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JOINT PROXY STATEMENT
REHABILICARE INC. STAODYN, INC.
Annual Meeting of Special Meeting of
Stockholders Stockholders
to be held on March 17, 1998 To be held on March 17, 1998
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PROSPECTUS OF REHABILICARE INC.
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This Joint Proxy Statement-Prospectus is being furnished to stockholders of
Rehabilicare Inc., a Minnesota corporation ("Rehabilicare"), in connection
with the solicitation of proxies by the Board of Directors of Rehabilicare
(the "Rehabilicare Board") for use at the annual meeting of stockholders of
Rehabilicare (including any adjournment or postponement thereof, the
"Rehabilicare Annual Meeting") to be held on March 17, 1998, at 10:00 a.m.
local time, at the Minneapolis Club, 729 Second Avenue South, Minneapolis,
Minnesota. At the Rehabilicare Annual Meeting, holders of the common stock,
$0.10 par value ("Rehabilicare Common Stock"), of Rehabilicare are being
asked to vote upon a proposal to approve an Agreement and Plan of Merger,
dated as of December 1, 1997 (the "Merger Agreement"), among Staodyn, Inc., a
Delaware corporation ("Staodyn"), Rehabilicare and Hippocrates Acquisition,
Inc., a Delaware corporation and wholly-owned subsidiary of Rehabilicare
("Merger Subsidiary"), providing for the merger of Merger Subsidiary with and
into Staodyn (the "Merger"). A copy of the Merger Agreement is attached
hereto as Appendix A and is incorporated herein by reference. Holders of
Rehabilicare Common Stock will also vote upon (1) the election of four
directors to serve until the next annual meeting of Rehabilicare
stockholders, (2) the election of two additional directors to serve until the
next annual meeting, but effective immediately after consummation of the
Merger and only if the Merger is completed, (3) a proposal to amend the
Articles of Incorporation of Rehabilicare to increase the number of
authorized shares of common stock to 30,000,000 (the "Charter Amendment") and
(4) a proposal to approve the Rehabilicare Inc. 1998 Stock Incentive Plan
(the "1998 Plan").
This Joint Proxy Statement-Prospectus also is being furnished to
stockholders of Staodyn in connection with the solicitation of proxies by the
Board of Directors of Staodyn (the "Staodyn Board") for use at the special
meeting of stockholders of Staodyn (including any adjournment or postponement
thereof, the "Staodyn Special Meeting") to be held on March 17, 1998, at 9:00
a.m. local time, at the Raintree Plaza Hotel Conference Center, 1900 Ken Pratt
Boulevard, Longmont, Colorado. At the Staodyn Special Meeting, holders of
the common stock, $0.01 par value ("Staodyn Common Stock"), of Staodyn will
vote upon a proposal to approve the Merger Agreement.
This Joint Proxy Statement--Prospectus also constitutes a prospectus of
Rehabilicare with respect to the Rehabilicare Common Stock issuable to holders
of Staodyn Common Stock upon consummation of the Merger. This Proxy/Prospectus
is accompanied by the Rehabilicare 1997 Annual Report, certain portions of
which are incorporated herein by reference.
Upon consummation of the Merger (the "Effective Time"), Staodyn will merge
with and into Merger Subsidiary, with Staodyn as the surviving corporation.
Each outstanding share of Staodyn Common Stock will be converted into the right
to receive 0.829 of a share of Rehabilicare Common Stock (the "Exchange
Ratio"), with cash being paid in lieu of fractional shares.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT-PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement-Prospectus is February 12, 1998.
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Rehabilicare Common Stock is listed on The Nasdaq National Market under the
symbol "REHB" and Staodyn Common Stock is quoted on The Nasdaq SmallCap under
the symbol "SDYN." The Rehabilicare Common Stock issued in connection with
the Merger will be listed on the Nasdaq National Market under the symbol
"REHB." The last reported sale price of Rehabilicare Common Stock as reported
by the Nasdaq National Market was $4.00 per share on December 1, 1997, and
$3.00 per share on February 11, 1998. Because the Exchange Ratio is fixed, a
change in the market price of Rehabilicare Common Stock before the
consummation of the Merger would affect the market value as of the Effective
Time of the Rehabilicare Common Stock to be received in the Merger in
exchange for Staodyn Common Stock. THERE CAN BE NO ASSURANCE AS TO THE MARKET
PRICE OF THE REHABILICARE COMMON STOCK AT ANY TIME PRIOR TO THE EFFECTIVE
TIME OR AT ANY TIME THEREAFTER. Stockholders are urged to obtain current
market quotations for Rehabilicare Common Stock and Staodyn Common Stock.
Based on (1) the 6,658,477 shares of Staodyn Common Stock outstanding on the
Staodyn Record Date (as defined herein), (2) the 521,332 shares of Staodyn
Common Stock issuable upon the exercise of outstanding stock options and
warrants on such date and (3) the Exchange Ratio of 0.829, approximately
5,952,061 shares of Rehabilicare Common Stock are expected to be issued in the
Merger or to be issuable following the Merger upon the exercise of the
Rehabilicare options and warrants into which outstanding Staodyn options and
warrants will be converted in connection with the Merger.
This Joint Proxy Statement--Prospectus is first being mailed to holders of
Rehabilicare Common Stock ("Rehabilicare Stockholders") and holders of Staodyn
Common Stock ("Staodyn Stockholders") on or about February 12, 1998.
AVAILABLE INFORMATION
Rehabilicare and Staodyn are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Rehabilicare and Staodyn with the
Commission may be inspected and copied at the Commission's public reference
room located at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the public reference facilities in the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661.
Copies of such material may be obtained at prescribed rates by writing to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. Certain of such reports, proxy statements and other information are
also available from the Commission over the Internet at http://www.sec.gov.
The shares of Staodyn Common Stock are traded over the counter on the Nasdaq
SmallCap Market. The shares of Rehabilicare Common Stock are traded over the
counter on the Nasdaq National Market. Reports, proxy statements and other
information concerning Rehabilicare and Staodyn may also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
This Joint Proxy Statement-Prospectus is included as part of a registration
statement on Form S-4 (together with all amendments and exhibits thereto,
including documents and information incorporated by reference, the
"Registration Statement") filed with the Commission by Rehabilicare, relating
to the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of the shares of Rehabilicare Common Stock offered hereby.
This Joint Proxy Statement-Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of
which have been omitted pursuant to the rules and regulations of the
Commission, to which reference is hereby made for further information with
respect to Rehabilicare and Staodyn and the Rehabilicare Common Stock offered
hereby. Statements contained herein concerning any documents are not
necessarily complete and, in each instance, reference is made to the copies
of such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by Rehabilicare are
incorporated herein by reference: (1) Rehabilicare's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997;
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(2) Rehabilicare's Annual Report on Form 10-KSB for the year ended June 30,
1997, as amended by 10-KSB A1 thereto dated September 30, 1997; (3) those
portions of Rehabilicare's 1997 Annual Report to Stockholders under the
captions "Management's Discussion and Analysis of Results of Operations and
Financial Condition," "Corporate Profile" and "Common Stock" (but no other
portion of such Annual Report) and (4) the description of the Rehabilicare
Common Stock contained in Rehabilicare's registration statements filed
pursuant to section 12 of the Exchange Act and any amendment or report
updating such description.
The following documents filed with the Commission by Staodyn are
incorporated herein by reference: (1) Staodyn's Quarterly Reports on Form
10-QSB for the quarters ended August 31, 1997, May 31, 1997 and February 28,
1997; (2) Staodyn's Annual Report on Form 10-KSB for the year ended November
30, 1996 (the "1996 Staodyn 10-KSB"); (3) the portions of Staodyn's Proxy
Statement for the Annual Meeting of Stockholders held on May 21, 1997 that
have been incorporated by reference in the 1996 Staodyn 10-KSB; and (4) the
description of the Staodyn Common Stock contained in Staodyn's registration
statements filed pursuant to section 12 of the Exchange Act and any amendment
or report updating such description.
All documents filed by either Staodyn or Rehabilicare pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof
and prior to the time at which the Staodyn Special Meeting and the
Rehabilicare Annual Meeting have been finally adjourned shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of
such filing. Any statement contained herein or in a document incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified
or superseded for purposes hereof to the extent that a statement contained
herein or in any other subsequently filed document which also is, or is
deemed to be, incorporated herein by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed
to constitute a part hereof, except as so modified or superseded.
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THE DOCUMENTS RELATING
TO STAODYN (EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN) ARE
AVAILABLE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF
THIS JOINT PROXY STATEMENT-PROSPECTUS IS DELIVERED, WITHOUT CHARGE, UPON
WRITTEN OR ORAL REQUEST TO MICHAEL J. NEWMAN, VICE PRESIDENT--FINANCE AND
ADMINISTRATION, STAODYN, INC., 1225 KEN PRATT BOULEVARD, LONGMONT, COLORADO
80501, TELEPHONE NUMBER (303) 772-3631. THE DOCUMENTS RELATING TO
REHABILICARE (EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN)
ARE AVAILABLE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY
OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS DELIVERED, WITHOUT CHARGE, UPON
WRITTEN OR ORAL REQUEST TO W. GLEN WINCHELL, CHIEF FINANCIAL OFFICER,
REHABILICARE, 1811 OLD HIGHWAY 8, NEW BRIGHTON, MN 55112, TELEPHONE NUMBER
(612) 631-0590. STAODYN OR REHABILICARE, AS THE CASE MAY BE, WILL SEND THE
REQUESTED DOCUMENTS BY FIRST-CLASS MAIL WITHIN THREE BUSINESS DAYS OF THE
RECEIPT OF THE REQUEST. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUEST SHOULD BE RECEIVED NO LATER THAN FIVE BUSINESS DAYS BEFORE THE
APPLICABLE MEETING DATE. PERSONS REQUESTING COPIES OF EXHIBITS TO SUCH
DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH
DOCUMENTS WILL BE CHARGED THE COSTS OF REPRODUCTION AND MAILING.
____________________
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT-
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY STAODYN OR REHABILICARE. THIS
JOINT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A
PROXY OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE ANY
SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT-PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF STAODYN OR
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REHABILICARE SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE. STAODYN HAS SUPPLIED ALL INFORMATION
CONTAINED IN THIS JOINT PROXY STATEMENT-PROSPECTUS RELATING TO STAODYN AND
ITS SUBSIDIARIES, AND REHABILICARE HAS SUPPLIED ALL INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT-PROSPECTUS RELATING TO REHABILICARE AND ITS
SUBSIDIARIES.
THIS JOINT PROXY STATEMENT-PROSPECTUS DOES NOT COVER ANY RESALES OF SHARES OF
REHABILICARE COMMON STOCK OFFERED HEREBY TO BE RECEIVED BY STOCKHOLDERS OF
REHABILICARE DEEMED TO BE "AFFILIATES" OF REHABILICARE OR STAODYN UPON THE
CONSUMMATION OF THE MERGER. NO PERSON IS AUTHORIZED TO MAKE USE OF THIS JOINT
PROXY STATEMENT-PROSPECTUS IN CONNECTION WITH ANY SUCH RESALES.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This Joint Proxy Statement-Prospectus (including information included or
incorporated by reference herein) contains forward-looking statements that
involve risks and uncertainties, including statements about the financial
condition, results of operations, plans, objectives, future performance and
business of each of Rehabilicare and Staodyn. These forward looking
statements include: (1) statements relating to the impact on revenues of the
Merger; (2) statements relating to the restructuring charges expected to be
incurred in connection with the Merger; and (3) statements preceded by,
followed by or that include the words "believes," "expects," "anticipates" or
similar expressions. See "THE MERGER--Reasons of Staodyn for the Merger" and
"--Opinion of Staodyn's Financial Advisor," "--Reasons of Rehabilicare for
the Merger," "--Opinion of Rehabilicare's Financial Advisor." These
forward-looking statements involve certain risks and uncertainties,
including, but not limited to the risk that: (1) expected cost savings from
the Merger are not fully realized or realized within the expected time frame;
(2) revenues following the Merger are lower than expected or operating costs
following the Merger are greater than expected; (3) costs or difficulties
related to the integration of the businesses of Rehabilicare and Staodyn are
greater than expected; (4) the operating results of Rehabilicare continue to
fluctuate; (5) inventory and receivables requirements for direct billed
medical equipment revenue change; (6) the markets for electrotherapy are
volatile; (7) reimbursement and other governmental or private agency actions
adversely affect the revenue of Rehabilicare; (8) competition adversely affects
the results of Rehabilicare; (9) legislative or regulatory changes adversely
affect the businesses in which Rehabilicare will be engaged; and (10) changes
in the securities markets affect the performance of Rehabilicare's shares.
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TABLE OF CONTENTS
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Page
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Available Information............................................................... 2
Incorporation Of Certain Information By Reference................................... 2
Cautionary Statement Concerning Forward-Looking Information......................... 4
Summary............................................................................. 6
General........................................................................... 6
The Companies..................................................................... 6
Rehabilicare Annual Meeting and Vote Required..................................... 7
Staodyn Special Meeting and Vote Required......................................... 7
The Merger........................................................................ 8
Conditions to the Merger.......................................................... 8
Recommendations of Boards of Directors............................................ 9
Opinion of Rehabilicare's Financial Advisor....................................... 9
Opinion of Staodyn's Financial Advisor............................................ 9
Effective Time of the Merger...................................................... 9
Waiver, Amendment; Termination.................................................... 10
Certain Federal Income Tax Consequences........................................... 10
Interests of Certain Persons in the Merger........................................ 11
Management and Operations After the Merger........................................ 11
Expenses and Termination Fees..................................................... 11
Appraisal/Dissenters' Rights...................................................... 11
Accounting Treatment.............................................................. 11
Markets and Market Prices......................................................... 12
Comparative Rights of Stockholders................................................ 12
Comparative Unaudited Per Share Data.............................................. 13
Selected Historical Financial Data................................................ 14
Pro Forma Selected Historical Financial Data...................................... 16
Staodyn Special Meeting............................................................. 17
General........................................................................... 17
Solicitation, Voting and Revocability of Proxies.................................. 17
Recommendation of Staodyn Board................................................... 18
Rehabilicare Annual Meeting......................................................... 19
General........................................................................... 19
Solicitation, Voting and Revocability of Proxies.................................. 19
Recommendation of Rehabilicare Board.............................................. 20
The Merger.......................................................................... 21
Description of the Merger......................................................... 21
Background of the Merger.......................................................... 21
Reasons of Staodyn for the Merger................................................. 25
Reasons of Rehabilicare for the Merger............................................ 26
Opinion of Staodyn's Financial Advisor............................................ 29
Opinion of Rehabilicare's Financial Advisor....................................... 32
Effective Time.................................................................... 36
Exchange of Certificates.......................................................... 36
Certain Representations and Warranties............................................ 37
Covenants and Agreements.......................................................... 38
Conditions........................................................................ 39
Termination....................................................................... 40
Termination Fees.................................................................. 41
Waiver and Amendment.............................................................. 41
Certain Federal Income Tax Consequences........................................... 41
Interests of Certain Persons in the Merger........................................ 42
Accounting Treatment.............................................................. 43
Resale of Rehabilicare Common Stock Received
by Staodyn Shareholders........................................................... 43
Appraisal and Dissenters' Rights.................................................. 44
Management and Operations After the Merger.......................................... 47
Board of Directors................................................................ 47
Management........................................................................ 48
Operations........................................................................ 48
Costs Incurred in Connection with the Merger...................................... 48
Corporate Headquarters............................................................ 48
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<TABLE>
<S> <C>
Market Prices....................................................................... 49
Rehabilicare...................................................................... 49
Staodyn........................................................................... 49
Business of Staodyn................................................................. 50
General........................................................................... 50
Recent Developments............................................................... 50
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 50
Business of Rehabilicare............................................................ 53
General........................................................................... 53
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 53
Description of Rehabilicare Capital Stock
General........................................................................... 55
Common Stock...................................................................... 55
Preferred Stock................................................................... 55
Minnesota Business Corporation Act................................................ 56
Transfer Agent and Registrar...................................................... 56
Comparison of Stockholder Rights.................................................... 56
Business Combination and Supermajority Voting..................................... 56
Dissenters' Rights................................................................ 57
Amendments to Charter and Bylaws.................................................. 57
Shareholder Action by Written Consent............................................. 58
Number of Directors, Vacancies and Newly-Created Directorships.................... 58
Classification of Board........................................................... 59
Special Meetings of Stockholders.................................................. 59
Quorum at Stockholders' Meetings.................................................. 60
Dividends......................................................................... 60
General........................................................................... 60
Proposal to Approve Amendment to Rehabilicare Articles of Incorporation............. 61
Proposal To Approve The Rehabilicare 1998 Stock Incentive Plan...................... 62
Ownership Of Rehabilicare Common Stock.............................................. 67
Election Of Rehabilicare Directors.................................................. 68
Directors of Rehabilicare......................................................... 68
Meetings of the Board and Certain Committees...................................... 68
Executive Officers................................................................ 68
Compliance With Section 16(a) of the Securities Exchange Act of 1934.............. 69
Executive Compensation............................................................ 69
Directors' Compensation........................................................... 70
Long-Term Plan Incentive Awards................................................... 70
Independent Accountants............................................................. 71
Legal Opinions...................................................................... 71
Experts............................................................................. 71
Stockholder Proposals............................................................... 71
Other Matters....................................................................... 71
Management And Additional Information............................................... 71
Financial Statements................................................................ F-1
Consolidated Financial Statements of Staodyn at November 30, 1996 and for the Two
Years then ended................................................................ F-2
Consolidated Financial Statements of Staodyn at August 31, 1997 and for the Nine
Months then ended............................................................... F-17
Consolidated Financial Statements of Rehabilicare at September 30, 1997 and for
the Three Months then ended..................................................... F-22
Unaudited Pro Forma Condensed Combined Financial Statements....................... F-26
Appendix A--Agreement and Plan of Merger
Appendix B--Section 262 of the Delaware General Corporation Law
Appendix C--Opinion of The Wallach Company, Inc.
Appendix D--Opinion of John G. Kinnard & Company, Incorporated
Appendix E--Rehabilicare 1998 Stock Incentive Plan
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SUMMARY
THE INFORMATION BELOW IS QUALIFIED IN ITS ENTIRETY BY AND REFERENCE IS
MADE TO, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS JOINT
PROXY STATEMENT-PROSPECTUS, INCLUDING THE ACCOMPANYING APPENDICES AND THE
DOCUMENTS INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT-PROSPECTUS.
EACH STOCKHOLDER IS URGED TO READ THIS JOINT PROXY STATEMENT-PROSPECTUS AND
THE EXHIBITS HERETO IN THEIR ENTIRETY AND WITH CARE.
GENERAL
At the Rehabilicare Annual Meeting, Rehabilicare Stockholders are being
asked to vote upon (1) a proposal to approve a Merger Agreement providing for
the merger of Merger Subsidiary with and into Staodyn and the conversion of
each outstanding share of Staodyn Common Stock into the right to receive
0.829 of a share of Rehabilicare Common Stock (with cash paid in lieu of
fractional shares); (2) the election of four directors to serve until the
next annual meeting of Rehabilicare stockholders, (3) the election of two
additional directors to serve until the next annual meeting, but effective
after consummation of the Merger and only if the Merger is completed, (4) a
proposal to amend the Rehabilicare Articles to increase the number of
authorized shares of Rehabilicare Common Stock to 30,000,000 (the "Charter
Amendment") and (5) a proposal to approve the Rehabilicare Inc. 1998 Stock
Incentive Plan (the "1998 Plan"). The approval of the Merger Agreement and
the consummation of the Merger are not contingent upon approval of the other
proposals. The election of four directors, the approval of the 1998 Plan and
the approval of the Charter Amendment are not contingent on approval of the
Merger Agreement. The election of two of the nominee-directors (Proposal No.
3 above), who are currently members of Staodyn's Board of Directors, is
contingent upon consummation of the Merger. In the event the Merger is not
consummated, two directorships will remain vacant until new directors are
elected to fill such directorships. The Board of Directors of Rehabilicare
is not aware of any other business to come before the Rehabilicare Annual
Meeting.
At the Staodyn Special Meeting, holders of Staodyn Stockholders will
vote upon a proposal to approve the Merger Agreement.
THE COMPANIES
REHABILICARE. Rehabilicare, a Minnesota corporation, is a designer,
manufacturer and provider of electromedical pain management and
rehabilitation products and services used for clinical, home health care and
occupational medicine applications. Rehabilicare offers a number of
electrotherapy devices for rehabilitation as well as several products for
chronic and acute pain management. These products consist of small,
portable, battery-powered electrical pulse generators which are connected by
wires to electrodes placed on the skin. Rehabilitation products accounted
for approximately 41% of Rehabilicare's total revenue in fiscal 1997 and 47%
in fiscal 1996. Pain management products accounted for approximately 25% of
Rehabilicare's total revenue in fiscal 1997 and 24% in fiscal 1996. The
balance of Rehabilicare's revenue resulted from the sale of accessories used
with treatment modalities. The principal executive offices of Rehabilicare
are located at 1811 Old Highway 8, New Brighton, MN 55112, telephone number
(612) 631-0590.
For further information concerning Rehabilicare, see "SELECTED
HISTORICAL FINANCIAL DATA," and "BUSINESS OF Rehabilicare" herein and the
Rehabilicare documents incorporated by reference herein as described under
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE."
STAODYN. Staodyn, a Delaware corporation, designs, develops,
manufactures, and markets noninvasive electrotherapeutic devices, supplies,
and accessories for use by physicians, physical therapists, athletic
trainers, and their patients. Staodyn's electrotherapeutic products are used
in the treatment of chronic and acute pain and neuromuscular rehabilitation.
Staodyn's pain management
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products treat chronic and acute pain with transcutaneous electrical nerve
stimulation or "TENS" that delivers carefully controlled pulses of
electricity through the skin to sensory nerves, thereby relieving pain
without the side effects often associated with drugs or surgery. Staodyn's
muscle rehabilitation devices use neuromuscular electrical stimulation
("NMES") or pulsed direct current ("PDC") to speed recovery of normal
function in muscle and other soft tissue affected by disease or trauma. The
principal executive offices of Staodyn are located at 1225 Ken Pratt
Boulevard, Longmont, Colorado 80501, telephone number (303) 772-3631.
For further information concerning Staodyn, see "SELECTED HISTORICAL
FINANCIAL DATA" and "BUSINESS OF STAODYN" herein and the Staodyn documents
incorporated by reference herein as described under "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
REHABILICARE ANNUAL MEETING AND VOTE REQUIRED
The Rehabilicare Annual Meeting will be held on March 17, 1998, at 10:00
a.m. local time, at the Minneapolis Club, 729 Second Avenue South, Minneapolis,
Minnesota. At that time, the Rehabilicare Stockholders will be asked to vote
upon (1) a proposal to approve the Merger Agreement, (2) the election of four
directors to serve until the next annual meeting of Rehabilicare
stockholders, (3) the election of two additional directors to serve until the
next annual meeting, but effective after consummation of the Merger and only
if the Merger is completed, (4) a proposal to approve the Charter Amendment
and (5) a proposal to approve the 1998 Plan. The approval of the Merger
Agreement and the consummation of the Merger are not contingent upon approval
of the other proposals. The election of four directors, the approval of the
1998 Plan and the approval of the Charter Amendment are not contingent on
approval of the Merger Agreement. The election of two of the
nominee-directors (Proposal No. 3 above), who are currently members of
Staodyn's Board of Directors, is contingent upon consummation of the Merger.
In the event the Merger is not consummated, two directorships will remain
vacant until new directors are elected to fill such directorships.
Only the record holders of Rehabilicare Common Stock at the close of
business on February 6, 1998 (the "Rehabilicare Record Date") are entitled to
notice of and to vote at the Rehabilicare Annual Meeting. On the
Rehabilicare Record Date, there were approximately 375 holders of record of
Rehabilicare Common Stock and 4,884,480 shares of Rehabilicare Common Stock
outstanding. Each share of Rehabilicare Common Stock entitles its holder to
one vote.
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Rehabilicare Common Stock.
Election of directors, approval of the Charter Amendment and approval of the
1998 Plan requires the affirmative vote of a majority of the shares of
Rehabilicare Common Stock represented at the Rehabilicare Annual Meeting,
provided that a quorum of holders of at least a majority of the outstanding
shares is present or represented by proxy at the meeting. As of the
Rehabilicare Record Date, directors and executive officers of Rehabilicare
beneficially owned and were entitled to vote 282,946 shares of Rehabilicare
Common Stock, or approximately 5.8% of the shares entitled to vote at the
Rehabilicare Annual Meeting. It is currently expected that each such
director and executive officer of Rehabilicare will vote the shares of
Rehabilicare Common Stock he or she is entitled to vote for approval and
adoption of the Merger Agreement and the other proposals described above. As
of the Rehabilicare Record Date, directors and executive officers of Staodyn
did not beneficially own any shares of Rehabilicare Common Stock. See
"REHABILICARE ANNUAL MEETING," "ELECTION OF REHABILICARE DIRECTORS,"
"PROPOSAL TO APPROVE AMENDMENT TO REHABILICARE ARTICLES OF INCORPORATION,"
"PROPOSAL TO APPROVE THE REHABILICARE 1998 STOCK INCENTIVE PLAN" and
"INDEPENDENT ACCOUNTANTS."
STAODYN SPECIAL MEETING AND VOTE REQUIRED
The Staodyn Special Meeting will be held on March 17, 1998, at 9:00 a.m.
local time, at the Raintree Plaza Hotel Conference Center, 1900 Ken Pratt
Boulevard, Longmont, Colorado, at which time the holders of Staodyn Common
Stock will be asked to approve the Merger Agreement. Only the record holders
of Staodyn Common Stock at the close of business on
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<PAGE>
February 6, 1998 (the "Staodyn Record Date") are entitled to notice of and to
vote at the Staodyn Special Meeting. On the Staodyn Record Date, there were
983 holders of record of Staodyn Common Stock and 6,658,477 shares of Staodyn
Common Stock outstanding.
The affirmative vote of the holders of a majority of the outstanding
shares of Staodyn Common Stock entitled to vote is required to approve the
Merger Agreement. As of the Staodyn Record Date, directors and executive
officers of Staodyn beneficially owned and were entitled to vote 433,899
shares of Staodyn Common Stock, or approximately 6.5% of the shares entitled
to vote at the Staodyn Special Meeting. It is currently expected that each
such director and executive officer of Staodyn will vote the shares of
Staodyn Common Stock he or she is entitled to vote for approval of the Merger
Agreement. As of the Staodyn Record Date, directors and executive officers
of Rehabilicare did not beneficially own any shares of Staodyn Common Stock.
See "STAODYN SPECIAL MEETING."
THE MERGER
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Subsidiary will be merged with and into Staodyn,
Staodyn will continue as the Surviving Corporation, and the separate
existence of Merger Subsidiary will cease. Pursuant to the Merger Agreement,
(1) each share of Staodyn Common Stock issued and outstanding immediately
prior to the Effective Time (other than (a) any shares to be canceled
pursuant to (2) and (b) any Dissenting Shares) will be converted into the
right to receive 0.829 of a share (the "Exchange Ratio") of Rehabilicare
Common Stock; (2) each share of Staodyn Common Stock issued and outstanding
immediately prior to the Effective Time and owned by Rehabilicare, Merger
Subsidiary or Staodyn or any direct or indirect subsidiary of Rehabilicare,
Merger Subsidiary or Staodyn will be canceled and extinguished without any
conversion thereof and no payment will be made with respect thereto; and (3)
each share of common stock of Merger Subsidiary issued and outstanding
immediately prior to the Effective Time will be converted into one validly
issued, fully paid and nonassessable share of Common Stock of Rehabilicare.
The shares of Rehabilicare Common Stock issued to Staodyn Stockholders in
connection with the Merger are sometimes referred to herein as the "Merger
Consideration."
Upon consummation of the Merger, each option or warrant to purchase
shares of Staodyn Common Stock issued by Staodyn pursuant to any of its stock
option plans or otherwise (each, a "Staodyn Stock Option") that is
outstanding and unexercised immediately prior to the Effective Time will be
converted automatically into an option to purchase shares of Rehabilicare
Common Stock. The number of shares of Rehabilicare Common Stock purchasable
upon the exercise of such Staodyn Stock Options will be equal to the product
of the number of shares of Staodyn Common Stock underlying the Staodyn Stock
Options multiplied by the Exchange Ratio and rounded down to the nearest
whole share, and the exercise price per share of Rehabilicare Common Stock
under each such Staodyn Stock Option will be adjusted by dividing the per
share exercise price of each such Staodyn Stock Option by the Exchange Ratio
and rounded upward to the nearest full cent. See "THE MERGER--Description of
the Merger."
CONDITIONS TO THE MERGER
The Merger is subject to the satisfaction of certain conditions,
including among others, the approval of the Merger Agreement and the Merger
by the holders of a majority of the outstanding shares of Staodyn Common
Stock entitled to vote at the Staodyn Special Meeting and by the holders of a
majority of the outstanding shares of Rehabilicare Common Stock entitled to
vote at the Rehabilicare Annual Meeting, and the receipt of applicable
authorizations, consents, orders or approvals from third parties. See "THE
MERGER--Conditions to the Merger."
RECOMMENDATIONS OF BOARDS OF DIRECTORS
THE BOARD OF DIRECTORS OF REHABILICARE (THE "REHABILICARE BOARD") HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
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<PAGE>
CONTEMPLATED THEREBY, THE CHARTER AMENDMENT AND THE 1998 PLAN. THE
REHABILICARE BOARD BELIEVES THAT THE MERGER, THE CHARTER AMENDMENT AND THE
1998 PLAN ARE IN THE BEST INTERESTS OF REHABILICARE AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT REHABILICARE STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE MERGER AGREEMENT AND APPROVAL OF THE CHARTER AMENDMENT AND THE 1998 PLAN.
FOR A DISCUSSION OF THE FACTORS CONSIDERED BY THE REHABILICARE BOARD IN
REACHING ITS CONCLUSIONS, SEE "THE MERGER--BACKGROUND OF THE MERGER" AND
"--REASONS OF REHABILICARE FOR THE MERGER."
THE BOARD OF DIRECTORS OF STAODYN (THE "STAODYN BOARD") HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE
STAODYN BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF STAODYN
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STAODYN STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT. FOR A DISCUSSION OF THE FACTORS CONSIDERED
BY THE STAODYN BOARD IN REACHING ITS CONCLUSIONS, SEE "THE MERGER--BACKGROUND
OF THE MERGER" AND "--REASONS OF STAODYN FOR THE MERGER."
OPINION OF REHABILICARE'S FINANCIAL ADVISOR
John G. Kinnard & Company, Incorporated ("Kinnard"), has rendered to the
Rehabilicare Board a written opinion, dated December 1, 1997, to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the Exchange Ratio is fair to the holders of Rehabilicare
Common Stock from a financial point of view. Such opinion was reconfirmed in
writing as of the date of this Joint Proxy Statement-Prospectus. A copy of
the opinion of Kinnard dated the date of this Joint Proxy
Statement-Prospectus is attached hereto as Appendix D and should be read
carefully in its entirety with respect to the procedures followed,
assumptions made, matters considered and limitations on the review undertaken
in connection with such opinion. The opinion of Kinnard is directed to the
Rehabilicare Board and relates only to the fairness of the Exchange Ratio
from a financial point of view, does not address any other aspect of the
proposed Merger or any related transaction and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at
the Rehabilicare Annual Meeting. See "THE MERGER--Opinion of Rehabilicare's
Financial Advisor."
OPINION OF STAODYN'S FINANCIAL ADVISOR
The Wallach Company, Inc. ("Wallach"), financial advisor to Staodyn, has
rendered to the Staodyn Board a written opinion, dated December 1, 1997, to
the effect that, as of such date and based upon and subject to certain
matters stated in such opinion, the Exchange Ratio is fair to the holders of
Staodyn Common Stock from a financial point of view. Such opinion was
reconfirmed in writing as of the date of this Joint Proxy
Statement-Prospectus. A copy of the opinion of Wallach dated the date of
this Joint Proxy Statement-Prospectus is attached hereto as Appendix C and
should be read carefully in its entirety with respect to the procedures
followed, assumptions made, matters considered and limitations on the review
undertaken in connection with such opinion. The opinion of Wallach is
directed to the Staodyn Board and relates only to the fairness of the
Exchange Ratio from a financial point of view, does not address any other
aspect of the proposed Merger or any related transaction and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote at the Staodyn Special Meeting. See "THE MERGER--Opinion of
Staodyn's Financial Advisor."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or, to the extent permitted in
the Merger Agreement, waiver of all conditions set forth below, the parties
will cause the Merger to be consummated by filing a certificate of merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware and make all other filings or recordings required by Delaware Law in
connection with the Merger and the transactions contemplated by the Merger
Agreement. The Merger will become effective at such time as the Certificate
of Merger is duly filed with the Secretary of State of the State of Delaware
or at such later
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<PAGE>
time as may be agreed by the parties in writing and specified in the
Certificate of Merger (the "Effective Time"). See "THE MERGER--Effective
Time."
WAIVER, AMENDMENT; TERMINATION
The Merger Agreement may be changed or modified by the parties only by
action taken by or on behalf of the respective boards of directors, reflected
in a written amendment signed by the parties, at any time prior to the
Effective Time; provided, however, that, after the approval of the Merger
Agreement and the Merger by the stockholders of Staodyn, no amendment may be
made which would reduce the amount or change the type of consideration into
which each share of Staodyn Common Stock will be converted upon consummation
of the Merger. See "THE MERGER--Waiver and Amendment."
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, notwithstanding any requisite approval
of the Merger Agreement and the Merger by the stockholders of Staodyn or of
Rehabilicare: (1) by mutual written consent of each of Rehabilicare, Merger
Subsidiary and Staodyn; (2) by either Rehabilicare, Merger Subsidiary or
Staodyn if either (a) the Effective Time has not occurred on or before July
31, 1998 (except that this right to terminate the Merger Agreement is not
available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date) or (b) there is a law that
makes consummation of the Merger illegal or otherwise prohibited or if any
court or Governmental Entity has taken any action restraining, enjoining or
otherwise prohibiting the Merger that has become final and unappealable; (3)
by either Rehabilicare or Merger Subsidiary if the board of directors of
Staodyn changes its recommendation of the Merger Agreement or the Merger or
recommends any competing transaction, or resolves to do so; (4) by Staodyn if
the board of directors of Rehabilicare changes its recommendation of the
Merger Agreement or the Merger or recommends any competing transaction or
resolves to do so; (5) by either Rehabilicare, Merger Subsidiary or Staodyn
if the stockholders of Staodyn fail to approve the Merger Agreement; (6) by
either Rehabilicare, Merger Subsidiary or Staodyn, if stockholders of
Rehabilicare fail to approve the Merger Agreement; (7) by Staodyn, in the
event of a material breach by Rehabilicare or Merger Subsidiary of any
representation, warranty, covenant or agreement contained in the Merger
Agreement (other than a breach of Rehabilicare or Merger Subsidiary due to
the occurrence of a Material Adverse Effect arising solely due to the public
announcement of the Merger) which has not been cured or is not curable by
July 31, 1998; (8) by Rehabilicare, in the event of a material breach by
Staodyn of any representation, warranty, covenant or agreement contained in
the Merger Agreement (other than a breach of Staodyn due to the occurrence of
a Material Adverse Effect arising solely due to the public announcement of
the Merger) which has not been cured or is not curable by July 31, 1998; (9)
by either Rehabilicare, Merger Subsidiary or Staodyn, if the average closing
sale price per share of Rehabilicare Common Stock as reported on the Nasdaq
National Market is less than $3.00 for the 10 trading days ending on the
fifth day prior to the Closing; or (10) by Rehabilicare, if the number of
shares held by the record holders of Staodyn Common Stock, who have properly
asserted their rights to appraisal of such shares pursuant to Section 262 of
Delaware Law, exceeds 165,000 shares of Staodyn Common Stock. See "THE
MERGER--Termination" and "--Termination Fees."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to qualify for federal income tax purposes as a
tax-free reorganization. Staodyn has received an opinion from Chrisman, Bynum
& Johnson, P.C., counsel to Staodyn, to the effect that the Merger will be
treated as a tax-free reorganization within the meaning of Section 368 of the
Internal Revenue Code, as amended (the "Code"), subject to customary
assumptions and representations. Consummation of the Merger is conditioned
upon such opinion not having been withdrawn in any material respect prior to
such consummation. Such opinion is not, however, binding on the Internal
Revenue Service. If the Merger qualifies as a tax free reorganization,
holders of the Staodyn Common Stock will generally recognize no gain or loss
for federal income tax purposes as a result of the exchange of their shares
of Staodyn Common Stock for shares of Rehabilicare Common Stock. EACH
STAODYN STOCKHOLDER IS URGED TO
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<PAGE>
CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER, AS WELL AS ANY APPLICABLE STATE, LOCAL, FOREIGN
OR OTHER TAX CONSEQUENCES, BASED ON SUCH STOCKHOLDER'S OWN PARTICULAR FACTS
AND CIRCUMSTANCES. See "THE MERGER--Certain Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each of John R. South, Michael J. Newman, John L. Fenstermaker and David S.
Hood, officers and managers of Staodyn, are parties to change of control
agreements that provide them with certain benefits in the event of termination
after the Merger and provide that all options they hold become exercisable
after the Merger. See "THE MERGER--Interests of Certain Persons in the
Merger."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Although certain of the management officials of Staodyn may be retained, the
Chief Executive Officer, Vice President of Finance and Vice President of Sales
and Marketing of Rehabilicare will continue in such positions with the
surviving corporation. Staodyn will become a wholly-owned subsidiary of
Rehabilicare with the same management and board of directors as Rehabilicare.
EXPENSES AND TERMINATION FEES
The Merger Agreement provides that if the Merger Agreement is terminated
because of a material breach that is not a result of a competing transaction
the breaching party must pay a fee of $1,000,000. If the Merger Agreement is
terminated because (1) the board of directors of a party changes its
recommendation of the Merger, (2) because the Stockholders of a party fail to
approve the Merger when a competing transaction exists, or (3) because of a
material breach of a representation, warranty, covenant or agreement
contained in the Merger Agreement, which has not been cured or is not curable
by July 31, 1998 and the breach giving rise to such termination is a result
of a competing transaction, the other party must be paid a fee of $1,500,000.
Each party to the Merger Agreement will bear all expenses incurred by it in
connection with the Merger Agreement and the transactions contemplated
thereby, except for the termination fee described above and except that
printing, mailing and filing expenses related to the Registration Statement
and the Joint Proxy Statement-Prospectus will be shared equally between
Staodyn and Rehabilicare.
APPRAISAL/DISSENTERS' RIGHTS
Holders of Rehabilicare Common Stock do not have appraisal rights under the
Minnesota Business Corporation Act (the "MBCA") with respect to the Merger.
Pursuant to Section 262 of the Delaware General Corporation Law ("DGCL"),
holders of Staodyn Common Stock may elect to have the "fair value" of their
shares of Staodyn Common Stock (determined in accordance with Delaware law)
individually appraised and paid to them if the Merger is completed and if
they comply with the requirements of Section 262 of the DGCL, a copy of which
is attached hereto as Appendix B. See "THE MERGER--Appraisal and Dissenters'
Rights."
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "pooling of
interests" under generally accepted accounting principles. The obligation of
Rehabilicare and Staodyn to consummate the Merger is conditioned upon receipt
of letters from their respective independent accountants to the effect that
the Merger may be accounted for in such manner. See "THE MERGER--Accounting
Treatment" and "--Conditions."
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<PAGE>
MARKETS AND MARKET PRICES
The Rehabilicare Common Stock is listed on the Nasdaq National Market
under the symbol "REHB" and the Staodyn Common Stock is traded on the Nasdaq
SmallCap Market under the symbol "SDYN." The following table sets forth the
closing price per share of Rehabilicare Common Stock and the closing price
per share of Staodyn Common Stock, as reported on the Nasdaq National Market
and the Nasdaq SmallCap Market, respectively, and the "equivalent per share
price" (as defined below) of Staodyn Common Stock as of December 1, 1997, the
last trading day before Rehabilicare and Staodyn publicly announced the
execution of the Merger Agreement and on February 11, 1998, the last trading
day prior to the date of this Joint Proxy Statement-Prospectus. The
"equivalent per share price" of Staodyn Common Stock as of each such date
equals the closing price per share of Rehabilicare Common Stock on such date
multiplied by the Exchange Ratio.
MARKET PRICES PER SHARE
-----------------------------------------
REHABILICARE STAODYN EQUIVALENT
COMMON COMMON PER SHARE
STOCK STOCK PRICE
--------------- ------------ ------------
December 1, 1997........ $4.00 $2.25 $3.32
February 11, 1998 ...... $3.00 $2.19 $2.49
Rehabilicare Stockholders and holders of Staodyn Common Stock are urged to
obtain current market quotations for Rehabilicare Common Stock and Staodyn
Common Stock. Because the Exchange Ratio is fixed, a change in the market
price of Rehabilicare Common Stock before the consummation of the Merger
would affect the market value as of the Effective Time of the Rehabilicare
Common Stock to be received in the Merger in exchange for Staodyn Common
Stock. THERE CAN BE NO ASSURANCE AS TO THE MARKET PRICE OF REHABILICARE
COMMON STOCK AT ANY TIME BEFORE THE EFFECTIVE DATE OR AT ANY TIME FOLLOWING
THE EXCHANGE OF STAODYN COMMON STOCK FOR REHABILICARE COMMON STOCK PURSUANT
TO THE MERGER.
COMPARATIVE RIGHTS OF STOCKHOLDERS
Upon consummation of the Merger, holders of Staodyn Common Stock will become
holders of Rehabilicare Common Stock. Staodyn is organized under the DGCL
and the laws of the State of Delaware, while Rehabilicare is organized under
the MBCA and laws of the State of Minnesota. Because of differences between
the DGCL and the MBCA and between the provisions that are included in their
charter documents, there are differences in the rights of the holders of
Staodyn Common Stock, on one hand, and the holders of Rehabilicare Common
Stock, on the other. For a discussion of certain similarities and differences
between the rights of holders of Staodyn Common Stock and the rights of
holders of Rehabilicare Common Stock, see "COMPARISON OF STOCKHOLDERS RIGHTS."
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<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth selected comparative unaudited per share data
for Rehabilicare on a historical and pro forma combined basis, and for
Staodyn on a historical and pro forma equivalent basis, giving effect to the
Merger using the pooling of interests method of accounting. For a
description of the effect of pooling of interests accounting on the
historical financial statements of Rehabilicare, see "THE MERGER--Accounting
Treatment." The information set forth below is based on and derived from the
consolidated historical financial statements of Rehabilicare and Staodyn and
the unaudited pro forma condensed combined financial statements, including
the respective notes thereto, incorporated by reference into, or appearing
elsewhere in, this Joint Proxy Statement-Prospectus. This information should
be read in conjunction with such historical financial statements and pro
forma financial statements and the related notes thereto. See "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
The per share data set forth herein are presented for comparative purposes
only and are not necessarily indicative of the future combined financial
position, the results of the future operations or the actual results or
combined financial position of Rehabilicare that would have been achieved had
the Merger been consummated as of the dates or for the periods indicated.
While no assurance can be given, Rehabilicare and Staodyn expect that,
following the Merger, the combined operations will achieve substantial
benefits from the Merger including operating cost savings and revenue
enhancements. However, the pro forma comparative unaudited per share data do
not reflect any direct costs, potential savings or revenue enhancements which
are expected to result from the consolidation of operations of Rehabilicare
and Staodyn, and therefore, do not purport to be indicative of the results of
future operations of Rehabilicare following the Merger.
REHABILICARE COMMON STOCK STAODYN COMMON STOCK(1)
------------------------- -----------------------
PRO FORMA PRO FORMA
BOOK VALUE(2): HISTORICAL COMBINED HISTORICAL EQUIVALENT
---------- --------- ---------- ----------
September 30, 1997.......... $ 1.66 $ 1.98 $ 1.87 $ 1.64
June 30, 1997............... 1.62 1.96 1.87 1.63
INCOME FROM
OPERATIONS(3)(4):
Three Months Ended
September 30, 1997.......... $ 0.03 $ 0.02 $ 0.02 $ 0.02
Year Ended:
June 30, 1997.............. 0.12 0.08 0.06 0.07
June 30, 1996.............. 0.06 0.04 0.04 0.04
June 30, 1995.............. 0.14 0.08 0.03 0.06
_________
(1) Historical book value information for Staodyn is as of August 31,
1997. Historical income from operations information for Staodyn is
for the three months ended August 31, 1997, for the twelve months
ended August 31, 1997, for the year ended November 30, 1996 and for
the year ended November 30, 1995, respectively.
(2) The pro forma combined book values per share of Rehabilicare Common
Stock are based upon the pro forma total common equity for
Rehabilicare and Staodyn, divided by the total pro forma shares of
Rehabilicare Common Stock assuming conversion of Staodyn Common Stock
at the Exchange Ratio of 0.829 of a share of Staodyn Common Stock for
each share of Rehabilicare Common Stock. The pro forma equivalent
book values per share of Staodyn Common Stock represent the pro forma
combined amounts multiplied by the Exchange Ratio. See "THE MERGER--
Description of the Merger."
(3) The pro forma combined income per share from continuing operations
has been computed based on the average number of outstanding shares
and common equivalent shares of Rehabilicare, and the average number
of outstanding shares and common equivalent shares of Staodyn
adjusted for the Exchange Ratio. The pro forma equivalent income per
share of Staodyn stock represents the pro forma combined income per
share multiplied by the Exchange Ratio. See "THE MERGER--Description
of the Merger."
(4) The historical earnings per common share for Staodyn was based on the
average number of common shares outstanding. The impact of common
share equivalents, such as stock options, and other potentially
dilutive securities is not material; therefore, they were not
included in the historical Staodyn calculations.
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SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical consolidated
financial information for Rehabilicare and Staodyn. The interim financial
data is unaudited; however, in the opinion of each of the companies, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. The selected historical financial data of Rehabilicare for the
years ended June 30, 1995 through 1997 and the selected historical financial
data of Staodyn for the years ended November 30, 1994 through 1996 were
derived from the audited consolidated historical financial statements of
Rehabilicare and Staodyn, respectively. The selected historical financial
data for the three months ended September 30, 1997 and 1996 of Rehabilicare
and the selected historical financial data for the nine months ended August
31, 1997 and 1996 of Staodyn were derived from the unaudited historical
financial statements of Rehabilicare and Staodyn, respectively. This
information should be read in conjunction with the audited consolidated
historical financial statements of Rehabilicare and Staodyn, the pro forma
selected historical financial data, and the unaudited pro forma condensed
combined financial statements, including the respective notes thereto,
incorporated by reference into, or appearing elsewhere in, this Joint Proxy
Statement-Prospectus. See "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE," "PRO FORMA SELECTED HISTORICAL FINANCIAL DATA" and
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
SELECTED HISTORICAL FINANCIAL DATA OF
REHABILICARE INC.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED JUNE 30,
------------------------- ----------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 1996 1997 1996 1995
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales............................ $ 2,929,902 $ 2,344,760 $ 10,991,105 $ 8,703,418 $ 9,249,029
Income from Operations............... 294,912 299,779 1,020,728 664,563 953,531
Interest Income (Expense)............ (56,787) (71,860) (249,233) (231,632) (80,645)
Other Income (Expense)............... 6,710 6,252 57,247 14,332 (4,774)
Provision for Income Taxes........... 83,000 84,000 265,000 165,000 228,000
----------- ----------- ------------ ----------- -----------
Net Income.......................... $ 161,835 $ 150,171 $ 563,742 $ 282,263 $ 640,112
----------- ----------- ------------ ----------- -----------
----------- ----------- ------------ ----------- -----------
Net Income Per Share................. $0.03 $ 0.03 $0.12 $ 0.06 $ 0.14
Dividends Per Common Share........... -0- -0- -0- -0- -0-
Weighted Average Number of
Common Shares Outstanding........ 4,948,443 4,856,757 4,886,714 4,868,633 4,685,733
SEPTEMBER 30, JUNE 30,
------------------------- ----------------------------------------
BALANCE SHEET DATA: 1997 1996 1997 1996 1995
----------- ----------- ------------ ----------- -----------
Total Current Assets................. $ 9,375,337 $ 9,012,125 $ 9,218,629 $ 8,894,730 $ 7,744,055
Total Assets......................... 11,864,582 11,386,177 11,602,054 11,321,810 10,248,341
Long-term Obligations................ 1,882,779 2,174,858 1,957,834 2,251,908 1,904,211
Stockholders' Equity................. 8,072,086 7,338,069 7,886,719 7,184,836 6,748,958
</TABLE>
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SELECTED HISTORICAL FINANCIAL DATA OF
STAODYN, INC.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED AUGUST 31, YEAR ENDED NOVEMBER 30,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales . . . . . . . . . . . . . $ 15,699,741 $ 13,668,866 $ 18,943,519 $ 18,371,001 $ 16,596,771
Income (Loss) From Operations . . . 303,677 153,631 311,695 276,677 (1,243,379)
Net Interest Income (Expense) . . . (43,827) (47,356) (65,192) (120,483) (139,113)
Other Income (Expense). . . . . . . 3,174 7,218 10,312 47,462 60,038
Provision for Income Taxes. . . . . -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Net Income (Loss) . . . . . . . . . $ 263,024 $ 113,493 $ 256,815 $ 203,656 $ (1,322,454)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net Income (Loss) Per Share . . . . $ 0.04 $ 0.02 $ 0.04 $ 0.03 $ (.24)
Dividends Per Common
Share . . . . . . . . . . . . . . -0- -0- -0- -0- -0-
Weighted Average Number of
Common Shares Outstanding . . . . 6,644,587 6,412,685 6,469,618 6,286,260 5,424,776
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Current Assets. . . . . . . . $ 12,330,264 $ 11,812,007 $ 12,302,543 $ 11,042,209 $ 10,356,835
Total Assets. . . . . . . . . . . . 15,508,794 15,388,255 15,654,452 14,742,900 14,823,116
Long-term Obligations . . . . . . . 1,484,876 1,297,234 1,258,146 1,461,959 1,676,800
Stockholders' Equity. . . . . . . . 12,542,441 12,205,738 12,293,716 11,671,368 11,335,845
</TABLE>
For information regarding the earnings of Staodyn for the year ended November
30, 1997, see "BUSINESS OF STAODYN -- Recent Developments."
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PRO FORMA SELECTED HISTORICAL FINANCIAL DATA
REFLECTING THE MERGER OF REHABILICARE INC. AND STAODYN, INC.
The following unaudited pro forma selected financial data gives effect
to the merger of Rehabilicare and Staodyn to be accounted for as a pooling of
interests. The unaudited pro forma balance sheet data is based upon
combining the balance sheets of Rehabilicare as of September 30, 1997 and
1996 and June 30, 1997, 1996 and 1995 with the balance sheets of Staodyn as
of August 31, 1997 and 1996, August 31, 1997 and November 30, 1996 and 1995,
respectively. The unaudited pro forma condensed income statement gives
effect to the proposed merger of Rehabilicare and Staodyn by combining the
results of operations of Rehabilicare for the three months ended September
30, 1997 and 1996 and for the three years ended June 30, 1997 with the
results of operations of Staodyn for the three months ended August 31, 1997
and 1996, for the year ended August 31, 1997 and for the two years ended
November 30, 1996, respectively, on a pooling of interests basis. The
operations of Staodyn for the three months ended November 30, 1996, resulting
in sales of $5.3 million and net income of $89,000, have been included in the
pro forma statements of income for the years ended June 30, 1997 and 1996.
The unaudited pro forma selected financial data should be read in conjunction
with the historical financial statements and notes thereto of Rehabilicare
and Staodyn. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and
"UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
The pro forma data is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position
that would have been achieved if the Merger had been consummated as of the
beginning of the periods indicated, nor is it necessarily indicative of
future financial position or results of operations. The pro forma income
statement items and related per share amounts do not include anticipated
revenue enhancements, operating cost savings or the after-tax impact of
merger-related costs expected as a result of the Merger.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED JUNE 30,
---------------------------- -------------------------------------------
1997 1996 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales and Rental Revenue. . . . $ 8,208,094 $ 7,179,251 $ 31,965,499 $ 27,646,937 $ 27,620,030
Income from Operations. . . . . . . 422,326 366,338 1,482,469 976,258 1,230,208
Net Income. . . . . . . . . . . . . 232,156 183,605 815,677 441,488 766,379
Net Earnings Per Share. . . . . . . 0.02 0.02 0.08 0.04 0.08
Dividends Per Common Share. . . . . -0- -0- -0- -0- -0-
Weighted Average Number of
Common Shares Outstanding . . . . 10,455,021 10,261,739 10,394,337 10,231,946 9,897,043
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------------------- -------------------------------------------
1997 1996 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Current Assets . . . . . . . $ 21,705,601 $ 20,824,132 $ 21,548,893 $ 21,197,273 $ 18,786,264
Total Assets . . . . . . . . . . . 27,373,376 26,774,432 27,110,848 26,976,262 24,991,241
Long-term Obligations. . . . . . . 3,367,655 3,472,092 3,442,710 3,510,054 3,366,170
Stockholders' Equity . . . . . . . 20,614,527 19,543,807 20,429,160 19,478,552 18,420,326
</TABLE>
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<PAGE>
STAODYN SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to Staodyn
Stockholders as part of the solicitation of proxies by the Staodyn Board for
use at the Staodyn Special Meeting to be held on March 17, 1998 at the Raintree
Plaza Hotel Conference Center, 1900 Ken Pratt Boulevard, Longmont, Colorado.
This Joint Proxy Statement-Prospectus and the accompanying Proxy Card are
first being mailed to holders of Staodyn Common Stock on or about February 12,
1998.
The purpose of the Staodyn Special Meeting is to vote upon (1) a
proposal to approve the Merger Agreement, pursuant to which, among other
things, (a) a wholly-owned subsidiary of Rehabilicare will be merged with and
into Staodyn, (b) Staodyn will become a wholly-owned subsidiary of
Rehabilicare, and (c) each outstanding share of Staodyn Common Stock will be
converted into the right to receive 0.829 of a share of Rehabilicare Common
Stock (with cash paid in lieu of fractional shares).
Pursuant to the Merger Agreement, holders of Staodyn Common Stock would
be entitled to receive 0.829 of a share of Rehabilicare Common Stock for each
share of Staodyn Common Stock held as of the Effective Date. Based on (1)
the 6,658,477 shares of Staodyn Common Stock outstanding on the Staodyn
Record Date (as defined herein), (2) the 521,332 shares of Staodyn Common
Stock issuable upon the exercise of outstanding stock options and warrants on
such date and (3) the Exchange Ratio of 0.829, approximately 5,952,061 shares
of Rehabilicare Common Stock are expected to be issued in the Merger or to be
issuable following the Merger upon the exercise of the Rehabilicare options
and warrants into which outstanding Staodyn options and warrants will be
converted in connection with the Merger.
The Merger is subject to a number of conditions, including the receipt
of stockholder approvals. See "THE MERGER--Conditions."
