SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
____________________________________
FORM 10-Q
____________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 30, 1996.
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________.
Commission File Number 0-11392
SPAN-AMERICA MEDICAL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
South Carolina 57-0525804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
70 Commerce Center
Greenville, South Carolina 29615
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (864) 288-8877
Not Applicable
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods 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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
class of common stock, as of the latest practical date.
Common Stock, No Par Value - 3,241,042 shares as of May 1, 1996
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INDEX
SPAN-AMERICA MEDICAL SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 30, 1996 and
September 30, 1995 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - three and six months
ended March 30, 1996 and April 1, 1995 . . . . . . . . . 4
Consolidated Statements of Cash Flows - six months ended
March 1, 1996 and April 1, 1995. . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements - March 30, 1996 . 6
Item 2. Management's Discussion and Analysis of Interim
Financial Condition and Results of Operations . . . . 8
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPAN-AMERICA MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 30, Sept. 30,
1996 1995
(Unaudited) (Note)
ASSETS
Current Assets
Cash and equivalents $ 280,074 $ 1,242,396
Securities available for sale 2,240,653 2,876,449
Accounts receivable, net of allowances
of $439,000 at March 30, 1996 and
$355,000 at September 30, 1995 4,726,053 4,446,913
Inventories - Note B 3,756,430 2,800,896
Prepaid expenses and other 228,034 221,929
Total Current Assets 11,231,244 11,588,583
Property and equipment, Net - Note C 5,251,951 5,457,350
Costs in excess of fair value of net
assets acquired, net of accumulated
amortization of $218,245 at March 30,
1996 and $172,383 at September 30, 1995 2,544,305 1,691,197
Other assets - Note D 2,095,889 1,876,573
$21,123,389 $20,613,703
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,223,959 $ 1,651,796
Accrued and sundry liabilities 735,949 1,325,334
Current portion of long-term debt 70,375 70,375
Total Current Liabilities 3,030,283 3,047,505
Long-term Debt, less current portion 251,156 286,344
Deferred Income Taxes and Compensation 2,006,178 1,844,517
Shareholders' Equity
Common Stock, no par value, 20,000,000
shares authorized; issued and
outstanding 3,241,042 shares at March 30,
1996 and 3,175,437 shares at September 30,
1995 4,516,894 4,225,122
Additional paid-in capital 145,834 145,834
Retained Earnings 11,494,575 11,421,100
16,157,303 15,792,056
Less guaranteed ESOP obligation 321,531 356,719
Total Shareholders' Equity 15,835,772 15,435,337
$21,123,389 $20,613,703
Note:The Balance Sheet at September 30, 1995 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
Net Sales $7,470,758 $7,725,672 $14,519,943 $14,634,506
Cost of Goods Sold 5,701,111 5,722,903 10,657,601 10,651,342
Gross Profit 1,769,647 2,002,769 3,862,342 3,983,164
Selling and
Marketing Expenses 1,304,806 1,168,469 2,416,640 2,335,586
General and
Administrative
Expenses 603,909 662,243 1,219,416 1,296,824
(Loss)/Income
from Operations (139,068) 172,057 226,286 350,754
Other (expense)/income:
Interest expense (8,017) (16,005)
Investment income
and other 74,939 72,393 165,364 136,313
66,922 72,393 149,360 136,313
(LOSS)INCOME BEFORE
INCOME TAXES (72,146) 244,450 375,646 487,067
Provision For/
(Benefit From) Income
Taxes (27,000) 92,700 141,000 183,000
NET INCOME/(LOSS) $(45,146) $151,750 $234,646 $304,067
Earnings/(Loss) Per
Common Share -Note E $(.01) $.05 $.07 $.09
Dividends per
Common Share $.025 $.025 $.05 $.05
Weighted Average
Shares Outstanding 3,224,570 3,268,737 3,214,889 3,259,272
See Notes to Consolidated Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 30, April 1,
1996 1995
OPERATING ACTIVITIES
Net Income $234,646 $304,067
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 525,162 547,824
Provision for losses on accounts
receivable 78,000 23,750
Loss on disposal of property, plant
and equipment and abandonment
of leasehold improvements 15,475 27,854
Gain on sale of other assets (3,640)
Increase in cash value of life
insurance (73,029) (91,005)
Deferred compensation 61,660 31,819
Changes in operating assets and liabilities:
Accounts receivable (368,759) (875,791)
Inventory (914,814) 262,396
Prepaid expenses and other current assets (145,313) 125,847
Accounts payable and accrued expenses (17,221) (73,145)
NET CASH (USED FOR)/PROVIDED BY
OPERATING ACTIVITIES (604,192) 279,976
INVESTING ACTIVITIES
Acquisition of Embracing Concepts, Inc. (592,435)
Purchases of marketable securities (800,000) (107,542)
Proceeds from the sale of marketable
securities 1,444,868
Purchases of property,plant and
equipment (201,171) (140,706)
Proceeds from sale of property, plant
and equipment 63,000
Payments for other assets (64,987) (25,544)
Proceeds from sale of other assets 3,750
NET CASH (USED FOR) INVESTING ACTIVITIES (213,725) (207,042)
FINANCING ACTIVITIES
Dividends paid (161,171) (163,412)
Common Stock issued upon exercise of options 50,250
Purchase and retirement of Common Stock (33,484)
NET CASH (USED FOR) FINANCING ACTIVITIES (144,405) (163,412)
(DECREASE) IN CASH AND CASH EQUIVALENTS (962,322) (90,478)
Cash and cash equivalents at beginning
of period 1,242,396 1,557,542
CASH AND CASH EQUIVALENTS AT END OF PERIOD $280,074 $1,467,064
See Notes to Consolidated Financial Statements.
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SPAN-AMERICA MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and six months periods ended
March 30, 1996 are not necessarily indicative of the results that
may be expected for the year ended September 28, 1996. For
further information, refer to the Company's annual report on Form
10-K for the year ended September 30, 1995.
NOTE B - INVENTORIES
The components of inventories are as follows:
March 30, Sept. 30,
1996 1995
Raw Materials $2,950,312 $2,140,095
Work in Process 53,476 17,513
Finished Goods 752,642 643,288
$3,756,430 $2,800,896
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized by major
classification as follows:
March 30, Sept. 30,
1996 1995
Land $ 317,343 $ 317,343
Land Improvements 240,016 240,016
Buildings 3,622,456 3,613,216
Machinery & Equipment 8,136,576 8,047,499
Furniture & Fixtures 603,032 591,024
Automobiles 9,520 9,520
Leasehold Improvements 92,420 92,420
13,021,363 12,911,038
Less Accumulated Depreciation 7,769,412 7,453,688
$ 5,251,951 $ 5,457,350
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NOTE D - OTHER ASSETS
Other assets consist of the following:
March 30, Sept. 30,
1996 1995
Patents, net of accumulated
amortization of $427,680 at
March 30, 1996 and $378,190 at
September 30, 1995 $ 677,272 $ 684,384
Cash value of life insurance
policies 1,087,785 1,014,756
Terminated contract rights,
net of accumulated amortization
of $204,596 at March 30, 1996 and
$175,368 at September 30, 1995. 87,684 116,912
Other 243,148 60,521
$2,095,889 $1,876,573
NOTE E - EARNINGS PER COMMON SHARE
Earnings per common share are computed using the weighted average
number of shares outstanding. The effect of common stock
equivalents on earnings per share is not material. Future shares
related to the Healthflex acquisition have not been included in a
fully diluted earnings per share calculation as their effect
would be anti-dilutive.
NOTE F - ACQUISITION OF EMBRACING CONCEPTS, INC.
On February 8, 1996, the Company acquired substantially all of
the assets of Embracing Concepts, Inc., a New York based company
which produced therapeutic seating cushions. The acquisition was
accounted for as a purchase.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter of fiscal 1996
declined 3% to $7.5 million compared to $7.7 million in
the second quarter of fiscal 1995. The decline in
sales was primarily due to a significant reduction in
consumer convoluted foam sales which were affected in
January and February partly by adverse weather
conditions. The decline in consumer sales was
partially offset by sales increases in the Company's
medical business unit. The combination of a 3% drop in total
net sales and a 1% increase in total expenses resulted in a
net loss of $45,000 ($.01 per share) for the second
quarter of fiscal 1996 compared to net income for the
second quarter of fiscal 1995 of $152,000 ($.05 per
share).
