UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of
the
Securities Exchange Act of 1934
Filed by the Registrant
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þ
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Filed by a Party other than the
Registrant
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o
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Check
the
appropriate box:
þ
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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o
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Soliciting
Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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Xcorporeal,
Inc.
(Name
of
Registrant as Specified In Its Charter)
(Name
of
Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
þ
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No
fee required.
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o
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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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):
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(4)
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Proposed
maximum aggregate value of transaction:
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(5)
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Total
fee paid:
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o
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Fee
paid previously with preliminary materials.
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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.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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(4)
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Date
Filed:
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Xcorporeal,
Inc.
12121
Wilshire Blvd., Suite 350
Los
Angeles, California 90025
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD ON NOVEMBER __, 2008
Dear
Fellow Stockholders:
Our
2008
annual meeting of stockholders will be held at The Water Garden, 1620
26
th
Street,
Sixth Floor, North Tower, Santa Monica, California, on Friday, November __,
2008, beginning at 10:00 a.m. local time. At the meeting, stockholders will
vote on the following matters:
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1.
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Adoption
of an amendment to our certificate of incorporation to provide
for a
classified board of directors and for stockholder action to be taken
only at meetings;
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2.
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Election
of directors to hold office until their successors are duly elected
and
qualified;
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3.
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Approval
of the issuance of shares of our common stock to effectuate a technology
transaction to acquire intellectual property rights relating to
a wearable
artificial kidney;
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4.
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Approval
of an amendment to our certificate of incorporation to increase
the number
of authorized shares; and
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5.
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Any
other matters that properly come before the
meeting.
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Stockholders
of record as of the close of business on
November
__
, 2008 are entitled to vote their shares by proxy or at the meeting
or
any postponement or adjournment thereof.
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By
order of the board of directors,
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Kelly
McCrann
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Chairman
of the Board and Chief Executive
Officer
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Los
Angeles, California
November __
,
2008
Whether
or not you expect to be present at the annual meeting, please complete, sign
and
date the enclosed proxy card and return it promptly in the enclosed return
envelope. No postage is required if mailed in the United States. Stockholders
who execute a proxy card may nevertheless attend the meeting, revoke their
proxy
and vote their shares in person.
Summary
Term Sheet for Technology Transaction
The
following is a summary of the principal terms of proposal three, for approval
of
the issuance of shares of our common stock to effectuate a technology
transaction to acquire intellectual property rights relating to a wearable
artificial kidney. This summary does not contain all information that may
be
important to you. We encourage you to read carefully this proxy statement,
including the attached appendices, in their entirety.
The
most
material terms of the proposed transaction are summarized as follows:
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§
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National
Quality Care, Inc. (
"
NQCI
"
)
will grant, transfer and assign to our wholly-owned subsidiary
Xcorporeal
Operations, Inc. (
"
Operations
"
)
all of the Technology defined in the License Agreement currently
in effect
between NQCI and Operations;
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§
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The
Technology includes all patents and patent applications related
to a
Wearable Artificial Kidney (
"
WAK
"
),
and other portable or continuous dialysis methods or
devices;
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§
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We
will issue and deliver 9,230,000 shares of our common stock
to
NQCI
,
making NQCI our largest stockholder
;
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§
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Except
for its definition, indemnification, representation and warranty
provisions, the License Agreement shall thereafter be terminated
and of no
further force or effect
;
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§
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Within
30 days after closing, we will file a registration statement
to attempt to
register the shares of NQCI for resale; and
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According
to an interim award in an arbitration between us and NQCI,
the
registration statement must be declared effective within
90
days
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A
more
detailed discussion of the Technology Transaction is contained under the
heading
“Proposal Three: Approval of Issuance of Stock for Technology Transaction,”
beginning on page 16 of this proxy statement.
TABLE
OF CONTENTS
ANNUAL
MEETING OF STOCKHOLDERS OF XCORPOREAL, INC.
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1
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What
is the purpose of the annual meeting?
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1
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Who
is entitled to vote?
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1
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Who
can attend the meeting?
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1
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What
is the difference between holding shares as a stockholder of
record and as
a beneficial owner?
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1
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What
constitutes a quorum?
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2
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How
do I vote?
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2
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Can
I change my vote after I return my proxy card?
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2
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What
are the board’s recommendations?
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2
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What
vote is required to approve each item?
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3
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Who
pays for the preparation of the proxy?
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3
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How
can I obtain additional copies?
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3
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Annual
report and other matters
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3
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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4
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Who
are the largest owners of our stock and how much stock do our
directors
and executive officers own?
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4
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Section
16(a) beneficial ownership reporting compliance
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5
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PROPOSAL
ONE: AMENDMENT TO CERTIFICATE OF INCORPORATION TO PROVIDE FOR
A CLASSIFIED
BOARD OF DIRECTORS AND FOR STOCKHOLDER ACTION TO BE TAKEN ONLY
AT
MEETINGS
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5
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Consideration
in support of the proposal
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6
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Other
considerations
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6
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PROPOSAL
TWO: ELECTION OF DIRECTORS
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6
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Nominees
standing for election
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7
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Recommendation
of the board
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7
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Information
concerning our board of directors and our nominees to the board
of
directors
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7
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How
are directors compensated?
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9
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How
often did the board meet during 2007?
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9
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Which
directors are independent?
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9
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What
committees has the board established?
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9
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Audit
committee
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9
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Compensation
committee
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9
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Nominating
committee
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10
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Annual
meeting attendance
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10
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Do
we have a code of ethics?
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10
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How
can stockholders communicate with our board of
directors?
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10
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Executive
Officers
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10
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EXECUTIVE
COMPENSATION
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11
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Executive
employment agreements
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11
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Confidentiality
agreements
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11
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imitation
on liability and indemnification matters
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11
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OUTSTANDING
EQUITY AWARDS AT LAST FISCAL YEAR-END
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11
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OPTIONS
EXERCISED IN 2007
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13
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DIRECTOR
COMPENSATION
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14
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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15
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Related
party transactions
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16
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PROPOSAL
THREE: APPROVAL OF ISSUANCE OF STOCK FOR TECHNOLOGY
TRANSACTION
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16
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Summary
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16
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Background
of the technology transaction
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16
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Shares
to be issued
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17
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The
Technology
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17
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Accounting
for the transaction
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17
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Federal
income tax consequences
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18
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Interests
of a director and officer
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19
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Vote
required for approval
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19
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Recommendation
of the board
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19
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PROPOSAL
FOUR: APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES
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19
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Authorized
but unissued shares
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19
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Considerations
in support of the proposal
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19
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Other
considerations
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20
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Anti-takeover
effects of certain provisions of Delaware law and our certificate
of
incorporation and bylaws
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20
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Effectiveness
of increase in number of authorized shares
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21
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Vote
required for approval
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21
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No
dissenter’s rights
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21
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Recommendation
of the board
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22
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COMPENSATION,
DISCUSSION AND ANALYSIS
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22
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General
executive compensation philosophy
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22
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Board
determination of compensation awards
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23
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Components
of executive compensation
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23
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Chief
executive officer compensation
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25
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Severance
and change of control arrangements
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25
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Internal
Revenue Code limits on deductibility of compensation
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25
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Compensation
committee interlocks and insider participation
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26
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COMPENSATION
COMMITTEE REPORT
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27
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INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
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27
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Audit
Fees
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27
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Audit
related fees
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27
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Tax
fees
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27
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All
other fees
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27
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Audit
committee’s pre-approval policies and procedures
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28
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2007
ANNUAL REPORT ON FORM 10-K
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28
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AUDIT
COMMITTEE REPORT
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28
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OTHER
BUSINESS
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29
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STOCKHOLDER
PROPOSALS FOR NEXT ANNUAL MEETING
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29
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Appendix
A - Amended and Restated Certificate of Incorporation of
Xcorporeal,
Inc.
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Appendix
B - License Agreement
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Appendix
C - Merger Agreement
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Appendix
D -Second Interim Award of Arbitrator
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2008
ANNUAL MEETING OF STOCKHOLDERS
OF
XCORPOREAL,
INC.
PROXY
STATEMENT
The
enclosed proxy is solicited on behalf of Xcorporeal, Inc., a Delaware
corporation, for use at our annual meeting of stockholders to be held on
November
__,
2008, beginning at 10:00 a.m. local time, at The Water Garden, 1620
26
th
Street,
Sixth Floor, North Tower, Santa Monica, California.
The
approximate date that this proxy statement, the accompanying notice of
annual
meeting and the enclosed form of proxy are being mailed to stockholders
is
November
__,
2008. You should review this information in conjunction with our 2007 Annual
Report on Form 10-KSB, which accompanies this proxy statement.
The
Merger
On
August
10, 2007, we and our wholly-owned subsidiary entered into a merger agreement
with Xcorporeal Operations, Inc., formerly known as Xcorporeal, Inc.
(“Operations"). The merger became effective on October 12, 2007. Operations
became our wholly-owned subsidiary and changed its name to Xcorporeal
Operations, Inc. We changed our name from CT Holdings Enterprises, Inc. to
Xcorporeal, Inc. Information in this proxy statement for the fiscal year ended
December 31, 2006 includes only our pre-merger information. Information provided
for any date after October 12, 2007 reflects changes that occurred as a result
of the merger. References to the “company,” “we,” “us” and “our” included both
us and Operations, our wholly-owed subsidiary.
ANNUAL
MEETING OF STOCKHOLDERS
What
is the purpose of the annual meeting?
At
the
annual meeting, our stockholders will vote on an amendment to our certificate
of
incorporation, the election of directors, approval of the issuance of stock
to
effectuate a technology transaction, approval of an increase in the number
of
authorized shares and any other matters that properly come before the meeting.
In addition, our management will report on our performance and respond to
questions from our stockholders.
Who
is entitled to vote?
Only
stockholders of record at the close of business on the record date,
November
___,
2008, are entitled to receive notice of the annual meeting and to vote
the
shares of common stock that they held on that date at the meeting, or any
postponement or adjournment of the meeting. Each outstanding share of common
stock entitles its holder to cast one vote on each matter to be voted upon.
Who
can attend the meeting?
All
stockholders as of the record date, or their duly appointed proxies, may attend
the meeting. Please note that if you hold shares in “street name” (that is,
through a broker or other nominee), you will need to bring evidence of your
share ownership, such as a copy of a brokerage statement, reflecting your stock
ownership as of the record date and valid picture identification.
What
is the difference between holding shares as a stockholder of record and as
a
beneficial owner?
Many
of
our stockholders hold their shares through a stockbroker, bank or other nominee
rather than directly in their own name. As summarized below, there are some
differences between shares held of record and those beneficially owned.
If
our
shares are registered directly in your name with our transfer agent,
Computershare Trust Company, N.A., you are considered the stockholder of record
with regard to those shares. As the stockholder of record, you have the right
to
grant your proxy directly to us to vote your shares on your behalf at the
meeting, or the right to vote in person at the meeting. We have enclosed or
sent
a proxy card for you to use.
If
you
hold our shares in a stock brokerage account or your shares are held by a bank
or other nominee, you are considered the beneficial owner of the shares held
in
“street name,” and these materials have been forwarded to you by your broker or
nominee, which is considered the stockholder of record with respect to those
shares. As the beneficial owner, you have the right to direct your broker or
nominee how to vote, and are also invited to attend the annual meeting so long
as you bring a copy of a brokerage statement reflecting your ownership as of
the
record date. However, since you are not the stockholder of record, you may
not
vote these shares in person at the meeting unless you obtain a signed proxy
from
your broker or nominee giving you the right to vote the shares. Your broker
or
nominee has enclosed or provided a voting instruction card for you to use to
direct your broker or nominee how to vote these shares.
What
constitutes a quorum?
The
presence at the meeting, in person or by proxy, of the holders of a majority
of
the votes entitled to be cast at the meeting will constitute a quorum,
permitting the meeting to conduct its business. As of
November
__,
2008,
there were 14,704,687 shares of our common stock issued and outstanding,
held by
approximately 3,000 stockholders of record. Proxies received, but marked
as
abstentions, and broker non-votes will be included in calculating the
number of
shares considered present at the meeting for purposes of determining
a quorum,
but will not be counted as votes cast “for” or “against” any given matter.
If
less than a majority of outstanding shares entitled to vote are represented
at
the meeting, a majority of the shares present at the meeting may adjourn
the
meeting without further notice.
How
do I vote?
If
you
complete and properly sign the accompanying proxy card and return it to us,
it
will be voted as you direct. If you are a registered stockholder and you attend
the meeting, you may deliver your completed proxy card in person. “Street name”
stockholders who wish to vote at the meeting will need to obtain a proxy from
the institution that holds their shares.
Can
I change my vote after I return my proxy card?
Yes.
Even
after you have submitted your proxy, you may change your vote at any time before
the proxy is exercised by filing with our Secretary either a notice of
revocation or a duly executed proxy bearing a later date. The powers of the
proxy holders will be suspended if you attend the meeting in person and so
request, although attendance at the meeting will not by itself revoke a
previously granted proxy.
What
are the board’s recommendations?
Unless
you give other instructions on your proxy card, the persons named as proxy
holders on the proxy card will vote in accordance with the recommendations
of
our board of directors. The board recommends a vote FOR adopting a classified
board of directors, FOR allowing stockholder action only at meetings, FOR
the
election of each of the nominated slate of directors, FOR approval of the
issuance of stock to effectuate a technology transaction, and FOR approval
of
the increase in the number of authorized shares. See “Classified Board of
Directors,” “Election of Directors,” “Technology Transaction” and "Increase in
Authorized Shares" below.
The
board
does not know of any other matters that may be brought before the meeting nor
does it foresee or have reason to believe that the proxy holders will have
to
vote for substitute or alternate board nominees. In the event that any other
matter should properly come before the meeting or any nominee is not available
for election, the proxy holders will vote as recommended by the board of
directors or, if no recommendation is given, in accordance with their best
judgment.
What
vote is required to approve each item?
Election
of Directors.
The
affirmative vote of a plurality of the votes cast, either in person or by proxy,
at the meeting by the holders of common stock is required for the election
of
directors. Broker non-votes will not be counted for purposes of the vote.
Other
Items.
For each
other item, the affirmative vote of a majority of the votes cast, either in
person or by proxy, at the annual meeting by the holders of common stock is
required for approval. An abstention will be counted as a vote against since
it
is one less vote for approval of the shares present. Brokers do not have the
authority to vote shares they hold on behalf of a beneficial holder in favor
of
any proposal, if they have not been instructed to do so by the beneficial
holder. Broker non-votes will not affect the outcome since they are not
considered shares present and entitled to vote for voting purposes.
If
you
hold your shares in “street name” through a broker or other nominee, your broker
or nominee may not be permitted to exercise voting discretion with respect
to
some of the matters to be acted upon. Thus, if you do not give your broker
or
nominee specific instructions, your shares may not be voted on those matters
and
will not be counted in determining the number of shares necessary for approval.
Shares represented by such “broker non-votes” will, however, be counted in
determining whether there is a quorum. Broker non-votes will not be counted
for
purposes of the vote.
Who
pays for the preparation of the proxy?
We
will
pay the cost of preparing, assembling and mailing the notice of meeting, proxy
statement and enclosed proxy card. In addition to the use of mail, our employees
may solicit proxies personally and by telephone. Our employees will receive
no
compensation for soliciting proxies other than their regular salaries. We may
request banks, brokers and other custodians, nominees and fiduciaries to forward
copies of the proxy materials to their principals and to request authority
for
the execution of proxies. We may reimburse such persons for their expenses
incurred in connection with these activities.
Our
principal executive offices are located at 12121 Wilshire Boulevard, Suite
350,
Los
Angeles,
California 90025, and our telephone number is (310) 923-9990. A list of
stockholders entitled to vote at the annual meeting will be available at our
offices, during normal business hours, for a period of ten days prior to the
meeting and at the meeting itself for examination by any stockholder.
How
can I obtain additional copies?
If
you
need additional copies of this proxy statement or the enclosed proxy card,
you
should contact:
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Xcorporeal,
Inc.
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Computershare
Trust Company, N.A.
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12121
Wilshire Blvd., Suite 350
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350
Indiana Street, Suite 800
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Los
Angeles, California 90025
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Golden,
Colorado 80401
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Telephone:
(310) 923-9990
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Telephone:
(303) 262-0600
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Attn:
Investor Relations
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We
will provide free of charge to those persons that make a request in writing
our
(i) Annual Report on Form 10-KSB, any amendments thereto and the financial
statements and any financial statement schedules filed by us with the Securities
and Exchange Commission, or SEC, under Section 16(a) of the Securities Exchange
Act of 1934, as amended, (ii) Audit Committee Charter, and (iii) Codes
of Ethics. Our annual report and other periodic reports and any amendments
thereto are also available on the SEC website at http://www.sec.gov by searching
the EDGAR database for our filings.
Annual
report and other matters
Our
2007
Annual Report on Form 10-KSB, which was mailed to stockholders with or preceding
this proxy statement, contains financial and other information about our
Company, but is not incorporated into this proxy statement and is not to be
considered a part of these proxy soliciting materials or subject to Regulations
14A or 14C or to the liabilities of Section 18 of the Exchange Act. The
information contained in the “Audit Committee Report” below shall not be deemed
filed with the SEC, or subject to Regulations 14A or 14C or to the liabilities
of Section 18 of the Exchange Act.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
Who
are the largest owners of our stock and how much stock do our directors and
executive officers own?
The
following table sets forth certain information regarding the shares of
common
stock beneficially owned as of
November
___,
2008
by: (i) each person known to us to be the beneficial owner of more than
5% of
our common stock, (ii) each of our directors, (iii) each executive officer
named
in the Summary Compensation Table set forth in the Executive Compensation
section, and (iv) all such directors and officers as a
group.
Name
and address of beneficial owner (1)
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Amount
and Nature of Beneficial Ownership
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Percent
of
Class
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Terren
S. Peizer (2)
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6,372,596
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42.9
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%
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Marc
G. Cummins (3)
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1,557,158
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10.6
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%
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Jay
A. Wolf (4)
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377,143
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2.6
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%
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Victor
Gura (5)
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125,000
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0.8
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%
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Kelly
J. McCrann (6)
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120,000
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0.8
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%
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Hans-Dietrich
Polaschegg
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—
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0.0
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%
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Robert
Weinstein (7)
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95,000
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0.6
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%
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All
directors and named executive officers as a group (7
persons)
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59.0
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%
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(1)
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Unless
otherwise indicated, the address of all of the above named persons
is c/o
Xcorporeal, Inc., 12121 Wilshire Blvd., Suite 350, Los Angeles, California
90025.
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(2)
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Includes
6,232,596 shares held of record by Consolidated National, LLC,
of which
Mr. Peizer is the sole managing member and beneficial owner. As
of
November
__
, 2008, 140,000 shares of Mr. Peizer’s stock options were vested
and exercisable within 60
days.
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(3)
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Includes
1,577,158 shares held of record by Prime Logic Capital, LLC, CPS
Opportunities, and GPC LXI, LLC. Mr. Cummins is a Managing Partner
of
Prime Capital, LLC. He disclaims beneficial ownership of the reported
securities except to the extent of his pecuniary interest therein.
Excludes warrants to purchase 150,000 shares held by OGT, LLC, an
affiliate of Prime Logic which Mr. Cummins disclaims beneficial ownership
in such shares except to the extent of his pecuniary interest
therein.
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(4)
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Includes
357,143 shares held of record by Trinad Capital Master Fund Ltd.
(the
"Master Fund"), that may be deemed to be beneficially owned by
Trinad
Management, LLC, the investment manager of the Master Fund and
Trinad
Capital LP; a controlling stockholder of the Master Fund; Trinad
Advisors
GP, LLC, the general partner of Trinad Capital LP; and Jay Wolf
a director
of the issuer and a managing director of Trinad Management, LLC
and a
managing director of Trinad Advisors GP, LLC. Mr. Wolf disclaims
beneficial ownership of the reported securities except to the extent
of
his pecuniary interest therein. As of November __, 2008, 20,000
shares of Mr. Wolf’s stock options were vested and exercisable within 60
days.
|
|
(5)
|
As
of November __, 2008, 125,000 shares of Dr. Gura’s stock options were
vested and exercisable within 60
days.
|
|
(6)
|
As
of November __, 2008, Mr. McCrann’s stock options were vested and
exercisable.
|
|
(7)
|
As
of November __, 2008, 75,000 shares of Mr. Weinstein’s stock options were
vested and exercisable within 60
days.
|
Unless
otherwise indicated, we believe that all persons named in the above table
have
sole voting and investment power with respect to all shares of our common
stock
beneficially owned by them. A person is deemed to be the beneficial owner
of
securities which may be acquired by such person within 60 days from the date
on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership
is determined by assuming that options, warrants and convertible securities
that
are held by such person (but not those held by any other person) and which
are
exercisable, convertible or exchangeable within such 60 day period, have
been so
exercised, converted or exchanged.
Unless
otherwise indicated above, the address of the shareholder is c/o Xcorporeal,
Inc., 12121 Wilshire Boulevard, Suite 350, Los Angeles, California
90025.
Section 16(a)
beneficial ownership reporting compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who beneficially own more than 10% of our common
stock
to file with the SEC initial reports of ownership and reports of changes
in
ownership of our common stock. These insiders are required by SEC regulations
to
furnish us with copies of all Section 16(a) forms they file, including Forms
3,
4 and 5. Based solely upon our review of copies of such forms we have received,
and other information available to us, to the best of our knowledge, except
for
a Schedule 13D statement of acquisition of beneficial ownership by Consolidated
National, LLC, all required forms have been filed on a timely basis.
PROPOSAL
ONE: AMENDMENT TO CERTIFICATE OF INCORPORATION
TO
PROVIDE FOR A CLASSIFIED BOARD OF DIRECTORS AND FOR
STOCKHOLDER
ACTION TO BE TAKEN ONLY AT MEETINGS
Our
current certificate of incorporation and bylaws provide that the number
of
directors shall be fixed from time to time by the board of directors. The
board
has fixed the current number of directors at five. The election and removal
of
directors is governed by our bylaws which provide that each director serves
until the next annual meeting of stockholders or until his successor has
been
elected and qualified. Additionally, a director may be removed with or
without
cause by a majority vote of the stockholders, and stockholders may act
by
written consent.
The
board
has proposed to institute a classified board of directors consisting of
three
classes of directors. Each class must contain one-third of the total number
of
directors, or as near thereto as possible. The initial Class I and Class
II will
each consist of five directors and the initial Class III will consist of
three
directors. The directors proposed to be in each class are identified in
the
"Nominees Standing for Election " section under "Proposal Two: Election
of
Directors" of this proxy statement. The term of the Class I directors will
expire at the next annual meeting of stockholders. The term of the Class
II
directors will expire at the second annual meeting following adoption of
a
classified board and the term of the Class III directors will expire at
the
third annual meeting following adoption of the classified board. Following
the
expiration of their initial terms, directors will be elected for terms
of three
years to succeed those whose terms expire.
Because
our directors will be directly affected by the classified board proposal,
they
may be deemed to have an interest in the outcome of the
proposal.
In
addition, the amended certificate would eliminate the ability of stockholders
to
act by written consent, and provide that stockholder action can only be
taken at
an annual or special meeting called by the board.
The
full
text of the amended and restated certificate of incorporation that are
the
subject of this proposal is set forth in Appendix A attached to this proxy
statement. If the proposal is adopted, the board of directors will adopt
a
corresponding amendment to our bylaws, without separate shareholder
consent.
Considerations
in support of the proposal
The
board
of directors believes that the proposal will enhance its ability to protect
stockholders against attempts to acquire control of the company by means
of
unfair or abusive tactics that exist in many unsolicited takeover attempts.
The
proposal would encourage persons seeking to acquire control of the company
to
engage in good faith, arms-length negotiations with the board regarding the
structure of their proposal, rather than waging a hostile proxy contest,
and
would permit the board to engage in such negotiations from a stronger position.
In addition, the proposal would facilitate our attracting and retaining
qualified board members and hiring and retaining competent management personnel
by increasing the likelihood of a stable corporate environment. The board
also
believes that ensuring continuity of service among board members and three-year
commitments for board service is desirable.
Other
considerations
The
proposal could have the effect of deterring third parties from initiating
proxy
contests or from acquiring substantial blocks of our shares. Such proxy contests
and acquisitions of substantial blocks of shares tend to increase, at least
temporarily, market prices for the target company's stock. Consequently,
if the
proposal is approved, our stockholders could be deprived of temporary
opportunities to sell their shares at higher market prices. Moreover, by
possibly deterring proxy contests or acquisitions of substantial blocks of
our
common stock, a classified board might have the incidental effect of inhibiting
changes in incumbent management, some or all of whom may be replaced in the
course of a change in control. The overall effect of the classified board
and
stockholder meeting requirement would be to render more difficult the
accomplishment of acquisitions of control by hostile third parties.
Vote
required for approval
Approval
of this proposal requires the affirmative vote of a majority of the shares
present or represented by proxy and entitled to vote at the annual meeting
of
stockholders, at which a quorum representing a majority of all outstanding
shares of our common stock is present and voting, either in person or by
proxy.
Abstentions and broker non-votes will be counted as present for purposes
of
determining the presence of a quorum. Abstentions will have the effect of
a
negative vote. Broker non-votes will not be counted for purposes of the vote.
Recommendation
of the board
The
board of directors unanimously recommends that you vote “FOR” amendment of our
certificate of incorporation to provide for a classified board of directors
and "FOR" allowing stockholder action only at
meetings.
PROPOSAL
TWO: ELECTION OF DIRECTORS
Our
amended and restated bylaws, adopted upon the effectiveness of the merger,
provide that the number of members on the board of directors shall be determined
from time to time by resolution of the board. At present, our board of directors
consists of seven members. If Proposal One, the classified board of directors
proposal to be voted on at this annual meeting, is approved the board will
be
divided into three classes, Class I, Class II and Class III. The initial
Class I
directors will be elected for one year, the initial Class II directors for
2
years, and the initial Class III directors for three years. Upon the expiration
of the initial staggered terms, directors will be elected for terms of three
years, to succeed those whose terms have expired. If Proposal One is not
approved, all nominees will be elected for a one-year term expiring at the
next
annual meeting of stockholders or until their successors are duly elected
and
qualified.
Nominees
standing for election
The
nominees for our board of directors are current directors Terren S. Peizer,
Marc
G.
Cummins, Kelly J. McCrann, Hans Polaschegg, Ph. D., and Jay A. Wolf.
All of the
directors’ terms expire at the annual meeting or until their successors are duly
elected and qualified. If Proposal One is approved,
Dr
.
Polaschegg
will
be
elected as
a
Class I
director,
Mr.
McCrann
will be elected as
a
Class
II
director
,
and
Messrs. Cummins, Peizer and Wolf will be elected as Class III directors.
The
board
of directors has no reason to believe that any nominee will refuse to
act or be
unable to accept election. However, if any of the nominees for director
is
unable to accept election or if any other unforeseen contingencies should
arise,
the board may designate a substitute nominee. In that case, the persons
named as
proxies will vote for the substitute nominee designated by the board.
No
arrangement or understanding exists between any nominee and any other person
or
persons pursuant to which any nominee was or is to be selected as a
director.
Recommendation
of the board
The
board of directors unanimously recommends that you vote “FOR” the election as
directors of each of the nominees named above.
Information
concerning our board of directors and our nominees to the board of
directors
Our
current directors and director nominees, the director class into which they
will
be elected if Proposal One passes, and their ages as of November __, 2008,
are as follows:
Name
|
|
Class
|
|
Age
|
|
Position
|
|
Director
Since
|
Terren
S. Peizer
|
|
III
|
|
49
|
|
Director
and
Executive
Chairman
|
|
2007
|
Marc
G. Cummins
|
|
III
|
|
48
|
|
Director
|
|
2007
|
Kelly
J. McCrann
|
|
II
|
|
52
|
|
Chairman
of the Board and Chief Executive Officer
|
|
2007
|
Han
Polaschegg, Ph. D.
|
|
I
|
|
65
|
|
Director
|
|
2007
|
Jay
A. Wolf
|
|
III
|
|
35
|
|
Director
|
|
2007
|
Terren
S. Peizer
serves
as
our Executive Chairman. He
became
the Chairman of Operations’
board
of
directors
in August 2006, our Executive Chairman in August 2007 and served as Chairman
of
our board of directors until October 2008.
From
April 1999 to October 2003, Mr. Peizer served as Chief Executive Officer
of
Clearant, Inc., which he founded to develop and commercialize a universal
pathogen inactivation technology. He served as Chairman of its board of
directors from April 1999 to October 2004 and a Director until February
2005.
From February 1997 to February 1999, Mr. Peizer served as President and
Vice
Chairman of Hollis-Eden Pharmaceuticals, Inc. In addition, from June 1999
through May 2003 he was a Director, and from June 1999 through December
2000 he
was Chairman of the Board, of supercomputer designer and builder Cray Inc.,
and
remains its largest beneficial stockholder. Mr. Peizer has been the largest
beneficial stockholder and held various senior executive positions with
several
technology and biotech companies. In these capacities he has assisted the
companies with assembling management teams, boards of directors and scientific
advisory boards, formulating business and financial strategies, investor
and
public relations, and capital formation. Mr. Peizer has been a Director,
Chairman of the Board and Chief Executive Officer of Hythiam, Inc., a healthcare
services management company focused on delivering solutions for those suffering
from alcoholism and other substance dependencies, since September 2003.
Mr.
Peizer has a background in venture capital, investing, mergers and acquisitions,
corporate finance, and previously held senior executive positions with
the
investment banking firms Goldman Sachs, First Boston and Drexel Burnham
Lambert.
He received his B.S.E. in Finance from The Wharton School of Finance and
Commerce.
Victor
Gura, M.D.
became
Operations' Chief Medical and Scientific Officer in December 2006, and became
a
member of the Board of Directors in October, 2006. He served as Chief Scientific
Officer of National Quality Care, Inc. from 2005 to November 2006. He was
formerly its Chairman of the Board, President and Chief Executive Officer.
Dr.
Gura is board certified in internal medicine/nephrology. He has been a director
and principal shareholder of Medipace Medical Group, Inc. in Los Angeles,
California, since 1980. Dr. Gura has been an attending physician at Cedars-Sinai
Medical Center since 1984 and the medical director of Los Angeles Community
Dialysis since 1985. He also serves as a Clinical Assistant Professor at UCLA
School of Medicine. He was a fellow at the nephrology departments at Tel Aviv
University Medical School and USC Medical Center. Dr. Gura received his M.D.
from School of Medicine, Buenos Aires University.
Marc
G. Cummins
became a
member of Operations' Board of Directors in November 2006. He is a Managing
Partner of Prime Capital, LLC, a private investment firm focused on consumer
companies. Prior to founding Prime Capital, Mr. Cummins was managing partner
of
Catterton Partners, a private equity investor in consumer products and service
companies with over $1 billion of assets under management. He has served as
a
director of Hythiam, Inc. since 2004. Prior to joining Catterton in 1998, Mr.
Cummins spent fourteen years at Donaldson, Lufkin & Jenrette Securities
Corporation where he was Managing Director of the Consumer Products and
Specialty Distribution Group, and was also involved in leveraged buyouts,
private equity and high yield financings. Mr. Cummins received a B.A. in
Economics, magna cum laude, from Middlebury College, where he was honored as
a
Middlebury College Scholar and is a member of Phi Beta Kappa. He also received
an M.B.A. in Finance with honors from The Wharton School at University of
Pennsylvania.
Kelly
J. McCrann
was
appointed as a member of Operations’
Board
of
Directors in August 2007.
In
October 2008, Mr. McCrann was appointed Chairman of the Board of Directors
and
Chief Executive Officer.
Mr.
McCrann is a senior healthcare executive with extensive experience in board
governance, strategic leadership, profit and loss management and strategic
transactions. He was most recently Senior Vice President of DaVita Inc.,
where
he was responsible for all home based renal replacement therapies for the
United
States’ second largest kidney dialysis provider. Prior to that, Mr. McCrann was
the Chief Executive Officer and President of
PacifiCare
Dental
and Vision, Inc. Mr. McCrann has held positions of increasing responsibility
at
Professional Dental Associates, Inc., Coram Healthcare Corporation, HMSS,
Inc.
and American Medical International. He is a graduate of the Harvard Business
School and began his career as a consultant for KPMG and McKinsey &
Company.
Hans-Dietrich
Polaschegg, PhD.
serves
as a consultant to the medical device industry. From 1979 to 1994, Dr.
