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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1998
Commission File Number 0-9407
REHABILICARE INC.
MINNESOTA 41-0985318
State of Incorporation IRS Employer Identification No.
1811 Old Highway Eight
New Brighton, Minnesota 55112-3493
(651) 631-0590
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
Check whether issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulations
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Company's revenue for the Fiscal Year Ended June 30, 1998 totaled
$33,812,453.
The aggregate market value of voting stock held by non-affiliates of
registrant as of September 23, 1998 was approximately $25,069,000 (based upon
the last sale price of such stock on such date as reported by the NASDAQ
National Market System). The number of shares of the Company's $.10 par value
common stock outstanding as of September 23, 1998 was 10,453,401.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Rehabilicare Inc. (the "Company") was incorporated as Medical Devices,
Inc., a Minnesota corporation, in 1972. The name was changed to Rehabilicare
Inc. in 1994. The Company is a manufacturer and provider of rehabilitation
and electromedical pain management products and services used in clinical,
home healthcare, and occupational medicine applications.
On March 17, 1998, pursuant to an Agreement and Plan of Merger executed by
Rehabilicare on December 1, 1997, and approved by shareholders on March 17,
1998, a wholly-owned subsidiary of the Company was merged into Staodyn, Inc. As
a result of the merger, each outstanding share of Staodyn common stock became
0.829 of a share of Rehabilicare common stock and Staodyn became a wholly-owned
subsidiary of the Company. The Company issued a total of 5,521,111 shares of
its common shares valued at about $16.5 million. The major assets acquired
included Staodyn's cash, accounts receivable, inventories, engineering,
manufacturing and computer equipment, patents, sales contracts and other
intangibles, and leasehold interests in facilities in Longmont, Colorado and
Tampa, Florida. The merger was recorded using the pooling-of-interests method.
BACKGROUND
Electrotherapy devices such as those marketed by the Company have broad
application in both the rehabilitation of injured or diseased muscle or other
soft tissue and the relief of chronic and acute pain. Transcutaneous electrical
nerve stimulation (TENS) devices have been prescribed by physicians and used by
physical therapists, athletic trainers, and other treating clinicians in pain
management for over 25 years. These devices have traditionally been designed to
be worn at home by patients with chronic pain problems. The distribution of
TENS products was, for many years, dominated by small, regional home healthcare
dealers who purchase products from manufacturers and rent or resell those
products to treating clinicians or, upon receipt of a physician's prescription,
directly to patients. When portable neuromuscular stimulators (NMS) were
introduced in the early 1980s, the same distribution techniques were employed.
During the late 1980s, amounts reimbursed for TENS rentals or purchases
were reduced by a number of insurance carriers, and margins for manufacturers
began to erode. As a result, the major TENS manufacturers began to distribute
their products directly to patients through direct sales representatives and
various healthcare providers, and to bill the patients and their insurance
carriers directly. In such direct rentals and sales, the manufacturer typically
makes consignment inventory available at treating clinics and other dispensing
locations. When a treating clinician determines that a specific device is
beneficial to a patient, a physician's prescription is obtained, and the patient
is trained in the use of the device. The product is then taken home by the
patient for in-home therapy. The Company believes that patient acceptance and
profit margins are improved significantly through direct distribution.
In addition to the change in distribution techniques utilized by the
electrotherapy device industry, the type of devices available for home use has
expanded. Physical therapists have long employed a number of electromedical
treatment modalities using large clinical units, including interferential
stimulation, pulsed galvanic (direct current), and microcurrent. Traditionally,
patients were required to visit the clinic to use these machines because they
were expensive and not portable. With the introduction of simpler, compact
portable products, these clinical therapies became available for home
application. The Company believes that the acceptance and use of electrotherapy
devices in home therapy, particularly in rehabilitation, will continue to
increase as these devices are enhanced to provide additional modalities and
application systems to address a broader range of conditions and injuries.
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PRODUCTS
The Company 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 24% of total revenue in fiscal 1998 and
22% in fiscal 1997. Pain management products accounted for approximately 46%
of total revenue in fiscal 1998 and 47% in fiscal 1997. The balance of the
Company's revenue resulted from the sale of accessories and supplies used with
treatment modalities. The acquisition of Staodyn with its complementary
products results in an increase in the Company's product offerings.
REHABILITATION PRODUCTS
The Company offers a variety of electrotherapy products for the
rehabilitation market, including neuromuscular stimulators, pulsed direct
current devices, and interferential stimulators.
NEUROMUSCULAR STIMULATION DEVICES. NMS devices are designed to facilitate
faster recovery of normal function in muscle and other soft tissue affected by
disease or trauma. Neuromuscular stimulation has proven effective in producing
controlled involuntary muscle contractions which assist in maintaining the
strength and mobility of a limb and preventing deterioration of muscle tissue in
patients who are unable to perform voluntary muscle contractions. Physicians
have also prescribed neuromuscular stimulation in a variety of circumstances to
improve muscle tone, increase joint mobility, and accelerate recovery from
traumatic injury. Common uses of NMS therapy include muscle re-education
associated with common knee injuries; relaxation of muscle spasms in the neck,
shoulder, and pelvic girdle; reduction of edema (swelling); reduction of
spasticity; and increase in range of motion when limitation in joint rotation is
due to soft tissue shortening. The Company's NMS products include the
Rehabilicare NM III-TM-, which features 16 preset programs covering the most
common applications, and the Staodyn EMS+2-TM-, which includes a pulsed direct
current channel. Both devices are suitable for clinical or home use.
PULSED DIRECT CURRENT DEVICES. PDC devices utilize direct current to
reduce pain and swelling, influence local blood circulation, reduce muscle
spasm, and increase range of motion. PDC is typically used post-operatively,
and for sports-related injuries, either acute or chronic. The Company's
products include the Rehabilicare GV II-TM-, a high voltage device used
primarily for joint sprains, muscular strains, hand and ankle injuries, and the
Staodyn SporTX-TM-, which features both a PDC and TENS channel, and is used
extensively in sports medicine, particularly by professional, college, and other
organized athletic teams.
INTERFERENTIAL STIMULATION DEVICES. Interferential is another form of
electrical stimulation commonly used in physical therapy. The Company's IF
II-TM- interferential stimulator delivers a continuous, high energy output that
provides deep tissue penetration and creates a soothing, mild heating action in
the affected area. The IF II is used for the treatment of pain and edema; to
increase blood flow and reduce muscle spasm associated with lower back problems,
joint injuries, contusions, bursitis, tendonitis; and for podiatric
applications.
PAIN MANAGEMENT PRODUCTS
TRANSCUTANEOUS ELECTRICAL NERVE STIMULATION DEVICES. TENS devices have
been used as a non-narcotic alternative or supplement to drug therapy for the
relief of chronic and acute pain for over 25 years. Although TENS is not
effective for every patient or every condition, medical professionals have
generally accepted TENS as an effective treatment for chronic or acute pain
resulting from a variety of medical conditions. These devices are most
frequently used to treat persistent conditions such as low back pain, joint
stiffness, and muscle spasm. Physicians have also prescribed TENS for pain
resulting from a variety of other localized conditions including abdominal
surgery, postoperative pain, tendonitis, phantom limb pain, and childbirth.
TENS devices generally reduce pain during treatment, and for a period of time
following usage, but do not cure the cause of the pain.
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Two theories have been advanced to explain the manner in which TENS
alleviates pain. The "gate control theory" postulates that the electrical
impulses from TENS devices block or interfere with the neurological transmission
of pain signals from the site of the injury to the brain. A second theory
suggests that the electrical impulses prompt the release of enkephalins or
endorphins, the body's natural pain suppressing agents. Neither theory has
conclusive support in scientific literature. Under either theory, TENS relieves
pain without the costs and risks associated with surgery or the undesirable side
effects and physiological problems of prolonged drug use, including addiction,
stupor, depression, disorientation, nausea, and ulcers.
The Company's current TENS line consists of eight different products. The
Company's Matrix-TM- is one of the most technologically advanced TENS devices
currently available. Incorporating five core treatments and eight programmed
modes, the Matrix provides a comprehensive range of TENS options for chronic,
acute, and postsurgical pain management. The UltraPac SX-TM- is a full-featured
TENS stimulator with a high degree of programming flexibility. The SMP-TM-
offers a unique 12-second modulated stimulation cycle which helps normalize the
sympathetic nervous system. While the product was designed specifically to
treat reflex sympathetic dystrophy (RSD) patients, it may also be used
effectively for most other types of chronic and acute pain. All of these
devices use integrated circuits and incorporate surface mount technology to
minimize size and weight.
In addition to its reusable TENS devices, the Company has developed and
markets FasTENS-TM-, a disposable acute pain management device for treatment of
postoperative pain. There are more than 500,000 orthopedic surgical procedures
performed each year, virtually all of which require the use of narcotic pain
medication. FasTENS is a safe and effective adjunct therapy for postoperative
orthopedic pain control. The Company believes that the use of FasTENS can
decrease the amount of narcotic pain medication needed, providing significant
benefits to the patient and cost savings to all parties concerned. Powered by a
"pull tab" activated lithium battery, FasTENS provides five to seven days of
treatment in continuous use. Upon completion of the therapy, FasTENS can be
discarded or returned to the Company for recycling.
The Company has an OEM contract with a distributor in the United Kingdom
for the use of a modified TENS unit (BabiTENS) manufactured by the Company for
pain control during labor and childbirth. That device is now being distributed
through a large pharmacy chain and is a widely accepted alternative to narcotic
pain management. The use of a TENS device in the European Union and Canada does
not require a doctor's prescription, although a medical referral is normally
required for third-party reimbursement.
The Staodyn TENS product line includes the Maxima-Registered
Trademark-II and III products, which are similar in features and use to the
Matrix device, and the Staodyn Nuwave-Registered Trademark-, which does not
have the adjustable parameters of the Matrix or Maxima TENS. The Nuwave is
easy for a patient to use, and has a waveform and electrode which have been
optimized for chronic lower back pain. The Nuwave also was the subject of a
clinical trial conducted by the Pain Treatment Center of the University of
Tennessee in 1990, which concluded that Nuwave TENS often proves to be
beneficial in patients with post-laminectomy or peripheral neuralgic pain,
even if they have not responded to other TENS therapy. The results of this
study have been used to differentiate this product as well as to provide
justification for higher reimbursement levels in certain instances.
IONTOPHORETIC DRUG DELIVERY SYSTEM. The Company markets the Iomed-TM-
Iontophoretic Drug Delivery System, which is marketed to physicians, physical
therapists, and other healthcare specialists treating acute and chronic pain.
Iontophoretic delivery involves the use of mild electrical stimulation to
enhance the delivery of a medication onto or into the skin. Iontophoretic drug
delivery is noninvasive and does not require the use of a needle or ingestion of
a capsule or tablet.
The Company also markets RehabiliCaine-TM-, an over-the-counter adhesive
patch product containing Lidocaine, a common analgesic. The product provides
temporary relief of muscle and joint pains including arthritis, simple backache,
tendonitis, and bursitis. The product is applied on the skin over or near the
area of pain.
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MICROCURRENT DEVICES
Microcurrent is a low level form of electrical stimulation that is well
respected by certain clinicians. Since microcurrent provides stimulation below
sensory nerve levels, there is no noticeable sensation during its use. Many
patients have claimed significant relief from pain and edema associated with
soft tissue injury using microcurrent where other treatment modalities have
failed. The Company began producing its own home microcurrent device (HMC-TM-)
in late 1994.
ACCESSORIES AND SUPPLIES
Users of medical rehabilitation and pain management devices require various
accessories and supplies. The Company sells self-adhesive and reusable
electrode pads, disposable electrodes, electrode leadwires, disposable
batteries, rechargeable batteries, and a power pack which eliminates the need
for batteries in a number of the Company's devices. The Company started
manufacturing its own line of electrodes during fiscal 1994 and purchases other
electrodes and accessories from outside suppliers. Accessories and supplies,
including those provided separately to clinics with initial product rentals,
accounted for approximately 31% of revenue in fiscal 1998 and 34% in fiscal
1997.
SALES AND MARKETING
The Company distributes its products both on a direct basis to healthcare
providers and their patients, and on a wholesale basis to home healthcare
dealers. Key decision makers in recommending use of the Company's products to
patients include physical therapists, athletic trainers, occupational
therapists, podiatrists, chiropractors, neurologists, dentists, and orthopedic
surgeons. Historically, the Company had approached these decision makers
through a network of home healthcare and specialty equipment dealers. Since the
early 1990s, the Company, along with most of the rest of the industry, have
emphasized direct rentals and sales to patients through healthcare providers and
third-party payors, rather than through dealers. For fiscal 1998, direct sales
and rentals represented 84% of total Company revenue. The merger with Staodyn
substantially increased the Company's product offerings, sales coverage, and
presence with healthcare providers, dealers, and payors.
DIRECT DISTRIBUTION
The Company's direct distribution activity offers the Company's products
through a nationwide network of independent sales representatives who devote the
major portion of their time to the sale of Rehabilicare and Staodyn products.
The addition of the Staodyn sales representatives necessitated some territory
realignment and a small number of sales management and representative
terminations. Staodyn sales representation tended to be strong in geographic
areas where Rehabilicare was not strong, and vice versa. As of June 30, 1998,
the direct sales force consisted of approximately 100 representatives, compared
to about 40 one year earlier. The combined retail sales force calls on about
3,000 active accounts, including physical and occupational therapy clinics,
orthopedic groups, sports medicine practices, and other providers of the
Company's and competitor's products. In direct distribution, the Company's
products (devices) generally are placed in clinics on a consignment basis, and
subsequently used, rented, and/or sold to patients as needed with the
appropriate physician prescription and supervision.
The direct distribution internal operations are located in Tampa,
Florida, and are focused on supporting the field sales activity through (1) a
full-service distribution capability, providing next day service of products
and supplies to providers and patients; (2) a trained staff who work with
physicians, rehabilitation clinics and other providers and insurance carrier
payors to provide billing, collection, and reimbursement services for
providers and their patients; and (3) a telemarketing sales staff which
follows up with patients to ensure that their product, supplies, and
paperwork needs are met, as well as assisting them in the purchase and
reimbursement process.
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To supplement the assistance offered by the Tampa sales support operation,
the Company also employs clinicians who communicate with patients by phone from
a clinical perspective and respond to calls from patients to ensure products are
working and used properly. This department then reports to the prescribing
clinician, allowing the clinician to contact the patient to alter therapy, as
appropriate.
WHOLESALE AND INTERNATIONAL
The Company's products are also sold on a nonexclusive basis to
approximately 200 home healthcare and durable medical equipment (DME) dealers.
These dealers sell or rent the products to individual users who are referred by
a physician, physical therapist, or other medical professional. Wholesale sales
amounted to 15% of the Company's sales in fiscal 1998.
The Company markets its products internationally through the use of
foreign distributors. Beginning in fiscal 1995, the Company's distributor in
the United Kingdom established a relationship with a large pharmacy chain
which utilizes the services of midwives and specifically trained advisors to
acquaint women with the advantages of electrotherapy for pain relief during
labor and delivery. The Company's BabiTENS product was developed for this
market. The BabiTENS and sales to the German distributor of the Staodyn
Dermapulse-Registered Trademark- wound management system accounted for the
major portion of the Company's international sales in fiscal 1998. The
Company is attempting to further expand international sales in Western Europe.
NEW PRODUCT DEVELOPMENT
The Company's research and development efforts have been directed primarily
at developing new lines of electrotherapy products for rehabilitation
applications. Efforts are being focused on developing enhancements of existing
products for use with specific diagnosed medical problems. Successful examples
of these development efforts are the Company's CTDx-TM- Electrostimulation
System and the Ortho Dx-TM- Electrotherapy System.
CTDX-TM- ELECTROSTIMULATION SYSTEM
The CTDx system was designed specifically to treat repetitive stress
injuries (RSIs) of the wrist and elbow, including carpal tunnel syndrome. These
cumulative trauma disorders represent a multibillion dollar annual workers'
compensation cost to U.S. industry. The CTDx system includes the SmartBrace
(wrist) or SmartWrap (elbow), application-specific electrodes and a CTDx
electrical stimulation device. It provides a non-narcotic, noninvasive and
conservative treatment for wrist pain. The system is applicable to multiple
industries and can be effectively used at the work site or in a clinic
specializing in occupational and industrial medicine. The Company also
completed a double-blind study demonstrating the effectiveness of the CTDx
versus placebo treatment which was published in the May issue of the "Journal of
the American Association of Occupational Health Nurses." U.S. patent protection
on the CTDx Electrostimulation System, SmartBrace wrist splint, and electrodes
was received in July 1996. Similar applications for other areas affected by
repetitive stress are currently being studied.
ORTHO DX-TM- ELECTROTHERAPY SYSTEM
Introduced during the first quarter of fiscal 1998, the Ortho Dx
Electrotherapy System is designed for post-surgical knee rehabilitation and is
comprised of a unique proprietary new electromedical stimulator and electrode
configuration. It combines both the PDC and NMS waveforms into one stimulator,
allowing physicians and therapists to increase local blood circulation to help
deal with post-surgical swelling of the knee while simultaneously re-educating
and strengthening key muscle groups in the leg. This innovative system
reduces the post-surgical treatment time and therefore reduces costs while
speeding the recovery time for the patient. The Ortho Dx is designed for ease
of application and use in hospital settings, clinics, at home, or work.
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COMPETITION
Several other companies currently manufacture and distribute
electrotherapy rehabilitation and pain management devices. Some of these
competitors have greater resources and name recognition than the Company and
may be better able to respond to changing market and industry conditions. In
addition, these companies may have greater experience in employing a direct
method of distribution and may benefit from established relationships in this
distribution channel. The Company believes that its principal competitor in
the electrotherapy rehabilitation and pain management market is Empi, Inc.
The Company competes in these markets primarily on the basis of the variety
and quality of product offerings, marketing and distribution presence, and
service. The merger of Staodyn with the Company more than doubled the
Company's size, and substantially expands its product offerings and sales and
distribution capabilities. The electrotherapy rehabilitation market for
modalities other than NMS, such as interferential, pulsed galvanic, and
microcurrent, is more fragmented and more difficult to define. The Company
believes that its ability to offer all of these modalities is in contrast to
the focus of its competitors. The Company further believes that there are no
dominant competitors for these other modalities and that the number of
modalities it offers, together with the distinctive features of its products,
allow it to compete favorably in this market.
MANUFACTURING AND SOURCES OF SUPPLY
All of the Company's electrotherapy devices, including all of the Staodyn
products previously manufactured at Staodyn's Longmont, Colorado facility, are
manufactured at the Company's headquarters and manufacturing facility in New
Brighton, Minnesota. Manufacturing operations consist primarily of installing
electronic components and materials onto printed circuit boards and assembling
them into the final product package. To maximize quality and reliability, and
decrease size and weight, most of the Company's products incorporate surface
mount technology and the Company utilizes machinery automating surface mount and
through-hole circuit board manufacturing. This capability was substantially
enhanced by the acquisition of Staodyn's surface mount equipment, which has
enabled the Company to rapidly increase the manufactured product output from
its New Brighton facility, and thus meet customer demand for both Rehabilicare
and Staodyn products.
The Company's electronic devices involve electromechanical assemblies and
proprietary electronic circuitry. Most of the raw materials and manufactured
components used in the Company's products are available from a number of
different suppliers. The Company maintains multiple sources of supply for most
significant items and believes that alternative sources could be developed, if
required, for present single supply sources without a material disruption of its
operations.
PATENTS AND TRADEMARKS
Rehabilicare generally has not pursued patent protection on its products,
believing that patent protection did not offer a significant competitive
advantage in the marketplace for electrotherapy devices. However, that policy
changed with the Company's CTDx Electrostimulation System, which the Company
believes represents a major new application for electrical stimulation. As a
result, the Company applied for, and in 1996 was issued, patents for the CTDx
system, including the SmartBrace wrist splint, SmartBrace electrodes, and CTDx
electrical stimulation device. This was the Company's first patent on an
electrotherapy product. During the past two fiscal years, the Company submitted
several more patent applications for approval. These applications are pending.
Staodyn historically maintained a more aggressive approach to patent protection
than the Company, and the majority of Staodyn products are covered by more than
25 U.S. and Canadian patents. Both the Company and Staodyn maintain trademark
registration for all of their branded product names.
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The Company believes that it owns or has the right to use all proprietary
technology necessary to manufacture and market its current products and those
under development. The Company has no knowledge that it is infringing upon any
patents held by others. The Company may decide for business reasons to retain a
patentable invention as a trade secret. In such event, or if patent protection
is not available, the Company must rely on trade secrets, know-how, and
continuing technological innovation to develop and maintain its competitive
position.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are subject to
regulation by the Food and Drug Administration (the FDA) and, in some instances,
by foreign governments. Under the 1976 Amendments to the Federal Food, Drug and
Cosmetic Act (the Act), and regulations promulgated thereunder, manufacturers of
medical devices must comply with certain controls which regulate the testing,
manufacturing, packaging, and marketing of medical devices. The Act and
regulations thereunder create three classifications for medical devices, each of
which is subject to different levels of regulatory control, with Class I being
the least stringent and Class III being subject to the most control. Class III
devices, which are life supporting or life sustaining, or are of substantial
importance in preventing impairment of human health, are generally subject to a
clinical evaluation program before receiving premarket approval from the FDA for
commercial distribution. Class II devices are subject in some cases to
performance standards which are typically developed through the joint efforts of
the FDA and manufacturers, but they do not require clinical evaluation and
premarket approval by the FDA. Performance standards for most Class II devices,
including the Company's products, have not been adopted, so only Class I
controls apply. Class I devices are subject only to general controls, such as
compliance with labeling and record-keeping regulations. The Company believes
that all of its currently marketed products are Class II products under this
classification system and that they do not require clinical evaluation and
premarket approval prior to commercial distribution.
If a new device is substantially equivalent to a device that was in
commercial distribution prior to the effective date of the 1976 Amendments, and
has been continuously marketed since that date, premarket approval requirements
are satisfied through a 510(k) premarket notification submission under which the
applicant provides product information supporting its claim of substantial
equivalence. This regulatory review typically takes 3-12 months. Because TENS
and NMS devices were marketed prior to 1976, all design enhancements since 1976
requiring regulatory approval have been marketed under this less burdensome form
of FDA procedure.
As a manufacturer of medical devices, the Company is also subject to
certain other FDA regulations, and its manufacturing processes and facilities
are subject to continuing review by the FDA to ensure compliance with its Good
Manufacturing Practices (GMP) regulations. The Company believes that its
manufacturing and quality control procedures substantially conform to the
requirements of the FDA regulations. New regulations have been adopted which
are now very similar to the international quality standards set forth in ISO
9000. The Company has received certification of its compliance with ISO 9001,
EN46001, and the European Medical Devices Directive.
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REIMBURSEMENT
Governmental and other efforts to reduce healthcare spending have
affected, and will continue to affect, the Company's operating results. The
cost of a significant portion of medical care in the United States is funded
by government and private insurance programs, such as Medicare, Medicaid,
health maintenance organizations, and private insurers, including Blue
Cross/Blue Shield plans. Government imposed limits on reimbursement of
hospitals and other healthcare providers have significantly curtailed their
spending budgets. Under certain government insurance programs, a healthcare
provider is reimbursed a fixed sum for services rendered in treating a
patient, regardless of the actual charge for such treatment. Private and
third-party reimbursement plans are also developing increasingly
sophisticated methods of controlling healthcare costs through redesign of
benefits and exploration of more cost-effective methods of delivering
healthcare. In general, these government and private cost-containment
measures have caused healthcare providers to be more selective in the
purchase of medical products.
Under most third-party reimbursement plans, the coverage of an item or
service and the amount of payment that will be made are separate decisions.
Efforts to reduce or control healthcare spending are likely to limit both the
coverage of certain medical devices, especially newly approved products, and the
amount of payment that will be allowed. Restrictions on coverage and payment of
the Company's products by third-party payors could have an adverse impact on the
Company. Management attempts to establish relationships with such payors to
assure coverage of its products and make the timing and extent of reimbursement
more predictable.
EMPLOYEES
As of September 23, 1998, the Company had 252 full-time employees,
including 136 in sales and marketing, 9 in research and development, 47 in
manufacturing, and 60 in finance and administration. Geographically, the
Company has 94 employees in its New Brighton facility, 119 employees in
Tampa, and 39 employees in various regional U.S. field sales offices. The
Company's employees are not represented by any collective bargaining
organization and the Company has never experienced a work stoppage. The
Company believes that its relations with its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located in a 30,000 square foot
owned building in New Brighton, Minnesota, a suburb of St. Paul. This facility
houses all of the Company's corporate activities including administration,
finance, sales and marketing, research and development, and manufacturing.
The Company leases 12,000 square feet of office space in Tampa, Florida
for its direct sales, customer service, patient support and billing and
collection activities, pursuant to a 60-month lease terminating in May 2001.
The Company believes that it will require additional space for these
operations which is not available at the current office facility and has
therefore engaged a broker to locate additional space.