For the year to date in fiscal 1996, net sales fell 1%
to $14.5 million from $14.6 million in the same period
last year. The sales decrease for the year to date
resulted from lower unit and dollar volume of the
Company's consumer and industrial foam products which
was not fully offset by a 9% increase in medical sales.
Net income for the first half of fiscal 1996 was
$235,000 ($.07 per share), down 23% from $304,000 ($.09
per share) in fiscal 1995. The decline in earnings was
mainly due to slightly lower sales volume and higher
manufacturing costs during the period.
The Company's total medical sales increased by 10% to
$3.6 million in the second quarter this year from $3.3
million in the same quarter last year due mainly to an
increase in dollar volume and unit sales of mattresses,
positioners, and convoluted foam overlays. Sales of
the Company's PressureGuard IV and DynaGuard dynamic
mattresses declined during the second quarter due to a
change, effective January 1, 1996, in the Medicare
reimbursement criteria. The sales decline in these two
product lines was offset by increases in sales of other
medical products.
For the year to date in fiscal 1996, medical sales
increased by 9% to $7.1 million from $6.5 million in
the same period last year due also to higher unit and
dollar volume of all major product lines. For the
remainder of the fiscal year, management expects sales
of dynamic mattress products to decline from first and
second quarter levels due to the reimbursement change
discussed above. However, sales of medical foam
overlays and positioner products are expected to
increase during the rest of fiscal 1996 as a result of
a new supply contract with a major distributor. Shipments
under this new contract are expected to
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begin in June 1996. Total medical sales for the
remainder of the 1996 fiscal year are expected to be
slightly higher than the same period in fiscal 1995.
Sales of consumer foam products declined by 27% during the
second quarter to $1.6 million from $2.2 million
in the same period last year. The decline in sales was
primarily due to a significant reduction in unit volume of
consumer convoluted foam pads which was affected in
January and February by adverse weather conditions.
Year to date sales of consumer foam products decreased
16% to $2.9 million from $3.5 million for the same
reason. Management expects consumer foam sales to
increase during the remainder of fiscal 1996.
Industrial foam sales decreased by 7% in the second
quarter of fiscal 1996 to $750,000 from $805,000 in the
same quarter last fiscal year. For the year to date,
industrial sales declined 10% to $1.5 million from $1.6
million in fiscal 1995. The second quarter and year to
date sales decreases were primarily the result of a
temporary decline in sales to an existing customer.
Industrial foam sales in fiscal 1996 are expected to be
slightly higher than in fiscal 1995.
Contract packaging sales increased 6% to $1.5 million
in the second quarter of fiscal 1996 from $1.4 million
in the second quarter last year due to a higher
demand for contract packaging products. Year to date
contract packaging sales remained approximately level
at $3 million as compared to the same period in fiscal
1995. Management expects that contract packaging sales
for fiscal 1996 will be slightly higher than those of
fiscal 1995.
The Company's gross profit declined approximately 12%
to $1.8 million for the second quarter of 1996 from
$2.0 million in the second quarter of fiscal 1995. The
gross margin percentage for the second quarter of
fiscal 1996 declined to 24% as compared to 26% in the
second quarter last year. The declines in gross profit
level and gross margin percentage were due to lower
sales volume and higher manufacturing costs resulting
in part from changes in product mix. Year-to-date
gross profit decreased by 3% to $3.9 million in the
first six months of fiscal 1996 from $4.0 million for
the same period last year. The year-to-date gross
margin percentage remained level at 27% compared to the
same period last year. Management expects the
Company's gross margin percentage for fiscal 1996 to be
lower than that of fiscal 1995 due mainly to
an expected shift in medical product mix toward lower
margin products.
Sales and marketing expenses rose by 12% to $1.3
million for the second quarter of fiscal 1996 compared
to $1.2 million in the same quarter last year. For the
9
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year to date in fiscal 1996, these expenses increased
by 3% to $2.4 million as compared to $2.3 million in
the same period last year. The majority of the
increase in sales and marketing expenses occurred in
medical product development and consumer package
development. Total sales and marketing expenses for
the full 1996 fiscal year are expected to be higher
than those of fiscal 1995.
General and administrative expenses declined by 9% for
the second quarter of fiscal 1996 to $604,000 as
compared to $662,000 in the second fiscal quarter of
last year. The decrease resulted mainly from reduced
compensation and insurance expenses. For the fiscal
year to date general and administrative expenses
decreased by 6% to $1.2 million compared to $1.3
million for the first six months of fiscal 1995 for the
same reasons. General and administrative expenses for
the full 1996 fiscal year are expected to be slightly
lower than in fiscal 1995.
During the first six months of fiscal 1996, the Company
paid dividends of $161,000, or 68% of net income for
the year-to-date period. This amount represented two
quarterly dividends of $.025 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $650,000 to fund its
operations during the first six months of fiscal 1996.
The Company's working capital decreased by $340,000 or
4% during the six months ended March 30, 1996 as a
result of decreases in cash and marketable securities
related in part to the Company's acquisition of
Embracing Concepts, Inc. in February 1996. The
Company's current ratio decreased to 3.7 at March 30,
1996 from 3.8 at fiscal year end 1995.
Accounts receivable, net of allowances, increased by
$279,000 (6%) to $4.7 million due to longer collection
times on medical and consumer sales. All of the
Company's accounts receivable are unsecured.
Inventory increased by $956,000, or 34%, during the
first two quarters of fiscal 1996 to $3.8 million. The
increases occurred primarily in medical and consumer
raw materials inventory. Medical raw material
inventory was higher mainly because the Company began
manufacturing a component which had previously been purchased
from an outside supplier. The increase in consumer raw
material inventory reflects the seasonal peak in
production of Terryfoam products. Management expects
inventory levels to decrease by fiscal year end 1996.
Net property and equipment decreased by $205,000, or
4%, during the first six months of fiscal 1996. The
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change resulted from the combination of capital
expenditures of $208,000 and normal depreciation
expense. Management expects capital expenditures
during the remainder of fiscal 1996 to increase
slightly over the first half of the fiscal year.
Costs in excess of the fair value of net assets
acquired increased by approximately $853,000, net of
accumulated amortization. The change was primarily due
to the Company's acquisition of Embracing Concepts,
Inc. which is discussed below and the issuance in
October 1995 of 50,171 shares of its common stock at an
approximate market value of $237,000 as an additional
purchase price pursuant to the agreement by which the
Company acquired Healthflex in February 1992.
On February 8, 1996, the Company acquired substantially
all of the assets of Embracing Concepts, Inc., a New
York based company which produced therapeutic seating
cushions. The acquisition was accounted for as a
purchase. The purchase price was approximately
$590,000 and was funded from the Company's existing
cash reserves.
The Company's trade accounts payable increased by
$572,000 (35%) to $2.2 million during the first two
quarters of fiscal 1996. The increase was due mainly
to normal monthly fluctuations in accounts payable
balances associated with the increase in inventory
levels. Accrued and sundry liabilities decreased by
$589,000 (44%) to $736,000 as compared to fiscal year
end 1995 primarily due to a decline in income tax payable
and accrued property taxes.
IMPACT OF INFLATION
Inflation was not a significant factor for the Company
during the first two quarters of fiscal 1996. Higher
inflation rates could impact the Company through higher
raw material costs. The Company's profit margin could
be adversely affected to the extent that the Company is
unable to pass along to its customers any increased
costs.
11
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company and its subsidiary are from time to
time parties to various legal actions arising
in the normal course of business. However,
management believes that as a result of legal
defenses and insurance arrangements, there are
no proceedings threatened or pending against
the Company that, if determined adversely,
would have a material adverse effect on the
business or the Company's operations or
financial position.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security
Holders -
The Company held its Annual Meeting of
Shareholders on February 16, 1996. At this
Annual Meeting, Thomas F. Grady, J. Ernest
Lathem, and James M. Shoemaker were elected to
three-year terms as Directors. Thomas D.
Henrion was elected to a one-year term, filling
the unexpired term of Ray Tortolani who retired
from the Board. The voting details are as
follows:
For Withheld Not voted
Thomas F. Grady 2,353,577 395,846 476,185
J. Ernest Lathem 2,360,521 388,902 476,185
James M. Shoemaker 2,270,721 478,702 476,185
Thomas D. Henrion 2,359,221 390,202 476,185
ITEM 5. Other Information - None
ITEM 6. Exhibits & Reports on Form 8-K
(a) Exhibit 10. Agreement For Sale and Purchase of
Assets By and Among Span-America Medical
Systems, Inc., Embracing Concepts, Inc., and
Edmund K. Maier February 6, 1996
(b) Exhibit 27 Financial Data Schedule
(For SEC Use Only)
(c) None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
SPAN-AMERICA MEDICAL SYSTEMS, INC.
