior to the Effective
Time (notwithstanding stockholder approval) (i) by mutual consent of Cambio and
Meadowbrook; (ii) by Meadowbrook or Cambio if (A) the Effective Time has not
occurred by September 15, 1998 (and the willful failure by the terminating party
to fulfill any obligation under the Merger Agreement has not been the cause of,
or resulted in, the failure of the Effective Time to occur on or before such
date); (B) there shall be a final non-appealable order, decree or ruling of a
court of competent jurisdiction in effect preventing consummation of the Merger;
(C) there shall be any statute, rule, regulation or non-appealable order
enacted, promulgated or issued or deemed applicable to the Merger by any
governmental entity that would make consummation of the Merger illegal; or (D)
the approval and adoption of the Merger Agreement by Cambio's shareholders shall
not have been obtained; (iii) by Meadowbrook or Cambio if there shall be any
action taken, or any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger, by any governmental entity, which
would (A) prohibit Meadowbrook's or Cambio's ownership or operation of any
portion of the business of Cambio or (B) compel Meadowbrook or Cambio to dispose
of or hold separate, as a result of the Merger, any portion of the business or
assets of Cambio or Meadowbrook; in either case, the unavailability of which
assets or business would have a material adverse effect on Meadowbrook or would
reasonably be expected to have a material adverse effect on Meadowbrook's
ability to realize the benefits expected from the Merger; (iv) by Meadowbrook if
it is not in material breach of its representations, warranties or obligations
under the Merger Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in the Merger Agreement on the part of
Cambio or if any representation or warranty of Cambio shall have become untrue,
in either case such that the conditions set forth in the Merger Agreement would
not be satisfied; provided, however, if such breach or breaches are capable of
being cured prior to the Effective Time, such breaches shall not have been cured
within 30 days of delivery to Cambio of written notice of such breach or
breaches (but no such cure period shall be required if such breach by its nature
cannot be cured); or (v) by Cambio if it is not in material breach of its
representations, warranties or obligations under the Merger Agreement and there
has been a breach of any representation, warranty, covenant or agreement
contained in the Merger Agreement on the part of Meadowbrook or Interset or if
any representation or warranty of Meadowbrook or Interset shall have become
untrue, in either case such that the conditions set forth in the Merger
Agreement would not be satisfied; provided, however, if such breach or breaches
are capable of being cured prior to the Effective Time, such breaches shall not
have been cured within 30 days of delivery to Meadowbrook of written notice of
such breach or breaches (but no such cure period shall be required if such
breach by its nature cannot be cured).
In the event of termination of the Merger Agreement by Meadowbrook or
Cambio, the Merger Agreement will become void, and there will be no liability or
obligation on the part of Meadowbrook or Cambio or their respective officers or
directors other than under certain specified provisions of the Merger Agreement
dealing with confidentiality agreements and the payment of expenses, and other
than liabilities or damages incurred or suffered by a party as a result of the
breach by the other party of any of its representations, warranties, covenants
or agreements set forth in the Merger Agreement.
Pursuant to the Merger Agreement, Cambio has agreed to pay Meadowbrook, a
termination fee of $500,000 in the event that the Closing does not occur, the
Merger Agreement is terminated, Meadowbrook is not in material breach of its
obligations under the Merger Agreement, and Cambio has willfully and materially
breached any representation, warranty, covenant or agreement contained in the
Merger Agreement.
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<PAGE>
Pursuant to the Merger Agreement, Meadowbrook has agreed to pay Cambio, a
termination fee of $500,000 in the event that the Closing does not occur, the
Merger Agreement is terminated, Cambio is not in material breach of its
obligations under the Merger Agreement, and Meadowbrook has willfully and
materially breached any representation, warranty, covenant or agreement
contained in the Merger Agreement.
Amendment and Waiver
The Merger Agreement may be amended at any time by Meadowbrook, Interset,
and Cambio. In addition, Meadowbrook or Cambio, by appropriate corporate action,
to the extent legally allowed, may extend the time for performance of the
obligations of the other parties to the Merger Agreement, waive inaccuracies in
representations and warranties, and waive compliance with any agreements or
conditions for their respective benefit contained in the Merger Agreement.
CERTAIN RELATED AGREEMENTS
Voting Agreements
Pursuant to (i) the Stockholders Voting Agreement, each of Frederick A.
Adler (who beneficially owns 1,450,000 shares of Cambio Preferred Stock),
Euro-America II, L.P. (who beneficially owns 1,000,000 shares of Cambio
Preferred Stock), 2001 Partners L.P. (who beneficially owns 583,333 shares of
Cambio Preferred Stock), Joseph K. Pagano (who beneficially owns 166,667 shares
of Cambio Preferred Stock), and Philip R. Chapman (who beneficially owns 133,333
shares of Cambio Preferred Stock and is director of Cambio) (collectively, such
Cambio shareholders beneficially own in the aggregate approximately 83.1% of the
shares of outstanding Cambio Capital Stock) have agreed with Meadowbrook, that,
prior to the earlier of the valid termination of the Merger Agreement or the
Effective Time, they will vote their shares in favor of the adoption of the
Merger Agreement and approval of the Merger and against (i) any actions or
agreements that would result in a breach of any representation, warranty,
covenant or obligation under the Merger Agreement, and (ii) any actions or
certain transactions which are intended to, or could reasonably be expected to,
impede, interfere with, delay or adversely affect the Merger or the other
transactions contemplated by the Merger Agreement or such Stockholders Voting
Agreement. As a result, in the event that Cambio receives a Superior Proposal,
the parties to the Stockholders Voting Agreement will be contractually obligated
to vote in favor of the Merger, regardless of whether the Cambio Board
recommends the Superior Proposal to the Cambio shareholders or withdraws or
modifies its recommendation concerning the approval of the Merger Agreement and
the Merger.
Pursuant to such Stockholders Voting Agreement, the Principal Shareholders
have also delivered to Meadowbrook, irrevocable proxies with respect to matters
covered by such Voting Agreement. In addition, subject to certain exceptions,
the Principal Shareholders have agreed not to sell, transfer, dispose of,
encumber or otherwise reduce beneficial ownership or risk relating to any Cambio
Capital Stock, subsequently acquired by them until the Effective Time or the
valid termination of the Merger Agreement.
The Principal Shareholders have also agreed that they shall not, directly
or indirectly, (i) solicit or initiate discussions or engage in negotiations
with any person other than Meadowbrook or take any action intended, designed or
reasonably likely to facilitate the efforts of any person, other than
Meadowbrook relating to a Third Party Proposal with respect to Cambio, (ii)
furnish any nonpublic information regarding Cambio or to any person in
connection with or in response to such Third Party Proposal or potential Third
Party Proposal; (iii) engage in discussions with any person with respect to any
such Third Party Proposal; (iv) approve, endorse or recommend any such Third
Party Proposal; or (v) enter into any letter of intent or other similar document
or any contract contemplating or otherwise relating to any such Third Party
Proposal.
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<PAGE>
Pursuant to the Glasser Voting Agreement, Dr. Glasser, Meadowbrook's
President and Chief Executive Officer and holder of approximately 89.3% of the
total voting power of the capital stock of Meadowbrook has agreed to vote or act
with respect to all shares of Meadowbrook securities owned by him, in favor of
the election of three designees of the Principal Shareholders to the Meadowbrook
Board.
Registration Rights Agreement
Following the Merger, the Principal Shareholders will have certain "demand"
rights to cause Meadowbrook to register under the Securities Act shares of
Meadowbrook Class A Common Stock received by the Principal Shareholders in
connection with the Merger having an aggregate offering price (before deduction
of underwriting discounts and commissions) of at least $1 million. Meadowbrook
will be required to effect up to two such "demand" registrations in any
twelve-month period. Meadowbrook will have the right to delay any such
registration for up to 90 days under certain circumstances.
In addition, the Principal Shareholders will have certain "piggyback"
registration rights. If Meadowbrook proposes to register any of its securities
under the Securities Act, other than in connection with the issuance of debt
securities by Meadowbrook, Meadowbrook's employee benefit plans or a merger or
reorganization transaction, the Principal Shareholders may require Meadowbrook
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to include all or a portion of their shares in such registration, subject to the
right of the managing underwriter, if any, to limit the number of shares to be
included by the Principal Shareholders in such registration to a certain extent.
The registration rights of the Principal Shareholders will expire at the
time that all shares of Meadowbrook received by the Principal Shareholders in
the Merger may be resold in a three month period by the Principal Shareholders
pursuant to Rule 144.
All expenses incurred in connection with the above registrations (other
than the underwriters' and brokers' discounts and commissions and the fees of
counsel for the Principal Shareholders) will be borne by Meadowbrook.
Secured Bridge Financing
Meadowbrook has loaned to Cambio $1,250,000 to fund Cambio's business
activities prior to the Closing. Such loans are evidenced by Secured Bridge
Financing Notes and are payable upon the earlier to occur of (i) the Closing;
(ii) September 15, 1998; (iii) the date on which Cambio closes any equity or
debt financing in excess of $50,000; (iv) the date on which all or substantially
all of the assets of Cambio are sold; or (v) the date on which there occurs any
"change of control" of Cambio (defined as a sale or other transfer, directly or
indirectly, of 30% or more of the beneficial voting or economic interest of
Cambio).
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<PAGE>
CAMBIO NETWORKS, INC.
Cambio Selected Financial Data
The statement of operations data for the two fiscal years ended December
31, 1996 and 1997, and the balance sheet data at December 31, 1997 are derived
from the audited financial statements of Cambio, which are included elsewhere in
this Joint Information/Consent Solicitation Statement and are qualified by
reference to such Financial Statements and Notes related thereto. The statement
of operations data for the three months ended March 31, 1998 and 1997, and
balance sheet data for the three months ended March 31, 1998 are derived from
unaudited consolidated financial statements of Cambio, which are included
elsewhere in this Joint Information/Consent Solicitation Statement and are
qualified by reference to such Financial Statements and Notes related thereto.
The data set forth below should be read in conjunction with "Cambio Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Cambio Financial Statements and related Notes included elsewhere in this
Joint Information/Consent Solicitation Statement.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- -----------------------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Net revenues ............................... $ 5,515,177 $ 7,231,794 $ 645,273 $ 1,806,591
Cost of revenues ........................... 1,368,370 622,307 179,181 26,755
------------ ------------ ------------ ------------
Gross Profit ........................ 4,146,807 6,609,487 466,092 1,779,836
Operating expenses:
Administrative expenses ................. 5,806,567 12,306,672 1,245,177 1,593,765
Research and development ................ 1,339,785 1,721,756 290,467 544,236
------------ ------------ ------------ ------------
Operating loss ...................... (2,999,545) (7,418,941) (1,069,552) (358,165)
Other income (expense):
Interest income ......................... 4,084 66,588 -- --
Interest expense ........................ (122,675) (19,301) (25,594) (4,681)
Other expense, net ...................... (56,919) (94,010) 1,336 9,719
------------ ------------ ------------ ------------
(175,510) (46,723) (24,258) 5,038
------------ ------------ ------------ ------------
Net loss ............................ $ (3,175,055) $ (7,465,664) $ (1,093,810) $ (353,127)
============ ============ ============ ============
</TABLE>
December 31, March 31,
1997 1998
---- ----
(unaudited)
Balance Sheet Data:
Working capital ........................ $(1,770,406) $(4,112,293)
Total assets ........................... 850,509 804,904
Long-term obligation and
capital lease obligations ............. 1,300,000 --
Stockholders' deficit .................. (2,759,224) (3,852,774)
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Management's Discussion and Analysis of Financial Condition and Results of
Operations of Cambio
The following discussion should be read in conjunction with Cambio's
Consolidated Financial Statements included elsewhere herein.
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data of Cambio expressed as a percentage of total
revenue.
Year Ended Three Months Ended
December 31, March 31,
------------------- -------------------
1997 1996 1998 1997
---- ----- ---- ----
Net revenues 100% 100% 100% 100%
Cost of revenues 25% 9% 28% 1%
------ ------- ------- -------
Gross profit 75% 91% 72% 99%
Operating expenses
Administrative expenses 105% 170% 193% 88%
Research and development 24% 24% 45% 30%
------ ------- ------- -------
Operating loss (54%) (103%) (166%) (20%)
Other income (expense)
Interest income -% 1% -% -%
Interest expense (2%) -% (4%) -%
Other expense, net (1%) (1%) -% 1%
------- -------- ------- -------
Total other (expense) (3%) (1%) (4%) -%
------- -------- -------- -------
Net loss (58%) (103%) (170%) (20%)
======= ======== ======== ========
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net revenues for the three months ended March 31, 1998 ("First Quarter
Fiscal 1998") were $645,273, a 64.3% decrease from net revenues of $1,806,591
for the three months ended March 31, 1997 ("First Quarter Fiscal 1997"). The
decrease in total revenue was primarily due to the lack of working capital and
Cambio's reduction in work force which resulted in decreased sales and marketing
activities.
The largest five customers accounting for 69% of net revenue for the First
Quarter Fiscal 1998 were PaineWebber Incorporated, Morgan Stanley & Co.
Incorporated, Pinacl Communications Systems, Southern Companies and Workplace
Technologies.
Cambio intends to continue to concentrate its efforts on increasing its
level of sales and decreasing its operating expenses in order to achieve
profitable operations. In that regard, in June 1998, Cambio appointed Ali
Al-Dahwi as President and Chief Operating Officer. Mr. Al-Dahwi was formerly
with Accugraph Corporation, one of Cambio's competitors, where he served as Vice
President and General Manager. Immediately after his appointment, Cambio
developed a new business model by which Cambio jointly owns with a third party
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<PAGE>
an already existing product which specializes in providing network solutions to
the telecommunications, financial and other enterprise industries. In addition,
consistent with the new business model, Cambio announced a company-wide
reduction in headcount affecting primarily employees which were focused in
developing a product similar to the one that was recently acquired.
Administrative expenses for the First Quarter Fiscal 1998 were $1,245,177 ,
a 21.9% decrease from administrative expenses of $1,593,765 for the First
Quarter Fiscal 1997. The decrease in administrative expenses was primarily due
to lower personnel costs resulting from a reduction in work force and reduced
marketing, and travel costs. During the second quarter of Fiscal 1997, Cambio's
headquarters were relocated in an effort to reduce total operating costs, which
included a work force adjustment.
Research and development ("R&D") expense for the First Quarter Fiscal 1998
was $290,467, a 46.6% decrease from R&D expense of $544,236 for the First
Quarter Fiscal 1997. The decrease in R&D expense is primarily due to decreased
personnel resources.
As a result of the foregoing, net loss for the First Quarter Fiscal 1998
was $1,093,810, an increase of $740,683 from a net loss of $353,127 for the
First Quarter Fiscal 1997. The increase in net loss is primarily due to the
decrease in net revenues.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues for the year ended December 31, 1997 ("Fiscal 1997") were
$5,515,177, a 23.7% decrease from net revenues of $7,231,794 for the year ended
December 31, 1996 ("Fiscal 1996"). The decrease in total revenue was primarily
due to the lack of working capital and Cambio's reduction in work force which
resulted in decreased sales and marketing activities.
The largest five customers accounting for 41.3% of net revenue for Fiscal
1997 were Pinacl Communications Systems, American Express, Deluxe Data Systems,
Burlington Northern Santa Fe and Morgan Stanley.
Administrative expenses for Fiscal 1997 were $5,806,567, a 52.8% decrease
from administrative expenses of $12,306,672 for Fiscal 1996.The decrease in
administrative expenses was primarily due to lower personnel costs resulting
from a reduction in work force and reduced marketing, and travel costs. During
the second quarter of Fiscal 1997, Cambio's headquarters were relocated in an
effort to reduce total operating costs, which included a work force adjustment.
Research and development ("R&D") expense for Fiscal 1997 was $1,339,785, a
22.2% decrease from R&D expense of $1,721,756 for Fiscal 1996. The decrease in
R&D expense is primarily due to decreased personnel resources.
As a result of the foregoing, net loss for Fiscal 1997 was $3,175,055, a
decrease of $4,290,609 from a net loss of $7,465,664 for Fiscal 1996. The
decrease in net loss is primarily due to the reduction of administrative
expenses offset by a decrease in net revenues.
Liquidity and Capital Resources
Net cash used by operating activities was $863,602 for the First Quarter
Fiscal 1998 compared with net cash used by operating activities of $367,289 for
the First Quarter Fiscal 1997. The increase in cash used by operating activities
was primarily due to the increase in net loss for Fiscal 1998.
Net cash used by operating activities was $2,557,725 for Fiscal 1997
compared with net cash used by operating activities of $5,997,294 for Fiscal
1996. The decrease in cash used by operating activities was primarily due to the
decrease in net loss for Fiscal 1997.
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<PAGE>
At March 31, 1998, Cambio had negative working capital of $4,112,293,
compared to negative working capital of $1,459,224 at December 31, 1997.
Cambio's current liabilities increased primarily from the receipt of additional
loans and the current nature of an obligation.
In September and November 1996, Cambio borrowed $750,000 from Greylock
Equity L.P., Highland Capital Partners II L.P. and other investment groups
evidenced by promissory notes bearing 7% interest per annum and due on demand
after September 1997. These notes provide for an automatic conversion into
Cambio's securities upon Cambio receiving financing in excess of $1,000,000. As
of July 30, 1998, the outstanding balance on the notes was $750,000.
From July 1997 through November 1997, Frederick R. Adler and Euro-America
II L.P. loaned Cambio an aggregate of $950,000 evidenced by promissory notes at
a per annum rate of prime plus 2% and due on demand. In December 1997, Cambio
repaid $800,000 against the amount of $950,000 in principal promissory notes
issued to Frederick R. Adler and Euro-America II L.P. From May through July 1998
Frederick R. Adler and Euro-America II L.P. loaned Cambio an additional $225,000
under the same terms of the previous loans. As of July 30, 1998, the outstanding
balance on the notes was $375,000.
In December 1997, U.S. Trust Company of Florida Savings Bank ("U.S. Trust")
provided Cambio with a Line of Credit of up to $2,000,000 (the ALoan@). Cambio
agreed to pay U.S. Trust interest on the average outstanding principal amount of
the Loan at a per annum rate of 7% and the Loan is due in February 1999. In
addition, the Loan is guaranteed by Frederick R. Adler and Euro-America II L.P,
two of Cambio's majority shareholders. The Loan was used to provide working
capital for operations and to repay $800,000 in promissory notes due to
Frederick R. Adler and Euro-America II L.P. As of July 30, 1998, the outstanding
balance on the Loan was $2,000,000.
Since April 1998, Meadowbrook has loaned Cambio $1,300,000 to fund it's
business activities prior to the Closing. The loans are evidenced by Secured
Bridge Financing Notes and are payable upon the earlier to occur of (i) the
Closing; (ii) September 15, 1998; (iii) the date on which Cambio closes any
equity or debt financing in excess of $50,000; (iv) the date on which all or
substantially all of the assets of Cambio are sold; or (v) the date on which
there occurs any "change of control" of Cambio (defined as a sale or other
transfer, directly or indirectly, of 30% or more of the beneficial voting or
economic interest of Cambio).
Cambio's current operations are cash flow negative, further straining
Cambio's working capital resources. Management of Cambio believes that its
expected funds from operations and from the completion of the acquisition by
Meadowbrook will be sufficient to meet its forecasted short-term cash
commitments. There can be no assurance that Meadowbrook will have sufficient
cash to fund Cambio's operations. Future funding for commitments for Cambio are
expected to be provided by internally generated funds and/or external financing
sources. There can be no assurance that Cambio will achieve its expected results
of operations or be able to obtain sufficient financing. If future funds from
operations do not meet management's expectations, Cambio's liquidity could be
impaired.
Cambio is currently evaluating the potential impact of the Year 2000
difficulties on the processing of date-sensitive information by Cambio's
computerized information system. The Year 2000 problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of Cambio's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, the costs of addressing the potential problems are not
currently expected to have a material adverse effect on Cambio's financial
position, liquidity or results of operations in future periods. However, if
Cambio, or its customers or vendors, are unable to resolve such processing
issues in a timely manner, it could pose a material financial risk. Accordingly,
Cambio plans to devote the necessary resources to resolve all significant Year
2000 issues in a timely manner.
Future factors that could affect Cambio's actual results include the
ability to continue to introduce and implement competitive products and services
on a timely, cost effective basis; the achievement of lower costs and expenses;
rapid technological change; reliance on major customers; lengthy sales and
implementation cycles; dependency on customer decisions as to timing and level
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<PAGE>
of expenditures; ability to maintain adequate working capital; the ability to
attract, adapt, motivate, and retain highly skilled technical, sales, and
management employees; and management's ability to integrate and incorporate new
operations, technologies, and personnel resulting from acquisitions. These are
representative, but not all inclusive, of future factors that could affect the
outcome for the forward-looking statement presented within this document.
Business of Cambio
Overview. Cambio provides client/server network documentation software and
services. Cambio's products and services are designed to enhance network
operations support and reduce network-related costs associated with a variety of
business needs including network changes, relocations, mergers and acquisitions,
network outsourcing, backup and disaster recovery planning. Network
documentation is an essential corporate information system that allows network
support professionals to create, maintain and access a centralized model of the
entire network, its components and their relationships. Cambio also provides a
broad range of network integration, consulting, training, implementation
services and Year 2000 solutions. Cambio was incorporated in 1987 as ISICAD,
Inc.
Products and Services.
Cambio provides products and services that provide network documentation,
network inventory, and equipment provisioning functions for large enterprise
networks and telecommunication enterprise networks.
netRunner(TM). netRunner is Cambio's newest product offering and is
considered Cambio's flagship product. It provides the user with the ability to
create and maintain a data model that represents all of the equipment, physical
connections, and circuit connections used to implement a global enterprise
network. netRunner provides many different ways to view and maintain network
physical equipment information both graphically and in GUI forms. netRunner also
models essential relationships such as location and connectivity. All
information created and maintained by netRunner is stored in a central
repository available to all network operations personnel for planning,
operating, isolating faults, and repairing large complex networks. Cambio
jointly owns the rights to source code for netRunner pursuant to a Source Code
Rights Transfer and License Agreement between Cambio and Phifer Consulting
Group, Inc., dated July 1, 1998.
The netRunner product line has four modules, three of which are already
operational in customer installations. The netRunner equipment provisioning
module provides equipment inventory and provisioning functions. The netRunner
connectivity module provides connectivity functions. The netRunner fiber, cable
and radio module, of which only the fiber optic management function is currently
operational, provides fiber optic, cable and radio management functions. The
netRunner circuit management and provisioning module, which the Company
anticipates will be available in September 1998, will provide circuit inventory
and provisioning functions. Additional modules and extensions of product
functionality are planned for 1998 and 1999 release.
All netRunner products are Windows NT/98/95 based client applications that
connect to Windows or UNIX based database systems that can scale from small
single site installations to multiple site installations that can handle the
needs of all networks supporting a global enterprise.
COMMAND. COMMAND is Cambio's first product offering. COMMAND was developed
as a UNIX based client and database in the late 1980's. COMMAND is an integrated
database with proprietary graphics technology to provide graphical views of a
network. In 1997, Cambio released COMMAND Version 5.0 which added Windows NT/95
client products with GUI data forms for ease of data entry and maintenance.
The COMMAND product line has six modules, all of which are operational in
customer installations. COMMAND Server is a Sun or Hewlett Packard UNIX based
server software product providing data access services from a central database
repository to the COMMAND Administrator, COMMAND Technician, COMMAND for
Windows, and COMMAND View for Windows client products.
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<PAGE>
The COMMAND Administrator client product provides data modeling functions,
data entry and maintenance functions, and graphical and form based views of all
system data on a Sun or Hewlett Packard based UNIX workstation.
The COMMAND for Windows client product provides data entry, data import,
and data maintenance functions with an intuitive user interface designed to
increase the productivity of personnel performing data entry and maintenance.
The COMMAND Technician product provides read-only graphical and form based
viewing functions on a Sun or Hewlett Packard based UNIX workstation. The
COMMAND Viewer for Windows client product provides all of the read-only
functions of COMMAND for Windows.
The COMMAND API Gateway and Integration APIs provide integration with
network management systems such as Hewlett Packard OpenView and Hewlett Packard
OEMF and with work ticket systems such as Remedy. A COMMAND system integrated
with a network management system and a work ticket systems ties together all of
the systems and information needed to diagnose, isolate, and repair network
faults.
Services. Cambio provides software and consulting services needed to
install, customize and fully deploy a complete network inventory or network
documentation system. Typical services include installation, customer specific
enhancements using COMMAND's customization language and macros, customized
development of extensions to core products, data modeling, and data maintenance.
Cambio also provides technical support programs and training programs for all
products.
Marketing and Sales. Cambio's customers are large enterprises operating
complex networks that are mission critical to the customer's core business.
Customers are in two primary market segments-enterprises operating network
communication centers and telecommunication service providers enterprise network
operations.
Cambio's products are primarily sold directly to end-user organizations in
North America through Cambio's direct sales force. Internationally, Cambio has
historically marketed and sold its products through independent distributors
supported by Cambio's international sales and support organization. Cambio has
realigned its organization to concentrate marketing and sales into two global
business units that address Cambio's two primary markets.
Cambio will continue to make its products available to markets outside
North America and expects these sales will provide a significant contribution to
total revenue.
Software Development. Cambio's research and development efforts are focused
on the needs of Cambio's primary markets-enterprise network communication
centers and telecommunications provider enterprise network operations. Within
these markets, the focus is on new application development to meet strategic
customer requirements, enhancement of existing products, software tools for data
entry, conversation and maintenance, migration from existing systems, and
integration with complementary systems.
All of Cambio's research and development has been performed in the United
States. Cambio intends to continue recruiting and hiring software developers and
to consider acquisition and licensing of software and technologies that
accelerate the development and release of new products.
Competition. Competition in the markets in which Cambio participates is
intense and Cambio expects the number of competitors to increase. Cambio's
continued development of enhanced network management and operational support
systems will broaden its range of available competing products. Competitors
include hardware manufacturers that have developed software (or obtained
software from third parties) to operate on their hardware. Cambio also
encounters competition from a large number of small software developers which
sell software or integrated systems either for specific industries or
applications within those industries.
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<PAGE>
The telecommunications market in which Cambio sells its products is a
relatively new, but highly competitive, market with a limited number of
competitors selling products. Some telephone companies are using their own
internal development resources to automate their engineering and provisioning
processes. A number of these telephone companies have nonetheless become major
customers due to Cambio's broad range of advanced products.
Cambio believes that in order to maintain and improve its competitive
position, it must continue to offer comprehensive services that help customers
effectively implement a complete, integrated software solution by providing a
full range of industry-leading consulting, integration, training and customer
support services. The timely delivery of flexible, cost effective solutions for
the growing dynamic marketplace will continue to be the competitive focus of
Cambio.
The principal competition currently faced by Cambio in the
telecommunications service provider market is the customer's development of
in-house solutions. In the enterprise network market, Cambio's principal North
American competitors are Architel Corporation, Visionael, Inc., customer care
providers attempting to expand into asset management and other "back office"
functions. Additional competition in all of Cambio's markets comes from Europe
and Japan where a number of companies have developed or are developing software
and integrated systems products which may compete with Cambio's products.
Proprietary Rights. Cambio relies on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect its proprietary rights. Presently, Cambio has no patents,
no patent applications on file, and intends to continue filing patent
applications in the future. As part of its confidentiality procedures, Cambio
generally enters into non-disclosure agreements with its employees, distributors
and corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use Cambio's
products or technology without authorization, or to develop similar technology
independently. Policing unauthorized use of Cambio's products is difficult and,
although Cambio is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In selling its products, Cambio relies on both signed license
agreements and "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, effective protection of intellectual property rights is unavailable or
limited in certain foreign countries. There can be no assurance that Cambio's
protection of its proprietary rights, including any patent that may be issued,
will be adequate or that Cambio's competitors will not independently develop
similar technology, duplicate Cambio's products or design around any patents
issued to Cambio or other intellectual property rights.
Cambio is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by Cambio with respect to current or future
products. Cambio expects that software product developers will increasingly be
subject to such claims as the number of products and competitors in Cambio's
industry segment grows and the functionality of products in the industry segment
overlaps.
Employees. As of July 30, 1998, Cambio had 35 full time employees,
consisting of 6 in research and development, 22 in sales, marketing and
consulting, one in technical support and 6 in general and administrative
functions. Cambio's future performance depends to a significant degree upon the
continued service of its key members of management, as well as marketing, sales,
consulting and product development personnel, none of whom are bound by an
employment contract, and its ability to attract and retain highly skilled
personnel in these areas. Competition for such personnel is intense, and there
can be no assurance that Cambio can retain its key employees or that it will be
successful in attracting, assimilating and retaining such personnel in the
future. None of Cambio's employees are represented by a labor union. Cambio has
not experienced any work stoppages and considers its relations with its
employees to be good.
Properties. Cambio believes that its existing facilities are adequate and
that sufficient additional space will be available as needed in the cities where
it is located.
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<PAGE>
Legal Proceedings. Cambio is not a party to any other litigation that would
have a material adverse effect on Cambio's business, operating results or
financial condition.
Executive Officers and Directors of Cambio
The names of the executive officers and directors of Cambio and certain
other information related to them, are set forth below:
Name Position
Gari Grimm Chairman of the Board; Chief Executive Officer
Ali Al-Dahwi President; Chief Operating Officer
Philip R. Chapman Director
Anne Zeichner Director
Harvey Wm. Glasser, M.D. Director
John McCracken Director
Robert Rush Director
Gari Grimm has served as Chairman of the Board of Cambio since June 1998
and as Chief Executive Officer since March 1997. Ms. Grimm served as President
of Cambio from March 1997 until June 1998. Ms. Grimm has over 25 years of senior
management experience with technology companies, having served as CEO for
WordStar International, COO of Electronics for Imaging and COO/CFO of Attachmate
Corporation. Ms. Grimm holds a BA from the University of Colorado, an MBA from
Harvard University, and an LLD from the University of Washington. Ms. Grimm is
58 years old.
Ali Al-Dahwi has served as President and COO of Cambio since June 1998.
From 1982 to 1998 Mr. Al-Dahwi held various positions at Accugraph Corporation,
one of Cambio's competitors. From 1996 to 1998 Mr. Al-Dahwi was Vice President
and General Manager - Global Complex Enterprise Network Business Unit and from
1992 to 1996 he was Manager of International Operations. Mr. Al-Dahwi holds a BS
in enginnering from the University of Texas El Paso. Mr. Al-Dahwi is 43 years
old.
Philip R. Chapman has served as director of Cambio since April 1997. Mr.
Chapman is currently a General Partner of Adler & Company and Euro-America II,
two of Cambio's major shareholders. Mr. Chapman is presently a director of
various publicly-held corporations such as, Integrated Packaging Assembly
Corporation and Shells Seafood Restaurants. He is also a director of several
privately held companies. Mr. Chapman holds a BS in psychology, and an MBA in
finance and marketing from Columbia University. Mr. Chapman is 36 years old.
Anne Zeichner was Cambio's President and CEO from 1996 until 1997. Ms.
Zeichner rejoined Cambio in June 1998 as director. Prior to becoming President
and CEO, Ms. Zeichner was Vice President of Worldwide Sales at Cambio. Before
joining Cambio, Ms. Zeichner held senior management - level positions at 3Com,
Centrum, Ascend and Fibemux. Ms. Zeichner is currently the Vice President of
Sales and Marketing at North Point Communications. Ms. Zeichner holds a BA from
Rutgers University and is 44 years old.
Harvey Wm. Glasser, M.D. founded the Meadowbrook in 1986 and since that
time he has served as Chairman of the Board and a director of Meadowbrook. Dr.
Glasser has been Chief Executive Officer since January 1, 1994 and was Co-Chief
Executive Officer from July 1993 until December 31, 1993. Dr. Glasser also
served as the Meadowbrook's Chief Executive Officer and President from the date
of its founding until June 1992. From 1972 to 1986, Dr. Glasser was the founder,
sole shareholder and President of Western Hospital Corporation, which managed
fifteen acute care hospitals in California, New Mexico, Oklahoma and Texas. Dr.
Glasser has been the principal owner of eight hospitals, including one acute
rehabilitation hospital which he operated from 1973 to June 1987. Dr. Glasser
received his M.D. degree from the University of Chicago School of Medicine and
trained in psychiatry at Stanford University Medical Center and Mt. Zion
Hospital. Dr. Glasser is 63 years old.
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<PAGE>
John P. McCracken has been a director of the Meadowbrook since April 1997.
In 1996, he founded First Step Consulting which provides sales and marketing
consulting services within the computer industry. From 1995 to 1996 he was
President and Chief Executive Officer of WitchDesk, Inc., a computer software
company. From 1993 to 1995 he served as Director of New Business Development for
Award Software International, a computer software company. From 1991 to 1993 he
was International Sales Manager for Star Signal Corporation, a computer hardware
manufacturer. Mr. McCracken is 36 years old.
Robert G. Rush has been a director of the Meadowbrook since February 1994.
In 1992, he founded Rush Enterprises, Inc., which acquires and/or invests in
small local businesses. From 1989 to 1992, he was the Executive Vice President,
Treasurer and Chief Financial Officer for MedRehab, a medical rehabilitation
service company which was engaged in providing physical, occupational, speech
and respiratory therapies through outpatient clinics and contracts in nursing
homes and hospitals. Mr. Rush is 45 years old.
Ownership of Cambio Capital Stock
The following table sets forth information as of the Cambio Record Date
with respect to the Cambio Capital Stock owned beneficially by (i) each person
who is known to Cambio to be the beneficial owner of more than five percent of
the Cambio Capital Stock and (ii) each Director and officer of Cambio. The
following table does not include shares of Cambio Common Stock issuable upon
exercise of outstanding stock options and assumes conversion of the outstanding
Cambio Preferred Stock into shares of Cambio Common Stock.
Name Number of Shares Percent
- ---- ---------------- -------
Frederick Adler..................... 1,450,000 36.1
Euro-America II, L.P................ 1,000,000 24.9
2001 Partners, L.P.................. 583,333 14.5
Joseph Pagano....................... 166,667 4.2
Philip Chapman...................... 133,333 3.3
Gari Grimm.......................... 665 *
Ann Zeichner........................ 364 *
James Cook.......................... 354 *
Harvey Wm. Glasser.................. 0 *
John P. McCracken................... 0 *
Robert G. Rush...................... 0 *
- ---------------
* Less than one percent.
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<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS OF MEADOWBROOK AND CAMBIO
Pro Forma Consolidated Statement of Operations
For the Year Ended June 30, 1997
(Unaudited)
In thousands
<CAPTION>
Meadowbrook
Rehabilitation Cambio Pro Forma Pro Forma
Group, Inc. Network, Inc. Adjustments Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ....................................................... $ 20,834 $ 7,450 $ -- $ 28,284
Cost of goods sold .............................................. -- 649 -- 649
----------- ----------- ----------- -----------
Gross profit ................................................ 20,834 6,801 -- 27,635
Selling and administrative expenses ............................. 23,189 8,748 586(a) 32,523
Research and development ........................................ -- 1,581 -- 1,581
Write-down of intangible assets ................................. 1,440 -- -- 1,440
Net loss on disposal and provision for subsequent disposal
of assets ...................................................... 82 -- -- 82
Interest and other (income) expense, net ........................ (55) (37) (28)(b) (120)
----------- ----------- ----------- -----------
Loss before income taxes and minority interest .................. (3,822) (3,491) (558) (7,871)
Income taxes .................................................... -- -- -- --
----------- ----------- ----------- -----------
Loss before minority interest ................................... (3,822) (3,491) (558) (7,871)
Minority interest in earnings of subsidiaries ................... 29 -- -- 29
----------- ----------- ----------- -----------
Net loss ........................................................ $ (3,851) $ (3,491) (558) $ (7,900)
=========== =========== =========== ===========
Basic Loss per Share ............................................ $ (1.33) $ (2.04)
=========== ===========
Weighted Average Common Shares Outstanding ...................... 2,895,366 976,871 3,872,237
=========== =========== ===========
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</TABLE>
<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS OF MEADOWBROOK AND CAMBIO
Pro Forma Consolidated Balance Sheets
March 31, 1998
(Unaudited)
In thousands
<CAPTION>
Meadowbrook
Rehabilitation Cambio Pro Forma Pro Forma
Group, Inc. Network, Inc. Adjustments Consolidated
----------- ------------- ----------- ------------
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash ............................................................. $ 3,830 $ 13 $ -- $ 3,843
Accounts receivable, net ......................................... 2,192 517 -- 2,709
Prepaid expenses and other ....................................... 500 15 -- 515
-------- -------- -------- --------
Total current assets ......................................... 6,522 545 -- 7,067
Property and equipment, net .......................................... 492 202 -- 694
Other non-current assets ............................................. 344 58 1,904(a) 2,306
-------- -------- -------- --------
Total Assets ................................................. $ 7,358 $ 805 $ 1,904 $ 10,067
======== ======== ======== ========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable ..................................................... $ 308 $ 993 $ -- $ 1,301
Accrued liabilities .................................................. 1,277 332 -- 1,609
Current maturities of long-term obligations .......................... 105 3,025 (1,900)(b) 1,230
Deferred revenue ..................................................... -- 307 -- 307
-------- -------- -------- --------
Total current liabilities ........................................ 1,690 4,657 (1,900) 4,447
-------- -------- -------- --------
Long-term liabilities
Note payable and other long-term liabilities ..................... 21 -- -- 21
-------- -------- -------- --------
Total liabilities ............................................ 1,711 4,657 (1,900) 4,468
-------- -------- -------- --------
Shareholders' equity (deficit):
Redeemable preferred stock ........................................... -- 1,050 (1,050)(c) --
Common stock ......................................................... 20 17,547 (19,447)(c) 30
10 (d)
1,900 (b)
Additional paid-in capital ........................................... 17,908 3,268 (3,268)(c) 18,875
967 (d)
Treasury stock ....................................................... (232) -- -- (232)
Accumulated deficit .................................................. (12,049) (25,717) 25,189 (c) (13,074)
(1,025)(e)
-------- -------- -------- --------
Total shareholders' equity (deficit) ............................. 5,647 (3,852) 3,804 5,599
-------- -------- -------- --------
Total Liabilities and stockholders' equity (deficit) ........ $ 7,358 $ 805 $ 1,904 $ 10,067
======== ======== ======== ========
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</TABLE>
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS OF MEADOWBROOK AND CAMBIO
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended March 31, 1998
(Unaudited)
In thousands
<TABLE>
<CAPTION>
Meadowbrook
Rehabilitation Cambio Pro Forma Pro Forma
Group, Inc. Network, Inc. Adjustments Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ....................................................... $ 6,286 $ 2,841 $ -- $ 9,127
Cost of goods sold .............................................. -- 1,338 -- 1,338
----------- ----------- ----------- -----------
Gross profit ................................................ 6,286 1,503 -- 7,789
Selling and administrative expenses ............................. 5,279 3,592 439 (a) 9,310
Research and development ........................................ -- 910 -- 910
Loss on sale of assets .......................................... 1,472 -- -- 1,472
Interest and other (income) expense, net ........................ (111) 151 (69)(b) (29)
----------- ----------- ----------- -----------
Loss before income taxes and minority interest .................. (354) (3,150) (370) (3,874)
Income taxes .................................................... -- -- -- --
----------- ----------- ----------- -----------
Loss before minority interest ................................... (354) (3,150) (370) (3,874)
Minority interest in earnings of subsidiaries ................... 4 -- -- 4
----------- ----------- ----------- -----------
Net loss ........................................................ $ (358) $ (3,150) (370) $ (3,878)
=========== =========== =========== ===========
Basic Loss per Share ............................................ $ (0.12) $ (1.00)
=========== ===========
Weighted Average Common Shares Outstanding ...................... 2,883,837 976,871 3,860,708
=========== =========== ===========
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</TABLE>
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS OF MEADOWBROOK AND CAMBIO
Notes Unaudited to Pro Forma Consolidated Financial Statements
Meadowbrook Rehabilitation Group, Inc. (the "Company") plans to acquire all
of the outstanding common stock of Cambio Networks Inc. ("Cambio") a network
inventory management solutions company (the "Acquisition"). The purchase price
will be paid in 976,871 shares of the Company's Class A Common Stock and the
assumption of certain liabilities. Goodwill will be recognized upon completion
of the transaction.
The accompanying pro forma financial statements are presented in accordance
with the Article 11 of Regulation S-X.
The accompanying unaudited pro forma condensed consolidated balance sheet
of the Company as of March 31, 1998 and the unaudited pro forma condensed
consolidated statements of operations for the year ended June 30, 1997 and the
nine months ended March 31, 1998 give effect to the Acquisition as if it had
occurred on July 1, 1996.
PRO FORMA ADJUSTMENTS
Statement of Operations for the Year Ended June 30, 1997:
(a) Records the amortization of the excess of cost over net assets acquired
attributable to the acquisition of Cambio using an estimated life of 5 years.
(b) Eliminates interest expense related to the outstanding indebtedness of
Cambio which was retired in exchange for Cambio Common Stock.
Balance Sheet as of March 31, 1998:
(a) Records excess of acquisition consideration over the estimated fair
value of net assets acquired and the accumulated amortization thereon.
(b) Records the retirement of certain Cambio debt in exchange for Cambio
Common Stock.
(c) Records the elimination of Cambio's stockholders' deficit.
(d) Records the issueance of the Company shares in exchange for all of
Cambio's outstanding Common and Preferred Stock.
(e) Records the accumulated amortization on the excess of acquisition
consideration over the estimated fair value of the net assets acquired.
Statement of Operations for the Nine Months Ended March 31, 1998
(a) Records the amortization of the excess of cost over net assets acquired
attributable to the acquisition of Cambio using an estimated life of 5 years.
(b) Eliminates interest expense related to the outstanding indebtedness of
Cambio, which was retired in exchange for Cambio Common Stock.
The adjustments do not give effect to any potential benefits that might
have been realized through the combination of operations and are not necessarily
indicative of the consolidated results which would have been reported if the
acquisition of Cambio had actually occurred on July 1, 1996.
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<PAGE>
DESCRIPTION OF MEADOWBROOK CAPITAL STOCK
The authorized capital stock of Meadowbrook consists of 15,000,000 shares
of Class A Common Stock, par value $.01 per share, 5,000,000 shares of Class B
Common Stock, par value $.01 per share and 1,000,000 shares of Preferred Stock,
par value $.01 per share. Assuming an Exchange Ratio of approximately 0.24339
(the Exchange Ratio as of July 24, 1998), immediately following the consummation
of the Merger, there will be outstanding approximately 2,712,737 shares of
Meadowbrook Class A Common Stock and options and warrants to purchase
approximately 331,143 shares of Meadowbrook Class A Common Stock.
Common Stock. Subject to preferences that may apply to any Preferred Stock
outstanding at the time, the holders of outstanding shares of Meadowbrook Class
A Common Stock and the Meadowbrook Class B Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may from time to time determine. Each holder
of Class A Common Stock is entitled to one vote for each share of Meadowbrook
Class A Common Stock held on all matters submitted to a vote of stockholders.