The Company also leases the former Staodyn headquarters building in
Longmont, Colorado. The Company has exercised its option to purchase that
facility and separately entered into an agreement to sell that facility to a
real estate developer. Both closings are expected to occur on or before
January 10, 1999.
ITEM 3. LEGAL PROCEEDINGS.
The Company has, from time to time, been a party to certain claims, legal
actions, and complaints arising in the ordinary course of business. Management
does not believe that the resolution of such matters has had or will have a
material impact on the Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended June 30, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Rehabilicare Inc. shares are traded on The Nasdaq Stock Market under the
symbol REHB. The table below sets forth the high and low closing sale prices of
the Company's common stock for the periods indicated, as quoted by Nasdaq:
<TABLE>
<CAPTION>
Closing Sale Price
----------------------
High Low
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<S> <C> <C>
Fiscal year ending June 30, 1998
First Quarter $ 3 7/8 $ 2 7/8
Second Quarter 4 9/16 2 15/16
Third Quarter 3 5/8 2 3/4
Fourth Quarter 3 2 1/2
</TABLE>
<TABLE>
<CAPTION>
Closing Sale Price
----------------------
High Low
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<S> <C> <C>
Fiscal year ending June 30, 1997
First Quarter $ 4 5/16 $ 3
Second Quarter 4 1/4 2 3/8
Third Quarter 4 1/4 2 7/8
Fourth Quarter 3 3/4 2 3/4
</TABLE>
The last sale price reported by Nasdaq on September 23, 1998 was $2.50.
As of September 23, 1998, there were approximately 800 shareholders of record
(not including beneficial holders) and the Company estimates there were
approximately 1,500 beneficial holders.
The Company has never declared or paid a cash dividend on its Common
Stock. The Board of Directors presently intends to retain all earnings for
use in the operation and expansion of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
On March 17, 1998, Rehabilicare merged with Staodyn, Inc. in a transaction
accounted for as a pooling-of-interests. As a result of that merger, the
financial statements and related notes, and this discussion, are based on the
combined financial position and results of operations as if the companies had
been combined throughout the periods. Prior to the merger, Staodyn reported its
financial results on a fiscal year ended November 30, while Rehabilicare
reported its financial results on a fiscal year ended June 30.
The balance sheet of Rehabilicare at June 30, 1997 on a combined basis
presents the historical financial position of Rehabilicare at June 30, 1997
combined with the historical financial position of Staodyn at November 30,
1997. The combined results of operations for the year ended June 30, 1998
represent the historical results of operations of Rehabilicare for such
period combined with the historical results of operations of Staodyn for the
same period. The combined results of operations for the year ended June 30,
1997 represent the historical results of operations of Rehabilicare for such
period combined with the historical results of operations of Staodyn for the
year ended November 30, 1997.
Staodyn, like Rehabilicare, was engaged in the design, manufacture and
distribution of electrotherapy products and had a product line that was
similar to the product line of Rehabilicare. Rehabilicare determined to
combine the manufacturing and billing functions of Staodyn with those of
Rehabilicare, moving Staodyn's manufacturing operations to Rehabilicare's
offices in St. Paul, Minnesota and moving Rehabilicare's billing functions to
Staodyn's facility in Tampa, Florida. Staodyn's Longmont facility was closed
at the end of June and Rehabilicare currently has a contract for sale of the
facility. Rehabilicare terminated approximately 80 employees in connection
with the consolidation of these operations and incurred moving costs and
facility, equipment and inventory writedowns in connection with the
transfers, which are discussed below.
Page 10
<PAGE>
OVERVIEW
The Company has designed, manufactured and distributed electrotherapy
products for clinical and home health care uses for over 25 years. Its
product line focused primarily on pain management until the late 1980s when
it was expanded to include a variety of rehabilitation products. Management
believes that the rehabilitation market, including occupational medicine
applications, is growing more rapidly than the pain management market, thus
providing greater potential for revenue growth.
Historically, the Company distributed its products primarily through
sales to regional home health care dealers which resold them to health care
providers or patients upon prescription by physicians. In fiscal 1992, the
Company began distributing directly to patients. Clinical versions of the
Company's electrotherapy modalities are placed with physicians, physical
therapists and other health care providers who refer home versions of those
modalities to patients after determining the most appropriate treatment. An
inventory of home units is left on consignment with such providers.
The Company bills the patient or the patient's insurance carrier
directly upon notification that a unit has been prescribed and provided to
the patient. It also takes responsibility for patient follow-up, including
the sale of additional supplies and any service required for its products.
The Company believes that its shift to a direct sales approach has improved
margins and its ability to penetrate existing markets. It has also resulted
in significant increases in consignment inventory and receivables.
Staodyn has also designed, manufactured and distributed electrotherapy
products for clinical and home health care uses for over 25 years. Its
product line focused primarily on pain management. Staodyn began
distributing its products directly to patients in 1992 through an
acquisition.
RESULTS OF OPERATIONS
The following table sets forth information from the statement of operations
as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------
1998 1997
---- ----
<S> <C> <C>
Net sales and rental revenue 100.0% 100.0%
Cost of sales and rentals 32.9 31.9
Gross profit 67.1 68.2
Operating expenses -
Selling, general and administrative 59.8 60.1
Research and development 2.9 3.1
Merger expense 10.6 ---
Total operating expenses 73.3 63.2
Income (loss) from operations (6.2) 5.0
Other expense 1.1 0.9
Income tax benefit 4.4 1.5
Net income (loss) (2.9) 5.6
</TABLE>
Revenue was $33,812,000 in fiscal 1998, a 5% increase from $32,134,000 in
fiscal 1997. Net sales and rental revenue from direct distribution to patients
increased 9% to $28,377,000 from $26,124,000 and accounted for approximately 84%
and 81% of total revenue, respectively. The increase was due primarily to
growth in the number of new patients.
Page 11
<PAGE>
Revenue from the Company's traditional dealer business, excluding
international, decreased by 1% to $5,269,000 in fiscal 1998 from $5,323,000.
International sales were $166,000 in fiscal 1998 compared to $687,000 in fiscal
1997. The primary reason for the decrease was the fulfillment in fiscal 1997 of
an order from the Company's dealer in the United Kingdom for the BabiTENS-TM-
product. Fiscal 1998 sales reflect ongoing accessory sales to that distributor
for use with those units.
Gross profit increased 4% to $22,677,000 or 67% of revenue in fiscal 1998
compared with $21,898,000 or 68% of revenue in fiscal 1997. As a result of the
merger with Staodyn, the company wrote-off approximately $832,000 of inventories
related to Staodyn product lines which have been discontinued. Before that
write-off, gross profit increased to 70% of revenue. The changes in gross
profit as a percent of revenue are primarily the result of the mix of sales and
rentals.
Selling, general and administrative expenses increased 5% to $20,227,000
in fiscal 1998 from $19,316,000 in fiscal 1997. The only significant changes
in selling, general and administrative expenses were variable expenses
including sales commissions and marketing costs related to the CTDx-TM- and
the new Ortho Dx product lines and an increased provision for uncollectible
retail receivables. The Company also incurred operating costs of $3,589,000
in fiscal 1998 for merger related expenses. That total included $1,375,000
for the write-off of fixed and intangible assets related to Staodyn product
lines, which have been discontinued.
Research and development expense was $986,000 or 3% of revenue in fiscal
1998 compared with $984,000 or 3% of revenue in fiscal 1997.
Rehabilicare incurred pretax expenses of approximately $4,421,000 in
connection with the merger during the year ended June 30, 1998, consisting of
approximately $1,165,000 of employee severance costs; approximately $496,000
of investment banking fees; $250,000 of professional fees; and $2,200,000
adjustment for obsolete inventory, fixed and tangible assets; and
approximately $310,000 of miscellaneous employee costs and expenses. Of those
total expenses, $832,000 representing inventory write-offs, was charged to
cost of sales and $3,589,000 was charged to operating expneses in the period
ended June 30, 1998. See Note 3 to the Consolidated Financial Statements.
The Company reported an operating loss of $2,125,000 in fiscal 1998
compared with operating income of $1,599,000 in fiscal 1997. Such loss was
primarily a result of the merger related expenses discussed above. The net
loss was $1,009,000 in fiscal 1998 compared to net income of $1,794,000 for
fiscal 1997.
Rehabilicare recorded an income tax benefit for fiscal 1998. The amount
recorded includes a tax benefit on losses reported for the year and full
reversal of valuation allowances in the amount of $769,000 recorded by
Staodyn as a separate company in previous years. The allowances had been
recorded against available tax loss carry forwards and timing differences in
the recognition of certain costs and expenses. Based on the successful
completion of the Merger and the foundation created for future profitable
operations, management believes that it is more likely than not that
Rehabilicare will ultimately realize the available tax benefits.
COMPARISON OF YEAR ENDED JUNE 30, 1997 TO YEAR ENDED JUNE 30, 1996
Revenue was $32,134,000 in fiscal 1997, up 16% from $27,647,000 in
fiscal 1996. All of the increase occurred in the Company's direct
distribution business, which increased by 22% to $26,124,000 in 1997 from
$21,450,000 the previous year, representing 81% of total revenue in 1997
compared to 78% in 1996. Both the number of retail sales representatives and
active patients increased significantly in 1997 compared to the previous
year. Revenue from the traditional dealer business decreased slightly to
$6,010,000 in 1997 from $6,197,000 in 1996.
Gross profit was $21,898,000 or 68% of revenue in fiscal 1997, compared
to $18,681,000 or 68% of revenue in 1996. Margins on direct sales and
rentals were unchanged in 1997 from 1996. The improvement in gross margin
due to the change in sales mix from dealer business to direct sales and
rentals was largely offset by a decrease in margins in dealer business.
Selling, general and administrative expenses increased 15% to
$19,316,000 in fiscal 1997 from $16,764,000 in fiscal 1996 due to expansion
of both the external sales and internal patient support activities. As a
percentage of revenue S, G & A expenses decreased from 61% to 60%.
Research and development expenses increased by 5% to $984,000, or 3% of
revenue, in fiscal 1997, compared to $941,000, or 3% of revenue, in fiscal
1996. During 1997, the Company developed the Ortho Dx product as well as
expanded the capabilities of the CTDx product line.
Page 12
<PAGE>
Operating income was $1,599,000 in fiscal 1997, up 64% from $977,000 in
fiscal 1996, due to the increase in revenue and effective management of costs
and expenses. The percentage increase in selling expenses was less than the
increase in revenue, and general & administrative and research & development
expenses were up less than 3% in total on a year-to-year basis.
Net income was $1,794,000 in fiscal 1997, compared to $539,000 in fiscal
1996. Income before income taxes was $1,297,000 in 1997, up 84% from $704,000
the previous year.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company used cash of $1,734,000 in fiscal 1998 and generated $273,000
of cash in 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
$1,277,000 in fiscal 1998 and $558,000 in fiscal 1997. During fiscal 1998,
the Company provided an additional $2,329,000 for uncollectible receivables and
wrote off $1,907,000 of accounts it considered uncollectible. As a percent of
receivables, the reserve increased from 19.1% in fiscal 1997 to 20.2% 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.
The Company 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.
Cash of $626,000 was used in investing activities in fiscal 1998 compared
with $482,000 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, which are now year 2000 compliant.
Financing activities used cash of $838,000 in fiscal 1998 and $652,000
in fiscal 1997. The Company repaid approximately $359,000 of long-term debt
in fiscal 1998 and $514,000 in fiscal 1997. The Company maintains a credit
facility, which provides for borrowing up to $5,000,000, limited by eligible
accounts receivable. At June 30, 1998, the borrowing base limit was
approximately $5,000,000. There were no borrowings under the line on June
1998 and $340,000 at June 30, 1997. In August 1998 (after fiscal year end),
the Company applied $3,300,000 of borrowings under the credit facility (a
portion as a term loan) to the purchase of the home electrotheraphy division
of Henley Healthcare, Inc. Except with respect to such application, the
Company does not have, any material commitments for capital expenditure and
believes that cash requirements during fiscal 1998 will be less than its
available credit facility.
The company has completed a review of its computer systems with regard
to year 2000 compliance and will either replace or correct through
programming modifications those computer systems that have been found to have
date-related deficiencies. In addition, the company is assessing the
readiness of third parties (e.g. venders and customers) that interact with
the company's systems. Also being assessed are facility and
telecommunications systems, as well as systems used to support manufacturing
processes, to ensure that these will be year 2000 ready. The company's
products have been assessed and found to be year 2000 compliant with the
exception of a few requiring minor corrective actions.
External and internal costs specifically associated with modifying
internal use software for year 2000 compliance are expressed as incurred. To
date, those costs have not been material. Based upon currently available
information, the company does not expect the costs of addressing potential
year 2000 problems to have a material adverse impact on the company's
financial position, results of operations or liquidity in future periods.
The company plans to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
This report contains "forward-looking statements" within the meaning of
Federal securities laws. The forward looking statements are subject to risks
and uncertainties, including, but not limited to: the risks related to
fluctuations in the Company's quarterly operating results; inventory and
receivables requirements for direct billed medical equipment sales; volatility
in the markets for electrotherapy; the effects of reimbursement and other
governmental or private agency actions on the Company's sales; and competition
and other risks that may be detailed in the Company's Form 10-KSB for the year
ending June 30, 1998 or in other filings with the Securities and Exchange
Commission.
Page 13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements and financial statement schedules are
attached as a separate section immediately following the signature page of this
Annual Report on Form 10-KSB:
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the years ended June 30, 1998
and 1997
Consolidated Statement of Changes in Stockholders' Equity for the years
ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended June 30, 1998
and 1997
Notes to Consolidated Financial Statements
Consolidated Supplemental Schedule for the years ended June 30, 1998 and
1997:
Schedule II - Valuation and Qualifying Accounts
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained under the headings "Election of Directors" and
"Executive Officers" of the Company's definitive proxy statement for its
annual meeting of shareholders to be held December 15, 1998 (hereafter the
"Proxy Statement"), is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information under the heading "Executive Compensation" of the Proxy
Statement is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is hereby incorporated by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of the
Proxy Statement is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) INDEX OF EXHIBITS
Page 14
<PAGE>
<TABLE>
<CAPTION>
Number Description
- -------- -------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of December 1, 1997 by and
among Rehabilicare Inc., Hippocrates Acquisition, Inc. and Staodyn,
Inc. (incorporated by reference to Exhibit A to the Proxy
Statement/Prospectus that forms a part of Amendment No. 1 to the
Registration Statement on Form S-4 filed by the Company on February
10, 1998 (File number 333-44139)) (i)
2.2 Asset Purchase Agreement dated August 6, 1998 between the Company and
Henley Healthcare, Inc.*
3 Restated Articles of Incorporation (c)
3.1 Articles of Amendment to Articles of Incorporation (i)
4.1 Bylaws of the Company (c)
4.2 1988 Restated Stock Option Plan, as amended (b)
4.3 1994 Employee Stock Purchase Plan (d)
4.4 Form of Incentive Stock Option Agreement (b)
4.5 Form of Nonqualified Stock Option Agreement (a)
10.2 Construction Loan Agreement dated October 20, 1994 between the Company
and Norwest Bank Minnesota, N.A., together with related Real Estate
Note; Security Agreement; and Mortgage Security Agreement, Fixture
Financing Statement and Assignment of Leases and Rents (e)
10.3 Contract for Private Redevelopment dated October 20, 1994 between the
Company and the City of New Brighton, Minnesota (e)
10.4 First Amendment dated January 10, 1995 to Contract for Private
Redevelopment dated October 20, 1994 between the Company and the City
of New Brighton, Minnesota (f)
10.5 Agreement for the Loan of Economic Recovery Funds dated October 20,
1994 between the Company and the City of New Brighton, Minnesota,
together with $199,900 Note and Mortgage (e)
10.6 First Amendment dated December 19, 1994 to Agreement for the Loan of
Economic Recovery Funds dated October 20, 1994 between the Company and
the City of New Brighton, Minnesota, together with $199,900 Note and
Mortgage (f)
10.7 Subordination Agreement dated March 3, 1996 between the City of New
Brighton and Twin Cities-Metro Development Company, as authorized
representative of the U.S. Small Business Administration (SBA) (f)
10.8 U.S. Small Business Administration Certified Development Company
Program "504" Note dated March 3, 1995 for $786,000 payable by the
Company to Twin Cities-Metro Development Company, together with
related Loan Agreement, Mortgage and Assignment of Mortgage to SBA (f)
10.9 Assessment Agreement dated April 26, 1994 between the Company and the
City of New Brighton and Certification by County Assessor of the
County of Ramsey, State of Minnesota (f)
10.10 $65,000 Limited Revenue Tax Increment Note payable to the Company by
the City of New Brighton (f)
10.11 Credit Agreement dated December 1, 1994 between the Company and
Norwest Bank Minnesota, N.A. (f)
10.13 Form of Severance Pay Agreement (h)
Page 15
<PAGE>
10.14 Stock Pledge Agreement and Promissory Note dated March 11, 1997
between the Company and David B. Kaysen (h)
10.15 Third Amendment dated August 5, 1998 to Credit Agreement dated
December 1, 1994 between the Company and Norwest Bank Minnesota, N.A.*
10.17 Purchase and Sale Agreement dated August 19, 1998 between the Company
and Etkin-Johnson Group LLC.*
10.18 Letter dated July 10, 1998 to 1225 Building, LLC and Pendelton
Construction Co. exercising options to purchase premises at 1225
Ken Pratt Boulevard in Longmont, Colorado.
23.1 Consent of Independent Public Accountants - PricewaterhouseCoopers LLP
27.1 Financial Data Schedule for the period ended March 31, 1998 (i)
27.2 Restated Financial Data Schedule for the year ended June 30, 1997 (i)
99 Safe Harbor Statement pursuant to the Private Securities Litigation
Reform Act of 1995
</TABLE>
- --------------------------------------------------------------------------------
(a) Incorporated by reference to the Company's Form 10 filed with the
Commission on June 27, 1988 (File Number 0-9407)
(b) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1988 (File Number 0-9407)
(c) Incorporated by reference to the Company's Form 10-Q for the quarter
ended December 31, 1992 (File Number 0-9407)
(d) Incorporated by reference to the Company's Registration Statement on
Form S-2 filed on June 24, 1993 (File Number 33-64884)
(e) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1994 (File Number 0-9407)
(f) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1995 (File Number 0-9407)
(g) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1996 (File Number 0-9407)
(h) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1997 (File Number 0-9407)
(i) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended March 31, 1998 (File Number 0-9407)
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
quarter ended June 30, 1998.
* Filed as part of this report
Page 16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
REHABILICARE INC.
Dated: September 28, 1998 By: /s/ DAVID B. KAYSEN
------------------------------------------
David B. Kaysen
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
------ ------- ------
<S> <C> <C>
/s/ DAVID B. KAYSEN President, Chief Executive Officer September 28, 1998
- --------------------------
David B. Kaysen
Vice President of Finance
(Principal Financial and
/s/ W. GLEN WINCHELL Accounting Officer) September 28, 1998
- --------------------------
W. Glen Winchell
Chairman, Chief Technical
/s/ ROBERT C. WINGROVE Officer and Director September 28, 1998
- --------------------------
Robert C. Wingrove
Director September 28, 1998
- --------------------------
Frederick H. Ayers
/s/ W. BAYNE GIBSON Director September 28, 1998
- --------------------------
W. Bayne Gibson
/s/ RICHARD E. JAHNKE Director September 28, 1998
- --------------------------
Richard E. Jahnke
/s/ JOHN H.P. MALEY Director September 28, 1998
- --------------------------
John H.P. Maley
</TABLE>
Page 17
<PAGE>
REHABILICARE INC.
Financial Statements as of
June 30, 1998 and 1997 and
Supplemental Schedule
Together With Report of
Independent Public Accountants
Page 18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Rehabilicare Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Rehabilicare Inc.
at June 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the two years in the period ended June 30, 1998, 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 auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, MN
September 23, 1998
Page 19
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 919,765 $ 2,654,118
Receivables, less reserve for uncollectible accounts 12,660,677 11,384,063
of $3,109,448 and $2,687,151
Inventories -
Raw materials 2,252,897 497,206
Work in process 249,277 --
Finished goods 4,292,870 6,621,484
Deferred income taxes 2,197,724 1,071,882
Prepaid expenses 300,827 442,320
------------- -------------
Total current assets 22,874,037 22,671,073
------------- -------------
PROPERTY AND EQUIPMENT: 11,915,732 12,770,451
Less accumulated depreciation (8,544,578) (8,446,523)
------------- -------------
Total property and equipment 3,371,154 4,323,928
------------- -------------
Intangible assets, net of accumulated amortization of
$1,983,764 and $1,446,642 477,210 1,099,004
Deferred income taxes 302,859 327,882
Other assets 35,098 49,460
------------- -------------
$ 27,060,358 $ 28,471,347
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable $ -- $ 340,000
Current maturities of long-term debt 404,172 373,878
Accounts payable 1,110,366 1,013,148
Accrued liabilities
Payroll 699,123 743,385
Commissions 458,783 370,210
Taxes -- 260,690
Other 996,979 442,478
------------- -------------
Total current liabilities 3,669,423 3,543,789
LONG-TERM DEBT 3,299,705 3,555,107
------------- -------------
Total liabilities 6,969,128 7,098,896
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 1,044,337 1,037,470
Additional paid-in capital 20,641,922 20,491,929
Less note receivable from officer/stockholder (237,500) (162,500)
Retained earnings (1,357,529) 5,552
------------- -------------
Total stockholders' equity 20,091,230 21,372,451
------------- -------------
$ 27,060,358 $ 28,471,347
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 20
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net sales and rental revenue $ 33,812,453 $ 32,133,707
Cost of sales and rentals 11,135,933 10,235,956
------------- -------------
Gross profit 22,676,520 21,897,751
Operating expenses:
Selling, general and administrative 20,226,837 19,315,697
Research and development 986,203 983,645
Merger expense 3,588,890 --
------------- -------------
Total operating expenses 24,801,930 20,299,342
------------- -------------
Income (loss) from operations (2,125,410) 1,598,409
Other income (expense):
Interest expense (391,677) (412,503)
Other income 13,235 110,775
------------- -------------
Income (loss) before income taxes (2,503,852) 1,296,681
Income tax benefit (1,495,169) (496,647)
------------- -------------
Net income (loss) $ (1,008,683) $ 1,793,328
------------- -------------
------------- -------------
Net income (loss) per common share and common
equivalent share
Basic $ (0.10) $ 0.17
------------- -------------
------------- -------------
Diluted $ (0.10) $ 0.17
------------- -------------
------------- -------------
Weighted average number of shares outstanding
Basic 10,398,346 10,247,589
------------- -------------
------------- -------------
Diluted 10,398,346 10,370,568
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 21
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
Note
Additional Receivable
Common Stock Paid-In From Officer/ Retained
Shares Amount Capital Stockholder Earnings Total
----------- ----------- ----------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 10,191,399 $1,019,140 $20,247,188 $ - $(1,787,776) $19,478,552
Exercise of stock options and
related tax benefits 181,965 18,196 240,048 (162,500) - 95,744
Common stock issued through Employee
Stock Purchase Plan 1,337 134 4,693 - - 4,827
Net income - - - - 1,793,328 1,793,328
---------- ---------- ----------- --------- ----------- -----------
BALANCE, June 30, 1997 10,374,701 1,037,470 20,491,929 (162,500) 5,552 21,372,451
Exercise of stock options and related
tax benefits 58,778 5,878 124,080 (75,000) - 54,958
Common stock issued through Employee
Stock Purchase Plan 9,890 989 25,913 - - 26,902
Adjustment to conform the year-
end of Staodyn, Inc. - - - - (354,398) (354,398)
Net loss - - - - (1,008,683) (1,008,683)
---------- ---------- ----------- --------- ----------- -----------
BALANCE, June 30, 1998 10,443,369 $1,044,337 $20,641,922 $(237,500) $(1,357,529) $20,091,230
---------- ---------- ----------- --------- ----------- -----------
---------- ---------- ----------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,008,683) $ 1,793,328
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 840,879 1,162,169
Non-recurring merger costs 1,374,550 --
Change in long-term portion of deferred income taxes 25,023 (359,626)
Stock Compensation -- 22,888
Loss on sale of equipment 8,941
Changes in current assets and liabilities
Receivables (1,276,614) (558,193)
Current deferred taxes (1,125,842) (481,021)
Inventories 323,646 (63,302)
Prepaid expenses 141,493 46,207
Accounts payable 97,218 (247,313)
Accrued liabilities 338,122 82,427
----------- -----------
Net cash provided by (used in) operating activities (270,208) 1,406,505
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (612,137) (403,126)
Investment in patents (28,129) --
Increase (decrease) in other assets 13,767 (79,072)
----------- -----------
Net cash used in investing activities (626,499) (482,198)
----------- -----------
FINANCING ACTIVITIES
Proceeds from new financing 133,515 --
Principal payments on long-term obligations (358,623) (513,844)
Proceeds from (payments on) line of credit, net (340,000) (215,000)
Equity transactions 81,860 77,053
Adjustment for pooling (354,398) --
----------- -----------
Net cash used in financing activities (837,646) (651,791)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,734,353) 272,516
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,654,118 2,381,602
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 919,765 $ 2,654,118
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 389,468 $ 423,401
----------- -----------
----------- -----------
Income taxes paid $ 9,611 $ 284,018
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 23
<PAGE>
REHABILICARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rehabilicare Inc. (the "Company") generates revenue from sales of its
products to medical equipment dealers and from rental or sales directly to
patients and health care providers. Revenue is recognized at the time of
shipment to dealers and health care providers or upon notification from a
health care provider that equipment has been prescribed and provided to a
patient. All revenue is recognized net of estimated sales allowances and
returns.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS
Revenue from rental and sale of products directly to patients and health
care providers accounted for approximately 84 percent of total revenue in fiscal
1998 and 81 percent in fiscal 1997. A significant portion of the related
receivables are from insurance companies or other third-party reimbursing
agents. The nature of these receivables within this industry has typically
resulted in long collection cycles. The Company establishes a reserve for
uncollectible accounts based upon factors surrounding credit risk of specific
insurance carriers, historical trends, patient responsibility and other
information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Ultimate results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market. Finished goods includes products held on consignment by health care
providers or other third parties for rental or sale to patients.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting proposes and accelerated
methods for income tax reporting purposes. Estimated useful lives for financial
reporting purposes are as follows:
<TABLE>
<S> <C>
Building 39 years
Office furniture and equipment 3-10 years
Production equipment 3-5 years
Clinical and rental equipment 5 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of patents. These assets are being
amortized using the straight-line method over estimated useful lives of 14
years. The Company periodically reviews its patents for indications of
impairment in accordance with SFAS No. 121.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
Page 24
<PAGE>
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 applies to entities with publicly held common
stock or potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997. Under SFAS No. 128, the
presentation of primary earnings per share is replaced with a presentation of
basic earnings per share. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share for entities with complex capital structures.