/s/ Richard C. Coggins
Richard C. Coggins
Vice President - Finance
/s/ Charles B. Mitchell
Charles B. Mitchell
Pres. and Chief Executive Officer
DATE: May 10, 1996
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AGREEMENT FOR SALE AND PURCHASE OF ASSETS
BY AND AMONG
SPAN-AMERICA MEDICAL SYSTEMS, INC.
EMBRACING CONCEPTS, INC.
AND
EDMUND K. MAIER
FEBRUARY 6, 1996
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1.
THE CLOSING.....................................................................................................5
1.1 General Provisions.........................................................................................5
SECTION 2.
PURCHASE OF ASSETS AND ASSUMPTION OF LIABILITIES...............................................................5
2.1 The Assets.................................................................................................5
2.2 Excluded Assets............................................................................................6
2.3 Assumption of Liabilities..................................................................................6
SECTION 3. PURCHASE PRICE...............................................................................................6
3.1 Purchase Price.............................................................................................6
3.2 Establishment of Purchase Price and Adjustments thereto...............................................6
SECTION 4. REPRESENTATIONS AND WARRANTIES OF MAIER AND ECI..............................................................7
4.1 Incorporation, Powers and Qualification....................................................................7
4.2 Capitalization.............................................................................................7
4.3 Partnerships, Etc..........................................................................................7
4.4 Subsidiaries...............................................................................................7
4.5 Corporate Documents........................................................................................7
4.6 Pending Litigation.........................................................................................7
4.7 Ownership of Stock.........................................................................................7
4.8 Officers, Directors and Employees..........................................................................8
4.9 Business of ECI............................................................................................8
4.10 Financial Statements.......................................................................................8
4.11 Absence of Undisclosed Liabilities.........................................................................8
4.12 Absence of Certain Changes.................................................................................8
4.13 Tax Returns................................................................................................8
4.14 Authorization and Execution of Documents...................................................................9
4.15 Contracts..................................................................................................9
4.16 Employment Contracts and Union Obligations.................................................................9
4.17 Insurance Policies.........................................................................................9
4.18 Benefit Plans..............................................................................................9
4.19 Liens, Mortgages, Charges and Encumbrances.................................................................9
4.20 Notes Payable..............................................................................................9
4.21 Notes Receivable...........................................................................................9
4.22 Leases.....................................................................................................9
4.23 Properties.................................................................................................9
4.24 Disclosure.................................................................................................9
4.25 Patent and Trademark Infringement.........................................................................10
4.26 Trademarks and Copyrights.................................................................................10
4.27 Compliance With Applicable Laws, Regulations and Obligations..............................................10
4.28 Environmental Matters.....................................................................................10
4.29 Reliance..................................................................................................10
SECTION 5. REPRESENTATIONS AND WARRANTIES OF SPAN.......................................................................10
5.1 Incorporation, Powers and Qualification...................................................................10
5.2 Authorization and Execution of Documents..................................................................10
2
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5.3 Disclosure................................................................................................11
5.4 General...................................................................................................11
5.5 Compliance With Applicable Laws, Regulations and Obligations..............................................11
5.6 Reliance..................................................................................................11
SECTION 6. INDEMNIFICATION ............................................................................................11
6.1 Survival of Representations, Warranties and Agreements....................................................11
6.2 Indemnification...........................................................................................11
6.3 Limitations on Indemnification............................................................................12
6.4 Right of Setoff...........................................................................................12
SECTION 7. ADDITIONAL COVENANTS OF THE PARTIES........................................................................12
7.1 Access....................................................................................................12
7.2 Confidentiality...........................................................................................12
7.3 Expenses..................................................................................................13
7.4 Risk of Loss..............................................................................................13
7.5 Brokers...................................................................................................13
7.6 Employment Agreement.......................................................................................13
SECTION 8. CONDUCT OF BUSINESS PENDING CLOSING..........................................................................13
8.1 Conduct of ECI Pending Closing............................................................................13
SECTION 9. CONDITIONS PRECEDENT TO CLOSING BY SPAN......................................................................14
9.1 Representations and Warranties True at Closing............................................................14
9.2 Performance...............................................................................................14
9.3 Delivery of Documents.....................................................................................15
9.4 Conduct of Business.......................................................................................15
9.5 Consents and Approvals....................................................................................15
9.6 Certificate...............................................................................................15
9.7 Opinion of Counsel........................................................................................15
9.8 Due Diligence.............................................................................................16
9.9 Approval of Span's Board of Directors.....................................................................16
9.10 Compliance with New York Sales Tax and Bulk Transfer Laws.................................................16
SECTION 10. CONDITIONS PRECEDENT TO CLOSING BY MAIER AND ECI............................................................16
10.1 Representations and Warranties True at Closing...........................................................16
10.2 Performance..............................................................................................16
10.3 Delivery of Documents....................................................................................16
10.4 Conduct of Business......................................................................................17
10.5 Certificate..............................................................................................17
10.6 Opinion of Counsel.......................................................................................17
SECTION 11. MISCELLANEOUS......................................................................................17
11.1 Amendment................................................................................................17
11.2 Parties in Interest......................................................................................18
11.3 Governing Law............................................................................................18
11.4 Notices..................................................................................................18
11.5 Headings.................................................................................................18
11.6 Severability.............................................................................................18
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11.7 Counterparts.............................................................................................19
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SCHEDULES
Schedule 2.1(1) Customer Rights, etc.
Schedule 2.1(2) Sales Agents Rights, etc.
Schedule 2.1(3) Computers, Furniture, Fixtures, Office Equipment and
Other Tangible Personal Property (Other than
Inventory)
Schedule 2.1(4) Inventory
Schedule 2.1(5) Trademarks, Tradenames, Corporate Names, Patents,
Licenses and Other Intangible Property
Schedule 2.2 Excluded Assets
Schedule 2.3 Assumption of Liabilities
Schedule 3.2 Estimated Value of Assets
Schedule 4.1 States in which ECI is Required to be Qualified as a
Foreign Corporation
Schedule 4.2 Capitalization - Exceptions
Schedule 4.6 Pending Litigation/Disputes
Schedule 4.7 Ownership of Stock Exceptions
Schedule 4.8 Officers, Directors and Employees
Schedule 4.11 Otherwise Undisclosed Liabilities
Schedule 4.12 Certain Changes
Schedule 4.15 Contracts, Commitments, Agreements and Obligations,
etc.
Schedule 4.16 Employment Contracts
Schedule 4.17 Insurance Policies
Schedule 4.18 Employee Benefit Plans
Schedule 4.19 Liens, Mortgages, Charges and Encumbrances
Schedule 4.20 Notes Payable
Schedule 4.21 Notes Receivable
Schedule 4.22 Leases
Schedule 4.23 Real Property
Schedule 7.6(1) Employment Agreement with Edmund K. Maier
Schedule 7.6(2) Employment Agreement with Laurie Rappl
Schedule 7.6(3) Employment Agreement with Joseph A. Benedict
EXHIBITS
Exhibit A..... Financial Statements of ECI
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THIS AGREEMENT FOR SALE AND PURCHASE OF ASSETS (this Agreement for Sale
and Purchase of Assets, together with the exhibits and schedules attached hereto
being hereinafter referred to as "Agreement"), made and entered into this 6th
day of February, 1996, by and between Span-America Medical Systems, Inc., a
corporation organized and existing under the laws of the State of South
Carolina, with its principal place of business in Greenville, South Carolina
("Span"), and Embracing Concepts, Inc., a corporation organized and existing
under the laws of the State of New York, with its principal place of business in
Rochester, New York ("ECI") and, only to the extent expressly provided
hereinafter, Edmund K. Maier, an individual ("Maier"), who is President and CEO
of ECI.
W-I-T-N-E-S-S-E-T-H:
WHEREAS, the boards of directors of Span and ECI deem it in the best
interests of their respective corporations and stockholders for Span to purchase
certain assets of ECI upon the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the respective representations,
warranties and covenants set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1.