Each holder of Class B Common Stock is entitled to 10 votes for each share of
Meadowbrook Class B Common Stock held on all matters submitted to a vote of
stockholders. Cumulative voting for the election of directors is not provided
for in the Meadowbrook Certificate of Incorporation, which means that the
holders of a majority of the shares voted can elect all of the directors then
standing for election. The Meadowbrook Class A Common Stock and the Meadowbrook
Class B Common Stock are not entitled to preemptive rights and is not subject to
conversion or redemption. Upon liquidation, dissolution or winding up of
Meadowbrook, the assets legally available for distribution to stockholders are
distributable ratably among the holders of the Meadowbrook Class A Common Stock
and the Meadowbrook Class B Common Stock and any participating Meadowbrook
Preferred Stock outstanding at that time after payment of liquidation
preferences, if any, on any outstanding Meadowbrook Preferred Stock and payment
of other claims of creditors. Each share of Meadowbrook Class A Common Stock to
be issued in the Merger will be fully paid and nonassessable.
Preferred Stock. The Meadowbrook Board is authorized, subject to any
limitations prescribed by Delaware law, to provide for the issuance of shares of
Meadowbrook Preferred Stock in one or more series, to establish from time to
time the number of shares to be included in each such series, to fix the powers,
preferences and rights of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding), without any further vote or action by the
stockholders. The Meadowbrook Board may authorize the issuance of Meadowbrook
Preferred Stock with voting or conversion rights that could adversely affect the
voting power of other rights of the holders of Meadowbrook Class A Common Stock
or Meadowbrook Class B Common Stock. Thus, the issuance of Meadowbrook Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of Meadowbrook. Meadowbrook has no current plan to issue any shares of
Meadowbrook Preferred Stock.
Delaware's Anti-Takeover Law. Meadowbrook is subject to the provisions of
the Anti-Takeover Law which regulates corporate takeovers. The Anti-Takeover Law
prevents certain Delaware corporations, including those whose securities are
listed on Nasdaq, from engaging, under certain circumstances, in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "interested stockholder" (a stockholder who owns
15% or more of the corporation's outstanding voting stock) for three years
following the date that such stockholder became an "interested stockholder." A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
Meadowbrook has not "opted out" of the provisions of the Anti-Takeover Law.
Registration Rights. In addition, Meadowbrook and the Principal
Shareholders will enter into the Registration Rights Agreement with respect to
the shares of Meadowbrook Class A Common Stock to be received by it in the
Merger. See "Certain Related Agreements-Registration Rights Agreement."
Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Meadowbrook Class A Common Stock is ChaseMellon Shareholder Services L.L.C.
Listing. The Meadowbrook Class A Common Stock is currently quoted on the
Nasdaq National Market under the trading symbol "MBRK."
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<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
MEADOWBROOK AND SHAREHOLDERS OF CAMBIO
Overview. Meadowbrook is incorporated in the State of Delaware. Following
the Effective Time of the Merger, shareholders of Cambio will hold Meadowbrook
Class A Common Stock rather than Cambio Common Stock or Cambio Preferred Stock
and, therefore, the rights of such shareholders will be governed by Delaware law
and the provisions of the Meadowbrook Certificate of Incorporation and Bylaws
rather than the Cambio Articles of Incorporation and the Bylaws. The following
discussion is a summary of certain significant differences between the
Meadowbrook Certificate of Incorporation and Bylaws and Cambio Articles of
Incorporation and Bylaws and of certain other differences in governing law. This
summary does not purport to be complete and is qualified in its entirety by
reference to the corporate statutes of Delaware and California, and by the
complete text of the Meadowbrook Certificate of Incorporation, Meadowbrook
Bylaws, Cambio Articles of Incorporation and Cambio Bylaws.
The Meadowbrook Certificate of Incorporation and Meadowbrook Bylaws contain
provisions that could discourage potential acquisition proposals and could delay
or prevent a change in control of Meadowbrook. Such provisions could diminish
the opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Meadowbrook
Class A Common Stock. Such provisions may also inhibit fluctuations in the
market price of the Meadowbrook Class A Common Stock that could result from
takeover attempts.
Pursuant to the Meadowbrook Certificate of Incorporation, the Meadowbrook
Board has the authority, without further action by the stockholders, to issue
from time to time shares of preferred stock in one or more series and to fix the
number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of Meadowbrook Class A Common Stock or
affect adversely the rights and powers, including voting rights, of the holders
of Meadowbrook Class A Common Stock, and may have the effect of delaying,
deferring or preventing a change in control of Meadowbrook. The ability of the
Meadowbrook Board to issue preferred stock without further stockholder approval
could also have the effect of entrenching management by discouraging potential
acquisition proposals even if such a transaction is favored by a majority of the
independent stockholders. Meadowbrook has no present plan to issue any shares of
preferred stock.
Unlike the Cambio Bylaws, which allow a 10% or greater stockholder to call
special meetings of shareholders, the Meadowbrook Bylaws provide that only the
Chairman of the Meadowbrook Board, or a majority of the Meadowbrook Board (by
written request), or stockholders owning shares which have a majority of the
voting power of the capital stock of Meadowbrook issued and outstanding and
entitled to vote, may call such meetings. In addition, for business to be
brought by a stockholder before the annual meeting of stockholders, the
Meadowbrook Bylaws provide that such stockholder must give between 10 and 60
day's advance written notice, containing specified information, of such
stockholder's proposal.
Upon consummation of the Merger, the holders of Cambio Common Stock and the
holders of Cambio Preferred Stock will become holders of Meadowbrook Class A
Common Stock. It is anticipated that the Cambio Preferred Stock will convert to
Cambio Common Stock prior to the consummation of the Merger. See "Cambio
Shareholder Approval." Upon such conversion, holders of Cambio Preferred Stock
will no longer be entitled to certain rights and privileges previously provided
for in Cambio's Articles of Incorporation. Such rights include (i) a dividend
preference in the amounts described above, (ii) a liquidation preference in the
amounts described above, (iii) certain anti-dilution adjustments upon dilutive
issuances of Cambio Capital Stock, and (iv) the right to vote as a separate
class concerning certain corporate transactions including the Merger. Appraisal
and dissenters' rights are available to shareholders of Cambio with respect to
the Merger. See "The Merger-Appraisal and Dissenters' Rights."
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<PAGE>
In addition, certain other rights and privileges of Cambio shareholders
will change as a result of the Merger. Upon completion of the Merger, the
percentage ownership of Meadowbrook by each former Cambio shareholder will be
substantially less than his, her or its current percentage ownership of Cambio.
In addition, Dr. Glasser, Meadowbrook's President and Chief Executive Officer,
through his ownership of all of the issued and outstanding Class B Common Stock
of Meadowbrook, currently holds approximately 89.3% of the total voting power of
the capital stock of Meadowbrook. Accordingly, former Cambio shareholders will
have a significantly smaller voting influence over the affairs of Meadowbrook
than they currently enjoy over the affairs of Cambio. Moreover, certain
contractual rights presently possessed by holders of Cambio Preferred Stock will
cease to exist after the Merger. Specifically, certain information rights,
registration rights, rights to representation on, or attendance at meetings of
the Cambio Board and other rights unique to the organization and financing of
Cambio will terminate at the Effective Time. Finally, the statutory protections
available to Cambio shareholders under Section 2115 of the CGCL will no longer
exist.
Limitation of Director Liability. California and Delaware law each permit a
corporation to adopt a provision in its articles or certificate of incorporation
eliminating the liability of directors to the corporation or its shareholders or
stockholders for monetary damages for breach of a director's fiduciary duty,
subject to certain limitations. The Meadowbrook Certificate of Incorporation and
the Cambio Articles of Incorporation each contain a provision eliminating
director liability to the maximum extent permitted by law, with Delaware law
permitting somewhat broader elimination of liability.
California law does not permit the elimination of monetary liability of a
director where such liability is based on: (i) intentional misconduct or a
knowing and culpable violation of law; (ii) acts or omissions that a director
believes to be contrary to the best interests of the corporation or its
shareholders or that involve the absence of good faith on the part of the
director; (iii) receipt of an improper personal benefit by the director; (iv)
acts or omissions that show reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders; (v) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders; (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest; or (vii) liability for improper distributions, loans or guarantees.
Delaware law does not permit the elimination of monetary liability of a
director where such liability is based on: (i) breaches of a director's duty of
loyalty to the corporation or its stockholders; (ii) acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law;
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) transactions in which the director received an improper
personal benefit.
Indemnification. The Meadowbrook Bylaws require the company to indemnify
all directors, officers and employees to the maximum extent permitted by law.
California law permits indemnification of expenses, judgments, fines and
settlements in connection with third-party actions, and indemnification of
expenses (and possibly settlements) in derivative actions, except that, with
respect to derivative actions (i.e., actions brought on behalf of a corporation
by a shareholder of such corporation): (i) no indemnification may be made when a
person is adjudged liable to the corporation in the performance of that person's
duty to the corporation and its shareholders unless a court determines such
person is entitled to indemnity for expenses, and then such indemnification may
be made only to the extent that the court so determines; and (ii) no
indemnification may be made in respect of amounts paid or expenses incurred in
settling or otherwise disposing of a pending action without court approval.
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<PAGE>
The foregoing indemnification is permitted only for acts taken in good
faith and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party) or the court handling the action.
California law requires indemnification when the individual has successfully
defended an action on the merits. California law also permits a corporation to
advance expenses to a person to defend a proceeding and to provide
indemnification broader than that expressly allowed by statute, subject to
certain limitations.
Delaware law relating to indemnification is similar to California law
except that: (i) no court approval is required to provide indemnification for
expenses incurred in derivative actions that are settled; (ii) it appears less
likely that a corporation could provide indemnification of amounts paid in
settling a derivative suit; (iii) the standard of conduct as to when
indemnification is permitted includes actions reasonably believed to be not
opposed to the best interests of the corporation, not just those believed to be
in the best interests of the corporation; and (iv) indemnification of expenses
is required whenever an individual has successfully defended an action,
regardless of whether or not a judgment was rendered on the merits of the
action.
Restrictions on Certain Business Combinations. Pursuant to the
Anti-Takeover Law, certain "business combinations" with "interested
stockholders" of Delaware corporations are subject to a three-year moratorium
unless specified conditions are met. For a description of the Anti-Takeover Law,
see "Description of Meadowbrook Capital Stock-Delaware's Anti-Takeover Law."
Although California law does not have a provision comparable to the
Anti-Takeover Law, it does require that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with a holder
of more than 50% but less than 90% of such common stock or such holder's
affiliate, unless all of the holders of such common stock consent to the
transaction or it is approved by the California Department of Corporations at a
"fairness hearing." This provision of California law may have the effect of
making a "cash-out" merger by a majority shareholder more difficult to
accomplish.
California law also provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is made
by an interested party (generally a controlling or managing party of the target
corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to shareholders.
Furthermore, if a tender of shares or vote is sought pursuant to an interested
party's proposal, and a later proposal is made by another party at least ten
days prior to the date for acceptance of the interested party proposal, then the
shareholders must be informed of the later offer and be afforded a reasonable
opportunity to withdraw any vote, consent or proxy, or to withdraw any tendered
shares.
Classification of Board of Directors. California law provides that
corporations that are listed on the New York or American Stock Exchange or
Nasdaq and have at least 800 shareholders may, with the approval of its Board of
Directors and shareholders, divide the Board of Directors into as many as three
classes with staggered terms of office, with only one class elected each year. A
corporation must have at least six directors to divide its Board into two
classes, and must have at least nine directors to classify its Board into three
classes.
Delaware law permits (but does not require) any corporation to classify its
Board of Directors and does not have a minimum Board size that is required to
classify the Board.
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<PAGE>
The Meadowbrook Certificate of Incorporation and Bylaws presently do not
provide for a classified Board, although a classified Board could be established
following the Merger with the approval of the Meadowbrook stockholders.
Size of Board of Directors. Under California law, the number of directors
of a corporation may be fixed in the articles of incorporation or bylaws of a
corporation, or a limited range may be established for the number of directors,
with the Board of Directors given authority to fix the exact number of directors
within such range. The Meadowbrook Bylaws establish the number of directors of
Meadowbrook to be between three and seven, currently set at three.
Under Delaware law, the number of directors of a corporation may be fixed
or changed by the Board of Directors acting alone, by amendment to the
corporation's bylaws, unless the directors are not authorized to amend the
bylaws or the number of directors is fixed in the certificate of incorporation,
in which cases stockholder approval is required. The Meadowbrook Bylaws
establish the initial authorized number of directors of Meadowbrook at between
three and seven. Dr. Glasser, John McCracken and Robert Rush currently are the
directors of Meadowbrook. Immediately after the Closing, the Meadowbrook Bylaws
will be amended to establish a new number of directors, and each of the then
current directors of Meadowbrook and certain directors of Cambio will be
appointed as directors of Meadowbrook. However, the Meadowbrook Certificate of
Incorporation and Bylaws authorize the Meadowbrook Board to amend the
Meadowbrook Bylaws, and accordingly a majority of the Meadowbrook Board will
have the ability to change the authorized number of directors and appoint
additional directors without having such additional directors first elected by
stockholders. This ability could have the effect of delaying or preventing a
change in control of Meadowbrook.
Cumulative Voting for Directors. Under California law, shareholders of a
California corporation may, unless such corporation's articles of incorporation
or bylaws expressly eliminate cumulative voting, cumulate their votes in the
election of directors so long as at least one shareholder has given notice,
prior to the voting, of such shareholder's intent to cumulate his or her votes
at the meeting. The Cambio Articles of Incorporation and Bylaws do not contain
any provision eliminating cumulative voting.
Stockholders of Meadowbrook will not be entitled to cumulate their votes in
the election of directors.
Removal of Directors. Under California law, a director or the entire Board
of Directors may be removed, with or without cause, by the affirmative vote of
the holders of a majority of the securities entitled to vote, provided that no
director of a corporation whose Board of Directors is unclassified (such as
Meadowbrook) may be removed (unless the entire Board of Directors is removed) if
the votes cast against such removal would be sufficient to elect the director in
an election involving cumulative voting. A director of a corporation whose Board
of Directors is classified may not be removed if the votes cast against removal
of the director would be sufficient to elect the director if voted cumulatively
(without regard to whether shares may otherwise be voted cumulatively) at an
election at which the same total number of votes were cast and either the number
of directors elected at the most recent annual meeting of shareholders, or if
greater, the number of directors for whom removal is being sought, were then
being elected. In addition, under California law, a director may be removed for
cause for certain specified reasons by the Superior Court in a suit by
shareholders holding at least 10% of the outstanding shares of any class.
-55-
<PAGE>
Under Delaware law, any director of a corporation without cumulative voting
and without a classified Board of Directors may be removed with or without cause
by holders of a majority of the shares then entitled to vote at an election of
directors. In addition, a Delaware corporation that adopts a classified Board
has the option of allowing directors to be removed only for cause.
Board of Directors Vacancies. The Meadowbrook Bylaws provide that vacancies
on the Meadowbrook Board, including newly created directorships, may be filled
by the vote of a majority of directors then in office. However, California law
prohibits directors from filling a vacancy on the Board created by the removal
of a director without cause unless such power is expressly granted to the Board
in a corporation's charter documents. The charter documents of Meadowbrook do
not authorize the Board to fill a vacancy by removal of a director without
cause.
Notice of Special Meetings of the Board of Directors. Under California law,
notice of a special meeting of the Board of Directors must be given four days
prior to such a meeting, if the notice is delivered by mail, or 48 hours prior
to such a meeting, if the notice is delivered personally or by telephone or
telegraph. Delaware law does not specify requirements with respect to the notice
period prior to a special meeting of the Board of Directors. The Meadowbrook
Bylaws require not less than 10 and not more than 60 days' notice prior to such
a special meeting.
Special Shareholders or Stockholders Meetings; Shareholder or Stockholder
Action by Written Consent. Under California law, special meetings of
shareholders may be called by the Board of Directors, the Chairman of the Board
of Directors, the President, the holders of shares representing 10% or more of
the outstanding voting power and such other persons as may be designated in the
articles of incorporation or bylaws. The Meadowbrook Bylaws authorize the
Chairman of the Board, a majority of the Meadowbrook Board (by written request),
or stockholders owning shares which have a majority of the voting power of the
capital stock of Meadowbrook issued and outstanding and entitled to vote to call
a special meeting. Any action required or able to be taken at any meeting of
Cambio shareholders may be taken without a meeting, without prior notice and
without a vote if a written consent is signed by the holders of outstanding
Cambio Capital Stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, provided that, except to fill a
vacancy caused by removal, directors may not be elected except by unanimous
written consent of shares entitled to vote. Unless the consents of all
shareholders entitled to vote have been solicited in writing, prompt notice of
the taking of any corporate action which is approved by shareholders without a
meeting by less than unanimous written consent shall be given to those
shareholders entitled to vote who have not consented in writing.
Delaware law, on the other hand, provides that special meetings of
stockholders may be called by a majority of the Board of Directors or by such
persons as may be designated in the certificate of incorporation or bylaws, and
does not expressly provide stockholders the right to call special meetings. The
Meadowbrook Bylaws currently provide that special meetings of stockholders may
be called only by the Chairman of the Board, a majority of the Meadowbrook Board
(by written request), or stockholders owning shares which have a majority of the
voting power of the capital stock of Meadowbrook issued and outstanding and
entitled to vote.
Amendment of Certificate or Articles of Incorporation. Under both Delaware
and California law, a company's certificate or articles of incorporation may be
amended only if such amendment is approved by the Board and by a majority of the
shareholders or stockholders. In addition, under both Delaware and California
law, if a corporation has more than one class or series of stock outstanding,
certain amendments that would affect the rights of such class or series require
the vote of a majority of the shares of such class or series. "Supermajority"
requirements (i.e., requirements of a vote of more than a majority of the
shares) are permitted under both California and Delaware law. Nevertheless,
-56-
<PAGE>
California law provides that, for a corporation with outstanding shares held of
record by 100 or more persons, such provision: (i) cannot require a vote higher
than 66 2/3%; (ii) must be approved by at least as large a proportion of the
outstanding shares as the supermajority provision requires; and (iii)
automatically expires after two years unless renewed pursuant to a shareholder
vote. Delaware law contains no similar provision.
Amendment of Bylaws. Under California law, bylaws may be amended by
shareholders holding a majority of the outstanding shares or by the Board of
Directors, except that if the number or a range of directors are specified in
the bylaws, this provision can be changed only with the approval of the
shareholders. Shareholders can adopt or amend bylaw provisions to limit the
ability of the Board of Directors to amend the bylaws. Under Delaware law, the
bylaws may be amended only by the stockholders, unless the corporation's
certificate of incorporation also confers the power to amend the bylaws on the
directors. The Meadowbrook Certificate of Incorporation authorizes Meadowbrook
directors to amend the Meadowbrook Bylaws.
Shareholder Vote for Mergers and Other Corporate Reorganizations.
Generally, California law requires a shareholder vote in more situations
involving corporate mergers and other reorganizations than does Delaware law.
Both California and Delaware law generally provide for shareholder or
stockholder votes of both the acquiring and acquired corporation to approve
mergers and of the selling corporation in a sale of all or substantially all of
its assets. In addition to the foregoing, California law also requires the
affirmative vote of a majority of the outstanding shares of (i) an acquiring
corporation in share-for-share reorganizations, (ii) the acquiring and acquired
corporations in sale-of-assets reorganizations and (iii) a parent corporation
whose equity securities are being issued or transferred in connection with
certain corporate reorganizations (such as triangular mergers), all subject to
certain exceptions, whereas Delaware law does not. California law generally
requires a vote of all outstanding shares voting in the aggregate and by class
when a vote is required in connection with these transactions, whereas Delaware
law generally does not require class voting in connection with these
transactions.
Delaware law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if: (i) the merger agreement does not amend the
existing certificate of incorporation; (ii) each share of the surviving
corporation outstanding before the merger is an identical outstanding or
treasury share after the merger; and (iii) the number of shares to be issued by
the surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to the merger. California law contains a similar
exception to its voting requirements for mergers and other reorganizations where
a corporation or its shareholders immediately prior to the reorganization own
immediately after the reorganization more than 5/6ths of the voting power of the
surviving or acquiring corporation, or its parent.
Dissenters' Rights in Mergers and Reorganizations. Under both California
and Delaware law, a dissenting shareholder of a corporation engaging in certain
major corporate transactions may, under varying circumstances, be entitled to
appraisal rights. Appraisal rights permit a shareholder to receive cash equal to
the fair market value of such shareholder's shares, in lieu of the consideration
such shareholder would otherwise receive in any such transaction.
Delaware law provides for dissenters' rights in certain mergers and
consolidations. However, such rights are not available with respect to: (i) a
merger or consolidation by a corporation, with respect to any class or series of
shares that are either listed on a national securities exchange or held by more
than 2,000 stockholders, if such stockholders receive shares of the surviving
corporation or of such a listed or widely-held corporation; or (ii) stockholders
of a corporation surviving a merger if no vote of the stockholders of the
surviving corporation is required to approve the merger.
-57-
<PAGE>
In general, California law does not afford dissenters' rights in
share-for-share reorganizations (except for those that do not result in the
acquiror gaining control of the other corporation) and sale-of-assets
reorganizations, and affords only limited dissenters' rights for mergers where a
shareholder vote is required if the shares are publicly traded. See "The
Merger-Appraisal and Dissenters' Rights."
Loans to Directors, Officers and Employees. Under Delaware law, a
corporation may make loans to, guarantee the obligations of or otherwise assist
its officers or other employees (including those who are directors), and those
of its subsidiaries, when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation. Under California law, a
corporation may make a loan to, or guarantee the obligations of, directors or
officers only if a majority of the disinterested directors determines that such
loan or guarantee may reasonably be expected to benefit the corporation.
Inspection of Shareholder or Stockholder Lists. Both California and
Delaware law allow any shareholder to inspect a corporation's shareholder list
for a purpose reasonably related to such person's interest as a shareholder. In
addition, California law provides that a shareholder or shareholders holding 5%
or more of a corporation's shares, or who hold 1% or more of a corporation's
shares after it is a public company and has filed a Schedule 14A with the SEC
relating to the election of directors, have an absolute right to inspect and
copy the corporation's shareholder list. Delaware law permits a stockholder to
inspect the stockholder list during the ten days preceding a stockholders'
meeting for any purpose germane to the meeting, but does not contain a provision
comparable to the absolute right of inspection provided by California law to
certain shareholders.
Payment of Dividends. California law does not use the concepts of par value
of shares, capital or surplus. The concepts of par value, capital and surplus
are retained under Delaware law.
Under California law, any distribution of corporate assets to shareholders
(including dividends and repurchases of shares) are limited either to: (i)
retained earnings; or (ii) an amount that would leave the corporation with
assets (exclusive of goodwill, capitalized research and development expenses and
deferred charges) equal to at least 1 1/4 times its liabilities (not including
deferred taxes, deferred income and other deferred credits) and with current
assets, as defined, at least equal to its current liabilities (or 1 1/4 times
its current liabilities if the average pretax and pre-interest earnings for the
preceding two fiscal years were less than the average interest expense for such
years). There are exceptions to the foregoing rules for repurchases pursuant to
employee stock plans. Additionally, a corporation cannot make a distribution if,
as a result of such distribution, the corporation would likely be unable to meet
its liabilities as they come due or if such distribution would impair certain
preference rights of the holders of preferred stock.
Delaware law permits the payment of dividends out of surplus (generally
defined as stockholders' equity less the par value of outstanding stock) or, if
there is no surplus, out of net profits for the current fiscal year and/or the
preceding fiscal year. Delaware law generally provides that a corporation may
redeem or repurchase its shares only if such redemption or repurchase would not
impair the capital of the corporation.
Interested Director Transactions. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest,
provided certain conditions are met. With certain exceptions, the conditions are
similar under California and Delaware law. Under California and Delaware law:
(i) either the shareholders (or stockholders) or the Board of Directors must
approve any such contract or transaction after full disclosure of the material
facts, and, in the case of Board approval, the contract or transaction must also
be "just and reasonable" (in California) or "fair" (in Delaware) to the
corporation; or (ii) the contract or transaction must have been just and
reasonable or fair, as applicable, to the corporation at the time it was
-58-
<PAGE>
approved. In the latter case, California law explicitly places the burden of
proof on the interested director. Under California law, if shareholder approval
is sought, the interested director is not entitled to vote his shares at a
shareholder meeting or by written consent with respect to any action regarding
such contract or transaction. If Board approval is sought, the contract or
transaction must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum). Under Delaware
law, if Board approval is sought, the contract or transaction must be approved
by a majority of the disinterested directors (even though less than a majority
of a quorum).
Derivative Suits. California law provides that a shareholder bringing a
derivative action on behalf of a corporation need not have been a shareholder at
the time of the transaction in question, provided that certain tests are met.
Under Delaware law, a stockholder may only bring a derivative action on behalf
of the corporation if the stockholder was a stockholder of the corporation at
the time of the transaction in question or his or her stock thereafter devolved
upon him or her by operation of law. California law also provides that the
corporation or the defendant in a derivative suit may make a motion to the court
for an order requiring the plaintiff shareholder to furnish a security bond.
Delaware does not have a similar bonding requirement.
Dissolution. Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's Board of Directors, and this right may not be
modified by the articles of incorporation. Under Delaware law, unless the Board
of Directors approves the proposal to dissolve, the dissolution must be
unanimously approved by all stockholders entitled to vote. A dissolution
initiated by the Board of Directors only requires the approval of a majority of
the corporation's stockholders. In the event of such a Board-initiated
dissolution, Delaware law allows a Delaware corporation to include in its
certificate of incorporation a supermajority voting requirement in connection
with dissolutions. The Meadowbrook Certificate of Incorporation does not contain
such a requirement.
-59-
<PAGE>
CAMBIO NETWORKS, INC. FINANCIAL STATEMENTS
<PAGE>
Financial Statements and
Report of Independent Certified
Public Accountants
CAMBIO NETWORKS, INC.
December 31, 1997
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENT OF STOCKHOLDERS' DEFICIT 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Cambio Networks, Inc.
We have audited the accompanying balance sheet of Cambio Networks, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
deficit, and cash flows for each of the two years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Cambio Networks, Inc., as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred net losses of $3,175,055 and $7,465,664 during the years
ended December 31, 1997 and 1996, respectively. As of December 31, 1997, the
Company's current liabilities exceeded its current assets by $1,770,406 and its
total liabilities exceeded its total assets by $2,759,224. These factors, among
others, as discussed in Note B to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note B. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Seattle, Washington
July 22, 1998
3
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
BALANCE SHEETS
ASSETS
December 31, March 31,
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Cash $ 13,028 $ 13,066
Accounts receivable, net of allowance for doubtful accounts of
$291,967 and $244,413, respectively 508,983 517,059
Inventory (note A2) 17,316 15,260
------------ ------------
Total current assets 539,327 545,385
PROPERTY AND EQUIPMENT, net (notes A3 and C) 256,364 201,556
OTHER ASSETS 54,818 57,963
------------ ------------
$ 850,509 $ 804,904
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable to stockholders (note D) $ 900,000 $ 900,000
Current maturities of long-term obligations -- 2,000,000
Line of credit (note D) -- 125,382
Cash overdraft 71,658 119,652
Accounts payable 703,455 873,229
Accrued liabilities 365,459 316,257
Deferred revenue (note A1) 228,773 306,922
Other liabilities 40,388 16,236
------------ ------------
Total current liabilities 2,309,733 4,657,678
LONG TERM OBLIGATION (note E) 1,300,000 --
COMMITMENTS AND CONTINGENCIES (notes G and H) -- --
STOCKHOLDERS' DEFICIT (notes B, I and J)
Preferred stock-series 1; no par value, 10,000,000 shares
authorized; 3,500,000 shares issued and outstanding 1,050,000 1,050,000
Common stock; no par value, 10,000,000 shares authorized; 387,293
and 392,493 shares issued and outstanding, respectively 17,546,332 17,546,592
Additional paid-in capital 3,268,056 3,268,056
Accumulated deficit (24,623,612) (25,717,422)
------------ ------------
Total stockholders' deficit (2,759,224) (3,852,774)
------------ ------------
$ 850,509 $ 804,904
============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31, Three months ended March 31,
----------------------- ----------------------------
1997 1996 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues (note A1) $ 5,515,177 $ 7,231,794 $ 645,273 $ 1,806,591
Cost of revenues 1,368,370 622,307 179,181 26,755
------------ ------------ ------------ ------------
Gross profit 4,146,807 6,609,487 466,092 1,779,836
Operating expenses
Administrative expenses 5,806,567 12,306,672 1,245,177 1,593,765
Research and development
(note A4) 1,339,785 1,721,756 290,467 544,236
------------ ------------ ------------ ------------
Operating loss (2,999,545) (7,418,941) (1,069,552) (358,165)
Other income (expense)
Interest income 4,084 66,588 -- --
Interest expense (122,675) (19,301) (25,594) (4,681)
Other expense, net (56,919) (94,010) 1,336 9,719
------------ ------------ ------------ ------------
(175,510) (46,723) (24,258) 5,038
------------ ------------ ------------ ------------
NET LOSS $ (3,175,055) $ (7,465,664) $ (1,093,810) $ (353,127)
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
STATEMENT OF STOCKHOLDERS' DEFICIT
Total
Common stock Preferred stock Additional stockholders'
--------------------- ----------------------- paid-in Accumulated equity
Shares Amount Shares Amount capital deficit (deficit)
------- ------------ ---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996 404 $ 297 27,052.748 $17,500,000 $3,000,000 $(13,982,901) $ 6,517,396
Exercise of stock options 4,878 45,910 -- -- -- -- 45,910
Net loss for December 31, 1996 -- -- -- -- -- (7,465,656) (7,465,656)
------- ----------- ---------- ----------- ---------- ------------ -----------
Balance at December 31, 1996 5,282 46,207 27,052.748 17,500,000 3,000,000 (21,448,557) (902,350)
Conversion of preferred series A, B and
C to common shares (note J) 379,511 17,500,000 (27,052.748) (17,500.000) -- -- --
Sale of preferred shares series 1 (note J) -- -- 3,500.000 1,050,000 -- -- 1,050,000
Re-granting of stock options (notes I and J) -- -- -- -- 187,000 -- 187,000
Granting of stock options (note I) -- -- -- -- 57,250 -- 57,250
Issuance of stock warrants -- -- -- -- 23,806 -- 23,806
Exercise of stock options 2,500 125 -- -- -- -- 125
Net loss for the year ended December 31, 1997 -- -- -- -- -- (3,175,055) (3,175,055)
------- ----------- ---------- ----------- ---------- ------------ -----------
Balance at December 31, 1997 387,293 17,546,332 3,500.000 1,050,000 3,268,056 (24,623,612) (2,759,224)
Exercise of stock options (unaudited) 5,200 260 -- -- -- -- 260
Net loss for the three months ended
March 31, 1998 (unaudited) -- -- -- -- -- (1,093,810) (1,093,810)
------- ----------- ---------- ----------- ---------- ------------ -----------
Balance at March 31, 1998 (unaudited) 392,493 $17,546,592 3,500.000 $ 1,050,000 $3,268,056 $(25,717,422) $(3,852,774)
======= =========== ========== =========== ========== ============ ===========
<FN>
The accompanying notes are an integral part of this statement
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31, Three months ended March 31,
--------------------------- ---------------------------
Increase (Decrease) in Cash 1997 1996 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(3,175,055) $(7,465,664) $(1,093,810) $ (353,127)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 269,141 334,416 64,804 64,113
Noncash stock compensation 268,056 -- -- --
Loss on disposal of assets 64,336 -- -- --
Provision for allowance for doubtful accounts (438,914) 313,667 (47,554) (116,363)
Changes in assets and liabilities
Accounts receivables 2,241,677 (140,084) 39,478 1,740,181
Inventory (17,316) 10,834 2,056 --
Prepaid expenses and other assets 106,036 223,571 (3,145) (29,639)
Accounts payable (1,025,964) 1,082,497 241,432 (1,072,382)
Accrued expenses and
other liabilities (39,003) (1,143,020) (145,012) (83,888)
Deferred revenue (810,719) 786,489 78,149 (516,184)
----------- ----------- ----------- -----------
Net cash used in
operating activities (2,557,725) (5,997,294) (863,602) (367,289)
Cash flows from investing activities
Capital expenditures (51,814) (479,768) (9,996) --
----------- ----------- ----------- -----------
Net cash used in
investing activities (51,814) (479,768) (9,996) --
Cash flows from financing activities
Cash overdraft 71,658 -- 47,994 --
Net borrowings from line of credit -- -- 125,382 --
Proceeds from issuance of common stock 125 45,910 260 --
Proceeds from issuance of preferred stock 1,050,000 -- -- 1,050,000
Proceeds from bank notes payable 1,300,000 -- 700,000 --
Proceeds from issuance of
notes payable to stockholders 950,000 750,000 -- --
Payment on notes payable to stockholders (800,000) -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing
activities 2,571,783 795,910 873,636 1,050,000
----------- ----------- ----------- -----------
Net increase (decrease) in cash (37,756) (5,681,152) 38 682,711
Cash at beginning of year 50,784 5,731,936 13,028 50,784
----------- ----------- ----------- -----------
Cash at end of year $ 13,028 $ 50,784 $ 13,066 $ 733,495
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 30,679 $ 22,989 $ 19,547 $ 8,444
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
7
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cambio Networks, Inc. (the Company), a California corporation, develops and
markets solutions for physical network management applications. Headquartered in
Bellevue, Washington, the Company operates sales offices nationally and in the
U.K.
A summary of the Company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. Revenue Recognition
The Company sells and licenses software for physical network management
applications. Revenue on these products is recognized upon delivery. The Company
also sells various software maintenance contracts. These contracts commit the
Company to provide stated services over a defined period. Revenue on these
contracts is recognized on a straight-line basis over the life of the respective
contract.
2. Inventories
Inventories are stated at the lower of cost or market; cost is determined by the
first-in, first-out method.
3. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lesser of
the period of the lease term or the estimated useful life of the assets.
4. Research and Development Costs
All expenditures for research and development are expensed in the year incurred.
Software development costs are charged to expense in the year incurred as
technological feasibility of the computer software product has not been
established.
8
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Fair Value of Financial Instruments
The carrying amount of the long-term obligation approximates fair value under
the requirements of "Statement of Financial Accounting Standards No. 107 -
Disclosure About Fair Value of Financial Instruments."
6. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
7. Interim Statements
In the opinion of management, the unaudited interim financial statements of
March 31, 1998 and for the three months ended March 31, 1998 and 1997 include
all adjustments, consisting only of those of an normal recurring nature,
necessary to present fairly the Company's financial position as of march 31,
1998 and the results of its operations and cash flows for the three months ended
March 31, 1998 and 1997. The results of operations for the three months ended
March 31, 1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE B - GOING CONCERN
As shown in the financial statements, the Company incurred net losses of
$7,465,664 and $3,175,055 during the years ended December 31, 1997 and 1996,
respectively. As of December 31, 1997, the Company's current liabilities
exceeded its current assets by $1,770,406 and its total liabilities exceeded its
total assets by $2,759,224. These factors raise substantial doubt about the
company's ability to continue as a going concern. The Company's ability to
continue as a going concern is contingent on the Company's ability to generate
additional capital and operate at a profit. Management's plans in regards to
these matters are as follows:
9
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE B - GOING CONCERN - Continued
On February 13, 1998, the Company received a letter of intent from Meadowbrook
Rehabilitation, Inc. (Meadowbrook), a liquidating health care company listed on
the NASDAQ, to acquire all of the outstanding shares of the Company. Meadowbrook
plans to close the acquisition by August 1998. Meadowbrook is currently in the
process of liquidating their health care business and plans to use the proceeds
of the liquidation for technology investments. Management believes the expected
proceeds from the sale of the health care business are expected to provide the
Company with access to capital required to launch the next generation product,
which the Company plans to launch in September 1998. Through July 15, 1998, the
Company has received $1,100,000 in bridge loans from Meadowbrook.
Management believes the proposed acquisition and subsequent infusion of
additional capital from Meadowbrook will be sufficient to at least allow the
Company to continue in existence for the ensuing twelve month period, however
the outcome is uncertain.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, March 31,
1997 1998
---------- ----------
Office and warehouse equipment $2,191,302 $2,201,298
Leasehold improvements 97,747 97,747
---------- ----------
2,289,049 2,299,045
Less accumulated depreciation
and amortization 2,032,685 2,097,489
---------- ----------
$ 256,364 $ 201,556
========== ==========
10
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE D - NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consist of the following:
December 31, March 31,
1997 1998
--------- ---------
Promissory notes to common stockholders bearing
interest at 7% per annum, due on demand,
collateralized by first position on all
assets of the Company
$250,000 $250,000
Promissory notes to common stockholders bearing
interest at 7% per annum, due on demand,
collateralized by co-second position on
all assets of the Company
500,000 500,000
Notes payable to preferred stockholders bearing
interest at prime rate (8.5% at December 31, 1997)
plus 2% per annum, due on demand, collateralized
by co-second position on all assets of the Company
150,000 150,000
-------- --------
$900,000 $900,000
======== ========
The promissory notes to common stockholders provide for an automatic conversion
into the Company's common stock upon the Company receiving equity financing in
excess of $1,000,000.
The Company issued 295,000 common stock warrants to the preferred stockholders
in connection with issuance of the notes payable, with an exercise price of
$0.30 per warrant. The warrants are immediately exercisable and expire at
various dates through December, 2002. At December 31, 1997, none of the warrants
had been exercised.
On March 16, 1998, the Company entered into a business loan agreement with a
bank. Under the terms of the loan agreement, the Company can borrow up to
$150,000 at prime plus 1%. The loan agreement expires on March 16, 1999 and is
guaranteed by the Company's President.
11
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE E - LONG-TERM OBLIGATION
At December 31, 1997 and March 31, 1998, the Company had a note payable to a
bank, bearing interest at 7% per annum. No payments on the loan are required
currently. The principal and accrued interest are due on February 1, 1999. The
note payable is guaranteed by the Company's preferred stockholders.
NOTE F - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided by
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes."
At December 31, 1997, a net operating loss (NOL) carryforward of approximately
$2,700,000 expiring through 2012 is available to offset future taxable income.
On April 17, 1997, an ownership change, as defined under Section 382 of the
Internal Revenue Code, occurred. Consequently, annual utilization of the
pre-change NOL to offset future taxable income will be limited. If the planned
acquisition by Meadowbrook should occur, there may be additional limitations on
the use of these carryforwards.
Deferred tax assets consist of the following at December 31, 1997:
Current
Allowance for doubtful accounts $ 99,000
Accrued vacation 41,000
Less valuation allowance (140,000)
----------
$ -
==========
Long-term
NOL carryforwards prior to ownership change in 1997 $ 36,000
NOL carryforwards after ownership change in 1997 1,068,000
Depreciation and amortization 81,000
Less valuation allowance (1,185,000)
----------
$ -
==========
12
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE F - INCOME TAXES - Continued
The Company has established a valuation allowance of $1,325,000 as of December
31, 1997, due to the uncertainty of future utilization. The valuation allowance
decreased by $4,475,000 during the year ended December 31, 1997, due to the
Section 382 limitations on the Company's NOL carryforwards.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases its office and service facilities and certain equipment under
noncancelable operating lease agreements which expire at various dates through
2002. Future minimum lease payments under these agreements follow:
December 31,
1998 $ 464,000
1999 231,000
2000 201,000
2001 88,000
2002 16,000
----------
$1,000,000
==========
Rent expense for the years ended December 31, 1997 and 1996 approximated
$1,015,000 and $1,116,000, respectively.
2. Contingencies
The Company is subject to Value Added Tax in the United Kingdom and is currently
in the process of finalizing the tax liability since 1995. Management believes
any liability the Company may owe will not be material to the financial
statements.
In April 1998, an officer terminated employment with the Company. The officer's
employment contract stated that if the agreement was terminated for a reason
other than with cause, the officer would receive $200,000, equaling one year's
salary. The Company is currently negotiating the employment settlement.
13
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan 401(k) (the Plan) covering
substantially all employees who have completed three months of service. At the
Board's discretion, the Company can matched 50% of employee contributions up to
a total contribution of 3% of each employee's annual salary. There were no
employer contributions in 1997 and 1996.
NOTE I - STOCK OPTION PLAN
Under the terms of the Company's 1994 Stock Option Plan, employees, officers,
directors and consultants to the Company may be granted incentive stock options
or non-statutory stock options to purchase up to an authorized 1,063,073 shares
of common stock. The options are generally granted at exercise prices equal to
the market value of the Company's common stock on the date of the grant. The
options generally vest over five years and expire ten years from date of grant.
The Company has adopted the disclosure only provisions of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The
Company applies the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB 25) and related Interpretations in determining the
amount of any compensation expense to be recognized from the issuance of stock
options to employees. Compensation expense is generally not recognized for the
Company's stock-based compensation plans when options are exercisable at the
exercise price not less than the market value of the Company's stock on the date
of the grant. For options with an exercise price less than fair market value,
compensation expense equal to the difference between the exercise price and the
fair market value is recognized at the date of grant.
Had compensation cost for options granted under the 1994 stock option plan been
determined based on the fair value method prescribed by SFAS 123, the Company's
net loss would have been increased by approximately $20,000 and $0 for the year
ended December 31, 1997 and 1996, respectively. The Black-Scholes option pricing
model was used to estimate the fair value of options granted using the following
assumptions for 1997: an expected life of 7.8 years; expected volatility of 0%,
and risk-free rate of 6.0%.
14
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE I - STOCK OPTION PLAN - Continued
A summary of the status of the Company's stock option plan as of December 31,
1997 and 1996 and March 31, 1998, and changes during the periods ending on those
dates is presented below.
Number of Weighted-average
shares exercise price
--------- ----------------
Balance at January 1, 1996 114,734 $8.80
Granted 46,350 9.48
Exercised (4,878) 9.41
Forfeited (89,123) 8.80
---------
Balance at December 31, 1996 67,083 9.48
Granted 977,000 0.05
Exercised (2,500) 0.05
Forfeited (67,083) 9.48
---------
Balance at December 31, 1997 974,500 0.05
Granted 55,500 0.05
Exercised (5,200) 0.05
---------
Balance at March 31, 1998 1,024,800 0.05
=========
The weighted-average fair value of options granted during the years ended
December 31, 1997 and 1996 was $9.49 and $0.27, respectively.
The following information applies to options outstanding at:
December 31, March 31,
1997 1998
------------ ------------
Options outstanding 974,500 1,024,800
Weighted average exercise price $0.05 $0.05
Weighted average remaining contractual life 10 10
Options exercisable 289,792 303,073
Weighted average exercise price $0.05 $0.05
15
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of March 31, 1998 and for the three months ended
March 31, 1998 and 1997 is unaudited)
NOTE I - STOCK OPTION PLAN - Continued
In April 1997, the Company reissued 748,000 stock options with an exercise price
of $0.05 to replace all of the outstanding stock options. The reissuance
provided a benefit to existing stock option holders with additional stock
options and accordingly, compensation cost was recognized. Additionally, the
Company granted 229,000 stock options with an exercise price of $0.05. The
exercise price was less than the market value of the Company's stock on the date
of the grant. Accordingly, compensation cost was recognized consistent with the
method of APB 25.