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Staodyn Stockholders as of the Staodyn Record Date are entitled to
notice of and to vote at the Staodyn Special Meeting and any adjournment or
postponement thereof. Accordingly, only holders of record of shares of
Staodyn Common Stock at the close of business on such date will be entitled
to vote at the Staodyn Special Meeting and any adjournment or postponement
thereof, with each share entitling its owner to one vote on all matters
properly presented at the Staodyn Special Meeting and any adjournment or
postponement thereof. On the Staodyn Record Date, there were approximately
983 holders of record of the 6,658,477 shares of Staodyn Common Stock then
outstanding.
Although the Staodyn Bylaws require the presence, in person or by proxy,
of not less than one-third of the total number of outstanding shares of
Staodyn Common Stock entitled to vote at the Staodyn Special Meeting for
purposes of a quorum at the Staodyn Special Meeting, under Delaware law, the
Merger Agreement must be approved by the holders of a majority of the
outstanding shares of Staodyn Common Stock. Such approval would also satisfy
the Nasdaq SmallCap Market requirement that the issuance of Rehabilicare
Common Stock contemplated by the Merger Agreement must be approved by a
majority of the votes cast at the Staodyn Special Meeting and that at least
50% of the votes entitled to be cast on the matter are voted at the Staodyn
Special Meeting.
If an executed Proxy Card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by such proxy
will be considered present at the Staodyn Special Meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not
be considered to have been voted in favor of such matter. Under the rules of
the Nasdaq SmallCap Market, brokers who hold shares in street name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote shares held for such customers without specific
instructions from such customers. Given that the DGCL requires the
affirmative vote of the holders of a majority of the outstanding shares of
Staodyn Common Stock to approve the Merger Agreement, any
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<PAGE>
abstention and any failure of such customers to provide specific instructions
with respect to their shares of Staodyn Common Stock to their broker will
have the same effect as a vote against the approval of the Merger Agreement.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE STAODYN
SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
AGREEMENT.
It is currently expected that all of the 433,899 shares of Staodyn
Common Stock which the directors and executive officers of Staodyn
beneficially owned and were entitled to vote as of the Staodyn Record Date
(6.5% of the total number of outstanding shares of Staodyn Common Stock as of
such date) will be voted for approval of the Merger Agreement. As of the
Staodyn Record Date, John H. P. Maley held a total of 10,000 shares of
Staodyn Common Stock, all of which he intended to vote in favor of the
Merger. No other director or executive officer of Rehabilicare beneficially
owned any shares of Staodyn Common Stock at such date.
If the accompanying Proxy Card is properly executed and returned to
Staodyn in time to be voted at the Staodyn Special Meeting, the shares
represented thereby will be voted in accordance with the instructions marked
thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL OF THE
MERGER AGREEMENT. The Staodyn Board does not know of any matters other than
those described in the notice of the Staodyn Special Meeting that are to come
before the Staodyn Special Meeting. If any other matters are properly
brought before the Staodyn Special Meeting, including, among other things, a
motion to adjourn or postpone the Staodyn Special Meeting to another time
and/or place for the purpose of soliciting additional proxies in favor of the
proposal to approve the Merger Agreement or to permit dissemination of
information regarding material developments relating to the Merger or
otherwise germane to the Staodyn Special Meeting, one or more of the persons
named in the Proxy Card will vote the shares represented by such proxy upon
such matters as determined in their discretion; provided, however, that no
proxy that is voted against the proposal to approve the Merger Agreement will
be voted in favor of any such adjournment or postponement for the purpose of
soliciting additional proxies.
The presence of a stockholder at the Staodyn Special Meeting will not
automatically revoke such stockholder's proxy. Any proxy given pursuant to
this solicitation may be revoked by the person giving it by giving written
notice of such revocation to the Secretary of Staodyn at any time before it
is voted, by delivering to Staodyn a duly executed, later-dated proxy or by
attending the Staodyn Special Meeting and voting in person. All written
notices of revocation and other communications with respect to revocation of
Staodyn proxies should be addressed to Michael J. Newman, Secretary, Staodyn,
Inc., 1225 Ken Pratt Boulevard, Longmont, Colorado 80501.
The cost of soliciting proxies for the Staodyn Special Meeting will be
borne by Staodyn, except that the cost of preparing and mailing this Joint
Proxy Statement-Prospectus (except legal and accounting fees, which will be
borne by the respective parties) will be borne equally by Rehabilicare and
Staodyn. In addition to use of the mails, proxies may be solicited
personally or by telephone, facsimile or other means of communication by
directors, officers and employees of Staodyn, who will not be specially
compensated for such activities, but who may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Staodyn will
also request persons, firms and companies holding shares in their names or in
the name of their nominees, which are beneficially owned by others, to send
proxy materials to and obtain proxies from such beneficial owners. Staodyn
will reimburse such persons for their reasonable expenses incurred in that
connection.
RECOMMENDATION OF STAODYN BOARD
The Staodyn Board has unanimously approved the Merger Agreement and the
transactions contemplated thereby. The Staodyn Board believes that the
Merger is in the best interests of Staodyn stockholders and unanimously
recommends that Staodyn Stockholders vote "FOR" approval of the Merger
Agreement. See "THE MERGER--Reasons of Staodyn for the Merger."
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<PAGE>
REHABILICARE ANNUAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to holders of
Rehabilicare Common Stock as part of the solicitation of proxies by the
Rehabilicare Board for use at the Rehabilicare Annual Meeting to be held on
March 17, 1998 at 10:00 a.m., local time, at the Minneapolis Club, 729 Second
Avenue South, Minneapolis, Minnesota. This Joint Proxy Statement-Prospectus
and the accompanying Proxy Card are first being mailed to holders of
Rehabilicare Common Stock on or about February 12, 1998.
The purpose of the Rehabilicare Annual Meeting is to vote upon (i) a
proposal to approve the Merger Agreement, (ii) the election of four directors
to serve until the next annual meeting of Rehabilicare's stockholders, (iii)
the election of two additional directors to serve until the next annual
meeting, but effective after consummation of the Merger and only if the
Merger is completed, (iv) a proposal to amend the Articles of Incorporation
of Rehabilicare to increase the number of authorized shares of common stock
to 30,000,000 (the "Charter Amendment") and (v) a proposal to approve the
Rehabilicare Inc. 1998 Stock Incentive Plan (the "1998 Plan").
The Merger is subject to a number of conditions, including the receipt
of stockholder approvals. See "THE MERGER--Conditions."
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Holders of Rehabilicare Common Stock as of the Rehabilicare Record Date
are entitled to notice of and to vote at the Rehabilicare Annual Meeting and
any adjournments or postponements thereof. Accordingly, only holders of
record of shares of Rehabilicare Common Stock at the close of business on
such date will be entitled to vote at the Rehabilicare Annual Meeting and any
adjournments or postponements thereof, with each share entitling its owner to
one vote on all matters properly presented at the Rehabilicare Annual Meeting
and any adjournments or postponements thereof. On the Rehabilicare Record
Date, there were 375 holders of record of the 4,884,480 shares of
Rehabilicare Common Stock then outstanding. Under Minnesota law, the Merger
Agreement must be approved by the holders of a majority of outstanding shares
of Rehabilicare Common Stock. A majority of the shares of Rehabilicare
Common Stock represented at the Rehabilicare Annual Meeting may elect
Directors of Rehabilicare and may approve the 1998 Plan and the Charter
Amendment, provided a quorum of at least a majority of the votes entitled to
be cast at the meeting is present.
If an executed Proxy Card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by such proxy
will be considered present at the Rehabilicare Annual Meeting for purposes of
determining the presence of a quorum and for purposes of calculating the
vote, but will not be considered to have been voted in favor of such matter.
In addition, brokers who hold shares in street name for customers who are the
beneficial owners of such shares are prohibited from giving a proxy to vote
shares held for such customers on matters other than the election of
directors without specific instructions from such customers. Given that the
MBCA requires the affirmative vote of the holders of a majority of the
outstanding shares of Rehabilicare Common Stock entitled to vote on the
proposal to approve the Merger Agreement, if such customers fail to provide
specific instructions with respect to their shares of Rehabilicare Common
Stock to their broker or such stockholders explicitly abstain from voting on
the proposals, the effect will be the same as a vote against the approval of
the Merger Agreement. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO
VOTE AT THE REHABILICARE ANNUAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER AGREEMENT.
It is currently expected that all of the 282,946 shares of
Rehabilicare Common Stock which the directors and executive officers of
Rehabilicare beneficially owned and were entitled to vote as of the
Rehabilicare Record Date (5.8% of the total number of outstanding shares of
Rehabilicare
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<PAGE>
Common Stock as of such date) will be voted for approval of the Merger
Agreement. As of the Rehabilicare Record Date, directors and executive
officers of Staodyn did not beneficially own any shares of Rehabilicare
Common Stock entitled to be voted at the Rehabilicare Annual Meeting.
If the accompanying Proxy Card is properly executed and returned to
Rehabilicare in time to be voted at the Rehabilicare Annual Meeting, the
shares represented thereby will be voted in accordance with the instructions
marked thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL OF
THE MERGER AGREEMENT, FOR ELECTION OF THE DIRECTORS, FOR APPROVAL OF THE 1998
PLAN, AND FOR APPROVAL OF THE CHARTER AMENDMENT. The Rehabilicare Board does
not know of any matters other than those described in the notice of the
Rehabilicare Annual Meeting that are to come before the Rehabilicare Annual
Meeting. If any other matters are properly brought before the Rehabilicare
Annual Meeting, including, among other things, a motion to adjourn or
postpone the Rehabilicare Annual Meeting to another time and/or place for the
purpose of soliciting additional proxies in favor of the proposal to approve
the Merger Agreement or to permit dissemination of information regarding
material developments relating to the Merger or otherwise germane to the
Rehabilicare Annual Meeting, one or more of the persons named in the Proxy
Card will vote the shares represented by such proxy upon such matters as
determined in their discretion; provided, however, that no proxy that is
voted against the proposal to approve the Merger Agreement will be voted in
favor of any such adjournment or postponement for the purpose of soliciting
additional proxies.
The presence of a stockholder at the Rehabilicare Annual Meeting will not
automatically revoke such stockholder's proxy. Any proxy given pursuant to
this solicitation may be revoked by the person giving it by giving written
notice of such revocation to the Chief Executive Officer of Rehabilicare at
any time before it is voted, by delivering to Rehabilicare a duly executed,
later-dated proxy, by delivering to any other person a duly executed, later
dated proxy that such other person uses to vote at the Rehabilicare Annual
Meeting or by attending the Rehabilicare Annual Meeting and voting in person.
All written notices of revocation and other communications with respect to
revocation of Rehabilicare proxies should be addressed to David Kaysen, Chief
Executive Officer, Rehabilicare Inc., 1811 Old Highway 8, New Brighton,
Minnesota 55112.
The cost of soliciting proxies for the Rehabilicare Annual Meeting will
be borne by Rehabilicare, except that the cost of preparing and mailing this
Joint Proxy Statement-Prospectus (except legal and accounting fees, which
will be borne by the respective parties) will be borne equally by
Rehabilicare and Staodyn. In addition to use of the mails, proxies may be
solicited personally or by telephone, facsimile or other means of
communication by directors, officers and employees of Rehabilicare, who will
not be specially compensated for such activities, but who may be reimbursed
for reasonable out-of-pocket expenses in connection with such solicitation.
Rehabilicare also will request persons, firms and companies holding shares in
their names or in the name of their nominees, which are beneficially owned by
others, to send proxy materials to and obtain proxies from such beneficial
owners. Rehabilicare will reimburse such persons for their reasonable
expenses incurred in that connection.
RECOMMENDATION OF REHABILICARE BOARD
The Rehabilicare Board has unanimously approved the Merger Agreement and
the transactions contemplated thereby. The Rehabilicare Board believes that
the Merger Agreement is in the best interests of Rehabilicare and its
stockholders and unanimously recommends that Rehabilicare Stockholders vote
"FOR" approval of the Merger Agreement. See "THE MERGER--Reasons of
Rehabilicare for the Merger," "PROPOSAL TO APPROVE THE REHABILICARE 1998
STOCK INCENTIVE PLAN" and "PROPOSAL TO APPROVE AMENDMENT TO REHABILICARE
ARTICLES OF INCORPORATION."
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<PAGE>
THE MERGER
THE FOLLOWING SUMMARY OF CERTAIN TERMS AND PROVISIONS OF THE MERGER
AGREEMENT, WHICH DESCRIBES ALL MATERIAL TERMS AND PROVISIONS THEREOF, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS JOINT PROXY STATEMENT-PROSPECTUS INCLUDING THE APPENDICES
HERETO AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. A COPY OF THE
MERGER AGREEMENT (EXCLUDING THE EXHIBITS AND SCHEDULES THERETO) IS SET FORTH
IN APPENDIX A TO THIS JOINT PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED
HEREIN BY REFERENCE, AND REFERENCE IS MADE THERETO FOR A COMPLETE DESCRIPTION
OF THE TERMS OF THE MERGER. STOCKHOLDERS ARE URGED TO READ THE MERGER
AGREEMENT AND EACH OF THE OTHER APPENDICES HERETO CAREFULLY.
DESCRIPTION OF THE MERGER
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Subsidiary will be merged with and into Staodyn,
Staodyn will continue as the Surviving Corporation, and the separate
existence of Merger Subsidiary will cease. Pursuant to the Merger Agreement,
(1) each share of Staodyn Common Stock issued and outstanding immediately
prior to the Effective Time (other than (a) any shares to be canceled
pursuant to (2) and (b) any Dissenting Shares) will be converted into the
right to receive 0.829 of a share (the "Exchange Ratio") of Rehabilicare
Common Stock; (2) each share of Staodyn Common Stock issued and outstanding
immediately prior to the Effective Time and owned by Rehabilicare, Merger
Subsidiary or Staodyn or any direct or indirect subsidiary of Rehabilicare,
Merger Subsidiary or Staodyn will be canceled and extinguished without any
conversion thereof and no payment will be made with respect thereto; and (3)
each share of common stock of Merger Subsidiary issued and outstanding
immediately prior to the Effective Time will be converted into one validly
issued, fully paid and nonassessable share of Rehabilicare Common Stock.
BACKGROUND OF THE MERGER
Rehabilicare has perceived for several years a need to increase its size
in order to achieve economies of scale in operating and administrative
expense, to accommodate meaningful levels of development expense, to achieve
better sales penetration in its relevant markets and to enhance the growth it
achieved through product innovation. Toward this end, Rehabilicare has
explored potential business combinations with several other companies in its
industry during the past few years. Specifically, during fiscal 1996
Rehabilicare had preliminary discussions regarding the acquisition of an
iontophoresis device manufacturer and a distributer of both iontophoresis and
electromedical products, neither of which were pursued.
Rehabilicare and Staodyn have been in contact for a number of years and
have discussed the advisability of a combination a number of times. During
1992, Rehabilicare contacted Staodyn and discussed the possibility of an
alliance. Nevertheless, because of disagreement as to the structure of
management these discussions never progressed beyond an initial meeting.
Rehabilicare initiated contact regarding combination discussions with Staodyn
again, and met with the President and Chief Executive Officer of Staodyn in
Longmont, Colorado in February 1994. Subsequent to these discussions,
Rehabilicare met with the Vice President--Finance and Vice
President--Operations of Staodyn in Minneapolis. Although the Board of
Directors of both corporations discussed a potential transaction in March
1994, discussions were curtailed because of market price volatility in their
respective shares and uncertainty about future pricing.
David Kaysen, the Chief Executive Officer of Rehabilicare, made contact
again with W. Bayne Gibson, former Chairman of Staodyn, in November 1996 when
Mr. Gibson was in Minneapolis. Although Mr. Kaysen again indicated his
interest in pursuing combination discussions, noting, among other things, the
consolidation that was occurring in the industry, Mr. Gibson indicated that
Staodyn had only recently retained new management and wished to allow such
management to pursue its own strategy of increasing the value of Staodyn's
common stock. Nevertheless, Mr. Gibson acknowledged
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<PAGE>
the advantages of a combination and agreed to discuss the matter further
after a period of several months.
In February 1997, Mr. Kaysen called Staodyn and arranged to meet with Mr.
Gibson and Mr. South, President and Chief Executive Officer of Staodyn, in
Boulder, Colorado. Mr. Kaysen spent several hours discussing the potential
for a combination. Mr. Gibson and Mr. South agreed that consolidation in the
industry was inevitable and that Rehabilicare was a logical acquisition
partner because of its complementary business, sales territories and size.
Nevertheless, Mr. South in particular indicated that he desired time to allow
the business plan he had created for Staodyn to be implemented.
Mr. Kaysen continued to urge Staodyn to seriously consider the
combination opportunity, and sent a series of facsimile messages to directors
of Staodyn urging discussions, including facsimiles on February 24, 1997,
March 14, 1997 and April 9, 1997. The general tenor of these facsimiles was
that Mr. Kaysen believed that the stockholders of Staodyn would experience
more rapid appreciation in the value of their shares, and more stable
long-term appreciation, in a combined company. The Staodyn Board considered
these communications at its meeting of March 25, 1997 and discussed generally
their fiduciary obligations to stockholders and the pricing that would be
required to entice them into combination discussions. The Staodyn Board
appointed a committee consisting of Frederick Ayers, Patrick Crane, John
South and Michael Newman to correspond with Rehabilicare and to seek the
advice of counsel regarding the Staodyn Board's obligations in response.
The Rehabilicare Board considered general pricing parameters, and the
possibility of a combination with Staodyn, at its regular board meeting on
May 6, 1997. Mr. Kaysen distributed financial information relating to
Staodyn, noting that he understood that sales of Staodyn were most strong in
geographies in which Rehabilicare was not strong. He explained that the
businesses of Rehabilicare and Staodyn were similar, and that their products
were complementary. He reviewed with the Rehabilicare Board the balance
sheet and income statements of Staodyn, and presented very preliminary,
internally prepared combined statements. He presented to the Rehabilicare
Board a letter he proposed to send to Staodyn indicating that Rehabilicare
desired to proceed with a diligence investigation and proposing to execute
confidentiality agreements. The Rehabilicare Board authorized Mr. Kaysen to
propose further due diligence and execution of a confidentiality agreement
with Staodyn.
At a regularly scheduled meeting of its Board of Directors on May 21,
1997, outside counsel advised the Staodyn Board of Directors as to their
fiduciary obligations in connection with a business combination. The Staodyn
Board discussed at length the advantages and disadvantages of continuation of
discussions with Rehabilicare, with particular focus on the course of action
likely to be most advantageous to Staodyn's stockholders. The Staodyn Board
authorized two directors of Staodyn to meet with directors of Rehabilicare to
consider whether there was cause for continued discussion.
Mr. Kaysen and Mr. Wingrove met with Mr. Ayers and Mr. South, in
Minneapolis on May 28, 1997 and discussed further Rehabilicare's desire to
move forward with an informational investigation. Mr. Kaysen presented
Staodyn with a confidentiality agreement at such meeting and discussed what
he perceived as the advantages of the combination. Mr. Ayers and Mr. South
discussed with Mr. Kaysen the likely effect of combining the two corporate
cultures.
At a special meeting held June 6, 1997, Mr. South and Mr. Ayers reported
to the Staodyn Board the substance of their discussions with Mr. Kaysen. The
Staodyn Board authorized execution of the confidentiality agreement,
authorized officers to begin interviewing financial advisors and established
persons responsible for Staodyn's diligence investigation. The Staodyn Board
also discussed generally the exchange rate they believed was appropriate.
Rehabilicare and Staodyn executed a confidentiality agreement on June 11,
1997. Rehabilicare sent to Staodyn a preliminary due diligence request list
on June 11, 1997 and commenced its diligence
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<PAGE>
investigation shortly thereafter and began forwarding information to Staodyn.
Rehabilicare also solicited, and received on June 11, 1997, a proposal from
John G. Kinnard & Company, Incorporated ("Kinnard") for its retention as
financial advisor in connection with the proposed transaction.
At a regular meeting of the Rehabilicare Board held on June 25, 1997, Mr.
Kaysen reported on his discussions with the Staodyn Board and on initial
impressions from the diligence investigation. The Rehabilicare Board
authorized the retention of Kinnard as financial advisor and discussed plans
as to Rehabilicare's diligence investigation, providing several specific
questions to pursue. The Board engaged in a prolonged discussion regarding
the advisability of the transaction, particularly in light of the difference
in expectations between the companies as to the exchange ratio.
On July 8, 1997, Mr. Newman met with Wallach to discuss the use of
Wallach's advisory services to evaluate strategic alternatives to maximize
Staodyn's share value, including a possible business combination with
Rehabilicare. The potential combination was discussed again at the regularly
scheduled meeting of the Staodyn Board on July 10, 1997. The Staodyn Board
considered comparisons of the business operations and assets of the two
entities and statistical information on Staodyn's performance versus other
competitors in the industry.
At a special meeting of the Rehabilicare Board held July 21, 1997, the
board members discussed with officers and with Kinnard financial information
regarding Staodyn, Rehabilicare, pro forma combined operations, comparable
combinations, and potential methods of valuation that might be employed. The
Rehabilicare Board also discussed with officers the facilities planning they
would use if such a combination were completed and integration plans they
would implement. The Rehabilicare Board authorized the officers to further
confirm to Staodyn that, subject to continued investigation, Rehabilicare was
interested in further pursuing discussion.
On August 9, 1997, at the request of Mr. Newman, Wallach issued a
proposal letter to Staodyn outlining the advisory services it could provide
to Staodyn's Board of Directors in the evaluation of strategic alternatives
to maximize Staodyn share value, including a possible business combination
with Rehabilicare. This proposal letter also outlined the fees and expenses
associated with the various advisory services offered.
Rehabilicare forwarded a portion of the analysis it had prepared to
Staodyn for its consideration and continued to pursue discussions with
Staodyn through August 1997. On August 22, 1997, Rehabilicare directors
received financial information based on input from Staodyn relative to the
projections, together with a preliminary contribution analysis. The
Rehabilicare Board considered these materials at a meeting held on August 25,
1997. The Rehabilicare Board discussed at length the level of pricing that
the materials implied would be fair to Rehabilicare's stockholders and the
dependence of such pricing on performance of the combined entity.
On August 27, 1997, the Staodyn Board met and authorized the retention of
Wallach as its financial advisor. The Staodyn Board also discussed the
financial information given to it by Rehabilicare and additional information
prepared by its officers. The preliminary financial information was compared
to the potential appreciation that Staodyn might achieve by following its
business plan. The Staodyn Board authorized officers to advise Rehabilicare
that they were interested in proceeding, but that a more specific proposal
was required before further action would be taken.
On September 10, 1997, the Rehabilicare Board met to consider a draft of
a letter of intent prepared by Rehabilicare officers for presentation to
Staodyn. Counsel to Rehabilicare was present and advised the Rehabilicare
Board as to their fiduciary obligations to stockholders, as well as the steps
required to complete a transaction of the type contemplated. The
Rehabilicare Board discussed the impact of such a combination on employees,
on contractual relations, on sales staff, on facilities and
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on share price. After considerable discussion among directors as to the
appropriateness of pricing, the Rehabilicare Board authorized the officers to
present the letter to Staodyn.
The proposed letter was delivered to Staodyn on September 11, 1997.
Staodyn never executed the letter, but instead requested that Wallach prepare
an analysis of the terms of the letter for presentation at its regular board
meeting to be held October 23, 1997. On September 22, 1997, Staodyn executed
a letter agreement retaining Wallach to act as exclusive advisor to Staodyn
regarding the potential combination with Rehabilicare and also to evaluate
other alternatives that the stockholders of Staodyn might have regarding
maximizing share value.
At the meeting of the Staodyn Board held October 23, 1997, the Staodyn
Board received and considered a detailed presentation from Wallach, including
the following: (i) a valuation analysis of Staodyn as an independent entity,
(ii) an overview of the electrotherapy market, (iii) a comparison of Staodyn
to other competitors in the electrotherapy market, including Rehabilicare,
(iv) a financial and strategic analysis of the potential combination of
Staodyn and Rehabilicare, including an examination of various potential
synergies and consolidation savings, (v) a discussion and analysis of other
potential business combinations which may be considered as alternatives to
the potential business combination of Staodyn and Rehabilicare, and (vi) an
analysis of the terms and conditions of the proposed letter of intent dated
September 10, 1997. The Board authorized the officers to notify Rehabilicare
that it would be interested in proceeding toward the preparation of a
definitive agreement if the parties could agree to an exchange ratio based on
the pricing suggested in Rehabilicare's letter and the pricing of
Rehabilicare Common Stock on the date the letter was delivered.
Staodyn communicated this proposal to Rehabilicare on October 23, 1997.
Mr. Kaysen made arrangements to travel to Colorado with Mr. Winchell and
Nancy Yankovich, a representative from Kinnard, on October 27, 1997. Mr.
Kaysen, Mr. Winchell and Ms. Yankovich met with Michael Franson, Bruce Hoyt
and Derek Pilling from Wallach in Denver on October 28, 1997 and, after
several hours of negotiation, agreed, subject to approval by their respective
boards of directors, to an exchange ratio of 0.829 of a share of Rehabilicare
Common Stock for each share of Staodyn Common Stock. Rehabilicare then
scheduled a meeting of its board of directors for November 10, 1997,
instructed counsel to begin preparation of an agreement and plan of merger,
and transmitted a detailed diligence request list to Staodyn.
Preliminary materials for the Rehabilicare Board, including a draft of
the proposed agreement and plan of merger, were distributed on November 7,
1997. At the Rehabilicare Board meeting held on November 10, 1997, the Board
received a detailed presentation from Kinnard regarding the pricing of the
transaction and reviewed with counsel the draft of the merger agreement. The
Rehabilicare Board questioned the officers on the value the transaction would
generate for stockholders, versus the value that would be generated if
Rehabilicare remained independent. The Rehabilicare Board specifically
requested that more detailed information regarding the value of the cash flow
generated by the combination be prepared for its review before a final
decision was made.
The Rehabilicare Board met again on Tuesday, November 11, 1997 and
reviewed additional information regarding free cash flow generated by Staodyn
and its effect on valuation. After considerable discussion, the Rehabilicare
Board approved the presentation of the draft merger agreement to Staodyn.
The Staodyn Board met to consider the proposed merger agreement, as
further negotiated by counsel, on November 25, 1997. Wallach presented its
analysis of the transaction and its draft opinion that the consideration to
be received was fair to the stockholders of Staodyn from a financial point of
view. The Staodyn Board approved the merger agreement, subject to several
additional changes to be negotiated with counsel and the finalized and signed
opinion from Wallach. Wallach delivered its opinion on December 1, 1997.
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<PAGE>
The Rehabilicare Board met on December 1, 1997 to consider the final
merger agreement. Kinnard presented a detailed analysis of the transaction
and delivered its opinion that the consideration to be paid was fair to the
stockholders of Rehabilicare. Counsel to Rehabilicare reviewed changes to
the Merger Agreement negotiated since the earlier draft was submitted. The
Rehabilicare Board suggested several additional changes, but approved the
merger agreement and the transactions contemplated thereby subject to such
changes.
The remaining changes to the merger agreement were negotiated during
the afternoon of December 1, 1997 and the Merger Agreement was signed by the
parties after the close of market on December 1, 1997.
REASONS OF STAODYN FOR THE MERGER
In reaching its decision to approve the Merger Agreement and related
transactions, and to recommend that Staodyn stockholders approve the Merger
Agreement, the Staodyn Board of Directors considered several factors,
including, but not limited to, the following:
MARKET VALUE OF STAODYN COMMON STOCK. In the four months prior to the
Merger Agreement, Staodyn common stock had generally traded in the range of
$1.50 to $2.00 per share. During 1997, Staodyn common stock did not trade
over $1.75 per share until mid-September. Staodyn's Board of Directors was
concerned about Staodyn's market capitalization and the ability of
stockholders to receive fair value for their Staodyn shares. The exchange
ratio proposed by Rehabilicare, based on Rehabilicare's stock price
immediately prior to the Merger announcement, represented a substantial
premium over the level at which Staodyn had been trading. The Board also
believed, and was so advised by its investment bankers, that the combined
company would likely have increased analyst coverage and market liquidity due
to the increased number of shares outstanding and public float. Thus, the
shares of the combined company would likely trade with smaller spreads
between bid and asked prices, and might trade at higher earnings multiples
than Staodyn. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
OPERATING EFFICIENCIES AND COST SAVINGS. Staodyn and Rehabilicare are
fundamentally similar companies. Combining the two companies provides
opportunities for significant operating efficiencies through the elimination
of redundant overhead and expense activities, and the consolidation of
facilities. The costs to complete the merger and achieve the economies of
scale were estimated by the officers of Rehabilicare and Staodyn at $2.5 to
$3.5 million, which were likely to be recovered through post-consolidation
cost savings in less than two years. See "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION."
HIGHER EARNINGS PER SHARE. Based on projections done by the
managements of both Staodyn and Rehabilicare, and work done by their
respective investment advisors, it appeared that the combined company, when
fully integrated, would achieve higher earnings per share for the years 1999
and beyond than either company was likely to achieve on its own. This
accretion of earnings would likely yield a higher stock price. See
"CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION."
COMPLEMENTARY MARKETING STRENGTHS AND PRODUCTS LINES. While the
companies themselves are similar, there is only limited competition
between them. With few exceptions, Staodyn's strongest sales
representation exists in geographic areas where Rehabilicare is not
strong, and vice versa. Likewise, Staodyn's product focus is in standard
TENS and pulsed direct current (PDC), whereas Rehabilicare's product focus
tends to be in interferential and neuromuscular electrical stimulation
(NMS). Staodyn has a developed and growing presence in managed care,
which Rehabilicare does not have. The opportunity for revenue enhancement
exists, but is dependent on the ability of both companies to keep their
sales force and customers intact and productive during the transition
period,
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<PAGE>
and to successfully integrate the best elements of both companies subsequent
to the Merger. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
ADVICE OF INVESTMENT ADVISOR AND FAIRNESS OPINION. The Staodyn Board
considered the financial advice of Wallach (including the assumptions and
methodologies underlying its analysis in connection therewith) and the
opinion of Wallach that, as of December 1, 1997, the Exchange Ratio was fair
to the holders of Staodyn Common Stock. The opinion of Wallach and the
analysis underlying its opinion are summarized below, and a copy of the
opinion delivered on the date hereof, setting forth the procedures followed,
the matters considered, the scope of the review undertaken and the
assumptions made by Wallach, is attached hereto as Appendix C. See
"--Opinion of Staodyn's Financial Advisor."
BASED ON THE FOREGOING, THE STAODYN BOARD UNANIMOUSLY RECOMMENDS THAT
STAODYN STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
REASONS OF REHABILICARE FOR THE MERGER
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby and to recommend that the Rehabilicare
Stockholders approve the Merger Agreement and approve the Charter Amendment,
the Rehabilicare Board considered a variety of factors, including the
following:
ENHANCED FRANCHISE/GREATER SALES PENETRATION. The Rehabilicare Board
considered that the Merger would result in a combined company with over
$30 million in revenue and approximately 60 to 70 sales agents operating
in all 50 states. The Rehabilicare Board was advised that the combined
company would be the second largest developer, manufacturer and seller of
electromedical pain management and rehabilitation products.
COMPLEMENTARY MARKETS; DIVERSIFICATION OF ECONOMIC RISK. The
Rehabilicare Board considered that the Merger would unite the highly
complementary markets of Rehabilicare in the Midwest and Southeast regions
with the markets of Staodyn in the Pacific Northwest, Rocky Mountain and
Northeast regions, and that the combined company's franchise would be
better able to serve all 48 contiguous states. The Rehabilicare Board was
advised that the geographical diversification of the combined entity
through the proposed Merger would likely result in more stable and
predictable financial results over time, increasing the potential
effectiveness of long-term and strategic planning. See "CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION."
OPPORTUNITIES FOR EFFICIENCIES AND COST SAVINGS. The Rehabilicare
Board considered that the combined company would be capable of increasing
its capitalization and profitability through the achievement of economies
of scale and the elimination of redundancies. The Rehabilicare Board was
advised that Rehabilicare management expected that the combined company
would be able to achieve approximately $3.2 million in annual pre-tax
expense savings attributable to the integration of data processing and
other back office operations, the elimination of redundant corporate
overhead and staff positions and the consolidation of certain
manufacturing and warehousing operations. The Rehabilicare Board was
advised that these potential cost savings are expected to be achieved in
various amounts at various times during the one-year period following the
Merger. In considering the opportunities for efficiencies and cost
savings, the Rehabilicare Board was aware that (i) such savings might not
be realized fully or realized within the time frame expected by
management, (ii) the two companies might fail to integrate well or achieve
synergies sufficient to avoid earnings dilution and (iii) costs or
difficulties related to the integration of the businesses of Rehabilicare
and Staodyn might be greater than expected. The Rehabilicare Board was
also aware that a reduction in work force would be necessary to achieve
the projected cost savings and efficiencies from the Merger. See
"CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION" and
"MANAGEMENT AND OPERATIONS AFTER THE MERGER."
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<PAGE>
INCREASED MARKET EXPOSURE AND LIQUIDITY. The Rehabilicare Board
considered that the combined company would have an increased stockholder base
and increased public float. The Rehabilicare Board was advised that this
would likely engender more analyst coverage and greater market liquidity.
See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION."
OPPORTUNITIES FOR REVENUE ENHANCEMENT. The Rehabilicare Board was
advised that each of Rehabilicare and Staodyn has unique products and that
the combined sales forces of the two companies would be able to offer a
larger product mix to customers. The Rehabilicare Board was informed that
the proposed Merger would provide opportunities for revenue enhancement
through the marketing of such products and services to the broad retail and
commercial customer base of Staodyn and through the large sales force of
Staodyn. The Rehabilicare Board was advised that Rehabilicare management
estimated that such revenue enhancements would provide significantly
increased revenue, but was aware that there could be no assurances that such
revenue enhancement and resulting income would be realized or the timing
thereof. The Rehabilicare Board also was aware of the risk that Staodyn's
relationship with its sales agents and customers might be disrupted as a
result of the Merger. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
PRODUCT DEVELOPMENT. The Rehabilicare Board was advised that the
resources that Rehabilicare and Staodyn could devote to product development
without significantly impacting annual income were very limited.
Rehabilicare management believes that the increased revenue of a combined
entity would be able to support a more meaningful level of product
development while at the same time accommodating a lower level of development
expense as a percentage of revenue. Further, the Rehabilicare Board was
advised that Staodyn has developed manufacturing technologies that are, in
some instances, superior to those utilized by Rehabilicare.
BILLING SYSTEM. The Rehabilicare Board was advised that Staodyn had
recently made a substantial investment in a computerized billing system.
Management advised the Rehabilicare Board that use of such system could avoid
the substantial investment Rehabilicare was considering to upgrade its system.
INDUSTRY CONDITIONS/ PROSPECTS FOR GROWTH. The Rehabilicare Board
considered the historical experience of Rehabilicare and of its industry,
noting that its history of growth through new product introduction was slow
and unpredictable. Further the Rehabilicare Board considered the
susceptibility of Rehabilicare to periodic downturns in the market or other
factors that might effect its business operations. The Rehabilicare Board
was advised by Rehabilicare management that a significant impediment to
growth and to its visibility in the market was its size. The Rehabilicare
Board noted that Rehabilicare had investigated other companies in its
industry that might be suitable candidates for combination discussions, but
that there appeared to be few other suitable alternatives.
FINANCIAL CONSIDERATIONS. The Rehabilicare Board considered its
evaluation of the financial terms of the Merger and their effect on holders
of Rehabilicare Common Stock and whether such terms are consistent with
Rehabilicare's long-term strategy of enhancing stockholder value. The
Rehabilicare Board was advised that earnings per share accretion of the
combined companies over projected earnings per share for Rehabilicare is
estimated to be 59% in fiscal year 1999, 50% in fiscal year 2000 and 32% in
fiscal year 2001. These estimates exclude the effect of Merger-related
expenses. The Rehabilicare Board was aware that actual results could vary
significantly from these estimates and specifically considered both more
pessimistic and more optimistic estimates. See "MANAGEMENT AND OPERATIONS
AFTER THE MERGER" and "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
GREATER CASH RESOURCES. The Rehabilicare Board considered that
Staodyn has historically generated significant cash, had a cash and short-
term investments balance at November 30, 1997 of approximately $2,500,000
and was projected to generate approximately $780,000 to $1.2 million of
free
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<PAGE>
cash flow in each of the next four years. As a result, the Rehabilicare
Board was advised that the Merger would significantly enhance Rehabilicare's
balance sheet, that it would allow Rehabilicare to reduce indebtedness and
that it would enhance both companies' ability to compete effectively in a
rapidly changing financial marketplace. The Rehabilicare Board was aware
that actual cash flow and competitive position could vary significantly from
these predictions. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
ADVICE OF FINANCIAL ADVISOR AND FAIRNESS OPINION. The Rehabilicare
Board considered the financial advice of Kinnard (including the assumptions
and methodologies underlying its analysis in connection therewith) and the
opinion of Kinnard that, as of December 1, 1997, the Exchange Ratio was fair
to the holders of Rehabilicare Common Stock. The opinion of Kinnard and the
analysis underlying its opinion are summarized below, and a copy of the
opinion delivered on the date hereof, setting forth the procedures followed,
the matters considered, the scope of the review undertaken and the
assumptions made by Kinnard, is attached hereto as Appendix D. See
"--Opinion of Rehabilicare's Financial Advisor."
TERMS OF MERGER AGREEMENT. The Rehabilicare Board took into
consideration the terms of the Merger Agreement and the transactions
contemplated thereby. The Rehabilicare Board was aware that the "no-shop"
provisions and termination fee contained in the Merger Agreement might
discourage an offer for Rehabilicare from a third party prior to consummation
of the Merger. See "--Covenants and Agreements" and "--Interests of Certain
Persons in the Merger."
DUE DILIGENCE REVIEW. The Rehabilicare Board considered its knowledge
and review of the financial condition, results of operations and business
operations and prospects of Rehabilicare and Staodyn, as well as the results
of Rehabilicare's due diligence review of Staodyn.
DIRECTORS AND MANAGEMENT OF REHABILICARE AFTER THE MERGER. The
Rehabilicare Board took into account that, the new Rehabilicare Board would
initially consist of four of the current directors of Rehabilicare and two of
the current board members of Staodyn, and that the current management of
Rehabilicare would have a significant influence in the management of the
combined company, with David B. Kaysen continuing as Chief Executive Officer
and President of the combined entity. See "--Interests of Certain Persons in
the Merger" and "MANAGEMENT AND OPERATIONS AFTER THE MERGER."
TAX AND ACCOUNTING TREATMENT OF THE MERGER. The Rehabilicare Board
considered that the Merger was expected to be tax-free to Rehabilicare and
its stockholders for federal income tax purposes and be accounted for under
the pooling of interests method of accounting. See "--Certain Federal Income
Tax Consequences."
The foregoing discussion of the information and factors considered by
the Rehabilicare Board is not intended to be exhaustive but is believed to
include all material factors considered by the Rehabilicare Board. In
reaching its determination to approve the Merger and the transactions
contemplated thereby, the Rehabilicare Board did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
given differing weights to differing factors. After deliberating with
respect to the Merger and other transactions contemplated by the Merger
Agreement, and considering, among other things, the matters discussed above,
the Rehabilicare Board unanimously approved the Merger Agreement and the
transactions contemplated thereby as being fair to, and in the best interests
of, Rehabilicare and its stockholders. There is no guarantee that the
combined company will achieve or receive any of the benefits, cost savings or
synergies described above. See "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION."
BASED ON THE FOREGOING, THE REHABILICARE BOARD UNANIMOUSLY RECOMMENDS
THAT REHABILICARE STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
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<PAGE>
OPINION OF STAODYN'S FINANCIAL ADVISOR
The Wallach Company, Inc. ("Wallach") has acted as financial advisor to
Staodyn in connection with the Merger.
Representatives of Wallach attended the meeting of the Staodyn Board
held on November 25, 1997 at which the Staodyn Board considered and approved
the Merger Agreement. At that meeting, Wallach rendered its draft opinion
(the "Wallach Opinion") that, as of such date, the Exchange Ratio was fair to
the holders of Staodyn Common Stock from a financial point of view. The
Wallach Opinion was finalized and delivered on December 1, 1997 and was
reconfirmed in writing as of the date of this Joint Proxy
Statement-Prospectus. No limitations were imposed by Staodyn with respect to
the investigations made or procedures followed by Wallach in rendering its
opinions.
The full text of Wallach's written opinion dated as of the date of this
Joint Proxy Statement-Prospectus is attached as Appendix C to this Joint
Proxy Statement-Prospectus and is incorporated herein by reference. The
description of the Wallach Opinion set forth herein is qualified in its
entirety by reference to the full text of such opinion. Staodyn Stockholders
are urged to read the Wallach Opinion in its entirety for a description of
the procedures followed, assumptions made, matters considered, and
qualifications and limitations on the review undertaken by Wallach in
connection therewith. THE WALLACH OPINION WAS PROVIDED TO THE STAODYN BOARD
FOR ITS INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL
POINT OF VIEW OF THE EXCHANGE RATIO TO THE HOLDERS OF STAODYN COMMON STOCK.
IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION OF STAODYN TO ENGAGE IN
THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STAODYN
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE STAODYN SPECIAL
MEETING WITH RESPECT TO THE MERGER OR ANY OTHER MATTER RELATED THERETO.
In connection with its opinion, Wallach reviewed, among other things,
(1) the Merger Agreement; (2) Annual Reports to Stockholders and Annual
Reports on Form 10-KSB of Staodyn for the three fiscal years ended November
30, 1996 and of Rehabilicare for the three fiscal years ended June 30, 1997;
(3) certain interim reports to stockholders of Staodyn and Rehabilicare and
certain Quarterly Reports on Form 10-QSB of Staodyn and Rehabilicare; (4)
certain other communications from Staodyn and Rehabilicare to their
respective stockholders; (5) certain interim financial analyses and forecasts
for the respective businesses as prepared by the management of Staodyn and
Rehabilicare; and (6) pro forma financial statements for the combined company
as prepared by the management of Staodyn. Wallach also held discussions with
certain members of the management of Staodyn and Rehabilicare regarding the
past and current business operations, financial conditions and future
prospects of Staodyn and Rehabilicare, respectively. In addition, Wallach
reviewed the reported price and trading activity for the common stock of
Staodyn and Rehabilicare, compared certain financial and stock market
information for Staodyn and Rehabilicare with similar aggregate transaction
information in the electrotherapy/medical device industry specifically, in
the drugs, medical supplies, equipment industries generally and performed
such other studies and analyses as it considered appropriate.
Wallach relied, without independent verification, upon the accuracy and
completeness of all the financial and other information reviewed by it for
purposes of rendering its opinion. In addition, Wallach did not make an
independent evaluation or appraisal of the assets and liabilities of Staodyn
or Rehabilicare and Wallach was not furnished with any such evaluation or
appraisal. Wallach was not asked to solicit, and accordingly did not
solicit, third parties with respect to potential alternative transactions.
Wallach assumed, with Staodyn's consent, that the merger will be tax free to
Staodyn and Rehabilicare and that the method of accounting will be pooling of
interests.
The following is a summary of certain of the financial analyses used by
Wallach in connection with arriving at its final opinion on December 1, 1997.
This summary does not purport to be a complete description of the analyses
performed by Wallach. The information presented below is based on the
financial condition of Staodyn and Rehabilicare as of a date or dates shortly
before the Merger
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<PAGE>
Agreement was executed on December 1, 1997 and stock price information
through the close of the market on November 21, 1997.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES. This analysis examines a
company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. Wallach compared
certain financial and stock market information for both Staodyn and
Rehabilicare with similar information for one other publicly traded company,
Empi, Inc. The selected company was chosen because it is publicly traded with
operations that for purposes of analysis may be considered similar to Staodyn
and Rehabilicare. The valuation analysis was based on several factors,
including sales, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), operating income, and earnings per share for the
latest twelve months ("LTM") and estimated by equity analysts for the current
fiscal year and the next fiscal year. The multiples and ratios for the three
publicly traded companies were based on the most recent publicly available
information. Wallach noted from this analysis that there was a range of
multiples for the three companies and the Market Value/EPS ratios were
similar for Staodyn and Rehabilicare.
<TABLE>
<CAPTION>
Enterprise Values Equity Value
----------------------------- -----------------------------
LTM
LTM Operating LTM LTM Current Next
Revenue Income EBITDA EPS Year EPS Year EPS
------- ------ ------ --- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Empi, Inc. 2.0x 9.2x 7.4x 17.4x 17.0x 15.1x
Rehabilicare Inc. 1.9x 21.3x 19.0x 32.8x 21.5x 14.9x
Staodyn, Inc. 0.6x 27.7x 8.8x 33.3x 45.7x 26.4x
</TABLE>
ANALYSIS OF MERGER AND ACQUISITION TRANSACTION DATA. Wallach reviewed
transactions in the drugs, medical supplies and equipment industry
classification as analyzed by Mergerstat Review. Average price/earnings
ratios offered in each year from 1992 through 1996 ranged from 29.8x to
49.8x, with a transaction weighted average of 35.4x; average premiums offered
by year for the same time period ranged from 16.7% to 51.2%, with a
transaction weighted average of 39.7%; average Total Invested Capital/EBITDA
multiple offered in 1996 was 16.4x; and Total Invested Capital/Operating
Income offered in 1996 was 23.4x. Applying the average multiples to
Staodyn's latest 12 months financials and closing price of $2.0 on November
21, 1997 resulted in a range of values for Staodyn (on a stand alone basis,
without giving consideration to the synergies and cost savings which may be
realized on a combined basis) of $1.55 to $3.89, with a median value of $2.17.
Wallach compared the above multiples to the offer for Staodyn. Based
upon Rehabilicare's closing price on November 21, 1997 of $3.88 and the
exchange ratio of .829, the values being offered for Staodyn were 0.99x for
Enterprise Value/Revenue; 14.24x for Enterprise Value/EBITDA; 45.03x for
Enterprise Value/Operating Income; 52.67x for Equity Value/Net Income; and
60.6% premium over Staodyn's Market Price.
DISCOUNTED CASH FLOW ANALYSIS. Wallach performed separate discounted
cash flow analyses for both Staodyn and Rehabilicare, as stand alone
companies and without consideration of the synergies and cost savings which
may be realized on a combined basis, using the projections prepared by the
management of each company. The discounted cash flow approach values a
business based on the current value of the future cash flow that a business
will generate. To establish current value under the approach, future cash
flow must be estimated and an appropriate discount rate determined. Wallach
calculated net present value of future cash flows for each company for the
years ending November 30, 1998 through November 30, 2000. Terminal values in
the year 2000 were calculated by applying a price/earnings multiple to net
income in the year 2000. The range of multiples used considered the current
price/earnings multiples for each company and the industry, the growth rate
in each company's
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earnings in the year 2000, and the average historical multiples for each
company and the industry. The various discount rates for each company were
chosen to reflect theoretical analyses of cost of capital, required rates of
return to investors, and risks attributable to the uncertainty of achieving
the projected cash flows.
Using financial performance discount rates of 17.5% to 27.5% and
terminal price/earnings ratios of 18x to 22x resulted in implied equity
values per share for Staodyn of $1.77 to $2.64.
PRO FORMA MERGER ANALYSIS. Based upon pro forma projections and stand
alone Staodyn projections prepared by the management of Staodyn, Wallach
analyzed certain pro forma effects on the combined company resulting from
the Merger. Wallach considered the base case, an upside case, and a downside
case. Wallach computed the resulting dilution/accretion for the base case
taking into account the potential cost savings and operating synergies of the
combined company, excluding certain estimated merger and one-time expenses.
The time period considered was fiscal years ending November 30, 1997 through
November 30, 2000. Comparing values for Staodyn shares on a stand alone basis
to values for Staodyn shares on a combined basis for fiscal 1998 shows
dilution in revenue and book value and shows accretion in EBITDA, operating
income, net income, and free cash flow. For the fiscal years ending June 30,
1999 through 2000, the same comparison on a stand alone basis to a combined
basis, per Staodyn share, shows accretion in EBITDA, operating income, net
income and free cash flow, and dilution in revenue and book value.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description.
Selecting portions of the analysis or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Wallach's opinion. In arriving at its fairness
determination, Wallach considered the results of all such analyses. No
company or transaction used in the above analyses are identical to Staodyn or
Rehabilicare, or the contemplated transaction. The analyses were prepared
solely for purposes of Wallach's providing its opinion to the Staodyn Board
as to the fairness of the Exchange Ratio and do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually
may be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by such analyses. Because such
analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of Staodyn, Rehabilicare, Wallach or any other person assumes
responsibility if future results are materially different from those forecast.
As described above, Wallach's presentation of its opinion to the Staodyn
Board was one of many factors taken into consideration by the Staodyn Board
in making its determination to approve the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analysis
performed by Wallach and is qualified by reference to the written opinion of
Wallach set forth in Appendix C hereto.
Wallach was selected and retained by Staodyn on the basis of its
expertise in valuing securities in connection with mergers and acquisition.
Wallach, as part of its investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with
mergers and acquisitions, private placements, and valuations for estate,
corporate and other purposes.
Staodyn and Wallach have entered into a letter agreement dated September
22, 1997, relating to the services to be provided by Wallach in connection
with the Merger. Staodyn has agreed to pay Wallach fees as follows: (1) a
cash fee of $25,000, which was payable upon the execution of the letter
agreement, (2) a cash fee of $125,000 payable at the Effective Time and (3) a
cash fee of $75,000 for the issuance of a fairness opinion at the Effective
Time. To date, Wallach has received fees for services provided from Staodyn
totaling $25,000, payable to it pursuant to clause (1) above. In such
letter, Staodyn also agreed to reimburse Wallach for its reasonable
out-of-pocket expenses incurred in
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connection with its advisory work and to indemnify Wallach against certain
liabilities relating to or arising out of the Merger, including liabilities
under the federal securities laws.
OPINION OF REHABILICARE'S FINANCIAL ADVISOR
Rehabilicare retained John G. Kinnard & Company, Incorporated
("Kinnard") on June 27, 1997 to act as Rehabilicare's financial advisor in
connection with a possible transaction with Staodyn, including rendering its
opinion to the Board of Directors of Rehabilicare as to the fairness, from a
financial point of view, of the consideration to be offered for Staodyn in
connection with the Merger.
At the December 1, 1997, meeting of Rehabilicare's Board of Directors,
Kinnard delivered its written opinion that, subject to the assumptions set
forth below, as of such date and based on the matters described therein, the
Exchange Ratio pursuant to the Merger Agreement was fair to the holders of
the common stock of Rehabilicare. Kinnard has consented to the use of its
name and the Kinnard opinion included in this Joint Proxy
Statement-Prospectus. No limitations were imposed by the Rehabilicare Board
upon Kinnard with respect to the investigations made or procedures followed
by it in rendering its opinion.
The full text of the written opinion of Kinnard dated December 1, 1997,
which sets forth among other things, assumptions made, matters considered and
limitations on the review undertaken, is attached hereto as Appendix D and
is incorporated herein by reference. Rehabilicare stockholders are urged to
read the Kinnard opinion in its entirety. The summary of the Kinnard opinion
in this Joint Proxy Statement-Prospectus sets forth the material analyses and
matters presented by Kinnard to the Rehabilicare Board and is qualified in
its entirety by reference to the full text of such opinion. The Kinnard
opinion is directed to the Rehabilicare Board, addresses only the fairness of
the Exchange Ratio, and does not constitute a recommendation to any
Rehabilicare stockholder as to how such a stockholder should vote at the
Rehabilicare Annual Meeting. The Kinnard opinion was rendered to the
Rehabilicare Board for its consideration in determining whether to approve
the Merger Agreement.
In connection with its opinion, Kinnard reviewed, among other things,
(1) the Merger Agreement; (2) Annual Reports to Stockholders or Annual
Reports on Form 10-KSB of Rehabilicare for the three fiscal years ended June
30, 1997 and of Staodyn for the three fiscal years ended November 30, 1996;
(3) certain interim reports to stockholders of Rehabilicare and Staodyn and
certain Quarterly Reports on Form 10-QSB of Rehabilicare and Staodyn; (4)
certain other communications from Rehabilicare and Staodyn to their
respective stockholders; (5) certain internal financial analyses and
forecasts for the respective businesses as prepared by the management of
Rehabilicare and Staodyn; and (6) pro forma financial statements for the
combined company as prepared by the management of Rehabilicare. Kinnard also
held discussions with certain members of the management of Rehabilicare and
Staodyn regarding the past and current business operations, financial
conditions and future prospects of Rehabilicare and Staodyn, respectively,
and held discussions with the management of Rehabilicare regarding the
operations of and prospects for the combined company. In addition, Kinnard
reviewed the reported price and trading activity for the common stock of
Rehabilicare and Staodyn, compared certain financial and stock market
information for Rehabilicare and Staodyn with similar information for certain
other companies the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the
electrotherapy/medical device industry specifically and in the drugs, medical
supplies, equipment industries generally, and performed such other studies
and analyses as it considered appropriate.
Kinnard relied without independent verification upon the accuracy and
completeness of all the financial and other information reviewed by it for
purposes of rendering its opinion. In addition, Kinnard did not make an
independent evaluation or appraisal of the assets and liabilities of
Rehabilicare or Staodyn and Kinnard was not furnished with any such
evaluation or appraisal. Kinnard was not asked to solicit, and accordingly
did not solicit, third parties with respect to potential
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alternative transactions. Kinnard assumed, with Rehabilicare's consent, that
the Merger will be tax free to Rehabilicare and Staodyn and that the method
of accounting will be pooling of interests.
The following is a summary of certain of the financial analyses used by
Kinnard in connection with arriving at its opinion and reviewed with the
Rehabilicare Board on December 1, 1997. This summary does not purport to be
a complete description of the analyses performed by Kinnard. The information
presented below is based on the financial condition of Rehabilicare and
Staodyn as of a date or dates shortly before the Merger Agreement was
executed on December 1, 1997 and stock price information through the close of
the market on November 21, 1997.
ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. This analysis
examines a company's valuation in the public market as compared to the
valuation in the public market of other selected publicly traded companies.
Kinnard compared certain financial and stock market information for both
Rehabilicare and Staodyn with similar information for two publicly traded
companies, Empi, Inc. and Henley Healthcare, Inc. The selected companies
were chosen because they are publicly traded companies with operations that
for purposes of analysis may be considered similar to Rehabilicare and
Staodyn. The valuation analysis was based on several factors, including
sales, earnings before interest, taxes, depreciation and amortization
("EBITDA"), operating income, and earnings per share for the latest twelve
months ("LTM") and estimated by equity analysts for the current fiscal year
and the next fiscal year. The multiples and ratios for the four publicly
traded companies were based on the most recent publicly available
information. Kinnard noted from this analysis that there was a range of
multiples for the four companies and that the Market Value/EPS ratios were
similar for Rehabilicare and Staodyn.