THE CLOSING
1.1 General Provisions. Subject to the terms and conditions hereof, at
the closing of the transactions contemplated herein (the "Closing"), ECI shall
sell and Span shall purchase substantially all of the assets of ECI included
herein. The Closing shall be held on or about February 12, 1996 ("Closing Date")
in the offices of Wyche, Burgess, Freeman & Parham, P. A. or at such other time
and/or place as the parties hereto may mutually agree; provided, however, that
in the event that the Closing has not occurred by March 31, 1996, either party
hereto shall have the right to terminate this Agreement, except that if such
failure to close is the result of the breach or nonperformance of a
representation, warranty or covenant hereunder, only the aggrieved party shall
have the right to terminate this Agreement. It is the intention of Span to close
at the earliest practicable date and it shall use its best efforts to close on
or before February 28, 1996.
SECTION 2.
PURCHASE OF ASSETS AND ASSUMPTION OF LIABILITIES
2.1 The Assets. The Assets to be purchased shall include all of the
following assets of ECI:
(1) All customer contracts, rights, lists, records, billing and
all other information relating to customers, including the
items set forth on Schedule 2.1(1).
(2) All sales agents rights, lists, records, payment and other
information relating to sales agents, including the items set
forth on Schedule 2.1(2);
(3) All computers, furniture, fixtures, office equipment and other
tangible personal property (other than inventory), including
the items set forth on Schedule 2.1(3);
(4) All inventory, including the items set forth on Schedule
2.1(4);
(5) All trademarks, tradenames, corporate names, patents (issued,
pending and applied for), licenses, goodwill, and any other
intangible assets, including leases and contracts, not herein
excluded, including the items set forth on Schedule 2.1(5).
Span will grant to ECI a nonexclusive license under the
tradenames "Embracing Concepts" and "ECI" and the ECI company
logo for a period not to exceed one year, enabling ECI to
conduct an orderly phasing
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out of its related business matters;
(6) All other assets of any type or nature used in ECI's
operations, except for those assets specifically excluded
pursuant to Section 2.2.
2.2 Excluded Assets. The following assets of ECI, owned as of the
Closing Date, are excluded from this sale and shall remain the property of ECI:
(1) Cash on hand, cash in accounts and certificates of deposit;
(2) Accounts receivable, whether paid, billed, or unbilled and due
for services rendered on or prior to the Closing Date,
including trade accounts, stockholder accounts, officer
accounts, affiliate and employees' accounts receivable. Span
shall cooperate with ECI as reasonably requested with respect
to credit extended to customers from which accounts receivable
to ECI remain unpaid subsequent to Closing;
(3) Notes receivable from stockholders, officers, employees, and
others;
(4) Any real property.
(5) Any other assets, as set forth on Schedule 2.2.
2.3 Assumption of Liabilities. Span is not assuming or agreeing to pay
or purchase any liabilities or obligations of ECI of any nature whatsoever,
except as follows:
(1) Liabilities or obligations of the Business incurred by Span in
the ordinary course of business following the Closing Date
(assuming the Closing of this transaction); and
(2) Any liabilities or obligations of the Business set forth on
Schedule 2.3.
SECTION 3. PURCHASE PRICE
3.1 Purchase Price. The total purchase price (the "Purchase Price") for
the Assets shall be $580,000 in cash, payable on the Closing Date, plus a
royalty on the sale by Span of ECI products as hereinafter defined consisting of
the greater of $20,000 per year or 5% of the net sales of ECI products for a
period of five (5) years following the Closing Date.
(1) The purchase price of $580,000 will be paid by cashier's check
or the wire transfer to a bank account designated by ECI.
(2) Royalty payments will be made as soon as practicable, but no
longer than 30 days, following the end of each calendar
quarter following the Closing Date.
3.2 Establishment of Purchase Price and Adjustments thereto. Effective
as of the Closing Date, Span's independent certified accountants will verify at
Span's expense the book value of the assets being acquired by Span and such
value will be binding upon the parties hereto.
(1) In the event that the book value of the assets described in
paragraph 2.1(3) and (4)to be acquired by Span is at least 10%
less at Closing then the estimated value shown on Schedule
3.2, Span shall have the right to reduce the $580,000 purchase
price on a dollar for dollar basis to reflect any lesser book
value of the assets as so determined or if the knowledge and
expertise of certain employees of ECI shall not be available
to Span after Closing, the purchase price shall be adjusted
appropriately downward.
(2) The purchase price will not be adjusted upward in the event
that the assets have a greater book value than that shown on
Schedule 3.2.
(3) The assets will be valued in accordance with generally
accepted accounting principles.
(4) Net Sales are defined as gross sales of ECI products less
returns, allowances and sales discounts actually creditable
and taken against ECI products. ECI products are defined as
all inventory purchased hereunder and all products made by or
for Span which are based in any material way on any of ECI's
current products, including such products as they may be
improved or modified
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regardless of the degree of improvement or modification, but
shall not apply to any new and different products designed and
developed by Span subsequent to the Closing. Span agrees to
keep for at least two years full and accurate books of account
and records of its transactions for which royalties are
payable under this Agreement. ECI may on reasonable notice to
Span examine such books of account and records through ECI's
independent certified public accountants, but only for the
purpose of determining Span's compliance or extent of
noncompliance with its royalty obligations under this
Agreement.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF MAIER AND ECI
ECI and Maier jointly and severally warrant and represent to Span as
follows:
4.1 Incorporation, Powers and Qualification. ECI is a corporation duly
organized, existing and in good standing under the laws of the State of New York
and is entitled to own its properties and assets and has all requisite corporate
power and authority to carry on its business as now conducted by it. ECI is not
licensed or qualified as a foreign corporation under the laws of any state and
neither the character nor location of its properties nor the nature of its
business makes licensing or qualification in any foreign jurisdiction necessary
to the best of its or his knowledge. Any exceptions to the foregoing are
disclosed on Schedule 4.1.
4.2 Capitalization. The entire authorized capital stock of ECI is 200
shares of common stock, no par value, (the "ECI Common Stock") of which 100
shares are validly issued, fully paid, nonassessable and outstanding. There are
no other authorized or outstanding equity or debt securities of ECI of any
class, kind or character. There are no outstanding (1) subscriptions, options,
warrants, calls, commitments or agreements with respect to or privileges or
rights to purchase any capital stock of ECI, or (2) obligations or securities
issued by ECI which are convertible into shares of capital stock of ECI. Any
exceptions to the foregoing are disclosed on Schedule 4.2 attached hereto.
Attached hereto as Schedule 4.2 is a list showing the full name and address of
each shareholder of ECI and the number of shares owned by him or her.
4.3 Partnerships, Etc. ECI is not a partner or a joint venturer with
any other person, corporation or legal entity.
4.4 Subsidiaries. ECI has no subsidiaries.
4.5 Corporate Documents. A copy of ECI's Certificate of Incorporation
and all Amendments thereto, certified by the Secretary of State of New York, and
a copy of ECI's Bylaws, as amended to date, certified by ECI's secretary, are
attached hereto as Schedule 4.5.
4.6 Pending Litigation. There are no proceedings or actions of any type
pending that would limit or impair the power or authority of ECI or Maier to
enter into this Agreement. There is no pending action, proceeding or material
claim of any type, or to the knowledge of Maier, threatened against ECI, its
properties or business. Furthermore, Maier does not know or have reasonable
grounds to know of any basis for such action, or of any governmental
investigation or proceeding relative to ECI, its properties or business. ECI is
not in default with respect to any order, writ, injunction or decree of any
court, or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign. Any
exceptions to the foregoing are disclosed on Schedule 4.6 attached hereto.
4.7 Ownership of Stock. All shares of the ECI Common Stock owned by its
stockholders are owned free and clear of any liens or encumbrances. Any
exceptions to the foregoing are disclosed on Schedule 4.7 attached hereto.
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4.8 Officers, Directors and Employees. Schedule 4.8 sets forth a true
and complete list of the following:
(1) The name of all ECI's directors and officers;
(2) The number of persons employed by ECI and the names, positions
and compensation of any such person in the employ of ECI
during the most recent twelve month period.
4.9 Business of ECI. ECI is only engaged in the business of selling the
products and services described on Schedule 4.9.
4.10 Financial Statements. Set forth on Exhibit A attached hereto are
an unaudited balance sheet and statement of income and retained earnings for ECI
as of and for the years ended December 31, 1994-1995, as prepared by ECI. Each
of the financial statements set forth on Exhibit A has been prepared in
accordance with generally accepted accounting principles, and the balance sheets
present fairly the financial condition of ECI as of the respective dates thereof
and the statements of income and retained earnings present fairly the results of
operations of ECI for the periods set forth therein.