NOTE J - PREFERRED AND COMMON STOCK
On April 9, 1997, the Company's stockholders approved, among other resolutions,
to provide for the automatic conversion of the Company's outstanding preferred
stock series A, B and C equal to the same number of shares of the Company's
common stock and effect a .01402856-to-1 reverse stock split of the resulting
shares of common stock. Additionally, the Company's stockholders approved to
effect a .0147669-to-1 reverse stock split of the common stock of the Company
(other than the common shares resulting from the conversion) and the shares
subject to the Company's outstanding stock options. All references to common
stock have been retroactively restated to reflect the decreased number of common
shares outstanding.
The Company's stockholders also approved to have the Company enter into a Series
1 Preferred Stock Purchase Agreement with a group of outside investors
(Purchasers). Under the terms of the agreement, the Company issued and sold to
the Purchasers 3,500,000 shares of the Company's Preferred Stock (Series 1) at
$0.30 per share.
Holders of Series 1 are entitled to receive, when and as declared by the Board
of Directors, cash dividends at the rate of 8% of the "Original Issue Price,"
$0.30. Each holder of Series 1 is entitled to an equal number of votes of the
Company's common stock into which the holder's aggregate number of shares of
Series 1 are convertible.
NOTE K - MAJOR CUSTOMERS
In 1997, the Company had sales to one customer totaling approximately $764,000.
The customer accounted for 13.9% of net revenues. There were no major customers
with sales over 10% in 1996. For the three months ended March 31, 1998, the
Company had sales to three customers totaling approximately $342,000, which
accounted for 53.0% of net revenues.
16
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
Among
MEADOWBROOK REHABILITATION GROUP, INC.,
INTERSET, INC.,
CAMBIO NETWORKS, INC.,
and
THE SECURITYHOLDERS NAMED HEREIN
April 3, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I THE MERGER............................................. 1
1.1 The Merger.......................................................... 1
1.2 Closing............................................................. 1
1.3 Effective Time...................................................... 2
1.4 Corporate Organization.............................................. 2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS............................... 2
2.1 Conversion of the Company Shares.................................... 2
2.2 Conversion of Stock Options......................................... 3
2.3 Surrender and Payment............................................... 3
2.4 Dissenting Shares................................................... 4
2.5 Adjustments......................................................... 5
2.6 Fractional Shares................................................... 5
ARTICLE III THE SURVIVING CORPORATION.............................. 5
3.1 Articles of Incorporation........................................... 5
3.2 Bylaws.............................................................. 5
3.3 Directors and Officers.............................................. 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......... 5
4.1 Organization and Qualification...................................... 6
4.2 Capital Structure................................................... 6
4.3 Subsidiaries; Equity Investments.................................... 7
4.4 Authority........................................................... 8
4.5 No Conflict with Other Instruments.................................. 8
4.6 Governmental Consents............................................... 8
4.7 Financial Statements................................................ 9
4.8 Absence of Changes.................................................. 9
4.9 Properties.......................................................... 11
4.10 Environmental Matters............................................... 11
4.11 Taxes............................................................... 12
4.12 Employees........................................................... 13
4.13 Compliance with Law................................................. 14
4.14 Litigation.......................................................... 14
4.15 Contracts........................................................... 14
4.16 No Default.......................................................... 15
4.17 Major Customers..................................................... 15
4.18 Proprietary Rights.................................................. 15
4.19 Insurance........................................................... 17
4.20 Brokers or Finders.................................................. 17
4.21 Related Parties..................................................... 17
4.22 Certain Advances.................................................... 17
4.23 No Misleading Statements............................................ 17
-A-i-
<PAGE>
Page
4.24 Company Proxy Statement............................................. 17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF MEADOWBROOK
AND INTERSET........................................... 18
5.1 Organization........................................................ 18
5.2 Capital Structure................................................... 18
5.3 Authority........................................................... 19
5.4 No Conflict with Other Instruments.................................. 19
5.5 Governmental Consents............................................... 20
5.6 SEC Documents....................................................... 20
5.7 Shares of Meadowbrook Common........................................ 20
5.8 No Material Adverse Change.......................................... 21
5.9 Nasdaq National Market.............................................. 21
5.10 Brokers or Finders.................................................. 21
5.11 Disclosure.......................................................... 21
ARTICLE VI CONDUCT PRIOR TO THE EFFECTIVE TIME.................... 21
6.1 Conduct of Business of the Company.................................. 21
6.2 No Solicitation..................................................... 23
6.3 Conduct of Business of Meadowbrook.................................. 24
ARTICLE VII ADDITIONAL AGREEMENTS.................................. 25
7.1 Approval of the Company Stockholders................................ 25
7.2 Preparation of Company Proxy Statement.............................. 25
7.3 Access to Information; Interim Financial Information................ 25
7.4 Confidentiality..................................................... 26
7.5 Expenses............................................................ 26
7.6 Public Disclosure................................................... 26
7.7 Reasonable Efforts.................................................. 27
7.8 Conduct; Notification of Certain Matters............................ 27
7.9 Tax-Free Reorganization............................................. 27
7.10 Blue Sky Laws....................................................... 27
7.11 Compliance with Exchange Act........................................ 27
7.12 Meadowbrook Funding................................................. 28
7.13 Meadowbrook Voting Agreement........................................ 28
7.14 Registration Rights Agreement....................................... 28
7.15 Additional Documents and Further Assurances......................... 28
7.16 Indemnification..................................................... 28
7.17 Waiver of Rights of First Refusal................................... 28
ARTICLE VIII CONDITIONS TO THE MERGER............................... 28
8.1 Conditions to Obligations of Each Party to Effect the Merger........ 28
8.2 Additional Conditions to Obligations of the Company................. 29
8.3 Additional Conditions to the Obligations of Meadowbrook and Interset 30
-A-ii-
<PAGE>
Page
ARTICLE IX INDEMNIFICATION........................................ 31
9.1 Survival of Representations and Warranties.......................... 31
9.2 Indemnification..................................................... 32
9.3 Exclusivity of Remedy............................................... 34
ARTICLE X TERMINATION, AMENDMENT, WAIVER, CLOSING....................... 35
10.1 Termination......................................................... 35
10.2 Effect of Termination............................................... 36
10.3 Termination Fee..................................................... 36
10.4 Amendment or Supplement............................................. 36
10.5 Extension of Time, Waiver........................................... 36
ARTICLE XI GENERAL................................................ 37
11.1 Notices............................................................. 37
11.2 Headings............................................................ 38
11.3 Counterparts........................................................ 38
11.4 Entire Agreement; Assignment........................................ 38
11.5 Severability........................................................ 39
11.6 Other Remedies...................................................... 39
11.7 Governing Law....................................................... 39
11.8 Absence of Third-Party Beneficiary Rights........................... 39
EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A Form of Stockholders Voting Agreement
Exhibit B Form of Meadowbrook Voting Agreement
Exhibit C Form of Secured Bridge Financing Note
Exhibit D Form of Registration Rights Agreement
SCHEDULES
Schedule 3.3 Officers of Surviving Corporation
Schedule 4 Disclosure Schedule
Schedule 4.2 Beneficial Owners of Company Stock and Holders of Company
Options
Schedule 4.7 1998 Operating Budget
-A-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of April
3, 1998, by and among MEADOWBROOK REHABILITATION GROUP, INC. a Delaware
corporation ("Meadowbrook"), INTERSET, INC., a Delaware corporation and a wholly
owned subsidiary of Meadowbrook ("Interset"), CAMBIO NETWORKS, INC., a
California corporation (the "Company"), and certain stockholders of the Company
named on the signature pages hereto (the "Securityholders").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Meadowbrook, Interset and the
Company deem it advisable and in the best interests of their respective
stockholders to effect the merger hereafter provided for, in which Interset
would merge with and into the Company and the Company would become a wholly
owned subsidiary of Meadowbrook (the "Merger");
WHEREAS, concurrently with the execution and delivery of this Agreement
and as a condition and inducement to Meadowbrook's and Interset's willingness to
enter into this Agreement, each of the Securityholders are entering into a
Stockholders Voting Agreement with Meadowbrook in substantially the form
attached hereto as Exhibit A (the "Stockholders Voting Agreement") which, among
other things, requires them to vote all the shares of Company Stock (defined
below) owned by them in accordance with the Stockholders Voting Agreement; and
WHEREAS, it is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"):
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, provisions and covenants herein contained, Meadowbrook, Interset and
the Company hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.3), upon
the terms and subject to the conditions of this Agreement, Interset shall be
merged with and into the Company in accordance with the California General
Corporation Law (the "CGCL") and the Delaware General Corporation Law (the
"DGCL"), whereupon the separate existence of Interset shall cease, and the
Company shall be the surviving corporation (the "Surviving Corporation").
1.2 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Pillsbury Madison &
Sutro LLP, 235 Montgomery Street, San Francisco, California as soon as
practicable following satisfaction or waiver of all of the conditions to the
obligations of the parties to consummate the transactions contemplated hereby in
accordance with this Agreement or at such other time, place and date as is
mutually agreed to by
-A-1-
<PAGE>
the parties hereto. The date and time of the Closing is referred to in this
Agreement as the "Closing Date."
1.3 Effective Time. As soon as practicable after satisfaction or, to the
extent permitted hereunder, waiver of all conditions to the Merger, the Company
and Interset shall file certificates of merger with the Secretary of State of
California and the Secretary of State of Delaware and make all other filings or
recordings required by the CGCL and the DGCL in connection with the Merger. The
Merger shall become effective at such time as the certificate of merger is duly
filed with the Secretary of State of the State of California (the "Effective
Time").
1.4 Corporate Organization. At and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises and be subject to all of the restrictions, disabilities and duties of
the Company and Interset, all as provided under the CGCL and the DGCL.
ARTICLE II
EFFECT OF THE MERGER ON THE
CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
2.1 Conversion of the Company Shares. At the Effective Time, by virtue
of the Merger and without any action on the part of any holder of securities of
Interset or the Company, the following shall occur:
(a) Each share of common stock of Interset outstanding immediately prior
to the Effective Time shall be converted into and become one fully paid and
nonassessable share of common stock, of the Surviving Corporation with the same
rights, powers and privileges as the shares so converted, and such shares shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation. Each stock certificate of Interset evidencing ownership of shares
of common stock of Interset shall continue to evidence ownership of the shares
of capital stock of the Surviving Corporation.
(b) Each share of Company Stock (as defined in Section 4.2(a)) held by
the Company as treasury stock or owned by Meadowbrook or any subsidiary of
Meadowbrook immediately prior to the Effective Time shall be canceled, and no
payment shall be made with respect thereto.
(c) The shares of Company Stock issued and outstanding immediately prior
to the Effective Time (except as otherwise provided in Section 2.1(b) or as
provided in Section 2.6 with respect to shares of Company Stock as to which
appraisal rights have been properly exercised under the CGCL) shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the right to receive shares of Class A Common Stock, $.01 par
value, of Meadowbrook (the "Meadowbrook Common") representing thirty-two and
one-half percent (32.5%) of the outstanding Meadowbrook Class A and Class B
Common Stock at the Effective Time, assuming the exercise of all Company Options
outstanding as of the date of this Agreement and no exercise of any Meadowbrook
Options (as defined below). The number of shares of Meadowbrook Common into
which each share of Company Stock will be converted (the "Exchange Ratio") will
be calculated immediately prior to the Effective Time.
-A-2-
<PAGE>
2.2 Conversion of Stock Options.
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, each unexpired and unexercised option
to purchase shares of Company Stock (individually a "Company Option" and
collectively the "Company Options") granted under the Company's 1994 Stock
Option Plan, (the "Company Plan") outstanding immediately prior to the Effective
Time shall be converted into an option to purchase Meadowbrook Common (a
"Converted Company Option") (the aggregate number of shares of Company Stock
issuable upon the exercise of all outstanding Company Options immediately prior
to the Effective Time is referred to herein as the "Outstanding Option Amount").
Each Company Option so converted by Meadowbrook will continue to have, and be
subject to, substantially the same terms and conditions set forth in the
documents governing such Company Option immediately prior to the Effective Time,
except that (i) such Converted Company Option will be exercisable for that
number of whole shares of Meadowbrook Common as is equal to the product of the
number of shares of Company Stock that were purchasable under the Company Option
immediately prior to the Effective Time, multiplied by the Exchange Ratio,
rounded down to the nearest whole number of shares of Meadowbrook Common and
(ii) the per share exercise price for the Meadowbrook Common issuable upon
exercise of such Converted Company Option will be equal to the quotient obtained
by dividing the exercise price per share of the shares of Company Stock at which
such Company Option was exercisable immediately prior to the Effective Time by
the Exchange Ratio, rounded up to the nearest whole cent. The parties intend
that the conversion of the Company Options hereunder will meet the requirements
of Section 424(a) of the Code and this Section 2.2(a) shall be interpreted
consistent with such intention. Consistent with the terms of the Company Options
and the documents governing such Company Option, the Merger will not terminate
or accelerate any Converted Company Option or any right of exercise, vesting or
repurchase relating thereto with respect to Meadowbrook Common acquired upon
exercise of such Converted Company Option.
(b) As soon as practicable after the Effective Time, Meadowbrook shall
issue to each holder of a Converted Company Option a document evidencing the
conversion of such holder's Company Option by Meadowbrook.
2.3 Surrender and Payment.
(a) Prior to the Effective Time, the Company shall provide Meadowbrook
with a list of the names and addresses of each of the Company's stockholders for
the purpose of assisting Meadowbrook in exchanging certificates which,
immediately prior to the Effective Time represented issued and outstanding
shares of Company Common, for the consideration set forth in Section 2.1(c) (the
"Merger Consideration"). Promptly after the Effective Time, Meadowbrook shall
send, or shall cause to be sent, to each holder of record of shares of Company
Stock at the Effective Time a letter of transmittal for use in such exchange
(which shall specify that the delivery shall be effected, and risk of loss and
title shall pass, only upon proper delivery of the certificates representing
shares of Company Stock to the Meadowbrook).
(b) Holders of shares of Company Stock that have been converted into a
right to receive the Merger Consideration, upon surrender to Meadowbrook of a
certificate or certificates representing such shares of Company Stock, together
with a properly completed letter of transmittal covering such shares, will be
entitled to receive the Merger Consideration payable in respect of such Company
Stock. Until so surrendered, each certificate representing shares of the Company
Stock
-A-3-
<PAGE>
shall, after the Effective Time, represent for all purposes only the right to
receive such Merger Consideration.
(c) The Meadowbrook Common comprising the Merger Consideration shall be
duly authorized, validly issued, fully paid and non-assessable, free and clear
of any liens, pledges or encumbrances of any kind except any restrictions on
subsequent sale by the Securityholders imposed by any federal or state
securities laws or regulations; provided however that each Securityholder hereby
agrees that it shall not effect any sale of Meadowbrook Common issued pursuant
to this Agreement for a period of twelve (12) months following the Effective
Time.
(d) If any portion of the Merger Consideration is to be paid to a person
other than the registered holder of shares of Company Stock represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and
accompanied by all documents required to evidence and effect the transfer and
that the person requesting such payment shall pay to Meadowbrook any transfer or
other taxes required as a result of such payment to a person other than the
registered holder of shares of Company Stock or establish to the satisfaction of
Meadowbrook that such tax has been paid or is not payable.
(e) After the Effective Time, there shall be no further registration of
transfers of Company Stock. If, after the Effective Time, certificates
representing shares of Company Stock are presented to the Surviving Corporation,
they shall be canceled and exchanged for the consideration provided for, and in
accordance with the procedures set forth, in this Article II.
(f) Any amounts remaining unclaimed by holders of shares of Company
Stock three (3) years after the Effective Time (or such earlier date prior to
such time as such amounts would otherwise escheat to or become property of any
governmental entity) shall, to the extent permitted by applicable law, become
the property of Meadowbrook free and clear of any claims or interest of any
person previously entitled thereto.
(g) No dividends, interest or other distributions with respect to
Meadowbrook Common constituting part of the Merger Consideration shall be paid
to the holder of any unsurrendered certificates representing shares of Company
Stock until such certificates are surrendered as provided in this Section 2.3.
Upon such surrender, there shall be paid, without interest, to the person in
whose name the certificates representing Meadowbrook Common into which such
shares of Company Stock were converted are registered, all dividends, interest
and other distributions payable in respect of such shares of Company Stock on a
date subsequent to, and in respect of a record date after, the Effective Time.
2.4 Dissenting Shares. Notwithstanding Section , shares of Company Stock
outstanding immediately prior to the Effective Time and held by a holder who has
not voted or consented to the Merger in writing and who has demanded appraisal
for such Company Shares in accordance with the CGCL shall not be converted into
a right to receive the Merger Consideration, unless and until such holder fails
to perfect or withdraws or otherwise loses such holder's right to appraisal. If
after the Effective Time such holder fails to perfect or withdraws or loses such
holder's right to appraisal, such shares of Company Stock shall be treated as if
they had been converted as of the Effective Time into a right to receive the
Merger Consideration. The Company shall give Meadowbrook prompt notice of any
demands received by the Company for appraisal of shares of Company Stock,
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and Meadowbrook shall have the right to participate in all negotiations and
proceedings with respect to such demands. The Company shall not, except with the
prior written consent of Meadowbrook, make any payment with respect to, or
settle or offer to settle, any such demands.
2.5 Adjustments. If at any time during the period between the date of
this Agreement and the Effective Time, any change in the outstanding shares of
capital stock of Meadowbrook shall occur, including by reason of any
reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares, or any stock dividend thereon with a record date during
such period, the number of shares of Meadowbrook Common constituting all or part
of the Merger Consideration shall be appropriately adjusted.
2.6 Fractional Shares. No fractional shares of Meadowbrook Common shall
be issued in the Merger. All fractional shares of Meadowbrook Common that a
holder of shares of Company Stock would otherwise be entitled to receive as a
result of the Merger shall be aggregated and if a fractional share results from
such aggregation, such holder shall be entitled to receive, in lieu thereof, an
amount in cash determined by multiplying such fractional share by the closing
price per share of Meadowbrook Common on the Nasdaq Stock Market on the trading
day immediately prior to the Effective Time.
ARTICLE III
THE SURVIVING CORPORATION
3.1 Articles of Incorporation. The articles of incorporation of the
Company in effect at the Effective Time shall be the articles of incorporation
of the Surviving Corporation until amended in accordance with applicable law.
3.2 Bylaws. The Bylaws of the Company in effect at the Effective Time
shall be the Bylaws of the Surviving Corporation until amended in accordance
with applicable law.
3.3 Directors and Officers. From and after the Effective Time, the
directors and officers of Interset shall be the directors and officers,
respectively, of the Surviving Corporation each as set forth on Schedule 3.3
attached hereto. In addition, at the Effective Time, pursuant to the terms of a
Voting Agreement substantially in the form of Exhibit B attached hereto (the
"Meadowbrook Voting Agreement"), the size of the Board of Directors of
Meadowbrook shall be increased to six (6) members and three (3) directors
nominated by the Company (and reasonably acceptable to Meadowbrook) shall be
appointed to the Board of Directors of Meadowbrook.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as otherwise specifically set forth on the disclosure schedule
delivered by the Company to Meadowbrook prior to the execution of this Agreement
and signed by the President of the Company (the "Disclosure Schedule"), the
Company represents and warrants to both Meadowbrook and Interset as follows:
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4.1 Organization and Qualification. Each of the Company and its
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization and
has all requisite power and authority to own, lease and operate its respective
properties and to carry on its business as now being conducted. As used in this
Agreement, "Subsidiary" means a corporation, partnership or other entity in
which the Company owns directly or indirectly fifty percent (50%) or more of the
voting stock, profits, equity or beneficial interest, is a partner of, or
otherwise controls the management of. Cambio Networks, Europe, Inc., a
California corporation and, a wholly owned Subsidiary of the Company, is the
only Subsidiary of the Company.
Each of the Company and its Subsidiary is qualified to do business as a
foreign corporation and is in good standing under the laws of each state or
other jurisdiction in which the nature of its business requires such
qualification, which states or jurisdictions are listed on the Disclosure
Schedule, except where the failure to be so qualified or in good standing which,
taken together with all other such failures, has not had, or would not
reasonably be expected to have, a Material Adverse Effect on the Company and its
Subsidiary, taken as a whole. As used in this Agreement, Material Adverse Effect
on or with respect to an entity (or group of entities, taken as a whole) means
such event, change or effect is materially adverse to the business, condition
(financial or otherwise), properties, assets, liabilities, or results of
operations of such entity (or, if with respect thereto, of such group of
entities taken as a whole) other than as a result of (i) general economic or
industry conditions, or (ii) the performance by the Company of its obligations
under this Agreement.
The Company has delivered or made available to Meadowbrook true,
complete and correct copies, with respect to each of the Company and its
Subsidiary, of its (i) Amended and Restated Articles of Incorporation and Bylaws
(or other applicable charter documents), as amended to the date hereof, (ii)
minutes of all of directors' and stockholders' meetings (or other applicable
meetings), complete and accurate as of the date hereof, (iii) stock certificate
books and all other records that collectively correctly set forth the record
ownership of all outstanding shares of its capital stock or other equity
interests and all rights to purchase capital stock or other equity interests,
and (iv) form of stock certificates, option agreements and rights to purchase
shares of its capital stock or other equity interests. Such Amended and Restated
Articles of Incorporation and Bylaws and other applicable charter documents are
in full force and effect.
4.2 Capital Structure.
(a) The authorized capital stock of the Company consists of ten million
(10,000,000) shares of common stock, no par value ("Company Common") and ten
million (10,000,000) shares of preferred stock, no par value ("Company
Preferred"). As of the date of this Agreement, there were issued and outstanding
four hundred twenty-three thousand eighty (423,080) shares of Company Common and
three million five hundred thousand (3,500,000) shares of Company Preferred. As
of the date of this Agreement, there were an aggregate of three million five
hundred thousand (3,500,000) shares of Company Common reserved for issuance upon
conversion of Company Preferred. Company Common and Company Preferred are
referred to herein collectively as "Company Stock." The rights, preferences and
privileges of Company Common and Company Preferred are as set forth in the
Company's Amended and Restated Articles of Incorporation.
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(b) As of the date of this Agreement, there were outstanding Company
Options to acquire nine hundred fifty-six thousand fifty-five (956,055) shares
of Company Common. As of the date of this Agreement, there were an aggregate of
nine hundred fifty-six thousand fifty-five (956,055) shares of Company Common
reserved for issuance upon the exercise of outstanding Company Options.
(c) Other than as described in paragraphs (a) and (b) above, there are
no other outstanding shares of capital stock or other equity securities of the
Company and no other options, warrants, calls, conversion rights, commitments or
agreements of any character to which the Company is a party or by which the
Company may be bound that do or may obligate the Company to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of the
Company's capital stock or securities convertible into or exchangeable for the
Company's capital stock or that do or may obligate the Company to grant, extend
or enter into any such option, warrant, call, conversion right, commitment or
agreement.
(d) Of the issued and outstanding shares of Company Stock, no shares are
subject to repurchase or redemption. All outstanding shares of Company Stock
are, and any shares of Company Stock issued upon exercise of Company Options
(subject to receipt of the exercise prices as provided therein) will be, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, the Company's Articles of Incorporation or Bylaws or any
agreement to which the Company is a party or by which the Company may be bound.
All outstanding securities of the Company have been issued in compliance with
applicable federal and state securities laws.
(e) Section 4.2 of the Disclosure Schedule ("Schedule 4.2") contains
complete and accurate lists of, and the number of shares owned of record by, the
holders of outstanding Company Common and Company Preferred and the number of
shares subject to Company Options and the holders of outstanding Company
Options, including in each case the addresses of record of such holders.
Schedule 4.2 is complete and accurate on the date hereof and, if required, an
updated Schedule 4.2 to be attached hereto will be complete and accurate as of
the Closing Date.
(f) Schedule 4.2 contains a complete and accurate list of each stock
option plan, stock appreciation rights or other equity-related stock incentive
plan of the Company and its Subsidiary.
(g) Except for any restrictions imposed by applicable federal and state
securities laws, there is no right of first refusal, co-sale right, right of
participation, right of first offer, option or other restriction on transfer
applicable to any shares of Company Stock.
(h) Except as contemplated by this Agreement and the Stockholders Voting
Agreement the Company is not a party or subject to any agreement or
understanding, and there is no voting trust, proxy, or other agreement or
understanding between or among any persons that affects or relates to the voting
or giving of written consent with respect to any outstanding security of the
Company, the election of directors, the appointment of officers or other actions
of the Company's Board or the management of the Company.
4.3 Subsidiaries; Equity Investments. Section 4.3 of the Disclosure
Schedule ("Schedule 4.3") contains a complete and accurate list of all of the
Company's Subsidiaries. Except as set forth in Schedule 4.3, the Company does
not have and has never had any other Subsidiaries or companies
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controlled by the Company and does not own and has never owned any equity
interest in, or controlled, directly or indirectly, any other corporation,
partnership, joint venture, trust, firm or other entity. Except as set forth in
Schedule 4.3, the Company owns all of the outstanding capital stock of the
Subsidiary listed on Schedule 4.3, free and clear of any claims, liens or
encumbrances except where such encumbrances would have no Material Adverse
Effect on the Company and its Subsidiary, taken as a whole, and no options,
warrants or other rights to acquire shares of capital stock of any Subsidiary
are outstanding.
4.4 Authority. The Company has all requisite corporate power and
authority to enter into this Agreement and, subject only to the requisite
approval of this Agreement by the Company's stockholders, to perform its
obligations hereunder and consummate the transactions contemplated hereby. The
vote required of the Company's stockholders to duly approve the Merger and this
Agreement is that number of shares as would constitute: (i) a majority of the
outstanding shares of Company Common, voting as a single class and (ii)
sixty-six and two-thirds percent (66-2/3%) of the outstanding owners of the
Company Preferred, voting as a single class. The execution and delivery of this
Agreement, the performance by the Company of its obligations hereunder and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of the Company,
including approval of the Company Board, subject only to the requisite approval
of this Agreement by the Company's stockholders. This Agreement is a valid and
binding obligation of the Company.
4.5 No Conflict with Other Instruments. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby (a) will
not result in any violation of, conflict with, constitute a breach, violation or
default (with or without notice or lapse of time, or both) under, give rise to a
right of termination, cancellation, forfeiture or acceleration of any obligation
or loss of any benefit under, or result in the creation or encumbrance on any of
the properties or assets of the Company or its Subsidiary pursuant to (i) any
provision of the Company's Amended and Restated Articles of Incorporation or
Bylaws or the charter or other organizational documents of its Subsidiary, as
the case may be, or (ii) any agreement, contract, understanding, note, mortgage,
indenture, lease, franchise, license, permit or other instrument to which the
Company or its Subsidiary is a party or by which the properties or assets of the
Company or its Subsidiary is bound, or (b) to the best knowledge of the Company
after reasonable inquiry, conflict with or result in any breach or violation of
any statute, judgment, decree, order, rule or governmental regulation applicable
to the Company or its Subsidiary their respective properties or assets, except,
in the case of clauses (a)(ii) and (b) for any of the foregoing that,
individually or in the aggregate, has not had or would be reasonably expected to
have a Material Adverse Effect on the Company and its Subsidiary, taken as a
whole, or that could not result in the creation of any material lien, charge or
encumbrance upon any assets of the Company or its Subsidiary or that could not
reasonably be expected to prevent, materially delay or materially burden the
transactions contemplated by this Agreement.
4.6 Governmental Consents. No consent, approval, order or authorization
of, or registration, declaration of, or qualification or filing with, any court,
administrative agency, commission, regulatory authority or other governmental or
administrative body or instrumentality, whether domestic or foreign, is required
by or with respect to the Company or its Subsidiary in connection with the
execution, delivery and performance of this Agreement by the Company or the
consummation by the Company of the transactions contemplated hereby, except for
(a) the filing of the Certificate of Merger with the California Secretary of
State and the Delaware Secretary of
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State (b) such consents, approvals, orders, authorizations, registrations,
declarations, qualifications or filings as may be required under federal or
state securities laws in connection with the transactions contemplated hereby.
4.7 Financial Statements. The Company has previously furnished to
Meadowbrook a complete and accurate copy of the unaudited consolidated financial
statements of the Company for the fiscal year ended December 31, 1997 (the
"Financial Statements") which comply as to form in all material respects with
applicable accounting requirements. The Financial Statements are complete and
correct in all material respects and have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods indicated and are consistent with each other. The
Financial Statements accurately set out and describe the financial condition and
operating results of the Company as of the dates, and for the periods, indicated
therein, subject, in the case of unaudited financial statements, to normal
year-end audit adjustments. At the date of the Financial Statements and as of
the Closing Date, except as set forth in the Disclosure Schedule, the Company
had no liabilities or obligations, secured or unsecured (whether accrued,
absolute or contingent and whether or not required to be reflected in the
Financial Statements under GAAP) not reflected in the Financial Statements or
the accompanying notes thereto except for liabilities and obligations that have
arisen in the ordinary course of business prior to the date of the Financial
Statements and which, under GAAP, would not have been required to be reflected
in the Financial Statements and except for liabilities incurred in the ordinary
course of business since the date of the Financial Statements which are usual
and normal in amount. The Company maintains a standard system of accounting
established and administered in accordance with GAAP. Attached as Schedule 4.7
to the Disclosure Schedule is the Company's budget for the twelve (12) months
ending December 31, 1998 that sets forth its budgeted revenues and expenses.
4.8 Absence of Changes. Since the date of the Financial Statements,
except as otherwise contemplated by this Agreement or set forth in the
Disclosure Schedule, each of the Company and its Subsidiary has conducted its
respective business only in the ordinary and usual course and, without limiting
the generality of the foregoing:
(a) There have been no changes in the condition (financial or
otherwise), business, net worth, assets, properties, employees, operations,
obligations or liabilities of the Company and its Subsidiary, taken as a whole,
which, in the aggregate, have had or may be reasonably expected to have a
Material Adverse Effect on the Company and its Subsidiary, taken as a whole;
(b) The Company has not nor has its Subsidiary issued, or authorized for
issuance, or entered into any commitment to issue, any equity security, bond,
note or other security;
(c) The Company has not nor has its Subsidiary incurred additional debt
for borrowed money, or incurred any obligation or liability except in the
ordinary course of business consistent with past practice and in any event not
in excess of twenty-five thousand dollars ($25,000) for any single occurrence;
(d) The Company has not nor has its Subsidiary paid any obligation or
liability, or discharged, settled or satisfied any claim, lien or encumbrance,
except for current liabilities in the ordinary course of business consistent
with past practice and in any event not in excess of twenty-five thousand
dollars ($25,000) for any single occurrence;
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(e) The Company has not nor has its Subsidiary declared or made any
dividend, payment or other distribution on or with respect to any share of
capital stock, other than, in the case of its Subsidiary, to the Company;
(f) The Company has not nor has its Subsidiary purchased, redeemed or
otherwise acquired or committed itself to acquire, directly or indirectly, any
share or shares of its capital stock;
(g) The Company has not nor has its Subsidiary mortgaged, pledged, or
otherwise encumbered any of its assets or properties, except for liens for
current taxes which are not yet delinquent and purchase-money liens arising out
of the purchase or sale of services or products made in the ordinary course of
business consistent with past practice and in any event not in excess of
twenty-five thousand dollars ($25,000) for any single item or seventy-five
thousand dollars ($75,000) in the aggregate;
(h) The Company has not nor has its Subsidiary disposed of, or agreed to
dispose of, by sale, lease, license or otherwise, any asset or property,
tangible or intangible, except in the ordinary course of business consistent
with past practice, and in each case for a consideration believed to be at least
equal to the fair value of such asset or property and in any event not in excess
of twentyfive-thousand dollars ($25,000) for any single item or seventy-five
thousand dollars ($75,000) in the aggregate;
(i) The Company has not nor has its Subsidiary purchased or agreed to
purchase or otherwise acquire any securities of any corporation, partnership,
joint venture, firm or other entity;
(j) The Company has not nor has its Subsidiary made any expenditure or
commitment for the purchase, acquisition, construction or improvement of a
capital asset, except in the ordinary course of business consistent with past
practice and in any event not in excess of twenty-five thousand dollars
($25,000) for any single item or seventy-five thousand dollars ($75,000) in the
aggregate;
(k) The Company has not nor has its Subsidiary sold, assigned,
transferred or conveyed, or committed itself to sell, assign, transfer or
convey, any Proprietary Rights (as defined in Section ) except pursuant to
licenses in the ordinary course of business consistent with past practice;
(l) The Company has not nor has its Subsidiary adopted or amended any
bonus, incentive, profit-sharing, stock option, stock purchase, pension,
retirement, deferred-compensation, severance, life insurance, medical or other
benefit plan, agreement, trust, fund or arrangement for the benefit of employees
of any kind whatsoever, nor entered into or amended any agreement relating to
employment, services as an independent contractor or consultant, or severance or
termination pay, nor agreed to do any of the foregoing;
(m) The Company has not nor has its Subsidiary effected or agreed to
effect any change in its directors, officers or key employees; and
(n) The Company has not effected or committed itself to effect any
amendment or modification in its Amended and Restated Articles of Incorporation
or Bylaws.
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4.9 Properties.
(a) The Company does not nor does any Subsidiary own any real property,
nor has it ever owned any real property. The Financial Statements reflect all of
the material real and personal property used by the Company and its Subsidiary
in their respective businesses or otherwise held by the Company and its
Subsidiary, except for (i) property acquired or disposed of in the ordinary
course of business consistent with past practice of the Company and its
Subsidiary, taken as a whole, since the date of the Financial Statements, and
(ii) personal property not required under GAAP to be reflected thereon. The
Company or its Subsidiary has good and marketable title to all assets and
properties listed in the Financial Statements as owned by the Company, free and
clear of any imperfections of title, lien, claim, encumbrance, restriction,
charge or equity of any nature whatsoever, except for liens for current taxes
not yet delinquent or which have no Material Adverse Effect on the Company.
(b) Section of the Disclosure Schedule contains a complete and accurate
list of all material real property leased by the Company and its Subsidiary (the
"Properties"), the name of the lessor and the date of the lease. The Company
does not nor does its Subsidiary have any options to purchase any such
Properties or any other real property. To the Company's knowledge, the
Properties are held under valid, existing and enforceable leases. To the
Company's knowledge the Properties and the operations of the Company or its
Subsidiary, as the case may be, thereon do not violate any applicable material
building code, zoning requirement or classification, or pollution control
ordinance or statute relating to the Properties or to such operations.
4.10 Environmental Matters.
(a) To the Company's knowledge, the Company and its Subsidiary are, and
at all times have been, in material compliance with all applicable local, state
and federal statutes, orders, rules, ordinances, regulations, codes and policies
and all judicial or administrative interpretations thereof (collectively,
"Environmental Laws") relating to pollution or protection of the environment,
including, without limitation, laws relating to exposures, emissions,
discharges, releases or threatened releases of Hazardous Substances (as defined
below) into or on land, ambient air, surface water, groundwater, personal
property or structures (including the protection, cleanup, removal, remediation
or damage thereof), or otherwise related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, discharge or
handling of Hazardous Substances. The Company has not nor has its Subsidiary
received any notice of any investigation, claim or proceeding against the
Company or such Subsidiary relating to Hazardous Substances or any action
pursuant to or violation or alleged violation under any Environmental Law. As
used in this Agreement, "Hazardous Substances" means any pollutant, contaminant,
material, substance, waste, chemical or compound regulated, restricted or
prohibited by any law, regulation or ordinance and designated by any
governmental agency to be hazardous, toxic, radioactive, biohazardous or
otherwise a danger to health or the environment.
(b) To the Company's knowledge, the Company has not nor has its
Subsidiary disposed of any Hazardous Substances on or about such properties.
(c) The Company and its Subsidiary have all material permits, licenses
and approvals required by Environmental Laws for the use and occupancy of, and
for all operations and activities conducted on, the Properties, and the Company
and its Subsidiary are in full compliance with all
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such permits, licenses and approvals, and all such permits, licenses and
approvals were duly issued, are in full force and effect except where the
failure to do so has not resulted in and would not reasonably be expected to
result in a Material Adverse Effect, and, to the extent necessary, will be
transferred to Meadowbrook at the Closing, and will remain in full force and
effect as so transferred to Meadowbrook.
4.11 Taxes.
(a) For purposes of this Agreement, the following terms have the
following meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable")
means any and all taxes, including without limitation (i) any income, profits,
alternative or add-on minimum tax, gross receipts, sales, use, value-added, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, net worth, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or assessment or charge of any kind whatsoever, together with any interest
or any penalty, addition to tax or additional amount imposed by any governmental
entity responsible for the imposition of any such tax (domestic or foreign) (a
"Taxing Authority"), (ii) any liability for the payment of any amounts of the
type described in clause (i) above as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period or as
the result of being a transferee or successor thereof, and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) above
as a result of any express or implied obligation to indemnify any other person.
(b) All Tax returns, statements, reports and forms (including estimated
Tax returns and reports and information returns and reports) required to be
filed with any Taxing Authority with respect to any Taxable period ending on or
before the Effective Time, by or on behalf of the Company or its Subsidiary
(collectively, the "Company Returns"), have been filed when due (including any
extensions of such due date), and all amounts shown to be due thereon on or
before the Effective Time have been paid on or before such date. The Financial
Statements fully accrue all actual and contingent liabilities for Taxes with
respect to all periods through the dates thereof in accordance with GAAP. The
Financial Statements (i) fully accrue consistent with past practices and in
accordance with GAAP all actual and contingent liabilities for Taxes with
respect to all periods through the date of the Financial Statements and (ii)
properly accrues consistent with past practices and in accordance with GAAP all
liabilities for Taxes payable after the Balance Sheet Date with respect to all
transactions and events occurring on or prior to such date. All information set
forth in the notes to the Financial Statements relating to Tax matters is
consistent with GAAP.
(c) To the Company's knowledge, no Tax liability has been incurred since
the date of the Financial Statements other than in the ordinary course of
business and adequate provision has been made for all Taxes since that date in
accordance with GAAP on at least a quarterly or, with respect to employment
taxes, monthly basis, except that which has not had or would be reasonably
expected to have a Material Adverse Effect on the Company and its Subsidiary,
taken as a whole. The Company and its Subsidiary have withheld and paid to the
applicable financial institution or Taxing Authority all amounts required to be
withheld, except that which has not had or would be reasonably expected to have
a Material Adverse Effect on the Company and its Subsidiary, taken as a whole.
All Company Returns filed with respect to federal income tax returns for Taxable
years of the Company and its Subsidiary in the case of the United States, have
been examined and closed and copies of audit reports previously have been
provided to Meadowbrook or are Company Returns with respect to which the
applicable period for assessment under applicable law, after giving effect
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to extensions or waivers, has expired. The Company has not nor has its
Subsidiary been granted any extension or waiver of the limitation period
applicable to any Company Return.
(d) To the Company's knowledge, there is no claim, audit, action, suit,
proceeding or investigation now pending or threatened against or with respect to
the Company or its Subsidiary in respect of any Tax or assessment. There are no
liabilities for Taxes with respect to any notice of deficiency or similar
document of any Tax Authority received by the Company or its Subsidiary which
have not been satisfied in full (including liabilities for interest, additions
to tax and penalties thereon and related expenses). To the Company's knowledge,
none of the Company, its Subsidiary nor any person on behalf of the Company or
its Subsidiary has entered into any agreement or consent pursuant to Section
341(f) of the Code. To the Company's knowledge, there are no liens for Taxes
upon the assets of the Company or its Subsidiary except liens for current Taxes
not yet due. Except as may be required as a result of the Merger, the Company
has not nor has its Subsidiary been required to include any adjustment in
Taxable income for any Tax period (or portion thereof) pursuant to Section 481
or 263A of the Code or any comparable provision under state or foreign Tax laws
as a result of transactions, events or accounting methods employed prior to the
Effective Time.
4.12 Employees. The Company has provided Meadowbrook with a complete and
accurate list setting forth all employees, scientific advisors and consultants
of the Company and each Subsidiary as of the date hereof, together with their
titles or positions, dates of hire, regular work location and current
compensation. The Company does not have nor does its Subsidiary have any
employment contract with any officer or employee or any other consultant or
person which is not terminable by it at will without liability, except as the
right of the Company or such Subsidiary to terminate its employees at will may
be limited by applicable federal, state or foreign law. Except as set forth in
the Disclosure Schedule, the Company does not have nor does its Subsidiary have
any deferred compensation, pension, health, profit sharing, bonus, stock
purchase, stock option, hospitalization, insurance, severance, workers'
compensation, supplemental unemployment benefits, vacation benefits, disability
benefits, or any other employee pension benefit (as defined in the Employee
Retirement Income Security Act of 1974 ("ERISA") or otherwise) or welfare
benefit plan or obligation covering any of its officers or employees ("Employee
Plans") or any informal understanding with respect to the foregoing. Each
Employee Plan complies in all material respects with applicable laws, including,
without limitation, ERISA and the Code. Each Employee Plan has been maintained
in material compliance with its terms, and all applicable ERISA and other
requirements as to the filing of reports, documents and notices with
governmental agencies and the furnishing of documents to participants or
beneficiaries have been satisfied. The Company does not nor does its Subsidiary
maintain or has ever maintained or contributed to any Employee Plan subject to
Title IV of ERISA (relating to defined benefit plans).
To the Company's knowledge, there are no controversies or labor disputes
or union organization activities pending or threatened between the Company or
its Subsidiary and any of their employees. To the Company's knowledge, none of
the employees of the Company or its Subsidiary belongs to any union or
collective bargaining unit. The Company and its Subsidiary have complied
materially with all applicable foreign, state and federal equal employment
opportunity and other laws and regulations related to employment or working
conditions, except that which has not had a would be reasonably expected to have
a Material Adverse Effect on the Company and its Subsidiary, taken as a whole.
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4.13 Compliance with Law. All material licenses, franchises, permits,
clearances, consents, certificates and other evidences of authority of the
Company and its Subsidiary, which are necessary to the conduct of the Company's
and its Subsidiary, respective businesses ("Permits") are in full force and
effect and the Company is not nor is its Subsidiary in violation of any Permit
in any material respect. Except for exceptions have not had or would be
reasonably expected to have, a Material Adverse Effect on the Company and its
Subsidiary, taken as a whole, the businesses of the Company and its Subsidiary
have been conducted in accordance with all applicable laws, regulations, orders
and other requirements of governmental authorities.