Basic earnings per share includes no dilution and is computed by dividing net
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform with the provisions of SFAS No. 128.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments primarily consist of cash,
receivables and payables for which current carrying amounts approximate fair
market value. Additionally, interest rates on outstanding borrowings are at
rates which approximate market rates for borrowings with similar terms and
average maturities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131 "Disclosure about Segments of an
Enterprise and Related Information." This statement, which must be adopted
by the company for the fiscal year ending June 30, 1999, establishes new
standards for reporting information about operating segments in annual and
interim financial statements. Under SFAS No. 131, operating segments are
determined consistent with the way management organizes and evaluates
financial information internally for making decisions and assessing per-
formance. SFAS No. 131 also requires related disclosures about products,
geographic areas, and major customers. Implementation of this disclosure
standard will not affect the company's results of operations, cash flows or
financial position.
SELECTED FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
As of June 30
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Property, Plant and Equipment
Land $ 306,553 $ 306,553
Buildings 3,152,323 3,084,140
Clinical and Rental Equipment 340,534 1,296,295
Production Equipment 3,174,596 3,448,832
Office Furniture and Equipment 4,941,726 4,634,631
----------- -----------
11,915,732 12,770,451
Less Accumulated Depreciation (8,544,578) (8,446,523)
----------- -----------
Total Property and Equipment $ 3,371,154 $ 4,323,928
----------- -----------
----------- -----------
</TABLE>
Page 25
<PAGE>
2. MERGER
On March 17, 1998, pursuant to an Agreement and Plan of Merger executed
by Rehabilicare on December 1, 1997 and approved by shareholders on March 17,
1998, a wholly-owned subsidiary of Rehabilicare was merged (the "Merger")
into Staodyn, Inc. ("Staodyn"). As a result of the Merger, each outstanding
share of common stock, $0.01 par value of Staodyn ("Staodyn Common Stock")
became 0.829 of a share of Rehabilicare Common Stock (with cash paid in lieu
of fractional shares) and Staodyn became a wholly-owned subsidiary of
Rehabilicare. Rehabilicare issued a total of 5,521,111 shares of its common
stock as a result of the Merger. Rehabilicare also assumed the obligations
to issue shares under options to purchase 383,083 shares of Staodyn Common
Stock (approximately 317,575 shares of Rehabilicare Common Stock) and
warrants to purchase 130,000 shares (107,770 shares of Rehabilicare Common
Stock).
The Merger was recorded using the pooling-of-interests method. Prior to
the Merger, Staodyn reported its financial results on a fiscal year ended
November 30, while Rehabilicare reported its financial results on a fiscal
year ended June 30. The balance sheet of Rehabilicare at June 30, 1997 on a
combined basis presents the historical financial position of Rehabilicare at
June 30, 1997 combined with the historical financial position of Staodyn at
November 30, 1997. The combined results of operations for the fiscal year
ended June 30, 1997 represent the historical results of operations of
Rehabilicare for such period combined with the historical results of
operations of Staodyn for the fiscal year ended November 30, 1997. The
combined results of operations for the fiscal year ended June 30, 1998
represent the historical results of operations of Rehabilicare for such
period combined with the historical results of operations of Staodyn for the
same period. Staodyn's revenue and costs and expenses of $10,813,033 and
$10,458,635, respectively, for the period July 1, 1997 through November 30,
1997 are included in the combined results of operations for the fiscal year
ended June 30, 1998 and 1997, resulting in an adjustment to retained earnings
of $354,398 during fiscal 1998.
3. NON-RECURRING CHARGES
Rehabilicare incurred pretax expenses of approximately $4,421,000 in
connection with the Merger for the year ended June 30, 1998, consisting of
approximately $1,165,000 of employee severance costs; approximately $496,000
of investment banking fees; $250,000 of professional fees; a $2,200,000
adjustment for obsolete inventory, fixed and tangible assets; and
approximately $310,000 of miscellaneous employee costs and expenses. Of
those total expenses, $832,000 representing inventory write-offs, was charged
to cost of sales and $3,589,000 was charged to operating expenses in the
period ended June 30, 1998.
<TABLE>
<CAPTION>
Inventory,
Severance Fixed and
and Related Tangible Assets Professional
Costs Write-down Fees Other Total
----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial Charges $ 1,215,000 $ 2,200,000 $ 746,000 $ 260,000 $ 4,421,000
Utilization:
Cash (573,000) -- (746,000) (260,000) (1,579,000)
Non-cash -- (2,200,000) -- -- (2,200,000)
----------- ------------- ------------ ----------- -----------
Balance at
June 30, 1998 $ 642,000 $ -- $ -- $ -- $ 642,000
----------- ------------- ------------ ----------- -----------
----------- ------------- ------------ ----------- -----------
</TABLE>
The June 30, 1998 reserve balance of $642,000 is included in other accrued
liabilities.
Page 26
<PAGE>
4. NOTES PAYABLE:
The Company maintains a revolving line of credit with a bank which
provides for borrowings up to $2,000,000, limited by eligible receivables, as
defined. There were no amounts outstanding on the line of credit at June 30,
1998. Borrowings under this line bear interest, payable monthly, at the
bank's prime rate (8.5% at June 30, 1998). Amounts outstanding are
collateralized by receivables, inventories, furniture and equipment. The
Company was in compliance with all financial covenants contained in the
credit agreement as of June 30, 1998.
Selected data on the Company's borrowings under its revolving line of
credit is shown below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Average balance outstanding $ 471,000 $ 534,000
Maximum balance outstanding $ 740,000 $ 845,000
Weighted average interest rate 8.5% 8.3%
</TABLE>
Subsequent to year-end and effective August 5, 1998, the Company amended
its Credit Agreement to increase the amount of credit from $2,000,000 to
$2,500,000 and to make a new term loan to the Company in the amount of
$2,500,000. The new term loan is a three year loan payable in monthly
installments of $69,445 plus accrued interest. Interest accrues at a fixed
annual rate of 8.05% for the first year, and then for the next two years at a
fixed annual rate equal to 2.75% in excess of the treasury rate. The
proceeds from this term loan were used to pay off a term note and to
acquire certain assets of a division of Henley Healthcare. (See Note 8 for
Discussion of Acquisition.)
5. LONG-TERM DEBT:
Long-term obligations at June 30 consisted of the following
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Financing obligation, lease payments are due in annual installments
through July 2003, interest at prime (8.5% at June 30, 1998), collateralized
by the Company's building in Longmont, Colorado. Option to purchase the
building was filed on July 2, 1998. (See Note 9) $ 1,258,500 $ 1,256,591
Mortgage note payable, principal and interest due in monthly
Installments through May 2015, interest at 7.37%,
Collateralized by the Company's land and building 721,982 742,942
Mortgage note payable, principal and interest due in monthly
Installments through May 2005 and a balloon payment at that
date, interest at 9.56%, collateralized by the Company's land
and building 718,344 734,596
Notes payable, principal and interest due in monthly
Installments through June 1999, interest at prime (8.5% at
June 30, 1998), collateralized by the Company's
Receivables, inventories, furniture and equipment 199,992 399,996
Capital lease obligations 755,684 745,485
Other 49,375 49,375
----------- -----------
3,703,877 3,928,985
Less-Current maturities (404,172) (373,878)
----------- -----------
$ 3,299,705 $ 3,555,107
----------- -----------
----------- -----------
</TABLE>
Page 27
<PAGE>
Under terms of the various loan agreements, the Company must meet certain
financial covenants, including maintaining certain levels of stockholders'
equity and meeting or exceeding certain financial ratios. As of June 30, 1998,
the Company was in compliance with all such covenants relating to significant
loan agreements.
Future maturities due in each fiscal year with respect to long-term debt,
excluding obligations under capital leases, are as follows:
<TABLE>
<S> <C>
1999 $ 240,424
2000 43,939
2001 47,754
2002 51,905
2003 56,425
Thereafter 2,507,746
-------------
$ 2,948,193
-------------
-------------
</TABLE>
CAPITAL LEASES
The Company has commitments under various capital leases which bear
interest at rates ranging from 6.15% to 14.1% and are payable in monthly
installments through May 2002. Aggregate principal payments due in each fiscal
year with respect to these obligations are as follows:
<TABLE>
<S> <C>
1999 $ 163,748
2000 175,318
2001 170,351
2002 213,127
2003 33,140
-------------
$ 755,684
-------------
-------------
</TABLE>
6. INCOME TAXES:
Deferred income taxes represent the tax effects of timing differences in
the recognition of revenue and expenses for financial reporting and income tax
purposes. Federal tax credits are recorded as a reduction of income tax expense
in the year the credits are utilized.
The following summarizes the components of the provision for taxes:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Currently payable:
Federal $ (374,632) $ 45,116
State (19,718) 2,375
Deferred (1,100,819) (544,138)
----------- -----------
$(1,495,169) $ (496,647)
----------- -----------
----------- -----------
</TABLE>
Page 28
<PAGE>
A reconciliation of the Company's reported provision for income taxes as
compared to that using statutory federal rates follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Statutory rate applied to income before taxes $ (851,300) $ 441,100
State income taxes, net of federal tax benefit (87,650) 57,600
Release of valuation allowance (780,765) (700,200)
Usage of net operating losses -- (293,700)
Nondeductible merger costs 279,860 17,000
Other (55,314) (18,447)
----------- -----------
$(1,495,169) $ (496,647)
----------- -----------
----------- -----------
Deferred tax benefits arising from:
Reserve for uncollectible accounts $ 557,218 $ 969,639
Accruals and other reserves 159,122 227,274
Accrued merger costs 506,733 --
Depreciation 75,037 46,384
Inventory 576,440 293,221
Sale and leaseback 336,871 312,312
Intangible assets 46,255 29,012
Net operating loss carryforwards 61,340 --
Alternative minimum tax credits -- 50,199
General business credits 181,567 252,488
----------- -----------
2,500,583 2,180,529
Valuation allowance -- (780,765)
----------- -----------
Total deferred tax assets, net $ 2,500,583 $ 1,399,764
----------- -----------
----------- -----------
</TABLE>
The tax provision in fiscal 1998 includes the impact of the release of all
remaining valuation allowances. In management's opinion, the sustained
profitability of operations, excluding the impact of the costs associated with
the merger with Staodyn, make it more likely than not that all potential
deferred tax assets will be fully utilized by the Company.
7. STOCKHOLDERS' EQUITY:
STOCK OPTIONS
The Company has 925,000 shares of its common stock reserved under its 1988
Restated Stock Option Plan, and 400,000 shares of its common stock reserved
under its 1998 Stock Incentive Plan for issuance to key employees, consultants,
or other persons providing valuable services to the Company. Options are granted
at prices not less than the fair market value on the date of grant and are
exercisable in cumulative installments over a term of five years.
Page 29
<PAGE>
The following table summarizes information with respect to such plans as
of June 30, 1998 and has been restated to reflect the converted stock options
from the Staodyn merger:
<TABLE>
<CAPTION>
Option Price on Dates
Of Grants Number of Shares
--------------------- ----------------
<S> <C> <C>
Balance outstanding at June 30, 1996 $ 0.075-$4.750 822,825
Granted 1.5838-4.3125 131.489
Exercised 0.750 - 2.109 (201,500)
Canceled 1.875 - 4.313 (43,305)
--------------- ------------
Balance outstanding at June 30, 1997 $0.750-$4.750 709,509
Granted 1.6586-3.5625 183,277
Exercised 0.875 - 2.625 (58,778)
Canceled 0.875 - 1.875 (1,500)
--------------- ------------
Balance outstanding at June 30, 1998 $0.750 - 4.750 832,508
------------
------------
Exercisable at June 30, 1998 $0.875 - 4.750 500,894
------------
------------
Available for grant at June 30, 1998 342,840
------------
------------
</TABLE>
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------ --------------------------
Weighted Average Weighted Average Weighted Average
Range of Remaining Exercise Price Exercise Price
Exercise Price Shares Contractual Life Per Share Shares Per Share
- -------------- ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$1.51 to $2.19 181,592 1.6 Years $ 1.93 169,477 $ 1.93
$2.25 to $3.13 383,482 3.6 Years 2.65 166,982 2.51
$3.17 to $4.00 175,595 3.5 Years 3.38 90,596 3.40
$4.25 to $4.98 46,658 2.9 Years 4.60 28,658 4.62
$5.42 to $6.33 45,181 3.9 Years 5.59 45,181 5.59
------- -------
832,508 500,894
------- -------
------- -------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the Company's stock plans. Had compensation expense
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C> <C>
Net Income As reported $(1,008,683) $ 1,793,328
Pro forma (1,055,305) 1,754,398
Basic earnings per share As reported $ (.10) $ .17
Pro forma (.10) .17
</TABLE>
Pro forma net income reflects only options and other stock based awards
granted in 1998, 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented because compensation cost is reflected
over the options' vesting periods, which are normally five years, and
compensation cost for options granted prior to fiscal year 1996 is not
considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997: dividend yield of 0%;
expected volatility of 42.53%; risk-free interest rate of 5.465%, 6.2% and 6.0%;
and expected lives of 4.5 years.
The weighted-average fair value per option at the date of grant for options
granted in 1998 and 1997 was $1.37 and $1.58 respectively.
The Company loaned a total of $237,500 to an officer for the exercise of
certain stock options. This loan is secured by a promissory note and a pledge
of the stock purchased and bears interest at the bank's prime rate (8.5% on June
30, 1998). Payments are due quarterly, including accrued interest, commencing
in fiscal 1999 and ending in fiscal 2001.
At June 30, 1998 the Company had 75,000 warrants outstanding to purchase
shares of its common stock at $2.25 per share. The warrants expired in August
1998.
Page 30
<PAGE>
STOCK PURCHASE PLAN
The Company has reserved 200,000 authorized shares of its common stock for
issuance under its Employee Stock Purchase Plan. All full-time employees are
eligible to participate in the plan by having amounts deducted from their
earnings.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to certain claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, the
resolution of these matters will not have a material impact on the financial
position or results of operations of the Company.
401(k) PLAN
The Company has a 401(k) plan in which substantially all employees are
eligible to participate. Participants may contribute up to 15% of eligible
earnings to the plan. Company contributions are 100% for the first 2% of
participants' contributions and 25% for the next 4% up to a maximum matching
annual contribution of $750 per participant. In addition, the Company may
make additional discretionary contributions to the plan as determined
annually. The Company contributed $49,570 and $34,399 to the plan for the
years ended June 30, 1998 and 1997, respectively. No discretionary
contributions were made for fiscal 1998 or fiscal 1997.
9. SUBSEQUENT EVENT
On August 6, 1998, the Company entered into an Asset Purchase Agreement
with Henley Healthcare, Inc. pursuant to which it acquired substantially all
assets of Henley's Homecare business unit. That unit markets and sells
electrotherapy pain management products for home use, similar to the Company's
primary business activities. Assets acquired consisted of inventories,
receivables and miscellaneous other assets such as furniture, equipment and
intangible assets. No liabilities were assumed.
The purchase price of $3,650,000 was paid in cash obtained from existing
funds and borrowings under a bank line of credit described in Note 4.
On July 10, 1998, the Company exercised its option to purchase the land and
building formerly occupied by Staodyn in Longmont, Colorado pursuant to two
leases covering that property. The purchase price as specified in those lease
agreements will be $2,234,000 plus scheduled lease payments and operating costs
due through the closing which is expected to occur on or before January 11,
1999.
On August 19, 1998, the company entered into a Purchase and Sale Agreement
under which it will sell the above property to a real estate developer for
$3,550,000 with the closing to occur immediately after the closing described in
the preceding paragraph.
Page 31
<PAGE>
REHABILICARE INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at Balance
Beginning of Net at End of
Year Additions Deductions Year
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
RESERVE FOR UNCOLLECTIBLE ACCOUNTS:
Year ended June 30, 1997 $ 2,361,000 $ 2,203,000 $ 1,877,000 $2,687,000
Year ended June 30, 1998 2,687,000 2,329,000 1,907,000 3,109,000
RESERVE FOR WARRANTY REPAIRS:
Year ended June 30, 1997 45,000 - 15,000 30,000
Year ended June 30, 1998 30,000 - --- 30,000
RESERVE FOR INVENTORY OBSOLESCENCE:
Year ended June 30, 1997 391,000 163,000 217,000 337,000
Year ended June 30, 1998 337,000 493,000 116,000 714,000
</TABLE>
Page 32
<PAGE>
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT is made as of the 5th day of August, 1998, and is by and
between Rehabilicare, Inc., a Minnesota corporation (the "Borrower"), and
Norwest Bank Minnesota, National Association, a national banking association
(the "Bank").
REFERENCE IS HEREBY MADE to that certain Credit Agreement dated as of December
1, 1994, as amended by a First Amendment dated June 27, 1996, and by a Second
Amendment dated April 24, 1998 (as amended, the "Credit Agreement"), made
between the Borrower and the Bank. Capitalized terms not otherwise defined
herein shall have the respective meanings ascribed to them in the Credit
Agreement.
WHEREAS, the Borrower has requested the Bank (i) to increase the amount of the
Credit from $2,000,000.00 to $2,500,000.00, and (ii) to make a new term loan to
the Borrower in the amount of $2,500,000.00, a portion of the proceeds of which
will be used to pay off the Second Term Note; and,
WHEREAS, the Bank is willing to grant the Borrower's requests, subject to the
provisions of this Third Amendment;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration received, it is agreed as follows:
1. Section 1.1 of the Credit Agreement is hereby amended by changing the
definitions of "Credit" and "Notes" so that, when read in their entireties,
they provide as follows:
"Credit" shall mean the conditional revolving line of credit
established by the Bank for the benefit of the Borrower in the amount
of $2,500,000.00.
"Notes" shall mean the Current Note, the First Term Note and the Third
Term Note.
2. Section 1.1 of the Credit Agreement is hereby further amended by adding the
following new definitions:
"Interest Adjustment Date" shall mean August 1, 1999 and the same day
of each year thereafter.
"Third Term Note" shall mean an installment promissory note dated of
even date with the Third Amendment to this Agreement, and made by the
Borrower in the face amount of $2,500,000.00 payable to the Bank.
<PAGE>
"Treasury Rate" shall mean the yield on one-year United States
Treasury securities, the determination of which rate by the Bank on
any particular Interest Adjustment Date shall be done by using the
most recent available data published by the Federal Reserve Board.
3. Section 2.1 of the Credit Agreement is hereby amended by changing the first
sentence of such Section so that, when read in its entirety, it provides as
follows:
Subject to the other provisions of this Agreement, the Bank may make
advances under the Credit to the Borrower from time to time until the
Maturity Date in an aggregate principal amount not exceeding the
lesser of the Borrowing Base or TWO MILLION FIVE HUNDRED THOUSAND AND
NO/100 DOLLARS ($2,500,000.00), at any one time outstanding.
4. The Credit Agreement is hereby further amended by adding the following as
new Section 2B immediately after Section 2A:
2B THE THIRD TERM LOAN
2B.1 Subject to the provisions of Section 3.4 hereof, the Bank
shall make a term loan to the Borrower on or before August 15,
1998 in one advance in the amount of $2,500,000.00. Said term
loan shall be non-revolving, and evidenced by the Third Term
Note. A portion of the proceeds of said term loan will be
used to pay off the Second Term Note.
2B.2 Interest on the Third Term Note shall accrue at a fixed annual
rate equal to 8.05% until August 1, 1999. From August 1, 1999
until the Third Term Note is fully paid, interest thereon
shall accrue at a fixed annual rate equal to 2.75% in excess
of the Treasury Rate, which interest rate shall be determined
as of each Interest Adjustment Date. Interest shall be
calculated on the basis of actual number of days elapsed in a
year of 360 days.
2B.3 Interest on the Third Term Note shall be payable ON DEMAND,
but until such demand is made, interest shall be payable
monthly, commencing September 1, 1998, and continuing on the
first day of each consecutive month thereafter, and upon
maturity.
2B.4 The principal of the Third Term Note shall be repayable as
follows:
-2-
<PAGE>
Thirty-five (35) installments, each in the amount of
$69,445.00, commencing September 1, 1998, and continuing on
the first day of each consecutive month thereafter through and
including July 1, 2001; plus, one
-3-
<PAGE>
(1) final installment in an amount equal to the then-remaining
outstanding principal balance of the Third Term Note shall be
due and payable on August 1, 2001.
2B.5 The Borrower may prepay the Third Term Note in whole or from
time to time in part without premium or penalty. Partial
prepayments may be applied to scheduled installments of
principal in inverse order of their maturities.
5. Section 3 of the Credit Agreement is hereby amended by adding the following
as new Section 3.4:
3.4 The Bank shall not fund the term loan contemplated by Section
2B hereof if, as of the date of funding, there exists any
Event of Default or any event which, with the giving of notice
or the passage of time (or both), could become an Event of
Default.
6. Sections 4.1, 4.2 and 4.3 of the Credit Agreement are hereby amended by
inserting the following immediately after the term "the Second Term Note,"
wherever that term appears in said Sections:
and the Third Term Note
7. Sections 7.7 and 7.9 of the Credit Agreement are hereby amended so that,
when read in their entireties, they provide as follows:
7.7 TANGIBLE NET WORTH. Permit its Tangible Net Worth to be less
than $19,500,000.00 as of June 30, 1999 and as of each fiscal
year end thereafter.
7.9 NET PROFIT. Fail to produce a net profit after taxes equal to
at least 2.0% of net sales as of each fiscal year end,
commencing June 30, 1999.
8. Section 8.1(A) of the Credit Agreement is hereby amended so that, when read
in its entirety, it provides as follows:
A. PAYMENT. Default in any payment of interest or of principal
on any one or more of the Notes when due, and continuance
thereof for 10 calendar days;
9. Sections 8.1 and 8.2 of the Credit Agreement are hereby amended by
inserting the following immediately after the term "the Second Term Note,"
wherever that term appears in the concluding paragraphs of said Sections:
and the Third Term Note
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<PAGE>
10. Section 9.3 of the Credit Agreement is hereby amended by inserting the
following immediately after the term "the Second Term Note" in the fourth
line of said Section:
and the Third Term Note
11. The Borrower and the Bank hereby agree that the terms and conditions
governing the First Term Note (and advances made thereunder) are set forth
in that certain Construction Loan Agreement dated October 20, 1994. Said
loan agreement remains in full force and effect.
12. The Bank hereby waives the covenant set forth in Section 7.5 of the Credit
Agreement for the limited purpose of permitting the Borrower to acquire
Healthcare Business Unit of Henley Healthcare, Inc. The waiver contained
in the immediately preceding sentence shall not be deemed a waiver of any
other term or condition set forth in the Credit Agreement, nor should it be
deemed a waiver of future transactions which would violate the covenant set
forth in Section 7.5 of the Credit Agreement.
13. Simultaneously with the execution of this Third Amendment, the Borrower
shall execute and deliver to the Bank a new promissory note (which, for
purposes of this Third Amendment only, shall hereinafter be referred to as
the "New Revolving Note"), substantially in the form of attached Exhibit A.