4.11 Absence of Undisclosed Liabilities. Except to the extent (i) set
forth in Exhibit A, (ii) disclosed on Schedule 4.11, or (iii) disclosed
otherwise in this Agreement, ECI has no material liabilities of any nature
(including unpaid federal, state or local taxes), whether accrued, absolute,
known, contingent or otherwise that would affect the assets covered under this
Agreement.
4.12 Absence of Certain Changes. Since December 31, 1995 and except as
disclosed on Schedule 4.12 or elsewhere in this Agreement, there has not been
any material change in the condition (financial or otherwise), of properties,
assets, liabilities or business prospects of ECI, which has been materially
adverse to the business or has occurred outside of the ordinary course of
business, including but not limited to, the following:
(1) Any engagement on the part of ECI in any unusual transactions
affecting its business or properties.
(2) Any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the properties,
assets, business or prospects of ECI.
(3) Any change in the accounting methods, practices or principles
followed by ECI, or any change in depreciation or amortization
policies or rates theretofore adopted.
(4) Any debts, obligations or liabilities incurred by ECI, except
current liabilities incurred and obligations under agreements
entered into in the ordinary course of business and except as
to matters set out in other portions of this Agreement.
(5) Any sale, lease, abandonment or other disposition by ECI of
any real property, or, other than in the ordinary course of
business, of any equipment, furniture, fixtures or other
properties.
(6) Any labor troubles, strikes or any other occurrence or
condition relating to employees which materially or adversely
affects or reasonably may materially or adversely affect the
assets, properties, business or prospects of ECI.
(7) Any increase in the compensation payable or to become payable
by ECI to any of its officers, employees or agents, or any
bonus payment, profit-sharing, pension or other employee
benefit or arrangement made to or with any of them.
4.13 Tax Returns. ECI has filed, in correct form, all tax returns and
estimates (federal, state and local) required to be filed by it and has paid all
taxes shown to be due and payable on the returns or on any assessment received
by ECI as well as all other taxes (federal, state and local) due and payable by
it on or before the date hereof, other than state and local realty taxes which
are payable but which are not yet due. The Internal Revenue Service has not
conducted an examination of any income tax returns of ECI.
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4.14 Authorization and Execution of Documents. This Agreement has been
duly authorized, executed and delivered by ECI and constitutes a valid and
legally binding obligation of ECI and Maier enforceable against each of ECI and
Maier in accordance with its terms. The execution and delivery of this Agreement
and the consummation of the transaction contemplated hereby (1) will not result
in any breach of the terms and conditions of or constitute a default under the
Articles of Incorporation or Bylaws of ECI or any instrument or obligation to
which either ECI or Maier is now a party or by which ECI or any of its
properties or assets may be bound and (2) will not violate any existing order,
writ, injunction or decree of any court, administrative agency or governmental
body, or any contract, agreement, indenture or instrument to which ECI or Maier
are parties or by which either of them is bound.
4.15 Contracts. Each material oral or written contract, commitment,
agreement or obligation to which ECI is a party and which is not otherwise
disclosed herein is identified on Schedule 4.15. ECI has complied with all
material provisions of such instruments and all other contracts and commitments
to which it is a party and is not in default under any of them. For purposes of
this Section 4.15, a material oral or written contract, commitment, agreement or
obligation of ECI is defined as one that is of an aggregate amount of at least
$1,000.
4.16 Employment Contracts and Union Obligations. ECI has no employment
contract or employee benefit arrangement of any type and no obligation to
bargain with or recognize any labor union. Any exceptions to the foregoing are
disclosed on Schedule 4.16 or 4.18.
4.17 Insurance Policies. All insurance policies or contracts carried by
ECI are described in detail on Schedule 4.17.
4.18 Benefit Plans. All bonus, pension, profit sharing, retirement,
stock purchase, stock option, hospitalization, insurance, and other executive or
employee compensation or benefit plans to which ECI is a party are described in
detail on Schedule 4.18.
4.19 Liens, Mortgages, Charges and Encumbrances. All Assets, when
transferred, will be free and clear of all liens, encumbrances, security
interests, leases and claims of others, except as set forth on Schedule 4.19.
ECI's transfer of the Assets hereunder will not give rise to a lien on the
Assets or a cause of action by any party against Span (including, without
limitation, any lien or cause of action under any bulk sales statute), except
sales tax arising solely out of the transfer of assets to Span.
4.20 Notes Payable. A list of all notes payable of ECI as of December
31, 1995 is shown on Schedule 4.20.
4.21 Notes Receivable. A list of all notes receivable of ECI as of
December 31, 1995 is shown on Schedule 4.21.
4.22 Leases. All leases wherein ECI is either Lessor or Lessee or
otherwise has an interest or obligation are described on Schedule 4.22.
4.23 Properties. All real property owned by ECI is described on
Schedule 4.23.
4.24 Disclosure. No representation or warranty by ECI or Maier in this
Agreement, or any statement or certificate furnished to or to be furnished to
Span pursuant hereto, or in connection with the transaction contemplated hereby,
contains or will contain at Closing any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the statements
contained therein not misleading.
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4.25 Patent and Trademark Infringement. In the conduct of ECI's
business during the preceding three years and as now operated, ECI has not
knowingly infringed any United States or foreign patents or trademarks of
others. ECI owns or possesses adequate licenses or other rights to use all
patents, trademarks, trade names, and copyrights that are utilized in the
conduct of its business and has not received any notice of conflict with
asserted rights of others that remain in effect.
4.26 Trademarks and Copyrights. The trademarks, trademark rights, trade
names, trade name rights, and copyrights listed and identified in Schedule
2.1(5) attached hereto are owned by ECI, and no rights have been granted to
others with respect thereto except as set forth in said Schedule 2.1(5).
4.27 Compliance With Applicable Laws, Regulations and Obligations. ECI
has complied in all material respects with all laws, regulations and orders
applicable to it or its business known to it. Except for routine business
licenses and regulatory permits and/or certificates required by local or state
jurisdictions or sales tax permits, ECI does not need any special governmental
permits or licenses in connection with the transaction of its business as
presently conducted. No notice or warning from any governmental authority with
respect to any failure or alleged failure of ECI to comply with any law,
regulation or order has been issued or given and is currently in effect, nor is
any such notice or warning proposed or threatened so far as is known to ECI or
Maier. The business of ECI is not currently being conducted pursuant to an
exemption to or exception from any law, governmental regulation, or permit or
license. ECI is not in default regarding any obligation to any entity to the
extent that it will be materially affected adversely under any license, permit,
order, authorization, grant, contract, agreement, lease or other document, order
or regulations to which it is a party or by which it is bound.
4.28 Environmental Matters. ECI is in compliance with all local, state
and federal environmental statutes, laws, rules, regulations and permits,
including but not limited to the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA"). ECI has not,
nor to ECI's knowledge have other parties, used, stored, disposed of or
permitted any "hazardous substance" (as defined in CERCLA), petroleum
hydrocarbon, polychlorinated biphenyl, asbestos or radioactive material
(collectively, "Hazardous Substances") to remain at, on, in or under any of the
property set forth on Schedule 4.23 or any of the property covered by any of the
real property leases set forth on Schedule 4.22. ECI has not installed, used, or
disposed of any asbestos or asbestos-containing material on, in or under any of
the property listed in Schedule 4.23 or any of the property covered by any of
the real property leases set forth on Schedule 4.22.
4.29 Reliance. The foregoing representations and warranties are made by
Maier and ECI with the knowledge and expectation of Span's reliance thereon and
are the only representations and warranties made by them. Span represents that
as of the closing it will have inspected the Assets and accepts the Assets in
"as is" condition.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF SPAN
Span warrants and represents to ECI and Maier as follows:
5.1 Incorporation, Powers and Qualification. Span is a corporation duly
organized, existing and in good standing under the laws of the State of South
Carolina and is entitled to own its properties and assets and has all requisite
corporate power and authority to carry on its business as now conducted by it.
5.2 Authorization and Execution of Documents. This Agreement has been
duly authorized, executed and delivered by Span and constitutes a valid and
legally binding obligation of Span enforceable against Span in accordance with
its terms. The execution and delivery of this Agreement and the consummation of
the
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transaction contemplated hereby (1) will not result in any breach of the terms
and conditions of or constitute a default under the Articles of Incorporation or
Bylaws of Span, or any instrument or obligation to which Span is now a party or
by which Span or any of its properties or assets may be bound and (2) will not
violate any existing order, writ, injunction or decree of any court,
administrative agency or governmental body, or any contract, agreement,
indenture or instrument to which Span is a party or by which it is bound.