<TABLE>
<CAPTION>
Total Capitalization Market Value
--------------------------------- ----------------------
LTM
LTM Operating LTM LTM 1997 1998
Revenue Income EBITDA EPS EPS EPS
------- --------- ------ --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Empi, Inc. 2.3x 10.7x 9.5x 17.4x 16.7x 14.2x
Henley Healthcare, Inc. 1.9x 29.6x 23.3x 360.9x NA NA
Rehabilicare Inc. 1.9x 21.4x 19.0x 32.8x - 21.5x
Staodyn, Inc. 0.6x 29.3x 9.6x 33.3x 40.0x 25.0x
</TABLE>
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Kinnard
reviewed and summarized the financial terms, to the extent publicly
available, of eight recent merger transactions for companies in the
electrotherapy/medical device industry. Kinnard calculated various valuation
multiples for each of the eight transactions, based upon information publicly
available at the time of each transaction. For the eight transactions, the
Total Consideration/Revenue multiples ranged from .71x to 1.55x, with an
average of 1.05x and a median of 1.05x. Total Consideration/Operating Income
multiples ranged from 7.88x to 35.93x, with an average of 15.72x and a median
of 12.51x. Equity Consideration/Net Income multiples ranged from 10.82x to
26.20x, with an average of 19.53x and a median of 20.54x. Equity
Consideration/Stockholders' Equity multiples ranged from 1.09x to 3.03x, with
an average of 1.97x and a median of 1.86x. Premiums to public stock prices
ranged from 20.8% to 49.5%, with an average of 33.0% and a median of 28.7%.
Applying the average and median multiples to Staodyn's latest 12-month
financials and closing stock price of $2.00 on November 21, 1997 resulted in
a range of values for Staodyn (on a stand alone basis, without giving
consideration to the synergies and cost savings which may be realized on a
combined basis) of $0.88 to $3.55, with an average value of $2.30.
Kinnard also reviewed transactions in the drugs, medical supplies and
equipment industry classification as analyzed by Mergerstat Review. Average
price/earnings ratios offered in each year
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from 1992 through September 30, 1997 ranged from 27.6x to 49.8x, with an
average of 35.3x; average premiums offered by year for the same time period
ranged from 16.7% to 51.2%, with an average of 36.2%; average Total Invested
Capital/EBITDA multiple offered in 1996 was 16.4x and in 1997 (through
September 30) was 15.0x, with an average of 15.7x; and average Total Invested
Capital/EBIT offered in 1996 was 23.4x and in 1997 (through September 30) was
20.6x, with an average of 22.0x. Applying the average multiples to Staodyn's
latest 12 months financials and closing stock price of $2.00 on November 21,
1997 resulted in a range of values for Staodyn (on a stand alone basis,
without giving consideration to the synergies and cost savings which may be
realized on a combined basis) of $1.51 to $3.24, with an average value of
$2.40.
Kinnard compared the above multiples to the offer for Staodyn. Based
upon Rehabilicare's closing price on November 21, 1997 of $3.88 and the
Exchange Ratio of .829, the values being offered for Staodyn were 1.03x for
Total Consideration/Revenue; 15.28x for Total Consideration/EBITDA; 46.99x
for Total Consideration/Operating Income; 52.67x for Equity Consideration/Net
Income; 1.71x for Equity Consideration/Stockholders' Equity; and 61% for
Premium over Market Price.
DISCOUNTED CASH FLOW ANALYSIS. Kinnard performed separate discounted
cash flow analyses for both Rehabilicare and Staodyn, as stand alone
companies and without consideration of the synergies and cost savings which
may be realized on a combined basis, using the projections prepared by the
managements of each company. The discounted cash flow approach values a
business based on the current value of the future cash flow that the business
will generate. To establish a current value under the approach, future cash
flow must be estimated and an appropriate discount rate determined. Kinnard
calculated a net present value of future cash flows for each company for the
years ending June 30, 1998 through June 30, 2002. Terminal values in the
year 2002 were calculated using two methods. The first method applied
price/earnings multiples to net income in the year 2002. The range of
multiples used considered the year end average price/earnings ratios for the
S&P 500 since 1960, current price/earnings multiples for each company and the
industry, and the growth rate in each company's earnings in the year 2002.
The second method applied multiples to free cash flow. The range of
multiples used considered relevant discount rates and the growth in each
company's free cash flow in the year 2002. The various ranges for discount
rates for each company were chosen to reflect theoretical analyses of cost of
capital, required rates of return to investors, and risks attributable to the
uncertainty of achieving the projected cash flows.
Using discount rates of 13-18% and price/earnings ratios of 14x to 22x
resulted in implied equity values per share for Staodyn of $2.74 to $4.43.
Using discount rates of 13-18% and free cash flow multiples of 16x to 22x
resulted in implied equity values per share for Staodyn of $2.47 to $3.55.
Using discount rates of 14-18% and price/earnings ratios of 14x to 22x
resulted in implied equity values per share for Rehabilicare of $3.72 to
$6.31. Using discount rates of 14-18% and free cash flow multiples of 16x to
22x resulted in implied equity values per share for Rehabilicare of $3.11 to
$4.68.
CONTRIBUTION ANALYSIS. Kinnard reviewed certain historical and certain
estimated future operating and financial information (including revenues, net
income, free cash flow and net tangible asset value) for Rehabilicare and
Staodyn. The analysis gave a 20% weighting to net income for the 12 months
ending June 30, 1997, 20% weighting to net income projected for the 12 months
ending June 30, 1998, 30% weighting to three year average free cash flow
(comprised of two years of historical free cash flows as of June 30, 1996 and
1997 and one year of projected free cash flow as of June 30, 1998), 10%
weighting to revenues for the 12 months ending June 30, 1997, 10% weighting
to revenues projected for the 12 months ending June 30, 1998, and 10%
weighting to current net tangible asset value. The analysis indicated that
Rehabilicare contributed 46.32% and Staodyn contributed 53.68% to the
combined company. Based upon the Exchange Ratio of .829, Rehabilicare
stockholders will own 47.29%, on a fully diluted basis, of the combined
company and Staodyn stockholders will own 52.71%.
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PRO FORMA MERGER ANALYSIS. Based upon pro forma projections and stand
alone Rehabilicare projections prepared by the management of Rehabilicare,
Kinnard analyzed certain pro forma effects on the combined company resulting
from the Merger. Kinnard considered a base case, an upside case, and a
downside case. Kinnard computed the resulting dilution/accretion for the base
case taking into account the potential cost savings and operating synergies
of the combined company. The time period considered was fiscal years ending
June 30, 1998 through June 30, 2002. Comparing values for Rehabilicare shares
on a stand alone basis to values for Rehabilicare shares on a combined basis
for fiscal 1998 (which does not reflect any synergies or cost savings of the
combined company because of the assumed closing date of March 31, 1998) shows
accretion in revenue, book value, and net tangible asset value and shows
dilution in EBITDA, operating income, net income, and free cash flow. For the
fiscal years ending June 30, 1999 (which is the first year of the pro forma
projections to reflect any synergies and cost savings of the combined
company) through 2002, the same comparison on a stand alone basis to a
combined basis, per Rehabilicare share, shows accretion in all factors,
including revenue, EBITDA, operating income, net income, book value, net
tangible asset value, and free cash flow.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Kinnard's opinion. In arriving at its fairness
determination, Kinnard considered the results of all such analyses. No
company or transaction used in the above analyses as a comparison is
identical to Staodyn, Rehabilicare, or the contemplated transaction. The
analyses were prepared solely for purposes of Kinnard's providing its opinion
to the Rehabilicare Board as to the fairness of the Exchange Ratio and do not
purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts
of future results are not necessarily indicative of actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Because such analyses are inherently subject to uncertainty, being
based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Rehabilicare, Staodyn, Kinnard or any
other person assumes responsibility if future results are materially
different from those forecast.
As described above, Kinnard's presentation of its opinion to the
Rehabilicare Board was one of many factors taken into consideration by the
Rehabilicare Board in making its determination to approve the Merger
Agreement. The foregoing summary does not purport to be a complete
description of the analysis performed by Kinnard and is qualified by
reference to the written opinion of Kinnard set forth in Appendix D hereto.
Pursuant to an agreement dated June 27, 1997 between Rehabilicare and
Kinnard, the fees payable to Kinnard consist of retainer fees of $30,000, an
advisory fee of $50,000 payable upon the signing of the Merger Agreement, a
fairness opinion fee of $75,000 payable upon delivery of the written opinion
to the Rehabilicare Board, and a success fee of $125,000 payable upon closing
of the Merger. In addition, Rehabilicare has agreed to reimburse Kinnard for
its reasonable out-of-pocket expenses and to indemnify Kinnard against
certain expenses and liabilities arising in connection with its engagement,
including liabilities under the Securities Act and the Exchange Act.
Kinnard was selected by Rehabilicare on the basis of its expertise in
valuing securities in connection with mergers and acquisitions, its knowledge
of Rehabilicare, and its knowledge of other companies and transactions in the
electrotherapy industry. Kinnard, as part of its investment banking business,
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, private
placements, and valuations for estate, corporate and other purposes. Kinnard
is familiar with Rehabilicare having provided certain investment banking
services to Rehabilicare in the past, including a public offering of
Rehabilicare's common stock on August 16, 1993. In connection with the public
offering, Kinnard received warrants to purchase 75,000 shares of Rehabilicare
common stock at an exercise price of $2.25 per share expiring on August 16,
1998. In addition, in the ordinary course of its business, Kinnard may
actively trade equity
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securities of Rehabilicare and Staodyn for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
EFFECTIVE TIME
As soon as practicable after satisfaction or, to the extent permitted in
the Merger Agreement, waiver of all conditions set forth below, the parties
will cause the Merger to be consummated by filing a certificate of merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware and make all other filings or recordings required by Delaware Law in
connection with the Merger and the transactions contemplated by the Merger
Agreement. The Merger will become effective at such time as the Certificate
of Merger is duly filed with the Secretary of State of the State of Delaware
or at such later time as may be agreed by the parties in writing and
specified in the Certificate of Merger (the "Effective Time").
EXCHANGE OF CERTIFICATES
As of the Effective Time, Rehabilicare will deposit with Norwest Bank
Minnesota, National Association or such other bank or trust company as may be
designated by Rehabilicare and as is reasonably acceptable to Staodyn (the
"Exchange Agent") certificates representing the shares of Rehabilicare Common
Stock issuable for the Merger Consideration (such shares of Rehabilicare
Common Stock, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund"). The Exchange
Agent will hold the Exchange Fund for the benefit of holders of shares of
Staodyn Common Stock. The Exchange Agent will distribute the Exchange Fund
pursuant to provisions for the conversion of the securities in exchange for
outstanding shares of Staodyn Common Stock (other than Dissenting Shares).
Except as contemplated by provisions for termination of the Exchange Fund,
the Exchange Fund will not be used for any other purpose. Rehabilicare will
make available to the Exchange Agent from time to time as needed, cash
sufficient to pay cash in lieu of fractional shares.
As promptly as practicable after the Effective Time, Rehabilicare will
cause the Exchange Agent to mail to each holder of record of certificates
which immediately prior to the Effective Time represented outstanding shares
of Staodyn Common Stock (the "Certificates") a letter of transmittal in
customary form. The letter of transmittal will specify that delivery of
Certificates will be effected, and risk of loss and title to the Certificates
will pass, only upon delivery of the Certificates to the Exchange Agent. The
Exchange Agent will accompany the letter of transmittal with instructions for
use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Rehabilicare Common Stock. Upon surrender
of a Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, and such other documents as the
Exchange Agent may reasonably require, the holder of such Certificate will be
entitled to receive a certificate representing that number of whole shares of
Rehabilicare Common Stock (rounded down to the nearest whole share) which
such holder has the right to receive pursuant to such provisions of the
Merger Agreement (after taking into account all the shares of Staodyn Common
Stock then held by such holder under all such Certificates so surrendered),
cash in lieu of fractional shares of Rehabilicare Common Stock, and any
dividends or other distributions to which such holder is entitled. If there
is a transfer of Share ownership which is not registered in the transfer
records of Staodyn, a certificate representing the proper number of shares of
Rehabilicare Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if, upon
presentation to the Exchange Agent, such Certificate will be properly
endorsed or otherwise be in proper form for transfer and the person
requesting such payment will pay any transfer or other taxes required by
reason of the issuance of shares of Rehabilicare Common Stock to a person
other than the registered holder of such Certificate or establish to the
reasonable satisfaction of Rehabilicare that such tax has been paid or is not
applicable. Subject to certain exceptions, each Certificate will be deemed at
any time after the Effective Time to represent only the right to receive upon
such surrender the Certificate representing
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shares of Rehabilicare Common Stock, cash in lieu of any fractional shares of
Rehabilicare Common Stock, and any dividends or other distributions to which
such holder is entitled.
No fractional shares of Rehabilicare Common Stock will be issued upon
the surrender of Certificates, and the fractional share interests will
entitle the owner only to receive, in lieu thereof, cash (without interest)
in an amount equal to such fractional part of a share of Rehabilicare Common
Stock multiplied by the closing price of Rehabilicare Common Stock on the
Closing Date.
Rehabilicare will not pay dividends or other distributions to the holder
of any unsurrendered Certificate, and Rehabilicare will not make any cash
payment for fractional shares to any such holder until the holder of record
of such Certificate surrenders such Certificate. Such payments will be made,
without interest, only when the Certificate is surrendered.
The Exchange Agent will deliver any portion of the Exchange Fund that
remains undistributed to the holders of the Certificates for two years after
the Effective Time to Rehabilicare, upon demand. After that time, any holders
of the Certificates who have not complied with the provisions for exchange of
Certificates will be required to look only to Rehabilicare for payment of
their claim for Rehabilicare Common Stock, any cash in lieu of fractional
shares of Rehabilicare Common Stock, and any dividends or distributions with
respect to Rehabilicare Common Stock.
None of Rehabilicare, Merger Subsidiary, Staodyn or the Exchange Agent
will be liable to any person in respect of any shares of Rehabilicare Common
Stock (or dividends or distributions with respect thereto) or cash in the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
The Exchange Agent will invest any cash included in the Exchange Fund in
deposit accounts, as directed by Rehabilicare, on a daily basis. The Exchange
Agent will pay any interest and other income resulting from such investments
to Rehabilicare.
If any Certificate is lost, stolen, or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen, or destroyed, and, if required by the Surviving Corporation, upon the
delivery to the Exchange Agent of a bond in such sum as the Surviving
Corporation may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen, or destroyed Certificate the shares of
Rehabilicare Common Stock and any cash in lieu of fractional shares, and
unpaid dividends and distributions on shares of Rehabilicare Common Stock
deliverable in respect thereof, pursuant to this Agreement.
If the holder of any shares of Staodyn Common Stock will become entitled
to receive payment for such shares pursuant to Section 262 of the Delaware
Law dealing with dissenters' rights, such payment will be made by the
Surviving Corporation in accordance with the Merger Agreement.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Rehabilicare, Merger Subsidiary and Staodyn, (which representations and
warranties are subject, in certain cases, to specified exceptions) to: (1)
its organization, existence and good standing; (2) its subsidiaries and their
corporate organization and existence; (3) its corporate power to consummate
the transactions contemplated by the Merger Agreement; (4) required
governmental or regulatory approvals to consummate the Merger; (5) the lack
of any conflict between the Merger and the charter, bylaw, laws or assets of
the parties; (6) its capitalization; (7) its compliance with securities law
filing requirements; (8) the absence of certain adverse events, occurrences
or developments; (9) the absence of litigation and other proceedings; (10)
the filing of all tax returns and payment of all required taxes; (11) its
intellectual property rights; (12) the absence of any collective bargaining
agreements or other labor
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union contract applicable to persons employed by any of the parties; (13) its
employee benefit plans; (14) compliance with law; (15) except for fees
payable to Kinnard and Wallach, the absence of any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated by the Merger Agreement; (16) the receipt of the
fairness opinions; (17) the accounting and tax treatment of the Merger; (18)
the absence of certain illegal activities; (19) certain contract matters;
(20) accounts receivable; (21) inventories; (22) compliance with
environmental laws; and (23) the absence of any untrue statement of a
material fact or omission of a material fact with regard to the various
representations and warranties contained in the Merger Agreement.
COVENANTS AND AGREEMENTS
Pursuant to the Merger Agreement, each of Rehabilicare, Merger
Subsidiary and Staodyn have agreed that, prior to the Effective Time, they
will, among other things, conduct their respective businesses in the ordinary
course consistent with past practice and use reasonable efforts to preserve
intact their business organizations and relationships with third parties.
Prior to the Effective Time, neither Staodyn nor any of its subsidiaries,
without prior written approval of Rehabilicare, will (1) amend its
certificate of incorporation, bylaws or other comparable charter documents;
(2) (a) declare or pay dividends, (b) split, combine or reclassify any of
their capital stock, or issue or authorize the issuance of any other
securities, or (c) purchase, redeem or otherwise acquire any shares of
capital stock; (3) issue, grant, award, sell, pledge or otherwise encumber
any shares of their capital stock or any other voting securities; (4) acquire
or agree to acquire by merger, consolidation, asset purchase or any other
manner (a) any corporation, partnership, joint venture, association or other
business organization, or (b) any assets that are material to Staodyn, except
purchases of inventory in the ordinary course of business; (5) sell, lease,
license, mortgage, subject to lien or otherwise dispose of any of its assets,
except sales of inventory in the ordinary course of business; (6) incur any
indebtedness or make any loans, advances or capital contributions to any
other person other than to Staodyn or to employees consistent with past
practice; (7) make or agree to make any new capital expenditure or
expenditures which individually is in excess of $100,000 or in the aggregate
are in excess of $500,000; (8) make any tax election or settle or compromise
any tax liability, or make any change in any method of accounting for taxes
or accounting policy or practice with respect to taxes; (9) pay, discharge,
settle or satisfy any material claims, liabilities or obligations other than
payment, discharge, settlement or satisfaction in the ordinary course of
business consistent with past practice; (10) except in the ordinary course of
business, modify, amend or terminate any material contract or agreement to
which Staodyn is a party or waive, release or assign any material rights or
claims; (11) enter into any agreement which if entered into prior to the
Agreement Date would have been required to be disclosed under the Merger
Agreement; (12) except as required by law or in the ordinary course of
business, change any bonus plan, compensation, fringe benefit or grant any
awards or take any action to fund any employee plan, agreement or
arrangement; (13) make any change in any method of accounting or accounting
practice or policy other than those required by generally accepted accounting
principles; (14) take any action that would prevent Rehabilicare from
accounting for the business combination to be effected by the Merger as a
pooling of interests; (15) take any action that would prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code; (16) pay any fees of any legal or tax advisor retained in connection
with the Merger calculated on a basis other than an hourly basis at the
maximum rates per hour set forth in the Company Disclosure Letter; (17)
authorize any of, or commit or agree to take any of, the foregoing actions;
or (18) enter into any written employment agreement, after the Agreement
Date, with any employee or any verbal agreement providing for benefits not
equivalent to employees of similar position in Staodyn. Neither Rehabilicare
nor any of its subsidiaries, without the prior written approval of Staodyn,
will (1) except for the Charter Amendment, amend its articles of
incorporation, bylaws or other comparable charter or organizational
documents; (2) (a) declare or pay dividends, (b) split, combine or reclassify
any of their capital stock, or issue or authorize the issuance of any other
securities, or (c) purchase, redeem or otherwise acquire any shares of
capital stock; (3) make any acquisition or take any other action which would
materially adversely affect its ability to consummate the transactions
contemplated by the Merger Agreement; (4) take any action that would prevent
the Merger from qualifying as a reorganization within the meaning of Section
368(a) of the
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Code; (5) take any action that would prevent Rehabilicare from accounting for
the business combination to be effected by the Merger as a pooling of
interests; or (6) authorize any of, or commit or agree to take any of, the
foregoing actions.
Each of Staodyn and Rehabilicare have covenanted that they will not,
prior to the Effective Time, participate in any discussions with, provide any
information to, enter into any agreement or understanding with, or otherwise
cooperate in any other way with any person concerning any competing
transaction, or permit or authorize any of their respective directors,
officers, employees, stockholders or representatives (including, without
limitation, any financial advisor, attorney or accountant) or any of their
subsidiaries to take any such action. Both Staodyn and Rehabilicare are
required to provide the other party notice of any inquiries, proposals or
requests for information concerning any competing transaction. For such
purposes, a "competing transaction" includes (1) any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving Rehabilicare or Staodyn, as the case may be, or any proposal or
offer to acquire in any manner 20% or more of their voting equity securities
in a single transaction or series of related transactions; (2) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 20% or
more of their assets in a single transaction or a series of related
transactions; or (3) any agreement to, or public announcement of a proposal,
plan or intention to do any of the foregoing.
Rehabilicare, Merger Subsidiary and Staodyn have also agreed to take
certain other actions, including: (1) all actions necessary to convene
meetings of stockholders to vote on approval of the Merger Agreement and
certain other matters outlined in the Merger Agreement; (2) to cooperate in
the preparation of a registration statement on Form S-4 to be filed by
Rehabilicare in connection with the issuance of Rehabilicare Common Stock in
the Merger; (3) to use reasonable efforts to cause their respective
accountants to deliver opinion letters stating that each of the parties will
qualify as a party to a pooling of interests transaction; (4) to provide to
each other access to all information and documents which the other may
reasonably request regarding the business, assets, liabilities, employees and
other aspects of the other party, other than the information and documents
that in the opinion of such other party's legal counsel may not be disclosed
under applicable law; (5) to comply with all of their respective obligations
under a confidentiality agreement; (6) to consult with each other before
issuing any press release or making any public statement; (7) to use
reasonable efforts to (a) take all appropriate action necessary to consummate
the Merger, (b) obtain appropriate licenses, waivers or approvals from any
governmental entities, (c) obtain necessary third party consents, and (iv)
make necessary filings under the securities laws and any other applicable
law; (8) to indemnify, defend and hold harmless the present and former
officers and directors of Staodyn against certain losses and expenses arising
out of actions or omissions occurring at or prior to the Effective Time to
the extent permitted or required as of the Agreement Date by the Staodyn
Certificate and Staodyn Bylaws; (9) to deliver certain information necessary
to comply with Rule 145 under the Securities Act; (10) to prepare and submit
certain listing applications; and (11) to negotiate prior to the Effective
Date an amendment to the lease of its facility on Longmont, Colorado so that
such lease may be terminated without penalty to any of the parties on or
after June 30, 1998.
CONDITIONS
The respective obligations of Staodyn, Rehabilicare and Merger
Subsidiary to consummate the Merger are subject to the satisfaction upon or
prior to the Closing of the following conditions: (1) the holders of a
majority of shares of outstanding Rehabilicare and Staodyn Common Stock must
approve the Merger Agreement in accordance with state law, and their
respective charters and bylaws; (2) all filings and approvals from
governmental entities necessary for the consummation of the transactions
contemplated by the Merger Agreement must have been filed and all applicable
waiting periods must have run or obtained; (3) the Form S-4 must have become
effective under the Securities Act, without stop orders or proceedings
commenced or threatened by the Commission; (4) there must be no legal
restraint or prohibition preventing the consummation of the Merger; (5)
Staodyn must have received an opinion in form and substance satisfactory to
Staodyn of Chrisman, Bynum & Johnson P.C. as to certain
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tax matters; and (6) Rehabilicare and Staodyn each must have received opinion
letters from their respective accountants.
The obligations of Rehabilicare and Merger Subsidiary to effect the
Merger are subject to the satisfaction prior to or upon the Closing of the
following conditions unless waived by Rehabilicare: (1) the accuracy of the
representations and warranties of Staodyn as of the Closing Date; (2) the
performance by Staodyn of the obligations and covenants required to be
performed by it prior to or as of the Closing Date; (3) the receipt of
certain consents, approvals and authorizations; (4) executed copies of
affiliate letters; and (5) the assertion of dissenters' rights with respect
to not more than 165,000 shares of Staodyn Common Stock.
The obligation of Staodyn to effect the Merger is subject to the
satisfaction prior to or upon the Closing of the following conditions, unless
waived by Staodyn: (1) the accuracy of the representations and warranties of
Rehabilicare and Merger Subsidiary as of the Closing Date; (2) the
performance of all obligations and covenants required to be performed by
Rehabilicare and Merger Subsidiary prior to or as of the Closing Date; (3)
the receipt of certain consents, approvals and authorizations; and (4) the
listing of shares of Rehabilicare Common Stock constituting the Merger
Consideration on the Nasdaq National Market.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, notwithstanding any requisite
approval of the Merger Agreement and the Merger by the stockholders of
Staodyn or of Rehabilicare: (1) by mutual written consent of each of
Rehabilicare, Merger Subsidiary and Staodyn; (2) by either Rehabilicare,
Merger Subsidiary or Staodyn if either (a) the Effective Time has not
occurred on or before July 31, 1998 (except that this right to terminate the
Merger Agreement is not available to any party whose failure to fulfill any
obligation under the Merger Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before such date) or (b)
there is a law that makes consummation of the Merger illegal or otherwise
prohibited or if any court or governmental entity has taken any action
restraining, enjoining or otherwise prohibiting the Merger that has become
final and unappealable; (3) by either Rehabilicare or Merger Subsidiary if
the Staodyn Board of Directors changes its recommendation of the Merger
Agreement or the Merger or recommends any competing transaction, or resolved
to do so; (4) by Staodyn if the Rehabilicare Board changes its recommendation
of the Merger Agreement or the Merger or recommends any competing transaction
or resolved to do so; (5) by either Rehabilicare, Merger Subsidiary or
Staodyn if the stockholders of Staodyn fail to approve the Merger Agreement;
(6) by either Rehabilicare, Merger Subsidiary or Staodyn, if stockholders of
Rehabilicare fail to approve the Merger Agreement; (7) by Staodyn, in the
event of a material breach by Rehabilicare or Merger Subsidiary of any
representation, warranty, covenant or agreement contained in the Merger
Agreement (other than a breach of Rehabilicare or Merger Subsidiary due to
the occurrence of a Material Adverse Effect arising solely due to the public
announcement of the Merger) which has not been cured or is not curable by
July 31, 1998; (8) by Rehabilicare, in the event of a material breach by
Staodyn of any representation, warranty, covenant or agreement contained in
the Merger Agreement (other than a breach of Staodyn due to the occurrence of
a Material Adverse Effect arising solely due to the public announcement of
the Merger) which has not been cured or is not curable by July 31, 1998; (9)
by either Rehabilicare, Merger Subsidiary or Staodyn, if the average closing
sale price per share of Rehabilicare Common Stock as reported on the Nasdaq
National Market System is less than $3.00 for the 10 trading days ending on
the fifth day prior to the Closing (the "Measurement Period"); or (10) by
Rehabilicare, if the number of shares held by the record holders of Staodyn
Common Stock, who have properly asserted their rights to appraisal of such
shares pursuant to Section 262 of Delaware Law, exceeds 165,000 shares of
Staodyn Common Stock. For purposes of clauses (7) and (8), the failure of
Rehabilicare or Staodyn to reaffirm the representations and warranties of the
Merger Agreement at Closing because such representations and warranties are
no longer accurate will not be considered a breach of such representations or
warranties, and will not give rise to a Termination Fee, unless the
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inaccuracy is a result of a competing transaction or of willful action by
Staodyn or Rehabilicare, as the case may be.
In the event of termination of the Merger Agreement pursuant to the
termination provisions, the Merger Agreement will forthwith become void,
there will be no liability under the Merger Agreement on the part of
Rehabilicare, Merger Subsidiary or Staodyn or any of their respective
officers or directors and all rights and obligations of any party will cease,
subject to the provision for Termination Fees.
TERMINATION FEES
The Merger Agreement provides that, if the Merger Agreement is
terminated because of a material breach that is not a result of a competing
transaction, the breaching party must pay a fee of $1,000,000. If the Merger
Agreement is terminated because (1) the board of directors of a party changes
its recommendation of the Merger or resolves to do so, (2) because the
stockholders of a party fail to approve the Merger when a competing
transaction exists, or (3) because of a material breach of a representation,
warranty, covenant or agreement contained in the Merger Agreement, which has
not been cured or is not curable by July 31, 1998 and the breach giving rise
to such termination is a result of a competing transaction, the other party
must be paid a fee of $1,500,000.
WAIVER AND AMENDMENT
The Merger Agreement may be changed or modified by the parties only by
action taken by or on behalf of their respective boards of directors,
reflected in a written amendment signed by the parties, at any time prior to
the Effective Time; provided, however, that, after the approval of the Merger
Agreement by the stockholders of Staodyn, no amendment may be made which
would reduce the amount or change the type of consideration into which each
Share will be converted upon consummation of the Merger.
At any time prior to the Effective Time, any party may (1) extend the
time for the performance of any obligation or other act of any other party,
(2) waive any inaccuracy in the representations and warranties contained in
the Merger Agreement or in any document delivered pursuant the Merger
Agreement and (3) waive compliance with any agreement or condition contained
in the Merger Agreement, except for the condition regarding the tax opinion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Staodyn and Rehabilicare expect that the Merger will constitute a
reorganization within the meaning of Section 386(a) of the Code and that for
federal income tax purposes no gain or loss will be recognized by
stockholders of Staodyn upon the receipt solely of Rehabilicare Common Stock
for Staodyn Common Stock pursuant to the Merger. The Internal Revenue Service
(the "Service") has not been and will not be asked to rule on the tax
consequences of the Merger. Instead, Staodyn will rely on the opinion of
Chrisman Bynum & Johnson, P.C., legal counsel to Staodyn, as to certain
federal income tax consequences of the Merger. Such opinion will be based
upon facts described therein and upon certain assumptions and certain
representations that will be made by Staodyn and Rehabilicare. The opinion of
Chrisman Bynum & Johnson, P.C. will be based on the Code, the Regulations
promulgated thereunder, current administrative rulings and practice and
judicial authority, all of which are subject to change. An opinion of counsel
is not binding on the Service and there can be no assurance, and none is
hereby given, that the opinion will be upheld by the courts if challenged by
the Service. EACH HOLDER OF STAODYN COMMON STOCK IS URGED TO CONSULT HIS OR
HER OWN TAX AND FINANCIAL ADVISORS AS TO THE FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER UNDER SUCH STOCKHOLDER'S OWN PARTICULAR FACTS AND CIRCUMSTANCES
AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING
OUT OF THE MERGER.
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The obligation of each of Staodyn and Rehabilicare to consummate the
Merger is conditioned on, among other things, the receipt by Staodyn of the
opinion, dated as of the Effective Time, of Chrisman Bynum & Johnson, P.C.,
which will be based upon facts and representations to be provided to such
firm, and subject to various assumptions, substantially to the effect that
the Merger will qualify as a "reorganization" within the meaning of Section
368(a) of the Code and that the following material federal income tax
consequences will result from the Merger:
(a) Rehabilicare, Merger Sub and Staodyn will each be a party to
that reorganization within the meaning of Code Section 368(b);
(b) No income, gain or loss will be recognized for federal income
tax purposes by either Staodyn or Rehabilicare as a result of the
consummation of the Merger;
(c) No income, gain or loss will be recognized for federal income
tax purposes by the stockholders of Staodyn upon the exchange in the
Merger of shares of Staodyn Common Stock solely for shares of
Rehabilicare Common Stock;
(d) The tax basis of Rehabilicare Common Stock received by a
Staodyn stockholder who exchanges all of such stockholder's Staodyn
Common Stock solely for Rehabilicare Common Stock in the Merger will be
the same as the tax basis of the Staodyn Common Stock surrendered
therefor; and
(e) A stockholder of Staodyn receiving cash in lieu of fractional
shares or existing appraisal (i.e., dissenters') rights will recognize
gain or loss, if any, realized in the Merger up to the amount of cash
received.
The receipt by a holder of Staodyn Common Stock of cash in lieu of a
fractional share interest in Rehabilicare Common Stock will be treated as
though the fractional share of Rehabilicare Common Stock was distributed as a
part of the exchange and then redeemed by Rehabilicare, and, assuming that
the redemption of the fractional share of Rehabilicare Common Stock is
characterized as a sale or exchange of such stock and not as a dividend, a
Staodyn stockholder will recognize gain or loss in an amount equal to the
difference between the amount of cash received and the basis of the
fractional share of Rehabilicare Common Stock deemed to be surrendered, which
gain or loss will be capital gain or loss if the Rehabilicare Common Stock
was a capital asset in the hands of the Staodyn stockholder.
The foregoing is only a summary description of the material anticipated
federal income tax consequences of the Merger, without regard to the
particular facts and circumstances of each stockholder of Staodyn. It does
not discuss all of the consequences that may be relevant to stockholders of
Staodyn entitled to special treatment under the Code (such as insurance
companies, dealers in securities, exempt organizations or foreign persons) or
to stockholders of Staodyn who acquired their Staodyn stock pursuant to the
exercise of employee stock options or otherwise as compensation. The summary
set forth above does not purport to be a complete analysis of all potential
tax effects of the transactions contemplated by the Merger Agreement or the
Merger itself. No information is provided herein with respect to the tax
consequences, if any, of the Merger or the exchange of shares pursuant
thereto under state, local, foreign or other tax laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each of John R. South, Michael J. Newman, John L. Fenstermaker and David
S. Hood (the "Staodyn Managers"), is a party to a Change of Control Agreement
with Staodyn. Each Change In Control Agreement provides that the Staodyn
Manager will receive certain severance benefits if the employment of the
Staodyn Manager is terminated by Staodyn or a successor after, or by the
Manager for good reason within two years after, a "Change of Control" of
Staodyn. The Merger will constitute a Change of Control of Staodyn for
purposes of such agreements. The severance benefits include
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continuation of base salary (or, at the Manager's election, a lump sum
payment equal to base salary) for 12 months after termination, payment of a
bonus for the year in which termination occurs, continued medical, dental and
disability insurance benefits for the year after termination, and continued
retirement benefits for the year after termination. The Change in Control
Agreements also provide that the stock options held by the Staodyn Managers
will be accelerated and become immediately exercisable after a Change of
Control.
ACCOUNTING TREATMENT
Rehabilicare and Staodyn intend that the Merger qualify as a pooling of
interests for accounting and financial reporting purposes. The obligation of
each of Rehabilicare and Staodyn to consummate the Merger is conditioned upon
receipt by Rehabilicare and Staodyn of the opinions of Price Waterhouse LLP,
the independent accountants of both Rehabilicare and Staodyn, to the effect
that the Merger qualifies for pooling of interests accounting treatment. For
information concerning certain restrictions to be imposed on the
transferability of the Rehabilicare Common Stock received by affiliates of
Staodyn in the Merger in order, among other things, to assure the
availability of pooling of interests accounting treatment, see "-Resale of
Rehabilicare Common Stock Received by Staodyn Stockholders."
Under the pooling of interests method of accounting, the historical
basis of the assets and liabilities of Staodyn and Rehabilicare will be
combined when the Merger becomes effective, the stockholders' equity accounts
of Staodyn and Rehabilicare will be combined on Rehabilicare's consolidated
balance sheet, and no goodwill or other intangible assets will be created.
Results of operations of the combined company will include results of Staodyn
and Rehabilicare for the entire fiscal period in which the Merger occurs and
the historical results of operations of the separate companies for fiscal
years prior to the Merger will be combined and reported as the results of
operations of the combined company.
RESALE OF REHABILICARE COMMON STOCK RECEIVED BY STAODYN STOCKHOLDERS
The shares of Rehabilicare Common Stock issuable to stockholders of
Staodyn upon consummation of the Merger have been registered under the
Securities Act. Such securities may be traded freely without restriction by
those stockholders who are not deemed to be "affiliates" of Rehabilicare or
Staodyn, as that term is defined in rules promulgated under the Securities
Act.
Shares of Rehabilicare Common Stock received by those stockholders of
Staodyn who are deemed to be "affiliates" of Staodyn at the time of the
Staodyn Special Meeting may be resold without registration under the
Securities Act only as permitted by Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act. Commission guidelines regarding
qualifying for the pooling of interests method of accounting also limit sales
of shares of the acquiring and acquired company by affiliates of either
company in a business combination. Commission guidelines also indicate that
the pooling of interests method of accounting will generally not be
challenged on the basis of sales by affiliates of the acquiring or acquired
company if they do not dispose of any of the shares of the corporation they
own or shares of a corporation they receive in connection with a merger
during the period beginning 30 days before the merger and ending when
financial results covering at least 30 days of post-merger operations of the
combined operations have been published.
Each of Rehabilicare and Staodyn has agreed in the Merger Agreement to
use its reasonable best efforts to obtain and deliver to the other party, on
or prior to the date of mailing of this Joint Proxy Statement-Prospectus,
signed representation letters from each director, executive officer and other
person who may reasonably be deemed to be an "affiliate" of such party to
the effect that such persons will not, among other things, offer to sell,
transfer or otherwise dispose of any of the shares of Rehabilicare Common
Stock distributed to them pursuant to the Merger except (1) with respect to
affiliates of Staodyn, in compliance with Rule 145, or in a transaction that,
in the opinion of counsel
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reasonably satisfactory to Rehabilicare, is otherwise exempt from the
registration requirements of the Securities Act, or in an offering which is
registered under the Securities Act and (2) with respect to affiliates of
each of Rehabilicare and Staodyn, in compliance with Commission guidelines
regarding qualifying for pooling of interests accounting treatment. This
Joint Proxy Statement-Prospectus does not cover resales of Rehabilicare
Common Stock received by persons who are deemed to be "affiliates" of
Staodyn. No person is authorized to make use of this Joint Proxy
Statement-Prospectus in connection with any such resales.
APPRAISAL AND DISSENTERS' RIGHTS
NO APPRAISAL RIGHTS FOR REHABILICARE STOCKHOLDERS. Under the MBCA,
holders of Rehabilicare Common Stock will have no appraisal rights in
connection with the Merger Agreement and the consummation of the transactions
contemplated thereby.
DISSENTERS' RIGHTS OF APPRAISAL FOR STAODYN STOCKHOLDERS. Under the
DGCL, any holder of Staodyn Common Stock on the date of the Demand (as
defined below) who holds such shares continually through the Effective Time
and follows the procedures set forth in Section 262 of the DGCL ("Section
262") will be entitled to have his or her Staodyn Common Stock appraised by
the Delaware Court of Chancery and to receive payment in cash of the "fair
value" of such Staodyn Common Stock, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, as determined
by such Court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders that gives rise to dissenters' rights, the
corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders who was a stockholder on the record date for the meeting
that appraisal rights are available and include in such notice a copy of
Section 262. This Joint Proxy Statement- Prospectus constitutes such notice
to the holders of Staodyn Common Stock. Section 262 is attached to this Joint
Proxy Statement-Prospectus as Appendix B.
A holder of Staodyn Common Stock wishing to exercise his or her
appraisal rights must deliver to Staodyn, before the vote of the holders of
Staodyn Common Stock approving the Merger Agreement, a written demand for
appraisal (the "Demand") of his or her shares and must not vote in favor of
approving the Merger Agreement. Because a proxy that does not contain voting
instructions will, unless revoked, be voted FOR adoption of the Merger
Agreement, a holder of Staodyn Common Stock who votes by proxy and who wishes
to exercise his or her appraisal rights must (1) vote AGAINST the adoption
and approval of the Merger Agreement or (2) ABSTAIN from voting on the
adoption and approval of the Merger Agreement. A vote against adoption and
approval of the Merger Agreement will not in and of itself constitute a
written demand for appraisal satisfying the requirements of Section 262.
Only a holder of record of Staodyn Common Stock is entitled to assert
appraisal rights for the Staodyn Common Stock registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the holder
of record, fully and correctly, as such holder's name appears on his or her
stock certificate(s). If the shares of Staodyn Common Stock are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the Demand must be made by the fiduciary. If the shares of
Staodyn Common Stock are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the Demand must be executed by or on
behalf of all joint owners. An authorized agent, including an agent for two
or more joint owners, may execute a Demand on behalf of a holder of record;
however, the agent must identify the record owner(s) and expressly disclose
the fact that in executing the Demand, the agent is acting as agent for the
record owner(s). A record holder, such as a broker, who holds Staodyn Common
Stock as nominee for several beneficial owners, may exercise appraisal
rights with respect to shares for which it is the record holder. In such
case, the Demand must set forth the number of shares of Staodyn Common Stock
as to which appraisal is sought. Where no number of shares of Staodyn Common
Stock is expressly mentioned, the Demand will be presumed to
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cover all shares of Staodyn Common Stock held in the name of the record
owner. Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly with the
statutory requirements with respect to the exercise of appraisal rights.
A holder of shares of Staodyn Common Stock held in "street name" who
desires appraisal rights with respect to such shares must take such actions
as may be necessary to ensure that a timely and proper demand for appraisal
is made by the record owner of such shares. Shares of Staodyn Common Stock
held through brokerage firms, banks, and other financial institutions are
frequently deposited with and held of record in the name of a nominee of a
central security depository, such as Cede & Co., Pacific & Co., Kray Co.,
Philadep and others. Any holder of Staodyn Common Stock desiring appraisal
rights with respect to such shares who held his or her shares through a
brokerage firm, bank or other financial institution is responsible for
ensuring that the demand for appraisal is made by their record holder. The
holder should instruct such firm, bank or institution that the demand for
appraisal must be made by the record holder of the shares, which might be the
nominee of a central security depository if the shares have been so
deposited. As required by Section 262, a demand for appraisal must reasonably
inform the corporation of the identity of the record holder (which might be a
nominee as described above) and of such holder's intention to seek appraisal
of such shares.
Holders who elect to exercise appraisal rights must mail or deliver
their written demands to: Staodyn, Inc., 1225 Ken Pratt Boulevard, Longmont,
Colorado 80501, Attention: Michael Newman, Secretary. The written demand for
appraisal should specify that the holder is thereby demanding appraisal of
his or her shares.
Within 10 days after the Effective Time, Staodyn, as the surviving
corporation in the Merger, must send a notice as the effectiveness of the
Merger to each holder of Staodyn Common Stock who has satisfied the foregoing
provisions of Section 262, which notice shall also include a copy of Section
262. Within 120 days after the Effective Time, but not thereafter, Staodyn or
any former holder of Staodyn Common Stock entitled to appraisal rights under
Section 262 may file a petition in the Delaware Court of Chancery demanding a
determination of the value of Staodyn Common Stock. Staodyn will not file any
such petition. Accordingly, the dissenting holder of Staodyn Common Stock
will need to initiate all necessary action to perfect his or her appraisal
rights within the time periods prescribed in Section 262.
Within 120 days after the Effective Time, any former holder of Staodyn
Common Stock who has complied with the requirements for exercise of appraisal
rights will be entitled, upon written request, to receive from Staodyn a
statement setting forth the aggregate number of shares of Staodyn Common
Stock not voted in favor of the adoption of the Merger Agreement and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such statement must be mailed within 10
days after a written request therefor has been received by Staodyn or within
10 days after expiration of the period for deliver of demands, whichever is
later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which former holders
of Staodyn Common Stock are entitled to appraisal rights and will appraise
the "fair value" of the Staodyn Common Stock exclusive of any element of
value arising from the accomplishment or expectation of the Merger. Holders
of Staodyn Common Stock considering seeking appraisal should be aware that
the fair value of their shares as determined under Section 262 could be more
than, the same as or less than the consideration they would receive pursuant
to the Merger Agreement, if they did not seek appraisal of their shares and
that investment advisors' opinions as to fairness from a financial point of
view of the Merger Consideration are not necessarily opinions as to fairness
of their shares under Section 262. Any judicial determination of the "fair
value" of the Staodyn Common Stock could be based on numerous considerations
including, but not limited to, the market value of Staodyn Common Stock prior
to the Merger and the net asset value and earnings of the Staodyn. The
Delaware Supreme Court has stated that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community
and
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otherwise admissible in court" should be considered in the appraisal
proceeding. The Court will also determine the amount of interest, if any, to
be paid upon the amounts to be received by persons whose shares have been
appraised. The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable. The Court may also order
that all or a portion of the expenses incurred by any stockholder in
connection with an appraisal proceeding, be charged pro rata against the
value of all the shares entitled to appraisal.
Any holder of Staodyn Common Stock who has duly demanded an appraisal
in compliance with Section 262 will not, after the Effective Time, be
entitled to vote the shares of Staodyn Common Stock subject to such demand
for any purpose or be entitled to the payment of dividends or other
distributions on those shares of Staodyn Common Stock, except dividends or
other distributions payable to holders of Staodyn Common Stock of record as
of a date prior to the Effective Time.
If any holder of Staodyn Common Stock who demands appraisal of his or
her Staodyn Common Stock under Section 262 fails to perfect, or effectively
withdraws or loses his or her right to appraisal, then the shares of Staodyn
Common Stock of such holder will be converted into and become the right to
receive the Merger Consideration in accordance with the Merger Agreement. A
holder of Staodyn Common Stock will fail to perfect, or effectively lose, his
or her right of appraisal if no petition for appraisal is filed within 120
days after the Effective Time, or if the stockholder delivers to the Staodyn
a written withdrawal of his or her demand for appraisal and acceptance of the
Merger, except that any such attempt to withdraw made more than 60 days after
the Effective Time will require the written approval of Staodyn.
Failure to follow the steps required by Section 262 for perfecting
rights may result in the loss of such rights.
The foregoing summary of the applicable provisions of Section 262 is
not intended to be a complete statement of such provisions and is qualified
in its entirety by reference to such Section, the full text of which is
attached as Appendix B to this Joint Proxy Statement-Prospectus.
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MANAGEMENT AND OPERATIONS AFTER THE MERGER
BOARD OF DIRECTORS. Immediately after the Effective Time, subject to
approval of the holders of 50% of the outstanding Rehabilicare Common Stock,
the following directors will be elected or appointed as directors of
Rehabilicare. In the event that the Merger Agreement is not approved, each of
such directors, except W. Bayne Gibson and Frederick H. Ayers will remain and
be continuing directors of Rehabilicare.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME AGE DIRECTOR SINCE BUSINESS EXPERIENCE FOR PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert C. Wingrove 65 1972 (Rehab.) Chairman of the Board of Rehabilicare
since 1984; Chief Technical Officer of
Rehabilicare since 1990.
David B. Kaysen 48 1992 (Rehab.) President and Chief Executive Officer of
Rehabilicare since March 1992; Director
of Surgidyne, Inc. (a manufacturer of
surgical wound drainage products).
John H. P. Maley 62 1996 (Rehab.) Chairman of Magister Corporation (a
developer and marketer of consumer
healthcare products) since July 1995;
Chairman or President, and CEO of
Chattanooga Group (a manufacturer of
physical therapy products) from March
1976 to December 1994. Director of
Atrion Corporation, a manufacturer of
medical products, since February 1996.
Richard E. Jahnke 49 1996 (Rehab.) President and Chief Operating Officer of
CNS Inc. (a manufacturer of consumer
products, including the Breathe Right-
Registered Trademark- nasal strip) since
1993. Executive Vice President and Chief
Operating Officer of Lemna Corporation,
which manufactures and sells waste water
treatment systems from 1991 to 1993.
Frederick H. Ayers 58 1984 (Stao.) Mr. Ayers has been President of F.H.
Ayers, Inc., Boulder, Colorado, a private
investment company since 1985.
W. Bayne Gibson 73 1984 (Stao.) Mr. Gibson is currently an independent
business consultant. From 1984 to 1996 he
was President, Chief Executive Officer
and Chairman of the Board of Staodyn.
</TABLE>
Additional information with respect to the foregoing individuals is set
forth under "ELECTION OF REHABILICARE DIRECTORS," in the case of individuals
who have been nominated to serve as directors of Rehabilicare, and in the
proxy statement with respect to Staodyn's 1997 Annual Meeting of
Stockholders, in the case of individuals who are currently directors of
Staodyn. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
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<PAGE>
MANAGEMENT. The executive officers of Rehabilicare after the Merger
will be comprised of current members of Rehabilicare's senior management. Mr.
Kaysen will continue to be President and Chief Executive Officer of
Rehabilicare following the Merger. In addition, Robert C. Wingrove, W. Glen
Winchell and William Sweeney, each of Rehabilicare, will remain Chief
Technical Officer, Vice President of Finance and Chief Financial Officer and
Vice President of Sales and Marketing, respectively, of Rehabilicare.
Although Rehabilicare hopes to retain the services of Mr. Newman and Mr.
Fenstermaker for a period of time after the Effective Time, Mr. South has
indicated that he will resign soon after the Merger and it is unlikely that
Mr. Newman and Mr. Fenstermaker will remain with the Company more than six
months after the Effective Time. Each of such persons would be entitled to
severance benefits upon termination. See "THE MERGER--Interests of Certain
Persons in the Merger."
Additional information about such persons is contained in the 1997
Rehabilicare 10-KSB, which is incorporated by reference in this Joint Proxy
Statement-Prospectus. See "AVAILABLE INFORMATION" and "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE."
OPERATIONS. Rehabilicare and Staodyn expect to ultimately realize cost
savings of approximately $3.2 million (pre-tax). Such cost savings are
expected to be realized by various means including reductions in staff,
consolidation of certain data processing and other back office operations,
and consolidation and elimination of certain duplicate or excess office
facilities. No adjustment has been included in the unaudited pro forma
condensed combined financial statements included in this Joint Proxy
Statement-Prospectus for the anticipated cost savings.
The extent to which cost savings will be achieved is dependent upon
various factors beyond the control of Rehabilicare or Staodyn, including
regulatory factors, economic conditions, and unanticipated changes in
business conditions. Therefore, no assurances can be given with respect to
the ultimate level of cost savings, if any, to be realized, or that such
savings will be realized in the time frame currently anticipated. See
"SUMMARY--Selected Historical Financial Data," "SUMMARY--Pro Forma Selected
Historical Financial Data," "FINANCIAL STATEMENTS--Unaudited Pro Forma
Condensed Combined Financial Statements" and "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION."
COSTS INCURRED IN CONNECTION WITH THE MERGER. Rehabilicare and Staodyn
also anticipate that they will incur Merger-related expenses and
restructuring charges in connection with the Merger, which expenses are
estimated to be approximately $2.5 to $3.5 million (pre-tax) in the
aggregate. These items principally result from expenses to be incurred in
connection with the integration of operations and systems, elimination of
redundancies, and staff reductions and officer and employee retention
arrangements. It is anticipated that substantially all of these expenses and
charges will be incurred in the first year following the Effective Date of
the Merger.
The expenses and charges to be incurred in connection with the Merger
are dependent upon various factors beyond the control of Rehabilicare and
Staodyn. No assurance can be given that such expenses and charges will not
exceed the amounts described above. See "SUMMARY--Selected Historical
Financial Data," "SUMMARY--Pro Forma Selected Historical Financial Data,"
"FINANCIAL STATEMENTS--Unaudited Pro Forma Condensed Combined Financial
Statements" and "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION."
CORPORATE HEADQUARTERS. Rehabilicare's corporate headquarters will
remain in St. Paul, Minnesota. In addition, it is expected that Rehabilicare
will continue to operate portions of its businesses from Staodyn's offices in
Tampa, Florida. Rehabilicare currently anticipates closing the Staodyn
facility in Longmont, Colorado.
For additional information regarding management and operations of the
combined company, see "BUSINESS OF STAODYN" AND "BUSINESS OF REHABILICARE."
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<PAGE>
MARKET PRICES
REHABILICARE
The Rehabilicare Common Stock is traded on the Nasdaq National Market
under the symbol "REHB." The following table sets forth the range of high and
low sales prices as reported by the Nasdaq National Market during the periods
indicated.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
QUARTER HIGH LOW
- ------- -------- --------
<S> <C> <C>
Fiscal Year Ended June 30, 1996:
First ................................................ $ 4 $ 2 1/2
Second ............................................... 4 2 1/4
Third ................................................ 5 1/4 3 1/2
Fourth ............................................... 4 3/4 3 3/8
Fiscal Year Ended June 30, 1997:
First ................................................ $ 4 5/16 $ 3
Second ............................................... 4 1/4 2 3/8
Third ................................................ 4 1/4 2 7/8
Fourth ............................................... 3 3/4 2 3/4
Fiscal Year Ending June 30, 1998:
First ................................................ 3 7/8 2 7/8
Second ............................................... 4 5/8 2 7/8
</TABLE>
On December 1, 1997, the last trading day before Rehabilicare and
Staodyn publicly announced the execution of the Merger Agreement, the closing
price per share of Rehabilicare Common Stock was $4.00. On February 11, 1998,
the last trading day prior to the date of this Joint Proxy
Statement-Prospectus, such price was $3.00. Past price performance is not
necessarily indicative of likely future price performance. Holders of
Rehabilicare Common Stock and Staodyn Common Stock are urged to obtain
current market quotations for shares of Rehabilicare Common Stock.
Holders of shares of Rehabilicare Common Stock are entitled to receive
dividends from funds legally available therefor when, as and if declared by
the Rehabilicare Board. Rehabilicare has never declared or paid dividends on
its Common Stock and intends to retain earnings for use in operations during
the foreseeable future.
STAODYN
The Staodyn Common Stock is listed on the Nasdaq SmallCap Market under
the symbol "SDYN." The following table sets forth the range of high and low
sales prices as reported on the Nasdaq SmallCap Market during the periods
indicated.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
QUARTER HIGH LOW
- ------- -------- --------
<S> <C> <C>
Fiscal Year Ending November 30, 1995:
First ............................................... $ 1 27/32 $ 1 3/16
Second .............................................. 2 1/16 1 3/16
Third ............................................... 2 5/8 1 11/16
Fourth .............................................. 2 5/16 1 5/8
Fiscal Year Ending November 30, 1996:
First ............................................... $ 1 3/4 $ 1 3/8
Second .............................................. 2 1/4 1 5/16
</TABLE>
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<PAGE>
Third 1 3/4 1 3/8
Fourth 1 11/16 1 5/16
Fiscal Year Ending November 30, 1997:
First $1 11/16 $1 3/16
Second 1 17/32 1 7/32
Third 1 23/32 1 11/32
Fourth 2 1/2 1 3/8
On December 1, 1997, the last trading day before Rehabilicare and
Staodyn publicly announced the execution of the Merger Agreement, the closing
price per share of Staodyn Common Stock on the Nasdaq SmallCap Market was
$2.25. On February 11, 1998, the last trading day prior to the date of this
Joint Proxy Statement- Prospectus, such price was $2.1875. Past price
performance is not necessarily indicative of likely future price performance.
Holders of Staodyn Common Stock are urged to obtain current market
quotations for shares of Staodyn Common Stock.
Holders of Staodyn Common Stock are entitled to receive dividends from
funds legally available therefor when, as and if declared by the Staodyn
Board.
BUSINESS OF STAODYN
GENERAL
Staodyn, a Delaware corporation, designs, develops, manufactures, and
markets noninvasive electrotherapeutic devices, supplies, and accessories for
use by physicians, physical therapists, athletic trainers, and their
patients. Staodyn's electrotherapeutic products are used in the treatment of
chronic and acute pain and neuromuscular rehabilitation. Staodyn's pain
management products treat chronic and acute pain with transcutaneous
electrical nerve stimulation or "TENS" that delivers carefully controlled
pulses of electricity through the skin to sensory nerves, thereby relieving
pain without the side effects often associated with drugs or surgery.
Staodyn's muscle rehabilitation devices use neuromuscular electrical
stimulation ("NMES") or pulsed direct current ("PDC") to speed recovery of
normal function in muscle and other soft tissue affected by disease or trauma.
