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Exhibit 2
ITEM 3. LEGAL PROCEEDINGS
THE XXXXXX MATTER
This is an action pending before the American Arbitration Association, which was
filed in 1999 by Microbest, Inc.'s former President, Xxxxxxx Xxxxxx, Xx.
(Xxxxxx).
Xxxxxx was hired as Microbest's President in November 1997 and the parties
entered into an Employment Agreement in June 1998. The Employment Agreement
allows termination for cause based on a "breach of fiduciary duty, permanent
disability, conviction of a felony or crime involving moral turpitude or
dishonesty, or such other conduct which holds Mircobest up to public ridicule."
Microbest terminated Xxxxxx'x employment for cause in December 1998. It is now
known that:
1. Xxxxxx misrepresented his educational background and professional
credential,
2. A complaint was made that Xxxxxx sexually harassed a female
employee,
3. Xxxxxx gave himself an unauthorized salary increase,
4. Xxxxxx inappropriately received undisclosed payments from a vendor,
and
5. Xxxxxx provided false information regarding the financial status of
the Company to the Board of Directors.
Xxxxxx'x seven-count Xxxxxx for Arbitration raises allegations against Microbest
and its CEO, Xxxxxxx Xxxxx ("Xxxxx") for breach of contract, breach of implied
covenant of good faith and fair dealing, fraud in the inducement, unpaid wages,
Quantum Meruit, breach of fiduciary duties and accounting. Xxxxxx alleges that
nothing he did meets the cause threshold and therefore, Microbest breached the
Employment Agreement and he is entitled to the compensation and benefits
outlined in the Employment Agreement. Xxxxxx further contends that even if he
was terminated for cause, he is still entitled to the 500,000 shares of
Microbest's common stock. Xxxxxx seeks damages of approximately $450,000 for
lost wages and benefits, plus the value of 500,000 shares of commons stock, and
his attorneys' fees and costs.
Microbest and Xxxxx deny the allegations of Xxxxxx'x Demand for Arbitration. In
addition, Microbest filed a four count counterclaim against Xxxxxx for:
Breach of Contract
Rescission
Fraud, and
Breach of Fiduciary Duty.
Microbest seeks in excess of $100,000 from Xxxxxx. Microbest contends that, for
the reasons set forth above, it terminated Xxxxxx for cause. Microbest further
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alleges that Xxxxxx fraudulently induced it to enter into the Employment
Agreement and, therefore, the agreement should be rescinded, including the stock
compensation plan.
Discovery is substantially complete. The final arbitration hearing is scheduled
on September 10-13, 2001.
Microbest believes that Xxxxxx'x allegations are without merit and that it had a
valid business reason to terminate Xxxxxx'x employment. However, due to the
uncertainty of litigation, counsel is unable to predict the amount of damages
Xxxxxx may be awarded at the final arbitration hearing or the amount of damages
the Company will be awarded if it prevails on its counterclaim.
THE SIMRAY MATTER
In late 1998, Xxxxxxx Xxxxx and Xxxxx Xxxxxxxx (hereinafter SIMRAY),
shareholders and creditors of Microbest Products, Inc. (MPI) and former
distributors of the Company's products brought a lawsuit against the Company in
connection with the level of its ownership participation in MPI prior to and
subsequent to the merger, as previously described in Part 1, Item 1, Description
of Business, Bankruptcy.
This lawsuit was settled in March 1999 by paying off an existing outstanding
loan of $100,000 and the issuance of 600,000 shares of the Company's common
stock. In connection with the issuance of common stock the Company recorded a
charge to litigation settlement expense of $525,000. The settlement terms
further stated that 300,000 of the 600,000 shares of common stock issued had a
one-year call provision and if the Company did not exercise its call provision,
then SIMRAY had a 10 day put provision.
In March of 2000, after the one-year call provision expired, SIMRAY exercised
their put and demanded $361,000 from the Company and obtained a judgment against
the Company. As a result, the Company filed voluntary bankruptcy to protect
itself from SIMRAY. See Part 1, Item 1 - Description of Business, Bankruptcy.
In November 2000, the Company and SIMRAY reached another agreement to settle the
litigation liability. In exchange for $200,000 cash, 50,000 free trading shares
of the Company's common stock and a two year option to purchase 250,000 shares
of the Company's common stock at a 25% discount, SIMRAY would assign their
position in the judgment. A shareholder of the Company paid the $200,000 cash,
another shareholder of the Company contributed the 50,000 shares and the Company
executed the stock option agreements pursuant to the above described terms. As a
result, the judgment was assigned from SIMRAY to the shareholder who paid the
$200,000.
In December 2000, the Company settled the $361,000 litigation liability with the
shareholder by issuing 7,220,000 shares of common stock.
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