5.3 Disclosure. No representation or warranty by Span in this
Agreement, nor any statement or certificate furnished to or to be furnished to
ECI pursuant hereto, or in connection with the transaction contemplated hereby,
contains or will contain at Closing any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the statements
contained therein not misleading.
5.4 General. Between the date of execution hereof and Closing, Span
shall not take any action which would adversely affect ECI, it business or
products. Span represents and warrants that it is not involved in any litigation
or other dispute which will materially affect the Closing of this transaction or
the future business prospects of the ECI products being acquired by Span.
5.5 Compliance With Applicable Laws, Regulations and Obligations. Span
has complied in all material respects with all laws, regulations and orders
applicable to it or its business known to it. Except for routine business
licenses and regulatory permits and/or certificates required by local or state
jurisdictions or sales tax permits, Span does not need any special governmental
permits or licenses in connection with the transaction of its business as
presently conducted. No notice or warning from any governmental authority with
respect to any failure or alleged failure of Span to comply with any law,
regulation or order has been issued or given and is currently in effect, nor is
any such notice or warning proposed or threatened so far as is known to Span.
The business of Span is not currently being conducted pursuant to an exemption
to or exception from any law, governmental regulation, or permit or license.
Span is not in default regarding any obligation to any entity to the extent that
it will be materially affected adversely under any license, permit, order,
authorization, grant, contract, agreement, lease or other document, order or
regulations to which it is a party or by which it is bound.
5.6 Reliance. The foregoing representations and warranties are made by
Span with the knowledge and expectation of Maier's and ECI's reliance thereon
and are the only representations and warranties made by Span.
SECTION 6. INDEMNIFICATION
6.1 Survival of Representations, Warranties and Agreements. Subject to
the limitations set forth in Section 6.3 of this Agreement and notwithstanding
any investigation conducted at any time with regards thereto by or on behalf of
any party to this Agreement, all representations, warranties, covenants and
agreements of the parties in this Agreement shall survive the execution,
delivery and performance of this Agreement. As used in this Section, any
reference to a representation, warranty or covenant contained in any Section of
this Agreement shall include the Schedule relating to such Section.
6.2 Indemnification. Subject to the limitations set forth in Section
6.3, each party (ECI and Maier on the one hand and Span on the other hand)
jointly and severally covenant and agree to indemnify and hold harmless the
other party from and against any and all losses, liabilities, damages, demands,
claims, suits, actions, judgments or causes of action, assessments, costs and
expenses, including, without limitation, interest, penalties, reasonable
attorneys' fees, any and all reasonable expenses incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, "Damages"), asserted against, resulting to, imposed
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upon, or incurred or suffered by the other party, directly or indirectly, as a
result of or arising from any inaccuracy in or breach or nonfulfillment of any
of the representations, warranties, covenants or agreements made by the
Indemnitors in this Agreement (collectively, "Indemnifiable Claims"); provided
the indemnifying party is notified of the indemnified claim and tendered the
defense with counsel of its own choosing and no settlement shall be entered into
without the agreement of the indemnifying party. For purposes of this Section,
all Damages shall be computed net of any taxes payable and insurance coverage
with respect thereto which reduces the Damages that would otherwise be
sustained; provided, however, that, in all cases, the timing of the receipt or
realization of insurance proceeds shall be taken into account in determining the
amount of reduction of Damages. A party shall be deemed to have suffered Damages
arising out of or resulting from the matters referred to in this Section if the
same shall be suffered by any parent, subsidiary or affiliate of that party
after the Closing. The obligation of indemnification hereunder shall terminate
three years from the date of Closing; provided, however, any claim asserted
prior to such date shall be subject to the provisions of this paragraph.
6.3 Limitations on Indemnification. Span shall not be entitled to
indemnification hereunder with respect to an Indemnifiable Claim arising out of
a breach of a representation, warranty, covenant or agreement (or, if more than
one such Indemnifiable Claims) as to Maier unless such breach shall arise from a
knowing or deliberate material misrepresentation or material omission on the
part of Maier with respect to such breach.
6.4 Right of Setoff. In addition to its other rights under this
Agreement, each party shall have the right to setoff the amount of each and
every Indemnifiable Claim not otherwise paid in accordance herewith against any
amounts owing to the other party or its stockholders, successors or assigns
after the Closing.
SECTION 7. ADDITIONAL COVENANTS OF THE PARTIES
7.1 Access. ECI shall allow Span and its counsel, accountants, and
other representatives, free and full access, during normal business hours
throughout the period prior to the Closing, to all its properties, books,
contracts, commitments and records, and shall furnish Span during such period
with all such information concerning its affairs as Span reasonably may request,
including, but not limited to, any accountants' work sheets.
7.2 Confidentiality. Each party will and will cause its employees and
agents (including, without limitation, attorneys and accountants) to hold in
strict confidence, unless disclosure is compelled by judicial or administrative
process, or in the opinion of its counsel, by other requirements of law, all
Confidential Information (as defined below) and will not disclose the same to
any person. Confidential Information shall be used only for the purpose of and
in connection with consummating the transaction contemplated herein. If this
Agreement is terminated, each party hereto will promptly return all documents of
whatever type, kind or nature, including but not limited to, photocopies, notes,
memoranda, computer discs, calculations, work sheets, abstracts, synopses,
tapes, recordings, etc., whether in the possession of Span, its agents or
employees, or ECI, its agents or employees, received by it from each other party
containing Confidential Information. The covenants in this Section 7.2 shall
survive the Closing Date forever. The term "Confidential Information" shall mean
all information of any kind concerning a party hereto that is furnished by such
party or on its behalf pursuant to Section 7.1 hereof, except information (i)
ascertainable or obtained from public or published information, (ii) received
from a third party not known to the recipient of Confidential Information to be
under an obligation to keep such information confidential, (iii) which is or
becomes known to the public (other than through a breach of this Agreement),
(iv) of which the recipient was in possession prior to disclosure thereof in
connection with the transactions contemplated herein, or (v) was independently
developed by the recipient without the benefit of Confidential Information.
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7.3 Expenses. Span agrees to pay ECI's reasonable legal and accounting
fees related to this transaction, provided that such payment by Span shall not
exceed $10,000 in the aggregate and the transaction is successfully closed
pursuant to the terms hereof. Span will also pay sales tax arising directly from
transfer of the Assets. In the event the failure to close this transaction is
caused solely by Span, such fees shall be nevertheless paid by Span. Span shall
be responsible for all incidental costs related to Closing and the transfer of
assets hereunder.
7.4 Risk of Loss. The risk of any material loss or material damage to
the property of ECI from fire or other casualty or cause shall be borne by ECI
at all times prior to the Closing Date. In the event of any such major loss or
major damage prior to Closing which makes it impractical to continue operations
in the present location, Span may, at its option, terminate this Agreement. In
the event Span elects not to terminate this Agreement for any reason, the
proceeds of any claim for any loss payable under any insurance policies with
respect thereto shall go to Span.
7.5 Brokers. Span, ECI and Maier covenant and warrant that no broker or
finder has acted for them or any of them in connection with this Agreement or
the transaction contemplated hereby. Span, ECI and Maier, agree to indemnify and
hold the other harmless from any such brokerage fee and against any other claim
for brokerage commission, finders fee or any similar commission, fee or charge
relative to this Agreement or the transaction contemplated hereby and any and
all expenses of any character (including reasonable attorneys fees) incurred in
connection with the investigation or defense of any such claim.
7.6 Employment Agreement. Span shall enter into mutually acceptable
employment agreements with Edmund K. Maier, Laurie Rappl and Joseph A. Benedict
for periods of three (3) years, two (2) years and two (2) years, respectively.
Such employment agreements will be substantially in the form attached hereto as
Schedule 7.6(1), 7.6(2) and 7.6(3)
7.7 HNE Healthcare Licensing Agreement. Span and ECI will enter into a
mutually acceptable agreement whereby ECI will assign future royalty receipts
from its licensing agreement with HNE Healthcare to Span at Closing, such
assignment to have been consented to by HNE Healthcare in writing prior to
Closing if required under the licensing agreement which is attached hereto as
Schedule 7.7. Span agrees that initial licensing fees owed to ECI by HNE
Healthcare will be retained by ECI or its successors, initially in the amount of
$150,000, of which $ 100,000 has already been received by ECI.