Polaschegg held positions of increasing responsibility at Fresenius AG, a global
leader in the manufacture of dialysis products. As Head of Research and
Development of the medical systems division of Fresenius, he designed three
hemodialysis machines. Dr. Polaschegg holds 88 medical technology patents and
is
credited with inventing electrolyte balancing, thermal energy balancing, safe
dialysate filtering, blood volume monitoring by ultrasound density, and safe
on-line hemodiafiltration. He is a member of several international American
and
European standard committees including Chairman of the Extracorporeal
Circulation and Infusion and Technology Committee. Dr. Polaschegg received
his
PhD in Nuclear Physics from Technical University of Vienna in
Austria.
Jay
A. Wolf
became a
member of Operations' Board of Directors in November 2006. He has over a decade
of investment and operations experience in a broad range of industries. His
investment experience includes: senior and subordinated debt, private equity
(including leveraged transactions), mergers & acquisitions and public equity
investments. Since 2003, Mr. Wolf has served as a Managing Director of Trinad
Capital. From 1999 to 2003, he served as the Executive Vice President of
Corporate Development for Wolf Group Integrated Communications Ltd. where he
was
responsible for our acquisition program. From 1996 to 1999, Mr. Wolf worked
at
Canadian Corporate Funding, Ltd., a Toronto-based merchant bank in the senior
debt department and subsequently for Trillium Growth, the firm’s venture capital
Fund. He sits on the boards of Shells Seafood Restaurants, Prolink Holdings
Corporation, Optio Software, Inc. and Starvox Communications, Inc. Mr. Wolf
received a Bachelor of Arts from Dalhousie University.
How
are directors compensated?
Compensation.
Each of
our directors has been granted warrants or options to purchase shares of our
common stock. Our directors do not receive cash compensation for their services
as directors. All members of the board of directors receive reimbursement for
actual travel-related expenses incurred in connection with their attendance
at
meetings of the board or committees.
Options.
Directors are eligible to receive options under our 2007 Incentive Compensation
Plan.
How
often did the board meet during 2007?
During
the fiscal year 2007, there were two formal meetings of the board of directors.
All directors attended 75% or more of the aggregate of meetings of the board
of
directors and their committees held during their respective terms.
Which
directors are independent
?
After
review of all of the relevant transactions or relationships of each director
and
his family members, our board of directors has determined that Messrs.
Cummins
and Wolf
and Dr. Polaschegg are independent as defined by the applicable AMEX rules.
There are no family relationships among any of our directors, executive
officers
or key employees.
What
committees has the board established?
As
of the
effective date of the merger, the board of directors established an audit
committee, compensation committee, and nominating committee. The board also
adopted written corporate governance guidelines for the board and a written
committee charter for each of the board’s committees, describing the authority
and responsibilities delegated to each committee by the board of directors.
A
copy of our audit committee charter, compensation committee charter and
nominating committee charter can be found on our website at
http://www.xcorporeal.com.
Audit
committee
Prior
to
their resignation upon effectiveness of the merger, the audit committee
consisted of Chris A. Economou and Mark Rogers. The audit committee held four
meetings during 2007.
The
audit
committee currently consists of Marc G. Cummins
and Jay
A. Wolf. The board of directors has determined that each of the members
is
independent as defined by the applicable AMEX rules, meet the applicable
requirements for audit committee members, including Rule 10A-3(b) under
the
Securities and Exchange Act of 1934, as amended, and, that Mr. Wolf qualifies
as
an audit committee financial expert as defined by Item 401(h)(2) of Regulation
S-K. The duties and responsibilities of the audit committee include: (i)
selecting, evaluating and, if appropriate, replacing our independent registered
accounting firm, (ii) reviewing the plan and scope of audits, (iii) reviewing
our significant accounting policies, any significant deficiencies in the
design
or operation of internal controls or material weakness therein and any
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation, and (iv) overseeing related auditing matters.
Compensation
committee
Prior
to
the effectiveness of the merger, we did not have a compensation committee,
but
the entire the board reviewed the compensation and employee benefits of our
officers.
The
compensation committee currently consists of
Hans
Polaschegg
and Jay
A. Wolf, each of whom is independent as defined by the applicable AMEX
rules.
The
compensation committee reviews and recommends to the board of directors
for
approval the compensation of our executive officers.
Nominating
committee
Prior
to
the effectiveness of the merger, we did not have a nominating committee, as
nominations were made by the independent members of the board as a
whole.
The
nominating committee currently consists of Marc. G. Cummins and Hans Polaschegg.
The committee nominates new directors and oversees corporate governance matters.
The
nominating committee will consider director candidates that are suggested by
members of the board, as well as by management and stockholders. The committee
may also retain a third-party executive search firm to identify candidates.
The
process for identifying and evaluating nominees for director involves reviewing
potentially eligible candidates, conducting background and reference checks,
interviewing the candidate and others (as schedules permit), meeting to consider
and approve the candidate and, as appropriate, preparing and presenting to
the
full board an analysis with regard to particular recommended candidates. The
nominating committee considers a potential candidate’s experience, areas of
expertise, and other factors relative to the overall composition of the board.
The committee endeavors to identify director nominees who have the highest
personal and professional integrity, have demonstrated exceptional ability
and
judgment, and, together with other director nominees and members, are expected
to serve the long term interest of our stockholders and contribute to our
overall corporate goals.
Annual
meeting attendance
Mr.
Peizer was the only director who attended our annual meeting of stockholders
in
2007. Upon effectiveness of the merger, we adopted a policy for attendance
by
the board of directors at our annual stockholder meetings which encourages
directors, if practicable and time permitting, to attend our annual stockholder
meetings.
Do
we have a code of ethics?
Upon
effectiveness of the merger, we adopted a Code of Ethics that applies to all
of
our officers, directors and employees, including our principal executive
officer, principal financial officer, principal accounting officer and
controller, and others performing similar functions. A copy of our Code of
Ethics can be found on our website at http://www.xcorporeal.com.
How
can stockholders communicate with our board of
directors?
Our
board
of directors believes that it is important for our stockholders to have a
process to send communications to the board. Accordingly, stockholders desiring
to send a communication to the board or a specific director may do so by sending
a letter addressed to the board of directors or any individual director at
the
address listed in this proxy statement. All such letters must identify the
author as a stockholder. Our corporate secretary will open the communications,
make copies and circulate them to the appropriate director or directors.
Executive
officers
Our
executive officers are elected annually by the board of directors and serve
at
the discretion of the board of directors. There are no family relationships
among any of our directors, executive officers or key employees. We consider
Kelly
McCrann, Victor Gura, M.D.,
and
Robert Weinstein to be our executive officers.
The
following sets forth certain information with respect to our executive officers
(other than director information which was disclosed under “Information
Concerning our Board of Directors and Nominees to the Board of Directors”
above):
Name
|
|
Age
|
|
Position
|
Robert
Weinstein
|
|
|
48
|
|
|
Chief
Financial Officer and Secretary
|
Victor
Gura, M.D.
|
|
|
65
|
|
|
Chief
Medical and Scientific
Officer
|
Robert
Weinstein
was
appointed our Chief Financial Officer in October 2007. He also serves on the
board of directors of Operations. He was appointed as Chief Financial Officer
of
Operations in August 2007. Prior to joining us, Mr. Weinstein served as Vice
President, Director of Quality Control & Compliance of Citi Private Equity
Services (formerly BISYS Private Equity Services) New York, NY, a worldwide
private equity fund administrator and accounting service provider. In 2005,
Mr.
Weinstein was the Founder, Finance & Accounting Consultant for EB
Associates, LLC, Irvington, NY, an entrepreneurial service organization. From
December 2002 to November 2004, Mr. Weinstein served as the Chief Financial
Officer for Able Laboratories, Inc., which filed Chapter 11 bankruptcy in July
2005. In 2002, he served as Acting Chief Financial Officer of Eutotech, Ltd.,
Fairfax, VA, a distressed, publicly traded early-stage technology transfer
and
development company. Mr. Weinstein received his M.B.A., Finance &
International Business from the University of Chicago, Graduate School of
Business, and a B.S. in Accounting from the State University of New York at
Albany. Mr. Weinstein is a Certified Public Accountant (inactive) in the State
of New York.
Victor
Gura, M.D.
became
Operations’ Chief Medical and Scientific Officer in December 2006, and became a
member of the Board of Directors in October, 2006.
He
resigned as a director in October 2008. Dr. Gura continues to serve as
a member
of our Board of Advisors.
He
served
as Chief Scientific Officer of National Quality Care, Inc. from 2005 to
November
2006. He was formerly its Chairman of the Board, President and Chief Executive
Officer. Dr. Gura is board certified in internal medicine/nephrology. He
has
been a director and principal shareholder of Medipace Medical Group, Inc.
in Los
Angeles, California, since 1980. Dr. Gura has been an attending physician
at
Cedars-Sinai Medical Center since 1984 and the medical director of Los
Angeles
Community Dialysis since 1985. He also serves as a Clinical Assistant Professor
at UCLA School of Medicine. He was a fellow at the nephrology departments
at Tel
Aviv University Medical School and USC Medical Center. Dr. Gura received
his
M.D. from School of Medicine, Buenos Aires University.
EXECUTIVE
COMPENSATION
The
following table sets forth the total compensation received by the named
executive officer during the fiscal years ended December 31, 2007 and
2006:
Summary
Compensation Table
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred Compensation Earnings
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
Daniel
S. Goldberger, Former President & COO
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
219,898
|
|
$
|
-
|
|
$
|
-
|
|
$
|
238,457
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
458,355
|
|
|
|
|
2006
|
|
$
|
35,170
|
|
$
|
-
|
|
$
|
-
|
|
$
|
70,497
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
105,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor
Gura, Chief Medical and Scientific Officer (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
455,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
855,901
|
|
$
|
-
|
|
$
|
-
|
|
$
|
19,500
|
|
$
|
1,330,401
|
|
|
|
|
2006
|
|
$
|
35,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
88,121
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
123,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Sotola, Former President (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
2006
|
|
$
|
3,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Stefanovich, Former Interim Chief Financial Officer (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
305,217
|
|
$
|
305,217
|
|
|
|
|
2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winson
Tang, Former Chief Operating Officer (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
156,250
|
|
$
|
-
|
|
$
|
-
|
|
$
|
287,161
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
443,411
|
|
|
|
|
2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Weinstein, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
100,128
|
|
$
|
21,400
|
|
$
|
-
|
|
$
|
175,564
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
297,092
|
|
|
|
|
2006
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
(1)
Mr.
Goldberger resigned as President & COO on August 10, 2007.
He
served as interim CEO from January to October 2008.
(2)
Dr.
Gura receives an auto allowance pursuant to his employment
agreement.
(3)
Mr.
Sotola resigned as president on October 13, 2006.
(4)
Mr.
Stefanovich served as an interim CFO with his services terminated as of December
27, 2007. He was paid as an independent consultant.
(5)
Effective May 12, 2008, Dr. Tang ceased to be our chief operating officer.
Effective August 15, 2008, Dr. Tang is no longer employed by us.
Executive
employment agreements
There
were no employment agreements in effect during the years ended December 31,
2006
and 2005.
Executive
Chairman
On
August
10, 2007, Terren S. Peizer entered into an Executive Chairman Agreement
with
Operations for an initial term of three years with automatic one-year renewals,
which Executive Chairman Agreement has been assumed by us. His base compensation
is $450,000 per annum as of July 1, 2007, with a signing bonus of $225,000.
Mr.
Peizer will be entitled to receive an annual bonus at the discretion of
the
board
based on
performance goals and targeted at 100% of his base compensation. He is
also
eligible to participate in any equity incentive plans adopted by us. In
the
event Mr. Peizer’s position is terminated without good cause or he resigns for
good reason, we will be obligated to pay Mr. Peizer in a lump sum an amount
equal to three years’ base compensation bonus plus 100% of the targeted bonus.
Chief
Executive Officer
On
October 6, 2008, we entered into an Employment Agreement with Kelly J.
McCrann,
effective October 2, 2008, for a term of two years at an initial annual
base
salary of $325,000. Mr. McCrann is eligible to receive discretionary
bonuses
based on achieving designated individual goals and milestones, overall
performance and profitability. Additionally, Mr. McCrann was granted
700,000
stock options as an exercise price of $1.50 per share under our 2007
Incentive
Compensation Plan, which vests 25% on each of the first, second, third
and
fourth anniversaries of the grant date, with anti-dilution protections.
He will
be included in our medical, dental, disability and life insurance, pensions
and
retirement plans, and other benefit plans and programs. If he is terminated
without good reason or resigns for good reason, as defined in the Employment
Agreement, we will be obligated to pay Mr. McCrann twelve month's base
salary.
Chief
Financial Officer
On
August
10, 2007, Robert Weinstein entered into an Employment Agreement with Operations
with an initial term of three years, with automatic one year renewals,
which
Employment Agreement has been assumed by us. His
initial
base
salary is $
275,000.
Mr.
Weinstein will be entitled to receive an annual bonus at the discretion
of the
board
based on
performance goals and targeted at 50% of his annual salary. In addition
to any
perquisites and other fringe benefits provided to other executives, Mr.
Weinstein received options to purchase 300,000 shares of common stock under
the
Operations 2006 Incentive Compensation Plan at an exercise price of $7.00
per
share and vesting at a rate of 25% per year, which options have been assumed
under our 2007 Incentive Compensation Plan. In the event Mr. Weinstein
is
terminated by us without good cause or he resigns for good reason, as such
terms
are defined in the Employment Agreement, we will be obligated to pay Mr.
Weinstein in a lump sum an amount equal to 12 months salary and
benefits.
Chief
Medical and Scientific Officer
On
November 30, 2006, Victor Gura, M.D. entered into an Employment Agreement with
Operations for a term of four years, which Employment Agreement has been assumed
by us. In October 2007, Dr. Gura became our Chief Medical and Scientific
Officer, which position he has held with Operations since December 2006. Dr.
Gura has been a member of our board of directors since October 2007, and was
appointed as a member of the board of directors of Operations in October 2006.
His initial annual base salary is $420,000. Dr. Gura is eligible to receive
discretionary bonuses on an annual basis targeted at 50% of his annual salary.
Additionally, Dr. Gura was granted 500,000 stock options at an exercise price
of
$5 per share under the Operations 2006 Incentive Compensation Plan. These
options, which were assumed under our 2007 Incentive Compensation Plan, will
vest 20% on each of the first, second, third, fourth and fifth anniversaries
of
the original grant date and expire November 14, 2011. He will also be granted
options to purchase an additional 500,000 shares of our common stock upon FDA
approval of our first product. Dr. Gura is eligible to receive reimbursement
of
reasonable and customary relocation expenses as well as health, medical, dental
insurance coverage and insurance for accidental death and disability. In the
event he is terminated by us without good cause or if he resigns for good
reason, as such terms as are defined in the Employment Agreement, we will be
obligated to pay Dr. Gura in a lump sum an amount equal to two year’s salary
plus 200% of the targeted bonus. In addition all stock options granted to Dr.
Gura will vest immediately.
Dr.
Gura’s agreement provides for medical insurance and disability benefits,
severance pay if his employment is terminated by us without cause or due
to
change in our control before the expiration of the agreement, and allows
for
bonus compensation and stock option grants as determined by our
board
of
directors
.
The
agreement also contains a restrictive covenant preventing competition with
us
and the use of confidential business information, except in connection
with the
performance of his duties for us, for a period of two years following the
termination of his employment with us.
Confidentiality
agreements
Each
employee is required to enter into a confidentiality agreement. These agreements
provide that for so long as the employee works for us, and after the employee’s
termination for any reason, the employee may not disclose in any way any of
our
proprietary confidential information.
Limitation
on liability and indemnification matters
Our
certificate of incorporation and amended and restated bylaws limit the liability
of directors and executive officers to the maximum extent permitted by Delaware
law. The limitation on our directors’ and executive officers’ liability may not
apply to liabilities arising under the federal securities laws. Our certificate
of incorporation and amended and restated bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. Insofar
as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to our directors and executive officers pursuant
to
our certificate of incorporation and amended and restated bylaws, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for such indemnification.
Outstanding
Equity Awards At Fiscal Year-End
The
following table sets forth information concerning unexercised options; stock
that has not vested; and equity incentive plan awards for each named executive
officer outstanding as of December 31, 2007:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
OPTION
AWARDS
|
|
STOCK
AWARDS
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
|
|
Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
($)
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units, or
Other Rights
That Have
Not Vested
(#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
S. Goldberger, Former President & COO (1)
|
|
|
40,000
|
|
|
160,000
|
|
|
200,000
|
|
$
|
5.00
|
|
|
November
14, 2016
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor
Gura, Chief Medical and Scientific Officer
|
|
|
125,000
|
|
|
375,000
|
|
|
500,000
|
|
$
|
5.00
|
|
|
November
14, 2016
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terren
S. Peizer, Chairman of the Board
|
|
|
140,000
|
|
|
560,000
|
|
|
700,000
|
|
$
|
5.00
|
|
|
November
14, 2011
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Sotola, Former President (2)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winson
Tang, Former Chief Operating Officer (3)
|
|
|
-
|
|
|
300,000
|
|
|
300,000
|
|
$
|
7.00
|
|
|
May
11, 2017
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Weinstein, Chief Financial Officer
|
|
|
-
|
|
|
300,000
|
|
|
300,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(1)
Mr.
Goldberger resigned as President & COO on August 10,
2007,
and
forfeited his 200,000 options in September 2008. From January to October
2008,
he served as interim CEO and resigned as a director in October
2008.
(2)
Mr.
Sotola resigned as president on October 13, 2006.
(3)
Effective May 12, 2008, Dr. Tang ceased to be our chief operating officer.
As of
August 15, 2008, he ceased to be employed by us.
OPTIONS
EXERCISED IN 2007
No
options were granted or exercised during the year ended December 31, 2007.
We
did not have a defined benefit pension plan or a defined contribution plan
and
the named executive officers received no benefits under any retirement plan
during the year ended December 31, 2007. We also had no deferred compensation
plans during the year ended December 31, 2007. Upon effectiveness of the merger,
all outstanding options were cancelled.
DIRECTOR
COMPENSATION
The
following table provides information regarding compensation that was paid to
the
individuals who served as directors during the year ended December 31, 2007.
Except as set forth in the table, during 2006, directors did not earn nor
receive cash compensation or compensation in the form of stock awards, option
awards or any other form.
The
following table reflects the compensation of directors for our fiscal year
ended
December 31, 2007:
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
following is a description of the material terms of the agreements and
arrangements involving us and our subsidiaries.
Related
party
transactions
In
connection with the contribution of the assets to our company, we issued
to
Consolidated National, LLC (CNL), of which our
Executive
Chairman
is the sole managing member and beneficial owner, an aggregate of 9,600,000
shares of common stock of which
6,232,596
shares
are still held by CNL.
Our
Chief
Medical and Scientific Officer and director of our Company, Dr. Victor Gura,
owns 13,453,250 shares of common stock of NQCI (or approximately 22.2% of NQCI's
common stock outstanding as of April 30, 2008) with whom we entered into a
license agreement. In addition, Medipace Medical Group, Inc., an affiliate
of
Dr. Gura, owns 800,000 shares of common stock of NQCI (or approximately 1.3%
of
NQCI's common stock outstanding as of April 30, 2008).
Pursuant
to a consulting agreement effective December 1, 2007, Daniel S. Goldberger,
former
director,
provided
consulting services as a management consultant
and
interim CEO as of January 2008
with a
devotion of at least 80 hours per month of services. In consideration of
the
services, we
paid
Mr.
Goldberger $15,000 per month during the first two months and $12,500 per month
through
October 2008. After his resignation as a director and interim CEO, we amended
his consulting agreement effective October 1, 2008 through December 31,
2008,
and
month to
month
thereafter
with a monthly service fee of $5,000.
Our
Chief
Medical and Scientific Officer maintains an office located at 9100 Wilshire
Blvd., Suite 360W, Beverly Hills, CA 91202. Pursuant to the reimbursement
agreement effective January 29, 2008, we will reimburse 50% of the rental and
50% of his monthly parking. The term of the agreement shall commence on April
23, 2007, date of the office lease agreement, and continue until the date on
which he ceases to use the remote office to perform his duties as our Chief
Medical and Scientific Officer.
PROPOSAL
THREE: APPROVAL OF ISSUANCE OF STOCK FOR TECHNOLOGY
TRANSACTION
Summary
We
are
seeking approval from our stockholders to issue
9,230,000
shares
of our common stock in order to obtain ownership of intellectual property
rights
relating to medical technologies currently licensed by our wholly-owned
subsidiary Xcorporeal Operations, Inc. (
"
Operations
"
).
The
most material terms of the proposed transaction are summarized as
follows:
|
•
|
National
Quality Care, Inc. (
"
NQCI
"
)
will grant, transfer and assign to Operations all of the
Technology
defined in the License
Agreement;
|
|
•
|
The
Technology includes all patents and patent applications related
to a
Wearable Artificial Kidney (
"
WAK
"
),
and other portable or continuous dialysis methods or
devices;
|
|
•
|
We
will issue and deliver 9,230,000 shares of our common stock
to
NQCI
,
making NQCI our largest stockholder
;
|
|
•
|
Except
for its definition, indemnification, representation and warranty
provisions, the License Agreement shall thereafter be terminated
and of no
further force or effect
;
|
|
•
|
Within
30 days after closing, we will file a registration statement
to attempt to
register the shares of NQCI for resale; and
|
|
•
|
According
to an interim award in an arbitration between us and NQCI, the
registration statement must be declared effective within 90
days.
|
Background
of the Technology Transaction
We
are a
medical device company developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. These devices will seek to provide patients with improved, efficient
and
cost effective therapy. The platform leads to three initial
products:
|
•
|
a
Portable Artificial Kidney (PAK) for hospital Renal Replacement
Therapy
(RRT);
|
|
•
|
a
PAK
for home hemodialysis; and
|
|
•
|
a
WAK for continuous ambulatory
hemodialysis.
|
We
have
completed functional prototypes of our hospital and home PAKs. that we plan
to
commercialize after 510(k) notification clearance from the Food and Drug
Administration (FDA) which we plan to seek by next year. We have demonstrated
a
feasibility prototype of the WAK which we plan to continue to develop;
commercialization of the WAK will require development of a functional prototype
and likely a full pre-market approval by the FDA, which could take several
years
or longer.
Our
rights to the WAK derive in part from a License Agreement dated September
1,
2006 between Operations and NQCI, pursuant to which we obtained the exclusive
rights to the technology designated therein. A copy of the License Agreement
is
attached as Appendix B to this proxy statement.
We
have
focused much of our efforts on development of the PAK, which has not
been
derived from the technology covered by the License Agreement. Once the
Technology Transaction has closed and the results of the arbitration
proceeding
are final, we will determine whether to devote additional resources to
development of the WAK. Because neither product is yet at a stage where
it can
be marketed commercially, we are not able to predict the portion of our
future
business which will be derived from each.
On
September 1, 2006, Operations also entered into a Merger Agreement with NQCI
which contemplated that we would acquire NQCI as a wholly owned subsidiary
pursuant to a triangular merger, or we would issue shares of our common stock
to
NQCI stockholders in consideration of the assignment of the technology relating
to our WAK and other medical devices (the “Technology Transaction”). The
agreement provided in Section 6(A)(4) that Operations had no obligation to
issue
or deliver any shares after December 31, 2006, unless the Parties mutually
agreed to extend such date, which they did not. In addition, on December
29,
2006, NQCI served us with written notice that it was terminating the Merger
Agreement, which we accepted. Accordingly, the merger was not consummated.
A
copy of the Merger Agreement is attached as Appendix C to this proxy
statement.
On
December 1, 2006, Operations initiated arbitration proceedings against NQCI
for
its breach of the License Agreement, which remains pending. NQCI claimed
the
License Agreement was terminated, and we sought a declaration that the License
Agreement remained in effect until the Closing of the Merger or Technology
Transaction. We later amended our claims to seek damages for NQCI’s failure to
perform its obligations under the License Agreement. NQCI filed counterclaims
seeking to invalidate the License Agreement and claiming monetary damages
against us. NQCI also filed claims against Dr. Gura, claiming he breached
his
obligations to NQCI by agreeing to serve on our board of directors. Following
a
hearing and extensive briefing, the arbitrator denied both parties’ claims for
damages. Although NQCI never filed an amendment to its counterclaims to seek
specific performance, on June 9, 2008, the arbitrator issued an Interim Award
granting specific performance of the Technology Transaction.
The
Interim Award stated that the total aggregate shares of stock to be received
by
NQCI stockholders at the Closing should equal 48% of all Operations shares
outstanding as of the date of the Merger Agreement. On September 1, 2006,
there
were 10,000,000 shares of Operations common stock outstanding. NQCI proposed
four possible share interest awards, arguing that it was entitled to between
9,600,000 and 17,130,293 shares, representing a 48% or 54% interest based
on
Operations shares outstanding at the time of the Merger Agreement or our
present
number of outstanding shares.
On
August
4, 2008, the arbitrator issued a Second Interim Award,
modifying
the initial Interim Award,
stating
that, if we desire to close the Technology Transaction, we must obtain
approval
from a majority of our stockholders and issue 9,230,000 shares of our
common
stock.
Although
the first Interim Award stated that 48% of the outstanding shares should
be
issued, the
Second
Interim Award states that
the
number
of shares
issued
should be
48% of
19,230,000 shares, the total number of shares necessary to put our
52% interest
at 10,000,000 shares. As of
October
__,
2008, there were 14,704,687 shares of our common stock issued and outstanding.
Accordingly, following Closing of the Technology Transaction, NQCI
stockholders
would own approximately
38
%
of our
total outstanding shares
,
making
NQCI our largest stockholder
.
The
arbitrator found that, with the exception of shareholder approval,
virtually all
conditions to Closing the Technology Transaction have been waived
,
including virtually all of NQCI’s representations and warranties concerning the
Technology
.
Upon
Closing of the Technology Transaction, all of the Technology will be
our sole
and exclusive property.
The
Second Interim Award also states that, contrary to the assertions made
by NQCI,
the License Agreement will remain in full force and effect until the Technology
Transaction closes or the arbitrator determines that it will never close.
Upon
Closing of the Technology Transaction, the License Agreement will terminate,
and
we will own all of the Technology.
On
January 3, 2008, the arbitrator issued an order denying NQCI’s motion to amend
its counterclaim to add us as a successor company following the merger.
However,
in the Second Interim Award, the arbitrator found that we are the
successor to
Operations as a result of the merger, even though we are not a party
to any of
the agreements or the arbitration, and ordered that our shares should
be issued
to NQCI rather than shares of Operations.
The
arbitrator has not ordered us to close the Technology Transaction.
However,
the Second Interim Award states that, if our stockholders fail to
approve the
issuance of stock to effectuate the Technology Transaction, all of
the
Technology covered by the License shall be declared the sole and
exclusive
property of NQCI, and the arbitrator shall schedule additional hearings
to
address two questions: whether the PAK technology is included within
that
Technology, and whether NQCI is entitled to compensatory damages
and the amount
of damages under these circumstances.
During
the arbitration, NQCI took the position that we had misappropriated
trade
secrets regarding the WAK and used them to create the PAK. The arbitrator
found
that we had not misappropriated NQCI’s trade secrets. However, should the
Technology Transaction not close for any reason, and the arbitrator
rules that
the licensed Technology must be returned to NQCI, the arbitrator
could find that
the PAK is derived in whole or in part from licensed Technology,
and could rule
that Operations must “return” the PAK technology to NQCI or that NQCI is
entitled to compensatory damages or both.
On
August
15, 2008, the arbitrator awarded NQCI $1.87 million of over $4 million
it
claimed in attorneys’ fees and costs, stating that NQCI’s lack of success and
other factors warranted a substantial reduction in the sums claimed.
The
arbitrator stated in pertinent part: “National’s success in the arbitration has
been only partial and this is directly relevant to the question of
the quantum
of attorneys’ fees which should be awarded. … National sought eight or nine
figure damages, but was awarded none. … Further, National asserted claims for
fraud, interference with contract, and other torts, all of which
were
rejected.
His
lack of
success warrants a substantial reduction in the sums claimed.”
NQCI
asked for a total of $4.04 million in attorneys’ fees and costs.
The
arbitrator awarded NQCI a total of $1.87 million.
In
an
August 29, 2008 Order Re Issuance of Xcorporeal Shares, the arbitrator
stated
that the shares should be issued directly to NQCI’s stockholders. However,
on
September 4, 2008, the arbitrator issued an order that we should
issue and
deliver the 9,230,000 shares directly to NQCI, rather than directly
to NQCI
stockholders, if we obtain stockholder approval and elect to proceed
with the
Technology Transaction.
The
Second Interim Award requires that we file a registration statement
under the
Securities Act to register for resale the shares to be issued to NQCI
within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement
and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the
arbitrator
nevertheless ordered that the registration statement must be declared
effective
within 90 days. We have no control over whether the registration statement
will
be declared effective by the Securities and Exchange Commission, and
no way to
predict what further action, if any, the arbitrator may order if it
is not
declared effective.
The
arbitrator has stated that he has not yet issued a final award that
may be
confirmed or challenged in a court of competent jurisdiction. A party
to the
arbitration could challenge the interim award in court, even after
stockholders
approve the transaction. In addition, the arbitrator could again change
the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would
order
that stockholders be given another opportunity to vote on the transaction,
even
if such changes are material. Arbitrators have broad equitable powers,
and
arbitration awards are difficult to challenge in court, even if the
arbitrator
makes rulings that are inconsistent or not in accordance with the law
or the
evidence.
Shares
to be issued
We
are
seeking approval from our stockholders to issue 9,230,000 shares
of our common
stock to NQCI in order to obtain ownership of intellectual property
rights
described above. As of
November
__,
2008,
there were 14,704,687 shares of our common stock issued and outstanding.
Accordingly,
following Closing of the Technology Transaction, NQCI would own approximately
38
%
of our
total outstanding shares. As set forth under Security Ownership of
Certain
Beneficial Owners and Management on page 4 of this proxy statement,
Consolidated
National, LLC (CNL), of which the Executive Chairman of our board
of directors,
Terren Peizer, is the sole managing member, owns 6,232,596 shares,
or
approximately 42% of our currently outstanding shares of common stock,
and
investment funds for which Prime Logic Capital, LLC, of which our
director, Marc
Cummins, is a managing partner, is an investment manager, beneficially
own
1,577,158 shares, or approximately 11% of our currently outstanding
shares of
common stock. Following the Closing of the Technology Transaction,
CNL and Prime
Logic would beneficially own or control approximately 26% and 7%
of our
outstanding shares, respectively.
As
a
result, NQCI may have the ability to substantially influence the outcome
of
issues submitted to our stockholders. The interests of NQCI may not coincide
with our interests or the interests of other stockholders, and it may
act in a
manner that advances its best interests and not necessarily those of
other
stockholders. One consequence to this substantial interest is that it
may deter
unsolicited takeovers, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market
prices.
The
Technology
Section
6.B(1) of the Merger Agreement provides that, at the Closing of the Technology
Transaction, NQCI shall absolutely, unconditionally, validly and irrevocably
sell, transfer, grant and assign to Operations all of the Technology, including,
but not limited to, the inventions embodied or described in the Licensor
Patents
and Patent Applications as defined in the License Agreement.
“Technology”
includes all existing and hereafter developed Intellectual Property, Know-How,
Licensor Patents, Licensor Patent Applications, Derivative Works, and any other
technology invented, improved or developed by NQCI, or as to which NQCI owns
or
holds any rights, arising out of or relating to the research, development,
design, manufacture or use of:
|
(a)
|
any
medical device, treatment or method as of September 1,
2006;
|
|
(b)
|
any
portable or continuous dialysis methods or devices, specifically
including
any wearable artificial kidney, or Wearable Kidney, and related
devices;
|
|
(c)
|
any
device, methods or treatments for congestive heart failure; and
|
|
(d)
|
any
artificial heart or coronary device.
|
“Intellectual
Property” includes:
|
(a)
|
patents,
patent applications, and patent rights;
|
|
(b)
|
trademarks,
trademark registrations and applications;
|
|
(c)
|
copyrights,
copyright applications, and copyright registrations;
and
|
|
(d)
|
trade
secrets, confidential information and know-how.
|
“Licensed
Products” includes all products based on or derived from the Technology,
including, but not limited to the Wearable Kidney and all related devices,
whether now-existing or hereafter developed.
Under
the
License Agreement, NQCI grants to us an exclusive license for 99 years
(or, if
earlier, until the expiration of NQCI's proprietary rights in the Technology)
for an annual royalty of 7% of net sales, with a minimum annual royalty
of
$250,000. We are required to "make commercially reasonable efforts to
develop
and commercially exploit the Technology to generate revenues" during
the term of
the License Agreement. The License Agreement does not provide for termination
in
the event the Merger Agreement is terminated; instead it provides for
an
adjustment of the royalty to 6.5%, 7.5% or 8.5% depending on the grounds
on
which the Merger Agreement was terminated. Either party has the right
to
terminate the License Agreement in the event of a material breach by
the other
party which remains uncured for a period of 30 days after notice. In
the event
of a termination of the License Agreement, we are required to cease all
use of
the Technology and return all "Licensee Confidential Information" to
NQCI. The
Technology relates primarily to the WAK. As is typical with licenses
of
technology, the License Agreement also covers "Derivative Works," which,
in
general, includes an original work that is based upon one or more pre-existing
works and which, if prepared, used or exploited in the absence of the
License
Agreement would constitute infringement or misappropriation of NQCI's
rights
under applicable law.