Staodyn operates both a retail sales division, which sells Staodyn's
products directly to patients, third-party payers, and medical practitioners,
and a wholesale division, which sells primarily to home healthcare dealers.
Staodyn was incorporated as Staodynamics, Inc. under Colorado law in
1975 and later was reincorporated as Staodyn, Inc. under Delaware law in
1987. Its principal executive offices are located at 1225 Ken Pratt
Boulevard, Longmont, Colorado 80501, telephone number (303) 772-3631. For
further information concerning Staodyn, see the Staodyn documents
incorporated by reference herein as described under "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
RECENT DEVELOPMENTS
On February 10, 1998, Staodyn announced earnings for the year ended
November 30, 1997. Staodyn reported net income of $1,230,000 or $.19 per
share, up from $257,000 or $.04 per share for the year ended November 30,
1996. The increased net income included a $762,000 or $.11 per share tax
benefit in the fourth quarter from partial release of Staodyn's valuation
allowance for deferred income taxes. Also contributing to the increased net
income was an increase in operating income to $578,000 in fiscal 1997 from
$311,695 in fiscal 1996. Net sales increased 12% to approximately $21,100,000
for fiscal 1997, as compared to approximately $18,900,000 for fiscal 1996.
This sales increase resulted from growth in Staodyn's retail business, which
increased 17% during fiscal 1997 from fiscal 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
NINE MONTHS ENDED AUGUST 31, 1997
Net sales for the fiscal 1997 third quarter were $5,278,000, an
increase of $444,000 or 9% over the comparable quarter of the prior year.
For the nine month period, sales increased by $2,031,000 or 15%. The
majority of this increase is attributable to the addition of two
independent representative groups in the second half of fiscal 1996 and
increased sales of Staodyn's SporTX product, as it continues to gain
acceptance in the professional and amateur sports markets.
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<PAGE>
Gross profit was $3,431,000 or 65%, as compared to $3,143,000 or 65%
for the third quarter of the prior year. For the nine month period, gross
profit was $10,096,000 or 64%, which compares to $8,855,000 or 65% for the
nine months ended August 31, 1996. Gross profit has remained steady due to
relatively stable product mix and pricing.
Total operating expenses were $3,304,000 for the third quarter of
1997, which represents an increase of $227,000 or 7%. For the nine month
period, operating expenses increased by $1,090,000 or 13% to $9,792,000.
Approximately $630,000 of this increase relates to higher commissions paid
on the higher sales levels. The balance of the increase is attributable to
additional managed care and sales support personnel.
Other income (expense) for the quarter was $(14,000), as compared to
$(13,000) for the comparable quarter of the prior year. For the nine month
period, other income (expense) was $(41,000) and $(40,000) for the current
and prior year, respectively. Other income(expense) consists primarily of
interest income and expense.
FISCAL YEAR ENDED NOVEMBER 30, 1996
Net sales for the fiscal year ended November 30, 1996 were
$18,944,000, an increase of $573,000 or 3% from the prior fiscal year. Retail
sales increased $656,000 or 5%. This increase in retail sales was due to the
expansion of the retail sales force, primarily in the second half of the
year. Net sales in the second half of the year were up 11% over the same
period of 1995. Two independent representative groups, who had previously
been customers of the wholesale division, were added to the retail
distribution network. Wholesale division sales decreased by $83,000 or 2%.
Gross profit was $12,311,000 for the year, or 65% of net sales, as
compared to $11,797,000 or 64% of net sales in 1995. The improvement in
gross profit is attributable to the sales mix improvement between the
retail and wholesale division sales.
Selling, general, and administrative expenses in fiscal 1996 totaled
$11,554,000, as compared to $11,084,000 in fiscal 1995. The increase of
$470,000, or 5%, is due to several factors. Sales and marketing expenses
were higher due to a significant expansion of the retail sales force
during the year, as well as higher commissions on the higher sales in the
retail division. Additionally, Staodyn hired a new President and Chief
Executive Officer in June 1996 in anticipation of the retirement of W.
Bayne Gibson in December 1996. This resulted in increased salary and
moving expenses.
Research and development expenditures remained fairly level. Research
and development expenses increased by $9,000 or 2%, to $446,000.
Other expenses for the year ended November 30, 1996 were $55,000, as
compared to $73,000 for fiscal 1995. Other income (expense) consists
primarily of interest earned on short-term cash investments and interest
expense on debt and capital leases. Interest earned on short-term
investments increased by $24,000; interest expense decreased by $31,000 as
related debt principal was decreased. These improvements, totaling $55,000,
were offset by lower other income of $33,000. Other income in fiscal 1995
consisted primarily of a rebate of rent which had been paid in prior years.
Net income for the fiscal year ended November 30, 1996 was $257,000
or $.04 per share, compared to $204,000 or $.03 per share for the fiscal year
ended November 30, 1995.
FISCAL YEAR ENDED NOVEMBER 30, 1995
Net sales for the fiscal year ended November 30, 1995 were
$18,371,000, an increase of $1,774,000 or 11% as compared to the prior
year. This increase was attributable entirely to increased sales in the
retail division, which were impacted by an increase in the number of sales
personnel of
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<PAGE>
approximately 15%. Sales through the wholesale distribution channel have
continued to decline as the wholesale market continues to consolidate.
Device sales accounted for approximately 60% of total Company sales, with the
balance being accessories and disposable supplies.
Gross profit was $11,797,000 or 64%, as compared to $10,446,000 or
63% in the prior year. The improvement in gross margin is attributable to a
higher percentage of supplies and accessories sold (at higher margins than
device sales).
Selling, general, and administrative expenses were $11,084,000 for
the year ended November 30, 1995 as compared to $11,278,000 for the prior
year. This decrease of $195,000, or 2%, is due primarily to a decrease in
sales and marketing expenses related to the wholesale division, as sales
commissions and administration expenses have been reduced consistent with the
sales decrease in that division. These savings have been partially offset by
increased sales commissions paid on higher sales in the retail division.
Research and development expenses in fiscal 1995 were $437,000, an
increase of $26,000 or 6% over fiscal 1994. The increase is due primarily to
a higher level of activity relating to modifications required for European
distribution of Staodyn's core products and Dermapulse.
Other income (expense) was $(73,000) for the fiscal year ended
November 30, 1995 as compared to $(79,000) for the year ended November 30,
1994. Income generated from the collection of accounts receivable for PMSI,
the former parent of the retail division, decreased by $78,000, as the
related receivables aged to three years. This was offset by increased
interest income of $15,000 on higher levels of excess cash available for
investment and by an increase of approximately $65,000 in other income
(expense).
Net income for the fiscal year ended November 30, 1995 was $204,000 or
$.03 per share, compared to a net loss of $(1,322,000) or $(.24) per share
for the prior year.
Liquidity and Capital Resources
Staodyn used cash of $60,000 in the nine month period ended August
31, 1997, primarily due to increased inventories and lower payables at
period-end. Staodyn generated cash from operations throughout the fiscal year
ended November 30, 1996. Cash generated from operations totaled $235,000 in
fiscal 1996, compared to $1,457,000 in fiscal 1995. The decrease in cash
generated from operations in fiscal 1996 was due to a usage of $1,437,000 to
finance accounts receivable, due primarily to higher sales in the third and
fourth quarters; this compared to a use for this purpose of $897,000 in
fiscal 1995. Additionally, $774,000 was used to finance inventories in fiscal
1996, also due partially to increased demand in the third and fourth
quarters; lower inventory levels had provided cash of $542,000 in fiscal
1995. These uses of cash were offset to some extent by the change in the
level of accounts payable (which provided cash of $261,000 in fiscal 1996 as
opposed to using cash of $232,000 in fiscal 1995); the levels of accounts
payable fluctuate due to the timing of check runs.
Cash of $617,000 was used for investing activities in fiscal 1996, as
compared to $445,000 in the prior year. The increase was due primarily to
investments in property, plant, and equipment of $326,000, up from $108,000
in fiscal 1995. The operations in Tampa were moved to a new facility early
in the second quarter, and the new facilities required some buildout as well
as the installation of additional computer and communications equipment.
Excess cash continues to be invested in short-term investments; the net
increase in invested cash was $281,000 in fiscal 1996 and $292,000 in fiscal
1995.
Cash used for financing activities totaled $204,000 in fiscal 1996, as
compared to $254,000 in fiscal 1995. The note payable to a related party
was satisfied early in fiscal 1996, which resulted in $87,000 lower cash
usage in fiscal 1996; this was offset by a lower amount of cash provided
from the issuance of common stock (primarily through employee stock
purchase plans) of $37,000.
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<PAGE>
Working capital at August 31, 1997 was $10,849,000, or a current
ratio of 8.3:1. This compares favorably to $10,200,000 or 5.9:1 at November
30, 1996. Staodyn believes that funds on hand are sufficient to support its
existing and planned operations for at least the next twelve months.
BUSINESS OF REHABILICARE
GENERAL
Rehabilicare, a Minnesota corporation, is a designer, manufacturer
and provider of electromedical pain management and rehabilitation products
and services used for clinical, home health care and occupational medicine
applications. Rehabilicare offers a number of electrotherapy devices for
rehabilitation as well as several products for chronic and acute pain
management. These products consist of small, portable, battery-powered
electrical pulse generators which are connected by wires to electrodes placed
on the skin. Rehabilitation products accounted for approximately 41% of
total revenue in fiscal 1997 and 47% in fiscal 1996. Pain management
products accounted for approximately 25% of total revenue in fiscal 1997 and
24% in fiscal 1996. The balance of Rehabilicare's revenue resulted from the
sale of accessories used with treatment modalities.
Rehabilicare was incorporated as Medical Devices, Inc. under the laws
of the State of Minnesota in 1972. Its name was changed to Rehabilicare Inc.
in November 1994. The principal executive offices of Rehabilicare are
located at 1811 Old Highway 8, New Brighton, Minnesota 55343, telephone
number (612) 638-0590. For further information concerning Rehabilicare, see
the Rehabilicare Annual Report delivered with this Proxy Statement-Prospectus
and the Rehabilicare documents incorporated by reference herein as described
under "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For information concerning the Results of Operations and Financial
Condition of Rehabilicare at and for the three years ended June 30, 1997, see
the Rehabilicare Annual Report delivered with this Proxy Statement-Prospectus.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1997
The following table sets forth information from the statements of
operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------------
1997 1996
------- -------
<S> <C> <C>
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 25.9 26.3
Gross profit 74.1 73.7
Operating expenses
Selling, general and administrative 60.0 55.7
Research and development 4.1 5.2
Total operating expenses 64.1 60.9
Operating income 10.0 12.8
Other expense 1.7 2.8
Provision for income taxes 2.8 3.6
Net income 5.5 6.4
</TABLE>
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<PAGE>
Revenue was $2,930,000 for the first quarter of fiscal 1998, a 25%
increase from $2,345,000 in the first quarter of fiscal 1997. Net sales and
rental revenue from direct distribution to patients increased 24% to
$2,449,000 from $1,970,000 and accounted for approximately 84% of total
revenue for the first quarter in both fiscal years. The increase was due
primarily to a 19% growth in the number of new patients. Revenue from
Rehabilicare's traditional dealer business, excluding international,
increased by 27% in fiscal 1998 from the first quarter of fiscal 1997 due
primarily to increased purchases by several key dealers. International sales
were minimal in the first quarter of both fiscal years.
Gross profit increased 26% to $2,172,000 or 74% of revenue in the
first quarter of fiscal 1998 compared with $1,728,000 or 74% of revenue in
the first quarter of fiscal 1997. Margins on dealer business were 52%
compared with 46% in the first quarter of fiscal 1997, reflecting an increase
in sales of more profitable products. Margins on direct sales and rentals
were 80% for the first quarter of fiscal 1998 compared with 79% in fiscal
1997. This improvement resulted from an increased volume of higher margin
accessory sales.
Selling, general and administrative expenses increased 34% to
$1,757,000 in the first quarter of fiscal 1998 from $1,307,000 in fiscal
1997. As a percent of revenue, those expenses increased from 56% to 60%. The
increase resulted primarily from an increased provision for uncollectible
retail receivables and marketing costs related to the CTDx and the new Ortho
Dx product lines.
Operating income was $295,000 in the first quarter of fiscal 1998
compared with $300,000 in the first quarter of fiscal 1997. Net income was
$162,000 in the first quarter of fiscal 1998 compared with $150,000 for the
first quarter of fiscal 1997. The effective tax rate of 34% for the first
quarter of fiscal 1998 was lower than the 36% effective rate for the first
quarter of fiscal 1997 due to the use of a tax advantaged Foreign Sales
Corporation (FSC) and a reduction of excess liability recorded in previous
years.
Financial Condition, Liquidity, and Capital Resources
Rehabilicare used cash of $157,000 in operations during the first
quarter of fiscal 1998. Rehabilicare used $179,000 of cash in the same
quarter of fiscal 1997.
Operations have previously required significant amounts of cash to
fund increases in receivables. Cash was used to fund increases in net
receivables of $326,000 in the first quarter of fiscal 1998 and $190,000 in
the first quarter of fiscal 1997. During the first quarter of fiscal 1998,
Rehabilicare provided an additional $268,000 for uncollectible receivables
and wrote off $244,000 of accounts it considered uncollectible. As a percent
of receivables, the reserve decreased from 21% in fiscal 1997 to 18% in
fiscal 1998.
The reserve for uncollectible accounts is determined after
considering various factors including historical trends, relationship and
experience with insurance or other third party payors and patient
responsibility for charges. Rehabilicare believes that its current reserve
for uncollectible accounts is adequate. However, it will be necessary to
continue maintaining a significant reserve to cover instances where the
extent of insurance coverage cannot be verified prior to distributing home
units to patients.
During the first quarter of fiscal 1998, a decrease of $145,000 in
accounts payable was partially offset by decreases in inventory of $46,000
and prepaid expenses of $61,000.
Cash of $121,000 was used in investing activities in the first
quarter of fiscal 1998 compared with $18,000 in fiscal 1997. Most of the
usage related to the purchase of new computer software and hardware for the
Company's manufacturing and accounting systems.
Financing activities provided cash of $251,000 in fiscal 1998 and
$191,000 in fiscal 1997. Rehabilicare repaid $77,000 of long-term debt in the
first quarter of fiscal 1998 and fiscal 1997. The
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<PAGE>
Company maintains a line of credit which provides for borrowing up to
$2,000,000, limited by eligible accounts receivable. At September 30, 1997,
the borrowing base limit was approximately $1,663,000. Borrowings under the
line were $645,000 on September 30, 1997 and $340,000 at June 30, 1996.
Rehabilicare anticipates that cash requirements during fiscal 1998 will be
less than its available credit facility.
DESCRIPTION OF REHABILICARE CAPITAL STOCK
THE FOLLOWING DESCRIPTION OF THE CAPITAL STOCK OF REHABILICARE DOES NOT
PURPORT TO BE COMPLETE AND IS SUBJECT, IN ALL RESPECTS, TO APPLICABLE
MINNESOTA LAW AND TO THE PROVISIONS OF THE REHABILICARE ARTICLES. THE
FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO THE SECOND RESTATED
ARTICLES OF INCORPORATION OF REHABILICARE, WHICH ARE INCORPORATED BY
REFERENCE AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY
STATEMENT-PROSPECTUS IS A PART.
GENERAL
The authorized capital stock of Rehabilicare consists of 15,000,000
shares of Common Stock, $.10 par value, and 5,000,000 shares of preferred
stock, $.01 par value, not designated as to terms and preferences.
COMMON STOCK
There were 4,870,002 shares of Rehabilicare Common Stock issued and
outstanding as of December 31, 1997. In addition, Rehabilicare had reserved
a total of 975,000 shares for issuance upon exercise of options granted or to
be granted under its 1988 Restated Stock Option Plan and 200,000 shares for
sale under its 1993 Employee Stock Purchase Plan at such date.
The holders of Rehabilicare Common Stock: (a) have equal ratable rights
to dividends from funds legally available therefor, when, as and if declared
by the Rehabilicare Board; (b) are entitled to share ratably in all of the
assets of Rehabilicare available for distribution to holders of Rehabilicare
Common Stock upon liquidation, dissolution or winding up of the affairs of
Rehabilicare; (c) do not have preemptive, subscription or conversion rights
and there are no redemption or sinking fund provisions applicable thereto;
and (d) are entitled to one vote per share on all matters which stockholders
may vote on at all meetings of stockholders. All shares of Rehabilicare
Common Stock now outstanding are fully paid and nonassessable.
The holders of Rehabilicare Common Stock do not have cumulative voting
rights, which means that the holders of more than 50% of such outstanding
shares voting for the election of directors can elect all of the directors of
Rehabilicare to be elected, if they so choose. In such event, the holders of
the remaining shares will not be able to elect any of Rehabilicare's
directors.
The payment by Rehabilicare of dividends, if any, in the future rests
within the discretion of the Rehabilicare Board and will depend, among other
things, upon Rehabilicare's earnings, its capital requirements and its
financial condition, as well as other relevant factors. Due to its
anticipated financial needs and future plans, Rehabilicare does not
contemplate paying any dividends upon the Rehabilicare Common Stock in the
foreseeable future.
PREFERRED STOCK
The Rehabilicare Board is authorized, without further stockholder action,
to issue preferred stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the preferred stock. Although there
is no current intention to do so, the Rehabilicare Board may, without
stockholder approval, issue shares of a class or series of
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preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of Rehabilicare Common Stock and may
have the effect of delaying, deferring or preventing a change in control of
Rehabilicare.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Statutes applies, with certain
exceptions, to any acquisition of voting stock of Rehabilicare (from a person
other than Rehabilicare, and other than in connection with certain mergers
and exchanges to which Rehabilicare is a party) resulting in the beneficial
ownership of 20% or more of the voting stock then outstanding. Section
302A.671 requires approval of any such acquisitions by a majority vote of the
stockholders of Rehabilicare prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by Rehabilicare within 30 days
after the acquiring person has failed to give a timely information statement
to Rehabilicare or the date the stockholders voted not to grant voting rights
to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any
business combination by Rehabilicare, or any subsidiary of Rehabilicare, with
any stockholder which purchases 10% or more of Rehabilicare's voting shares
(an "interested stockholder") within four years following such interested
stockholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the
Rehabilicare Board before the interested stockholder's share acquisition date.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to Rehabilicare Common
Stock is Norwest Bank Minnesota, National Association.
COMPARISON OF STOCKHOLDER RIGHTS
The rights of the stockholders of Staodyn are governed by the DGCL, the
Certificate of Incorporation of Staodyn (the "Staodyn Certificate"), and the
Bylaws of Staodyn (the "Staodyn Bylaws"). The rights of the stockholders of
Rehabilicare are governed by the MBCA, the Second Restated Articles of
Incorporation of Rehabilicare (the "Rehabilicare Articles"), and the Amended
and Restated Bylaws of Rehabilicare (the "Rehabilicare Bylaws"). The
following is a summary of certain material differences between the rights of
stockholders of Staodyn and the rights of stockholders of Rehabilicare, as
contained in provisions of the Staodyn Certificate and the Staodyn Bylaws,
and the Rehabilicare Articles and the Rehabilicare Bylaws.
The following does not purport to be a complete statement of the rights
of Staodyn's stockholders under applicable Delaware law, and the Staodyn
Certificate and the Staodyn Bylaws as compared with the rights of
Rehabilicare stockholders under applicable Minnesota law, and the
Rehabilicare Articles and the Rehabilicare Bylaws. The identification of
certain specific differences is not meant to indicate that other equally or
more significant differences do not exist.
BUSINESS COMBINATIONS AND SUPERMAJORITY VOTING. Under Delaware law, a
corporation is prohibited from engaging in certain business combinations,
including a merger, sale of substantial assets, loan or substantial issuance
of stock, with an interested stockholder, or an interested stockholder's
affiliates and associates, for a three-year period beginning on the date the
interested stockholder acquires 15% or more of the outstanding voting stock
of the corporation. The restrictions on business combinations do not apply
if the board of directors gives prior approval to the transaction in which
the 15% ownership level is exceeded, the interested stockholder acquires at
one time 85% of the corporation's stock (excluding shares held by management
or employee stock plans in which employees do not have the effective power to
tender stock) or the business combination is approved by the board of
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directors and authorized at a meeting of stockholders by the holders of at
least 66 2/3% of the outstanding voting stock, excluding shares owned by the
interested stockholder.
Under the Staodyn Certificate, certain business combinations require the
approval of not less than 66 2/3% of the outstanding shares of Staodyn voting
stock, unless a majority of the continuing directors have approved the
business combination or the business combination is at a price not less than
the highest per share price paid by the acquiring person. For such purposes,
business combination includes certain mergers, consolidations, dispositions
of the assets, securities sales, recapitalizations and liquidations of
Staodyn with a beneficial holder of 20% or more of the voting stock.
Minnesota law requires approval by the disinterested stockholders of any
"control share acquisition" of stock of an "issuing public corporation" if an
acquiror exceeds specified levels of ownership (20%, 33 1/3% and 50%) of the
stock of the target corporation. This provision essentially requires a proxy
contest to approve such share acquisitions and delays the acquiror's purchase
up to 55 days while a special stockholders' meeting is held to vote on the
acquisition. The definition of "control share acquisition" excludes cash
tender offers for all outstanding shares if the offer has been approved in
advance by the board of directors of the target corporation and acquisitions
by employee benefit plans.
Minnesota law restricts transactions with a stockholder (an "interested
stockholder") acquiring ten percent or more of the shares of a publicly held
(i.e., required to file Exchange Act reports) "issuing public corporation"
unless the share acquisition or the transaction has been approved by the
corporation's board of directors prior to the acquisition of the ten percent
interest. An "issuing public corporation" is a corporation which has at
least 50 stockholders. For four years after the ten percent threshold is
exceeded (absent prior board approval), the corporation cannot have a merger,
sale of substantial assets, loan, substantial issuance of stock, plan of
liquidation or reincorporation involving the interested stockholder or its
affiliates. The Rehabilicare Articles do not further address business
combinations under Minnesota law.
DISSENTERS' RIGHTS. Under Delaware law, appraisal rights are available
only in connection with certain statutory mergers or consolidations, unless
the certificate of incorporation grants such rights with respect to
amendments to its certificate of incorporation, any merger or consolidation
in which the corporation is a constituent corporation, or sales of all or
substantially all of the assets of a corporation. The Staodyn Certificate
does not grant such additional rights. Appraisal rights under Delaware law,
however, are not available if (1) the corporation's stock is (prior to the
relevant transaction) listed on a national securities exchange or designated
as a National Market System security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or (2) held of record by
more than 2,000 stockholders, neither of which exceptions applies to Staodyn
Common Stock. Consequently, appraisal rights are available to Staodyn
Stockholders in the Merger. See "THE MERGER--Appraisal and Dissenters'
Rights."
Minnesota law also makes appraisal rights available to dissenting
stockholders in the event of any of the following actions: (1) an amendment
of the articles of incorporation that materially and adversely affects the
rights and preferences of the shares of the dissenting stockholder; (2) a
sale or transfer of all or substantially all of the assets of the
corporation; (3) a plan of merger to which the corporation is a party; (4) a
plan of exchange of shares to which the corporation is a party; and (5) any
other corporation action with respect to which the corporation's articles of
incorporation or bylaws give dissenting stockholders the right to obtain
payment for their shares. The Rehabilicare Articles contain no additional
provisions for dissenters' rights.
AMENDMENTS TO CHARTER AND BYLAWS. Under Delaware law, a corporation's
certificate of incorporation may be amended by resolution of the board of
directors and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote. Delaware law reserves the power to
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amend or repeal the bylaws exclusively to the stockholders unless the
certificate of incorporation confers such power upon the directors.
Under Minnesota law, the articles of incorporation may be amended by the
greater of (1) a majority of the voting power present and entitled to vote on
an item, or (2) a majority of the voting power of the minimum number of
shares entitled to vote that would constitute a quorum for the transaction of
business at the meeting. Minnesota law also entitles holders of shares of a
class or series to vote as a class or series on any amendment which would (1)
change the number of authorized shares of such class or series, (2) change or
adversely affect the rights and preferences of such class or series, (3)
create a new class or series of shares with rights and preferences prior and
superior to such class or series, or (4) increase the rights and preferences
of any class or series with prior and superior rights and preferences to such
class or series.
Minnesota law grants the power to adopt and amend bylaws to the board of
directors unless the power is reserved exclusively for stockholders in the
charter; provided, however, that Minnesota law has a limitation on the power
of the board of directors to adopt or amend bylaws which is not contained in
the Delaware statute. After the adoption of initial bylaws, the board of a
Minnesota corporation may not adopt, amend or repeal a bylaw fixing a quorum
for meetings of stockholders, prescribing procedures for removing directors
or filling vacancies in the board, or fixing the number of directors or their
classifications, qualifications or terms of office except that the board may
adopt or amend a bylaw to increase the number of directors. This limitation
occasionally prevents the board from changing certain governance provisions
(or even adopting an updated set of bylaws that happens to change the wording
of such provisions) without the expense of stockholder approval. The
stockholder approval requirement does not turn on the materiality or adverse
nature to stockholders of a change. Any change triggers the requirement.
Minnesota law also allows the holders of 3% or more of the voting power
of shares to call for adoption, amendment or repeal of a bylaw. Delaware law
does not specify the requirements for stockholder initiation of amendments to
the bylaws.
SHAREHOLDER ACTION BY WRITTEN CONSENT. Delaware law provides that,
unless otherwise provided in the certificate of incorporation, stockholders
may act by the written consent of the holders of not less than the minimum
number of shares that would be necessary to approve such action at a meeting
where all shares entitled to vote were present and voted. The Staodyn
Certificate does not restrict action by written consent.
Under Minnesota law, any action required or permitted to be taken in a
meeting of the stockholders may be taken without a meeting by a written
action signed by all of the stockholders. The Rehabilicare Bylaws provide
that any action which might be taken at a meeting of the stockholders may be
taken without a meeting if done in writing and signed by all of the
stockholders entitled to vote on that action.
NUMBER OF DIRECTORS, VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Under
Delaware law, the number of directors shall be fixed by or in the manner
provided in the bylaws, unless the certificate of incorporation fixes the
number of directors, in which case a change in the number of directors shall
be made only by amendment to the certificate. Unless otherwise provided in
the certificate of incorporation or bylaws, 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 be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. The Staodyn
Certificate fixes the maximum number of directors at 12. The Staodyn
Certificate provides that newly created directorships resulting from any
increase in the authorized number of directors and any vacancies in the Board
of Directors my be filled (1) by the affirmative vote of a majority of the
directors then in office, even though less than a quorum, or (2) by the
affirmative vote of the holders of a majority of the shares present and
entitled to vote for the election of directors.
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Directors so chosen by the Board of Directors or the stockholders to fill a
vacancy or newly created directorship will hold office for a term expiring at
the annual meeting of stockholders at which the term of the class to which
they have been appointed or elected expires.
Under Minnesota law, the minimum number of directors is one. Minnesota
law permits the number of directors to be fixed by the articles of
incorporation or bylaws, and the number of directors may be increased or
decreased by the stockholders or the board in the manner permitted by the
articles of incorporation or bylaws. The number of Rehabilicare directors
may be increased or decreased from time to time by resolution of the Board of
Directors or the stockholders.
Under Minnesota law, unless different rules for filling vacancies are
provided for in the articles of incorporation or bylaws, vacancies resulting
from the death, resignation, removal or disqualification of a director may be
filled by the affirmative vote of a majority of the remaining directors, even
though less than a quorum, and vacancies resulting from a newly-created
directorship may be filled by the affirmative vote of a majority of the
directors serving at the time of the increase. The stockholders may also
elect a new director to fill a vacancy that is created by the removal of a
director by the stockholders. According to the Rehabilicare Bylaws, vacancies
on the Board of Directors of Rehabilicare occurring by reason of death,
resignation, removal or disqualification will be filled for the unexpired
term by a majority of the remaining directors of the Board although less than
a quorum; newly create directorships resulting from an increase in the
authorized number of directors by action of the Board of Directors as
permitted by the Bylaws may be filled by a majority vote of the directors
serving at the time of such increase; and each director elected pursuant to
this provision will be a director until such director's successor is elected
by the stockholders at the next regular or special meeting.
CLASSIFICATION OF BOARD. A classified board of directors is one in which
a certain number, but not all, of the directors are elected on a rotating
basis each year. This method of electing directors makes changes in the
composition of the board of directors, and thus a potential change in control
of a corporation, a lengthier and more difficult process. The Staodyn
Certificate provides for a classified board. According to the Staodyn
Certificate the Board of Directors is divided into three classes, as nearly
equal in number of directors as possible, as determined by the Board of
Directors. Each class is elected for a term expiring at the annual meeting
of stockholders held in the third successive year thereafter.
Minnesota law permits, but does not require, a classified board of
directors, with the terms of any such classes to be provided for in the
articles of incorporation and bylaws. The Rehabilicare Articles do not
provide for a classified board.
SPECIAL MEETINGS OF STOCKHOLDERS. The Staodyn Bylaws provide that
special meetings of stockholders, for any purpose unless otherwise prescribed
by statute, may be called by the President and the Board of Directors. The
Board of Directors may designate any place as the place for any special
meeting of the stockholders. Written or printed notice of a special meeting
must be delivered not less than 10 nor more than 60 days before the date of
the meeting, either personally or by mail, by or at the direction of the
President or the Secretary to each stockholder of record entitled to vote at
such meeting.
The Rehabilicare Bylaws provide that a special meeting of the
stockholders may be held at any time and for any purpose and may be called by
the chief executive officer, the chief financial officer, two or more
directors or by a stockholder or stockholders holding 10% or more of the
voting power of all shares entitled to vote, except that a special meeting
for the purpose of considering any action to directly or indirectly
facilitate or affect a business combination, including any action to change
or otherwise affect the composition of the Board of Directors for that
purpose, must be called by 25% or more of the voting power of all shares
entitled to vote. According to the Rehabilicare Bylaws, a stockholder or
stockholders holding the requisite percentage of the voting power of all
shares entitled
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to vote may demand a special meeting of the stockholders by written notice of
demand given to the chief executive officer or chief financial officer of the
corporation and containing the purposes of the meeting. Within 30 days after
receipt of demand by one of those officers, the Board of Directors will cause
a special meeting of stockholders to be called and held on notice no later
than 90 days after receipt of the demand, at the expense of the corporation.
Special meetings must be held on the date and at the time and place fixed by
the chief executive officer or the Board of Directors, except that a special
meeting called by or at demand of a stockholder or stockholders must be held
in the county where the principal executive office is located. The business
transacted at a special meeting must be limited to the purposes as stated in
the notice of the meeting.
QUORUM AT STOCKHOLDERS' MEETINGS. The Staodyn Bylaws provide that
one-third (1/3) of the shares outstanding of Staodyn entitled to vote,
represented in person or by proxy, constitutes a quorum at a meeting of
stockholders. If a quorum is present, the affirmative vote of a majority of
the shares represented at the meeting and entitled to vote on the subject
matter will be the act of the stockholders, unless the vote of a greater
number is required by law or the Certificate of Incorporation.
The Rehabilicare Bylaws provide that the holders of a majority of the
shares entitled to vote constitutes a quorum for the transaction of business
at any regular or special meeting. If a quorum is present, the affirmative
vote of the greater of (i) a majority of the voting power of the shares
present and entitled to vote, or (2) a majority of the voting power of the
minimum number of the shares entitled to vote that would constitute a quorum
will be an act of stockholders, in each case unless a higher percentage is
required under the MBCA or the Articles.
DIVIDENDS. Under Delaware law, dividends may be paid out of surplus or
out of net profits for the fiscal year in which the dividend is paid or the
preceding fiscal year, except that no dividends may be paid if the capital of
the corporation has been diminished to an amount less than the liquidation
preference of outstanding preferred stock. Neither the Staodyn Certificate
nor Bylaws make any additional provisions for dividends.
Under Minnesota law, a corporation may make a distribution only if the
board of directors has determined that the corporation is able, and the
corporation is in fact able, to pay its debts in the ordinary course of
business after making the distribution. A distribution may be made to
holders of a class or series of shares only if all amounts payable to holders
of shares having a preference are paid (except for those having waived rights
to payment) and if payment of such distribution does not reduce the net
assets of the corporation below the aggregate preferential amount payable
upon liquidation (unless the distribution is made to stockholders in the
order of and to the extent of their respective priorities). Under the
Rehabilicare Bylaws, the Board of Directors may authorize and cause the
company to make distributions whenever, and in such amounts or forms as, in
its opinion, are deemed advisable.
GENERAL. The foregoing discussion of certain material differences
between the rights of holders of Staodyn Common Stock and the rights of
holders of Rehabilicare Common Stock under the Certificates and Articles of
Incorporation, respectively, and Bylaws pursuant to Delaware and Minnesota
law is only a summary of certain provisions and does not purport to be a
complete description of such similarities and differences. The foregoing
discussion also does not reflect any rules of The Nasdaq National Market that
may apply to Rehabilicare or Staodyn. The foregoing discussion is qualified
in its entirety by reference to the MBCA, the DGCL, the common law
thereunder, and the full texts of the Certificates and Articles of
Incorporation, respectively, and Bylaws of Staodyn and Rehabilicare.
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PROPOSAL TO APPROVE AMENDMENT TO REHABILICARE ARTICLES OF INCORPORATION
The Rehabilicare Board of Directors has proposed that the Articles be
amended in accordance with the MBCA to increase the number of authorized
shares of Rehabilicare Common Stock from 15,000,000 to 30,000,000 (the
"Charter Amendment"). The principal purpose and effect of the Charter
Amendment is to authorize additional shares of capital stock that may be
issued upon the approval of the Rehabilicare Board without stockholder
approval to accommodate further issuances under employee benefit plans, for
future equity financings, if any, and for use in connection with other
acquisitions, if any. Rehabilicare is not currently negotiating or
contemplating to negotiate any future financings or other acquisitions. While
the Rehabilicare Board recommends that Rehabilicare Stockholders vote "FOR"
the Charter Amendment, the approval of the Merger Agreement is not contingent
upon the approval of the Rehabilicare Charter Amendment.
As of the Rehabilicare Record Date, there were 4,884,480 shares of
Rehabilicare Common Stock outstanding and an additional 975,000 shares of
Rehabilicare Common Stock were reserved for issuance. This leaves
Rehabilicare with 9,140,520 authorized but unissued, unreserved and
uncommitted shares of Rehabilicare Common Stock available for issuance. After
giving effect to the Merger, approximately 5,952,061 additional shares of
Rehabilicare Common Stock will be outstanding or reserved for issuance.
Accordingly, Rehabilicare will have approximately 3,188,459 shares of
Rehabilicare Common Stock available for issuance after the Merger (without
giving effect to the Charter Amendment). As of the Rehabilicare Record Date,
there were no preferred shares of Rehabilicare outstanding and no preferred
shares of Rehabilicare reserved for issuance. Rehabilicare had 5,000,000
authorized but unissued, unreserved and uncommitted preferred shares
available for issuance at the Rehabilicare Record Date.
The additional shares of Rehabilicare Common Stock for which
authorization is sought would be a part of the existing class of Rehabilicare
Common Stock and, if and when issued, would have the same rights and
privileges as the shares of Rehabilicare Common Stock presently outstanding.
Such additional shares would not (and the shares of Rehabilicare Common Stock
presently outstanding do not) entitle holders thereof to preemptive or
cumulative voting rights. The increase in authorized shares will, in
addition to providing sufficient capital stock for issuance in connection
with the Merger, provide additional shares for general corporate purposes,
including stock dividends, raising additional capital, issuances pursuant to
employee and stockholder stock plans and possible future acquisitions. There
are, however, no present plans, understandings or agreements for issuing a
material number of additional shares of Rehabilicare Common Stock from the
additional shares of stock proposed to be authorized pursuant to the Charter
Amendment.
The issuance of shares of Rehabilicare Common Stock, including the
additional shares that would be authorized if the Charter Amendment is
adopted, may dilute the present equity ownership position of current holders
of Rehabilicare Common Stock and may be made without stockholder approval,
unless otherwise required by applicable laws or stock exchange regulation.
Under existing Nasdaq National Market regulations, approval of the holders of
a majority of the shares of Rehabilicare Common Stock would nevertheless be
required in connection with any transaction or series of related transactions
that would result in the original issuance of additional shares of
Rehabilicare Common Stock, other than in a public offering for cash, if (1)
the Rehabilicare Common Stock (including securities convertible into
Rehabilicare Common Stock) has, or will have upon issuance, voting power
equal to or in excess of 20% of the voting power outstanding before the
issuance of such Rehabilicare Common Stock, (2) the number of shares of
Rehabilicare Common Stock to be issued is or will be equal to or in excess of
20% of the number of shares outstanding before the issuance of the
Rehabilicare Common Stock or (3) the issuance would result in a change of
control of Rehabilicare.
The amendment might also have the effect of discouraging an attempt by
another person or entity, through the acquisition of a substantial number
of shares of Rehabilicare Common Stock, to acquire control of Rehabilicare
with a view to consummating a merger, sale of all or any part of
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Rehabilicare's assets, or a similar transaction, because the issuance of
new shares could be used to dilute the stock ownership of such person or
entity.
PROPOSAL TO APPROVE THE REHABILICARE 1998 STOCK INCENTIVE PLAN
In February 1997, the Rehabilicare Board adopted the Rehabilicare 1998
Stock Incentive Plan (the "1998 Plan"), subject to approval by the
Rehabilicare Stockholders. While the Rehabilicare Board recommends that
Rehabilicare Stockholders vote "FOR" the approval of the 1998 Plan, the
approval of the Merger is not contingent upon approval of the 1998 Plan. The
purpose of the 1998 Plan is to aid in attracting and retaining employees,
management personnel, other personnel and members of the Rehabilicare Board
who are not also employees of Rehabilicare ("Non-Employee Directors") capable
of assuring the future success of Rehabilicare, to offer such persons
incentives to put forth maximum efforts for the success of Rehabilicare's
business and to afford such persons an opportunity to acquire a proprietary
interest in Rehabilicare. The following summary description of the 1998 Plan
is qualified in its entirety by reference to the full text of the plan, which
is attached to this Joint Proxy Statement-Prospectus as Appendix E.
SUMMARY OF THE 1998 PLAN
ADMINISTRATION. With the exception of the provisions applicable to
Non-Employee Directors, which are discussed below, the 1998 Plan is
administered by the Compensation Committee of the Rehabilicare Board (the
"Committee"). The Committee has the authority to select the individuals
to whom awards are granted, to determine the types of awards to be granted
and the number of shares of Rehabilicare Common Stock covered by such awards,
to set the terms and conditions of such awards, and to determine whether the
payment of any amounts received under any award shall or may be deferred. The
Committee has the authority to establish rules for the administration of the
1998 Plan, and determinations and interpretations with respect to the 1998
Plan are at the sole discretion of the Committee, whose determinations and
interpretations are binding on all interested parties. The Committee may
delegate its powers and duties under the 1998 Plan to one or more officers
with respect to individuals who are not subject to Section 16 of the Exchange
Act; provided, however, that the Committee may not delegate any of its powers
and duties under the 1998 Plan in such a manner as would fail to comply with
any of the requirements of Section 162(m) of the Code.
TERMS OF THE 1998 PLAN. The 1998 Plan permits the granting of a variety
of different types of awards: (1) stock options, including incentive stock
options meeting the requirements of Section 422 of the Code, and stock
options that do not meet such requirements (non-qualified stock options); (2)
stock appreciation rights (SARs); (3) restricted stock and restricted stock
units; (4) performance awards; (5) dividend equivalents; and (6) other awards
valued in whole or in part by reference to or otherwise based upon
Rehabilicare Common Stock ("other stock-based awards"). Awards may be
granted alone, in addition to, in tandem with, or in substitution for any
other award granted under the 1998 Plan or any other plan. Awards may be
granted for no cash consideration or for such minimal cash consideration as
may be required by applicable law. Awards may provide that upon the grant or
exercise thereof the holder will receive cash, shares of Rehabilicare Common
Stock or other securities, awards or property, or any combination thereof, as
the Committee shall determine. The exercise price per share under any
incentive stock option, the grant price of any SAR, and the purchase price of
any security which may be purchased under any other stock-based award under
Section 6(f) of the 1998 Plan may not be less than 100% of the fair market
value of Rehabilicare Common Stock on the date of the grant of such option,
SAR or right. Determinations of fair market value under the 1998 Plan are
made in accordance with methods and procedures established by the Committee.
Options may be exercised by payment in full of the exercise price,
either in cash or, at the discretion of the Committee, in whole or in part
by the tendering of shares of Rehabilicare Common Stock or other
consideration having a fair market value on the date the option is
exercised equal to the
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exercise price. The 1998 Plan provides that the Committee may grant "reload
options," separately or together with another option, and may establish the
terms and conditions of such reload options. Pursuant to a reload option, the
optionee would be granted a new option when the payment of the exercise price
of the option to which such reload option relates is made by using shares of
Rehabilicare Common Stock owned by the optionee. The new option granted upon
such exercise would be an option to purchase the number of shares not
exceeding the sum of (1) the number of shares of Rehabilicare Common Stock
tendered as payment upon the exercise of the option to which such reload
option relates and (2) the number of shares of Rehabilicare Common Stock
tendered or withheld as payment of the amount to be withheld under applicable
tax laws in connection with the exercise of the option to which such reload
option relates. Reload options may be granted with respect to options
previously granted under the 1998 Plan or any other stock option plan of
Rehabilicare, and may be granted in connection with any option granted under
the 1998 Plan or any other such plan at the time of such grant. Such reload
options shall have a per share exercise price equal to the fair market value
as of the date of grant of the new option. Shares surrendered as part or all
of the exercise price of the option to which it relates that have been owned
by the optionee less than six months will not be counted for purposes of
determining the number of shares that may be purchased pursuant to a reload
option.
The holder of a SAR is entitled to receive the excess of the fair market
value (calculated as of the exercise date or, if the Committee shall so
determine, as of anytime during a specified period before or after the
exercise date) of a specified number of shares over the grant price of the
SAR.
Shares of restricted stock and restricted stock units will be subject to
such restrictions as the Committee may impose (including any limitations on
the right to vote or the right to receive dividends), which restrictions may
lapse separately or in combination at such time or times, in such
installments or otherwise as the Committee may determine. Restricted stock
may not be transferred by the holder until the restrictions established by
the Committee lapse. Holders of restricted stock units have the right,
subject to any restrictions imposed by the Committee, to receive shares of
Rehabilicare Common Stock at some future date. Upon termination of the
holder's employment during the restriction period, restricted stock and
restricted stock units are forfeited, unless the Committee determines
otherwise.
Performance awards provide the holder thereof the right to receive
payments, in whole or in part, upon the achievement of such goals during such
performance periods as the Committee shall establish. A performance award
granted under the 1998 Plan may be denominated or payable in cash, shares of
Rehabilicare Common Stock or restricted stock or restricted stock units, or
other securities, awards or property. Dividend equivalents entitle the
holder thereof to receive payments (in cash, shares or otherwise, as
determined by the Committee) equivalent to the amount of cash dividends with
respect to a specified number of shares. The Committee is also authorized to
establish the terms and conditions of other stock-based awards.
RESTRICTIONS ON AWARDS AND TRANSFERS. No person who is an employee of
Rehabilicare at the time of grant may be granted any award or awards under
the 1998 Plan, the value of which awards are based solely on an increase in
the value of the shares after the date of grant of such awards, of more than
100,000 shares in the aggregate in any calendar year. The foregoing annual
limitation specifically includes the grant of any "performance-based awards"
within the meaning of Section 162(m) of the Code.
No award granted under the 1998 Plan may be assigned, transferred,
pledged or otherwise encumbered by the individual to whom it is granted,
otherwise than by will or the laws of descent and distribution, except that
the Committee may permit the designation of a beneficiary. Each award is
exercisable, during such individual's lifetime, only by such individual or,
if permissible under applicable law, by such individual's guardian or legal
representative.
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<PAGE>
The aggregate number of shares of Rehabilicare Common Stock which may be
issued under all awards granted under the 1998 Plan is 400,000 (subject to
adjustment as described below). If any shares of Rehabilicare Common Stock
subject to any award or to which an award relates are not purchased or are
forfeited, or if any such award terminates without the delivery of shares,
the shares previously set aside for such awards will be available for future
awards under the 1998 Plan. Notwithstanding the foregoing, the total number
of shares of Rehabilicare Common Stock that may be purchased upon exercise of
incentive stock options granted under the 1998 Plan may not exceed 400,000,
subject to adjustment as described below and in Section 422 or 424 of the
Code or any successor provision. Shares relating to awards which allow the
holder to receive or purchase shares will be counted against the aggregate
number of shares available for granting awards under the 1998 Plan.
If any dividend or other distribution, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of shares of Rehabilicare
Common Stock or other securities of Rehabilicare, issuance of warrants or
other rights to purchase shares of Rehabilicare Common Stock or other
securities of Rehabilicare, or other similar corporate transaction or event
affects the shares of Rehabilicare Common Stock so that an adjustment is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the 1998 Plan, the
Committee shall, in such manner as it deems equitable, adjust any or all of
(1) the number and type of shares (or other securities or property) which
thereafter may be made the subject of awards, (2) the number and type of
shares (or other securities or property) subject to outstanding awards and
(3) the exercise price with respect to any award.
TERMINATION. The 1998 Plan shall be effective as of the date on which it
is approved by Rehabilicare's stockholders and, unless it has been previously
discontinued or terminated, shall terminate ten years after such date. No
awards may be made after such termination date. However, unless otherwise
expressly provided in the 1998 Plan or an applicable award agreement, any
award granted may extend beyond the end of such period.
AMENDMENT. The Board of Directors may amend, alter or discontinue the
1998 Plan at any time, provided that stockholder approval must be obtained
for any such action that, absent such stockholder approval, would (1) cause
Rule 16b-3 under the Exchange Act to become unavailable with respect to the
1998 Plan; (2) violate the rules or regulations of the Nasdaq National
Market, any other securities exchange or the National Association of
Securities Dealers, Inc. applicable to Rehabilicare; or (3) cause
Rehabilicare to be unable, under the Code, to grant incentive stock options
under the 1998 Plan. The Committee may correct any defect, supply any
omission, or reconcile any inconsistency in the 1998 Plan or any award
agreement in the manner and to the extent it shall deem desirable to carry
the 1998 Plan into effect. The Committee may waive any condition of, or
rights of Rehabilicare under any outstanding award, prospectively or
retroactively, but the Committee may not amend or terminate any outstanding
award, prospectively or retroactively, without the consent of the holder or
beneficiary of the award.
For information regarding stock prices of Rehabilicare Common Stock, see
"MARKET PRICES."
FEDERAL TAX CONSEQUENCES. The following is a summary of the principal
federal income tax consequences generally applicable to awards under the 1998
Plan.
The grant of an option or SAR is not expected to result in any taxable
income to the recipient. The holder of an incentive stock option generally
will have no taxable income upon exercising the incentive stock option
(except that a liability may arise pursuant to the alternative minimum tax),
and Rehabilicare will not be entitled to a tax deduction when an incentive
stock option is exercised. Upon exercising a non-qualified stock option, the
optionee must recognize ordinary income equal to the excess of the fair
market value of the shares of Rehabilicare Common Stock acquired on the date
of exercise over the exercise price, and Rehabilicare will be entitled at
that time to a tax deduction in the same amount. Upon exercising a SAR, the
amount of any cash received and the fair market value on the
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<PAGE>
exercise date of any shares of Rehabilicare Common Stock received are taxable
to the recipient as ordinary income and deductible by Rehabilicare. The tax
consequence to an optionee upon a disposition of shares acquired through the
exercise of an option or SAR will depend on how long the shares have been
held and upon whether such shares were acquired by exercising an incentive
stock option or by exercising a non-qualified stock option or SAR.
Generally, there will be no tax consequence to Rehabilicare in connection
with disposition of shares acquired under an option, except that Rehabilicare
may be entitled to a tax deduction in the case of a disposition of shares
acquired under an incentive stock option before the applicable incentive
stock option holding periods set forth in the Code have been satisfied.
With respect to other awards granted under the 1998 Plan that are payable
either in cash or shares of Rehabilicare Common Stock that are either
transferable or not subject to substantial risk of forfeiture, the holder of
such an award must recognize ordinary income equal to the excess of (1) the
cash or the fair market value of the shares of Rehabilicare Common Stock
received (determined as of the date of such receipt) over (2) the amount (if
any) paid for such shares of Rehabilicare Common Stock by the holder of the
award, and Rehabilicare will be entitled at that time to a deduction for the
same amount. With respect to an award that is payable in shares of
Rehabilicare Common Stock that are restricted as to transferability and
subject to substantial risk of forfeiture, unless a special election is made
pursuant to the Code, the holder of the award must recognize ordinary income
equal to the excess of (1) the fair market value of the shares of
Rehabilicare Common Stock received (determined as of the first time the
shares become transferable or not subject to substantial risk of forfeiture,
whichever occurs earlier) over (2) the amount (if any) paid for such shares
of Rehabilicare Common Stock by the holder, and Rehabilicare will be entitled
at that time to a tax deduction in the same amount.
Special rules may apply in the case of individuals subject to Section 16
of the Exchange Act. In particular, unless a special election is made
pursuant to the Code, shares received pursuant to the exercise of a stock
option or SAR may be treated as restricted as to transferability and subject
to a substantial risk of forfeiture for a period up to six months after the
date of exercise. Accordingly, the amount of any ordinary income recognized,
and the amount of Rehabilicare's tax deduction, are determined as of the end
of such period.
Under the 1998 Plan, the Committee may permit participants (other than
Non-Employee Directors) receiving or exercising awards, subject to the
discretion of the Committee and upon such terms and conditions as it may
impose, to surrender shares of Rehabilicare Common Stock (either shares
received upon the receipt or exercise of the award or shares previously owned
by the optionee) or other property to Rehabilicare to satisfy federal and
state tax obligations. In addition, the Committee may grant, subject to its
discretion and such rules as it may adopt, a bonus to a participant in order
to provide funds to pay all or a portion of federal and state taxes due as a
result of the receipt or exercise of (or lapse of restrictions relating to)
an award. The amount of any such bonus will be taxable to the participant as
ordinary income, and Rehabilicare will have a corresponding deduction equal
to such amount (subject to the usual rules concerning reasonable
compensation).
ELIGIBLE PERSONS. Any employee, officer, consultant or independent
contractor of Rehabilicare and its affiliates selected by the Committee is
eligible to receive an award under the 1998 Plan. Non-Employee Directors,
however, are only eligible to receive the automatic option grants described
below.
NON-EMPLOYEE DIRECTORS. If the 1998 Plan is approved by the Rehabilicare
Stockholders, on the date of each of Rehabilicare's annual meeting of
stockholders, each Non-Employee Director shall be granted an option to
purchase 2,500 shares of Rehabilicare Common Stock on the date of
Rehabilicare's annual meeting of stockholders each year, commencing with the
Rehabilicare Annual Meeting, if the director will remain in office
immediately following such meeting. The exercise price of each option shall
be equal to 100% of the fair market value per share on the date of grant.
Such options shall be non-qualified stock options, shall become fully
exercisable on the date of grant and with respect to an additional 25% on the
second, third and fourth annual anniversary of the date of grant and
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<PAGE>
shall terminate on the fifth anniversary of the date of grant. Such options
shall also terminate three months following the date the participant ceases
to be a director of Rehabilicare, except that if the participant (1) shall
cease to be a director by reason of willful and material misconduct, the
option shall terminate as of the date of such misconduct, (2) shall cease to
be a director due to disability or retirement, the option may be exercised in
accordance with its terms as if such termination had not occurred, and (3) if
the participant shall die while a director of Rehabilicare and he or she
shall not have fully exercised the option, the option may be exercised in
accordance with its terms by the participant's legal representatives.
RECOMMENDATION BY THE REHABILICARE BOARD; VOTE REQUIRED. The
affirmative vote of the holders of a majority of the shares of
Rehabilicare Common Stock represented at the Rehabilicare Annual Meeting
and entitled to vote is necessary for approval of the 1998 Plan. Proxies
will be voted in favor of such proposal unless otherwise specified. THE
REHABILICARE BOARD RECOMMENDS THAT REHABILICARE STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE 1998 PLAN.
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OWNERSHIP OF REHABILICARE COMMON STOCK
The following table gives, as of September 16, 1998, certain information
concerning the beneficial ownership of Rehabilicare Common Stock by each of
Rehabilicare's directors, by the Rehabilicare executive officers named in the
Summary Compensation Table below and by Rehabilicare's present directors and
all of its executive officers as a group. Unless otherwise indicated, all
shares listed as beneficially owned are held with sole voting and investment
power.
SHARES BENEFICIALLY
NAME OWNED (1) PERCENT OWNED
- ---- ------------------- -------------
Woodland Partners LLC 865,200 (2) 17.8
60 South Sixth Street
Minneapolis, MN 55402
U.S. Bancorp 424,450 (3) 8.7
601 Second Avenue South
Minneapolis, MN 55402
Heartland Advisors, Inc. 400,000 (4) 8.2
790 North Milwaukee Street
Milwaukee, WI 53202
Robert K. Anderson 360,660 7.4
8070 North Coconino
Paradise Valley, AZ 85253
Robert E. Buuck 272,500 (5) 5.6
Opus Center, Suite 421
9900 Bren Road East
Minneapolis, MN 55343
Robert C. Wingrove 209,684 4.3
David B. Kaysen 128,010 2.6
W. Glen Winchell 63,012 1.2
William J. Sweeney 20,000 *
William R. Hibbs 81,499 1.7
Donn O. Berkeland 25,000 *
John H. P. Maley 4,500 *
Richard E. Jahnke 4,500 *
All Directors and Officers 536,205 10.6
as a group (8 persons)
- --------------------------
* Less than 1%
(1) Includes for Mr. Wingrove, Mr. Kaysen, Mr. Winchell, Mr.
Sweeney, Mr. Hibbs, Mr. Berkeland, Mr. Maley, Mr. Jahnke and
all directors and officers as a group, 32,000 shares, 42,000
shares, 58,000 shares, 20,000 shares, 12,500 shares, 12,500
shares and 4,500 shares, 4,500 shares, and 186,000
respectively, which can be purchased by exercise of options
which become exercisable within 60 days.
(2) Based on Schedule 13G dated August 6, 1997. Woodland Partners
LLP has sole voting power for 732,100 of these shares.
(3) Based on Schedule 13G dated August 8, 1997. Includes 3,750
shares for which U.S. Bancorp has shared dispositive power.
(4) Based on Schedule 13G dated February 12, 1997.
(5) Includes 187,500 shares held by the Buuck Family Partnership
of which Mr. Buuck is the trustee.
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ELECTION OF REHABILICARE DIRECTORS
DIRECTORS OF REHABILICARE
Six persons have been nominated for election as directors at the annual
meeting. Four of such persons, including Robert C. Wingrove, David B.