7.8 Raw Materials. Span acknowledges that ECI may make purchases of
certain raw materials prior to Closing to fulfill existing outstanding purchase
orders and Span agrees to reimburse ECI for such purchases provided that the
unit price of the materials are competitive with general marketing prices and
that the total amount of such reimbursement through Closing shall not exceed
$7,000.
SECTION 8. CONDUCT OF BUSINESS PENDING CLOSING
8.1 Conduct of ECI Pending Closing. During the period commencing on the
date hereof and continuing until the Closing Date, ECI and Maier covenant and
agree to the following (except to the extent that Span shall otherwise expressly
consent in writing, which consent shall not be unreasonably delayed or
withheld); provided, however, that any breach of or inaccuracy in any of the
covenants given in this Section 8.1 must be material in the aggregate with
respect to the business of ECI before such breach shall be actionable or shall
constitute grounds for termination or failure to perform under this Agreement.
(1) ECI will carry on its business only in the ordinary course in
substantially the same manner as heretofore conducted and, to
the extent consistent with such business, use all reasonable
efforts to preserve intact its business organizations,
maintain the services of its present officers and
13
<PAGE>
employees and preserve its relationships with customers,
suppliers and others having business dealings with it so that
its goodwill and going business shall be unimpaired at the
Closing Date.
(2) ECI will not amend its Articles of Incorporation or Bylaws as
in effect on the date hereof.
(3) ECI will not issue, grant, pledge or sell, or authorize the
issuance of, reclassify or redeem, purchase or otherwise
acquire, any shares of its capital stock of any class or any
securities convertible into shares of any class, or any
rights, warrants or options (including employee stock options)
to acquire any such shares; nor will it enter into any
arrangement or contract with respect to the issuance of any
such shares or other convertible securities; nor will it
declare, set aside or pay any dividends (of any type) or make
any other change in its capital structure; nor will Maier
convey any interest in ECI Common Stock except pursuant to the
laws of descent and distribution, except as herein otherwise
disclosed.
(4) ECI will promptly advise Span orally and in writing of any
change in the business of ECI which is or may reasonably be
expected to be materially adverse to the business of ECI.
(5) ECI will not take, agree to take, or knowingly permit to be
taken any action or do or knowingly permit to be done anything
in the conduct of the business of ECI, or otherwise, which
would be contrary to or in breach of any of the terms or
provisions of this Agreement, or which would cause any of the
representations of ECI contained herein to be or become untrue
in any material respect.
(6) ECI will not incur any indebtedness for borrowed money, issue
or sell any debt securities, or assume or otherwise become
liable, whether directly, contingently or otherwise, for the
obligation of any other party, other than in the ordinary
course of business.
(7) After the execution of this Agreement and except for paragraph
7.8 above, ECI will not incur any expense outside the ordinary
course of business or any single capital expenditure in excess
of $1,000 without the prior written consent of Span.
(8) ECI will not grant any employees or officers any increase in
compensation or in severance or termination pay, or enter into
any employment agreement with any employee or officer without
the consent of Span.
(9) Prior to the Closing or the termination of this Agreement, ECI
will not acquire or agree to be acquired, merge or consolidate
with any other company, or purchase substantially all of the
assets of any other business, corporation, partnership,
association or other business organiza tion, entity or
division thereof.
SECTION 9. CONDITIONS PRECEDENT TO CLOSING BY SPAN
Unless waived by Span, the obligations of Span under the Agreement are
subject to the fulfillment, prior to or at Closing, of each of the following
conditions:
9.1 Representations and Warranties True at Closing. The several
warranties and representations of ECI and Maier contained herein shall be
construed to be continuous and continuing from the date of this Agreement to the
Closing Date, and shall be true at the time of Closing as though such
representations and warranties were made at and as of such time, and shall not
be affected by any investigation, verification or approval by any party hereto
or by anyone on behalf of any of such parties.
9.2 Performance. ECI and Maier shall have performed and complied with
all agreements, covenants and conditions required by this Agreement to be
performed or complied with by either or both prior to or at Closing.
14
<PAGE>
9.3 Delivery of Documents. ECI and/or Maier shall have delivered to
Span all documents and other information required to be provided to Span on or
before Closing as set forth herein. The following additional documents shall be
delivered to Span on or before Closing:
(1) A Certificate of Good Standing from the State of New York with
respect to ECI;
(2) The Employment Agreements;
(3) A certificate signed by ECI and Maier stating that all the
warranties and representations made by them herein remain true
and correct on the Closing Date and that all covenants and
agreements required herein to have been performed by them by
Closing have been performed;
(4) Certified copies of actions of the stockholders and the
directors of ECI approving this Agreement and all documents to
be executed and delivered in accordance herewith and
authorizing the officers of ECI to execute this Agreement and
to take all other steps required to carry out the terms
hereof;
(5) Assignment of customer contracts, rights, lists, records,
billing and other information, including the items as shown on
Schedule 2.1(1), together with all related information,
including but not limited to any and all customer invoice
registers, billing cycle data and billing tapes.
(6) Assignment of all sales agent rights, lists, records, payments
and other information, including the items as shown on
Schedule 2.1(2);
(7) Bill of Sale of ECI's fixed assets warranting good title and
conveying to Span all of the items being sold hereunder,
including the items listed and summarized on Schedule 2.1(3);
(8) Bill of Sale of ECI's inventory, including the items as shown
on Schedule 2.1(4);
(9) Assignment of ownership of all trademarks, tradenames,
corporate names, patents, licenses, goodwill, and any other
intangible assets, including leases and contracts, not herein
excluded; including the items described on Schedule 2.1(5);
and
(10) Any and all other instruments and documents that may be
reasonably necessary to effectuate the obligations of Maier
and ECI hereunder.
9.4 Conduct of Business. The business of ECI shall have been conducted
in the usual and customary manner, and there shall have been no material
casualty or material adverse change in the business or financial condition of
ECI from the date hereof through the Closing Date.
9.5 Consents and Approvals. All approvals, permits, orders, consents,
or other authorizations (whether corporate, shareholder, regulatory or
otherwise) with respect to ECI which, in the reasonable opinion of counsel for
Span, are necessary to the consummation of the transactions contemplated hereby
shall have been obtained, and no governmental agency or department or judicial
authority shall have issued any order, writ, injunction or decree prohibiting
the consummation of the transactions contemplated hereby. Approvals of all
applicable regulatory agencies shall have been obtained without the imposition
of any condition or requirements that, in the reasonable judgment of Span,
renders the consummation of this transaction unduly burdensome. For Span, in its
reasonable judgment to consider any condition or requirement unduly burdensome,
the elements of any such condition or requirement must constitute an action,
condition or requirement that would cause the consummation of this transaction
to be commercially unreasonable within normal business conditions.
9.6 Certificate. Span shall have been furnished with such certificates
of officers of ECI and/or such certificates of Maier, in form and substance
reasonably satisfactory to Span, dated as of the Closing Date, certifying to
such matters as Span may reasonably request, including but not limited to the
fulfillment of the conditions specified in this Section 9.
9.7 Opinion of Counsel. ECI shall have furnished Span with an opinion
of its counsel, dated as of the Closing Date, and in form and substance
reasonably satisfactory to Span and its counsel, to the effect that: (i) ECI is
duly incorporated, validly existing and in good standing under the laws of the
State of New York ; (ii)
15
<PAGE>
the consummation of the transactions contemplated by this Agreement will not (A)
violate any provision of ECI's Certificate of Incorporation or Bylaws as
certified to such counsel, (B) violate any provision of, result in the
termination of, or result in the acceleration of any obligation under, any
mortgage, lien, lease, franchise, license, permit, agreement, instrument, order,
arbitration award, judgment or decree known or disclosed to counsel to which ECI
is a party, or by which it is bound; (iii) ECI has appropriate corporate power
and authority to enter into this Agreement, and the Agreement has been duly
authorized, executed and delivered by ECI and constitutes a valid and legally
binding obligation of ECI enforceable against ECI in accordance with its terms;
(iv) This Agreement constitutes a valid and legally binding obligation of Maier
enforceable against Maier in accordance with its terms; (v) the bills of sale
and assignments delivered by ECI to Span at closing are sufficient in form to
vest in Span legal and beneficial title to the Assets (except no opinion with
respect to title will be given); (vi) to the knowledge of such counsel, after
due inquiry, no suit or proceeding is pending or threatened against ECI except
as may be disclosed in the Agreement. For purposes of the opinion, the term
Agreement shall include this Agreement and all agreements attached hereto as
exhibits. The opinion may contain exceptions consistent with all disclosures by
ECI and Maier, as well as usual and customary qualifications and exceptions.