Accounting
for the transaction
The
Technology Transaction will be accounted for as a purchase of the Technology
in
exchange for shares of our common stock. In accordance with FASB
Concepts
Statement No. 7,
Using
Cash Flow Information and Present Value in Accounting
Measurements
,
the
intellectual property rights we will
acquire
in the
Technology Transaction will be
measured
based on
the fair value of the shares
surrendered
on the date of issuance, which is clearly more evident than the fair
value of
the intellectual property. Through the evaluation of the components
of the
intellectual property and information pursuant to the arbitration suggesting
it
may not be proprietary, we have determined the intellectual property
is not
economically viable. However, continuing research on the technology
will be
useful in developing the prototype of our Wearable Artificial Kidney.
In
accordance with
FASB 2,
Accounting
for Research and Development Costs
,
and
its
related interpretations,
we
will
expense the value of the intellectual property,
determined
in process research and development, at the date of acquisition.
Federal
income tax consequences
For
federal income tax purposes, we believe the Technology Transaction will
be
considered a taxable sale of assets by NQCI, based on the fair market value
of
the shares of stock we issue to NQCI to purchase such assets. NQCI may
incur
taxable income as a result of the sale. NQCI may be required to recognize
gain
or loss equal to the difference between:
(i)
the
fair market value of our common stock received in the exchange, and (ii)
NQCI's
tax basis in the assets surrendered
thereof.
The gain
or loss recognized would be long-term capital gain or loss if NQCI’s holding
period was more than one year.
We
do not
believe that we or any of our stockholders will incur any tax liability
as a
result of the Technology Transaction.
We
expect
that there will be no material federal income tax consequences of the Technology
Transaction on our stockholders.
The
above
determination is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended (the “Code”), existing Treasury Regulations promulgated
under the Code, and current administrative rulings 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 of the Technology
Transaction.
Any
discussion of federal tax issues in this information statement is not intended
or written to be used as tax advice. To ensure compliance with IRS
Circular
230, shareholders are hereby notified that: (A) any
discussion of federal tax issues in this information statement is not intended
or written to be used, and it cannot be used by shareholders, for the purpose
of
avoiding penalties that may be imposed on them under the Internal Revenue Code;
(B) such discussion is written to support the transactions or matters addressed
herein; and (C) shareholders should seek advice based on their particular
circumstances from an independent tax advisor.
The
discussion set forth above does not address all U.S. federal income tax
considerations that may be relevant to stockholders in light of their particular
circumstances, and does not apply to stockholders that are subject to special
rules under U.S. federal income tax laws. This discussion assumes that the
transaction will be considered a taxable sale of assets by NQCI. However,
we have not requested nor will we request a ruling from the Internal Revenue
Service or an opinion of counsel with regard to any of the tax consequences
of
the Technology Transaction. The Internal Revenue Service may assert a contrary
position, and it is possible that the Internal Revenue Service may successfully
assert a contrary position in litigation or other proceedings.
Stockholders
are urged to consult their own tax advisors as to the U.S. federal income tax
consequences of the Technology Transaction based on their own circumstances,
as
well as the effects of state, local, non-U.S. tax laws and U.S. tax laws other
than income tax laws.
Interests
of a director and officer
According
to NQCI’s most recent annual report, Dr. Victor Gura, one of our directors and
our chief medical and scientific officer, owns 14,253,250 shares of NQCI’s
common stock, approximately 23.5% of its total outstanding shares.
Before
becoming a director and
our
Chief Medical and Scientific Officer
in
2006,
Dr. Gura served as NQCI's Chief Scientific Officer and was a member of
NQCI's
board of directors. He resigned from those positions before taking his
positions
with us. He was not directly involved in negotiating the merger or license
agreement with us. These
negotiations were
handled
by NQCI
's
Chief
Executive Officer, Robert Snukal and unanimously approved by NQCI's board
of
directors, including Dr. Gura. When the dispute which is the subject of
the
arbitration arose, NQCI filed suit against us and several members of our
board
of directors, including Dr. Gura. Dr. Gura participated in limited settlement
discussions with NQCI in his capacity as an individually named defendant,
but
those discussions were not successful. The disputes between NQCI and Dr.
Gura
were arbitrated concurrently with disputes between NQCI and us. The arbitrator
denied all of NQCI's claims against Dr. Gura.
Our
board of directors considered Dr. Gura’s ownership interest in NQCI in
recommending that stockholders approve the issuance of stock to effectuate
the
Technology Transaction.
Vote
required for approval
Our
common stock is publicly traded on the American Stock Exchange (AMEX)
under the
symbol
XCR
.
Section
7.12 of the AMEX Company Guide requires stockholder approval as a prerequisite
to listing additional shares issued as consideration for an acquisition
of the
assets of another company if any individual director or officer of the
listed
company has a 5% or greater interest, directly or indirectly, in the
company or
assets to be acquired or in the consideration to be paid in the transaction;
or
where the issuance of common stock would result in an increase in outstanding
common shares of 20% or more.
In
addition, stockholder approval is one of the conditions to Closing the
Technology Transaction set forth in the Merger Agreement, and the arbitrator
has
held that consent of a majority of our stockholders must approve the Technology
Transaction, if we desire to effectuate it.
Approval
of this proposal requires the affirmative vote of a majority of the shares
present or represented by proxy and entitled to vote at the annual meeting
of
stockholders, at which a quorum representing a majority of all outstanding
shares of our common stock is present and voting, either in person or by
proxy.
Abstentions and broker non-votes will be counted as present for purposes
of
determining the presence of a quorum. Abstentions will have the effect of
a
negative vote. Broker non-votes will not be counted for purposes of the vote.
Consummation and effectiveness of the technology transaction may be subject
to
issuance of a final arbitration award and court approval thereof.
In
connection with the Merger Agreement, CNL executed a written agreement
agreeing
to vote all of its shares in favor of the Merger Agreement, a proposal
to
approve the issuance of Operations stock pursuant to and upon the terms
and
subject to the conditions set forth in the Merger Agreement, and any
other
matter necessary to approve the transactions contemplated by the Merger
Agreement. CNL, whose sole managing member is the Executive Chairman
of our
board, beneficially owns approximately 42% of our currently outstanding
common
shares.
Another
member of our board is a managing partner of Prime Logic, which is the
investment manager for funds beneficially owning approximately 11% of
our
currently
outstanding
shares.
We
believe that both CNL and Prime Logic’s managed funds will vote their shares in
favor of the transaction.
If
both
of these stockholders retain their ownership as of the record date and
vote
their shares in favor of the transaction, that would be sufficient to
constitute
the majority necessary for stockholder approval of the transaction. In
making a
final decision on whether to proceed with the transaction, our board
of
directors may take into account the number or percentage of our other
stockholders who vote for or against the proposal, though no approval
is
required beyond a majority of the total shares voting at the
meeting.
Recommendation
of the board
In
recommending that stockholders approve the issuance of our stock to effectuate
the Technology Transaction, the
primary
factor considered by the board was the risk that, if our stockholders do
not
vote to approve the transaction, the arbitrator might impose some form
of
alternative relief, which may include taking all of our technology, including
our PAK even though it was not developed based on Licensed Technology,
and/or
ordering us to pay monetary damages in an unknown amount we cannot afford.
In
addition, the arbitrator has refused to issue a final award that would
be
subject to court review and appeal, and has structured the interim award
in a
way that effectively prevents us from seeking any court review. The board
also
considered other factors militating in favor of approval, including
the
nature and effect of the interim awards
,
the
fair market value of the 9,230,000 shares to be issued to close the transaction,
taking into account the $
0.40
per
share closing price on
October
24, 2008,
the
approximately $19 million expended as of June 30, 2008 in developing the
WAK
,
ownership of which we would obtain by closing the transaction, and the
PAK,
rights to which might be placed in jeopardy if
the
transaction does not close
,
the
potential long-term business opportunity of the WAK,
and
that
the terms of the License Agreement and Merger Agreement were the result
of
vigorous arms-length negotiations among sophisticated business persons
represented by experienced counsel
.
In
addition, the board considered factors militating against approval, including
revisions made to the merger agreement such as eliminating NQCI’s
representations and warranties regarding the Technology, and mandating
that the
resale registration statement be declared effective, uncertainty regarding
the
finality of the interim awards, the fundamental unfairness and uncertainly
of
the arbitration process, that the shares issued
represent approximately
38
%
of the
total shares that will be outstanding immediately upon closing,
and
will
make an opposing party in arbitration our largest stockholder, uncertainty
in
the value of the Technology and the business opportunity of the WAK,
the
risks
and uncertainties in developing the WAK,
and
the
stock
ownership of Dr. Gura in NQCI
.
The
board of directors unanimously recommends that you vote “FOR” approval of
issuance of stock for the Technology Transaction.
PROPOSAL
FOUR: APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES
Our
current certificate of incorporation authorizes us to issue a total of
50,000,000 shares, 40,000,000 shares of common stock, $0.0001 par value,
and
10,000,000 shares of preferred stock, $0.0001 par value. The board has
proposed
to amend the current certificate of incorporation to authorize us to issue
a
total of 100,000,000 shares, 90,000,000 shares of common stock. $0.0001
par
value, and 10,000,000 shares of preferred stock, $0.0001 par value.
The
full
text of the amended and restated certificate of incorporation that is the
subject of this proposal is set forth in Appendix A attached to this proxy
statement. If the proposal is adopted, the board of directors will adopt
a
corresponding amendment to our bylaws, without separate shareholder
consent.
Authorized
but unissued shares
The
authorized but unissued shares of common and preferred stock are available
for
future issuance without stockholder approval, unless otherwise required by
law
or applicable stock exchange rules. These additional shares may be used for
a
variety of corporate purposes, including future public offering to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares could hinder or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
Considerations
in support of the proposal
As
of
November
__,
2008, there were 14,704,687 shares of our common stock outstanding; 4,000,000
shares reserved for issuance upon the exercise of currently outstanding
warrants
and employee stock options; and, if approved by stockholders, 9,320,000
shares
that may be issued in connection with the Technology Transaction described
in
Proposal Three above.
No
shares
of preferred stock are currently outstanding.
The
board
believes that the increase in the number of authorized shares is appropriate
to
permit the board to reserve shares for issuance upon the conversion or
exercise
of any convertible debt, warrants or stock options that may be outstanding
in
the future, and to provide us with the flexibility to act in the future
with
respect to financings, acquisitions, stock splits, stock option plans
and other
corporate purposes, without the delay and expense of obtaining shareholder
approval each time an opportunity requiring the issuance of shares may
arise.
The
board
is not currently considering any transactions which would necessitate the
issuance of additional shares of our common stock above the number of shares
of
stock currently authorized. However, the board believes that having additional
shares of authorized common stock available for issuance increases our ability
to pursue opportunities for future financings, acquisitions and other
transactions, when necessary or appropriate. We would also help ensure our
ability to effectuate the grant of warrants, options or convertible securities,
future stock splits or stock dividends.
Other
considerations
An
increase in the authorized shares of common stock could, under certain
circumstances, have an anti-takeover effect, for example, by diluting the
stock
of a person seeking to effect a change in the composition of the board of
directors or contemplating a tender offer or other transaction for a combination
of the company with another company. However, this action is not in response
to
any current effort of which we are aware to accumulate our common stock or
to
obtain control of the company.
Authorizing
the issuance of additional shares could have an effect on the potential
realizable value of a stockholder's investment. In the absence of a
proportionate increase in earnings and book value, an increase in the aggregate
number of outstanding shares caused by the issuance of additional shares
would
dilute the earnings per share and book value per share of all our outstanding
shares of capital stock. If such factors were reflected in the price per
share
of the common stock, the potential realizable value of a stockholder's
investment could be adversely affected.
The
additional shares of common stock to be authorized by adoption of the amendment
to the certificate of incorporation would have rights identical to the currently
outstanding shares of common stock, and adoption of the amendment to the
certificate of incorporation will not affect the rights of the holders of
currently outstanding shares of common stock.
Anti-
takeover
effects of certain provisions of Delaware law and our certificate of
incorporation and bylaws
Our
certificate of incorporation and bylaws contain a number of provisions that
could make our acquisition by means of a tender or exchange offer, a proxy
contest or otherwise more difficult. These provisions are summarized
below.
Removal
of Directors.
Our
certificate of incorporation currently provides that our directors may only
be
removed by the affirmative vote of our stockholders. Our proposed amended
certificate further provides that directors may only be removed for cause.
Although our bylaws do not give the board the power to approve or disapprove
stockholder nomination for the election of directors or any other business
stockholders desire to conduct at an annual or any other meeting , the bylaws
may have the effect of precluding a nomination for the election of directors
or
precluding the conduct of business at a particular meeting if the proper
procedures are not followed, or discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of directors
or
otherwise attempting to obtain control, even if the conduct of that solicitation
or attempt might be beneficial to our stockholders.
Special
Meetings and Consents
.
Our
bylaws provide that special meetings of stockholders can be called by the
President, the Chairman or the board at any time. Our proposed amended
certificate further provides that stockholder action may not be taken by
written
consent, and may only be taken at an annual or special meeting of
stockholders.
Undesignated
Preferred Stock
,
The
ability to authorize undesignated preferred stock makes it possible for the
board to issue preferred stock with voting or other rights or preferences
that
could impede the success of any attempt to acquire us. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of the company.
Delaware
Anti-Takeover Statute
.
We are
subject to the provisions of Section 203 of the Delaware General Corporation
Law
regulating corporate takeovers. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging under certain circumstances in a
business combination with an interested stockholder for a period of three
years
following the date such person became an interested stockholder
unless:
Prior
to
the date of the transaction, the board of directors of the corporation approved
either the business combination or the transaction, which resulted in the
stockholder becoming an interested stockholder.
Upon
completion of the transaction that resulted in the stockholder becoming an
interested stockholder, the stockholder owned as least 85% of the voting
stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (i) shares owned
by
the persons who are directors and also officers and (ii) shares owned by
employee stock plans in which employee participants do not have the right
to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer.
On
or
subsequent to the date of the transaction, the business combination is approved
by the board and authorized at an annual or special meeting of stockholders,
and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
An
interested stockholder is a person who, together with affiliates and associates
owns or, within three years prior to the determination of interested stockholder
status did own, 15% or more of a corporation's outstanding voting securities.
We
expect the existence of this provision to have an anti-takeover effect with
respect to transactions the board does not approve in advance. We also
anticipate that Section 203 may also discourage attempts that might result
in a
premium over market price of the shares of common stock held by
stockholders.
The
provisions of Delaware law, our certificate of incorporation and our bylaws
could have the effect of discouraging others from attempting hostile takeovers
and, as a consequence, may also inhibit temporary fluctuations in the market
price of our common stock that often result from actual or rumored hostile
takeover attempts. These provisions may also have the effect of preventing
changes in our management. It is possible that these provisions could make
it
more difficult to accomplish transactions that stockholders may otherwise
deem
to be in their best interests.
Effectiveness
of
increase
in
number
of authorized shares
If
the
proposal is adopted by stockholders, the increase in the number of authorized
shares will become effective on the filing of the amendment to the certificate
of incorporation with the Secretary of State of Delaware
Vote
required for approval
Approval
of this proposal requires the affirmative vote of a majority of the shares
present or represented by proxy and entitled to vote at the annual meeting
of
stockholders, at which a quorum representing a majority of all outstanding
shares of our common stock is present and voting, either in person or by
proxy.
Abstentions and broker non-votes will be counted as present for purposes
of
determining the presence of a quorum. Abstentions will have the effect of
a
negative vote. Broker non-votes will not be counted for purposes of the
vote.
Under
Delaware law, our dissenting shareholders are not entitled to appraisal rights
with respect to the amendments to our certificate of incorporation, and we
will
not independently provide our shareholders with any such right.
Recommendation
of the board
The
board of directors unanimously recommends that you vote “FOR” approval of the
increase in number of authorized shares.
COM
PENSATION
DISCUSSION AND ANALYSIS
The
following discussion and analysis contains statements regarding future
individual and company performance targets and goals. These targets and goals
are disclosed in the limited context of our compensation programs and should
not
be understood to be statements of management's expectations or estimates of
results or other guidance. We specifically caution investors not to apply these
statements to other contexts.
We
believe our long term success is dependent on a leadership team with the
integrity, skills, and dedication necessary to oversee a growing organization
on
a day-to-day basis. In addition, the leadership must have the vision to
anticipate and respond to future market and regulatory developments. Our
executive compensation program is designed to enable us to attract, motivate
and
retain a senior management team with the collective and individual abilities
to
meet these challenges. The program's primary objective is to align executives'
efforts with the long term interests of stockholders by enhancing our
reputation, financial success and capabilities.
Gene
ral
executive compensation philosophy
We
compensate our executives, including the named executive officers who are
identified in the Summary Compensation Table, through a combination of base
salary, cash bonus incentives, long-term equity incentive compensation, and
related benefits. These components are designed, in aggregate, to be competitive
with comparable organizations and to align the financial incentives for the
executives with the short and long term interests of stockholders.
The
compensation committee of the board of directors receives the Company's
management recommendations and then discusses, reviews and considers
management's recommendations with respect to the compensation of those members
of senior management whose compensation the committee considers. The committee
then makes its recommendation to the board which discusses and then decides
raises, bonuses and options. Although their advice may be sought and
they may be questioned by the committee, executive members of the board do
not
participate in the committee's or the board's discussion and
vote. Prior to the committee making its recommendations, the members
of the committee have several discussions among themselves and meet to discuss,
among other things, the performance and contributions of each of the members
of
senior management whose compensation they are considering as well as
expectations (of the individual for the year and the future and those of the
Company), results, responsibilities, and desire to retain such executive. In
addition, the committee may have conversations with certain others before making
its recommendations.
The
Company's philosophy is to provide a compensation package that attracts,
motivates and retains executive talent, and delivers rewards for superior
performance as well as consequences for
underperformance. Specifically, our executive compensation program is
designed to:
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provide
a competitive total compensation package that is competitive within
the
medical device industry in which we compete for executive talent,
and will
assist in the retention of our executives and motivate them to perform
at
a superior level;
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link
a substantial part of each executive's compensation to the achievement
of
our financial and operating objectives and to the individual's
performance;
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provide
long-term incentive compensation that focuses executives' efforts
on
building stockholder value by aligning their interests with our
stockholders; and
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provide
incentives that promote executive
retention.
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Each
year, the management and the board approve financial and non-financial
objectives for the Company and the executive officers, which may be reflected
in
the Company's executive employment agreements and incentive compensation plans.
We design our incentive compensation plans to reward company-wide performance.
In addition, we also consider the individual performance of each executive
officer and other relevant criteria, such as the accomplishments of the
management team as a whole. In designing and administering our executive
compensation programs, we attempt to strike an appropriate balance among these
elements.
The
major
compensation elements for our named executive officers are base salary,
performance-based bonuses, stock options, insurance benefits and perquisites.
Each of these elements is an integral part of and supports our overall
compensation objectives. Base salaries (other than increases), insurance
benefits and perquisites form stable parts of our executive officers'
compensation packages that are not dependent on our performance during a
particular year. We set these compensation elements at competitive levels so
that we are able to attract, motivate and retain highly qualified executive
officers. Consistent with our performance-based philosophy, we reserve the
largest potential compensation awards for performance- and incentive-based
programs. These programs include awards that are based on our financial
performance and provide compensation in the form of both cash and equity to
provide incentives that are tied to both our short-term and long-term
performance. Our performance-based bonus program rewards short-term and
long-term performance, while our equity awards, in the form of stock options,
reward long-term performance and align the interests of management with our
stockholders.
Boar
d
determination of compensation awards
The
compensation committee recommends and the board determines the compensation
awards to be made to our executive officers. The compensation committee
recommends and the board determines the total compensation levels for our
executive officers by considering several factors, including each executive
officer's role and responsibilities, how the executive officer is performing
against those responsibilities, our performance, and the competitive market
data
applicable to the executive officers’ positions.
In
arriving at specific levels of compensation for executive officers, the board
has relied on:
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the
recommendations of management;
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benchmarks
provided by generally available compensation surveys;
and
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the
experience of board members and their knowledge of compensation paid
by
comparable companies or companies of similar size or generally engaged
in
the healthcare services business.
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The
Company seeks an appropriate relationship between executive pay and corporate
performance. Executive officers are entitled to customary benefits generally
available to all Company employees, including group medical, dental and life
insurance and a 401(k) plan. The Company has employment agreements (which
include severance arrangements) with two of our key executive officers to
provide them with the employment security and severance deemed necessary to
retain them.
Comp
onents
of executive compensation
Base
salary.
Base
salaries provide our executive officers with a degree of financial certainty
and
stability. We seek to provide base salaries sufficient to attract and retain
highly qualified executives. Whenever management proposes to enter into a new
employment agreement or to renew an existing employment agreement, the
compensation committee reviews and recommends, and the board determines, the
base salaries for such persons, including our chief executive officer
and our other executive officers. Salaries are also reviewed in the case of
executive promotions or other significant changes in responsibilities. In each
case, the compensation committee and the board each take into account
competitive salary practices, scope of responsibilities, the results previously
achieved by the executive and his or her development potential.
On
an
individual basis, a base salary increase, where appropriate and as contemplated
by the individual's employment agreement, is designed to reward performance
consistent with our overall financial performance in the context of competitive
practice. Performance reviews, including changes in an executive officer's
scope
of responsibilities, in combination with general market trends determine
individual salary increases. Aside from contractually provided minimum cost
of
living adjustments, no formulaic base salary increases are provided to the
named
executive officers.
In
addition to complying with the executive compensation policy and to the
requirements of applicable employment agreements, compensation for each of
the
executive officers for 2007 was based on the executive's performance of his
or
her duties and responsibilities, the performance of the Company, both financial
and otherwise, and the success of the executive in managing, developing and
executing our business development, sales and marketing, financing and strategic
plans, as appropriate. No merit raises or bonuses were approved or recommended
for our executive officers for 2008.
Bonus.
Executive officers are eligible to receive cash bonuses based on the degree
of
the Company's achievement of financial and other objectives and the degree
of
achievement by each such officer of his or her individual objectives. Within
such guidelines the amount of any bonus is discretionary.
The
primary purpose of our performance incentive awards is to motivate our
executives to meet or exceed our company-wide short-term performance objectives.
Our cash bonuses are designed to reward management-level employees for their
contributions to individual and corporate objectives. Regardless of our
performance, the board retains the discretion to adjust the amount of our
executives' bonus based upon individual performance or
circumstances.
At
the
beginning of 2007, the management and the board established performance
objectives for the payment of incentive awards to each of the named executive
officers and other senior management employees. Performance objectives were
based on corporate objectives established as part of the annual operating plan
process. Year end bonus awards were based on attainment of these performance
objectives as adjusted to reflect changes in our business and industry
throughout the year. The compensation committee recommended and the board
determined that bonuses in the amounts set forth in the total compensation
chart
above were appropriate. Each individual's bonus was determined based
upon the individual's attainment of performance objectives pre-established
for
that participant by the board, senior management, or the executive's supervisor.
The management and the board established the chief executive officer's
performance objectives.
In
general, each participant set for himself or herself (subject to his or her
supervisor's review and approval or modification) a number of objectives for
2007 and then received a performance evaluation against those objectives as
a
part of the year-end compensation review process. The individual objectives
varied considerably in detail and subject matter depending on the executive's
position. By accounting for individual performance, we were able to
differentiate among executives and emphasize the link between individual
performance and compensation.
Stock
options.
Equity
participation is a key component of the Company's executive compensation
program. Under the incentive compensation plan, the Company is permitted to
grant stock options to officers, directors, employees and consultants. To date,
stock options have been the sole means of providing equity participation to
executive officers. Stock options are granted to executive officers primarily
based on the officer's actual and expected contribution to the Company's
development. Options are designed to retain executive officers and motivate
them
to enhance stockholder value by aligning their financial interests with those
of
the stockholders. Stock options are intended to enable the Company to attract
and retain key personnel and provide an effective incentive for management
to
create stockholder value over the long term since the option value depends
on
appreciation in the price of the Company's common stock.
Our
employees, including our executive officers, are eligible to participate in
the
award of stock options under our 2007 Incentive Compensation Plan, as
amended. Option grant dates for newly hired or promoted officers and
other eligible employees have typically been approved on the first board meeting
date following the date of employment or in the new position. Employees who
have
demonstrated outstanding performance during the year may be awarded options
during or following the year. Such grants provide an incentive for
our executives and other employees to increase our market value, as represented
by our market price, as well as serving as a method for motivating and retaining
our executives.
In
determining to provide long-term incentive awards in the form of stock options,
the board considered cost and dilution impact, market trends relating to
long-term incentive compensation and other relevant factors. The board
determined that an award of stock options more closely aligns the interests
of
the recipient with those of our stockholders because the recipient will only
realize a return on the option if our stock price increases over the term of
the
option.
Perquisites
and Other Benefits.
We
also
provide other benefits to our executive officers that are not tied to any formal
individual or Company performance criteria and are intended to be part of a
competitive overall compensation program. For 2007, these benefits included
payment of term life insurance premiums, club dues, and automobile allowances.
We also offer 401(k) retirement plans, and medical plans, for which executives
are generally charged the same rates as all other employees.
Chi
ef
executive officer compensation
The
compensation committee, at least annually, reviews and recommends to the
board
of directors the compensation of
Kelly
McCrann, Chairman of the Board and Chief Executive Officer
,
in
accordance with the terms of his employment agreement, as well as any variations
in his compensation the committee feels are warranted. Mr.
McCrann
,
as a
member of the board, does not participate in and abstains from all discussions
and decisions of the board with regard to his compensation. The board believes
that in the highly competitive healthcare industry in which the Company
operates, it is important that Mr.
McCrann
receive
compensation consistent with compensation received by chief executive officers
of competitors and companies in similar stages of development. Mr.
McCrann
was a board member and did not receive compensation,
base
salary
nor
bonus
in
2007.
His base
salary for 2008 is currently $
325,000,
prorated for his October 2, 2008 start date..
See
"Executive employment agreements" for a description of the material terms
and
conditions of Mr.
McCrann
's
employment agreement.
Seve
rance
and change of control arrangements
We
have
entered into change of control employment agreements with certain of our named
executive officers, as described in "Executive employment agreements." These
agreements provide for severance payments to be made to the executive officers
if their employment is terminated under specified circumstances following a
change of control. We also provide benefits to these executive officers upon
qualifying terminations. The agreements are designed to retain our executive
officers and provide continuity of management in the event of an actual or
threatened change of control and to ensure that our executive officers'
compensation and benefits expectations would be satisfied in such
event.
Inte
rnal
Revenue Code limits on deductibility of
compensation
Section 162(m)
of the Internal Revenue Code of 1986, as amended, generally disallows a federal
income tax deduction to public companies for certain compensation in excess
of
$1 million paid to a corporation's chief executive officer or any of its
four other most highly compensated executive officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. The board is of the opinion that the Company's
incentive compensation plan has been structured to qualify the compensation
income deemed to be received upon the exercise of stock options granted under
the plans as performance-based compensation. The board will review with
appropriate experts or consultants as necessary the potential effects of Section
162(m) periodically and in the future may decide to structure additional
portions of compensation programs in a manner designed to permit unlimited
deductibility for federal income tax purposes.
The
Company is not currently subject to the limitations of Section 162(m) because
no
executive officers received cash payments during 2007 in excess of $1 million.
To the extent that the Company is subject to the Section 162(m) limitation
in
the future, the effect of this limitation on earnings may be mitigated by net
operating losses, although the amount of any deduction disallowed under Section
162(m) could increase alternative minimum tax by a portion of such disallowed
amount. For information relating to the Company's net operating losses, see
the
consolidated financial statements included in the 2007 Annual Report to
stockholders.
All
members of the compensation committee qualify as outside directors. The board
considers the anticipated tax treatment to the Company and our executive
officers when reviewing executive compensation and our compensation programs.
The deductibility of some types of compensation payments can depend upon the
timing of an executive's vesting or exercise of previously granted rights.
Interpretations of and changes in applicable tax laws and regulations, as well
as other factors beyond the board's control, also can affect the deductibility
of compensation.
While
the
tax impact of any compensation arrangement is one factor to be considered,
such
impact is evaluated in light of the Company's overall compensation philosophy.
The board will consider ways to maximize the deductibility of executive
compensation, while retaining the discretion it deems necessary to compensate
officers in a manner commensurate with performance and the competitive
environment for executive talent. From time to time, the board may award
compensation to our executive officers which is not fully deductible if it
determines that such award is consistent with its philosophy and is in our
and
our stockholders' best interests, or as part of initial employment offers,
such
as grants of nonqualified stock options.
Sections 280G
and 4999 of the Internal Revenue Code impose certain adverse tax consequences
on
compensation treated as excess parachute payments. An executive is treated
as
having received excess parachute payments for purposes of Sections 280G and
4999 of the Internal Revenue Code if he or she receives compensatory payments
or
benefits that are contingent on a change in the ownership or control of a
corporation, and the aggregate amount of such contingent compensatory payments
and benefits equal or exceeds three times the executive's base amount. If the
executive's aggregate contingent compensatory payments and benefits equal or
exceed three times the executive's base amount, the portion of the payments
and
benefits in excess of one times the base amount are treated as excess parachute
payments. Treasury Regulations define the events that constitute a change in
ownership or control of a corporation for purposes of Sections 280G and
4999 of the Internal Revenue Code and the executives subject to
Sections 280G and 4999 of the Internal Revenue Code.
An
executive's base amount generally is determined by averaging the executive's
Form W-2 taxable compensation from the corporation and its subsidiaries for
the five calendar years preceding the calendar year in which the change in
ownership or control occurs. An executive's excess parachute payments are
subject to a 20% excise tax under Section 4999 of the Internal Revenue
Code, in addition to any applicable federal income and employment taxes. Also,
the corporation's compensation deduction in respect of the executive's excess
parachute payments is disallowed under Section 280G of the Internal Revenue
Code. If we were to be subject to a change of control, certain amounts received
by our executives (for example, amounts attributable to the accelerated vesting
of stock options) could be excess parachute payments under Sections 280G
and 4999 of the Internal Revenue Code. We provide our chief executive
officer with tax gross up payments in event of a change of control.
Section 409A
of the Internal Revenue Code imposes distribution requirements on nonqualified
deferred compensation plans and arrangements. If a nonqualified deferred
compensation plan or arrangement fails to comply with Section 409A of the
Internal Revenue Code, an executive participating in such plan or arrangement
will be subject to adverse tax consequences (including an additional 20% income
tax on amounts deferred under the plan or arrangement). Our nonqualified
deferred compensation plans and arrangements for our executive officers are
intended to comply with Section 409A of the Internal Revenue Code, or to be
exempt from the requirements of Section 409A of the Internal Revenue
Code.
Comp
ensation
committee interlocks and insider participation
No
member
of the compensation committee was at any time during the past fiscal year an
officer or employee of the Company, was formerly an officer of the Company
or
any of our subsidiaries, or had any employment relationship with
us.
During
the last fiscal year, none of our executive officers served as:
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a
member of the compensation committee (or other committee of the board
of
directors performing equivalent functions or, in the absence of any
such
committee, the entire board of directors) of another entity, one
of whose
executive officers served on our compensation
committee;
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a
director of another entity one of whose executive officers served
on our
compensation committee; or
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a
member of the compensation committee (or other committee of the board
of
directors performing equivalent functions or, in the absence of any
such
committee, the entire board of directors) of another entity, one
of whose
executive officers served as a director of the
Company.
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COM
PENSATION
COMMITTEE REPORT
The
following report of the compensation committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
of
our other filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis set forth in this proxy with management and, based on such
discussions, the compensation committee recommended to the board of directors
that the Compensation Discussion and Analysis section be included
herein.
Submitted
by the compensation committee:
Dr.
Hans
Polaschegg
,
Chairman
Jay
A.
Wolf
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The
firm
of KBA Group, LLP served as our independent registered public accounting firm
for the 2006 fiscal year, but was replaced by the firm of BDO Seidman LLP as
of
the effective date of the merger. BDO Seidman served as the
independent registered public accounting firm for Operations. BDO Seidman
will continue to serve as our independent registered public accounting firm
for
the remainder of the 2008 fiscal year unless the audit committee deems it
advisable to make a substitution. We anticipate that representatives of BDO
Seidman will attend the annual meeting, and will be available to respond to
appropriate questions.