Kaysen, John H. P. Maley, and Richard E. Jahnke, are currently directors of
Rehabilicare. Two of such persons, including Frederick H. Ayers and W. Bayne
Gibson, are currently directors of Staodyn and will be elected only if the
Merger is approved. The directors of Rehabilicare will be elected at the
Rehabilicare Annual Meeting to serve until the earlier of the next annual
meeting of Rehabilicare stockholders or the Effective Time; provided,
however, that the election of Messrs. Ayers and Gibson is contingent upon the
consummation of the Merger and they will not become directors until
immediately following the Effective Time. In the event the Merger is not
consummated, Messrs. Ayers and Gibson will not become directors of
Rehabilicare and, as a result, two directorships will remain vacant until new
directors are elected to fill such directorships. The Merger is not
conditioned upon approval of the nominees named below.
In accordance with the Merger Agreement, two directors of Rehabilicare
are not standing for reelection. William R. Hibbs resigned as a Director
effective December 11, 1997, having served since August 1989, indicating that
he will be out of the country during the first few months of 1998. Donn O.
Berkeland elected to not stand for re-election, having served since June 1992.
The Rehabilicare Board recommends that the Rehabilicare Stockholders
elect the above nominees as directors of Rehabilicare for the ensuing year.
It is intended that the persons named as proxies in the enclosed form of
proxy will vote the proxies received by them for the election as directors of
the nominees, unless otherwise directed. Each nominee has indicated a
willingness to serve, but in case any nominee is not a candidate at the
meeting, for reasons not known to Rehabilicare, the proxies named in the
enclosed form of proxy may vote for a substitute nominee at their discretion.
Information regarding the nominees is set forth below under the caption
"MANAGEMENT AND OPERATIONS AFTER THE MERGER."
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF COMMON
STOCK REPRESENTED AT THE MEETING IS REQUIRED FOR THE ELECTION OF EACH
DIRECTOR. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE.
MEETINGS OF THE BOARD AND CERTAIN COMMITTEES
During fiscal 1997, the Rehabilicare Board maintained an Audit Committee,
comprised of Messrs. Gette and Hibbs, and a Compensation Committee, comprised
of Messrs. Gette, Berkeland and Hibbs. Each of these committees met once
during the fiscal year. The Audit Committee reviews and makes recommendations
to the Board of Directors with respect to designated matters. The
Compensation Committee considers and makes recommendations with respect to
compensation of officers of Rehabilicare (including salaries and incentive
compensation). There is no standing nominating committee.
During the fiscal year ended June 30, 1997, the Rehabilicare Board held
five meetings. Each incumbent Director attended at least 75% of all meetings
of the Board while he was serving on the Board and all meetings of any
committee of the Board on which he served.
EXECUTIVE OFFICERS
Name Age Position
- ------------------ --- ---------------------------------------------
Robert C. Wingrove 65 Chairman and Chief Technical Officer
David B. Kaysen 48 Chief Executive Officer
William J. Sweeney 55 Vice President of Sales and Marketing
W. Glen Winchell 51 Vice President of Finance and Chief Financial
Officer
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<PAGE>
See the biographical information on Messrs. Wingrove and Kaysen under
Directors.
William J. Sweeney started with Rehabilicare as Vice President of Sales and
Marketing in April 1996. From June 1993 to April 1996, he was employed by
CIRCON Corporation and Surgitek, Inc., a company acquired by CIRCON
Corporation, both manufacturers of surgical products, most recently as
Corporate Business Development Manger. From May 1992 to May 1993, he was
Director of Sales for Applied Medical Resources, a distributor of vascular,
urology and surgical products. From June 1990 to May 1992, he was Director of
Sales for Mentor Corporation, a manufacturer of urology products.
W. Glen Winchell started with Rehabilicare as Vice President of Finance and
Chief Financial Officer in September 1993. From December 1990 to September
1993, he was self-employed as a financial consultant and owner/operator of
several small retail businesses. From October 1988 to December 1990, he was
Chairman and Chief Executive Officer of Braxton Industries, Inc., a provider
of waste management and alternative fuel production services.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and directors and persons who beneficially own more than ten percent
(10%) of Rehabilicare's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Commission. Executive officers,
directors and greater than ten percent (10%) beneficial owners are required
by Commission regulations to furnish Rehabilicare with copies of all Section
16(a) forms they file.
Rehabilicare believes that its executive officers and directors complied
with all applicable Section 16(a) filing requirements during and with respect
to the fiscal year ended June 30, 1997.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The table below shows the compensation
awarded or paid to, or earned by, Rehabilicare's chief executive officer and
each of its most highly compensated executive officers who received salary
and bonus of $100,000 or more (the "named executive officers") during each of
the years in the three-year period ended June 30, 1997.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------ Long-Term All Other
Name and Other Annual Compensation(1) Compensation
Principal Position Year Salary Bonus Compensation Options (2) (3)
- ------------------ ---- -------- ------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David B. Kaysen 1997 $163,125 $28,260 -- 15,000 $750
PRESIDENT AND CHIEF 1996 155,531 -- -- 15,000 904
EXECUTIVE OFFICER 1995 141,659 -- -- 15,000 420
Robert C. Wingrove 1997 $125,800 $19,042 -- 10,000 $753
CHIEF TECHNICAL 1996 121,500 -- -- 10,000 842
OFFICER 1995 115,500 -- -- 15,000 524
W. Glen Winchell 1997 $ 97,692 $16,302 -- 5,000 $759
VICE PRESIDENT OF 1996 91,875 -- -- 10,000 788
FINANCE AND CHIEF 1995 79,000 1,280 -- 20,000 500
FINANCIAL OFFICER
Willam J. Sweeney 1997 $ 90,599 $16,325 20,000 (4) 10,000 $763
VICE PRESIDENT OF SALES 1996 20,249 -- -- 30,000 --
AND MARKETING (5)
___________________
</TABLE>
(1) Rehabilicare did not award any restricted stock or make any long-term
incentive payments to executives.
(2) Represents the number of shares of Rehabilicare common stock that can
be purchased upon the exercise of stock options granted during the year.
(3) Represents Rehabilicare's contributions to a 401(k) plan.
(4) Represents relocation expense allowance.
(5) Mr. Sweeney was employed as Vice President of Sales and Marketing in
April 1996.
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<PAGE>
STOCK-BASED COMPENSATION. The following table provides information
regarding options to purchase Rehabilicare Common Stock granted to the named
executive officers pursuant to the Rehabilicare 1993 Stock Incentive Plan
during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE ($/SHARE) DATE
- ------------------------------ ---------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Mr. Kaysen 15,000 23.1% $3.3125 9/9/01
Mr. Wingrove 10,000 15.4% $3.3125 9/9/01
Mr. Winchell 5,000 7.7% $3.3125 9/9/01
Mr. Sweeney 10,000 15.4% $3.3125 9/9/01
</TABLE>
The following table summarizes the value of options held at the end of
fiscal 1997 by the named executive officers.
OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options In-the-Money Options
Acquired Value at End of Fiscal 1997 at End of Fiscal 1997 (2)
on Realized -------------------------- ------------------------------
Name Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- --------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Kaysen 100,000 $ 162,500(3) 30,000 30,000 $ 34,688 $ 20,625
Mr. Wingrove 80,000 $ 111,250 23,000 22,000 $ 28,000 $ 17,000
Mr. Winchell -- -- 41,000 24,000 $ 54,688 $ 25,000
Mr. Sweeney -- -- 14,000 26,000 $ 375 $ 1,500
</TABLE>
(1) Represents the difference between fair market value at date of
exercise and the exercise price.
(2) Represents the difference between $3.50 (the last sales price at
June 30, 1997) and the exercise price multiplied by the number of
shares.
(3) The Company loaned Mr. Kaysen $162,500 for the acquisition of these
shares pursuant to a promissory note secured by 85,729 shares of
Company common stock owned by Mr. Kaysen and bearing interest at
the prime rate.
DIRECTORS' COMPENSATION
Directors who are not also officers or employees of Rehabilicare receive
fees of $1,000 per quarter; an option to purchase 2,500 shares of
Rehabilicare's common stock under its 1988 Restated Stock Option Plan on July
1 of each year; and are reimbursed for their expenses in attending board
meetings.
LONG-TERM PLAN INCENTIVE AWARDS
Other than its 1988 Restated Stock Option Plan and 1993 Employee Stock
Purchase Plan, Rehabilicare does not maintain any long-term incentive plan.
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INDEPENDENT ACCOUNTANTS
The Rehabilicare Board has selected Price Waterhouse LLP as independent
accountants for the year ending June 30, 1998. It is expected that
representatives of Price Waterhouse LLP will be present at the Rehabilicare
Annual Meeting, will have the opportunity to make a statement if they so
desire, and will be available to respond to appropriate questions.
The Rehabilicare Board determined, effective January 13, 1997, to dismiss
Arthur Andersen LLP as Rehabilicare's independent public accountants. During
the two fiscal years preceding such dismissal, there were no disagreements
with Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to their satisfaction, would have caused them to make reference to
the subject matter of the disagreements in connection with their reports. No
report of Arthur Andersen LLP on Rehabilicare's financial statements for the
two fiscal years preceding such dismissal contained an adverse opinion or a
disclaimer of opinion or was qualified as to uncertainty, audit scope or
accounting principles.
LEGAL OPINIONS
The validity of the shares of Rehabilicare Common Stock offered hereby
will be passed upon for Rehabilicare by Dorsey & Whitney LLP, Minneapolis,
Minnesota.
The Merger Agreement provides that, as a condition to the obligation of
each of Rehabilicare, Merger Subsidiary and Staodyn to consummate the Merger,
Staodyn shall have received the opinion of Chrisman, Bynum & Johnson, legal
counsel to Staodyn, substantially to the effect that the Merger will qualify
as a "reorganization" under Section 368(a) of the Code.
EXPERTS
The financial statements of Rehabilicare incorporated in this Prospectus
by reference to the Rehabilicare Annual Report on Form 10-KSB for the year
ended June 30, 1997, have been so incorporated in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated balance sheet of Rehabilicare as of June 30, 1996 and
the related consolidated financial statements for the year then ended
appearing in Rehabilicare's Form 10-KSB for the year ended June 30, 1997,
have been audited by Arthur Andersen LLP, independent public accountants, as
set forth in their report thereon included therein and incorporated herein by
reference in reliance upon authority of said firm as experts in giving said
reports.
The financial statements of Staodyn as of November 30, 1996 and for each
of the two years in the period ended November 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in Rehabilicare's proxy
solicitation materials for its 1999 annual meeting of stockholders, any
stockholder proposal to be considered at such meeting must be received by
Rehabilicare's Corporate Secretary, at Rehabilicare's main office, 1811 Old
Highway 8, New Brighton, Minnesota 55112, no later than October 14, 1998.
Any such proposal shall be subject to the requirements of the proxy rules
adopted under the Exchange Act.
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<PAGE>
OTHER MATTERS
As of the date of this Joint Proxy Statement-Prospectus, the Rehabilicare
Board and the Staodyn Board know of no matters that will be presented for
consideration at the Rehabilicare Annual Meeting or the Staodyn Special
Meeting other than as described in this Joint Proxy Statement-Prospectus. If
any other matters shall properly come before either stockholder meeting or
any adjournments or postponements thereof and be voted upon, the enclosed
proxies will be deemed to confer discretionary authority on the individuals
named as proxies therein to vote the shares represented by such proxies as to
any such matters. The persons named as proxies intend to vote or not to vote
in accordance with the recommendation of the respective managements of
Rehabilicare and Staodyn.
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to the management, executive compensation,
various benefit plans (including stock plans), voting securities and the
principal holders thereof, certain relationships and related transactions and
other related matters as to Rehabilicare is set forth in or incorporated by
reference in the Annual Report on Form 10-KSB for the year ended June 30,
1997 of Rehabilicare, which is incorporated by reference in this Joint Proxy
Statement-Prospectus. See "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE." Rehabilicare Stockholders who wish to obtain copies thereof may
contact Rehabilicare at its address or telephone number set forth under
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE."
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<PAGE>
Index to Consolidated Financial Statements
STAODYN, INC.
At November 30, 1996 and For The Two Years Then Ended
Report of Independent Accountants................................... F-2
Consolidated Balance Sheet as of November 30, 1996............. F-3, F-4
Consolidated Statements of Operations for the years ended
November 30, 1996 and 1995................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for
the years ended November 30, 1996 and 1995................ F-6
Consolidated Statements of Cash Flows for the years ended
November 30, 1996 and 1995........................... F-7, F-8
Notes to Consolidated Financial Statements.............. F-9 through F-16
At August 31, 1997 and for the Three and Nine Months Then Ended
(Unaudited)
Consolidated Balance Sheet as of August 31, 1997 and
November 30, 1996........................................ F-17
Consolidated Statements of Operations for the Three and Nine
Months Ended August 31, 1997 and 1996.................... F-18
Consolidated Statements of Cash Flows for the Nine Months
Ended August 31, 1997 and 1996........................... F-19
Notes to Financial Statements........................................F-25
REHABILICARE INC.
At September 30, 1997 and for the Three Months Then Ended
(Unaudited)
Consolidated Balance Sheet as of September 30, 1997 and
June 30, 1997.............................................F-22
Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1996................. F-22
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1997 and 1996........................ F-23
Notes to Financial Statements........................................F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Staodyn, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Staodyn, Inc. and its subsidiary at November 30, 1996 and the results of
their operations and their cash flows for each of the two fiscal years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted accounting standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Boulder, Colorado
January 30, 1997
F-2
<PAGE>
Staodyn, Inc.
Consolidated Balance Sheet
As of November 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,025,343
Short-term investments 1,323,706
Accounts receivable, net of allowance for doubtful
accounts of $950,821 5,319,749
Inventories, net 4,398,525
Prepaid expenses and other assets 235,220
-----------
Total current assets 12,302,543
-----------
Property, plant, and equipment (at cost)
Land 156,554
Buildings and improvements 1,442,839
Production and laboratory equipment 2,330,971
Office furniture and fixtures 988,799
Data processing equipment 2,206,159
Automotive equipment 8,153
-----------
7,133,475
Less accumulated depreciation and amortization (5,204,990)
-----------
1,928,485
-----------
Intangible assets:
Product supply agreement, net of accumulated
amortization of $360,000 540,000
Goodwill, noncompete agreement, and other intangibles,
net of accumulated amortization of $732,610 873,457
Other assets 9,967
-----------
Total assets $15,654,452
-----------
-----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
Staodyn, Inc.
Consolidated Balance Sheet
As of November 30, 1996
(continued)
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations $ 207,086
Accounts payable 730,938
Commissions payable 184,585
Accrued payroll expense 502,650
Taxes payable, other than income 113,102
Other accrued liabilities 364,229
----------
Total current liabilities 2,102,590
----------
Long-term debt:
Finance obligation, net of unamortized debt expense
of $21,681 1,253,319
Capitalized lease obligations, long-term 4,827
----------
Total long-term debt 1,258,146
----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value; 1,000,000
shares authorized; none issued --
Common stock - $0.01 par value; 10,000,000
shares authorized; 6,641,217 shares
issued and outstanding 66,412
Additional paid-in capital 15,468,439
Accumulated deficit (3,241,135)
-----------
12,293,716
-----------
Total liabilities and stockholders' equity $15,654,452
-----------
-----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
Staodyn, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales $18,943,519 $18,371,001
Cost of sales 6,632,071 6,573,697
----------- -----------
Gross profit 12,311,448 11,797,304
----------- -----------
Operating expenses:
Selling, general, and administrative 11,553,939 11,083,684
Research and development 445,814 436,943
----------- -----------
11,999,753 11,520,627
----------- -----------
Income from operations 311,695 276,677
Other income (expense):
Interest income 121,475 97,602
Other income--related party 13,135 17,430
Interest expense (186,667) (209,462)
Interest expense--related party - (8,623)
Other income (expense), net (2,823) 30,032
----------- -----------
(54,880) (73,021)
Income before income taxes 256,815 203,656
Income taxes - -
----------- -----------
Net income $ 256,815 $ 203,656
----------- -----------
----------- -----------
Income per common share $ .04 $ .03
----------- -----------
----------- -----------
Weighted average number of
common shares outstanding 6,469,618 6,286,260
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
Staodyn, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
------------ In Accumulated
Shares Amount Capital Deficit
------------ ------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at November 30, 1994 6,214,316 $62,143 $14,975,308 $(3,701,606)
Issuance of common stock
upon exercise of warrants 10,000 100 11,775 -
Issuance of common stock for
employee stock bonus and
employee stock purchase plans 64,720 647 75,483 -
Issuance of common stock as
compensation to directors 26,000 260 24,852 -
Issuance of common stock
as compensation 10,000 100 18,650 -
Net income - - - 203,656
--------- ------- ----------- -----------
Balance at November 30, 1995 6,325,036 $63,250 $15,106,068 $(3,497,950)
Issuance of common stock
for acquisition of distribution
channels 264,357 2,644 300,583 -
Issuance of common stock for
employee stock bonus and
employee stock purchase plans 31,824 318 40,988 -
Issuance of common stock
as compensation to directors 20,000 200 20,800 -
Net income - - - 256,815
--------- ------- ----------- -----------
Balance at November 30, 1996 6,641,217 $66,412 $15,468,439 $(3,241,135)
--------- ------- ----------- -----------
--------- ------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
Staodyn, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 256,815 $ 203,656
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 997,842 971,545
Provision for doubtful accounts 776,242 755,159
Stock compensation - 35,284
Loss on sale of equipment 2,582 -
Accrued interest (58,000) -
Increase (decrease) from changes in assets and liabilities:
Accounts receivable (1,436,776) (897,164)
Inventories, net (773,615) 541,859
Prepaid expenses and deposits (63,508) (35,045)
Other assets 2,819 -
Accounts payable 261,348 (231,655)
Commissions payable 37,691 (16,151)
Accrued payroll 97,534 (18,382)
Taxes payable, other than income 7,678 54,961
Other current liabilities 126,623 92,911
----------- -----------
Net cash provided by operating activities 235,275 1,456,978
----------- -----------
INVESTING ACTIVITIES
Payments for purchases of property, plant, and equipment (325,783) (108,081)
Payments for other noncurrent assets (18,055) (44,231)
Purchases of short-term investments (2,796,097) (3,382,661)
Maturities of short-term investments 2,515,000 3,090,000
Proceeds from sale of equipment 8,000 -
----------- -----------
Net cash used in investing activities (616,935) (444,973)
----------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
Staodyn, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuances of common stock . . . . . . . . . . . . $ 41,306 $ 77,833
Principal payments of note payable--related party. . . . . . . . (31,170) (117,714)
Principal payments under capital lease obligations . . . . . . . (213,773) (214,602)
------------ -----------
Net cash used in financing activities. . . . . . . . . . . . . . (203,637) (254,483)
------------ -----------
Net (decrease) increase in cash and cash equivalents . . . . . . (585,297) 757,522
Cash and cash equivalents at beginning of period . . . . . . . . 1,610,640 853,118
------------ -----------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 1,025,343 $ 1,610,640
------------ -----------
------------ -----------
Supplemental information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . $ 186,667 $ 218,085
Supplemental schedule of noncash investing activities
Equipment acquisitions through capital lease obligations. . $ -- $ 31,620
Stock issued as compensation. . . . . . . . . . . . . . . . 21,000 18,750
Stock issued for acquisition of distribution channels . . . 295,975 --
Stock issued for purchase of inventory. . . . . . . . . . . 7,252 --
</TABLE>
See accompanying notes.
F-8
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
In 1994 the Company incorporated a subsidiary in the Netherlands
(Staodyn B.V.) in anticipation of marketing products to the European
Community. The consolidated financial statements include the accounts of this
wholly-owned subsidiary.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
Short-term investments at November 30, 1996 represent investments in
commercial paper of approximately $1,324,000, whose amortized cost
approximates fair market value. These securities mature within six months or
less. Under Statement of Financial Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," these securities are
carried at amortized cost as the Company has both the ability and intent to
hold to maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, short-term investments, accounts receivable, payables and
accrued liabilities whose fair value approximates the carrying amount due to
the short maturities of these instruments.
INVENTORIES
Inventories are generally stated at the lower of first-in,
first-out (FIFO) cost or market.
INCOME TAXES
Deferred income taxes are provided for the difference between the
book and tax basis of assets and liabilities.
DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets. Property, plant, and equipment held
under capital leases are amortized on the straight-line method over the
shorter of the lease term or estimated useful lives of the assets. The
estimated useful lives of property, plant, and equipment for purposes of
computing depreciation are:
Buildings. . . . . . . . . . . . . . . 30 years
Leasehold improvements . . . . . . . . 5 to 15 years
Production and laboratory equipment. . 3 to 5 years
Office furniture and fixtures. . . . . 3 to 5 years
Data processing equipment. . . . . . . 3 to 5 years
Automotive equipment . . . . . . . . . 3 years
Depreciation expense totaled approximately $698,000 and $740,000
for the fiscal years ended November 30, 1996 and 1995, respectively.
F-9
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are amortized over the following estimated useful lives:
Product supply agreement . . . . . . 10 years
Goodwill . . . . . . . . . . . . . . 3 to 20 years
Noncompete agreement . . . . . . . . 5 years
RESEARCH AND DEVELOPMENT
The Company expenses all research and development costs as incurred.
EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of
common and common equivalent shares, including dilutive common stock options
and warrants outstanding during the year. Options and warrants outstanding
during the fiscal years ended November 30, 1996 and 1995 are not included in
the computation of weighted average shares outstanding as their inclusion
results in a dilution of less than three percent.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are due from a large number of
insurance carriers and individuals throughout the United States and from
approximately 600 active medical product dealers and distributors.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. The
more significant areas requiring the use of management estimates relate to
accounts receivable and inventory reserves, the estimated useful lives of
intangible assets, and the valuation allowance for deferred tax assets.
Actual results could differ from those estimates.
2. ASSET ACQUISITIONS
On November 15, 1992 the Company purchased substantially all of the
assets, excluding accounts receivable, of Technical Medical Devices, Inc.
(TMD), a wholly-owned medical products distribution subsidiary of Pharmacy
Management Services, Inc. (PMSI). In conjunction with the purchase, the
Company entered into a transition support agreement with PMSI whereby PMSI
agreed to provide operating facilities and support services subsequent to the
purchase. During fiscal 1996 and 1995, expenses totaling approximately
$42,250 and $136,500, respectively, were paid to PMSI for support services
under this agreement.
F-10
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
2. ASSET ACQUISITIONS (CONTINUED)
PMSI's ownership percentage is approximately 18% as of November 30, 1996.
The shareholder agreement granted PMSI demand registration rights after
June 30, 1994. PMSI was acquired by Beverly Enterprises in June 1995.
In connection with the purchase of two distribution channels during 1996,
the Company issued 264,357 shares of unissued, restricted common stock.
Approximately 71,000 shares are subject to a contingent guarantee which
provides that the number of shares issued may be adjusted as of August 12,
1998. Such shares will be increased proportionately should the value of
these shares fall below $87,500, or decreased proportionately if the value
exceeds $125,000.
3. INVENTORIES
Inventories at November 30, 1996 include the following components:
Raw materials . . . . . . . . . . . . $ 684,860
Work in process . . . . . . . . . . . 46,450
Finished goods. . . . . . . . . . . . 3,667,215
-----------
$ 4,398,525
-----------
-----------
4. LONG-TERM DEBT
Long-term debt at November 30, 1996 consists of the following:
Finance obligation, net. . . . . . . . $ 1,253,319
Capitalized lease obligations. . . . . 211,913
-----------
1,465,232
Less current portion . . . . . . . . . (207,086)
-----------
$ 1,258,146
-----------
-----------
FINANCE OBLIGATION--SALE AND LEASEBACK OF BUILDING
In July 1993 the Company completed a sale and leaseback transaction on
the owned portion of its facilities and related land in Longmont, Colorado.
The property was sold to a limited liability company (LLC) for $1,275,000 in
cash. The sale and leaseback transaction is accounted for as a financing; the
sales price (net of unamortized debt expenses) is reflected as a long-term
financing obligation and the operating lease payments as interest until the
earlier of the end of the lease term or the exercise of the purchase option
included in the lease. The building and related improvements are carried as
assets on the Company's books and depreciated. One of the officers of the
Company is a minority (16%) participant in the LLC.
The financing obligation will mature in July 2003.
Staodyn, Inc.
F-11
<PAGE>
Notes to Consolidated Financial Statements
November 30, 1996
4. LONG-TERM DEBT (CONTINUED)
CAPITALIZED LEASE OBLIGATIONS
The capitalized lease obligations relate to certain production, data
processing, and office equipment. Original cost and accumulated depreciation
of assets under capital leases at November 30, 1996 are:
Cost . . . . . . . . . . . . . . . . . $ 866,489
Less accumulated depreciation. . . . . (728,103)
---------
$ 138,386
---------
---------
Future minimum lease payments at November 30, 1996 for these leases are
as follows:
1997 . . . . . . . . . . . . . . . . . $ 222,373
1998 . . . . . . . . . . . . . . . . . 4,104
1999 . . . . . . . . . . . . . . . . . 1,390
---------
Total minimum lease payments . . . . . 227,867
Less amounts representing interest . . (15,954)
---------
Present value of lease payments. . . . 211,913
Less current portion . . . . . . . . . (207,086)
---------
$ 4,827
---------
---------
5. PROFIT SHARING PLAN
All full-time employees who have completed at least one year of service
are eligible to participate in the Company's 401(k) Plan. The Plan meets the
requirements of Section 401(k) of the Internal Revenue Code, and total
Company contributions are limited to 50% of the aggregate employee
contributions to the Plan, subject to a maximum amount of 3% of regular
compensation for each employee. The rules applicable to Section 401(k) may
also serve to further limit the Company's contributions to the Plan,
particularly with respect to highly compensated employees. Company expense
for contributions to the Plan was approximately $28,500 and $23,000 for
fiscal 1996 and 1995, respectively.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases land and a building in Longmont, Colorado, under two
operating leases expiring in July 2003. The leases call for payments totaling
$219,500 per year; the annual payments may be adjusted in fiscal 1998 based
upon the prime rate at the anniversary date of the leases. Each lease gives
the Company the option to purchase the respective property at any time after
the fifth year of the lease (July 1998); the purchase option prices vary
based upon the year exercised and range from 110% of an established price in
the fifth year to 120% in the tenth year (the established price is $1,275,000
for the portion which was sold and leased back; $720,000 for the second
lease). Total interest expense in fiscal 1996 and 1995 was $140,250 in each
year for the portion sold and leased back. Total rent expense was $79,200 for
the remaining portion in both fiscal 1996 and 1995.
F-12
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES (CONTINUED)
The Company subleased building space for its operation in Tampa,
Florida, from PMSI under an operating lease which expired in March 1996.
Total rent expense under this lease was $41,068 and $100,100 in fiscal 1996
and 1995, respectively. Additionally, the Company leased a separate
warehouse facility under an operating lease which expired in February 1996.
A portion of this facility was subleased to PMSI in September 1995 for
approximately $2,700 per month, or a total of $17,242 and $8,300 in 1996 and
1995, respectively. Rent expense under this lease, net of sublease income,
was $3,025 and $28,000 in fiscal 1996 and 1995, respectively.
The Company leased new office facilities for its operation in Tampa,
Florida, in May of 1996. This lease was amended to include additional office
space in January of 1997. The lease, which expires in April of 2001, calls
for total monthly payments of approximately $12,000. Total rent expense
under this lease was $60,713 for fiscal 1996.
The Company also leases various equipment under noncancelable operating
leases. Total rent expense under these leases was approximately $11,500 and
$23,000 in each of the years ended November 30, 1996 and 1995, respectively.
Future minimum lease payments for all noncancelable operating leases and
subleases having remaining terms in excess of one year as of November 30,
1996 are as follows:
1997 $ 356,967
1998 361,693
1999 366,623
2000 372,505
2001 284,412
Thereafter 356,606
----------
Total minimum lease obligations $2,098,806
==========
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company maintains the 1982 and 1992 Stock Option Plans (SOP) which
provide for the granting of incentive and nonincentive options to employees,
directors, and consultants of the Company. The Company's 1982 SOP expired on
May 31, 1992. The 1992 SOP permits options to be granted to purchase a
maximum of 400,000 shares of the Company's common stock. The term of the
options granted may not exceed 10 years.
F-13
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Stock option activity was as follows:
PRICE PER
SHARES SHARE
------- ---------
Outstanding at November 30, 1994 230,500 $1.81 - $5.25
Granted 88,000 1.25 - 2.50
Canceled (46,000) 1.41 - 4.38
-------
Outstanding at November 30, 1995 272,500 1.25 - 5.25
Granted 138,000 1.38 - 1.97
Canceled (4,001) 1.38 - 3.38
-------
Outstanding at November 30, 1996 406,499 $1.25 - $5.25
=======
At November 30, 1996:
Number of shares exercisable 189,841
Number of shares authorized and
available for future grant 49,001
STOCK PURCHASE PLAN
The 1983 Employee Qualified Stock Purchase Plan (the ESPP) permits
employees to purchase a maximum of 400,000 shares of the Company's common
stock. Eligible employees are offered the right to purchase shares
semiannually in June and December at a purchase price equal to 85% of the
lesser of the fair market value on either the first or the last business day
of the purchase period. Participants may contribute up to 10% of their
regular base pay toward the purchase of the shares. During the fiscal years
ended November 30, 1996 and 1995, 29,424 and 58,170 shares were purchased at
an average price of $1.26 and $1.14 per share, respectively. At November 30,
1996 there were 53,939 shares authorized and available for issuance under the
ESPP.
STOCK WARRANTS
In connection with the Company's November 1993 public offering,
underwriters were granted Unit Purchase Options entitling the underwriters to
purchase up to 130,000 units for $6.75 per unit. These options are currently
exercisable and expire in November 1998.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" was issued in 1995 with an effective date for
fiscal years beginning after December 15, 1995. The Company has elected that
upon adoption in fiscal year 1997, they will continue to measure compensation
cost
F-14
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and will make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting as defined in SFAS 123 had been applied.
8. INCOME TAXES
The Company has net operating loss carryforwards of approximately
$1,370,000 expiring from 2006 to 2010. The Company has general business tax
credit carryforwards of approximately $296,000 expiring from 1997 to 2005.
Utilization of net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
A valuation allowance is recorded against deferred tax assets to the
extent that management considers that it is unlikely whether such deferred
tax assets will be realized. Management has considered a variety of factors,
both positive and negative evidence, in reaching this conclusion, which is
based primarily on the cumulative operating loss over the last three years.
Significant components of the Company's deferred tax assets and liabilities
at November 30 are as follows:
1996 1995
----------- -----------
Deferred tax liabilities: $ - $ (9,259)
Property and equipment ----------- -----------
Deferred tax assets:
Sale and leaseback 311,091 309,870
Accounts receivable reserves and allowances 484,049 714,166
Inventory 245,753 331,806
Accrued liabilities 108,110 77,703
Contribution carryforwards 16,629 15,417
Property and equipment 59,817 -
Alternative minimum tax credits 5,729 5,729
General business tax credits 296,486 296,486
Net operating loss carryforwards 517,256 437,708
----------- -----------
Subtotal 2,044,920 2,188,885
Valuation allowance (2,044,920) (2,179,626)
----------- -----------
Total deferred tax assets - 9,259
----------- -----------
Net deferred tax assets (liability) $ - $ -
=========== ===========
F-15
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
8. INCOME TAXES (CONTINUED)
A reconciliation between the Company's actual income tax expense and
income taxes computed by applying the federal statutory rate of 34% is as
follows:
NOVEMBER 30 NOVEMBER 30
1996 1995
----------- -----------
Computed income tax expense at the
statutory rate $ 87,300 $ 69,200
Effect of net operating losses (130,700) (98,100)
Goodwill amortization 21,800 9,300
Nondeductible T & E 13,400 13,600
Effect of state income taxes 8,500 8,700
Other (300) (2,700)
--------- --------
$ - $ -
========= ========
9. RELATED PARTY TRANSACTIONS
The Company sells products to PMSI under the terms of the Product Supply
Agreement entered into in conjunction with the acquisition of TMD. Sales to
PMSI under this agreement totaled approximately $228,000 and $217,000 in the
years ended November 30, 1996 and 1995, respectively.
Additionally, the Company provided services related to the collection of
pre-acquisition accounts receivable for PMSI for which fees are received.
Total income under this agreement was approximately $13,000 and $17,500 for
the years ended November 30, 1996 and 1995, respectively.
F-16
<PAGE>
STAODYN, INC.
BALANCE SHEET
August 31 November 30
1997 1996
----------- -----------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 965,636 $ 1,025,343
Short-term investments 1,182,075 1,323,706
Accounts receivable, net 5,368,468 5,319,749
Inventories, net 4,636,568 4,398,525
Prepaid expenses and other assets 177,517 235,220
----------- -----------
Total current assets 12,330,264 12,302,543
Property, Plant and Equipment, Net 2,007,139 1,928,485
Other Assets
Patents and intangibles, net 687,543 873,457
Product supply agreement, net 472,500 540,000
Other 11,348 9,967
----------- -----------
$15,508,794 $15,654,452
=========== ===========
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 89,436 $ 207,086
Accounts payable 379,157 730,938
Accrued expenses and other liabilities 1,012,884 1,164,566
----------- -----------
Total current liabilities 1,481,477 2,102,590
Long-Term Debt 1,484,876 1,258,146
Commitments and Contingencies
Stockholders' Equity
Preferred stock - $0.01 par value; 1,000,000
shares authorized; none issued - -
Common stock - $0.01 par value; 10,000,000
shares authorized; 6,707,165 shares issued
in 1997 and 6,641,217 in 1996 67,072 66,412
Additional paid-in capital 15,537,718 15,468,439
Accumulated deficit (2,978,111) (3,241,135)
----------- -----------
12,626,679 12,293,716
Less treasury stock (at cost) - 60,000 shares (84,238) -
----------- -----------
12,542,441 12,293,716
----------- -----------
Total Liabilities and Stockholders' Equity $15,508,794 $15,654,452
=========== ===========
F-17
<PAGE>
STAODYN, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ --------------------------
August 31 August 31 August 31 August 31
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $5,278,192 $4,834,491 $15,699,741 $13,668,866
Cost of Sales 1,847,156 1,691,171 5,603,711 4,813,374
---------- ---------- ----------- -----------
Gross Profit 3,431,036 3,143,320 10,096,030 8,855,492
---------- ---------- ----------- -----------
Operating Expenses
Selling, general and
administrative 3,184,390 2,980,100 9,448,536 8,350,963
Research and development 119,232 96,661 343,817 350,898
---------- ---------- ----------- -----------
3,303,622 3,076,761 9,792,353 8,701,861
---------- ---------- ----------- -----------
Income (Loss) from Operations 127,414 66,559 303,677 153,631
Other Income (Expense), Net (13,993) (12,633) (40,653) (40,138)
---------- ---------- ----------- -----------
Income (Loss) Before
Income Taxes 113,421 53,926 263,024 113,493
Income Tax Expense (Benefit) - - - -
---------- ---------- ----------- -----------
Net Income (Loss) $ 113,421 $ 53,926 $ 263,024 $ 113,493
========== ========== =========== ===========
Income (Loss) Per Common Share $ .02 $ .01 $ .04 $ .02
========== ========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 6,642,434 6,519,882 6,644,587 6,412,685
========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
STAODYN, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
August 31 August 31
1997 1996
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 252,978 $ 153,420
----------- -----------
INVESTING ACTIVITIES
Payments for purchases of property, plant
and equipment (288,472) (225,752)
Payment for other assets (11,206) (30,297)
Proceeds from sale of equipment - 8,000
Purchases of short-term investments (1,166,289) (1,303,217)
Maturities of short-term investments 1,362,000 1,000,000
----------- -----------
Net cash used in investing
activities (103,967) (551,266)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 46,421 40,650
Principal payments under capital lease
obligations and long-term debt (170,901) (192,744)
Purchases of treasury stock (84,238) -
----------- -----------
Net cash used in financing
activities (208,718) (152,094)
----------- -----------
Net decrease in cash and cash equivalents (59,707) (549,940)
Cash and cash equivalents at beginning of period 1,025,343 1,610,640
----------- -----------
Cash and cash equivalents at end of period $ 965,636 $ 1,060,700
=========== ===========
Supplemental information:
Interest paid $ 121,179 $ 143,382
=========== ===========
Supplemental schedule of noncash investing
activities:
Equipment acquisitions through capital
lease obligations $ 277,527 $ -
Stock issued as compensation $ 23,518 $ 21,000
</TABLE>
See accompanying notes.
F-19
<PAGE>
STAODYN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended August 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
November 30, 1997. For further information, refer to the financial statements
and footnotes thereto included in the Registrant Company's annual report on
Form 10-KSB for the year ended November 30, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Income taxes are provided for the difference between the book and tax basis of
assets and liabilities.
EARNINGS PER SHARE
Earnings (loss) per common share is based on the weighted average number of
common and common equivalent shares, including dilutive common stock options
and warrants, outstanding during the period. Options and warrants outstanding
during the fiscal quarter ended August 31, 1997 are not included in the
computation of weighted shares outstanding as their inclusion results in
dilution of less than three percent. The Company has never declared or paid a
dividend to its shareholders.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. The more significant areas
requiring the use of management estimates relate to accounts receivable and
inventory reserves, the estimated useful lives of intangible assets, and the
valuation allowance for deferred tax assets. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, short-
term investments, accounts receivable, payables, and accrued liabilities whose
fair value approximates the carrying amount due to the short maturities of
these instruments.
F-20
<PAGE>
STAODYN, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVENTORIES
Inventories include the following components:
August 31 November 30
1997 1996
---------- -----------
Raw materials $ 755,925 $ 684,860
Work in process 68,953 46,450
Finished goods 3,811,690 3,667,215
---------- ----------
$4,636,568 $4,398,525
========== ==========
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 specifies revised computational guidelines, presentation and disclosure
requirements for earnings per share and supersedes Accounting Principal Board
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not permitted;
however, upon adoption, SFAS No. 128 requires restatement of all prior period
earnings per share information. The Company believes adoption of SFAS 128 will
not have a material impact on its reported earnings per share.
F-21
<PAGE>
REHABILICARE INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 19,253 $ 46,529
Receivables, less reserve for
uncollectible accounts of
$1,376,000 and $1,353,000 6,177,037 5,850,686
Inventories -
Raw materials 479,822 497,206
Finished goods 1,968,101 2,032,210
Deferred income tax benefit 575,000 575,000
Prepaid expenses 156,124 216,998
---------- ----------
Total current assets 9,375,337 9,218,629
PROPERTY AND EQUIPMENT 5,092,956 4,936,463
Less accumulated depreciation (2,669,340) (2,618,667)
---------- ----------
Total property and equipment 2,423,616 2,317,796
Intangible assets 28,129 28,129
Other assets 37,500 37,500
----------- -----------
$11,864,582 $11,602,054
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 645,000 $ 340,000
Current maturities of long-term debt 293,951 296,250
Accounts payable 327,586 472,674
Accrued liabilities -
Payroll 138,140 213,296
Commissions 176,717 185,015
Taxes 279,444 197,573
Other 48,879 52,693
----------- -----------
Total current liabilities 1,909,717 1,757,501
LONG-TERM DEBT 1,882,779 1,957,834
STOCKHOLDERS' EQUITY
Common stock 487,000 485,359
Additional paid-in capital 5,568,650 5,546,759
Less note receivable from
officer/stockholder (162,500) (162,500)
Retained earnings 2,178,936 2,017,101
Total stockholders' equity 8,072,086 7,886,719
----------- -----------
$11,864,582 $11,602,054
----------- -----------
----------- -----------
</TABLE>
F-22
<PAGE>
REHABILICARE INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-------------------------
1997 1996
---------- ----------
ASSETS
Net sales and rental revenue $2,929,902 $2,344,760
Cost of sales and rentals 758,028 616,910
---------- ----------
Gross profit 2,171,874 1,727,850
OPERATING EXPENSES:
Selling, general and administrative 1,757,134 1,307,167
Research and development 119,828 120,904
---------- ----------
Total Operating Expenses 1,876,962 1,428,071
Income from operations 294,912 299,779
OTHER INCOME (EXPENSE):
Interest expense (56,787) (71,860)
Other income 6,710 6,252
---------- ----------
Income before income taxes 244,835 234,171
PROVISION FOR INCOME TAXES 83,000 84,000
---------- ----------
Net income $ 161,835 $ 150,171
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.03 $ 0.03
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING 4,948,443 4,856,757
---------- ----------
---------- ----------
F-23
<PAGE>
REHABILICARE INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
------------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income $ 161,835 $ 150,171
Adjustments to reconcile net income to net cash
generated by or used in operating activities:
Depreciation 50,673 72,164
Changes in current assets and liabilities:
Receivables (326,351) (190,229)
Inventories 46,456 81,176
Prepaid expenses 60,874 (15,550)
Accounts payable (145,088) (155,801)
Accrued liabilities (5,397) (121,317)
--------- ---------
Net cash used in operating activities (156,997) (179,386)
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment, net (121,456) (18,040)
--------- ---------
FINANCING ACTIVITIES
Principal payments on long-term debt, net (77,355) (76,748)
Proceeds from (payments on) line of credit, net 305,000 265,000
Proceeds from exercise of stock options 11,874 3,062
Proceeds from purchases of stock by employees 11,658 --
--------- ---------
Net cash provided by financing activities 251,177 191,314
--------- ---------
Net decrease in cash (27,276) (6,112)
CASH AT BEGINNING OF PERIOD 46,529 32,553
--------- ---------
CASH AT END OF PERIOD $ 19,253 $ 26,441
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 56,787 $ 71,860
--------- ---------
--------- ---------
Income taxes $ 170 $ 187,900
--------- ---------
--------- ---------
F-24
<PAGE>
REHABILICARE INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Note A
The amounts set forth in the preceding financial statements are unaudited
as of and for the periods ended September 30, 1997 and 1996, but in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair statement of the results for the
periods presented. Such results are not necessarily indicative of results
for the full year. The significant accounting policies and certain financial
information which are normally included in financial statements prepared in
accordance with generally accepted accounting principles, but which are not
required for interim reporting purposes, have been omitted. The accompanying
financial statements of the Company should be read in conjunction with the
financial statements and related notes included in the Company's Annual
Report on Form 10-KSB.
F-25
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma financial statements give effect to the
merger of Rehabilicare and Staodyn to be accounted for as a pooling of
interests. The unaudited pro forma condensed balance sheet presents the
combined financial position of Rehabilicare and Staodyn as of September 30,
1997 and is based upon the historical balance sheet of Rehabilicare as of
September 30, 1997 and of Staodyn as of August 31, 1997. The unaudited pro
forma condensed statements of income give effect to the proposed merger of
Rehabilicare and Staodyn by combining the results of operations of
Rehabilicare for the three months ended September 30, 1997 and 1996 and for
the three years ended June 30, 1997 with the results of operations of Staodyn
for the three months ended August 31, 1997 and 1996, for the year ended
August 31, 1997 and for the two years ended November 30, 1996, respectively,
on a pooling of interests basis. The operations of Staodyn for the three
months ended November 30, 1996, resulting in sales of $5.3 million and net
income of $89,000, have been included in the pro forma statement of income
for the years ended June 30, 1997 and 1996. These unaudited pro forma
financial statements should be read in conjunction with the historical
financial statements and notes thereto of Rehabilicare and Staodyn.
The unaudited pro forma information should be read in conjunction with the
consolidated historical financial statements of Rehabilicare and Staodyn,
including the respective notes thereto, which are incorporated by reference
or included in this Joint Proxy Statement--Prospectus. The Unaudited Pro
Forma Condensed Combined Financial Information presented is not necessarily
indicative of the combined financial position or results of operations of the
combined entity of the actual financial position or results that would have
been achieved had the Merger been consummated for the periods indicated.
INDEX
PAGE
----
Unaudited Pro Forma Condensed Combined Balance Sheet at
September 30, 1997..................................................... F-27
Unaudited Pro Forma Condensed Combined Statement of Income:
Three months ended September 30, 1997................................ F-28
Three months ended September 30, 1996................................ F-29
Year ended June 30, 1997............................................. F-30
Year ended June 30, 1996............................................. F-31
Year ended June 30, 1995............................................. F-32
Notes to Unaudited Pro Forma Condensed Combined Financial
Information........................................................ F-33
F-26
<PAGE>
MERGER OF REHABILICARE AND STAODYN
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REHABILICARE STAODYN ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 19,253 $ 965,636 $ $ 984,889
Short-term investments 1,182,075 1,182,075
Receivables, net 6,177,037 5,368,468 11,545,505
Inventories 2,447,923 4,636,568 7,084,491
Deferred income tax benefit 575,000 -- 575,000
Prepaid expenses 156,124 177,517 333,641
----------- ----------- --------- -----------
Total current assets 9,375,337 12,330,264 -- 21,705,601
Property and equipment, net 2,423,616 2,007,139 4,430,755
Intangible assets 28,129 1,160,043 1,188,172
Other assets 37,500 11,348 48,848
----------- ----------- --------- -----------
$11,864,582 $15,508,794 $ -- $27,373,376
----------- ----------- --------- -----------
----------- ----------- --------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable $ 645,000 $ $ $ 645,000
Current maturities of long-term debt 293,951 89,436 383,387
Accounts payable 327,586 379,157 706,743
Accrued liabilities 643,180 1,012,884 1,656,064
----------- ----------- --------- -----------
Total current liabilities 1,909,717 1,481,477 -- 3,391,194
Long-term debt 1,882,779 1,484,876 3,367,655
Commitments and contingencies
Stockholders' equity:
Common stock 487,000 67,072 488,952 (1) 1,043,024
Additional paid-in capital 5,568,650 15,537,718 (573,190)(1) 20,533,178
Less note receivable from
officer/stockholder (162,500) -- (162,500)
Retained earnings 2,178,936 (2,978,111) (799,175)
Less treasury stock (at cost) (84,238) 84,238 (1)
----------- ----------- --------- -----------
Total stockholders' equity 8,072,086 12,542,441 -- 20,614,527
----------- ----------- --------- -----------
$11,864,582 $15,508,794 $ -- $27,373,376
----------- ----------- --------- -----------
----------- ----------- --------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-27
<PAGE>
MERGER OF REHABILICARE AND STAODYN
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REHABILICARE STAODYN ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and rental revenue $2,929,902 $5,278,192 $ $ 8,208,094
Cost of sales 758,028 1,847,156 2,605,184
---------- ---------- ------- -----------
Gross profit 2,171,874 3,431,036 5,602,910
Operating expenses:
Selling, general and administration 1,757,134 3,184,390 4,941,524
Research and development 119,828 119,232 239,060
---------- ---------- ------- -----------
Total operating expenses 1,876,962 3,303,622 5,180,584
Income from operations 294,912 127,414 422,326
Other income (expense):
Interest income (expense) (56,787) (15,935) (72,722)
Other income (expense) 6,710 1,942 8,652
---------- ---------- ------- -----------
(50,077) (13,993) (64,070)
Income before taxes 244,835 113,421 358,256
Provision for income taxes 83,000 -- 43,100(2) 126,100
---------- ---------- ------- -----------
Net income $ 161,835 $ 113,421 $43,100 $ 232,156
---------- ---------- ------- -----------
---------- ---------- ------- -----------
Earnings per share data:
Net income per share $ 0.03 $ 0.02 $ 0.02
---------- ---------- -----------
---------- ---------- -----------
Weighted average common and
common equivalent shares
outstanding 4,948,443 6,642,434 10,445,021(3)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-28
<PAGE>
MERGER OF REHABILICARE AND STAODYN
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REHABILICARE STAODYN ADJUSTMENTS COMBINED
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and rental revenue $2,344,760 $4,834,491 $ $ 7,179,251
Cost of sales 616,910 1,691,171 2,308,081
---------- ---------- -------- -----------
Gross profit 1,727,850 3,143,320 4,871,170
Operating expenses:
Selling, general and administration 1,307,167 2,980,100 4,287,267
Research and development 120,904 96,661 217,565
---------- ---------- -------- -----------
Total operating expenses 1,428,071 3,076,761 4,504,832
Income from operations 299,779 66,559 366,338
Other income (expense):
Interest income (expense) (71,860) (16,928) (88,788)
Other income (expense) 6,252 4,295 10,547
---------- ---------- -------- -----------
(65,608) (12,633) (78,241)
Income before taxes 234,171 53,926 288,097
Provision for income taxes 84,000 -- 20,492(2) 104,492
---------- ---------- -------- -----------
Net income $ 150,171 $ 53,926 $ 20,492 $ 183,605
---------- ---------- -------- -----------
---------- ---------- -------- -----------
Earnings per share data:
Net income per share $ 0.03 $ 0.01 $ 0.02
---------- ---------- -------- -----------
---------- ---------- -------- -----------
Weighted average common and
common equivalent shares
outstanding 4,856,757 6,519,882 10,261,739(3)
---------- ---------- -------- -----------
---------- ---------- -------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-29
<PAGE>
MERGER OF REHABILICARE AND STAODYN
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REHABILICARE STAODYN ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and rental revenue $10,991,105 $20,974,394 $ $31,965,499
Cost of sales 2,759,633 7,422,408 10,182,041
----------- ----------- -------- -----------
Gross profit 8,231,472 13,551,986 21,783,458
Operating expenses:
Selling, general and administration 6,682,899 12,651,512 19,334,411
Research and development 527,845 438,733 966,578
----------- ----------- -------- -----------
Total operating expenses 7,210,744 13,090,245 20,300,989
Income from operations 1,020,728 461,741 1,482,469
Other income (expense):
Interest income(expense) (249,233) (65,192) (314,425)
Other income (expense), net 57,247 9,797 67,044
----------- ----------- -------- -----------
(191,986) (55,395) (247,381)
Income before taxes 828,742 406,346 1,235,088
Provision for income taxes 265,000 -- 154,411(2) 419,411
----------- ----------- -------- -----------
Net income $ 563,742 $ 406,346 $154,411 $ 815,677
----------- ----------- -------- -----------
----------- ----------- -------- -----------
Earnings per share data:
Net income per share $ 0.12 $ 0.06 $ 0.08
----------- ----------- -------- -----------
----------- ----------- -------- -----------
Weighted average common and
common equivalent shares
outstanding 4,886,714 6,643,695 10,394,337(3)
----------- ----------- -------- -----------
----------- ----------- -------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-30
<PAGE>
MERGER OF REHABILICARE AND STAODYN
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REHABILICARE STAODYN ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and rental revenue $8,703,418 $18,943,519 $ $27,646,937
Cost of sales 2,333,704 6,632,071 8,965,775
---------- ----------- ------- -----------
Gross profit 6,369,714 12,311,448 18,681,162
Operating expenses:
Selling, general and administration 5,209,753 11,553,939 16,763,692
Research and development 495,398 445,814 941,212
---------- ----------- ------- -----------
Total operating expenses 5,705,151 11,999,753 17,704,904
Income from operations 664,563 311,695 976,258
Other income (expense):
Interest income (expense) (231,632) (65,192) (296,824)
Other income (expense) 14,332 10,312 24,644
---------- ----------- ------- -----------
(217,300) (54,880) (272,180)
Income before taxes 447,263 256,815 704,078
Provision for income taxes 165,000 97,590(2) 262,590
---------- ----------- ------- -----------
Net income $ 282,263 $ 256,815 $97,590 $ 441,488
---------- ----------- ------- -----------
---------- ----------- ------- -----------
Earnings per share data:
Net income per share $ 0.06 $ 0.04 $ 0.04
---------- ----------- ------- -----------
---------- ----------- ------- -----------
Weighted average common and
common equivalent shares
outstanding 4,868,633 6,469,618 10,231,946(3)
---------- ----------- ------- -----------
---------- ----------- ------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-31
<PAGE>
MERGER OF REHABILICARE AND STAODYN
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
REHABILICARE STAODYN ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and rental revenue $9,249,029 $18,371,001 $ $27,620,030
Cost of sales 2,783,433 6,573,697 9,357,130
---------- ----------- ------ -----------
Gross profit 6,465,596 11,797,304 18,262,900
Operating expenses:
Selling, general and administration 5,089,276 11,083,684 16,172,960
Research and development 422,789 436,943 859,732
---------- ----------- ------ -----------
Total operating expenses 5,512,065 11,520,627 17,032,692
Income from operations 953,531 276,677 1,230,208
Other income (expense):
Interest income (expense) (80,645) (120,483) (201,128)
Other income (expense) (4,774) 47,462 42,688
---------- ----------- ------ -----------
(85,419) (73,021) (158,440)
Income before taxes 868,112 203,656 1,071,768
Provision for income taxes 228,000 77,389(2) 305,389
---------- ----------- ------ -----------
Net income $ 640,112 $ 203,656 $77,389 $ 766,379
---------- ----------- ------ -----------
---------- ----------- ------ -----------
Earnings per share data:
Net income per share $ 0.14 $ 0.03 $ 0.08
---------- ----------- -----------
---------- ----------- -----------
Weighted average common and
common equivalent shares
outstanding 4,685,733 6,286,260 9,897,043(3)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
F-32
<PAGE>
MERGER OF REHABILICARE AND STAODYN
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. Adjustment to reflect the issuance of 5,560,240 shares of
Rehabilicare Common Stock in exchange for all of the outstanding shares of
Staodyn at an exchange ratio of 0.829 of a share of Rehabilicare Common
Stock for each share of Staodyn Common Stock.
NOTE 2. Adjustment to calculate the provision for income taxes for
Staodyn at an effective statutory rate of 38%, as if the companies had been
combined for all periods presented.
NOTE 3. Adjusted to reflect the conversion of Staodyn weighted average
common and common equivalent shares outstanding to 0.829 share of
Rehabilicare Common Stock.
F-33
<PAGE>
APPENDIX A
______________________________________________________
AGREEMENT AND PLAN OF MERGER
Among
REHABILICARE INC.,
HIPPOCRATES ACQUISITION, INC.
And
STAODYN, INC.