The New Revolving Note shall replace, but shall not be deemed payment or
satisfaction of, the Current Note. All references in the Credit Agreement
to the "Current Note" shall be deemed to mean the New Revolving Note.
Exhibit A to this Third Amendment shall replace Exhibit A to the Credit
Agreement.
14. Simultaneously with the execution of this Third Amendment, the Borrower
shall also execute and deliver to the Bank the Third Term Note.
15. The Borrower hereby represents and warrants to the Bank as follows:
A. As of the date of this Third Amendment, the outstanding
principal balances of the Current Note, the First Term Note
and the Second Term Note (immediately prior to the payoff
contemplated by Section 4 hereof) are $0.00, $719,491.17 and
$183.325.00, respectively, and accrued but unpaid interest
thereon equals $0.00, $382.13, and $129.86, respectively.
B. The Credit Agreement, the Notes and the Security Agreement
constitute valid, legal and binding obligations owed by the
Borrower to the Bank, subject to no counterclaim, defense,
offset, abatement or recoupment.
C. As of the date of this Third Amendment, (i) all of the
representations and warranties contained in Sections 5.1, 5.4
and 5.5 of the Credit Agreement are
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<PAGE>
true, and (ii) there exists no Event of Default and no event
which, with the giving of notice or the passage of time, or
both, could become an Event of Default.
D. The execution, delivery and performance of this Third
Amendment, the New Revolving Note and the Third Term Note by
the Borrower are within its corporate powers, have been duly
authorized, and are not in contravention of law or the terms
of the Borrower's Articles of Incorporation or By-laws, or of
any undertaking to which the Borrower is a party or by which
it is bound.
E. All financial statements delivered to the Bank by or on behalf
of the Borrower, including any schedules and notes pertaining
thereto, have been prepared in accordance with Generally
Accepted Accounting Principles consistently applied, and fully
and fairly present the financial condition of the Borrower at
the dates thereof and the results of operations for the
periods covered thereby, and there have been no material
adverse changes in the financial condition or business of the
Borrower from March 31, 1998 to the date hereof.
16. Upon request by the Bank, the Borrower shall deliver a Norwest Corporate
Certificate Of Authority to the Bank dated as of the date of this Third
Amendment, and in form and content acceptable to the Bank.
17. Except as expressly modified by this Third Amendment, the Credit Agreement
remains unchanged and in full force and effect.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Third Amendment
as of the date first written above.
REHABILICARE, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:_______________________________ By:________________________
Gregory G. Quade,
Its:_______________________________ Vice President
By:_______________________________
Its:_______________________________
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<PAGE>
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
by and between
REHABILICARE INC.
and
HENLEY HEALTHCARE, INC.
August 6, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
ARTICLE I
TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES
1.01 Transfer of Assets . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . 3
1.03 Assumption of Liabilities . . . . . . . . . . . . . . . . . . . 3
1.04 Excluded Liabilities . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II
PURCHASE PRICE
2.01 Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.02 Manner of Payment . . . . . . . . . . . . . . . . . . . . . . . 3
2.03 Allocation of Purchase Price . . . . . . . . . . . . . . . . . . 4
ARTICLE III
CLOSING
3.01 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.02 General Procedure . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.01 Incorporation and Corporate Power . . . . . . . . . . . . . . . 4
4.02 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.03 Execution, Delivery; Valid and Binding Agreement . . . . . . . . 5
4.04 Authority; No Breach . . . . . . . . . . . . . . . . . . . . . . 5
4.05 Governmental Authorities; Consents . . . . . . . . . . . . . . . 5
4.06 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 5
4.07 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . 5
4.08 No Material Adverse Changes . . . . . . . . . . . . . . . . . . 6
4.09 Absence of Certain Developments . . . . . . . . . . . . . . . . 6
4.10 Title to Properties . . . . . . . . . . . . . . . . . . . . . . 6
4.11 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . 7
4.12 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.13 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.14 Contracts and Commitments . . . . . . . . . . . . . . . . . . . 8
4.15 Intellectual Property Rights . . . . . . . . . . . . . . . . . . 9
4.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.17 Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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<PAGE>
4.18 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . 10
4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.21 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . 11
4.22 Customers and Suppliers . . . . . . . . . . . . . . . . . . . . 11
4.23 Compliance with Laws; Permits . . . . . . . . . . . . . . . . . 12
4.24 Environmental Matters . . . . . . . . . . . . . . . . . . . . . 12
4.25 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.26 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
5.01 Incorporation and Corporate Power . . . . . . . . . . . . . . . 13
5.02 Execution, Delivery; Valid and Binding Agreement . . . . . . . . 13
5.03 No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.04 Governmental Authorities; Consents . . . . . . . . . . . . . . . 13
5.05 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VI
COVENANTS OF SELLER
6.01 Conduct of the Business . . . . . . . . . . . . . . . . . . . . 14
6.02 Access to Books and Records . . . . . . . . . . . . . . . . . . 15
6.03 Regulatory Filings . . . . . . . . . . . . . . . . . . . . . . . 15
6.04 Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.05 No Negotiations, etc. . . . . . . . . . . . . . . . . . . . . . 16
6.06 Business Employees . . . . . . . . . . . . . . . . . . . . . . . 16
6.07 Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.08 Services and Premises Agreement . . . . . . . . . . . . . . . . 17
ARTICLE VII
COVENANTS OF BUYER
7.01 Regulatory Filings . . . . . . . . . . . . . . . . . . . . . . . 17
7.02 Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VIII
CONDITIONS TO CLOSING
8.01 Conditions to Buyer's Obligations . . . . . . . . . . . . . . . 18
8.02 Conditions to Seller's Obligations . . . . . . . . . . . . . . . 19
ARTICLE IX
TERMINATION
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<PAGE>
9.01 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.02 Effect of Termination . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE X
ADDITIONAL AGREEMENTS
10.01 Consulting Services . . . . . . . . . . . . . . . . . . . . . . 21
10.02 Old Receivables . . . . . . . . . . . . . . . . . . . . . . . . 21
10.03 Noncompetition Covenant . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XI
SURVIVAL; INDEMNIFICATION
11.01 Survival of Representations and Warranties . . . . . . . . . . . 22
11.02 Indemnification by Seller . . . . . . . . . . . . . . . . . . . 22
11.03 Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . 23
11.04 Method of Asserting Claims . . . . . . . . . . . . . . . . . . . 23
ARTICLE XII
MISCELLANEOUS
12.01 Press Releases and Announcements . . . . . . . . . . . . . . . . 24
12.02 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.03 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 25
12.04 Cooperation and Exchange of Information. . . . . . . . . . . . . 25
12.05 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . 25
12.06 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.07 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
12.08 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 26
12.09 Complete Agreement . . . . . . . . . . . . . . . . . . . . . . . 26
12.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 26
12.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
EXHIBIT A Assumed Liabilities
EXHIBIT B Assumed Contracts
EXHIBIT C Allocation of Purchase Price
EXHIBIT D Bill of Sale
EXHIBIT E Assignment and Assumption Agreement
EXHIBIT F Facilities and Services Agreement
EXHIBIT G Seller Officer Certificate
EXHIBIT H Buyer Officer Certificate
EXHIBIT I Seller Distributors
Schedule 1.01(a) Equipment, Machinery, Furniture Fixtures and Equipment
Schedule 1.01(b) Inventory
Schedule 1.01(e) Contracts
Schedule 1.01(f) Intellectual Property
Schedule 4.10 Leases
Schedule 4.17 Warranties
Schedule 4.18 Employees
Schedule 4.19 Benefit Plans
Schedule 4.20 Insurance
Schedule 4.22 Customers and Suppliers
- iii -
<PAGE>
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of August
6, 1998, is made and entered into by and between Rehabilicare Inc., a Minnesota
corporation ("Buyer"), and Henley Healthcare, Inc., a Texas corporation
("Seller").
WHEREAS, Seller is engaged in the business of manufacturing, licensing
and distributing diversified products and services in the pain management
industry;
WHEREAS, as part of its business, Seller markets and sells to patients
of various providers, and to Kaiser Permanente, through its Homecare business
unit, electrotherapy pain management and wound care products for home use,
including, without limitation, nerve and muscle stimulators, portable
electrotherapy units, transcutaneous nerve stimulation units and drug delivery
gels and pads (such products being hereafter referred to as the "Products" and
the business of marketing and selling the Products, including the Kaiser
Business (as defined below), but not including the Current WholeSale Business
(as defined below), being hereafter referred to as the "Business");
WHEREAS, as part of the Business, Seller sells the Products to Kaiser
Permanente and its affiliates, patients and physicians (the "Kaiser Business");
WHEREAS, Seller also distributes the Products through sale to the
distributors and dealers (such sales of the Products to such distributors, but
not including the Kaiser Business, being hereafter referred to as the "Current
Wholesale Business") and manufactures, licenses, markets and distributes
products that are not electrotherapy products to other markets, including
distribution of other products for third-party billing through its AMC division
(the distribution and sale through the Current Wholesale Business, together with
the manufacture, distribution and sale of such other products, being hereafter
referred to as the "Excluded Business");
WHEREAS, Seller desires to sell and assign to Buyer, and Buyer desires
to purchase and assume from Seller, on the terms and subject to the conditions
set forth in this Agreement, substantially all of the assets and certain
liabilities of Seller that are currently being used by Seller in the conduct of
the Business.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements and the conditions set forth in this
Agreement, Buyer and Seller hereby agree as follows:
ARTICLE I
TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES
1.01 TRANSFER OF ASSETS. On the terms and subject to the conditions
set forth in this Agreement, Seller shall, at the Closing (as defined in Section
3.01 hereof), sell, transfer and assign to Buyer, and Buyer shall purchase and
acquire from Seller, all of Seller's right, title and interest, as of the
Closing Date (as defined in Section 3.01 hereof), in and to all of the assets
set forth below (collectively, the "Assets"):
(a) The equipment, machinery, vehicles, furniture, fixtures,
furnishings and leasehold improvements owned by Seller and used by Seller
in the operation of the Business, which are identified in Schedule 1.01(a)
hereto;
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(b) Seller's inventories of supplies, raw materials, parts, finished
goods, work-in-process, product labels and packaging materials used in
connection with the Business, including, without limitation, those
inventories described in Schedule 1.01(b) hereto;
(c) Seller's interest in all orders or contracts for the purchase
of supplies, raw materials, parts, product labels and packaging materials
used in connection with the Business;
(d) Seller's interest in the licenses, contracts or agreements with
respect to the Business which are listed in Schedule 1.01(d);
(e) All unfilled or uncompleted customer contracts, commitments or
purchase or sales orders received and accepted by Seller in connection with
the Business in the ordinary course of business to the extent assignable;
(f) Seller's documents or other tangible materials embodying
technology or intellectual property rights owned by, licensed to or
otherwise controlled by Seller and used in connection with the Business,
whether such properties are located on Seller's business premises or on the
business premises of Seller's suppliers or customers,including all software
programs used in or developed for support of the Business, and Seller's
rights in patents, patent applications, trademarks, service marks, trade
names, corporate names, copyrights, trade secrets, and other intellectual
property rights owned by, licensed to or otherwise controlled by Seller or
used in, developed for use in or necessary to the conduct of the Business
as now conducted or planned all of which are listed in Schedule 1.01(f);
(g) All of Seller's books, records and other documents and
information relating to the Assets or the Business, including, without
limitation, all customer, and prospect lists, customer identities, customer
requirements and customer specifications, sales literature, inventory
records, purchase orders and invoices, sales orders and sales order log
books, customer information, commission records, correspondence, employee
payroll and personnel records, product data, material safety data sheets,
price lists, product demonstrations, quotes and bids and all product
catalogs and brochures;
(h) All accounts or notes receivable (excluding intra-company
accounts) owing to Seller that relate to the Business, as reflected in
electronic records delivered, or made available to Buyer, at the facilities
of Seller on the Closing Date and as reflected in the Closing Date Trial
Balance delivered to Buyer at Closing;
(i) The current telephone listings of the Business and the right to
use the telephone numbers currently being used at the principal offices and
other offices or facilities of the Business, to the extent they are
assignable;
(j) All permits, licenses and other governmental approvals held by
Seller with respect to the Business, to the extent they are assignable;
(k) All insurance policies of Seller obtained in connection with the
Business and all rights of Seller (including rights to receive dividends)
under or arising out of such insurance policies, to the extent they are
assignable;
(l) Goodwill, all related tangibles and intangibles which Seller
uses in the conduct of the Business and all rights to continue to use the
Assets in the conduct of a going business.
The parties hereto expressly agree that Buyer is not assuming any of the
liabilities, obligations or
2
<PAGE>
undertakings relating to the foregoing Assets, except for those liabilities and
obligations specifically assumed by Buyer in Section 1.03 hereof.
1.02 EXCLUDED ASSETS. Notwithstanding the terms of Section 1.01, the
following assets shall be retained by Seller and shall not be sold, transferred
or assigned to Buyer in connection with the purchase of the Assets:
(a) All bank accounts of Seller;
(b) All corporate certificates of authority and corporate minute
books and the corporate stock record or register of Seller;
(c) Such licenses, permits or other certificates of authority which,
by their terms, are nonassignable, all of which are identified in the
Disclosure Schedule under the caption referencing Section 4.14 or Section
4.24 as being retained by the Seller; and
(d) All assets not used in connection with the Business
1.03 ASSUMPTION OF LIABILITIES. Buyer shall assume, pay, perform in
accordance with their terms or otherwise satisfy, as of the Closing Date:
(a) The liabilities of Seller set forth in Exhibit A hereto; and
(b) Seller's obligations under the leases, agreements, contracts,
arrangements and licenses described in Exhibit B hereto.
1.04 EXCLUDED LIABILITIES. Other than as set forth above in Section
1.03, Seller shall retain, and Buyer shall not assume, and nothing contained in
this Agreement shall be construed as an assumption by Buyer of, any liabilities,
obligations or undertakings of Seller of any nature whatsoever, whether accrued,
absolute, fixed or contingent, known or unknown due or to become due,
unliquidated or otherwise. Seller shall be responsible for all of the
liabilities, obligations and undertakings of Seller not assumed by Buyer
pursuant to Section 1.03 hereof.
ARTICLE II
PURCHASE PRICE
2.01 AMOUNT. The total purchase price (the "Purchase Price") for the
Assets shall be Three Million, Six Hundred and Fifty Thousand Dollars
($3,650,000), plus the value of the liabilities and obligations of Seller to be
assumed by Buyer pursuant to Section 1.03 and plus the cost of any inventory
related to the Kaiser Business hereafter purchased by Buyer. Buyer shall not,
in any event, be required to pay for the inventory associated with the Kaiser
Business unless and until it has been provided with a list of such inventory,
has had a reasonable opportunity to inspect such inventory, and has found such
inventory acceptable.
2.02 MANNER OF PAYMENT. Buyer shall pay the cash portion of the
Purchase Price for the Assets to Seller on the Closing Date by wire transfer to
Seller's account at Comerica Bank--Texas, 6260 East Mockingbird, 2nd floor,
Dallas Texas 7541214 for credit to Henley Healthcare, ABA # 111000753 (account #
188-0444524).
2.03 ALLOCATION OF PURCHASE PRICE. The Buyer and Seller have
allocated the Purchase Price among the Assets as set forth on Exhibit C, which
exhibit shall be updated as of the Closing Date in such a manner as determined
by Buyer subject to Seller's consent (which shall not be unreasonably
3
<PAGE>
withheld), after taking into account the applicable Treasury Regulations and the
fair market value of such items. Buyer shall prepare for filing all Returns (as
defined in Section 4.13(a)) that may be required with respect to the transaction
provided for herein pursuant to Section 1060 of the Internal Revenue Code of
1986, as amended (the "Code"), any Treasury Regulations promulgated thereunder,
any other similar provision of the Code and any other similar, applicable
foreign, state or local tax law or regulation. Seller shall provide information
that may be required by Buyer for the purpose of preparing such Returns, execute
and file such Returns as requested by Buyer and file all other returns and tax
information on a basis that is consistent with such Returns prepared by Buyer.
ARTICLE III
CLOSING
3.01 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Dorsey & Whitney,
220 South Sixth Street, Minneapolis, Minnesota at 12:00 p.m. on the date of this
Agreement or at such other place and on such other date as is mutually agreeable
to Buyer and Seller. The date on which the Closing occurs is referred to herein
as the "Closing Date," and the Closing shall be deemed effective as of 8:00
a.m., Minneapolis time, on the Closing Date.
3.02 GENERAL PROCEDURE. At the Closing, each party shall deliver to
the party entitled to receipt thereof the documents required to be delivered
pursuant to Article VIII hereof and such other documents, instruments and
materials (or complete and accurate copies thereof, where appropriate) as may be
reasonably required in order to effectuate the intent and provisions of this
Agreement, and all such documents, instruments and materials shall be
satisfactory in form and substance to counsel for the receiving party. The
conveyance, transfer, assignment and delivery of the Assets shall be effected by
Seller's execution and delivery to Buyer of a bill of sale substantially in the
form attached hereto as Exhibit D (the "Bill of Sale") and such other
instruments of conveyance, transfer, assignment and delivery as Buyer shall
reasonably request to cause Seller to transfer, convey, assign and deliver the
Assets to Buyer, and the assignment and assumption of Seller's Liabilities to
Buyer shall be effected by Seller's and Buyer's execution of an assignment and
assumption agreement substantially in the form attached hereto as Exhibit E (the
"Assignment and Assumption Agreement").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that, except as set
forth in the Disclosure Schedule delivered by Seller to Buyer on the date hereof
(the "Disclosure Schedule") (which Disclosure Schedule sets forth the exceptions
to the representations and warranties contained in this Article IV under
captions referencing the Sections to which such exceptions apply):
4.01 INCORPORATION AND CORPORATE POWER. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Texas and has all requisite corporate power and authority and all
authorizations, licenses, permits and certifications necessary to carry on the
Business as now being conducted and to own, lease and operate the Assets.
Seller is qualified as a foreign corporation to do business in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be qualified and in which the failure to be so qualified would
have a material adverse effect on the financial or operating condition of the
Business.
4.02 SUBSIDIARIES. The Assets do not include any stock, partnership
interest, joint venture interest or any other security or ownership interest
issued by any other corporation, organization
4
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or entity.
4.03 EXECUTION, DELIVERY; VALID AND BINDING AGREEMENT. The
execution, delivery and performance of this Agreement by Seller and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Seller, and no other proceedings on its
part are necessary to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly executed and delivered by Seller and,
assuming that this Agreement is the valid and binding agreement of Buyer,
constitutes the valid and binding obligation of Seller, enforceable in
accordance with its terms.
4.04 AUTHORITY; NO BREACH. Seller has the requisite corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this
Agreement by Seller and the consummation of the transactions contemplated hereby
do not conflict with or result in any breach of any of the provisions of, or
constitute a default under, result in a violation of, result in the creation of
a right of termination or acceleration or any lien, security interest, charge or
authorization, consent, approval, exemption or other action by or notice to any
court or other governmental body, under the provisions of the Articles of
Incorporation or Bylaws of Seller or any indenture, mortgage, lease, loan
agreement or other agreement or instrument by which Seller or the Assets are
bound or affected (other than consents required under Section 8.01(d) hereof,
which Seller undertakes to obtain prior to the Closing Date), or any law,
statute, rule or regulation or order, judgment or decree to which Seller or the
Assets are subject.
4.05 GOVERNMENTAL AUTHORITIES; CONSENTS. The Seller is not required
to submit any notice, report or other filing with any governmental authority in
connection with the execution or delivery by it of this Agreement or the
consummation of the transactions contemplated hereby. No consent, approval or
authorization of any governmental or regulatory authority is required to be
obtained by Seller in connection with its execution, delivery and performance of
this Agreement.
4.06 FINANCIAL STATEMENTS. Seller has delivered to Buyer copies of
(a) the unaudited balance sheet, as of June 30, 1998, of the Business (the
"Latest Balance Sheet") and the unaudited statements of earnings of the Business
for the six-month period ended June 30, 1998 (such statements and the Latest
Balance Sheet being herein referred to as the "Latest Financial Statements") and
(b) the unaudited balance sheets, as of December 31, 1997 of the Business and
the unaudited statements of earnings of the Business for the twelve-month period
ended December 31, 1997 (collectively, the "Annual Financial Statements"). The
Latest Financial Statements and the Annual Financial Statements are based upon
the information contained in the books and records of Seller and fairly present
the financial condition of the Business as of the dates thereof and results of
operations for the periods referred to therein.
4.07 ABSENCE OF UNDISCLOSED LIABILITIES. With respect to the Assets
or the operations of the Business, Seller has no liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise, whether due or to become due,
whether known or unknown, and regardless of when asserted) arising out of
transactions or events heretofore entered into, or any action or inaction, or
any state of facts existing, with respect to or based upon transactions or
events heretofore occurring, except (i) as reflected in the Latest Balance
Sheet, or (ii) liabilities which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a material
uninsured liability for breach of contract, breach of warranty, tort,
infringement, claim or lawsuit).
4.08 NO MATERIAL ADVERSE CHANGES. Since the date of the Latest
Balance Sheet (the "Balance Sheet Date"), there has been no material adverse
change in the assets, financial condition, operating results, customer, employee
or supplier relations, business condition or prospects of Seller.
4.09 ABSENCE OF CERTAIN DEVELOPMENTS. Since the Balance Sheet Date,
Seller has not, in each case, with respect to the Business:
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(a) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of the Assets except (i) liens for current property taxes not
yet due and payable, (ii) liens imposed by law and incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers, materialmen and the like, or (iii) liens in respect of pledges or
deposits under workers' compensation laws;
(b) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any tangible assets of
the Business or canceled any debts or claims, in each case, except in the
ordinary course of business;
(c) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any patents, trademarks,
trade names, copyrights, trade secrets or other intangible assets used in or
held for use in the Business;
(d) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in the
ordinary course of business or consistent with past practice;
(e) taken any other action or entered into any other transaction
other than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any "insider" (as defined in
Section 4.21 hereof) other than transactions contemplated by this Agreement;
(f) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it in connection with the Business,
whether or not covered by insurance;
(g) made or granted any bonus or any wage, salary or compensation
increase to any employee or consultant of the Business, or made or granted any
increase in any employee benefit plan or arrangement, or amended or terminated
any existing employee benefit plan or arrangement, or adopted any new employee
benefit plan or arrangement or made any commitment or incurred any liability to
any labor organization;
4.10 TITLE TO PROPERTIES.
(a) Seller does not own any real property used in connection with the
Business. The real property leases (the "Leases") described under the caption
referencing this Section 4.10 in the Disclosure Schedule constitute all of the
real property used or occupied by Seller in connection with the Business (the
"Real Property").
(b) The Leases are in full force and effect, and Seller holds a valid
and existing leasehold interest under each of the Leases for the term set forth
under such caption in the Disclosure Schedule. Seller has delivered to Buyer
complete and accurate copies of each of the Leases, and none of the Leases has
been modified in any respect, except to the extent that such modifications are
disclosed by the copies delivered to Buyer. Seller is not in default, and no
circumstances exist which, if unremedied, would, either with or without notice
or the passage of time or both, result in such default under any of the Leases;
nor, to the best knowledge of Seller, is any other party to any of the Leases in
default.
(c) Seller owns good and indefeasible title to the Assets, including
each of the tangible assets reflected on the Latest Balance Sheet or acquired
since the date thereof, free and clear of all liens and encumbrances, except for
(i) liens for current taxes not yet due and payable, (ii) the properties subject
to the Leases, (iii) assets disposed of since the date of the Latest Balance
Sheet in the ordinary course of business, (iv) liens imposed by law and incurred
in the ordinary course of business for obligations not yet due to carriers,
warehousemen, laborers and materialmen and (v) liens in respect of pledges or
deposits
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under workers' compensation laws, all of which liens aggregate less than $1,000.
(d) Schedule 1.01(a) sets forth a description of all the Assets which
constitute equipment, machinery, motor vehicles, furniture, fixtures,
furnishings and leasehold improvements. All of the buildings, machinery,
equipment and other tangible assets necessary for the conduct of the Business,
including those set forth in Schedule 1.01(a), are in good condition and repair,
ordinary wear and tear excepted, and are usable in the ordinary course of
business. There are no defects in such assets or other conditions relating
thereto which, in the aggregate, materially adversely affect the operation or
value of such assets. Seller owns, or leases under valid leases, all buildings,
machinery, equipment and other tangible assets necessary for the conduct of the
Business.
4.11 ACCOUNTS RECEIVABLE. The accounts receivable of the Business
reflected on the Latest Balance Sheet (the "Latest Balance Sheet Trial Balance")
and any additional accounts receivable accrued since the Balance Sheet Date,
each to the extent less than 360 days old (the "Current Year Receivables") are
valid receivables, are not subject to valid counterclaims or setoffs, and are
collectible in accordance with their terms, except to the extent of the bad debt
reserve reflected on the Latest Balance Sheet.