Audit
Fees
Total
fees for professional services rendered by our principal accountant for the
audit and review of our financial statements included in our Form 10-QSBs and
Form 10-KSBs, and services provided in connection with our other SEC filings
for
the year ended December 31, 2006 were $143,000. Total fees for professional
services rendered by our principal accountant for the audit and review of our
financial statements included in our Form 10-QSBs and Form 10-KSBs, and services
provided in connection with our other SEC filings for the year ended December
31, 2007 were $318,000.
Audit
Related Fees
Audit-related
fees are for accounting technical consultations and totaled $24,000 in 2007
and
none in 2006.
Tax
Fees
We
paid
no fees for professional services with respect to tax compliance, tax advice,
or
tax planning to our auditor in 2006 or 2007.
All
Other Fees
Our
principal accountant did not bill us any other fees during 2006 or
2007.
Audit
committee’s pre-approval policies and procedures
Our
Audit
Committee has responsibility for the approval of all audit and non-audit
services before we engage an accountant. All of the services rendered to us
by
BDO Seidman, LLP are pre-approved by the Audit Committee before the engagement
of the auditors for such services. Our pre-approval policy expressly provides
for the annual pre-approval of all audits, audit-related and all non-audit
services proposed to be rendered by the independent auditor for the fiscal
year,
as specifically described in the auditor's engagement letter, such annual
pre-approval to be performed by the Audit Committee.
2007
ANNUAL REPORT ON FORM 10-KSB
We
will
mail with this proxy statement a copy of our annual report on Form 10-KSB
to
each stockholder of record as of
November
__,
2008.
If a stockholder requires an additional copy of our annual report, we
will
provide one, without charge, on the written request of any such stockholder
addressed to us at 12121 Wilshire Blvd., Suite 350, Los Angeles, California
90025, Attn: Investor Relations.
AUDIT
COMMITTEE REPORT
The
following report of the audit committee does not constitute soliciting material
and should not be deemed filed or incorporated by reference into any of our
other filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.
The
audit
committee has the sole authority to select, evaluate and, if appropriate,
replace our independent registered public accounting firm, and to pre-approve
all auditing and permitted non-auditing services performed by them for
the
Company including their fees and other terms. BDO Seidman, LLP was engaged
as
the independent registered public accounting firm for the Company in October
2007.
The
audit
committee
currently
consists
of
Messrs. Wolf
and
Cummins
.
The
board of directors has determined that
the
members
of the audit committee are financially literate and independent within
the
requirements of AMEX, the Securities and Exchange Commission and the Company's
audit committee charter.
Management,
not the audit committee, is responsible for the preparation, presentation,
accuracy and integrity of the Company's financial statements, establishing,
maintaining and evaluating the effectiveness of internal controls and disclosure
controls and procedures, and evaluating any change in internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect internal control over financial reporting. The Company's
independent registered public accounting firm is responsible for performing
an
independent audit of the Company's consolidated financial
statements and expressing an opinion as to their conformity with U.S.
generally accepted accounting principles. The audit committee's responsibility
is to oversee these processes. Members of the committee rely on the information
provided to them and on the representations made by management and the
independent registered public accounting firm.
In
fulfilling its responsibilities, the audit committee met with management and
BDO
Seidman, including sessions at which management was not present, and reviewed
and discussed the unaudited financial statements contained in the Company's
quarterly reports on Form 10-QSB for each of the quarters ended in 2007, and
the
audited financial statements contained in the 2007 Annual Report on Form 10-KSB,
prior to their filing with the Securities and Exchange Commission. The audit
committee discussed with BDO Seidman the matters required to be discussed by
Statement on Auditing Standards No. 61,
Communications
with Audit Committees
,
as
currently in effect, including the independent registered public accounting
firm's overall evaluations of the quality, not just the acceptability, of the
Company's accounting principles, the critical accounting policies and practices
used in the preparation of the financial statements, the reasonableness of
significant judgments, and such other matters as are required to be discussed
with the committee under generally accepted auditing standards. The audit
committee also received the written disclosures and the letter from BDO Seidman
required by Independence Standards Board Standard No. 1, Independence
Discussion with Audit Committees, and reviewed with BDO Seidman its
independence.
Based
on
the review and discussions with management and the independent accountants,
and
subject to the limitations on its role and responsibilities described above
and
in its Charter, the audit committee recommended to the board of directors that
the audited financial statements be included in the Company's Annual Report
on
Form 10-KSB for the year ended December 31, 2007 that was filed with the
SEC.
Submitted
by the audit committee:
Jay
A.
Wolf, Chairman
Marc
G.
Cummins
We
know
of no other business to be brought before the annual meeting. If, however,
any
other business should properly come before the annual meeting, the persons
named
in the accompanying proxy will vote proxies as in their discretion they may
deem
appropriate, unless they are directed by a proxy to do otherwise.
STOCKHOLDER
PROPOSALS FOR NEXT ANNUAL MEETING
Stockholders
interested in presenting a proposal for consideration at our 2009 annual meeting
of stockholders may do so by following the procedures prescribed in
Rule 14a-8 under the Securities Exchange Act of 1934, as amended. We
currently anticipate our 2009 Annual Meeting of Shareholders to be held
September 17, 2009. To be eligible for inclusion in our proxy statement and
form
of proxy relating to the meeting, stockholder proposals must be received in
writing by our corporate Secretary, Xcorporeal, Inc., 12121 Wilshire Blvd.,
Suite 350, Los Angeles, California 90025, no later than April 29, 2009.
If
the
date of next year’s annual meeting is changed by more than 30 days, then
any proposal must be received not later than ten days after the new date is
disclosed in order to be included in our proxy materials.
In
order
for a stockholder proposal not intended to be subject to Rule 14a-8 (and
thus not subject to inclusion in our proxy statement) to be considered “timely”
within the meaning of Rule 14a-4 under the Securities Exchange Act of 1934,
as
amended, notice of any such stockholder proposals must be given to us in writing
not less than 45 days prior to the date on which we first mailed our proxy
materials for the 2008 meeting, which is set forth on page 1 of this proxy
statement (or within a reasonable time prior to the date on which we mail our
proxy materials for the 2008 annual meeting if the date of that meeting is
changed more than 30 days from the prior year).
A
stockholder’s notice to us must set forth for each matter proposed to be brought
before the annual meeting (a) a brief description of the matter the
stockholder proposes to bring before the meeting and the reasons for conducting
such business at the meeting, (b) the name and recent address of the
stockholder proposing such business, (c) the class and number of shares of
our stock which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business.
If
a
stockholder proposal is received after April 29, 2009, we may vote in our
discretion as to the proposal all of the shares for which we have received
proxies for the meeting.
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Chairman
of the Board
and Chief Executive Officer
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Los
Angeles, California
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Appendix
A
AMENDED
AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
XCORPOREAL,
INC.
The
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware does hereby certify in accordance
with
§245 of the General Corporation Law of Delaware:
That
the
original name of the corporation was Apollo Resources, Inc. and the original
Certificate of Incorporation was filed August 29, 1988;
that
at a
meeting of the board of directors of Xcorporeal, Inc., resolutions were duly
adopted setting forth an Amended and Restated Certificate of Incorporation
of
the corporation, declaring said Amended and Restated Certificate of
Incorporation to be advisable; and
that
a
majority of the outstanding shares of Xcorporeal, Inc. duly adopted resolutions
setting forth an Amended and Restated Certificate of Incorporation of the
corporation, declaring said Amended and Restated Certificate of Incorporation
to
be advisable.
The
resolutions of the Board of Directors and the shareholders set forth the
proposed Amended and Restated Certificate of Incorporation as
follows:
1.
The
name of the corporation is Xcorporeal, Inc. (the “Corporation”).
2.
The
address of the Corporation’s registered office in the State of Delaware is 615
South DuPont Highway, Dover, Delaware 19901, County of Kent. The name of
its
registered agent at such address is National Corporate Research,
Ltd.
3.
The
purpose of the Corporation is to engage in any lawful act or activity for
which
corporations may be organized under the General Corporation Law of the State
of
Delaware (“DGCL”).
4.
Capital
Stock
.
(a)
Authorized
Capital Stock
.
The
total number of shares of capital stock that the Corporation is authorized
to
issue is One Hundred Million (100,000,000) shares, consisting of Ninety
Million
(90,000,000) shares of common stock, par value $0.0001 per share (“Common
Stock”), and Ten Million (10,000,000) shares of preferred stock, par value of
$0.0001 per share (“preferred stock”).
(b)
Preferred
Stock
.
The
Board of Directors of the Corporation is hereby expressly authorized, by
resolution or resolutions thereof, to provide out of the unissued shares
of
preferred stock for one or more series of preferred stock, and, with respect
to
each such series, to fix the number of shares constituting such series and
the
designation of such series, the powers (including voting powers), if any,
of the
shares of such series and the preferences and relative, participating, optional
or other special rights, if any, and any qualifications, limitations or
restrictions of the shares of such series. The designations, powers, preferences
and relative, participating, optional and other special rights of each series
of
preferred stock, if any, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series of preferred
stock at any time outstanding. The Board of Directors is also expressly
authorized to increase or decrease the number of shares of any series so
created, subsequent to the issue of that series but not below the number
of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall
resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
(c)
Common
Stock
.
(i)
Voting
Rights
.
Except
as otherwise required by law, or as otherwise fixed by resolution or resolutions
of the Board of Directors with respect to one or more series of preferred
stock,
the entire voting power and all voting rights shall be vested exclusively
in the
Common Stock, and each stockholder of the Corporation who at the time possesses
voting power for any purpose shall be entitled to one vote for each share
of
such stock standing in his or her name on the books of the Corporation.
(ii)
Action
by Written Consent
.
Any
election of directors or other action by the stockholders of the Corporation
must be effected at an annual or special meeting of stockholders and may
not be
effected by written consent without a meeting.
(iii)
Dividends
.
Subject
to the rights, preferences, privileges, restrictions and other matters
pertaining to the preferred stock that may, at that time be outstanding,
the
holders of the Common Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of any assets of the Corporation
legally
available therefore, such dividends as may be declared from time to time
by the
Board of Directors.
(iv)
Liquidation;
Dissolution
.
In the
event of any liquidation, dissolution or winding up (either voluntary or
involuntary) of the Corporation, the holders of shares of Common Stock shall
be
entitled to receive the assets and funds of the Corporation available for
distribution after payments to creditors and to the holders of any preferred
stock of the Corporation that may at the time be outstanding, in proportion
to
the number of shares held by them, respectively, without regard to
class.
5.
Board
of Directors
.
(a)
Management
.
The
management of the business and the conduct of the affairs of the Corporation
shall be vested in the Board of Directors. The number of directors that shall
constitute the Board of Directors shall be fixed exclusively by resolutions
adopted by the Board of Directors.
(b)
Classified
Board
.
Except
to the extent otherwise provided in any certificate of designations filed
under
Section 151(g) of the Delaware General Corporation Law (or its successor
statute
as in effect from time to time), the Board of Directors shall be and is divided
into three classes, Class I, Class II and Class III. Such classes shall be
as
nearly equal in number of directors as reasonably possible. Each director
shall
serve for a term ending on the third annual meeting following the annual
meeting
at which such director was elected, provided, however, that the directors
first
elected to Class I shall serve for a term ending on the annual meeting date
next
following the end of calendar year 2008, the directors first elected to Class
II
shall serve for a term ending on the second annual meeting date next following
the end of calendar year 2008, and the directors first elected to Class III
shall serve for a term ending on the third annual meeting date next following
the end of calendar year 2008. The foregoing notwithstanding, each director
shall serve until his successor shall have been duly elected and qualified
unless he shall resign, become disqualified or shall otherwise be removed.
At
each
annual election, the directors chosen to succeed those whose terms then expire
shall be of the same class of the directors they succeed unless, by reason
of
any intervening changes in the authorized number of directors, the designated
board shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors among the classes. If a director dies, resigns or is
removed, the director chosen to fill the vacant directorship shall be of
the
same class as the director he or she succeeds, unless, by reason of any previous
changes in the authorized number of directors, the Board shall designate
such
vacant directorship as a directorship of another class in order more nearly
to
achieve equality in the number of directors among the classes.
Notwithstanding
the rule that the three classes shall be as nearly equal in number of directors
as reasonably possible, in the event of any change in the authorized number
of
directors, each director then continuing to serve as such shall nevertheless
continue as a director of the class of which he is a member until the expiration
of his current term or his prior death, resignation or removal. If any newly
created directorship may, consistently with the rule that the three classes
shall be as nearly equal in number of directors as reasonably possible, be
allocated to one of two or more classes, the Board shall allocate it to that
of
the available classes whose term of office is due to expire at the earliest
date
following such allocation.
Vacancies
and newly created directorships resulting from any increase in the authorized
number of directors elected by all of the stockholders having the right to
vote
as a single class may, unless the Board of Directors determines otherwise,
only
be filled by a majority of the directors then in office, although less than
a
quorum, or by a sole remaining director; provided, however, that if the holders
of any class or classes of stock or series thereof are entitled to elect
one or
more directors, vacancies and newly created directorships of such class or
classes or series may only be filled by a majority of the directors elected
by
such class or classes or series thereof then in office, or by a sole remaining
director so elected.
(c)
Term
of Office
.
A
director shall hold office until his or her successor shall be elected and
qualified or until such director’s earlier death, resignation, retirement or
removal from office.
(d)
Removal
.
Subject
to the rights of the holders of any series of Preferred Stock then outstanding,
any director, or the entire Board, may be removed from office at any time
only
for cause, and only by the affirmative vote of the holders of a majority
of
shares of Common Stock then outstanding.
(e)
Vacancies
.
Subject
to any limitation imposed by law or any rights of holders of preferred stock,
any vacancies (including newly created directorships) shall be filled only
by
the affirmative vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. Directors appointed
to fill
vacancies created by the resignation or termination of a director will serve
the
remainder of the term of the resigning or terminated director.
(f)
No
Written Ballot
.
Unless
and except to the extent that the bylaws of the Corporation shall so require,
the election of directors of the Corporation need not be by written ballot.
(g)
Amendment
of Bylaws
.
In
furtherance and not in limitation of the powers conferred by the laws of
the
State of Delaware, the Board of Directors is expressly authorized to make,
alter, amend and repeal the bylaws of the Corporation, subject to the power
of
the stockholders of the Corporation to alter, amend or repeal any bylaw whether
adopted by them or otherwise, in accordance with the bylaws.
6.
Special
Meetings of Stockholders
.
Except
as otherwise required by law and subject to the rights, if any, of the holders
of any series of preferred stock, special meetings of the stockholders of
the
Corporation for any purpose or purposes may be called at any time only by
the
Chairman of the Board of Directors, the Chief Executive Officer, the President
or the Secretary of the Corporation, in each case pursuant to a resolution
of
the Board of Directors, and special meetings of stockholders of the Corporation
may not be called by any other person or persons.
7.
Amendment
of Certificate of Incorporation
.
The
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein
are
granted subject to this reservation.
8.
Indemnification;
Limitation of Liability
.
Except
to the extent that the DGCL prohibits the elimination or limitation of liability
of directors for breaches of fiduciary duty, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director. No amendment to or
repeal of this Section 8 of the relevant provisions of the DGCL shall apply
to
or have any effect on the liability or alleged liability of any director
of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
The
foregoing Amended and Restated Certificate of Incorporation has been duly
approved by the Board of Directors of Xcorporeal, Inc. in accordance with
the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
The
stockholders of Xcorporeal, Inc. approved the Amended and Restated Certificate
of Incorporation of the Corporation in accordance with the provisions of
Section
242 of the General Corporation Law of the State of Delaware.
IN
WITNESS WHEREOF, Xcorporeal, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed by its Chief Executive Officer
this
___ day of
November
,
2008.
|
|
|
|
XCORPOREAL,
INC.,
a
Delaware corporation
|
|
|
|
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By:
|
|
|
Chief
Executive Officer
|
Appendix
B
LICENSE
AGREEMENT
This
License Agreement (“
Agreement
”)
is
entered into as of September 1, 2006, by and between National Quality Care,
Inc., a Delaware corporation (“
Licensor
”),
and
Xcorporeal, Inc. (“
Licensee
”)
(each,
a “
Party
;”
collectively, the “
Parties
”).
The
Parties hereby agree as follows:
1.
Defined
Terms
.
For
purposes of this Agreement, the following definitions will apply:
“
Affiliate
”
means,
when applied to a Party, any entity that is controlled by, controls, or
is under
common control with, such Party.
“
Confidential
Information
”
means
and includes any non-public information relating to or concerning a Party
hereto
(the “
Disclosing
Party
”),
or
any of its Affiliates, that is provided or made available to the other
Party
(the “
Receiving
Party
”),
either before or after the Effective Date of this Agreement, directly or
indirectly, in any form whatsoever, including in writing, orally, and in
electronic or other machine readable form, including, but not be limited
to,
designs, know-how, inventions, technical data, ideas, uses, processes,
methods,
formulae, research and development records and materials, work in process,
scientific, engineering and/or manufacturing records or materials, marketing
plans, business plans, financial or personnel records or materials, present
or
future products, sales, suppliers, customers, employees, investors or business,
information about this Agreement, and any other non-public business records
and
information, the use or disclosure of which might reasonably be construed
to be
contrary to the interests of the Disclosing Party or any of its Affiliates,
including non-public information of third parties that is possessed by
the
Disclosing Party is subject to confidentiality obligations and that the
Disclosing Party is lawfully allowed to disclose to the Receiving Party.
“
Derivative
Works
”
means
(a) for Licensor material subject to copyright or mask work right
protection, any work that as a whole represents an original work of authorship,
and is based upon one or more pre-existing works, such as a revision,
modification, translation, abridgment, condensation, expansion, collection,
compilation or any other form in which such pre-existing works may be recast,
transformed or adapted; (b) for Licensor patentable materials, any
adaptation, subset, addition, improvement or combination of such materials;
(c) for Licensor material subject to trade secret protection, any new
material, information or data relating to and derived from such material,
including new material that may be protectable by copyright, patent or
other
proprietary rights; and (d) with respect to each of the above, any material
the preparation, use and/or distribution of which, in the absence of this
Agreement or other authorization from Licensor, would constitute infringement
or
misappropriation under applicable law.
“
Gross
Sales
”
means
the total amount actually received by Licensee as revenue from the exploitation
of the Technology (as defined below) by Licensee, its Affiliates and sub
licensees, collectively, less separately stated freight payable to third
parties, commercially reasonable special packaging, and duties, sales,
use,
excise, value added and other taxes, discounts, returns, and allowances.
“
Intellectual
Property Rights
”
means
all of the following worldwide legal rights owned, held or controlled
by
Licensor: (a) patents, patent applications, and patent rights; (b)
trademarks, trademark registrations and applications thereof, trade names,
rights in trade dress and packaging; (c) rights associated with works of
authorship (including audiovisual works), including copyrights, copyright
applications, and copyright registrations; (d) rights relating to the
protection of trade secrets, confidential information, technical information,
know-how, ideas, concepts, processes, procedures, techniques, discoveries,
and
inventions; (e) Moral Rights (as defined below); (f) design rights;
(g) rights in name, likeness and other rights of commercial publicity;
(h) any rights analogous to those set forth in the preceding clauses and
any other proprietary rights relating to intangible property; and
(i) divisions, continuations, renewals, reissues, and extensions of the
foregoing (as applicable) now existing or hereafter filed, issued, or
acquired.
“
Know-How
”
means
all (i) information and data possessed by Licensor, exclusive of any of the
independent claims contained in the Licensor Patents (but including all
other
information and data contained in, or related to, any patent application
filed
by or on behalf of Licensor), relating to the exploitation and/or use of
the
Licensed Products (as defined below), including without limitation:
(a) sources of materials; (b) methods, processes and procedures (and
related test results and design data) for the extraction, isolation, creation,
purification, and/or chemical modification of materials used in the production
of the Licensed Products; (c) methods, processes and procedures used in the
design, development, creation, modification, manufacture, production,
processing, storage, packaging, testing and/or evaluation of the Licensed
Products, including without limitation all biological and toxicological
tests
(and results thereof) together with all correspondence, notes, memoranda,
and
other information and/or data provided to, or received from, all health
regulatory authorities; and (ii) trade secrets, data, formulae,
compositions, processes, designs, sketches, photographs, graphs, drawings,
samples, program proposals, presentations, inventions and ideas, past,
current,
and planned research and development, current and planned manufacturing
or
distribution methods and processes, market studies, business plans, computer
software and programs, systems, structures and architectures (and related
processes, formulae, composition, improvements, devices, inventions,
discoveries, concepts, ideas, designs, methods and information), and any
other
information, however documented, that is not generally known to the public
or
that constitutes a trade secret under any applicable trade secret law.
“
Licensed
Products
”
means
all products based on or derived from the Technology (as defined below),
and any
products sold in connection with the use of such products, including, but
not
limited to the Wearable Kidney and all related devices, whether now-existing
or
hereafter developed, that where sold, would infringe or misappropriate
one or
more of Licensor’s Intellectual Property Rights or Know-How, including, without
limitation, the Licensor Patents or Licensor Patent Applications.
“
Licensor
Patents
”
means
the patents (and all re-issues and extensions) listed on the
Schedule
attached
hereto and the patents, when issued, based upon the Licensor Patent Applications
and in all divisions, continuations and continuations in part relating
thereto.
“
Licensor
Patent Applications
”
means
the patent applications listed on the
Schedule
attached
hereto and any substitutions and continuations together with any patent
applications based on, or related to, the Technology that may be filed
by
Licensor from the date hereof.
“
Moral
Rights
”
means
any rights of paternity or integrity, any right to claim authorship, to
object
to or prevent any distortion, mutilation or modification of, or other derogatory
action in relation to the subject work, whether or not such would be prejudicial
to the author’s honor or reputation, to withdraw from circulation or control the
publication or distribution of the subject work, and any similar right,
existing
under judicial or statutory law of any country in the world, or under any
treaty, regardless of whether or not such right is denominated or generally
referred to as a “moral right.”
“
Net
Sales
”
means
Gross Sales less the following: (a) all direct costs and expenses of
Licensee attributable to the research, development, production, marketing,
sale
and exploitation of the Licensed Products, including, without limitation,
costs
of materials and direct labor costs; and (b) all indirect costs of Licensee
properly allocated under generally accepted accounting principles to the
research, development, production, marketing, sale and/or exploitation
of the
Licensed Products, including, without limitation, overhead and selling,
general
and administrative expenses.
“
Technology
”
means
and includes all existing and hereafter developed Intellectual Property,
Know-How, Licensor Patents, Licensor Patent Applications, Derivative Works,
and
any other technology invented, improved or developed by Licensor, or as
to which
Licensor owns or holds any rights, arising out of or relating to the research,
development, design, manufacture or use of: (a) any medical device,
treatment or method as of the date of this Agreement, (b) any portable or
continuous dialysis methods or devices, specifically including any wearable
artificial kidney, or Wearable Kidney, and related devices, (c) any device,
methods or treatments for congestive heart failure, and (d) any artificial
heart or coronary device.
“
Territory
”
means
anywhere in the universe.
2.
Grant Of Exclusive License.
Subject
to Licensee’s continuing full compliance and complete and timely performance of
all of the material obligations, terms and conditions imposed on it by
this
Agreement, Licensor hereby grants to Licensee, with right to grant sublicenses,
the sole and exclusive license, during the Term and throughout the Territory,
to
use, improve, expand and otherwise exploit the Technology, to make (and
have
made), use, and sell the Licensed Products, and otherwise to practice the
inventions and the art that is embodied or described in the Licensor Patents,
the Licensor Patent Applications, and any improvements thereto made in
whole or
in part by Licensor (whether or not patented) in connection with the Technology
(the “
License
”),
provided,
however
,
that
the terms of any sublicense shall expressly conform and be made subject
to the
terms and conditions of this Agreement.
3.
License Fees, Reports And Records.
A.
License
Fees
.
(1) During
the Term of this Agreement, Licensee shall pay to Licensor a license fee
of
seven percent (7.0 %) of Net Sales (the “
Royalty
”);
provided,
however
,
that
Licensee
shall pay to Licensor a minimum aggregate annual Royalty of two hundred
fifty
thousand dollars ($250,000.00) (the “
Minimum
Royalty
”).
Within ninety (90) days of each anniversary of the date of this Agreement,
Licensee shall pay Licensor the remaining difference, if any, between the
Minimum Royalty and the aggregate of all Royalty payments for the preceding
year. All payments due hereunder will be paid by wire transfer or check
payable
in United States currency. Whenever conversion of payments from any foreign
currency is required, such conversion will be made at the rate of exchange
reported in The Wall Street Journal on the last business day of the applicable
reporting period. Unless earlier terminated as provided hereinafter, the
obligation of Licensee to pay Royalties to Licensor shall expire upon the
date
that none of the Licensed Products infringe any of the Licensor Patents.
(2) Notwithstanding
the foregoing
Section 3(A)(1)
,
in the
event that the Merger Agreement of even date herewith among the Parties
and NQCI
Acquisition Corporation, a Delaware corporation (the “
Merger
Agreement
”)
is
terminated pursuant to Section 6(A) thereof, the Royalty pursuant to this
Agreement will thereafter be as follows:
(a)
If notice of termination is given pursuant to Section 6(A)(3), six and
one-half percent (6.5%) of Gross Sales;
(b)
If notice of termination is given pursuant to Section 6(A)(1), (5) or
(6), seven and one-half percent (7.5%) of Gross Sales; and
(c)
If notice of termination is given pursuant to Section 6(A)(2) or (4), eight
and one-half percent (8.5%) of Gross Sales;
provided,
however
,
that if
it is later determined by an arbitrator or court of competent jurisdiction
that
a notice of termination was improper, or that the Merger Agreement was
terminated on a different basis or pursuant to a different provision, the
Royalty rate will be retroactively adjusted to the correct rate pursuant
to one
of the foregoing subsections, and any difference between the Royalty paid
and
the Royalty rate determined to be correct will be paid by the appropriate
Party
to the other within ninety (90) days of any such final determination.
B.
Reports
.
Within
thirty (30) days following the end of each fiscal quarter, Licensee shall
deliver to Licensor a report setting forth the calculation of the Royalty
for
the applicable fiscal period, including the number of Licensed Products
sold by
Licensee and all sublicensees (if any), the Gross Sales and Net Sales,
as
applicable, a reasonable breakdown of expenses in arriving at the foregoing,
any
other transactions involving Licensed Products, and the Gross Sales or
Net
Sales, as applicable, resulting from all such transactions during such
fiscal
quarter, and accompanied by payment of the Royalty due thereon.
C.
Records
.
Licensee and its sublicensees (if any) shall maintain records of the
transactions involving Licensed Products, Gross Sales, Net Sales, permitted
expense deductions, and all Royalties paid thereon for a period of four
(4) years following the end of the quarter following sale.
(a)
Audits
.
Licensor may appoint an independent certified public accountant, who shall
have
the right to examine the records required under this
Section 3.C
during
normal business hours on reasonable notice. Licensee shall, as a condition
to
the grant of any
sublicense,
obtain the agreement of the sublicensee to make such records available
for
inspection by Licensor’ independent auditor.
(b)
Audit
Expenses
.
Licensor shall initially bear all costs and expenses of any audit conducted
by
Licensor’s independent accountant. If there is an underpayment of Royalties in
excess of five percent (5%), Licensee shall remit the amount of such
underpayment to Licensor, together with a reimbursement for the reasonable
costs
and expenses of Licensor in connection with the audit. If there is an
overpayment of Royalties in excess of five percent (5%), Licensor shall
remit
the amount of such overpayment to Licensee, together with reimbursement
for the
reasonable costs and expenses of Licensee in connection with the audit.
Any
disputes concerning Royalty amounts due will be resolved by expedited,
final
offer (baseball style) arbitration.
4.
Term.
A.
Term
.
This
Agreement and the License granted hereby shall, subject to all terms
and
conditions set forth herein, remain in full force and effect for ninety-nine
(99) years from the date hereof (the “
Term
”);
provided, however, that the Term shall end as to each of the Licensor
Patents
and copyrights upon the expiration of the term thereof, and as to each
other
item of Intellectual Property Rights when, if and as they cease to be
protectable or fall into the public domain through no fault, action or
inaction
on the part of either of the Parties.
B.
Termination
.
Either
Party shall have the right to terminate this Agreement: (1) for uncured
material
breach of a material term of this Agreement by the other Party, by giving
formal
written notice specifying the breach, and such breach has continued without
cure
for a period of (a) thirty (30) days after such notice or (b) if
the Party receiving such a notice (i) concludes in good faith that there
the
conduct alleged to be occurring is not occurring or does not constitute
a
material breach of this Agreement, and (ii) timely initiates an arbitration
proceeding in accordance with
Section 9.H
,
thirty
(30) days after entry of the arbitration award; or (2) in the event
that the other Party files for protection under the U.S. Bankruptcy Code,
or
makes an assignment for the benefit of creditors. Upon termination of this
Agreement pursuant to this
Section 4.B
,
(a) Licensee, and all sublicensees (if any), shall cease to use the
Technology in any way, (b) Licensee, and all sublicensees (if any), shall
return to Licensor all Licensor Confidential Information, and (c) the
Parties shall remain liable for all of their respective obligations under
this
Agreement that accrued prior to the date of termination.
5.
Intellectual Property Rights.
A.
Prosecution
of Patent Applications
.
Licensor shall diligently prosecute all of the Licensor Patent Applications
at
its own expense including, without limitation, in those foreign countries
described in the
Schedule
attached
hereto. If, at any time, Licensor intends to allow any Licensor Patent
Application or Licensor Patent to lapse or to become abandoned or forfeited,
Licensor shall notify Licensee, in writing, of its intention at least sixty
(60) days before the date upon which said patent or application is due to
lapse or become abandoned or forfeited. In the event that Licensee desires
itself to continue to prosecute any such Licensor Patent Application, or
to take
the necessary action to maintain in force any such Licensor Patents, then
Licensee shall, within thirty (30) days following Licensor’s written notice
of intent to abandon, give
written
notice to Licensor of Licensee’s intent to prosecute and/or maintain such patent
rights and Licensor shall thereupon promptly assign the entire right, title
and
interest, legal and equitable, in and to that patent or application to
Licensee.
Licensee shall be under no obligation to prosecute or maintain in force
any
Licensor Patents, Licensor Patent Applications or other Intellectual Property
Rights.
B.
Option
to Purchase Limited Patent and Intellectual Property Rights
.
In the
event that Licensor files a petition in Bankruptcy under the U.S. Bankruptcy
Code, or has filed against it a petition of involuntary bankruptcy that
is not
dismissed with 60 days thereafter, Licensor will be deemed to have sold to
Licensee, the day prior to the filing of said petition, the Licensor Patents
and
Licensor Patent Applications and all other Intellectual Property Rights
pertaining to the Technology for a purchase price equal to the amount of
the
Royalties paid to that time and the further Royalties that would otherwise
have
become payable by Licensee to Licensor over the remainder of the then-current
Term of this Agreement. The prospective portion of the purchase price shall
be
paid in the same manner and at the same time as the future Royalties would
otherwise have been paid hereunder.
C.
Infringement
.
(1) If
Licensor discovers that a third party is manufacturing or selling products
in
the Territory that infringe the Licensor Patents or any other legally
enforceable Intellectual Property Rights pertaining to the Technology,
it shall
notify Licensee of such infringement and give such Party all appropriate
information in its possession relating to the infringement. This section
shall
not impose any obligation on either Licensor or Licensee to maintain any
ongoing
investigative program to detect any third party infringement.
(2) Licensee
shall have the sole right and authority to take such steps as it deems
reasonable and appropriate in its sole discretion to determine whether
actionable infringement is occurring and, if it is, to stop the infringement
in
the Territory during the Term, including but not limited to filing a legal
action against the alleged infringer in its own name.
(3) Licensee
shall have the sole right to direct and control the prosecution of such
an
action, including selection of counsel and deciding to settle, dismiss
or
continue the prosecution of the action on such terms and in the manner
it deems
reasonable and appropriate in its sole discretion, and shall, subject to
Section 5.C(4)
,
bear
all costs and expenses of such action, and shall retain all damages and
other
remedies recovered in such action.
(4) Licensee
shall have the right to offset all damages and losses awarded by any Court
of
competent jurisdiction relating to any infringement of the Intellectual
Property
Rights or the sale or use of the Licensed Products, including Licensee’s legal
fees, costs and expenses, against any Royalty otherwise payable to Licensor.
D.
Development
and Expenses
.
(1)
Development
.
Licensee shall make commercially reasonable efforts to develop and commercially
exploit the Technology to generate revenues during the Term.
(2)
Requested
Expenses
.