Dated: December 1, 1997
______________________________________________________
<PAGE>
INDEX
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER ......................................................................... A-1
SECTION 1.1 The Merger ................................................................. A-1
SECTION 1.2 Certificate of Merger; Effective Time ...................................... A-1
SECTION 1.3 Effect of Merger ........................................................... A-1
SECTION 1.4 Closing .................................................................... A-2
SECTION 1.5 Certificate of Incorporation; Bylaws ....................................... A-2
SECTION 1.6 Directors and Officers ..................................................... A-2
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES ......................... A-2
SECTION 2.1 Conversion of Securities ................................................... A-2
SECTION 2.2 Dissenting Shares .......................................................... A-2
SECTION 2.3 Rights of Holders of Company Common Stock .................................. A-3
SECTION 2.4 Adjustments to Exchange Ratio .............................................. A-3
SECTION 2.5 Exchange of Certificates ................................................... A-3
SECTION 2.6 Stock Options .............................................................. A-5
SECTION 2.7 Warrants ................................................................... A-6
SECTION 2.8 Notices to Option and Warrant Holders ...................................... A-6
ARTICLE III REPRESENTATIONS AND WARRANTIESOF THE COMPANY ............................... A-7
SECTION 3.1 Corporate Existence and Power .............................................. A-7
SECTION 3.2 Subsidiaries ............................................................... A-7
SECTION 3.3 Corporate Authorization .................................................... A-7
SECTION 3.4 Governmental Authorization ................................................. A-8
SECTION 3.5 Non-Contravention .......................................................... A-8
SECTION 3.6 Capitalization ............................................................. A-8
SECTION 3.7 SEC Documents .............................................................. A-9
SECTION 3.8 Absence of Certain Changes or Events ....................................... A-9
SECTION 3.9 Litigation ................................................................ A-10
SECTION 3.10 Taxes ..................................................................... A-10
SECTION 3.11 Intellectual Property Rights .............................................. A-11
SECTION 3.12 Labor Matters ............................................................. A-12
SECTION 3.13 Employee Benefit Plans .................................................... A-12
SECTION 3.14 Compliance with Laws ...................................................... A-13
SECTION 3.15 Brokers ................................................................... A-13
SECTION 3.16 Opinion of Financial Advisor .............................................. A-13
SECTION 3.17 Accounting Matters ........................................................ A-13
SECTION 3.18 Tax Matters ............................................................... A-13
SECTION 3.19 Certain Business Matters .................................................. A-13
SECTION 3.20 Certain Contract Matters .................................................. A-13
SECTION 3.21 Accounts Receivable ....................................................... A-15
SECTION 3.22 Inventory ................................................................. A-15
SECTION 3.23 Environmental Matters ..................................................... A-15
SECTION 3.24 Disclosure ................................................................ A-17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB .......................... A-17
SECTION 4.1 Corporate Existence and Power ............................................. A-17
SECTION 4.2 Subsidiaries .............................................................. A-17
SECTION 4.3 Corporate Authorization ................................................... A-17
SECTION 4.4 Governmental Authorization ................................................ A-18
SECTION 4.5 Non-Contravention ......................................................... A-18
SECTION 4.6 Capitalization ............................................................ A-18
SECTION 4.7 SEC Documents ............................................................. A-19
SECTION 4.8 Absence of Certain Changes or Events ...................................... A-19
SECTION 4.9 Litigation ................................................................ A-20
SECTION 4.10 Taxes ..................................................................... A-20
SECTION 4.11 Intellectual Property Rights .............................................. A-21
</TABLE>
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<TABLE>
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SECTION 4.12 Labor Matters ............................................................. A-22
SECTION 4.13 Employee Benefit Plans .................................................... A-22
SECTION 4.14 Compliance with Laws ...................................................... A-23
SECTION 4.15 Brokers ................................................................... A-23
SECTION 4.16 Opinion of Financial Advisor .............................................. A-23
SECTION 4.17 Accounting Matters ........................................................ A-23
SECTION 4.18 Tax Matters ............................................................... A-24
SECTION 4.19 Certain Business Matters .................................................. A-24
SECTION 4.20 Certain Contract Matters .................................................. A-24
SECTION 4.21 Accounts Receivable ....................................................... A-24
SECTION 4.22 Inventory ................................................................. A-24
SECTION 4.23 Environmental Matters ..................................................... A-25
SECTION 4.24 Disclosure ................................................................ A-25
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS ................................. A-26
SECTION 5.1 Conduct of Business by the Company ........................................ A-26
SECTION 5.2 Conduct of Business by Parent ............................................. A-28
SECTION 5.3 No Solicitation of Transactions ........................................... A-28
ARTICLE VI ADDITIONAL AGREEMENTS ..................................................... A-29
SECTION 6.1 Stockholders Approval ..................................................... A-29
SECTION 6.2 Preparation of Form S-4 and the Proxy Statement; Stockholders' Meeting .... A-29
SECTION 6.3 Information Supplied by the Company ....................................... A-30
SECTION 6.4 Information Supplied by Parent ............................................ A-30
SECTION 6.5 Letters of the Company's Accountants ...................................... A-30
SECTION 6.6 Letters of Parent's Accountants ........................................... A-31
SECTION 6.7 Access to Information ..................................................... A-31
SECTION 6.8 Confidentiality ........................................................... A-31
SECTION 6.9 Public Announcements ...................................................... A-31
SECTION 6.10 Appropriate Action; Consents; Filings ..................................... A-31
SECTION 6.11 Directors' and Officers' Indemnification and Insurance ................... A-32
SECTION 6.12 Obligations of Sub ........................................................ A-33
SECTION 6.13 Pooling Affiliates ........................................................ A-33
SECTION 6.14 Nasdaq Listing ............................................................ A-34
SECTION 6.15 Employee Benefits ......................................................... A-34
SECTION 6.16 Longmont Facility ......................................................... A-35
SECTION 6.17 Preparation of Tax Returns ................................................ A-35
ARTICLE VII CONDITIONS TO THE MERGER .................................................. A-35
SECTION 7.1 Conditions of Each Party's Obligation to Effect the Merger ................ A-35
SECTION 7.2 Conditions of Obligations of Parent and Sub ............................... A-36
SECTION 7.3 Conditions of Obligation of the Company ................................... A-37
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER ......................................... A-37
SECTION 8.1 Termination ............................................................... A-37
SECTION 8.2 Effect of Termination ..................................................... A-38
SECTION 8.3 Remedies and Dispute Resolution ........................................... A-38
ARTICLE IX GENERAL PROVISIONS ........................................................ A-40
SECTION 9.1 Nonsurvival of Representations and Warranties ............................. A-40
SECTION 9.2 Notices ................................................................... A-40
SECTION 9.3 Definitions ............................................................... A-40
SECTION 9.4 Amendment ................................................................. A-42
SECTION 9.5 Waiver .................................................................... A-42
SECTION 9.6 Entire Agreement .......................................................... A-42
SECTION 9.7 Severability .............................................................. A-42
SECTION 9.8 Successors and Assigns .................................................... A-43
SECTION 9.9 Parties in Interest ....................................................... A-43
SECTION 9.10 Governing Law ............................................................. A-43
SECTION 9.11 Counterparts; Effectiveness ............................................... A-43
</TABLE>
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<TABLE>
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EXHIBIT A--Form of Company Affiliate Letter ................................................. A-1
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated December 1, 1997, ("Agreement
Date") by and among REHABILICARE INC., a Minnesota corporation ("Parent"),
HIPPOCRATES ACQUISITION, INC., a Delaware corporation and wholly owned
subsidiary of Parent ("Sub"), and STAODYN, INC., a Delaware corporation (the
"Company").
WHEREAS, the respective boards of directors of the Company, Parent and
Sub have determined that it is in the best interests of Company, Parent and
Sub and their respective shareholders or stockholders, as appropriate, to
consummate the merger of Sub and the Company (the "Merger") upon the terms
and subject to the conditions of this Agreement;
WHEREAS, as a result of the Merger, all of the outstanding common stock,
$.01 par value, of the Company ("Company Common Stock"), will be converted into
the right to receive common stock, $.10 par value, of Parent ("Parent Common
Stock");
WHEREAS Parent, Sub, and the Company desire to make certain
representations, warranties, covenants, and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall
be accounted for as a "pooling of interests".
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, and agreements, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time, Sub shall be merged with
and into the Company in accordance with the General Corporation Law of the
State of Delaware ("Delaware Law"), whereupon the separate existence of Sub
shall cease, and the Company shall continue as the surviving corporation (the
"Surviving Corporation").
SECTION 1.2 CERTIFICATE OF MERGER; EFFECTIVE TIME. As soon as
practicable after satisfaction or, to the extent permitted hereunder, waiver
of all conditions to the Merger set forth in Article VII, the parties shall
cause the Merger to be consummated by filing a certificate of merger (the
"Certificate of Merger") with the Secretary of State of the State of Delaware
and make all other filings or recordings required by Delaware Law in
connection with the Merger and the transactions contemplated by this
Agreement. The Merger shall become effective at such time as the Certificate
of Merger is duly filed with the Secretary of State of the State of Delaware
or at such later time as may be agreed by the parties in writing and
specified in the Certificate of Merger (the "Effective Time").
SECTION 1.3 EFFECT OF MERGER. From and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, powers, and
franchises and be subject to all of the restrictions, disabilities, and duties
of the Company and Sub, all as provided under Delaware Law.
SECTION 1.4 CLOSING. The closing of the Merger (the "Closing") will
take place at 10:00 a.m. on a date to be specified by the parties, which shall
be no later than the second business day after satisfaction or waiver of the
conditions set forth in Article VII (the "Closing Date"), at a time and place
and by a method as mutually agreed to by the parties.
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SECTION 1.5 CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective
Time, the certificate of incorporation and bylaws of the Company, as in
effect immediately prior to the Effective Time, shall be the certificate of
incorporation and bylaws of the Surviving Corporation.
SECTION 1.6 DIRECTORS AND OFFICERS. The officers of Sub immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation. The initial directors of the Surviving Corporation shall be
Fred Ayers, Bayne Gibson, David Kaysen, John Maley, Richard Jahnke and Robert
Wingrove.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.1 CONVERSION OF SECURITIES. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Company Common Stock or any shares of capital stock of Sub:
(a) each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than (i) any shares to be
canceled pursuant to Section 2.1(b) and (ii) any Dissenting Shares, as
defined in Section 2.2 hereof shall be converted, subject to Section 2.5(e),
into the right to receive 0.829 shares (the "Exchange Ratio") of Parent
Common Stock (such shares of Parent Common Stock being hereinafter referred
to as the "Merger Consideration");
(b) each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time and owned by Parent, Sub or the Company
or any direct or indirect subsidiary of Parent, Sub or the Company shall be
canceled and extinguished without any conversion thereof and no payment shall
be made with respect thereto; and
(c) each share of common stock, $.01 par value per share, of Sub ("Sub
Common Stock") issued and outstanding immediately prior to the Effective Time
shall be converted into one validly issued, fully paid and nonassessable share
of Common Stock of the Surviving Corporation.
SECTION 2.2 DISSENTING SHARES.
(a) Notwithstanding anything in this Agreement to the contrary, if
Section 262 of the Delaware Law shall be applicable to the Merger, shares of
Company Common Stock that are issued and outstanding immediately prior to the
Effective Time and which are held by shareholders who have not voted such
shares in favor of the Merger, who shall have delivered, prior to any vote on
the Merger, a written demand for the appraisal of such shares in the manner
provided in Section 262 of the Delaware Law and who, as of the Effective
Time, shall not have effectively withdrawn or lost such right to dissenters'
rights ("Dissenting Shares") shall not be converted into or represent a right
to receive the Merger Consideration pursuant to Section 2.1 hereof, but the
holders thereof shall be entitled only to such rights as are granted by
Section 262 of the Delaware Law. Each holder of Dissenting Shares who
becomes entitled to payment for such shares pursuant to Section 262 of the
Delaware Law shall receive payment therefor from the Surviving Corporation in
accordance with the Delaware Law; provided, however, that if any such holder
of Dissenting Shares shall have effectively withdrawn such holder's demand
for appraisal of such shares or lost such holder's right to appraisal and
payment of such shares under Section 262 of the Delaware Law, such holder or
holders (as the case may be) shall forfeit the right to appraisal of such
shares and each such share shall thereupon be deemed to have been canceled,
extinguished and converted, as of the Effective Time, into and represent the
right to receive payment from the Surviving Corporation of the Merger
Consideration, as provided in Section 2.1 hereof.
(b) The Company shall give Parent (i) prompt notice of any written
demand for fair value, any withdrawal of a demand for fair value and any other
instrument served pursuant to Section 262 of the Delaware Law received by the
Company, and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for fair value under such Section 262 of the Delaware
Law. The Company shall not, except with the prior written consent of Parent,
voluntarily make any payment with respect to any demand for fair value or offer
to settle or settle any such demand.
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SECTION 2.3 RIGHTS OF HOLDERS OF COMPANY COMMON STOCK. On and after
the Effective Time and until surrendered for exchange, each outstanding stock
certificate which immediately prior to the Effective Time represented shares
of Company Common Stock (other than Dissenting Shares) shall be deemed for
all purposes, except as provided in Section 2.5(e), to evidence ownership of
and to represent the right to receive the number of whole shares of Parent
Common Stock into which such shares of Company Common Stock shall have been
converted. The record holder of such outstanding certificate shall, after the
Effective Time, be entitled to vote the shares of Parent Common Stock into
which such shares of Company Common Stock shall have been converted on any
matters on which the holders of record of Parent Common Stock, as of any date
subsequent to the Effective Time, shall be entitled to vote. In any matters
relating to such certificates, Parent may rely conclusively upon the record
of stockholders maintained by the Company containing the names and addresses
of the holders of record of Company Common Stock at the Effective Time.
SECTION 2.4 ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio set
forth in Section 2.1 shall be adjusted to reflect fully the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Company Common Stock or Parent
Common Stock), reorganization, recapitalization or other like change with
respect to Company Common Stock or Parent Common Stock occurring after the
Agreement Date and prior to the Effective Time.
SECTION 2.5 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, Parent shall deposit
with Norwest Bank Minnesota, National Association or such other bank or trust
company as may be designated by Parent and as is reasonably acceptable to the
Company (the "Exchange Agent") certificates representing the shares of Parent
Common Stock issuable pursuant to Section 2.1 (such shares of Parent Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall hold
the Exchange Fund for the benefit of holders of shares of Company Common Stock.
The Exchange Agent shall distribute the Exchange Fund pursuant to Section 2.1
in exchange for outstanding shares of Company Common Stock (other than
Dissenting Shares). Except as contemplated by Section 2.5(f), the Exchange
Fund shall not be used for any other purpose. Parent shall make available to
the Exchange Agent from time to time as needed, cash sufficient to pay cash in
lieu of fractional shares pursuant to Section 2.5(e).
(b) EXCHANGE PROCEDURES. As promptly as practicable after the
Effective Time, Parent shall cause the Exchange Agent to mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock (the
"Certificates") whose shares were converted into the right to receive shares
of Parent Common Stock pursuant to Section 2.1(a) a letter of transmittal in
customary form. The letter of transmittal shall specify that delivery of
Certificates shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent. The Exchange Agent shall accompany the letter of transmittal
with instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together
with such letter of transmittal, duly executed, and such other documents as
the Exchange Agent may reasonably require, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of Parent Common Stock (rounded down to the
nearest whole share) which such holder has the right to receive pursuant to
the provisions of this Article II (after taking into account all the shares
of Company Common Stock then held by such holder under all such Certificates
so surrendered), cash in lieu of fractional shares of Parent Common Stock to
which such holder is entitled pursuant to Section 2.5(e), and any dividends
or other distributions to which such holder is entitled pursuant to Section
2.5(c). The Exchange Agent shall forthwith cancel the Certificates so
surrendered. If there is a transfer of Share ownership which is not
registered in the transfer records of the Company, a certificate representing
the proper number of shares of Parent Common Stock may be issued to a person
other than the person in whose name the Certificate so surrendered is
registered, if, upon presentation to the Exchange Agent, such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and
the person requesting such payment shall pay any transfer or other taxes
required by reason of the issuance of shares of Parent Common Stock to a
person other than the registered holder of such Certificate or establish to
the reasonable satisfaction of Parent that such tax has been paid or is not
applicable. Except as provided in Section 2.3, until surrendered as
contemplated by this Section 2.5(b), each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon
such surrender the Certificate representing shares of Parent Common Stock,
cash in lieu of any
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<PAGE>
fractional shares of Parent Common Stock as contemplated by this Section 2.5,
and any dividends or other distributions to which such holder is entitled
pursuant to Section 2.5(c). No interest will be paid or will accrue on any
cash payable pursuant to Sections 2.5(c) or 2.5(e).
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. Parent will
pay no dividends and make no other distributions with respect to Parent
Common Stock with a record date after the Effective Time to the holder of any
unsurrendered Certificate with respect to the shares of Parent Common Stock
represented thereby, and Parent will make no cash payment in lieu of
fractional shares to any such holder pursuant to Section 2.5(e) until the
holder of record of such Certificate surrenders such Certificate. Following
surrender of any such Certificate, the Exchange Agent, on behalf of Parent,
shall pay to the record holder of the Certificate representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 2.5(e) and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such whole shares of Parent Common Stock and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to such surrender and a payment date subsequent
to such surrender payable with respect to such whole shares of Parent Common
Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares
of Parent Common Stock issued upon the surrender for exchange of shares of
Company Common Stock in accordance with the terms hereof (including any cash
paid pursuant to Section 2.5(c) or 2.5(e)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock.
(e) NO FRACTIONAL SHARES.
(i) No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share
interests will not entitle the owner thereof to vote or to any rights
of a shareholder of Parent.
(ii) Notwithstanding any other provision of this Agreement,
each holder of shares of Company Common Stock exchanged for shares of
Parent Common Stock pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Parent Common Stock
(after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Parent Common Stock
multiplied by the closing price of Parent Common Stock on the Closing
Date.
(f) TERMINATION OF EXCHANGE FUND. The Exchange Agent shall
deliver any portion of the Exchange Fund that remains undistributed to the
holders of the Certificates for two years after the Effective Time to
Parent, upon demand. Any holders of the Certificates who have not
theretofore complied with this Article II shall thereafter look only to
Parent for payment of their claim for Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock, and any dividends or
distributions with respect to Parent Common Stock.
(g) NO LIABILITY. None of Parent, Sub, the Company or the
Exchange Agent shall be liable to any person in respect of any shares of
Parent Common Stock (or dividends or distributions with respect thereto)
or cash in the Exchange Fund delivered to a public official pursuant to
any applicable abandoned property, escheat, or similar law.
(h) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall
invest any cash included in the Exchange Fund in deposit accounts, as
directed by Parent, on a daily basis. The Exchange Agent shall pay any
interest and other income resulting from such investments to Parent.
(i) LOST CERTIFICATES. If any Certificate shall have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen, or destroyed, and, if
required by the Surviving Corporation, upon the delivery to the Exchange
Agent of a bond in such sum as the Surviving Corporation may direct as
indemnity against any claim that may be
A-4
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made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen, or destroyed Certificate the
shares of Parent Common Stock and any cash in lieu of fractional
shares, and unpaid dividends and distributions on shares of Parent
Common Stock deliverable in respect thereof, pursuant to this Agreement.
(j) If the holder of any shares of Company Common Stock shall
become entitled to receive payment for such shares pursuant to Section 262
of the Delaware Law and Section 2.2 hereof, such payment shall be made by
the Surviving Corporation in accordance with Section 2.2 hereof.
SECTION 2.6 STOCK OPTIONS.
(a) Each option to purchase shares of Company Common Stock (a
"Company Option") under the Company's 1982 Stock Option Plan, as amended
and under the Company's 1992 Stock Option Plan, as amended, outstanding
immediately prior to the Effective Time shall remain outstanding following
the Effective Time.
(b) At the Effective Time, Parent shall assume each Company
Option by virtue of the Merger and without any further action on the part
of the Company or the holders thereof. Parent shall assume each such
option in such manner that Parent (i) is a corporation "assuming a stock
option in a transaction to which Section 424(a) applies" within the
meaning of Section 424 of the Code or (ii) to the extent that Section 424
of the Code does not apply to any such Company Option, would be such a
corporation were Section 424 of the Code applicable to such Company
Option.
(c) From and after the Effective Time, all references to the
Company in the Company Options and the related stock option agreements
shall be deemed to refer to Parent. After the Effective Time, each
Company Option assumed by Parent shall be exercisable upon the same terms
and conditions as were in effect under the Company Options and the related
option agreements immediately prior to the Effective Time, except that (i)
each Company Option shall be exercisable for that whole number of shares
of Parent Common Stock (rounded down to the nearest whole share) equal to
the number of shares of Company Common Stock subject to such Company
Option immediately prior to the Effective Time multiplied by the Exchange
Ratio, and (ii) the option price per share of Parent Common Stock shall be
an amount equal to the option price per share of Company Common stock
subject to such Company Option in effect immediately prior to the
Effective Time divided by the Exchange Ratio (the option price per share,
as so determined, being rounded upward to the nearest full cent).
SECTION 2.7 WARRANTS.
(a) Each outstanding warrant to purchase shares of Company
Common Stock (a "Company Warrant") outstanding immediately prior to the
Effective Time shall remain outstanding following the Effective Time. To
the extent permitted by the terms of the Company Warrants, at the
Effective Time, Parent shall assume each Company Warrant, by virtue of the
Merger and without any further action on the part of the Company or the
holders thereof.
(b) To the extent permitted by the terms of the Company
Warrants, from and after the Effective Time, all references to the Company
in the Company Warrants and the related warrant agreements shall be deemed
to refer to Parent. After the Effective Time, each Company Warrant
assumed by Parent shall be exercisable upon the same terms and conditions
as were in effect under the Company Warrants and the related warrant
agreements immediately prior to the Effective Time, except that, to the
extent permitted by the terms of the Company Warrants, (i) each Company
Warrant shall be exercisable for that whole number of shares of Parent
Common Stock (rounded down to the nearest whole share) into which the
number of shares of Company Common Stock subject to such Company Warrant
immediately prior to the Effective Time would be converted under Section
2.1, and (ii) the warrant price per share of Parent Common Stock shall be
an amount equal to the warrant price per share of Company Common stock
subject to such Company Warrant in effect immediately prior to the
Effective Time divided by the Exchange Ratio (the warrant price per share,
as so determined, being rounded upward to the nearest full cent).
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SECTION 2.8 NOTICES TO OPTION AND WARRANT HOLDERS. As soon as
practicable after the Effective Time, Parent shall deliver to each holder of
a Company Option or Company Warrant, an appropriate notice setting forth such
holder's rights pursuant thereto. Parent shall notify such holders that the
Company Option or Company Warrant, as the case may be, shall continue in
effect on the same terms and conditions (including anti-dilution provisions,
and subject to the adjustments required by Sections 2.6 and 2.7 after giving
effect to the Merger). Parent shall comply with the terms of each Company
Option or Company Warrant. Parent shall use reasonable efforts to ensure that
each Company Option and Company Warrant, to the extent it qualifies for
special tax treatment prior to the Effective Time (including, without
limitation, Section 422 of the Code), shall continue so to qualify after the
Effective Time. Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Parent Common Stock for
delivery pursuant to the terms set forth in Sections 2.6 and 2.7. After the
Effective Time (but in no event later than 30 days after the Effective Time),
Parent shall file a Registration Statement on Form S-8 with respect to the
shares of Parent Common Stock subject to Company Options, and shall use its
reasonable efforts to maintain the effectiveness of such registration
statement (and maintain the current status of the prospectus contained
therein) for so long as such options remain outstanding.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Parent and Sub that, except as
set forth in, and qualified by, the Company Disclosure Schedules attached to
this Agreement (which schedules identify exceptions by specific section
reference):
SECTION 3.1 CORPORATE EXISTENCE AND POWER.
(a) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware. The Company has
all corporate power required to carry on its business as now conducted. The
Company is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the character of the property it
owns or leases or the nature of its activities makes such qualification
necessary, except for those jurisdictions in which the failure to be so
qualified would not have a material adverse effect on the Company (a "Company
Material Adverse Effect"). For purposes of this Agreement, a "Company
Material Adverse Effect" means (i) a material adverse effect on the business,
assets (including intangible assets), liabilities, financial condition, or
results of operations of the Company and any of its subsidiaries, taken as a
whole, or on the ability of the Surviving Corporation following the Merger to
continue the business of the Company and any of its subsidiaries, taken as a
whole, substantially as currently conducted or proposed to be conducted, or
(ii) a material impairment in the ability of the Company to perform any of
its obligations under this Agreement or to consummate the Merger.
(b) The Company has delivered to Parent correct and complete copies
of the Company's certificate of incorporation and bylaws in effect as of the
Agreement Date.
SECTION 3.2 SUBSIDIARIES.
(a) Schedule 3.2 lists each subsidiary of the Company, together
with its jurisdiction of incorporation or organization. All outstanding
shares of capital stock of each such subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable. The Company owns all of
such shares, free and clear of pledges, claims, liens, charges, encumbrances,
and security interests of any nature whatsoever (each, a "Lien"). No options,
warrants, or other rights to acquire any securities of any type of any of
such subsidiaries are outstanding as of the Agreement Date.
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(b) Except for the capital stock of its subsidiaries and except for
ownership interests set forth in Schedule 3.2, the Company does not own,
directly or indirectly, any capital stock or other ownership interest in any
corporation, partnership, joint venture, or other entity.
SECTION 3.3 CORPORATE AUTHORIZATION. The Company's execution,
delivery, and performance of this Agreement and its consummation of the
transactions contemplated hereby are within its corporate powers. Except for
approval by the affirmative vote of a majority of the holders of the
outstanding shares of Company Common Stock required for the Merger, the
Company has duly authorized the Merger. The Company has duly and validly
executed and delivered this Agreement. Assuming this Agreement constitutes
the valid and binding agreement of Parent and Sub, this Agreement constitutes
a valid and binding agreement of the Company enforceable against the Company
in accordance with its terms.
SECTION 3.4 GOVERNMENTAL AUTHORIZATION. Except as set forth on
Schedule 3.4, the Company's execution, delivery and performance of this
Agreement and its consummation of the Merger require no action by, or in
respect of, or filing with, any federal, state, local, or foreign
governmental body, agency, official, or authority (including courts,
administrative agencies, commissions, self-regulatory agencies, or
authorities or other governmental authority or instrumentality) (each, a
"Governmental Entity") other than the following: (a) filing the Certificate
of Merger in accordance with Delaware Law; (b) compliance with applicable
requirements of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder (the "Exchange Act"); (c)
compliance with the rules or regulations of the Nasdaq SmallCap Market; and
(d) compliance with the securities laws of various states.
SECTION 3.5 NON-CONTRAVENTION. The Company's execution, delivery,
and performance of this Agreement does not, and its consummation of the
transactions contemplated hereby will not: (a) contravene or conflict with
the certificate of incorporation or bylaws of the Company; (b) assuming
compliance with the matters referred to in Section 3.4, contravene, conflict
with, or constitute a violation of any provision of any law, regulation,
judgment, injunction, order, or decree binding on or applicable to the
Company, other than such as would not, individually or in the aggregate, have
a Company Material Adverse Effect; (c) assuming compliance with the matters
set forth in Section 3.4 constitute a breach, violation, or a default under,
or give rise to a right of termination, cancellation, or acceleration of any
right or obligation of the Company or to a loss of any benefit to which the
Company is entitled under any provision of, any agreement, contract, or other
instrument binding upon the Company or any license, franchise, permit or
other similar authorization held by the Company, other than such as would
not, individually or in the aggregate, have a Company Material Adverse
Effect; or (d) result in the creation or imposition of any Lien on any asset
of the Company, other than such as would not, individually or in the
aggregate, have a Company Material Adverse Effect. Schedule 3.5 sets forth a
complete, and correct list of all consents, approvals, and authorizations the
Company is required to obtain from any non-Governmental Entity in connection
with this Agreement, the Merger, and the transactions contemplated hereby,
other than those with respect to which the failure of the Company to obtain
such consent, approval, or authorization, individually or in the aggregate,
would not have a Company Material Adverse Effect.
SECTION 3.6 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
10,000,000 shares of Company Common Stock and 1,000,000 shares of preferred
stock, $.01 par value ("Company Preferred Stock" and together with Company
Common Stock, "Company Capital Stock"). As of the Agreement Date, 6,634,065
shares of Company Common Stock are outstanding and no shares of Company
Preferred Stock are outstanding. As of the Agreement Date, Company Options to
purchase an aggregate of 389,500 shares of Company Common Stock are
outstanding, and Company Warrants to purchase an aggregate of 130,000 shares of
Company Common Stock are outstanding. The Company has duly reserved for
issuance
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pursuant to the exercise of options under existing plans or warrants a total
of 930,000 shares of Company Common Stock, including 519,500 shares for
issuance upon exercise of such options and warrants that are outstanding. All
outstanding shares of Company Capital Stock have been duly authorized and
validly issued and are fully paid and nonassessable. The Company issued all
such shares in compliance with all applicable federal and state securities
laws. The Company Common Stock is registered pursuant to Section 12(g) of
the Exchange Act and has been approved for listing on the Nasdaq SmallCap
Market.
(b) Except as set forth in this Section and except for changes
since the Agreement Date resulting from the exercise of the Company Options
outstanding on the Agreement Date, (i) no shares of Company Capital Stock or
other voting securities of the Company are outstanding, (ii) no securities of
the Company convertible into or exchangeable for shares of Company Capital
Stock or other voting securities of the Company are outstanding, and (iii) no
options or other rights to acquire from the Company, and no obligation of the
Company to issue, any Company Capital Stock, voting securities or securities
convertible into or exchangeable for Company Capital Stock or other voting
securities of the Company are outstanding (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "Company Securities").
SECTION 3.7 SEC DOCUMENTS. The Company has filed all required
reports, schedules, forms, statements, and other documents with the
Securities and Exchange Commission (the "SEC") since December 1, 1993
(together with subsequent documents filed by the Company before the Agreement
Date that revise or supersede such earlier filed documents, the "Company SEC
Documents"). As of their respective dates, the Company SEC Documents complied
as to form in all material respects with the requirements of the Securities
Act of 1933, as amended (the "Securities Act") or the Exchange Act, as the
case may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Company SEC Documents. As of their respective dates none
of the Company SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents complied as
of their respective dates of filing with the SEC as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles (except, in the case of
unaudited statements, as permitted by Form 10-QSB of the Exchange Act)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto), and fairly present the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of its operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except as set forth in the Company SEC
Documents, and except for liabilities and obligations incurred in the
ordinary course of business consistent with past practice, the Company has no
liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by generally accepted accounting principles
to be set forth on a consolidated balance sheet of the Company or in the
notes thereto which, individually or in the aggregate, would have a Company
Material Adverse Effect.
SECTION 3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Company SEC Documents, and except as expressly contemplated
by this Agreement or set forth in Schedule 3.8, since the date of the most
recent audited financial statements included in the Company SEC Documents,
the Company and each of its subsidiaries have conducted their respective
businesses only in the ordinary course, and neither the Company nor any of
its subsidiaries has experienced, agreed to, or effected, as the case may be:
(a) any event, occurrence, or development of a state of
circumstances or facts which has had a Company Material Adverse Effect;
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(b) any declaration, setting aside, or payment of any dividend or
other distribution with respect to any shares of capital stock, or any
repurchase, redemption, or other acquisition by the Company of any
outstanding shares of Company Capital Stock or other securities of, or other
ownership interests in, the Company or its subsidiaries;
(c) any split, combination, or reclassification of any capital
stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock;
(d) any incurrence, assumption, or guarantee of any indebtedness
for borrowed money other than in the ordinary course of business and in
amounts and on terms consistent with past practices (including any such
borrowings under its existing bank credit facility);
(e) any change in any method of accounting or accounting practice
by the Company, except for any such change required by reason of a concurrent
change in generally accepted accounting principles;
(f) any (i) grant, except pursuant to agreements in effect on the
Agreement Date, of any material severance or termination pay to any director,
officer or employee of the Company, (ii) material employment, deferred
compensation, or other similar agreement (or any amendment to any such
existing agreement), (iii) material increase in benefits payable under any
existing severance or termination pay policies or employment agreements, or
(iv) other than in the ordinary course of business consistent with past
practices, material increase in compensation, bonus or other benefits payable
to directors, officers or employees of the Company;
(g) any damage, destruction, or other casualty loss (if not covered
by collectible insurance) affecting the business assets of the Company which,
individually or in the aggregate, has had or would reasonably be expected to
have a Company Material Adverse Effect; or
(h) a significant increase in the number of sales agents or sales
representatives of the Company who terminate, or indicate an intention to
terminate, their employment or agency with the Company over the ordinary
turnover of sales agents or representatives historically experienced by the
Company.
For purposes of Section 3.8(h) as it may be reaffirmed at Closing, a
"significant increase" in the number of sales agents or sales representatives
who terminate or indicate an intention to terminate their employment or
agency with the Company shall be deemed to have occurred if sales agents or
representatives accounting for 25% or more of the Company's retail sales
division gross revenues for the fiscal year ended November 30, 1997 (which
agents and representatives were in those capacities on the date of this
Agreement), have terminated on or before the Closing Date or indicated on or
before the Closing Date their intention to terminate, such agents' or
representatives' agency or employment with the Company; provided, however,
that no sales agent or representative shall be included for purposes of
calculating such 25% if the Company has information that indicates that such
agent or representative is not, and will not be, employed by a competitor.
SECTION 3.9 LITIGATION. Except as disclosed in the Company SEC
Documents, there is no action, suit, investigation, or proceeding pending
against or, to the knowledge of the Company, overtly threatened against or
affecting, the Company or any of its properties (other than any such suit,
action, or proceeding challenging the acquisition by Parent or Sub of the
shares of Company Common Stock or any provision of this Agreement or seeking
to restrain or prohibit the consummation of the Merger) before any
Governmental Entity or by any Governmental Entity that, individually or in
the aggregate, would reasonably be expected to have a Company Material
Adverse Effect.
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SECTION 3.10 TAXES. The Company, its subsidiaries and each
affiliated, consolidated, combined or unitary group of which the Company or
any of its subsidiaries is a member (a "Company Affiliated Group"), has filed
all tax returns and reports required to be filed by it and has paid (or the
Company has paid on its behalf) all taxes required to be paid by it (other
than taxes, the failure to pay which would not, individually or in the
aggregate, have a Company Material Adverse Effect). All other taxes of the
Company which will be due and payable, whether now or hereafter, for any
period ending on, including, or ending prior to the Closing Date, have been
paid by or on behalf of the Company or are reflected on the Company's books
as an accrued tax liability, either current or deferred. The most recent
financial statements contained in the Company SEC Documents reflect an
adequate reserve for all material taxes payable by the Company and any of its
subsidiaries for all taxable periods and portions thereof through the date of
such financial statements. No deficiencies for any taxes have been proposed,
asserted, or assessed against the Company or any Company Affiliated Group
(other than deficiencies, the liability for which would not, individually or
in the aggregate, have a Company Material Adverse Effect). No extensions nor
requests for waivers or extensions of the time to assess any taxes have been
granted or are pending. None of the assets or properties of the Company or
its subsidiaries is subject to any tax lien (other than liens for taxes that
are not yet due) except for liens which would not, individually or in the
aggregate, have a Company Material Adverse Effect. The Company is not under
audit with respect to any taxable period for any federal, state, local, or
foreign taxes (including income and franchise taxes but not including real or
personal property taxes) by the Internal Revenue Service ("IRS") or other
applicable tax authority. Neither the Company nor any of its subsidiaries is
a party to any agreement, contract or arrangement that would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code. As used in this
Agreement, "taxes" shall include all federal, state, local and foreign
income, property, premium, payroll, sales, excise, and other taxes, tariffs,
or governmental charges of any nature whatsoever, including any interest,
penalties, or additions with respect thereto, and "returns" shall include all
returns, reports, information returns, and information statements with
respect to taxes required to be filed by the IRS or any other tax authority.
SECTION 3.11 INTELLECTUAL PROPERTY RIGHTS.
(a) Schedule 3.11 describes: (i) all patents and all registrations
for trademarks, service marks, trade names, corporate names, copyrights and
mask works; (ii) all pending patent applications or applications for
registration for trademarks, service marks, trade names, corporate names,
copyrights and mask works; and (iii) all material accumulations of trade
secrets, that (as to each of (i)-(iii)) are owned by, or otherwise controlled
by, the Company and used in, developed for use in or necessary to the conduct
of the business of the Company as now conducted or as planned to be conducted
as described herein (the "Company Owned Intellectual Property Rights").
Except as set forth in the Disclosure Schedule, the Company owns and
possesses all right, title and interest, or holds such other interest as is
identified in the Disclosure Schedule, in and to the rights set forth under
such caption free and clear of all liens, security interests, adverse
ownership claims or other encumbrances and has the full right to exploit such
Company Owned Intellectual Property Rights without restriction or payment of
compensation to any other party.
(b) Schedule 3.11 describes all agreements granting to the Company
rights in patents, patent applications, trademarks, service marks, trade
names, corporate names, copyrights, mask works, trade secrets or other
intellectual property rights used in or necessary to the conduct of the
business of the Company as now conducted or as planned to be conducted as
described herein (the "Company Licensed-In Intellectual Property Rights").
All such agreements are in force and the Company is not in breach of any such
agreement.
(c) Schedule 3.11 describes all products and services marketed or
that have been marketed by the Company within the past two years, identifies
the method(s) of intellectual property protection utilized by the Company
with respect to such products and services and sets forth the amount
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of gross sales for such products and services for the year ended November 30,
1996 and the eleven-month period ended October 31, 1997.
(d) Schedule 3.11 describes all agreements granting to third
parties any rights in Company Owned Intellectual Property Rights and any
agreements to grant intellectual property rights that the Company may acquire
in the future.
(e) Except as disclosed in Schedule 3.11, all of the Company Owned
Intellectual Property Rights will be assumed by, and will become intellectual
property rights of, the Surviving Corporation in the Merger, without the
requirement that any consent to assignment be obtained or any payment (other
than government filing or registration fees) be made. Except as disclosed in
Schedule 3.11, all licenses of the Company Licensed-In Intellectual Property
Rights will be assumed by, and will become valid agreements of, the Surviving
Corporation in the Merger, without the requirement that any consent to
assignment be obtained or any payment be made (other than future royalties as
provided in such agreements).
(f) Except as disclosed in Schedule 3.11, the Company has taken all
commercially reasonable steps to acquire, protect and maintain the Company
Owned Intellectual Property Rights. Without limiting the generality of the
foregoing, (i) all maintenance, annuity, renewal and other such fees and
filings due on Company Owned Intellectual Property Rights have been paid or
made; and (ii) the Company has no knowledge of any defects in, or facts
surrounding, the Company Owned Intellectual Property Rights that would lead
to any of them becoming invalid or unenforceable.
(g) Except as disclosed in Schedule 3.11, the Company has not
received any notice of, nor are there any facts known to the Company which
indicate a likelihood of, any infringement or misappropriation by, or
conflict from, any third party with respect to the Company Owned Intellectual
Property Rights or any Company Licensed-In Intellectual Property Rights that
are exclusively licensed to the Company; and no claim by any third party
contesting the validity of any Company Owned Intellectual Property Rights has
been made, is currently outstanding or is threatened.
(h) Except as disclosed in Schedule 3.11, the Company has not
received any notice of any infringement, misappropriation or violation by the
Company of any intellectual property rights of any third parties and the
Company, to its knowledge, has not infringed, misappropriated or otherwise
violated any such intellectual property rights; and no infringement,
misappropriation or violation of any intellectual property rights or other
rights of any third parties has occurred or will occur with respect to
products and services currently being sold by the Company or with respect to
the products and services currently under development (in their present state
of development) or with respect to the conduct of the business of the Company
as now conducted.
(i) Except as disclosed in Schedule 3.11, the Company has not
entered into any agreement restricting the Company from selling, leasing or
otherwise distributing any of its current products or products under
development to any class of customers, in any geographic area, during any
time period or in any segment of the market.
(j) The Company has the right to make available to the Surviving
Corporation all trade secrets and other confidential information used in the
business of the Company, including such information entrusted to the Company
by third parties.
(k) There are no quality defects in the designs contained in the
Company Owned Intellectual Property Rights and, except as disclosed in
Schedule 3.11, such designs comply with all applicable laws.
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SECTION 3.12 LABOR MATTERS. Neither the Company nor any of its
subsidiaries is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Company or any of its
subsidiaries.
SECTION 3.13 EMPLOYEE BENEFIT PLANS.
(a) Schedule 3.13 sets forth each employee benefit plan with
respect to which the Company or its ERISA Affiliates, as hereinafter defined,
sponsors or otherwise has any obligation (the "Company Employee Benefit
Plans"). For purposes of this Agreement, "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended, and "ERISA Affiliates"
means any trade or business (whether or not incorporated) that is part of the
same controlled group, or under common control with, or part of an affiliated
service group that includes, the Company within the meaning of Section
414(b), (c), (m) or (o) of the Code.
(b) Except as disclosed in Schedule 3.13:
(i) No Company Employee Benefit Plan is subject to Title IV of
ERISA.
(ii) No Company Employee Benefit Plan promises or provides health
or life benefits to retirees or former employees except as required by
federal continuation of coverage laws or similar state laws.
(iii) Each Company Employee Benefit Plan has at all times been
operated in substantial compliance with ERISA, the Code, any other
applicable law (including all reporting and disclosure requirements
thereunder) and the terms of the plan. Each Company Employee Benefit Plan
that is intended to be tax qualified under Section 401(a) of the Code has
received a favorable determination letter from the IRS stating that the Plan
(and all amendments) is tax qualified and that any trust associated with the
plan is tax exempt under Section 501(a) of the Code. To the knowledge of
the Company, there is no reason why such qualified status would be revoked.
(iv) To the knowledge of the Company, no state of facts or
conditions exist which reasonably could be expected to subject the Company
to any material liability (other than routine claims for benefits) with
respect to any Company Employee Benefit Plan under the terms of the Company
Employee Benefit Plan or applicable law.
(v) The Company has not committed to make any material
increase in contributions or benefits under any Company Employee Benefit
Plan and has not committed to establish any new plan.
(vi) There are no material unfunded liabilities as of the
Closing Date associated with any Company Employee Benefit Plan. All
contributions to each Company Employee Benefit Plan that are required to be
made with respect to periods ending on or before the Closing Date (including
periods from the first day of the then current plan or policy year to the
Closing Date) have been made or accrued before the Closing Date.
(vii) With respect to each Company Employee Benefit Plan (to the
extent applicable), the Company has delivered to Parent copies of the plan
documents, plan amendments, summary plan descriptions, the most recent tax
qualified determination letters from the IRS, the three most recent Form
5500 Annual Reports, including related schedules and audited financials, and
a list of assets associated with each Company Employee Benefit Plan.
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(viii) The benefits to be provided to participants under each
Company Employee Benefit Plan, other than a tax qualified plan under Code
Section 401(a), are to be provided exclusively through insurance or from the
general assets of the Company.
SECTION 3.14 COMPLIANCE WITH LAWS. Except as disclosed in the
Company SEC Documents, neither the Company nor any of its subsidiaries (a) is
in violation of, nor has it violated, any applicable provisions of any laws,
statutes, ordinances or regulations, including the applicable provisions of
Title XVIII of the Social Security Act and the regulations promulgated
thereunder (the "Medicare Laws") and the applicable provisions of Title XIX
of the Social Security Act and the regulations promulgated thereunder and
applicable state laws and regulations implementing the Medicaid program (the
"Medicaid Laws"), or (b) has received any notice from any Governmental Entity
or any other person that the Company or any of its subsidiaries is in
violation of, or has violated, any applicable provisions of any laws,
statutes, ordinances or regulations, except in the case of clauses (a) and
(b), for violations, individually or in the aggregate, which have not had and
would not reasonably be expected to have a Company Material Adverse Effect.
Each of the Company and each of its subsidiaries has all permits, licenses,
and franchises from Governmental Entities required to conduct its business as
now being conducted, except for such permits, licenses, and franchises the
absence of which would not, individually or in the aggregate, have a Company
Material Adverse Effect.
SECTION 3.15 BROKERS. No broker, investment banker, financial
advisor, or other person, other than The Wallach Company, Inc. ("Company's
Broker"), the fees and expenses of which will be paid by the Company, is
entitled to any broker's, finder's, financial advisor's, or other similar fee
or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company. The
Company has provided Parent with a correct and complete copy of the fee
letter between the Company and the Company's Broker.
SECTION 3.16 OPINION OF FINANCIAL ADVISOR. The Company has received
the opinion of the Company's Broker, dated the Agreement Date, to the effect
that, as of such date, the consideration to be received in the Merger by the
Company's stockholders (other than Parent and its affiliates) is fair to such
stockholders from a financial point of view, a signed copy of which opinion
has been delivered to Parent.
SECTION 3.17 ACCOUNTING MATTERS. Neither the Company nor, to its
knowledge, any of its affiliates, has taken or agreed to take any action that
(without regard to any action taken or agreed to be taken by Parent or any of
its affiliates) would prevent Parent from accounting for the business
combination to be effected by the Merger as a pooling of interests.
SECTION 3.18 TAX MATTERS. Neither the Company nor, to its knowledge,
any of its affiliates, has taken or agreed to take any action, or knows of
any circumstances, that (without regard to any action taken or agreed to be
taken by Parent or any of its affiliates) would prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
SECTION 3.19 CERTAIN BUSINESS MATTERS. Neither the Company nor, to
its knowledge, any of its affiliates has (a) made or agreed to make any
contribution, payment or gift to any customer, supplier, governmental
official, employee or agent where either the contribution, payment or gift or
the purpose thereof was illegal under any applicable law, (b) established or
maintained any unrecorded fund or asset of the Company or any of its
subsidiaries for any improper purpose or made any false entries on its books
and records for any reason, (c) made or agreed to make any contribution, or
reimbursed any political gift or contribution made by any other person, to
any candidate for federal, state or local public office in violation of any
applicable law, or (d) engaged in any activity constituting fraud or abuse
under applicable laws relating to health care, insurance or the regulation of
professional corporations.
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SECTION 3.20 CERTAIN CONTRACT MATTERS.
(a) Schedule 3.20(a) sets forth, as of the Agreement Date, a list
of each contract to which the Company, its subsidiaries, or any of its
affiliates (other than individuals) is a party limiting the right of the
Company prior to the Closing Date, or Parent or any of its subsidiaries, or
affiliates (other than individuals), at or after the Closing Date, to engage
in, or to compete with any person in, any business, including each contract
containing exclusivity provisions restricting the geographical area in which,
or the method by which, any business may be conducted by the Company, its
subsidiaries, or any of its affiliates (other than individuals) prior to the
Closing Date, or by Parent, its subsidiaries, or affiliates (other than
individuals) after the Closing Date.
(b) The Company and its subsidiaries have acted in full compliance
with all laws and regulations applicable to the contracts held by the Company
or its subsidiaries with, or covering beneficiaries of, the federal Medicare
program, the federal and state Medicaid programs. To the Company's knowledge,
no circumstances exist which would allow the government customer under such
contracts to require or request the repayment or reduction, as the case may
be, of any payments made to, accrued by, or to be made to the Company or its
subsidiaries under such contracts.
(c) Each contract listed on Schedule 3.20(a) or described in
Section 3.20(b) is in full force and effect, each is a legal, valid and
binding contract, and there is no material default (or any event which, with
the giving of notice or lapse of time or both, would be a material default)
by the Company or any of its subsidiaries, in the timely performance of any
material obligation to be performed or paid under any such contract.
SECTION 3.21 ACCOUNTS RECEIVABLE. Schedule 3.21 contains a complete
and accurate balance sheet of the Company as of November 1, 1997 and a
complete and accurate accounts receivables aging report as of November 1,
1997. The accounts receivable reflected on Schedule 3.21 and those arising
after the date thereof are valid receivables, are not subject to valid
counterclaims or set-offs, and are collectible in accordance with their
terms, except to the extent of the bad debt reserve reflected on Schedule
3.21.
SECTION 3.22 INVENTORY. The inventory of raw materials, work in
process and finished goods of the Company consists of items of a cost,
quality and quantity usable and, with respect to finished goods only, salable
at the normal profit levels of the Company in the ordinary course of the
business of the Company. The inventory of finished goods of the Company is
not slow-moving as determined in accordance with past practices, obsolete or
damaged and is merchantable and fit for its particular use. The Company has
on hand or has ordered and expects timely delivery of such quantities of raw
materials, and has on hand such quantities of work in process and finished
goods, in each case as are reasonably required to timely fill current orders
on hand which require delivery within 60 days and to maintain the manufacture
and shipment of products at its normal level of operations. The values at
which such inventory is carried on the balance sheet contained in Schedule
3.21 are in accordance with generally accepted accounting principles.
Schedule 3.22 contains a materially complete and accurate summary of the
Company's inventory of raw materials, work in progress, finished goods and
reserve for obsolete and other inventory allowance or accrual calculation
schedules as of November 1, 1997.
SECTION 3.23 ENVIRONMENTAL MATTERS.
(a) As used in this Section 3.23, the following terms shall have
the following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or
hazardous pollutant, contaminant, chemical, waste, material or substance as
defined in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement
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relating to such substance or otherwise relating to the environment or human
health or safety, including without limitation any waste, material,
substance, pollutant or contaminant that might cause any injury to human
health or safety or to the environment or might subject a party to any
imposition of costs or liability under any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state,
local and foreign laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to
pollution, contamination or protection of the environment (including,
without limitation, all applicable federal, state, local and foreign laws,
rules, regulations, codes, ordinances, orders, decrees, directives,
permits, licenses and judgments relating to Hazardous Materials in effect
as of the Agreement Date).
(iii) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any other
release or threatened release, however defined, whether intentional or
unintentional, of any Hazardous Material.
(b) The Company and the real property owned or leased by the
Company (the "Company's Property") are in material compliance with all
applicable Environmental Laws.
(c) The Company has obtained, and maintained in full force and
effect, all environmental permits, licenses, certificates of compliance,
approvals and other authorizations (collectively, the "Environmental
Permits") necessary to conduct its business and operate the Company's
Property. A true and correct copy of each of such Environmental Permit has
been provided by the Company to Parent. The Company has conducted its
business in compliance with all terms and conditions of the Environmental
Permits. The Company has filed all reports and notifications required to be
filed under and pursuant to all applicable Environmental Laws.
(d) Except as set forth in the Disclosure Schedule under the
caption referencing this Section 3.23: (i) no Hazardous Materials have been
generated, treated, contained, handled, located, used, manufactured,
processed, buried, incinerated, deposited, stored, or released on, under or
about any part of the Company's Property during the period the Company was in
possession thereof, (ii) the Company's Property and any improvements thereon,
contain no asbestos, urea, formaldehyde, radon at levels above natural
background, polychlorinated biphenyls (PCBs) or pesticides, and (iii) no
aboveground or underground storage tanks are located on, under or about the
Company's Property.
(e) Except as set forth in the Disclosure Schedule under the
caption referencing this Section 3.23, the Company has not received notice
alleging in any manner that any of them is, or might be potentially
responsible for any Release of Hazardous Materials, or any costs arising
under or violation of Environmental Laws.
(f) To the knowledge of the Company, no expenditure outside the
ordinary course of business will be required in order for Parent, Sub or the
Surviving Corporation to comply with any Environmental Laws in effect at the
Effective Time in connection with the operation or continued operation of the
business of the Company or the Company's Property in a manner consistent with
the current operation thereof by the Company.
(g) The Company and the Company's Property are not and have not
been listed on the United States Environmental Protection Agency National
Priorities List of Hazardous Waste Sites, or any other list, schedule, law,
inventory or record of hazardous or solid waste sites maintained by any
federal, state or local agency.
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(h) The Company has disclosed and delivered to Parent all
environmental reports and investigations which the Company has obtained or
ordered with respect to the business of the Company and the Company's
Property.
(i) To the knowledge of the Company, no part of the business of the
Company and none of the Company's Property has been used as a landfill, dump
or other disposal, storage, transfer, handling or treatment area for
Hazardous Materials, or as a gasoline service station or a facility for
selling, dispensing, storing, transferring, disposing or handling petroleum
and/or petroleum products.
(j) No lien has been attached or filed against the Company or the
Company's Property in favor of any governmental or private entity for (i) any
liability or imposition of costs under or violation of any applicable
Environmental Law; or (ii) any Release of Hazardous Materials.
SECTION 3.24 DISCLOSURE. No representation or warranty contained in
this Agreement, in the Company Disclosure Schedules, or in any document
delivered by the Company to Parent pursuant to Article VII of this Agreement,
contains, or will at the Effective Time contain, any untrue statement of a
material fact or omits or will at, the Effective Time, omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were or will be made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUB
Parent and Sub represent and warrant to the Company that, except as
set forth in, and qualified by, the Parent Disclosure Schedules attached to
this Agreement (which schedules identify exceptions by specific section
reference):
SECTION 4.1 CORPORATE EXISTENCE AND POWER.
(a) Each of Parent and Sub is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation. Each of Parent and Sub has all corporate powers required to
carry on its business as now conducted. Each of Parent and Sub is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the character of the property that they own or
lease or the nature of their respective activities makes such qualification
necessary, except for those jurisdictions in which the failure to be so
qualified would not have a material adverse effect on Parent or any of its
subsidiaries (a "Parent Material Adverse Effect"). For purposes of this
Agreement, a "Parent Material Adverse Effect" means (i) a material adverse
effect on the business, assets (including intangible assets), liabilities,
financial condition or results of operations of Parent and any of its
subsidiaries, taken as a whole, or (ii) a material impairment in the ability
of Parent and any of its subsidiaries to perform any of their respective
obligations under this Agreement or to consummate the Merger.
(b) Parent and Sub have heretofore made available to the Company
correct and complete copies of the certificate of incorporation and bylaws of
Parent and Sub as currently in effect.
SECTION 4.2 SUBSIDIARIES.
(a) Schedule 4.2 lists each subsidiary of the Parent, together with
its jurisdiction of incorporation or organization. All outstanding shares of
capital stock of each such subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable. The Parent owns all of such
shares, free and clear of any Lien. No options, warrants, or other rights to
acquire any securities of any type of any of such subsidiaries are
outstanding as of the Agreement Date.
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(b) Except for the capital stock of its subsidiaries and except for
ownership interests set forth in Schedule 4.2, the Parent does not own,
directly or indirectly, any capital stock or other ownership interest in any
corporation, partnership, joint venture, or other entity.
SECTION 4.3 CORPORATE AUTHORIZATION. Parent's and Sub's execution,
delivery and performance of this Agreement and their consummation of the
transactions contemplated hereby are within their respective corporate
powers. Except for approval by the affirmative vote of a majority of the
holders of the shares of Parent Common Stock required for the Merger, Parent
and Sub each has duly authorized the Merger. Parent and Sub each has duly and
validly executed and delivered this Agreement. This Agreement constitutes a
valid and binding agreement of each of Parent and Sub and is enforceable in
accordance with its terms. Parent has taken all actions as may be necessary,
in its capacity as sole stockholder of Sub, to authorize the Merger.
SECTION 4.4 GOVERNMENTAL AUTHORIZATION. Parent's and Sub's
execution, delivery, and performance of this Agreement and their consummation
of the transactions contemplated hereby require no action by, or in respect
of, or filing with, any federal, state, local, or foreign Governmental Entity
other than the following: (a) the filing of the Certificate of Merger in
accordance with Delaware Law; (b) compliance with applicable requirements of
the Securities Act; (c) compliance with the Exchange Act and the rules and
regulations promulgated thereunder; (d) compliance with the rules or
regulations of the Nasdaq National Market; and (e) compliance with the
securities laws of various states.