4.14 Litigation. There is no claim, dispute, action, proceeding, notice,
order, suit, appeal or investigation, at law or in equity, pending or to the
Company's knowledge threatened, against the Company or its Subsidiary or any of
their respective directors, officers, employees or agents, or involving any of
their respective assets or properties, before any court, agency, authority,
arbitration panel or other tribunal, except that which has not had or would not
reasonably be expected to have a Material Adverse Effect on the Company and its
Subsidiary, taken as a whole. The Company is not nor is its Subsidiary subject
to any order, writ, injunction or its decree of any court, agency, authority,
arbitration panel or other tribunal, nor is the Company or its Subsidiary in
default with respect to its notice, order, writ, injunction or decree.
4.15 Contracts. Section 4.15 of the Disclosure Schedule contains a
complete and accurate list of each material executory contract and agreement in
the following categories to which the Company or its Subsidiary is a party, or
by which the Company or its Subsidiary is bound in any respect: (a) agreements
for the purchase, sale, lease or other disposition of equipment, goods,
materials, supplies, or capital assets, or for the performance of services which
are not terminable without penalty on 30 days' notice, in any case involving
more than fifty thousand dollars ($50,000); (b) contracts or agreements for the
joint performance of work or services, and all other joint venture,
collaboration, research, or other agreements, and grant requests or proposals
for research and development contracts in excess of one hundred thousand dollars
($100,000) each; (c) management or employment contracts, consulting or
scientific advisory contracts, collective bargaining contracts, termination and
severance agreements; (d) notes, mortgages, deeds of trust, loan agreements,
security agreement, guarantees, debentures, indentures, credit agreements and
other evidences of indebtedness; (e) each Employee Plan (including, without
limitation, any contracts or agreements with trustees, insurance companies or
others relating to any such employee benefit plan or arrangement); (f) warrants,
repurchase or other contracts or agreements relating to the issuance of capital
stock or other equity interests of the Company or its Subsidiary; (g) contracts
or agreements with any director, officer, employee, consultant or stockholder;
(h) patents, licenses, sublicenses, royalty agreements and other contracts or
agreements to which the Company or its Subsidiary is a party, or otherwise
subject, relating to Company's Proprietary Rights; (i) personal property or
capital equipment leases and other rental, use or service arrangements of the
Company and its Subsidiary involving payment obligations in excess of fifty
thousand dollars ($50,000) and which cannot be terminated without penalty on 30
days' notice; (j) any agreement pursuant to which the Company or its Subsidiary
has granted or may grant in the future, to any party, a source code license or
option or other right to use or acquire source code; and (k) other material
contracts.
The Company has not nor has its Subsidiary nor, to the knowledge of the
Company, has any of its employees entered into any contract or agreement
containing covenants limiting the right of the Company or its Subsidiary to
compete in any business or with any person. As used in this
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Agreement, the terms "contract" and "agreement" include every contract,
agreement, commitment, understanding and promise, whether written or oral.
4.16 No Default.
(a) Each of the contracts, agreements or other instruments referred to
in Section is a legal, binding and enforceable obligation by or against the
Company or its Subsidiary, as the case may be, subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
federal or state laws affecting the rights of creditors and the effect or
availability of rules of law governing specific performance, injunctive relief
or other equitable remedies. To the Company's knowledge, no party with whom the
Company or its Subsidiary has an agreement or contract is in default thereunder
or has breached any term or provision thereof which has had or would be
reasonably expected to have a Material Adverse Effect on the business of the
Company and its Subsidiary, taken as a whole.
(b) The Company and its Subsidiary, in all material respects, have
performed, or are now performing, the obligations of, and the Company is not nor
is its Subsidiary in material default (or would by the lapse of time and/or the
giving of notice be in material default) in respect of, any contract, agreement
or commitment binding upon it or its assets or properties and material to the
conduct of its business. No third party has notified the Company or its
Subsidiary of any claim, dispute or controversy with respect to any of the
executory contracts of the Company or such Subsidiary, as the case may be, nor
has the Company or its Subsidiary received notice or warning of alleged
nonperformance, delay in delivery or other noncompliance by the Company or its
Subsidiary with respect to its obligations under any of those contracts.
4.17 Major Customers. Schedule 4.17 of the Disclosure Schedule sets
forth a complete and correct list of the twenty five (25) largest customers of
the Company and its Subsidiary in terms of sales revenue during the twelve (12)
month period ended December 31, 1997. Except as set forth and described in
Schedule 4.17, no customer identified in the Disclosure Schedule has given the
Company or its Subsidiary any notice terminating, suspending or reducing in any
material respect, or specifying an intention to terminate, suspend or reduce in
any material respect in the future, or otherwise reflecting a material adverse
change in, the business relationship between such customer and the Company and
its Subsidiary and, to the knowledge of the Company and the Securityholders,
there has not been any material adverse change in the business relationship of
the Company or its Subsidiary with any such customer since December 31, 1997.
4.18 Proprietary Rights.
(a) Section 4.18 of the Disclosure Schedule sets forth a complete and
accurate list (the "Intellectual Property Disclosure Schedule") of all patents
and applications for patents, trademarks, trade names, service marks, and
copyrights, and applications therefor, owned by the Company and its Subsidiary.
Such list specifies, as applicable: (i) the title of the patent, trademark,
trade name, service mark, copyright or application therefor; (ii) the
jurisdiction by or in which such patent, trademark, trade name, service mark or
copyright has been issued or registered or in which an application has been
filed, including the registration or application numbers; and (iii) material
licenses, sublicenses and similar agreements to which the Company or its
Subsidiary is a party or pursuant to which any other party is authorized to use,
exercise or receive any benefit from any Proprietary Rights (as defined below)
of the Company or its Subsidiary.
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(b) To the Company's knowledge, the Company and its Subsidiary owns or
possesses or has the right to obtain valid licenses or other rights to use all
patents, patent applications, trademarks, trademark applications, trade secrets,
service marks, trade names, copyrights, inventions, drawings, designs,
proprietary know-how or information, or other rights with respect thereto
(collectively referred to as "Proprietary Rights"), used or currently proposed
to be used in the business of the Company or such its Subsidiary, as the case
may be, and the same are sufficient to conduct the Company's or its Subsidiary's
business as it has been and is now being conducted. The Company or its
Subsidiary, as the case may be, has the rights to use, sell, license,
sublicense, assign, transfer, convey or dispose of such Proprietary Rights and
the products, processes and materials covered thereby.
(c) To the knowledge of the Company, the operations of the Company and
its Subsidiary do not conflict with or infringe, and no one has asserted to the
Company that such operations conflict with or infringe, any Proprietary Rights,
owned, possessed or used by any third party. There are no claims, disputes,
actions, proceedings, suits or appeals pending against the Company or Subsidiary
with respect to any Proprietary Rights, and to the Company's knowledge, none has
been threatened against the Company or its Subsidiary. The Proprietary Rights of
the Company are free of any unresolved ownership disputes with respect to any
third party and to the best knowledge of the Company there is no unauthorized
use, infringement or misappropriation of any of such Proprietary Rights by any
third party, including any employee or former employee of the Company or its
Subsidiary nor is there any breach of any license, sublicense or other agreement
authorizing another party to use such Proprietary Rights of the Company. The
Company has not nor has its Subsidiary has entered into any agreement granting
any third party the right to bring infringement actions with respect to, or
otherwise to enforce rights with respect to, any such Proprietary Right of the
Company which has had or would reasonably be expected to have a Material Adverse
Effect on its Company and its Subsidiary, taken as a whole.
(d) The Intellectual Property Disclosure Schedule contains a complete
and accurate list of any proceedings before any patent or trademark authority to
which the Company or its Subsidiary is a party, a description of the subject
matter of each proceeding, and the current status of each proceeding, including,
without limitation, interferences, priority contests, opposition, and protests.
Such list includes any pending applications for reissue or reexamination of a
patent. The Company or its Subsidiary has the exclusive right to file, prosecute
and maintain any such applications for patents, copyrights or trademarks and the
patents and registrations that issue therefrom.
(e) All patents and registered trademarks, service marks, and other
Company product or service identifiers and registered copyrights held by the
Company and its Subsidiary are valid and enforceable.
(f) The Company and its Subsidiary have taken all other measures it
deems reasonable to maintain the confidentiality of the Proprietary Rights of
the Company used or proposed to be used in the conduct of its business the value
of which to the Company and its Subsidiary is contingent upon maintenance of the
confidentiality thereof.
(g) The Company and its Subsidiary have secured valid written
assignments from all consultants and employees who contributed to the creation
or development of the Company's or its Subsidiary's Proprietary Rights of the
rights to such contributions that the Company or its Subsidiary does not already
own by operation of law.
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(h) Except as set forth in the Intellectual Property Disclosure
Schedule, each employee and officer of and consultant to the Company and its
Subsidiary has executed a Proprietary Information and Inventions Agreement or
other nondisclosure agreement and either a Non-Competition Agreement or a Key
Employee Agreement material in the forms provided to Meadowbrook. To the
Company's, knowledge, no employee or officer of or consultant to the Company is
in violation of any material term of any employment contract, proprietary
information and inventions agreement, non-competition agreement, or any other
contract or agreement relating to the relationship of any such employee or
consultant with the Company or any previous employer.
4.19 Insurance. The Company has provided Meadowbrook with copies of all
insurance policies to which the Company or its Subsidiary is a party or is a
beneficiary or named insured. All the insurable properties of the Company and
its Subsidiary are insured pursuant to insurance policies in full force and
effect. There have been no claims in excess of twenty-five thousand dollars
($25,000) asserted under any of the insurance policies of the Company or its
Subsidiary in respect of all general liability, professional liability, errors
and omissions, and worker's compensation and medical claims since the Company's
incorporation.
4.20 Brokers or Finders. Neither the Company nor any of its officers,
directors, employees or stockholders has employed any broker or finder or
incurred any liability for any brokerage, finder's or similar fees or
commissions in connection with this Agreement or the transactions contemplated
hereby.
4.21 Related Parties. No officer or director of the Company, or any
affiliate of the Company or any such person, has, either directly or indirectly,
(a) a material interest in any corporation, partnership, firm or other person or
entity which furnishes or sells services or products which are similar to those
furnished or sold by the Company or its Subsidiary, or (b) a beneficial interest
in any material contract or agreement to which the Company or its Subsidiary is
a party or by which the Company or a Subsidiary may be bound.
4.22 Certain Advances. There are no receivables of the Company or its
Subsidiary owing from directors, officers, employees, consultants or
stockholders of the Company or its Subsidiary, as the case may be, or owing by
any affiliate of any director or officer of the Company or its Subsidiary, other
than advances in the ordinary course of business consistent with past practice
to officers and employees for reimbursable business expenses which are not in
excess of ten thousand dollars ($10,000) for any one individual.
4.23 No Misleading Statements. No representation or warranty made
herein, in the Disclosure Schedule or in the Appendices, Schedules and Exhibits
attached hereto or any written statement or certificate furnished or to be
furnished to Meadowbrook pursuant hereto or in connection with the transactions
contemplated hereby (when read together) contains any untrue statement of a
material fact or omits a material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which they
are made, not misleading. The Company has disclosed to Meadowbrook all material
information of which it is aware relating specifically to the operations and
business of the Company as of the date of this Agreement or relating to the
transactions contemplated by this Agreement.
4.24 Company Proxy Statement. The information supplied by the Company
for inclusion in the information statement to be sent to the stockholders of the
Company in connection with the
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meeting of the Company stockholders to consider the Merger (the "Company
Stockholders Meeting") or in connection with any written consent of stockholders
of the Company (such proxy or information statement as amended or supplemented
is referred to herein as the "Company Proxy Statement") shall not, on the date
the Company Proxy Statement is first mailed to the Company stockholders, at the
time of the Company Stockholders Meeting, or written consent of the Company
stockholders and at the Effective Time, contain any statement which is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they are made, not false or misleading. If at any time
prior to the Effective Time any event or information should be discovered by the
Company which should be set forth in an amendment to the Company Proxy
Statement, the Company shall promptly inform Meadowbrook and Interset and shall
communicate such information to the Company stockholders in an appropriate
manner. Notwithstanding the foregoing, the Company makes no representation,
warranty or covenant with respect to any information supplied by Meadowbrook or
Interset which is contained in any of the foregoing documents.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MEADOWBROOK AND INTERSET
Meadowbrook and Interset represent and warrant to the Company and the
Securityholders as follows:
5.1 Organization. Each of Meadowbrook and Interset is a corporation duly
incorporated, validly existing and in good standing under the laws of Delaware
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted. Each of
Meadowbrook and Interset is qualified to do business as a foreign corporation
and is in good standing under the laws of each state or other jurisdiction in
which the nature of its business requires such qualification, except where the
failure to be so qualified or in good standing would not have a Material Adverse
Effect on Meadowbrook and its subsidiaries, taken as a whole. The copies of
Meadowbrook's Restated Certificate of Incorporation and Interset's Certificate
of Incorporation and ByLaws that have been delivered to the Company are complete
and correct and in full force and effect. All of the issued and outstanding
capital stock of Interset is owned by Meadowbrook.
5.2 Capital Structure.
(a) The authorized capital stock of Meadowbrook consists of fifteen
million (15,000,000) shares of Meadowbrook Common, $.01 par value, five million
(5,000,000) shares of Class B Common Stock, par value $.01 per share (the
"Meadowbrook Class B Common") and one million (1,000,000) shares of preferred
stock, $.01 par value ("the Meadowbrook Preferred"). As of the date of this
Agreement, there were issued and outstanding one million one hundred fifty-seven
thousand two hundred forty-four (1,157,244) shares of Meadowbrook Common, seven
hundred seventy three thousand (773,000) shares of Meadowbrook Class B Common
and no shares of Meadowbrook Preferred. As of the date of this Agreement, there
were no shares of Meadowbrook Common reserved for issuance upon conversion of
Meadowbrook Preferred. The rights, preferences and
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privileges of the Meadowbrook Common, the Meadowbrook Class B Common and the
Meadowbrook Preferred are as set forth in the Meadowbrook's Restated Certificate
of Incorporation.
(b) As of the date of this Agreement, there were outstanding options to
acquire 63,334 shares of Meadowbrook Common (the "Meadowbrook Options"). As of
the date of this Agreement, there were an aggregate of 41,667 shares of
Meadowbrook Common reserved for issuance upon the exercise of outstanding
Meadowbrook Options.
(c) Other than as described paragraphs (a) and (b) above, there are no
other outstanding shares of capital stock or other equity securities of
Meadowbrook and no other options, warrants, calls, conversion rights,
commitments or agreements of any character to which Meadowbrook is a party or by
which Meadowbrook may be bound that do or may obligate Meadowbrook to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
Meadowbrook's capital stock or securities convertible into or exchangeable for
Meadowbrook's capital stock or that do or may obligate Meadowbrook to grant,
extend or enter into any such option, warrant, call, conversion right,
commitment or agreement.
(d) Of the issued and outstanding shares of Meadowbrook Common, no
shares are subject to repurchase or redemption. All outstanding shares of
Meadowbrook Common are, and any shares of Meadowbrook Common issued upon
exercise of any options (subject to receipt of the exercise prices as provided
therein) will be, validly issued, fully paid and nonassessable and not subject
to preemptive rights created by statute, Meadowbrook's Restated Certificate of
Incorporation or Bylaws or any agreement to which Meadowbrook is a party or by
which Meadowbrook may be bound. All outstanding securities of Meadowbrook have
been issued in compliance with applicable federal and state securities laws.
(e) Except as contemplated by this Agreement and the Meadowbrook Voting
Agreement, Meadowbrook is not a party or subject to any agreement or
understanding, and there is no voting trust, proxy, or other agreement or
understanding between or among any persons that affects or relates to the voting
or giving of written consent with respect to any outstanding security of
Meadowbrook, the election of directors, the appointment of officers or other
actions of Meadowbrook's Board or the management of Meadowbrook.
5.3 Authority. Each of Meadowbrook and Interset has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder and consummate the transactions contemplated hereby. The
execution and delivery of this Agreement, the performance by each of Meadowbrook
and Interset of its obligations hereunder and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Meadowbrook and Interset, including
approval of the Board of Directors of Meadowbrook (the "Meadowbrook Board") and
Interset and the approval of the stockholders of Meadowbrook and Interset (by
virtue of the written consent of the majority stockholder of Meadowbrook). This
Agreement is a valid and binding obligation of each of Meadowbrook and Interset.
5.4 No Conflict with Other Instruments. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby (a) will
not result in any violation of, conflict with, constitute a breach, violation or
default (with or without notice or lapse of time, or both)
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under, give rise to a right of termination, cancellation, forfeiture or
acceleration of any obligation or loss of any benefit under, or result in the
creation or encumbrance on any of the properties or assets of Meadowbrook or any
of its subsidiaries, including Interset, pursuant to (i) any provision of
Meadowbrook's Restated Certificate of Incorporation or Interset's Certificate of
Incorporation or Bylaws, or (ii) any agreement, contract, understanding, note,
mortgage, indenture, lease, franchise, license, permit or other instrument to
which Meadowbrook or any of its subsidiaries is a party or by which the
properties or assets of Meadowbrook or any of its subsidiaries is bound, or (b)
to the knowledge of Meadowbrook after reasonable inquiry, conflict with or
result in any breach or violation of any statute, judgment, decree, order, rule
or governmental regulation applicable to Meadowbrook or any of its subsidiaries
or their respective properties or assets, except, in the case of clauses (a)(ii)
and (b) for any of the foregoing that would not, individually or in the
aggregate, have a Material Adverse Effect on Meadowbrook and its subsidiaries,
taken as a whole, or that could not result in the creation of any material lien,
charge or encumbrance upon any assets of Meadowbrook or any of its subsidiaries
or that could not prevent, materially delay or materially burden the
transactions contemplated by this Agreement.
5.5 Governmental Consents. No consent, approval, order or authorization
of, or registration, declaration or filing with, any governmental authority is
required by or with respect to Meadowbrook or Interset in connection with the
execution and delivery of this Agreement by Meadowbrook and Interset or the
consummation by Meadowbrook and Interset of the transactions contemplated
hereby, except for (a) the filing of the Certificate of Merger with the Delaware
Secretary of State and the California Secretary of State and (b) such consents,
approvals, orders, authorizations, registrations, declarations, qualifications
or filings as may be required under federal or state securities laws in
connection with the transactions set forth herein or which the failure to obtain
would not have a material adverse effect on the consummation by Meadowbrook of
the transactions contemplated hereby.
5.6 SEC Documents. Meadowbrook has furnished to the Company complete and
accurate copies of Meadowbrook's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997, Meadowbrook's Quarterly Report on Form 10-Q for the
quarters ended September 30, 1997 and December 31, 1997 and Meadowbrook's Proxy
Statement for its Annual Meeting of Stockholders held on November 20, 1997
("Meadowbrook's SEC Filings"), each as filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As of their respective filing dates, Meadowbrook's SEC Filings complied
in all material respects with the requirements of the Exchange Act and, as of
their respective filing dates, Meadowbrook's SEC Filings did not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading. All other documents subsequently filed by
Meadowbrook pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Agreement and before the termination of this Agreement,
shall be incorporated by reference into the term "Meadowbrook's SEC Filings."
5.7 Shares of Meadowbrook Common. The shares of Meadowbrook Common to be
issued pursuant to the Merger will, when issued and delivered to the
Securityholders and the shares of Meadowbrook Common to be issued pursuant to
the Converted Company Options will, when issued and delivered to the holders
thereof on payment of the consideration provided for therein, be duly
authorized, validly issued, fully paid and nonassessable.
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5.8 No Material Adverse Change. Since December 31, 1997, except as
disclosed in Meadowbrook's SEC Filings, there has not occurred: (a) any change
that resulted or would reasonably be expected to result in a material adverse
effect on Meadowbrook and its subsidiaries, taken as a whole; (b) any amendment
or change in Meadowbrook's Restated Certificate of Incorporation or Bylaws; or
(c) any damage to, destruction or loss of any assets of Meadowbrook (whether or
not covered by insurance) that resulted or would reasonably be expected to
result in a material adverse effect on Meadowbrook and its subsidiaries, taken
as a whole.
5.9 Nasdaq National Market. As of the date of this Agreement,
Meadowbrook is authorized for quotation on the Nasdaq National Market, provided
however, that any subsequent change in Meadowbrook's listing status with the
Nasdaq National Market shall not be considered a breach of this representation
nor be deemed to have a Material Adverse Effect on Meadowbrook for purposes of
this Agreement.
5.10 Brokers or Finders. Neither Meadowbrook nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage, finder's or similar fees or commissions in
connection with this Agreement or the transactions contemplated hereby.
5.11 Disclosure. None of the information provided by Meadowbrook or
Interset and contained in the Company Proxy Statement, at the time such Company
Proxy Statement was first delivered to the Company Stockholders and at the time
of the Company Stockholders' Meeting, or written consent of the Company
Stockholders, and none of the representations and warranties made or other
information provided by Meadowbrook or Interset in this Agreement or any
Schedule or Exhibit attached hereto, or in any other certificate document or
instrument furnished by Meadowbrook or Interset either pursuant to the terms of
this Agreement or in connection with the transactions contemplated hereby
contains or will contain at the Effective Time any untrue statement of a
material fact or omits or will omit to state at the Effective Time a material
fact known to Meadowbrook necessary in order to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE VI
CONDUCT PRIOR TO THE EFFECTIVE TIME
6.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, the Company agrees (except as contemplated by
this Agreement or to the extent that Meadowbrook shall otherwise consent in
writing) to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due, and, to the extent
consistent with such business, to use all commercially reasonable efforts
consistent with past practice and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and ongoing businesses
at the Effective Time (and to cause its Subsidiary to do the same).
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Following the date of this Agreement, the Company shall promptly notify
Meadowbrook of any materially negative event related to the Company and its
Subsidiary or the business of the Company and its Subsidiary, taken as a whole.
Without limiting the foregoing, except as expressly contemplated by this
Agreement, the Company shall not, and shall not permit its Subsidiary to,
without the prior written consent of Meadowbrook:
(a) Enter into any material commitment or transaction not in the
ordinary course of business consistent with past practice;
(b) Transfer to any person or entity any material rights to the
Proprietary Rights of the Company, other than pursuant to licenses in the
ordinary course of business consistent with past practice;
(c) Enter into any material agreements (or material amendments thereto)
pursuant to which any unrelated third party is granted marketing, distribution
or similar rights of any type or scope with respect to any products of the
Company or its Subsidiary other than in the ordinary course of business
consistent with past practice;
(d) Amend or otherwise modify, except in the ordinary course of business
consistent with past practice, or violate the material terms of, any of the
agreements set forth or described in the Disclosure Schedule;
(e) Commence any material litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or other equity interests, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares of
its capital stock (or options, warrants or other rights exercisable therefor),
except in connection with the restructuring of its indebtedness;
(g) Except for the issuance of shares of Company Stock upon exercise of
presently outstanding Company Options or upon conversion of outstanding Company
Preferred, issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any shares
of its capital stock or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, except in connection with the restructuring of its indebtedness;
(h) Cause or permit any amendments to its Amended and Restated Articles
of Incorporation or Bylaws (or other charter documents) except as contemplated
by this Agreement;
(i) Acquire by merging or consolidating with, or by purchasing any
assets or equity securities of, or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof, or otherwise acquire or agree to acquire any assets in an amount in
excess of fifty thousand dollars ($50,000) in the case of a single transaction
or in excess of one hundred thousand dollars ($100,000) in the aggregate in any
30-day period;
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(j) Sell, lease, license or otherwise dispose of any of its properties
or assets in excess of fifty thousand dollars ($50,000), except in the ordinary
course of business consistent with past practice;
(k) Except as contemplated by Section 7.12 of this Agreement, incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue or
sell any of its debt securities or guarantee any debt securities of others;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee other than pursuant to the existing
agreements of the Company or its Subsidiary;
(m) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers to any person whose aggregate
annual base salary would exceed fifty thousand dollars ($50,000) pay or agree to
pay any special bonus or special remuneration to any director or employee other
than in connection with normal annual bonus and salary adjustments for all
non-officers and directors upon consultation with Meadowbrook, or increase the
salaries or wage rates of its other employees, except as consistent with the
ordinary course of business consistent with past practice;
(n) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable, other than
in the ordinary course of business consistent with past practice;
(o) Pay, discharge or satisfy, in an amount in excess of twenty-five
thousand dollars ($25,000) (in any one case) or seventy-five thousand dollars
($75,000) (in the aggregate), any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Financial Statements or that
arose in the ordinary course of business subsequent to December 31, 1997 or
unless payment of such claim, liability or obligation is due in accordance with
its terms or expenses consistent with the provisions of this Agreement incurred
in connection with the transactions contemplated hereby and is not in excess of
twenty-five thousand dollars ($25,000);
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes; or
(q) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 6.1(a) through 6.1(p) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
6.2 No Solicitation.
(a) Until the earlier of the Effective Time and the date of termination
of this Agreement, the Company agrees that it shall not, and shall not authorize
or permit of its Subsidiary or any of its or its Subsidiary's officers,
directors, agents, representatives or affiliates to, directly or indirectly,
take any of the following actions with any party other than Meadowbrook and its
designees: solicit,
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initiate, facilitate or encourage (including by way of furnishing or disclosing
non-public information) any inquiries or the making of any proposal with respect
to any merger, consolidation or other business combination involving the Company
or its Subsidiary or acquisition of any kind of material portion of the capital
stock or assets of the Company or its Subsidiary (an "Acquisition Transaction")
or negotiate, explore or otherwise communicate in any way with any third party
with respect to any Acquisition Transaction or enter into any agreement,
arrangement or understanding with respect to an Acquisition Transaction or
requiring it to abandon, terminate, or fail to consummate the Merger or any
other transactions contemplated by this Agreement, or make or authorize any
statement, recommendation or solicitation in support of any Acquisition
Transaction with any third party other than Meadowbrook and Interset.
(b) If (i) the Company or its representatives receives prior to the
earlier of the Effective Time and the termination of this Agreement any offer,
letter of intent or other proposal, as applicable, relating to an Acquisition
Transaction or any request for non-public information relating to the Company in
connection with an Acquisition Transaction or for access to the properties,
books or records of the Company or its Subsidiary by any person or entity that
informs the Company Board that it is considering making, or has made, a proposal
relating to an Acquisition Transaction, the Company shall promptly notify
Meadowbrook orally and in writing thereof, including information as to the
identity of the offeror or the party making any such offer or proposal and the
specific terms of such offer or proposal, as the case may be, and such other
information related thereto as Meadowbrook may reasonably request.
6.3 Conduct of Business of Meadowbrook. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, Meadowbrook agrees (except as contemplated by
this Agreement or to the extent that the Company shall otherwise consent in
writing, which consent shall not be unreasonably withheld, delayed or
conditioned) to carry on its business in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due, and, to the extent
consistent with such business, to use all commercially reasonable efforts
consistent with past practice and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and ongoing businesses
at the Effective Time. Following the date of this Agreement, Meadowbrook shall
promptly notify the Company of any materially negative event related to
Meadowbrook or its business. Notwithstanding the foregoing, prior to the Closing
Date, Meadowbrook further agrees not to take any of the following actions
(except as contemplated by this Agreement or to the extent that the Company
shall otherwise consent in writing, which consent shall not be unreasonably
withheld, delayed or conditioned):
(a) Cause or permit any amendments to its Restated Certificate of
Incorporation or Bylaws (or other charter documents) except as contemplated by
this Agreement;
(b) Acquire by merging or consolidating with, or by purchasing any
assets or equity securities of, or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof, or otherwise acquire or agree to acquire any assets in an amount in
excess of one hundred thousand dollars ($100,000) in the case of a single
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transaction or in excess of three hundred thousand dollars ($300,000) in the
aggregate in any 30-day period;
(c) Sell, lease, license or otherwise dispose of any of its properties
or assets in excess of three hundred thousand dollars ($300,000), except in the
ordinary course of business consistent with past practice; or
(d) Issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any shares
of its capital stock or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, except for the issuance of shares of Meadowbrook Common upon the
exercise of presently outstanding Meadowbrook Options in an amount not to exceed
thirty thousand (30,000) shares or to effect any stock split or combination,
exchange or readjustment of shares.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Approval of the Company Stockholders. Prior to the Closing Date and
at the earliest practicable date following the date hereof, the Company will
solicit written consents from its stockholders seeking, or hold the Company
Stockholders Meeting for the purpose of seeking, approval of this Agreement, the
Merger and related matters. If the Company holds the Company Stockholders
Meeting, the Board of Directors will solicit proxies from the Company's
stockholders to vote such stockholders' shares at the Company Stockholders
Meeting. In soliciting such written consent or proxies, the Board of Directors
of the Company will recommend to the stockholders of the Company that they
approve this Agreement and the Merger and shall use its reasonable efforts to
obtain the approval of the stockholders of the Company entitled to vote on or
consent to this Agreement and the Merger in accordance with the CGCL and the
Company's Articles of Incorporation. The Board of Directors of the Company shall
not take any action to amend or nullify its resolution approving, or its
recommendation to stockholders of, this Agreement and the transactions
contemplated hereby.
7.2 Preparation of Company Proxy Statement. The Company and Meadowbrook
will prepare as soon as reasonably practicable the Company Proxy Statement in
form and substance reasonably acceptable to Meadowbrook, with respect to the
solicitation of written consents and/or proxies from the stockholders of the
Company to approve this Agreement, the Merger and related matters. The Company
Proxy Statement shall be in such form and contain such information so as to
permit compliance by Meadowbrook with the requirements of Regulation D under the
Securities Act of 1933, as amended (the "Securities Act") in connection with the
issuance of shares of Meadowbrook Common in the Merger.
7.3 Access to Information; Interim Financial Information. Subject to any
applicable contractual confidentiality obligations (which each party shall use
all commercially reasonable efforts to cause to be waived) each party shall
afford the other party and its accountants, counsel and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to (a) all of its and its subsidiaries' properties, books,
contracts, agreements
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and records, and (b) all other information concerning the business, properties
and personnel (subject to restrictions imposed by applicable law) of it and its
subsidiaries as the others may reasonably request. No information or knowledge
obtained in any investigation pursuant to this Section shall affect or be deemed
to modify any representation or warranty contained herein or the conditions to
the obligations of the parties to consummate the Merger. Promptly following the
end of each month between the date of this Agreement and the Closing Date, the
Company shall prepare and furnish to Meadowbrook financial statements of the
Company as of and for the month and year-to-date periods ending on the last day
of such month, all prepared in a manner consistent with the Company's past
practice.
7.4 Confidentiality. Each of the parties hereto hereby agrees to use
reasonable efforts to assure that any non-public information that such party may
obtain from another party in connection with this Agreement will be confidential
and, unless and until the Closing occurs, such party will not disclose any such
information to any other Person (other than on a "need-to-know" basis to its
stockholders, directors, managers, officers, partners and employees, and
representatives of its advisers, investors and lenders whose knowledge thereof
is necessary in order to facilitate the consummation of the Merger) or use such
information to the detriment of the other parties; provided that (a) such party
may use and disclose any such information once it has been publicly disclosed
(other than by such party in breach of its obligations under this Section ) or
which rightfully has come into the possession of such party (other than from the
other parties), and (b) to the extent that such party may, in the reasonable
opinion of its counsel, be compelled by applicable law or any legal requirement
to disclose any of such information, such party may disclose such information if
it will have used all reasonable efforts, and will have afforded the other
parties the opportunity, to obtain an appropriate protective order, or other
satisfactory assurance of confidential treatment, for the information compelled
to be disclosed. The obligation by the parties to hold information in confidence
pursuant to this Section will be satisfied if such party exercises the same care
with respect to such information as it would exercise to preserve the
confidentiality of its own similar information. In the event of termination of
this Agreement, each party will cause to be delivered to the other, and retain
no copies of, any documents, work papers and other materials obtained by such
party or on its behalf from the other parties, whether so obtained before or
after the execution hereof as long as such documents, work papers and other
materials do not fall within the exceptions set forth in clauses (a) and (b) of
this subsection.
7.5 Expenses. All fees and expenses incurred in connection with the
Merger including, without limitation, all legal, accounting, financial advisory,
consulting and all other fees and expenses of third parties incurred by a party
in connection with the negotiation and effectuation of the terms and conditions
of this Agreement and the transactions contemplated hereby, shall be the
obligation of the respective party incurring such fees and expenses; provided,
however, at the Closing, Meadowbrook shall pay the reasonable fees and expenses
of Cooley Godward LLP, incurred in their representation of the Company, in an
amount not to exceed twenty five thousand dollars ($25,000).
7.6 Public Disclosure. Unless otherwise required by law (including,
without limitation, securities laws) or, as to Meadowbrook, by the rules and
regulations of the Nasdaq Stock Market, prior to the Effective Time, no
disclosure (whether or not in response to an inquiry) of the discussions or
subject matter of this Agreement shall be made by any party hereto unless
approved by Meadowbrook and the Company prior to release, provided that such
approval shall not be unreasonably withheld.
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7.7 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use all commercially reasonable
efforts to take promptly, or cause to be taken promptly, all actions, and to do
promptly, or cause to be done promptly all things reasonably necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations and filings and to
remove any injunctions or other impediments or delays, legal or otherwise, in
order to consummate and make effective the transactions contemplated by this
Agreement for the purpose of securing to the parties hereto the benefits
contemplated by this Agreement; provided that neither the Company nor
Meadowbrook shall be required to agree to any divestiture by Meadowbrook or the
Company, as may be applicable, or any of Meadowbrook's or the Company's
subsidiaries or affiliates of shares of capital stock or of any business, assets
or properties of Meadowbrook or its affiliates or the Company, its subsidiaries
or its affiliates, or the imposition of any material limitation on the ability
of any of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
7.8 Conduct; Notification of Certain Matters. Each of Meadowbrook and
the Company shall use all commercially reasonable efforts to not take, or fail
to take, any action that from the date hereof through the Closing would cause or
constitute a breach of any of its respective representations, warranties,
agreements and covenants set forth in this Agreement. The Company shall give
prompt written notice to Meadowbrook, and Meadowbrook shall give prompt written
notice to the Company, of (a) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which causes or is likely to cause any
representation or warranty of the Company or Meadowbrook or Interset,
respectively, contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time and (b) any failure of the
Company or Meadowbrook or Interset, as the case may be, to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section shall not limit or otherwise affect the
other party's right to rely on the representations and warranties herein or any
the other remedies available to the party receiving such notice.
7.9 Tax-Free Reorganization. Meadowbrook and the Company shall each use
all commercially reasonable efforts to cause the Merger to be treated as a
reorganization within the meaning of Section 368 of the Code, including the
execution of tax representation certificates standard for transactions of this
type.
7.10 Blue Sky Laws. Meadowbrook shall take such steps as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the shares of Meadowbrook Common
pursuant hereto. The Company shall use all reasonable efforts to assist
Meadowbrook as may be reasonably necessary to comply with the securities and
blue sky laws of all jurisdictions which are applicable in connection with the
issuance of the shares of Meadowbrook Common pursuant hereto.
7.11 Compliance with Exchange Act. As promptly as practicable after the
date hereof, Meadowbrook shall, in accordance with Section 14(c) of the Exchange
Act, file with the Securities and Exchange Commission and distribute to
stockholders of Meadowbrook an Information Statement which contains the
information required by Regulation 14C under the Exchange Act. Such Information
Statement shall be referred to as the "Meadowbrook Information Statement."
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7.12 Meadowbrook Funding. Prior to the Closing Date Meadowbrook agrees
to advance funding to the Company in an aggregate amount not to exceed five
hundred thousand dollars ($500,000) in accordance with the terms and conditions
of the Secured Bridge Financing Note attached hereto as Exhibit C.
7.13 Meadowbrook Voting Agreement. The Meadowbrook Voting Agreement
shall be entered into by the parties thereto.
7.14 Registration Rights Agreement. Meadowbrook and the Securityholders
shall enter into the Registration Rights Agreement attached hereto as Exhibit D.
7.15 Additional Documents and Further Assurances. Each party hereto, at
the reasonable request of the other party hereto, shall execute and deliver such
other instruments and do and perform such other acts and things as may be
reasonably necessary or desirable for effecting completely the consummation of
this Agreement and the transactions contemplated hereby.
7.16 Indemnification. Meadowbrook shall guarantee and shall cause the
Surviving Corporation to maintain and perform in the same manner the Company's
existing indemnification provisions with respect to present and former directors
and officers of the Company for all losses, claims, damages, expenses or
liabilities arising out of actions or omissions or alleged actions or omissions
occurring at or prior to the Effective Time to the extent permitted or required
under applicable law and the Company's Amended and Restated Articles of
Incorporation and Bylaws in effect as of the date hereof (to the extent
consistent with applicable law), for a period of not less than six (6) years
after the Effective Time.
7.17 Waiver of Rights of First Refusal. Each Securityholder hereby
waives, as of the Effective Time, the Right of First Refusal and any
corresponding notice requirements set forth in Section 4 of the Investor Rights
Agreement, dated April 17, 1997 between the Company and certain shareholders of
the Company (the "Investor Rights Agreement") arising from any issuance of
equity securities by the Company prior to the date hereof, including without
limitation the issuance of warrants to Frederick Adler ("Adler") and
Euro-America II, L.P. ("EAII") in connection with loans to the Company made by
Adler and EAII. The Securityholders and the Company further agree to cause the
termination of the Investor Rights Agreement as of the Effective Time.
ARTICLE VIII
CONDITIONS TO THE MERGER
8.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the requisite vote of the stockholders of the Company.
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(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect.
8.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate the Merger and the transactions contemplated by
this Agreement shall be subject to the satisfaction at or prior to the Closing
of each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and warranties
of Meadowbrook and Interset contained in this Agreement shall be true and
correct on the date hereof 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 need be true and correct only as of the specified date),
except for changes contemplated by this Agreement and except for such
inaccuracies that, considered collectively, have not had and would not
reasonably be expected to have a Material Adverse Effect on Meadowbrook (it
being understood that, for purposes of determining the accuracy of such
representations and warranties, all "Material Adverse Effect" and other
materiality qualifications contained in such representations and warranties
shall be disregarded).
(b) Agreements and Covenants. Each of Meadowbrook and Interset shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it on
or prior to the Effective Time.
(c) Officer's Certificate. Each of Meadowbrook and Interset shall have
furnished the Company with a certificate dated the Closing Date signed on behalf
of it by the Chief Executive Officer or President to the effect that the
conditions set forth in Sections 7.2(a) and (b) have been satisfied.
(d) Meadowbrook Voting Agreement. The relevant parties shall have
entered into the Meadowbrook Voting Agreement substantially in the form attached
hereto as Exhibit B.
(e) Board of Directors. The size of the Board of Directors of
Meadowbrook shall have been increased to six (6) members and the three (3)
individuals nominated by the Company (and reasonably acceptable to Meadowbrook)
shall have been appointed to the Board of Directors of Meadowbrook.
(f) Restructuring. The Securityholders, on behalf of the Company, shall
have caused to be paid such amounts as may be necessary to reduce the Company's
outstanding indebtedness to U.S. Trust Florida to an amount no greater than one
million dollars ($1,000,000). The Company's indebtedness to its stockholders
shall have been eliminated.
(g) Private Placement Exemption. The issuance of shares of Meadowbrook
Common pursuant to the Merger will be exempt from the registration requirements
of Section 5 of the Securities Act pursuant to an appropriate exemption
available under Regulation D under the Securities Act.
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(h) Registration Rights Agreement. Meadowbrook and the Securityholders
shall have entered into the Registration Rights Agreement substantially in the
form attached hereto as Exhibit D.
(i) Amendment to Meadowbrook Bylaws. Meadowbrook shall have amended its
Bylaws to provide that Meadowbrook shall not take any action relating to a
Special Transaction (as defined below) unless such action is approved by four
(4) or more directors of Meadowbrook. Meadowbrook agrees that such bylaw
provision shall not be amended or be nullified during the term of the
Meadowbrook Voting Agreement. The term "Special Transaction" shall mean any of:
(i) any merger, consolidation or other business combination by Meadowbrook with
one or more persons in which Meadowbrook is not the continuing or surviving
corporation of such merger, consolidation or other business combination; (ii)
the dissolution or liquidation of Meadowbrook; and (iii) any sale, lease,
exchange, mortgage, pledge or transfer of all or substantially all of the assets
of Meadowbrook.
(j) Material Adverse Change. Since the date of this Agreement, there
shall not have been any material adverse change on Meadowbrook and its
subsidiaries, taken as a whole, or any material adverse effect on the ability of
Meadowbrook to consummate the transactions contemplated hereby. For purposes of
this condition, a reduction in the trading price of Meadowbrook Common, as
reported by the Nasdaq Stock Market, whether occurring at any time or from time
to time, shall not, in and of itself, constitute a material adverse effect.
8.3 Additional Conditions to the Obligations of Meadowbrook and
Interset. The obligations of Meadowbrook and Interset to consummate the Merger
and the transactions contemplated by this Agreement shall be subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
of which may be waived, in writing, exclusively by Meadowbrook:
(a) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct on the date
hereof 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 need be true and correct only as of the specified date), except for
changes contemplated by this Agreement and except for such inaccuracies that,
considered collectively, have not had and would not reasonably be expected to
have a Material Adverse Effect on the Company (it being understood that, for
purposes of determining the accuracy of such representations and warranties, all
"Material Adverse Effect" and other materiality qualifications contained in such
representations and warranties shall be disregarded).
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time.
(c) Officer's Certificate. The Company shall have furnished Meadowbrook
with a certificate dated the Closing Date signed on behalf of it by its Chief
Executive Officer or President to the effect that the conditions set forth in
Sections 7.7(a) and (b) have been satisfied.
(d) Meadowbrook Information Statement. A period of twenty (20) calendar
days shall have elapsed after the date on which the Meadowbrook Information
Statement was sent to stockholders
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of Meadowbrook pursuant to Regulation 14C under the Exchange Act or Meadowbrook
shall have held a stockholders meeting for the purposes of approving the Merger
and this Agreement.
(e) Material Adverse Change. Since the date of this Agreement, there
shall not have been any material adverse change on the Company and its
Subsidiary, taken as a whole, or any material adverse effect on the ability of
the Company to consummate the transactions contemplated hereby.
(f) Third Party Consents. Meadowbrook shall have been furnished with
evidence satisfactory to it that the Company has obtained the consents,
approvals, assignments and waivers set forth in the Disclosure Schedule, except
for such consents, approvals, assignments and waivers that would not reasonably
be expected to have a Material Adverse Effect.
(g) Resignations. Meadowbrook shall have received the resignations of
the directors and officers of the Company, to be effective immediately upon the
Closing.
(h) Restructuring. The Securityholders, on behalf of the Company, shall
have caused to be paid such amounts as may be necessary to reduce the Company's
indebtedness to U.S. Trust Florida to an amount no greater than one million
dollars ($1,000,000). The Company's indebtedness to its stockholders shall have
been repaid in full, together with interest thereon (including, without
limitation, any prepayment premium). Meadowbrook shall have received evidence in
form, scope and substance satisfactory to Meadowbrook that the matters set forth
in this Section have been satisfied (including promissory notes evidencing
indebtedness to the Company's stockholders marked "canceled").