4.12 INVENTORY. Seller's inventory of raw materials, work in process
and finished goods relating to the Business consists of items of a quality and
quantity usable and, with respect to finished goods only, salable at the
Seller's normal profit levels, in each case, in the ordinary course of the
business. As of the date of the Latest Balance Sheet, the values at which such
inventory is carried on the Latest Balance Sheet are in accordance with
generally accepted accounting principles. Schedule 1.01(b) is (i) a true and
correct list as of July 31, 1998 of the inventories of the portion of the
Business operated from Akron, Ohio (the "Ohio Inventories"), and (ii) a true and
correct list of the inventories of portion of the Business (operated as "Texas
T.E.N.S") operated from Houston, Texas as of January 12, 1998 (the "Texas
Inventories"). There has not been any increase or decrease in the Ohio
Inventories since July 31, 1998, or in the Texas Inventories since January 12,
1998 except increases resulting from purchase of inventory and decreases
resulting from sales of inventory, in each case in the ordinary course of
business. There has not, in either case, been any material increase or decrease
in the value of the Ohio Inventories or the Texas Inventories since such
respective dates. To the extent that Schedule 1.01(b) refers to "Henley
Healthcare Inventory by Group," such Schedule is referring to Ohio Inventories
and to the extent referred to therein (i) as "on hand," such Ohio Inventories
are maintained and on hand at the offices of Seller at 895 Home Avenue, Akron,
Ohio and (ii) as "Consgmt," such inventories are maintained at healthcare
providers on consignment, (iii) as "rental," such inventory was, as of July 30,
1998, rented to end-users, and (iv) as "trial" such inventory was demonstration
or trial inventory. To the extent that Schedule 1.01(b) is referring to "Texas
Tens" such inventory represent Texas Inventories and to the extent listed
therein (i) as rental and consigned, is located with providers or renters, (ii)
as "physical inventory," is located at the Seller's premises in Sugar Land,
Texas.
4.13 TAX MATTERS.
(a) Each of Seller and any subsidiary, any affiliated, combined or
unitary group of which the Company or any subsidiary is or was a member, any
"Plans" (as defined in Section 4.19 hereof), as the case may be (each, a "Tax
Affiliate" and, collectively, the "Tax Affiliates"), has: (i) timely filed (or
has had timely filed on its behalf) all returns, declarations, reports,
estimates, information returns, and statements ("Returns") required to be filed
or sent by it in respect of any "Taxes" (as defined in subsection (p) below) or
required to be filed or sent by it by any taxing authority having jurisdiction;
(ii) timely and properly paid (or has had paid on its behalf) all Taxes shown to
be due and payable on such Returns; (iii) established on its Latest Balance
Sheet, in accordance with generally accepted accounting principles, reserves
that are adequate for the payment of any Taxes not yet due and payable; (iv)
complied with all applicable laws, rules, and regulations relating to the
withholding of Taxes and the payment thereof (including, without limitation,
withholding of Taxes under Sections 1441 and 1442 of the Internal Revenue
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Code of 1986, as amended (the "Code"), or similar provisions under any foreign
laws), and timely and properly withheld from individual employee wages and paid
over to the proper governmental authorities all amounts required to be so
withheld and paid over under all applicable laws.
(b) There are no liens for Taxes upon any of the Assets, except for
current taxes not yet due and payable.
(c) Seller represents and warrants that the tangible personal
property being transferred in Texas to Buyer pursuant to this Agreement
constitutes the entire operating assets of a separate identifiable segment of a
business for purposes of Section 151.304(b)(2) of the Texas Tax Code and Section
3.316(d) of Title 34 of the Texas Administrative Code. Therefore, Buyer's
acquisition of such tangible personal property (excluding motor vehicles) is
exempt from Texas sales and use taxes as an occassional sale pursuant to Section
151.304 of the Texas Code and Section 3.316(d) of the Texas Administrative Code.
(d) Seller represents and warrants that the tangible personal
property being transferred in Ohio to Buyer pursuant to this Agreement is
property that was obtained by Seller, through purchase or otherwise, for
Seller's own use in Ohio and that was previously subject to Ohio's taxing
jurisdiction on its sale or use. Therefore, Buyer's acquisition of such
tangible personal property (excluding motor vehicles, is exempt from Ohio sales
and use taxes as a casual sale pursuant to Sections 5739.01(L) and 5739.02(B)(8)
of the Ohio Code.
4.14 CONTRACTS AND COMMITMENTS.
(a) Schedule 1.01(d) lists all agreements, whether oral or written,
to which Seller is a party, which are currently in effect, and which relate to
the operation of the Business or the Assets, including, without limitation: (i)
each contract for the employment of any officer, individual employee or other
person on a full-time or consulting basis who performs functions in connection
with the Business or relating to severance pay for any such person; (ii) each
confidentiality agreement; (iii) each agreement or indenture relating to the
borrowing of money or to mortgaging, pledging or otherwise placing a lien on any
of the Assets; (iv) each lease or agreement relating to the Business under which
Seller is lessee of, or holds or operates any property, real or personal, owned
by any other party, for which the annual rental exceeds $2,000; (v) each
contract or group of related contracts (including purchase orders) with the same
party for the purchase of products or services under which the undelivered
balance of such products or services of the Business is in excess of $2,000;
(vi) each contract or group of related contracts with the same party for the
sale of products or services of the Business under which the undelivered balance
of such products or services has a sales price in excess of $2,000; (vii) each
contract or group of related contracts relating to the Business with the same
party (other than any contract or group of related contracts for the purchase or
sale of products or services) continuing over a period of more than six months
from the date or dates thereof, not terminable by it on 30 days' or less notice
without penalty and involving more than $2,000; (viii) each contract which
prohibits Seller from freely engaging in business anywhere in the world; (ix)
each contract for the sale or distribution of any of the products of the
Business (including any distributor, sales and original equipment manufacturer
contract); (x) each franchise agreement relating to the Business; (xi) each
license agreement or agreement providing for the payment or receipt of royalties
or other compensation by Seller in connection with the intellectual property
rights listed in Schedule 1.01(g); (vii) each contract or commitment for capital
expenditures of the Business in excess of $2,000; (xviii) agreement for the sale
of any Asset; or (xix) other agreement which is either material to the Business
or was not entered into in the ordinary course of business.
(b) Seller has performed all obligations required to be performed by
it in connection with the contracts or commitments contained in Schedule 1.01(d)
and is not in receipt of any claim of default under any contract or commitment
required to be disclosed under such caption; Seller has no present expectation
or intention of not fully performing any material obligation pursuant to any
contract or commitment required to be disclosed under such caption; and Seller
has no knowledge of any breach or
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anticipated breach by any other party to any contract or commitment required to
be disclosed under such caption.
(c) Prior to the date of this Agreement, Buyer has been supplied with
a true and correct copy of each written contract or commitment, and a written
description of each oral contract or commitment, contained in Schedule 1.01(d),
together with all amendments, waivers or other changes thereto.
4.15 INTELLECTUAL PROPERTY RIGHTS. Schedule 1.01(f) describes all
rights in patents, patent applications, trademarks, service marks, trade names,
corporate names, copyrights, trade secrets, know-how or other intellectual
property rights owned by, licensed to or otherwise controlled by Seller in
connection with the conduct of the Business or used in, developed for use in or
necessary to the conduct of the Business as now conducted or planned to be
conducted. Seller owns and possesses all right, title and interest, or holds a
valid license, in and to the rights set forth under such caption. Schedule
1.01(g) describes all intellectual property rights which have been licensed to
third parties and those intellectual property rights which are licensed from
third parties. Seller has taken all necessary action to protect the
intellectual property rights set forth under such caption. Seller has not
received any notice of, nor are there any facts known to Seller which indicate a
likelihood of, any infringement or misappropriation by, or conflict from, any
third party with respect to the intellectual property rights listed in the
Disclosure Schedule; no claim by any third party contesting the validity of any
intellectual property rights listed under such caption has been made, is
currently outstanding or, to the best knowledge of the Company, is threatened;
Seller has not received any notice of any infringement, misappropriation or
violation by Seller of any intellectual property rights of any third parties and
Seller has not infringed, misappropriated or otherwise violated any such
intellectual property rights; and no infringement, illicit copying,
misappropriation or violation has occurred or will occur with respect to
products currently being sold by Seller or with respect to the products
currently under development (in their present state of development) or with
respect to the conduct of the Business as now conducted.
4.16 LITIGATION. There are no actions, suits, proceedings, orders or
investigations pending or, to the best knowledge of Seller, threatened against
Seller, at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and there is no reasonable basis known to
Seller for any of the foregoing, in each case that materially effect the
Business, or that would or could constitute an encumbrance on the Assets or
effect the Seller's ability to consummate the transactions contemplated by this
Agreement.
4.17 WARRANTIES. The Disclosure Schedule summarizes under the
caption referencing this Section 4.17 all claims outstanding, pending or, to the
best knowledge of Seller, threatened for breach of any warranty relating to any
products of the Business sold by Seller prior to the date hereof. The
description of Seller's product warranties set forth under the caption
referencing this Section 4.17 is correct and complete. The reserves for
warranty claims on the Latest Balance Sheet are consistent with Seller's prior
practices and are fully adequate to cover all warranty claims made or to be made
against any products of the Business sold prior to the date thereof.
4.18 EMPLOYEES. The Disclosure Schedule, under the caption
referencing this Section 4.18, lists, as of the date set forth in the Disclosure
Schedule, each employee of Seller who performs functions in connection with the
Business (the "Business Employees") and the position, title, remuneration
(including any scheduled salary or remuneration increases), date of employment
and accrued vacation pay of each such employee. With respect to such employees
of Seller who perform functions in connection with the Business: (a) to the best
knowledge of Seller, no such employee or group of employees has any plans to
terminate his or its employment; (b) Seller has complied with all laws relating
to the employment of labor, including provisions thereof relating to wages,
hours, equal opportunity, collective bargaining and the payment of social
security and other taxes; (c) Seller has no material labor
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relations problem pending and its labor relations are satisfactory; (d) there
are no workers' compensation claims pending against Seller nor is Seller aware
of any facts that would give rise to such a claim; (e) to the best knowledge of
Seller, no employee of Seller is subject to any secrecy or noncompetition
agreement or any other agreement or restriction of any kind that would impede in
any way the ability of such employee to carry out fully all activities of such
employee in furtherance of the Business; and (f) no employee or former employee
of Seller has any claim with respect to any intellectual property rights of
Seller set forth under the caption referencing Section 4.18 hereof in the
Disclosure Schedule.
4.19 EMPLOYEE BENEFIT PLANS.
(a) Except as set forth under the caption referencing Section 4.19
hereof in the Disclosure Schedule, with respect to all employees and former
employees of Seller who perform or performed functions in connection with the
Business and all dependents and beneficiaries of such employees and former
employees: (i) Seller does not maintain or contribute to any nonqualified
deferred compensation or retirement plans, contracts or arrangements; (ii)
Seller does not maintain or contribute to any qualified defined contribution
plans (as defined in Section 3(34) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 414(i) of the Code; (iii) Seller
does not maintain or contribute to any qualified defined benefit plans (as
defined in Section 3(35) of ERISA or Section 414(j) of the Code); and (iv)
Seller does not maintain or contribute to any employee welfare benefit plans (as
defined in Section 3(1) of ERISA).
(b) To the extent required (either as a matter of law or to obtain
the intended tax treatment and tax benefits), all employee benefit plans (as
defined in Section 3(3) of ERISA) which Seller does maintain or to which it does
contribute (collectively, the "Plans") comply in all material respects with the
requirements of ERISA and the Code. With respect to the Plans, (i) all required
contributions which are due have been made and a proper accrual has been made
for all contributions due in the current fiscal year; (ii) there are no actions,
suits or claims pending, other than routine uncontested claims for benefits; and
(iii) there have been no prohibited transactions (as defined in Section 406 of
ERISA or Section 4975 of the Code).
(c) Buyer has received true and complete copies of (i) the most
recent determination letter, if any, received by Seller from the Internal
Revenue Service regarding the Plans which Seller maintains or to which it
contributes and any amendment to any Plan made subsequent to any Plan amendments
covered by any such determination letter; (ii) the most recent financial
statements and annual report or return for the Plans; and (iii) the most
recently prepared actuarial valuation reports.
(d) Seller does not contribute (and has not ever contributed) to any
multi-employer plan, as defined in Section 3(37) of ERISA. Seller has no actual
or potential liabilities under Section 4201 of ERISA for any complete or partial
withdrawal from a multi-employer plan. Seller has no actual or potential
liability for death or medical benefits after separation from employment, other
than (i) death benefits under the employee benefit plans or programs (whether or
not subject to ERISA) set forth under the caption referencing this Section 4.19
in the Disclosure Schedule and (ii) health care continuation benefits described
in Section 4980B of the Code.
(e) Neither Seller nor any of its directors, officers, employees or
other "fiduciaries", as such term is defined in Section 3(21) of ERISA, has
committed any breach of fiduciary responsibility imposed by ERISA or any other
applicable law with respect to the Plans which would subject Seller, Buyer,
Buyer's subsidiaries or any of their respective directors, officers or employees
to any liability under ERISA or any applicable law.
(f) Seller has not incurred any liability for any tax or civil
penalty or any disqualification of any employee benefit plan (as defined in
Section 3(3) of ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6
of Title I and Section 502(i) of ERISA.
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4.20 INSURANCE. The Disclosure Schedule, under the caption
referencing this Section 4.20, lists and briefly describes each insurance policy
maintained by Seller with respect to the Assets and operations of the Business
and sets forth the date of expiration of each such insurance policy. All of
such insurance policies are in full force and effect and are issued by insurers
of recognized responsibility. Seller is not in default with respect to its
obligations under any of any insurance policies relating to the Assets or the
Business.
4.21 AFFILIATE TRANSACTIONS. No officer, director or employee of
Seller or any member of the immediate family of any such officer, director or
employee, or any entity in which any of such persons owns any beneficial
interest (other than any publicly-held corporation whose stock is traded on a
national securities exchange or in the over-the-counter market and less than one
percent of the stock of which is beneficially owned by any of such persons)
(collectively "insiders"), has any agreement with Seller (other than normal
employment arrangements) or any interest in any property, real, personal or
mixed, tangible or intangible, used in or pertaining to the Business of Seller
(other than ownership of capital stock of Seller). None of the insiders has any
direct or indirect interest in any competitor, supplier or customer of the
Business or in any person, firm or entity from whom or to whom Seller leases any
property used in the Business, or in any other person, firm or entity with whom
the Business transacts business of any nature.
4.22 CUSTOMERS AND SUPPLIERS. The Disclosure Schedule, under the
caption referencing this Section 4.22, lists the 10 largest suppliers of Seller
relating to the Business for the fiscal year ended December 31, 1997 and for the
six-month period ended June 30, 1998 and sets forth opposite the name of each
such supplier the approximate percentage of net sales to, or purchases by, the
Business attributable to such customer or supplier for each such period. Since
the Balance Sheet Date, no supplier listed on the Disclosure Schedule under the
caption referencing this Section 4.22 has indicated that it will stop or
decrease the rate of business done with Seller except for changes in the
ordinary course of Seller's business.
4.23 COMPLIANCE WITH LAWS; PERMITS.
(a) Seller and its officers, directors, agents and employees have
complied in all material respects with all applicable laws, regulations and
other requirements, including, but not limited to, federal, state, local and
foreign laws, ordinances, rules, regulations and other requirements pertaining
to product labeling, consumer products safety, equal employment opportunity,
employee retirement, affirmative action and other hiring practices, occupational
safety and health, workers' compensation, unemployment and building and zoning
codes, which materially affect the Business, the Assets or the Real Property and
to which Seller may be subject, and, to Seller's knowledge, no claims have been
filed against Seller alleging a violation of any such laws, regulations or other
requirements. Seller has no knowledge of any action, pending or threatened, to
change the zoning or building ordinances or any other laws, rules, regulations
or ordinances affecting the Assets or the Real Property. Seller is not relying
on any exemption from or deferral of any such applicable law, regulation or
other requirement that would not be available to Buyer after it acquires the
Assets.
(b) Seller has, in full force and effect, all licenses, permits and
certificates, from federal, state, local and foreign authorities (including,
without limitation, federal and state agencies regulating occupational health
and safety) necessary to conduct its Business and own and operate Assets
(collectively, the "Permits") for which the failure to have such Permits would
singly or in the aggregate have a material adverse effect on the Business or the
Assets. A true, correct and complete list of all the Permits is set forth under
the caption referencing this Section 4.23 in the Disclosure Schedule, with an
indication as to whether the Permit is assignable to Buyer. Seller has
conducted its business in compliance with all material terms and conditions of
the Permits.
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(c) In connection with the Business, Seller has not made or agreed to
make gifts of money, other property or similar benefits (other than incidental
gifts of articles of nominal value) to any actual or potential customer,
supplier, governmental employee or any other person in a position to assist or
hinder Seller in connection with any actual or proposed transaction.
4.24 ENVIRONMENTAL MATTERS. Seller, with respect to the Business and
the Real Property, is in material compliance with all applicable all applicable
laws, rules, directives, permits, licenses and judgments relating to pollution,
contamination or protection of the environment ("Environmental Laws"). Seller
has not received notice alleging in any manner that Seller is, or might be
potentially responsible for, any release of hazardous materials, or any costs
arising under or violation of Environmental Laws with respect to the Business or
the Assets. No expenditure will be required in order for Buyer to comply with
any Environmental Laws in effect at the time of the Closing in connection with
the operation or continued operation of the Business or the Real Property in a
manner consistent with the current operation thereof by Seller. Seller, on
behalf of itself and its successors and assigns, hereby waives, releases and
agrees not to bring any claim, demand, cause of action or proceeding, including
without limitation any cost recovery action, against Buyer under any
Environmental Law in connection with the Buyer's purchase, ownership or
operation of the Business and the Assets.
4.25 BROKERAGE. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of Seller.
4.26 DISCLOSURE. Neither this Agreement nor any of the Exhibits
hereto nor any of the documents delivered by or on behalf of Seller pursuant to
Article VIII hereof nor the Disclosure Schedule nor any of the financial
statements referred to in Section 4.06 hereof, taken as a whole, contain any
untrue statement of a material fact regarding Seller or the Business or any of
the other matters dealt with in this Article IV relating to Seller or the
transactions contemplated by this Agreement. This Agreement, the Exhibits
hereto, the documents delivered to Buyer by or on behalf of Seller pursuant to
Article VIII hereof, the Disclosure Schedule and the financial statements
referred to in Section 4.06 hereof, taken as a whole, do not omit any material
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they were made, not misleading, and there is no fact
which has not been disclosed to Buyer of which any officer or director of Seller
is aware which materially affects adversely or could reasonably be anticipated
to materially affect adversely the Assets or the Business.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that:
5.01 INCORPORATION AND CORPORATE POWER. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota, with the requisite corporate power and authority to enter into
this Agreement and perform its obligations hereunder.
5.02 EXECUTION, DELIVERY; VALID AND BINDING AGREEMENT. The
execution, delivery and performance of this Agreement by Buyer and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action, and no other corporate proceedings
on its part are necessary to authorize the execution, delivery or performance of
this Agreement. This Agreement has been duly executed and delivered by Buyer
and constitutes the valid and binding obligation of Buyer, enforceable in
accordance with its terms.
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5.03 NO BREACH. The execution, delivery and performance of this
Agreement by Buyer and the consummation by Buyer of the transactions
contemplated hereby do not conflict with or result in any breach of any of the
provisions of, constitute a default under, result in a violation of, result in
the creation of a right of termination or acceleration or any lien, security
interest, charge or encumbrance upon any assets of Buyer, or require any
authorization, consent, approval, exemption or other action by or notice to any
court or other governmental body, under the provisions of the Articles of
Incorporation or Bylaws of Buyer or any indenture, mortgage, lease, loan
agreement or other agreement or instrument by which Buyer is bound or affected,
or any law, statute, rule or regulation or order, judgment or decree to which
Buyer is subject.
5.04 GOVERNMENTAL AUTHORITIES; CONSENTS. Buyer is not required to
submit any notice, report or other filing with any governmental authority in
connection with the execution or delivery by it of this Agreement or the
consummation of the transactions contemplated hereby. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by Buyer in connection with its execution,
delivery and performance of this Agreement or the transactions contemplated
hereby.
5.05 BROKERAGE. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of Buyer.
ARTICLE VI
COVENANTS OF SELLER
6.01 CONDUCT OF THE BUSINESS. In connection with the Assets or the
Business, Seller agrees to observe each term set forth in this Section 6.01 and
agrees that, from the date hereof until the Closing Date, unless otherwise
consented to by Buyer in writing:
(a) The Business shall be conducted only in, and Seller shall not
take any action except in, the ordinary course of Seller's business, on an
arm's-length basis and in accordance in all material respects with all
applicable laws, rules and regulations and Seller's past custom and practice;
(b) Seller shall not, directly or indirectly, do or permit to occur
any of the following insofar as they relate to Business or the Assets: (i) sell,
pledge, dispose of or encumber any of the Assets, except in the ordinary course
of business; (ii) acquire (by merger, exchange, consolidation, acquisition of
stock or assets or otherwise) any corporation, partnership, joint venture or
other business organization or division or material assets thereof; (iii) incur
any indebtedness for borrowed money or issue any debt securities except the
borrowing of working capital in the ordinary course of business and consistent
with past practice; (iv) permit any accounts payable owed to trade creditors to
remain outstanding more than 60 days; (v) accelerate, beyond the normal
collection cycle, collection of accounts receivable; or (vi) enter into or
propose to enter into, or modify or propose to modify, any agreement,
arrangement or understanding with respect to any of the matters set forth in
this Section 6.01(b);
(c) Seller shall not, directly or indirectly, enter into or modify
any employment, severance or similar agreements or arrangements with, or grant
any bonuses, salary increases, severance or termination pay to, any Business
Employee, other than in accordance with contractual obligations in existence on
the date of this Agreement;
(d) Seller shall not cancel or terminate its current insurance
policies covering the Assets
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and the Business, or cause any of the coverage thereunder to lapse, unless
simultaneously with such termination, cancellation or lapse, replacement
policies providing coverage equal to or greater than the coverage under the
canceled, terminated or lapsed policies for substantially similar premiums are
in full force and effect;
(e) Seller shall (i) use its best efforts to preserve intact the
organization and goodwill of the Business, keep available the services of
Seller's officers and employees as a group and maintain satisfactory
relationships with suppliers, distributors, customers and others having business
relationships with Seller in connection with the Business; (ii) confer on a
regular and frequent basis with representatives of Buyer to report operational
matters and the general status of ongoing operations with respect to the
Business; (iii) not intentionally take any action which would render, or which
reasonably may be expected to render, any representation or warranty made by it
in this Agreement untrue at the Closing; (iv) notify Buyer of any emergency or
other change in the normal course of the Business or in the operation of the
properties of the Business and of any governmental or third party complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) if such emergency, change, complaint, investigation or hearing
would be material, individually or in the aggregate, to the business, operations
or financial condition of Seller or to Seller's or Buyer's ability to consummate
the transactions contemplated by this Agreement; and (v) promptly notify Buyer
in writing if Seller shall discover that any representation or warranty made by
it in this Agreement was when made, or has subsequently become, untrue in any
respect;
(f) Seller shall (i) file any Tax returns, elections or information
statements with respect to any liabilities for Taxes of Seller or other matters
relating to Taxes of Seller which affect the Assets and pursuant to applicable
law must be filed prior to the Closing Date; (ii) promptly upon filing provide
copies of any such Tax returns, elections or information statements to Buyer;
(iii) make any such Tax elections or other discretionary positions with respect
to Taxes taken by or affecting Seller only upon prior consultation with and
consent of Buyer; and (iv) not amend any Return;
(g) Neither Seller nor any of its Affiliates shall make any election
without respect to Taxes, change an annual accounting period, adopt or change
any accounting method or file any amended return, report or form, if such
election, adoption, change or filing would have the effect of increasing the Tax
liability of the Buyer with respect to any period ending after the Closing Date;
and
(h) Seller shall not perform any act referenced by (or omit to
perform any act which omission is referenced by) the terms of Section 4.09.
6.02 ACCESS TO BOOKS AND RECORDS. Between the date hereof and the
Closing Date, Seller shall afford to Buyer and its authorized representatives
(the "Buyer's Representatives") full access at all reasonable times and upon
reasonable notice to the offices, properties, books, records, officers,
employees and other items of the Business, and the work papers of Arthur
Andersen LLP, Seller's independent accountants, relating to work done by Arthur
Andersen LLP for Seller (insofar as the work relates to the Business or the
Assets) for the fiscal year ended December 31, 1997, and otherwise provide such
assistance as is reasonably requested by Buyer in order that Buyer may have a
full opportunity to make such investigation and evaluation as it shall
reasonably desire to make of the Business and the Assets. In addition, Seller
and its officers and directors shall cooperate fully (including providing
introductions where necessary) with Buyer to enable Buyer to contact such third
parties, including customers, prospective customers, specifying agencies,
vendors or suppliers of the Business, as Buyer deems reasonably necessary to
complete its due diligence; PROVIDED THAT Buyer agrees not to initiate such
contacts without the prior approval of Seller, which approval will not be
unreasonably withheld.