Upon
Licensee’s request, Licensor shall make commercially reasonable efforts to
continue and advance the research and development program to prepare the
Technology for commercial exploitation, and Licensee shall pay all reasonable
and necessary research and development costs and expenses arising therefrom.
(3)
Monthly
Expenses
.
No
later than the earlier of (i) thirty (30) days after the date on which
Licensee has obtained total debt or equity investment of at least three
million
five hundred thousand dollars ($3,500,000.00) or (ii) ninety (90) days
after the date hereof, Licensee shall reimburse Licensor’s reasonable and
necessary expenses incurred in the ordinary course of business consistent
with
past practices (“
Licensor
Expenses
”),
during the period from the date hereof to the Closing (as defined therein)
or
termination of the Merger Agreement. All such Licensor Expenses shall:
(a) be only for the specific persons, services and expenses listed in
reasonable detail on the Budget contained in the Company Disclosure Schedule
to
the Merger Agreement, (b) be payable hereunder only to the extent not paid
pursuant to the Merger Agreement, (c) be mutually agreed upon in advance of
being reimbursed with regard to all Professional Fees set forth in the
Budget,
and (d) include, but not be limited to, expenses already paid or accrued
relating to human clinical trials carried out or to be carried out on behalf
of
Licensor in Italy and the United Kingdom as set forth in the Budget.
6.
Confidentiality
.
A. Each
Party agrees that during the performance of this Agreement, it may disclose
to
the other Confidential Information of such Disclosing Party. Each Receiving
Party shall not, at any time or in any manner, disclose, copy, modify,
distribute or otherwise transfer the Disclosing Party’s Confidential
Information, or any part thereof, to any other person, except as permitted
by
this Agreement.
B. A
Receiving Party may disclose Confidential Information (1) to professional
advisors of the Receiving Party in accordance with customary business
practices
in connection with the Agreement, and (2) to the Disclosing Party’s
employees who have a specific need to know in order to perform that Party’s
obligations hereunder,
provided,
however
,
that
all such permitted disclosures shall be required to maintain the confidentiality
of the Confidential Information in accordance with this Agreement, and
each
Receiving Party shall be responsible for all of its employees’ actions. Each
Party shall use the other Party’s Confidential Information only to properly
fulfill its obligations hereunder, and not for any other purpose. Upon
request
of a Party, and in any event promptly following termination of this Agreement
under
Section 4.C
above,
each Receiving Party shall immediately return the originals and all copies
of
any Confidential Information to the Disclosing Party.
C. The
obligations and restrictions set forth in this
Section 6
shall
not apply to any Confidential Information that falls within any of the
following
exceptions:
(1) is
or becomes part of the public domain without breach of this Agreement by
a
Receiving Party;
(2) is
lawfully in the possession of a Receiving Party prior to receiving it from
the
Disclosing Party hereunder;
(3) is
independently developed by or for a Receiving Party completely apart from
the
disclosures hereunder;
(4) is
received from a third party who lawfully acquires such information without
restriction, and without breach of this Agreement by a Receiving Party;
or
(5) is
released to the public or to a third party without a duty of confidentiality,
pursuant to a binding court order or government regulation, provided that
the
Receiving Party delivers a copy of such order or action to the Disclosing
Party
and cooperates with the Disclosing Party if it elects to contest such
disclosure.
Nothing
provided for in this
Section 6
shall be
construed to preclude or inhibit Licensee’s rights to exploit any of its rights
under the License.
7.
Representations And Warranties.
A.
Representations
and Warrants by Licensor
.
Licensor represents and warrants, as of the date first set forth above
and upon
the Effective Date and upon the date each Licensor Patent issues that:
(1) Licensor
has the right to enter into this Agreement and there are no outstanding
assignments, grants, licenses, encumbrances, obligations or agreements,
whether
written, oral or implied, that are inconsistent with this Agreement;
(2) Licensor
is the owner of the entire right, title and interest in and to invention
and the
art claimed in the Licensor Patent Applications and the claims contained
in any
Licensor Patent Rights that issues and that it has the sole right to grant
the
licenses granted to Licensee herein;
(3) The
Licensor Patents will not have been fraudulently procured, and Licensor
has no
reason to believe that the claims contained in the Licensor Patent Applications
will not be issued in a manner that will protect sales of the Licensed
Products
in the Territory from competitors utilizing the invention or its equivalent;
(4) Licensor
has no knowledge of any circumstances that would render the Licensor Patents,
when issued, invalid; and
(5) Licensor
has not granted any license to or under the Technology to any other person
or
entity for its use within the Territory.
B. Representations
by Licensee. Licensee represents and warrants that it has the right enter
into
and deliver this Agreement and undertake the duties provided for in this
Agreement.
8.
Indemnification.
A.
Indemnification
by Licensor
.
Licensor agrees to hold harmless, defend and indemnify each of Licensee
and its
officers, directors, shareholders, employees, members,
partners,
managers, attorneys and agents, from and against any liability, claims,
demands,
actions, costs, expenses, including reasonable attorneys’ fees, or causes of
action whatsoever (collectively, “
Claims
”)
arising on account of:
(1) Any
breach by Licensor of its representations and warranties contained herein;
(2) Licensee’s
lawful and non-negligent use of any Intellectual Property Rights licensed
by
Licensor hereunder;
(3) Any
Claims that Licensee’s use of the Intellectual Property Rights in conformity of
this Agreement infringes upon or misappropriates the intellectual property
rights of any third party; or
(4) Licensor’s
operations or conduct prior to the date of this Agreement with regard to
the
research, development, or production of the Technology and/or Licensed
Products.
Such Claims shall include, without limitation, any product liability claims
or
Claims on account of any injury or death of persons or damage to property
based
on alleged defects in the Technology existing as of the effective date
of this
Agreement or based on actions or omissions of Licensor, regardless of whether
such Claims are made prior to or at any time after the date of this Agreement.
B.
Indemnification
by Licensee
.
Licensee agrees to hold harmless, defend and indemnify each of Licensor
and its
officers, directors, shareholders, employees, members, partners, managers,
attorneys and agents, from and against any Claims arising on account of
any
breach by Licensee of it representations and warranties contained herein.
9.
General.
A.
Reformation/Severability
.
If any
provision of this Agreement is declared invalid by any tribunal, then such
provision shall be deemed automatically adjusted to the minimum extent
necessary
to conform to the requirements for validity as declared at such time and,
as so
adjusted, shall be deemed a provision of this Agreement as though originally
included herein. In the event that the provision invalidated is of such
a nature
that it cannot be so adjusted, the provision shall be deemed deleted from
this
Agreement as though such provision had never been included herein. In either
case, the remaining provisions of this Agreement shall remain in effect.
B.
Binding
Effect
.
All of
the terms of this Agreement shall be binding upon, and inure to the benefit
of,
and be enforceable by, the Parties and their successors and permitted assigns,
if any.
C.
Schedules
.
All
schedules attached hereto and referred to herein, are an integral part
of this
Agreement and are incorporated herein by reference hereby.
D.
Subject
Headings
.
The
subject headings of the sections of this Agreement are included solely
for
purposes of convenience and reference only, and shall not be deemed to
explain,
modify, limit, amplify or aid in the meaning, construction or interpretation
of
any of the provisions of this Agreement.
E.
Interpretations
and Definitions
.
In this
Agreement whenever the context so requires, the gender includes the neuter,
feminine and masculine and the number includes the singular and the plural
and
the words “person” and “party” include individuals, corporations, partnerships,
firms, trusts or associations.
F.
Waiver
.
Any
waiver by any Party of any breach of any term or condition of this Agreement
shall not be deemed a waiver of any other breach of such term or of any
other
term or condition, nor shall the failure of any Party to enforce such provision
constitute a waiver of such provision or any other provision, nor shall
such
action be deemed a waiver or release of the other Party for any claims
arising
out of or connected with this Agreement.
G.
Choice
of Law
.
This
Agreement and all matters or issues collateral hereto shall be construed
in
accordance with, and governed by, the laws of the State of Delaware.
H.
Arbitration
.
Any
dispute, controversy or claim arising out of or relating to this Agreement,
shall be resolved by final and binding arbitration before a retired judge
at
JAMS or its successor in Santa Monica, California. The expenses of arbitration,
the reasonable fees and costs of legal counsel, experts, and evidence shall
be
awarded to the prevailing Party. Any interim or final award of the arbitrator
may be entered in any court of competent jurisdiction.
I.
Successors
and Assigns
.
Neither
this Agreement nor any of the rights or obligations hereunder shall be
assignable by any Party hereto without the written consent of the other
Party
first obtained and any attempted assignment without such written consent
shall
be void and confer no rights upon any third party. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of
the
parties hereto and their respective representatives, successors and permitted
assigns.
J.
No
Joint Venture
.
This
Agreement does not constitute and shall not be construed to constitute
an
agency, a partnership or a joint venture between the Parties. Neither Party
shall have any power or right, nor shall it represent itself as having
any power
or right to obligate or bind the other Party in any manner whatsoever and
nothing contained in this Agreement shall give or is intended to give any
rights
of any nature to third party. This is an agreement between separate entities
and
neither is the agent of the other for any purpose whatsoever.
K.
Notice
.
All
written notices or other written communications required under this Agreement
shall be deemed properly given when provided to the parties entitled thereto
by
personal delivery (including delivery by commercial services such as messengers
and airfreight forwarders), by electronic means (such as by electronic
mail,
telex or facsimile transmission) or by mail sent registered or certified
mail,
postage prepaid at the following addresses (or to such other address of
a Party
designated in writing by such Party to the others):
If
to
Licensee:
Xcorporeal,
Inc.
Attn:
Terren S. Peizer
c/o
Greenberg Traurig, LLP
2450
Colorado Avenue, Suite 400E
Santa
Monica, California 90404
Attn:
John C. Kirkland, Esq.
Fax:
(310) 586-0286
With
a
copy to:
Greenberg
Traurig, LLP
2450
Colorado Avenue, Suite 400E
Santa
Monica, California 90404
Attn:
John C. Kirkland, Esq.
Fax:
(310) 586-0286
If
to
Licensor:
National
Quality Care, Inc.
9033
Wilshire Boulevard, Suite 501
Beverly
Hills, California 90211
Attention:
Robert M. Snukal
Fax:
(310) 840-5681
With
a
copy to:
Jenkins
& Gilchrist, LLP
12100
Wilshire Boulevard, 15th Floor
Los
Angeles, California 90025
Attn:
Jeffrey P. Berg, Esq.
Fax:
(310) 820-8859
All
notices given by electronic means shall be confirmed by delivering to the
Party
entitled thereto a copy of said notice by certified or registered mail,
postage
prepaid, return receipt requested. All written notices shall be deemed
delivered
and properly received upon the earlier of two (2) days after mailing the
confirmation notice or upon actual receipt of the notice provided by personal
delivery or electronic means.
L.
Further
Documents
.
Each
Party shall execute and deliver, at any time and from time to time, upon
the
request of the other such further instruments, papers or documents as may
be
necessary or appropriate to consummate the transactions contemplated hereby
and
to take such other action as the other Party may reasonably request to
effectuate the purposes of this Agreement.
M.
Amendment
.
This
Agreement may only be amended, modified or changed by a written document
executed by both Parties.
N.
Counterparts
.
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and
the same
instrument.
O.
Entire
Agreement
.
This
instrument contains the entire agreement between the Parties, and supersedes
all
prior or contemporaneous understandings or agreements, whether written
or oral.
Neither Party has relied upon any promise, representation or undertaking
not
expressly set forth herein.
IN
WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed
as
of the day and date first set forth above.
LICENSOR:
NATIONAL
QUALITY CARE, INC.
By:
|
|
/s/
Victor Gura
|
|
|
Name:
|
|
Victor
Gura, M.D.
|
|
|
Title:
|
|
Chief
Scientific Officer
|
|
|
|
|
|
|
|
By:
|
|
/s/
Robert M. Snukal
|
|
|
Name:
|
|
Robert
M. Snukal
|
|
|
Title:
|
|
Chief
Executive Officer
|
|
|
|
|
LICENSEE:
|
|
|
|
|
|
|
|
|
|
|
|
XCORPOREAL,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
Terren S. Peizer
|
|
|
|
|
Name:
|
|
Terren
S. Peizer
|
|
|
|
|
Title:
|
|
Chairman
of the Board
|
|
|
NATIONAL
QUALITY CARE, INC.
Patent
Status
|
A
|
B
|
C
|
D
|
E
|
F
|
G
|
H
|
I
|
J
|
1
|
COUNTRY
|
TITLE
|
STATUS
|
FILE/
DATE
|
SERIAL
NO
|
ISSUE
DATE
|
EXPIRES
|
PATENT
NO
|
NEXT
ACTION
|
DATE
DUE
|
2
|
US
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
ISSUED
|
11/16/01
|
10/085,349
|
11/01/05
|
11/16/21
|
6,960,179
|
1ST
MAINT FEE DUE
|
05/01/09
|
3
|
Japan
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PENDING
|
09/26/02
|
2003-545355
|
|
|
|
EXAMINATION
REPORT
(Examination
Rqstd 9/25/05)
|
09/25/06
|
4
|
Mexico
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PENDING
|
09/26/02
|
PA/a/2004/004690
|
|
|
|
ANNUITY
DUE
|
09/26/07
|
5
|
Sweden
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PENDING
|
09/26/02
|
0401253-0
|
|
|
|
OA
RESPONSE
|
07/10/06
|
6
|
Europe
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PUBLISHED
|
09/26/02
|
02773650.3
|
|
|
|
ANNUITY5
DUE
|
09/26/06
|
7
|
Brazil
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PENDING
|
09/26/02
|
PI
0214228-7
|
|
|
|
ANNUITY5
DUE
|
12/26/06
|
8
|
PCT
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
NAT'L
PHASE
|
09/26/02
|
PCT/US02/30968
|
|
|
|
NON-ACTIVE
|
N/A
|
9
|
US
|
WEARABLE
PERITONEAL DIALYSIS SYSTEM
|
ABANDONED
|
12/13/01
|
10/015,542
|
|
|
|
NON-ACTIVE
|
N/A
|
10
|
US
|
LOW
HYDRAULIC RESISTANCE CARTRIDGE
|
PUBLISHED
|
01/23/03
|
10/350,858
|
|
|
|
OA
RESPONSE
|
08/04/06
|
11
|
US
|
WEARABLE
CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PUBLISHED
|
09/14/04
|
10/940,862
|
|
|
|
STATUS
CHECK
(Ready
For Exam as of
3/1/06)
|
06/14/06
|
12
|
US
|
WEARABLE
ULTRAFILTRATION DEVICE
|
PUBLISHED
|
05/17/04
|
10/846,618
|
|
|
|
STATUS
CHECK
(Ready
For Exam as of
3/1/06)
|
06/17/06
|
13
|
US
|
WEARABLE
ULTRAFILTRATION DEVICE
|
PUBLISHED
|
09/19/02
|
10/251,937
|
|
|
|
OA
RESPONSE
|
07/19/06
|
14
|
US-
Provisional
|
DUAL-VENTRICLE
PUMP CARTRIDGE
|
PENDING
|
08/05/05
|
60/706,167
|
|
|
|
FILE
NON-PRV & FOREIGN
APPS
|
08/05/06
|
15
|
US
|
METHOD
FOR INSTALLING AND
SERVICING
A WEARABLE CONTINUOUS RENAL
REPLACEMENT
THERAPY DEVICE
|
PROPOSED
|
|
|
|
|
|
APPLICATION
DRAFTED
|
06/01/06
|
16
|
US
|
DUAL-VENTRICLE
PUMP CARTRIDGE
|
PROPOSED
|
|
|
|
|
|
FILING
DEADLINE
|
08/05/06
|
Appendix
C
MERGER
AGREEMENT
This Merger Agreement
(“
Agreement
”) is entered into as of September 1,
2006, by and among Xcorporeal, Inc. (“
Shell
”), NQCI
Acquisition Corporation, a Delaware corporation and a newly-created wholly-owned
Subsidiary of Shell (“
Merger Subsidiary
”), and National
Quality Care, Inc., a Delaware corporation (“
Company
”),
(each a “
Party
” and collectively the
“
Parties
”).
RECITALS
A. This Agreement
contemplates a
reverse triangular merger as defined in Section 368(a)(2)(E) of the Code of
Merger Subsidiary
with and into Company in a transaction qualifying as a
reorganization under Section 354 of the Code.
B. This Agreement
further
contemplates that, in the event that the merger transaction does not close,
Company may assign its Technology to Shell in consideration of Shell Shares.
C. The Closing of
the transactions
contemplated by this Agreement are subject to the filing and effectiveness
of a
Registration Statement and Information Statements as set forth herein.
D. At the Closing,
either the
Company Stockholders will receive Shell Shares in exchange for their Company
Shares, and the Company will become a wholly-owned Subsidiary of Shell, or
the
Company will receive Shell Shares in consideration of the Technology
Transaction.
NOW, THEREFORE
,
in
consideration of the premises and the representations, warranties and covenants
contained herein, the Parties agree as follows.
1.
Basic
Transaction
.
A.
Merger
. On and
subject
to the terms and conditions of this Agreement, Merger Subsidiary will merge
with
and into Company (the “
Merger
”). Company will be the
corporation surviving the Merger (after the Closing, the “
Surviving
Corporation
”). The separate corporate existence of Merger
Subsidiary will cease as of the Merger.
B
Technology
Transaction
. If the
Merger is terminated before the Closing of the Merger in accordance with
Section 6.A
, the Closing of the Technology Transaction shall proceed
in accordance with
Section 6.B
.
C.
Documents
. As soon
as
practicable following the execution of this Agreement, each Party will deliver
to the others the various certificates, instruments, and documents referred
to
herein.
D.
Closing
. The closing
of
one of the two mutually-exclusive transactions contemplated by this Agreement,
either in the form of the Merger or the Technology
Transaction,
will take
place as soon as practicable on the business day following the satisfaction
or
waiver of all conditions to the obligations of the Parties to consummate
the
transaction, other than conditions with respect to actions the respective
Parties will take at the Closing itself, or such other time as the Parties
may
mutually determine, (the “
Closing
”).
D.
Voting Agreements
.
(1)
Stockholder
Agreement
. Concurrently herewith, each of the Majority
Stockholders will enter into the Voting Agreement (the “
Stockholder
Agreement
”), in the form attached as
Exhibit A
hereto, absolutely and irrevocably
ratifying, approving and consenting to: (a) the License Agreement between
Company and Shell entered into concurrently herewith (the “
License
Agreement
”) and (b) subject to
Sections 2.B(7)
and
3.J
and effective as of the Closing, this Agreement
and the transactions
contemplated by this Agreement, including without limitation the Merger
or the
Technology Transaction.
(2)
CNL Agreement
. Concurrently
herewith, CNL will enter into the Agreement
(the “
CNL Agreement
”), in the form attached as
Exhibit B
hereto (together with
the Stockholder
Agreements, the “
Voting Agreements
”), absolutely and
irrevocably ratifying, approving and consenting to: (a) the License
Agreement; and (b) subject to
Sections 2.A
and
3.J
and
effective as of the Closing, this Agreement and the transactions contemplated
by
this Agreement, including without limitation the Merger or the Technology
Transaction.
(3)
Director
Agreement
. Concurrently herewith, Shell will enter into the
agreement (the “
Director Agreement
”), in the form
attached as
Exhibit C
hereto.,
E.
Merger Certificate
. At
the Closing of the Merger, Shell will file with the Secretary of State
of the
State of Delaware a Certificate of Merger between Company and Merger Subsidiary,
in the form attached hereto as
Exhibit D
(the
“
Merger Certificate
”).
F.
Effect of
Merger or
Technology Transaction
.
(1)
General
. The
Merger will become effective upon filing of the Merger
Certificate with the Secretary of State of the State of Delaware (the
“
Effective Time
”). The Merger will have the effect set
forth in the DGCL. The Surviving Corporation may, at any time after the
Closing,
take any action, including executing or delivering any document, in the
name and
on behalf of either Company or Merger Subsidiary in order to carry out
and
effectuate the transactions contemplated by this Agreement.
(2)
Certificate
of Incorporation
. The certificate of incorporation of
Surviving Corporation will be amended and restated at and as of the Closing
to
read as did the certificate of incorporation of Merger Subsidiary immediately
prior to the Closing, except that the name of Surviving Corporation may
be
changed by Shell.
(3)
Bylaws
. The
bylaws of Surviving Corporation will be amended and restated
at and as of the Closing to read as did the bylaws of Merger Subsidiary
immediately prior to the Closing, except that the name of Surviving Corporation
may be changed by Shell.
(4)
Directors
. The
directors of Company who shall be directors of Surviving
Corporation at and as of the Closing are as set forth in the attached
Exhibit E
.
(5)
Conversion
of Company Securities
.
(a)
Conversion
of Shares
. At and as of the Closing of the Merger, (a) all issued and
outstanding Company Securities (other than any Dissenting Shares) will,
by
virtue of the Merger and without any further action on behalf of Shell,
Company
or any Company Stockholder, automatically be converted into and become
validly
issued, fully paid and non-assessable Shell Shares (the ratio of Company
Shares
to one (1) Shell Share is referred to herein as the “
Conversion
Ratio
”), such that all holders of all Company Shares will
collectively receive, on a fully diluted basis, after taking into account
the
conversion into Company Shares of all Convertible Debt, which shall occur
prior
to and as a condition of Closing, an aggregate of forty-eight (48%) of
all Shell
Shares outstanding as of the date hereof, adjusted for any stock splits
or
dividends prior to the Closing, (b) each Dissenting Share will be converted
into the right to receive payment from Surviving Corporation with respect
thereto in accordance with the provisions of the DGCL and, to the extent
applicable, the CGCL, and (c) all unissued and treasury Company Shares will
be cancelled.
(b)
Share
Certificates
.
(i) Following
the Closing of the Merger, upon surrender of an original stock certificate
representing Company Shares, Shell will cause to be issued a stock certificate
for Shell Shares to which such Person is entitled pursuant to the Conversion
Ratio, bearing any necessary or appropriate restrictive legend. Shell will
not
pay any dividend or make any distribution on Shell Shares with a record
date at
or after the Closing to any record holder of outstanding Company Shares
until
the holder surrenders for exchange his, her, or its certificates that
represented Company Shares.
(ii) If
any certificate evidencing Shares shall has been lost, stolen or destroyed,
upon
the making of an affidavit of that fact by the Person claiming the certificate
to be lost, stolen or destroyed and, if required by Shell or its Transfer
Agent,
the posting of an indemnity bond, in such reasonable amount as the Transfer
Agent may direct, as collateral security against any claim that may be
made with
respect to the certificate, Shell will cause to be issued in exchange for
the
lost, stolen or destroyed certificate the applicable number of Shell Shares.
(c)
Conversion
of Warrants
. All warrants to purchase Company Shares issued and outstanding
at the Closing of the Merger, as set forth in the attached
Exhibit F
(“
Company
Warrants
”) will, by
virtue of the Merger and without any action on the part of Shell, Company
or the
holders of the Warrants, be converted into and will become warrants to
purchase
Shell Shares (“
Shell Warrants
”) as part of the
Conversion Ratio, on the same terms and conditions as those set forth in
Exhibit F
.
(d)
Conversion
of Options
. All options to purchase Company Shares outstanding at the
Closing of the Merger, as set forth in the attached
Exhibit G
(“
Company
Options
”) will, by virtue of the Merger and without any action on
the part of Shell, Company or
the holders of
the
options, be assumed by Shell, and will become options to purchase Shell
Shares
(“
Shell Options
”) as part of the Conversion Ratio, on
the same terms and conditions as those set forth in
Exhibit G
.
(e) No
fractional Shell Shares, or Shell Warrants or Shell Options to receive
fractional Shell Shares will be issued, and any right to receive a fractional
share will be rounded to the nearest whole Shell Share. As of the Closing
of the
Merger, the Company Shares, Company Warrants and Company Options (collectively,
“
Company Securities
”) will be deemed canceled and will
cease to exist, and each holder of a Company Security will cease to have
any
rights with respect thereto, other than those expressly set forth in this
Section 1.F(5)
. After the Closing of the Merger, transfers of
Company Shares outstanding prior to the Closing will not be made on the
stock
transfer books of Surviving Corporation.
(f)
CNL
Warrants
. At the Closing of the Merger, CNL will be granted Shell Warrants
to purchase a number of validly issued, fully paid and non-assessable Shell
Shares equal to the aggregate number of Shell Shares into which any Company
Warrants outstanding as of the Closing are convertible, at prices per share
equal to the prices per share of all such Company Warrants, and otherwise
on
terms equal to or better than the most favorable terms of such Company
Warrants;
provided, however
, that the Shell Warrants granted to CNL pursuant to
this
Section 1.F(5)(f)
may be exercised only when the corresponding
number of such converted Company Warrants are exercised.
(g)
CNL
Options
. At the Closing of the Merger, CNL will be granted Shell Options to
purchase a number of validly issued, fully paid and non-assessable Shell
Shares
equal to the aggregate number of Shell Shares into which any Company Options
outstanding as of the Closing are convertible, at prices per share equal
to the
prices per share of all such Company Options, and otherwise on terms equal
to or
better than the most favorable terms of such Company Options;
provided,
however
, that the Shell Options granted to CNL pursuant to this
Section 1.F(5)(g)
may be exercised only when the corresponding
number of such converted Company Options are exercised.
(h)
Technology
Shares
. At the Closing of the Technology Transaction, Shell shall issue and
deliver to the Company the number of Shell Shares set forth in
Section 6.B(2)
.
2.
Conditions To Obligations To
Close
.
A.
Conditions
to Shell’s
Obligation
. The obligation of each of Shell and, in the case of the closing
of the Merger, Merger Subsidiary to consummate the transactions to be performed
by it in connection with the Closing is subject to satisfaction of the
following
conditions:
(1) The
representations and warranties set forth in
Section 4
will be true
and correct in all material respects as if made at and as of the Closing,
except
to the extent that such representations and warranties are qualified by
the term
“material,” or contain terms such as “Adverse Effect” or “Adverse Change,” in
which case such representations and warranties as so written, including
the term
“material” or “Material,” will be true and correct in all respects at and as of
the Closing;
(2) Company
will have performed and complied with all of its covenants hereunder in
all
material respects through the Closing, except to the extent that such covenants
are qualified by the term “material,” or contain terms such as “Adverse Effect”
or “Adverse Change,” in which case Company will have performed and complied with
all of such covenants as so written, including the term “material” or
“Material,” in all respects through the Closing;
(3) There
will not be any judgment, order, decree or injunction in effect that would
(a)
prevent consummation of any of the transactions contemplated by this Agreement,
(b) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation, (c) adversely affect the right of Shell
to own
the capital stock of Surviving Corporation and to control Surviving Corporation
and its Subsidiaries, or (d) adversely affect the right of any of Surviving
Corporation and its Subsidiaries to own its assets and to operate its business;
(4) Company
will have delivered to Shell a certificate to the effect that each of the
conditions specified in
Sections 2.A(1)-(3)
is satisfied in all
respects;
(5) In
the case of the Closing of the Merger, Company will have delivered to Shell
an
executed counterpart of the
Merger Certificate
;
(6) Shell
will have received from counsel to Company an opinion in form and substance
as
set forth in
Exhibit H
attached hereto;
(7) At
least twenty (20) calendar days will have passed since a definitive written
information statement pursuant to Rule 14c-2 under the Exchange Act
(“
Company Statement
”), which will include the
information required to be disclosed under Rule 14f-1 under the Exchange
Act, has been filed with the SEC and transmitted to every record holder
of
Company Shares from whom proxy authorization or consent is not solicited;
(8) At
least twenty (20) calendar days will have passed since a definitive written
information statement pursuant to Rule 14c-2 under the Exchange Act
(“
Shell Statement
”) has been filed with the SEC and
transmitted to every record holder of Company Shares from whom proxy
authorization or consent is not solicited;
(9) In
the case of the Closing of the Merger, a registration statement relating
to the
offering and issuance of the Shell Shares (“
Registration
Statement
”) will have become effective under the Securities Act,
and no stop order suspending the effectiveness of the Registration Statement
or
any part thereof shall have been issued and no proceeding for that purpose,
and
no similar proceeding in respect of the Company Statement shall have been
initiated or threatened in writing by the SEC or any other Governmental
Authority; and all requests for additional information on the part of the
SEC or
any other Governmental Authority shall have been complied with to the reasonable
satisfaction of the parties hereto, or an exemption from the Securities
Act and
applicable state securities laws is available;
(10) In
the case of the Closing of the Merger, all of Company’s debt securities that
give the holder of such debt security the right to purchase a specified
number
of Company Shares (“
Convertible Debt
”), as set forth in
Exhibit J
, shall have been converted
to Company
Shares as
part of the Conversion
Ratio. All other Company debt obligations shall have been either retired
by
Company or converted to Company Shares prior to the Closing;
(11) In
the case of the Closing of the Merger, Shell will have received the
resignations, effective as of the Closing, of each director and officer
of
Company and its Subsidiaries, other than those set forth in
Exhibit E
attached hereto;
(12) As
of the date of execution of this Agreement, Company shall have obtained
an
executed Affiliate Agreement in the form of
Exhibit I
hereto (the “
Affiliate
Agreement
”) from all Persons who may be deemed to be an “Affiliate”
of Company within the meaning of Rule 145 promulgated under the Securities
Act, as listed on
Section 2.A(11)
of the Company Disclosure
Schedule. Shell shall be entitled to place legends, as specified in the
Affiliate Agreement, on the certificates evidencing the Shell Shares to
be
received by any Affiliate of Company and to issue appropriate stop transfer
instructions to the transfer agent for such Shell Shares consistent with
the
terms of the Affiliate Agreement, regardless of whether such Person has
executed
an Affiliate Agreement;
(13) As
of the date of execution of this Agreement, Company, Shell, CNL and each
of the
Majority Stockholders shall have entered into the Voting Agreements;
(14) In
the case of the Closing of the Merger, prior to the Closing the Parties
and the
Directors named therein shall have executed an Asset Assignment and Debt
Payment
Agreement (the “
AADP Agreement
”), in the form attached
as
Exhibit J
hereto, pursuant to which, among other
provisions, LACD shall have assumed all of Company’s accounts payable and
accounts receivable which, together with LACD’s liabilities, accounts payable
and accounts receivable, shall be disclosed to Shell in writing within
thirty
(30) days of the date hereof;
(15) In
the case of the Closing of the Merger, prior to the Closing Company shall
have
sold all assets of Los Angeles Community Dialysis, Inc., a California
corporation and wholly-owned Subsidiary of Company
(“
LACD
”), with the exception of LACD’s accounts
receivable, and LACD shall have no outstanding liabilities of any kind
except as
scheduled in the AADP Agreement;
(16) The
Parties shall have executed the License Agreement; and
(17) This
Agreement shall have been adopted by the requisite vote of the stockholders
of
each of Shell, and, if required, Merger Sub, and Company.
Shell and Merger
Subsidiary may waive any condition specified in this
Section 2.A
if
it or they execute a writing so stating at or prior to the Closing.
B.
Conditions
to Company’s
Obligation
. The obligation of Company to consummate the transactions to be
performed by it in connection with the Closing is subject to satisfaction
of the
following conditions:
(1) The
representations and warranties set forth in
Section 5
will be true
and correct in all material respects at and as of the Closing, except to
the
extent that such
representations
and
warranties are qualified by the term “material,” or contain terms such as
“Adverse Effect” or “Adverse Change,” in which case such representations and
warranties as so written, including the term “material” or “Material,” will be
true and correct in all respects at and as of the Closing;
(2) Each
of Shell and, in the case of the Closing of the Merger, Merger Subsidiary
will
have performed and complied with all of its covenants hereunder in all
material
respects through the Closing, except to the extent that such covenants
are
qualified by the term “material,” or contain terms such as “Adverse Effect” or
“Adverse Change,” in which case Shell and, in the case of the Closing of the
Merger, Merger Subsidiary will have performed and complied with all of
such
covenants as so written, including the term “material” or “Material,” in all
respects through the Closing;
(3) There
will not be any judgment, order, decree or injunction in effect that would
(a)
prevent consummation of any of the transactions contemplated by this Agreement,
or (b) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation;
(4) Shell
will have delivered to Company a certificate to the effect that each of
the
conditions specified in
Sections 2.B(1)-(3)
is satisfied in all
respects;
(5) In
the case of the Closing of the Merger, Shell will have delivered to Company
an
executed counterpart of the Merger Certificate;
(6) Company
will have received from counsel to Merger Subsidiary an opinion in form
and
substance as set forth in
Exhibit K
attached
hereto.