9.8 Due Diligence. Span shall have completed a due diligence
investigation of ECI, the results of which shall be reasonably satisfactory to
Span. Should Span's due diligence investigation result in Span's desire to
terminate this Agreement, the due diligence report shall be disclosed to ECI,
and ECI shall have five business days in which to cure any adverse conditions of
the report or ECI shall have the right to terminate this Agreement without
penalty.
9.9 Approval of Span's Board of Directors. ECI and its counsel shall
have been furnished a certified copy of a resolution of the Board of Directors
of Span authorizing and approving the transaction contemplated herein and
further authorizing its appropriate officers to take such steps as they may deem
necessary or desirable to consummate such transaction in accordance with the
terms and conditions of this Agreement.
9.10 Compliance with New York Sales Tax and Bulk Transfer Laws. ECI and
Span shall have jointly complied with the New York Bulk Transfer Act and Section
1141(c) of the New York Tax Law to the reasonable satisfaction of Span's
counsel.
SECTION 10. CONDITIONS PRECEDENT TO CLOSING BY MAIER AND ECI
Unless waived by ECI, the obligations of ECI and Maier under the
Agreement are subject to the fulfillment, prior to or at Closing, of each of the
following conditions:
10.1 Representations and Warranties True at Closing. The several
warranties and representations of Span contained herein shall be construed to be
continuous and continuing from the date of this Agreement to the Closing Date,
and shall be true at the time of Closing as though such representations and
warranties were made at and as of such time, and shall not be affected by any
investigation, verification or approval by any party hereto or by anyone on
behalf of any of such parties.
10.2 Performance. Span shall have performed and complied with all
agreements, covenants and conditions required by this Agreement to be performed
or complied with by Span prior to or at Closing.
10.3 Delivery of Documents. Span shall have delivered to ECI and Maier
all documents and other information required to be provided to ECI and Maier on
or before Closing as set forth herein. The following additional documents shall
be delivered to ECI and Maier on or before Closing:
(1) The Purchase Price payable to ECI at Closing pursuant to the
terms of Section 3.2 hereof;
16
<PAGE>
(2) Certified copies of actions of the directors of Span approving
this Agreement and all documents to be executed and delivered
in accordance herewith and authorizing the officers of Span to
execute this Agreement and to take all other steps required to
carry out the terms hereof;
(3) A Certificate of Good Standing from the State of South
Carolina with respect to Span;
(4) The Employment Agreements;
(5) A certificate signed by an authorized officer of Span stating
that all the warranties and representations made by them
herein remain true and correct on the Closing Date and that
all covenants and agreements required herein to have been
performed by Span by Closing have been performed; and
(6) Any and all other instruments and documents that may be
reasonably necessary to effectuate the obligations of Span
hereunder.
10.4 Conduct of Business. The business of Span shall have been
conducted in the usual and customary manner, and there shall have been no
material casualty or material adverse change in the business or financial
condition of Span from the date hereof through the Closing Date.
10.5 Certificate. ECI and Maier shall have been furnished with such
certificates of officers of Span, in form and substance reasonably satisfactory
to ECI, dated as of the Closing Date, certifying to such matters as ECI may
reasonably request, including but not limited to the fulfillment of the
conditions specified in this Section 10.
10.6 Opinion of Counsel. Span shall have furnished Maier and ECI with
an opinion of its counsel, dated as of the Closing Date, and in form and
substance reasonably satisfactory to Maier and ECI and their counsel, to the
effect that: (i) Span is duly organized, validly existing and in good standing
under the laws of the State of South Carolina; (ii) the consummation of the
transactions contemplated by this Agreement will not (A) violate any provision
of Span's Articles of Incorporation or Bylaws as certified to such counsel, (B)
violate any provision of, result in the termination of, or result in the
acceleration of any obligation under, any mortgage, lien, lease, franchise,
license, permit, agreement, instrument, order, arbitration award, judgment or
decree known to counsel to which Span is a party, or by which it is bound,
except as such would not, in the aggregate, have a material adverse effect on
the business or financial condition of Span, or (C) violate or conflict with any
other restriction of any kind or character of which such counsel has knowledge
and to which Span is subject; (iii) Span has the legal right and power and all
authorizations and approvals required by law to enter into this Agreement, and
to consummate the transactions contemplated herein; (iv) Span has full corporate
power and authority to enter into this Agreement, and this Agreement has been
duly authorized, executed and delivered by Span and constitutes a valid and
legally binding obligation of Span enforceable against Span in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance or similar laws now or
hereafter in effect relating to creditors' rights or debtors' obligations
generally; (v) to the best knowledge of such counsel, no material suit or
proceeding is pending or threatened against Span or other parties which would
have a material adverse effect on Span's business or properties or its abilities
to make the representations and warranties and perform the obligations set forth
herein or any adverse effect on the future of ECI's products. For purposes of
the opinion, the term Agreement shall include this Agreement and all agreements
attached hereto as exhibits. The opinion may contain exceptions consistent with
all disclosures by Span, as well as usual and customary qualifications and
exceptions.
SECTION 11. MISCELLANEOUS
11.1 Amendment. This Agreement contains the entire agreement between
the parties hereto and shall
17
<PAGE>
be amended only by an instrument in writing signed by all the parties hereto
and/or duly authorized officers and agents.
11.2 Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective heirs, executors, administrators,
successors and assigns, provided that none of the parties hereto shall assign
any of his or its rights or privileges hereunder prior to the consummation of
the transaction contemplated hereby without the written consent of the other
parties. No assignment of rights under this Agreement will be binding unless
agreed to in writing by each of the parties.
11.3 Governing Law. This Agreement shall be construed and governed in
accordance with the laws of the State of South Carolina.
11.4 Notices. All notices hereunder shall be sent by depositing the
same in the United States mail in a sealed envelope, by certified or registered
mail, return receipt requested with postage prepaid, marked confidential and
addressed to the ECI, Maier and Span at the following addresses, or at such
other address as shall be furnished in writing:
As to ECI/Maier: Embracing Concepts, Inc.
40 Humboldt Street
Rochester, New York 14609
(716) 654-9090 (tel) (716) 654-6108 (fax)
Attn: Edmund K. Maier
With a Copy to: Jaeckle, Fleischmann & Mugel
Ellwanger & Barry Building
39 State Street
Rochester, New York 14614-1310
Attn: Ronald S. Kareken
(716) 262-3640 (tel) (716) 262-4133 (fax)
As to Span Span-America Medical Systems, Inc.
Post Office Box 5231
Greenville, South Carolina 29606
Attention: Charles B. Mitchell
(864) 288-8877 (tel) (864) 288-8692 (fax)
With a Copy to: Wyche, Burgess, Freeman & Parham, P.A.
Post Office Box 728
Greenville, South Carolina 29602
Attention: James M. Shoemaker, Jr.
(864) 242-8210 (tel) (864) 235-8900 (fax)
11.5 Headings. The headings of the sections of this Agreement are for
the convenience of reference only and do not form a part hereof and in no way
modify, interpret or construe the meanings of the parties.
11.6 Severability. Each portion of this Agreement is severable, and if
one portion shall prove to be invalid, unenforceable or violative of any
statute, regulation, ordinance or other law, the remainder of the Agreement
shall remain in full force and effect. If this Agreement is deemed ineffective
against one or more of the Stockholders, the obligations of the other parties
hereto shall not be affected in any respect.
18
<PAGE>
11.7 Counterparts. This Agreement may be signed in one or more
counterparts, all of which shall be construed to be an original.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals the day and year first above written.
SPAN-AMERICA MEDICAL SYSTEMS, INC.
\s\ Richard C. Coggins \s\ Charles B. Mitchell
Richard C. Coggins, Secretary Charles B. Mitchell, President and CEO
EMBRACING CONCEPTS, INC.
\s\ Carolyn Maier \s\ Edmund K. Maier
Carolyn Maier, Secretary Edmund K. Maier, President
\s\ Edmund K. Maier
Edmund K. Maier, Individually
19
<PAGE>
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