6.03 REGULATORY FILINGS. As promptly as practicable after the
execution of this Agreement, Seller shall make or cause to be made all filings
and submissions under any laws or regulations applicable to the Business for the
consummation of the transactions contemplated herein.
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Seller will coordinate and cooperate with Buyer in exchanging such information,
will not make any such filing without providing to Buyer a final copy thereof
for its review and consent at least two full business days in advance of the
proposed filing and will provide such reasonable assistance as Buyer may request
in connection with all of the foregoing.
6.04 CONDITIONS. Seller shall take all commercially reasonable
actions necessary or desirable to cause the conditions set forth in Section 8.01
to be satisfied and to consummate the transactions contemplated herein as soon
as reasonably possible after the satisfaction thereof (but in any event within
three business days of such date).
6.05 NO NEGOTIATIONS, ETC. Seller shall not directly or indirectly,
through any officer, director, agent or otherwise, solicit, initiate or
encourage submission of any proposal or offer from any person or entity
(including any of its or their officers or employees) relating to the
acquisition or purchase of the Business or any of the Assets.
6.06 BUSINESS EMPLOYEES.
(a) Seller agrees that Buyer may hire effective as of the Closing Date
all of the Business Employees except the two employees covered by the Facilities
and Services Agreement. Seller agrees to cooperate with Buyer in providing
notice of termination to such Business Employees as of the Closing Date.
(b) All Employees who accept employment with Buyer as of the Closing Date
shall be eligible to participate in the employee benefit plans and other fringe
benefits of Buyer on the same basis as such plans and benefits are offered to
employees of Buyer with comparable positions with Buyer. For purposes of this
Section, "employee benefit plans and other fringe benefits," includes, without
limitation, health insurance benefits, disability, life and accident insurance,
sickness benefits, and vacation. All eligibility waiting periods and
pre-existing condition exclusions shall be waived under Buyer's employee benefit
plans with respect to such Business Employees and their dependents to the extent
they had been waived or satisfied under similar plans of the Seller immediately
prior to the Closing Date. Notwithstanding anything in this Section 6.06(b) or
elsewhere in this Section 6.06, Buyer shall not be obligated to provide an
Employee with any pension, medical, vacation or other benefits that are not
currently provided by Buyer to its existing employees or with any benefits that
exceed the level of benefits provided by Buyer to its existing employees.
(c) Seller shall be responsible for payments for accrued vacation not
taken by a Business Employee prior to the Closing Date and for all earned
incentive compensation including bonuses, if any, with respect to service
completed prior to the Closing Date. Seller shall offer Employees who accept
positions with Buyer the option to receive cash or to transfer to Buyer their
accrued vacation days or fractions thereof earned but unused while employed by
Seller. In the event any Employee elects to receive cash upon employment by
Buyer, Seller shall make a cash payment to such Employee within 10 days after
the Closing Date. In the event any such Employee elects to have his or her
accrued vacation transferred upon employment by Buyer, Buyer shall give such
Employee credit after the Closing Date for the same number of vacation days or
fractions thereof he or she has accrued with Seller as of the Closing Date. In
the event Employees elect to have their accrued vacation carried over to Buyer,
Seller shall pay to Buyer within 10 days after the Closing Date an amount equal
to the cash value of each such Employee's accrued vacation before payroll
deductions. In subsequent calendar years, Employees will be eligible to earn
vacation according to the schedule specified in Buyer's vacation policy.
(d) Seller shall retain the responsibility for payment of all medical,
dental, health and disability claims incurred by any Employee on or prior to the
Closing Date, and Buyer shall not assume any liability with respect to such
claims, including liability for continuing payments after Closing for claims
incurred at or prior to the Closing. Buyer agrees to use its best efforts to
ensure that any preexisting
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condition clause in any of Buyer's health or disability insurance coverage shall
not be applicable to Employees who accept employment with Buyer. Buyer assumes
responsibility for payment of all medical, dental, health and disability claims
incurred by Employees in its employ after the Closing Date.
(e) Seller shall be responsible for providing any Employee whose
"qualifying event," within the meaning of Section 4980B(f) of the Code, occurs
on or prior to the Closing Date (and such Employee's "qualified beneficiaries"
within the meaning of Section 4980B(f) of the Code) with the continuation of
group health coverage required by Section 4980B(f) of the Code ("Continuation
Coverage") under the terms of the health plan maintained by Seller. Buyer shall
be responsible for Continuation Coverage to any Employee who accepts employment
with Buyer (and each Employee's qualified beneficiaries) whose qualifying event
occurs after the Closing Date to the extent required by law.
6.07 AGENTS. Immediately after execution of this Agreement, Seller
shall notify the sales agents, sales representatives or other persons who
sell any products or services offered by the Business on behalf of Seller
(collectively, "Agents") of the execution of this Agreement and its intention
to assign its rights and obligations under any agreement with such Agents to
Buyer. Subject to any existing agreement with the same, and at the direction
of Buyer, Seller shall cancel any contract with an Agent who refuses such
assignment in accordance with its obligations under Section 10.03. Seller
shall cooperate with Buyer in negotiating new arrangements between such
agents, distributors and dealers and Buyer.
6.08 SERVICES AND PREMISES AGREEMENT. Seller shall, at the request
of Buyer, obtain the consent of the lessors of the Real Property in Akron,
Ohio to the Facilities and Services Agreement set forth in the attached
Exhibit F (the "Services Agreement").
ARTICLE VII
COVENANTS OF BUYER
Buyer covenants and agrees with Seller as follows:
7.01 REGULATORY FILINGS. As promptly as practicable after the
execution of the Agreement, Buyer shall make or cause to be made all filings and
submissions under any laws or regulations applicable to Buyer for the
consummation of the transactions contemplated herein. Buyer will coordinate and
cooperate with Seller in exchanging such information, will not make any such
filing without providing to Seller a final copy thereof for its review and
consent at least two full business days in advance of the proposed filing and
will provide such reasonable assistance as Seller may request in connection with
all of the foregoing.
7.02 CONDITIONS. Buyer shall take all commercially reasonable
actions necessary or desirable to cause the conditions set forth in Section 8.02
to be satisfied and to consummate the transactions contemplated herein as soon
as reasonably possible after the satisfaction thereof (but in any event within
three business days of such date).
7.03 EMPLOYEES. Buyer shall offer employment to substantially all of
the Business Employees and shall not dismiss employees so hired during the
ninety days after closing to the extent that the number of employees of Seller
that have been dismissed by Buyer during such ninety day period, plus the number
of Business Employees not offered employment by Buyer, exceeds fifty.
ARTICLE VIII
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CONDITIONS TO CLOSING
8.01 CONDITIONS TO BUYER'S OBLIGATIONS. The obligation of Buyer to
consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article IV hereof
shall be true and correct in all material respects at and as of the Closing Date
as though then made and as though the Closing Date had been substituted for the
date of this Agreement throughout such representations and warranties (without
taking into account any disclosures by Seller of discoveries, events or
occurrences arising on or after the date hereof), except that any such
representation or warranty made as of a specified date (other than the date
hereof) shall only need to have been true on and as of such date;
(b) Seller shall have performed in all material respects all of the
covenants and agreements required to be performed and complied with by it under
this Agreement prior to the Closing;
(c) Seller shall have assigned to Buyer the agreements and permits
specified in the Disclosure Schedule under the captions referencing Sections
4.14 and 4.23 (except as otherwise noted thereon);
(d) Seller shall have obtained, or caused to be obtained, each
consent and approval necessary in order that the transactions contemplated
herein not constitute a breach or violation of, or result in a right of
termination or acceleration of, or creation of any encumbrance on any of the
Assets pursuant to the provisions of, any agreement, arrangement or undertaking
of or affecting Seller or any license, franchise or permit of or affecting
Seller, regardless of whether assigned to Seller pursuant to Section 8.01(c);
(e) Buyer shall have been successful in obtaining the agreement of
such of Seller's Business Employees, sales agents, sales representatives,
distributors and dealers to become employees, sales agents, sales
representatives, distributors and dealers of Buyer as Buyer reasonably concludes
are necessary for the continued operation of the Business.
(f) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated hereby or seeking to obtain material damages in
connection with such transactions, (ii) seeking to prohibit direct or indirect
ownership or operation by Buyer of all or a material portion of the Assets, or
to compel Buyer or any of its subsidiaries to dispose of or to hold separately
all or a material portion of the business or assets of Buyer and its
subsidiaries, as a result of the transactions contemplated hereby, (iii) seeking
to invalidate or render unenforceable any material provision of this Agreement
or any of the other agreements attached as exhibits hereto (collectively, and
including the Services Agreement, the "Related Agreements"), or (iv) otherwise
relating to and materially adversely affecting the transactions contemplated
hereby;
(g) There shall not be any action taken, or any statute, rule,
regulation, judgment, order or injunction enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated hereby
by any federal, state or foreign court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly, in
any of the consequences referred to in Section 8.01(f) hereof;
(h) There shall be no material difference between the Latest Balance
Sheet Trial Balance and the Closing Date Trial Balance (as defined in subsection
(k)(vii) below);
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(i) Buyer shall not have discovered any fact or circumstance existing
as of the date of this Agreement which has not been disclosed to Buyer as of the
date of this Agreement regarding the Business or Assets, which is, individually
or in the aggregate with other such facts and circumstances, materially adverse
to the value of the Assets or the Business, as determined by the Buyer in its
reasonable discretion;
(j) There shall have been no damage, destruction or loss of or to any
of the Assets, whether or not covered by insurance, which, in the aggregate,
has, or would be reasonably likely to have, a material adverse effect on the
Assets or the Business;
(k) On the Closing Date, Seller shall have delivered to Buyer all of
the following:
(i) the Bill of Sale and such other instruments of conveyance,
transfer, assignment and delivery as Buyer shall have reasonably requested
pursuant to Section 3.02 hereof;
(ii) the Assignment and Assumption Agreement;
(iii) certificates of the officers of Seller with the best
knowledge of the Company or other persons satisfactory to Buyer
substantially in the form set forth in Exhibit G attached hereto, dated the
Closing Date, stating that the conditions precedent set forth in
subsections (a) and (b) above have been satisfied;
(iv) copies of the third party and governmental consents and
approvals referred to in subsections (c) and (d) above;
(v) a copy of the text of the resolutions adopted by the board
of directors of Seller authorizing the execution, delivery and performance
of this Agreement and the consummation of all of the transactions
contemplated by this Agreement; along with a certificate executed on behalf
of Seller, by its corporate secretary certifying to Buyer that such copy is
a true, correct and complete copy of such resolutions, and that such
resolutions were duly adopted and have not been amended or rescinded;
(vi) an executed copy of each of the Related Agreements;
(vii) a trial balance of accounts receivable of the Business
dated as of the close of business on the day before the Closing certified
by the Chief Financial Officer of Seller (the "Closing Date Trial
Balance"); and
(ix) such other certificates, documents and instruments as
Buyer reasonably requests related to the transactions contemplated hereby.
8.02 CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of Seller
to consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article V hereof
will be true and correct in all material respects at and as of the Closing as
though then made and as though the Closing Date had been substituted for the
date of this Agreement throughout such representations and warranties;
(b) Buyer shall have performed in all material respects all the
covenants and agreements required to be performed by it under this Agreement
prior to the Closing;
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(c) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated hereby or seeking to obtain material damages in
connection with such transactions, (ii) seeking to invalidate or render
unenforceable any material provision of this Agreement or any of the Related
Agreements, or (iii) otherwise relating to and materially adversely affecting
the transactions contemplated hereby;
(e) There shall not be any action taken, or any statute, rule,
regulation, judgment, order or injunction, enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated hereby
by any federal, state or foreign court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly, in
any of the consequences referred to in Section 8.02(d) hereof;
(f) On the Closing Date, Buyer will have delivered to Seller:
(i) a wire transfer in immediately available funds in the amount
of the Purchase Price,
(ii) a certificate of appropriate officer(s) of Buyer
substantially in the form set forth as Exhibit H attached hereto, dated the
Closing Date, stating that the conditions precedent set forth in
subsections (a) and (b) above have been satisfied,
(iii) an executed copy of the Assignment and Assumption
Agreement and of each of the Related Agreements, and
(iv) a copy of the text of the resolutions adopted by the board
of directors of Buyer authorizing the execution, delivery and performance
of this Agreement and the consummation of all of the transactions
contemplated by this Agreement, along with a certificate executed on behalf
of Buyer by its corporate secretary certifying to Seller that such copy is
a true, correct and complete copy of such resolutions, and that such
resolutions were duly adopted and have not been amended or rescinded.
ARTICLE IX
TERMINATION
9.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by the mutual consent of Buyer and Seller;
(b) by either Buyer or Seller if there has been a material
misrepresentation, breach of warranty or breach of covenant on the part of the
other in the representations, warranties and covenants set forth in this
Agreement;
(c) by either Buyer or Seller if the transactions contemplated hereby
have not been consummated by September 30, 1998; PROVIDED THAT, neither Buyer
nor Seller will be entitled to terminate this Agreement pursuant to this
Section 9.01(c) if such party's willful breach of this Agreement has prevented
the consummation of the transactions contemplated hereby; or
(d) by Buyer if, after the date hereof, there shall have been a
material adverse change in
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the financial condition or business of the Business or if, after the date
hereof, an event shall have occurred which, so far as reasonably can be
foreseen, would result in any such change, except to the extent such change is
directly caused by Buyer.
9.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Buyer or Seller as provided in Section 9.01, this Agreement
shall become void and there shall be no liability on the part of either Buyer or
Seller, or their respective stockholders, officers, or directors, except that
Sections 12.01, 12.02 and 12.10 hereof shall survive indefinitely, and except
with respect to willful breaches of this Agreement prior to the time of such
termination.
ARTICLE X
ADDITIONAL AGREEMENTS
10.01 CONSULTING SERVICES. Seller shall retain in its employ, and
make available to Buyer in accordance with and subject to the terms set forth in
the Services Agreement, the services of Leo J. Wood and Barbara Woody (the
"Leased Employees") for such proportion of their respective work time as shall
be reasonably requested by Buyer. The Leased Employees shall at all times
remain employees of Seller and Seller shall be solely responsible for all
compensation, benefits, insurance and other expenses related to the Leased
Employees.
10.02 OLD RECEIVABLES. Buyer covenants and agrees to use its best
efforts to collect the receivables of the Business outstanding on the Closing
Date that are older than 360 days ("Old Receivables"). With respect to any Old
Receivable actually collected by Buyer within one year after the Closing Date,
Buyer shall pay to Seller, within 30 days of the end of any month in which it
receives payment on such Old Receivable, one hundred percent (100%) of the cash
amount actually collected, provided, however, that Buyer's aggregate obligation
to pay Seller for any Old Receivable so collected shall be limited to $300,000
and Buyer shall retain any and all payments in excess of such amount and any and
all payments actually received more than one year after the Closing Date.
10.03 NONCOMPETITION COVENANT.
(a) During the three-year period commencing on the Closing Date,
Seller shall not directly or indirectly engage in, invest in, finance, own,
manage, operate, control or participate in the ownership, management, operation
or control of, or be in any way connected with, render services to or assist any
business activities that are competitive with the Business as conducted prior to
the consummation of the transactions contemplated hereby. Seller understands
that Buyer would not have agreed to purchase the Assets without having received
this noncompetition covenant from Seller, and Seller acknowledges that it has
entered into this noncompetition covenant as a material inducement to Buyer to
consummate the transactions contemplated hereby. Notwithstanding this Section
10.03(a), Seller may continue to distribute Products through sales to the
distributors and dealers for which it does not have ongoing supply agreements,
but not through third party or direct billing, in accordance with the Excluded
Business.
(b) Except as contemplated by Section 6.06, 6.07, and 10.01, during
the three-year period commencing on the Closing Date, neither Seller nor Buyer
shall, without the written consent of the other party, directly or indirectly,
either as principal, agent, independent contractor, consultant, director,
officer, employee, employer, advisor, stockholder, partner or in any other
individual capacity whatsoever, either for their own benefit or for the benefit
of any other person, solicit or cause to be solicited for employment any
employee of the other party, or hire any such employee with whom it has had
contact in the course of the transaction contemplated by this Agreement. Any
such consent granted by the Company is revocable at any time. For purposes of
this paragraph, solicitation shall not include solicitation of employees (i) who
first solicit employment from the party in question, or (ii) who are solicited
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(A) by advertising in periodicals of general circulation, or (B) by an employee
search firm on behalf of the party in question, so long as such party did not
direct or encourage such firm to solicit such employee or any other employees of
the other party. In addition, and without limiting the generality of the
foregoing, Seller shall not, without the written consent of Buyer, directly or
indirectly, solicit , cause to be solicited or hire any Business Employee
(except those Business Employees referenced in the Services Agreement) for a
period of three years after the date of this Agreement.
(c) REMEDIES. Seller acknowledges that it would be difficult to
fully compensate the Buyer for damages resulting from any breach by Seller of
the provisions of this Section 10.03. Accordingly, in the event of any actual
or threatened breach of such provisions, the Buyer shall (in addition to any
other remedies which it may have) be entitled to temporary and/or permanent
injunctive relief to enforce such provisions, and such relief may be granted
without the necessity of proving actual damages. Seller further acknowledges
that this Agreement constitutes a material inducement to the Buyer to complete
the purchase of the Assets and Buyer will be relying on the enforceability of
this Section 10.03 in completing such acquisition.
ARTICLE XI
SURVIVAL; INDEMNIFICATION
11.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and notwithstanding the participation of such party in
the Closing, the representations and warranties contained in Article IV and
Article V hereof shall survive the Closing for a period of two years following
the Closing Date.
11.02 INDEMNIFICATION BY SELLER. (a) Subject to the limitations of
Section 11.02(b), Seller agrees to indemnify in full Buyer and its officers,
directors, employees, agents and stockholders (collectively, the "Buyer
Indemnified Parties") and hold them harmless against any loss, liability,
deficiency, damage, expense or cost (including reasonable legal expenses),
whether or not actually incurred or paid prior to the third anniversary of the
Closing Date (collectively, "Losses"), which Buyer Indemnified Parties may
suffer, sustain or become subject to, as a result of (i) any misrepresentation
in any of the representations and warranties of Seller contained in this
Agreement or in any exhibits, schedules, certificates or other documents
delivered or to be delivered by or on behalf of Seller pursuant to the terms of
this Agreement or otherwise referenced or incorporated in this Agreement
(collectively, the "Related Documents"), (ii) any breach of, or failure to
perform, any agreement of Seller contained in this Agreement or any of the
Related Documents, or (iii) any "Claims" (as defined in Section 11.04(a) hereof)
or threatened Claims against Buyer arising out of the actions or inactions of
Seller with respect to the Assets or the Business prior to the Closing
(collectively, "Buyer Losses").
(b) Seller shall be liable to Buyer Indemnified Parties for any Buyer
Losses only if the aggregate amount of all Buyer Losses exceeds $36,500 (the
"Basket Amount"), in which case Seller shall be obligated to indemnify the Buyer
Indemnified Parties only for the excess of the aggregate amount of all such
Buyer Losses over the Basket Amount; provided, however, that Losses of Buyer
resulting from breach of the covenants and warranties contained in sections
6.06(a), 6.06(c), Article X or from liabilities of Seller not expressly assumed
by this Agreement shall not be subject to such Basket Amount.
11.03 INDEMNIFICATION BY BUYER. (a) Subject to the limitations of
Section 11.03(b), Buyer agrees to indemnify in full the Seller, and its
officers, directors, employees, agents and stockholders (collectively, the
"Seller Indemnified Parties") and hold them harmless against any Losses which
any of the Seller Indemnified Parties may suffer, sustain or become subject to
as a result of (i) any misrepresentation in any of the representations and
warranties of Buyer contained in this Agreement or in
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any of the Related Documents, (ii) any breach of, or failure to perform, any
agreement of Buyer contained in this Agreement or any of the Related Documents
(including, without limitation, any WARN Act liability incurred by Buyer for
violation of the covenant contained in section 7.03), or (iii) any Claims or
threatened Claims against Seller arising out of the actions or inactions of
Buyer with respect to the Assets or the Business after the Closing
(collectively, "Seller Losses").
(b) Buyer shall be liable to the Seller Indemnified Parties for any
Seller Losses only if the aggregate amount of all Seller Losses exceeds the
Basket Amount, in which case Buyer shall be obligated to indemnify the Seller
Indemnified Parties only for the excess of the aggregate amount of all such
Seller Losses over the Basket Amount; provided, however, that Losses of Seller
resulting from breach of the covenant contained in section 7.03 shall not be
subject to such Basket Amount.
11.04 METHOD OF ASSERTING CLAIMS. As used herein, an "Indemnified
Party" shall refer to a "Buyer Indemnified Party" or "Seller Indemnified Party,"
as applicable, the "Notifying Party" shall refer to the party hereto whose
Indemnified Parties are entitled to indemnification hereunder, and the
"Indemnifying Party" shall refer to the party hereto obligated to indemnify such
Notifying Party's Indemnified Parties.
(a) In the event that any of the Indemnified Parties is made a
defendant in or party to any action or proceeding, judicial or administrative,
instituted by any third party for the liability or the costs or expenses of
which are Losses (any such third party action or proceeding being referred to as
a "Claim"), the Notifying Party shall give the Indemnifying Party prompt notice
thereof. The failure to give such notice shall not affect any Indemnified
Party's ability to seek reimbursement unless such failure has materially and
adversely affected the Indemnifying Party's ability to defend successfully a
Claim. The Indemnifying Party shall be entitled to contest and defend such
Claim; PROVIDED, that the Indemnifying Party (i) has a reasonable basis for
concluding that such defense may be successful and (ii) diligently contests and
defends such Claim. Notice of the intention so to contest and defend shall be
given by the Indemnifying Party to the Notifying Party within 20 business days
after the Notifying Party's notice of such Claim (but, in all events, at least
five business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the Indemnifying Party. The Notifying Party shall be entitled at
any time, at its own cost and expense (which expense shall not constitute a Loss
unless the Notifying Party reasonably determines that the Indemnifying Party is
not adequately representing or, because of a conflict of interest, may not
adequately represent, any interests of the Indemnified Parties, and only to the
extent that such expenses are reasonable), to participate in such contest and
defense and to be represented by attorneys of its or their own choosing. If the
Notifying Party elects to participate in such defense, the Notifying Party will
cooperate with the Indemnifying Party in the conduct of such defense. Neither
the Notifying Party nor the Indemnifying Party may concede, settle or compromise
any Claim without the consent of the other party, which consents will not be
unreasonably withheld. Notwithstanding the foregoing, (i) if a Claim seeks
equitable relief or (ii) if the subject matter of a Claim relates to the ongoing
business of any of the Indemnified Parties, which Claim, if decided against any
of the Indemnified Parties, would materially adversely affect the ongoing
business or reputation of any of the Indemnified Parties, then, in each such
case, the Indemnified Parties alone shall be entitled to contest, defend and
settle such Claim in the first instance and, if the Indemnified Parties do not
contest, defend or settle such Claim, the Indemnifying Party shall then have the
right to contest and defend (but not settle) such Claim.
(b) In the event any Indemnified Party should have a claim against
any Indemnifying Party that does not involve a Claim, the Notifying Party shall
deliver a notice of such claim with reasonable promptness to the Indemnifying
Party. If the Indemnifying Party notifies the Notifying Party that it does not
dispute the claim described in such notice or fails to notify the Notifying
Party within 30 days after delivery of such notice by the Notifying Party
whether the Indemnifying Party disputes the claim described in such notice, the
Loss in the amount specified in the Notifying Party's notice will be
conclusively deemed a liability of the Indemnifying Party and the Indemnifying
Party shall pay the amount
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<PAGE>
of such Loss to the Indemnified Party on demand. If the Indemnifying Party has
timely disputed its Liability with respect to such claim, the Chief Executive
Officers of each of the Indemnifying Party and the Notifying Party will proceed
in good faith to negotiate a resolution of such dispute, and if not resolved
through the negotiations of such Chief Executive Officers within 60 days after
the delivery of the Notifying Party's notice of such claim, such dispute shall
be resolved fully and finally in Kansas City, Missouri by an arbitrator selected
pursuant to, and an arbitration governed by, the Commercial Arbitration Rules of
the American Arbitration Association. The arbitrator shall resolve the dispute
within 30 days after selection and judgment upon the award rendered by such
arbitrator may be entered in any court of competent jurisdiction.
(c) After the Closing, the rights set forth in this Article XI shall
be each party's sole and exclusive remedies against the other party hereto for
misrepresentations or breaches of covenants contained in this Agreement and the
Related Documents, other than those covenants contained in Article X.