SECTION 4.5 NON-CONTRAVENTION. Parent's and Sub's execution,
delivery and performance of this Agreement does not, and Parent's and Sub's
consummation of the transactions contemplated hereby will not: (a) contravene
or conflict with the articles or certificate of incorporation or bylaws of
Parent and Sub; (b) assuming compliance with the matters referred to in
Section 4.4, contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order, or decree
binding upon or applicable to Parent and Sub, other than such as would not,
individually or in the aggregate, have a Parent Material Adverse Effect; (c)
constitute a breach or violation of, or a default under or give rise to a
right of termination, cancellation, or acceleration of any right or
obligation of Parent or Sub or to a loss of any benefit to which Parent or
Sub is entitled under any provision of, any agreement, contract, or other
instrument binding upon Parent or Sub or any license, franchise, permit, or
other similar authorization held by Parent or Sub, other than such as would
not, individually or in the aggregate, have a Parent Material Adverse Effect;
or (d) result in the creation or imposition of any Lien on any asset of
Parent or Sub, other than such as would not, individually or in the
aggregate, have a Parent Material Adverse Effect. Schedule 4.5 sets forth a
correct and complete list of all consents, approvals, and authorizations
required to be obtained by Parent and Sub from any non-Governmental Entity in
connection with this Agreement, the Merger and the transactions contemplated
hereby, other than those with respect to which the failure of Parent and Sub
to obtain such consent, approval or authorization, individually or in the
aggregate, would not have a Parent Material Adverse Effect.
SECTION 4.6 CAPITALIZATION.
(a) The authorized capital stock of Parent consists of 15,000,000
shares of Parent Common Stock, $.10 par value, and 5,000,000 shares of
preferred stock, without par value ("Parent Preferred Stock" and together
with Parent Common Stock, "Parent Capital Stock"). As of the Agreement Date,
4,870,002 shares of Parent Common Stock are outstanding and no shares of
Parent Preferred Stock are outstanding. As of the Agreement Date, Parent
Options to purchase an aggregate of 375,000 shares of Parent Common Stock are
outstanding, and Parent Warrants to purchase an aggregate of 75,000 shares of
Parent Common Stock are outstanding. Parent has duly reserved for issuance
pursuant to the exercise of options under existing plans or warrants a total
of 925,000 shares of Parent Common Stock, including 450,000 shares of Parent
Common Stock for issuance of such options and warrants that are outstanding.
All outstanding shares of Parent Capital Stock have been duly authorized and
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validly issued and are fully paid and nonassessable. Parent issued all such
shares in compliance with all applicable federal and state securities laws.
The Parent Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and has been approved for listing on the Nasdaq National Market.
(b) Parent owns, beneficially and of record, all issued and
outstanding shares of common stock of Sub, which shares are validly issued,
fully paid, and non-assessable, and free and clear of all liens.
(c) Except as set forth in this Section and except for changes
since the Agreement Date resulting from the exercise of employee and director
options outstanding on the Agreement Date, (i) no shares of Parent Capital
Stock or other voting securities of Parent are outstanding, (ii) no
securities of Parent convertible into or exchangeable for shares of capital
stock or voting securities of Parent are outstanding, and (iii) no options or
other rights to acquire from Parent, and no obligation of Parent to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of Parent are outstanding
(the items in clauses (i), (ii), and (iii) being referred to collectively as
the "Parent Securities"). No obligations of Parent to repurchase, redeem, or
otherwise acquire any Parent Securities are outstanding.
SECTION 4.7 SEC DOCUMENTS. Parent has filed all required reports,
schedules, forms, statements, and other documents with the SEC since June 30,
1994 (together with later filed documents that revise or supersede earlier
filed documents, the "Parent SEC Documents"). As of their respective dates,
the Parent SEC Documents complied as to form in all material respects with
the requirements of the Securities Act, or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Parent SEC Documents. None of the Parent SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Parent included in the Parent SEC
Documents complied as of their respective dates of filing with the SEC as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except,
in the case of unaudited statements, as permitted by Form 10-QSB of the
Exchange Act) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto), and fairly present the
consolidated financial position of Parent and its consolidated subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except as set forth in the
Parent SEC Documents, and except for liabilities and obligations incurred in
the ordinary course of business consistent with past practice, neither Parent
nor any of its subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) required by generally
accepted accounting principles to be set forth on a consolidated balance
sheet of Parent and its consolidated subsidiaries or in the notes thereto
which, individually or in the aggregate, would have a Parent Material Adverse
Effect.
SECTION 4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Parent SEC Documents, and except as expressly contemplated
by this Agreement, since the date of the most recent audited financial
statements included in the Parent SEC Documents, Parent and each of its
subsidiaries have conducted their respective businesses only in the ordinary
course, and neither Parent nor any of its subsidiaries has experienced,
agreed to, or effected, as the case may be:
(a) any event, occurrence, or development of a state of
circumstances or facts which has had a Parent Material Adverse Effect;
(b) any declaration, setting aside, or payment of any dividend or
other distribution with respect to any shares of capital stock, or any
repurchase, redemption, or other acquisition by
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Parent of any outstanding shares of Parent Capital Stock or other securities
of, or other ownership interests in, Parent or its subsidiaries;
(c) any split, combination, or reclassification of any capital
stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock;
(d) any incurrence, assumption, or guarantee of any indebtedness
for borrowed money other than in the ordinary course of business and in
amounts and on terms consistent with past practices (including any such
borrowings under its existing bank credit facility);
(e) any change in any method of accounting or accounting practice
by Parent, except for any such change required by reason of a concurrent
change in generally accepted accounting principles;
(f) any (i) grant, except pursuant to agreements in effect on the
Agreement Date, of any material severance or termination pay to any director,
officer or employee of Parent, (ii) material employment, deferred
compensation, or other similar agreement (or any amendment to any such
existing agreement), (iii) material increase in benefits payable under any
existing severance or termination pay policies or employment agreements, or
(iv) other than in the ordinary course of business consistent with past
practices, material increase in compensation, bonus or other benefits payable
to directors, officers or employees of Parent;
(g) any damage, destruction, or other casualty loss (if not covered
by collectible insurance) affecting the business assets of Parent which,
individually or in the aggregate, has had or would reasonably be expected to
have a Parent Material Adverse Effect; or
(h) a significant increase in the number of sales agents or sales
representatives of the Parent who terminate, or indicate an intention to
terminate, their employment or agency with the Parent over the ordinary
turnover of sales agents or representatives historically experienced by the
Parent.
For purposes of Section 4.8(h) as it may be reaffirmed at Closing, a
"significant increase" in the number of sales agents or sales representatives
who terminate or indicate an intention to terminate their employment or
agency with the Parent shall be deemed to have occurred if sales agents or
representatives accounting for 25% or more of the Parent's retail sales
division gross revenues for the fiscal year ended June 30, 1997 (which agents
and representatives were in those capacities on the date of this Agreement),
have terminated on or before the Closing Date or indicated on or before the
Closing Date their intention to terminate, such agents' or representatives'
agency or employment with the Parent; provided, however, that no sales agent
or representative shall be included for purposes of calculating such 25% if
the Parent has information that indicates that such agent or representative
is not, and will not be, employed by a competitor.
SECTION 4.9 LITIGATION. Except as disclosed in the Parent SEC
Documents, there is no action, suit, investigation, or proceeding pending
against or, to the knowledge of Parent, overtly threatened against or
affecting, Parent or any of its properties (other than any such suit, action,
or proceeding challenging the acquisition by Parent or Sub of the shares of
Company Common Stock or any provision of this Agreement or seeking to
restrain or prohibit the consummation of the Merger) before any Governmental
Entity or by any Governmental Entity that, individually or in the aggregate,
would reasonably be expected to have a Parent Material Adverse Effect.
SECTION 4.10 TAXES. Parent, its subsidiaries and each affiliated,
consolidated, combined or unitary group of which Parent or any of its
subsidiaries is a member (a "Parent Affiliated
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Group"), has filed all tax returns and reports required to be filed by it and
has paid (or Parent has paid on its behalf) all taxes required to be paid by
it (other than taxes, the failure to pay which would not, individually or in
the aggregate, have a Parent Material Adverse Effect). All other taxes of
Parent which will be due and payable, whether now or hereafter, for any
period ending on, including, or ending prior to the Closing Date, have been
paid by or on behalf of Parent or are reflected on Parent's books as an
accrued tax liability, either current or deferred. The most recent financial
statements contained in the Parent SEC Documents reflect an adequate reserve
for all material taxes payable by Parent and any of its subsidiaries for all
taxable periods and portions thereof through the date of such financial
statements. No deficiencies for any taxes have been proposed, asserted, or
assessed against Parent or any Parent Affiliated Group (other than
deficiencies, the liability for which would not, individually or in the
aggregate, have a Parent Material Adverse Effect). No extensions nor requests
for extension or waivers of the time to assess any taxes have been granted or
are pending. None of the assets or properties of Parent or its subsidiaries
is subject to any tax lien (other than liens for taxes that are not yet due)
except for liens which would not, individually or in the aggregate, have a
Parent Material Adverse Effect. Parent is not under audit with respect to any
taxable period for any federal, state, local, or foreign taxes (including
income and franchise taxes but not including real or personal property taxes)
by the IRS or other applicable tax authority. Neither Parent nor any of its
subsidiaries is a party to any agreement, contract or arrangement that would
result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code.
SECTION 4.11 INTELLECTUAL PROPERTY RIGHTS.
(a) Schedule 4.11 describes: (i) all patents and all registrations
for trademarks, service marks, trade names, corporate names, copyrights and
mask works; (ii) all pending patent applications or applications for
registration for trademarks, service marks, trade names, corporate names,
copyrights and mask works; and (iii) all material accumulations of trade
secrets, that (as to each of (i)-(iii)) are owned by, or otherwise controlled
by, Parent and used in, developed for use in or necessary to the conduct of
the business of Parent as now conducted or as planned to be conducted as
described herein (the "Parent Owned Intellectual Property Rights"). Except as
set forth in the Disclosure Schedule, Parent owns and possesses all right,
title and interest, or holds such other interest as is identified in the
Disclosure Schedule, in and to the rights set forth under such caption free
and clear of all liens, security interests, adverse ownership claims or other
encumbrances and has the full right to exploit such Parent Owned Intellectual
Property Rights without restriction or payment of compensation to any other
party.
(b) Schedule 4.11 describes all agreements granting to Parent
rights in patents, patent applications, trademarks, service marks, trade
names, corporate names, copyrights, mask works, trade secrets or other
intellectual property rights used in or necessary to the conduct of the
business of Parent as now conducted or as planned to be conducted as
described herein (the "Parent Licensed-In Intellectual Property Rights"). All
such agreements are in force and Parent is not in breach of any such
agreement.
(c) Schedule 4.11 describes all products and services marketed or
that have been marketed by Parent within the past two years, identifies the
method(s) of intellectual property protection utilized by Parent with respect
to such products and services and sets forth the amount of gross sales for
such products and services for the year ended June 30, 1997 and the
three-month period ended September 30, 1997.
(d) Schedule 4.11 describes all agreements granting to third parties
any rights in Parent Owned Intellectual Property Rights and any agreements to
grant intellectual property rights that Parent may acquire in the future.
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(e) Except as disclosed in Schedule 4.11, Parent has taken all
commercially reasonable steps to acquire, protect and maintain the Parent
Owned Intellectual Property Rights. Without limiting the generality of the
foregoing, (i) all maintenance, annuity, renewal and other such fees and
filings due on Parent Owned Intellectual Property Rights have been paid or
made; and (ii) Parent has no knowledge of any defects in, or facts
surrounding, the Parent Owned Intellectual Property Rights that would lead to
any of them becoming invalid or unenforceable.
(f) Except as disclosed in Schedule 4.11, Parent has not received
any notice of, nor are there any facts known to Parent which indicate a
likelihood of, any infringement or misappropriation by, or conflict from, any
third party with respect to the Parent Owned Intellectual Property Rights or
any Parent Licensed-In Intellectual Property Rights that are exclusively
licensed to Parent; and no claim by any third party contesting the validity
of any Parent Owned Intellectual Property Rights has been made, is currently
outstanding or is threatened.
(g) Except as disclosed in Schedule 4.11, Parent has not received
any notice of any infringement, misappropriation or violation by Parent of
any intellectual property rights of any third parties and Parent, to its
knowledge, has not infringed, misappropriated or otherwise violated any such
intellectual property rights; and no infringement, misappropriation or
violation of any intellectual property rights or other rights of any third
parties has occurred or will occur with respect to products and services
currently being sold by Parent or with respect to the products and services
currently under development (in their present state of development) or with
respect to the conduct of the business of Parent as now conducted.
(h) Except as disclosed in Schedule 4.11, Parent has not entered
into any agreement restricting Parent from selling, leasing or otherwise
distributing any of its current products or products under development to any
class of customers, in any geographic area, during any time period or in any
segment of the market.
(i) Parent has the right to make available to the Surviving
Corporation all trade secrets and other confidential information used in the
business of Parent, including such information entrusted to Parent by third
parties.
(j) There are no quality defects in the designs contained in the
Parent Owned Intellectual Property Rights and, except as disclosed in
Schedule 4.11, such designs comply with all applicable laws.
SECTION 4.12 LABOR MATTERS. Neither Parent nor any of its
subsidiaries is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by Parent or any of its
subsidiaries.
SECTION 4.13 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.13 sets forth each employee benefit plan with
respect to which Parent or its ERISA Affiliates sponsors or otherwise has any
obligation (the "Parent Employee Benefit Plans").
(b) Except as disclosed in Schedule 4.13:
(i) No Parent Employee Benefit Plan is subject to Title IV of
ERISA.
(ii) No Parent Employee Benefit Plan promises or provides
health or life benefits to retirees or former employees except as required
by federal continuation of coverage laws or similar state laws.
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(iii) Each Parent Employee Benefit Plan has at all times been
operated in substantial compliance with ERISA, the Code, any other
applicable law (including all reporting and disclosure requirements
thereunder) and the terms of the plan. Each Parent Employee Benefit Plan
that is intended to be tax qualified under Section 401(a) of the Code has
received a favorable determination letter from the IRS stating that the
Plan (and all amendments) is tax qualified and that any trust associated
with the plan is tax exempt under Section 501(a) of the Code. To the
knowledge of Parent, there is no reason why such qualified status would be
revoked.
(iv) To the knowledge of Parent, no state of facts or
conditions exist which reasonably could be expected to subject Parent to
any material liability (other than routine claims for benefits) with
respect to any Parent Employee Benefit Plan under the terms of the Parent
Employee Benefit Plan or applicable law.
(v) Parent has not committed to make any material increase in
contributions or benefits under any Parent Employee Benefit Plan and has
not committed to establish any new plan.
(vi) There are no material unfunded liabilities as of the
Closing Date associated with any Parent Employee Benefit Plan. All
contributions to each Parent Employee Benefit Plan that are required to be
made with respect to periods ending on or before the Closing Date
(including periods from the first day of the then current plan or policy
year to the Closing Date) have been made or accrued before the Closing
Date.
(vii) With respect to each Parent Employee Benefit Plan (to the
extent applicable), Parent has delivered to Company copies of the plan
documents, plan amendments, summary plan descriptions, the most recent tax
qualified determination letters from the IRS, the three most recent Form
5500 Annual Reports, including related schedules and audited financials,
and a list of assets associated with each Parent Employee Benefit Plan.
(viii) The benefits to be provided to participants under
each Parent Employee Benefit Plan, other than a tax qualified plan under
Code Section 401(a), are to be provided exclusively through insurance or
from the general assets of Parent.
SECTION 4.14 COMPLIANCE WITH LAWS. Except as disclosed in the
Parent SEC Documents, neither Parent nor any of its subsidiaries (a) is in
violation of, nor has it violated, any applicable provisions of any laws,
statutes, ordinances or regulations, including the applicable the Medicare
Laws and the Medicaid Laws, or (b) has received any notice from any
Governmental Entity or any other person that the Company or any of its
subsidiaries is in violation of, or has violated, any applicable provisions
of any laws, statutes, ordinances or regulations, except in the case of
clauses (a) and (b), for violations, individually or in the aggregate, which
have not had and would not reasonably be expected to have a have a Parent
Material Adverse Effect. Each of Parent and each of its subsidiaries has all
permits, licenses, and franchises from Governmental Entities required to
conduct its business as now being conducted, except for such permits,
licenses, and franchises the absence of which would not, individually or in
the aggregate, have a Parent Material Adverse Effect.
SECTION 4.15 BROKERS. Except for John G. Kinnard & Co. ("Parent's
Broker") no broker, investment banker, financial advisor or other person is
entitled to any broker's, finder's, financial advisor's or other similar fee
or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Parent and Sub.
Parent has provided the Company with a correct and complete copy of the fee
letter between Parent and Parent's broker.
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SECTION 4.16 OPINION OF FINANCIAL ADVISOR. Parent has received
the opinion of Parent's Broker, dated the Agreement Date, to the effect that,
as of such date, the consideration to be paid in the Merger is fair to
Parent's stockholders from a financial point of view, a signed copy of which
opinion has been delivered to the Company.
SECTION 4.17 ACCOUNTING MATTERS. Neither Parent nor Sub nor, to
Parent's knowledge, any of Parent's affiliates, has taken or agreed to take
any action that (without regard to any action taken or agreed to be taken by
the Company or any of its affiliates) would prevent Parent from accounting
for the business combination to be effected by the Merger as a pooling of
interests.
SECTION 4.18 TAX MATTERS. Neither Parent nor Sub nor, to its
knowledge, any of Parent's affiliates, has taken or agreed to take any
action, or knows of any circumstances, that (without regard to any action
taken or agreed to be taken by the Company or any of its affiliates) would
prevent the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
SECTION 4.19 CERTAIN BUSINESS MATTERS. Neither Parent nor, to its
knowledge, any of its affiliates has (a) made or agreed to make any
contribution, payment or gift to any customer, supplier, governmental
official, employee or agent where either the contribution, payment or gift or
the purpose thereof was illegal under any applicable law, (b) established or
maintained any unrecorded fund or asset of Parent or any of its subsidiaries
for any improper purpose or made any false entries on its books and records
for any reason, (c) made or agreed to make any contribution, or reimbursed
any political gift or contribution made by any other person, to any candidate
for federal, state or local public office in violation of any applicable law,
or (d) engaged in any activity constituting fraud or abuse under applicable
laws relating to health care, insurance or the regulation of professional
corporations.
SECTION 4.20 CERTAIN CONTRACT MATTERS.
(a) Schedule 4.20(a) sets forth, as of the Agreement Date, a list
of each contract to which Parent, its subsidiaries, or any of its affiliates
(other than individuals) is a party limiting the right of Parent prior to the
Closing Date, or Parent or any of its subsidiaries, or affiliates (other than
individuals), at or after the Closing Date, to engage in, or to compete with
any person in, any business, including each contract containing exclusivity
provisions restricting the geographical area in which, or the method by
which, any business may be conducted by Parent, its subsidiaries, or any of
its affiliates (other than individuals) prior to the Closing Date, or by
Parent, its subsidiaries, or affiliates (other than individuals) after the
Closing Date.
(b) Parent and its subsidiaries have acted in full compliance with
all laws and regulations applicable to the contracts held by Parent or its
subsidiaries with, or covering beneficiaries of, the federal Medicare
program, the federal and state Medicaid programs. To Parent's knowledge, no
circumstances exist which would allow the government customer under such
contracts to require or request the repayment or reduction, as the case may
be, of any payments made to, accrued by, or to be made to Parent or its
subsidiaries under such contracts.
(c) Each contract listed on Schedule 4.20(a) or described in
Section 4.20(b) is in full force and effect, each is a legal, valid and
binding contract, and there is no material default (or any event which, with
the giving of notice or lapse of time or both, would be a material default)
by Parent or any of its subsidiaries, in the timely performance of any
material obligation to be performed or paid under any such contract.
SECTION 4.21 ACCOUNTS RECEIVABLE. Schedule 4.21 contains a complete
and accurate balance sheet of Parent as of November 1, 1997 and a complete and
accurate accounts receivables aging report as of November 1, 1997. The
accounts receivable reflected on Schedule 4.21 and those arising
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after the date thereof are valid receivables, are not subject to valid
counterclaims or set-offs, and are collectible in accordance with their
terms, except to the extent of the bad debt reserve reflected on Schedule
4.21.
SECTION 4.22 INVENTORY. The inventory of raw materials, work in
process and finished goods of Parent consists of items of a cost, quality and
quantity usable and, with respect to finished goods only, salable at the
normal profit levels of Parent in the ordinary course of the business of
Parent. The inventory of finished goods of Parent is not slow-moving as
determined in accordance with past practices, obsolete or damaged and is
merchantable and fit for its particular use. Parent has on hand or has
ordered and expects timely delivery of such quantities of raw materials, and
has on hand such quantities of work in process and finished goods, in each
case as are reasonably required to timely fill current orders on hand which
require delivery within 60 days and to maintain the manufacture and shipment
of products at its normal level of operations. The values at which such
inventory is carried on the balance sheet contained in Schedule 4.21 are in
accordance with generally accepted accounting principles. Schedule 4.22
contains a materially complete and accurate summary of Parent's inventory of
raw materials, work in progress, finished goods and reserve for obsolete and
other inventory allowance or accrual calculation schedules as of November 1,
1997.
SECTION 4.23 ENVIRONMENTAL MATTERS.
(a) Parent and the real property owned or leased by Parent
("Parent's Property") are in material compliance with all applicable
Environmental Laws.
(b) Parent has obtained, and maintained in full force and effect,
all environmental permits necessary to conduct its business and operate
Parent's Property. A true and correct copy of each such Environmental Permit
has been provided by Parent to the Company. Parent has conducted its
business in compliance with all terms and conditions of Parent's
Environmental Permits. Parent has filed all reports and notifications
required to be filed under and pursuant to all applicable Environmental Laws.
(c) Except as set forth in the Disclosure Schedule under the
caption referencing this Section 4.23: (i) no Hazardous Materials have been
generated, treated, contained, handled, located, used, manufactured,
processed, buried, incinerated, deposited, stored, or released on, under or
about any part of Parent's Property during the period Parent was in
possession thereof, (ii) Parent's Property and any improvements thereon,
contain no asbestos, urea, formaldehyde, radon at levels above natural
background, PCBs or pesticides, and (iii) no aboveground or underground
storage tanks are located on, under or about Parent's Property.
(d) Except as set forth in the Disclosure Schedule under the
caption referencing this Section 4.23, Parent has not received notice
alleging in any manner that any of them is, or might be potentially
responsible for any Release of Hazardous Materials, or any costs arising
under or violation of Environmental Laws.
(e) Parent and Parent's Property are not and have not been listed
on the United States Environmental Protection Agency National Priorities List
of Hazardous Waste Sites, or any other list, schedule, law, inventory or
record of hazardous or solid waste sites maintained by any federal, state or
local agency.
(f) Parent has disclosed and delivered to the Company all
environmental reports and investigations which Parent has obtained or ordered
with respect to the business of Parent and Parent's Property.
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(g) To the knowledge of Parent, no part of the business of Parent
or Parent's Property has been used as a landfill, dump or other disposal,
storage, transfer, handling or treatment area for Hazardous Materials, or as
a gasoline service station or a facility for selling, dispensing, storing,
transferring, disposing or handling petroleum and/or petroleum products.
(h) No lien has been attached or filed against Parent or Parent's
Property in favor of any governmental or private entity for (i) any liability
or imposition of costs under or violation of any applicable Environmental
Law; or (ii) any Release of Hazardous Materials.
SECTION 4.24 DISCLOSURE. No representation or warranty contained
in this Agreement, in the Parent Disclosure Schedules, or in any document
delivered by Parent to the Company pursuant to Article VII of this Agreement,
contains, or will at the Effective Time contain, any untrue statement of a
material fact or omits or will at, the Effective Time, omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were or will be made, not misleading.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 5.1 CONDUCT OF BUSINESS BY THE COMPANY. Except as
contemplated by this Agreement, from the Agreement Date until the Effective
Time, each of the Company and each of its subsidiaries shall conduct its
business in the ordinary course consistent with past practice and shall use
reasonable efforts to preserve intact its business organization and
relationships with third parties and to keep available the services of its
present officers and employees. Without limiting the generality of the
foregoing, except as provided in this Agreement from the Agreement Date until
the Effective Time, neither the Company nor any of its subsidiaries, without
the prior written approval of Parent, will:
(a) amend its certificate of incorporation, bylaws, or other
comparable charter of organizational documents;
(b) (i) declare or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of
their capital stock, (ii) split, combine, or reclassify any of their capital
stock, or issue or authorize the issuance of any other securities in respect
of shares of their capital stock, or (iii) purchase, redeem, or otherwise
acquire any shares of capital stock or any other securities or any rights,
warrants, or options to acquire any such shares or other securities;
(c) issue, grant, award, sell, pledge, or otherwise encumber any
shares of their capital stock, any other voting securities, or any securities
convertible into or any rights, warrants, or options to acquire, any such
shares, voting securities, or convertible securities, other than the issuance
of shares of Company Common Stock upon the exercise of Company Options or
Company Warrants in accordance with their present terms;
(d) acquire or agree to acquire by merger, consolidation, asset
purchase, or any other manner, (i) any corporation, partnership, joint
venture, association or other business organization, or any division thereof
or (ii) any assets that are material, individually or in the aggregate, to
the Company, except purchases of inventory in the ordinary course of business
consistent with past practice;
(e) sell, lease, license, mortgage, subject to any Lien, or
otherwise dispose of any of its assets, except sales of inventory in the
ordinary course of business consistent with past practice;
(f) (i) incur any indebtedness, issue or sell any debt securities
or warrants or other rights to acquire any debt securities of the Company or
a subsidiary, guarantee any debt or debt security of another person, enter
into any "keep well" or other agreement to maintain any financial statement
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condition of another person or enter into any arrangement having the economic
effect of any of the foregoing, except for short-term borrowings incurred in
the ordinary course of business consistent with past practice, or (ii) make
any loans, advances, or capital contributions to, or investments in, any
other person, other than (A) to the Company or (B) advances to employees
consistent with past practice;
(g) make or agree to make any new capital expenditure or
expenditures which, individually, is in excess of $100,000 or, in the
aggregate, are in excess of $500,000;
(h) make any tax election or settle or compromise any tax
liability, or make any change in any method of accounting for taxes or
accounting policy or practice with respect to taxes;
(i) pay, discharge, settle, or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement, or
satisfaction, in the ordinary course of business consistent with past
practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the Company included in the
Company SEC Documents or incurred in the ordinary course of business
consistent with past practice, or waive any material benefits of, or agree to
modify in any material respect, any confidentiality, standstill or similar
agreements to which the Company or a subsidiary is a party;
(j) except in the ordinary course of business, modify, amend, or
terminate any material contract or agreement to which the Company is a party
or waive, release, or assign any material rights or claims;
(k) enter into any agreement which if entered into prior to the
Agreement Date would have been required to be listed on Section 3.20(a) of
the Company Disclosure Schedule or which is covered by Section 3.20(b) or
amend or modify any agreement listed on 3.20(a) or covered by Section 3.20(b);
(l) except as required by applicable law or in the ordinary course
of business, (i) adopt, enter into, terminate, or amend any bonus, profit
sharing, thrift, compensation, stock option, stock purchase, restricted
stock, pension, retirement, or deferred compensation or other plan, trust
arrangement or fund for the benefit or welfare of any director, officer or
current or former employee (each, a "Benefit Plan"), (ii) increase in any
manner the compensation or fringe benefits of, or pay any bonus to, any
director or employee (except for normal increases or bonuses in the ordinary
course of business consistent with past practice), (iii) pay any benefit not
provided for under any Benefit Plan, (iv) except as permitted in clause (ii),
grant any awards, or remove any existing restrictions, under any bonus,
incentive, performance or other compensation plan or arrangement or Benefit
Plan, or (v) take any action to fund or in any other way secure the payment
of compensation or benefits under any employee plan, agreement, or
arrangement or Benefit Plan;
(m) make any change in any method of accounting or accounting
practice or policy other than those required by generally accepted accounting
principles;
(n) take any action that (without regard to any action taken or
agreed to be taken by Parent or any of its affiliates) would prevent Parent
from accounting for the business combination to be effected by the Merger as
a pooling of interests;
(o) take any action that (without regard to any action taken or
agreed to be taken by Parent or any of its affiliates) would prevent the
Merger from qualifying as a reorganization within the meaning of Sections
368(a) of the Code;
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(p) pay any fees of any legal or tax adviser retained in
connection with the Merger, including Chrisman Bynum & Johnson or Hogan &
Hartson, L.L.P., calculated on a basis other than an hourly basis at the
maximum rates per hour set forth in the Company Disclosure Letter, with bills
detailing such hours and hourly charges to be submitted to Parent at the
Effective Time;
(q) authorize any of, or commit or agree to take any of, the
foregoing actions; or
(r) enter into any written employment agreement, after the
Agreement Date, with any employee or any verbal agreement providing for
benefits not equivalent to employees of similar position in the Company.
SECTION 5.2 CONDUCT OF BUSINESS BY PARENT. Except as provided in
this Agreement, from the Agreement Date until the Effective Time, each of
Parent and Sub shall conduct its business in the ordinary course consistent
with past practice and shall use reasonable efforts to preserve intact its
business organization and relationships with third parties and to keep
available the services of its present officers and employees. Without
limiting the generality of the foregoing neither Parent nor any of its
subsidiaries, without the prior written approval of the Company, will:
(a) except for an amendment to increase the number of authorized
shares of its common stock from 15,000,000 to 30,000,000 (the "Charter
Amendment"), amend its articles of incorporation, bylaws, or other comparable
charter of organizational documents;
(b) (i) declare or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of
their capital stock, (ii) split, combine, or reclassify any of their capital
stock, or issue or authorize the issuance of any other securities in respect
of shares of their capital stock, or (iii) purchase, redeem, or otherwise
acquire any shares of capital stock or any other securities or any rights,
warrants, or options to acquire any such shares or other securities;
(c) make any acquisition or take any other action which would
materially adversely affect its ability to consummate the transactions
contemplated by this Agreement;
(d) take any action that (without regard to any action taken or
agreed to be taken by the Company or any of its affiliates) would prevent the
Merger from qualifying as a reorganization within the meaning of Sections
368(a) of the Code;
(e) take any action that (without regard to any action taken or
agreed to be taken by the Company or any of its affiliates) would prevent
Parent from accounting for the business combination to be effected by the
Merger as a pooling of interests; or
(f) authorize either of, or commit or agree to take either of, the
foregoing actions.
SECTION 5.3 NO SOLICITATION OF TRANSACTIONS.
(a) Except as expressly contemplated by this Agreement or
otherwise consented to in writing by Parent, from the Agreement Date until
the Effective Time, the Company shall not participate in any discussions
with, provide any information to, enter into any agreement or understanding
with, or otherwise cooperate in any other way with any person (other than
Parent and its directors, officers, employees, representatives, and agents)
concerning any "Company Competing Transaction," or permit or authorize any of
the directors, officers, employees, shareholders or representatives
(including, without limitation, any financial advisor, attorney, or
accountant) of the Company or any of its subsidiaries to take any such
action. The Company shall promptly notify Parent when it receives, or
becomes aware that any subsidiary or any director, officer, employee, or
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representative of the Company or any subsidiary has received any inquiries,
proposals, or requests for information concerning a Company Competing
Transaction.
For purposes of this Agreement, "Company Competing Transaction"
shall mean any of the following involving the Company (other than the
transactions contemplated by this Agreement): (a) any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving the Company or any proposal or offer to acquire in any manner 20%
or more of the voting equity securities of the Company in a single
transaction or series of related transactions; (b) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition of 20% or more of the assets
of the Company on a consolidated basis, in a single transaction or a series
of related transactions; or (c) any agreement to, or public announcement by
the Company of a proposal, plan, or intention to, do any of the foregoing, in
each case other than in accordance with this Agreement.
(b) Except as expressly contemplated by this Agreement, or
otherwise consented to in writing by the Company, from the Agreement Date
until the Effective Time, Parent shall not participate in any discussions
with, provide any information to, enter into any agreement or understanding
with, or otherwise cooperate in any other way with any person (other than
Company and its directors, officers, employees, representatives, and agents)
concerning any "Parent Competing Transaction," or permit or authorize any of
the directors, officers, employees, shareholders or representatives
(including, without limitation, any financial advisor, attorney, or
accountant) of Parent or any of its subsidiaries to take any such action.
Parent shall promptly notify Company when it receives, or becomes aware that
any subsidiary or any director, officer, employee, or representative of
Parent or any subsidiary has received any inquiries, proposals, or requests
for information concerning a Parent Competing Transaction.
For purposes of this Agreement, "Parent Competing Transaction"
shall mean any of the following involving the Parent (other than the
transactions contemplated by this Agreement): (a) any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving Parent, or any proposal or offer to acquire in any manner 20% or
more of the voting equity securities of Parent in a single transaction or
series of related transactions; (b) any sale, lease, exchange, mortgage,
pledge, transfer, or other disposition of 20% or more of the assets of Parent
on a consolidated basis, in a single transaction or a series of related
transactions; or (c) any agreement to, or public announcement by Parent of a
proposal, plan, or intention to, do any of the foregoing, in each case other
than in accordance with this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 STOCKHOLDER APPROVALS. Each of the Company and
Parent shall take, in accordance with applicable law, applicable Nasdaq rules
and its respective certificate or articles of incorporation and by-laws, all
action necessary to convene, respectively, (i) an appropriate meeting of
stockholders of Parent to consider and vote upon (A) the approval and
adoption of this Agreement and the Merger (including the issuance of the
shares of Parent Common Stock to be issued in the Merger pursuant to this
Agreement), (B) the approval of the Charter Amendment, (C) the election,
effective immediately after the Effective Time, of the persons set forth in
Section 1.6 to the board of directors of Parent, and (D) any other matters
required to be approved by Parent stockholders for consummation of the
Merger, and (ii) an appropriate meeting of stockholders of the Company to
consider and vote upon the approval and adoption of this Agreement and the
Merger and any other matters required to be approved by the Company's
stockholders for consummation of the Merger as promptly as practicable after
the Registration Statement is declared effective. The board of directors of
Parent and the board of directors of the Company shall recommend such
approval, and each of Parent and the Company shall take all reasonable lawful
action to solicit such approval by its respective stockholders. The Company
and Parent shall coordinate and cooperate with respect to the timing of the
meetings and shall use
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their respective best efforts to hold such meetings on the same day as soon
as practicable after the Agreement Date.
SECTION 6.2 PREPARATION OF FORM S-4 AND THE PROXY STATEMENT;
STOCKHOLDERS' MEETINGS. As soon as practicable following the Agreement Date,
(i) the Company and Parent shall cooperate in the preparation of a
registration statement on Form S-4 (the "Form S-4") to be filed by Parent in
connection with the issuance of Parent Common Stock in the Merger (including
the joint proxy statement and prospectus and other proxy solicitation
materials of the Company and Parent constituting a part thereof (the "Joint
Proxy Statement")). Each of the Company and Parent shall use reasonable
efforts to have the Form S-4 declared effective under the Securities Act as
promptly as practicable after such filing and to maintain such effectiveness
until the shares covered thereby have been issued. Parent shall provide the
Company with copies of all filings made pursuant to this Section 6.2 and
shall consult with the Company on any responses to comments made by the staff
of the SEC with respect thereto. The Company and Parent will use reasonable
efforts to cause the Joint Proxy Statement to be mailed to their respective
stockholders as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. Parent shall, at its expense, also take
any action required to be taken under any applicable state securities laws in
connection with the issuance of Parent Common Stock in the Merger.
SECTION 6.3 INFORMATION SUPPLIED BY THE COMPANY. None of the
information supplied or to be supplied by the Company specifically for
inclusion or incorporation by reference in (a) the Form S-4 will, at the time
the Form S-4 is filed with the SEC, at any time it is amended or supplemented
and, at the time it becomes effective under the Securities Act and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are
made, not misleading, and (b) the Proxy Statement will, at the date it is
first mailed to the Company's stockholders and at the time of the
Stockholders' Meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. If at any time prior to the Effective
Time any event or circumstance relating to the Company, or its officers or
directors, should be discovered by the Company which should be set forth in
an amendment to the Form S-4 or a supplement to the Proxy Statement, the
Company shall promptly inform Parent. All documents, if any, that the
Company is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form and substance in all
material respects with the applicable requirements of the Exchange Act and
the rules and regulations thereunder.
SECTION 6.4 INFORMATION SUPPLIED BY PARENT. None of the
information supplied or to be supplied by Parent specifically for inclusion
or incorporation by reference in (i) the Form S-4 will, at the time the Form
S-4 is filed with the SEC, at any time it is amended or supplemented, at the
time it becomes effective under the Securities Act and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading, and (ii) the Proxy Statement will, at the date it is first mailed
to the Company's stockholders and at the time of the Stockholders' Meetings,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event or
circumstance relating to Parent or its officers and directors, should be
discovered by Parent which should be set forth in an amendment to the Form
S-4 or a supplement to the Proxy Statement, Parent shall promptly inform the
Company and shall promptly prepare such supplement or amendment and file such
amendment to the Form S-4. All documents that Parent is responsible for
filing with the SEC in connection with the transactions contemplated herein
will comply as to form and substance in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
thereunder. Prior to the Closing Date, Parent shall use reasonable efforts
to cause the
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shares of Parent Common Stock to be issued pursuant to the Merger to be
registered or qualified under all applicable securities or blue sky laws of
each of the states and territories of the United States, and to take any
other actions which may be necessary to enable the Parent Common Stock to be
issued pursuant to the Merger to be distributed in each such jurisdiction.
SECTION 6.5 LETTERS OF THE COMPANY'S ACCOUNTANTS. The Company
shall use reasonable efforts to cause to be delivered to Parent opinion
letters from Price Waterhouse LLP ("Company's Accountant"), addressed to
Parent and the Company, on or prior to the Agreement Date, stating that after
appropriate review of the Merger Agreement and based on its familiarity with
the Company, the Company will qualify as a party to a pooling of interests
transaction under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations.
SECTION 6.6 LETTERS OF PARENT'S ACCOUNTANTS. Parent shall use
reasonable efforts to cause to be received by it opinion letters from Price
Waterhouse LLP ("Parent's Accountant"), addressed to Parent and the Company,
on or prior to the Agreement Date, stating that the Merger will qualify as a
pooling of interests transaction under Opinion 16 of the Accounting
Principles Board and applicable SEC rules and regulations.
SECTION 6.7 ACCESS TO INFORMATION. Subject to Section 6.8, from
the Agreement Date to the Effective Time, Parent and the Company shall each
provide to the other access to all information and documents which the other
may reasonably request regarding the business, assets, liabilities, employees
and other aspects of the other party, other than the information and
documents that in the opinion of such other party's legal counsel may not be
disclosed under applicable law.
SECTION 6.8 CONFIDENTIALITY. The parties will, and will cause
their respective directors, officers, employees, accountants, consultants,
legal counsel, and other representatives to, comply with all of their
respective obligations under the confidentiality agreement between Parent and
the Company, dated June 6, 1997 (the "Confidentiality Agreement"). Without
limiting the generality of the obligations set forth in the Confidentiality
Agreement, both parties to this Agreement agree that, without the consent of
the other party, neither party will solicit or cause to be solicited for
employment any employee, sales agent or sales representative of the other
party, or hire any employee, sales agent or sales representative with whom
such party had contact in the course of evaluating the Merger, prior to the
Effective Time and for a period of 18 months after any termination of this
Agreement. Any such consent granted by a party is revocable at any time.
For purposes of this paragraph, solicitation shall not include solicitation
of employees, sales agents or sales representatives (i) who first solicit
employment or relationship from the party in question, or (ii) who are
solicited (A) by advertising in periodicals of general circulation, or (B) by
an employee search firm on a party's behalf, so long as such party does not
direct or encourage such firm to solicit such employee or any other employees
of the other party.
SECTION 6.9 PUBLIC ANNOUNCEMENTS. Each of Parent and the Company
will consult with the other party before issuing any press release or making
any public statement with respect to this Agreement and the transactions
contemplated hereby and, except as may be required by applicable law or any
listing agreement with any national securities exchange, will not issue any
such press release or make any such public statement prior to such
consultation. The parties have agreed on the text of a joint press release
by which Parent and the Company will announce the execution of this Agreement.
SECTION 6.10 APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) The Company and Parent shall use reasonable efforts to (i)
take, or cause to be taken, all appropriate action necessary under applicable
law or required to be taken by any Governmental Entity to consummate the
Merger and the transactions contemplated by this Agreement
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as promptly as practicable, (ii) obtain from any Governmental Entities any
licenses, waivers, or approvals required to be obtained by the Company or
Parent or any of their respective subsidiaries in connection with the
authorization, execution, and delivery of this Agreement and the consummation
of the transactions contemplated hereby, (iii) give any notices to
non-Governmental Entities and obtain any third party consents, (A) necessary
to consummate the Merger and the transactions contemplated by this Agreement,
(B) disclosed or required to be disclosed in the schedules to this Agreement,
or (C) required to prevent a Company Material Adverse Effect or a Parent
Material Adverse Effect, and (iv) as promptly as practicable, make all
necessary filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the Securities
Act, the Exchange Act, and any other applicable federal or state securities
laws, and (B) any other applicable law; provided that Parent and the Company
shall cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith.
Without limiting the generality of the foregoing, the Company and Parent
shall use reasonable efforts to give any notices to any applicable third
parties and to obtain all necessary consents in order to ensure that the
Merger does not cause termination of the lease or leases, as the same may be
amended, relating to the Company's facility located at 5802 Breckenridge
Parkway, Suites 101, 105 and 200, Tampa, Florida. In the event that either
Parent or the Company shall fail to perform any action listed in (i), (ii),
(iii), or (iv) above, it shall use reasonable efforts, and shall take any
such actions reasonably requested by the other party, to minimize any adverse
effect upon the Company and Parent, their respective subsidiaries and their
respective businesses resulting, or which could reasonably be expected to
result after the Effective Time, from the failure to perform such action. The
Company and Parent shall use reasonable efforts to furnish to each other all
information required for any application or other filing to be made pursuant
to the rules and regulations of any applicable law (including all information
required to be included in the Form S-4 and the Proxy Statement) in
connection with the transactions contemplated by this Agreement.
(b) Except as otherwise permitted by this Agreement, none of the
Company, Parent or Sub will knowingly take any action, or omit to take any
action, if such action or omission would, or would reasonably be expected to,
result in any of its representations or warranties set forth herein being or
becoming untrue, or in any of the conditions to the Merger set forth in this
Agreement not being satisfied.
(c) From the Agreement Date until the Effective Time, each of
Parent, and the Company shall promptly notify the other of any pending or
threatened action, proceeding or investigation by any Governmental Entity or
any other person (i) challenging or seeking material damages in connection
with the Merger or the conversion of the Company Common Stock into Parent
Common Stock pursuant to the Merger or (ii) seeking to restrain or prohibit
the consummation of the Merger or otherwise limit the right of Parent or any
of its subsidiaries to own or operate all or any portion of the businesses or
assets of the Company.
SECTION 6.11 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) From and after the Effective Time, Parent shall, and shall
cause the Company to, jointly and severally, indemnify, defend and hold
harmless the present and former officers and directors of the Company and
persons who become officers or directors prior to the Effective Time
(collectively, the "Indemnitees") against all losses, expenses, (including
reasonable attorney's fees) claims, damages, liabilities, costs or judgments
or amounts that are paid in settlement with the approval of Parent (which
approval shall not be unreasonably withheld) arising out of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement) to the full
extent permitted or required as of the Agreement Date by the Company's
certificate of incorporation and bylaws (and shall also advance expenses as
incurred to the fullest extent permitted under the Company's certificate of
incorporation and bylaws, provided
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that the person to whom expenses are advanced provides the undertaking to
repay such advances if and as contemplated by applicable law or such
certificate of incorporation and bylaws). The Company shall use reasonable
efforts to obtain extended reporting endorsements (tail coverage) on the
fiduciary liability, professional liability (including medical malpractice
and hospital professional liability), and directors and officers liability
policies currently covering the Company or any of the Indemnitees required to
be indemnified by Parent at a commercially reasonable cost, effective as of
and following the Effective Time; provided that such coverage and the cost
thereof shall be subject to Parent's approval. In connection with such
efforts, the Company will complete accurately in all material respects any
insurance applications and forms of the applicable insurer and take any
reasonable steps to preserve any claims, including submitting a full and
complete list of any potential claims of which the Company has knowledge,
under the policy issued by such insurer. In the event the Company is unable
to obtain such extended reporting coverage under the Company's existing
directors and officers liability insurance policies at a commercially
reasonable cost, Parent shall use reasonable efforts to provide similar
coverage for those Indemnitees that it is required to indemnify under
policies then maintained by Parent; provided that such similar coverage is
available to Parent at a commercially reasonable cost. Notwithstanding any
provisions of this Section 6.11(a), failure by the Company and/or Parent,
despite use of their respective reasonable efforts, to obtain such extended
reporting endorsements or to provide such similar coverage under Parent's
policies shall not in any way affect, lessen or excuse Parent from its
obligation to indemnify, defend and hold harmless the Indemnitees to the
extent required by this Section 6.11.
(b) In the event any claim, action, suit, proceeding or
investigation (a "D&O Claim") for which indemnification is provided under
this Section 6.11 is brought against an Indemnitee (whether arising before or
after the Effective Time) after the Effective Time (i) such Indemnitee may
retain counsel satisfactory to it (subject to approval by the indemnifying
party, which approval shall not be unreasonably withheld, and subject to the
terms and conditions of the applicable directors and officers liability
insurance or fiduciary liability insurance policies), (ii) the indemnifying
party shall pay all reasonable fees and expenses of such counsel for such
Indemnitee promptly as statements therefor are received (subject to the
ability of the indemnifying party to receive such information relative to the
legal services provided as is customarily provided and reasonably requested
by the indemnifying party and provided that nothing in this Section 6.11
shall prevent the indemnifying party from disputing any fees it reasonably
believes are not reasonable), and (iii) the indemnifying party will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that the indemnifying party shall not be liable for any settlement
of any D&O Claim effected without its written consent, which consent shall
not be unreasonably withheld. Any Indemnitee wishing to claim
indemnification under this Section 6.11, upon learning of any such D&O Claim,
shall notify the appropriate indemnifying party (but the failure so to notify
such indemnifying party shall not relieve the indemnifying party from any
liability which it may have under this Section 6.11 except to the extent such
failure materially prejudices such indemnifying party), and shall deliver to
such indemnifying party the undertaking contemplated by applicable law. The
Indemnitees as a group may retain only one law firm to represent them with
respect to each such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnitees.
(c) This Section 6.11 is intended to benefit the Indemnitees,
shall be enforceable by each Indemnitee and his or her heirs and
representatives, and shall be binding on all successors and assigns of the
Company and Parent.
SECTION 6.12 OBLIGATIONS OF SUB. Parent shall take all action
necessary to cause Sub to perform its obligations under this Agreement and to
consummate the Merger on the terms and subject to conditions set forth in
this Agreement.
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SECTION 6.13 POOLING AFFILIATES.
(a) Promptly following the Agreement Date, the Company shall
deliver to Parent a list of names and addresses of those persons who are
affiliates within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act or otherwise applicable SEC accounting
releases with respect to pooling of interests accounting treatment (each such
person, a "Pooling Affiliate") of the Company. The Company shall provide
Parent such information and documents as Parent shall reasonably request for
purposes of reviewing such list. The Company shall deliver to Parent, on or
prior to the Effective Time, an affiliate letter in the form attached hereto
as Exhibit A, executed by each of the Pooling Affiliates of the Company
identified in the foregoing list. Parent shall be entitled to place legends
as specified in such affiliate letters on the certificates evidencing any of
the Parent Common Stock to be received by such Pooling Affiliates pursuant to
the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Parent Common Stock, consistent
with the terms of such letters.
(b) For so long as resales of shares of Parent Common Stock issued
pursuant to the Merger are subject to the resale restrictions set forth in
Rule 145 under the Securities Act, Parent will use reasonable efforts to
comply with Rule 144(c)(1) under the Securities Act.
SECTION 6.14 NASDAQ LISTING. Parent shall promptly prepare and
submit a listing application in accordance with the rules of the Nasdaq
National Market covering the shares of Parent Common Stock to be issued in
connection with the Merger and to be issued in connection with the exercise
of Company Options and Company Warrants to be assumed by Parent hereunder.
Parent shall use reasonable efforts to have such application approved by the
Nasdaq National Market prior to the Effective Time.
SECTION 6.15 EMPLOYEE BENEFITS.
(a) Parent reserves the right to request in writing at least 15
days prior to the Closing Date, that the Company cease contributing to one or
more of the Company Employee Benefit Plans effective as of the Closing Date.
(b) If Parent requests that the Company cease contributions to or
terminate a qualified plan under Section 401(k) of the Code (the "Company's
401(k) Plan"), the Company shall (i) adopt written resolutions, the form and
substance of which shall be satisfactory to Parent, to terminate the
Company's 401(k) Plan and to fully (100%) vest all participants under the
Company's 401(k) Plan no later than the third business day preceding the
Closing Date; provided, however, that such plan termination may be made
contingent upon the consummation of the Merger and distribution of benefits
may be made contingent upon the receipt of a favorable determination letter
from the IRS with respect to the termination of the Company's 401(k) Plan,
(ii) deliver, prior to the Closing Date, notice of the Company's 401(k) Plan
termination to any trustees and custodians of the Company's 401(k) Plan
and/or its assets, (iii) appoint (if not already appointed) an institutional
trustee of the Company's 401(k) Plan, and (iv) prepare IRS Form 5310, with
full disclosure of the Merger and the existence of Parent's 401(k) Savings
Plan ("Parent's 401(k) Plan") and the fact that Company employees
participating in the Company's 401(k) Plan as of the Closing Date shall
become participants in Parent's 401(k) Plan immediately following the Closing
Date. The Company shall take all actions necessary to cause such IRS Form
5310, in a form satisfactory to Parent, to be filed with the IRS on, or as
soon as practicable following the Effective Time. If a favorable
determination letter is received from the IRS with respect to the termination
of the Company's 401(k) Plan and distributions of benefits thereunder, Parent
shall take all actions necessary to cause distributions on account of
termination of the Plan to be made as soon as administratively feasible
thereafter. If the IRS fails to issue a favorable determination letter, the
Company's 401(k) Plan shall, at Parent's option, be (i) merged into Parent's
401(k) Plan, or (ii) maintained as a separate frozen qualified plan. In the
event that Parent elects, in accordance with the
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preceding sentence, to continue the Company's 401(k) Plan, then the Company's
401(k) Plan shall be operated in a manner generally consistent with Parent's
401(k) Plan, in terms of available investment options, payment of expenses
and other plan features.
(c) Parent shall recognize all past service with the Company for
employees who are employed by the Company or on disability or a leave of
absence on the Closing Date (the "eligible employees") for all purposes under
all of the Parent Employee Benefit Plans.
(d) Parent shall cause each eligible employee to receive a level
of employee benefits, which in the aggregate is no less favorable than the
employee benefits provided to other Parent employees of substantially
comparable status.
(e) Parent shall recognize all deductibles and coinsurance
payments accrued by eligible employees in 1997 prior to Closing.
(f) Notwithstanding the foregoing, the Company shall suspend the
Company's 1983 Employee Stock Purchase Plan effective as of January 1, 1998
and no further contributions or purchases shall be made under such plan.
(g) Parent shall recognize past service with the Company for all
employees who are terminated as employees by Parent or the Surviving
Corporation after the Effective Time and shall provide the same benefits to
such employees as are provided to Parent's employees under its severance plan
and policies to the extent such benefits are not provided under the plans of
the Surviving Corporation. Any such terminations will be conducted by Parent
in full compliance with applicable law, including the WARN Act.
(h) Parent acknowledges and agrees that, in accordance with
section 1(a)(c)(i) of such agreements, the Merger constitutes a "Change of
Control" as defined in the Change of Control Agreement dated as of July 1,
1996, between the Company and Michael J. Newman, the Change of Control
Agreement dated as of July 1, 1996 between the Company and John L.
Fenstermaker, the Change of Control Agreement dated as of June 1, 1996
between the Company and John R. South and the Change of Control Agreement
dated as of July 1, 1997 between the Company and David S. Hood.
SECTION 6.16 LONGMONT FACILITY. The Company shall negotiate prior
to the Effective Date an amendment to the lease of its facility located at
1225 Ken Pratt Boulevard, Longmont, Colorado, (which amendment need not be
effective unless the Merger is consummated) so that such lease may be
terminated, without penalty to Parent, Sub or the Company, on or after June
30, 1998. Subject to such obligation, the Company, Parent and Sub shall
cooperate in the assignment of such lease, or the option contained in such
lease, or in such other transactions as shall be prudent, to maximize the
value represented by such lease and option.
SECTION 6.17 PREPARATION OF TAX RETURNS.
(a) The Company shall file (or cause to be filed) at its own
expense, on or prior to the due date, all tax returns, including all Company
Employee Benefit Plan returns and reports, for all tax periods ending on or
before the Closing Date where the due date for such returns or reports
(taking into account valid extensions of the respective due dates) falls on
or before the Closing Date; provided, however, that the Company shall provide
Parent with a copy of appropriate workpapers, schedules drafts and final
copies of each federal and state income tax return or election of the Company
(including returns of all Company Employee Benefit Plans) at least ten days
before filing such return or election and shall reasonably cooperate with any
request by Parent in connection therewith.
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(b) Parent, in its sole and absolute discretion, will file (or
cause to be filed) all tax returns of the Company due after the Closing Date.
After the Closing Date, Parent, in its sole and absolute discretion and to
the extent permitted by law, shall have the right to amend, modify or
otherwise change all tax returns of the Company for all tax periods.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.1 CONDITIONS OF EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of the Company, Parent and Sub to
consummate the Merger are subject to the satisfaction upon or prior to the
Closing of the following conditions:
(a) STOCKHOLDER APPROVAL. The holders of a majority of shares of
outstanding Company Common Stock shall have approved this Agreement and the
Merger in accordance with Delaware Law and the certificate of incorporation
and bylaws of the Company and the holders of a majority of shares of Parent
Common Stock shall have approved this Agreement in accordance with Minnesota
Law and the articles of incorporation and bylaws of Parent.
(b) GOVERNMENTAL ENTITY APPROVALS. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expiration of
waiting periods imposed by, any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement shall have
been filed, expired or been obtained.
(c) FORM S-4; PROXY STATEMENT. The Form S-4 shall have become
effective under the Securities Act, shall not be the subject of any stop
order or proceedings seeking a stop order, and the Joint Proxy Statement
shall not at the Effective Time of the Merger be subject to any proceedings
commenced or threatened by the SEC.
(d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
Governmental Entity of competent jurisdiction nor other legal restraint or
prohibition preventing the consummation of the Merger shall be in effect.
(e) TAX OPINION. The Company shall have received an opinion dated
as of the Effective Time in form and substance satisfactory to the Company of
Chrisman Bynum & Johnson, to the effect that (i) the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, (ii) Parent, Sub and the Company will each be a
party to that reorganization within the meaning of Section 368(b) of the Code
(iii) no income, gain or loss will be recognized for federal income tax
purposes by either the Company or Parent as a result of the consummation of
the Merger, and (iv) no income, gain or loss will be recognized for federal
income tax purposes by stockholders of the Company upon the exchange in the
Merger of shares of Company Common Stock solely for shares of Parent Common
Stock (except to the extent of any cash received in lieu of fractional
shares). In connection with such opinion, counsel shall be entitled to rely
upon certain representations and covenants of the Company, Parent, Sub, and
such other persons as such counsel deems appropriate.