(i) Private Placement Exemption. Meadowbrook shall be satisfied that the
issuance of shares of Meadowbrook Common pursuant to the Merger will be exempt
from the registration requirements of Section 5 of the Securities Act pursuant
to an appropriate exemption available under Regulation D under the Securities
Act.
(j) Fairness Opinion. Within thirty (30) days of the date of this
Agreement, the Board of Directors of Meadowbrook shall have received an opinion
from Alliant Partners, in a form reasonably satisfactory to such Board of
Directors, to the effect that the Merger and the transactions contemplated by
this Agreement are fair to Meadowbrook from a financial point of view.
ARTICLE IX
INDEMNIFICATION
9.1 Survival of Representations and Warranties. All of the Company's
representations and warranties in this Agreement, the Disclosure Schedule, the
supplements to the Disclosure Schedule, the certificate delivered pursuant to
Section , and any other certificate or instrument delivered pursuant to this
Agreement shall survive the Merger and continue until 5:00 p.m., California
time, on the earlier of the date which is one year after the Closing Date (the
"Expiration Date") or the applicable statute of limitations and shall not be
affected by any investigation conducted for or on behalf of Meadowbrook with
respect thereto or any knowledge acquired by Meadowbrook or its officers,
directors, employees, stockholders or agents as to the accuracy or inaccuracy of
any such representation or warranty. The waiver of any condition based on the
accuracy of any
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representation or warranty, or the performance or compliance of any covenant or
obligation, will not affect the right to indemnification set forth in this
Article IX.
9.2 Indemnification.
(a) Indemnification. Subject to the limitations set forth herein, by
approval and adoption of this Agreement, each of the Securityholders agrees to
indemnify Meadowbrook for such Securityholder's pro rata portion (based on the
number of shares of Company Stock held by the Securityholder immediately prior
to the Effective Time relative to the total number of outstanding shares of
Company Stock immediately prior to the Effective Time) of claims, losses,
liabilities, damages, deficiencies, costs and expenses, including reasonable
attorneys' fees and expenses, and expenses of investigation and defense
(calculated after deduction for insurance proceeds recovered or recoverable)
incurred by Meadowbrook or the Surviving Corporation directly or indirectly as a
result of any inaccuracy or breach of a representation or warranty of the
Company contained herein or in any instrument delivered pursuant to this
Agreement or any failure by the Company to perform or comply with any covenant
contained herein (hereinafter individually a "Loss" and collectively "Losses").
Meadowbrook may not receive any payment for indemnification from the
Securityholders unless and until Officer's Certificates (as defined in paragraph
(c) below) identifying Losses, the aggregate cumulative amount of which exceed
seventy thousand dollars ($70,000) have been delivered to the Securityholder
Agent as provided in paragraph (c); in such case, Meadowbrook may recover from
the Securityholders the amount of the cumulative Losses on a pro rata basis;
provided, however, that the Securityholders shall have no obligation to make any
payment to Meadowbrook with respect to any representation or warranty made in
good faith without actual knowledge of falsity. Any payment for indemnification
from any Securityholder shall be paid by the forfeiture and return of shares of
Meadowbrook Common received as such Securityholder's pro rata portion of the
Merger Consideration. In no event shall the maximum aggregate liability of any
Securityholder with respect to all claims of indemnification under this Article
IX exceed that number of shares of Meadowbrook Common equal to twenty-five
percent (25%) of such Securityholder's pro rata portion of the Merger
Consideration (valued at the average of the daily market prices of one share of
Meadowbrook Common for thirty (30) business days prior to the Effective Time
(the "Trading Price"). The daily market price of a share of Meadowbrook Common
on any business day will be (a) the last sale price on such day on the principal
stock exchange on which shares of Meadowbrook Common are then listed or admitted
to trading or (b) if no sales take place on such date, the average of the
reported bid and asked prices on such day as officially noted on that exchange.
The Trading Price will be appropriately adjusted to reflect the effects of any
stock dividend, stock split, reclassification or combination affecting
Meadowbrook Common as a class, the record date or ex-dividend date of which
occurs during the period in which the Trading Price is to be determined.
(b) Securityholder Agent of the Securityholders; Power of Attorney.
(i) Each Securityholder appoints Philip Chapman, as agent and
attorney-in-fact (the "Securityholder Agent") for such Securityholder, to give
and receive notices and communications, to authorize in satisfaction of claims
by Meadowbrook, to object to such deliveries, to agree to negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary or appropriate in the judgment of the Securityholder Agent for
the accomplishment of the foregoing. Such agency may be changed by the
Securityholders from time to time upon not less
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than thirty (30) days' prior written notice to Meadowbrook; provided that the
Securityholder Agent may not be removed unless two-thirds in interest of the
Securityholders agree to such removal and to the identity of the substituted
agent. Any vacancy in the position of Securityholder Agent may be filled by
approval of a majority in interest of the Securityholders. No bond shall be
required of the Securityholder Agent, and the Securityholder Agent shall not
receive compensation for his services. Notices or communications to or from the
Securityholder Agent shall constitute notice to or from each of the
Securityholders.
(ii) The Securityholder Agent shall not be liable for any act done or
omitted hereunder as Securityholder Agent while acting in good faith and in the
exercise of reasonable judgment. The Securityholders shall severally indemnify
the Securityholder Agent and hold the Securityholder Agent harmless against any
loss, liability or expense incurred without negligence or bad faith on the part
of the Securityholder Agent and arising out of or in connection with the
acceptance or administration of the Securityholder Agent's duties hereunder,
including the reasonable fees and expenses of any legal counsel retained by the
Securityholder Agent.
(c) Claims.
(i) Upon receipt by the Securityholder Agent at any time on or before
5:00 p.m. California time on the Expiration Date of a certificate signed by any
officer of Meadowbrook (an "Officer's Certificate"): (A) stating that
Meadowbrook has in good faith paid or properly accrued or reasonably anticipates
that it will have to pay or accrue Losses, and (B) specifying in reasonable
detail the individual items of Losses included in the amount so stated, the date
each such item was paid or properly accrued, or the basis for such anticipated
liability, and the nature of the misrepresentation, breach of warranty or
covenant to which such item is related and to the extent known a reasonable
summary of the facts underlying the claim, and if no objection is received from
the Securityholder Agent in accordance with Section 9.2(d), each Securityholder
shall pay to the Securityholder's Agent an amount equal to such Securityholder's
pro rata portion of the Losses (as limited by Section 9.2(a)) and the
Securityholder Agent shall deliver to Meadowbrook, as promptly as practicable,
an amount equal to such Losses.
(d) Resolution of Conflicts; Arbitration.
(i) If within a period of thirty (30) days following the delivery of the
Officer's Certificate, the Securityholder Agent shall object in writing to any
claim or claims made in any Officer's Certificate, the Securityholder Agent and
Meadowbrook shall attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If the Securityholder
Agent and Meadowbrook should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties.
(ii) If no such agreement can be reached after good faith negotiation,
either Meadowbrook or the Securityholder Agent may demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration conducted by three arbitrators.
Meadowbrook and the Securityholder Agent shall each select one arbitrator, and
the two arbitrators so selected shall select a third arbitrator, each of which
arbitrators shall be independent and have at least ten (10) years relevant
experience. The arbitrators shall set a limited time period and establish
procedures
-A-33-
<PAGE>
designed to reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel or limit discovery
and shall have the authority to impose sanctions, including attorneys' fees and
costs, to the extent as a court of competent law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement. Such decision shall be
written and shall be supported by written findings of fact and conclusions which
shall set forth the award, judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. Any such arbitration shall be held in San
Francisco, California, under the rules then in effect of Judicial Arbitration
and Mediation Services, Inc.
(e) Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all the
Securityholders and shall be final, binding and conclusive upon each of the
Securityholders, and Meadowbrook may rely upon any such decision, act, consent
or instruction of the Securityholder Agent as being the decision, act, consent
or instruction of each Securityholder. Meadowbrook is hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Securityholder Agent.
(f) Third-Party Claims. In the event Meadowbrook becomes aware of a
third-party claim which Meadowbrook believes may result in a demand against the
Securityholders, Meadowbrook shall notify the Securityholder Agent of such
claim, and the Securityholder Agent, as representative for the Securityholders,
shall be entitled, at their expense, to participate in any defense of such
claim. Meadowbrook shall have the right in its sole discretion to settle any
such claim; provided, however, that except with the consent of the
Securityholder Agent, no settlement of any such claim with third-party claimants
shall alone be determinative of the amount of any claim against the
Securityholders. In the event that the Securityholder Agent has consented in
writing to any such settlement and acknowledged that the claim by Meadowbrook is
a valid claim against the Securityholders, the Securityholder Agent shall have
no power or authority to object under any provision of this Article IX to the
amount of any claim by Meadowbrook against the Securityholders with respect to
such settlement.
9.3 Exclusivity of Remedy. The indemnification remedies and other
remedies provided in this Article IX shall be deemed to be exclusive.
Accordingly, the exercise by Meadowbrook of its rights under this Article IX
shall be deemed to be an election of remedies and shall be deemed to prejudice,
or to constitute or operate as a waiver of, any other right or remedy that such
person may be entitled to exercise (whether under this Agreement, under any
other agreement or instrument, under any statute, rule or other regulation or
ordinance, at common law, in equity or otherwise).
-A-34-
<PAGE>
ARTICLE X
TERMINATION, AMENDMENT, WAIVER, CLOSING
10.1 Termination. Except as provided in Section 10.2 below, this
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) By mutual consent of the Company and Meadowbrook;
(b) By Meadowbrook or the Company if: (i) the Effective Time has not
occurred by July 31, 1998 (provided that the right to terminate this Agreement
under this clause (i) shall not be available to any party whose willful failure
to fulfill any obligation hereunder has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date); (ii) there shall
be a final non-appealable order, decree or ruling of a court of competent
jurisdiction in effect preventing consummation of the Merger; (iii) there shall
be any statute, rule, regulation or non-appealable order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make consummation of the Merger illegal; or (iv) the approval and adoption of
this Agreement by the Company's stockholders shall not have been obtained;
(c) By Meadowbrook or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger, by any governmental entity, which would: (i) prohibit
Meadowbrook's or the Company's ownership or operation of any portion of the
business of the Company or (ii) compel Meadowbrook or the Company to dispose of
or hold separate, as a result of the Merger, any portion of the business or
assets of the Company or Meadowbrook; in either case, the unavailability of
which assets or business would be reasonably expected to have a Material Adverse
Effect on Meadowbrook or would reasonably be expected to have a material adverse
effect on Meadowbrook's ability to realize the benefits expected from the
Merger.
(d) By Meadowbrook if it is not in material breach of its
representations, warranties or obligations under this Agreement and there has
been a breach of any representation, warranty, covenant or agreement contained
in this Agreement on the part of the Company or if any representation or
warranty of the Company shall have become untrue, in either case such that the
conditions set forth in Section 8.3 would not be satisfied; provided, however,
if such breach or breaches are capable of being cured prior to the Effective
Time, such breaches shall not have been cured within thirty (30) days of
delivery to the Company of written notice of such breach or breaches (but no
such cure period shall be required if such breach by its nature cannot be
cured);
(e) By the Company if it is not in material breach of its
representations, warranties or obligations under this Agreement and there has
been a breach of any representation, warranty, covenant or agreement contained
in this Agreement on the part of Meadowbrook or Interset or if any
representation or warranty of Meadowbrook or Interset shall have become untrue,
in either case such that the conditions set forth in Section 8.2 would not be
satisfied; provided, however, if such breach or breaches are capable of being
cured prior to the Effective Time, such breaches shall not have been cured
within thirty (30) days of delivery to Meadowbrook of written notice of such
breach or breaches (but no such cure period shall be required if such breach by
its nature cannot be cured);
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<PAGE>
Where action is taken to terminate this Agreement pursuant to this
Section 10.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
10.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and, except as set forth in Section 10.3, there shall be no liability or
obligation on the part of Meadowbrook, Interset or the Company, or their
respective subsidiaries, officers, directors or stockholders, provided that, the
provisions of Sections 7.4 and 7.5 and Article X of this Agreement shall remain
in full force and effect and survive any termination of this Agreement.
10.3 Termination Fee.
(a) The Company shall pay to Meadowbrook, a termination fee of five
hundred thousand dollars ($500,000) in cash by wire transfer or cashier's check
in the event that the Closing does not occur, this Agreement is terminated,
Meadowbrook is not in material breach of its obligations under this Agreement,
and the Company has willfully and materially breached any representation,
warranty, covenant or agreement contained in this Agreement.
(b) Meadowbrook shall pay to the Company, a termination fee of five
hundred thousand dollars ($500,000) in cash by wire transfer or cashier's check
in the event that the Closing does not occur, this Agreement is terminated, the
Company is not in material breach of its obligations under this Agreement, and
Meadowbrook has willfully and materially breached any representation, warranty,
covenant or agreement contained in this Agreement.
(c) Any termination payment payable by the Company under this Section
10.3 shall be made within ten (10) calendar days after termination of this
Agreement.
(d) The payments called for by this Section 10.3 shall be deemed to be
liquidated damages and shall be in addition to any rights or remedies at law or
equity arising out of a breach of the obligations set forth in this Agreement.
10.4 Amendment or Supplement. This Agreement may be amended or
supplemented at any time before or after approval of this Agreement by the
stockholders of the Company to the extent permitted under of the CGCL. No
amendment or supplement shall be effective unless in writing and signed by the
party or parties sought to be bound thereby.
Subject to the preceding paragraph, this Agreement may be amended in a
writing executed by the Chief Executive Officer of the Company and the Chief
Executive Officer of Meadowbrook in order to modify the structure of the Merger
to substitute for Interset another directly or indirectly wholly owned
subsidiary of Meadowbrook, pursuant to which such Subsidiary shall then become a
party to this Agreement and all references in this agreement to Interset shall
thereafter be deemed to refer to such substituted subsidiary of Meadowbrook.
10.5 Extension of Time, Waiver. At any time prior to the Effective Time,
Meadowbrook and Interset, on the one hand, and Company, on the other hand, may,
to the extent legally allowed:
-A-36-
<PAGE>
(a) Extend the time for the performance of any of the obligations or
other acts of the other party hereto,
(b) Waive any inaccuracies in the representations and warranties made to
such party contained herein or in any document delivered pursuant
hereto, and
(c) Waive compliance with any of the agreements or conditions for the
benefit of such party contained herein except the conditions set forth
in Sections 10.3(a) and 10.3(b) hereof; provided, that no failure or
delay by any party hereto in exercising any right hereunder shall
operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise
of any other right hereunder.
Any agreement on the part of any party hereto to any such extension or waiver
shall be valid if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE XI
GENERAL
11.1 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and delivered
personally or sent by certified mail, postage prepaid, by telecopy (with receipt
confirmed and promptly confirmed by personal delivery, U.S. first class mail, or
courier), or by courier service, as follows:
(a) If to Meadowbrook or Interset to:
Meadowbrook Rehabilitation Group, Inc.
2000 Powell Street, Suite 1203
Emeryville, CA 94608
Attn: Chief Executive Officer
Fax: (510) 420-7008
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attn: Blair W. White, Esq.
Fax: (415) 983-1200
(b) If to the Company to:
Cambio Networks, Inc.
154 SE 30th Place, Suite 200
Bellevue, WA 98007
Attn: President and Chief Executive Officer
Fax: (425) 643-2005
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<PAGE>
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Michael Sullivan, Esq.
Fax: (650) 857-0663
(c) If to a Securityholder to:
The last known address on the
Company's stock ledger
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Michael Sullivan, Esq.
Fax: (650) 857-0663
(d) If to the Securityholder Agent:
Philip Chapman
c/o Venad Administrative Services, Inc.
100 First Stamford Place
Stamford, CT 06902
Fax: (203) 359-0880
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
11.2 Headings. The headings of the several sections of this Agreement
are inserted for convenience of reference only and are not intended to affect
the meaning or interpretation of this Agreement.
11.3 Counterparts. This Agreement may be executed in counterparts, and
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument.
11.4 Entire Agreement; Assignment. This Agreement, the Schedules and
Exhibits hereto (including the Disclosure Schedule), and the documents and
instruments and other agreements among the parties hereto referenced herein: (a)
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof;
(b) are not intended to confer upon any other person any rights or remedies
hereunder (except as provided in
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<PAGE>
Section below); and (c), except as contemplated by Section shall not be assigned
by operation of law or otherwise except as mutually agreed in writing between
the parties
11.5 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
11.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
11.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof,
except to the extent that the laws of the State of California are mandatorily
applicable to the Merger. Each of the parties hereto agrees that process may be
served them in any manner authorized by the laws of the State of Delaware for
such persons and waives and covenants not to assert or plead any objection which
they might otherwise have to such jurisdiction and such process.
11.8 Absence of Third-Party Beneficiary Rights. No provision of this
Agreement is intended, or will be interpreted, to provide to or create for any
third-party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, employee, partner or any party hereto or any
other person or entity, and all provisions hereof will be personal solely
between the parties to this Agreement, except that the provisions of Section
7.16 shall be for the benefit of, and enforceable by, the indemnified persons
referred to therein.
[Signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed, all as of the date first above written.
MEADOWBROOK REHABILITATION GROUP,
INC.
By /s/ Harvey Wm. Glasser
Title President
INTERSET, INC.
By /s/ Harvey Wm. Glasser
Title President
CAMBIO NETWORKS, INC.
By /s/ Gari Grimm
Title President & COO
SECURITYHOLDERS:
EURO-AMERICA-II, L.P.
By /s/ Frederick R. Adler
Title General Partner
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<PAGE>
2001 PARTNERS, L.P.
By /s/ Elizabeth A. Wertheimer
Title General Partner
/s/ Frederick Adler
Frederick Adler
/s/ Joseph K. Pagano
Joseph K. Pagano
/s/ Philip Chapman
Philip Chapman
-A-41-
<PAGE>
AGREEMENT OF AMENDMENT
This Agreement of Amendment (this "Amendment") is entered into as of July
27, 1998 by and among MEADOWBROOK REHABILITATION GROUP, INC., a Delaware
corporation ("Meadowbrook"), INTERSET, INC., a Delaware corporation
("Interset"), CAMBIO NETWORKS, INC., a California corporation (the "Company"),
and certain stockholders of the Company named on the signature pages hereto (the
"Securityholders").
W I T N E S S E T H:
WHEREAS, the parties hereto desire to amend that certain Agreement and Plan
of Merger by and among Meadowbrook, Interset, the Company and the
Securityholders, dated as of April 3, 1998 (the "Merger Agreement"), as provided
herein; and
WHEREAS, the parties hereto also desire to amend that certain Stockholders
Voting Agreement, dated April 3, 1998, among Meadowbrook and the Securityholders
(the "Voting Agreement"), as provided herein;
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Cambio and the Securityholders hereby agree to waive all of the closing
conditions contained in Section 8.2 of the Merger Agreement (except the closing
conditions contained in paragraph (g) of such Section 8.2).
2. Meadowbrook and Interset hereby agree to waive all of the closing
conditions contained in Section 8.3 of the Merger Agreement (except the closing
conditions contained in paragraphs (d) and (i) of such Section 8.3).
3. The termination date for the Merger Agreement is changed by replacing
the date "July 31, 1998" in Section 10.1(b)(i) with the date "September 15,
1998".
4. Meadowbrook and the Securityholders agree that the term "Merger
Agreement" as used in the Voting Agreement shall mean the Merger Agreement as
amended by this Amendment.
5. This Amendment may be signed in any number of counterparts each of which
will be an original and all of which together will constitute one Amendment.
6. This Amendment and the rights of the parties under it will be governed
by and construed in all respects in accordance with the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.
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<PAGE>
7. This Amendment and the Merger Agreement and Voting Agreement, as amended
hereby, contain the entire agreement of the parties and supersede all prior oral
and written agreements and understandings, in each case with respect to the
subject matter hereof. Except as amended by this Amendment, all terms of the
Merger Agreement and Voting Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed,
all as of the date first above written.
MEADOWBROOK REHABILITATION GROUP, INC.
By /s/ Harvey Wm. Glasser, M.D.
Title President
INTERSET, INC.
By /s/ Harvey Wm. Glasser, M.D.
Title President
CAMBIO NETWORKS, INC.
By /s/ Gari Grimm
Title President and CEO
-A-43-
<PAGE>
SECURITYHOLDERS:
EURO-AMERICA-II, L.P.
By /s/ Frederick Adler
Title General Partner
2001 PARTNERS, L.P.
By /s/ Elizabeth A. Wertheimer
Title General Partner
/s/ Frederick Adler
Frederick Adler
/s/ Joseph K. Pagano
Joseph K. Pagano
/s/ Philip Chapman
Philip Chapman
-A-44-
Exhibit D to the Merger Agreement
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of the
____ day of _______________, 1998 by and among MEADOWBROOK REHABILITATION GROUP,
INC., a Delaware corporation ("Meadowbrook") and the persons listed on Schedule
A hereto (the "Holders").
WHEREAS, Meadowbrook and the Holders have entered into that certain
Agreement and Plan of Merger among Meadowbrook, Cambio Networks, Inc. and
Interset, Inc. ("Interset") and the Holders (the "Acquisition Agreement")
whereby Meadowbrook agreed to issue to the Holders certain shares (the "Shares")
of its Class A Common Stock, $.01 par value (the "Common Stock"); and
WHEREAS, in connection with the issuance of the Shares, Meadowbrook and the
Holders desire to provide for the rights of the Holders with respect to the
registration of the Shares according to the terms of this Agreement.
NOW THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Definitions.
1.1 The term "Business Day" means any day that is not a Saturday, Sunday or
a day on which banking institutions are required to be closed in San Francisco,
California.
1.2 The term "Commission" means the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
1.3 The term "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
1.4 The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 12 hereof;
1.5 The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document;
1.6 The term "Registrable Securities" means a. the Shares, and b. Common
Stock issued as a dividend or other distribution with respect to, or in exchange
for or in replacement of, the Shares, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which such person's
registration rights are not assigned; provided, however, that any Shares
previously sold to the public pursuant to a registered public offering or
pursuant to Rule 144 under the Securities Act shall cease to be Registrable
Securities.
1.7 The term "Securities Act" means the Securities Act of 1933, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
1.8 The term "Trading Price" means the average of the daily market prices
of one Share for thirty (30) consecutive Business Days commencing twenty-five
(25) Business Days before the date on which a Holder gives a Demand Notice. The
daily market price of a Share on any Business Day will be (a) the last sale
price on such day on the principal stock exchange on which the Shares are then
listed or admitted to trading or (b) if no sale takes place on such date on that
exchange, the average of the reported closing bid and asked prices on such day
as officially noted on that exchange. The Trading Price will be appropriately
A-D-1
<PAGE>
adjusted to reflect the effects of any stock dividend, stock split,
reclassification or combination affecting the Shares as a class, the record date
or dividend date of which occurs during the period in which the Trading Price is
to be determined.
1.9 All other capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Acquisition Agreement to which this Exhibit D
is attached.
2. Demand Registration Rights.
2.1 After the date that is one year following the Closing Date, the Holders
of Registrable Securities may request, by written notice to Meadowbrook (a
"Demand Notice"), that Meadowbrook file a registration statement registering for
offering and sale all or a portion of the Registrable Securities (a "Demand
Registration"). Meadowbrook will give notice of its receipt of such request to
the Holders that did not join in such request at the addresses for notice to
them on Schedule A attached hereto, and will use its reasonable best efforts to
file, within forty-five (45) days after receipt of the initial request for
registration, a registration statement on an appropriate form with the
Commission covering all Registrable Securities owned by the Holders (the
"Selling Holders") for which registration is requested by written notice given
to Meadowbrook within fifteen (15) days after Meadowbrook gives notice of its
receipt of a request for registration, subject to Meadowbrook's blackout rights
described below. Meadowbrook will use its reasonable best efforts to cause such
registration statement to be declared effective as soon thereafter as
practicable. Meadowbrook will include in such registration statement provisions
permitting the use of such registration statement and the related prospectus in
connection with the offering of such Registrable Securities for ninety (90) days
after the effective date of such registration statement, subject to
Meadowbrook's blackout rights described below. Meadowbrook agrees to keep such
registration statement effective for such 90-day period and, after the
expiration of such 90-day period, may deregister the Registrable Securities
registered thereon that have not been sold. Meadowbrook will not be obligated to
effect more than two Demand Registrations during any 12-month period calculated
from the first anniversary of the date of this Agreement.
2.2 Notwithstanding the preceding provisions of this section, a Demand
Registration will be effected by Meadowbrook only if the Selling Holders have
demanded the registration of Registrable Securities having an aggregate Trading
Price of one million dollars ($1,000,000) or more; provided that any Demand
Registration that is requested to be an underwritten offering will be effected
by Meadowbrook only if the Selling Holders have demanded the registration of
Registrable Securities having an aggregate Trading Price of five million dollars
($5,000,000) or more. If the Demand Notice covers Registrable Securities having
an aggregate Trading Price of less than one million dollars ($1,000,000) (or in
the event of an underwritten offering, five million dollars ($5,000,000)), such
Demand Notice will be disregarded and Meadowbrook will give notice of that fact
to the Holders.
2.3 Unless otherwise elected by the Selling Holders, the sale of
Registrable Securities that are the subject of the Demand Registration will be
conducted publicly through one or more registered broker-dealers selected by the
Selling Holders over the principal national stock exchange or interdealer
quotation system where such securities are listed or quoted. If the Selling
Holders elect to effect the Demand Registration as an underwritten offering,
Meadowbrook will select the underwriter or underwriters that will manage or lead
such registration; provided that any underwriter or underwriters shall be
reasonably satisfactory to the Selling Holders. A Selling Holder will not be
entitled to participate in any underwritten offering unless and until such
Selling Holder has entered into an underwriting or other agreement with such
underwriter or underwriters in such form as Meadowbrook and such underwriter or
underwriters may determine. Meadowbrook will enter into an indemnity or other
agreement with the underwriters of such offering containing customary
representations, warranties, covenants, indemnities and other terms.
3. Piggyback Registration Rights.
3.1 If at any time or times Meadowbrook proposes to make a registered
public offering of any of its securities under the Securities Act, whether to be
sold by it or by one or more third parties, other than an offering registered on
Form S-8, Form S-4 or other Commission registration form not suitable for
A-D-2
<PAGE>
inclusion of shares of selling stockholders for offer to the public, Meadowbrook
shall give written notice of the proposed registration to each Holder not less
than forty-five (45) days prior to the proposed filing date of the registration
form, and in any underwriting of such offering, shall cause to be registered
under the Securities Act all Registrable Shares that have been designated for
registration at such Holder's request. Meadowbrook may withdraw any proposed
registration statement or offering of securities under this Section 3 at any
time without any liability to the Holders hereunder.
3.2 If a registration in which the Holders have the right to participate
pursuant to this Section 3 is an underwritten primary registration on behalf of
Meadowbrook and the managing underwriters advise Meadowbrook in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number that can be sold in such offering, Meadowbrook
shall include in such offering the securities of Meadowbrook proposed to be sold
by Meadowbrook, by the Holders and by the other selling stockholders, if any,
pro rata based upon the number of Registrable Shares requested by each to be
included in such registration, or in such other amounts upon which Meadowbrook,
the Holders and the other selling stockholders may agree.
4. Obligations of Meadowbrook.
Whenever required under this Agreement to effect the registration of any
Registrable Securities, Meadowbrook shall, as expeditiously as reasonably
possible:
4.1 Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its reasonable efforts to cause
such registration statement to become effective, and keep such registration
statement continuously effective under the Securities Act until the earlier of
the expiration of ninety (90) days after the date of declaration of
effectiveness of such registration statement by the Commission (the "Expiration
Date") or the date on which this Agreement has terminated with respect to all
the Holders of Registrable Securities. In the event that, in the judgment of
Meadowbrook, it is advisable to suspend use of the prospectus relating to such
registration statement for a discrete period of time (a "Deferral Period") due
to pending material corporate developments or similar material events that have
not yet been publicly disclosed and as to which Meadowbrook believes public
disclosure will be prejudicial to Meadowbrook, Meadowbrook shall deliver a
certificate in writing, signed by its Chief Executive Officer or Chief Financial
Officer, to each Holder, to the effect of the foregoing and, upon receipt of
such certificate, such the Holders agree not to dispose of such Holder's
Registrable Securities covered by such registration or prospectus (other than in
transactions exempt from the registration requirements under the Securities
Act); provided, however, that such Deferral Period shall be no longer than sixty
(60) days. The Expiration Date shall be extended for a period of time equal to
such Deferral Period.
4.2 Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
4.3 Furnish to the Holders covered by such registration statement such
numbers of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as they may reasonably request in order to facilitate the disposition of such
Registrable Securities.
4.4 Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders
thereof, provided that Meadowbrook shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
5. Obligations of the Holders
5.1 It shall be a condition precedent to the obligations of Meadowbrook to
take any action pursuant to this Agreement that the selling the Holders shall
furnish to Meadowbrook such information regarding themselves, the Registrable
Securities held by them, and the intended method of disposition of such
securities as shall be required to effect the registration of the Registrable
Securities.
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5.2 Upon the receipt by a Holder of any notice from Meadowbrook of (i) the
existence of any fact or the happening of any event as a result of which the
prospectus included in a registration statement filed pursuant to Section 3, as
such registration statement is then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, (ii) the issuance by the Commission of any stop
order or injunction suspending or enjoining the use or the effectiveness of such
registration statement or the initiation of any proceedings for that purpose, or
the taking of any similar action by the securities regulators of any state or
other jurisdiction, or (iii) the request by the Commission or any other federal
or state governmental agency for amendments or supplements to such registration
statement or related prospectus or for additional information related thereto,
such Holder shall forthwith discontinue disposition of such Holder's Registrable
Securities covered by such registration or prospectus (other than in
transactions exempt from the registration requirements under the Securities Act)
until such Holder's receipt of the supplemented or amended prospectus or until
such Holder is advised in writing by Meadowbrook that the use of the applicable
prospectus may be resumed. In such a case, the Effectiveness Period shall be
extended by the number of days from and including the date of the giving of such
notice to and including the date when each Holder shall have received a copy of
the supplemented or amended prospectus or when such Holder is advised in writing
by Meadowbrook that the use of the applicable prospectus may be resumed.
6. Lock-Up Provision.
In connection with any underwritten public offering by Meadowbrook of its
equity securities pursuant to an effective registration statement filed under
the Securities Act, if requested by the underwriter the Holders will not engage
in transactions involving Meadowbrook's equity securities, including by
commencing any public offering of Meadowbrook's equity securities or by causing
a Demand Registration, for a period (not to exceed one hundred eighty (180) days
after the effective date of any Meadowbrook registration statement) that is
equal to the shortest period that such restriction is made applicable to all
directors and officers of Meadowbrook.
7. Expenses.
Meadowbrook shall bear and pay all expenses incurred by Meadowbrook in
connection with any registration, filing or qualification of Registrable
Securities with respect to the registrations pursuant to Section 3 hereof for
each Holder thereof (which right may be assigned as provided in Section 10
hereof), including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto, fees and disbursements of counsel for Meadowbrook, blue sky fees and
expenses, including fees and disbursements of counsel related to all blue sky
matters, the expenses of providing materials pursuant to Section 4.3 hereof, but
excluding the fees and disbursements of counsel for the selling the Holders,
stock transfer taxes that may be payable by the selling the Holders, and all
underwriting discounts and commissions relating to Registrable Securities, which
shall be borne by the Holders.
8. Delay of Registration.
No Holder shall have any right to obtain or seek an injunction restraining
or otherwise delaying any such registration as the result of any controversy
that might arise with respect to the interpretation or implementation of this
Agreement.
9. Indemnification.
In the event any Registrable Securities are included in a registration
statement under this Agreement:
9.1 To the extent permitted by law, Meadowbrook will indemnify and hold
harmless each Holder of such Registrable Securities, the officers and directors
of each such Holder, and each person, if any, who controls such Holder within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
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omissions or violations (collectively, a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by Meadowbrook of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and Meadowbrook will
reimburse each such Holder, officer or director, or controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 9.1
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of
Meadowbrook (which consent shall not be unreasonably withheld), nor shall
Meadowbrook be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, officer, director, or controlling person.
9.2 To the extent permitted by law, each selling Holder will indemnify and
hold harmless Meadowbrook, each of its directors, each of its officers who have
signed the registration statement, each person, if any, who controls Meadowbrook
within the meaning of the Securities Act, and any other Holder selling
securities in such registration statement or any of its directors or officers or
any person who controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which Meadowbrook or any such director,
officer or controlling person, or other such Holder or director, officer or
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will reimburse any legal or other expenses reasonably
incurred by Meadowbrook or any such director, officer, controlling person, or
other Holder, director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 9.2
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; provided, that in no
event shall any indemnity under this Section 9.2 exceed the gross proceeds
received by such Holder from the sale of Registrable Securities as contemplated
hereunder.
9.3 Promptly after receipt by an indemnified party under this Section 9 of
notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 9, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
9, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 9.
9.4 The obligations of Meadowbrook and the Holders under this Section 9
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
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<PAGE>
10. Assignment of Registration Rights.
The rights to cause Meadowbrook to register Registrable Securities pursuant
to this Agreement may be assigned by any Holder who transfers all of his, her or
its shares of Registrable Securities; provided, in each case, Meadowbrook is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately following
such transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. For the purposes of determining
the number of shares of Registrable Securities held by a transferee or assignee,
the holdings of transferees and assignees of a partnership who are partners or
retired partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities by gift, will or intestate succession) shall be aggregated together
and with the partnership; provided that all assignees and transferees who would
not qualify individually for assignment of registration rights shall have a
single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under this Section 10.
11. Termination of Registration Rights.
Meadowbrook's obligations pursuant to this Agreement shall terminate as to
any Holder of Registrable Securities when the Holder can sell all of such
Holder's shares pursuant to Rule 144 or any successor exemption under the
Securities Act during any 90-day period.
12. Miscellaneous.
12.1 Successors and Assigns. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
12.2 Notices. Unless otherwise provided, any notice, request, demand or
other communication required or permitted under this Agreement shall be given in
writing and shall be deemed effectively given upon personal delivery to the
party to be notified, or when sent by telex, telecopier (with receipt
confirmed), or overnight courier service, or upon deposit with the United States
Post Office, by registered or certified mail, postage prepaid and addressed as
follows (or at such other address as a party may designate by notice to the
other):
If to Meadowbrook:
Meadowbrook Rehabilitation Group, Inc.
2000 Powell Street, Suite 1203
Emeryville, CA 94608
Attention: Chief Executive Officer
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attention: Blair W. White
If to the Holders:
to their respective addresses shown on Schedule A hereto
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<PAGE>
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Michael J. Sullivan
12.3 Waivers. The observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the party against whom such
waiver is sought to be enforced. No waiver by either party of any default with
respect to any provision, condition or requirement hereof shall be deemed to be
a continuing waiver in the future thereof or a waiver of any other provision,
condition or requirement hereof; nor shall any delay or omission of either party
to exercise any right hereunder in any manner impair the exercise of any such
right accruing to it thereafter.
12.4 Severability. If one or more provisions of this Agreement are held to
be unenforceable, invalid or void by a court of competent jurisdiction, such
provision shall be excluded from this Agreement and the balance of this
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.
12.5 Entire Agreement; Amendments.
(a) Except as otherwise provided herein or in the Stock Purchase Agreement,
this Agreement contains the entire understanding of the parties with respect to
the matters covered herein and supersedes all prior agreements and
understandings, written or oral, between the parties relating to the subject
matter hereof.
(b) Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of Meadowbrook and the holders of a majority of the Registrable
Securities then outstanding. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each holder of any Registrable Securities
then outstanding, each future holder of all such Registrable Securities, and
Meadowbrook.
12.6 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of California (irrespective of its choice of law
principles).
12.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.8 Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement. Any reference in this Agreement to a statutory
provision or rule or regulation promulgated thereunder shall be deemed to
include any similar successor statutory provision or rule or regulation
promulgated thereunder.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MEADOWBROOK REHABILITATION GROUP, INC.
By
Name
Title
Holders:
By
Name
Title
Address:
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<PAGE>
ANNEX B
CHAPTER 13 OF THE
CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS
1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each stockholder of the corporation
entitled to vote on the transaction and each stockholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the stockholder holds shares to purchase for cash at
their fair market value the shares owned by the stockholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of stockholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
stockholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting stockholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting stockholder has submitted for endorsement, in
accordance with Section 1302.
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(c) As used in this chapter, "dissenting stockholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of a reorganization, any stockholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such stockholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the stockholder desires to exercise the stockholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any stockholder who has a right to require the corporation to purchase
the stockholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the stockholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the stockholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the stockholder.
(c) The demand shall state the number and class of the shares held of
record by the stockholder which the stockholder demands that the corporation
purchase and shall contain a statement of what such stockholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the stockholder to sell the shares at such price.
1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the stockholder, the stockholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the stockholder's certificates representing
any shares which the stockholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the stockholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
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1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the stockholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
stockholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of issues;
appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the stockholder fail to agree upon the fair market value of the
shares, then the stockholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the stockholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting stockholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
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(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting stockholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308. Rights of dissenting stockholders pending valuation; withdrawal of
demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
stockholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309. Termination of dissenting share and stockholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting stockholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
stockholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
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(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting stockholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the stockholder.
(d) The dissenting stockholder, with the consent of the corporation,
withdraws the stockholder's demand for purchase of the dissenting shares.
1310. Suspension of right to compensation or valuation proceedings;
litigation of stockholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the stockholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
1312. Right of dissenting stockholder to attack, set aside or rescind
merger or reorganization; restraining order or injunction; conditions
(a) No stockholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the stockholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any stockholder of such party who has not demanded payment of cash for
such stockholder's shares pursuant to this chapter; but if the stockholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the stockholder shall not thereafter have any right to demand payment
of cash for the stockholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining stockholder or
the class of stockholders of which such stockholder is a member.
B-5
<PAGE>
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the stockholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the stockholders of any party so controlled.
B-6
<PAGE>
ANNEX C
Meadowbrook Rehabilitation Group, Inc.'s Annual Report on Form 10-K for the year
ended June 30, 1997 and Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number
0-19726
MEADOWBROOK REHABILITATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3022377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Powell Street, Suite 800, Emeryville, California 94608
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 420-0900
---------------------
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g)of the Act:
Class A Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
As of September 25, 1997, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant, based on the closing price
for the Registrant's Class A Common Stock in The NASDAQ Stock Market on such
date, was $2,876,545. This calculation does not reflect a determination that
certain persons are affiliates of the Registrant for any other purposes.
The number of shares of Class A Common Stock outstanding on September 25,
1997 was 1,157,244. The number of shares of Class B Common Stock outstanding on
September 25, 1997 was 773,000.
Part III of this Form 10-K incorporates by reference information from the
Registrant's proxy statement with respect to the 1997 Annual Meeting of
Stockholders.
<PAGE>
TABLE OF CONTENTS
Page
PART I. .......................................................... 3
ITEM 1. BUSINESS............................................. 3
ITEM 2. PROPERTIES........................................... 13
ITEM 3. LEGAL PROCEEDINGS.................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................. 15
PART II. .......................................................... 16
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................... 16
ITEM 6. SELECTED FINANCIAL DATA.............................. 17
ITEM 7. .....MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................... 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 27
PART III. ......................................................... 28
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................... 28
ITEM 11. EXECUTIVE COMPENSATION............................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................................... 28
PART IV. ......................................................... 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................. 29
SIGNATURES ................................................. 32
<PAGE>
PART I
ITEM 1 BUSINESS
Meadowbrook Rehabilitation Group, Inc. (together with its subsidiaries, the
"Company" or "Meadowbrook"), sold all of its traditional acute, subacute and
post-acute operations during fiscal 1997 and subsequent to fiscal year end. In
addition, subsequent to fiscal year end, the Company sold certain of its
outpatient rehabilitation clinics in Florida and Georgia. The Board of
Directors' decision to sell its acute, subacute and post-acute operations as
well as certain of the Company's Florida and Georgia outpatient rehabilitation
clinic operations were due to the poor operating results from these businesses
as well as poor prospects for growth in their respective markets. The growth of
these business lines was also limited by the Company's lack of capital to
execute internal growth or strategic acquisitions, which might have given the
Company the critical mass to compete effectively in these business lines.
In October 1996, the Company sold the assets of its post-acute
rehabilitation facility located in Park Ridge, Illinois. On January 13, 1997,
the Company sold its three outpatient rehabilitation clinics in Alaska. On March
31, 1997, the Company sold its Georgia operations, consisting of a
neurobehavioral program, a subacute program operated under a management
agreement, a post-acute program and related real estate. Subsequent to fiscal
year end, the Company sold the assets of its Kansas operations. The Company's
Kansas operations included an acute program, a subacute program and a post-acute
program. The Kansas sale transaction closed on July 31, 1997. On August 31,
1997, the Company sold five outpatient rehabilitation clinics and certain other
assets in Florida and Georgia. In addition, the Company closed six outpatient
rehabilitation clinics in Colorado and Florida during fiscal 1997.
Following such closures and dispositions, the operations of the Company
include its home health agencies with operations in Colorado and Kansas, its
four outpatient rehabilitation clinics in Colorado and three outpatient
rehabilitation clinics (two of which are operated under a management agreement)
in Florida. The Company's recent focus on home health reflects its view that the
home health industry has strong prospects for long-term growth. Currently, the
Company has no plans to divest its home health business and is evaluating
possible opportunities to expand such business. In addition, the Company's Board
of Directors is continuing to evaluate the Company's overall strategic direction
and alternatives. The alternatives under consideration by the Board include,
among other things, a merger or other business combination. There can be no
assurance that any such alternatives will be available on favorable terms, if at
all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing in
non-healthcare businesses. As a result, the nature of the Company's business
could change significantly.
The Company's outpatient rehabilitation and home health businesses
comprised 52% of the Company's fiscal 1997 net operating revenues while the
Company's acute, subacute and post-acute business lines, which where sold during
fiscal 1997 and subsequent to year end, comprised 48%. Descriptions of the
Company's home health and outpatient rehabilitation business lines are provided
below.
See Item 7., "Management's Discussion and Analysis of Financial Condition
and Results of Operations", for further discussion of certain trends, events and
risks affecting the Company's business.
Home Health Services
General. The Company operates home health agencies with operations in
Colorado and Kansas under the name Total Home Health. The Company entered the
home health business because of its experience in acute, subacute and post-acute
healthcare where there is a growing trend toward early discharges of patients
from acute and subacute treatment programs. Many of these patients have not
received the intensity of services that may be necessary for them to achieve a
full recovery from their diseases, disorders, injuries or other traumatic
conditions. As a result, the Company believes that there is an increasing need
for home health services.
Industry. The importance of home healthcare is increasing as a result of
significant economic pressures within the healthcare industry. Total
expenditures within the healthcare industry have increased at twice the rate of
inflation in recent years. The ongoing pressure to contain healthcare costs,
while maintaining high quality care, is accelerating the growth of alternate
site care that reduces hospital admissions and lengths of hospital stays, such
as home healthcare. Home healthcare is one of the fastest growing segments of
the healthcare industry.