(7) At
least twenty (20) calendar days will have passed since the Company
Statement has been filed with the SEC and transmitted to every record holder
of
Company Shares from whom proxy authorization or consent is not solicited;
(8) The
Registration Statement will have become effective under the Securities
Act, or
an exemption from the Securities Act and applicable state securities laws
is
available;
(9) At
least twenty (20) calendar days will have passed since the Shell Statement,
if required under applicable law, has been filed with the SEC and transmitted
to
every record holder of Shell Shares from whom proxy authorization or consent
is
not solicited;
(10) As
of the date of execution of this Agreement, CNL shall have entered into
the CNL
Agreement;
(11) The
Parties shall have executed the License Agreement;
(12) In
the case of the Closing of the Merger, prior to the Closing the Parties
shall
have executed the AADP Agreement;
(13) This
Agreement shall have been adopted by the requisite vote of the stockholders
of
each of Shell and Merger Sub, if required; and
(14) The
Parties shall have executed the Director Agreement.
Company may waive
any
condition specified in this
Section 2.B
if it executes a writing so
stating at or prior to the Closing.
3.
Covenants
.
The Parties agree
as follows with
respect to the period from and after the execution of this Agreement until
the
Closing or termination of this Agreement:
A.
General
. Each
of the
Parties will use its best efforts to prepare, execute and deliver all documents,
take all actions and do all things necessary, proper, or advisable in order
to
consummate and make effective the transactions contemplated by this Agreement
as
soon as practicable, including the satisfaction, but not waiver, of all
of the
Closing conditions set forth in
Section 2
.
B.
Notices
. Company
will
give any notices (and will cause each of its Subsidiaries to give any notices)
to third parties, and will use its best efforts to obtain (and will cause
each
of its Subsidiaries to use its best efforts to obtain) any necessary third-party
consents.
C.
SEC and State
Filings
.
Each of the Parties will, and will cause each of its Subsidiaries to, give
any
notices to, make any filings with, and use its best efforts to obtain any
authorizations, consents, and approvals of Governmental Authorities in
connection with the matters referred to herein. Without limiting the generality
of the foregoing:
(1)
Company Statements
. Company
and Shell, if required, will prepare as soon
as practicable and timely file with the SEC preliminary and definitive
Company
Statements, in form and substance reasonably satisfactory to Shell and
Company,
respectively, and mail all necessary and appropriate definitive documents
to all
Company Stockholders and Shell Stockholders, respectively, and as soon
as
practicable after approval by the SEC or the expiration of applicable waiting
periods.
(2)
Registration
Statement
. Shell will prepare as soon as practicable and
timely file with the SEC the Registration Statement on appropriate form
with
respect to the Merger or the Technology Transaction, as the case may be,
and the
offering of the Shell Shares. Within ninety (90) days following the
effectiveness of a resale registration statement on Form S-3 on behalf
of
selling stockholder from whom Shell has raised in excess of twenty-five
million
dollars ($25,000,000.00), Shell will: (a) prepare and file with the SEC a
registration statement on Form S-3, with respect to any unregistered Shell
Shares (i) underlying the Shell Warrants and Shell Options or
(ii) issued in connection with the Technology Transfer; and (b) use
reasonable efforts to cause such registration statement to become and remain
effective for a period of five (5) years following the Closing.
(3)
Blue Sky
Filings
. Shell will take all actions that may be necessary,
proper, or advisable under applicable state securities laws in connection
with
the offering and issuance of the Shell Shares.
(4)
Further Cooperation
. The
filing Party in each instance will use its best
efforts to respond to the comments of the SEC or any state Governmental
Authorities on any filings and will make any further filings, including
amendments and supplements, in connection therewith that may be necessary,
proper, or advisable. Shell will provide Company, and Company will provide
Shell, with whatever information and assistance in connection with the
foregoing
filings the filing Party may request.
D.
Section 16 Matters
.
Prior to Closing of the Merger, the Board of Directors of Company will
adopt a
resolution consistent with the interpretive guidance of the SEC stating
that the
disposition of Company Shares, Warrants or Options pursuant to this Agreement
by
any officer or director of the Company who is a covered person for purposes
of
Section 16 of the Exchange Act (together with the rules and regulations
thereunder, “
Section 16
”) (each, a
“
Company Covered Person
”) is intended to be
an exempt
transaction for purposes of Section 16 provided that such Company Shares,
Warrants or Options are listed in the Section 16 Information (as defined
below). Company shall deliver to Shell such Section 16 Information in a
timely fashion prior to Closing. Upon receiving Company’s Section 16
Information and prior to Closing, the Board of Directors of Shell will
adopt a
resolution consistent with the interpretive guidance of the SEC stating
that the
acquisition of Shell Shares, Warrants or Options pursuant to this Agreement
by
any Company Covered Person who becomes a covered person of Shell for purposes
of
Section 16 is intended to be an exempt transaction for the purposes of
Section 16 provided that such Shell Shares, Warrants or Options are listed
in the Section 16 Information. “
Section 16
Information
” shall mean information accurate in all material
respects regarding the Company Covered Persons and the number of Company
Shares
held by each Company Covered Person that are to be exchanged for Shell
Shares
pursuant to this Agreement , and the number and description of the Company
Warrants and Options held by each such Company Covered Person which are
to be
converted into Shell Warrants and Options hereunder.
E.
Operation
of Business
.
Company will not (and will not cause or permit any of its Subsidiaries
to)
engage in any practice, take any action, or enter into any transaction
outside
the Ordinary Course of Business. Without limiting the generality of the
foregoing, without the prior written consent of Shell, neither Company
nor any
of its Subsidiaries will:
(1) Authorize
or effect any change in its charter or bylaws;
(2) Grant
any options, warrants, or other rights to purchase or obtain any of its
stock or
issue, sell, or otherwise dispose of any of its capital stock (except upon
the
conversion or exercise of options, warrants, and other rights currently
outstanding);
(3) Declare,
set aside, or pay any dividend or distribution with respect to its stock
(whether in cash or in kind), or redeem, repurchase, or otherwise acquire
any of
its capital stock;
(4) Issue
any note, bond, or other debt security or create, incur, assume, or guarantee
any indebtedness for borrowed money or capitalized lease obligation outside
the
Ordinary Course of Business;
provided, however
, that Company may issue
Convertible Debt to any of its directors and officers so long as such
Convertible Debt is converted to Company Shares prior to Closing in accordance
with
Section 2.A(9)
hereof, and that the Conversion Ratio will be
automatically adjusted to take into account any additional Company Shares
resulting therefrom so that the total number of Shell Shares issued in
exchange
for Company Shares will not be increased;
(5) Make
any capital investment in, make any loan to, or acquire the securities
or assets
of any other Person outside the Ordinary Course of Business;
(6) Grant,
extend or expand any employment terms for any of its directors, officers,
and
employees outside the Ordinary Course of Business;
(7) Commit
to any of the foregoing; or
(8) Issue
any press release or public statement regarding the Company or any Products.
The foregoing
notwithstanding, Company may take the following actions prior to Closing:
(a)
increase its authorized shares of common stock to 125,000,000 Company Shares;
provided, however
, that such Company Shares shall be subject to the
restrictions set forth in
Sections 3.E(2)
and
(3)
above;
(b) perform its obligations and effectuate the transactions provided for in
the May 31, 2006 Purchase and Sale Agreement and Joint Escrow Instructions
with Kidney Dialysis Center of West Los Angeles, LLC, (c) sell all assets
of the acute dialysis care division, with the exception of its accounts
receivable, for an amount sufficient to satisfy all of its outstanding
liabilities, and (d) make distributions to the former stockholders of
Company pursuant to the AADP Agreement. The provisions of this
Section 3.E
shall terminate in the event of the Closing of the
Technology Transaction or the termination of this Agreement.
F.
Expense Reimbursement
.
No later than the earlier of (i) thirty (30) days after the date on
which Shell has obtained total debt or equity investment of at least three
million five hundred thousand dollars ($3,500,000.00) or (ii) ninety
(90) days after the date hereof, Licensee shall reimburse Company’s
reasonable and necessary expenses incurred in the ordinary course of business
consistent with past practices (“
Company Expenses
”),
during the period from the date hereof to the Closing (as defined therein)
or
termination of this Agreement. All Company Expenses shall: (a) be only for
the specific persons, services and expenses listed in reasonable detail
on the
Budget contained in the Company Disclosure Schedule to the Merger Agreement,
(b) be payable hereunder only to the extent not paid pursuant to the Merger
Agreement, (c) be mutually agreed upon in advance of being reimbursed with
regard to all Professional Fees set forth in the Budget, and (d) include,
but not be limited to, expenses already paid or accrued relating to human
clinical trials carried out or to be carried out on behalf of Licensor
in Italy
and the United Kingdom as set forth in the Budget.
G.
Reasonable
Access
.
Company and Shell will (and will cause each of their Subsidiaries to) permit
representatives of Shell and Company(including legal counsel and
accountants)
to have
reasonable access, during normal business hours and on reasonable notice,
to all
information (including tax information) concerning the business, properties
and
personnel, of or pertaining to Company and each of its Subsidiaries. Shell
will
treat and hold as such any Confidential Information it receives from Company
or
any of its Subsidiaries in the course of the reviews contemplated by this
Section 3.G
, will not use any of the Confidential Information except
in connection with this Agreement or the License Agreement, and, if this
Agreement is terminated for any reason whatsoever, agrees to return to
Company
all tangible embodiments (and all copies) thereof that are in its possession.
H.
Notice of
Developments
.
Each Party will give prompt written notice to the others of any material
adverse
development causing a breach of any of its own representations and warranties
in
this Agreement. No disclosure by any Party pursuant to this
Section 3.H
, however, will be deemed to amend or supplement the
Company Disclosure Schedule or the Shell Disclosure Schedule or to prevent
or
cure any misrepresentation, breach of warranty, or breach of covenant.
I.
Exclusivity
. Company
will not, and will not cause or permit any of its Subsidiaries, directors
or
officers to: (1) solicit, initiate, encourage or entertain the submission
of any proposal or offer from any Person relating to the acquisition of
all or
substantially all of the capital stock or assets of Company or any of its
Subsidiaries (including any acquisition structured as a merger, consolidation,
or share exchange); (2) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate
in, or
facilitate in any other manner any effort or attempt by any Person to do
or seek
any of the foregoing, except in the case of directors to the extent their
fiduciary duties may require. Company will notify Shell immediately if
any
Person makes any proposal, offer, inquiry, or contact with respect to any
of the
foregoing (an “
Acquisition Proposal
”) or if the Board of
Directors of Company shall have approved, recommended executed or entered
into
an Acquisition Proposal, or resolved to do so. The foregoing notwithstanding,
Company may solicit offers, participate in negotiations, and execute any
necessary agreements related solely to the sale of the assets of LACD.
The
provisions of this
Section 3.I
shall terminate in the event of the
Closing of the Technology Transaction or the termination of this Agreement.
J.
Directors’ and Officers’
Indemnification
and Insurance
.
(1) From and after
the Effective
Time, Shell will, or will cause the Surviving Corporation to, (i) fulfill
and honor in all respects the obligations to indemnify and hold harmless
the
Shell’s, the Surviving Corporation’s, Company’s and each of their Subsidiaries’
present and former directors, officers and employees and their heirs, executors
and assigns (each an “
Indemnified Party
,” and
collectively, the “
Indemnified Personnel
”), to the same
extent that such individuals are entitled to indemnification as of the
date of
this Agreement pursuant to applicable law, articles of incorporation, bylaws
and
indemnification or other agreements, if any, in existence on the date hereof
with, or for the benefit of, any such Indemnified Party arising out of
or
pertaining to matters existing or occurring at or prior to the Effective
Time
and for acts or omissions existing or occurring at or prior to the Effective
Time (including for acts or omissions occurring in connection with the
approval
of this Agreement and the consummation of the transactions contemplated
hereby),
whether or not asserted or claimed prior thereto, and (ii)
include and caused
to
be maintained in effect in the Surviving Corporation’s (or any successor’s)
certificate of incorporation and bylaws for a period of five years after
the
Effective Time, subject to any limitation imposed from time to time under
applicable law, provisions regarding elimination of liability of directors,
indemnification of officers, directors and employees, and advancement of
expenses, that are at least as favorable to the Indemnified Personnel as
those
set forth in the current articles of incorporation and bylaws of the Company
in
effect on the date hereof.
(2) In the event
that any claim,
action, suit, proceeding or investigation involving any Indemnified Party
is
brought or initiated within five years after the Effective Time and arises
out
of or pertains to any actual or alleged action or omission in his or
her
capacity as an officer, director or employee of Company or any of its
Subsidiaries occurring prior to the Effective Time, or arises out of
or pertains
to the transactions contemplated by this Agreement, in each case for
which such
Indemnified Party is indemnified under this
Section 3.J
, except as
otherwise required by applicable law or contract or policy terms, (i) the
Indemnified Personnel, may, at their option, (A) elect to retain individual
counsel at their own expense or (B), as a group, elect to retain only
one law
firm to represent such Indemnified Personnel, which counsel shall be
counsel of
Shell in addition to local counsel (provided that if the use of counsel
of Shell
would be expected under applicable standards of professional conduct
to give
rise to a conflict between the position of the Indemnified Personnel
and that of
Shell, the Indemnified Personnel shall be entitled instead to be represented,
either as a group by one counsel, or individually by separate counsel
at their
own expense, in addition to local counsel, selected by the Indemnified
Personnel, and reasonably satisfactory to Shell), (ii) after the Effective
Time, Shell and the Surviving Corporation will pay the reasonable fees
and
expenses of all such counsel, promptly after statements thereof are received
and
(iii) Shell and the Surviving Corporation will cooperate in the defense of
any such matter;
provided, however
, that Shell and the Surviving
Corporation will not be liable for any settlement effected without their
written
consent (which consent will not be unreasonably withheld, delayed, or
conditioned); and provided, further, that, in the event that any claim
or claims
for indemnification are asserted or made within such five-year period,
all
rights to indemnification are asserted or made within such five-year
period, all
rights to indemnification in respect of any such claim or claims will
continue
until the disposition of any and all such claims. Any Indemnified Personnel
wishing to claim indemnification under this
Section 3.J
, upon
learning of such claim, action, suit, proceeding or investigation, shall
promptly notify Shell and the Surviving Corporation (provided that the
failure
to so notify Shell or the Surviving Corporation shall not relieve such
entity
from any liability that it may have under this
Section 3.J
, except
to the extent that such failure prejudices such entity), and shall deliver
to
Shell and the Surviving Corporation the undertaking contemplated by Section
145(e) of the DGCL.
(3) At the Closing
of the Merger,
Shell will, or will cause the Surviving Corporation to, secure a “tail” on the
Company’s existing directors’ and officers’ insurance policies, which will
provide Company, each individual serving as a director or officer of Company
as
of the date of this Agreement or of the Surviving Corporation at the Closing
of
the Merger, and such other Persons, if any, currently covered by such existing
directors’ and officers’ insurance policies with coverage on terms and in
amounts that are no less favorable than those of the Company’s policies
in effect on
the date
hereof, or obtain substantially similar coverage for such persons, for
a period
of at least five (5) years from the Effective Time.
(4) Notwithstanding
anything in
the Agreement to the contrary, the provisions of this
Section 3.J
are intended to be for the benefit of, and will be enforceable by, the
Indemnified Personnel, their heirs and representatives, and may not be
amended
or repealed without the prior written consent of the affected Indemnified
Personnel, and are in addition to, and not in substitution for, any other
rights
to indemnification or contribution that such Indemnified Personnel may
have by
contract or applicable law.
(5) Notwithstanding
anything in
this Agreement to the contrary, in the event that Shell or the Surviving
Corporation or any of their respective successors or assigns
(i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all its properties and
assets to any person, then, and in each such case, Shell or Surviving
Corporation shall cause proper provisions to be made so that the successors
and
assigns of Shell or the Surviving Corporation, as the case may be, assume
the
obligations set forth in this
Section 3.J
.
K.
Indemnification
of Company
and Majority Stockholders
. Shell shall at all times indemnify and hold
harmless Company and the Majority Stockholders and their respective Affiliates,
Subsidiaries, directors, officers, employees, representatives, attorneys
and
agents from any and all costs, expenses, losses, damages and liabilities
incurred or suffered, directly or indirectly, by any of them (including,
without
limitation, legal fees and expenses) resulting from or attributable to:
(1) The
breach of, or misstatement in, any one or more of the representations,
warranties, or covenants of either Shell or Merger Subsidiary made in or
pursuant to this Agreement or any other Merger Document;
(2) Any
claims, demands, suits, investigations, proceedings or actions by any third
party containing or relating to allegations that, if true, would constitute
a
breach of, or misstatement in, any one or more of the representations,
warranties, or covenants of either Shell or Merger Subsidiary made in or
pursuant to this Agreement or any other Merger Document; or
(3) Any
claims, demands, suits, investigations, proceedings or actions by Company
stockholders against Company arising from or connected with the transactions
contemplated by this Agreement or any other Merger Documents;
provided,
however
, that Shell shall not have any obligation under this
Section 3.K(3)
with respect to any claims, demands, suits,
investigations, proceedings or actions to the extent any resulting liability
is
strictly and solely attributable to Company’s breach of any material
representation, warranty or obligation hereunder or Company’s gross negligence
or willful misconduct.
L.
Defense of
Claims
. If
any Party has received actual notice or any claim asserted or any action
or
administrative or other proceeding commenced in respect of which claim,
action,
or proceeding indemnity properly may be sought against another Party or
Parties
pursuant
Section 3.K
above (such Party or Parties, individually and
collectively, the “
Indemnitor
”), the
Party or Parties
seeking indemnity (such Party or Parties, individually and collectively,
the
“
Indemnitee
”) will give notice in writing to the
Indemnitor.
(1) Within
ten (10) days after the earlier of (a) receipt of such notice or
(b) receipt of actual notice by Indemnitor from sources other than
Indemnitee, Indemnitor may give Indemnitee written notice of its election
to
conduct the defense of such claim, action, or proceeding at its own expense.
If
Indemnitor has given Indemnitee such notice of election to conduct the
defense,
Indemnitor may conduct the defense at its expense, but Indemnitee may
nevertheless have the right to participate in the defense at the expense
of
Indemnitor.
(2) If
Indemnitor has not notified Indemnitee in writing (within the time period
above
provided) of its election to conduct the defense of such claim, action,
or
proceeding, Indemnitee may (but need not) conduct the defense of such claim,
action, or proceeding at the expense of Indemnitor. Indemnitee may at any
time
notify Indemnitor of Indemnitee’s intention to settle, compromise, or satisfy
any such claim, action, or proceeding (the defense of which Indemnitor
has not
previously elected to conduct) and may make such settlement, compromise,
or
satisfaction at the expense of Indemnitor unless Indemnitor notifies Indemnitee
in writing (within five (5) days after receipt of such notice of intention
to settle, compromise, or satisfy) of its election to assume, at Indemnitor’s
sole expense, the defense of any such claim, action, or proceeding and
promptly
take appropriate action to implement such defense.
(3) Any
settlement, compromise, or satisfaction made by Indemnitee or any such
final
judgment or decree entered in any claim, action, or proceeding defended
only by
Indemnitee pursuant to this
Section 3.L
, regardless of amount or
terms, will be deemed to have been consented to by, and will be binding
on,
Indemnitor as fully as though Indemnitor had assumed the defense and a
final
judgment or decree had been entered in such proceeding or action by a court
of
competent jurisdiction in the amount of such settlement, compromise,
satisfaction, judgment, or decree.
(4) If
Indemnitor has elected under this
Section 3.L
to conduct the defense
of any claim, action, or proceeding, then Indemnitor will be obligated
to pay
the amount of any adverse final judgment or decree rendered with respect
to such
claim, action, or proceeding. If Indemnitor elects to settle, compromise,
or
satisfy any claim, action, or proceeding defended by it, the cost of any
such
settlement, compromise, or satisfaction will be borne entirely by Indemnitor
and
may be made only with the prior written consent of Indemnitee, such consent
not
to be unreasonably withheld.
(5) All
Parties will use all reasonable efforts to cooperate fully with respect
to the
defense of any claim, action, or proceeding covered by this
Section 3.L
.
(M)
Issuance
of Shell
Shares
. Shell will not issue any Shell Shares except for such consideration,
having a value not less than the par value thereof, as determined from
time to
time by the board of directors, or by the stockholders if the certificate
of
incorporation so provides, in accordance with Sections 152 and 153 of the
DGCL.
4.
Company’s Representations And
Warranties
.
The Company represents
and warrants to
Shell that the statements contained in this
Section 4
are correct and
complete as of the date of this Agreement and will be correct and complete
as of
the Closing, as though made then and as though the Closing were substituted
for
the date of this Agreement throughout this
Section 4
, except as set
forth in the disclosure schedule attached to this Agreement as
Exhibit L
(the “
Company Disclosure
Schedule
”) corresponding to the Section of this Agreement, to which
any of the following representations and warranties specifically relate,
or as
disclosed in another section of the Company Disclosure Schedule, if it
is
reasonably apparent on the face of the disclosure that it is applicable
to
another Section of this Agreement, or in the Company Public Reports:
A.
Organization,
Qualification,
and Corporate Power
. Each of Company and its Subsidiaries is a corporation
duly organized, validly existing, and in good standing under the laws of
the
jurisdiction of its incorporation. Each of Company and its Subsidiaries
is duly
authorized to conduct business and is in good standing under the laws of
each
jurisdiction where such qualification is required. Company and its Subsidiaries
has full corporate power and authority to carry on the business in which
it is
engaged and to own and use the properties owned and used by it.
B.
Capitalization
. The
entire authorized capital stock of Company consists solely of
125,000,000
Company Shares, of which
48,133,738
Company Shares are issued and
outstanding, and
5,000,000
shares of preferred stock, none of which are
issued or outstanding. All of the issued and outstanding Company Shares
have
been duly authorized and are validly issued, fully paid, non-assessable
and free
of preemptive rights, and were issued in compliance with all applicable
state
and federal securities laws.
Exhibits F and G
set forth
a full and complete listing of all Company Securities. Except as set forth
in
such
Exhibits F and G
, there are no: (1) other
outstanding or authorized shares, options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts
or
commitments of any kind that could require Company to issue, sell, or otherwise
cause to become outstanding any of its capital stock.; (2) equity
securities, debt securities or instruments convertible into or exchangeable
for
shares of such stock; or (3) outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to
Company.
C.
Authorization
of
Transaction
. Company has all requisite power and authority, including full
corporate power and authority, to execute and deliver this Agreement and
to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Company
and
the consummation by Company of the transactions contemplated hereby have
been
duly and validly authorized by all necessary corporate action by Company
and,
except as set forth herein, no other corporate proceedings on the part
of
Company and no shareholder vote or consent are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Company and each Majority
Stockholder. This Agreement and all other agreements and obligations entered
into and undertaken in connection with the transactions contemplated hereby
to
which Company and each Majority Stockholder is a party constitute the valid
and
legally binding obligations of Company and each such Majority
Stockholder,
enforceable against Company and each such Majority Stockholder in accordance
with their respective terms.
D.
Non-Contravention
.
Neither the execution and delivery of this Agreement, nor the consummation
of
the transactions contemplated hereby, will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge,
or other restriction of any government, governmental agency, or court to
which
Company or any of its Subsidiaries is subject or any provision of the charter
or
bylaws of Company or any of its Subsidiaries, or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration
of,
create in any party the right to accelerate, terminate, modify, or cancel,
or
require any notice under any agreement, contract, lease, license, instrument,
or
other arrangement to which Company or any of its Subsidiaries is a party
or by
which it is bound or to which any of its assets is subject (or result in
the
imposition of any Lien upon any of its assets). Other than in connection
with
the provisions of the DGCL, the CGLC to the extent applicable, the Exchange
Act,
the Securities Act, and state securities laws, neither Company nor any
of its
Subsidiaries needs to give any notice to, make any filing with, or obtain
any
authorization, consent, or approval of any government or governmental agency
in
order for the Parties to consummate the transactions contemplated by this
Agreement.
E.
Filings with
SEC
. Except
as set forth on the Company Disclosure Schedule, Company has timely made
all
filings with the SEC that it has been required to make under the Securities
Act
and the Exchange Act (collectively the “
Company Public
Reports
”) since December 31, 2001, and, to the Knowledge of
the current officers and directors of Company, since Company Public Reports
were
first required to be filed. Each of the Company Public Reports has complied
with
the Securities Act and the Exchange Act in all material respects. None
of the
Company Public Reports, as of their respective dates, contained any untrue
statement of a material fact or omitted to state a material fact necessary
in
order to make the statements made therein, in light of the circumstances
under
which they were made, not misleading.
F.
Financial
Statements
.
Company has filed quarterly reports on Form 10-Q for the fiscal quarter
ended
March 31, 2006 and an annual report on Form 10-K for the fiscal year ended
December 31, 2005 (“
Year End
”). The financial
statements included in or incorporated by reference into these Company
Public
Reports (including the related notes and schedules) have been prepared
in
accordance with GAAP throughout the periods covered thereby, present fairly
the
financial condition of Company and its Subsidiaries as of the indicated
dates
and the results of operations of Company and its Subsidiaries for the indicated
periods and are correct and complete in all respects, and are consistent
with
the books and records of Company and its Subsidiaries;
provided, however
,
that the interim statements are subject to normal year-end adjustments.
G.
Events Subsequent
to Year
End
. Since Year End, there has not been any Adverse Change.
H.
Undisclosed
Liabilities
.
Neither Company nor any of its Subsidiaries has any liability of any kind,
whether known or unknown, whether asserted or unasserted, whether absolute
or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and
whether due or
to
become due, including any liability for taxes, except for (i) liabilities
set forth on the face of the balance sheet dated as of Year End (rather
than in
any notes thereto) and (ii) liabilities that have arisen after Year End in
the Ordinary Course of Business (none of which results from, arises out
of,
relates to, is in the nature of, or was caused by any breach of contract,
breach
of warranty, tort, infringement, or violation of law). As of the Closing,
neither Company nor any of its Subsidiaries will have any liability of
any kind,
whether known or unknown, whether asserted or unasserted, whether absolute
or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due.
I.
Brokers’ Fees
. Except
as
set forth on the Company Disclosure Schedule, neither Company nor any of
its
Subsidiaries has any liability or obligation to pay any fees or commissions
to
any broker, finder, or agent with respect to the transactions contemplated
by
this Agreement.
J.
Tax Treatment
. Company
operates at least one significant historic business line, or owns at least
a
significant portion of its historic business assets, in each case within
the
meaning of Treas. Reg. §1.368-1(d). Neither Company nor, to the Knowledge of
Company, any of its Affiliates has taken or agreed to take action that
would
prevent the Merger from constituting a reorganization qualifying under
the
provisions of Section 354 of the Code.
K.
Disclosures
. The
Company
Statement will comply with the Exchange Act in all material respects. The
Company Statement will not contain any untrue statement of a material fact
or
omit to state a material fact necessary in order to make the statements
made
therein, in light of the circumstances under which they will be made, not
misleading;
provided, however
, that Company makes no representation or
warranty with respect to any information that Shell will supply specifically
for
use in the Company Statement. None of the information that Company will
supply
specifically for use in the Shell Statement or the Registration Statement
will
contain any untrue statement of a material fact or omit to state a material
fact
necessary in order to make the statements made therein, in light of the
circumstances under which they will be made, not misleading.
L.
Litigation
. There
is no
action, suit, legal or administrative proceeding or investigation pending,
or to
Company’s Knowledge threatened, against or involving Company (either as a
plaintiff or defendant) before any court or governmental agency, authority,
body
or arbitrator. Neither Company nor to its Knowledge any officer, director
or
employee of Company, has been permanently or temporarily enjoined by any
order,
judgment or decree of any court or any governmental agency, authority or
body
from engaging in or continuing any conduct or practice in connection with
the
business, assets, or properties of Company. There in existence on the date
hereof any order, judgment or decree of any court, tribunal or agency enjoining
or requiring Company to take any action of any kind with respect to its
business, assets or properties.
M.
Insurance
. To
the
Knowledge of the current officers and directors of Company, no material
claims
were made under any policies of insurance from the formation of the Company.
To
the Knowledge of Company, no material claims were made under any policies
of
insurance from December 31, 1996 to December 31, 2001. Except as set
forth on the Company Disclosure Schedule, no material claims have been
made
under any policies of insurance since
December 31, 2001.
True, correct, and complete copies of all Company insurance policies have
been
made available to Shell. All current insurance policies are in full force
and
effect, are in amounts of a nature that are adequate and customary for
Company’s
business, and to the Knowledge of Company are sufficient for compliance
with all
legal requirements and agreements to which it is a party or by which it
is
bound. All premiums due on current policies or renewals have been paid,
and
there is no material default under any of the policies.
N.
Tax Matters
.
(1) Within
the times and in the manner prescribed by law, Company has filed all federal,
state and local tax returns and all tax returns for other governing bodies
having jurisdiction to levy taxes upon it which are required to be filed;
(2) Company
has paid all taxes, interest, penalties, assessments and deficiencies which
have
become due, including without limitation income, franchise, real estate,
and
sales and withholding taxes;
(3) All
tax returns filed, or to be filed by Company before the Closing, for all
taxable
years since December 31, 2001 constitute complete and accurate
representations of the respective tax liabilities of Company for such years,
to
the Knowledge of Company all tax returns filed by Company for all taxable
years
from January 31, 1997 to December 31, 2001 constitute complete and
accurate representations of the respective tax liabilities of Company for
such
years, and to the Knowledge of the current officers and directors of Company
all
tax returns filed by Company for all taxable years from formation of the
Company
constitute complete and accurate representations of the respective tax
liabilities of Company for such years.
(4) Company
has not waived or extended any applicable statute of limitations relating
to the
assessment of federal, state or local taxes;
(5) No
examinations of the federal, state or local tax returns of Company are
currently
in progress nor threatened and no deficiencies have been asserted or to
its
Knowledge assessed against Company as a result of any audit by the Internal
Revenue Service or any state or local taxing authority and no such deficiency
has been proposed or threatened;
(6) There
are no pending or threatened audits, assessments or other actions relating
to
any liability in respect of taxes of Company by any tax authority nor are
there
any matters under discussion with any tax authority with respect to taxes
of
Company;
(7) Company
has not filed a consent pursuant to Section 341(f) of the Code relating
to
collapsible corporations nor has Company agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset as such term
is defined in Section 341(f)(4) of the Code; and
(8) Company
has filed all required state and federal income tax returns for all periods
through December 31, 2003, and will file all such returns for all periods
through December 31, 2005 prior to Closing. Company does not and will not
owe any taxes or penalties for any such periods.
O.
Books and
Records
. The
general ledger and books of account of Company, all minute books of Company,
all
federal, state and local income, franchise, property and other tax returns
filed
by Company, all reports and filings with the SEC by Company, all of which
have
been made available to Shell, are in all material respects complete and
correct
and have been maintained in accordance with good business practice and
in
accordance with all applicable procedures required by laws and regulations.
P.
Contracts
and
Commitments
. True, complete, and correct copies or lists of the following
contracts and agreements, whether written or oral, have been made available
to
Shell:
(1) All
loan agreements, indentures, mortgages, guaranties to which Company is
a party
or by which Company or any of its property is bound and any other agreement
evidencing indebtedness in excess of $10,000;
(2) All
pledges, conditional sale or title retention agreements, security agreements,
equipment obligations, personal property leases and lease purchase agreements
to
which Company is a party or by which Company or any of its property is
bound,
evidencing indebtedness in excess of $10,000;
(3) All
contracts, agreements, commitments, purchase orders or other understandings
or
arrangements to which Company is a party or by which Company or any of
its
property is bound that involve payments or receipts by Company of more
than
$10,000 in the case of any single contract, agreement, commitment, understanding
or arrangement under which full performance (including payment) has not
been
rendered by all parties thereto;
(4) All
collective bargaining agreements, employment and consulting agreements
providing
for payments in excess of $10,000 per year, executive compensation plans,
bonus
plans, deferred compensation agreements, pension plans, retirement plans,
employee stock option or stock purchase plans and group life, health and
accident insurance and other employee benefit plans, agreements, arrangements
or
commitments to which Company is a party or by which Company or any of its
property is bound;
(5) All
agency, distributor, sales representative, franchise or similar agreements
providing for payments in excess of $10,000 to which Company is a party
or by
which Company or any of its property is bound;
(6) All
agreements, understandings or arrangements in excess of $10,000 individually
between or among Company and any director, officer, stockholder or, to
Company’s
Knowledge, affiliate or family member of such Person; and
(7) All
contracts, agreements or other arrangements imposing a non-competition
obligation on Company.
(8) Every
contract or agreement of any kind to which Company is a party will not
bind or
obligate Company in any manner as of the Closing Date.
Q.
Compliance
with Agreements
and Laws
.