(f) POOLING LETTERS. Parent and the Company shall have received
each of the letters described in Sections 6.4 and 6.5 from the Company's
Accountant and Parent's Accountant, respectively and such letters shall not
have been withdrawn.
SECTION 7.2 CONDITIONS OF OBLIGATIONS OF PARENT AND SUB. The
obligations of Parent and Sub to effect the Merger are subject to the
satisfaction prior to or upon the Closing of the following conditions, unless
waived by Parent and Sub:
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(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all respects as of the Closing Date, as though made on and as of
such date (provided that those representations or warranties made as of a
particular date need only be true and correct as of such date). Parent shall
have received a certificate signed on behalf of the Company by the chief
executive officer and the chief financial officer of the Company to such
effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall
have performed in all material respects all obligations and covenants
required to be performed by it under this Agreement prior to or as of the
Closing Date, and Parent shall have received a certificate signed on behalf
of the Company by the chief executive officer and the chief financial officer
of the Company to such effect.
(c) CONSENTS. The consents, approvals and authorizations
described in Schedule 3.5 shall have been obtained in form and in substance
reasonably satisfactory to each of Parent and Sub, except for such consents,
approvals and authorizations with respect to which the failure to obtain
would not have a Company Material Adverse Effect.
(d) LETTERS FROM COMPANY AFFILIATES. Parent shall have received
from each person referred to in Section 6.13 an executed copy of an agreement
substantially in the form of Exhibit A.
(e) DISSENTING SHARES. There shall not be more than 165,000
Dissenting Shares.
SECTION 7.3 CONDITIONS OF OBLIGATION OF THE COMPANY. The
obligation of the Company to effect the Merger is subject to the satisfaction
prior to or upon the Closing of the following conditions, unless waived by
the Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Parent and Sub set forth in this Agreement shall be true and
correct in all respects as of the Closing Date, as though made on and as of
such date (provided that those representations or warranties made as of a
particular date need only be true and correct as of such date). The Company
shall have received a certificate signed on behalf of Parent by the chief
executive officer and the chief financial officer of Parent to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF PARENT AND SUB. Parent and Sub
shall have performed in all material respects all obligations and covenants
required to be performed by them under this Agreement prior to or as of the
Closing Date, and the Company shall have received a certificate signed on
behalf of Parent by the chief executive officer and the chief financial
officer of Parent to such effect.
(c) CONSENTS. The consents, approvals and authorizations
described in Schedule 4.4 shall have been obtained in form and substance
reasonably satisfactory to the Company, except for such consents, approvals
and authorizations with respect to which the failure to obtain would not have
a Parent Material Adverse Effect.
(d) NASDAQ LISTING. The shares of Parent Common Stock
constituting the Merger Consideration shall have been approved for listing on
the Nasdaq National Market System.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time,
notwithstanding any requisite approval of this Agreement and the Merger by
the stockholders of the Company:
(a) by mutual written consent of each of Parent, Sub and the
Company;
(b) by either Parent, Sub or the Company if either (i) the
Effective Time shall not have occurred on or before July 31, 1998; provided,
however, that the right to terminate this Agreement under this Section 8.1(b)
(i) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date, or (ii) there
shall be any law that makes consummation of the Merger illegal or otherwise
prohibited or if any court of competent jurisdiction or Governmental Entity
shall have issued an order, decree, ruling, or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and unappealable;
(c) by either Parent or Sub if the board of directors of the
Company withdraws, modifies, or changes its recommendation of this Agreement
or the Merger in a manner adverse to Parent or Sub or shall have resolved to
do any of the foregoing or the board of directors of the Company shall have
recommended to the stockholders of the Company any Company Competing
Transaction or resolved to do so;
(d) by the Company if the board of directors of Parent withdraws,
modifies, or changes its recommendation of this Agreement or the Merger in a
manner adverse to the Company or shall have resolved to do any of the
foregoing or the board of directors of Parent shall have recommended to the
stockholders of Parent any Parent Competing Transaction or resolved to do so;
(e) by either Parent, Sub or the Company if the Company's
Stockholders' Meeting shall have been held and the stockholders of the
Company shall have failed to approve this Agreement and the Merger at such
meeting (including any adjournment or postponement thereof);
(f) by either Parent, Sub, or the Company, if Parent's
Stockholders' Meeting shall have been held and the stockholders of Parent
shall have failed to approve this Agreement and the Merger at such meeting
(including any adjournment or postponement thereof);
(g) by the Company, in the event of a material breach by Parent or
Sub of any representation, warranty, covenant or agreement contained herein
(other than a breach of Parent or Sub due to the occurrence of a Parent
Material Adverse Effect arising solely due to the public announcement of the
Merger) which has not been cured or is not curable by July 31, 1998;
(h) by Parent, in the event of a material breach by the Company of
any representation, warranty, covenant or agreement contained herein (other
than a breach of Company due to the occurrence of a Company Material Adverse
Effect arising solely due to the public announcement of the Merger) which has
not been cured or is not curable by July 31, 1998;
(i) by either Parent, Sub or the Company, if the average closing
sale price per share of Parent Common Stock as reported on the Nasdaq
National Market System is less than $3.00 for the 10 trading days ending on
the fifth day prior to the Closing (the "Measurement Period"); or
(j) by Parent, if the number of shares held by the record holders
of Company Common Stock, who have properly asserted their rights to appraisal
of such shares pursuant to Section 262 of Delaware Law, exceeds 165,000
shares of Company Common Stock.
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For purposes of subsections (g) and (h) or this Section 8.1, the failure of
the Parent or the Company to reaffirm in accordance with Section 7.2(b) and
Section 7.2(a), respectively, the representations and warranties of this
Agreement at Closing because such representations and warranties are no
longer accurate shall not be considered a breach of such representations or
warranties, and shall not give rise to a payment pursuant to Section 8.3,
unless the inaccuracy is a result of a Competing Transaction or of wilful
action by the Company or Parent, as the case may be.
SECTION 8.2 EFFECT OF TERMINATION. Except as provided in Sections
9.1 and 8.3, in the event of the termination of this Agreement pursuant to
Section 8.1, this Agreement shall forthwith become void, there shall be no
liability under this Agreement on the part of Parent, Sub, or the Company or
any of their respective officers or directors and all rights and obligations
of any party shall cease, subject to the remedies of the parties set forth in
Section 8.3.
SECTION 8.3 REMEDIES AND DISPUTE RESOLUTION.
(a) COMPANY TERMINATION FEE.
(i) The Company shall pay Parent a fee of $1,000,000, if this
Agreement is terminated pursuant to Section 8.1(h) and the breach giving
rise to such termination is not a result of a Company Competing
Transaction.
(ii) The Company shall pay Parent a fee of $1,500,000, (x) if this
Agreement is terminated pursuant to Section 8.1(c), (y) if this Agreement
is terminated pursuant to Section 8.1(e) and a Company Competing
Transaction exists on the date of the Company's Stockholders' Meeting, or
(z) if this Agreement is terminated pursuant to Section 8.1(h) and the
breach giving rise to such termination is a result of a Company Competing
Transaction.
The fees described in subsections 8.3(a)(i) and (ii) are herein referred to
as the Company Termination Fee. Such Company Termination Fee shall be due and
payable with thirty (30) days of Termination, except that any Company
Termination Fee that arises solely because of Section 8.3(a)(ii)(y) and not
because of any breach of Section 5.3(a) shall be due and payable only if and
when a Company Competing Transaction with the competing party is consummated.
In the event that the Company shall fail to pay the Company Termination Fee
when due, there shall also be paid the costs and expenses actually incurred
or accrued by Parent or Sub (including, without limitation, fees and expenses
of counsel) in connection with the collection under and enforcement of this
Section 8.3(a), together with interest on such unpaid Company Termination
Fee, commencing on the date that such Company Termination Fee becomes due, at
a rate equal to the rate of interest publicly announced by U.S. Bank National
Association from time to time, in the City of Minneapolis, Minnesota, as such
bank's "base rate" plus 2%.
(b) PARENT TERMINATION FEE.
(i) Parent shall pay Company a fee of $1,000,000, if this Agreement
is terminated pursuant to Section 8.1(g) and the breach giving rise to
such termination is not a result of a Parent Competing Transaction.
(ii) Parent shall pay to the Company a fee of $1,500,000, (x) if
this Agreement is terminated pursuant to Section 8.1(d), (y) if this
Agreement is terminated pursuant to Section 8.1(f) and a Parent Competing
Transaction exists on the date of the Parent's Stockholders' Meeting, or
(z) if this Agreement is terminated pursuant to Section 8.1(g) and the
breach giving rise to such termination is a result of a Parent Competing
Transaction.
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The fees described in subsections 8.3(b)(i) and (ii) are herein referred to
as the Parent Termination Fee. Such Parent Termination Fee shall be due and
payable with thirty (30) days of Termination, except that any Parent
Termination Fee that arises solely because of Section 8.3(b)(ii)(y) and not
because of any breach of Section 5.3(b) shall be due and payable only if and
when a Parent Competing Transaction with the competing party is consummated.
In the event that Parent shall fail to pay the Parent Termination Fee when
due, there shall also be paid the costs and expenses actually incurred or
accrued by Company (including, without limitation, fees and expenses of
counsel) in connection with the collection under and enforcement of this
Section 8.3(b), together with interest on such unpaid Parent Termination Fee,
commencing on the date that such Parent Termination Fee becomes due, at a
rate equal to the rate of interest publicly announced by U.S. Bank National
Association from time to time, in the City of Minneapolis, Minnesota, as such
bank's "base rate" plus 2%.
(c) TRANSACTION COSTS. Except as set forth in this Section, all
costs and expenses incurred in connection with this Agreement and the Merger
shall be paid by the party incurring such costs or expenses, whether or not
the Merger is consummated; provided, however, that Parent and the Company
shall share equally all fees and expenses, other than attorneys' and
accountants' and investment bankers' fees, incurred in relation to the
printing, filing, and mailing of the Form S-4 and the Proxy Statement
(including financial statements and exhibits) and any amendments or
supplements thereto.
(d) OTHER REMEDIES. Nothing in this Section 8.3 precludes a party
from seeking such other remedies at law or equity as it deems appropriate.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None
of the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time;
provided, however, that this Section 9.1 shall not limit any agreement or
covenant of the parties which by its terms contemplates performance after the
Effective Time.
SECTION 9.2 NOTICES. All notices, requests, claims, demands and
other communications to any party hereunder shall be in writing (including
telecopy or similar writing) and shall be deemed given if delivered
personally, by facsimile, certified mail (postage prepaid, return receipt
requested) or sent by overnight courier (in each case, providing proof of
delivery) to the parties at the following addresses (or such other address
for a party as shall be specified in like notice):
if to Parent or Sub, to:
Rehabilicare Inc.
1811 Old Highway 8
New Brighton, MN 55343
Attention: David B. Kaysen
Facsimile: (612) 638-0477
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if to the Company, to:
Staodyn, Inc.
1225 Ken Pratt Boulevard
Longmont, Colorado 80501
Attention: John R. South
Facsimile: (303) 651-0266
SECTION 9.3 DEFINITIONS. For purposes of this Agreement, the
following terms shall have the meanings ascribed to such terms in the
sections referenced below:
Term Section
---------------------------------------------------------------------------
Agreement Date . . . . . . . . . . . . . . . . . . . . . . . . . Recitals
Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1
Certificate of Merger. . . . . . . . . . . . . . . . . . . . . . 1.2
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
Charter Amendment. . . . . . . . . . . . . . . . . . . . . . . . 5.2
Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recitals
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recitals
Company Affiliated Group . . . . . . . . . . . . . . . . . . . . 3.10
Company Capital Stock. . . . . . . . . . . . . . . . . . . . . . 3.6
Company Common Stock . . . . . . . . . . . . . . . . . . . . . . Recitals
Company Competing Transaction. . . . . . . . . . . . . . . . . . 5.3
Company Employee Benefit Plan. . . . . . . . . . . . . . . . . . 3.13
Company Licensed-In Intellectual Property Rights . . . . . . . . 3.11
Company Material Adverse Effect. . . . . . . . . . . . . . . . . 3.1
Company Option . . . . . . . . . . . . . . . . . . . . . . . . . 2.6
Company Owned Intellectual Property Rights . . . . . . . . . . . 3.11
Company Plans. . . . . . . . . . . . . . . . . . . . . . . . . . 3.13
Company SEC Documents. . . . . . . . . . . . . . . . . . . . . . 3.7
Company Securities . . . . . . . . . . . . . . . . . . . . . . . 3.6
Company Termination Fee. . . . . . . . . . . . . . . . . . . . . 8.3
Company's 401(k) Plan. . . . . . . . . . . . . . . . . . . . . . 6.15
Company's Accountant . . . . . . . . . . . . . . . . . . . . . . 6.4
Company's Broker . . . . . . . . . . . . . . . . . . . . . . . . 3.15
Company's Property . . . . . . . . . . . . . . . . . . . . . . . 3.23
Competing Transaction. . . . . . . . . . . . . . . . . . . . . . 5.3
Company Warrant. . . . . . . . . . . . . . . . . . . . . . . . . 2.7
Confidentiality Agreement. . . . . . . . . . . . . . . . . . . . 6.7
D & O Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
Delaware Law . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1
Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . . 2.2
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . 3.23&4.23
Environmental Permits. . . . . . . . . . . . . . . . . . . . . . 3.23
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.13
ERISA Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 3.13
Evaluation Material. . . . . . . . . . . . . . . . . . . . . . . 6.7
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4
Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
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Exchange Fund..................................... 2.5
Exchange Ratio.................................... 2.1
Expenses.......................................... 8.3
Form S-4.......................................... 6.1
Governmental Entity............................... 3.4
Hazardous Materials............................... 3.23&4.23
Indemnification Agreements........................ 6.11
Indemnitees....................................... 6.10
IRS............................................... 3.10
Joint Proxy Statement............................. 6.1
Lien.............................................. 3.2
Medicaid Laws..................................... 3.4
Medicare Laws..................................... 3.4
Merger............................................ Recitals
Merger Consideration.............................. 2.1
Parent............................................ Recitals
Parent Affiliated Group........................... 4.10
Parent Capital Stock.............................. 4.6
Parent Common Stock............................... Recitals
Parent Competing Transaction...................... 5.3
Parent Employee Benefit Plan...................... 4.13
Parent Licensed-In Intellectual Property Rights... 4.11
Parent Material Adverse Effect.................... 4.1
Parent Owned Intellectual Property Rights......... 4.11
Parent Plans...................................... 4.12
Parent Preferred Stock............................ 4.6
Parent SEC Documents.............................. 4.7
Parent Securities................................. 4.6
Parent Termination Fee............................ 8.3
Parent's 401(k) Plan.............................. 6.15
Parent's Accountant............................... 6.5
Parent's Broker................................... 4.15
Parent's Property................................. 4.23
Pooling Affiliate................................. 6.13
Reference Market Value............................ 2.1
Release........................................... 3.23&4.23
SEC............................................... 3.7
Securities Act.................................... 3.7
Stockholders' Meetings............................ 6.1
Sub............................................... Recitals
Sub Common Stock.................................. 2.1
Surviving Corporation............................. 1.1
SECTION 9.4 AMENDMENT. This Agreement may be changed or modified
by the parties only by action taken by or on behalf of their respective
boards of directors, reflected in a written amendment signed by the parties,
at any time prior to the Effective Time; provided, however, that, after the
approval of this Agreement and the Merger by the stockholders of the Company,
no amendment may be made which would reduce the amount or change the type of
consideration into which each Share shall be converted upon consummation of
the Merger.
SECTION 9.5 WAIVER. At any time prior to the Effective Time, any
party may (a) extend the time for the performance of any obligation or other
act of any other party, (b) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered
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pursuant to this Agreement and (c) waive compliance with any agreement or
condition contained herein, except for the condition regarding the tax
opinion described in Section 7.1(e) hereof. Any such extension or waiver
shall be valid only if set forth in any instrument in writing signed by the
party or parties to be bound thereby.
SECTION 9.6 ENTIRE AGREEMENT. This Agreement (including the
Exhibits and Schedules) and the other documents referenced herein (including
the Confidentiality Agreement) contain the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
arrangements and understandings, both written and oral, with respect thereto.
SECTION 9.7 SEVERABILITY. It is the desire and intent of the
parties that the provisions of this Agreement be enforced to the fullest
extent permissible under the law and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, in the event that
any provision of this Agreement would be held in any jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction. Notwithstanding the foregoing, if
such provision could be more narrowly drawn so as not to be invalid,
prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction.
SECTION 9.8 SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties.
SECTION 9.9 PARTIES IN INTEREST. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and nothing in
this Agreement, express or implied, is intended to or shall confer upon any
other person any right, benefit or remedy of any nature whatsoever under or
by reason of this Agreement, other than Section 6.11 (which is intended to be
for the benefit of the persons covered by the indemnification provisions
contained therein and may be enforced by such persons).
SECTION 9.10 GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware, without
giving effect to the principles of conflict of laws thereof.
SECTION 9.11 COUNTERPARTS; EFFECTIVENESS. This Agreement may be
signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the
same instrument. This Agreement shall become effective when each party
hereto shall have received counterparts hereof signed by all of the other
parties hereto.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers as of the day and
year first above written.
REHABILICARE INC.
By____________________
Name: David B. Kaysen
Title: President
HIPPOCRATES ACQUISITION, INC.
By ____________________
Name: David B. Kaysen
Title: President
STAODYN, INC.
By _____________________
Name: John R. South
Title: President
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APPENDIX B
SECTION 262 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
SECTION 262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Section 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair value of the
stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and
also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by
more than 2,000 holders; and further provided that no appraisal rights shall
be available for any shares of stock of the constituent corporation surviving
a merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of
Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply as nearly
as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been
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given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the date the notice
is given; provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall
be entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the list
at the addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
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Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate fully
in all proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock. The Court's
decree may be enforced as other decrees in the Court of Chancery may be
enforced, whether such surviving or resulting corporation be a corporation of
this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as
provided in subsection (d) of this section shall be entitled to vote such
stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions payable
to stockholders of record at a date which is prior to the effective date of
the merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX C
December 1, 1997
The Board of Directors
Staodyn, Inc.
1225 Florida Avenue
P.O. Box 1379
Longmont, CO 80502
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the common stockholders of Staodyn, Inc. ( "Staodyn" or the
"Company") of the exchange ratio in the proposed merger (the "Merger") of
Staodyn with and into Hippocrates Acquisition, Inc., a subsidiary of
Rehabilicare, Inc. (collectively referred to herein as "Rehabilicare"),
pursuant to the Merger Agreement dated December 1, 1997, ("Agreement").
Under the terms of the Agreement, each outstanding share of Staodyn common
stock, $0.01 par value, will be converted into .829 of a share of
Rehabilicare common stock, $0.10 par value (the "Staodyn/Rehabilicare
Exchange Ratio").
In arriving at our opinion, we have, among other things:
i. reviewed certain publicly available financial statements and other
financial information not publicly available of Staodyn;
ii. reviewed the current condition and growth prospects for Staodyn and
its subsidiary operations, including financial projections prepared by
Staodyn management;
iii. discussed the past and current operations and financial conditions
and the prospects of Staodyn with Staodyn management;
iv. reviewed Staodyn's historical stock trading activity and considered
the prospect for value, liquidity and growth if Staodyn were to remain
independent;
v. evaluated the economic and competitive climate of the medical
device industry, specifically the prospects and competitive environment of
the electrical stimulation segment of the medical device industry;
viii. compared the Rehabilicare offer to recent transactions involving
other companies of similar size;
ix. examined the price and trading activity for Rehabilicare;
x. reviewed the Agreement among Rehabilicare and Staodyn;
xi. analyzed the price obtainable for Staodyn's shares at this time
compared with the risks involved and possible price available at a later time;
xii. reviewed the implications for Staodyn shareholders receiving
Rehabilicare stock with regards to prospects for value, liquidity and growth;
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xiii. met with Rehabilicare management and reviewed certain publicly
available financial statements and other financial information not publicly
available of Rehabilicare;
xiv. reviewed certain publicly available information regarding the
merger of Rehabilicare and its implication for Staodyn shareholders including
the prospects for value, liquidity and growth; and
xv. evaluated the future growth prospects of Rehabilicare following the
Merger.
We have assumed without independent verification the accuracy and
completeness of the financial and other information regarding Staodyn and
Rehabilicare that was provided to us or obtained from publicly available
sources. We have not prepared or acquired an independent valuation or
appraisal of any of the assets of Staodyn and Rehabilicare. With respect to
business plans and forecasts, we have assumed that they have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of Staodyn and Rehabilicare as to the future
performance of Staodyn and Rehabilicare, respectfully. Furthermore, we have
assumed that the Merger will be consummated on a timely basis in accordance
with its terms and pursuant to the Agreement. We have also taken into
account our assessment of general economic, market and financial conditions
as they exist, as well as our experience in connection with similar
transactions and securities valuations generally. Our opinion necessarily is
based upon conditions as they exist and can be evaluated as of the date of
this opinion.
The Wallach Company, Inc. is an investment banking firm engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, private placements, and valuations for corporate and other
purposes. The Wallach Company, Inc., as Staodyn's financial adviser,
assisted with the negotiations leading to the Agreement for which it has and
will receive compensation.
It is understood that this letter is for the information of the
Staodyn Board of Directors only and may not be used for any other purpose
without our prior written consent, provided, however, that we hereby consent
to the inclusion of this opinion in any registration statement or proxy
statement used in connection with the Merger so long as the opinion is
included in its entirety in such registration statement or proxy statement.
Based on our analysis of the foregoing, the assumptions described
above and upon such other factors we deem relevant, it is our opinion that,
as of the date hereof, the Staodyn/Rehabilicare Exchange Ratio is fair to
Staodyn shareholders from a financial point of view.
The Wallach Company, Inc.
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APPENDIX D
[LETTERHEAD OF JOHN G. KINNARD & COMPANY, INCORPORATED]
February 12, 1998
CONFIDENTIAL
Board of Directors
Rehabilicare Inc.
1811 Old Highway Eight
New Brighton, MN 55112
Gentlemen:
You have requested our opinion as to the fairness to the holders of the
common stock of Rehabilicare Inc. ("Rehabilicare") of the Exchange Ratio (as
defined below) to be paid pursuant to the Agreement and Plan of Merger (the
"Merger Agreement"), dated as of December 1, 1997 by and among the Company,
Hippocrates Acquisition, Inc. ("Sub") and Staodyn, Inc. ("Staodyn").
Pursuant to the Merger Agreement, Sub shall be merged with and into Staodyn,
whereupon the separate existence of Sub shall cease and Staodyn will become a
wholly-owned subsidiary of Rehabilicare (the "Merger"). In the Merger, all
of the outstanding common stock, $.01 par value, of Staodyn will be converted
into the right to receive .829 shares (the "Exchange Ratio") of common stock
of Rehabilicare.
John G. Kinnard and Company, Incorporated, as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements, and valuations for estate, corporate and
other purposes. We are acting as financial advisor to Rehabilicare in
connection with the Merger and will receive a fee from Rehabilicare for our
services, a significant portion of which is contingent upon the consummation
of the Merger. In addition, Rehabilicare has agreed to indemnify us for
certain liabilities arising out of our engagement. We have, in the past,
provided financial advisory and financing services to Rehabilicare and may
continue to do so and have received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of our business, we
may actively trade equity securities of Rehabilicare and Staodyn for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
In connection with this opinion we have reviewed, among other things,
the Merger Agreement, Annual Reports to Stockholders or Annual Reports on
Form 10-K of Rehabilicare for the three fiscal years ended June 30, 1997
and, in the case of Staodyn, for the three fiscal years ended November 30,
1996; certain interim reports to stockholders of Rehabilicare and Staodyn and
certain Quarterly Reports on Form 10-Q of Rehabilicare and Staodyn; certain
other communications from Rehabilicare and Staodyn to their respective
stockholders; certain internal financial analyses and forecasts for the
respective businesses as prepared by the management of Rehabilicare and
Staodyn; and pro forma financial statements for the combined company as
prepared by the management of Rehabilicare. We have also held discussions
with certain members of the management of Rehabilicare and Staodyn regarding
the past and current business operations, financial conditions and future
prospects of Rehabilicare and Staodyn,
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Board of Directors
Rehabilicare Inc.
Page 2
respectively, and have held discussions with the management of Rehabilicare
regarding operations of and prospects for the combined company. In addition,
we have reviewed the reported price and trading activity for the common stock
of Rehabilicare and Staodyn, compared certain financial and stock market
information for Rehabilicare and Staodyn with similar information for certain
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the electrotherapy/ medical
products industry specifically and in the drugs/ medical supplies/ equipment
industries generally, and performed such other studies and analyses as we
considered appropriate.
We have relied upon the accuracy and completeness of all of the
financial and other information reviewed by us, and have assumed such
accuracy and completeness for purposes of this opinion. In addition, we have
not made an independent evaluation or appraisal of the assets and liabilities
of Rehabilicare or Staodyn and we have not been furnished with any such
evaluation or appraisal. We have assumed, with your consent, that the Merger
will be tax-free to Rehabilicare and Staodyn and that it will be accounted
for as a pooling. Our opinion expressed herein is provided for the
information and assistance of the Board of Directors of Rehabilicare in
connection with its consideration of the Exchange Ratio and does not
constitute a recommendation to any holder of shares as to how such holder of
shares should vote on the proposed transaction.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion that as of the date hereof
the Exchange Ratio pursuant to the Merger Agreement is fair to the holders of
the common stock of Rehabilicare.
Very truly yours,
John G. Kinnard and Company, Incorporated
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APPENDIX E
REHABILICARE INC.
1998 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE.
The purpose of the Plan is to aid in attracting and retaining
management personnel and members of the Board of Directors who are not also
employees ("Non-Employee Directors") of Rehabilicare Inc. (the "Company")
capable of assuring the future success of the Company, to offer such
personnel incentives to put forth maximum efforts for the success of the
Company's business and to afford such personnel an opportunity to acquire a
proprietary interest in the Company.
SECTION 2. DEFINITIONS.
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean (i) any entity that, directly or
indirectly through one or more intermediaries, is controlled by the Company
and (ii) any entity in which the Company has a significant equity interest,
in each case as determined by the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Performance Award, Dividend
Equivalent or Other Stock-Based Award granted under the Plan.
(c) "Award Agreement" shall mean any written agreement, contract or
other instrument or document evidencing any Award granted under the Plan.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any regulations promulgated thereunder.
(e) "Committee" shall mean a committee of the Board of Directors of
the Company designated by such Board to administer the Plan, which shall
consist of members appointed from time to time by the Board of Directors.
Each member of the Committee shall be an "outside director" as defined in
Section 162(m) of the Code.
(f) "Company" shall mean Rehabilicare Inc., a Minnesota corporation,
and any successor corporation.
(g) "Dividend Equivalent" shall mean any right granted under Section
6(e) of the Plan.
(h) "Eligible Person" shall mean any employee, officer, consultant or
independent contractor providing services to the Company or any Affiliate who
the Committee determines to be an Eligible Person. Eligible Person shall not
include any Non-Employee Director, who shall receive Awards only pursuant to
Section 6(h) of the Plan.
(i) "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the fair
market value of such property
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determined by such methods or procedures as shall be established from time to
time by the Committee or, in the case of grants pursuant to Section 6(h), the
Board of Directors.
(j) "Incentive Stock Option" shall mean an option granted under
Section 6(a) of the Plan that is intended to meet the requirements of Section
422 of the Code or any successor provision.
(k) "Non-Qualified Stock Option" shall mean an option granted under
Section 6(a) of the Plan, or Section 6(h) of the Plan in the case of grants
to Participating Non-Employee Directors, that is not intended to be an
Incentive Stock Option.
(l) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option, and shall include Restoration Options.
(m) "Other Stock-Based Award" shall mean any right granted under
Section 6(f) of the Plan.
(n) "Participant" shall mean an Eligible Person designated to be
granted an Award under the Plan.
(o) "Participating Non-Employee Director" shall mean all Non-Employee
Directors of the Company except any Non-Employee Director who has notified
the Company in writing at least six months in advance of a meeting of the
shareholders of the Company of his or her desire not to receive Non-Qualified
Stock Options pursuant to Section 6(h) of the Plan and who receives no
compensation or other consideration for such election not to receive, or
compensation or consideration in place of, such election not to receive
options.
(p) "Performance Award" shall mean any right granted under Section
6(d) of the Plan.
(q) "Person" shall mean any individual, corporation, partnership,
association or trust.
(r) "Plan" shall mean this 1998 Stock Incentive Plan, as amended from
time to time.
(s) " Reload Option" shall mean any Option granted under Section
6(a)(iv) of the Plan.
(t) "Restricted Stock" shall mean any Share granted under Section
6(c) of the Plan.
(u) "Restricted Stock Unit" shall mean any unit granted under Section
6(c) of the Plan evidencing the right to receive a Share (or a cash payment
equal to the Fair Market Value of a Share) at some future date.
(v) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as
amended, or any successor rule or regulation.
(w) "Shares" shall mean shares of Common Stock, $.01 par value, of
the Company or such other securities or property as may become subject to
Awards pursuant to an adjustment made under Section 4(c) of the Plan.
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(x) "Stock Appreciation Right" shall mean any right granted under
Section 6(b) of the Plan.
SECTION 3. ADMINISTRATION.
(a) POWER AND AUTHORITY OF THE COMMITTEE. The Plan shall be
administered by the Committee; PROVIDED, HOWEVER, that Section 6(h) of the
Plan shall not be administered by the Committee but rather by the Board of
Directors subject to the provisions and restrictions of such Section 6(h).
Subject to the express provisions of the Plan and to applicable law, and
except with respect to Section 6(h) of the Plan, the Committee shall have
full power and authority to: (i) designate Participants; (ii) determine the
type or types of Awards to be granted to each Participant under the Plan;
(iii) determine the number of Shares to be covered by (or with respect to
which payments, rights or other matters are to be calculated in connection
with) each Award; (iv) determine the terms and conditions of any Award or
Award Agreement; (v) amend the terms and conditions of any Award or Award
Agreement and accelerate the exercisability of Options or the lapse of
restrictions relating to Restricted Stock, Restricted Stock Units or other
Awards; (vi) determine whether, to what extent and under what circumstances
Awards may be exercised in cash, Shares, other securities, other Awards or
other property, or canceled, forfeited or suspended; (vii) determine whether,
to what extent and under what circumstances cash, Shares, other securities,
other Awards, other property and other amounts payable with respect to an
Award under the Plan shall be deferred either automatically or at the
election of the holder thereof or the Committee; (viii) interpret and
administer the Plan and any instrument or agreement relating to, or Award
made under, the Plan; (ix) establish, amend, suspend or waive such rules and
regulations and appoint such agents as it shall deem appropriate for the
proper administration of the Plan; and (x) make any other determination and
take any other action that the Committee deems necessary or desirable for the
administration of the Plan. Unless otherwise expressly provided in the Plan,
all designations, determinations, interpretations and other decisions under
or with respect to the Plan or any Award shall be within the sole discretion
of the Committee, may be made at any time and shall be final, conclusive and
binding upon any Participant, any holder or beneficiary of any Award and any
employee of the Company or any Affiliate.
(b) DELEGATION. The Committee may delegate its powers and duties
under the Plan to one or more officers of the Company or any Affiliate or a
committee of such officers, subject to such terms, conditions and limitations
as the Committee may establish in its sole discretion; PROVIDED, HOWEVER,
that the Committee shall not delegate its powers and duties under the Plan
with regard to officers or directors of the Company or any Affiliate who are
subject to Section 16 of the Securities Exchange Act of 1934, as amended.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section
4(c), the number of Shares available for granting Awards under the Plan shall
be 400,000. If any Shares covered by an Award or to which an Award relates
are not purchased or are forfeited, or if an Award otherwise terminates
without delivery of any Shares, then the number of Shares counted against the
aggregate number of Shares available under the Plan with respect to such
Award, to the extent of any such forfeiture or termination, shall again be
available for granting Awards under the Plan.
(b) ACCOUNTING FOR AWARDS. For purposes of this Section 4, if an
Award entitles the holder thereof to receive or purchase Shares, the number
of Shares covered by such Award or to which such Award relates shall be
counted on the date of grant of such Award against the aggregate number of
Shares available for granting Awards under the Plan.
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(c) ADJUSTMENTS. In the event that the Committee (or, in the case of grants
under Section 6(h) of the Plan, the Board of Directors) shall determine that
any dividend or other distribution (whether in the form of cash, Shares,
other securities or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of Shares or other securities of the
Company, issuance of warrants or other rights to purchase Shares or other
securities of the Company or other similar corporate transaction or event
affects the Shares such that an adjustment is determined by the Committee
(or, in the case of grants under Section 6(h) of the Plan, the Board of
Directors) to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
Plan, then the Committee (or, in the case of grants under Section 6(h) of the
Plan, the Board of Directors) shall, in such manner as it may deem equitable,
adjust any or all of (i) the number and type of Shares (or other securities
or other property) which thereafter may be made the subject of Awards, (ii)
the number and type of Shares (or other securities or other property) subject
to outstanding Awards and (iii) the purchase or exercise price with respect
to any Award; PROVIDED, HOWEVER, that the number of Shares covered by any
Award or to which such Award relates shall always be a whole number.
(d) LIMITATION ON ANNUAL AWARDS TO INDIVIDUALS. Notwithstanding any
other provision in this Plan, no Participant may be granted an Award or
Awards under the Plan, the value of which is based solely on an increase in
the value of the Shares after the date of grant of such Award or Awards, for
more than 100,000 Shares in the aggregate in any one calendar year period
beginning with the period commencing on January 1, 1994 through December 31,
1994. The foregoing annual limitation specifically includes the grant of any
"performance-based" awards within the meaning of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY.
Any Eligible Person, including any Eligible Person who is an officer
or director of the Company or any Affiliate, shall be eligible to be
designated a Participant. In determining which Eligible Persons shall
receive an Award and the terms of any Award, the Committee may take into
account the nature of the services rendered by the respective Eligible
Persons, their present and potential contributions to the success of the
Company or such other factors as the Committee, in its discretion, shall deem
relevant. Notwithstanding the foregoing, an Incentive Stock Option may only
be granted to full or part-time employees (which term as used herein
includes, without limitation, officers and directors who are also employees)
and an Incentive Stock Option shall not be granted to an employee of an
Affiliate unless such Affiliate is also a "subsidiary corporation" of the
Company within the meaning of Section 424(f) of the Code or any successor
provision. Participating Non-Employee Directors shall receive Awards of
Non-Qualified Stock Options as provided in Section 6(h) of the Plan.
SECTION 6. AWARDS.
(a) OPTIONS. The Committee is hereby authorized to grant Options to
Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine:
(i) EXERCISE PRICE. The purchase price per Share purchasable under
an Option shall be determined by the Committee; PROVIDED, HOWEVER, that such
purchase price shall not be less than 100% of the Fair Market Value of a
Share on the date of grant of such Option.
(ii) OPTION TERM. The term of each Option shall be fixed by the
Committee.
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(iii) TIME AND METHOD OF EXERCISE. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part and
the method or methods by which, and the form or forms (including, without
limitation, cash, Shares, promissory notes, other securities, other Awards
or other property, or any combination thereof, having a Fair Market Value
on the exercise date equal to the relevant exercise price) in which, payment
of the exercise price with respect thereto may be made or deemed to have
been made.
(iv) RELOAD OPTIONS. The Committee may grant Reload Options,
separately or together with another Option, pursuant to which, subject to
the terms and conditions established by the Committee and any applicable
requirements of Rule 16b-3 or any other applicable law, the Participant
would be granted a new Option when the payment of the exercise price of the
option to which such Reload Option relates is made by the delivery of Shares
owned by the Participant pursuant to the relevant provisions of the plan or
agreement relating to such option, which new Option would be an Option to
purchase the number of Shares not exceeding the sum of (A) the number of
Shares so provided as consideration upon the exercise of the previously
granted option to which such Reload Option relates and (B) the number of
Shares, if any, tendered or withheld as payment of the amount to be withheld
under applicable tax laws in connection with the exercise of the option to
which such Reload Option relates pursuant to the relevant provisions of the
plan or agreement relating to such option. Reload Options may be granted
with respect to options previously granted under the Plan or any other stock
option plan of the Company, and may be granted in connection with any option
granted under the Plan or any other stock option plan of the Company at the
time of such grant.
(b) STOCK APPRECIATION RIGHTS. The Committee is hereby authorized
to grant Stock Appreciation Rights to Participants subject to the terms of
the Plan and any applicable Award Agreement. A Stock Appreciation Right
granted under the Plan shall confer on the holder thereof a right to receive
upon exercise thereof the excess of (i) the Fair Market Value of one Share on
the date of exercise (or, if the Committee shall so determine, at any time
during a specified period before or after the date of exercise) over (ii) the
grant price of the Stock Appreciation Right as specified by the Committee,
which price shall not be less than 100% of the Fair Market Value of one Share
on the date of grant of the Stock Appreciation Right. Subject to the terms of
the Plan and any applicable Award Agreement, the grant price, term, methods
of exercise, dates of exercise, methods of settlement and any other terms and
conditions of any Stock Appreciation Right shall be as determined by the
Committee. The Committee may impose such conditions or restrictions on the
exercise of any Stock Appreciation Right as it may deem appropriate.
(c) RESTRICTED STOCK AND RESTRICTED STOCK UNITS. The Committee is
hereby authorized to grant Awards of Restricted Stock and Restricted Stock
Units to Participants with the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions of the
Plan as the Committee shall determine:
(i) RESTRICTIONS. Shares of Restricted Stock and Restricted Stock
Units shall be subject to such restrictions as the Committee may impose
(including, without limitation, any limitation on the right to vote a Share
of Restricted Stock or the right to receive any dividend or other right or
property with respect thereto), which restrictions may lapse separately or
in combination at such time or times, in such installments or otherwise as
the Committee may deem appropriate.
(ii) STOCK CERTIFICATES. Any Restricted Stock granted under the Plan
shall be evidenced by issuance of a stock certificate or certificates, which
certificate or certificates
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shall be held by the Company. Such certificate or certificates shall be
registered in the name of the Participant and shall bear an appropriate
legend referring to the terms, conditions and restrictions applicable to
such Restricted Stock. In the case of Restricted Stock Units, no Shares
shall be issued at the time such Awards are granted.
(iii) FORFEITURE; DELIVERY OF SHARES. Except as otherwise determined
by the Committee, upon termination of employment (as determined under
criteria established by the Committee) during the applicable restriction
period, all Shares of Restricted Stock and all Restricted Stock Units at
such time subject to restriction shall be forfeited and reacquired by the
Company; PROVIDED, HOWEVER, that the Committee may, when it finds that a
waiver would be in the best interest of the Company, waive in whole or in
part any or all remaining restrictions with respect to Shares of Restricted
Stock or Restricted Stock Units. Any Share representing Restricted Stock
that is no longer subject to restrictions shall be delivered to the holder
thereof promptly after the applicable restrictions lapse or are waived.
Upon the lapse or waiver of restrictions and the restricted period relating
to Restricted Stock Units evidencing the right to receive Shares, such
Shares shall be issued and delivered to the holders of the Restricted
Stock Units.
(d) PERFORMANCE AWARDS. The Committee is hereby authorized to
grant Performance Awards to Participants subject to the terms of the Plan and
any applicable Award Agreement. A Performance Award granted under the Plan
(i) may be denominated or payable in cash, Shares (including, without
limitation, Restricted Stock), other securities, other Awards or other
property and (ii) shall confer on the holder thereof the right to receive
payments, in whole or in part, upon the achievement of such performance goals
during such performance periods as the Committee shall establish. Subject to
the terms of the Plan and any applicable Award Agreement, the performance
goals to be achieved during any performance period, the length of any
performance period, the amount of any Performance Award granted, the amount
of any payment or transfer to be made pursuant to any Performance Award and
any other terms and conditions of any Performance Award shall be determined
by the Committee.
(e) DIVIDEND EQUIVALENTS. The Committee is hereby authorized to
grant to Participants Dividend Equivalents under which such Participants
shall be entitled to receive payments (in cash, Shares, other securities,
other Awards or other property as determined in the discretion of the
Committee) equivalent to the amount of cash dividends paid by the Company to
holders of Shares with respect to a number of Shares determined by the
Committee. Subject to the terms of the Plan and any applicable Award
Agreement, such Dividend Equivalents may have such terms and conditions as
the Committee shall determine.
(f) OTHER STOCK-BASED AWARDS. The Committee is hereby authorized
to grant to Participants such other Awards that are denominated or payable
in, valued in whole or in part by reference to, or otherwise based on or
related to, Shares (including, without limitation, securities convertible
into Shares), as are deemed by the Committee to be consistent with the
purpose of the Plan; PROVIDED, HOWEVER, that such grants must comply with
Rule 16b-3 and applicable law. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the terms and
conditions of such Awards. Shares or other securities delivered pursuant to
a purchase right granted under this Section 6(f) shall be purchased for such
consideration, which may be paid by such method or methods and in such form
or forms (including without limitation, cash, Shares, promissory notes, other
securities, other Awards or other property or any combination thereof), as
the Committee shall determine, the value of which consideration, as
established by the Committee, shall not be less than 100% of the Fair Market
Value of such Shares or other securities as of the date such purchase right
is granted.
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(g) GENERAL. Except as otherwise specified with respect to Awards
to Participating Non-Employee Directors pursuant to Section 6(h) of the Plan:
(i) NO CASH CONSIDERATION FOR AWARDS. Awards shall be granted
for no cash consideration or for such minimal cash consideration as may be
required by applicable law.
(ii) AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may,
in the discretion of the Committee, be granted either alone or in addition
to, in tandem with or in substitution for any other Award or any award
granted under any plan of the Company or any Affiliate other than the
Plan. Awards granted in addition to or in tandem with other Awards or in
addition to or in tandem with awards granted under any such other plan of
the Company or any Affiliate may be granted either at the same time as or
at a different time from the grant of such other Awards or awards.
(iii) FORMS OF PAYMENT UNDER AWARDS. Subject to the terms of the
Plan and of any applicable Award Agreement, payments or transfers to be
made by the Company or an Affiliate upon the grant, exercise or payment of
an Award may be made in such form or forms as the Committee shall
determine (including, without limitation, cash, Shares, promissory notes,
other securities, other Awards or other property or any combination
thereof), and may be made in a single payment or transfer, in installments
or on a deferred basis, in each case in accordance with rules and
procedures established by the Committee. Such rules and procedures may
include, without limitation, provisions for the payment or crediting of
reasonable interest on installment or deferred payments or the grant or
crediting of Dividend Equivalents with respect to installment or deferred
payments.
(iv) LIMITS ON TRANSFER OF AWARDS. No Award and no right under
any such Award shall be transferable by a Participant otherwise than by
will or by the laws of descent and distribution; PROVIDED, HOWEVER, that,
if so determined by the Committee, a Participant may, in the manner
established by the Committee, designate a beneficiary or beneficiaries to
exercise the rights of the Participant and receive any property
distributable with respect to any Award upon the death of the Participant.
Each Award or right under any Award shall be exercisable during the
Participant's lifetime only by the Participant or, if permissible under
applicable law, by the Participant's guardian or legal representative. No
Award or right under any such Award may be pledged, alienated, attached or
otherwise encumbered, and any purported pledge, alienation, attachment or
encumbrance thereof shall be void and unenforceable against the Company or
any Affiliate.
(v) TERM OF AWARDS. The term of each Award shall be for such
period as may be determined by the Committee.
(vi) RESTRICTIONS; SECURITIES EXCHANGE LISTING. All
certificates for Shares or other securities delivered under the Plan
pursuant to any Award or the exercise thereof shall be subject to such
stop transfer orders and other restrictions as the Committee (or, in the
case of grants under 6(h) of the Plan, the Board of Directors) may deem
advisable under the Plan or the rules, regulations and other requirements
of the Securities and Exchange Commission and any applicable federal or
state securities laws, and the Committee may cause a legend or legends to
be placed on any such certificates to make appropriate reference to such
restrictions. If the Shares or other securities are traded on a
securities exchange, the Company shall not be required to deliver any
Shares or other securities covered by an Award unless and until such
Shares or other securities have been admitted for trading on such
securities exchange.
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(h) NON-QUALIFIED STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS. The
Board of Directors shall issue Non-Qualified Stock Options to
Participating Non-Employee Directors in accordance with this Section 6(h).
Non-Qualified Stock Options to purchase 2,500 shares shall be granted
to each new Participating Non-Employee Director at the first annual
shareholders' meeting on which such director is first elected a director
by shareholders. Such Non-Qualified Stock Options shall be in lieu of,
and not in addition to, options granted in the same calendar year to such
directors under any other stock option plan of the Company. On the date
of each annual meeting of shareholders thereafter (beginning with the 1998
annual meeting with respect to Non-Employee Directors on the date of
adoption of this Plan)), each Participating Non-Employee Director then in
office shall be automatically granted non-qualified stock options to
purchase 2,500 shares of Common Stock (subject to adjustment in accordance
with section 4(c)).
Each Non-Qualified Stock Option granted to a Participating
Non-Employee Director pursuant to this Section 6(h) shall be exercisable
fully exercisable on and after the date of grant and shall expire on the
fifth anniversary of the date of grant, except as provided below. Reload
options may not be granted to any Non-Employee Director. This Section
6(h) shall not be amended more than once every six months other than to
comport with changes in the Code, the Employee Retirement Income Security
Act or the rules and regulations thereunder.
All grants of Non-Qualified Stock Options pursuant to this Section
6(h) shall be automatic and non-discretionary and shall be made strictly
in accordance with the foregoing terms and the following additional
provisions:
(i) Non-Qualified Stock Options granted to a Participating
Non-Employee Director hereunder shall terminate and may no longer be
exercised if such Director ceases to be a Non-Employee Director of the
Company, except that:
(A) If such Director's term shall be terminated for any reason other
than gross and willful misconduct, death, disability, or retirement, such
Director may at any time within a period of three months after such
termination, but not after the termination date of the Option, exercise
the Option to the extent exercisable on the date of termination.
(B) If such Director's term shall be terminated by reason of gross
and willful misconduct during the course of the term, including but not
limited to, wrongful appropriation of funds of the Company or the
commission of a gross misdemeanor or felony, the Option shall be
terminated as of the date of the misconduct.
(C) If such Director's term shall be terminated by reason of
disability or retirement, such Director may exercise the Option in
accordance with the terms thereof as though such termination had never
occurred. If such Director shall die following any such termination, the
Option may be exercised in accordance with its terms by the personal
representatives or administrators of such Director or by any person or
persons to whom the Option has been transferred by will or the applicable
laws of descent and distribution.
(D) If such Director shall die while a Director of the Company or
within three months after termination of such Director's term for any
reason other than disability or retirement or gross and willful
misconduct, the Option may be exercised in accordance with its terms by
the personal representatives or administrators of such Director or by any
person
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or persons to whom the Option has been transferred by will or the
applicable laws of descent and distribution.
(ii) Non-Qualified Stock Options granted to Participating
Non-Employee Directors may be exercised in whole or in part from time to
time by serving written notice of exercise on the Company at its principal
executive offices, to the attention of the Company's Secretary. The
notice shall state the number of shares as to which the Option is being
exercised and be accompanied by payment of the purchase price. A
Participating Non-Employee Director may, at such Director's election, pay
the purchase price by check payable to the Company, by promissory note, or
in shares of the Company's Common Stock, or in any combination thereof
having a Fair Market Value on the exercise date qual to the applicable
exercise price. If payment or partial payment is made by promissory note,
such note shall (A) be secured by the Shares to be delivered upon exercise
of such Option (other than those withheld in payment of taxes as set forth
below), (B) be limited in principal amount to the maximum amount permitted
under applicable laws, rules and regulations, (C) be for a term of six
years and (D) bear interest at the applicable federal rate (as determined
in accordance with Section 1274(d) of the Code), compounded semi-annually.
(iii) In order to comply with all applicable federal or state income
tax laws or regulations, the Company may take such action as it deems
appropriate to ensure that all applicable federal or state payroll,
withholding, income or other taxes, which are the sole and absolute
responsibility of a Participating Non-Employee Director, are withheld or
collected from such Director. At any time when a Participating
Non-Employee Director is required to pay the Company an amount required to
be withheld under applicable income tax laws in connection with an Option
granted pursuant to this Section 6(h), such Director may (A) elect to have
the Company withhold a portion of the Shares otherwise to be delivered
upon exercise of such Option with a Fair Market Value equal to the amount
of such taxes (an "Election") or (B) deliver to the Company shares other
than Shares issuable upon exercise of such Option with a Fair Market Value
equal to the amount of such taxes. An Election, if any, must be made on or
before the date that the amount of tax to be withheld is determined. The
Board of Directors may disapprove of any Election, may suspend or
terminate the right to make Elections, may limit the amount of any
Election, and may make rules concerning the required information to be
included in any Election. Participating Non-Employee Directors may only
make an Election in compliance with the Rules established by the Company
to comply with Section 16(b) of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
SECTION 7. AMENDMENT AND TERMINATION; ADJUSTMENTS.
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(a) AMENDMENTS TO THE PLAN. The Board of Directors of the Company may
amend, alter, suspend, discontinue or terminate the Plan; PROVIDED, HOWEVER,
that, notwithstanding any other provision of the Plan or any Award Agreement,
without the approval of the stockholders of the Company, no such amendment,
alteration, suspension, discontinuation or termination shall be made that,
absent such approval:
(i) would cause Rule 16b-3 to become unavailable with respect to
the Plan;
(ii) would violate the rules or regulations of the New York Stock
Exchange, any other securities exchange or the National Association of
Securities Dealers, Inc. that are applicable to the Company; or
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(iii) would cause the Company to be unable, under the Code, to grant
Incentive Stock Options under the Plan.
(b) AMENDMENTS TO AWARDS. Except with respect to Awards granted
pursuant to Section 6(h) of the Plan, the Committee may waive any conditions
of or rights of the Company under any outstanding Award, prospectively or
retroactively. The Committee may not amend, alter, suspend, discontinue or
terminate any outstanding Award, prospectively or retroactively, without the
consent of the Participant or holder or beneficiary thereof, except as
otherwise herein provided.
(c) CORRECTION OF DEFECTS, OMISSIONS AND INCONSISTENCIES. The
Committee (or, in the case of grants under Section 6(h) of the Plan, the
Board of Directors) may correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Award in the manner and to the extent it
shall deem desirable to carry the Plan into effect.
SECTION 8. INCOME TAX WITHHOLDING; TAX BONUSES.
(a) WITHHOLDING. In order to comply with all applicable federal or
state income tax laws or regulations, the Company may take such action as it
deems appropriate to ensure that all applicable federal or state payroll,
withholding, income or other taxes, which are the sole and absolute
responsibility of a Participant, are withheld or collected from such
Participant. In order to assist a Participant in paying all or a portion of
the federal and state taxes to be withheld or collected upon exercise or
receipt of (or the lapse of restrictions relating to) an Award, the
Committee, in its discretion and subject to such additional terms and
conditions as it may adopt, may permit the Participant to satisfy such tax
obligation by (i) electing to have the Company withhold a portion of the
Shares otherwise to be delivered upon exercise or receipt of (or the lapse of
restrictions relating to) such Award with a Fair Market Value equal to the
amount of such taxes or (ii) delivering to the Company Shares other than
Shares issuable upon exercise or receipt of (or the lapse of restrictions
relating to) such Award with a Fair Market Value equal to the amount of such
taxes. The election, if any, must be made on or before the date that the
amount of tax to be withheld is determined.
(b) TAX BONUSES. The Committee, in its discretion, shall have the
authority, at the time of grant of any Award under this Plan or at any time
thereafter, to approve cash bonuses to designated Participants to be paid
upon their exercise or receipt of (or the lapse of restrictions relating to)
Awards in order to provide funds to pay all or a portion of federal and state
taxes due as a result of such exercise or receipt (or the lapse of such
restrictions). The Committee shall have full authority in its discretion to
determine the amount of any such tax bonus.
SECTION 9. GENERAL PROVISIONS.
(a) NO RIGHTS TO AWARDS. Except as otherwise provided in Section
6(h) of the Plan, no Eligible Person, Participant or other Person shall have
any claim to be granted any Award under the Plan, and there is no obligation
for uniformity of treatment of Eligible Persons, Participants or holders or
beneficiaries of Awards under the Plan. The terms and conditions of Awards
need not be the same with respect to any Participant or with respect to
different Participants.
(b) AWARD AGREEMENTS. No Participant will have rights under an
Award granted to such Participant unless and until an Award Agreement shall
have been duly executed on behalf of the Company.
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(c) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other or additional compensation arrangements, and such
arrangements may be either generally applicable or applicable only in
specific cases.
(d) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ, or
as giving a Non-Employee Director the right to continue as a Director, of the
Company or any Affiliate, nor will it affect in any way the right of the
Company or an Affiliate to terminate such employment at any time, with or
without cause. In addition, the Company or an Affiliate may at any time
dismiss a Participant from employment, or terminate the term of a
Non-Employee Director, free from any liability or any claim under the Plan,
unless otherwise expressly provided in the Plan or in any Award Agreement.
(e) GOVERNING LAW. The validity, construction and effect of the
Plan or any Award, and any rules and regulations relating to the Plan or any
Award, shall be determined in accordance with the laws of the State of
Minnesota.
(f) SEVERABILITY. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Plan or any Award under any law deemed
applicable by the Committee (or, in the case of grants under Section 6(h) of
the Plan, the Board of Directors), such provision shall be construed or
deemed amended to conform to applicable laws, or if it cannot be so construed
or deemed amended without, in the determination of the Committee (or, in the
case of grants under Section 6(h) of the Plan, the Board of Directors),
materially altering the purpose or intent of the Plan or the Award, such
provision shall be stricken as to such jurisdiction or Award, and the
remainder of the Plan or any such Award shall remain in full force and effect.
(g) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant
or any other Person. To the extent that any Person acquires a right to
receive payments from the Company or any Affiliate pursuant to an Award, such
right shall be no greater than the right of any unsecured general creditor of
the Company or any Affiliate.
(h) NO FRACTIONAL SHARES. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee (or, in the
case of grants under Section 6(h) of the Plan, the Board of Directors) shall
determine whether cash shall be paid in lieu of any fractional Shares or
whether such fractional Shares or any rights thereto shall be canceled,
terminated or otherwise eliminated.
(i) HEADINGS. Headings are given to the Sections and subsections
of the Plan solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
SECTION 10. EFFECTIVE DATE OF THE PLAN.
The Plan shall be effective as of the date on which it is approved by
the shareholders of the Company.
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SECTION 11. TERM OF THE PLAN.
Unless the Plan shall have been discontinued or terminated as
provided in Section 7(a), the Plan shall terminate on the date which is ten
years after the date on which the Plan receives shareholder approval. No
Award shall be granted after the termination of the Plan. However, unless
otherwise expressly provided in the Plan or in an applicable Award Agreement,
any Award theretofore granted may extend beyond the termination of the Plan,
and the authority of the Committee provided for hereunder with respect to the
Plan and any Awards, and the authority of the Board of Directors of the
Company to amend the Plan, shall extend beyond the termination of the Plan.
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