The growth in home healthcare is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home healthcare often results in lower costs, which is
increasingly important under managed care. In addition, home healthcare has
grown rapidly as a result of advances in medical technology, which have
facilitated the delivery of services in alternate sites; demographic trends,
such as an aging population; and a strong preference among patients to receive
healthcare in their homes.
Historically, the home healthcare industry has been highly fragmented and
characterized by local providers that typically do not offer a comprehensive
range of cost-effective services. These local providers often do not have the
capital necessary to expand their operations or the range of services offered,
which limits their ability to compete for managed care contracts and other
referrals and to realize efficiencies in their operations. As managed care has
become more prevalent, payors increasingly are seeking home healthcare providers
that offer a cost-effective, comprehensive range of services in each market
served, which further inhibits the ability of local providers to compete
effectively. As a result of these economic and competitive pressures, the home
healthcare industry is undergoing rapid consolidation, a trend the Company
expects will continue.
Strategy. Building on its established presence in Colorado and Kansas, the
Company seeks to further enhance its position in these markets by providing a
full range of cost-effective home healthcare services. To achieve this goal, the
Company intends to more closely coordinate and monitor patient care through its
own nursing staff and in training its employees, identifying patients' needs and
cross-selling the Company's services.
The Company will consider opportunities to expand its existing branch
locations, expand the range of services offered and increase referrals from
managed care organizations. In addition, the Company will review selected
acquisition opportunities in the geographic region in which the Company
operates. Management believes that by developing a substantial market presence
in its geographic region, the Company will be able to increase its referrals
from managed care organizations.
The Company is also targeting managed care organizations by stressing its
disease management programs for the treatment of HIV/AIDS, cancer, and other
chronic illnesses, and by providing customized outcome and utilization reports.
The Company expects that managed care contracts will generate an increasing
number of referrals as the penetration of managed care continues to accelerate.
Products and Services. The Company delivers its services through branches
whose functions include (i) receiving referrals from physicians, (ii) assessing
a patient's needs, (iii) determining the extent of a patient's insurance
coverage and coordinating reimbursement for services, (iv) coordinating the
delivery of care to the patient and (v) supervising the quality of the care the
patient receives.
Each branch is managed by an administrator who is responsible for ensuring
the quality of the services provided by the Company. Coordinators at each site
work with all of the professionals servicing the patient to ensure the proper
management of the patient's care. Offering a full range of home healthcare
services and coordinating that care through its own nursing and therapy staff
allows the Company to offer cost-effective, high quality services.
Nursing and Related Patient Services. Working closely with each patient's
physician, who develops that patient's plan of treatment, the team of clinicians
at the branch closely monitor the patient's course of treatment and provide the
physician with regular reports on the patient's status. Prior to the delivery of
home healthcare, a nurse from the local branch assesses the home environment and
helps determine the suitability of home care and what services are needed.
Nurses continue to visit their patients as needed to carefully monitor their
course of treatment. The Company offers a broad range of nursing and related
patient services, including:
Registered nurses who provide a broad range of nursing care, including
pain management, infusion therapy, skilled observation and assessment
and teaching procedures.
Licensed practical nurses who perform technical nursing procedures,
such as injections and dressing changes.
Physical therapists who provide needed therapies to help patients
improve activities of daily living, as well as structured therapies to
improve mobility and specialized exercise programs.
Occupational therapists who provide structured therapies for increased
independence in the patient's daily living.
Speech therapists who provide therapies to increase a patient's
communication skills and improve swallowing techniques following a
trauma.
Social workers who help patients and their families deal with the
concerns that arise from health problems.
Home health aides who provide assistance, hourly or around-the-clock,
with personal care, such as bathing and walking.
Homemakers/companions who assist with meal preparation and
housekeeping.
<PAGE>
Infusion Therapy Services. Infusion therapies involve the intravenous
administration of anti-infective, chemotherapy, pain management, nutrition and
other therapies. Before accepting a patient for home infusion treatment, the
nursing staff at the local branch works closely with the patient's physician to
assess the patient's suitability for home care. Once it has been determined that
the patient should receive home infusion therapy, the nursing staff trains the
patient and/or patient's family members in the proper use of home infusion
therapy equipment. The Company provides the following home infusion therapy
services:
Enteral nutrition which is the infusion of nutrients through a feeding
tube inserted directly into the functioning portion of a patient's
digestive tract. This long-term therapy is often prescribed for
patients who are unable to eat or drink normally.
Antibiotic therapy which is the infusion of antibiotic medications
into a patient's bloodstream typically to treat a variety of serious
infections and diseases.
Total parenteral nutrition which is the long-term provision of
nutrients through surgically implanted central vein catheters or
through peripherally inserted central catheters, for patients who
cannot absorb adequate nutrients enterally due to chronic
gastrointestinal conditions.
Pain management which involves the infusion of certain drugs into the
bloodstream of patients suffering from acute or chronic pain.
Chemotherapy which is the infusion of drugs into a patient's
bloodstream to treat various forms of cancer.
Other therapies including new delivery technologies and medications to
address a broad range of patient conditions, such as the side effects
associated with transplants, HIV/AIDS and cancer.
Marketing. The Company generates referrals from physicians, hospitals,
discharge planners and other healthcare professionals. Recently, more people
have enrolled in managed care organizations and, as a result, the Company's
traditional referral base has changed. In order to compete, the Company is
continuing its program of marketing its services to managed care organizations.
The Company competes for referrals by offering a full range of cost-effective
home healthcare services, a focus on disease management and a strong regional
presence. The Company believes that its reputation as a cost-conscious provider
of services positions it favorably among managed care organizations.
Each branch manager spends time marketing the Company's services to
referral and payment sources. The marketing techniques employed by the Company
include direct solicitation, direct mail, exhibitions at professional
conferences and seminars, submission of proposals for contractual arrangement,
active participation in community events and ongoing commitment to customer
service.
Corporate personnel work closely with each branch to develop their
abilities to cross-sell the Company's services. The nursing staff assists in the
marketing effort by helping to educate referral sources about the services the
Company offers to its specialized patient populations.
Competition. The home healthcare market is highly competitive and is
undergoing both horizontal and vertical integration. As a result of such
consolidation, the Company's competitors include nationwide operators who have
hundreds of branches. Some of the competitors include hospital chains and
providers of multiple products and services for the home healthcare market. The
established referral networks of certain of these healthcare providers, combined
with their size and purchasing power, make them formidable competitors to the
Company. Managed care organizations, a referral base crucial to the Company's
success, may show a preference to deal with these larger, regional or national
providers, who may offer more services and areas of expertise.
In addition, there are few barriers to entry in the home healthcare market.
New competitors have entered the areas served by the Company and others may do
so in the future. There can be no assurance that such increased competition will
not have a material adverse effect on the Company's operations and financial
condition.
The Company competes on the basis of a number of factors, including the
cost-effectiveness of its services, the quality of its services, and its
reputation and regional focus. The Company's focus on disease management and
emphasis on treating certain patient populations allows it to differentiate
itself from its competitors. By increasing its regional focus and reducing its
overhead to become a low-cost provider, the Company believes that it can compete
against larger alternate healthcare providers.
Outpatient Rehabilitation Services
General. Currently, the Company operates four outpatient rehabilitation
clinics in Colorado and three outpatient rehabilitation clinics (two of which
are operated under a management agreement) in Florida. During fiscal 1997, the
Company closed six outpatient rehabilitation clinics in Colorado and Florida.
Subsequent to fiscal year end, the Company sold five outpatient rehabilitation
clinics in Florida and Georgia. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Company is currently
considering possible opportunities to sell its Colorado outpatient
rehabilitation clinics and its remaining Florida operations.
Products and Services. The Company delivers its services through its
outpatient rehabilitation clinics. The goals of the Company's outpatient
rehabilitation services are to improve a patient's physical strength and range
of motion, reduce pain, help prevent re-injury and restore the ability to
perform basic activities. The primary services provided are:
Therapy Modalities and Therapeutic Exercises. Each patient receives an
initial evaluation by a licensed therapist and based on that
evaluation, an individualized rehabilitation program is developed for
the patient. Patients may be treated in the Company's outpatient
rehabilitation clinics or in nursing homes where the Company has
contracts to provide such services. At these locations, the Company
provides a full range of therapy services, including physical therapy,
occupational therapy, speech/language therapy and social services.
Patients undergo varying courses of therapy dependent upon their
needs. Some patients may only require a few hours of therapy per week
for a few weeks, while others may remain in therapy up to six months
or more, depending on the nature, severity and complexity of their
injuries.
Functional Capacity Assessment. The Company also provides functional
capacity assessments to evaluate the physical condition and endurance
of a current or prospective employee to meet the requirements of
employment. The assessment may be used by employers, insurers and
other payors to estimate the extent of rehabilitation treatment needed
or as an objective method of evaluating specific work capacity.
Preventative Services. The Company also provides services designed to
prevent or avoid injuries in the work place. These preventative
services, which may be performed at an employer's work site, include
programs to teach employees proper body mechanics, techniques and
detailed analysis of specific job activities, such as lifting, with
the goal of changing how a job is performed to prevent injuries to
employees.
Marketing. The Company's marketing strategy is to develop a broad base of
referral sources for its outpatient rehabilitation services on regional and
local levels. In marketing its services, the Company focuses on the high quality
of its services and its geographic presence in Colorado. The Company also
emphasizes its outcome oriented approach to rehabilitation.
On a regional and local level, the Company targets hospital discharge
planners, regional HMOs, PPOs and other managed care providers and physicians
for referrals. Families are also a source of referrals, often due to information
provided by family support organizations or past experience with the Company.
The Company has secured contracts with numerous insurance companies, and
continues to pursue contractual relationships with payors at the regional and
local level.
Competition. The outpatient rehabilitation industry is highly competitive
and subject to continual changes in the manner in which services are provided
and in which providers are selected. Depending upon the geographic market, the
Company may compete with national, regional or local providers.
The Company competes with regional and national outpatient rehabilitation
providers for Medicare, Medicaid and private payor patients. The Company also
competes with these entities in the recruitment of therapists and other skilled
professionals. Many of the Company's competitors have far greater financial and
personnel resources than the Company.
The primary competitive factors in the outpatient rehabilitation industry
remain quality of care, responsiveness to the patients' and payors' needs,
durable outcomes and cost-effectiveness.
The Company's outpatient rehabilitation business has been affected by the
healthcare industry's emphasis on cost containment and managed care, coupled
with increased competition for national contracts. During the past several years
the Company was adversely affected by the competitive pressure to reduce
healthcare costs. An increase in the number of providers offering similar
services resulted in a shift of patients to other providers, and lower
reimbursement rates. These factors contributed to the Company's decision to sell
or close a number of its outpatient rehabilitation clinics during fiscal 1997
and subsequent to fiscal year end. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<PAGE>
Sources of Revenues and Reimbursement
The following table sets forth the dollar volume and percentage of the
Company's net operating revenues derived from each business line:
Year Ended
June 30, 1997
------------------
(000's) %
Acute, Subacute and Post-Acute Rehabilitation
Services................................... $9,990 48%
Outpatient Rehabilitation Services ........... 4,541 22%
Home Health Services.......................... 6,303 30%
------- -------
Net Operating Revenues ....................... $20,834 100%
======= =======
The following table sets forth the percentage of the Company's net
operating revenues from private payors, Medicare and Medicaid for the periods
indicated:
Source Year Ended June 30,
------ ------------------------------------
1995 1996 1997
---- ---- ----
Private payors and commercial insurance .... 67% 59% 51%
Medicare ................................... 16% 34% 41%
Medicaid ................................... 17% 7% 8%
---- ---- ----
Total ................................ 100% 100% 100%
==== ==== ====
Private payors include indemnity insurance carriers, HMOs, workers'
compensation programs and self-paying patients. The Company's charges for such
patients are established by the Company, although in the Company's traditional
business it negotiated fixed-rate contractual arrangements with numerous
individual patients and third party payors, including insurance companies and
managed care providers. The increase in the percentage of net operating revenue
received from Medicare during fiscal 1996 and 1997 reflects the increased
proportion of Medicare patients at the Company's home health agencies in
Colorado and Kansas.
During fiscal 1997 and subsequent to year end the Company sold all of its
acute, subacute and post-acute facilities as well as its outpatient
rehabilitation clinics in Alaska and five outpatient rehabilitation clinics and
certain other assets in Florida and Georgia. In addition, the Company closed six
outpatient rehabilitation clinics in Colorado and Florida during fiscal 1997.
The Company currently operates home health agencies with operations in Colorado
and Kansas, four outpatient rehabilitation clinics in Colorado and three
outpatient rehabilitation clinics (two of which are operated under a management
agreement) in Florida. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<PAGE>
The following table sets forth the percentage of the Company's net
operating revenues for fiscal 1997 assuming that the dispositions referred to
above had taken place at the beginning of fiscal 1997:
Year Ended
June 30,
Source 1997
------ ----------
Private payors and commercial insurance .... 21%
Medicare ................................... 67%
Medicaid.................................... 12%
----------
Total............................ 100%
==========
During fiscal 1997, the Company provided inpatient and outpatient services
to Medicare patients at several of its facilities and in its home health
business. The Medicare program generally utilizes a cost-based reimbursement
system for rehabilitation services under which home health agencies, certified
SNFs, rehabilitation agencies, and certified outpatient rehabilitation
facilities ("CORFs") are reimbursed for the reasonable direct and indirect
allowable costs incurred in providing routine care, plus a return on equity,
subject to certain cost ceilings. These costs normally include allowances for
administrative and general costs and the cost of property and equipment
(depreciation and interest or rent expense). The Company files annual cost
reports for each cost-reimbursed facility. These cost reports serve as the basis
for determining the prior year's cost settlements and interim per diem payment
rates for the next year.
The Company has applied for an exception from such cost ceilings for fiscal
years 1992 through 1995 for its former Gardner, Kansas facility. The Company did
not transfer accounts receivable in connection with the sale of its Kansas
operations. Accordingly the Company intends to file such requests for the Kansas
facility for fiscal years 1996 and 1997. These exceptions are based on atypical
costs incurred in providing more intensive services to its patients than those
typically rendered in a SNF. See "Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Cost-based reimbursement is generally subject to retrospective audit and
adjustment. In conducting annual reviews of a facility's or home health agency's
reimbursement rates, Medicare may determine that payments previously made to a
facility on an interim basis were in excess of allowable costs and may recover
any such overpayments by reducing future payments to the affected facility or
other facilities operated by the same owner. Management believes that it has
properly applied the Medicare payment formula and that any future adjustments
arising from such retrospective audits should have no material adverse effect on
the Company.
Regulation
The healthcare industry is subject to substantial federal, state and local
government regulation. These regulations affect the Company primarily by
requiring licensing or certification of its facilities and controlling
reimbursement for services.
Licensing is regulated by the states, while Medicare certification is
federally administered. Generally, licensing and Medicare certification follow
specific standards and requirements. Compliance is monitored by periodic on-site
inspections by representatives of applicable government agencies.
The Company believes that all the facilities and programs operated by the
Company are duly licensed in accordance with the requirements of federal, state
and local agencies having jurisdiction over its operations. However, there can
be no assurance that changes in present laws or interpretations of current laws
would not have a material adverse effect on the Company.
Certain state laws prohibit general business corporations from practicing
or holding themselves out as a practitioner of medicine. The Company neither
employs physicians to practice medicine nor holds itself out as a medical
practitioner. Generally, the corporate practice of medicine doctrine has not
been construed by the courts to apply to the type of health professionals
employed by the Company. The Company believes it is in compliance with state
laws prohibiting the corporate practice of medicine. However, there can be no
assurance that changes in interpretations of the laws would not adversely affect
the Company's operations. In any event, the Company believes that it will be
able to adjust its operations to bring the Company in compliance with the law if
so required.
The Company's Colorado and Kansas home health agencies and its Colorado
outpatient rehabilitation clinics are certified to participate in Medicare. In
order to receive Medicare reimbursement, all of the Company's certified
facilities must meet the applicable conditions promulgated by the United States
Department of Health and Human Services relating to standards of patient care,
type of facility, equipment and personnel and must comply with all state and
local laws, rules and regulations. These facilities undergo routine Medicare
certification surveys. To date, the Company's Medicare certified facilities have
been found to be in compliance with Medicare requirements. The Company files
annual cost reports for its Medicare certified facilities to determine cost
settlements for the most recent fiscal year, and interim payment rates for the
following year.
The Company is also subject to federal and state fraud and abuse laws
prohibiting direct or indirect payments for patient referrals, prohibiting
referrals to an entity in which the referring provider has a financial interest,
and regulating reimbursement procedures and practices under Medicare, Medicaid
and state programs as well as in relation to private payors. While the Company
believes that it is in material compliance with such laws, it continues to
monitor its compliance.
The anti-kickback provisions of the federal Medicare and Medicaid Patient
and Program Protection Act of 1987 (the "Anti-kickback Statute") prohibit the
offer, payment, solicitation or receipt of any remuneration in return for the
referral of items or services paid for in whole or in part under the Medicare or
Medicaid programs (or certain other state healthcare programs). To date, courts
and government agencies have interpreted the Anti-kickback Statute to apply to a
broad range of financial relationships between providers and referral sources,
such as physicians and other practitioners. The United States Department of
Health and Human Services has adopted regulations creating "safe harbors" for
federal criminal and civil penalties under the Anti-kickback Statute by
exempting certain types of ownership interests and other financial arrangements
that do not appear to pose a threat of Medicare and Medicaid program abuse.
Transactions covered by the Anti-kickback Statue that do not conform to an
applicable safe harbor are not necessarily in violation of the Anti-kickback
Statute, but the practice may be subject to increased scrutiny and possible
prosecution. The criminal penalty for conviction under the Anti-kickback Statute
is a fine of up to $25,000 and/or up to 5 years imprisonment. In addition,
conviction mandates exclusion from participation in the Medicare and Medicaid
programs. Such exclusion can also result in conviction under other federal laws
which impose civil and criminal penalties for submitting false claims, such as
claims for services not provided as alleged. Several healthcare reform proposals
have included an expansion of the Anti-kickback Statute to apply to referrals of
any patients regardless of payor source.
The federal government has increased significantly the financial and human
resources allocated to enforcing the fraud and abuse laws. It is the Company's
policy to monitor its compliance with such laws and to take appropriate actions
to ensure such compliance. While the Company believes that it is in material
compliance with such laws, there can be no assurance that the practices of the
Company, if reviewed, would be found to be in full compliance with such laws, as
such laws ultimately may be interpreted.
Insurance
The Company maintains professional malpractice liability coverage for each
of its facilities in addition to a claims made policy for its professional and
general liability coverage. The policy covers only claims that are filed within
the policy period. The Company intends to continue to carry such insurance,
although there can be no assurance that coverage will continue to be available
in adequate amounts or at a reasonable cost.
Employees
At June 30, 1996 and 1997, the Company had the following employees:
June 30,
-----------
1996 1997
---- ----
Full-Time Employees 412 274
Part-Time Employees 73 38
On-Call Per Diem Employees 128 113
---- ----
Total Employees 613 425
==== ====
Of the full-time employees at June 30, 1996 and 1997, 15 and 11 persons,
respectively, were employed at the Company's headquarters in Emeryville,
California. None of the Company's employees are represented by a labor union,
and the Company is not aware of any current activities to unionize its
employees. Management considers the relationship between the Company and its
employees to be positive. The 35 employees at the Company's former Florida
outpatient clinics were employed under a staff leasing arrangement at June 30,
1997. The employees were under contract with a staff leasing agency which
provides payroll processing services and comprehensive health and workers'
compensation benefits. All other liabilities related to the employees are
assumed by the Company. These employees are included in the table above.
The sale of the Company's Georgia and Illinois operations in fiscal 1997,
resulted in a total reduction of 191 employees. These employees are included in
the June 30, 1996 totals set forth above. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
<PAGE>
The following table reflects the approximate number of people employed by
the Company, as of the date of this report, at the Company's outpatient
rehabilitation clinics in Colorado and Florida, the home health agencies with
operations in Colorado and Kansas, and the Company's headquarters.
Full-Time Employees 184
Part-Time Employees 26
On-Call Per Diem Employees 87
----
Total Employees 297
====
Although the Company has a sufficient pool of skilled employees to staff
its programs at current levels, there is no assurance that in the event that the
Company grows it would be able to meet its needs for such medical professionals
due to a general shortage of qualified therapists.
ITEM 2 PROPERTIES
Operating Facilities
Outpatient Rehabilitation Clinics and Home Health Agencies
As of the date of this report, the Company operates four outpatient
rehabilitation clinics in Colorado, three outpatient rehabilitation clinics (two
of which are operated under a management agreement) in Florida and fifteen home
health agencies and satellite locations.
Colorado Outpatient Rehabilitation Clinics Location
------------------------------------------ --------
Medbrook Rehab Center of Colorado Colorado City, CO
Medbrook Rehab Center of Colorado Monte Vista, CO
Medbrook Rehab Center of Colorado Pueblo, CO
Medbrook Rehab Center of Colorado Trinidad, CO
Florida Outpatient Rehabilitation Clinics
-----------------------------------------
Medbrook Rehab Center Jacksonville, FL
Medbrook Rehab Center Jacksonville, FL
Medbrook Rehab Center St. Augustine, FL
Home Health
-----------
Total Home Health, Inc. Colorado Springs,CO
Total Home Health, Inc. Cortez, CO
Total Home Health, Inc. Delta, CO
Total Home Health, Inc. Florence, CO
Total Home Health, Inc. Holly, CO
Total Home Health, Inc. La Junta, CO
Total Home Health, Inc. Lamar, CO
Total Home Health, Inc. Montrose, CO
Total Home Health, Inc. Pueblo, CO
Total Home Health, Inc. Rocky Ford, CO
Total Home Health, Inc. Trinidad, CO
Total Home Health, Inc. Walsenburg, CO
Total Home Health, Inc. Dodge City, KS
Total Home Health, Inc. Garden City, KS
Total Home Health, Inc. Leoti, KS
<PAGE>
Sold or Closed Locations
During fiscal 1997 and subsequent to year end the Company sold or closed the
following locations:
Colorado and Alaska Outpatient Facilities Location
------------------------------------------ --------
Medbrook Rehab Center of Alaska Kenai, Ak
Medbrook Rehab Center of Alaska North Pole, AK
Medbrook Rehab Center of Alaska Soldotna, AK
Medbrook Rehab Center of Colorado Colorado Springs, CO
Medbrook Rehab Center of Colorado Florence, CO
Medbrook Rehab Center of Colorado Las Animas, CO
Medbrook Rehab Center of Colorado Rifle, CO
Medbrook Rehab Center of Colorado Walsenburg, CO
Medbrook Rehab Center of Colorado Woodland Park, CO
Florida Outpatient Facilities Location
----------------------------- --------
Beaches Physical Therapy St. Augustine, FL
Body Anew Ormond Beach, FL
Bodymax Physical Therapy of Palatka Palatka, FL
Medbrook Rehab Center Daytona, FL
Medbrook Rehab Center Palm Coast, FL
Medbrook Rehab Center St. Augustine, FL
Moultrie Physical Therapy Moultrie, GA
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Acute Rehabilitation Facility Location Capacity Date Opened
----------------------------- -------- -------- -----------
Meadowbrook Rehabilitation Hospital of Kansas Gardner, KS 63 Beds December 1986
Subacute Rehabilitation Facilities
----------------------------------
Meadowbrook Rehabilitation Hospital of Kansas Gardner, KS 21 Beds December 1986
Meadowbrook of Atlanta Lithia Springs, GA 48 Beds June 1995
Meadowbrook of Atlanta (The Neurobehavioral Ctr.) Atlanta, GA 22 Beds July 1991
Post-Acute, TLCs and Day Treatment Clinics
------------------------------------------
Meadowbrook Rehabilitation Hospital of Kansas Gardner, KS 4 Patients July 1987
Meadowbrook of Atlanta Decatur, GA 12 Patients December 1988
Meadowbrook of Chicago Park Ridge, IL 12 Patients May 1990
</TABLE>
The Company cannot calculate a patient utilization percentage for the
Company's outpatient rehabilitation facilities or home health agencies because
there is no measurable capacity for the potential number of visits.
The Company leases all of its properties. The Company maintains its
corporate office in Emeryville, California under a lease which expires in
October 1997.
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Executive Officers of the Registrant
In addition to Harvey Wm. Glasser, M.D., the only other executive officer
of the Company is James F. Murphy. Mr. Murphy joined the Company in March 1994,
as Vice President and Chief Financial Officer. From July 1993 to March 1994, Mr.
Murphy served as a consultant to the Company. From December 1991 to March 1994,
Mr. Murphy operated a financial consulting firm specializing in corporate
restructuring. Prior to that, Mr. Murphy worked in finance for a large real
estate developer. Mr. Murphy worked for Arthur Andersen LLP from 1986 to 1990
and received his C.P.A. in 1989. Mr. Murphy is 35 years old.
All officers of the Company serve at the pleasure of the Board of
Directors.
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on The NASDAQ Stock Market. On
September 25, 1997, the closing sales price of the Class A Common Stock was
$2.50 per share.
The table below sets forth the quarterly high and low closing sales prices
for the Class A Common Stock in the period from July 1, 1995 through June 30,
1997 (giving effect to the one-for-three reverse stock split reflected on April
22, 1996 as if it had occurred on July 1, 1995):
Fiscal 1996 Fiscal 1997
----------- -----------
Quarter High Low High Low
------- ---- --- ---- ---
1st $7 1/2 $6 $2 3/4 $1
2nd $6 $1 1/2 $2 3/4 $1 3/8
3rd $4 1/2 $2 1/4 $1 13/16 $1 5/8
4th $4 1/4 $1 1/2 $2 1/2 $1 7/8
The Company has not paid cash dividends in the past and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
As of September 25, 1997, there were 74 holders of record of the Company's
Class A Common Stock and one holder of record of the Company's Class B Common
Stock. There is no public trading market for the Class B Common Stock.
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Year Ended June 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net operating revenues $28,650 $18,052 $19,974 $23,623 $20,834
Non-capital operating expenses:
Salaries and employee benefits 15,905 11,107 12,036 15,189 14,877
Provision for doubtful accounts 3,681 1,099 1,371 584 454
Other non-capital operating expenses 8,639 6,353 5,821 5,986 5,650
Write-down of intangible assets -- -- 1,030 -- 1,440
Net loss on disposal and provision
for subsequent disposal of assets -- -- -- -- 82
-------- -------- -------- -------- --------
Total non-capital operating expenses 28,225 18,559 20,258 21,759 22,503
-------- -------- -------- -------- --------
Capital expenses:
Depreciation and amortization 497 479 543 586 572
Rent 3,085 2,223 2,351 1,953 1,635
Interest expense (income) (201) (193) 26 (114) (55)
-------- -------- -------- -------- --------
Total capital expenses 3,381 2,509 2,920 2,425 2,152
-------- -------- -------- -------- --------
Restructuring charges 1,041 675 310 -- --
Settlement of litigation -- 1,438 -- -- --
-------- -------- -------- -------- --------
Total expenses 32,647 23,181 23,488 24,184 24,655
-------- -------- -------- -------- --------
Net loss before income taxes and minority
interest (3,997) (5,129) (3,514) (561) (3,821)
Income tax provision (benefit) (1,244) (787) (93) -- --
-------- -------- -------- -------- --------
Net loss before minority interest ($2,753) ($4,342) ($3,421) ($561) ($3,821)
Minority interest -- 30 108 29 30
-------- -------- -------- -------- --------
Net loss ($2,753) ($4,372) ($3,529) ($590) ($3,851)
======== ======== ======== ======== ========
Net loss per common share ($1.42) ($2.26) ($1.82) ($0.31) ($1.99)
Weighted average common shares used in per
common share calculation 1,943 1,939 1,937 1,930 1,930
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $16,451 $11,889 $7,711 $6,519 $4,815
Total assets 23,058 18,587 16,304 14,840 9,548
Long-term liabilities and capital lease
obligations 129 550 1,074 658 49
Stockholders' equity 18,721 14,249 10,677 10,086 6,236
</TABLE>
During fiscal 1997 and subsequent to year end the Company sold all of its
acute, subacute and post-acute facilities as well as its outpatient
rehabilitation clinics in Alaska, and certain outpatient rehabilitation clinics
in Florida and Georgia. In addition, the Company closed six outpatient
rehabilitation clinics in Colorado and Florida during fiscal 1997. The Company
currently operates home health agencies with operations in Colorado and Kansas,
four outpatient rehabilitation clinics in Colorado and three outpatient
rehabilitation clinics (two of which are operated under a management agreement)
in Florida.
<PAGE>
The following table sets forth unaudited pro forma selected financial data
for the twelve months ended June 30, 1997 as if the asset dispositions that have
occurred since July 1, 1996 had taken place on July 1, 1996. Such unaudited pro
forma financial information reflects all adjustments for the twelve months ended
June 30, 1997, consisting only of normal recurring adjustments which, in the
opinion of management, are necessary to fairly state the Company's results of
its operations for the period presented. The unaudited pro forma financial
information does not purport to present the consolidated financial position and
consolidated results of operations of the Company had the dispositions actually
occurred on July 1, 1996; nor does it purport to be indicative of results that
will be attained in the future. The pro forma financial information should be
read in conjunction with the Company's Form 8-K dated March 31, 1997, the
Company's Form 8-K dated July 31, 1997, and the Company's Form 8-K dated August
31, 1997.
Year Ended
June 30,
1997
---------------------
(In thousands, except
per share data)
Pro Forma Statements of Operations Data:
Net operating revenues $9,186
Non-capital operating expenses:
Salaries and employee benefits 6,216
Provision for doubtful accounts 82
Other non-capital operating expenses 2,675
Loss on disposal of assets 7
-------
Total non-capital operating expenses 8,980
Capital expenses:
Depreciation and amortization 249
Rent 508
Interest expense (income) (270)
-------
Total capital expenses 487
-------
Net loss before income taxes (281)
Income tax provision (benefit) --
-------
Net loss ($281)
=======
Net loss per common share ($0.15)
Weighted average common shares used in per
common share calculation 1,930
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TRENDS AND RECENT EVENTS
Potential Ineligibility for Continued Listing on the NASDAQ National Market
The NASDAQ Stock Market has adopted new quantitative maintenance
requirements for continued listing on the NASDAQ National Market. The new
criteria become effective on February 23, 1998. The Company currently is in
compliance with all of the new criteria for continued NASDAQ National Market
listing except for the requirement that the market value of its public float be
at least $5 million. The Company estimates that the market value of its public
float as of September 25, 1997 is $2,877,000. If the Company is not in
compliance with the new maintenance criteria on the effective date, the Company
understands that it would be moved to the NASDAQ SmallCap Market. Delisting from
the NASDAQ National Market could have an adverse effect on the liquidity of the
Company's Class A Common Stock.
<PAGE>
Consideration of Strategic Alternatives
Since the beginning of fiscal 1997, the Company has disposed of
substantially all of its operating assets. On August 31, 1997, the Company sold
five of its outpatient rehabilitation clinics in Florida and Georgia and certain
other assets. On July 31, 1997, the Company sold its Kansas operations. On March
31, 1997, the Company sold all of its Georgia operations, consisting of a
neurobehavioral program, a subacute program operated under a management
agreement, and a post-acute program. Earlier in fiscal 1997, the Company sold
its post-acute program in Illinois and its outpatient rehabilitation clinics in
Alaska. In addition, the Company closed six outpatient rehabilitation clinics in
Colorado and Florida during fiscal 1997. The Board of Directors of the Company
is continuing to evaluate the Company's strategic direction and alternatives.
The alternatives under consideration by the Board include, among other things, a
merger or other business combination and/or additional sales of assets. There
can be no assurance that any such alternatives will be available on favorable
terms, if at all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing the
proceeds from its asset sales in non-healthcare businesses. As a result, the
nature of the Company's business could change significantly. Dr. Glasser holds a
majority of the combined voting power of the Company's two classes of common
stock and, accordingly, has the ability to effect a change in management or to
cause or prevent a significant corporate transaction regardless of how other
stockholders might vote.
Recent Asset Dispositions
Sale of Florida Operations. On August 31, 1997, the Company sold five
outpatient rehabilitation clinics and certain other assets located in Florida
and Georgia. The outpatient rehabilitation clinics were located in St.
Augustine, Palatka, Palm Coast, and Ormond Beach, Florida and in Moultrie,
Georgia. The Company sold the clinics in two separate transactions. The
aggregate sale price for the outpatient rehabilitation clinics and other assets
was $550,000. The Company received promissory notes from the purchasers for the
aggregate purchase price. The promissory notes are secured by the acquired
assets and the Company also received personal guarantees from the stockholders
of the purchasers. The purchasers acquired all assets including accounts
receivable and are responsible for all accounts payable and certain payroll
liabilities. As part of the transaction, the Company retained all liabilities
for amounts due to the former owners of the clinics. At closing, this amount was
$197,000. This transaction resulted in a loss of $2,046,000, primarily as a
result of the write-down of goodwill associated with the Company's acquisition
of certain of the clinics in 1994. The loss is recorded as other operating
expense in the Company's June 30, 1997 financial statements.
Sale of Kansas Operations. On July 31, 1997, the Company sold its Kansas
operations, consisting of acute, subacute and post-acute rehabilitation
programs. The sale price for the Kansas operations was $1,500,000 in cash. The
Company's agreement with the purchaser provides that the Company retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. The increase in the Company's cash position as a result of
this transaction, assuming collection of the accounts receivable, will be
approximately $2,500,000. This transaction will result in a gain of
approximately $1,178,000. This gain will be reflected in the Company's first
quarter fiscal 1998 results.
Sale of Georgia Operations. On March 31, 1997, the Company sold its Georgia
operations, consisting of a neurobehavioral program, a subacute program operated
under a management agreement, and a post-acute program and related real estate.
The sale price for the Georgia operations was $1,300,000 in cash. The Company's
agreement with the purchaser provided that the Company retain outstanding
accounts receivable and be responsible for the accounts payable at the closing
date. This transaction resulted in a gain of $517,000, which was recorded as
other operating income in fiscal 1997.
Sale of Alaska Operations. On January 13, 1997, the Company sold its three
outpatient rehabilitation clinics in Alaska. The sale price was $200,000. This
transaction resulted in a loss of $29,000, which was recorded as other operating
expense during fiscal 1997.
Sale of Illinois Operations. On October 7, 1996, the Company sold the
assets of its post-acute rehabilitation operations located in Park Ridge,
Illinois for $100,000 in cash. The Company's agreement with the purchaser
provided that the Company retain outstanding accounts receivable and be
responsible for the accounts payable at the closing date. This transaction
resulted in a gain of $63,000, which was recorded as other operating income
during fiscal 1997.
Colorado Outpatient Clinics and Home Health Agency Acquisition. On June 30,
1995, the Company acquired eleven outpatient rehabilitation clinics in Colorado,
three outpatient rehabilitation clinics in Alaska and home health agencies with
operations in Colorado, New Mexico and Kansas. The Company paid $133,000 and
incurred liabilities of $572,000 in connection with the purchase. The Company
also agreed to make additional payments based on the earnings performance of the
outpatient rehabilitation clinics and the home health agencies based on the
results for the twelve month periods ending June 30, 1996 through 1999. The
Company was not required to make any cash payment based on results as of June
30, 1996 or 1997. If the operations collectively achieve the target earnings
thresholds for the twelve months ending June 30, 1998 and 1999, the Company's
maximum liability would be $550,000. During fiscal 1997 the Company closed its
home health agency in New Mexico.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts receivable balance then outstanding.
However, accounts receivable collections have not been sufficient to repay the
loan, and the loan balance on June 30, 1997 was $249,000. This loan balance is
collateralized by personal assets of the debtor.
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the home health agencies were being withheld to offset
amounts due by the previous owner for final settlement of the home health
agencies' cost reports for the years 1992 through 1995. While the intermediary
resumed making payments for current charges in January 1996, the intermediary
had withheld $728,000 related to these settlements. During the second quarter of
fiscal 1997, the Company received $425,000 in payment of amounts withheld. The
Company has submitted appeals on behalf of the previous owner requesting payment
of the remaining balance. In the event that such appeals are unsuccessful, the
Company intends to pursue collection from the previous owner and offset the
amounts withheld against any additional amounts due to the previous owner under
the acquisition agreements. Amounts owed to the Company as of June 30, 1997, by
Medicare and the previous owner of the Colorado operations exceed the minimum
amounts owed to the previous owner by $237,000.
On January 1, 1996, the Company acquired the assets of two physical therapy
clinics in Pueblo and Colorado City, Colorado. In connection with the
acquisitions, the Company paid $45,000 and became obligated to pay an additional
$20,000. Additionally, the Company assumed liabilities of $75,000.
On April 1, 1996, the Company acquired the assets of a contract therapy
business with operations in Pueblo and Colorado Springs, Colorado. The business
provides therapy staffing to hospitals, nursing homes and home health agencies.
In connection with the acquisition, the Company paid $10,000 and assumed
liabilities for leasehold improvements of $62,000.
Healthcare Regulation and Reform
Continuing political debate is subjecting the healthcare industry to
significant reform. Healthcare reform proposals have been formulated by the
current administration, members of Congress, and, periodically, state
legislators. These proposals include the current administration's announcement
of a "crack down on fraud in the home healthcare industry" and the related six
month moratorium on the admission of new home health providers into the Medicare
program. Government officials can be expected to continue to review and assess
alternative healthcare delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors. Legislative changes to "balance the budget" and
slow the annual rate of growth of Medicare and Medicaid are expected. Such
changes may adversely impact reimbursement for the Company's services.
Forward-looking Statements
In addition to the historical information contained herein, this Form 10-K
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to risks and uncertainties, including
risks and uncertainties set forth in this Form 10-K, that may cause actual
results to differ materially. These forward-looking statements speak only as of
the date hereof. The Company disclaims any intent or obligation to update these
forward-looking statements.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the relationship, as a percentage of net
operating revenues, of certain items included in the Company's consolidated
statements of operations for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
<S> <C> <C> <C>
Statements of Operations Data: 1995 1996 1997
---- ---- ----
Net operating revenues 100.0% 100.0% 100.0%
------- ------- -------
Non-capital operating expenses:
Salaries and employee benefits 60.3 64.3 71.4
Provision for doubtful accounts 6.9 2.5 2.2
Other non-capital operating expenses 29.1 25.3 27.1
Write-down of intangible assets 5.2 -- 6.9
Net loss on disposal and provision for
subsequent disposal of assets -- -- 0.4
------- ------- -------
Total non-capital operating expenses 101.5 92.1 108.0
------- ------- -------
Capital expenses:
Depreciation and amortization 2.7 2.5 2.8
Rent 11.8 8.3 7.9
Interest (income) expense 0.1 (0.5) (0.3)
------- ------- -------
Total capital expenses 14.6 10.3 10.4
------- ------- -------
Restructuring charges 1.6 -- --
------- ------- -------
Total expenses 117.7 102.4 118.4
------- ------- -------
Net loss before income taxes and minority
interest (17.7) (2.4) (18.4)
Income tax provision (benefit) (0.5) -- --
------- ------- -------
Net (loss) before minority interest (17.2) (2.4) (18.4)
Minority interest 0.5 0.1 0.1
------- ------- -------
Net (loss) (17.7%) (2.5%) (18.5%)
======= ======= =======
</TABLE>
Year ended June 30, 1997 Compared to the Year ended June 30, 1996
The Company's net operating revenues decreased 12% to $20,834,000 for the
year ended June 30, 1997, as compared to $23,623,000 in the prior fiscal year.
The decrease was due to decreased patient volume at the Company's Kansas
facility, as well as the sale of the Company's Illinois operations in October
1996, the sale of the Company's Alaska operations in December 1996, and the sale
of the Company's Georgia operations in March 1997. See "Trends and Recent
Events". The number of patient days in the Company's former core business
decreased 23% to 20,846 patient days for the year ended June 30, 1997, from
27,014 in the prior fiscal year. The decrease was primarily due to lower census
levels at the Company's Kansas facility and the sale transactions referred to
above.
Below is a summary of net operating revenues and patient days for fiscal
1996 and 1997 with respect to the operations sold by the Company during fiscal
1997:
Net Operating Revenues Patient Days
Fiscal year Fiscal year
------------------------ ----------------
1996 1997 1996 1997
---------- ---------- ------ ------
Alaska $696,000 $372,000 N/A N/A
Georgia 6,068,000 4,856,000 13,767 10,672
Illinois 1,803,000 307,000 3,142 614
---------- ---------- ------ ------
Total $8,567,000 $5,535,000 16,909 11,286
========== ========== ====== ======
The decrease in net operating revenues in the Company's former core
business was partially offset by increased net operating revenues in the
Company's home health business. The number of patient visits in the Company's
home health business increased 46% to 126,510 patient visits for the year ended
June 30, 1997, from 86,868 patient visits in the prior fiscal year.
In the following discussion, the Company distinguishes between capital and
non-capital operating expenses. This distinction is made to clarify those costs
that are controllable from those costs that are not controllable, in the short
term. Capital expenses such as rent are generally fixed in the short term.
Non-capital operating expenses such as employee costs are generally variable in
the short term and are therefore subject to faster management intervention as
business conditions change.
Total non-capital operating expenses increased 3% for the year ended June
30, 1997, to $22,503,000, as compared to $21,759,000 for the same period in the
prior fiscal year. The increase relates primarily to the write-down of
intangible assets and provision for the loss on the subsequent disposition of
the Company's Florida operations totaling $2,046,000. Such loss was partially
offset by the net gain of $524,000 recorded on the sale of the Company's Alaska,
Georgia and Illinois operations, as well as losses on the sale of certain other
assets. Salaries and employee benefits continue to be the primary component of
the Company's non-capital operating expenses. Salaries and employee benefits
decreased 2% to $14,877,000 for the year ended June 30, 1997, as compared to
$15,189,000 for the same period in the prior fiscal year.
The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services and other operating expenses. For the year
ended June 30, 1997, the Company's other non-capital operating expenses
decreased 6% to $5,650,000, as compared to $5,986,000 for the same period in the
prior fiscal year. The decrease is primarily due to lower purchased services and
professional fees as a result of the sale of the Company's Alaska, Georgia and
Illinois operations during fiscal 1997. The provision for doubtful accounts
decreased to $454,000 for the year ended June 30, 1997, from $584,000 for the
same period in the prior fiscal year. The provision for doubtful accounts as a
percentage of revenues was 2% for fiscal 1996 and 1997.
Total capital expenses decreased 11% for the year ended June 30, 1997, to
$2,152,000 as compared to $2,425,000 for the same period in the prior fiscal
year. Rent expense decreased 16% to $1,635,000 for the year ended June 30, 1997
as compared to $1,953,000 for the same period in the prior fiscal year. The
decrease in rent expense is primarily due to lower rents paid under leases
requiring payments on the basis of net operating revenue and patient volume at
certain facilities, as well as the sale of the Company's Alaska, Georgia and
Illinois operations during fiscal 1997.