(1) To
its Knowledge, (a) Company has all requisite licenses, permits and
certificates, including environmental, health and safety permits, from
federal,
state and local authorities necessary to conduct its business and own and
operate its assets including, without limitation all necessary approvals,
licenses, and permits from the FDA, except where the failure to have such
permits would not reasonably be expected to have an Adverse Effect, true,
correct, and complete copies or list of which has been made available to
Shell;
(b) Company is not in violation of any law, regulation or ordinance
(including, without limitation, laws, regulations or ordinances relating
to
building, zoning, environmental, disposal of hazardous waste, land use
or
similar matters) relating to its properties, the enforcement of which would
have
an Adverse Effect; and (c) the business of Company as conducted since
December 31, 1996 has not violated, and as of the Closing does not violate,
in any material respect, any federal, state, local or foreign laws, regulations
or orders (including, but not limited to, any of the foregoing relating
to FDA
research and development regulations and approval processes, employment
discrimination, occupational safety, environmental protection, hazardous
waste,
conservation, or corrupt practices), the enforcement of which would have
an
Adverse Effect. To the Knowledge of the current officers and directors
of
Company, the business of Company from formation did not violate, in any
material
respect, any federal, state, local or foreign laws, regulations or orders
(including, but not limited to, any of the foregoing relating to FDA research
and development regulations and approval processes, employment discrimination,
occupational safety, environmental protection, hazardous waste, conservation,
or
corrupt practices), the enforcement of which would have an Adverse Effect.
Company has not had notice or communication from any federal, state or
local
governmental or regulatory authority or otherwise of any such violation
or
noncompliance.
(2) To
its Knowledge, Company is not in violation of any federal, state, county
or
municipal authority law, ruling, order, decree, regulation, permit, or
other
environmental or hazardous waste requirement applicable to Company relating
to
health, safety, pollution, hazardous waste, environmental or other similar
matters, which has not been entirely corrected and which has or would reasonably
be expected to have an Adverse Effect.
R.
Employee
Relations
.
(1) To
its Knowledge, Company is in material compliance with all federal, state,
and
municipal laws respecting employment and employment practices, terms and
conditions of employment, and wages and hours, and is not engaged in any
unfair
labor practice, and there are no arrears in the payment of wages or social
security taxes.
(2) None
of the employees of Company is represented by any labor union;
(3) There
is no unfair labor practice complaint against Company pending before the
National Labor Relations Board or any state or local agency;
(4) There
is no pending labor strike or other material labor trouble affecting Company
(including, without limitation, any known organizational drive); and
(5) There
is no material labor grievance pending against Company.
S.
Employee
Benefit Plans
.
(1) Company
has no (a) employee benefit plans as defined in ERISA Section 3(3),
(b) bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance or other similar employee benefit plans,
or
(c) material unexpired severance agreements with any current or former
employee of Company.
(2) With
respect to such plans, individually and in the aggregate, no event has
occurred
and, to its Knowledge, there exists no condition or set of circumstances
in
connection with which Company could be subject to any liability that is
reasonably likely to have an Adverse Effect under ERISA, the Code or any
other
applicable law.
(3) With
respect to such plans, individually and in the aggregate, there are no
funded
benefit obligations for which contributions have not been made or properly
accrued and there are no unfunded benefit obligations that have not been
accounted for by reserves, which obligations are reasonably likely to have
an
Adverse Effect.
(4) Except
as set forth on the Company Disclosure Schedule, Company is not a party
to any
(a) agreement with any officer or other key employee of Company,
(b) agreement with any officer of Company providing any term of employment
or compensation guarantee extending for a period longer than the Closing,
or
(c) agreement or plan, including any stock option plan, stock appreciation
right plan, restricted stock plan or stock purchase plan, which will remain
in
effect or have any benefits as of the Closing.
T.
Indebtedness
to and from
Affiliates
. Except as set forth on the Company Disclosure Schedule, Company
is not indebted, directly or to its Knowledge indirectly, to any officer,
director or greater than 10% stockholder of Company in any amount other
than for
salaries for services rendered or reimbursable business expenses, and no
such
Person is indebted to Company except for advances made to employees of
Company
in the ordinary course of business to meet reimbursable business expenses.
U.
Banking Facilities
. Its
disclosure schedule sets forth a true, correct, and complete list of:
(1) Each
bank, savings and loan or similar financial institution in which Company
has an
account or safety deposit box and the numbers of the accounts or safety
deposit
boxes maintained by Company thereat; and
(2) The
names of all signatories authorized to draw on each such account or to
have
access to any such safety deposit box facility.
V.
Powers of
Attorney and
Suretyships
. Company does not have (i) any general powers of attorney
outstanding, whether as grantor or grantee thereof, or (ii) except as
reflected in its financial statements, any obligation or liability, whether
actual, accrued, accruing, contingent or otherwise, as guarantor, surety,
co-signer, endorser, co-maker, indemnitor, or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture,
association,
organization or other entity, except as endorser or maker of checks or
letters
of credit, respectively, endorsed or made in the ordinary course of business.
W.
Conflicts
of Interest
.
Except as set forth in
Section 4.T
hereof or on the Company
Disclosure Schedule, no officer, director, or greater than ten percent
(10%)
stockholder of Company nor, to its Knowledge, any affiliate of any such
Person,
now has or within the last three (3) years had, either directly or
indirectly:
(1) An
equity or debt interest in any Person that furnishes or sells or during
such
period furnished or sold services or products to Shell, or purchases or
during
such period purchased from Company any goods or services, or otherwise
during
such period did business with Company; or
(2) A
beneficial interest in any contract, commitment or agreement to which Company
is
or was a party or under which Company is or was obligated or bound or to
which
its properties may be or may have been subject, other than stock options
and
other contracts, commitments or agreements between Company and such persons
in
their capacities as employees, officers, directors or stockholders of Company.
X.
Stockholder
Claims
.
There are no existing claims against Company by any current or former
stockholder of Company, and to the Knowledge of Company, no facts or
circumstances reasonably likely to result in any such claim.
Y.
Affiliates
. Except
as
set forth on the Company Disclosure Schedule,, there are no persons other
than
the Parties who, to the Knowledge of Company, may be deemed to be Affiliates
of
Company.
Z.
Intellectual
Property
.
(1) No
claim has been asserted to Company that the conduct of the business of
Company
as currently conducted infringes upon or may infringe upon or misappropriates
the Intellectual Property rights of any third party, and to the Knowledge
of
Company, the conduct of the business of Company as currently conducted
does not
infringe upon or misappropriate the Intellectual Property rights of any
third
party;
(2) Except
as set forth on the Company Disclosure Schedule, with respect to each item
of
Intellectual Property owned by Company and material to the business, financial
condition or results of operations of Company (the “
Company Owned
Intellectual Property
”), Company is the sole and exclusive owner of
the entire right, title and interest in and to such Company Owned Intellectual
Property and is entitled to use such Company Owned Intellectual Property
in the
continued operation of its business;
(3) With
respect to each item of Intellectual Property licensed to Company that
is
material to the business of Company as currently conducted (the
“
Company Licensed Intellectual Property
”), Company has
the right to use such Company Licensed Intellectual Property in the continued
operation of its business in accordance with the terms of the license agreement
governing such Company Licensed Intellectual Property;
(4) The
Company Owned Intellectual Property has not been adjudged invalid or
unenforceable, in whole or in part, by any governmental agency, authority,
or
court of competent jurisdiction; to the Knowledge of Company, the Company
Owned
Intellectual Property is valid and enforceable, and no Person is engaging
in any
activity that infringes upon the Company Owned Intellectual Property; and
(5) With
the exception of the execution of the License Agreement, neither the execution
of this Agreement nor the consummation of any transaction pursuant hereto
shall
adversely affect any of Company’s rights with respect to the Company Owned
Intellectual Property or the Company Licensed Intellectual Property.
5.
Shell’s Representations And
Warranties
.
Each of Shell
and Merger Subsidiary
represents and warrants to Company that the statements contained in this
Section 5
are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing (as though made then
and as
though the Closing were substituted for the date of this Agreement throughout
this
Section 5
, except as set forth in the except as set forth in
the disclosure schedule attached this Agreement as
Exhibit M
(the “
Shell Disclosure
Schedule
”) corresponding to the Section of this Agreement, to which
any of the following representations and warranties specifically relate,
or as
disclosed in another section of the Shell Disclosure Schedule, if it is
reasonably apparent on the face of the disclosure that it is applicable
to
another Section of this Agreement:
A.
Organization
. Each
of
Shell and Merger Subsidiary is a corporation (or other entity) duly organized,
validly existing, and in good standing under the laws of the jurisdiction
of its
incorporation (or other formation). Merger Subsidiary has had no business
operations since inception, and has no assets or liabilities of any kind,
whether known or unknown, whether asserted or unasserted, whether absolute
or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due.
B.
Capitalization
.
(1) The
authorized capital stock of Shell, and the Shell Shares issued and outstanding
as of the date of this Agreement, are as set forth in the Shell Public
Reports.
To Shell’s Knowledge, there are no: (a) other outstanding or authorized
shares, options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments of any kind
that
could require Shell to issue, sell, or otherwise cause to become outstanding
any
of its capital stock; (b) equity securities, debt securities or instruments
convertible into or exchangeable for shares of such stock; or
(c) outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Shell.
(2) The
entire authorized capital stock of Merger Subsidiary consists of one thousand
(1,000) shares of common stock, none of which are issued or outstanding.
There
are no: (a) other outstanding or authorized shares, options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights,
or
other contracts or commitments of any kind that could require Merger Subsidiary
to issue, sell, or otherwise cause to become outstanding any of its capital
stock; (b) equity securities, debt securities or instruments convertible
into or
exchangeable
for shares
of such stock; or (c) outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to Merger
Subsidiary.
C.
Authorization
of
Transaction
. Each of Shell and Merger Subsidiary has all requisite power and
authority, including full corporate power and authority, to execute and
deliver
this Agreement and to perform its obligations hereunder and to consummate
the
transactions contemplated hereby. The execution and delivery of this Agreement
by Shell and Merger Sub and the consummation by Shell and Merger Subsidiary
of
the transactions contemplated hereby have been duly and validly authorized
by
all necessary corporate action by Shell and Merger Subsidiary and, except
as set
forth herein, no other corporate proceedings on the part of Shell or Merger
Subsidiary and no shareholder vote or consent are necessary to authorize
this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Shell and Merger Subsidiary.
This Agreement and all other agreements and obligations entered into and
undertaken in connection with the transactions contemplated hereby to which
each
of Shell, Merger Subsidiary and CNL is a party constitute the valid and
legally
binding obligations of each of Shell, Merger Subsidiary and CNL, enforceable
against Shell, Merger Subsidiary and CNL in accordance with their respective
terms.
D.
Non-Contravention
.
Neither the execution and delivery of this Agreement, nor the consummation
of
the transactions contemplated hereby, will (a) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge,
or other restriction of any government, governmental agency, or court to
which
either Shell or Merger Subsidiary is subject or any provision of the charter,
bylaws, or other governing documents of either Shell or Merger Subsidiary
or
(b) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement to which either
Shell
or Merger Subsidiary is a party or by which it is bound or to which any
of its
assets is subject except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, or failure to give
notice
would not have a Adverse Effect on the ability of the Parties to consummate
the
transactions contemplated by this Agreement. Other than in connection with
the
provisions of the DGCL, the Exchange Act, the Securities Act, and applicable
state securities laws, neither Shell nor Merger Subsidiary needs to give
any
notice to, make any filing with, or obtain any authorization, consent,
or
approval of any government or governmental agency in order for the Parties
to
consummate the transactions contemplated by this Agreement except where
the
failure to give notice, to file, or to obtain any authorization, consent,
or
approval would not have a Adverse Effect on the ability of the Parties
to
consummate the transactions contemplated by this Agreement.
E.
Filings with
SEC
. Except
as set forth on the Shell Disclosure Schedule, to the Knowledge of the
current
officers and directors of Shell: Shell has timely made all filings with
the SEC
that it has been required to make under the Securities Act and the Exchange
Act
(collectively the “
Shell Public Reports
”) since Shell
Public Reports were first required to be filed; each of the Shell Public
Reports
has complied with the Securities Act and the Exchange Act in all material
respects; none of the Shell Public Reports, as of their respective dates,
contained any untrue statement of a material fact or omitted to state a
material
fact necessary in
order to make
the
statements made therein, in light of the circumstances under which they
were
made, not misleading.
F.
Financial
Statements
.
Shell has filed a quarterly report on Form 10-Q for the fiscal quarter
ended
March 31 or June 30, 2006, and an annual report on Form 10-K for the
fiscal year ended December 31, 2005 (“
Year End
”).
Except as set forth on the Shell Disclosure Schedule, to the Knowledge
of the
current officers and directors of Shell, the financial statements included
in or
incorporated by reference into the Shell Public Reports (including the
related
notes and schedules) have been prepared in accordance with GAAP throughout
the
periods covered thereby, present fairly the financial condition of Company
and
its Subsidiaries as of the indicated dates and the results of operations
of
Shell and its Subsidiaries for the indicated periods and are correct and
complete in all respects, and are consistent with the books and records
of Shell
and its Subsidiaries;
provided, however
, that the interim statements are
subject to normal year-end adjustments.
G.
Events Subsequent
to Year
End
. Except as set forth on the Shell Disclosure Schedule, to the Knowledge
of the current officers and directors of Shell, there has not been any
Adverse
Change since Year End.
H.
OTCBB Eligibility
. To
the Knowledge of the current officers and directors of Shell, Shell meets
all
issuer and equity security requirements to permit an NASD member to quote
the
Shell Shares on, the OTC Bulletin Board, other than the requirements of
the
Securities Act and applicable state securities laws.
I.
Form S-3
Eligibility
. To the Knowledge of the current officers and directors of
Shell, Shell meets all Registrant Requirements in order to use Form S-3
for the
registration of securities under the Act, including without limitation
all
requirements set forth in Section I.A of the General Instructions to Form
S-3 promulgated by the SEC.
J.
Undisclosed
Liabilities
.
Except as set forth on the Shell Disclosure Schedule, to the Knowledge
of the
current officers and directors of Shell, neither Shell nor Merger Subsidiary
has
any liability of any kind, whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due, including
any liability for taxes, except for (1) liabilities set forth on the face
of the balance sheet dated as of Year End (rather than in any notes thereto)
and
(2) liabilities that have arisen after Year End in the Ordinary Course of
Business (none of which results from, arises out of, relates to, is in
the
nature of, or was caused by any breach of contract, breach of warranty,
tort,
infringement, or violation of law).
K.
Brokers’ Fees
. Neither
Shell nor Merger Subsidiary has any liability or obligation to pay any
fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which Company or any of its Subsidiaries
could become liable or obligated.
L.
Tax Treatment
. It
is the
present intention of Shell to continue at least one significant historic
business line of Company, or to use at least a significant portion of Company’s
historic business assets in a business, in each case within the meaning
of
Treas. Reg.
§1.368-1(d). Neither
Shell or Merger Subsidiary nor, to the Knowledge of Shell, any of their
Affiliates has taken or agreed to take action that would prevent the Merger
from
constituting a reorganization qualifying under the provisions of
Section 354 of the Code.
M.
Disclosure
. The
Shell
Statement and the Registration Statement will comply with the Securities
Act in
all material respects. The Shell Statement and the Registration Statement
will
not contain any untrue statement of a material fact or omit to state a
material
fact necessary in order to make the statements made therein, in light of
the
circumstances under which they will be made, not misleading;
provided,
however
, that Shell makes no representation or warranty with respect to any
information that Company will supply specifically for use in the Shell
Statement
or the Registration Statement. None of the information that Shell and Merger
Subsidiary will supply specifically for use in the Company Statement will
contain any untrue statement of a material fact or omit to state a material
fact
necessary in order to make the statements made therein, in light of the
circumstances under which they will be made, not misleading.
N.
Litigation
. There
is no
action, suit, legal or administrative proceeding or investigation pending,
or to
Shell’s Knowledge threatened, against or involving Shell (either as a plaintiff
or defendant) before any court or governmental agency, authority, body
or
arbitrator. Neither Shell nor to its Knowledge any officer, director or
employee
of Shell, has been permanently or temporarily enjoined by any order, judgment
or
decree of any court or any governmental agency, authority or body from
engaging
in or continuing any conduct or practice in connection with the business,
assets, or properties of Shell, Merger Subsidiary, or Company. There in
existence on the date hereof any order, judgment or decree of any court,
tribunal or agency enjoining or requiring Shell to take any action of any
kind
with respect to its business, assets or properties.
O.
Books and
Records
. The
general ledger and books of account of Shell, all minute books of Shell,
all
federal, state and local income, franchise, property and other tax returns
filed
by Shell, all reports and filings with the SEC by Shell, all of which have
been
made available to Company, are in all material respects complete and correct
and
have been maintained in accordance with good business practice and in accordance
with all applicable procedures required by laws and regulations.
P.
Stockholder
Claims
.
There are no existing claims against Shell by any current or former stockholder
of Shell, and to Shell’s Knowledge, no facts or circumstances reasonably likely
to result in any such claims.
Q.
Affiliates
. Except
for
the Parties, there are no persons who, to the Knowledge of Shell, may be
deemed
to be Affiliates of Shell.
R.
Operations
of Merger
Subsidiary
. Merger Subsidiary is a direct, wholly owned subsidiary of Shell,
was formed solely for the purpose of engaging in the transactions contemplated
by this Agreement, has engaged in no other business activities and has
conducted
its operations only as contemplated by this Agreement.
6.
Termination of Merger
Transaction
.
A.
Termination
. Any
of the
Parties may terminate the Merger Transaction with the prior authorization
of its
board of directors, before or after stockholder approval, only as provided
in
this
Section 6.A
below:
(1) Shell
may terminate the Merger Transaction by giving written notice to Company
within
ninety (90) days following the date of this Agreement if Shell is not
reasonably satisfied with the results of its due diligence regarding the
Company.
(2) Shell
may terminate the Merger Transaction by giving written notice to Company
at any
time prior to the Closing of the Merger in the event of an Uncured Breach
by
Company.
(3) Company
may terminate the Merger Transaction by giving written notice to Shell
and
Merger Subsidiary at any time prior to the Closing of the Merger in the
event of
an Uncured Breach by Shell or Merger Subsidiary.
(4) Company
may terminate the Merger Transaction if the Closing of the Merger shall
not have
been consummated on or before December 1, 2006, and either Party may
terminate the Merger Transaction if the Closing of the Merger shall not
have
been consummated on or before close of business on Friday, December 29,
2006;
provided
,
however
, that the right to terminate the Merger
Transaction under this
Section 6.A(4)
shall not be available to any
party whose Uncured Breach has been the cause of, or resulted in, the failure
of
the Closing of the Merger to have been consummated on or before such date.
For
the avoidance of doubt, notwithstanding any other provision of this Agreement,
under no circumstances, other than as caused by its own Uncured Breach,
will
Shell have any obligation to issue or deliver any Shell Shares after
December 31, 2006, unless the Parties mutually agree to extend such date.
(5) Either
Party may terminate the Merger Transaction, if a Governmental Authority
of
competent jurisdiction shall have issued an order or taken any other action,
in
each case which has become final and non-appealable, and which permanently
restrains, enjoins or otherwise prohibits the Closing of the Merger.
B.
Effect of
Termination
.
If the Merger Transaction is terminated pursuant to
Section 6.A
:
(1) Company
shall absolutely, unconditionally, validly and irrevocably sell, transfer,
grant
and assign to Shell all of the Technology, including, but not limited to,
the
sole and exclusive right, in perpetuity and throughout the Territory, to
use,
improve, expand and otherwise exploit the Technology, to make (and have
made),
use, and sell the Licensed Products, and otherwise to practice the inventions
and the art that is embodied or described in the Licensor Patents, the
Licensor
Patent Applications, and any improvements thereto made in whole or in part
by
Licensor (whether or not patented) in connection with the Technology (each
such
capitalized term as defined in the License Agreement), (the
“
Technology Transaction
”);
(2) At
the Closing of the Technology Transaction and in consideration of the transfer
provided for in
Section 6.B(2)(a)
, Shell shall deliver to Company
validly issued, fully paid and non-assessable Shell Shares in one of the
following amounts:
(i) If
notice of termination is given pursuant to
Section 6(A)(2) or (4)
,
Nine Million Six Hundred Thousand (9,600,000) Shell Shares; or
(ii) If
notice of termination is given pursuant to
Section 6(A)(1), (3) or
(5)
, Twelve Million Four Hundred Eighty Thousand (12,480,000) Shell Shares;
Provided,
however
, that if the total number of Shell Shares outstanding as of the date
of this Agreement is other than Ten Million Four Hundred Thousand (10,400,000),
the number of Shell Shares provided for in this
Section 6.B(2)
will
be proportionately adjusted in accordance with the Conversion Ratio as
set forth
in
Section 1.F(5)(a)
; and
Provided,
further
, that if it is later determined by an arbitrator or court of
competent jurisdiction that a notice of termination was improper, or that
the
Agreement was terminated on a different basis or pursuant to a different
provision, the number of Shell Shares to be issued pursuant to this
Section 6.B(2)
will be retroactively adjusted to the correct umber
pursuant to one of the foregoing subsections, and any difference between
the
Shell Shares issued and the Shell Shares determined to be correct will
be issued
or returned for cancellation by the appropriate Party to the other within
ninety
(90) days of any such final determination; and
(3) Except
for the provisions of Sections 1, 7 and 8 of the License Agreement, which
shall remain in full force and effect and be deemed incorporated herein
by
reference, the License Agreement shall thereafter be terminated and be
of no
further force or effect whatsoever.
7.
Definitions
.
“
Adverse Effect
”
or “
Adverse
Change
” means any effect or change that would be, or could reasonably be
expected to be, materially adverse to the business, assets, financial condition,
operating results, operations, or business prospects of Company, or to
the
ability of Company to consummate timely the transactions contemplated by
this
Agreement, regardless of whether or not such adverse effect or change can
be or
has been cured at any time or whether Shell has knowledge of such effect
or
change on the date hereof, including any adverse change, event, development,
or
effect arising from or relating to: (a) general business or economic
conditions, including such conditions related to the business of Company,
(b) national or international political or social conditions, including the
engagement by the United States in hostilities, whether or not pursuant
to the
declaration of a national emergency or war, or the occurrence of any military
or
terrorist attack upon the United States, or any of its territories, possessions,
or diplomatic or consular offices or upon any military installation, equipment
or personnel of the United States, (c) financial, banking, or securities
markets, including any general suspension of trading in, or limitation
on prices
for, securities on any national exchange or trading market, (d) changes
in GAAP,
(e) changes in laws, rules, regulations, orders, or other binding
directives issued by any governmental entity, and (f) the taking of any
action contemplated by this Agreement and the other agreements contemplated
hereby.
“
Affiliate
”
has the
meaning set
forth in Rule 12b-2 of the regulations promulgated under the Exchange Act.
“
CGCL
”
means
the Corporations
Code of the State of California, as amended.
“
CNL
”
means
Consolidated
National, LLC, a California limited liability company.
“
Code
”
means
the Internal
Revenue Code of 1986, as amended, or any succeeding law.
“
Company Share
”
means
any share
of the common stock, $0.01 par value per share, of Company.
“
Company Stockholder
”
means
any
Person who holds any Company Shares.
“
Confidential
Information
” means
material non-public information concerning the business and affairs of
Company
and its Subsidiaries, that is confidential or proprietary in nature, relating
to
(a) Company’s proprietary technology, including any patent applications,
trade secrets, methods, data, processes, formulas, instrumentation, techniques,
know-how, procedures, enhancements or improvements, or (b) Company’s
products or services, systems, finances, methods of operation, strategy,
business plans, prospective or existing contracts or other business
arrangements, that Company uses reasonable efforts to identify as Confidential
Information when provided. Confidential Information does not include information
that is or becomes: (i) part of the public domain through no act or
omission of the receiving Party, (ii) developed independently by the
receiving Party, or (iii) lawfully provided to the receiving Party by a
third party not subject to an obligation of confidentiality or otherwise
prohibited from transmitting the information.
“
DGCL
”
means
the General
Corporation Law of the State of Delaware, as amended.
“
Dissenting
Share
” means any
Company Share held of record by any stockholder who has exercised applicable
appraisal rights under the DGCL.
“
Exchange
Act
” means the
Securities Exchange Act of 1934, as amended.
“
FDA
”
means
the Food and Drug
Administration, or any successor agency.
“
GAAP
”
means
United States
generally accepted accounting principles as in effect from time to time,
consistently applied.
“
Governmental
Authority
” means
any national, state, municipal, local or foreign government, any
instrumentality, subdivision, court, administrative agency or commission
or
other authority thereof, or any quasi-governmental or private body exercising
any regulatory, taxing, importing or other governmental or quasi-governmental
authority.
“
Intellectual
Property
” means
(a) United States, non-United States and international patents, patent
applications and statutory invention registrations, (b) trademarks, service
marks, trade dress, logos, trade names, corporate names and other source
identifiers, and registrations and applications for registration thereof,
(c) copyrightable works, copyrights, and registrations
and applications
for
registration thereof, and (d) confidential and proprietary information,
including trade secrets and know-how.
“
IRS
”
means
the Internal Revenue
Service.
“
Knowledge
”
means
actual
knowledge after reasonable investigation.
“
Lien
”
means
any mortgage,
pledge, lien, encumbrance, charge, or other security interest, other than
(a) liens for taxes not yet due and payable or for taxes that the taxpayer
is contesting in good faith through appropriate proceedings, (b) purchase
money liens and liens securing rental payments under capital lease arrangements,
and (c) other liens arising in the Ordinary Course of Business and not
incurred in connection with the borrowing of money.
“
Majority
Stockholders
” means
Victor Gura, M.D., Robert M. Snukal and Leonardo Berezovsky, M.D., individually
and as Trustee of all Trusts holding Company Shares of which he is a Trustee.
“
Merger Documents
”
means
this
Agreement, the Affiliate Agreements, the Voting Agreements, the Registration
Statement, the Company Statement, the Shell Statement, the AADP Agreement,
all
SEC filings, all filings made pursuant to applicable state securities laws,
and
any other documents executed or filed in connection with the transactions
contemplated herein (but excluding the License Agreement).
“
Ordinary
Course of Business
”
means the ordinary course of business consistent with past custom and
practice,
including with respect to nature, quantity and frequency.
“
Person
”
means
an individual, a
partnership, a corporation, a limited liability company, an association,
a joint
stock company, a trust, a joint venture, an unincorporated organization,
any
other business entity, or a governmental entity (or any department, agency,
or
political subdivision thereof).
“
SEC
”
means
the Securities and
Exchange Commission.
“
Securities
Act
” means the
Securities Act of 1933, as amended.
“
Shell Securities
”
means
any
Shell Share and any security exercisable or convertible into Shell Shares.
“
Shell Share
”
means
any share of
the common stock of Shell.
“
Shell Stockholder
”
means
any
Person who holds any Shell Shares.
“
Stockholder
Approval
” means the
effective affirmative vote of the holders of a majority of the Company
Shares or
Shell Shares, as the case may be, in favor of this Agreement and the Merger.
“
Subsidiary
”
means,
with respect
to any Person, any corporation, limited liability company, partnership,
association, or other business entity of which (a) if a corporation, a
majority of the
total
voting power of shares of stock entitled (without regard to the occurrence
of
any contingency) to vote in the election of directors, managers, or trustees
thereof is at the time owned or controlled, directly or indirectly, by
that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof or (b) if a limited liability company, partnership, association, or
other business entity (other than a corporation), a majority of the partnership
or other similar ownership interests thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more Subsidiaries of that
Person or a combination thereof and for this purpose, a Person or Persons
owns a
majority ownership interest in such a business entity (other than a corporation)
if such Person or Persons will be allocated a majority of such business
entity’s
gains or losses or will be or control any managing director or general
partner
of such business entity (other than a corporation). The term “
Subsidiary
”
will include all Subsidiaries of such Subsidiary.
“
Uncured Breach
”
means
an
unexcused breach of any material representation, warranty or covenant contained
in this Agreement, in any material respect, following written notice reasonably
specifying the breach and the demanded manner of cure, if and when the
breach
has continued without cure for a period of thirty (30) days after the
notice of breach.
8.
General
.
A.
Press Releases
and Public
Announcements
. No Party will issue any press release or make any public
announcement relating to the subject matter of this Agreement without the
prior
written approval of the other Parties;
provided, however
, that any Party
may make any public disclosure it believes in good faith based upon advise
of
counsel is required by applicable law or any listing or trading agreement
concerning its publicly traded securities (in which case the disclosing
Party
will use its best efforts to advise the other Party prior to making the
disclosure).
B.
No Third-Party
Beneficiaries
. This Agreement will not confer any rights or remedies upon
any Person other than the Parties and their respective successors and permitted
assigns.
C.
Succession
and
Assignment
. This Agreement will be binding upon and inure to the benefit of
the Parties named herein and their respective successors and permitted
assigns.
No Party may assign either this Agreement or any of its rights, interests,
or
obligations hereunder without the prior written approval of the other Parties.
D.
Headings
. The
section
headings contained in this Agreement are inserted for convenience only
and will
not affect in any way the meaning or interpretation of this Agreement.
E.
Notices
. All
notices,
requests, demands, claims, and other communications hereunder will be in
writing. Any notice, request, demand, claim, or other communication hereunder
will be deemed duly given (i) when delivered personally to the recipient,
(ii) one (1) business day after being sent to the recipient by
reputable overnight courier service, (iii) one (1) business day after
being sent to the recipient by facsimile transmission or electronic mail,
or
(iv) four (4) business days after being mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid,
and
addressed to the intended recipient as set forth below:
If
to Shell or Merger Subsidiary
:
Xcorporeal,
Inc.
c/o Greenberg Traurig, LLP
2450 Colorado
Avenue, Suite 400E
Attn: Terren S. Peizer
Fax: (310) 586-0286
With
a copy to
:
Greenberg
Traurig, LLP
2450 Colorado Avenue,
Suite 400E
Santa Monica, California 90404
Attn: John C. Kirkland,
Esq.
Fax: (310) 586-0286
If
to Company
:
National
Quality Care, Inc.
9033 Wilshire Boulevard,
Suite 501
Beverly Hills, California 90211
Attention: Robert M.
Snukal
Fax: (310) 840-5681
With
a copy to
:
Jenkins
&
Gilchrist,
LLP
12100 Wilshire Boulevard, 15th
Floor
Los Angeles, California 90025
Attn: Jeffrey P. Berg, Esq.
Fax:
(310) 820-8859
Any Party may
change
the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties
notice
in the manner herein set forth.
F.
Governing
Law
. This
Agreement will be governed by and construed in accordance with the domestic
laws
of the State of Delaware without giving effect to any choice or conflict
of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other
than the
State of Delaware.
G.
Arbitration
. Any
dispute,
controversy or claim arising out of or relating to this Agreement, shall
be
resolved by final and binding arbitration before a retired judge at JAMS
or its
successor in Santa Monica, California. The expenses of arbitration, the
reasonable fees and costs of legal counsel, experts, and evidence shall
be
awarded to the prevailing party. Any interim or final award of the arbitrator
may be entered in any court of competent jurisdiction.
H.
Severability
. Any
term
or provision of this Agreement that is invalid or unenforceable in any
situation
in any jurisdiction will not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or enforceability
of the
offending term or provision in any other situation or in any other jurisdiction.
I.
Attorneys
and Expenses
.
All Parties have been represented by their own separate counsel in connection
with this Agreement and the transactions contemplated hereby: Greenberg
Traurig,
LLP and its attorneys have solely represented the interests of CNL and
Shell,
and Jenkens & Gilchrist and its attorneys have solely represented the
interests of Company. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
J.
Attorneys’ Fees
. If
attorneys’ fees or other costs are incurred to secure performance of any
obligations hereunder, or to establish damages for the breach thereof or
to
obtain any other appropriate relief, whether by way of prosecution or defense,
the prevailing party will be entitled to recover reasonable attorney’s fees and
costs incurred in connection therewith, including on appeal therefrom.
K.
Construction
. The
Parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement will be construed as if drafted jointly by the Parties
and no presumption or burden of proof will arise favoring or disfavoring
any
Party by virtue of the authorship of any of the provisions of this Agreement.
Any reference to any federal, state, local, or foreign statute or law will
be
deemed also to refer to all rules and regulations promulgated thereunder,
unless
the context otherwise requires. The word “including” will mean including without
limitation. Time is of the essence of each provision of this Agreement.
L.
Incorporation
of
Exhibits
. The Exhibits identified in this Agreement are incorporated herein
by reference and made a part hereof.
M.
Amendments
and Waivers
.
The Parties may mutually amend any provision of this Agreement at any time
prior
to the Closing with the prior authorization of their respective boards
of
directors;
provided, however
, that any amendment effected subsequent to
stockholder approval will be subject to the restrictions contained in the
DGCL.