Notwithstanding the foregoing, nothing herein shall prevent any of the
Indemnified Parties from bringing an action based upon allegations of fraud or
other intentional breach of an obligation of or with respect to either party in
connection with this Agreement and the Related Documents. In the event such
action is brought, the prevailing party's attorneys' fees and costs shall be
paid by the nonprevailing party.
ARTICLE XII
MISCELLANEOUS
12.01 PRESS RELEASES AND ANNOUNCEMENTS. Prior to the Closing Date,
neither party hereto shall issue any press release (or make any other public
announcement) related to this Agreement or the transactions contemplated hereby
or make any announcement to the employees, customers or suppliers of Seller
without prior written approval of the other party hereto, except as may be
necessary, in the opinion of counsel to the party seeking to make disclosure, to
comply with the requirements of this Agreement or applicable law. If any such
press release or public announcement is so required, the party making such
disclosure shall consult with the other party prior to making such disclosure,
and the parties shall use all reasonable efforts, acting in good faith, to agree
upon a text for such disclosure which is satisfactory to both parties.
12.02 EXPENSES. Except as otherwise expressly provided for herein,
Seller and Buyer will pay all of their own expenses (including attorneys' and
accountants' fees, in connection with the negotiation of this Agreement, the
performance of their respective obligations hereunder and the consummation of
the transactions contemplated by this Agreement (whether consummated or not).
12.03 FURTHER ASSURANCES. Seller agrees that, on and after the
Closing Date, it shall take all appropriate action and execute any documents,
instruments or conveyances of any kind which may be reasonably necessary or
advisable to carry out any of the provisions hereof, including, without
limitation, putting Buyer in possession and operating control of the Assets and
transferring all Permits and environmental permits to Buyer that are
transferable.
12.04 COOPERATION AND EXCHANGE OF INFORMATION. Buyer and Seller shall
provide each other with such cooperation and information as either of them
reasonably may request of the other in filing any Tax return, amended return or
claim for refund, determining a liability for Taxes or a right to a refund of
Taxes or in conducting any audit or proceeding in respect of Taxes. Such
cooperation and information shall include providing copies of relevant Tax
returns or portions thereof, together with accompanying schedules and related
work papers and documents relating to rulings or other determinations by Taxing
authorities. Each party shall make its employees available on a mutually
convenient basis to provide explanation of any documents or information provided
hereunder. The Seller upon written request by the Buyer, will provide to the
Buyer such factual information reasonably necessary for filing Tax returns, Tax
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planning and contesting any Tax audit that the Seller possesses as the Buyer may
reasonably request with respect to the Assets (which information the Seller
agrees to maintain and preserve for so long as it may be needed by the Buyer).
12.05 AMENDMENT AND WAIVER. This Agreement may not be amended or
waived except in a writing executed by the party against which such amendment or
waiver is sought to be enforced. No course of dealing between or among any
persons having any interest in this Agreement will be deemed effective to modify
or amend any part of this Agreement or any rights or obligations of any person
under or by reason of this Agreement.
12.06 NOTICES. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when personally delivered or
three business days after being mailed by first class U.S. mail, return receipt
requested, or when receipt is acknowledged, if sent by facsimile, telecopy or
other electronic transmission device. Notices, demands and communications to
Buyer and Seller will, unless another address is specified in writing, be sent
to the address indicated below:
NOTICES TO BUYER: WITH A COPY TO:
Mr. David B. Kaysen
Rehabilicare Inc.
1811 Old Highway 8
New Brighton, MN 55112
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Thomas Martin
Fax: (612) 340-8738
NOTICES TO SELLER:
Mr. Michael M. Barbour
Henley Healthcare, Inc.
120 Industrial Boulevard
Sugar Land, TX 77478
WITH A COPY TO:
Porter & Hedges, L.L.P.
700 Lousiana
Houston, TX 77002
Attention: Robert G. Reedy
Fax: (713) 226-0274
12.07 ASSIGNMENT. This Agreement and all of the provisions hereof
will be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that neither this Agreement
nor any of the rights, interests or obligations hereunder may be assigned by
either party hereto without the prior written consent of the other party hereto.
12.08 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this
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<PAGE>
Agreement is held to be prohibited by or invalid under applicable law, such
provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
12.09 COMPLETE AGREEMENT. This Agreement and the Related Agreements
and the Exhibits hereto, the Disclosure Schedule and the other documents
referred to herein contain the complete agreement between the parties and
supersede any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related to the subject matter
hereof in any way.
12.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument.
12.11 GOVERNING LAW. The internal law, without regard to conflicts of
laws principles, of the State of Minnesota will govern all questions concerning
the construction, validity and interpretation of this Agreement and the
performance of the obligations imposed by this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
REHABILICARE INC.
By
-------------------------------------------
Its
----------------------------------------
HENLEY HEALTHCARE, INC.
By
-------------------------------------------
Its
----------------------------------------
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<PAGE>
PURCHASE AND SALE AGREEMENT
(Improved Property)
between
STAODYN, INC.
(A Wholly-Owned Subsidiary of Rehabilicare Inc.)
and
ETKIN-JOHNSON GROUP LLC
<PAGE>
PURCHASE AND SALE AGREEMENT
(IMPROVED PROPERTY)
THIS AGREEMENT dated August ____, 1998, is between STAODYN, INC., a
Delaware corporation, a wholly-owned subsidiary of Rehabilicare Inc., a
Minnesota corporation, ("Seller"), and ETKIN-JOHNSON GROUP LLC, a Colorado
limited liability company ("Buyer").
RECITALS
A. Seller owns the options ("Options") to acquire certain land,
improvements and tangible personal property located at 1225 Ken Pratt Boulevard
(formerly known as 1225 Florida Avenue), Longmont, Colorado which is further
described and defined as the "Property" in Section 1 of this Agreement pursuant
to the terms of the Leases (each of which is referred to as a "Lease" and
collectively "Leases") between Staodyn, Inc. as Lessee and 1225 Building LLC as
Lessor dated July 16, 1993 and Staodyn as Lessee and Pendleton Construction Co.,
Inc. as Lessor dated July 16, 1993 (1225 Building LLC and Pendleton Construction
Co., Inc. are each individually referred to as a "Ground Owner" and collectively
"Ground Owners").
B. Seller desires to exercise the Options and acquire the Property and to
immediately thereafter sell the Property to Buyer and Buyer desires to purchase
the Property, upon the terms and provisions of this Agreement.
COVENANTS
IN CONSIDERATION of the foregoing and the mutual agreements herein, the
parties hereto agree as follows:
SECTION 1. PROPERTY AND PURCHASE PRICE
1.1 PROPERTY. Subject to the terms and conditions of this Agreement,
Seller agrees to sell and convey and Buyer agrees to purchase and pay for the
following described property (all of which is hereinafter collectively referred
to as the "Property"):
(a) The land described in EXHIBIT 1.1 (a) hereto together with all
rights and all appurtenances to or used in connection therewith that are
transferred by Ground Owners to Sellers pursuant to the options (the "Land"),
including without limitation, any of the following that are actually
transferred by the Ground Owners to the Seller: all minerals, oil,
<PAGE>
gas and other hydrocarbon substances on and under the Land, as well as all
development rights, air rights, water, water rights and water stock relating
to the Land, any rights to any land lying in the bed of any existing
dedicated street, road or alley adjoining the Land and to all strips and
gores adjoining the Land, and any other easements, rights-of-way or
appurtenances used in connection with the beneficial use and enjoyment of the
Land;
(b) All improvements located on, appurtenant to or used in connection
with the Land (the "Improvements");
(c) The fixtures and tangible personal property identified in Exhibit
1.1 (c) hereto (the "Personal Property");
(d) Copies of all non-proprietary books, records, files, reports,
plans and specifications and soil tests relating to the Land or Improvements, in
the possession or under the control of the Seller that are specifically
requested by Buyer (the "Reports");
(e) Seller's rights as Landlord under any subleases of the Property
which have been approved by Buyer and which extend beyond the Closing.
1.2 PURCHASE PRICE. The purchase price for the Property is Three Million
Five Hundred Fifty Thousand Dollars ($3,550,000.00) and shall be payable as
follows:
(a) One Hundred Thousand Dollars ($100,000.00) (the "Deposit") paid
to Seller by Buyer within five (5) business days following execution of this
Agreement, which amount shall be held by Land Title Guarantee Company with an
address of Commercial Department (Attn: Ellie Matthew), 3033 East First Avenue,
Suite 600, Denver, CO 80206 (the "Title Company") in an interest-bearing account
of a type agreed upon by Buyer and Seller, as an earnest money deposit and part
payment of the purchase price. This Deposit becomes non-refundable upon the
expiration of the Examination Period unless Buyer has exercised its rights to
terminate this Agreement pursuant to Section 5. By delivery of a fully executed
copy of this Agreement to the Title Company, the parties direct the Title
Company to hold and disburse the deposit in accordance with the terms of this
Agreement. Except as provided in Section 8.2, interest on the Deposit shall be
the property of Buyer;
(b) The balance of the purchase price of Three Million Four Hundred
Fifty Thousand Dollars ($3,450,000.00), subject to closing adjustments, shall be
paid by Buyer at the closing of the purchase and sale provided for in Section
6.1 (the "Closing") by wire transfer to an account designated by Seller.
2
<PAGE>
SECTION 2. DOCUMENTS TO BE DELIVERED TO BUYER
2.1 DOCUMENTS TO BE DELIVERED TO BUYER. Within ten (10) days after the
date of Seller's execution of this Agreement or such other time as may be
specified below, Seller shall deliver to Buyer at Seller's expense the following
items relating to the Property:
(a) A title insurance commitment ("Commitment") issued by the
Title Company showing the status of record title to the Land and
Improvements, along with legible copies of all recorded documents referred to
in the Commitment, which Commitment commits to insure title to the Property
in the Buyer in the amount of the purchase price under an Owner's Policy,
ALTA 1992 with the standard printed exceptions contained in such form deleted
and the exception for taxes limited to current year taxes not due or payable.
Buyer acknowledges receipt of the Commitment and copies of such documents
prior to the date hereof. Exceptions (other than preprinted exceptions) shown
on Schedule B-2 of the title insurance commitment are referred to below as
the "Permitted Exceptions."
(b) A certificate of taxes due covering the Land and the
Improvements, prepared by the Treasurer of the County in which the Property is
located, which Buyer acknowledges it has received prior to the date hereof.
(c) Within thirty (30) days following the date of Seller's execution
of this Agreement, two (2) copies of a survey of the Property prepared by a
surveyor registered in the State of Colorado which shall meet the minimum
standard detail requirements for ALTA/ACSM Land Title Surveys, for an Urban
Survey, jointly established and adopted by ALTA and ACSM in 1992, to be dated
not more than thirty (30) days prior to the date of this Agreement, certified to
Buyer, Buyer's lender and the Title Company as of a recent date.
(d) Within ten (10) days of Buyer's request therefor, copies of such
Reports as Buyer may specifically request shall be furnished to Buyer pursuant
to Section 5.1(a) hereof.
(e) A copy of any environmental report concerning the Property in the
possession of Seller.
(f) A copy of the Leases and all amendments and modifications
thereto, if any.
3
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SELLER AND BUYER
3.1 SELLER'S REPRESENTATIONS. All representations and warranties are made
according to Seller's actual knowledge. Seller's actual knowledge shall mean
and refer only to the actual knowledge of Mr. David Kaysen, CEO of Staodyn, Inc.
Seller represents and warrants to Buyer as of the date of this Agreement and as
of the date of the Closing as follows:
(a) STATUS AND AUTHORITY. It is duly organized, validly existing
and in good standing. It has full power to own its property and to carry on
its business as now being conducted. It has the right, power, legal capacity
and authority to enter into and perform its obligations under this Agreement
and the documents to be executed and delivered pursuant hereto. The
execution and delivery of this Agreement and such documents have been duly
and validly authorized by all necessary corporate action on its part to make
this Agreement and such documents valid and binding upon it. Upon execution
and delivery, this Agreement and such documents will constitute Seller's
valid and binding obligations enforceable in accordance with their terms,
except to the extent limited by bankruptcy or insolvency laws, or laws
affecting creditors' rights generally.
(b) TITLE TO THE OPTIONS. Seller is the current lessee under the
Leases and has full right to exercise the Options.
(c) LIABILITIES. Seller has incurred no obligation or liability
which is, or could become, a lien or other encumbrance on the Property of any
nature whatsoever.
(d) TANGIBLE PERSONAL PROPERTY. At Closing, Seller shall convey by
quitclaim deed the Personal Property. Seller has good and marketable title
to the Personal Property free of all liens and encumbrances. Buyer shall
have the right to inspect all the Personal Property prior to the Closing.
(e) LEASES. On the date of the Closing, the Leases will be
terminated and there will be no leases affecting the Property except subleases,
if any, approved by Buyer, or in the event of an Accelerated Closing, pursuant
to Section 6.1 hereof, all subleases not previously approved by Buyer shall be
terminable on thirty (30) days' advance written notice.
(f) LITIGATION. There is no action, suit or proceeding pending or to
the actual knowledge of Seller, threatened against the Property or Seller with
respect to its interests in, management and rental of, or other activities with
respect to, the Property.
4
<PAGE>
(g) ZONING AND COMPLIANCE WITH LAW. Seller has no actual knowledge
of, nor has it received notice of, any violation of any applicable federal,
state or local law or regulation, including without limitation, any applicable
building, zoning, environmental or other law, ordinance or regulation, affecting
the Property or its operations.
(h) NO DEFAULTS. The consummation of the transactions contemplated
by this Agreement will not result in the breach of any of the terms or
provisions of, or constitute a default under any material agreement or other
instrument to which Seller is a party or by which it or any portion of the
Property may be bound.
(i) LIENS. All sums due for work that has been or will be performed
in or on the Property by Seller and materials furnished in connection therewith
which might in any circumstance give rise to a mechanic's or materialman's lien
either have been paid or, as to work presently in progress or to be performed,
Seller will promptly make payment as payment becomes due, and all necessary
waivers of rights to a mechanic's or materialmen's lien either have been
obtained or Seller will promptly obtain such waivers as such work is completed.
(j) LEASE. The Leases and documents referred to therein delivered by
Seller to Buyer constitutes the entire agreement between Seller and Ground
Owners and there has been no default by Seller thereunder and Ground Owners have
made no claims that Seller is in default thereunder.
3.2 BUYER'S REPRESENTATIONS. Buyer represents and warrants to Seller that
all limited liability company action necessary to authorize the Buyer to proceed
with the transaction contemplated by this Agreement has been taken and that the
persons entering into this Agreement on behalf of the Buyer have been duly
authorized to execute and deliver this Agreement and all other documents
required to be executed by Buyer hereunder.
SECTION 4. SELLER'S OBLIGATIONS BEFORE CLOSING
4.1 THE LEASE AND OPTION. Seller will not modify, alter or amend the
Options and will not default in its obligation under the Leases or take any
action or fail to take any action which would result in the termination or lapse
of the Options; and will take all actions required to exercise its rights under
the Options and to consummate the acquisition of the Property thereunder on or
before the Closing Date (described below).
4.2 SUBLEASES. Seller will not enter into any subleases of the Property
that are not terminable on thirty (30) days advance notice without the prior
written approval of such sublease by Buyer.
5
<PAGE>
SECTION 5. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligation of Buyer to purchase the Property is subject to the
satisfaction of the following conditions precedent on or before the time set
forth below. If any condition is not so satisfied, the condition may be waived
by Buyer in writing designated as a waiver or amendment to this Agreement, or
Buyer may terminate this Agreement in which event Buyer shall be returned the
Deposit and the parties will be released from all obligations hereunder.
5.1 DETERMINATION BY BUYER.
(a) CONDITIONS PRECEDENT. On or before expiration of the
"Examination Period" (as defined below), Buyer shall determine that the
following are acceptable to Buyer in its sole and absolute discretion:
(i) the exceptions to the marketability of the title to the
Property as shown by the Commitment and other title evidence delivered
pursuant to Section 2.1;
(ii) the financial condition of the Property;
(iii) the Improvements and the Personal Property are in
working condition and that any machinery included therein also is in
operating condition; and
(iv) the results of Buyer's inspections made pursuant to Section
5.1 (b) hereof.
As used herein, the term "Examination Period" shall mean the period of time
commencing on the date of execution of this Agreement by Seller and ending on
the same day of the second month following such day unless such day is a
Saturday, Sunday or legal holiday in which event the Examination Period shall be
extended to the next day which is not a Saturday, Sunday or legal holiday;
provided however the expiration of the Examination Period will be extended for a
period of time equal to any delay in Seller providing the documents required
under Section 2.1 beyond the date on which delivery is required under Section
2.1.
(b) RIGHT OF ENTRY; INSPECTIONS; REPORTS. Buyer and Buyer's
representatives, agents, consultants and designees shall have the right, at
reasonable times and upon reasonable notice to Seller, to enter upon the
Property, at Buyer's own cost, for any purpose in connection with its proposed
purchase, development or operation of the Property,
6
<PAGE>
including, without limitation, the right to examine all Reports relating to
the Property which are in the possession or control of Seller and the right
to make such inspections, investigations and tests as Buyer may elect to make
or obtain; provided, however, any entry of Buyer hereunder shall be conducted
in such a manner as to minimize the inconvenience caused to any tenants or
Seller. To the extent that any Reports pertaining to the Property are
located in Seller's New Brighton, Minnesota office, the same shall be made
available to Buyer for inspection at such office, or at Seller's election,
may be copied and delivered to Buyer within ten (10) days following Buyer's
specific written request therefor. Buyer acknowledges and agrees that any
Reports or other information furnished by Seller in regard to the Property
are made without warranty or representation. In addition, Buyer may make such
inquiries as Buyer deems appropriate of Seller's consultants or contractors
who have performed work with respect to the Property. Seller agrees to make
all such books, records and files available to Buyer and Buyer's attorneys,
accountants and other representatives at any time during business hours upon
reasonable notice from Buyer and to cause its consultants and contractors to
furnish Buyer with any information and copies of documents reasonably
requested by Buyer. From and after the execution of this Agreement, Buyer
and Buyer's representatives, agents, consultants and designees shall be
entitled to communicate directly with all governmental authorities in
connection with Buyer's proposed purchase of the Property. Buyer shall
indemnify, defend, protect and hold Seller harmless from any claims,
liabilities, damages or expenses (including attorneys' fees and costs)
arising out of or incurred in connection with the entry by Buyer or its
agents, designees, or representatives hereunder or arising from or in
connection with any and all mechanic's liens and physical damage to property
or persons arising out of any such entry by Buyer or its agents, designees or
representatives, which obligations of Buyer shall survive the termination of
this Agreement.
(c) BUYER'S RIGHT TO TERMINATE. If on or before the expiration of
the Examination Period, Buyer delivers to Seller written notice that any of
the conditions precedent set forth in Section 5.1 (a), have not been
satisfied, it shall be conclusively presumed that Buyer has elected to
terminate this Agreement and Buyer will instruct the Title Company to refund
the Deposit in which event the Deposit will be returned to Buyer and this
Agreement shall be of no further force or effect. If no such written notice
is given by Buyer to Seller on or prior to expiration of the Examination
Period, the conditions precedent set forth in Section 5.1 (a) shall be deemed
to be satisfied.
5.2 ACCURACY OF REPRESENTATIONS AND WARRANTIES OF SELLER. On the date of
this Agreement and as of the Closing Date, all representations and warranties in
this Agreement by Seller shall be true in all material respects as though made
at that time. Buyer shall give written notice of any inaccuracies it discovers
to Seller and Seller thereafter shall have the opportunity to object and/or
proceed to cure or to terminate this Agreement. If the Seller's
7
<PAGE>
decision is to proceed to cure, then the inaccuracy will be considered by
Buyer to be resolved.
5.3 NO MATERIAL ADVERSE CHANGE. Subject to the provision in Section 9,
during the period from the date of this Agreement to the Closing Date, the
Property shall not have sustained any loss or damage which materially adversely
affects its use. Condemnation is addressed in Section 9.
5.4 COMPLIANCE WITH COVENANTS. Seller shall have complied with all the
agreements and covenants set forth in this Agreement.
5.5 DOCUMENT APPROVAL. On the Closing Date, all certificates, opinions
and other documents required to be delivered under this Agreement by Seller at
Closing shall have been delivered to Buyer in form and substance required by
this Agreement.
5.6 SUBSEQUENTLY DISCOVERED DEFECTS. If any matter affecting title to
the Property ("Title Defect") shall arise or be discovered by Buyer which is
not set out in the Commitment or the Survey, Buyer shall have the right to
object to such Title Defect by the delivery to Seller of notice of such Title
Defect within five (5) days after Buyer discovers such Title Defect provided
that, if such Title Defect is discovered within five (5) days prior to the
Closing Date, the Closing shall be extended for such period as may be
necessary to give effect to the provisions of this Section 5.6 If Buyer does
not so object within such period, such Title Defect shall become a Permitted
Exception. Upon receipt of notice of Buyer's objection to any such Title
Defect, Seller shall have the right, but not the obligation, to cure such
Title Defect to the satisfaction of Buyer and the Title Company for a period
of five (5) days from the date of such notice except for such items that are
typically cured at Closing such as satisfactions of deeds of trust and other
liens satisfied by the payment of money. If the aforesaid cure period
extends beyond the Closing, the date of the Closing shall be extended to a
date that is three (3) days after the expiration date of such five-day
period. If Seller cures Buyer's objection to the satisfaction of Buyer
within the cure period, then the Closing shall occur on the original or
postponed date of the Closing but otherwise upon the terms and provisions
contained herein. If Seller has not cured such Title Defect to the
satisfaction of the Title Company such that the Title Company will delete the
Title Defect from the final policy to be issued, Buyer shall either (a) close
on such original or postponed date (and Buyer shall thereby be deemed to have
waived such objection) or (b) terminate this Agreement by giving notice to
Seller and the Title Company before such original or postponed date, in which
case the Deposit shall be delivered to Buyer and each party shall thereupon
be released from all further obligations under this Agreement. If, in
Seller's attempt to cure a Title Defect, Buyer discovers other Title Defects
not set out in the
8
<PAGE>
Commitment or Survey, such additional Title Defects shall be subject to the
procedure set forth above.
SECTION 6. THE CLOSING
6.1 THE CLOSING. The Closing shall take place at 10:00 a.m. local time
at the offices of LeBoeuf, Lamb, Greene & MacRae, in Denver, Colorado on the
date Seller acquires title to the Property but not earlier than January 10,
1999 and not later than July 10, 1999 (the "Closing Date"), or such later
date as may be established pursuant to the terms hereof. Seller represents
it has exercised the Options. Within thirty (30) days of the date hereof,
Seller shall give Buyer written notice of the specific Closing Date, which
shall be no earlier than January 10, 1999 and no later than July 10, 1999.
Notwithstanding anything herein to the contrary, Buyer may request Seller to
close on a date earlier than January 10, 1999, and provided the Ground Owners
consent to such earlier Closing Date, the parties shall cooperate with each
other to close on an earlier date mutually acceptable to the parties and the
Ground Owners (an "ACCELERATED CLOSING"), and on such Accelerated Closing
Date, Buyer, in addition to the Purchase Price, shall pay to Seller, all rent
and other expenses and charges owed by Seller to Ground Owners pursuant to
the Leases attributable to the period between such actual earlier Closing
Date and January 10, 1999.
6.2 OBLIGATIONS OF SELLER AND BUYER AT CLOSING. The following events
shall occur at the Closing:
(a) Seller shall execute (or cause Ground Owners to execute), have
acknowledged and deliver to Buyer a special warranty deed conveying title to
Buyer to the Land and the Improvements, subject only to the Permitted
Exceptions.
(b) Buyer shall be delivered either (i) a current ALTA Extended
Owner's Policy of title insurance on the Property to be issued pursuant to the
Commitment showing no lien, encumbrance or other restriction other than the
Permitted Exceptions or (ii) an unqualified written commitment from the Title
Company to deliver such policy of title insurance.
(c) Seller shall execute, have acknowledged and deliver to Buyer an
instrument whereby Seller as lessee terminates the Leases.
(d) Seller shall execute, have acknowledged and deliver to Buyer a
bill of sale conveying to Buyer all of Seller's right, title and interest in and
to the Personal Property with general warranties of title, subject only to those
matters approved or waived by Buyer pursuant to Section 5 that relate to the
Personal Property.
9
<PAGE>
(e) Seller shall deliver to Buyer an affidavit that all
representations and warranties contained in Sections 3.1 and 12.7.
(f) Seller shall deliver to Buyer a certification executed by Seller
under penalty of perjury in the form of, and upon the terms set forth in EXHIBIT
6.2(f) attached hereto, setting forth Seller's address and federal tax
identification number and certifying that Seller is not a "foreign person" in
accordance with and/or for the purpose of the provisions of Sections 7701 and
1445 (as may be amended) of the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder.
(g) Seller and Buyer shall deliver, or cause to be delivered, such
other instruments and documents as may be reasonably required to transfer title
to the Property to Buyer in the condition herein contemplated.