Net interest income for the year ended June 30, 1997, decreased to $55,000
as compared to $114,000 for the same period in the prior fiscal year. This
decrease is due to lower cash balances available for investment during fiscal
1997.
The Company reported a net loss of $3,851,000 for the year ended June 30,
1997, as compared to a net loss of $590,000 for the same period in the prior
fiscal year. The fiscal 1997 loss included the $1,522,000 net loss incurred in
connection with the sale of certain operations during and subsequent to fiscal
1997. The Company did not record a tax benefit for fiscal years 1996 and 1997
because carrybacks of current losses against previous taxable earnings are no
longer available.
<PAGE>
Year ended June 30, 1996 Compared to the Year ended June 30, 1995
The Company's net operating revenues increased 18% to $23,623,000 for the
year ended June 30, 1996, as compared to $19,974,000 in the prior fiscal year.
The increase was due primarily to net operating revenue of $7,127,000 generated
by the Colorado outpatient clinics and Colorado and Kansas home health business
during fiscal 1996, and to favorable prior year cost report settlements of
$603,000 recorded in the second quarter of fiscal 1996, related to its former
San Jose, California facility and its Gardner, Kansas facility. The
comparability of fiscal 1996 and 1995 net operating revenues was affected by the
closure of the Company's psychiatric partial hospitalization program during the
first quarter of fiscal 1996 and the conversion in June 1995, of the Company's
Georgia subacute facility from a leased unit to a management arrangement under
which the Company's revenue consists primarily of management fees. Fiscal 1996
net operating revenues also reflect decreased utilization of the Company's core
facilities (i.e., its acute, subacute and post-acute rehabilitation units in
Georgia, Illinois and Kansas). Excluding the Company's Arlington, Texas
post-acute facility which was closed in fiscal 1995, the number of patient days
in the Company's core business decreased 7% to 27,014 patient days for the
fiscal year ended June 30, 1996, from 28,944 for fiscal 1995.
In the Company's core business, revenue per patient day decreased 7% to
$526 for the year ended June 30, 1996, as compared to $567 for the prior fiscal
year. Fiscal 1996 amounts do not include revenue per patient day at the Georgia
subacute facility, which was operated by the Company under a management
agreement beginning on June 5, 1995. The decrease in fiscal 1996 was largely due
to an increase in the percentage of Medicare patients served at the Company's
Gardner, Kansas facility.
Total non-capital operating expenses for the year ended June 30, 1996
increased 7% to $21,759,000 from $20,258,000 during the prior fiscal year. This
increase primarily resulted from the acquisition of the Colorado outpatient
clinics and Colorado and Kansas home health agencies. Salaries and employee
benefits were the primary component of the Company's non-capital operating
expenses. Salaries and employee benefits increased 26% to $15,189,000 for the
year ended June 30, 1996, as compared to $12,036,000 for the same period in the
prior fiscal year. This increase was largely due to the inclusion of salaries
and employee benefits for the Colorado outpatient clinics and home health
agencies. Salaries and employee benefits as a percentage of net operating
revenues increased to 64% for the year ended June 30, 1996, as compared to 60%
in the prior fiscal year.
The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services and other operating expenses. For the year
ended June 30, 1996 other non-capital operating expenses increased 3% to
$5,986,000, as compared to $5,821,000 for the same period in the prior fiscal
year. The increase is primarily due to the inclusion of other non-capital
operating expenses for the Colorado outpatient clinics and Colorado and Kansas
home health agencies. The provision for doubtful accounts decreased 57% to
$584,000 for the year ended June 30, 1996, from $1,371,000 for the prior fiscal
year. The provision for doubtful accounts as a percentage of net operating
revenues was 2% for the year ended June 30, 1996, as compared to 7% for the
prior fiscal year. The reduction in the provision is due to lower provision
rates for the Company's outpatient clinics and home health business lines. In
addition, the provision for doubtful accounts for the year ended June 30, 1995
includes a charge of $700,000 for the write-off of two litigation receivables in
which the patients were unsuccessful in their third party litigation.
Total capital expenses decreased 17% for the year ended June 30, 1996 to
$2,425,000, as compared to $2,920,000 for the prior fiscal year. Rent expense
decreased 17% to $1,953,000 for the year ended June 30, 1996, as compared to
$2,351,000 for the prior fiscal year. The decrease in rent expense is primarily
due to lower rents paid under leases requiring payments on the basis of net
operating revenue and patient volume at certain facilities, as well as the
conversion of the Company's subacute facility in Georgia to a management
contract in June 1995. The Company pays no rent under this management contract.
The decreases were partially offset by rents paid during fiscal 1996 for its
Colorado outpatient clinics and Colorado and Kansas home health agencies.
Net interest income for the year ended June 30, 1996 was $114,000 as
compared to net interest expense of $26,000 for the prior fiscal year. This
increase is due to higher interest earnings during the fiscal 1996 period, as
well as less interest expense on acquisition payments during fiscal 1996.
The Company reported a net loss for the year ended June 30, 1996 of
$590,000, as compared to a net loss of $3,529,000 for the prior fiscal year. The
Company's effective tax rate for fiscal 1995 was a benefit of 3%. The Company
did not record a benefit for the year ended June 30, 01996 because carrybacks of
current losses against previous taxable earnings are no longer available.
Unaudited Quarterly Results
Set forth below is certain summary information with respect to the
Company's operations for the last eight fiscal quarters:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997
------------------------------------ ---------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Statements of Operations Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $5,579 $6,095 $6,321 $5,628 $5,977 $5,528 $5,508 $3,821
Income (loss) before income
taxes and minority interest (563) 105 51 (154) (598) (513) 98 (2,809)
Net Income (loss) (585) 88 34 (127) (611) (517) 88 (2,811)
Earnings (loss) per share ($0.30) $0.05 $0.02 ($0.07) ($0.32) ($0.27) $0.05 ($1.46)
Average shares outstanding 1,931 1,930 1,930 1,930 1,930 1,930 1,930 1,930
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $4,815,000, compared
to working capital of $6,519,000 at June 30, 1996. The Company had cash and cash
equivalents of $2,929,000 at June 30, 1997, as compared to $3,439,000 at June
30, 1996. At June 30, 1995, the Company had deposited $500,000 to secure a bank
loan of $900,000 as part of its Colorado outpatient clinic and home health
agencies acquisition. At June 30, 1997, $279,000 of the amount deposited is
classified as restricted cash securing the loan balance of $249,000, as well as
security for the Company's outstanding balance on its line-of-credit. See
"Trends and Recent Events".
During the fiscal year ended June 30, 1997, the Company's operating
activities used $637,000 of available cash resources, as compared to cash used
for operating activities of $2,001,000 during the same period in the prior
fiscal year. The cash used for operating activities during the year ended June
30, 1997 primarily reflects amounts necessary to fund the Company's net
operating losses. The cash used for operating activities during the year ended
June 30, 1996 reflects funding of working capital for the Company's Colorado
outpatient clinics and home health agencies and amounts necessary to fund the
Company's net operating losses. Cash provided from investment activities during
the year ended June 30, 1997 was $923,000, as compared to cash used for
investment activities of $1,013,000 during the prior fiscal year. The cash
provided from investment activities for the year ended June 30, 1997 primarily
relates to proceeds from the sales of the Company's Alaska, Georgia and Illinois
operations. See "Trends and Recent Events".
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $4,279,000 at June 30, 1997, as compared to $4,739,000 at
June 30, 1996. At June 30, 1997, the Company had an allowance for doubtful
accounts of $1,195,000, as compared to $1,445,000 at June 30, 1996. The number
of average days of revenue outstanding, excluding the revenues and receivables
related to litigation patients, was 67 days at June 30, 1997, as compared to 65
days at June 30, 1996.
It was the Company's practice in its core business to admit selected
patients who were seeking monetary recovery in pending litigation with third
parties. These patients are directly obligated to pay the Company for services
rendered although the timing of collection is determined by the settlement of
their litigation and is beyond the control of the Company. For this reason,
liens were generally placed against pending insurance settlements. Prior to
admitting such patients, the Company and its counsel evaluated the merits of the
patient's case, the anticipated cost of services to be provided and the
likelihood of the patient's successful recovery of damages in litigation. Once
the patient was admitted, the Company and its counsel monitored the status of
the litigation. The Company retained the accounts receivable related to such
patients in connection with the sale of its Kansas operations. There can be no
assurance, however, that the Company will ultimately be reimbursed for all the
services it provided to such patients. At June 30, 1997, accounts receivable
related to these litigation patients totaled $520,000, as compared to $444,000
at June 30, 1996. These litigation patient receivables accounted for an
additional 13 and 19 average days revenue outstanding at June 30, 1997 and June
30, 1996, respectively.
The Company's amount due to Medicare intermediaries of $101,000 at June 30,
1997 includes amounts the Company anticipates to pay on cost report settlements
for its Colorado home health agencies and its final cost report for the
Company's former Gardner, Kansas facility. Such amount also includes amounts the
Company expects to receive upon regulatory approval of the Company's annual
application for an exception from the routine cost limitation ("RCL") under the
Medicare program for fiscal years 1992 through 1996 for its former Gardner,
Kansas facility. Medicare reimbursement is generally based upon reasonable
direct and indirect allowable costs incurred in providing services. At the
Company's former Gardner, Kansas facility these costs were subject to the RCL.
Requests for an exception from the RCL have been submitted for fiscal years 1992
through 1995 for the Company's former Gardner, Kansas facility. In connection
with the sale of its Kansas operation, the Company retained the accounts
receivable and it accordingly intends to file such a request for fiscal 1996 and
1997. The requests are based upon atypical costs incurred at the Kansas facility
in the treatment of patients who received substantially more intensive services
than those generally received in SNFs. There can be no assurance that the
Company will collect in full the amounts it has requested or intends to request,
nor can there be any assurance as to the timing of any such collection.
The Company has no current material commitments for capital expenditures,
except for those in connection with the Company's acquisitions as described
under "Trends and Recent Events" above. The Company also expects to make routine
capital improvements to its facilities in the normal course of business.
The Company may use a portion of its cash balance to finance internal
development of its home health business line. The Company has a line-of-credit
of $1,000,000 from a bank. Any draws on the line-of-credit would be secured by a
cash deposit. At June 30, 1997, the Company had $60,000 outstanding under the
line-of-credit. The Company will need to obtain access to additional capital,
through bank loans or otherwise, in order to fund any significant acquisition
opportunities. The Company believes that its existing cash, credit line and cash
flows from operations, will be sufficient to satisfy the Company's estimated
operating cash requirements for its existing facilities for the next twelve
months.
Inflation in recent years has not had a significant effect on the Company's
business and is not expected to adversely effect the Company in the future
unless the current rate of inflation increases significantly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Balance Sheets, Consolidated
Statements of Operations, Consolidated Statements of Stockholders' Equity and
Consolidated Statements of Cash Flows, Notes to Consolidated Financial
Statements, Financial Statement Schedules and Report of Independent Public
Accountants attached to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Registrant is incorporated by
reference from the information under the caption "Election of Directors" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Stockholders. Information with respect to certain executive officers of the
Registrant is included in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant". Information concerning compliance with Section
16(a) of the Exchange Act is incorporated by reference from the information
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive proxy statement for its 1997 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from information under the caption "Executive
Compensation" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Stock
Ownership of Directors and Executive Officers" in the Company's definitive proxy
statement for its 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Transactions" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Stockholders.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference Page
Attached Consolidated
Financial Statements
(a) 1. Consolidated financial statements:
Report of Independent Public Accountants......................... 2
Consolidated Balance Sheets at June 30, 1996 and 1997............ 3
Consolidated Statements of Operations for the Years
Ended June 30, 1995, 1996 and 1997....................... 4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1995, 1996 and 1997....................... 5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1996 and 1997....................... 6
Notes to Consolidated Financial Statements....................... 7
2. Financial statement schedules for the Years
Ended June 30, 1995, 1996 and 1997
II - Valuation and Qualifying Accounts.................... 17
3. Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the
Company, filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Commission File No.
33-44197) (the "Registration Statement") and incorporated
herein by reference.
3.2 Certificate of Amendment of Restated Certificate of
Incorporation filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended 1996
and incorporated herein by reference.
3.3 Amended and Restated By-Laws of the Company, filed as
Exhibit 3.2 to the Registration Statement and
incorporated herein by reference.
10.1 1994 Stock Incentive Plan of the Company filed as Exhibit
10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (the "1995 10-K") and
incorporated herein by reference.
<PAGE>
10.2 Stock Purchase Agreements, dated as of April 30, 1994, by
and among Medbrook Corp. and the named shareholders of
each of Southpark Rehabilitation, Inc., Megsis, Inc., The
Last Stand, Inc., Soleil, Inc., Menage A Trois, Inc., 1st
Coast Physical Therapy, Inc., and Southpark Physical
Therapy, Inc., filed as Exhibit 2.1 to the Company's
current report on Form 8-K dated May 11, 1994 and
incorporated herein by reference.
10.3 Earnout Agreement, dated as of April 30, 1994, by and
among Medbrook Corp, Lynne W. Powell and Mark W.
Adukiewicz, filed as Exhibit 2.2 to the Company's current
report on Form 8-K dated May 11, 1994 and incorporated
herein by reference.
10.4 Earnout Agreement, dated as of April 30, 1994, by and
among Medbrook Corp., Lynne W. Powell and Elizabeth A.
Norton, filed as Exhibit 2.3 to the Company's current
report on Form 8-K dated May 11, 1994 and incorporated
herein by reference.
10.5 Amended and Restated Earnout Agreement, dated June 26,
1995, by and among Medbrook Corp., Lynne Powell, Mark
Adukiewicz, James Powell and Beth Norton, filed as
Exhibit 10.10 to the 1995 10-K and incorporated herein by
reference.
10.6 Lease Agreement, dated December 28, 1994, by and among
Meadowbrook Hospital, Inc. and Dr. Harvey Wm. Glasser,
filed as Exhibit 10.11 to the 1995 10-K and incorporated
herein by reference.
10.7 Amendment to lease, dated December 28, 1994, by and among
Meadowbrook Hospital, Inc., North Lake Investors, LLC and
Dr. Harvey Wm. Glasser, filed as Exhibit 10.13 to the
1995 10-K and incorporated herein by reference.
10.8 Agreement for Sale of Lease, dated December 28, 1994, by
and among Meadowbrook Hospital, Inc. and North Lake
Investors, LLC, filed as Exhibit 10.14 to the 1995 10-K
and incorporated herein by reference.
10.9 Lease Agreement dated December 31, 1994, by and among Dr.
Harvey Wm. Glasser, Meadowbrook Hospital, Inc. and
Meadowbrook Rehabilitation Group, Inc., filed as Exhibit
10.16 to the 1995 10-K and incorporated herein by
reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP (see Page 33 of this Form
10-K).
24.1 Power of Attorney (see Page 32 of this Form 10-K).
27.1 Financial Data Schedule.
<PAGE>
(b) Reports on Form 8-K:
On March 31, 1997, the Company filed a current report on Form
8-K with the Securities and Exchange Commission reporting
under items 2 and 7 thereof and including pro forma financial
statements for the year ended June 30, 1996 and the six months
ended December 31, 1996.
On July 31, 1997, the Company filed a current report on Form
8-K with the Securities and Exchange Commission reporting
under items 2 and 7 thereof and including pro forma financial
statements for the year ended June 30, 1996 and the nine
months ended March 31, 1997.
On August 31, 1997, the Company filed a current report on Form
8-K with the Securities and Exchange Commission reporting
under items 2 and 7 thereof and including pro forma financial
statements for the year ended June 30, 1996 and the nine
months ended March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: September 26, 1997 MEADOWBROOK REHABILITATION GROUP,
INC.
By /s/HARVEY WM. GLASSER, M.D.
---------------------------
Harvey Wm. Glasser, M.D.
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints HARVEY WM. GLASSER, M.D. his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
HARVEY WM.GLASSER, M.D. Chief Executive Officer, September 26, 1997
- -----------------------
Harvey Wm. Glasser, M.D. President and Treasurer
(Principal Executive Officer)
JAMES F. MURPHY Vice President and September 26, 1997
- -----------------------
James F. Murphy Chief Financial Officer
(Principal Accounting Officer
and Principal Financial Officer)
JOHN MCCRACKEN Director September 26, 1997
- -----------------------
John McCracken
ROBERT RUSH Director September 26, 1997
- -----------------------
Robert Rush
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into the Company's previously filed
Registration Statement File No. 33-50772.
San Francisco, California ARTHUR ANDERSEN LLP
September 26, 1997
<PAGE>
MEADOWBROOK REHABILITATION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Meadowbrook Rehabilitation Group, Inc.:
We have audited the accompanying consolidated balance sheets of Meadowbrook
Rehabilitation Group, Inc. (a Delaware corporation) and subsidiaries as of June
30, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Meadowbrook
Rehabilitation Group, Inc. and subsidiaries as of June 30, 1996 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a part of the basic financial statements. The schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
September 5, 1997
<PAGE>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1997
ASSETS
1996 1997
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $3,439,440 $2,928,781
Restricted cash 311,000 278,649
Patient accounts receivable, less
allowance for doubtful accounts of
$1,445,000 and $1,195,000 respectively 4,738,957 4,278,756
Other receivables 1,264,444 293,165
Due from intermediaries 331,918 --
Income tax refund receivable 140,362 --
Prepaid expenses and other assets 376,898 298,970
------------ ------------
Total current assets 10,603,019 8,078,321
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 683,770 --
Furniture and equipment 2,993,965 2,154,947
Leasehold improvements 783,614 686,116
------------ -----------
4,461,349 2,841,063
Less - accumulated depreciation (2,095,193) (1,708,734)
------------ ------------
Net property and equipment 2,366,156 1,132,329
------------ ------------
OTHER ASSETS:
Goodwill and intangible assets 1,870,555 337,734
------------ ------------
Total assets $14,839,730 $9,548,384
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of $657,724 $291,037
notes payable
Current maturities of capital lease obligations 32,803 24,821
Accounts payable 1,226,053 968,027
Accrued payroll and employee benefits 1,101,168 755,748
Due to intermediaries -- 100,780
Other accrued liabilities 1,065,820 1,123,124
------------ ------------
Total current liabilities 4,083,568 3,263,537
------------ ------------
LONG-TERM LIABILITIES:
Note payable and other long-term liabilities 636,255 48,989
Capital lease obligations 21,815 --
------------ -----------
Total long-term liabilities 658,070 48,989
------------ -----------
Total liabilities 4,741,638 3,312,526
------------ -----------
MINORITY INTEREST IN EQUITY OF
CONSOLIDATED SUBSIDIARIES 11,665 --
------------ -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A; 15,000,000 shares authorized;
1,157,244 shares issued and outstanding
at June 30, 1996 and 1997 11,572 11,572
Class B; 5,000,000 shares authorized;
773,000 shares issued and outstanding
at June 30, 1996 and 1997 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Retained deficit (7,840,997) (11,691,566)
------------ -----------
Total stockholders' equity 10,086,427 6,235,858
------------ -----------
Total liabilities and stockholders'
equity $14,839,730 $9,548,384
============ ===========
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<S> <C> <C> <C>
1995 1996 1997
------------ ------------- ------------
NET OPERATING REVENUES $19,973,613 $23,622,560 $20,834,438
OPERATING EXPENSES:
Salaries and employee benefits 12,036,473 15,189,173 14,877,168
Professional fees and purchased services 3,023,225 2,509,166 2,239,179
Provision for doubtful accounts 1,371,151 583,661 454,255
Other operating expenses 2,797,809 3,476,400 3,411,087
Depreciation and amortization 542,890 586,180 572,249
Rent -
To unrelated parties 1,764,617 1,540,634 1,252,802
To related parties 586,518 412,468 382,456
Write-down of intangible assets 1,029,767 -- 1,439,520
Net loss on disposal and provision
for subsequent
disposal of assets -- -- 82,130
Restructuring charges 310,000 -- --
------------ ------------- ------------
Total operating expenses 23,462,450 24,297,682 24,710,846
------------ ------------- ------------
Loss from operations (3,488,837) (675,122) (3,876,408)
------------ ------------- ------------
OTHER (INCOME) EXPENSE:
Interest (income) expense, net 25,536 (113,834) (55,313)
------------ ------------- ------------
Total other (income) expense 25,536 (113,834) (55,313)
------------ ------------- ------------
Loss before income taxes and minority interest (3,514,373) (561,288) (3,821,095)
INCOME TAX BENEFIT (92,890) -- --
------------ ------------- ------------
Loss before minority interest ($3,421,483) ($561,288) ($3,821,095)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES 107,642 29,016 29,474
------------ ------------- ------------
Net loss ($3,529,125) ($590,304) ($3,850,569)
============ ============= ============
NET LOSS PER COMMON SHARE ($1.82) ($0.31) ($1.99)
============ ============= ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,936,703 1,930,349 1,930,244
============ ============= ==============
<FN>
The accompanying notes are an integral part of these consolidating statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
Class A Class B
--------------------- --------------------
Total
Shares Amount Shares Amount Paid-in Retained Stockholders'
Capital Deficit Equity
-------------------- -------------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 1,162,745 $11,627 773,000 $7,730 $17,950,818 ($3,721,568) $14,248,607
Common stock issuance
upon option exercise 2,250 23 -- -- 1,226 -- 1,249
Repurchase of shares (7,333) (73) -- -- (43,927) -- (44,000)
Net loss -- -- -- -- -- (3,529,125) (3,529,125)
---------- -------- ------- ------- ------------ ------------- -------------
BALANCE, JUNE 30, 1995 1,157,662 11,577 773,000 7,730 17,908,117 (7,250,693) 10,676,731
Cancellation of shares (418) (5) -- -- 5 -- --
Net loss -- -- -- -- -- (590,304) (590,304)
---------- -------- -------- ------ ------------ ------------- -------------
BALANCE, JUNE 30, 1996 1,157,244 11,572 773,000 7,730 17,908,122 (7,840,997) 10,086,427
Net loss -- -- -- -- -- (3,850,569) (3,850,569)
---------- -------- ------- ------ ------------ ------------- -------------
BALANCE, JUNE 30, 1997 1,157,244 $11,572 773,000 $7,730 $17,908,122 ($11,691,566) $6,235,858
========== ======== ======= ====== ============ ============= =============
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997
------------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,529,125) ($590,304) ($3,850,569)
Adjustments to reconcile net loss to cash provided by
(used for) operating activities -
Depreciation and amortization 542,890 586,180 572,249
Net loss on disposal and provision for
subsequent
disposal of assets 33,592 8,122 82,130
Write-down of intangible assets 1,029,767 -- 1,439,520
Minority interest expense -- 29,016 29,474
Changes in assets and liabilities -
Decrease (increase) in patient accounts receivable, net 2,345,398 (675,012) 460,201
Decrease in due from/to intermediaries 1,579,372 282,085 432,698
Decrease in income tax refund receivable 1,908,244 29,638 140,362
Decrease (increase) in other receivables (161,555) (999,962) 971,279
Decrease (increase) in prepaid expenses and other current assets 108,892 (91,435) 77,928
Increase (decrease) in accounts payable and accrued liabilities 217,834 (357,817) (991,931)
Decrease in other long-term liabilities -- (221,897) --
------------ ----------- ------------
Cash provided by (used for) operating activities 4,075,309 (2,001,386) (636,659)
------------ ----------- ------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (359,129) (556,705) (231,046)
Payments on prior purchase of -- (357,543) (330,724)
outpatient clinics
Proceeds from sale of assets 1,950 23,431 1,485,009
Purchase of outpatient (1,056,604) (82,500) --
clinics
Costs resulting from purchase of outpatient facilities (167,447) (40,000) --
------------ ----------- ------------
Cash provided by (used for) investment activities (1,581,230) (1,013,317) 923,239
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 325,840 791,942 517,239
Payments of short-term borrowings (207,345) (813,180) (1,263,909)
Long-term borrowings -- 95,198 --
Payments of capital lease obligations (70,360) (40,003) (29,797)
Decrease (increase) in cash deposited to secure a loan (500,000) 189,000 32,351
Payments to minority (90,000) (76,121) (53,123)
shareholders
Issuance of common stock for options exercised 1,249 -- --
------------ ----------- -----------
Cash provided by (used for) financing activities (540,616) 146,836 (797,239)
Net increase (decrease) in cash 1,953,463 (2,867,867) (510,659)
CASH AND CASH EQUIVALENTS, beginning of period 4,353,844 6,307,307 3,439,440
------------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $6,307,307 $3,439,440 $2,928,781
============= =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities -
Property additions financed with capital leases $-- $76,020 $--
Property additions financed with notes payable -- 114,098 --
Liability resulting from purchase of outpatient facilities 1,743,319 186,692 --
Stock received as repayment of receivable from related party 44,000 -- --
Payments -
Interest paid 179,567 44,881 59,152
Income taxes paid -- 32,492 20,900
<FN>
The accompanying notes are an integral part of these consolidated statements.
</FN>
</TABLE>
<PAGE>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND OPERATIONS:
Meadowbrook Rehabilitation Group, Inc. (Meadowbrook) and its subsidiaries
(collectively, the Company) have undergone significant operating changes during
and subsequent to fiscal year 1997. As of September 1997, the Company operates
home health agencies in Colorado and Kansas, four outpatient rehabilitation
clinics in Colorado and three outpatient rehabilitation clinics (two of which
are operated under a management agreement) in Florida. The Company has sold all
of its traditional acute, subacute and post-acute operations during fiscal 1997
and subsequent to year end. In addition, the Company sold five of its outpatient
rehabilitation clinics located in Florida and Georgia subsequent to year end.
The Company also closed six outpatient rehabilitation clinics during fiscal
1997. These transactions are more fully described in Note 2.
The Company experienced significant operating losses during fiscal years
1995, 1996 and 1997. Factors contributing to fiscal year 1997 losses include a
net loss of $1,522,000 (including a write-down of intangible assets) recorded in
connection with the Company's sale of its Alaska, Georgia and Illinois
operations during fiscal 1997 and the sale of five outpatient rehabilitation
clinics and certain other assets in Florida and Georgia subsequent to year end.
The fiscal 1997 results also include operating losses incurred by the Company's
Florida and Kansas operations.
Factors contributing to fiscal 1996 results include among other things,
losses incurred at the Company's Colorado facilities, as well as decreased
patient census and revenue per patient day in the Company's acute, subacute and
post-acute facilities.
Major factors contributing to fiscal 1995 losses included, among others, a
continued deterioration in patient census and revenue per patient day at the
Companys acute, subacute and post-acute facilities and a charge of $1,030,000
to write-off intangible assets recorded as part of the fiscal 1994 acquisition
of its Florida operations. The write-off was the result of the Company's
management contracts at five facilities being terminated. In addition, the
Company recorded a charge of $700,000 to write-off two litigation accounts
receivable in which the patients were unsuccessful in their third party
litigation (see Note 3). In addition, the Company recorded restructuring charges
of $310,000 related to the closure of its psychiatric partial hospitalization
program in Indianapolis. The program was closed on September 22, 1995 (see Note
2).
The Company's future profitability is dependent on the successful operation
of the Company's home health agencies and outpatient rehabilitation clinics.
There can be no assurance as to the Company's future profitability. The Company
has a $1,000,000 bank line-of-credit, which would require a $500,000 bank
deposit if drawn (see Note 3). Otherwise, the Company currently does not have
access to additional capital. There can be no assurance that in the future the
Company will not experience a shortage of available cash necessary to operate
its business.
The Company's Board of Directors is continuing to evaluate the Company's
overall strategic direction and alternatives. The alternatives under
consideration by the Board include, among other things, a merger or other
business combination and/or additional sales of assets. There can be no
assurance that any such alternatives will be available on favorable terms, if at
all.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has indicated
his view that the Company's business should not necessarily be limited to
medical rehabilitation or the healthcare field generally and that, if presented
with an appropriate opportunity, the Company should consider investing in
non-healthcare businesses. As a result, the nature of the Company's business
could change significantly. Dr. Glasser holds a majority of the combined voting
power of the Company's two classes of common stock and accordingly has the
ability to effect a change in management or to cause or prevent a significant
corporate transaction regardless of how other stockholders might vote.
<PAGE>
2. OPERATING CHANGES AND SALE OF OPERATIONS:
Florida In May, 1997, the Company's board of directors and management
initiated the sale of its Florida operations. On August 31, 1997, the Company
sold the assets of five outpatient rehabilitation clinics and certain other
assets located in Florida and Georgia. The outpatient rehabilitation clinics
were located in St. Augustine, Palatka, Palm Coast, and Ormond Beach, Florida
and in Moultrie, Georgia. The Company sold the clinics in two separate
transactions. The aggregate sale price for the outpatient rehabilitation clinics
and other assets was $550,000. The Company received promissory notes from the
purchasers for the aggregate purchase price. The promissory notes are secured by
the acquired assets and the Company also received personal guarantees from
shareholders of the purchasers. The purchasers acquired all assets including
accounts receivable and are responsible for all accounts payable and certain
payroll liabilities. As part of the transaction, the Company retained all
liabilities for amounts due to the former owners of the clinics. At closing,
this amount was $197,000. The assets sold consisted of current assets of
$384,000, property and equipment of $275,000, and liabilities of $117,000. As of
June 30, 1997 a provision has been recorded to reduce the carrying value of the
assets related to these operations to realizable value. This transaction
resulted in a loss of $2,046,000, primarily as a result of the write-down of
goodwill associated with the Company's acquisition of certain of the clinics in
1994. The loss is recorded as other operating expense in the Company's June 30,
1997 financial statements.
Kansas On July 31, 1997, the Company sold the majority of the assets of its
Kansas operations, consisting of acute, subacute and post-acute rehabilitation
programs. The sale price for the Kansas operations was $1,500,000 in cash. The
Company's agreement with the purchaser provides that the Company will retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. The assets sold consisted of current assets of $2,000 and
property and equipment of $179,000. The hospital was leased from Harvey Wm.
Glasser, M.D., the Company's Chief Executive Officer and majority shareholder.
Concurrently with the sale of the assets of the subsidiary, Dr. Glasser sold the
hospital leased by the subsidiary to the same purchaser. The Company's sale of
the Kansas operations will result in a gain of $1,178,000. This gain will be
recorded in the Company's first quarter fiscal 1998 results.
Georgia On March 31, 1997, the Company sold the majority of the assets of
its Georgia operations, consisting of a neurobehavioral program, a subacute
program operated under a management agreement, and a post-acute program and
related real estate. The sale price for the Georgia operations was $1,300,000 in
cash. The Company's agreement with the purchaser provides that the Company
retain outstanding accounts receivable and be responsible for the accounts
payable at the closing date. This transaction resulted in a gain of $517,000,
which was recorded as other operating income in fiscal 1997.
Alaska On January 13, 1997, the Company sold its three outpatient clinics
in Alaska. The sale price was $200,000 in cash. This transaction resulted in a
loss of $29,000, which was recorded as other operating expense during fiscal
1997.
Illinois On October 7, 1996, the Company sold the majority of the assets of
its post-acute rehabilitation facility located in Park Ridge, Illinois. The
Company's agreement with the purchaser provided that the Company retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. This transaction resulted in a gain of $63,000, which was
recorded as other operating income during fiscal 1997.
Indianapolis During fiscal 1995 the Company internally developed, through
its wholly owned subsidiary, Medbrook of Indiana, a psychiatric partial
hospitalization program which provided psychiatric services in long-term care
facilities. In June 1995, the Company decided to close the psychiatric partial
hospitalization program. The program was closed on September 22, 1995. The
Company recorded a restructuring charge of $310,000, as of June 30, 1995,
related to the closure of the program.
<PAGE>
The operations sold during fiscal year 1997 or subsequent to year end
comprised the majority of the Company's operations. The following table
segregates net operating revenues and operating results between operations
retained and operation disposed of. Loss from operations amounts include
allocations of common corporate overhead cost.
<TABLE>
<CAPTION>
1995 1996 1997
(unaudited) (unaudited) (unaudited)
---------------------------- ---------------------------- ----------------------------
Net Net Net
operating Loss from operating Loss from operating Loss from
revenues operations revenues operations revenues operations
----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operations retained $870,217 ($108,895) $10,265,871 ($182,545) $9,186,447 ($550,850)
Operations disposed of
during and subsequent
to year end 19,103,396 (3,379,942) 13,356,689 (492,577) 11,647,991 (3,325,558)
----------- ------------ ----------- ---------- ----------- ------------
$19,973,613 ($3,488,837) $23,622,560 ($675,122) $20,834,438 ($3,876,408)
=========== ============ =========== ========== =========== ============
</TABLE>
The above information does not purport to present the consolidated results
of operations of the Company had the dispositions actually occurred on July 1,
1994; nor does it purport to be indicative of results that will be attained in
the future.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The consolidated financial statements include the accounts of Meadowbrook
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. In 1995, the Company
deposited $500,000 to secure a bank loan of $900,000 made by a bank to the
previous owner of the acquired Colorado operations. The loan balance on June 30,
1997 was $249,000. The Company has not recorded as a liability, but reflects the
restricted cash on its balance sheet. As the loan is repaid, the security
deposit will be transferred and become security on the Company's $1,000,000
line-of-credit with the bank. At June 30, 1997, $279,000 of the amount deposited
is classified as restricted cash securing the loan balance of $249,000 as well
as the Company's outstanding line-of-credit balance of $60,000.
Accounts Receivable and Allowance for Doubtful Accounts
The reimbursement process related to many of the Company's patients is
complex and involves multiple payors. In addition, it had been the Company's
practice to admit selected patients who, although obligated to pay the Company,
are seeking monetary recovery in pending litigation with third parties. The
industry's trend towards cost containment has imposed increasing limits on
reimbursement which has resulted in longer collection periods and, in some
cases, has made ultimate reimbursement more difficult. These factors delay the
timing and affect the amount of payment to the Company.
During the year ended June 30, 1997, the Company wrote-off net balances of
$704,000 of accounts receivable compared to $1,052,000 during the year ended
June 30, 1996. During fiscal 1995 the Company recorded a charge of $700,000 to
write-off two receivables in which the patients were unsuccessful in their third
party litigation. As of June 30, 1996 and 1997, $1,328,000 and $1,141,000,
respectively, of the Company's accounts receivable were greater than one year
past due. The Company has recorded allowances for uncollectible accounts that
reflect the best judgment of management as to the ultimate collectibility of
accounts receivable balances. However the nature of the reimbursement process,
as well as the sale of certain of the Company's facilities during and subsequent
to year end, makes these judgments difficult and actual reimbursement could vary
significantly from these estimates.
<PAGE>
Patient Revenues and Provision for Contractual Discounts
Patient services are billed at standard rates. Payments for services
rendered to private payors and patients covered by commercial insurance are
generally negotiated at amounts lower than standard rates. Payments for services
rendered to patients covered by Medicare and Medicaid are generally at lower
than standard rates. Contractual allowances are recorded to reflect the
difference between standard rates and expected reimbursement, so that patient
accounts receivable are recorded net of estimated discounts. The Company
provided care to Medicaid beneficiaries under short-term contracts at the
Company's Gardner, Kansas facility.
Final determination of amounts receivable or payable under the Medicare and
Medicaid programs is subject to audit or review by the respective administrative
agencies. Provisions have been recorded for estimated adjustments (see Note 9).
The following table reflects the estimated percentage of net patient
revenues by payor type:
Year Ended June 30,
--------------------------------
Source 1995 1996 1997
------- ------- -------
Private payors and commercial insurance.. 67% 59% 51%
Medicare ................................ 16% 34% 41%
Medicaid ................................ 17% 7% 8%
------- ------- -------
Total ................................... 100% 100% 100%
------- ------- -------
The operations retained by the Company after the sale activity described in
Note 2 receive approximately 80% of their revenue through the Medicare and
Medicaid programs.
Property and Equipment and Depreciation
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method based on the estimated useful lives
that range as follows:
Building - 20 years
Furniture and equipment - 3 to 15 years
Leasehold improvements - Life of the lease
Goodwill and Other Intangible Assets
Goodwill and other intangible assets recorded in connection with the
Company's acquisitions are amortized on a straight-line basis, over periods of 6
to 40 years.
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets at least
quarterly to determine if facts and circumstances exist which suggest that the
long-lived assets may be impaired or that the amortization period needs to be
modified. Among the factors the Company considers in making the evaluation are
changes in market position, reputation, profitability and geographic
penetration, as well as technological obsolescence. If there are indications
that the impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the related operation and determine if the long-lived
asset is recoverable based on such projected undiscounted cash flows. If
impairment is indicated, then an adjustment will be made to reduce the carrying
value of the asset to its fair value.
Net Loss Per Common Share
Net loss per share is computed based on the weighted average number of
common shares outstanding during each period. Net common income per common share
is computed based on the weighted average number of common and common equivalent
shares outstanding during each period and the assumed exercise of dilutive stock
options (less the number of treasury shares assumed to be purchased from the
proceeds using the estimated average market price of Class A Common Stock).
Common equivalent shares consist of stock options and warrants granted.
<PAGE>
The adoption of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" is not expected to significantly impact the Company's
earnings per share calculation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. SHORT-TERM BORROWINGS AND NOTES PAYABLE:
At June 30, 1996 and 1997 the Company had notes payable of $1,196,330 and
$340,026, respectively. These notes are payable in varying installments at an
average interest rate of 8.6%. The notes payable at June 30, 1997 include
$136,425 arising from prior year acquisitions (see Notes 2 and 10) and $60,000
related to borrowings from a bank under a line-of-credit arrangement.
Scheduled maturities for the notes payable and other long-term liabilities
are as follows:
1998 $291,037
1999 36,833
2000 12,156
2001 --
2002 --
--------
$340,026
========
5. LEASES:
The Company leases certain property and equipment under capital and
operating leases. The original cost of assets under capital leases included in
property and equipment is $165,494 at June 30, 1996, and $88,570 at June 30,
1997, with accumulated depreciation of $70,632 and $32,463 as of June 30, 1996
and 1997, respectively.
The minimum future lease payments required under the Company's capital and
operating leases (excluding facilities sold subsequent to year end) during the
five years beginning July 1, 1997, are as follows:
Capital Operating
Leases Leases
------------ ---------------
Year 1 $28,031 $ 398,323
Year 2 -- 248,976
Year 3 -- 147,566
Year 4 -- 63,568
Year 5 -- 13,467
Thereafter -- --
------------ ---------------
Total minimum payments 28,031 $871,900
===============
Interest on capital lease obligations (3,210)
------------
Net minimum payments 24,821
Current maturities of capital obligations 24,821
------------
Long-term capital lease obligations $ --
============
<PAGE>
6. STOCKHOLDERS' EQUITY:
Common Stock
The Company has Class A and Class B Common Stock. Class A Common Stock
includes the same rights as Class B Common Stock in all respects except for the
following:
o Class B Common Stock has ten votes per share and Class A Common Stock
has one vote per share.
o Class B Common Stock is convertible 1 for 1 into Class A Common Stock at
any time at the option of the holder.
o Class B Common Stock automatically converts to Class A Common Stock when
Class B Common Stock represents less than 12.5% of the total number of
votes entitled to be cast in the election of directors.
o No additional shares of Class B Common Stock will be issued without
prior approval of the Class A Common stockholders except for stock
dividends and stock splits.
Reverse Stock Split
On April 22, 1996, the Restated Certificate of Incorporation of the Company
was amended to effect a one-for-three reverse stock split of the Company's Class
A and Class B Common Stock. The Company has retroactively reflected the reverse
stock split in the financial statements for all periods presented.
Potential Ineligibility for Continued Listing on the NASDAQ Stock Market
The NASDAQ Stock Market has adopted new quantitative maintenance
requirements for continued listing on the NASDAQ National Market. The new
criteria become effective on February 23, 1998. The Company currently is in
compliance with all of the new criteria for continued NASDAQ National Market
listing except for the requirement that the market value of its public float be
at least $5 million. The Company estimates that the market value of its public
float as of September 25, 1997 is $2,877,000. If the Company is not in
compliance with the new maintenance criteria on the effective date, the Company
understands that it would be moved to the NASDAQ SmallCap Market. Delisting from
the NASDAQ National Market could have an adverse effect on the liquidity of the
Company's Class A Common Stock.
Stock Plan
The 1994 Stock Incentive Plan (the "Plan") was adopted by the Company's
Board of Directors in September 1994, and was approved by the Company's
stockholders in November 1994. At June 30, 1997, a total of 681,667 shares of
Class A Common Stock were reserved for issuance under the Plan pursuant to the
direct award or sale of shares or the exercise of options granted under the
Plan. The Plan is administered by a compensation committee of the Board of
Directors of the Company, which selects the persons to whom shares will be sold
or awarded or to whom options will be granted. The committee determines the
number of shares subject to each sale, award or grant, and prescribes other
terms and conditions, including vesting schedules, in connection with each sale,
award or grant.
The exercise price of nonqualified options must be at least 75% of the fair
market value of the Class A Common Stock on the date of the grant. The exercise
price of incentive stock options (ISOs) cannot be lower than 100% of the fair
market value of the Class A Common Stock on the date of the grant and, in the
case of ISOs granted to holders of more than 10% of the voting power of the
Company, not less than 110% of such fair market value. The term of an option
cannot exceed ten years, and the term of an option granted to a holder of more
than 10% of the voting rights of the Company cannot exceed five years. The
purchase price of shares sold under the Plan must be at least 85% of the fair
market value of the Class A Common Stock and, in the case of a holder of more
than 10% of the voting power of the Company, not less than 100% of such fair
market value.
<PAGE>
Class A Common Stock ISO's outstanding under the Plan are as follows:
Shares Exercise Price
Under Option Per Share
----------------- ----------------
Outstanding at June 30, 1995 199,074 $0.56-$39.00
------------
Granted September 1995 10,000 6.19
Cancelled October 1995 (33,333) 5.63
Cancelled October 1995 (33,333) 6.00
Granted October 1995 21,667 3.38
Cancelled November 1995 (833) 0.03
Cancelled November 1995 (1,667) 39.00
Cancelled November 1995 (1,667) 21.38
Cancelled November 1995 (1,575) 3.33
Cancelled November 1995 (8,333) 5.25
Granted January 1996 6,667 3.00
Cancelled January 1996 (6,667) 3.38
Cancelled January 1996 (1,667) 6.00
Granted April 1996 5,000 4.13
------------
Outstanding at June 30, 1996 153,333 $0.56-$39.00
--------------
Cancelled October 1996 (5,000) 6.00
Cancelled October 1996 (5,000) 3.38
Cancelled November 1996 (1,667) 6.00
Cancelled November 1996 (1,667) 3.00
Cancelled January 1997 (5,000) 6.00
Granted January 1997 3,333 1.75
Cancelled March 1997 (16,667) 18.00
Cancelled March 1997 (4,167) 6.18
Cancelled March 1997 (5,833) 3.38
Cancelled March 1997 (3,333) 6.00
Granted April 1997 3,333 2.00
Cancelled April 1997 (8,333) 5.25
Cancelled April 1997 (1,666) 6.00
Cancelled April 1997 (1,666) 3.00
Cancelled April 1997 (1,667) 1.75
Cancelled June 1997 (5,000) 4.13
--------------
Outstanding at June 30, 1997 93,333 $1.75-$18.00
==============
As of June 30, 1997, 60,000 options were exercisable.