No amendment of any provision of this Agreement will be valid unless the
same
will be in writing and signed by all of the Parties. No waiver by any Party
of
any provision of this Agreement or any default, misrepresentation, or breach
of
warranty or covenant hereunder, whether intentional or not, will be valid
unless
the same will be in writing and signed by the Party making such waiver
nor will
such waiver be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or affect
in any
way any rights arising by virtue of any prior or subsequent such default,
misrepresentation, or breach of warranty or covenant.
N.
Survival
. All
of the
representations, warranties, and covenants of the Parties contained in
this
Agreement shall survive the Closing, and continue in full force and effect
for a
period of one (1) year thereafter.
O.
Termination
of
Agreement
. Any of the Parties may jointly terminate this Agreement with the
prior authorization of its board of directors, before or after stockholder
approval, by mutual written consent at any time prior to the Closing.
P.
Counterparts
. This
Agreement may be executed in one or more counterparts, including by means
of
facsimile, each of which will be deemed an original, and all of which together
will constitute one and the same instrument.
Q.
Entire Agreement
. This
Agreement, including the attached Exhibits and documents referred to herein,
constitutes the entire agreement among the Parties, and supersedes all
prior or
contemporaneous understandings or agreements, whether written or oral.
Neither
party has relied upon any promise, representation or undertaking not expressly
set forth herein. To the extent that there is any conflict between any
provision
in this Agreement and any provision in any other agreement to which the
Parties
are also parties, the provision of this Agreement shall govern.
IN WITNESS WHEREOF,
the Parties hereto
have executed this Agreement as of the date first above written.
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COMPANY:
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NATIONAL QUALITY CARE,
INC.
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By:
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/s/ Robert M. Snukal
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Robert M. Snukal, Chief Executive
Officer
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By:
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/s/ Victor Gura
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Victor Gura, M.D., Chief Scientific
Officer
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SHELL:
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XCORPOREAL, INC.
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By:
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/s/ Terren S. Peizer
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Terren S. Peizer, Chairman of the
Board
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MERGER SUBSIDIARY:
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NQCI ACQUISITION CORPORATION
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By:
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/s/ Terren S. Peizer
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Terren S. Peizer
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EXHIBIT
D
JAMS
ARBITRATION NUMBER 1210026747
XCORPOREAL,
INC.,
Claimant,
And
NATIONAL
QUALITY CARE, INC.,
Respondent.
NATIONAL
QUALITY CARE, INC.,
Counter
Claimant,
And
XCORPOREAL,
INC., TERREN PEIZER.
VICTOR
GURA,
Counter
Respondents.
VICTOR
GURA,
Third
Party Claimant,
And
NATIONAL
QUALITY CARE, INC.,
Third
Party Respondent.
SECOND
INTERIM AWARD
(August
4, 2008)
Introduction.
This
arbitration presents for resolution disputes between and among claimants
and
counter respondents Xcorporeal, Inc. and Terren Peizer, respondent,
counterclaimant and third party respondent National Quality Care, Inc.
(National), and counter-respondent and third party claimant Dr. Victor Gura,
concerning transactions aimed at commercial exploitation of a Wearable
Artificial Kidney (WAK) and related technology invented by Dr.
Gura.
Two
additional entities also are involved in the arbitration, each formed in
a
transaction during the pendency of the arbitration in which the shareholders
of
Xcorporeal traded their shares for those of a new entity, C. T. Holdings
(CT),
the Technology and monies formerly held by Xcorporeal were transferred into
a
wholly owned subsidiary of CT named Xcorporeal Operations, and then CT was
renamed Xcorporeal. In this Second Interim Award the name Xcorporeal refers
to
the entity which is party to the Agreements in dispute and which commenced
the
arbitration. The newly formed parent company is referred to herein as New
Xcorp,
and the subsidiary as Operations.
On
June
6, 2008, after an extensive evidentiary hearing, the arbitrator rendered
an
interim award (First Interim Award) finding that National was entitled to
a
decree of specific performance, and specifying several additional questions
that
needed to be addressed and resolved before such a decree could be
framed.
Supplemental
opening and closing briefs were filed, and a hearing for oral argument had
July
28, 2008, James Turken and Chanda Hinman appearing for Xcorp. and Peizer,
John
Hersey and Scott Lieberman for Dr. Gura, and William Chertok, Christopher
Dueringer and Rosario Vizzie for National.
The
following is the arbitrator's statement of reasons and Second Interim
Award.
Challenges
To First Interim Award.
Before
turning to the issues necessary to shape a specific performance decree, the
arbitrator responds to several objections by Xcorporeal to the First Interim
Award contained in briefs.
Excuse
of
National's Obligation To Perform By December 31, 2006. First, Xcorporeal
argues
that National never raised during the arbitration the notion, central to
the
First Interim Award, that Xcorporeal's filing of this arbitration proceeding
excused National's obligation to proceed with the Technology Transaction.
This
is correct only in a narrow sense. National argued that Xcorporeal had committed
an anticipatory breach of the Merger Agreement. The arbitrator concluded
that
the filing of an arbitration demand, explicitly permitted by the Merger
Agreement, could not constitute an anticipatory breach.
But,
the
relief that Xcorporeal sought, namely a declaration that the License Agreement
should govern the parties' relations in perpetuity, strongly evidence that
Xcorporeal would not consummate the Technology Transaction—all as carefully
explained in the First Interim Award. There is no credible evidence that
Xcorporeal was prepared to transfer 48% or more of its shares to National
during
the pendency of this arbitration in which Xcorporeal sought a decree entitling
it to the Technology in perpetuity without giving up
any
shares.
And, it would have been wholly unreasonable to expect National to proceed
with
the Technology Transaction, and deliver ownership of its technology to
Xcorporeal, while Xcorporeal was pursuing an arbitration decree enforcing
the
License Agreement, an entirely different arrangement which National (correctly)
believed to be contrary to the Merger Agreement, and which, if enforced,
preserved title to the Technology in National.
Contract
conditions can be excused by conduct inconsistent with performance, and there
hardly can be a clearer example of conduct inconsistent with intent to perform
than Xcorporeal's filing of the arbitration demand was with any alleged intent
to carry out the Technology Transaction by December 31, 2006.
Pleading
Of Specific Performance Remedy. Next, Xcorporeal suggests that National never
pleaded a claim for specific performance. Again, this is correct only in
a
narrow and technical sense. By pretrial motion, brought and heard before
the
arbitration, National sought to amend its demand to include a claim for specific
performance. If the arbitrator's denial of leave to do so means, in a technical
sense, that such a claim was "never pled," then Xcorporeal's suggestion is
correct. But Xcorporeal's implication that the arbitrator invented a remedy
never proposed by National is incorrect. And indeed, as explained in the
First
Interim Award, the order denying leave to amend expressly reserved the right
to
consider a specific performance remedy, and one that bound the new Xcorporeal,
if proof at the trial warranted these steps.
Termination
By Mutual Consent. Xcorporeal renews the argument that what really occurred
here
was a termination by mutual consent under section 8.0 of the Merger Agreement.
The Agreement gave each side the right to terminate for various reasons,
and
specified distinct remedies for a termination on specific contractual grounds.
Xcorporeal's interpretation would undermine those remedies by allowing, for
example, a party who defaulted to defeat the remedies for default simply
by
"agreeing" to the termination after the fact. This is an unreasonable
construction of section 8.0, and one which undermines other rights in the
Agreement, contrary to the rules of construction requiring that all parts
of a
contract be given meaning, and that different parts be read in harmony with
one
another. Reasonably construed, section 8.0 was intended to apply where the
two
sides sat down and mutually consented to terminate the Agreement, on terms
acceptable to each. There is no evidence that National intended, in terminating
the agreement, to forgo the rights conferred upon it under section 6 of the
Agreement, or that the termination was one by mutual consent.
The
arbitrator now turns to the issues necessary to settle a specific performance
decree.
Specific
Performance Issues.
Can
"New"
Xcorporeal Be Bound By The Award? Under the Merger Agreement, National was
to
receive shares in the old, publicly traded Xcorporeal entity. It was not
certain
that National's shares would be publicly tradable; that depended upon the
filing
of a registration statement and approval by the Securities And Exchange
Commission. But there was a reasonable probability that the shares National
was
to receive would be publicly tradable.
The
Merger Agreement says "This Agreement will be binding upon and inure to the
benefit of the Parties named herein and their respective successors and
permitted assigns." (8(C).) New Xcorp's public filings describe its business
in
precisely the same terms as did Xcorporeal's: "We are a medical device company
developing an innovative extra corporeal platform that may be used in devices
to
replace the function of various human organs." All Xcorporeal shareholders,
officers, and directors became New Xcorp's shareholders, officers, and
directors. The new entity's articles and bylaws are identical to the old
entity's, and Mr. Peizer was the principal (67%) shareholder of the new entity,
as he was of the old. (He evidently has since sold shares, reducing his interest
to 42%.)
A
"successor" is defined as: "A corporation that, through amalgamation,
consolidation or other assumption of interests is vested with the rights
and
duties of an earlier corporation." (Black's Law Dictionary, 7
th
Ed.,
p.
1446)
Xcorporeal
shareholders swapped their stock for share in New Xcorp. Operations got the
Technology and the money. Together, New Xcorp and Operations beneficially
own
and control the same assets as Xcorporeal, and conduct the very same business.
The shareholders, officers, and directors of New Xcorp are the same as those
of
Xcorporeal. A strong preponderance of evidence shows New Xcorp to be a
"successor" of Xcorporeal within the meaning of the Merger Agreement." The
arbitrator so finds.
Xcorporeal
argues that New Xcorp did not exist at the time the arbitration commenced
nor at
the time of the underlying transactions, was not a party to the Merger
Agreement, was not a party to the arbitration, is not bound to arbitrate,
and is
beyond the arbitrator's jurisdiction. Xcorporeal says that National is entitled
at most to receive the non-publicly traded shares of
Operations.
All
of
these arguments are rejected. At the time the arbitration was commenced,
and
today New Xcorp's personnel, assets, and shares all were part and parcel
of
Xcorporeal, and all were subject to arbitral jurisdiction. Xcorporeal could
not
unilaterally extricate part of itself from arbitral jurisdiction by dividing,
amoeba-like, in mid-proceeding, without the arbitrator's consent, and in
the
face of the Merger Agreement's proviso that it binds successors to its
terms—including the arbitration clause.
The
argument that New Xcorp is a new, distinct entity, that has not participated
nor
been represented by counsel in the arbitration is artificial. New Xcorp's
interests in the arbitration are completely aligned with those of Operations
and
Old Xcorporeal. It did not separately exist during the events which are the
subject of the transaction. Further, it could have avoided any alleged arbitral
detriment from its separate existence by deferring the split until the case
was
concluded—or, it could have acceded to, instead of opposing, National's belated
request to add it to the arbitration before the plenary hearing
began.
The
arbitrator concludes that he has jurisdiction over New Xcorp.
National
Is Entitled To Shares In New Xcorp. The next question is whether National
is
entitled to receive shares of New Xcorp as opposed to those of
Operations.
This
question is largely answered in the previous discussion. The Merger Agreement
promises that National will receive the shares of Xcorporeal, a publicly
traded
corporation, with the prospect that those shares shall be publicly tradable
if
successfully registered. This was the consideration for the merger and the
Technology Transaction. Xcorporeal could not, by its unilateral action during
the pendency of the arbitration, place this remedy out of reach, by swapping
its
shares for those of New Xcorp, and New Xcorp cannot, as a bound successor,
avoid
the obligation to issue its shares to National.
Xcorporeal
argues that new Xcorp has added shareholders who were not parties to the
Merger
Agreement whose interests will be affected by the awards and decrees in this
case. But, the arbitration was already pending when these shareholders acquired
their interests, and presumably, Xcorporeal made sufficient disclosures to
acquaint these new purchasers with the existence and potential ramifications
of
the arbitration.
Xcorporeal
correctly points out that its obligation under the Merger Agreement was to
file
a registration statement and use reasonable efforts to have the shares
registered—not to guarantee registration and resultant actual public
tradability. The arbitrator's acknowledges this limitation and will frame
the
decree consistent with it, retaining jurisdiction to monitor the progress
of
registration and assure that reasonable efforts are employed to obtain
it.
Number
Of
Shares National Should Receive. The Merger Agreement recites that at its
date
there were 10,400,000 shares of Xcorporeal outstanding. Xcorporeal's latest
briefs instead put the figure at 10,000,000. Section 6B(2) contemplated that
National would receive, in the Technology Transaction, either 9,600,000
additional shares, bringing the total number of shares outstanding to 20
million, and giving National a 48% interest, or 12,480,000 additional shares,
bringing the total number of outstanding shares to 22,880,000, with National
enjoying a 54% interest. A proviso in section 6 B(2)(ii) stated as
follows:
If
the
total number of…shares outstanding as of the date of this Agreement is other
than ... 10,400,000, the number of...shares provided for in this section...
will
be proportionately adjusted in accordance with the Conversion Ratio as set
forth
in section 1F(5)(a).
Section
1F(5)(a) stated as follows:
Conversion
of Shares. At and as of the Closing of the Merger, (a) all issued and
outstanding Company[National] Securities ... will ... be converted into and
become validly issued, fully paid and non-assessable Shell Shares (the ratio
of
Company Shares to one (1) Shell Share is referred to herein as the
"Conversion
Ratio"),
such
that
all holders of all Company Shares will collectively receive ...
an
aggregate of forty-eight and one-half percent (48.5%) of all Shell Shares
outstanding as of the date hereof,
adjusted
for any stock splits or dividends prior to the Closing ...
National
was to receive the 48% share if Xcorporeal terminated the Agreement for breach,
or either side terminated under the December 1 or December 29 deadlines.
(6B(2)(i).) National was get a 54% interest if Xcorporeal terminated for
dissatisfaction with its due diligence, or National terminated for Xcorporeal's
breach. (6B(2)(ii).) Roughly speaking, these alternatives awarded a lower
share
to National if it bore the fault for failure of the merger transaction, and
a
higher share if Xcorporeal bore the fault. This implication is reinforced
by the
proviso authorizing the arbitrator, upon determining that a notice of
termination was given improperly, to retroactively adjust the shares awarded
to
National. (The correlation between shares due and fault is only partial;
for
example a termination due to governmental action, not necessarily the fault
of
either party, would result in a higher share for National.)
National
purported to terminate the Merger Agreement in its entirety when, as explained
in the First Interim Award, the agreed-upon remedy was to proceed with the
Technology Transaction, rather than to terminate the Merger Agreement outright
(National also had the right to seek a decree in the arbitration enforcing
the
Technology Transaction, relief which it eventually sought). National was
not
entitled to terminate the Merger Agreement outright, and its notice of
termination was in this respect "improper." Therefore, under the second proviso
of section 6(B)(2), National is entitled to receive only the lesser of the
two
alternative interests.
Under
the
Agreement, National's putative share was linked to the number of shares
outstanding as of the date of the Agreement, adjusted for stock splits or
dividends which occurred after that date but prior to Closing. New XCorp
evidently now has more outstanding shares than the 10,400,000 shares Xcorporeal
had at the time of the Agreement. National's brief asserts that New Xcorp
has
outstanding 14,592,472 shares. National does not urge that Xcorporeal had
other
than 10,000,000 shares at the time of the Agreement. Nor does it argue that
New
Xcorp's additional shares result from stock splits or
dividends.
National
proposes four possible alternate share interest awards, a 48% or a 54% interest
based on shares outstanding at the time of the Merger Agreement, and a 48%
or
54% interest based on the present number of outstanding shares of New
Xcorp.
The
arbitrator concludes that the correct number of shares to award to National
is
9,230,000. This is 48% of 19,230,000 shares, the total number of shares
necessary to put New Xcorp's 52% interest at 10 million
shares.
The
arbitrator rejects Xcorporeal's argument that National is entitled only to
48%
of 10,000,000 shares. This argument cannot be reconciled with the Merger
Agreement, which states that National was to receive 9,600,000 shares if
Xcorporeal had 10,400,000 shares.
In
summary, National is entitled to 9,230,000 shares, assuming it is otherwise
entitled to a specific performance decree.
Conditions
To Closing. The parties appear to agree that at least two conditions must
be
fulfilled prior to the Closing, each required by federal securities law.
These
are: an information statement and a registration statement.
There
is
a dispute as to when the information statement should issue. The information
statement and its timing are discussed below.
In
addition, there is a dispute as to whether National must comply with the
other
conditions specified in the Merger Agreement. The arbitrator now turns to
discussion of these.
A
number
of the conditions in the Merger Agreement do not apply to the Technology
Transaction. Among the remaining conditions which do apply, Xcorporeal argues
that National cannot satisfy the following:
—
National cannot certify compliance with all covenants in the Merger Agreement,
because after December 31, 2006, National issued additional shares to Mr.
Snukal, and incurred additional debt.
—
National denied Xcorporeal access to all of National's information during
pendency of the arbitration.
—
National cannot make certain representations and warranties required by the
Merger Agreement, for example concerning undisclosed liabilities, insurance,
and
intellectual property.
—
National must, but cannot, represent that there has been no "adverse change"
to
its business or assets.
—
National is required to deliver a legal opinion.
The
arbitrator's rulings are as follows.
Xcorporeal's
conduct excused National's obligation not to issue new shares or seek capital.
Xcorporeal knew, or should have known, that commencing the arbitration prior
to
the deadline to close the Merger or Technology Transaction would lead to
a long
delay in closing either of those transactions. The arbitration demand sought
a
result totally at odds with either of the agreed transactions. Neither the
Merger nor the Technology Transaction could close if Xcorporeal obtained
the
relief sought in its arbitration demand, enforcement of the License Agreement.
Further, it could reasonably be foreseen that many months, perhaps several
years, would be required to reach a final determination in the arbitration.
By
filing the arbitration, Xcorporeal signaled that it would not transfer shares
to
National by the December 31, 2006 deadline, and also assured that closing
of
either merger or Technology Transaction would be indefinitely delayed. Since
Xcorporeal was not going to deliver the promised consideration for the
Technology, namely publicly tradable shares, National needed another source
of
funds for the purpose, inter alia, of defending the
arbitration.
By
the
same conduct, Xcorporeal excused any condition requiring National to provide
Xcorporeal with unfettered access to National's information. Xcorporeal's
arbitration demand asserted, at core, that the Merger Agreement wasn't binding.
Xcorporeal could not maintain this contention and yet at the same time insist
on
nationals compliance with the terms of the same Agreement.
The
same
analysis leads to the conclusion that Xcorporeal excused the other conditions
to
the Technology Transaction contained in the Merger Agreement. Xcorporeal
could
not at the same time maintain in the arbitration that the Merger Agreement
was
not binding upon it, yet at the same time insist that its conditions must
be
punctiliously observed by National.
Further,
the various other unsatisfied conditions were not and are not material.
National's warranties respecting insurance and undisclosed liabilities are
not
material to the Technology Transaction because Xcorporeal is not merging
with
National, but only receiving certain of its assets. As indicated in the First
Interim Award, Xcorporeal failed to prove any material defects in the
Technology, and has evidenced by its aggressive pursuit of the arbitration
it's
belief that the Technology is sound and valuable.
As
to the
condition requiring a legal opinion, the Merger Agreement specified that
the
legal opinion must be in the form attached as an exhibit, but no form was
attached, Thus, there was no meeting of the minds as to the required
opinion.
Xcorporeal
points to a boilerplate anti-waiver clause in Merger Agreement, arguing that
it
bars the arbitrator from finding Xcorporeal has by its conduct waived or
excused
the conditions. A similar argument recently was heard and rejected by the
California Supreme Court in the case of
Gueyffier
v Ann Summers Ltd,
(2008),
43 Cal 4th 1179, 1182. There, the Supreme Court affirmed an arbitrator's
finding
that a term in a franchise agreement requiring notice of default and an
opportunity to cure was excused or had been waived. The argument against
excuse
was stronger in that case than here, as the contract specified that the cure
clause was material and could not be modified or changed by the arbitrator.
The
Supreme Court nonetheless held:
We
conclude the Court of Appeal erred in its application of section 1286.2.
Absent
an express and unambiguous limitation in the contract or the submission to
arbitration, an arbitrator has the authority to find the facts, interpret
the
contract, and award any relief rationally related to his or her factual findings
and contractual interpretation. [citations omitted] The parties here having
included no effective limitation in their contract, as we discuss, the
arbitrator did not exceed his powers by interpreting the contract to allow
for
equitable excusal of the notice-and-cure condition or by making a factual
finding that notice would have been an idle act. The award therefore was
not
subject to vacation under section 1286.2, subdivision (a)(4).
In
the
present case, the Agreement does not contain a clause which even attempts
to
constrain the arbitrator's authority to excuse performance of
conditions.
Therefore,
all remaining conditions are excused, save the information statement and
the
registration statement requirements, which are required by
law.
Information
Statement. As a condition to closing, the Merger Agreement requires that
the
parties deliver to the Xcorporeal stockholders a written information statement
pursuant to Rule 14c-2 of the Rules promulgated by the SEC under the Securities
Exchange Act of 1934. Subparagraph (a)(1) of the rule states as
follows:
"In
connection with ... the taking of corporate action by the written authorization
or consent of security holders, the registrant shall transmit to every security
holder of the class that is entitled to vote or give an authorization or
consent
in regard to any matter to be acted upon
and
from whom proxy authorization or consent is not
solicited
...
a
written
information statement." (emphasis added)
As
is
apparent from the text, the Rule applies to transactions authorized by or
consented to in writing by a majority of shareholders without the necessity
of a
proxy solicitation or a formal meeting or vote. Where the majority necessary
to
authorize a transaction must be obtained by soliciting votes or proxies to
vote,
a similar rule applies, but the proponents of the corporate decision must
hold a
meeting where the shareholders vote on the proposal. In either instance,
the
preliminary statement is provided to the SEC, which has an opportunity to
comment upon the contents. Once the SEC is satisfied, the statement is issued
in
"definitive" form to the shareholders.
National
urges that New Xcorp has the ability to assemble sufficient votes by written
consent to approve the Technology Transaction. National posits that the needed
majority can be obtained by Mr. Peiser
[sic]
,
who
owns 42% of the shares, by overtures to other substantial shareholders friendly
to him. New Xcorp, on the other hand, argues that Peiser
[sic]
lacks
the ability to informally assemble a majority. If New Xcorp is correct, and
the
needed majority can be assembled (if at all) only by means of a proxy
solicitation and a meeting preceded by notice as required by Rule 14a-3,
then
the meeting cannot be conducted sooner than 20 days after the proxy solicitees
have been provided with a definitive information statement.
The
arbitrator cannot predict whether New Xcorp can assemble the votes needed
to
approve the Technology Transaction, but it appears at least possible that
approval might be secured either by written authorization and consent or
by
proxy solicitations and a shareholder meeting. The schedule set forth below
accommodates both possibilities.
Request
For Final Or Partial Final Award. New Xcorp argues that the arbitrator should
issue a final award before a definitive proxy or information statement is
distributed, apparently on the theory that the solicitees must know the outcome
of the arbitration in its entirety in order to be able to cast an informed
ballot. National rejoins by proposing the issuance of a Partial Final Award,
citing the JAMS Rules and California cases authorizing such a remedy (e.g.
Roehl
v Ritchie
(2007),
147 Cal App 4
th
338.)
The
authors of the Guide To Best Practices In Commercial Arbitration (College
Of
Commercial Arbitrators) advise:
"Partial
final awards should be issued
only
when
the
parties arbitration agreement or applicable rules
compel
their
use
or when arbitrators have determined that the issuance of one or more such
awards
is reasonably necessary to the efficient resolution of the closed portions
of
the preceding and the dispute as a whole." (von Kann, Gaitis, Lehrman, Juris
Net
LLC, 2006, at 189, emphasis added)
This
is
consistent with the advice of Justice Sills in the
Roehl
case,
supra:
"If
anything is confirmed by the instant appeal, it is the significance of the
process of confirming an arbitration award. The time to make sure that the
i's
are dotted, t's are crossed, and that the award decides all necessary issues
in
a single, final and self-contained award is
before
the
award
is confirmed, not
after.
That
is
the best way to ensure that an arbitrator's decision is truly "the end, not
the
beginning,
of the dispute. [citation omitted]"
Neither
side argues persuasively why the issuance of a final or partial final award
is
necessary or desirable at this time. New Xcorp's argument that such is necessary
to enable a fully informed shareholder decision is unpersuasive. The First
Interim Award, together with the present Second Interim Award, sufficiently
explain what the arbitrator has decided and what he intends to do. The case
is
not ripe for a "single, final and self-contained award." The shape of the
final
relief is yet unknown, and is dependent largely on New Xcorp's decisions
and
conduct in response to this Second Interim Award. Issuance of a final award
at
this time would simply facilitate the immediate spread of the controversy
into
the courts, multiplying litigation, interfering with orderly processing of
the
dispute in this arbitration, and raising the possibility of conflicting
rulings.
The
arbitrator respects the parties' right to eventual recourse to the courts,
where
National may seek confirmation of the award and Xcorporeal may challenge
it. But
now is not the appropriate time. A final award will issue after the dispute
has
been completely resolved, as far as practical, in this forum.
The
request for a final or partial final award is, for the time being,
denied.
Schedule
For Performance Of the Technology Transaction.
The
parties shall use their best efforts to consummate the Technology
Transaction.
New
Xcorp
shall advise the other parties and the arbitrator in writing and by e mail
not
later than August 11, 2008, at 5 p.m. Pacific Standard Time, whether it has
obtained written authorization or consent of a majority of shareholders to
the
Technology Transaction, and, if the answer is "no", whether it will seek
majority consent by proxy solicitation.
If
written authorization or consent is obtained, New Xcorp shall, not later
than
August 15, 2008, file with the SEC a preliminary information statement complying
with the applicable Rule. New Xcorp shall file and issue to the shareholders
a
definitive information statement 10 days after the preliminary statement
if the
SEC has not provided comments, or immediately after such later time as the
SEC
has confirmed that it has no further comments. After the shareholders have
had
the definitive information statement for 20 days, the parties shall forthwith
close the Technology Transaction.
If
no
written authorization or consent is obtained, but New Xcorp elects to pursue
majority consent by proxy, New Xcorp shall file a preliminary proxy statement
with the SEC by August 15, 2008. New Xcorp shall file and issue to the
shareholders a definitive proxy statement within 10 days after the preliminary
statement if the SEC has not provided comments, or immediately after such
later
time as the SEC has confirmed that it has no further comments. The definitive
proxy statement shall set the shareholder meeting for a date 20 days following
its issuance. If the majority of shareholders consent to the Technology
Transaction, the parties shall close the Technology Transaction not later
than
10 days after the shareholder meeting.
If
closing occurs, Xcorp shall file a registration statement covering the shares
to
be issued to National within 30 days after closing, and the registration
statement shall become effective within 90 days after filing.
The
arbitrator may extend the deadlines specified above for good
cause.
Reports.
Counsel for Xcorporeal shall keep the arbitrator and the other parties closely
advised of its efforts to comply with the foregoing schedule, as well as
of any
other developments which affect the remedial plan laid out herein. In
particular, they shall immediately notify the arbitrator and National's counsel
if and as soon as any decision is made not to proceed with the Technology
Transaction, so that the arbitrator can schedule an immediate hearing on
the
alternative relief provided for below.
Alternative
Relief. If a majority of New Xcorp shareholders fail to agree to the Technology
Transaction, either by means of written authorization and consent, or proxy
solicitation, the following relief shall be decreed:
All
of
the Technology covered by the License Agreement shall be decreed to be the
sole
and exclusive property of National.
The
arbitrator shall schedule additional hearings to address two questions: is
the
portable artificial kidney (PAK) technology included in within that technology
covered by the License Agreement which shall refer to National, and whether
National is entitled to compensatory damages and the amount of damages under
these circumstances.
License
In Effect Pending Consummation Of Technology Transaction? Xcorporeal asks
the
arbitrator to declare this to be so. Paragraph 6 of the Merger Agreement
states
that termination of the merger transaction terminates the License Agreement
as
well, but it is not clear whether the termination of the license is effective
upon notice of termination of the merger, or closing of the Technology
Transaction. The more reasonable construction is that the parties intended
that
Xcorporeal remain legally entitled to use the technology pending closing
of the
Technology Transaction, and so the arbitrator orders that the license will
remain in effect until closing, or until the arbitrator finds that no closing
will take place and that instead the alternate relief will
apply.
Fee
Application. On July 30
th
National
filed an application for an award of $3.9 million in attorneys fees and costs.
Dr. Gura filed a separate application for $577,000 in fees. There is no need
to
defer issuance of this Second Interim Award pending decision on the attorneys'
fee applications. Xcorporeal's information statements can advise the
shareholders of the prior finding that National is the prevailing party in
the
arbitration, and of the contents of National's fee application. This should
be
sufficient for informed shareholder decisions.
Decision
on the fee applications will follow in due course after briefing is completed
and the arbitrator has a chance to review the filings and deliberate upon
the
proper decision.
Interim
Award/Retention of Jurisdiction.
This
is
an interim award, not intended to be subject to motions to confirm or vacate.
The arbitrator retains jurisdiction to monitor and supervise the performance
of
the remedial provisions laid out above, to conduct further hearings and make
further orders as needed, and ultimately to issue a single final, complete
and
self-contained award.
The
Case
Manager, Christy Arceo, is requested to promptly transmit this Second Interim
Award to counsel.
Dated:
August 4, 2008
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By:
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/s/
Richard C. Neal
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Hon.
Richard C. Neal (Ret)
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Arbitrator
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XCORPOREAL,
INC.
2008
ANNUAL MEETING OF STOCKHOLDERS
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned stockholder of XCORPOREAL, INC., a Delaware corporation (the
“Company”), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement of the Company, each dated September __,
2008,
and hereby appoints Terren S. Peizer and Robert Weinstein, and each of
them,
proxies and attorneys-in-fact, with full power to each of substitution,
on
behalf and in the name of the undersigned, to represent the undersigned
at the
2008 Annual Meeting of Stockholders of the Company, to be held on Friday,
November __, 2008, at 10:00 a.m., local time, at The Water Garden, 1620
26
th
Street,
Sixth Floor, North Tower, Santa Monica, California, and at any adjournment
or
adjournments thereof, and to vote all shares of the Company’s common stock that
the undersigned would be entitled to vote if then and there personally
present,
on the matters set forth on the reverse side.
This
Proxy will be voted as directed or, if no contrary direction is indicated,
will
be voted FOR the adoption of a classified board, FOR allowing stockholder
action
only at meetings, FOR the election of directors, FOR approval of the technology
transaction, FOR approval of the increase in the number of authorized shares,
and as said proxies deem advisable on such other matters as may come before
the
meeting.
A
majority of such proxies or substitutes as shall be present and shall act at
the
meeting or any adjournment or adjournments thereof (or if only one shall be
present and act, then that one) shall have and may exercise all of the powers
of
said proxies hereunder.
(Continued
and to be signed and dated on the other side.)
XCORPOREAL,
INC.
Sign,
Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.
o
Votes
must be indicated (x) in Black or Blue ink.
1. AMENDMENT
TO CERTIFICATE OF INCORPORATION
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A.
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TO
PROVIDE FOR CLASSIFIED
BOARD
OF DIRECTORS
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o
FOR
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o
AGAINST
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ABSTAIN
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B.
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TO
REQUIRE STOCKHOLDER ACTION
BE
TAKEN ONLY AT MEETINGS
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o
FOR
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o
AGAINST
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o
ABSTAIN
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2.
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ELECTION
OF DIRECTORS
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o
FOR
all
nominees
listed
below
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o
WITHHOLD
AUTHORITY
to vote for
all
nominees listed below
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o
*EXCEPTIONS
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Terren
S.
Peizer, Marc G. Cummins, Kelly J. McCrann, Hans Polaschegg and Jay A.
Wolf
(INSTRUCTIONS:
To withhold authority to vote for any individual nominee, mark the “Exceptions”
box and write that nominee’s name in the space provided
below.)
*
Exceptions
3.
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APPROVAL
OF ISSUANCE OF SHARES FOR TECHNOLOGY TRANSACTION
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o
FOR
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o
AGAINST
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o
ABSTAIN
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4.
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APPROVAL
OF INCREASE IN AUTHORIZED SHARES
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o
FOR
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o
AGAINST
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o
ABSTAIN
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and
upon
such matters which may properly come before the meeting or any adjournment
or
adjournments thereof.
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To
change your address, please mark this box.
o
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To
include any comments, please mark this box.
o
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(This
Proxy should be dated, signed by the stockholder(s) exactly as
his or her
name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If
shares are
held by joint tenants or as community property, both stockholders
should
sign.)
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Date
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Share
Owner sign here
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Co-Owner
sign here
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