(h) At the Closing, Buyer shall deliver a wire transfer of funds
against delivery of the items specified in Section 6.2 payable to the order of
Seller in the amount set forth in Section 1.2(b).
6.3 CLOSING COSTS. Closing costs and adjustments shall be allocated as
follows:
(a) Buyer shall pay all recording and documentary fees due in
connection with the acquisition of the Property from Seller. Seller will pay
the cost of the owner's policy of title insurance to be provided pursuant to the
terms of this Agreement, up to but not in excess of $3,110 and all sales, use or
excise taxes, if any, due upon the transfer of the Personal Property.
(b) All real property taxes levied against the Land and Improvements,
all personal property taxes levied against the Personal Property, and other
regular expenses, if any, affecting the Property shall be paid or shall be
prorated as of 11.59 p.m. on the day preceding the Closing in accordance with
the provisions set forth below. For purposes of calculating prorations, Buyer
shall be deemed to be in title to the Property and therefore entitled to the
income and responsible for the expenses, for the entire day upon which the
Closing occurs. Any apportionments which are not expressly provided for below
shall be made in accordance with customary practice in Denver, Colorado and all
apportionments are final. To the extent any revenues or costs are reasonably
ascertainable, such adjustments, if and to the extent known and agreed upon as
of the Closing, shall be paid by Buyer to Seller (if the prorations result in a
net credit to the Seller) or by Seller to Buyer (if the prorations result in a
net credit to the Buyer), by increasing or reducing the cash portion of the
purchase price to be paid by Buyer at the Closing. Any such adjustments not
determined or not agreed upon as of the Closing, and identified as such in
writing by the parties, shall be paid by Buyer
10
<PAGE>
to Seller, or by Seller to Buyer, as the case may be, in cash as soon as
practicable following the Closing.
(c) All non-delinquent real estate taxes and assessments on the
Land and Improvements and all non-delinquent taxes on the Personal Property
shall be prorated based on the actual current tax bill or the most recent
levy and assessment information, if available, but if such tax bill or levy
and assessment information has not been received by Seller or ascertained by
Buyer and Seller, as the case may be, by the Closing the then current year's
taxes shall be deemed to be one hundred two percent (102%) of the amount of
the previous year's tax bill and such adjustment shall be final;
(d) All utility service charges for electricity, heat and air
conditioning service, other utilities, elevator maintenance, common area
maintenance, taxes (other than real estate taxes and personal property taxes),
other expenses incurred in operating the Property that Seller customarily pays,
and any other costs incurred in the ordinary course of business or the
management and operation of the Property shall be prorated on an accrual basis.
Seller shall pay all such expenses that accrue prior to the Closing and Buyer
shall pay all such expenses accruing on the Closing and thereafter. Seller and
Buyer shall obtain billings and meter readings as of the Closing to aid in such
prorations; and
(e) All capital and other improvements (including labor and
materials) which are performed or contracted for by Seller prior to the Closing
Date will be paid by the Seller, without contribution or proration from Buyer,
and Seller hereby indemnifies and holds Buyer and the Property harmless from any
materialmen or mechanic liens arising from the same, however, Buyer acknowledges
that Seller has no obligations to make such improvements prior to the Closing
Date.
SECTION 7. CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The obligations of Seller to convey the Property to Buyer, and Buyer's
right to purchase the Property, are subject to the satisfaction of the
following conditions precedent on or before the time set forth below. If any
condition is not so satisfied, the condition may be waived by Seller in
writing designated as a waiver or amendment to this Agreement, or Seller may
terminate this Agreement by written notice to Buyer given within ten (10)
business days of the applicable satisfaction date set forth below in which
event the Deposit shall be returned to Buyer and the parties shall be
released from all obligations hereunder.
7.1 PERFORMANCE BY GROUND OWNER. On or before the Closing Date, the
Ground Owners shall have performed their obligations under the Options
including, without limitation, Ground Owners' obligation to convey title to the
Property to Seller or Buyer (as
11
<PAGE>
Seller may direct). If Seller gives Buyer notice of termination due to
Ground Owners' default in their obligation to sell the Property to Seller,
then at Buyer's election made in writing to Seller within ten business days
following receipt of such notice of Seller's termination ("BUYER'S ELECTION
NOTICE"), either (a) Seller will assign to Buyer all claims it may have
against Ground Owners or either of them upon Buyer's payment of the Purchase
Price, adjusted pursuant to the terms hereof, to Seller, which payment shall
be made within ten days of Buyer's Election Notice, or (b) this Agreement
shall be terminated, in which event the Deposit shall be returned to Buyer
and thereafter Seller shall reimburse Buyer for "Buyer's Costs", as defined
in and in accordance with SECTION 8.3 hereof.
If Seller does not terminate this Agreement after a Ground Owner
default, and if within sixty (60) days following such default Seller has been
unable to cause the Ground Owners to convey title to Buyer, then Buyer may
terminate this Agreement upon written notice to Seller given within fifteen (15)
days of the expiration of said sixty (60) day period and the Deposit shall be
returned to Buyer and Seller shall reimburse Buyer for "Buyer's Costs", as
defined in and in accordance with SECTION 8.3 hereof.
7.2 ACCURACY OF REPRESENTATIONS AND WARRANTIES OF BUYER. On the date of
this Agreement and as of the Closing Date, all representations and warranties in
this Agreement by Buyer shall be true in all material respects as though made at
that time.
7.3 COMPLIANCE WITH COVENANTS. On the Closing Date, Buyer shall have
complied with all of its monetary covenants set forth in this Agreement.
SECTION 8. DEFAULT AND TERMINATION
8.1 TIME OF ESSENCE. Time is of the essence of the obligations of the
parties.
8.2 BUYER DEFAULT. If Buyer defaults in performing its obligations
hereunder and any such default is not cured within ten (10) days of Buyer's
receipt of Seller's written notice of any such default, Seller shall be entitled
to (i) terminate this Agreement and have the Deposit and all interest thereon
paid to Seller as liquidated damages, or (ii) bring an action against Buyer for
specific performance.
8.3 SELLER DEFAULT. If Seller shall default in performing its
obligations hereunder, (i) Buyer may elect to terminate this Agreement, have
the Deposit returned to Buyer and thereafter, Seller shall reimburse Buyer
for its non-refundable, out-of-pocket expenses incurred with respect to its
satisfaction of the conditions precedent set forth in SECTION 5.1 hereof and
its costs to secure financing for the transaction contemplated herein, which
costs shall in no event exceed $100,000 within thirty (30) days of Seller's
receipt of invoices for
12
<PAGE>
such costs (collectively "BUYER COSTS") or (ii) Buyer may elect to seek
specific performance of this Agreement from Seller because of such default.
Seller shall have no liability hereunder arising out of the default of the
Ground Owner, other than as set forth in Section 7.1(b) hereof.
SECTION 9. CASUALTY AND CONDEMNATION
It is the intention of the parties that Seller shall transfer the
Property at the Closing in its present state and condition, subject only to
reasonable wear and tear. Therefore, risk of loss to the Property from fire
or other casualty shall be borne by Seller until the Closing is completed.
In the event that any damage occurs to the Property prior to the Closing Date
and the reasonable cost of repair is $50,000.00 or less, Seller shall cause
such repairs to be made as soon as reasonably practical and the Closing Date
shall be reasonably extended to accommodate such restoration by Seller. If
the Property is damaged by fire or other casualty prior to Closing and the
reasonable cost of repair and restoration of such damage with materials of
like kind and quality is greater than $50,000.00, Buyer may elect either to
(a) have Seller assign to Buyer all of its right, title and interest in and
to the proceeds of any and all fire or other casualty insurance relating to
such damage (and deductible related to such insurance proceeds), and the
Buyer shall be entitled to a credit against the purchase price in an amount
equal to the deductible portion of the insurance policy covering the
Property, or (b) terminate this Agreement, in which event the Deposit shall
be returned to Buyer and Seller shall, within thirty (30) days of receipt of
invoices therefor, pay Buyer's Costs.
In the event that all or a portion of the Property is taken or
threatened to be taken by eminent domain prior to the Closing Date (a
"TAKING"), Buyer and Seller shall each have the option of terminating this
Agreement within twenty (20) days following the date that Seller provides
notice to Buyer of the Taking, in which case Buyer shall receive back the
entire Deposit and both Buyer and Seller shall be released from all
obligations hereunder. In the event that neither party exercises such option
to terminate this Agreement, then the parties shall proceed to close this
transaction as contemplated hereby and Seller shall assign to Buyer all of
Seller's interests in all proceeds payable to Seller in connection with the
Taking. Notwithstanding anything herein to the contrary, if any such Taking
does not involve condemnation of Seller's leasehold interest under the Leases
or the Options, then Seller shall have no option of terminating this
Agreement.
SECTION 10. INDEMNIFICATION
This Section Intentionally Deleted.
SECTION 11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
13
<PAGE>
No representations or warranties whatever are made by any party to this
Agreement except as specifically set forth in this Agreement or in an instrument
delivered pursuant to this Agreement. The representations, warranties and
indemnities made by the parties to this Agreement and the covenants and
agreements to be performed or complied with by the respective parties under this
Agreement before the Closing Date shall be deemed to be continuing and shall
survive the Closing; provided, however, the representations and warranties of
Seller shall terminate on the date which is one year after the Closing Date.
SECTION 12. MISCELLANEOUS
12.1 EFFECT OF HEADINGS. The subject headings of paragraphs and
subparagraphs of this Agreement are included for purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions.
12.2 ENTIRE AGREEMENT/SURVIVAL OF AGREEMENT. This Agreement constitutes
the entire agreement between the parties hereto and supersedes all prior and
contemporaneous agreements, representations and understandings of the parties
regarding the subject matter of this Agreement. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by the
parties hereto. This Agreement and all provisions hereof shall survive the
Closing contemplated hereunder except as expressly set forth herein to the
contrary.
12.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.4 BINDING EFFECT. This Agreement shall be binding on and shall inure to
the benefit of the parties to it and their respective successors and assigns.
12.5 NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given on the date of
service, if served personally on the party to whom notice is given, if sent by
facsimile with electronic confirmation of delivery, or on the third day after
mailing, if mailed to the party to whom notice is to be given, by first class
mail, registered or certified, postage prepaid and properly addressed as
follows:
To Buyer at:
Etkin-Johnson Group LLC
14
<PAGE>
1512 Larimer St., Suite 325
Denver, CO 80202
Attention: David L. Johnson
Phone: 303-629-5354
Fax: 303-629-5451
with a copy to:
LeBoeuf, Lamb, Greene & MacRae
370 17 Street, Suite 2600
Denver, Colorado 80202-5626
Attention: Barry Permut, Esq.
Phone: 303-291-2720
Fax: 303-297-0422
To Seller at:
Rehabilicare
1811 Old Highway 8
New Brighton, Minnesota 55112
Attention: David Kaysen, CEO
Phone: 612-638-0419
Fax: 612-638-0477
with a copy to:
Malkerson Gilliland Martin LLP
1500 AT&T Tower
901 Marquette Avenue
Minneapolis, Minnesota 55402
Attention: Kathleen Martin
Phone: 612-344-1702
Fax: 612-344-1414
12.6 GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Colorado.
12.7 BROKER'S FEES. Each of the parties represents and warrants that
except for Seller's engagement of CB Commercial whose commission will be paid by
Seller, it has not employed, retained or otherwise utilized any broker or finder
in connection with any of the
15
<PAGE>
transactions contemplated by this Agreement and no other broker or person is
entitled to any commission or finder's fees in connection with any of these
transactions. The parties each agree to indemnify and hold harmless one
another against any loss, liability, damage, cost, claim or expense incurred
by reason of any brokerage commission or finder's fee alleged to be payable
because of any act, omission or statement of the indemnifying party.
12.8 RECOVERY OF LITIGATION COSTS. If any legal action or any arbitration
or other proceeding is brought for the enforcement of this Agreement, or because
of an alleged dispute, breach, default, or misrepresentation in connection with
any of the provisions of this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
12.10 SELLER'S EXECUTION OF AGREEMENT. Provided Seller executes and
returns to Buyer a counterpart of this Agreement within five (5) business days
of the day first above set forth, this Agreement shall thereupon become a
binding and enforceable contract between Seller and Buyer.
STAODYN, INC.,
a Delaware corporation
By:
--------------------------------------
Its:
--------------------------------
Date of Execution by Seller: August ___, 1998
ETKIN-JOHNSON GROUP LLC,
a Colorado limited liability company
By:
--------------------------------------
Its Manager
Date of Execution by Buyer: August ___, 1998
16
<PAGE>
EXHIBIT 1.1(a)
Legal Description of Land
PARCEL A:
Lots 1 and 3, Block 1, Longmont Industrial Park, Unit No. 2, Replat C, County of
Boulder, Colorado
PARCEL B:
Lot 2, Longmont Industrial Park Replat of Lot 4, Unit No. 2, Replat D, County of
Boulder, Colorado
PARCEL C:
Lot 2, Block 1, Longmont Industrial Park Unit No. 2, Replat C, County of
Boulder, State of Colorado
17
<PAGE>
EXHIBIT 1.1(c)
Tangible Personal Property
1. The air compressors located in the Building.
2. The phone system currently installed in the Building.
18
<PAGE>
EXHIBIT 6.2(f)
Transferor Certification of Non-Foreign Status
To inform ______________________, a ______________________corporation
("Transferee") that withholding of tax under Section 1445 of the Internal
Revenue Code of 1986, as amended ("Code") will not be required upon the
transfer of certain real property to the Transferee by
________________________ ("Transferor"), the undersigned hereby certifies the
following on behalf of the Transferor:
1. The Transferor is not a foreign corporation, foreign partnership,
foreign trust, or foreign estate (as those terms are defined in the Code and the
Income Tax Regulations promulgated thereunder);
2. The Transferor's U. S. employer identification/social security number
is ________________________; and
3. The Transferor's office/personal residence address is
____________________________________
____________________________________
____________________________________
The Transferor understands that this Certification may be disclosed to the
Internal Revenue Service by the Transferee and that any false statement
contained herein could be punished by fine, imprisonment, or both.
The Transferor understands that the Transferee is relying on this
Certification in determining whether withholding is required upon said
transfer.
Under penalty of perjury I declare that I have examined this Certification
and to the best of my knowledge and belief it is true, correct and complete, and
I further declare that I have authority to sign this document on behalf of the
Transferor.
DATE: _____________, 1998.
By:
---------------------------------------
Its:
---------------------------------------
19
<PAGE>
July 10, 1998
1225 Building, LLC VIA FACSIMILE AND OVERNIGHT UPS
Attn: Thomas P. Brock, Manager
2595 Canyon Blvd., Suite 340
Boulder, Colorado 80302
Re: Exercise of Option to Purchase Premises
located at 1225 Ken Pratt Boulevard
(formerly 1225 Florida Avenue), Longmont, Colorado
Dear Ladies and Gentlemen:
Pursuant to that certain Lease Agreement (the "Lease") dated July
16, 1993 by and between Staodyn, Inc., as tenant, and you, as landlord,
concerning the premises more fully described in the Lease and commonly now
known as 1225 Ken Pratt Boulevard (formerly known as 1225 Florida Avenue) in
the City of Longmont, County of Boulder, State of Colorado (the "Premises"),
Staodyn is hereby providing you its written notice that it is exercising its
option to purchase the Premises as set forth in Section 20 of the Lease on or
before July 10, 1999.
We anticipate examining title to the Premises shortly and will advise you if
we encounter any title issues in the course of our examination. We will
attempt to communicate with you during the course of preparing for closing to
ensure as smooth a closing as possible.
As I am certain you are aware, Staodyn recently was acquired by Rehabilicare
Inc., a Minneapolis-based company. Staodyn is now a wholly-owned subsidiary
of Rehabilicare Inc. Accordingly, all further notices and communications
regarding the Lease, including those related to Staodyn's purchase of the
Premises, should be addressed to:
David Kaysen, CEO
Rehabilicare Inc.
1811 Old Highway 8
New Brighton, MN 55112
Please feel free to call me should you have any questions in regards to
Staodyn's intended purchase of the Property.
Very truly yours,
David B. Kaysen
Chief Executive Officer
DBK/cr
<PAGE>
July 10, 1998
Pendelton Construction Co. VIA OVERNIGHT UPS
c/o Dorisine Pendelton
1228 East 4th Avenue
Longmont, CO 80501
Re: Exercise of Option to Purchase Premises
located at 1225 Ken Pratt Boulevard
(formerly 1225 Florida Avenue), Longmont, Colorado
Dear Ladies and Gentlemen:
Pursuant to that certain Lease Agreement (the "Lease") dated July 16,
1993 by and between Staodyn, Inc., as tenant, and you, as landlord,
concerning the premises more fully described in the Lease and commonly now
known as 1225 Ken Pratt Boulevard (formerly known as 1225 Florida Avenue) in
the City of Longmont, County of Boulder, State of Colorado (the "Premises"),
Staodyn is hereby providing you its written notice that it is exercising its
option to purchase the Premises as set forth in Section 20 of the Lease on or
before July 10, 1999.
We anticipate examining title to the Premises shortly and will advise you if
we encounter any title issues in the course of our examination. We will
attempt to communicate with you during the course of preparing for closing to
ensure as smooth a closing as possible.
As I am certain you are aware, Staodyn recently was acquired by Rehabilicare
Inc., a Minneapolis-based company. Staodyn is now a wholly-owned subsidiary
of Rehabilicare Inc. Accordingly, all further notices and communications
regarding the Lease, including those related to Staodyn's purchase of the
Premises, should be addressed to:
David Kaysen, CEO
Rehabilicare Inc.
1811 Old Highway 8
New Brighton, MN 55112
Please feel free to call me should you have any questions in regards to
Staodyn's intended purchase of the Property.
Very truly yours,
David B. Kaysen
Chief Executive Officer
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each Registration
Statement on Form S-8 (No. 33-26053, 33-63962, 33-63964 and 333-48155) of
Rehabilicare Inc. of our report dated September 23, 1998 appearing in this
From 10-KSB.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
September 28, 1998
<PAGE>
EXHIBIT 99
SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements regarding the future prospects of the Company must be evaluated
in the context of a number of factors that may materially affect its financial
condition and results of operations. Disclosure of these factors is intended to
permit the Company to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Most of these factors have
been discussed in prior filings by the Company with the Securities and Exchange
Commission. Although the Company has attempted to list the factors that it is
currently aware may have an impact on its operations, other factors may in the
future prove to be important and the following list should not necessarily be
considered comprehensive.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced
quarterly fluctuations in operating results and anticipates that these
fluctuations will continue. These fluctuations have been caused by various
factors, including the buying patterns of the Company's target market; the
number and timing of new product introductions and enhancements by the Company
and its competitors; the effects of industry evaluations and publicity; the
timing of product orders and shipments; marketing and promotional programs; and
economic conditions in the regions in which the Company does business. A
significant portion of the Company's operating expenses is relatively fixed in
nature and planned expenditures are based primarily on sales forecasts. If
revenue does not meet the Company's expectations in any given quarter, operating
results may be adversely affected.
DISTRIBUTION SYSTEMS. The Company has consigned inventory to approximately
2,200 clinics for direct distribution to patients. Although the Company
attempts to obligate such clinics to monitor the inventory, it has experienced
inventory losses in each year since it has commenced direct distribution and
expects such losses to continue. Further, the Company generally experiences
increased inventory loss with dissatisfied or terminated sales agents and there
can be no assurances that its reserves for lost inventory are adequate.
In addition, because private and government health care reimbursement
entities (health insurance carriers) require a substantial amount of time to
approve reimbursement for sale and rental of products, the Company's accounts
receivable have grown significantly in recent years. The Company has added
personnel to deal with collections and record keeping and has established
reserves, which it believes are adequate, for uncollectible receivables and lost
inventory. Nevertheless, there can be no assurances that the Company can
continue to generate increasing revenue; that all the revenue it generates can
be collected; that its reserves for uncollectible accounts will be adequate; or
that its relationships with clinics can be maintained.
VOLATILE MARKETS. The electrotherapy pain management market is a
relatively mature and competitive market, subject to significant fluctuations in
profitability caused by foreign competition, questions of therapeutic efficacy,
governmental regulation and private rates of reimbursement. The electrotherapy
rehabilitation market is an evolving and fragmented market with a number of
different companies offering competing treatments without any clear indication
of industry preference. There can be no assurance that the Company will ever be
able to capture a significant portion of the pain management market or that it
can establish a significant position in the electrotherapy rehabilitation
market.
COMPETITION. Competition in the medical device industry from other
electrotherapy pain management and rehabilitation device companies, as well as
from pharmaceutical companies and biotechnology companies, is intense. The
market for the Company's products, and particularly its pain management
products, is extremely competitive. Although the Company believes that the
rehabilitation products it sells distinguish it from its competitors, there can
be no assurance that the Company will be able to compete effectively in the sale
or rental of its products.
Page 33
<PAGE>
REIMBURSEMENT RATES. Most of the Company's products are sold or rented on
prescription and the sales or rental price is reimbursed to the Company or its
dealers by the patients' insurers. Both private insurers and the United States
Government as the administrator of Medicare and Medicaid will reimburse patients
for the cost of such products based on scheduled rates that they have
established. Generally the Company, and other providers of medical products,
attempt to sell and lease their products at prices approximating these
reimbursement rates. Nevertheless, private and government payers are
increasingly vigorous in their attempts to contain health care costs through
limitations on the level of reimbursement and scrutiny of items submitted for
reimbursement. In some instances, such payers have made determinations that a
form of electrotherapy is not an acceptable form of treatment and have refused
all reimbursement for that electrotherapy modality. To the extent such private
insurers or Medicare or Medicaid decrease the rate of reimbursement or refuse
reimbursement with respect to any product or line of products, the Company's
profit margins and revenues will be adversely effected.
CLINICAL EFFICACY. TENS sales were negatively affected several years ago,
and may continue to be affected, by publications questioning the efficacy of
TENS for pain relief. The mechanism through which a number of electrotherapy
modalities relieve pain is not precisely understood and although studies
generally indicate that TENS and other modalities offered by the Company are
effective in relieving chronic pain, there can be no assurance that contrary
studies or publicity will not negatively impact sales in the future. Such
studies have, and can be expected to continue to have, a negative impact on
reimbursement.
GOVERNMENTAL REGULATION. The Company's products are subject to changing
Federal regulation governing the use, marketing and sale of medical products.
Generally, medical products must be "substantially equivalent" to existing
medical products or will be subject to an extensive premarket approval process
that often requires clinical testing. The Company has received approval from
the Food and Drug Administration (FDA) for ability to market its existing
products based on substantial equivalence. Nevertheless, there can be no
assurance that approval to market such products for broader medical
applications, or other products the Company may introduce, will be granted on
such basis. The FDA also regulates the manufacture of medical devices under its
"good manufacturing practices" regulations and requires that the manufacturing
process follow certain pre-established procedures. The FDA and state regulatory
bodies also regulate the form of advertisement and methods used to sell and
distribute medical products. Although the Company believes that its
manufacturing processes comply with good manufacturing practices and that all of
its advertising and sales practices comply with applicable law, a contrary
finding by a regulatory body could have an adverse effect on its operations.
PRODUCT LIABILITY. Like most producers of medical products, the Company
faces the risk of product liability claims and unfavorable publicity in the
event that the use of its products causes injury or has other adverse effects.
Although the Company has product liability insurance for risks of up to
$2,000,000 and has not been subject to any material claims for product
liability, there can be no assurance that it will be able to avoid product
liability exposure.
LACK OF PROPRIETARY PROTECTION. The Company holds various patents and
plans to seek protection for certain technology in the future. However, the
Company has not applied for protection on the technology incorporated into other
products that it currently offers. In the absence of proprietary protection,
the Company is vulnerable to competitors that may attempt to copy its products.
In addition, although the Company has never been the subject of a suit for
patent or trademark infringement and does not believe that the technology
incorporated into its products infringes upon the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertion will not result in
royalty payments or costly litigation.
Page 34
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon certain key personnel, including Mr. Kaysen, its
President and Chief Executive Officer. The loss of Mr. Kaysen, or other key
management or technical personnel, could adversely affect the Company's
business. In addition, the Company's success will depend on its ability to
attract and retain skilled personnel in all areas of its business. There can be
no assurance that the Company will be successful in attracting and retaining
such personnel.
LIMITED PUBLIC MARKET/POSSIBLE VOLATILITY OF STOCK PRICE. To date there
has been a limited trading market in the Company's Common Stock. The Company
believes that factors such as new product announcements by the Company and
quarter-to-quarter variations in financial results could cause the market price
of the Common Stock to fluctuate substantially. In addition, the stock market
in general has recently experienced significant price and volume fluctuations
unrelated to the performance of individual companies. Broad market fluctuations
as well as general economic or political conditions may adversely affect the
market price of the Common Stock.
Page 35
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 919,765
<SECURITIES> 0
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