The exercise price for options granted was at least fair market value at
the date of grant. Options issued under the Plan, unless otherwise specified,
vest evenly over a four-year period from the date of grant.
The Company has not applied the provisions of SFAS No. 123, "Accounting for
Stock Based Compensation" because options granted in fiscal years 1996 and 1997
are immaterial.
7. INCOME TAXES:
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". Under SFAS 109
deferred taxes are provided under the liability method using current tax rates.
The Company recorded a tax benefit for the year ended June 30, 1995 due to
the availability of federal and state loss carry backs for tax and financial
reporting purposes. The tax benefit rate is reduced significantly in 1995
primarily because of limits on available federal tax payments made in prior
years which could be refunded. For fiscal years 1996 and 1997, no benefit was
recorded because carrybacks of current losses against previous taxable earnings
are no longer available.
<PAGE>
The following is a summary of the Company's benefit for income taxes:
Year Ended June 30
--------------------------------------------------
1995 1996 1997
------------- -------------- -------------
Current -
Federal $ (92,890) $ -- $ --
State -- -- --
------------- -------------- -------------
(92,980)
Deferred (prepaid) -
Federal -- -- --
State -- -- --
------------- ------------- -------------
Benefit $ (92,890) $ -- $ --
============= ============= =============
The deferred provision (benefit) for income taxes results from the
following temporary differences:
Year Ended June 30
------------------------------------------
1995 1996 1997
------------ ------------- ------------
Allowance for doubtful accounts $ (52,910) $ 205,720 $ 92,500
Accrued payables 82,276 74,000 (142,450)
Depreciation (10,360) (37,000) 54,390
Tax loss carry forwards (695,600) (117,157) (933,053)
Other -- -- --
Valuation allowance 676,594 (125,563) 928,613
------------ ------------- ------------
$ -- $ -- $ --
============ ============= ============
<TABLE>
<CAPTION>
The income tax provision (benefit) is calculated based upon effective tax rates which differ from the federal statutory rate.
The following table reconciles the differences between the two rates by amount and percentage:
Year Ended June 30
------------------------------------------------------------------------------
1995 1996 1997
--------------- ------------- ---------------
Amount % Amount % Amount %
--------------- ----- ------------- ----- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $ (1,194,887) (34%) $ (200,703) (34%) $ (1,309,340) (34%)
State taxes, net of federal
effects (105,431) (3) (17,709) (3) (3)
(115,530)
Permanent differences 437,185 12 53,280 9 610,500 16
Net operating losses
not currently benefited 676,594 19 165,132 28 933,053 24
Other 93,649 3 -- -- (118,683) (3)
---------------- ----- ------------- ----- -------------- -----
Benefit $ (92,890) (3%) $ -- -- $ -- --
================ ===== ============= ===== ============== =====
</TABLE>
The deferred income tax assets are comprised of the following at June 30:
1996 1997
--------------- --------------
Allowance for doubtful accounts $ 534,650 $ 442,150
Accrued payables 170,940 313,390
Depreciation 165,390 111,000
Tax loss carry forwards 995,757 1,928,810
--------------- --------------
Net deferred income tax assets 1,866,737 2,795,350
Less valuation allowance (1,866,737) (2,795,350)
--------------- --------------
Deferred income tax asset $ -- $ --
=============== ==============
<PAGE>
8. RELATED PARTY TRANSACTIONS:
The Company has entered into certain transactions with parties that are
related by common ownership or control. These transactions are summarized below:
o The Company leases and has leased in the past certain facilities from
the majority stockholder of the Company. The Company entered into
agreements to lease these facilities for initial terms of up to ten
years. The Company pays the stockholder a base rental amount per month,
plus a percentage (ranging from 2-1/2% to 5%) of net patient revenue
less a provision for bad debts above a defined threshold. Rental expense
on these leases for the years ended June 30, 1995, 1996 and 1997, was
$586,518, $412,468 and $382,456, respectively, of which $7,577 and
$1,158 was unpaid at June 30, 1996 and 1997, respectively. Subsequent to
year end the majority stockholder sold the final facility leased to the
Company in conjunction with the Company's sale of its Kansas operations
(see Note 2).
o As part of the Company's initial public offering, the Company granted
certain directors an aggregate of 5,000 shares of Class A Common Stock
in lieu of directors' fees. The shares vested over a four year period.
For the year ended June 30, 1995, the Company recorded expense of
$27,761 related to these shares.
9. COMMITMENTS AND CONTINGENCIES:
Medicare Reimbursement The Company's amount due to Medicare intermediaries
of $101,000 at June 30, 1997 includes amounts the Company anticipates to pay on
cost report settlements for its Colorado home health agencies and Colorado
outpatient rehabilitation clinics acquired on June 30, 1995 and its final cost
report for the Company's Gardner, Kansas facility. Such amount also includes
amounts the Company expects to receive upon regulatory approval of the Company's
annual application for an exception from the routine cost limitation ("RCL")
under the Medicare program for fiscal years 1992 through 1996 for its Gardner,
Kansas facility. Medicare reimbursement is generally based upon reasonable
direct and indirect allowable costs incurred in providing services. At the
Company's Gardner, Kansas facility these costs were subject to the RCL. Requests
for an exception from the RCL have been submitted for fiscal years 1992 through
1995 for the Company's Gardner, Kansas facility. In connection with the sale of
its Kansas operation, the Company retained the accounts receivable and it
accordingly intends to file such a request for fiscal 1996 and 1997. The
requests are based upon atypical costs incurred at the Kansas facility in the
treatment of patients who received substantially more intensive services than
those generally received in SNFs. There can be no assurance that the Company
will collect in full the amounts it has requested or intends to request, nor can
there be any assurance as to the timing of any such collection.
10. ACQUISITIONS:
Colorado Outpatient Clinics and Home Health Agency Acquisition
On June 30, 1995, the Company acquired eleven outpatient rehabilitation
clinics in Colorado, three outpatient rehabilitation clinics in Alaska and home
health agencies with operations in Colorado, New Mexico and Kansas. The Company
paid $133,000 and incurred liabilities of $572,000 in connection with the
purchase. The Company also agreed to make additional payments based on the
earnings performance of the outpatient rehabilitation clinics and the home
health agencies based on the results for the twelve month periods ending June
30, 1996, through 1999. The Company was not required to make any cash payment
based on results as of June 30, 1996 and 1997. If the operations collectively
achieve the target earnings thresholds for the twelve months ending June 30,
1998 through 1999, the Company's maximum liability would be $550,000.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts receivable balance then outstanding.
However, accounts receivable collections have not been sufficient to repay the
loan and the loan balance on June 30, 1997 was $249,000. This loan balance is
collateralized by personal assets of the debtor.
<PAGE>
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the home health agencies' were being withheld to offset
amounts due by the previous owner for final settlement of the home health
agencies' cost reports for the years 1992 through 1995. While the intermediary
resumed making payments for current charges in January 1996, the intermediary
had withheld $728,000 related to these settlements. During the second quarter of
fiscal 1997, the Company received $425,000 in payment of amounts withheld. The
Company has submitted appeals on behalf of the previous owner requesting payment
of the remaining balance. In the event that such appeals are unsuccessful, the
Company intends to pursue collection from the previous owner and offset the
amounts withheld against any additional amounts due to the previous owner under
the acquisition agreements. Amounts owed to the Company as of June 30, 1997, by
Medicare and the previous owner of the Colorado operations exceed the minimum
amounts owed to the previous owner by $237,000. This amount is included in other
receivables on the Company's balance sheet.
<PAGE>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1995, 1996, AND 1997
1995 1996 1997
----------- ----------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance at beginning of period $2,025,000 $2,001,000 $1,445,000
Provision charged to expense 1,371,151 583,661 454,255
Write-offs, net of recoveries (1,395,151) (1,051,890) (704,255)
Other -- (87,771) --
----------- ----------- -----------
Balance at end of period $2,001,000 $1,445,000 $1,195,000
=========== =========== ===========
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 0-19726
MEADOWBROOK REHABILITATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3022377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Powell Street, Suite 1203, Emeryville, California 94608
(Address and Zip Code of principal executive offices)
(510) 420-0900
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ______
At May 14, 1998, the latest practicable date, there were 1,735,866
outstanding shares of Class A Common Stock, $.01 par value per share, and
1,159,500 outstanding shares of Class B Common Stock, $.01 par value per share.
<PAGE>
8
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets ............................3
Consolidated Statements of Operations ...................4
Consolidated Statements of Cash Flows ...................5
Consolidated Statements of Stockholders' Equity .........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Trends and Recent Events ................................7
Results of Operations ...............................12
Liquidity and Capital Resources ......................14
Impact of Accounting Statements ......................16
Interim Periods ........................................16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ......................................17
Item 2. Changes in Securities ...............................17
Item 3. Defaults Upon Senior Securities ......................17
Item 4. Submission of Matters to a Vote of Security Holders ....17
Item 5. Other Information ......................................17
Item 6. Exhibits ...............................................17
SIGNATURES .........................................................18
<PAGE>
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION (Item 1. - Financial Statements)
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,548,494 $ 2,928,781
Restricted cash 281,521 278,649
Patient accounts receivable, less allowance for doubtful accounts
of $757,000 and $1,194,000 respectively 1,375,373 4,278,756
Due from intermediaries 816,462 --
Other receivables 334,115 293,165
Prepaid expenses and other assets 166,382 298,970
-------------- -------------
Total current assets 6,522,347 8,078,321
-------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment 903,258 2,154,947
Leasehold improvements 151,813 686,116
-------------- -------------
1,055,071 2,841,063
Less: accumulated depreciation
(563,422) (1,708,734)
-------------- --------------
Net property and equipment 491,649 1,132,329
-------------- --------------
OTHER ASSETS:
Goodwill and intangible assets 343,663 337,734
-------------- --------------
TOTAL ASSETS $ 7,357,659 $ 9,548,384
============== ==============
CURRENT LIABILITIES:
Short-term borrowings and current maturities of notes payable $ 102,836 $ 291,037
Current maturities of capital lease obligations 2,491 24,821
Accounts payable 307,845 968,027
Accrued payroll and employee benefits 392,625 755,748
Due to intermediaries -- 100,780
Other accrued liabilities 883,793 1,123,124
-------------- --------------
Total current liabilities 1,689,590 3,263,537
-------------- --------------
LONG-TERM LIABILITIES:
Note payable and other long-term liabilities 21,394 48,989
-------------- --------------
Total long-term liabilities 21,394 48,989
-------------- --------------
TOTAL LIABILITIES 1,710,984 3,312,526
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value:
Class A - 15,000,000 shares authorized; 1,157,244 shares issued and outstanding
at March 31, 1998 and June 30, 1997 11,572 11,572
Class B - 5,000,000 shares authorized; 773,000 shares issued and outstanding
at March 31, 1998 and June 30, 1997 7,730 7,730
Paid-in capital 17,908,122 17,908,122
Treasury stock, at cost, Class A - 59,900 shares at March 31, 1998 -- (231,610)
Retained deficit (12,049,139) (11,691,566)
-------------- --------------
Total stockholders' equity 5,646,675 6,235,858
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,357,659 $ 9,548,384
============== ==============
<FN>
- -------------------------------------------------------------------------------------------------------------------------
The notes to consolidated financial statements, as contained in the Company's Annual Report
on Form 10-K, are an integral part of these financial statements.
3
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES $ 1,286,115 $ 5,508,323 $ 6,286,489 $17,013,035
OPERATING EXPENSES:
Salaries and employee benefits 1,476,604 3,824,664 5,615,519 11,926,130
Professional fees and purchased services 136,022 529,770 600,592 1,887,597
Provision for doubtful accounts 4,953 129,147 81,106 346,381
Other operating expenses 336,823 882,961 1,261,534 2,658,606
Depreciation and amortization 48,715 139,147 190,032 448,109
Rent:
To unrelated parties 122,642 303,237 444,085 1,038,016
To related parties -- 97,920 29,962 289,708
(Gain) loss on sale of assets 3,045 (488,240) (1,471,999) (530,942)
------------ ------------ ------------ ------------
Total operating expenses 2,128,804 5,418,606 6,750,831 18,063,605
------------ ------------ ------------ ------------
Income (loss) from operations (842,689) 89,717 (464,342) (1,050,570)
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest income (44,776) (24,021) (126,936) (85,564)
Interest expense 3,432 15,394 16,212 47,380
------------ ------------ ------------ ------------
Net other income (41,344) (8,627) (110,724) (38,184)
------------ ------------ ------------ ------------
Income (loss) before income taxes (801,345) 98,344 (353,618) (1,012,386)
INCOME TAX PROVISION -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST (801,345) 98,344 (353,618) (1,012,386)
MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES -- 9,871 3,955 26,660
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (801,345) $ 88,473 $ (357,573) $(1,039,046)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE (basic and diluted) $ (0.42) $ 0.05 $ (0.18) $ (0.54)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,906,844 1,930,244 1,922,558 1,930,244
============ ============ ============ ============
<FN>
- -----------------------------------------------------------------------------------------------------------------------------
The notes to consolidated financial statements, as contained in the Company's Annual Report
on Form 10-K, are an integral part of these financial statements.
4
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (357,573) $ (1,039,046)
Adjustments to reconcile net (loss) to net cash
provided by (used for) operations:
Depreciation and amortization 190,032 448,109
Gain on sale of assets (1,471,999) (530,942)
Minority interest expense 3,955 26,660
Changes in assets and liabilities:
(Increase) decrease in patient receivables 2,414,633 (383,152)
(Increase) decrease in due from intermediaries (872,067) 322,288
Decrease in income tax refund receivables -- 91,417
Decrease in other receivables 249,043 294,198
Decrease in prepaid expenses and
other current assets 47,613 197,753
(Decrease) in accounts payable and
accrued liabilities (158,943) (190,458)
-------------- --------------
Cash (used) provided for operating activities 44,694 (763,173)
-------------- --------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to property and equipment (51,121) (149,246)
Payments on prior purchase of outpatient clinics (281,275) (318,244)
Purchase of home health agency (20,000) --
Proceeds from sale of assets 1,407,807 1,459,652
-------------- --------------
Cash provided by investment activities 1,055,411 992,182
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term notes borrowings 127,221 273,002
Payments of short-term borrowings (343,017) (546,599)
Payments of capital lease obligations (22,330) (22,113)
(Increase) decrease in restricted cash (2,872) 62,000
Payments to minority shareholders (7,784) (43,746)
Purchase of Treasury stock (231,610) --
-------------- --------------
Cash (used for) financing activities (480,392) (277,456)
-------------- --------------
Net increase (decrease) in cash 619,713 (48,477)
CASH AND CASH EQUIVALENTS, Beginning of Period 2,928,781 3,439,440
-------------- --------------
CASH, End of Period $ 3,548,494 $ 3,390,993
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash activities:
Notes received on sale of Florida operations $ 215,000 $ --
Payments:
Interest paid 16,212 51,626
Income taxes paid 11,600 20,900
<FN>
- -------------------------------------------------------------------------------------------------------------------------
The notes to consolidated financial statements, as contained in the Company's Annual Report
on Form 10-K, are an integral part of these financial statements.
5
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEADOWBROOK REHABILITATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Retained Total
-----------------------------------------
Class A Class B Paid-in Earnings Treasury Stockholders'
-------------------- -------------------
Shares Amount Shares Amount Capital (Deficit) Stock Equity
---------- --------- --------- -------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 $ (7,840,997) $ -- $10,086,427
Net (loss) -- -- -- -- -- (3,850,569) -- (3,850,569)
---------- --------- --------- -------- ------------ ------------- ---------- ------------
BALANCE, JUNE 30, 1997 1,157,244 11,572 773,000 7,730 17,908,122 (11,691,566) -- 6,235,858
Purchase of shares
for treasury -- -- -- -- -- -- (231,610) (231,610)
Net (loss) -- -- -- -- -- (357,573) (357,573)
---------- --------- --------- -------- ------------ ------------- ----------- ------------
BALANCE, MARCH 31, 1998 1,157,244 $ 11,572 773,000 $ 7,730 $ 17,908,122 $(12,049,139) $ (231,610) $ 5,646,675
========== ========= ========= ======== ============ ============= ========== ============
<FN>
- -------------------------------------------------------------------------------------------------------------------------------
The notes to consolidated financial statements, as contained in the Company's Annual Report
on Form 10-K, are an integral part of these financial statements.
6
</FN>
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
TRENDS AND RECENT EVENTS
Consideration of Strategic Alternatives
As a result of poor operating results and poor prospects for growth in
their respective markets, the Company's Board of Directors decided to sell its
acute, subacute and post-acute operations as well as certain of the Company's
Florida and Georgia outpatient rehabilitation clinic operations. Since the
beginning of the fiscal year ended June 30, 1997 ("Fiscal 1997"), the Company
has disposed of substantially all of its operating assets. Early in Fiscal 1997,
the Company sold its post-acute program in Illinois and its outpatient
rehabilitation clinics in Alaska. On March 31, 1997, the Company sold all of its
Georgia operations, consisting of a neurobehavioral program, a subacute program
operated under a management agreement, and a post-acute program. On July 31,
1997, the Company sold its Kansas operations. On August 31, 1997, the Company
sold five of its outpatient rehabilitation clinics in Florida and Georgia and
certain other assets. On September 30, 1997, the Company sold its remaining
Florida outpatient clinic and two management contracts. In addition, the Company
closed six outpatient rehabilitation clinics in Colorado and Florida during
Fiscal 1997. As of March 31, 1998, the Company operated home health agencies
with operations in Colorado and Kansas and four physical therapy clinics in
Colorado.
Harvey Wm. Glasser, M.D., the Company's majority stockholder, has
indicated his view that the Company's business should not necessarily be limited
to medical rehabilitation or the healthcare field generally and that, if
presented with an appropriate opportunity, the Company should consider investing
the proceeds from its asset sales in non-healthcare businesses. As a result, the
nature of the Company's business could change significantly. Dr. Glasser holds a
majority of the combined voting power of the Company's two classes of common
stock and, accordingly, has the ability to effect a change in management or to
cause or prevent a significant corporate transaction regardless of how other
stockholders might vote.
On April 7, 1998, the Company announced that it had entered into an
agreement to acquire Cambio Networks, Inc. ("Cambio"). Based in Bellevue,
Washington, Cambio is a network management inventory software company providing
services to financial, telephony, medical, and Y2K Markets in both the U.S. and
Common Market. Cambio's COMMAND Network Inventory Management System provides a
comprehensive solution for network inventory management that enables customers
to optimize the management of a corporation's network infrastructure - both
physical and logical. The agreement provides for a merger in which the Company
will acquire each issued and outstanding share of common and preferred stock of
Cambio through the merger of a wholly owned subsidiary of the Company with and
into Cambio. Under the terms of the agreement, Cambio's current shareholders
will receive in the aggregate a number of shares of the Company's Class A Common
Stock representing 32.5% of the outstanding Class A and Class B Common Stock of
the Company at the time of the closing. The closing of the merger is subject to
7
<PAGE>
several conditions, including the approval of the stockholders of the Company
and Cambio. If these and certain other conditions are met, the transaction is
anticipated to be completed by the end of June 1998.
The Board of Directors of the Company is continuing to evaluate the
Company's strategic direction and alternatives. The alternatives under
consideration by the Board include, among other things, acquisitions or other
business combinations and/or additional sales of assets. There can be no
assurance that any such alternatives will be available on favorable terms, if at
all. Acquisitions entail numerous risks, including difficulties or an inability
to successfully assimilate acquired operations and products, diversion of
management's attention and loss of key employees of acquired businesses, all of
which the Company has encountered with previous acquisitions. Future
acquisitions by the Company may require dilutive issuances of equity securities,
the incurrence of additional debt, and the creation of goodwill or other
intangible assets that could result in amortization expense. These factors could
have a material adverse effect on the Company's business, operating results and
financial condition.
Potential Ineligibility for Continued Listing on the NASDAQ National Market
On February 23, 1998, the Nasdaq Stock Market adopted new quantitative
maintenance requirements for continued listing on the Nasdaq National Market.
During February 1998, the Company was notified by the Nasdaq Stock Market that
it was not in compliance with the requirement that listed companies have a
minimum public float of at least 750,000 shares and that the market value of its
public float be at least $5,000,000. On April 22, 1998, the Company effected a
three-for-two stock split which increased the Company's public float to
approximately 954,485 shares. The Company, however, is not in compliance with
the market value of its public float requirement. The Company estimates that the
market value of its public float as of May 13, 1998 is $1,431,728. The Company
has until May 28, 1998, to comply with such requirement or to request a
temporary exception from it, which would stay the delisting process until
further review. In the event the Company is unable to meet the requirements for
continued listing on the Nasdaq National Market, it intends to apply for
inclusion of its Class A Common Stock on the Nasdaq SmallCap Market. Delisting
from the Nasdaq National Market could have an adverse effect on the liquidity of
the Company's Class A Common Stock.
Three-for-Two Stock Split of the Company's Common Stock
On March 8, 1998, the Company's Board of Directors authorized a
three-for-two stock split of the Company's Common Stock, which was effected in
the form of a stock dividend on April 22, 1998. Except for the disclosure
regarding the shares outstanding as of May 14, 1998, the latest practicable
date, all share information and per share data throughout this report has not
been adjusted to reflect such stock split.
8
<PAGE>
Recent Asset Dispositions
Sale of Florida Operations. On August 31, 1997, the Company sold five
outpatient rehabilitation clinics and certain other assets located in Florida
and Georgia. The outpatient rehabilitation clinics were located in St.
Augustine, Palatka, Palm Coast, and Ormond Beach, Florida and in Moultrie,
Georgia. The Company sold the clinics in two separate transactions. The
aggregate sale price for the outpatient rehabilitation clinics and other assets
was $550,000. The Company received promissory notes from the purchasers for the
aggregate purchase price. The promissory notes are secured by the acquired
assets and the Company also received personal guarantees from the stockholders
of the purchasers. During the three months ended December 31, 1997 ("Second
Quarter Fiscal 1998"), the Company received $335,000 as payment in full for one
of the promissory notes. The purchasers acquired all assets including accounts
receivable and were responsible for all accounts payable and certain payroll
liabilities. As part of the transaction, the Company retained all liabilities
for amounts due to the former owners of the clinics. At closing, this amount was
$197,000. This transaction resulted in a loss of $2,046,000, primarily as a
result of the write-down of goodwill associated with the Company's acquisition
of certain of the clinics in 1994. The loss was recorded as other operating
expense in the Company's Fiscal 1997 financial statements.
On September 30, 1997, the Company sold its remaining outpatient clinic
located in Jacksonville, Florida and its two management contracts located in
Jacksonville and St. Augustine, Florida. The sale price was $115,000 in cash.
The purchaser acquired all assets, including accounts receivable. There was no
gain or loss resulting from this transaction.
During Second Quarter Fiscal 1998, certain contingencies related to the
Florida sale were resolved and the Company determined that reserves of $308,000
recorded at the time of the sale were no longer needed. Accordingly, these
reserves have been reversed and the resulting gain is included in (gain) loss on
sale of assets in the accompanying income statement.
Sale of Kansas Operations. On July 31, 1997, the Company sold its
Kansas operations, consisting of acute, subacute and post-acute rehabilitation
programs. The sale price for the Kansas operations was $1,500,000 in cash. The
Company's agreement with the purchaser provided for the Company to retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. This transaction resulted in a gain of approximately
$1,178,000. This gain is reflected in the Company's results for the three months
ended September 30, 1997 ("First Quarter Fiscal 1998").
Sale of Georgia Operations. On March 31, 1997, the Company sold its
Georgia operations, consisting of a neurobehavioral program, a subacute program
operated under a management agreement, and a post-acute program and related real
estate. The sale price for the Georgia operations was $1,300,000 in cash. The
Company's agreement with the purchaser provided for the Company to retain
outstanding accounts receivable and be responsible for the accounts payable at
the closing date. This transaction resulted in a gain of $517,000, which was
recorded as other operating income in Fiscal 1997.
9
<PAGE>
Sale of Alaska Operations. On January 13, 1997, the Company sold its
three outpatient rehabilitation clinics in Alaska. The sale price was $200,000.
This transaction resulted in a loss of $29,000, which was recorded in (gain)
loss on sale of assets during Fiscal 1997.
Sale of Illinois Operations. On October 7, 1996, the Company sold the
assets of its post-acute rehabilitation operations located in Park Ridge,
Illinois for $100,000 in cash. The Company's agreement with the purchaser
provided for the Company to retain outstanding accounts receivable and be
responsible for the accounts payable at the closing date. This transaction
resulted in a gain of $63,000, which was recorded in net gain (loss) on sale of
assets during Fiscal 1997.
Colorado Outpatient Clinics and Home Health Agency Acquisition. On June
30, 1995, the Company acquired eleven outpatient rehabilitation clinics in
Colorado, three outpatient rehabilitation clinics in Alaska and home health
agencies with operations in Colorado, New Mexico and Kansas. The Company paid
$133,000 and incurred liabilities of $572,000 in connection with the purchase.
The Company also agreed to make additional payments based on the earnings
performance of the outpatient rehabilitation clinics and the home health
agencies based on the results for the twelve-month periods ending June 30, 1996
through 1999. The Company was not required to make any cash payment based on
results as of June 30, 1996 or 1997. If the operations collectively achieve the
target earnings thresholds for the twelve months ending June 30, 1998 and 1999,
the Company's maximum liability would be $550,000. During Fiscal 1997, the
Company closed its home health agency in New Mexico.
In addition, in connection with the acquisition, the Company agreed to
deposit $500,000 to secure a $900,000 bank loan to the previous owner of the
acquired businesses. The Company is overseeing the repayment of the loan through
the collection of accounts receivable which are being collected on behalf of the
previous owner. At the time of the acquisition, the Company anticipated that the
loan would be repaid based on the accounts receivable balance then outstanding.
However, accounts receivable collections have not been sufficient to repay the
loan, and the loan balance on March 31, 1998 was approximately $267,000. This
loan balance is collateralized by personal assets of the debtor.
In October 1995, the Company was notified by its intermediary that its
Medicare payments for the home health agencies were being withheld to offset
amounts due by the previous owner for final settlement of the home health
agencies' cost reports for the years 1992 through 1995. While the intermediary
resumed making payments for current charges in January 1996, the intermediary
had withheld $728,000 related to these settlements. During the three months
ended September 30, 1996 ("First Quarter Fiscal 1997"), the Company received
$425,000 in payment of amounts withheld. The Company has submitted appeals on
behalf of the previous owner requesting payment of the remaining balance. In the
event that such appeals are unsuccessful, the Company intends to pursue
collection from the previous owner and offset the amounts withheld against any
additional amounts due to the previous owner under the acquisition agreements.
Amounts owed to the Company as of March 31, 1998, by Medicare and the previous
owner of the Colorado operations exceed the minimum amounts owed to the previous
owner by $237,000.
10
<PAGE>
Healthcare Regulation and Reform
There is continuing political debate concerning the need for reform of
the healthcare industry. Healthcare reform proposals have been formulated by the
current administration, members of Congress, and, periodically, state
legislators. The Health Care Financing Administration ("HCFA") has recently
adopted regulations that will affect Medicare cost reimbursements based on
actual reasonable allowable costs subject to per visit limitations. Effective
July 1, 1998, such reimbursements will also be subject to an aggregate annual
per beneficiary limitation. Government officials can be expected to continue to
review and assess alternative healthcare delivery systems and payment
methodologies. Changes in the law or new interpretations of existing laws may
have a dramatic effect on the definition of permissible or impermissible
activities, the relative cost of doing business, and the methods and amounts of
payments for medical care by both governmental and other payors. Legislative
changes to "balance the budget" and slow the annual rate of growth of Medicare
and Medicaid are expected. Such changes may adversely impact reimbursement for
the Company's services.
Forward-looking Statements
In addition to the historical information contained herein, this Form
10-Q contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to risks and uncertainties, including
risks and uncertainties set forth in this Form 10-Q, that may cause actual
results to differ materially. These forward-looking statements speak only as of
the date hereof. The Company disclaims any intent or obligation to update these
forward-looking statements.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated (i) the
percentage of net operating revenues represented by certain selected items
reflected in the Company's consolidated statements of operations and (ii) the
percentage change in the dollar amount of such items from the same periods in
the prior fiscal year.
<TABLE>
<CAPTION>
% of Net Revenue % of Net Revenue
Three Months Ended Nine Months Ended % $ % $
March 31, March 31, Change Change
--------------------- ----------------------- Three Nine
1998 1997 1998 1997 Months Months
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues 100.0 100.0 100.0 100.0 (76.7) (62.5)
Non-capital operating expenses:
Salaries and employee benefits 114.8 69.4 89.3 70.1 (61.4) (52.9)
Other non-capital expenses 37.2 28.0 30.9 28.8 (69.0) (60.3)
(Gain) loss on sale of assets 0.2 (8.9) (23.4) (3.1) (100.6) 177.2
-------- -------- -------- --------
Total non-capital expenses 152.2 88.5 96.8 95.7 (59.9) (62.6)
Capital expenses:
Depreciation and amortization 3.8 2.5 3.0 2.6 (65.0) (57.6)
Rent 9.5 7.3 7.5 7.8 (69.4) (64.3)
Interest 0.3 0.3 0.3 0.3 (77.7) (65.8)
--------
-------- -------- --------
Total capital expenses 13.6 10.1 10.8 10.7 (68.5) (62.7)
-------- -------- -------- --------
Total expenses 165.8 98.6 107.6 106.4 (60.8) (62.6)
Interest income 3.5 0.4 2.0 0.5 86.4 48.4
-------- -------- -------- --------
Income (loss) before income taxes (62.3) 1.8 (5.6) (5.9) (914.8) (74.9)
Income tax provision -- -- -- -- -- --
-------- -------- -------- --------
Income (loss) before minority
interest (62.3) 1.8 (5.6) (5.9) (914.8) (74.9)
Minority interest -- 0.2 0.1 0.2 (100.0) (85.2)
-------- -------- -------- --------
Net income (loss) (62.3) 1.6 (5.7) (6.1) (1,005.8) (75.2)
======== ======== ======== ========
</TABLE>
The Company's net operating revenues decreased 76.7% and 62.5% to
$1,286,115 and $6,286,489 for the three months ended March 31, 1998 ("Third
Quarter Fiscal 1998") and nine months ended March 31, 1998 ("Nine Months Fiscal
1998"), as compared to $5,508,323 and $17,013,035 for the same periods in the
prior fiscal year. The decrease was due primarily to the sale of the Company's
Georgia, Alaska, and Illinois operations during the Second and Third Quarters
Fiscal 1997 and the sale of the Company's Kansas and Florida operations during
the First Quarter Fiscal 1998. See "Trends and Recent Events".
Due to increased pressures on home health referrals by physicians
stemming from healthcare reform initiatives, the Company's home health business
is experiencing decreasing net operating revenues. The number of patient visits
in the Company's home health business decreased 33.1 % and 2.6% to 20,878 and
86,233 for the Third Quarter and Nine Months Fiscal 1998, from 31,220 and 88,514
for the same periods in the prior fiscal year. In addition, the Company
anticipates that as a result of the new per-beneficiary annual limitations on
home health agency costs, which will be in effect as of July 1,1998, the home
health business will be subject to lower Medicare cost reimbursements thereby
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further decreasing operating revenues. The Company is currently restructuring
its home health operations to address these industry trends.
Below is a summary of net operating revenues for the Third Quarter and
Nine Months Fiscal 1997 and 1998, with respect to operations sold by the Company
during Fiscal 1997 and the First Quarter Fiscal 1998.
Net operating revenues Net operating revenues
Three months ended March 31, Nine months ended March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Alaska $ -- $ -- $ -- $ 372,036
Georgia -- 1,642,764 -- 4,856,216
Illinois -- -- -- 307,086
Kansas -- 1,277,771 319,728 3,738,745
Florida -- 486,001 277,788 1,613,276
------------- ------------- ------------- -------------
Total $ -- $ 3,406,536 $ 597,516 $ 10,887,359
============= ============= ============= =============
Total non-capital operating expenses (excluding the (gain) loss on the
sale of assets) for the Third Quarter and Nine Months Fiscal 1998 decreased
63.6% and 55.1% to $1,954,402 and $7,558,751, respectively, from $5,366,542 and
$16,818,714, during the same periods in the prior fiscal year. The decrease
resulted primarily from the sale of the Company's Georgia, Alaska, and Illinois
operations during the Second and Third Quarters Fiscal 1997 and the sale of the
Company's Kansas and Florida operations during the First Quarter Fiscal 1998.
See "Trends and Recent Events". Salaries and employee benefits continue to be
the primary component of the Company's non-capital operating expenses. Salaries
and employee benefits decreased 61.4% and 52.9% to $1,476,604 and $5,615,519 for
the Third Quarter and Nine Months Fiscal 1998, as compared to $3,824,664 and
$11,926,130 for the same periods in the prior fiscal year. Salaries and employee
benefits as a percentage of net operating revenues increased to 114.8% and 89.3%
for the Third Quarter and Nine Months Fiscal 1998, as compared to 69.4% and
70.1% for the same periods in the prior fiscal year. The increase is due to the
Company's concentration in home health, which is more labor-intensive and has
suffered from decreasing revenues as discussed above.
The Company's other non-capital operating expenses primarily consist of
professional fees, purchased services, provision for doubtful accounts and other
operating expenses. For the Third Quarter and Nine Months Fiscal 1998, the
Company's other non-capital operating expenses decreased 69.0% and 60.3% to
$477,798 and $1,943,232, respectively, as compared to $1,541,878 and $4,892,584,
for the same periods in the prior fiscal year. The decrease is primarily due to
the sale of the Company's Georgia, Alaska, and Illinois operations during the
Second and Third Quarters Fiscal 1997 and the sale of the Company's Kansas and
Florida operations during the First Quarter Fiscal 1998. See "Trends and Recent
Events".
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Total capital expenses decreased 68.5% and 62.7% during the Third
Quarter and Nine Months Fiscal 1998, to $174,789 and $680,291, respectively, as
compared to $555,698 and $1,823,213 for the same periods in the prior fiscal
year. Rent expense decreased 69.4% and 64.3% to $122,642 and $474,047 for the
Third Quarter and Nine Months Fiscal 1998, respectively, as compared to $401,157
and $1,327,724 for the same periods in the prior fiscal year. The decrease is
primarily due to the sale of the Company's Georgia, Alaska, and Illinois
operations during the Second and Third Quarters Fiscal 1997 and the sale of the
Company's Kansas and Florida operations during the First Quarter Fiscal 1998.
See "Trends and Recent Events".
The Company's results for its Nine Months Fiscal 1998 include a net
gain of $1,471,999 on the sale of its Kansas and Florida operations. This amount
is offset by losses incurred on the sale of certain other assets.
Net interest income for the Third Quarter and Nine Months Fiscal 1998
increased to $44,776 and $126,936, respectively, as compared to $24,021 and
$85,564 for the same periods in the prior fiscal year. This increase is due to
higher cash balances during the Third Quarter and Nine Months Fiscal 1998.
The Company reported a net loss for the Third Quarter Fiscal 1998 of
$801,345, as compared to net income of $88,473 for the same period in the prior
fiscal year. For the Nine Months Fiscal 1998, the Company reported net loss of
$357,573, as compared to a net loss of $1,039,046 for the Nine Months Fiscal
1997. The net loss for the Nine Months Fiscal 1998 includes the gain on the sale
of the Company's Kansas and Florida operations. The Company did not record a tax
provision for the Nine Months Fiscal 1997 because tax loss carryforwards were
available to offset earnings in the period.
Basic and diluted loss per share was $0.42 and $0.18 for the Third
Quarter and Nine Months Fiscal 1998, respectively, as compared to a net income
of $0.05 and a net loss of $0.54 per share for the same period in the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $4,832,757,
compared to working capital of $4,814,784 at June 30, 1997. The Company had cash
and cash equivalents of $3,548,494 at March 31, 1998, as compared to $2,928,781
at June 30, 1997.
During the Nine Months Fiscal 1998, the Company's operating activities
provided $44,694, as compared to cash used for operating activities of $763,173
during the same period in the prior fiscal year. The cash provided by operating
activities during the Nine Months Fiscal 1998 are primarily the result of
collections of accounts receivable from the facilities sold by the Company,
offset by a decrease in accounts payable related to the facilities sold and
increased receivables from intermediaries related to the Company's home health
operations. Cash provided by investment activities during the Nine Months Fiscal
1998 was $1,055,411, as compared to cash provided of $992,182 during the same
period in the prior fiscal year. The cash provided by investment activities for
the Nine Months Fiscal 1998 and Fiscal 1997 primarily reflects the proceeds from
the sale of the Company's assets.
14
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On February 21, 1998, the Company's Board of Directors approved a stock
repurchase program under which it could purchase up to an aggregate of ten
percent (10%) of the outstanding shares of its Class A Common Stock. As of March
31, 1998, the Company had repurchased 59,900 shares of its Class A Common Stock
for an aggregate price of $231,610.
Net patient accounts receivable, which excludes amounts due from
intermediaries, was $1,375,373 at March 31, 1998, as compared to $4,278,756 at
June 30, 1997. This decrease is primarily due to the sale of Company's Georgia,
Alaska, and Illinois operations during the Second and Third Quarters Fiscal 1997
and the sale of the Company's Kansas and Florida operations during the First
Quarter Fiscal 1998. See "Trends and Recent Events". At March 31, 1998, the
Company had an allowance for doubtful accounts of $757,000, as compared to
$1,194,000 at June 30, 1997.
The Company's amount due from Medicare intermediaries of $816,462 at
March 31, 1998 includes amounts the Company anticipates that it will receive in
connection with cost report settlements for its Colorado home health agencies
and its final cost report for the Company's former Gardner, Kansas facility.
Such amount also includes amounts the Company expects to receive upon regulatory
approval of the Company's annual application for an exception from the routine
cost limitation ("RCL") under the Medicare program for fiscal years 1992 through
1996 for its former Gardner, Kansas facility. Medicare reimbursement is
generally based upon reasonable direct and indirect allowable costs incurred in
providing services. At the Company's former Gardner, Kansas facility these costs
were subject to the RCL. Requests for an exception from the RCL have been
submitted for fiscal years 1992 through 1997 for such facility. The requests are
based upon atypical costs incurred at the Kansas facility in the treatment of
patients who received substantially more intensive services than those generally
received in skilled nursing facilities. There can be no assurance that the
Company will collect in full the amounts it has requested or intends to request,
nor can there be any assurance as to the timing of any such collection.
On April 3, 1998, the Company and Cambio executed a Secured Bridge
Financing Note (the "Note") pursuant to which the Company provided Cambio with a
loan of five hundred thousand dollars ($500,000) to finance its ongoing
operations. The Note bears interest at 8% per annum and is due the earliest of
(i) July 31, 1998; (ii) upon the closing of the acquisition of Cambio; or (iii)
the occurrence of certain events as defined in the Note.
The Company has no current material commitments for capital
expenditures, except for those in connection with the Company's acquisitions as
described under "Trends and Recent Events" above. The Company also expects to
make routine capital improvements to its facilities in the normal course of
business.
The Company may use a portion of its cash balance to finance its
ongoing home health business operations. The Company has a line-of-credit of
$1,000,000 from a bank. Any draws on the line-of-credit would be secured by a
cash deposit. The Company will need to obtain access to additional capital,
through bank loans or otherwise, in order to fund any significant acquisition
opportunities. The Company believes that its existing cash, credit line and cash
15
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flows from operations, will be sufficient to satisfy the Company's estimated
operating cash requirements for its existing facilities for the next twelve
months.
Inflation in recent years has not had a significant effect on the
Company's business and is not expected to adversely effect the Company in the
future unless the current rate of inflation increases significantly.
IMPACT OF ACCOUNTING STATEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earning per Share", the
adoption of which is not expected to significantly impact the Company's earnings
per share calculation.
INTERIM PERIODS
The Company believes that all the necessary adjustments have been
included in the amounts shown in the unaudited consolidated financial statements
contained in Item 1. above, for the Third Quarter Fiscal 1997 and 1998, to state
fairly and consistently the results of such interim periods. This includes all
normal recurring adjustments that the Company considers necessary for a fair
statement thereof, in accordance with generally accepted accounting principles
applied in a consistent manner. This report should be read in conjunction with
the Company's Annual Report on Form 10-K.
16
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.1 - Financial Data Schedule
B. Reports on Form 8-K
None
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEADOWBROOK REHABILITATION GROUP, INC.
DATE: May 15, 1998 By /s/ Harvey Wm. Glasser, M.D.
------------------------------------
Harvey Wm. Glasser, M.D.
President and Chief Executive Officer
18
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CAMBIO NETWORKS, INC.
15400 SE 30th Place, Suite 200
Bellevue, WA 98007
CONSENT
THIS CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a shareholder of record of Cambio Networks, Inc., a
California corporation ("Cambio") acknowledges receipt of the accompanying Joint
Information/Consent Solicitation Statement (the "Joint Information/Consent
Solicitation Statement") from Cambio soliciting the consent of shareholders.
On the proposal to approve and adopt the Agreement and Plan of Merger (the
"Merger Agreement"), dated as of April 3, 1998, by and among Meadowbrook
Rehabilitation Group, Inc., a Delaware corporation ("Meadowbrook"), Cambio
and Interset, Inc., a corporation and wholly owned subsidiary of
Meadowbrook ("Merger Subsidiary"), and to approve the transactions
contemplated by the Merger Agreement, including, but not limited to, the
merger (the "Merger") of Merger Subsidiary with and into Cambio with Cambio
surviving as a wholly owned subsidiary of Meadowbrook and the conversion of
the undersigned's shares of Cambio Common Stock and/or Cambio Preferred
Stock into shares of Meadowbrook Class A Common Stock, all as set forth in
the Merger Agreement, the undersigned hereby takes the action indicated
below.
[ ] CONSENTS TO THE ADOPTION [ ] DOES NOT CONSENT [ ] ABSTAINS
OF THE MERGER AGREEMENT AND
THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED
THEREBY.
Capitalized terms used herein but not defined shall bear the respective
meanings ascribed to them in the accompanying Joint Information/Consent
Solicitation Statement.
Print name exactly as it appears on share certificates and sign below. When
shares are held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
Dated:________________ , 1998
________________________________________________________
[PRINT NAME EXACTLY AS IT APPEARS ON STOCK CERTIFICATES]
_________________________ _________________________
Signature Signature
[If shares are held jointly, each holder should sign]
By:__________________________________________________
[Signature and title of person signing on behalf
of shareholder if shareholder not an individual]
Please Mark, Sign, Date and Return the Consent Promptly Using the Enclosed
Return Envelope.
